Annual Report 1950 - SEC.gov

Sixteenth Annual Report

of the

Securities and Exchange

Commission

Fiscal Year Ended June 30, 1950

UNITED S'TATES GOV,ERNMENT PRINTING OFFICE, WASHINGTON: IUO

For lillIeby the Superintendent ot Documents, U. S. GuYerom.nt PrinU ... Olll.,.Wuhlnilon 25, D. C. Price 55cents-

II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

425 Second Street'NW.

Washington 25, D. C.

COMMISSIONERS

HARRY A. McDoNALD, Chairman.DONALD C. COOK, Vice-OhairmanRICHARD B. MCENTIRE

PAUL R. ROWEN

EDWARD T. MCCORMICK

ORVAL L. Dnbors, Secretary

LEITER OF TRANSMI1TAL

SECURITIES AND EXCHANGE C01\IMISSION,

Washington, D.O., January 31, 1951.SIR: I have the honor to transmit to you the Sixteenth Annual

Report of the Securities and Exchange Commission, in accordancewith the provisions of section 23 (b) of the Securities Exchange Actof 1934, approved June 6, 1934; section 23 of the Public UtilityHolding Company Act of 1935, approved August 26, 1935; section46 (a) of the Investment Company Act of 1940,approved August 22,1940, section 216 of the Investment Advisers Act of 1940, approvedAugust 22, 1940,and section 3 of the act of April 25, 1949,amendingthe Bretton Woods Agreements Act.

Respectfully,HARRY A. McDoNALD,

Ohairman.THE PRESIDENT OF THE SEN ATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D. O.III

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TABLE OF CONTENTSPage

Foreword_________________________________________________________ XICommissioners and staff officers___________________________________ __ XVIRegional and branch offiees., ________________________________________ xv

PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933The registration process

Purpose of registrationExamination procedureEffective date of registration statement;Time required for registration

The volume of securities registeredVolume of all securities registeredVolume of securities registered for cash sale

A. All securitiesB. Stocks and bondsC. All securities registered for cash sale for the accounts of

issuers-by type of issuerD. Use of investment bankers as to securities registered for

cash sale for the accounts of issuersAll new securities offered for cash sale

Registered securitiesUnregistered securities

CorporateNoncorporate

Total registered and unregistered securitiesRegistration statements filed

Disposition of registration statementsOther documents filed under the act

Exemption from registration under the actExempt offerings under regulation AExempt offerings under regulation A-MExempt offerings under regulation B

Confidential written reports under regulation BOil and gas investigations

Formal actions under section 8Stop-order proceedings under section 8 (d)

Deficiencies discovered in examination of registration statementsChanges in rules, regulations and forms

Regulation BW-Reports of International Bank for Reconstruction,Regulation A-General exemption of small issues

Litigation under the act

PART II

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF1934

Regulation of exchanges and exchange trading; ___________________ 23Registration of exehanges.L, , _ ________________________ 23Disciplinary actions by exchanges against membera, ___________ 26

Registration of securities on exchanges___________________________ 26Examination of applications and reports______________________ 26Statistics of securities registered on exchanges_________________ 28Temporary exemption of substituted or additional securities., ___ 28Special offerings on exchangea.; _ ____ ______________ 29Secondary distributions approved by exchanges; __ ____________ 30

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VI TABLE OF COKTENTS

PART II-Continued

ADMINISTRATION OF THE SECURITIES EXCHAKGE ACT OF1934-Continued

Termination of registration under section 19 (a) (2)Unlisted trading privileges on exchanges

Applications for unlisted trading privilegesDelisting of securities from exchanges

Securities delisted by applicationSecurities delis ted by certificationSecurities removed from listing on exempted exchanges

Manipulation and StabilizationManipulation

Trading investigationsStabilization

Security transactions of corporation insidersReports of transactions and holdingsPublication of data reportedPreventing unfair use of inside information

Statistics of ownership reportsSolicitations of proxies, consents, and authorizations

Statistics of proxy statementsExamination of proxies

Regulation of brokers and dealersRegistration

Administrative proceedingsRecord of broker-dealer proceedings

Broker-dealer insI?ectionsPricing practicesFinancial reports

Supervision of N ASD activity~~e~b~rship---~---------------------------------------- __ Disciplinary actions

Changes in rules, regulations, and formsForm 10Form 10- KForm 8-KForm 9-KForm 8Rule X-12A-4

Litigation under the act,Inju?~tio~ actions_:Participation as amUU8 cunaeAppellate proceedingsKaiser-Frazier investigation and litigation with Otis & Co

Page3131343535353636363838393940404141424243434445505151525252535353545454545455565858

PART IIIADMINISTRATION OF THE PUBLIC UTILITY HOLDING COM-

PANY ACT OF 1935The public utility industry under the acL________________________ 60Progress under section II-over-all summary _ __ __________________ 62Progress under section ll-survey of individual systems____________ 65Cities Service Co_____ __ ____ ___ ____ _____ _ 65The Commonwealth & Southern Corp____________________________ 67Electric Bond and Share Co_____________________________________ 68

American & Foreign Power Co., Inc_________________________ 69American Power & Light Co________________________________ 70Electric Power & Light Corp________________________________ 71National Power & Light Co_________________________________ 72

General Public Utilities Corp , _ _ _ __ ____ _ 73International Hydro-Electric System______ __ ___ 74Long Island Lighting Co_ ___ _______________ _______ _ ___ 76The Middle"West Corp____ __ __ _____________________ ____________ 77National Gas & Electric Corp___________________________________ 78

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TABLE OF CONTENTS VII

PART III-Continued

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT 0%" 1935-Continued

New England Public Service Co ................................. Niagara Hudson Power Cor .......h.. .............. North Continent Utilities & ~ ~ o ~ & ~ o ~ . ~ . ~ . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Standard Power and Light Gorp.-Standard Gas and Electric Co. The United Corp .......................................... The United Li h t & Railways Co ............................

The continuing hol8ing company systems ......................... American Gas m d Electric Co .............................. American Natural Gas Co.................................. Central and South West Cor ......................... The Columbia Gas System, ~ I : : : I ........................ Consolidated Natural Gas Ca ............................... Delaware Pawer & Light Co ................................ Interstate Power Co ....................................... Middle South Utilities, Inc ................................. National Fuel Gaa Co ...................................... New England Electric System ............................... Xew England Gas & Electric Association ..................... Northern Natural Gas Co.................................. Northern States Power Co .................................. Ohio Edison Co ........................................... The Southern Co .......................................... Utah Power and Light Co ................................... The West Penn Electrio Co ..................................

Issues of seeuntiea, assumptions of liabilities and alterations of rights. . Competitive bldding ............................................ Cooperation with State and Local regulatory authorities ............ Litigation under the act ........................................

Actions to enforce voluntary plans under section 11 (e)........ Petitions to review orders of the Commission under section 24 (a) . Enforcement proceedings under section 11 (e).. ...............; Petitions to review orders of the Commission .................. Petitions for intervention ...................................

PAR'l'I('11'.4TIOY OF THE CO3lhllJSION I S CORPORVI'E KE-011(:.4TlZ.4TlOY.3 I'NLIER C1f.4l'TEH ...........?(OF T11E 13AXKIt17PTC'\' ACT, AS AMENDED

Commission's functions under chapter X......................... The Commission ss a party to proceedings ........................ Summary of activitis ..........................................

Activities relating to the trusteeship ......................... Problems in the administration of the estate .................. Responsibilities of fiduciaries ................................ Activities with respect to allowances .........................

Institution of chapter X proceedings ............................. .......................... XPlans of reorganization under chapter

Fairness ofplan ........................................... Feasibility of plan ......................................... Consummation of plan .....................................

Advisory rep0 rt.. .............................................

ADMINISTRATION OF T H E TRUST INDENTURE ACT OF.......1820 Kature of trust indenture regulation . . . . . . . . . . . . . . . . . . . . . . lntraration r i r h Seeuritie~.4ct of 1833. . . . . . . . . . . . . . . . . . . Stari.+trrs of inderrturclr qualified.. . . . . . . . . . . . . . . . . . . . . .

VIII T~LE OF CONTENTS

147147147151152152153153155156156160162165165166166166167167168169169169170172

PART VIADMINISTRATION OF THE INVESTMENT COMPANY ACT OF

W~ h~Registration under the act___ ____ _ __ ____ 140Types and investment policies of companies formed_______________ 141Sellingliterature_______________________________________________ 141Data on investment companiea.; ___ ___ __ __ _ 142Applications flled; , ____________________________________________ 142Litigation under the act, _______________________________________ 143

PART VIIADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940Registration statlsties, _________________________________ 145Administrative proceedings _____________________________________ 145

PART VIIIOTHER ACTIVITIES OF THE COMMISSION UNDER THE

VARIOUS STATUTESThe Commission in the courts

CivilproceedingsCriminal proceedings

Complaints and InvestigatlonsInvestigations of securities violationsCanadian situation

Securities violations fileActivities of the Commission in accounting and auditing

Examination of financial statementsProposed amendment of regulation S-X

.. Other de,:el!>pme~t~ in accounting and auditingDivision of oplIDon wntmgInternational Bank for Reconstruction and DevelopmentAdvisory and interpretative assistanceConfidential treatment of applications, reports or documentsStatistics and special studies

Saving studyFinancial position of corporationsCapital marketsPersonneLFiscal affairsPublications

Public releasesOther publications

Information for public inspectionPublic hearings

PART IXAPPENDIX-8TATISTICAL TABLES

Table 1. Registrations fully effective under the Securities Act of 1933_ __ 174Part 1. Distribution by months_________________________________ 174Part 2. Breakdown by method of distribution and type of security

of the volume proposed for cash sale for account of is-suers________________________________________________ 175

Part 3. Purpose of registration and industry of registrant- _________ 176Table 2. Claesificatlon by quality and size of new bond issues registered

under the Securities Act of 1933 for cash sale to the generalpublic through investment bankers during the fiscal years 1948,1949, and 1950_ _____ ___________________________________ 177

Part 1. Number of bond issues and aggregate value_______________ 177Part 2. Compensation to distributorB____________________________ 178

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TABLE OF CONTENT&

PUT IX--Continued

APPENDIX-STATISTICAL TABLES-Continued

IX

PageTable 3. New securities offered for cash sale in the United States________ 179

Part 1. Type of offering________________________________________ 179Part 2. Type of security_______________________________________ 180Part 3. Type of issuer_________________________________________ 181Part 4. Private placements of corporate securities_________________ 182

Table 4. Proposed uses of net proceeds from the sale of new corporatesecurities offered for cash sale in the United Btates , ___ ___ 184

Part 1. All corporate__________________________________________ 184Part 2. Public utility _ _ _ __ _______ 185Part 3. IndustriaL ___ __ _ _______ 187Part 4. Railroad., __ ____ _ __ 189Part 5. Real estate and financiaL_______________________________ 190

Table 5. A 17-year summary of corporate bonds publicly and privatelyplaced in each year-1934 through 195Q--by calendar yearc , , 191

Table 6. A 17-year summary of new securities offered for cash in theUnited Statesc. , , _ _ _ _ _____________ 192

Table 7. Brokers and dealers registered under section 15 of the SecuritiesExchange Act of 1934--effective registrations as of June 30,1950, classified by type of organization and by location ofprincipal offiee , _ __ ___ ___ 193

Table 8. Market value and volume of sales effected on securities exchangesfor the three 6-months periods ended June 30, 1950__________ 195

Part 1. Six months ended June 30, 1949__________________________ 195Part 2. Six months ended December 31,1949_____________________ 196Part 3. Six months ended June 30, 1950__________________________ 197

Table 9. Special offerings effected on national securities exchanges forfiscal year ended June 30,1950___________________________ 198

Table 10. Secondary distributions of listed stocks approved by nationalsecurities exchanges for fiscal year ended June 30, 1950______ 198

Table 11. Classification by industry of issuers having securities registeredon national securities exchanges as of June 30, 1949 and as ofJune 30, 1950_ ________ __________ _______________________ 199

Table 12. Number and amount of securities classified according to basis forthe admission to dealing on all exchanges as of June 30, 1950__ 199

Table 13:Part 1. Number and amount of securities classified according to the

number of registered exchanges on which issue was ad-mitted to dealing as of June 30,1950___________________ 200

Part 2. Proportion of registered issues that are also admitted to un-listed trading privileges on other exchanges as of June 30,1950________________________________________________ 200

Part 3. Proportion of issues admitted to unlisted trading privilegesthat are also registered on other exchanges as of June 30,1950________________________________________________ 201

Part 4. Proportion of all issues admitted to dealing on registeredexchanges that are admitted to dealing on more than 1registered exchange as of June 30, 1950__________________ 201

Table 14. Number of issuers having securities admitted to dealings onexchanges as of June 30,1950, classified according to the basisfor admission of their securities to dealing_________________ 201

Table 15. Number of issuers having stocks only, bonds only, and bothstocks and bonds admitted to dealings on exchanges as ofJune 30, 1950_ ______________ ____________________ _______ 201

Table 16. For each exchange as of June 30, 1950, the number of issuersand securities, basis for admission of securities to trading, andthe percentage of stocks and bonds admitted to trading on oneor more other exchanges_________________________________ 202

Table 17. Number of issues admitted to unlisted trading pursuant toclauses 2 and 3 of section 12 (f) of the Securities Exchange Actof 1934 and volume of transactions therein________________ 203

x TABLE OF CONTENTS

PART IX--Continued

APPENDIX-STATIS'I'ICAL TABLES-ContinuedPage

Table 18. Reorganization cases instituted under chapter X and section77-B in which the Commission filed a notice of appearanceand in which the Commission actively participated during thefiscal year ended June 30,1950___________________________ 204

Table 19. Reorganization proceedings in which the Commission partici-pated during the fiscal year ended June 30,1950___________ 204

Table 20. Summary of cases instituted in the courts by the Commissionunder the Seeurities Act of 1933, the Securities Exchange Actof 1934, the Public Utility Holding Company Act of 1935, theInvestment Company Act of 1940, and the InvestmentAdvisers Act of 1940____________________________________ 206

Table 21. Summary of cases instituted against the Commission, cases inwhich the Commission participated as in intervenor or amicuscuriae, and reorganization cases on appeal under chapter X inwhich the Commission participated-pending during thefiscal year ended June 30,1950___________________________ 206

Table 22. Injunctive proceedings brought by Cornmission, under theSecurities Act of 1933, the Securities Exchange Act of 1934, thePublic Utility Holding Company Act of 1935 and the Invest-ment Advisers Act of 1940, which were pending during thefiscal year ended June 30,1950__________________________ 207

Table 23. Indictments returned for violation of the acts administered bythe Commission, the Mail Fraud statute (sec. 338, title 18,U. S. C.), and other related Federal statutes (where the Com-mission took part in the investigation and development of thecase) which were pending during the 1950 fiscal year________ 210

Table 24. Petitions for review of orders of Commission under the SecuritiesAct of 1933, the Securities Exchange Act of 1934, the PublicHolding Company Act of 1935, and the Investment CompanyAct of 1940, pending in circuit courts of appeals during the fiscalyear ended June 30,1950________________________________ 215

Table 25. Contempt proceedings pending during the fiscal year endedJune 30,1950__________________________________________ 216

Part 1. Civil contempt proceedings , ___ 216Part 2. Criminal contempt proceedings___________________________ 216

Table 26. Cases in which the Commission participated as intervenor or asamicus curiae, pending during the fiscal year ended June 30,1950__________________________________________________ 217

Table 27. Proceedings by the Commission, pending during the fiscal yearended June 30, 1950, to enforce subpenas under the SecuritiesAct of 1933 and the Securities Exchange Act of 1934________ 224

Table 28. Miscellaneous actions against the Commission or employees ofthe Commission during the fiscal year ended June 30, 1950___ 225

Table 29. Actions to enforce voluntary plans under section 11 (e) tocomply with section 11 (b) of the Public Utility HoldingCompany Act of 1935___________________________________ 226

Table 30. Actions under section 11 (d) of the Public Utility Holding Com-pany Act of 1935 to enforce compliance with Commission'sorder issued under section 11 (b) of that act_______________ 228

Table 31. Reorganization cases under chapter X of the National Bank-ruptcy Act in which the Commission participated whenappeals were taken from district court orders __ ____________ 229

Table 32. A 17-year summary of criminal cases developed by the Com-mission-1934 through 1950, by fiscal year________________ 230

Table 33. Summary of criminal cases developed by the Commission whichwere still pending at June 30, 1950-by fiscal year__________ 231

Table 34. A 17-year summary classifying all defendants in criminal casesdeveloped by the Commission-1934 to July 1, 1950________ 231

Table 35. A 17-year summary of all injunction cases instituted by theCommission-1934 to July 1, 1950, by calendar year________ 232

FOREWORD

This is the Sixteenth Annual Report of the Securities and ExchangeCommission. It covers the year July 1, 1949 to June 30, 1950.

The report first outlines the activities of the Commission under themajor statutes entrusted to it and, in later sections, deals with over-allactivities that cut through statutory lines.

For the Securities and Exchange Commission the year was an ex-tremely active one. Financing by industry, the major source of work-load for the Commission, has continued at a high rate. The Commis-sion's job in a particular financing may be the clearance of a registra-tion statement under the Securities Act or the approval of the financingunder the Public Utility Holding Company Act, or it may be, byformal or informal means, to issue an opinion as to whether the financ-ing is exempted from these statutes. In any case the work must bedone thoroughly and promptly-to guard the interest of investorsand to be fair to business whose timing schedules may be closelygeared to market conditions.

This balance of interests is, in our view, essential to the effectivenessof the laws. Thorough performance is a necessity in order to servethe investor whom the laws seek to protect. Unwarranted delays are adisservice to those who must live with and comply with the laws. Thebasic philosophy behind these statutes is that free enterprise is facili-tated by honest and decent relations between investor and management.The Commission stresses the facilitative aspect of these laws.

Past reports of the S. E. C. have outlined its progress toward simpli-fying administration and compliance. Those efforts continue. Theyare--in the context of our disclosure laws-e-eflorts to transform dis-closure on paper into effective information of the investor. Forexample, the Commission has by dint of constant pressure succeededin eliminating from prospectuses destined for investors a good deal oftechnical and confusing detail. This process of simplification has notyet reached the financial statements in prospectuses to the extent theCommission would like to see that done. The accounting professionhas recently been invited to join the Commission in an effort to re-duce the present formal presentation of information in balance sheetsand income statements to homely and understandable terms.

Material problems have faced the Commission in its study of methodsof revising the mechanics of prospectus distribution under t'he Securi-ties Act. These difficulties have delayed the recommendation of statu-tory changes. However, the study has proved to be a fruitful onenevertheless. It has stimulated an active interest in the usefulnessof the prospectus as a vehicle of investor information. It hasprompted active attempts-with revisions already made and more inthe offing-to change the prospectus into a piece of informative litera-ture useful to the layman. It has led to a consideration of thepossibilities of authorizing more informative identifying literature

xt

XII FOREWORD

to be used by distributors in advance of effectiveness of registration.It has resulted in a consideration of the possibility of encouragingpreeffective use of adequate informative material. One possible rulenow being discussed would allow this pre-effective material to besupplemented (after effectiveness) with a simple sheet giving missinginformation about price, yields, and spreads, so that the pre-effectivematerial and the supplemental sheet together would constitute theprospectus. In this way the need for printing and distributing aftereffectiveness a wholly new prospectus (duplicating much of the infor-mation previously circulated) could be avoided.

These rule revisions are designed to encourage investors to readpros.l?ectuses and to stimulate distributor interest in making timelydistribution of adequate information. "Whether they are substitutesfor a revision of the statute, which would make it mandatory to pro-vide a prospectus before selling a security, cannot now be statedwith any assurance.

Of particular significance in this report is the record of our progressunder section 11 of the Public Utility Holdin~ Company Act. Thatsection requires the integration and simplification of holding companysystems, and-under certain circumstances-the elimination of hold-ing companies. These aims are accomplished by voluntary plans,approved by the Commission and, in many cases, by the courts, fordisposal of holding companies' controlling interests in operating com-panies, for reorganization of system companies, or for dissolution oftop or intermediate holding companies.

In the 12 years of active administration of these provisions over$10,000,000,000of assets have been released from jurisdiction under theHolding Company Act. There remain subject to the act about$13,000,000,000of assets in holding company systems; and it is guessedthat the Commission will remain with a $6,000,000,000to $7,000,000,000industry to regulate under the standards of the act.

The completion of this vast program would bring administrationof the Holding Company Act into a new phase. Enormous increasesin utility construction in recent years have put a heavy demand on thestaff for the processing of financing applications. The defense pro-gram will continue to require large outlays by the industry for capitalexpansion, and that work alone will draw heavily on personnelresources no longer committed to the section 11 phase of our work.

Of necessity many duties under the act have had to be rationed inorder to concentrate on the task of integration and simplification. Aresurvey of those duties is in progress.

On January 9, 1950, the Commission transmitted to the Congress areport recommending an amendment to the Securities Exchange Actof 1934 which would extend to investors in unregistered securities theprotections afforded by the act in respect of the availability of publicinformation, the provision of data necessary for intelligent exerciseof the right to vote, and the regulation of insiders' short-term trading.This report supplemented and brought up to date an earlier reportwhich had been submitted on June 19, 1946.

Economic development since 1946, the report indicated, had mademore essential the need for this legislation. Individual holdings ofcash, deposits, and U. S. Government securities were at a record high,

FOREWORD XIII

and yet investment in equity securities had not correspondinglyincreased. Where idle funds were used for the purchase of suchsecurities, they were used largely to increase the investment in securi-ties subject to the protections of the Securities Exchange Act. Thelack of publicity about companies outside of the scope of the act has,in our view, been a substantial factor in the lack of investor interestin these securities. A survey of the financial manuals disclosed thatthere were approximately 1,800 companies which would be coveredby the proposed legislation.

After the receipt of these recommendations by the Commission,there were introduced into the Senate by Senator Frear and into theHouse of Representatives by Representative Sadowski identical billsproviding for the amendment of the Securities Exchange Act inaccordance with the Commission's proposals. Hearings were heldbefore the Senate Banking and Currency Committee, but no committeereport was rendered to the Congress. Senator Frear explained in aspeech delivered on the floor of the Senate that this was caused bythe continuous emergency which faced the Banking and CurrencyCommittee as a result of the Korean War. According to the Senator,it was decided that the subcommittee should further study the legis-lation with a view to action on it at the next session.

COMMISSIONERS AND STAFF OFFICERS

(as of October 20, 1950)Commissioners Te~~~p;re8

HARRYA. McDoNALD, of Michigan, Chairman-______________________ 1951DONALDC. COOK,of l\1ichigan, Vice Chairman_______________________ 1954RICHARDB. McENTIRE, of Kansas_________________________________ 1953PAUL R. ROWEN, of l\1assachusetts_________________________________ 1955EDWARDT. MCCORMICK,of Arizona________________________________ 1952

Secretary: ORVALL. DuBOIS

Staff OfficersBALDWIN B. BANE, Director, Division of Corporation Finance. ANDREW

JACKSON,Associate Director.MORTONE. YOHALEM,Director, Division of Public Utilities.ANTHOX H. LUND, Director, Division of Trading and Exchange. SHERRY

T. McADAM, Jr., Associate Director.ROGERS. FOSTER,General Counsel. LOUIS Loss, Associate General Counsel.EARLE C. KING, Chief Accountant.MICHAELE. l\100NEY,Director, Division of Opinion Writing.JEROMES. KATZIN, Executive Assistant to the Chairman.NATHAND. LoBELL,Executive Adviser to the Commission.HASTINGS P. AVERY,Director, Division of Administrative Services.WILLIAM E. BECKER,Director, Division of Personnel.JAMES J. RIORDAN,Director, Division of Budget and Finance.

XIV

REGIONAL AND BRANCH OFFICES

Regional AdministratorsZone 1-Peter T. Byrne, Equitable Building (Room 2006), 120 Broadway,

New York 5, N. Y.Zone 2-Philip E. Kendrick, Post OfficeSquare Building (Room 501),79 Milk

Street, Boston 9, Mass.Zone 3-William Green, Atlanta National Building (Room 322), Whitehall

and Alabama Streets, Atlanta 3, Ga.Zone 4--Charles J. Odenweller, Jr., Standard Building (Room 1608), 1370

Ontario Street, Cleveland 13, Ohio.Zone 5-Thomas B. Hart, Bankers Building (Room 630), 105 West Adams

Street, Chicago 3, Ill.Zone 6-0ran H. Allred. United States Courthouse (Room 103), Tenth and

Lamar Streets, Fort Worth 2, Tex.Zone 7-John L. Geraghty. Midland Savings Building (Room 822), 444

Seventeenth Rtreet. Denver 2. Colo.Zone 8-Howard A. Judy. Appraisers Building (Room 308). 630 Sansome

Street. San Francisco 11, Calif.Zone 9-James E. Newton. 1411 Fourth Avenue Building (Room 810),

Seattle 1, Wash.Zone lo-E. Russel Kelly, 425 Second Street NW., Washington 25, D. C.

Branch OfficesFederal Building (Room 1074) Detroit 26. Mich.United States Post Office and Courthouse (Room 1737), 312 North Spring

Street, Los Angeles 12, Calif,Pioneer Building (Room 400), Fourth and Roberts Street, St. Paul, Minn.Wright Building (Room 327), Tulsa 3, Okla.United States Courthouse and Customhouse (Room 1006), 1114 Market

Street, St. Louis 1, Mo.

xV

•

PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933The purpose of the Securities Act of 1933 is to provide full and fair

disclosure and to prevent fraud in the sale of securities in interstateand foreign commerce and through the mails. To this end, the actrequires that issuers of securities to be offered for such public salemust file with the Commission registration statements setting forthprescribed information about the securities; that investors must befurnished, at or before delivery of the security purchased, a copy of arequired prospectus containing the more significant items of suchinformation; and civil and criminal penalties are provided for secu-rities frauds. The act does not authorize the Commission to pass onthe investment merits of securities and it makes representations to thecontrary unlawful.

THE REGISTRATION PROCESS

Purpose of Registration

Unless exempted from the Securities Act, securities offered for salein interstate commerce or by the use of the mails must be registered.Securities for which such exemption is provided consist, in general, ofgovernment and municipal securities and the issues of banks, railroads,cooperatives and other organizations and associations specified in sec-tion 3 (a) of the act or covered by exemptions in rules and regulationsadopted by the Commission, as discussed elsewhere in this report, pur-suant to section 3 (b) of the act. In addition, while the act containsno exemption for securities of governmental or other foreign issuersas such, Public Law 142, 81st Congress, approved by President Tru-man on June 29, 1949,extended a specific exemption to securities issuedor guaranteed by the International Bank for Reconstruction andDevelopment from the registration requirements of both the SecuritiesAct of 1933 and the Securities Exchange Act of 1934.

An integral part of each registration statement is the prospectus,which sets forth the more pertinent information about the securityoffering. As a basic method of direct disclosure to investors, theprospectus plays a vital role in carrying out the purpose of the act.

The registration statement as a whole discloses material factsdealing, among other things, with the character, size, and profitable-ness of the business, its capital structure, the uses to which the companyintends to put the proceeds realized from the sale of the securities,options outstanding against securities of the issuer, remuneration ofofficers and directors, bonus and profit-sharing arrangements, under-writers' commissions, and pending and threatened legal proceedings.

There must also be included in this document certified financial state-ments of the business enterprise.

915841--51----2 1

2 SECURITIES AJ\TJ) EXCHANGE COMMISSION

The information contained in registration statements filed with theCommission is not only made available immediately for public inspec-tion at the officesof the Commission but also forms the basis of wide-spread publicity released by financial news services, financial writers,and newspapers throughout the nation, which further accelerates theprocess of getting this information rapidly before a greatly enlargedfield of potential investors.

While the purpose of registration is thus to secure full and fairdisclosure of material facts about securities to enable prospectiveinvestors to judge the risk involved intelligently, it is not intendedto remove the risk from investment decisions. The Commission is notauthorized under the Securities Act of 1933 to pass on the investmentmerits of securities, and an effective registration statement does notimply that the Commission has in any way passed upon the meritsof or given approval to the securities covered. Section 23 of the actmakes it unlawful to make any contrary representation to any pro-spective purchaser.Examination Procedures

One of the Commission's most important undertakings has beenits development of procedures and techniques, which are constantlyundergoing improvements as dictated by experience, for the fast andthorough examination of registration statements to determine com-pliance with the disclosure requirements of the act. The need forspeed in the examination process arises not only from the statutoryprescription of an effective date of the registration statement, in theordinary case on the twentieth day after its filing, but also from theCommission's desire to avoid unnecessary interference with financingplans.

"'Whereexamination shows the registration statement to be inac-curate or incomplete in disclosure of material information, the Com-mission may resort to its power under section 8 of the act and issuean order preventing or suspending the effectivenessof the registrationstatement. However, the Commission has, during the past five years.continued its policy of exercising this power sparingly. Instead, ithas relied for enforcement mainly upon the long-standing practice ofsecuring an amendment to the registration statement. Accordingly,registrants are informally advised, as promptly as possible after thestatements are filed, of any material misrepresentations or omissionsfound upon examination and they are afforded an opportunity tofile correcting amendments before the statements become effective.This advice is furnished by means of an informal "letter of comment"which indicates what information should be corrected or supple-mented to meet the disclosure standards.

Another informal procedure that has proved effective in speedingthe registration process is the "pre-filing conference" between staffmembers and representatives of registrants and underwriters. In thismanner registrants are encouraged to discuss problems in connectionwith the proposed filing for the purpose of determining in advancewhat types or methods of disclosure may be necessary under the cir-cumstances. This has contributed to the marked reduction in the num-

SIXTEENTH ANNUAL REPORT 3

bel' of instances where the Commission has found it necessary to resortto stop-order proceedings or other formal action under section 8.

Neither the Commission, the issuer, nor the underwriter desires astatement to become effective unless it complies with the act. Often,the staff will ascertain that deficiencies exist in the registration state-ment as filed, or the issuer or underwriter may wish either to amendthe statement or simply to delay its effectiveness because of changesin the securities market or for other business reasons. In such cases,if there is a danger that the registration statement may become effec-tive in defective form or prematurely for the purposes of the issuer orunderwriter, it is customary for the registrant to file a minor amend-ment, called a "delaying amendment," which starts the 20-day wait-ing period running anew.Effective Date of Registration Statement

The 20-day waiting period between the filing and effectiveness ofregistration statements was provided by the Congress in order to per-mit widespread publicity among investors of the information con-tained in the registration statement before it becomes effective. TheCommission is, however, empowered at its discretion to accelerate theeffective date where the facts justify such action so that the full20-dayperiod need not elapse before the registration statement can becomeeffective. In the exercise of this power, the Commission must havedue regard to the adequacy of the information about the securityalready available to the public, to the complexity of the particularfinancing, and to the public interest and the protection of investors.Time Required for Registration

For some years the Commission has made every effort to completethe registration process within the 20-day waiting period. Thiseffort has been largely successful, and the median elapsed time fromthe filing date of a registration statement to its effective date has beenprogressively shortened from 30y:! days in the 1947 fiscal year to 21days in the 1950fiscal year. A breakdown of this elapsed time for the1950fiscal year is contained in the following table:

Time elapsed in registration pl'ocess-1950 fiscal year

1949 1950

July Aug. Sept. Oct. Nov. Dec Jan. Feb. Mar. Apr. May June- -- - -- - - - -- - -- --

Total regrstratlon statementseffectiveduring month (num-

39 38 33ber)__________________________ 24 24 36 42 25 65 59 67 36-- - -- - - --Elapsed time (median number

ofdays)'From date of filing ragrstra-

tion statement to firstletter of comment. .... ___ . 10 10 10 9 9 11 10 10 11 10 10 12

From date of letter or com-ment to first amendmentby registrant. ... _______ . .. 7 7 7 7 6 9 7 5 6 6 6 6

From date of first amend-ment to tbe effectivedateor registration ___________ .. 6 3 5 3 4 5 5 4 4 4 4 5

-- - --- -- - - - -- - -- --Total median elapsedtime (days)___________ 23 20 22 19 19 25 22 19 21 20 20 23

-- - - -- - =

4 SECURITIES AND EXCHANGE COMMIS:SION

A.lthough the median elapsed time from filing to effectiveness was21 days in the 1950 fiscal year, this time was 20 days or less in sixmonths of the year, accounting for more than half of all the registra-tion statements which became effective during the year. The Com-mission intends to continue its efforts to bring the total elapsed mediantime down to 20 days or less in all months.'

THE VOLUME OF SECURITIES REGISTEREDVolume of All Securities Registered iu Fiscal Year

1950 1949Total registered $5,307,077,000 $5,333,362,000The amount of securities effectively registered during the 1950 fiscal

year was practically the same as that for the 1949 period.The volume registered in the 1950 fiscal year was distributed over

4872 statements covering 647 issues, as compared with 429 statementscovering 588 issues for the 1949 fiscal year.Volume of securities registered for cash sale

304,736,0004,686,051,000

$4, 381, 314, 000

621,027,0005,307,077,000

19J,9

$4,204,008,000193,870,000

4,397,878,000935,484,000

5,333,362,000

1950

Total registeredfor cash sale _Total registered for other than cashsale _Total of allregisteredsecurities _

A. ALL SECURITIES

Registered for cash sale for accounts ofissuers _Registered for cash sale for accounts ofothers than issuers _

B. STOCKS AND BONDS REGISTERED FOR CASH SALE FOR THE ACCOUNTSOF ISSUERS

Equity securitiesother than preferred stock,Preferred stock _Total allstock _All bonds _TotaL _

1950$1,786,056,000

467,929,0002,253,985,0002,127,330,0004,381,314,000

191,9$1,083,117,000

325,854,0001,408,971,0002,795,036,0004,204,008,000

1There Is no necessary connection between the total time elapsed In the registrationprocess and the 20 day waitIng perIod required by the statute. Under section 8 of theSecuritIes Act a regtstratlon statement becomes ell'ectIve on the 20th day after filing(unless the CommIssIon has accelerated ell'ectIveness). The filing of an amendment to theregistration statement begins the waIting period running anew, unless the CommIssIon hasconsented to or required the filing of the amendment.

After due notice and hearing the CommIssIon may refuse to permit a statement to be-come ell'ective. or may issue a stop-order determinIng the ell'ectiveness of the statement.

In view of the tradition of the CommissIon to rely on careful examination of registrationstatements and the procurement of corrections by voluntary means, emphasis In the regis-tration process is upon correction In response to a stair letter of comment, rather than uponformal procedures to refuse or terminate eftectiveness.

The total time elapsed in the registration process is not completely withIn the control ofthe CommissIon. As will be noted from the chart above, a substantial part of this total timeIncludes the time taken by the registrant to make corrections pursuant to a letter of com-ment and the subsequent time taken to examIne the amended statement.

As the chart shows the median elapsed tIme from the date of filing to the first letter ofcomment runs between 9 and 12 days. The remainder of the time Is consumed by theregistrant In making corrections and In a revIew of those correctIons by the stall'.

Customarily a statement Is declared eftectlve shortly after the receipt of the correctionsmade pursuant to the letter of comment. At times, however, more than one letter isnecessary.

This figure di1l'ers from the 488 shown in the table on p. 176 due to dill'erence inelasslfteatton as to time of ell'ectIveness of registration statements. See appendix table I,footnote 2 for details.

•


(Millions of dollars) I

It should be noted that while the volume of bonds registered byissuers for cash sale decreased substantially, stock so registered showeda marked increase.

From September 1934 through June 1949 new money purposesrepresented 37 percent of the net proceeds expected from the cash saleof issues registered for the accounts of the issuers. In the 1950 fiscalyear new money purposes represented 51 percent of the expected netproceeds for the year-large enough to raise the 16-year average 2points to 39 percent,"

The table below shows the amount of each type of security registeredfor cash sale for the accounts of the issuers in each of the fiscal years1935through 1950as well as the three 5-year totals. In addition to thetotals of the new issues for cash sale, all registrations are shown for thesame periods.

Cash sale for account of issuers

Fiscal year ended June 30 All regis- Total Bonds and Common stocktrations Preferredtaee-ernount stock and certl1lcatescertificates of participation

1935' __________________________________ 913 686 490 28 1681936___________________________________ 4,835 3,936 3,153 252 5311937___________________________________ 4,851 3,635 2.426 406 8021938___________________________________ 2,101 1,349 666 209 4741939___________________________________ 2.579 2,020 1,593 109 3181935--39 15,280 11,626 8,328 1,003 2,293

1940___________________________________ 1,787 1,433 1,112 110 2101941___________________________________ 2,611 2,081 1,721 164 1961942___________________________________ 2,003 1,465 1,041 162 2631943___________________________________ 659 486 316 32 1371944___________________________________ 1,760 1,347 732 343 2721940-44. 8,820 6,812 4,922 812 1,078

1945___________________________________ 3,225 2,715 1,851 407 4561946___________________________________ 7,073 5,424 3,102 991 1,3311947___________________________________ 6,732 4,874 2,937 787 1,1501948 6,405 5,032 2,817 537 1,6781949___________________________________ 5,333 4,204 2,795 326 1,0831945--49____________________________ 28,768 22,249 13,502 3,047 5,698

1950___________________________________ 5,307 4,381 2,127 468 1,786

I Dollar amounts are rounded to millions and will not necessarily add to totals.I For 10 months ended June 30, 1935.

C. ALL SECURITIES REGISTERED FOR CASH SALE FOR THE ACCOUNTS OFISSUERS-BY TYPE OF ISSUEB

Tllpe of IssuerElectric,gas, and water companies _Financialand investment companies _Transportation and communication com-panies 1

Manufacturing companies _Foreign governments _Extractive companies _Merchandising companies _S'erVlcecompames., .Real estatecompanies ._

1950$2,038,227,000

1,067,692,000522,753,000506,304,000175,950,00033,027,00025,370,000

7,582,0004,409,000

19./9$1, 796, 709,000

680,600,000989,911,000679,447,000

o33,495,00014,675,000

9,171,000°Total____________________________ 4,381,314,000 4,204,008,000

IDoes not include companies subject to regulation by the Interstate Commerce Commission and there-fore exempt from registration.

See also appendix table 1, pt. 3.

__________________________--

_________ -----------------

_______________• ___________________

_

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•

6 SECUR'ITIES AND EXCHANGE COMMISSION

19J,9$2,758,454,000

557,361,000962,830,000

1950$2,927,787,000

Registrations of securities for cash sale by electric, gas, and watercompanies exceeded by 13 percent their previous high established inthe 1949 fiscal year. Those for the financial and investment com-panies exceeded by 18 percent their previous high established in the1946 fiscal year. These two groups accounted for 47 percent and 24percent respectively of the total for the year. Manufacturing com-panies and transportation and communication companies registeredabout equal amounts, each 12 percent of the total, decreases of 25 and47 percent, respectively, from the amounts of the 1949fiscal year.

D. USE OF INVESTMENT BANKERS AS TO SECURITIES REGISTERED FOR CASHSALE FOR THE ACCOUNTS OF ISSUERS

Amount registered to be sold throughinvestment bankers:

Under agreements to purchase forresaleUnder agreements to use "best efforts"to selL

Total registered to be sold through invest-ment bankers

Total registered to be sold directly to in-vestors by issuers

3,890,617,000

490,698,000

3,315,814,000

888,194,000

Total 4,381,314,000 4,204,008,000

The Commission's Section of Operational Statistics continues tostudy the costs of flotation of security issues. The greatest part ofthese costs continues to be commissions and discount, which are theamounts paid to investment bankers, the balance being distributedamong other expenses such as (a) those not affected by registration:exchange listings, Federal revenue, stamp taxes, State fees and taxes,trustees, transfer agents, etc., (b) those partly affected by registra-tion : printing and engraving, legal fees and expenses, accounting feesand expenses, engineering, appraising, etc., and miscellaneous and(c) those entirely attributable to registration: the S. E. C. filing feeof one one-hundredth of 1 percent of the maximum offering price ofthe securities registered.

During the past 5 calendar years, 1945-49 inclusive, registrationsof all types of securities (for cash sale and otherwise) amounted toapproximately $29,000,000,000. The cost of flotation of these secu-rities was $2.64per hundred dollars of gross proceeds. Of this, com-pensation paid to underwriters amounted to $2.12 and other expensesamounted to $0.52.

In the 1950fiscal year, investment bankers were used in the sale of89 percent of the total registered for cash sale for the accounts ofissuers as compared with 79 percent in the 1949fiscal year. Commit-ments by investment bankers to purchase for resale involved 67 per-cent of the total registered for cash sale for the accounts of issuers,as compared with 66 percent in the 1949fiscal year.~

That part of cost of flotation represented by commissions and dis-counts to investment bankers, but excluding other expenses, is shownior each type of security for each of the past 10 fiscal years. The

See appendix tables 1 and 2 for a more detailed breakdown of the dollar volume ofSecurities Act registrations.

_

_

_

_

-

•


table below covers securities effectively registered for cash sale throughinvestment bankers to the general public for the accounts of the regrs-trants, but does not include securities sold to existing security holdersof the issuers, securities sold to special groups, and securities of invest-ment companies.

Commissions and discounts to investment bankers(Percent ofgross proceeds)

FIScalyear ended Bonds Preferred Common Fiscal year cnded Bonds Preferred CommonJune 30 stock stock June 30 stock stock

194L_____________ 1 8 4 1 144 1946______________ 9 3 1 801942______________ 1 5 4 1 101 1947______________ 9 28 931943______________ 1.7 J 6 97 1948______________ .6 4 5 1021944______________ 1 5 3 1 8 1 1949.-____________ 8 38 7 11945______________ 1 J J 1 93 1950______________ .6 2 7 64

ALL NEW SECURITIES OFFERED FOR CASH SALE'

Registered SecuritiesSecurities effectively registered under the Securities Act of 1933

and actually offered for cash sale during the 1950fiscal year amountedto $3,163,000,000. This total was less than the amount of securitiesoffered in any of the postwar fiscal years; $4,656,000,000were so offeredduring the peak year ended June 1946. The amounts of such offeringsin the last 2 years, valued at actual offering prices, are as follows: 6

Corporate (excluding investment com-panies)Noncorporate (Foreign Government)

TotaLUnregistered Securities

CORPORATE

1950 1949$2,987,000,000 $3,443,000,000

176, 000, 000 0

$3,163,000,000 $3,443,000,000

Some $3,006,000,000of unregistered corporate securities are knownto have been offered for cash sale by issuers in the 1950 fiscal year ascompared with $3,686,000,000 in the 1949 fiscal year. The basis forexemption of these securities from registration is as follows: 7

Basis for exemption from registration: 1950 1949Privately placed issues______________ $2,211,000,000 $2,904, ODD, 000Railroads and other common carriers__ 572,000,000 621,000,000Commercial bank issues , ____________ lID, 000, 000 25, 000, 000Intrastate offerings , ________________ 6, ODD, 000 5, 000, 000Offerings under regulation A 1_ _ _ _ _ _ _ _ 107, 000, 000 121, 000, 000Other exemptions___________________ ° 10,000,000

Total $3,006,000,000 $3,686,000,000I Includes ouly offerings between $100,000and $300,000ill size. See p. 9 [or a more detailed discusslon of

regulation A offuillgs.

See appendix for a detailed statistical breakdown of all securities o[fered for cash salein the United States_

The figures given In this section exclude securities sold through continuous offertng',such as issues of open-end investment companies and employee purchase plans.

7 Where a security may have been exempted from registration for more than one reason.the security was counted only once.

_ _

_

•

•

8 SECURITIES AND EXCHANGE COMMISSION

NONCORPORATE

1949$11, 135, 000, 000

2,512,000,000166,000,000

o10,000,000

The total of unregistered governmental and eleemosynary securitiesoffered for cash sale in the United States during the 1950 fiscal yearwas $15,673,000,000 as compared with $13,823,000,000 in the 1949fiscal year. These totals consist of the following:Issuer: 1950

United States Government $12,068,000,000State and local governments , ________ 3, 482, 000, 000Foreign governments________________ 0International Bank_________________ 101,000,000Miscellaneous nonprofit organlzations , 22,000,000

Total $15,673,000,000 $13,823,000,000

Total Registered and Unregistered Securities

Proceeds from corporate securities flotations, both registered andunregistered, applicable to expansion of fixed and working capitalamounted to $3,940,000,000. This is considerably lower than thevolume of securities sold for this purpose during the 1949 and 1948fiscal years, the amount being approximately $5,800,000,000 in eachof these two periods. Electric and gas companies accounted for 41percent of the new money financing, manufacturing firms 17 percent,communication companies 8 percent, railroads 9 percent, and allothers 25 percent. Securities offered for retirement of outstandingsecurities and repayment of bank loans amounted to $1,601,000,000inthe 1950 fiscal period compared with $921,000,000 in the precedingyear. The increase was due to a substantial rise in the amount ofsecurities refunded, particularly by electric and gas utility companies."

REGISTRATION STATEMENTS FILED

During the 1950 fiscal year 496 registration statements were filedcovering proposed offerings in the aggregate amount of $5,220,654,010.

Number and di8position of registration statements filed

Prior to July I, July I, 1949to Total as of June1949 June 30, 1950 30,1950

Registration statements:8,043 8,639Flied •••..•........ ___ .• _ •. _ .. _._ ....•.•...••. 496

Effective-net ...... __ ..•. _ •.•.•.•............ 6,663 1488 17,144Under stop or refusal order-s-net. .. _____ ...... 182 10 182Withdrawn_ ........................ _. ___ .•. _. 1,145 23 1,168Pending at June 30,1949.•.... _ ... _________ ... 63 -----------.--.--- ------- --- ---- ----Pending at June 30,1950...................... -.-----------.---- 45

8,043 ------- - ----- ----- 8,639Aggregate dollar amount:

$57,962,671,149 $5,Z~O,654,010 $63, 183,325,159As filed___ ••...•............ _ ....... _. __ ..••. _ As etfective •. _ .... __ .. _ •.•• _ .•.•.............. 54,113,698,063 5,307,077,191 59,440,775,254

1 Excludes 2 registration stetements which became etfectlve and were subsequently withdrawn andincludes 1 registration statement previously under stop order.

I 7 registration statements which became etfectlve prior to July I, 1949were withdrawn and are countedin the number withdrawn.

I During the flscel year a stop order was issued agaInst 1registration statement and a stop order on anotherregistration statement was lifted, making no change in the net number of stop order cases.

See appendix table 4 for statistics in greater detatl as to the use of net proceeds fromthe sale of securtttes.

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•

SIXTEENTH ANNUAL REPORT 9Additional documents filed in the 1950 ttscal year related to Securities Act

registrationsNature of document: Number

Material amendments to registration statements filed before theeffective date of registration____________________________________ 764

Formal amendments filed before the effective date of registration forthe purpose of delaying the effective date_________________________ 421

Material amendments filed after the effective date of regtstration.L, , 638

Total amendments to registration statements 1,823Supplemental prospectus material, not classified as amendments

to registration statements 1,112Reports filed under section 15 (d) of the Securities Exchange Act

of 1934 pursuant to undertakings contained in registrationstatements under the Securities Act of 1933:

Annualreports___________________________________________ 753Current reports 2,378

EXEMPTION FROM REGISTRATION UNDER THE ACT

The Commission is authorized by section 3 (b) of the act to adoptrules and regulations granting exemptions from the registration re-quirements for issues of securities whose aggregate offering price tothe public does not exceed $300,000.

The Commission has adopted five regulations pursuant to thisauthority: Regulation A, a general exemption for small issues; regula-tion A-R, a special exemption for notes and bonds secured by firstliens on family dwellings; regulation A-M, a special exemption forassessable shares of stock of mining companies; regulation B, anexemption for fractional undivided interests in oil or gas rights, andregulation B-T, an exemption for interests in oil royalty trusts orsimilar types of trusts or unincorporated associations.

Small offerings of securities may be made and sold to the publicpursuant to a section 3 (b) exemption on the basis of a less completedisclosure than that required by the act in the case of a registeredsecurity. For example, regulation A provides for the filing of a simpleletter of notification, containing limited information about the issuerand the offering, with the appropriate regional officeof the Commis-sion, and provides further that the offering may be made five businessdays thereafter.It should be emphasized, however, that exemption from regis-

tration permitted under section 3 (b) carries no exemption from civilliabilities under section 12 for misstatements or omissions, or fromthe criminal liabilities for fraud under section 17. For the properenforcement of these sections, the conditions for the availability of theexemptions provided under section 3 (b) include, with the exceptionof regulation A-R, the requirement that certain minimum informationbe filed with the Commission and that disclosure of certain inform ationbe made in sales literature, if any sales literature is used. While noprospectus need be used, selling literature must be filed in advance ofIts use.Exempt Ofi'erings under Regulation A

In the 1950 fiscal year 1,357 letters of notification were filed underregulation A, covering offerings in the aggregate amount of $171,743,-472, compared with 1,392 filings totaling $186,782,661during the 1949

10 SECURITIES A1-.TDEXCHANGE COMMISSION

fiscal year. The 1950 fiscal year figures include 136 letters of notifica-tion covering stock offerings aggregating $19,909,525 filed by com-panies engaged in some phase of the oil and gas business.

In addition to the 1,357letters of notification filed in the 1950fiscalyear, 1,159 amendments to these letters of notification were receivedand examined and there were 1,844 filings of sales literature to beused in connection with such offerings.

Of 1,345letters of notification covering completed offerings filed inthe 1950fiscal year, 787 covered proposed offerings of $100,000or less;218 covered offerings for more than $100,000and less than $200,000;and 340 covered offerings of more than $200,000 but not more than$300,000. Issuing companies made 1,134of these offerings, stockhold-ers made 199, and both issuers and stockholders joined in making theremaining 12. Commercial underwriters marketed 398of the offermgs,officers and directors or other persons not regularly engaged in theunderwriting business handled 164, and there was no underwritingof the remaining 803.

The procedure for making an exempt offering under regulation Ais simple. All that is necessary is to file the prescribed letter of notifi-cation, and such sales literature as the offeror intends to employ, withthe appropriate regional officeof the Commission five busmess daysbefore the offering is to be made. In processing by the Commission thismaterial is examined in the field and reviewed by the staff at the Com-mission's headquarters. This review involves a search for pertinentinformation in the Commission's extensive files and an examinationto determine whether the exemption provided by the regulation isapplicable to the particular case and whether the information fileddiscloses any violation of any of the acts administered by the Commis-sion. The results of this review are made available promptly to theregional office. The Commission also follows the practice of cooper-ating with the proper local authorities in the States in which the securi-ties are proposed to be offered by furnishing them significant dataabout the proposed offering.Exempt Offerings under Regulation A-M

During the 1950fiscal year the Commission received and examined !)prospectuses covering an aggregate offering price of $303,122for as-sessable shares of mining corporations exempt from registration underthis regulation.Exempt Offerings under Regulation B

The Commission maintains a specialized unit in its headquartersofficeto administer regulation B and to advise and assist with technicalphases of all offerings of oil and gas securities arising under other pro- tvisions of the Securities Act. In addition, the Commission maintains " a petroleum geologist in Tulsa, Okla., who advises the Commission asto the development of tracts and wells in the Mid-Continent andCoastal regions. Development has been active in the Rocky Mountainsduring the 1950 fiscal year.

The exemption from registration provided by regulation B forfractional undivided interests in oil or gas rights is limited to a maxi-mum aggregate offering price of $100,000. Regulation B requires that

SIXTEENTH ANNUAL REPORT 11an offering sheet be filed with the Commission summarizing pertinentinformation regarding the security being offered.

In addition to 136 offerings under regulation A which covered oiland gas securities, 88 offering sheets and 61 amendments were filed un-der regulation B during the 1950 fiscal year. The following actionswere taken on these filings:

Action taken on filmg8 under regulation B

Temporary suspension orders (rule 340 (a ) ) 14Orders terminating proceedings after amendmenL________________________ 8Orders consenting to withdrawal of off'ertng sheet and terminating pro-ceedlng ---____________ 1Orders terminating- effectiveness of offering- sheet (no proceeding pendlng j ; , l)Orders consenting- to withdrawal of offering- sheet (no proceeding- pending) __ 1Orders accepting- amendment of offerin.e; sheet (no proceeding pending) 34

Total orders_____________________________________________________ 66

Oonfidential written reports of sales under regulation B.-Anotherfunction of the Commission in the administration of regulation Bis to determine from confidential written reports of actual salesthat no violations of law occurred in the marketing of oil and gassecurities exempted under this regulation. Such reports are requiredto be filed pursuant to rules 320 (a) and 322 (c) and (d) concerningsales made by broker-dealers to investors and by dealers to otherdealers. During the 1950 fiscal year 1,132such reports were receivedwith respect to aggregate sales of $829,875.

Oil and gas investigations.-Most oil and gas investigations ariseout of complaints received by the Commission. They are conductedprimarily to ascertain whether there has been any violation of sectionr>, which requires registration, or of section 17, which prohibits fraudin securities transactions.

A typical investigation was made in the 1950 fiscal year to deter-mine whether certain claims of profits in sales literature used to selloil royalties under regulation B were misleading. The offering circu-lar claimed that the royalties would return a profit of 8 to 12 per-cent and would be a better investment than most stocks and bonds.The staff made an extensive study of the total income received fromroyalties sold by the offeror under offering sheets relating to as manyas 46 tracts since 1940. Inasmuch as information as to productionand income from these tracts was not a matter of published record,a large part of the necessary data was obtained from the producerand the purchaser of the oil. Itwas found that out of the 46 tractsunder review, only 2 had returned the capital invested, with a profit;4 should eventually do so, with a modest profit; and of the remaining40 tracts only a very few can reasonably be expected ever to returneven as much as the capital invested.

The offeror agreed to cease claiming an 8 to 12 percent yield, toceasecomparing any return on these royalties with that available fromstocks and bonds, and to describe his royalties as liquidating assetsthe return from which cannot be regarded as profit until the capitalinvested has been recovered by the purchaser.

12 SECURITIES AA""DEXCHANGE COMMISSION

The Commission instituted 10 new investigations involving oil andgas securities during the 1950fiscal year and 23 such cases were closed.This brought the total pending during the year to 135 and the numberpending at the close of the year to 112. As a result of evidence de-veloped in two cases, the Commission secured injunctions in the courtsrestraining violations of the registration and antifraud provisions ofthe act. The facts in two other cases were referred to the Departmentof Justice for criminal prosecution, in which the Commission co-operated. The conviction of Claude Cleve Alfred in connection withfraudulent sales of oil securities is mentioned in another section ofthis report.

FORMAL ACTION UNDER SECTION 8

The purpose of the Commission's informal procedures in processingregistration statements is to get registration statements which complywith the requirements of the act before the statements becomeeffective. In almost all cases conference and comment by letter aresufficient both for the needs of the registrant and for the adequateprotection of investors. It is sometimes necessary, however, for theCommission to exercise its powers under section 8 in order to preventa reg-istration statement from becoming effective in deficient or mis-leading form or to suspend the effectiveness of a registration statementwhich has already become effective.

Under section 8 (b) the Commission may institute proceedings todetermine whether It should issue an order to prevent a registrationstatement from becoming effective. Such proceedings are authorizedif the registration statement as filed is on its face inaccurate or incom-plete in any material respect. Under section 8 (d) proceedings may beinstituted at any time to determine whether the Commission shouldissue a stop-order to suspend the effectiveness of a registration state-ment if it appears to the Commission that the registration statementincludes any untrue statement of a material fact or omits to state anymaterial fact required to be stated or otherwise necessary to make thestatements included not misleading. Under section 8 (e) the Com-mission may make an examination to determine whether to issue astop-order under section 8 (d).Stop-order Proceedings under Section 8 (d)

Two stop order proceedings were pending at the beginning of the1950 fiscal year and one was instituted during the year under section8 (d). These cases are described below.

Pan American Gold. Limited. (no personai lialJility)-File No.2-7603.-This Canadian company filed a registration statement cover-ing 1,983,295of its common shares, $1 par value, to be offered at 45cents per share and net about $670,500 to the issuer. According tothe registration statement, these proceeds were to be used (1) for theexploration of a gold mining prospect located in South Dakota,and (2) for the equipment of a South American gold placer miningproperty.

Upon examination the registration statement appeared to containmaterially misleading representations, and in the 1949 fiscal year theCommission authorized a private examination under section 8 (e) to


determine the adequacy and accuracy of certain of these representa-tions and to determine whether stop-order proceedings should be in-stituted. On the basis of testimony adduced at the examination, stop-order proceedings were instituted. Following these proceedings andafter the registrant filed amendments to the registration statementwhich substantially corrected deficiences, the Commission issued itsopinion, deferring issuance of a stop-order pending correction by theregistrant of the remaining deficiencies, at which time the registrationstatement could become effective,"

The Commission found that the original registration statement wasmaterially misleading in numerous respects. The prospectus filed asa part of the original registration statement contained informationto the effect that the registrant's South Dakota property is locatedalong the southern border of the famous Homestake Mine. A map,forming a part of the prospectus, showed what purported to be thesoutheasterly "trend" of the Homestake gold ore bodies into andthrough the registrant's property. This representation was said torest on the authority of United States Geological Survey Atlas Folio219. The Commission found that the map was not supported bysuch folio and that the registrant had no factual basis for portrayingthe extension of the Homestake ore bodies into and through its prop-erty. The prospectus was amended to omit this unjustifiable claimand also to delete a report on the property which the Commission heldto be materially inaccurate, inadequate, and misleading. In additionit was amended to show for the first time that the registrant was awareof several unfavorable geological reports made after exploratorydrilling.

The South American property of the registrant was described orig-ally in the registration statement as being ready for productiveoperation upon installation of mining equipment. The amount ofcommercial gravel said to be available for mining was estimated at aminimum of 5,000,000cubic yards averaging $1 per cubic yard in gold.The planned rate of production was said to be at least 1,000,000cubicyards of gravel per year. The registrant stated that it believed thatoperations on the property should enable it to obtain steady earningpower from this property. The amended registration statement dis-closes that the registrant made no investigation of the property, andhas no factual information about the presence, extent, or character ofgravel deposits on the property. The prospectus, as revised, showsthat the registrant intends to test the property as an initial step inorder to determine whether it warrants the installation of machineryfor production. Specifically, it is stated in the revised prospectus:"If the further exploratory work and shafting as contemplated do notshow sufficient values to justify further development, this propertywill be abandoned."

The Maumee Oil Oorporation-File No. fJ-7976.- This case was com-pleted during the 1950fiscal year although instituted previously. Thecompany was incorporated in Ohio on July 30, 1947 and on May 11,1949 filed a registration statement covering 8,000 shares of no parvalue common stock to be offered at $100 a share. Its assets consisted

Securl ties Act release No. 3368.•

14 SECURITIES A!\'D EXCHANGE COMMISSION

of assignments of oil and gas leases and an undivided one-half interestin four wells (two of which were not productive) in the Beddo field inthe vicinity of Ballinger, Runnels County, Tex. A.fter examinationof the registration statement, stop-order proceedings were institutedon May 27, 1949.

From information developed at the hearing it appeared that theregistration statement failed to disclose that the Beddo field was aninferior field which seldom, if ever, marketed more than 60 percentof its allowable production, and often much less, and that the numberof dry holes in the field exceededthe number of producing wells. Theregistration statement also failed to provide adequate informationwith respect to the wells in which the registrant had an interest. Theprospectus stated that two of the four wells were unproductive, butit failed to state that the other two producing wells had no reasonablechance of profitable production and were bemg operated on a day today basis only because this was more economical than to abandon them.

At the time the registration statement was filed the registrant wasin possession of two reports from geologists which indicated that, atbest, only 5 percent of the registrant's acreage had a reasonable chanceto produce oil in any amount. The Commission held that in suchcircumstances, where there had been significant exploration in the areaindicating that the possibilities of success were extremely remote, itwas misleading to imply a fair chance of profit by describing theoffering as "speculative," or to state or imply that the area in whichthe registrant's properties were located had not been proved, or thatthe registrant's own acreage should be regarded as unproved. Asto the registrant's plan for new drilling, to be financed with proceedsfrom the sale of the securities sought to be registered, it was heldmisleading for the registrant to characterize the projected wells as"exploratory" without disclosing the information in its possessionindicating that since the projected wells were to be located in thevicinity of its existing unprofitable wells there was no reasonablefactual basis for an expectation that new wells would be better thanthe existing wells.

The registration statement and prospectus failed to name Eldrid~eS. Price as a promoter although required to do so by the Commis-sion's rules, and to provide a fair disclosure of the registrant's deal-ings with him. Price, although not an officer,director, or stockholder,sold assignments of oil and gas leases on some 2,677acres of his hold-ings in Runnels County, Tex., to the persons who became the originalshareholders of the company. Price received about $290,340, about92 percent of all the money obtained by the registrant from the saleof securities. The original amount paid to Price was $43.75 an acre,but this was later raised to $100 although Price was apparently at thesame time acquiring additional acreage for about $1 per acre.

The Commission's opinion mentions other omissions and incon-sistencies in the registration statement relating to such matters asthe amount of the offering, the liability of certain shareholders forassessment, the business experience of officers, inaccurate financialstatements, and the failure to file material exhibits." At the close of

10 Securities Act release No. 3354.

SIXTEENTH ANNUAL REPORT 15the 1950 fiscal year the registrant had not attempted to correct thedeficiencies found to exist in its registration statement and the stoporder was still in effect.

Ralph A. Blanchard and George P. Simons, doing business asNorthwest Petroleumr-File No. 2-8243.-The registration statementfiled in this case covered 350 "undivided Fractional Participating In-terests (Oil)" to be offered for sale to the public at an aggregate priceof $175,000. The Commission, alleging generally that there is reason-able cause to believe that the disclosures contained in the registrationstatement and prospectus are inaccurate and incomplete in materialrespects, challenging 19 items specifically, instituted stop-order pro-ceedings during the 1950 fiscal year that were still pending at theclose of the year."

DEFICIENCIES DISCOVERED IN EXAMINATION OF REGISTRATIONSTATEMENTS

The examination of registration statements during the waitingperiod brings to light many deficiencies in the registration statementswhich would, if undiscovered, be published and furnished to investors.These are sometimes corrected; often they are of such material char-acter that the statements are withdrawn on discovery of the deficiency.The following are examples of deficiencies discovered in examinationof registration statements.Overstated Oil Reserves

An oil-producing company filed a registration statement covering$2,937,254of 4% percent senior cumulative interest debentures, dueJanuary 1, 1965; $1,147,150of 5 percent junior income debentures, dueJanuary 1, 1970; 30,500 shares of $5 cumulative class A preferredstock, no par; 51,000shares of $5 cumulative class B preferred stock,no par; and 2,000shares of common stock, no par.

Prior to the formation of the company, the promoters of its predeces-sors had sold working interests in oil leases, in which the promotersretained overriding royalties, to some 350 investors in and aroundBoston. These royalties and other assets were subsequently conveyedto the company by the promoters. The company appears to have beencontinuously short of working capital although, in addition to sub-stantial loans from insurance companies and banks, it had receivedadditional funds from a syndicate composed of some of the originalinvestors in the leases. A plan of reorganization was devised whichprovided for: (1) A large loan from the RFC; (2) the acquisitionof additional 011 properties; (3) the repayment of part of the out-standing loans; and (4) payments in cash and new securities for theproperties owned and to be acquired. The Commission determinedthat the proposed offering of debentures, preferred stock, and commonstock, in addition to cash, to the 350 investors was a public offeringand required the filing of a registration statement.

It became apparent upon review by the Commission of the reportsprepared by various petroleum engineers in respect of the company'soil and gas reserves, and after conference with such engineers, that

11 Securities Act release No. 3367.


the reserve estimates were too high, that upon a reasonable estimateof these reserves there was no present value behind the securities pro-posed to be offered, and that the prospects of any future values wereremote and contingent. Consequently the company proposed, in lieuof furnishing an estimate of oil and gas reserves in the registrationstatement, to state the fact that the securities being offered were with-out present value and of extremely remote and contingent future value,and also to make a more detailed statement of such facts on the secondpage of the prospectus. This amendment was made and resulted infurnishing to prospective purchasers in a readily understandable formthe ultimate conclusion as to the effect of the factors of value-such asthe estimated amount of reserves, the dollar value of oil, lifting costs,and rate of extractions-instead of a mere itemization of these factorsthemselves.Understatement of Liability

The adoption of pension plans during the year presented new prob-lems to some registrants as in the case of a registrant which adopted a5-year plan to become effective on a date within an interim period forwhich unaudited financial statements were furnished as permitted bythe rules. The company's financial statements filed with the Commis-sion included a charge to profit and loss for the interim period pro~>or-tionate to the total estimated cost for the 5-year period with an equiva-lent amount reflected in the balance sheet as a liability. Examinationof the plan indicated that in the first year a much larger number ofemployees would be eligible under the plan than in the succeedingyears due to the fact that all employees over the required age and termof service for eligibility could claim their pension rights immediately,although not all of them were expected to do so. When this featurewas called to the attention of the registrant the financial statementswere amended to increase the liability shown in the balance sheet underthe pension plan from the previous estimate of approximately $500,000to $2,000,000, of which $400,000 was classified as current. The previ-ously determined accrual was charged to profit and loss and the remain-ing $1,500,000 was set up as a deferred charge to be allocated againstfuture operations. A comprehensive footnote described the pensionplan and indicated that the liability included in the balance sheet wasbased upon the best indication at the date of filing of the intention ofeligible employees to retire within the terms of the plan.Restatement of Reserves

A company filing a registration statement covering 76,983 sharesof 4% percent cumulative preferred stock owned several old estab-lished operating mining companies, which followed a widespreadpractice of making no provision for depletion of their mining proper-ties. However, in its latest balance sheet accompanying the registra-tion statement the parent company reflected a reserve for contmgen-cies amounting to $4,000,000, created by a charge to earned surplus"for the eventual write-off of its investment direct or indirect in min-ing property upon the exhaustion of any such property." It al?pearedto the staff that one of the mines, the mining property of which wascarried at $4,388,410, was practically in a salvage status. The reserve,previously described as a contingency reserve, was thereafter changed

SIXTEENTH ANNUAL REPORT 17to "Reserve for exhaustion of mining property," and shown in thecompany balance sheet as a deduction from the carrying value of theinvestments in the mining companies and in the consolidated balancesheet as a deduction from the carrying value of mining property. Ineach case, the carrying value was thereby reduced $4,000,000 thusgiving unambiguous recognition to the status at the balance sheetdate, which in the original filing could be determined only by a verycareful reading of pertinent parts of the text of the prospectus.

A significant amendment to the prospectus was also obtained inview of the indications in the text that one of the principal mines ofthe company was practically exhausted. The summary of earningswas amended to call attention to the present status of the company'sprincipal revenue-producing mine.Statement of Potential Profits

A company in the promotional stage included in its prospectus astatement indicating the company's estimate of annual production inunits of the items to be manufactured and gave the estimated factorprices of the units, so that a gross sales estimate could have been cal-culated by a prospective investor. The estimated annual cost of opera-tions was given in round figures, with a minimum of detail, and omit-ting certain important elements of cost such as depreciation, main-tenance, repairs, and rents. The over-all effect was to imply that sub-stantial profits might be realized by the company, despite the dis-claimer contained in the prospectus to the effect that the companycould not assure the rate of production upon which the estimates werebased or that the prices quoted would be received for the product.When these uncertainties were pointed out the registrant deleted thoseelements of the presentation which provided the basis for possiblemisleading calculations of profit.Failure to Disclose History and Risks Involved

A company, organized in 1947 as the successor to companies whichhave been engaged since 1945 in developing a small automobile, fileda registration statement on May 10, 1949 covering 5,000,000shares ofco:m,monstock to be offered to the public at $1 per share through anunderwriter pursuant to a "best efforts" arrangement. The prospectusstated that the registrant's first product was to be a station wagon.

As a result of inadequacies cited by the staff in its letter of comment,the prospectus was extensively revised and disclosed, among otherthings, that: (1) None of the registrant's 18 existing model cars metthe exact specifications proposed for the car to be built, and additionaltesting was required which might result in substantial design changes,increased preproduction expense, and production delays; (2) theregistrant and its predecessors in the period from October 8, 1945 toJune 30, 1949 had received $2,271,482 in cash, including $1,476,633for dealer and distributor franchise fees, and had paid out $2,150,198,including $656,351 for salaries and wages; (3) the registrant's bal-ance sheet at June 30, 1949 showed assets in excess of liabilities ofonly $12,026; (4) the registrant's cost estimates and production planswere predicated upon the attainment of an annual production andsales volume which represented approximately 70 percent of the entire

9111841-51-3


United States domestic station wagon market, based on productionfigures for the 18 months ended June 30, 1949; (5) if substantiallyall of the proceeds of the issue were not received it would be necessaryto reduce the proposed production llrogram and to raise the sellingprice of the car, in which event it might be difficult, or impossible, toovercome the resultant competitive disadvantages; and (6) there wasno provision for the return of funds to the purchasers of the stock ifthe registrant were unable to sell all the shares being offered and carryout its plans. The registration statement as amended became effectiveOctober 3, 1949.

On February 17, 1950, the registrant filed a petition for reorganiza-tion pursuant to chapter X of the Bankruptcy Act, and was declaredbankrupt May 19, 1950. No shares covered by the registration state-ment had been sold.Questionable Selling Activities

A registration statement of a Montana corporation, proposing toengage in the manufacture and sale of ground wood pulp, became effec-tive in August 1949. The corporation was in the promotional stage,its tangible assets consisting of a plant site in Montana and about$150,000obtained from the sale of securities in Montana several yearsbefore. The registration statement included a report of a forestryexpert which indicated that the best source of timber for the projectwould be in Montana, north of the plant site. Shortly after the regis-tration statement became effective, it was learned that the corporationwas receiving extensive publicity in the Idaho-Washington area abouta proposed purchase of land in Idaho for the purpose of constructinga paper and pulp plant there. Investigation by the Commission'sregional officerevealed that the land had been purchased and, more-over, that the corporation had been making sales of stock in Montanawithout using a prospectus required by the Securities Act and withouta proper license from the State of Montana.

Following this investigation, the corporation filed an amendedprospectus which referred to the purchase of land in Idaho, implyingthat it might be used for timber-storage purposes and justifying thepurchase on the grounds that funds for that purpose had not beenobtained from its offering of registered securities. The corporationwas requested to reconcile the proposed use of the Idaho property withthe above-mentioned report of its forestry expert, and to point out inthe prospectus that the use of funds in Idaho was not consistent withrepresentations made in selling literature employed in the originalsale of securities in Montana, namely that all proceeds would be usedto construct a plant in Montana. The registrant canceled its agree-ment to purchase the Idaho property and offered to make rescissionto all purchasers of stock who had not received a proper prospectus.

CHANGES IN RULES, REGULATIONS, AND FORMS AFFECTING EXEMPTSECURITIES

Regulation BW-Repol'ts of Internationai Bank for Reconstruotionand Development.-'dection 15 (a) of the Bretton Woods AgreementsAct, which was added to that act by the Eighty-first Congress and

8IXTEEKTH AKKUAL REPORT 19

approved by President Truman on June 29, 1949,exempts from regis-tration under both the Securities Act of 1933 and the Securities Ex-dhange Act of 1934securities issued, or guaranteed both as to princi paland interest, by the International Bank tor Reconstruction and De-velopment. However. the bank is required to file with the Commissionsuch annual and other reports with respect to such securities as theCommission shall determine to be appropriate, in view of the specialcharacter of the bank and its operations. and necessary in the publicinterest and for the protection of investors. The Commission hasheretofore expressed its opinion that an exemption is available underthe Trust Indenture Act of 1939.

New rules and regulations were adopted on January 9, 1950,desig-nated regulation BW, to require the bank to file with the Commissionsubstantially the same information, documents, and reports as wouldbe required if the bank had securities registered under the SecruitiesExchange Act of 1934. The bank is required also to file a report withthe Commission not less than 7 days prior to the date on which anyof its primary obligations are sold to the public in the United States.This report and the periodic reports filed make available at the Com-mission information quite similar to the information which wouldbe required in a registration statement under the Securities Act of1933. This carries out the intention which the Commission expressedto the Congress when the amendment to the Bretton 'V"oodsAgree-ment Act was under consideration.

The Commission announced at the same time that it was informedby the hank that no public offering of securities guaranteed by thebank was presently contemplated." Accordingly, the new rules, inso-far as they require the reporting of the proposed public sale of securi-ties, were limited to the sale of primary obligations of the bank.

The Commission at the same time rescinded certain rules previouslyadopted under the Securities Act of 1933and the Securities ExchangeAct of 1934with particular reference to the bank.

Regulation A-Ge'fleral eeem.ption. for emall i88ue8.-Three amend-ments to regulation A, which provides an exemption from registra-tion under the Securities Act for certain small issues, were adopted bythe Commission during the 1950fiscal year."

The first of these amendments raised from $100,000to $300,000theamount of the aggregate offering price of securities which may beoffered by the estate of a deceased person for the purpose of payingtaxes or other expenses of the estate. There are situations in whichthe deceased person did not stand in a control relation with the issuerbut in which the executor or administrator (because of direct or indi-rect holdings of his own) does stand in such a relationship and wouldbe prevented from selling without registration. The enlarged exemp-tion is available, however, only if the deceased person was not in acontrol relationship with the issuer and would not have been requiredto register the securities if the offering had been made by him priorto his death.

82 Bretton Woods Agreements Act release No. 1. For a further discussion see p. 164 ofthis report.

13 Securities Exchange Act release Nos. 3352, 3370, and 3377.


The second amendment is intended to prevent the commencementor continuance of the sale of securities under regulation A during thependency of injunction proceedings instituted by the Commission.Under a literal construction of the rule previously in effect, a personwho had filed a letter of notification under which a portion of thesecurities thereby qualified remained unsold might continue to sell(insofar as the rule was concerned) such securities without registra-tion despite the pendency of an action instituted by the Commissionto enjoin the issuer or other person affiliated with the issuer fromengaging in or continuing any conduct or practice in connection withthe sale of any security of such issuer.

It is obviously inconsistent with the Commission's action in securingan injunction to prevent violations of the act to continue in effect adiscretionary exemption which might tend to a substantial degree tonullify the relief being sought.

The third amendment makes it clear that the maximum aggregateamount of securities which may be sold under regulation A in any 12-month period is $300,000 in actual gross proceeds from the public.The amendment was made to correct an erroneous impression in somequarters that if the initial offering price did not exceed that amount,the entire offering might be sold for an actual aggregate price to thepublic exceeding $300,000.

LITIGATION UNDER THE SECURITIES ACT

The bulk of litigation in connection with the enforcement of theSecurities Act deals with persons who fail to register securities beforeoffering them to the public as required by section 5 and persons whomake fraudulent security sales in violation of section 17. Violationsof section 5 deprive the public of information essential to intelligentinvesting and violations of section 17 involve outright deception ofpublic investors. In either situation, maximum protection is affordedto the public by enjoining further sales. For this reason, it is cus-tomary for the Commission to enjoin t~e illegal activities promptly,even though criminal action may be instituted later.

Some cases involve violations of both sections of the act; some in-clude also violations of other acts administered by the Commission,particularly the Securities Exchange Act of 1934, which containsantifraud provisions.

During the course of the year the Commission obtained temporaryor permanent injunctions against further violations of section 5 incases involving sales of securities of mining companies,H oil and gascorporations," and other types of business." As in the past, some

"S. E. a. v. Pilot Si/vet'-Lead Mines, Ine., Civil Action No. 747, E. D. Wash .• Aug. 51949, 8. E. a. v, Lucky Fridall Eztension Mimng 00., Civil Action No 714. E. D. Wash.;Aug. 5, 1949; 8. E. O. v. Silver Greek Precision ooro., Civil Action No. 50-663. S. D. N. Y.,July 8, 1949; B. E. C. v. James R Davies. sr., CIVIlAction No. 2673, D. Idaho, Aug. 19,1949, and S. E a. v. Alhambra Gold Mine Corp., CiVilAction No. 11820, S. D. Calif., Aug. 1,1950

,. B. E. O. v, F. L. Rignell 00., Civil Action No. W 75, D. Kan., Feb. 24, 1950; B. E. a. 5.A.loha Oil 00., civn Action No 4463, W. D. Okla, June 30, 1949, and B. E. a. v. H. A.Tucker, Civil Action No. 4724, W. D. Okla.. Feb. 28, 1950.

1.8. E. O. v. Westates Agricultural Ohemieo; 00., Civil Action No. 582, E. D. Wash.,Nov. 2, 1949; 8. E. O. v, Garrette W. Peck~ et 01., er-n Action No. 11337-WM. S. D. Calif ..May 5, 1950 «(laboratories) : 8. E. O. v. Johnson Machine Works, et al., Civil Action No.1892, N. D. Tex., Oct. 5, 1949; S. E. a. v, Automatic SI/stems Corp., et 01., CiVil Action

/SIXTEENTH ANNUAL REPORT 21

of the securities sold were not in conventional form. For example,III the Chinchilla Chateau case 11 promoters offered unregistered in-vestment contracts evidenced by purchase agreements for among otherthings, pairs of live chinchillas.

Some of the recurring types of misrepresentation are illustrated inthe following cases. In S. E. O. v. Helcolicon Mines, t-»; et a» thecourt enjoined further sales of the stock of Helcolicon Mines upon ashowing that the individual defendants had falsely represented,among other things, that tests in an area covered by the company'smining claims had established the existence of gold in sufficientquanti-ties and value to justify large-scale operations and that the Recon-struction Finance Corporation and certain banks in Alaska had agreedto participate in production loans to the company aggregating$1,000,000as soon as minerals in the ground covered by its claims hadbeen evaluated to the extent of $2,000,000. InS. E. O. v. (Iharles A.Howe and Maryland-Nevada Operating 00., Ino.,19 defendants wereenjoined from violating both sections 5 and 17 of the act on the basisof a complaint charging that, in order to sell investment contracts,they falsely stated that they intended to operate certain mining equip-ment to recover, by using a special process, commercially valuablegold from about 100 miles of beach on the west coast of California.S. E. O. v. Diamonds db Metals Exploration 00., Lnc., et aUo wasanother mining case where the defendants were enjoined from viola-tions of both sections 5 and 17 of the act. Violation of both sectionswere also enjoined in several oil promotions during the past year."

An injunction was issued in S. E. O. v. Empire Insurance Agenoyand. J elf B. Burleson 22 upon a complaint that the defendants madeuntrue statements with respect to the amount of stock of the corporatedefendant subscribed during the first week of public offering, withrespect to the retention of a sizable surplus after paying a dividendand with respect to leases entered into for occupancy of a building tobe constructed.

Industrial promotions which resulted in injunctions for violationsof both sections 5 and 17 included: S. E. O. v, Olaytonian M amufac-t1.lll'ingOMp., Inc., et al.,23S. E. O. v. Oo-op Insurance Oo., et al.,214S. E. O. v. Alfred L. Lodge, et al.25 and S. tEo O. V. Trusteed Fumds,Inc.26 An injunction based on violation of both these sections was

No. 1750, W. D. Tenn., Feb. 17, 1950; 8. E. O. v. Ohinchilla Ohateau, Ine., et 01., CivilAction No. 419-50, D. N. J., June 19,1950; S. E. O. v. Ferrel Industries, Inc., Civil ActionNo 28263H, N. D. Calif., Aug. 29, 1949 (weapons) ; 8. E. O. v, South Pacific EngineeringCoru., et al., Civil Action No. 5135, D. Oreg., Jan. 12, 1950 (timber and mineral concessionsIII Equador).

See footnote 16, supra.]8 Civil Action No. 1401, W. D. Michigan, Nov. 8, 1949.rs CiVilAction 11'0.1290,D. Del., Mar. 6, 1950.20 S. E. O. v. Diamonds & Metals ExploratiOn 00., Ine., et al., Civil Action No. 2468, W. D.

Wash., Feb. 10, 1950... S. E. a. v, William Seyler, et al., Civil Action No. 122 CD, D. S. D., Apr. 13. 1950;

8 E. O. v. The Stevens-Stephens 00., Inc., et al., CIVIlAction No. 1943. N. D. Tex.• Feb. 24,1950; S. E. a. v. Alwyn H. Wild, et al., Civil Action No. 52-162, S. D. N. Y., Oct. 25, 1949 ;S. E. O. v. Northwest Petroleum, Ltd., et aZ., Civil Action No. 5188, D. Oreg., dispositionpending.

,. Civil Action No. 1573, D. N. Mex., Dec. 8, 1949.ea Civil Action No. 50-180, D. Mass., Mar. 15. 1950.24 Civil ActIOn No. 1496, D. Ariz., June 30, 1950.:IS Civil Action No. 50-92, D. Mass., Feb. 9, 1950.28 Civil Action No. 8622, D. Mass., Sept. 9, 1949. Although the complaint alleged viola-

tions of the prospectus and an tifra ud provtslons of the Securities Act, this case Is describedbelow at page 14 In connection with its Investment Company Act aspects.

"

22 SECURITIES A~"'D EXCHANGE COMMISSION

also obtained in S. E. O. v, James M. (Iuozeo 21 to terminate a "Ponzi"type scheme, the defendant having paid back as fictitious profits partof the proceeds from sales of investment contracts.

In S. E. O. v, Oleo F. Ramsey 28 a complaint seeking an injunctionis presently pending to prevent further sales of stock in corporationswhich the defendant allegedly falsely represented to have extensiveand valuable rights, concessions, and properties in Peru. Furtheraction is also pending in S. E. O. v. Mercer Hicks Oorp.,29 a case inwhich a broker-dealer who had formerly operated as a sole proprietorattempted to continue his business in corporate form by selling thecorporation's stock to the public. No section 5 violation was chargedbecause a letter of notification had been filed pursuant to the require-ments of the Commission's rules relating to the exemption of smallofferings. But the complaint alleged that in the course of sales ofstock there were many violations of section 17. Among them werefailure to disclose the existence of substantial operating deficits andthe fact that dividends had been paid out of capital surplus contributedby investors in the stock; falsely representing that the corporationwas earning money when it was actually losing money; and appro-priating customers' cash and securities without their knowledge orconsent and substituting the stock of Mercer Hicks Corp. Subsequentto the close of the fiscal year a preliminary injunction was obtainedby the Commission. The Commission also requested the appointmentof a receiver but withdrew its motion when a receiver was appointedunder the New York Martin Act.

As an aid to its investigative function, the Commission often findsit necessary to subpena witnesses or their records. If Commissionsubpenas are resisted the Commission applies to the courts for an orderdirecting the production of the witnesses or documents. Two casesduring the past year arose out of such applications to the court. Theywere S. E. O. v. Ooeur D'Alene Uonsolidated Silver-Lead Mines, Inc.et ano 3U and S. E. O. v. Alhambra Gold Mine Oorp, et al.31 The Com-mission was successful in both instances and the documents requestedwere produced.

Civil Action No. 8413, D. Mass., .July 11, 1949.28 Civil Action No. 2233, W. D. Wash. (pending).29 Civil Action No. 5896, S. D. N. Y. (pending).30 Civil Action No. 836, E. D. Wash., Aug. 3, 1949.31 Civil Action No. 10843M. S D Calif. Jan 4. 1950

'"

PART II

ADMINISTRATION OF THE SECURITIES EXCHANGEACT OF 1934

The Securities Exchange Act of 1934 is designed to eliminate fraud,manipulation, and other abuses in the trading of securities both on theorganized exchanges and in the over-the-counter markets, which to-gether constitute the Nation's facilities for trading in securities; tomake available to the public information regarding the condition ofcorporations whose securities are listed on any national securities ex-change; to provide for the regulation of proxies respecting listedsecurities; and to regulate the use of the Nation's credit in securitiestrading. The authority to issue rules on the use of credit in securi-ties transactions is lodged in the Board of Governors of the FederalReserve System, but the administration of these rules and of the otherprovisions of the act is vested in the Commission.

The act provides for the registration of national securities exchanges,brokers, and dealers in securities, and associations of brokers anddealers.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges

Section 5 of the act requires each securities exchange within theUnited States or subject to its jurisdiction to register with the Com-mission as a national securities exchange or to apply for exemptionfrom such registration. Exemption from registration may be grantedto an exchange which has such a limited volume of transactions effectedthereon that, in the opinion of the Commission, it is not practicable andnot necessary pI' appropriate in the public interest or for the protec-tion of investors to require its registration.

At the close of the 1950 fiscal year the following 16 exchanges wereregistered as national securities exchanges:Boston Stock Exchange New York Stock ExchangeChicago Board of Trade Phtladelphia-Baltimoro Stock ExcIJallgeCincinnati Stock Exchange Pittsburgh Stock E!x:changeDetroit Stock Exchange Salt Lake Stock ExchangeLos Angeles Stock Exchange San Francisco Mining ExchangeMidwest Stock Exchange San Francisco Stock ExchangeNew Orleans Stock Exchange Spokane Stock ExchangeNew York Curb Exchange Washington Stock Exchange

Four exchanges were exempted from registration at the close of the1950 fiscal year. These were:Colorado Springs Stock Exchange Richmond Stock ExchangeHonolulu Stock Exchange Wheeling Stock Exchange

In the latter part of 1!).f\), the Chicago, Cleveland, and St. LouisStock Exchanges, all registered national securities exchanges, and theMinneapolis:St. Paul Stock Exchange, an exempted exchange, entered

23


into an agreement providing for the consolidation of their member-ship and operations. The plan of consolidation became effective onDecember 1, 1949, and provided that the Chicago Stock Exchangewould have the status of a continuing exchange with its name changedto the Midwest Stock Exchange. Accordingly, the registration of theChicago Stock Exchange as a national securities exchange continuedin effect for the new Midwest Stock Exchange; the other three ex-changes were liquidated and the registration of the Cleveland andSt. Louis Stock Exchanges and the exemption of the Minneapolis-St.Paul Stock Exchange were withdrawn. A majority of the membersof the three liquidated exchanges acquired membership in the Mid-west Stock Exchange, and a majority of the issuers of securities listedon such exchanges transferred their listing and registration to the newexchange. Headquarters of the Midwest Stock Exchange is in thecity of Chicago, and branches have been opened in the cities of Cleve-land and St. Louis. These branches are connected directly with theexchange floor in Chicago by private duplex teletype and buy and sellorders are transmitted from the branches over these wires to Chicago.These two branches serve also as local clearing officesfor receipt anddelivery between member firms, in their respective cities, of itemswhich have been processed through the clearance department in Chi-cago. Thus, member brokers in branch officecities, as well as thosein other cities using the clearing-by-mail plan (an innovation devel-oped by the Chicago Stock Exchange during the past several years)are able to handle their own orders without the intermediary servicesof a Chicago correspondent clearing house member firm. The con-solidation was intended to enlarge and broaden markets in the Mid-west for stockholders in that section of the country.

Effective January 1, 1950, the Commission revised its forms andrules pertaining to the registration and exemption of exchanges.'The purpose of the revision was to simplify the application for regis-tration as a national securities exchange, or for exemption from suchregistration, and to reduce the number of formal amendments re-quired to be filed in keeping the information contained in such an ap-plication up to date. As in the previous form, the revised form ofapplication requires an exchange to furnish information about itsorganization, rules of procedure, trading practices, membership re-quirements, and related matters. The revised application has elimi-nated the need for an exchange to duplicate in the statement, which ispart of the application, many items of information which experiencehas shown are furnished in its constitution and rules filed as an ex-hibit to the application. Under the revised procedure an exchangeordinarily will be required to file a formal amendment only once eachyear. Changes effected during the year are to be reported by an ex-change either by letter or by the filing of copies of notices made gener-ally available to its members. In view of the substantial number ofamendments which had been filed by each exchange to its originalapplication in 1934, the Commission requested each registered andexempted exchange to file as an amendment a complete new applica-tion on the revised form prior to June 30, 1950.

1Securities Exchange Act release No•• 883.


Including the amendments containing the revised applications, theexchanges filed a total of 50 amendments during the fiscal year. 'Vhilemany of these amendments contained only periodic information re-quired by the rules, such as membership lists, names of officers anddirectors of the exchange and financial statements of the exchangemany other changes relating to the internal operations of the ex-changes also were reflected in these amendments. Each amendmentwas reviewed to ascertain whether the changes reflected therein werein the public interest and complied with the provisions of the act. Thenature of the changes effected in the exchanges' rules and trading prac-tices varied considerably; some of the more significant changes oc-curring during the fiscal year are briefly outlined below:

Boston Stock Exchange amended its rules relating to the executionof odd-lot orders in securities having a primary market on anotherexchange. The amendment provides that unless otherwise specificallyrequested such orders involving less than five shares would be filled onthe basis of the last reported round-lot transaction occurring on theexchange on which the primary market for the security exists. Pre-viously all odd-lot orders were required to be executed on the basis ofthe next round-lot transaction occurring on the primary exchange.

Cincinnati Stock Exchange amended its rules with respect to theexecution of odd-lot orders in securities dually traded on that exchangeand either the New York Stock or New York Curb Exchange, to per-mit the execution of such orders on a round lot sale occurring on theCincinnati Stock Exchange, subject to certain conditions. Previouslyall odd-lot orders in such securities were required to be executed on anappropriate round-lot sale occurring on a New York exchange.

Detroit Stock Exchange amended its rules to permit members totransact business for nonmembers who are members of the NationalAssociation of Security Dealers, Inc., at a commission rate of not lessthan 60 percent of the usual minimum nonmember commission rates.This follows a procedure adopted by several west coast exchangessome years ago.

Boston, New York, and San Francisco Stock Exchanges and NewYork Curb Exchange amended their rules to permit registered em-ployees of members to be compensated on a commission basis as well ason a salary basis.

New York Stock Exchange amended its constitution to provide foran increase in the size of its board of governors and to change thecomposition thereof. This exchange also adopted new general quali-fications for the listing of securities. It revised its schedule of listingfees and discontinued the optional method of permitting issuers to paythe listing fee for additional shares on a lump-sum basis rather thanon an annual continuing fee basis. Its board of governors approvedand submitted to the membership for vote a proposed general amend-ment to its constitution to provide for the permissive incorporation ofmembers firms and the admission of corporations, under prescribedrestrictions, as member corporations. The proposed amendment wasdisapproved by the membership.

After conferences between New York Stock Exchange and membersof the Commission's staff, the exchange again modified its floor-tradingrules which had been originally adopted in 1945. Shortly thereafter,


New York Curb Exchange revised its floor trading rules to conformwith those of New York Stock Exchange. The revised rules removedcertain restrictions on floor traders' purchases at prices below the pre-vious day's close and permitted a limited amount of purchases abovethe last sale price even if this purchase price exceeded the previousday's close. Some restriction was placed for the first time on thenumber of purchases a floor trader could effect on his bid at risingprices. These exchanges also adopted a rule forbidding floor tradersfrom congregating in or dominating the market.Disciplinary Actions by Exchanges Against Members

Each national securities exchange, pursuant to a request of theCommission, reports to the Commission any action of a disciplinarynature taken by it against any of its members or against any partneror employee of a member for violation of the Securities Exchange Actof any rule or regulation thereunder, or of any exchange rule. Duringthe past fiscal year five exchanges reported taking disciplinary actionagainst 25 members, member firms, and partners of member firms.

The nature of the actions reported included fines ranging from $25to $1,000in seven cases,with total fines aggregating $2,375; suspensionof an individual from exchange membership; censure of individualsor firms for infractions of the rules, and warnings against further vio-lations. The disciplinary actions resulted from violations of exchangerules, principally those pertaining to capital requirements, floor trad-ing, partnership agreements, and handling of customers' accounts.

REGISTRATION OF SECURITIES ON EXCHANGES

Purpose and Nature of Registration

Section 12 of the Securities Exchange Act forbids trading in anysecurity on a national securities exchange unless the security is reg-istered or exempt from registration. The purpose of this provisionis to make available to investors reliable and comprehensive informa-tion regarding the affairs of the issuing company by requiring anissuer to filewith the Commission and the exchange an application forregistration disclosing pertinent information regarding the issuerand its securities. A companion provision contained in section 13 ofthe act requires the filing of annual, quarterly, and other periodicreports to keep this information up to date. These applications andreports must be filed on forms prescribed by the Commission as appro-priate to the class of issuer or security involved.Examination of Applications and Reports

All applications and reports filed pursuant to sections 12 and 13 areexamined by the staff to determine whether accurate and adequatedisclosure has been made of the specific types of information requiredby the act and the rules and regulations promulgated thereunder. Theexamination under the Securities Exchange Act, like that under theSecurities Act of 1933,does not involve an appraisal and is not con-cerned with the merits of the registrant's securities. When examina-tion of an application or a report discloses that material informationhas been omitted, or that sound principles have not been followed

SIXTEEKTH AXKUAL REPORT 27in the preparation and presentation of accompanying financial data,the examining staff follows much the same procedure as that developedin its work under the Securities Act in sending to the registrant a letterof comment, or in holding a conference with its attorneys or account-ants or other representatives, pointing out any inadequacies in theinformation filed in order that necessary correcting amendments maybe obtained. Here again, amendments are examined in the same man-ner as the original documents. Where a particular inadequacy is notmaterial, the registrant is notified by letter pointing out the defect andsuggesting the proper procedure to be followed in the preparation andfiling of future reports, without insistence upon the filing of an amend-ment to the particular document in question.

Examination of financial data-Applications and reports are exam-ined to make sure that sound accounting principles have been followedin the presentation of accompanying financial data. At times exten-sive revisions become necessary. An example of accounting for fixedassets and depreciation arose during the year in connection with thefinancial statements of a large public utility holding company. TheDivision of Corporation Finance had commented to the effect that th«accountants' certificate, which included the phrase "subject to theadequacy of the companies' provisions for property retirement as towhich we are not in a position to express an opinion" was unsatisfac-tory under the Comrnission's rules. The company responded that itsauditors were in the process of making comprehensive studies of thesituation and that amendments could not be made until these studieswere completed. In due course a conference was arranged with thestaff of the division in which officers of the company, accompaniedby their accountants and counsel, reported on the results of this studyof the property and provisions for its retirement. Consequently thecompany effected a change in property retirement reserve appropria-tions and accumulated reserves, which resulted in an increase in thereserve balances of $18,793,528, of which $17,152,641 was chargedto surplus and $1,640,887 to current profit and loss. Thereupon theregistrant filed amended financial statements in accord with thischange.

In its 1948 annual report another registrant, engaged in paint andchemicals manufacturing, set up a reserve of $750,000on the liabilityside of the balance sheet with a corresponding charge to earned sur-plus, to provide for an indicated loss on sale of its investment in a sub-sidiary company at approximately $750,000less than the book value ofthe investment on the parent's books.

Since the reserve was clearly a valuation reserve, the Division ofCorporation Finance requested that it be deducted from the invest-ment account on the asset side of the balance sheet i and, since thecharge was clearly a loss recognized in the year, the division requestedthat it be included in the profit and loss statement rather than earnedsurplus. The financial statements were amended, showing an increasefrom $555,920.64to $1,305,920.64in consolidated net loss for the year.The sale was consummated in 1949at an aggregate loss of $859,138.60or $109,138.60in excess of the $750,000reserve provided in 1948.

Coordination. of annual reports to stockholders and filings ioith. theOommission.-Financial statements filed during the year revealed an

28 SECUlHTIES AND EXCHANGE COMMISSION

increasing trend toward the use of the same basic statements (balancesheet, income and surplus statements) in the annual reports to theCommission and in the companies' published annual reports to stock-holders. The rules of the Commission permit the filing of the report tostockholders to meet the financial statement requirements of the Form1Q-K annual report to the Commission insofar as the former substan-tially complies with the provisions of the latter form. A current ex-ample of this growing practice, which avoids duplication of reporting,may be found in the Form 1Q-K for the fiscal year ended June 30,1949of the Colorado Fuel & Iron Corp. and subsidiary companies in whichthe annual report to stockholders, when supplemented by schedulesnot included in the published report and covered by a signed certificateof the independent accountants, met the requirements of the form in allmaterial respects.Statistics of Securities Registered on Exchanges

At the close of the 1950 fiscal year, 2,128 issuers had 3,544 securityissues listed and registered on national securities exchanges. Thesesecurities consisted of 2,573 stock issues aggregating 3,147,684,318shares, and 971 bond issues aggregating $20,898,718,791 in principalamount. This represents increases of 182,312,982 shares and $121,-419,744 in principal amount, respectively, over the aggregate amountsof securities listed and registered on national securities exchanges atthe close of the 1949 fiscal year. The following table shows the numberof applications and reports filed during the fiscal year in connectionwith the registration of securities on national securities exchanges:Applications for registration of securities on national securities sxchanges., 521Applications for registration of unlssued securities for "when issued"

dealing on national securities exchanges___________________________ 71Exemption statements for trading short-term warrants on national se-

curi ties exchanges________________________________________________ 52Annual reports 2,091Current reports 8,814Amendments to applications and reports_______________________________ 929

During the 1950 fiscal year 49 new issuers registered securities underthe Securities Exchange Act on national securities exchanges, and theregistration of all securities of 61 issuers was terminated, principallyby reason of retirement and redemption and through mergers and con-solidations. Included in these 61 issuers are 16 whose securities wereremoved from registration by reason of the termination of the regis-tration of the Cleveland and St. Louis Stock Exchanges on December1, 1949, such issuers having determined not to transfer the registrationof their securities to the Midwest Stock Exchange.

TEMPORARY EXEMPTION OF SUBSTITUTED OR ADDITIONALSECURITIES

Rule X-12A-5 provides a temporary exemption from the registra-tion requirements of section 12 (a) of the act to securities issued insubstitution for, or in addition to, securities previously listed or ad-mitted to unlisted trading privileges on a national securities exchange.The purpose of this exemption is to enable transactions to be lawfully


effected on an exchange in such substituted or additional securitiespending their registration or admission to unlisted trading privilegeson an exchange.

The exchanges filed notifications of admission to trading under thisrule with respect to 118 issues during the year. In some instances,the same issue was admitted to trading on more than one exchange,so that the total admissions to such trading, including duplications,numbered 211.Special Offerings on Exchanges

Rule X-10B-2 under the Securities Exchange Act permits specialofferings of large blocks of securities to be made on a national securi-ties exchange provided such offerings are effected pursuant to a planwhich has been filed with and approved by the Commission. A secu-rity may be the subject of a special offering when it has been determinedthat the auction market on the floor of the exchange cannot absorb aparticular block within a reasonable period of time without unduedisturbance to the current price of the security. A special offering ofa security is made at a fixed price consistent with the existing auctionmarket price of the security, and members acting as brokers for publicbuyers are paid a special commission by the seller which ordinarilyexceeds the regular brokerage commission. Buyers of the securityare not charged any commission on their purchases and obtain thesecurity at the net price of the offering.

Since February 6, 1942, the date on which rule X-10B-2 wasamended to permit special offerings, the Commission has declaredeffective special offering plans of the following nine exchanges on thedate shown opposite each:New York Stock Exchange Feb. 14, 1942San Francisco Stock Exchange Apr. 17, 1942New York Curb Exchange May 15, 1942Philadelphia-Baltimore Stock Exchange________________________ Sept. 23, 1943Detroit Stock Exchange_______________________________________ Nov. 18, 1943Midwest Stock Exchange' Mar. 27, 1944Cincinnati Stock Exchange June 26, 1944Los Angeles Stock Exchange___________________________________ May 28, 1948Boston Stock Exchange_______________________________________ Sept. 15, 1948

2 Formerly the Chicago Stock Exchange; name changed Dec. 1, 1949.

During the past year the New York Stock Exchange, New YorkCurb Exchange, and San Francisco Stock Exchange each submittedto the Commission proposed amendments to their special offeringplans, and the Commission declared effective, for an experimentalperiod ending December 30, 1950, the amended plans of each of theseexchanges. The purposes of the amendments to the special offeringplans of these exchanges were: (1) To permit the offeror to allot ona firm basis, to member firms engaged in the distributing business,not more than 50percent of the securities involved in the offering. Upto this time when buy orders in a special offering exceeded the amountof the offering the entire amount of the offered securities was requiredto be allocated in reasonably proportionate amounts. Under theamendment only those shares not allotted to member firms on a firmbasis must be allocated. (2) To permit members and member firmsto retain the special commission applicable to securities received under

30 SECURITIES A:I\"'DEXCHANGE COMMIESION

a firm allotment for the bona fide purpose of distribution even thoughtheir efforts to distribute such securities are unsuccessful. Under theold plans members and member firms were prohibited from retainingany part of the special commission in connection with purchases fortheir own account. This modification is designed to supplement andgive effect to the provisions of the amendment mentioned under (1)above. (3) To provide that the special commission may not be lessthan a regular single nonmember commission based upon the per sharerate of 100 shares at the price of the special offering. (4) To makeit permissive rather than mandatory that certain specified factors betaken into consideration by the exchanges in determining whether aparticular block of securities may be made the subject of a specialoffering. This will give the exchanges a certain administrative dis-cretion in determining whether to permit the use of exchange facilitiesfor a special offering. This amendment also reduces from 6 monthsto 1 month the period of time during which price range and volume oftransactions in the particular security must be considered in makingthe necessary determination.

Each exchange with a special-offering plan in effect has been re-quested to report certain information to the Commission on eachoffering effectedon the exchange under the plan. Such reports showeda total of 29 offerings effected on the New York Stock Exchange andNew York Curb Exchange during the fiscal year ended June 30, 1950.These offerings involved the sale of 430,955 shares of stock with anaggregate market value of $11,129,000and ranging in market valuefrom $40,400to $1,293,800. Special commissions paid to brokers par-ticipating in these 29 offerings totaled $266,000. By comparison, inthe preceding fiscal year a total of 25 offerings involving 263,700sharesof stock having a market value of $5,750,000 were effected on fiveexchanges, with special commissions paid to brokers totaling $161,000.Further details of special offerings during the year are' given in ap-pendix table 10.

During the period February 19, 1942 throuzh June 30,1950, a totalof 435 offerings have been effected. These o1ferings totaled 5,346,855shares with a market value of $155,464,000and brokers have been paidspecial commissions totaling $3,081,800.Secondary Distributions Approved by Exchanges

A "secondary distribution," as the term is used in this section, is adistribution over-the-counter by a dealer 01' group of dealers of a com-paratively large block of a J?reviously issued and outstanding securitylisted 01' admitted to trading on an exchange. Such distributionstake place when it has been determined that it would not be in the bestinterest of the various parties involved to sell the shares on the ex-change in the regular way or by special offering. The distributionsgenerally take place after the close of exchange trading. As in thecase of special offerings, buyers obtain the security from the dealerat the net price of the offering, which usually is at or below the mostrecent price registered on the exchange. It is generally the practiceof exchanges to require members to obtain the approval of the exchangebefore participating in such secondary distributions.


During the fiscal year ended June 30, 1950, 5 exchanges reportedhaving approved a total of 78 secondary distributions under which3,705,320shares of stock with a market value of $99,077,000were sold.Further details of secondary distributions of exchange stocks are givenin appendix table 11.Termination of Registration Under Section 19 (a) (2)

Where it is found that the issuer of any security registered on anexchange has failed to comply with any applicable provision of theSecurities Exchange Act or the rules and regulations thereunder, theCommission has authority under Section 19 (a) (2) of the act, afterappropriate notice and opportunity for hearmg, to deny, to suspendthe effectivedate of, to suspend for a period of not exceeding 12months,or to withdraw the registration of that security.

The Commission has little occasion to resort to formal action underthis authority, and no such proceedings were instituted during the 1950fiscal year. However, as noted in the fifteenth annual report, page 38,proceedings were pending in one case at the beginning of the year.This case involved the registration of Barnhart-Morrow consolidatedcommon capital stock $1 par value on the Los Angeles Stock Exchange.After successive postponements of the hearings at the request of theexchange and the issuer, the registrant filed, in connection with itsannual reports required under the law, amended financial statementsfor the years 1945, 1946, 1947, and 1948, satisfactorily correcting thedeficiencies cited. As a result the Commission dismissed the pro-ceedings.

As originally filed, the balance sheets of the company for thosedates had included under "Intangible assets" an item of about $219,000captioned "Capital stock issued for services and leases." This rep-resented capital stock issued to the two organizers of the companyfor alleged services and for a lease interest acquired from the organ-izers but abandoned and quit-claimed by the company to the lessor in1927. Furthermore, the company had been in receivership from 1931to 1936. After objection was made by the staff to inclusion of the$219,000item it was deducted from the common stock account.Unlisted Trading Privileges on Exchanges

A security, unless exempted, which is not registered on a nationalsecurities exchange under section 12 (b) of the Securities ExchangeAct of 1934, may not be traded on such exchanges unless unlistedtrading privileges are available under section 12 (f) of the SecuritiesExchange Act of 1934.

Section 12 (f) provides that upon application to and approval bythe Commission a national securities exchange may: (1) continueunlisted trading privileges to which a security had been admittedon such exchange prior to March 1, 1934; (2) under certain condi-tions extend unlisted trading privileges to any security duly listedand registered on any other national securities exchange; or (3)extend unlisted trading privileges to any security in respect of whichthere is available from a registration statement and periodic reportsor other data filed under the Securities Exchange Act of 1934, or the


Securities Act of 1933, information substantially equivalent to thatfiled in respect of a security duly listed and registered on a nationalsecurities exchange. The statute requires that appropriate notice beissued and an opportunity for hearing provided, and that the appli-cant exchange establish to the satisfaction of the Commission thatthere exists m the vicinity of that exchange sufficiently widespreadpublic distribution and sufficient public trading activity in the securityto render the extension of unlisted trading privileges on that exchangenecessary or appropriate in the public interest or for the protectionof investors.

The following summarizes the status of unlisted issues on theregistered exchanges as of June 30, 1950:

Listed on some other registered exchangeNot listed on any registered exchange

TotalTotal, all stocks and bonds, 958 issues.

Sloch545332877

Bonds6

75

81

The first grant of an application by an exchange under section12 (f) (2) for unlisted tradmg in stocks listed on some other regis-tered exchange was in April, 1937. There have been 692 admissionsof such stocks to the various exchanges. Stocks covered by 599 admis-sions were extant as of June 30, 1950. The number of actual issuesinvolved is less than this figure because many issues have beenadmitted to unlisted trading on two or more exchanges. The numer-ous admissions, including the record number of 130 during the pastfiscal year, have, however, barely maintained the ratio of listed stockstraded unlisted on other exchanges to all listed stocks. On June 30,1945, for example, 21.8 percent of all registered (listed) stock issuesand 54.9 percent of all registered shares were also admitted to unlistedtrading on other exchanges, while 5 years later, after 396 section 12(f) (2) admissions," the comparable figures were 21.2 percent of theissues and 54.3 percent of the shares. During this 5-year period, thenumber of stocks listed on New York Stock Exchange and traded onother exchanges has declined from 51.6 to 49.8 percent of all stockslisted thereon. Securities registered on that exchange are the prin-cipal source of unlisted admissions under section 12 (f) (2). Listedstocks which are also traded unlisted on other exchanges, numbering545 as of June 30,1950, and were 554 on June 30,1937. However, the11 regional exchanges which have availed themselves of section 12 (f)in order to procure trading privileges in securities listed on otherexchanges had only 84 more stocks to trade in on June 30, 1950, thanthey had on June 30,1937, and 598 of the total stock issues traded onthose exchanges in 1950 were admitted pursuant to section 12 (f)(2), without which it appears that these exchanges might have suf-fered a decline of more than 500 stocks :

"33 in 1945, 78 in 1946, 71 in 1947, 46 in 1948, 38 in 1949, and 130 in 1950, all Infiscal years ending June 30. Part of the Increase in 1950 Is due to the Commission's re-quests for 12 (f) (2) applications rather than applleatfons for determination of substantlal equivalence pursuant to rule X-12 (f)-2 (b), in numerous cases where new issueswere succeeding old ones in corporate changes and where the llsted status of the fss~pmade recourse to section 12 (f) (2) possible and appropriate. -,

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Stock available for June 30,trading 1

1~~d~12 (I) (2)

June 30, June 30, admls-1937 1950 slons

Boston ______________________________________________________________ 370 383 275ClncmnatL _________________________________________________________ 101 110 65Detroit _____________________________________________________________ 119 206 « 128Los Angeles_________________________________________________________ 197 261 186Midwest, ___________________________________________________________ ,517 454 379Phlladelphia-Baltlmore _____________________________________________ ,538 489 382Pittsburgh __________________________________________________________ ,102 126 71Salt Lake _______________________________________________________. ___ 107 100 100San FrancISCOStock ________________________________________________ '337 354 304Washington ____________________________________________. ___________ 39 41 39Wheellng ____________._______. ________. _____________________________ 32 19 16

TotaL _________. __ ___________________________________________ . 2,459 2,543 1,945

I Includes many duplications of Issues among the exchanges .Includes issues of exchanges merged thereafter.Includes 10 sec. 12 (I) (2) admissions,

, The sole increase over 1937.

New York Curb Exchange does not trade in New York Stock Ex-changes issues. The single section 12 (f) (2) extant admission of astock on the Curb is Utah-Idaho Sugar common, listed on Salt LakeStock Exchange. Stocks available for trading on the Curb have de-clined from 1,149 in 1937 to 779 in 1950, both figures as of June 30.New York Stock Exchange does not have any section 12 (f) (2) admis-sions, since it does not permit trading in unlisted securities. Since thesection 12 (f) (2) adniissions of stocks to the regional exchanges areprincipally of issues listed on New York Stock Exchange, and sincethese admissions constitute an ever-increasing proportion of the stocksavailable for trading on the regional exchanges, their effect is to con-centrate trading- on the regional exchanges more and more in thenational, as against the local issues.

The 332 stocks admitted to unlisted trading- without being listed onany registered exchange aggregated 329,904,324shares, or about 91/2percent of the total shares admitted to trading on the registered ex-changes as of June 30, 1950. Reported volume of trading in the 332issues for the calendar year 1949 was 21,715,000 shares, or about 41,4percent of the total share volume on the registered exchanges. Inthis compilation "shares" include warrants, American depositary re-ceipts, voting trust certificates, etc. New York Curb Exchange ac-counted for about 93 percent of the 21,715,000reported share volume,San Francisco Stock Exchange for about 6 percent and 1 percent wasscattered among 6 other regional exchanges. Reported volumes areabout seven-eighths of actual volumes on New York Curb Exchange,principally because odd lots are not usually reported on the ticker.Considering this factor and the volume in stocks removed from un-listed trading during 1949, it appears that approximately one-third ofthe share volume in that year on New York Curb Exchange was inunlisted stocks not registered pursuant to the Securities Exchange Actof 1934.

In June 1950, the stocks traded on an unlisted basis pursuant tosection 12 (f) (3) were reduced to six, upon retirement of AmericanGas & Electric preferred.

9Hi8U-51--4

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34 SECURITIES AND EXCHANGE COMMIESION

Of 592 bond issues available for unlisted trading on exchanges as ofJune 30, 1937, only 81 were available on June 30, 1950. These aggre-gated $879,231,350 face value and most of the issues were on NewYork Curb Exchange.

In addition to the unlisted issues discussed above on the registeredexchanges, there were 35 stocks and 1 bond issue admitted only to un-listed trading on the Honolulu Stock Exchange, an exempted exchange.Applications for Unlisted Trading Privileges

Pursuant to clause (2) of section 12 (f), a total of 131 issues wereaccorded unlisted trading privileges during the 1950 fiscal year.

Stock exchange applying:BostonCincinnatiDetroitLos AngelesMidwestPhiladelphia-BaltimorePittsburghSan FranciscoVVashington

Total

Number oj ueue«Stocks Bonds

3116141520153

15 11

130 1

Changes in Securities Admitted to Unlisted Trading Privileges

Rule X-12F-2 under the Securities Exchange Act provides for thecase where a change is made in a security previously admitted to un-listed trading privileges. Under paragraph (a) of this rule if thechange is in the title of the security or the name of the issuer, in thematurity, interest rate or outstanding aggregate principal amount ofan issue of bonds, debentures or notes, or in the par value, dividendrate, number of shares authorized or the outstanding number of sharesof a stock, the security as changed is deemed to be the security originallyadmitted to unlisted trading privileges on the exchange. The ex-change is required to notify the Commission of such changes promptlyafter it learns of the change and many such notifications are receivedduring the year.

Paragraph (b) of rule X-12F -2 provides for changes in a securityadmitted to unlisted trading privileges where the change is more com-prehensive than those enumerated in paragraph (a) of the rule. Insuch case the exchange may file an application requesting a Commissiondetermination of the effect of the change, describing each change ef-fected in the security and furnishing copies of all written matter sub-mitted by the issuer to its security holders relating to such changes.If the Commission determines that the security after such change issubstantially equivalent to the security originally admitted to unlistedtrading privileges, than the security as changed is deemed to be thesecurity originally admitted to unlisted trading privileges on that ex-change. Pursuant to the provisions of paragraph (b) of rule X-12F -2,the Commission granted four applications for a determination of sub-stantial equivalence by New York Curb Exchange and an application

Middle States Petroleum Corp., Feb. 9, 1950: Northeru Indiana Public Service Co.,Feb. 9, 1950, Kansas Gas & Electric Co., Feb. 20, 1950.

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by New Orleans Stock Exchange with respect to two stocks." Oneapplication by New York Curb Exchange was denied:

DELISTING OF SECURITIES FROM EXCHANGES

Securities Delisted by ApplicationSection 12 (d) of the Securities Exchange Act provides that upon

application by the issuer or the exchange to the Commission, a securitymay be withdrawn or stricken from listing and registration on a na-tional securities exchange in accordance with the rules of the exchangeand subject to such terms as the Commission deems necessary for theprotection of investors. In accordance with this procedure, six bondIssues and three stock issues were stricken from listing and registrationupon application by exchanges. All six bond issues 7 and one of thestock issues" were delisted by New York Stock Exchange, on theground that the amounts of the issues remaining outstanding had beenreduced to inconsequential proportions by reason of exchanges or re-demptions. The two remaining stock issues were delisted by NewYork Curb Exchange (and one of them also by Philadelphia-BaltimoreStock Exchange 9) by reason of reacquisition of most of the shares inthe one case and liquidation in the other.'.

The Commission granted the application by the receivers of onecorporation to withdraw its common stock from registration and list-ing on New York Curb Exchange on the ground that the companywas insolvent and in process of liquidation." It granted the applica-tion of another corporation to withdraw its common stock from reg-istration and listing on Chicago Board of Trade since the company hadalready registered and listed the same security upon Midwest StockExchange,"Securities Delisted by Certification

Securities which have been paid at maturity, redeemed, or retired infull, or which have become exchangeable for other securities in sub-stitution therefor, may be removed from listing and registration on anational securities exchange if the exchange files a certification withthe Commission to the effect that such retirement has occurred. Theremoval of the security becomes effective automatically after the inter-val of time prescribed by rule X-12D2-2 (a). The exchanges filedcertifications under this rule effecting the removal of 152 separateissues. In some instances the same issue was removed from more thanone exchange, so that the total number of removals, including dupli-cations, was 181. Successor issues to those removed became listed andregistered OIl exchanges in many cases.

Ford Motor Co., Ltd., of Great Britain, Feb. 28, 1950.J ell'erson Lake Sulphur Co., Mar. 23, 1950.

7 The Long Island Railroad Co., Securities Exchange Act release No. 2484, (1949);Mortgage Bank of the Venetian Provinces, Securities Exchange Act retease No. 4334,(1949) ; Chicago, St. Louis and New Orleans Railroad Co., Securities Exchange Act relea~pNo. 4426, (1950); State of San Paulo, Securities Exchange Act release No. 4426, (1950) ;City of Porto Alegre, Securities Exchange Act release No. 4426 (1950).

"The Joliet & Chicago Railroad Co., Secuntles Exchange Act release No. 4444 (1950).Cooper Distributing Co., Securities Exchange Act release No. 4275 (1949).

reOld Poindexter Distillery, Jnc., Securities Exchange Act release No. 4335 (1949);Cooper Distributing Co., Securftfes Exchange Act release No. 4275 (1949).

11 Leonard 011 Development eo., Securities Exchange Act release No. 4354 (1949).12Centlivre Brewing Corp., Securities Exchange Act release No. 4443 (1950).

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36 SECURiTIES AND EXCHANGE COMMISSION

In accordance with the provisions of rule X-12D2-1 (d), New YorkCurb Exchange removed 16 issues from listing and registration whenthey became listed and registered on New York Stock Exchange. Thisrule permits a national securities exchange to remove a security fromlisting and registration in the event trading therein has been termi-nated pursuant to a rule of the exchange which requires such termi-nation if the security becomes listed and registered and admitted totrading on another exchange. Removal under this rule is automatic,the exchange being required merely to notify the Commission of theremoval.Securities Removed From Listing on Exempted Exchange

A security may be removed from listing on an exempted exchangeby such an exchange filing an appropriate amendment to its exemptionstatement setting forth a statement of the reasons for the removal.One exempted exchange removed two issues from listing thereon dur-ing the year, due in one case to the redemption of the security and inthe other to the expiration of a voting trust agreement.

MANIPULATION AND STABILIZATION

Sections 9, 10, and 15 of the Securities Exchange Act prohibitmanipulation of securities prices. Section 9 forbids certain specifi-cally described forms of manipulative activity. Transactions whichcreate actual or apparent trading activity or which raise or lower pricesare declared to be unlawful if they are effected for the l?urpose ofinducing others to buy or to sell. Certain practices desiznated as"wash sales" and "matched orders" effected for the purpose of creatinga false or misleading appearance of active trading or a false or mis-leading appearance with respect to the market for a security are de-clared to be illegal. Persons selling or offering securities for sale areprohibited from disseminating false information to the effect that theprice of a security will, or is likely to, rise or fall because of marketoperations conducted for the purpose of raising or depressing the priceof a security. Persons selling or buying securities are forbidden tomake false or misleading statements of material facts, with knowledgeof their falsity, or willfully to omit material information regardingsuch securities for the purpose of inducing purchases or sales.

Pursuant to its statutory authority, the Commission has adoptedrules and regulations to aid it in carrying out the expressed will ofCongress. Sections 9, 10, and 15, as augmented by the Commission'srules and regulations, are aimed at freezing our securities marketsfrom artificial influence and maintaining fair and honest marketswhose prices are established by supply and demand and are uninflu-enced by manipulative activity.Manipulation

The manipulation of securities prices which in previous years tookmillions of dollars annually from the J?ublic, was one of the principalreasons for the adoption of the Securities Exchange Act of 1934. Inthe early days of the Commission's existence, some market operatorsattempted to continue their manipulative activities. The Commissionuncovered these activities and as a result various penalties were im-

SIXTEENTH! ANNUAL REPORT 37

posed upon certain operators, including expulsions from exchanges,Jail sentences, and fines. As a result of the administration of the act,manipulation is believed no longer to be an appreciable factor in ourmarkets. However, sporadic attempts artificially to raise or depressthe prices of securities are still encountered, and it is evident that anyrelaxation of market surveillance on the part of the Commission wouldcreate a danger of reestablishment of many of the manipulative prac-tices the act was designed to prevent.

During the fiscal year ended June 30, 1950, several actions arisingout of manipulative investigations were undertaken. A permanentinjunction was obtained against Henry M. Stanley on the basis ofattempts to manipulate the market in the stock of Friars Ale BrewingCo, Public hearings were begun in Chicago to revoke the broker-dealer registration of Adams & Co., Bennett, Spanier & Co., and RayT. Haas for their manipulation of the price of Mohawk Liqueur Co.stock. The registration of W. H. Bell & Co., Inc., was revoked forSecurities Act violations in the stock of Bost, Inc. A series of fraudsperpetrated on an investment trust resulted in the jailing of WilliamA. Hancock and led to an action to revoke the registration of the firmof Junger, Anderson & Co. All of the above cases were discoveredduring investigations which arose out of the detection methods de-scribed in the following paragraphs, A clarification of certain issuesinvolving the propriety of trading by underwriters was made in anopinion dealing with the underwriting of bonds of Northern IndianaPublic Service Co.

In administering the antimanipulative requirements there is a pre-mium on prompt action to prevent harm before it occurs, and on theavoidance of interference WIth the legitimate functioning of the mar-kets. To accomplish this the Commission has continuously modifiedand sought to improve its procedures for the systematic surveillanceof trading in securities. Methods used to detect manipulation havenecessarily been flexible, since techniques employed by manipulatorschange constantly, increasing in subtlety and complexity.

The staff regularly scrutinizes price movements in approximately8,500 securities, including about 3,700 issues traded on the exchangesand 4,800 which have the most active markets over the counter. In-formation maintained concerning these securities includes not onlydata reflecting the market action of such securities, but also includesnews items, earnings figures, dividends, options, and other facts whichmight explain price and volume changes. In addition, monthly ob-servations are made of the price movements of thousands of otherissues which occasionally change hands in our public markets. Themarkets for securities about to be sold to the public are watched veryclosely. In this connection the markets for almost 1,400 issues in theamount of about $172,000,000,offered under regulation A, were care-fully checked for improper pricing or market grooming. Several hun-dred other securities were kept under special daily observation duringthe 1950 fiscal year, for periods ranging from 14 to 90 days, becausea public offering under a registration statement was proposed andeither the underwriter or the Issuer had reserved the right to stabilizethe market for the security. The issues actually offered had a publicoffering price in excess of $3,000,000,000.


"Whenno apparent explanation can be found for an unusual move-ment in a security or for an unusual volume of trading, the mattermay be referred to one of the regional officesof the Commission for afield investigation. For reasons of policy the Commission keeps con-fidential the fact that trading in a given security is under investiga-tion, for it has found that knowledge of the existence of such investiga-tions may unduly affect the market or reflect unfairly upon individ-uals whose activities are being investigated. As a result, the Com-mission occasionally receives criticism for failing to investigate cer-tain cases when, in fact, it is actually engaged in an intensive investi-gation.

The Commission's investigations of unusual market activity taketwo forms. The "quiz," or preliminary investigation, is designed todetect and discourage incipient manipulation by a prompt determina-tion of the reasons for unusual market behavior. Often the results ofa quiz point to a legitimate reason for the activity under review andthe case is closed. Frequently, facts are uncovered which require moreextended investigation, and in these cases formal orders of investiga-tion are issued by the Commission. In a formal investigation, mem-bers of the Commission staff are empowered to subpena pertinentmaterial and to take testimony under oath. In the course of such in-'vestigations, data on purchases and sales over substantial periods oftime are often compiled and trading operations involving considerablequantities of securities are scrutinized.

The Commission operates on the premise that manipulation shouldbe suppressed at its inception. Many of the cases investigated nevercome to the attention of the public because the promptness of the Com-mission's investigations, t'hrough the quiz technique, stops the ma-nipulation before it is fully developed. Losses by the public are sel-dom recoverable even though the perpetrator of a fraud is brought tojustice. Therefore it is believed that these investigatory methods af-ford more protection to the public than allowin~ unlawful marketoperations to continue until it appears that sufficient evidence for asuccessful prosecution is obtainable.

Trading investigations

"Quizzes" Formalin-vestigations

Pendmg June 30, 1949___________________________________________________________ 137 18Initiated in period July 1, 1949--June 30,1950 ____________________________________ 117 3Total to be accounted for __________________________________________________ 254 21

Closed or completed during fiscal year ___________________________________________ 174 10Changed to formal during fiscal year .. 3Total disposed of, ______________________________________ 177 10

Pending at end of fiscal year. 1 77 11

Stabilization

During the 1950fiscal year many conferences were held with repre-sentatives of issuers and underwriters in order to assist them toavoid violation of the statutory provisions and rules of the Com-

_________________________ ___________________ ------------0 __________________

__----------------------- ___________________________

SIXTEENTH ANNUAL REPORT 39mission dealing with stabilizing, manipulation, and frau~ and manywritten and telephone requests were answered. Formal Commissionrules dealing directly with stabilization relate only to offerings "atthe market" or at prices relating to market prices. The practiceapplicable to fixed price offerings is embodied in a wealth of interpre-tive material. It is the Commission's experience that such issuersand underwriters place great value on the immediate service whichthe Commission is able to render them by being at all times avail-able to give them responsible advice as to problems dealing withproper stabilizing techniques in the offering of securities.

During the 1950 fiscal year the Commission continued the admin-istration of rules X-17A-2 and X-9A6-I. Rule X-17A-2 and FormX-17A-l (the form on which stabilizing transactions are reported)were amended in the interest of simplification and clarity. RuleX-17A-2 requires the filing of detailed reports of all transactionsincident to offerings in respect of which a registration statement hasbeen filed under the Securities Act of 1933 and where any stabilizingoperation is undertaken to facilitate the offerings of securities regis-tered on national securities exchanges, in which the offering prices arerepresented to be "at the market" or at prices related to market prices.

Of almost 500 registration statements filed during the 1950 fiscalyear, 220 contained a statement of intention to stabilize to facilitatethe offerings covered by such registration statements. Each of thelatter filings was examined as to the propriety of the proposed methodof distribution and market support and the full disclosure thereof.Because a registration statement sometimes covers more than one classof security, there were 252 offerings of securities in respect of whicha statement was made, as required by rule 426 under the SecuritiesAct, to the effect that a stabilizing operation was contemplated.Stabilizing operations were actually conducted to facilitate 59 of theseofferings, principally stocks. Offerings of stock issues aggregating20,369,462 shares with an aggregate public offering price of $408,-092,189 were stabilized, but only 1 bond offering, having a principalamount of $4,000,000,was stabilized. In connection with these stabi-lizing operations, 7,990 reports were filed with the Commission duringthe fiscal year. Each of these reports has been analyzed to determinewhether the stabilizing activities were within permissible limits.

SECURITY TRANSACfIONS OF CORPORATION INSIDERS

Reports of Transactions and HoldingsTo give information to the public about transactions by corporation

insiders in securities of their companies, certain reports are requiredto be filed with the Commission by persons closely identified with themanagement or control of industrial, utility, and investment com-panies under the conditions specified in three of the acts whic'h theCommission administers-e-sections 16 (a) of the Securities ExchangeAct of 1934, 17 (a) of the Public Utility Holding Company Act of1935, and 30 (f) of the Investment Company Act of 1940. An initialreport must be filed disclosing the amount of such security holdings,and thereafter a report must be filed for each month in which anyc'hange occurs in these holdings. The reports show the relationship


of the reporting insider to his named company; the date, number ofshares, and security involved in each transaction; the character ofthe transaction (whether a purchase, sale, gift, exchange, etc.) ; andthe nature of ownership (whether direct or indirect through a holdingcompany, partnership, trust, etc.),Publication of Data Reported

The reports filed by insiders are available for public inspectionfrom the time they are filed. However, it is impossible for the major-ity of investors personally to inspect them either at the Commission orat the national stock exchanges, where additional copies of the reportsare filed. Accordingly, the Commission issues a monthly Official Sum-mary of Security Holdings and Transactions which summarizes thesereports. Before the close of the 1950 fiscal year, as a part of the Com-mission's management-improvement program, a study was made toreappraise the service afforded by this publication. In that connec-tion, a card was attached to each copy of the summary distributed inMarch asking subscribers what use was made of the summary andwhat value it afforded them, and inviting their suggestions for waysin which it might be improved for the benefit of investors.

More than 1,400 replies were received representing nearly 40 per-cent of the 3,814 subscribers circularized, The replies indicated, ingeneral, that five out of six subscribers own corporate securities-andthat those who are not stockholders consist mainly of newspapermen,teachers, students, librarians, and government and trade associationofficials. Moreover, it was indicated that each copy of the summary isused by an average of 8.4 persons. The indirect coverage resultingfrom its use by newspapermen as a source for news stories is incal-culable (167 newspapermen are subscribers). It was also found thatapproximately 50 percent of the summary subscribers are engaged insome form of the securities business, that 20 percent are primarilyinvestors, that 20 percent are lawyers, engineers, accountants and cor-poration executives, and that the remaining 10 percent are journalists,teachers, and persons engaged in a variety of miscellaneous occupa-tions. By and large the returns demonstrate that the summary isdeemed by its users to be important particularly in reflecting insiders'opinions of the prospects of the corporation implicit in their transac-tions and holdings.

Subscribers offered a number of specific suggestions for improve-ment of the summary. Some of the suggested changes have alreadybeen put into effect, and a number of other suggestions proposed bysubscribers, as well as by members of the Commission's staff, are beinggiven further consideration with a view to improving the usefulnessof the summary and cutting down its publication costs.Preventing Unfair Use of Inside Information

For the Jlurpose of preventing the unfair use of information whichmay have been obtained by a corporation insider b.Yreason of his rela-tionship to his company, section 16 (b) of the Securities ExchangeAct further provides that any profit he realizes from anI purchase andsale, or sale and purchase, of any equity security 0 the companywithin any period of less than 6 months shall be recoverable through


court action brought by the issuer or by any security holder actingin its behalf. Corresponding provisions are contained in section 17(b) of the Public Utility Holding Company Act of 1935 and in sec-tion 30 (f) of the Investment Company Act of 1940. The reportingprovisions of these acts have in a number of instances brought to lighttransactions involving substantial profits from short-term trades whichwere recovered by or in behalf of the issuers, either through voluntaryrepayment or as a result of court action.Volume of Reports Filed and Examined

Members of the staff examine all reports of insider holdings andtrading to determine their compliance with the statutory require-ments. Amended reports are obtained where inaccuracies or omis-sions appear. Details as to the volume and kinds of reports filedduring the year are shown in the following table.

Number of security ownership reports of otflcers, directors, principal securityholders, and certain other affiliated persons filed and eaJamined during the ttscalyear ended June 80, 1950

Description of report IOriginal Amended Totalreports reports

Securities Exchange Act of 1934:Form 4. .•.• . ........•..• _""_" _" ....•..• _. ...... 14,705 858 15,503Form 5... _. _. ._ .....•...• .• ............ ••............• 424 15 439Form 6 ..• __ .........•• ____ •.......... _. ___ •.............. _._ ... 2,269 43 2,312

Public utility Holding Company Act of 1935'Form U-17-1 ..... ""_' ............ .. •.•............ 58 0 58Form U-17-2 ..... _. .. _._ ......•• _. .........•.. _. _' 643 20 663

Investment Company Act of 1940:Form N~OF-l_._ ... _. ...•.......... _. ............. •.. 118 7 125Form N~OF-2 ... _._ ........ _. .. _. _. 616 33 M9

TotaL ...•• _. ........... _. ............. .......... _. 18, 833 976 19, BOll

I Form 4 is used to report changes in ownership; Form 5, to report ownership at the time any equitysecurity i~ first listed and registered on a nattonal securities exchange; and Form 6, to report ownership ofpersons who subsequently become officers, directors, or principal stockholders of the issuer of such a listedand registered equity seeurrty, under sec. 16 (a) of the Securities Exchange Act of 1934. Form U-17-1 isused for initial reports and Form U-17-2 for reports of changes in ownership of securities, under sec. 17 (a)of the Public Utility Holding Company Act of 1935. Form N-1lOF-11s used for initial reports and FormN~OF-2 for reports of changes in ownership of securities, under sec. 30 (f) of the Investment Company Actofl940.

SOLICITATION OF PROXIES, CONSENTS, AND AUTHORIZATIONS

The Commission is authorized under three of the acts it administersto prescribe rules and regulations concerning the solicitation ofproxies, consents, and authorizations in connection with securities ofthe company subject to those acts." Pursuant to this authority, theCommission has adopted regulation X-14, which is designed to pro-tect investors by requiring the disclosure of certain information tothem when their J?roxies are being solicited. The rules afford inves-tors an opportunity for active participation in the affairs of theircompany. Under regulation X-14 each person solicited must befurnished with such information as will enable him to act intelli-gently upon each separate matter in respect of which his vote or con-

,. Sections 14 (a) of the Securities Exchange Act of 1934. 12 (a) of the Public UtilityHolding Company Act of 1935, and 20 (a) of the Investment Company Act of 1940.

__ __ ____• __ _ __ _ _ __ __•

___ _

_ __

_ __ ____ ___""'"

__ _________

___ _________

" _ __ __________

_ ____ ___" _


sent is sought. The proxy rules set forth in this regulation also con-tain provisions which enable security holders who are not allied withthe management to communicate with other security holders whenthe management is soliciting proxies.Statistics of Proxy Statements

During the 1950 fiscal irear, material relating to 1,668different so-licitations of proxies and 'follow-up" material used in connection with186 of these solicitations was filed with the Commission, 1,653 proxystatements were filed during the 1949 calendar year, practically thesame number as in each of the four preceding calendar years. Thecomparative numbers of proxy statements filed by management andnonmanagement groups and the principal items of business for whichstockholders' action was sought in these solicitations is shown in thetable below for each of the past five calendar years.

Year ended Dec. 31

1945 1946 1947 1948 1949--- --- --- ---

Proxy statements filed by management ______________ 1,570 1,664 1,613 1,648 1,625Proxy statements flied by others than management __ 24 21 32 29 28--- --- --- --- ---

Total proxy statements filed ___________________ 1,594 1,685 1,645 1,677 1,653--- --- --- --- ---

For meetings at which the election of directors wasone of the items of business ________________________ 1,3.'iO 1,407 1,461 1,534 1,536

For meetings not involving the election of directors __ 213 244 149 115 97For assents and authorizations not involving a meet-

ing or the election of directors ______________________ 31 34 35 28 20--- --- --- --- ---Total proxy statements fIIed ___________________ 1,594 1,685 1,645 1,677 1,653

The items of business other than that of election of directors weredistributed among a somewhat wide variety of specific proposals asfollows:

Year ended Dec. 31

1945 1946 1947 1948 1949------ --- --- ---

Mergers. consolidations, aequisltion of businesses, and pur.40chase and sale of property 6.'; 69 46 43

Issuance of new seeuntles, modification 01 existing securities,recapitalization plans other than mergers or consolidatlons ___ 227 249 223 154 193Employees pension plans ______________________________________ 94 75 66 59 49

Bonus and profit-sharing plans, including stock options ________ 51 52 60 32 20Indemnification of officers and directors. 25 36 22 21 12Change in date of annual meeting 33 28 27 24 9Other miscellaneous amendments to bylsws. and miscellaneousother matters 217 309 207 215 187Stockholder appt oval of independent auditors _________________ 296 304 312 365 381Number of management's proxy statements eontainmg stock-

14 43holder proposals _____________________________________________ 19 15 38Number of such stockholder proposals 34 34 29 57 68Netnumbel of stockholders whose progosals were included in

management's proxy statements (eac stockholder is countedonly once in each year regardless of the number of companies

17 9 13 21that included his proposals in proxy statements) _____________ 18

Examination of ProxiesWhile proxy examination work occurs throughout the year, it has

a seasonal peak during the spring. Thus, of 1,517 annual meetings

-

_________________ • _________________

__________ •• _______________ •_______________________

__________________________________• _______" ____

___• _____________________

SIXTEENTH Al\'NUAL REPORT 43

for which proxy statements were filed during the 1949 calendar year,1,085meetings, over 70 percent of the total, were held during March,April, and May; 544of the total, 36 percent, took place in April alone;160 meetings were held in the last week of April; and as many as 65meetings were scheduled for 1 day, the fourth Tuesday in April.

Pension plaJls.-An outstanding feature of the year was the numberof cases in which pension plans were presented to stockholders forapproval. While the plans in a single industry followed a somewhatgeneral pattern, there were variations due to differences in the financialcondition of the companies and the differing approaches of manage-ment. A common characteristic of many plans was the 5-year termunder which some managements insisted that the company's liabilityran only to employees who qualified and elected to go on pension duringthe term. One plan of this type, submitted to its stockholders by alarge steel producer, provided for payments into a trust in five annualinstallments so that the last payment would be made 4 years after thefinal year of the plan. Estimates showing the cost, assuming that alleligible employees would elect to take pensions, were clearly presentedin a table by maturing classes and payments to the fund. Assumingthat the plan might well be renewed on its expiration, the inclusionof a statement in the proxy soliciting material was obtained indicatingan approximate range of annual cost if the plan were so continued.This company disclaimed any intention of funding past service costfor employees who would not qualify for pensions during the 5-yearterm of the plan.

In contrast to the position taken by the above-mentioned company,one of the leading steel producers solicited proxies with a view toamending its existing plan to increase the benefits and broaden thecoverage, and presented in its proxy statement its summary of costson the assumption that the plan would continue indefinitely eventhough the contract covered only 5 years specifically. In this case thesummary presented a comparison of lump-sum costs of past serviceand the estimated comparative annual costs during 1950 for the exist-ing and proposed plans. Because of the very substantial figures pre-sented and the technical character of the references to income taxlaws, the staff requested and obtained in the management's introduc-tion to the summaries of costs a clear statement that the figures forcosts were presented before giving effect to income taxes.

REGULATION OF BROKERS AND DEALERS IN OVER.THE.COUNTERMARKETS

Registration

Brokers and dealers using the mails or other instrumentalities ofinterstate commerce to effect transactions in securities on over-the-counter markets are required to be registered with the Commissionpursuant to section 15 (a) of the Securities Exchange Act of 1934;exemption, however, is granted to those brokers and dealers whosebusiness is exclusively instrastate or exclusively in exempt securities.The following tabulation reflects certain data with respect to registra-tion of brokers and dealers during the 1950fiscal year:


Registration of brokers and dealers under scction 15 (b) of the SecuritiesEa:change Act of 198.r-ttscal year ending June 80, 1950

Effective registrations at close of preceding fiscal year 3,924Effective registrations carried as inactive_____________________________ 70Registrations placed under suspension during preceding year_____________ 0Applications pending at close of preceding fiscal year____________________ 23Applications filed during fiscal year___________________________________ 493

Total 4,510

Applications withdrawn during year___________________________________ 13Applications cancelled during year____________________________________ 0Registrations withdrawn during year_________________________________ 418Registrations cancelled during year___________________________________ 43Registrations denied during year______________________________________ 0Registrations suspended during year___________________________________ 0Registrations revoked during year_____________________________________ 12Registrations expired by rule X-15B-3_________________________________ 1Registrations effective at end of year 3,930Registrations effective at end of year carried as inactive________________ 170Applications pending at end of year__________________________________ 23

Total 4,510

1Registrations on inactive status because of inability to locate registrant despite carefulinquiry.

,Administrative Proceedings

Section 15 (b) of the act provides that registration of a broker ordealer may be denied for specific types of misconduct on the part of anapplicant. Registration may be revoked for such misconduct if theCommission finds after an appropriate record has been made that suchdenial or revocation is necessary in the public interest. The Commis-sion's staff, therefore, examines all applications for registration andnumerous other available sources of information to determine whetherthe applicant has engaged in any violations of law which would consti-tute a statutory basis for challenging the propriety of giving him theprivileges of registration. When indications of such misconduct arediscovered, the Commission orders proceedings to establish the facts.The applicant has full opportunity to be heard on the specified charges.Similar procedures are followed in revocation proceedings against reg-istered brokers and dealers and in proceedings to determine whether tosuspend or expel a broker or dealer from membership in a national se-curities exchange or association. The following tabulation reflects thenumber of proceedings instituted under sections 15 (b) and 15A 14

during the 1950 fiscal year and the disposition thereof.

Record Of broker-dealer registration proceedings and proceedings to suspend orexpel from, membership in a national securities ea:change or association insti-tuted pursuant to the Securities Exchange Act of 1934 tor the 1950 f£8cal year

Proceedings pending at start of fiscal year to :Revoke registration________________________________________________ 5Revoke registration and suspend or expel from NASD________________ 8Deny registration to applicanL_____________________________________ 1

Total proceedings pending________________________________________ 14

1& Section 15A of the Securities Exchange Act of 1934, provides for the registration ofsecurities dealers associations and. among other things, outlines conditions of membershipin such associations.

SIXTEENTH ANNUAL REPORT 45Reoord of broker-dealer registration prooeedings, eto.-Continued

Proceedings instituted during fiscal year to:Revoke regffitration________________________________________________ 13Revoke registration and suspend or expel from NASD_________________ 10Deny registration to applicants______________________________________ 9Suspend or expel from NASD and exchanges_________________________ 1

Total proceedings instituted______________________________________ 33

Total proceedings current during fiscal year_______________________ 47

DISPOSITION OF PROCEEDINGS

Proceedings to revoke registration:Dismissed on withdrawal of registration____________________________ 1Registration revoked_______________________________________________ 6

Total_________________________________________________________ 7

Proceedings to revoke registration and suspend or expel from NASD: U

Dismissed-registration and membership continued -________ 2Registration revoked and firm expelled from NASD_________________ ]Regtstratton revoked-no action taken on NASD membership__________ 3

Total___________________________________________________________ 6

Proceedings to suspend or expel from NASD and exchanges:Dismissed-memberships continued_________________________ __ 1

Total___________________________________________________________ 1

Proceedings to deny registration to applicants:Dismissed on withdrawal of application_____________________________ 2Dismissed-registration permitted___________________________________ 6

Total___________________________________________________________ 8

Total proceedings disposed of_____________________________________ 22

Proceeding-s pending at end of fiscal year to:Revoke registration________________________________________________ 11Revoke registration and suspend or expel from NASD_________________ 12Deny registration to applicants____________________________________ 2

Total proceedings pending at end of fiscal year____________________ 2!'i

Total proceedings accounted fOf__________________________________ 4715 The National Association of SecurIties Dealers. Inc., is the only national securities

association registered with the Commission.

As shown in the foregoing tabulation, nine proceedings involvingthe denial of registration as an over-the-counter broker or dealer wereordered during the 1950 fiscal year and one was pending at the be,gin-ning of the year. Two applications were withdrawn after the COm-mission had given notice of hearing. Six applications for registra-tion were granted. Two proceedings were pending at the end of theyear. One proceeding involved solely the question of suspension orexpulsion from the NASD and various securities exchanges and in itsfindings and opinion the Commission determined that the impositionof a sanction was not necessary. Of the 23 revocation proceedingsagainst registered brokers and dealers ordered during the fiscal year


and the 13 proceedings pending at the beginning of the year," theCommission disposed of 13 as follows:Ilegistration revoked___________________________________________________ 9Regtstratlon revoked and firm expelled from NASD_______________________ 1Proceedings dismissed and registration cancelled or withdrawn____________ 1Proceedings dismissed and registration continued in effecL_______________ 2

Registrations revoked (* indicates eepulsion. from NASD was also ordered)

SecuritiesExchange Act

Firm Release NoVVendell ~I. VVeston__________________________________________________ 4312~'.II.VVinter& Co 4280Pennaluna & Co. (a partnership) 4314D. S. VVaddy & Co____________________________________________________ 4322Brownlng&Co 4333

'Valter J. ~Ianning----------------------------------------------_____ 4446N. James Elliott*____________________________________________________ 4409VV. II. Bell & Co______________________________________________________ 4292S: T. Jackson & Co., Inc_______________________________________________ 4459J. C. Flannery & Co__________________________________________________ 4459

Most of the proceedings brought against brokers and dealers stemat least indirectly from the Commission's routine fraud detectionprocedures designed to detect and prevent violations of law.

In proceedings brought by the Commission against Wendell MaroWeston, doing business as Weston & Co. and Assured Warranty Corp.,for the revocation of their registrations as a broker-dealer and invest-ment adviser, respectively, the Commission found that over a longcourse of conduct 1Veston systematically defrauded a client whoreposed great trust and confidence in him.

The client turned over to Weston $97,000 in cash for safekeeping,and Weston soon induced her to invest $84,631 of this in securities.Thereafter, 'Weston organized Assured Warranty Corp., in which hetook a controlling interest, which issued 200 shares of preferred stockin his name. He held the stock for the client and paid the corpora-tion $20,000 of her money. The client entered into an investmentadvisory agreement with Assured Warranty by the terms of whichAssured 'Varranty might give orders for purchase and sale of speci-fied securities on her behalf with Weston as broker. Weston there-upon bought and sold securities for her account, utilizing the servicesof members of the New York and Boston Stock Exchanges. Fromtime to time during the course of these transactions, Weston obtaineda total of $50,000 more from the client's account which he used forthe purchase of additonal preferred stock in Assured Warranty.

The Commission found that the client was unaware that her fundswere being syphoned out of her account for the furchase of stock inan unsuccessful promotional company. The tota gross income of thecompany was $7,074 in a period when its expenses amounted to$68,090, of which $27,000 was paid to Weston as salary and advances.The total net loss was over $61,000, of which over 90 percent was borneby her.

The Commission stated that Weston stood in the relation of fiduciaryto his client because of the trust and confidence reposed in him by the

,. Some of these proceedings, as shown In the tabulation, included the question of sus-pension or expulsion from the NASD.

SIXTEENTH ANNUAL REPORT 47client and because of the more formal obligation which he owed toher as an investment adviser. As a fiduciary, Weston was requiredto act in the utmost faith in every phase of their relations, to investher funds carefully, and to exercise any special authority granted tohim in connection with an unusual venture only when accompaniedby full disclosure of the exact nature of the proposition and the risksundertaken. The Commission found that in putting his client's moneyto a speculative use for his personal benefit, and in designedly con-cealing his scheme by elaborate deceptions, Weston pursued a courseof conduct which operated as a fraud on the client within the scopeof rules X-10B-5 and X-15C1-2 (adopted under sections 10 (b) and15 (c) (1) of the Securities Exchange Act of 1934), and section17 (a) of the Securities Act of 1933. The Commission further foundthat in failing to deliver confirmations of transactions to the clientWeston had wilfully violated section 15 (c) (1) of the SecuritiesExchange Act and rule X-15C1-4 thereunder.

Weston filed annual financial reports in 1945 and 1946 in which hefailed to reflect a substantial claim of the client for the return of hermisused funds and his liability on a promissory note issued in settle-ment of this claim, which the Commission found to be in wilful viola-tion of section 17 (a) of the Securities Exchange Act and ruleX-17A-5 thereunder.

The Commission revoked the registration of Weston & Co. as abroker-dealer.

Finding that in its application for registration as an investmentadviser and in supplemental reports Assured Warranty Corp, had wil-fully made untrue statements and misleading omissions as to the own-ership of its stock and the nature of its activities, the Commissionrevoked the registration of Assured Warranty Corp. as an investmentadviser.

Three cases decided during the year involved, in part, violationsof section 5 (a) of the Securities Act of 1933. These cases involvedGreen & Co., the S. T. Jackson & Co., Inc., and J. C. Flannery & Co.All three respondents were found to have distributed the commonstock of Columbia Machinery & Engineering Corp. when no regis-tration was in effect as to such securities. The Commission found thatin 1946 six Columbia stockholders, who constituted members of agroup in control of Columbia, sold all their holdings of Columbiastock, consisting of 142,600 shares of 200,000 outstanding shares ofcommon stock and 1,600shares of 2,000shares of outstanding preferredstock. Of the common stock, 138,300 shares were sold by the threecompanies, and the preferred stock was all sold to Jackson & Co. andFlannery & Co. acting in joint account. The Commission noted thatthe selling stockholders, either directly or through their representa-tives in the Columbia management, constituted a cohesive group whichhad organized Columbia and directed its affairs through their con-trol of its board of directors and management. The sales of Columbiastock by these stockholders were not unrelated independent transac-tions but were the culmination of continuing efforts by principalstockholders of Columbia to dispose collectively of their interest.These efforts were known to the respondent firms which, from earlyin 1946, had cooperated among themselves in the sales of the Colum-


bia stock, were close to Columbia, and in fact took a hand in directingits course.

The Commission concluded that the sales effected by the respondentcompanies were knowingly made on behalf of members of a group incontrol of Columbia, that the respondents were underwriters withinthe definition contained in section 2 (11) of the Securities Act, andthat registration of the Columbia stock which they distributed wasrequired by that act. It found, therefore, that the S. T. Jackson &Co. Inc., Stacy T. Jackson, J. C. Flannery & Co., and Joseph C.Flannery wilfully violated section 5 (a) of the Securities Act in thesale of the common and preferred stock of Columbia, and that Greene& Co. and William F. Thompson wilfully violated that section in thesale of Columbia stock. The S. T. Jackson & Co., Inc. and J. C.Flannery & Co., in addition, were found to have engaged in fraudulentpractices in connection with their sales of Columbia common andpreferred stock,"

On findings of wilful violations of the antifraud provisions of theSecurities Act of 1933 and the Securities Exchange Act of 1934, andother provisions of the latter act, the Commission revoked the registra-tion of the S. T. Jackson & Co., Inc. and J. C. Flannery & Co., andfound Stacy T. Jackson and Joseph C. Flannery to be causes of suchrevocations.

Proceedings instituted against Halsey, Stuart & Co., Inc., ("Hal-sey") and Harold L. Stuart, involved market activities in the 3% per-cent series C first-mortgage bonds, due 1973, of Northern IndianaPublic Service Co. and sales without delivery of prospectuses requiredby the Securities Act.

Halsey was syndicate manager of a group of 92 underwriters, whichin 1943 purchased an issue of $45,000,000 of the Northern IndianaPublic Service Co. bonds from the issuing company. The bonds wereregistered under section 5 of the Securities Act but were not tradedon any exchange.

When the underwriting syndicate terminated 12,561bonds remainedunsold. Halsey held 4,772,of these unsold bonds, most of them havingbeen bought by Halsey from other underwriters at a bid slightlyhigher than cost to the underwriters. This bid had the effect ofeliminating overhanging holdings in the hands of other underwriters,who might have thrown them onto the market with serious conse-quences to the distribution as a whole and in particular to Halsey'sstake at that time of over $2,000,000in undistributed bonds.

In a period of about 400 business days Halsey published bids orinvited offers of the bonds on 292 business days. In the earlier monthsfollowing the close of the syndicate it was the heaviest known buyerin the dealer market and made most of its purchases from liquidatingunderwriters{ often bidding and paying prices at increasingly higherlevels. On the other hand, it sold comparatively few bonds in thatmarket, confining most of its sales to customers. The post syndicatemarket developed in three stages: A first period marked by extensive

While the Commission did not minimize the violation by Greene & Co. and Wllliam F.Thompson of the registration requirements of the Securities Act, it did not think it neces-sary, in the public Interest, to impose remedial sanctions and dlsmlssed the proceedingswith respect to Greene & Co. and Wllliam F. ThompllOn.

"

SIXTEENTH ANNUAL REPORT 49liquidation by underwriters and a fall in prices to about 101; a secondperiod marked by a tightening supply, reduced rate of activity, netaccumulation of additional inventory by Halsey, and a price rise toabout 103; a third period in which general activity was further re-duced and Halsey undertook a consistent liquidation of net inventoryas prices rose to about 107. Thereafter Halsey's trading thinned outto insignificant proportions.

The Commission found that Halsey's activities in the market forcednot only its own bids but independent bids as well to be raised in orderto attract bonds. Beginning even prior to the close of the syndicate,Halsey drained off the potential market over $4,000,000 of bonds.Thereafter, it was an active purchaser whose pattern of conduct re-sulted in draining off the supply that came into the market and chan-neling it to investors who were not likely to become active traders.Halsey's purchases demonstrably could not have been made to satisfyexisting orders. Halsey's trading created active and apparent activityand at times it raised prices directly either by bids or transactions.In addition, throughout long periods following the close of the syndi-cate, its transactions gave support to the wholesale market and tendedto fix price floors, because of their volume, because of the fact thatHalsey made large purchases while others were relatively inactive, andbecause the general pattern of Halsey's trading was to remove over-hang from the dealer market and to place the bonds with investors.

The Commission found that Halsey engaged in such practices forthe purpose of inducing others to buy. The Commission stated, "Itis undisputed that it desired, in the period following close of thesyndicate, to preserve as much of its inventory as it could in the hopeand belief that the price would improve. Hope, belief, and motiveare not 'purpose' in the legal sense applicable to this case. But 'pur-pose' must be inferred when hope, belief, and motive are implementedby activity objectively resulting in market support, price raising,sales at higher prices, and the protection of inventory." The Com-mission pointed out that Halsey had received Securities ExchangeAct release No. 3505, which deals with the legality of transactionsby underwriters during the course of a distribution and states thatconduct which would violate section 9 (a) (2) of the Exchange Actwould also constitute a violation of section 15 of that act and section17 of the Securities Act.

The Commission found that Halsey had wilfully violated section 17(a) of the Securities Act and sections 10 (b) and 15 (c) of the Ex-change Act and the rules thereunder.

The Commission further found that from September 11, 1944through April 2, 1945, Halsey sold these bonds without delivery ofprospectuses as required by section 5 (a) (2) of the Securities Act.The violation was not characterized as wilful since Halsey in prac-tice treated the bonds as fungible and had used prospectuses for ayear to cover all of its sales for the year.

Concluding that it would not be in the public interest to take noaction against Halsey, if it still maintained the view that it was freeto engage in the activities described, the Commission afforded Halseyan opportunity to assure the Commission that it would in the future

915841-51-5


comply with the Commission's enunciated principles. Halsey filed astatement of compliance and the Commission thereupon dismissed theproceedings.Broker-Dealer Inspections

The broker-dealer inspection program, initiated by the Commissionin 1940 under section 17 (a) of the Securities Exchange Act, whichauthorizes the Commission to make periodic, special, and other ex-amination of the books and records of brokers and dealers, is one ofthe Commission's important procedures in the detection and preven-tion of violations of law by broker-dealers. These inspections are con-ducted by the staff of the Commission's regional offices. They are some-times limited to a particular phase of a firm's operations, such as itsfinancial condition or its method of handling particular accounts, butgenerally they involve full-scale examination of all characteristicactivities, culminating in a report on the extent to which its operationsare in compliance with the standards established by the act and rules.

Regional officesreported on 906 inspections during the year. In 59inspections the question of financial condition was a matter for con-sideration; 56 inspections involved noncompliance with the Commis-sion's hypothecation rules; in 15 inspections secret profits in agencytransactions were reported; in 165 inspections noncompliance withregulation T was reported, involving chiefly the failure to complywith the provisions of the regulation respecting cash accounts; otherinfractions too scattered to classify were noted in 113 inspections.

As a result of the Commission's policy of explaining the applicationof its rules and regulations and of urging management controls whichwill afford strict compliance therewith, many violations, particularlythose involving improper hypothecation of securities, or the rule relat-ing to the capital position of the firm, are frequently cured before theinspection has been completed. However, in connection with morethan 40 inspections post-inspection surveillance or investigation beyondthe scope of the inspection became necessary-to ascertain whethercorrections had been made as promised and to determine whetherdisciplinary or remedial action was necessary. Two of the firms in-spected retired from business during investigation and revocationproceedings are pending as to three others.

In addition to inquiry into the various matters mentioned above, theinspection procedures call for a test check to determine whether thefirm inspected deals fairly with customers at prices reasonably relatedto the current market. These test checks have a dual purpose-firstto enforce the principle, judicially established in Oharles E. Hughesill 00., Inc. v. S. E. 0./8 that it is fraudulent for a dealer to sell securi-ties to customers, or buy from them, at prices not reasonably relatedto the market unless he discloses the variation from the market, andsecond to determine the effectiveness of the rules of the NASD relatingto fair prices and fair and equitable principles of trade.

18139 F. 2d 434 (c. A. 1943) ccrt. den. 321 U. S. 786 (1944). On Nov. 25. 1944. theboard of g-overnorHof the NASD adopted an interpretation of sec. 1 of art. III of its Rulesof Fair Practice holding that transactions by dealers at prices not reasonably related tothe market constitute conduct Inconsistent with just and equitable principles of trade.

SIKTEE~ ~AL REPORT 51Pricing Practices

The following tabulation reflects information obtained in inspec-tions made during the year with respect to pricing practices in salesto customers:

NASD Others Totalsmembers

Number of inspections _____________________________________________ 654 252 006Number of ins~IOns reportmg sales to customers m which the

customer pal more than 5 percent above the current market 242 32 274

~::::; g~:J~~~~~-.-_~:::::::::::::::::::::::::::::::::::::::: 16,682 1,559 18,241

Number of sales in which the customer paid more than 5 percent14,241 1,281 15,522

above the cnrrent market _________________________________________ 1,697 fi75 2,272

I For test purposes in the case of unlisted securtties the high offer in quotations among dealers as of the dateof the sale is used; on exchange securities the high sale on the date of sale, or If there was no sale, the askedprice. as reported by the exchange on which the seeunty IS traded, is used.

Market pnees as of the date of sale are not readily available m all instances. This is often true of securi-ties inactively traded and generally true of secunties having only a local market. There were 2,719 transsetions reported m these Inspections on whtch no market prices were readily available.

A further breakdown of the last item in the above tabulation showssubstantial concentration of the total 2,272 sales made by membersand nonmembers of NASD at more than 5 percent mark-up.

One hundred and thirty-four inspections in which 8,143 sales wereanalyzed accounted for only 384 sales at mark-ups of over 5 percent,and in no instance was the number of sales at such mark-ups a sub.stantial part of the test check. However, the remaining 1,888sales atsuch mark-ups, accounted for in 140 inspections, constituted over 25percent of 7,379sales analyzed. In each of these test checks, the num-ber of sales made by the firm at mark-ups of over 5 percent constituted10 percent or more of the firm's sales analyzed. The concentration ofsuch transactions was in the 140 firms as indicated below:

NASD Others Totalmembers

Number of inspections in which the sales to customers at a mark-upof more than 5 percent over the current market represented morethan 10 percent of the sales analyzed ______________________________ 112 28 140

Number of sales analyzed in such Inspections _______________________ 6,192 1,187 7.379Number of such sales made at a mark-up of more than 5 percent overthe current market ________________________________________________ 1,319 569 1,888

Financial ReportsBrokers and dealers are required by rule X-17A-5 to file reports of

financial condition during each calendar year. During the 1950 fiscalyear a total of 3,581 financial reports were filed. Each report is ex-amined to determine, among other things, whether there has been anyviolation of rule X-15C3-1, which provides that the aggregate in-debtedness of a broker or dealer shall not exceed 20 times his net capi-tal. When deficiencies are found steps are taken immediately to securecompliance in this important phase of the Commission's activities inaffording protection to customers.

Failure to file the reports as required is an infraction of the rule andmay lead to disciplinary proceedings. Frequently, small firms doing

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relatively little or no business fail to file reports on time. These arehandled by a procedure for cancellation of registration when the regis-trant's inactivity is established. Informal procedures are frequentlyused to procure filing by those who do not furnish reports on time.In some instances action becomes necessary to revoke registration.Proceedings were instituted during the year to revoke the registra-tions of six firms for failure to file financial reports.

SUPERVISION OF NASD ACTIVITIESMembership

At the end of the 1950 fiscal year there were 2,784 members of theNational Association of Securities Dealers, Inc. (NASD), the onlynational securities association registered as such with the Commission.This represented an increase of 89 members in the year, as the resultof 246 admissions and 157terminations of membership. At the samedate there were 28,794 individuals, including generally all partners,officers, traders, salesmen, and other persons employed by memberfirms in capacities which involved their doing business directly withthe public, an increase of 1,545during the year. This increase was theresult of 5,444 initial registrations or reregistrations and 3,899 termi-nations of registration.Disciplinary Actions

The Commission received from the NASD during the 1950 fiscalyear reports of final action in 25 disciplinary cases in which formalcomplamts had been filed against members. Three of these complaintswere dismissed on findings by the NASD district business conductcommittee of initial jurisdiction that there had been no violations ofthe rules of fair practice. In the remaining 22 cases the committeesfound violations of such rules and imposed various penalties.

In 13 such cases the complaints were directed solely against memberfirms. In 9 of these cases fines were levied ranging from $100 to$2,000 and aggregating $4,000. Of these 9 firms fined, 5 were alsocensured and costs of the proceedings were charged in 4 cases. Onesuch firm was fined, censured, and suspended from membership for90 days. In the remaining 4 cases, 1 member was expelled, 2 firmswere censured, and 1 complaint was disposed of by acceptance by thecommittee of a statement pledging future observance and compliancewith the rules of fair practice.

In nine other cases complaints were directed not only against mem-ber firms but also against registered representatives of such firms.The significance of this type of action arises from the NASD bylawsand rules under which registered representatives have the same rights,duties, and obligations and are subject to the same disciplinary pro-cedures, penalties, and disqualifications as members. Thus, for ex-ample, revocation of registration by the NASD of a registered repre-sentative would operate as a barrier to membership and to employmentby or affiliation with a member unless the Commission finds it appro-priate in the public interest to approve or direct to the contrary.

In three such cases the complaints were dismissed as to the memberfirms although one registered representative was censured and two rep-resentatives had their registrations revoked; one firm was censured

SIXTEENTH ANNUAL REPORT 53and its registered representative was fined $200; one firm was censuredand fined $200 and the registration of its representative was revoked;another firm was fined $500 and both the firm and the representativeswere censured. One such complaint was disposed of by acceptance bythe committee from the firm of a statement of future observance andcompliance with the rules of fair practice and the expulsion of therepresentative (who had been a partner) and the revocation of hisregistration. Another complaint filed jointly against two memberfirms and the principal of one firm, who was also a registered repre-sentative, resulted in a decision by the district business conduct com-mittee to expel each firm from membership and to revoke the registra-tion, as registered representatives, of the principal named in the com-plaint and of two principals of the other firm. In addition, costs tothe maximum allowable amount of $500 were assessed against eachfirm. One firm and its two principals appealed this decision to theboard of governors and this appeal was pending at the year end.

During the year the Commission continued its practice of referringto the NASD, for appropriate action, facts concerning the businesspractices of members where there was some indication of possible vio-lations of the rules of fair practice. Five such references were madein the year here under review and one had been in process at the startof that year. Reports of disposition were received during the year ontwo of these cases, both of which involved formal complaint proce-dure and are included in the description of the disposition of suchcases recited above. Four such cases were in process at the year end.

During the 1950 fiscal year the Commission was not called upon toact in any matter arising from denial of membership by the NASD oron a petition for approval of, or continuation in, membership. At theyear end there was before the Commission, on appeal by the aggrievedmember, one disciplinary decision by the NASD. This was the onlysuch matter to come before the Commission in the year here reviewed.

CHANGES IN RULES, REGULATIONS, AND FORMS

During the 1950 fiscal year, the Commission made a number ofimportant changes in its application and report forms and relatedrules and regulations under the Securities Exchange Act.

Form 10.-This form, the principal form for the registration on anexchange of securities of commercial and industrial companies, wascompletely revised. The revision merges into this form eight otherregistration forms previously prescribed for various classes of regis-trants. Among the more important changes made were the amplifica-tion of the items and instructions calling for a description of businessand property so as to indicate more precisely the information required,the disclosure of material litigation, and the amendment of the remun-eration items to correspond with the requirements of the Commission'sproxy rules.

Form lO-K.-This is the principal form for annual reports of listedcompanies under the Securities Exchange Act and for registrantsunder the Securities Act required to report under section 15 (d) ofthe Securities Exchange Act. It was revised along lines similar to therevision of Form 10 and likewise supersedes several other forms previ-


ously prescribed for the annual reports of various classes of regis-trants. The revised form also eliminates certain duplication whichhad previously existed between the requirements of this form andForm 8-K for current reports.

Subsequent to this revision of Form 10-K, it was further amendedto permit electric utilities and natural gas companies which file annualreports with the Federal Power Commission on that Commission'sForm No.1 or Form No.2 to file copies of such reports with this Com-mission in satisfaction of most of the requirements of Form 10-IeThis provision is optional and any company may file its report eitherin accordance therewith or on Form 10-K in accordance with thepreviously existing requirements.

Form 8-K.- This form prescribed for current reports was amendedto require the reporting of certain events with respect to which reportshad not previously been required. The principal additional eventsrequired to be reported are the acquisition or disposition of a substan-tial amount of assets; the institution or termination of important liti-gation; the guaranteeing of securities of other issuers; and defaultsupon senior securities.

Form 9-K.-The Commission also adopted Form 9-K, a new quar-terly report form, replacing item 11 of old Form 8-K for reportinggross sales and operating revenues. Except for providing a separateform for such reports and some amplification of the instructions toinclude certain administrative interpretations, this new form did notmake any substantial change in the requirements with respect to suchreports.

Form 8.-During the year the Commission also revised Form 8which is a one-page form used as a cover or facing page for amend-ments to applications for registration, and annual, quarterly, andcurrent reports filed under the Securities Exchange Act. Use of theform had previously been restricted to listed companies. However,under the revision, the form is also available for use by registrantsunder the Securities Act which are required to file annual and otherreports under section 15 (d) of the Securities Exchange Act.

Revision of role X-l'2A-lr-Ewemption for certain short-term war-rants.-In addition the Commission adopted a revised rule X-12A-4.This rule exempts certain short-term warrants from registration undersection 12 (a) of the Securities Exchange Act. Previously, the exemp-tion had been limited to issued warrants, and under this revision therule has been broadened to exempt unissued warrants as well. TheCommission adopted at the same time a new Form AN-4, which isprescribed for the exemption statements required by rule X-12A-4,and rescinded Form 15-AN, heretofore prescribed for such statements.

LITIGATION UNDER THE SECURITIES EXCHANGE ACT

During the past year the Commission's litigation under the Secu-rities Exchange Act consisted principally of injunction actions insti-tuted by the Commission and its participation as amious curiae inprivate suits involving important questions of construction of variousprovisions of the act and rules thereunder.

SIXTEENTH ANNUAL REPORT 55Injunction Actions

A permanent injunction was obtained in S. E. O. v. Walter G. Fur-long 18 against a broker-dealer who had not registered as required bysection 15.19 In addition to this violation, the complaint alleged thatthe defendant had falsely represented that he was employed by abrokerage firm, had obtained secret profits from its customers by sell-ing securities at prices substantially above the prevailing market pricesand had converted customers' funds to his own use.

A number of other injunctions were sought in cases involving regis-tered broker-dealers." Most of these were based on charges of failureto conform to required financial standards. The common element inS. E. O. v. General Stock and Bond Uorp." and S. E. O. v, Adams &00., et al.22 was solicitation of business by the defendants while theirliabilities exceeded their assets. In the General Stock and Bond case,where a permanent injunction was obtained by consent, the complaintalso charged violation of the Commission's rule X-15C3-1, in that thefirm permitted its indebtedness to exceed 2'0 times net capital. Ad-ditional violations charged in the Adams case included the hypothe-cation of customers' securities without their consent," In that casethe company's affairs were placed in the hands of a receiver in orderto obtain equitable treatment for its customers. An injunction wasobtained in S. E. O. v. Gordon B. Todd,24 where the defendant hadviolated the margin requirements and had failed to keep books andrecords in the manner required by law.

Violation of the antimanipulation provisions of the act, sections9 (a) (1) and (2), was enjoined in S. E. O. v. Henry M. Stanley.25The complaint alleged that Stanley effected a series of transactionsin a security listed on the Detroit Stock Exchange to create actual andapparent trading in the security for the purpose of inducing othersto purchase the stock and that he consummated "wash sales" andentered "matched" orders to cause a false and misleading appearancewith respect to the market for the security.

The Commission's proxy regulations were involved in S. E. O. v.John A. TOpf!ing,26 where a decree was obtained by consent perma-nently enjoining a shareholder of Certain-Teed Products Corp., aregistered corporation, from further violation of section 14 (a) ofthe act and the rules and regulations issued thereunder. It was basedupon the defendant's failure to file with the Commission letters tovarious common stockholders preliminary to a proposed solicitation ofproxies 27 and certain false and misleading statements in this material.

1ll Civil Action No. C 862-49, D. N. J., Nov. 1949.10 For Violation of the injunction in 8. E. O. v. Kirby. Civil Action No. 25742, N. D. Ohio.

Apr. 28, 1949, agalnst acting as a broker-dealer without registrn tlon, referreil to in 15SEC Ann. Rep. 66, contempt proceedings were instituted during the fiscal year. See p. 151,infra.

20 For litigation against broker-dealers under the criminal provisions of the Securities Actsee pp. 150-151.

21 Civil Action No. 50-236, D. Mass., Mar. 31,1950.. Civil Action No. 49 C 1145, N. D. Ill., Juiy 18, 1040 (temporary restralulng order

issued and continued at various dates; final judgment still pendlna) ... The complaint also alleged violations of sees. 17 (a) (2) and (3) of the Securities Act

of 1933.Civil Action No. 55. 384, S. D. N. Y., Feb. 10, 1950.

.. Civil Action No. 9079, D. Mich., Mar. 13,19:10.26 Civil Action No. 50-79, S. D. N. Y., Sept. 27. 1949.21 See S. E. O. v. ToPPing, 85 F. Supp. 63 (S. D. N. Y.• !lIay 24. 1949) ; 15 S. E. C. Ann.

Rep. 72,

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The first litigated case in which the Commission relied on its powerto bring an action in the United States district courts to enforce com-pliance with section 13 of the act and rules thereunder requiring thefiling of annual and quarterly reports by a listed corporation reg-istered under the act was S. E. O. v, Atlas TMk Oorporation." Itwas alleged that Atlas Tack Corp. had failed to file annual reportsfor the years 1947 and 1948, had submitted materially deficient an-nual reports for the years 1945 and 1946,had failed to file a numberof quarterly reports and had made such tardy filing in most instancesthat investors were deprived of the timely information with whichthe statute is designed to provide them. The evidence was clear thatthe Commission had made repeated requests for the information be-fore resorting to judicial compulsion. This litigation resulted in adecree after the close of the fiscal year compelling correction of thedeficienciesin past filings.and requiring the corporation to file reportsat the times and in the manner prescribed by the statute and regu-lations.Participation as Amicus Curiae

Most of the cases in which the Commission participated as amiouscuriae involved construction of section 16 (b) of the act, which accordsto a corporation the right to recapture Short-swing (less than 6months) profits realized from transactions in its equity securities by"insiders." vVhether a production manager was an "insider" withinthe intent of section 16 (b) was the question posed in Oolby v. Klune.2

The district court in granting summary judgment for the defendantheld that the employee involved was not an "officer"subjected to liabil-ity by the statute. The Commission, though taking no 'Position uponthe ultimate issue, appeared amicus curiae on the appeal and submit-ted a memorandum urging that whether a person is an officer dependsupon the employee's "responsibility for the policy of at least a sub-stantial segment of the corporation's affairs" and "participation inexecutive councils of the corporation as an officer." The appellatecourt remanded the case to the district court to take evidence on thequestion whether the defendant performed "important executiveduties of such character that he would be likely, in discharging theseduties, to obtain confidential information about the company's affairsthat would aid him if he engaged in personal market transactions." 30

An interpretation dealing with the valuation of stock purchasewarrants was rendered in Trumoale v. Blumberg et al.,31 where plain-tiff, a stockholder in Universal Pictures Co., invoked section 16 (b)to recover on behalf of the corporation profits which he alleged thedefendants, who were officers and directors of the company, hadmade. It appeared that, pursuant to an employment contract, thedefendants received 3,000 warrants for the purchase of stock of thecompany. At the time they were received, these warrants wereworth $11,500. Within 6 months prior to their receipt the defend-ants had sold, for $120,688, 3,000 other warrants they owned.Plaintiff, contending that the warrants had a cost basis of zero, sought

.. Civil Action No. 50-143, D. Mass., July 17, 1950.

.. 83 F. SuPP. 159 (S. D. N. Y., 1949) .

.. Oolby v. Klune, 178 F. 2d 872 (C. A. 2,1949).1188 F. Supp. 677 (S. D. N. Y., 1950), ajJ'd per curiam BUb nom. Truncale v, SCUlly,

unreported (C. A. 2, Jan. 23, 1950). For another phase of this Ilttzatton see Truncale v.plumberp, et al., 80 :ji'. Supp. 387 (S. D. N. Y., 1948) discussed in 15 SEC Ann. Rep. 70.

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SIXTEEKTH ANNUAL REPORT 57to recover the entire sale price. The district court held no profit wasrealized. On appeal the Commission took the position that whetherthese warrants were considered as compensation or not there was norecoverable profit. As compensation their cost basis would be thevalue of the services performed which might properly be valued inexcess of the sales price. If considered as an incentive payment, noprofit was realized under the circumstances of this case because therewas no causal relationship between the purchase and sale such as thestatute was designed to reach. The court of appeals affirmed onthe basis of the opinion of the district court.

The issue in Arbetman v. Playford, et al.,32 in which the Commis-sion appeared amicus curiae, was whether an insider must accountfor profits from a purchase and sale within a 6 months period, wherethe profit is realized by sale which follows registration but purchasepreceded registration. The Commission took the position that aninsider should be liable under such circumstances because a contraryconstruction would defeat the purpose of the statute by allowing anopportunity for abuse of inside information. No opinion on themerits was reached, however, because the litigation was terminatedby a settlement between the parties.

In another case, R. Hoe ill Co., Inc. v. I1fcCune,33a corporation pro-posed to compromise a claim, based on section 16 (b), against one ofits directors and by motion requested a district court to approve thesettlement. In answer to an order to show cause, the Commissionadvised that the Court should not undertake to pass upon the ace-quacy of the settlement in any manner which would prejudice theright of action of plaintiff's shareholder to sue on behalf of the cor-poration for the full amount of the profit involved. This positionwas adopted by the court in its opinion."

The Commission also participated as amicus curiae in Robinson etal. v. Difford et al., E. D. Pa., Civil Action No. 10,322, which invokedsection 10 (b) of the act and rule X-10B-5 thereunder. The Com-mission opposed the contention, presented by a motion to dismiss thecomplaint, that the provisions do not apply to so-called private trans-actions in securities, i. e., transactions in securities not registered onan exchange nor traded over-the-counter by securities brokers anddealers. The fraudulent transactions charged in this case were pur-chases by a majority "control group" (including officers and direc-tors) of a closely held corporation of the stock holdings of minorityshareholders allegedly by means of fraudulent misrepresentations,half truths and omissions of material facts. As indicated above, thecomplaint did not aver that the stock was registered upon an exchangeor had ever been the subject of trading by a broker or dealer. On July14, 1950, shortly after the close of the fiscal year, the court denied themotion to dismiss in an opinion which upheld the Commission's viewthat the section was applicable." The same question, among others,

.. CivlI Action No. 47-278 (S. D. N. Y.) ; see 83 F. Supp, 335 (S. D. N. Y., 1949) .

.. Civil Action No. 45-311 (S. D. N. Y.)

.. Ibid., (S. D. N. Y., Nov. 11, 1949).asCCH Fed. Sec. L. Servo par. 90,486. The court rejected the contention that there can

be no private right of action for violation of rule X-I0B-5, relying inter alia upon Karaonv, National Gypsum 00.,69 F. Supp, 512 (E. D. Pa., 1946), and SlaVin v. Germantown FireInsurance 00., 174 F. 2d 799 (C. A. 3, 1949), in both of which the Commission, as anamicus curiae, had successfully argued that such action could be maintained.

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is now awaiting decision by the Delaware Federal district court inSpeed et al. v. T'ransamerica Oorp., Civil Action No. 480, in whichthe Commission is also participating as an amicus ouriae:"Appellate Proceedings

During the course of the year only one petition for review of anorder of the Commission revoking a broker-dealer registration wasfiled, and the case was dismissed by order of the Court because of thepetitioner's failure to prosecute the appeal." The decision on themerits in Noms &: Hirshberg v. S. E. 0., 177 F. 2d 228 (C. A. D. C.,1949), sustaining the revocation order of the Commission was handeddown during the past fiscal year. This litigation has been discussedin previous annual reports."

THE KAISER-FRAZER INVESTIGATION AND THE LITIGATION WITHOTIS & CO.

Early in 1948, the Commission instituted an investigation into thecircumstances surrounding the failure of a stock offering by Kaiser-Frazer Corp., and there ensued a series of administrative and courtproceedings which, from the standpoint of sheer volume, have beenamong the most extensive in the history of the Commission. By June30, 1950, the administrative and judicial proceedings (including pri-vate suits) aggregated nine in number, not counting numerous ap-peals, and attorneys for the Commission had prepared a total of 35briefs or documents in the nature of briefs, and 43 other legal docu-ments such as pleadings and affidavits. The history of these proceed-ings is discussed in some detail in the Fifteenth Annual Report of theCommission."

During the past fiscal year the Commission obtained a decision inthe Supreme Court of the United States 40 which left it free to com-mence hearings in an administrative proceeding under the SecuritiesExchange Act to determine whether Otis & Co., an investment bank-ing concern, had violated the act and the rules thereunder in connec-tion with the Kaiser-Frazer stock offering, and, if so, whether theregistration of Otis & Co. as a broker-dealer should be revoked andwhether it should be suspended or expelled from the National Asso-ciation of Securities Dealers, Inc. (NASD).

After the disposition of various prehearing motions, the hearingswere finally commenced in the Spring of 1950. Thereafter they weresuspended while counsel attempted to settle the details involved inincorporation by reference of major blocks of testimony adduced inthe Commission's earlier investigation, which had been conductedwithout cross-examination. This was the status of the hearings at theclose of the fiscal year .

•• For previous comment on the Bpeed case see 13 SEC Ann. Rep 63, and 15 SEC Ann.Rep. 72. Oral argument In this case preliminary to judgment on the merits was held onJune 22, 1950.

81 Southeastern securtuee Corp. and Eugene F. Luck v, B. E. C., CIvil Action No. 12947,C. A. 5, Mar. 29, 1950

38 See 13 SEC Ann Rep. 35-36, 41; 13 SEC Ann Rep. 61; 14 SEC Ann Rep. 53; and15 SEC Ann. Ren. 67-68 .

.. Pages 73-77.0 S. E. C v. Otis &: co., 338 U. s. 888 (1949).•

SrKTEE~ ~AL REPORT 59

While the hearings were proceeding at the administrative level, theCommission was continuing its efforts to clarify certain issues raisedin claims of res judicata advanced by Otis & Co. Following a deci-sion on this point in the Court of Appeals for the District of Colum-bia Circuit," (which the court indicated was intended to defer theissue for later consideration) the Commission applied to the SupremeCourt (after the close of the fiscal year) for a petition for a writ ofcertiorari."

Meanwhile the NASD had pressed to a conclusion a proceeding ofits own to determine whether Otis & Co., a member of the Association,had violated the Association's rules in refusing, upon a claim of attor-ney-client privilege, to supply certain information to an investigatingcommittee of the NASD which was also examining the Kaiser-Frazerstock offering. The outcome of this proceeding was a 2-year sus-pension of Otis & Co. from membership in the NASD. Otis & Co.appealed to the Commission under section 15A (g) of the SecuritiesExchange Act of 1934, which provides for an automatic stay of theNASD's action pending the Commission's decision. This appeal wasstill pending before the Commission at the end of the fiscal year.

Otis & Co. had unsuccessfully attempted in the courts to stay thisNASD proceeding and to stay the Commission from taking any actionin the matter as well. During the fiscal year Otis & Co. had continuedits efforts in this direction by way of appeal to the United States Courtof Appeals for the District of Columbia Circuit," but this appeal wasvoluntarily dismissed following the Supreme Court decision abovenoted.

So far as concerns the stockholders' actions which were institutedagainst Kaiser-Frazer Corp. after the collapse of its stock offeringin 1948, the Commission, in accordance with its usual practice, hadnot participated (except to the limited extent noted at page 77 of theFifteenth Annual Report) because of the general absence of issuesbearing on the construction of the securities laws. During the fiscalyear, however, attempts were made by litigants in two of these actionsto subpena large numbers of interpretations rendered by the Com-mission in matters other than the Kaiser-Frazer stock offering. Uponthe Commission's explanation of the public interest reasons which havecaused it from its inception to keep such interpretations confidentialexcept in very unsuual circumstances, the subpenas were quashed bythe court."

The various stockholders' actions, which involved largely overlap-ping claims, moved far towards a conclusion during the fiscal yearwhen a proposed settlement in one of the suits was approved by thecourt after extensive hearings in which the parties to the other suitswere heard on the question of the adequacy of the settlement.w Afterthe close of the fiscal year, however, certain of the parties filed a noticeof appeal from the order approving the settlement.

41 S. E. O. v. ttarrtso« et al. (No. 10043. C. A. D. C. 1950) ... S. E. O. v. Harrison et al. (No. 345, October Term, 1950).. An application for an Injunction pending the outcome of the appeal was denied on

Sept. 9, 1949. Otis d; 00. v. NASD et al. (No. 10397. C. A D C. 1949).. Stella v. Kaiser et al. (Civil No. 45-750, S. D. N. Y. 1950) ; In re S. E. a. (No. M8-8\5

S. D. N. Y. 1950) ... Pergament et al. v. Frazier et al. (Clv. No. 7354, E. D. Mich. 1950).

•

PART mADMINISTRATION OF THE PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

The Public Utility Holding Company Act of 1935was passed by theSeventy-fourth Congress following an extensive investigation by theFederal Trade Commission. That investigation disclosed a varietyof abuses in public-utility holding company finance and operations, themore significant of which are enumerated in section 1 (b) of the act:(1) Inadequate disclosure to investors of the information necessaryto appraise the financial position and earning power of the companieswhose securities they purchase; (2) the issuance of securities againstfictitious and unsound values; (3) the overloading of operating com-panies with debt and fixed charges thus tending to prevent voluntaryrate reductions; (4) the imposition of excessive charges upon operat-ing companies for various services such as management, supervisionof construction and the purchase of supplies and equipment; (5) thecontrol by holding companies of the accounting practices and rate,dividend and other policies of their operating subsidiaries so as tocomplicate or obstruct State regulation; (6) the control of subsidiaryholding companies and operatmg companies through disproportion-ately small investment; (7) the extension of holding company systemswithout relation to economy of operations or to the integration and co-ordination of related properties.

The statute provides for regulation of public-utility holding com-pany systems which are engaged in the electric utility business or inthe retail distribution of natural or manufactured gas. The provi-sions of the act are in two basic categories. The first deals with thefinancing and operations of holding company systems. These regula-tions, however, are carefully designed not to conflict with, but to sup-plement and strengthen State regulation. Thus, the jurisdiction ofthe act does not extend to rate making and does not authorize theCommission to prescribe accounting systems for operating subsidiaries,except in a comparatively few instances where there are neither Statenor other Federal laws prescribing such accounting systems. Thesecond area of regulatory jurisdiction under the act provides for thegeographical integration and corporate simplification of holding com-pany systems.

THE PUBLIC UTILITY INDUSTRY UNDER THE ACT

Public utility properties subject to the Holding Company Act onJune 30, 1950continue to represent an important segment of the elec-tric and gas utility industries of the United States, despite the releaseof 98 companies from the regulatory jurisdiction of the Commissionduring the past year. At the close of the fiscal year, there were reg-istered with the Commission 46 holding company systems whoseaggregate consolidated system assets On that date amounted to ap-

60

SIXTEENTH ANNUAL REPORT 61proximately $12,822,000,000. These figures may be compared with46 systems on June 30,1949, having system assets of $14,294,000,000.

The decrease of approximately $1,472,000,000 represents a netchange reflecting primarily the difference between divestments ofcompanies which are no longer subject to the act with aggregate assetsof $2,231,000,000 and property additions totaling some $600,000,000,which were occasioned by the tremendous growth in the industry inevidence since the close of World War II. Because of this expansionin plant facilities, not only by utility subsidiaries, but also by non-utility subsidiaries of holdingcompany systems, it is not possible topresent an intelligent comparison of those assets of registered holdingcompany systems which were subject to the act when the statute wasfirst enacted with the assets of systems subject to the act at the presenttime.

On June 30, 1950 there were 543 companies subject to regulation bythe Commission under the act as registered holding companies andsubsidiaries thereof. These included 68 holding companies, 223 elec-tric and gas utility companies, and 252 nonutility companies. Cor-responding data for June 30, 1949 showed 641 companies subject toregulation, consisting of 72 holding companies, 274 electric and gasutility companies, and 295 nonutility companies. The changes in thenumber of companies subject to regulation under the act during thepast year, and for the entire period of the Commission's administra-tion of the statute, are summarized in the following tables.

Oompanies released from regulatory jurisdiction of the Oommission

Total Sales dis- Compa-compames Absorbed solutions Exernp- Otber messub-subject by merger and other tion by drspos- Total ject to actto act or consoh- divest- rule or alsduring dation ments order as of Junepenod ! 30

--- --- --- -- -- ---FIscal vear ending June 30, 1950

Holding companies _________________ 73 2 1 2 -------- 5 68Electric and/or gas companies ______ 275 11 37 4 -------- 52 223Nonutihties plus utihtres otber

tban electric and/or gas eompan-Ies 307 1 52 2 55 252--- --- --- --- -- -- ---Total companies 655 14 so 8 112 543--- --- --- --- -- -- ---

Fiscal uear ending June 30, 191,9

Holding companies ________________ 78 3 3 6 72Electric and/or gas companies ______ 315 9 31 ---------- 1 41 274Nonutillties plus utihties other

than electnc and/or gas com-pames _______________ 327 3 19 5 5 32 295--- --- --- --- -- -- ---Total companies _____________ 720 12 53 8 6 79 641--- --- --- --- -- -- ---

Period from June 15, 1938 to June30,1950

Holding companies _________________ 211 25 73 36 9 143 68Electnc and/or gas companies ______ 919 147 436 64 49 696 223NonutUities plus utlhties other

than electric and/or gas com-92 252panies ____________________________ 1,035 103 523 65 783

--- --- --- --- -- -- ---Total companies , ____________ 2,165 275 1,032 165 150 1,622 543

, Reflects company additions and classification adjustments during tbe period indicated,'A few companies have been subject and not subject to the act a number of times, These instances

contnbute some msignlficant duplication to tbe reported company totals.

_________•_____________________ --------___•_________ --------

•

•____________


While it is not possible at this date to predict accurately the ultimatedisposition of all holding company systems it is estimated that, whenall problems arising under section 11 (b) have been settled, there willremain subject to the Commission's continuing regulatory jurisdictionapproximately 20 systems with aggregate assets of 6 or 7 billion dollars.

PROGRESS UNDER SECTION II-OYER-ALL SUMMARY

The fiscal year ended June 30, 1950has been a significant year fromthe standpoint of consummation of reorganization and dissolutionplans under section 11. Seventy-eight companies with aggregateassets of $2,231,000,000were divested by holding companies and, as aresult, are no longer subject to the act. This compares with the divest-ment of 44 companies with assets of $1,749,000,000in the fiscal year1949 and 111 companies with assets of $1,244,000,000 in 1948. Inaddition, holding companies divested themselves of 52 other com-panies with assets aggregating some $2,000,000,000which continuedsubject to the act on June 30, 1950 as registered holding companies orsubsidiaries thereof. Of this latter number, 25 companies with assetsof approximately $1,200,000,000 are expected to remain subject toregulation by the Commission indefinitely as components of simplifiedand integrated holding company systems meeting all of the require-ments of section 11 (b).

During the entire 15-year life of the statute, 751 companies withassets of $10,326,000,000have been divested from holding companycontrol and are, therefore, no longer subject to regulation by the Com-mission. Divested companies in the "still subject" category for the15-year period number 233 with aggregate assets of $5,692,000,000.

Of this number, 166 companies with assets of $4,541,000,000 arepresently expected to continue in operation as holding company sys-tems subject to the Commission's regulatory supervision under the act.

Analyses of these divestments by types of companies and method ofdivestment are presented in the following tables.

Electric, [Jas, and nonutility companies divested under the Public Utility HoldingCompany Act Of 1935 (no longer subject to the act as registered holding com-panies or subsidiaries thereof as of June 80, 1950)

Dec 1,1935 to June 30,1950 July l,19t9 to June 30,1950

CompaniesNumber of Assets I Number of Assets'companies companies

Electric utiht y_________________________________ 245 $8,488,717,201 28 $1,953,578,329Gas utilrty _____________________________________ 147 696, 168, 110 10 137,363,968Nonutillty _____________________________________ 359 , 1,141,536,507 40 , 140,015,340TotaL ___________________________________ 751 10,326,421,818 78 2,230,957,637

I As of di vestment date or year end next preceding date of divestment.I A small percentage of the assets of nonutihty eomparues was meluded in the consolidated assets of the

electric and/or gas unhtres.

SIKTEE~ ~AL REPORT 63

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Divestments by sales of partial segments of properties under the Public UtilityHolding Company Act of 1935 ( no longer subject to the act as of June 30,1950)

Dec. 1, 1935 to June 30, July 1, 1949 to June 30,1950 1950

Number of Consideration Number of Considerationcompanies received companies receivedmvolved involved

Electric utility 87 $91. 172. 569 5 $1,661. 423Gas utility _____________________________________ 24 n, 205, 516 ----------------N onunlity _____________________________________ 49 37,074,458 5 9,464,703TotaL _. 160 139.452,513 10 n, 126, 126

Divestments of partial segments of electric and gas utility properties still .~ubjectto the Public Utility Holding Company Act as of June 30,1950

Number of sellingcompames Consideratlon received

~~'ig- G as Total Electric I Gas Total

Dec. 1,1935, to June 30,1950

1. Purchasers expected to remain subject totheact.__________________________________ 8 5

2. Purchasers expected to be released fromjurisdictiOn of the act._____________ ____ 2 2

3. Future status of purchasers cannot be esti-mated at this time_______________________ 2 2

Totals .________________________ 12 9

13 $17,295,208 $1,607,323 $18, 902, 531

4 317,969 638,000 955,969

4 2,407,899 2,237,500 4,645,399

21 20,021,076 4,482,823 24,503,899

July 1, 191,9,to June SO, 1950

1. Purchasers expected to remain subject tothe act. .________________ 3 1 4 15,109,801 196,000 15,305,801

2. Purchasers expected to be released from[urrsdietlon of the act, .3. Future status of purchasers cannot be esti-mated at this time .________________ .

Totals . 3 4 15,109,801 196,000 15,305, 801

Further evidence of the impact upon the utility industry of thetransition in ownership of operating companies under section 11 isafforded by noting the increase in trading activity in common stocksof the classes A and B electric utilities, as classified by the FederalPower Commission. At December 31, 1939, there were 383 companiesin these categories and, of this number, only 56 companies or 14.6percent had common stock in which there was some evidence of trad-ing activity. At December 31, 1949, the total number of companiesin classes A and B had declined to 316, but of this number, 130 or 41.1percent had all or a substantial proportion of their common shares inthe hands of the public and hence were listed on an exchange ortraded in the over-the-counter market. Eight additional stocks be-came available for public trading during the period from January1 to June 30, 1950. A few of the companies in this group remainedsubject to the Holding Company Act because they are holding com-

___• _____________________________

_________•• ______________________

__•• _____

• • _

_ • _

•• _•• •• __

SIXTEENTH ANNUAL REPORT 65panies as well as operating companies, or because a portion of theircommon stock was still held by a holding company subject to futuredivestment. Most of the 130companies, however, are now independentoperating utilities no longer subject to Commission jurisdiction.

Of the balance of 186 companies whose stocks were not activelytraded at the close of 1949, 1091 were still subject to the HoldingCompany Act, although this number has been further reduced by di-vestments, mergers, and exemptions which have occurred in 1950.Most of the companies which are now subject to the Holding Com-pany Act, and whose common stocks are not traded, are expected toremain in that status as subsidiaries of continuing holding companies.In these instances, however, the public has access to the commonstocks of integrated parent holding companies which have gonethrough the processes of section 11.

PROGRESS UNDER SECTION ll-SURVEY OF INDIVIDUAL SYSTEMS

During the past year the task of bringing the holding company sys-tems into conformity with section 11 has gone forward at a rapidpace. Many of the important interpretive problems, which in earlieryears required extensive consideration by the Commission as well asfrequent judicial review, are now resolved and the patterns forachievement of compliance are well established. In addition. thecondition of the security market during the past year has been gener-ally favorable to the consummation of necessary portfolio securityofferings.

Outstanding among the section 11 (e) plans (or segments thereof)consummated during the past fiscal year were those of the Common-wealth & Southern Corp., American Power & Light Corp., NiagaraHudson Power Corp. and United Light & Railways Co. During thesame period, the extensive reorganization plans of Long Island Light-ing Co. and Pittsburgh Railways Co. were approved by the Commis-sion and, with court approval, were expected to be consummatedwithin a short time.

The Commission also issued three supplemental orders which de-termined the respective rights of the preferred stockholders of Elec-tric Bond & Share Co. and Federal Light & Traction Co. and theprior lien preferred stockholders of New England Public ServiceCo. to receive certain cash payments in addition to the sum of invol-untary liquidating values and accrued dividends.

The achievements in these and other systems are described in thefollowing summaries which set forth with respect to each of 19 sys-tems the historical developments and current progress toward compli-ance with section 11.Cities Service Company

Cities Service Co., at the time of its registration in 1941, was thetop holding company in a system containing 125 companies of which49 were electric and gas utility companies with consolidated assets of

1The balance of the classes A and B electric utilities consists of companies which arenot subject to the Holding Company Act and whose stocks are not actively traded. Gen-erally speaking, these are either subsidiaries of holding companies exempt from the provl-sions of the act or are companies of small size whose stocks are closely held.

915841-51-6


approximately $1,000,000,000. This system owned or operated prop-erties in each of the 48 States and in several foreign countries. Utilityproperties were held by three subholding companies, Cities ServicePower & Light Co., Federal Light & Traction Co., and Arkansas Natu-ral Gas Corp., each controlling one or more utility systems.

In proceedings under section 11 (b) of the act, the Commissionfound that Cities should be limited in its operations to those of a singleintegrated gas utility system and required Cities to dispose of its otherinterests." However, Cities expressed a desire to retain instead itsnonutility businesses and, accordingly, the Commission modified itssection 11 (b) (1) order so as to permit Cities to effect complianceby disposing of all of its utility interests,"

Cities Service Power & Light Co., pursuant to a plan approved onMarch 14, 1944,4simplified its corporate structure by eliminating itsdebentures and preferred stocks. InAugust 1946,Power & Light liq-uidated and dissolved, transferring to Cities its portfolio holdings,"These consisted of an interest of approximately 65 percent in FederalLight & Traction Co., the common stocks of four operating utilitycompanies, Ohio Public Service Co., Spokane Gas & Fuel Co., theToledo Edison Co., and Doniphan County Light & Power Co., andother miscellaneous holdings.

Federal Light & Traction Co. has likewise completed liquidationproceedings. A number of its smaller properties were sold to individ-uals or other private purchasers and the stock of Tucson Gas, ElectricLight & Power Co. was sold to underwriters for public distribution.Federal also merged four of its subsidiaries to form Public Service Co.of New Mexico and the stock of this company was distributed to Fed-eral's common stockholders.

Federal distributed to its preferred stockholders $100 per share plusaccrued and unpaid dividends, but the Commission at that timereserved jurisdiction with respect to the right of the preferred stock-holders to receive any additional amount. This right was evidencedby certificates of contingent interest. By order dated June 19t 1950,the Commission determined this reserved issue and ordered. thatholders of the certificates be paid $10 per share together with com-pensation for delay in payment at the rate of 5.45 percent per annumfrom October 2, 1947.6

On January 26, 1950,Arkansas Natural Gas Corp. filed a new planunder section 11 (e) designed to effect compliance with the require-ments of section 11 (b). It provides for simplification of the com-pany's corporate structure and for the disposition by Arkansas Natu-ral, as a partial liquidating dividend, of its stock holdings in Arkansas-Louisiana Gas Co., a natural gas utility subsidiary. Its other sub-sidiary, Arkansas Fuel Oil Co., will then merge with ArkansasNaturaI. This plan is still pending before the Commission.

On April 24, 1947, the Commission approved a section 11 (e) planfiled by Cities for the simplification of its corporate structure. Thisplan provided for the issuance of approximately $115,000,000prin-

2 Holding Company .Act releases Nos. 4489 and 4551., Holding Company .Act release No. 5350.

Holding Company .Act release No. 4944.Holding Company .Act release No. 6865.Holding Company .Act release NOB.9931 and 9981.

• • •

SIXTEE~ ~AL REPORT 67cipal amount of new debentures to the holders of Cities' outstandingpreferred and preference stocks representing a principal amountequivalent to the redemption prices of the three series of preferredand preference stocks plus accumulated dividend arrears of approxi-mately $50,000,000/ In addition, provision was made for the imme-diate retirement of approximately $40,000,000of the company's pre-viously existing long-term debt and for the application of anticipatedproceeds from the disposition of its utility subsidiaries to the retire-ment of the remaining old debt plus a reduction in the amount of thenew debentures. Since consummation of that plan in June 1947,Cities has disposed of its interests in the common stocks of PublicService Co. of New Mexico (acquired through liquidation of FederalLight & Traction Co.) , Ohio Public Service Co., and the Toledo Edi-son Co. Proceeds derived from the sales of these holdings togetherwith other available cash have been employed to reduce the outstand-ing debt of Cities by more than $87,400,000.The Commonwealth & Southern Corporation

At the time of its registration as a public utility holding companyin March 1938, the Commonwealth & Southern Corp: controlled aholding company system consisting of some 43 compames. Its prm-cipal subsidiaries were 11 public utility companies all of which ren-dered electric service and some of which also furnished gas, trans-portation, and other services. These companies conducted their opera-tions in five Northern and six Southern States. Although some ofthe electric properties in the south were interconnected, the northernelectric properties for the most part were situated in separate anddistinct areas. The publicly held securities of the subsidiaries, con-sisting primarily of bonds and preferred stocks, aggregated about$711,000,000while Commonwealth's own debt securities and preferredstock totaled about $52,000,000and $150,000,000respectively. Thusthe system had outstanding an extremely large amount of senior se-curities ranking ahead of Commonwealth's common stock. Dividendson this common stock had not been paid since March 1932 and divi-dends on the cumulative preferred stock had been paid at a reducedrate for several years resulting in dividend arrearages of ahout$18,000,000.

Divestments from time to time eliminated from Commonwealth'sholding company system all the transportation companies and nearlyall the small nonutility companies. Commonwealth also sold its in-terests in three utility subsidiaries operating in Tennessee, South Caro-lina, and Indiana, and transferred its interests in the public utilitycompanies which conduct integrated electric operations in Georgia,Alabama, Florida, and Mississippi to the Southern Co., a newly or-ganized public utility holding company.

The past fiscal year witnessed the consummation of the final section11 plan of Commonwealth, after its approval by this Commission 8

and upon order for enforcement by the District Court of the UnitedStates for the District of Delaware." This plan, which became effec-

7 Holding Company Act release No. 736R.8 Holding Company Act release No. 8633

84 F. Supp, 809 (D. Del., 1949).•

68 SEetrRI'l'IES AND EXCIlANGE COMMISSION

tive on October 1, 1949,provided for the distribution of common stockof Consumers Power Co. and Central Illinois Light Co., together with$1 per share in cash, in exchange for the preferred stock of Common-wealth, and for the distribution of Commonwealth's remaining assets,after provision for its liabilities, in exchange for Commonwealth'scommon stock. These remaining assets consisted chiefly of commonstock of the Southern Co. and Ohio Edison Co. Pursuant to theplan, Commonwealth was dissolved as of Ocotber 1, 1949,and is in thefinal stages of liquidation.

Thus the original system of 43 companies has been resolved intoa number of independent operating companies, and two integratedregional holding company systems which are expected to continueunder the jurisdiction of the Commission. One of these systems con-sists of Ohio Edison Co. and its subsidiary, Pennsylvania Power Co.;the other is composed of the Southern Co. and its 4 interconnectedpublic utility subsidiaries.

In connection with the consummation of Commonwealth's plan,the Commission, in September 1949,approved an application to changethe mutual service company of Commonwealth's holding companysystem into an independent service company." The Commission, atthe same time, approved the organization of a new company, SouthernServices, Inc., to becomea mutual service company for the subsidiarycompanies of the Southern Co.Electric Bond and Share Company

The Electric Bond & Share Co. system was the largest to registerunder the Holding Company Act. At the time of its registration in1938, it controlled 121 domestic subsidiaries including 5 major sub-holding companies with combined assets of nearly 3lh billion dollars.These subholding companies were American & Foreign Power Co.Inc., American Gas & Electric Co., American Power & Light Co.,Electric Power & Light Corp., and National Power & Light Co. Ofthese, American Gas & Electric and American Power & Light havebeen severed from the system. Electric Power & Light has beendissolved pursuant to a plan consummated in May and July 1949.National Power & Light has disposed of substantially all of its hold-ings and has few remaining assets.

Pursuant to plans filed in 1945and 1946,which were approved bythe Commission and ordered enforced by the district court, Bond &Share paid $100 per share, or an aggregate amount of $104,328,000,to the holders of its $5 and $6 preferred stocks and, in addition, de-livered to each of such holders a certificate evidencing the right toreceive any additional amounts which the Commission or the courtsmight approve or direct."

On April 7, 1947, Bond & Share filed plan II-B in which it pro-posed that no further payment be made to the certificate holders. OnJune 19, 1950, after hearings and oral argument, the Commissionissued its order in connection with plan II-B and held that the holdersof certificates issued with respect to the $6 preferred stock should

10 Holding Company Act release No. 9362.11 Holding Company Act release No. 6768.

SIXTEENTH ANNUAL REPORT 69receive $10 per share together with compensation for delay in paymentat the rate of 5.45 percent from March 6, 1947, and that no furtherpayments should be made to holders of certificates issued with respectto the $5 preferred stock."

In the past, Bond & Share had filed plans with the Commissionwhich contemplated the divestment of all of its public utility hold-ings in the United States in order that its status might be changed tothat of an investment company. However, in September 1949, Bond &Share applied to the Commission for relief from its commitment todispose of the stock of United Gas Corp. received in connection withthe dissolution of Electric Power & Light Corp.

The plan described in this application contemplates the dispositionof all domestic utilities other than United Gas, the creation of a "poolof capital" by Bond & Share to be invested in special situations and theexemption of Bond & Share from the Holding Company Act exceptwith respect to reorganization proceedings affecting American &Foreign Power Co., Inc. and with respect to distributions of securitiesnot theretofore authorized by the Commission. Hearings have beencompleted in respect to that phase of the proceeding involving Bond &Share's request for relief of Its commitment to dispose of its holdingsin United Gas Corp.

During December 1949, Bond & Share distributed and sold itsholdings of the common stock of Middle South Utilities, Inc. whichhad been received in connection with the dissolution plan of ElectricPower & Light Corp." Subsequent to the close of the past fiscal year,Bond & Share filed an application to acquire 381,0671j2 shares of com-mon stock of the Southern Co. in exchange for its holdings of 254,045shares of common stock of Birmingham Electric CO.14American & Foreign Power Company, Inc.

American & Foreign Power Co., Inc. (an Electric Bond & Sharesubsidiary) controls a mutual service company and some 70 subsidiarycompanies located in Central and South America, Cuba, Mexico, China,and India. Since the operations of all of Foreign Power's subsidiariesare in foreign countries, the Commission's principal concern is withrespect to the simplification of the company's corporate structure andits relationship to Electric Bond & Share Co. Foreign Power's capitalstructure at December 31, 1949, consisted of debentures, serial notes,bank notes, three classes of preferred stock with dividend arrearages ofsome $410,000,000, common stock, and option warrants. Bond & Shareholds all the serial notes and substantial blocks of the junior securities.

On October 24, 1944, Foreign Power and Bond & Share filed a planfor the reorganization of Foreign Power. After extensive hearings,this plan was amended by the two companies and on November 19,1947, the Commission approved such amended plan after the filing ofcertain additional modifications." The plan, as approved by the Com-

Holding Company Act release Nos. 9931 and 9980.12 Middle Sonth Utilities. Ine., was organized in the preceding fiscal year as a new registered

holding company to acquire a group of electric utility companics operating in the SouthCentral States which were formerly direct subsidiaries of Electric Power & Light Corp.

U It is contemplated that Birmingham will ultimately be merged into Alabama PowerCo., a subsidiary of the Southern Co.

lli Holding Company Act releases Nos. 7815 and 7849.

"

70 SEGUR'ITIES AND EXCHANGE COMMISSION

mission, was subsequently approved by the United States DistrictCourt for the District of Maine.I6

However, because the company could not effectuate the financingnecessary to consummate the plan, both the district court and theCommission vacated their orders approving it. On May 2, 1949, theCommission issued an order pursuant to section 11 (b) (2) of the actrequiring Bond & Share and Foreign Power to take steps to reorganizeForeign Power in such a manner that its resulting capital structurewill consist only of common stock plus such amount of debt as willmeet the applicable standards of the act,"

During December 1949,pursuant to authority granted by the Com-mission, Bond & Share transferred to Foreign Power $19,500,000prin-cipal amount of past due 6 percent debentures of Cuban Electric Co.and $30,000,000principal amount of past due serial notes of ForeignPower in exchange for $49,500,000principal amount of new 6-yearnotes of Foreign Power. This step was taken to facilitate the reorgani-zation of Foreign Power's Cuban subsidiaries and to enable ForeignPower to obtain a bank credit of $15,000,000.18

Early in 1950,Foreign Power prepared and made available to repre-sentatives of its security holders detailed information concerning theoperations of the company and its subsidiaries. It invited suggestionsfrom security holders with respect to a new overall reorganizationplan. As of the close of the fiscal year, the company was consideringsuch suggestions and contemplated filing a new plan within the nextfew months.American Power & Light Co.

On August 22, 1942,American Power & Light Co. (an Electric Bond& Share subsidiary) was ordered to dissolve on grounds similar tothose set forth with regard to National Power & Light Co. At thetime of the issuance of this dissolution order, American controlleddirectly or indirectly 35 subsidiaries, 16 of which were public utilitycompanies. American's capital structure consisted of long-term debt,two classes of cumulative preferred stock with dividend arrearages ofmore than $35,000,000,and common stock. By the close of the pastfiscal year, this company had accomplished the major phases of its pro-gram of compliance with section 11 and controlled only 2 utilitysubsidiaries.

Earlier steps taken by American included disposition of its interestin Nebraska Power Co., Arizona Light & Power Co., and New MexicoElectric Service Co. and retirement of its long-term debt. InOctober1945, the Commission approved the formation by American of a newTexas holding company, Texas Utilities Co., which acquired fromAmerican its interest in Texas Electric Service Co. and Texas Power& Light Co. and from Electric Power & Light Corp., the latter's inter-est in Dallas Power & Light Co.

In April 1947,two other subsidiaries, Northwestern Electric Co. andPacific Power & Light Co. were merged with Commission authoriza-tion. The stockholdings of American in Kansas Gas & Electric Co.

1.80 F SuPP. 514 (D. Me.. 1947),17 Holding Company Act release No. 9044.1B Holding Company Act release No. 91)89.


were disposed of in two public offerings made in May 1948 and July1949.

In October 1949, the Commission approved the section 11 (e) planof American 19 which was subsequently ordered enforced by the UnitedStates district court. The plan was consummated on February 15,1950 and pursuant thereto, American distributed to its preferred stockand common stockholders its holdings of stock of Texas Utilities CO.,2OFlorida Power & Light Co., Minnesota Power & Light Co., and theMontana Power Co., as well as shares of new common stock in Amer-ican. Coincidentally with this distribution, settlement of claimsagainst Bond & Share by American and its subsidiaries was accom-plished through the payment to American of $2,500,000 by Bond &Share. Part of this amount was contributed by American to a numberof its subsidiaries.

Prior to consummation of this plan, American sold its holdings ofcommon stock of Pacific Power & Light Co. to a group of underwritersfor a cash consideration of $16,125,000. It has since proposed to dis-tribute the proceeds of this sale to its present stockholders. The dis-tribution was approved by the Commission in June 1950 21 and follow-ing the close of the fiscal year has been ordered enforced by the UnitedStates district court.

At June 30, 1950, American's remaining assets consisted of the com-mon stock of the Washington Water Power Co., the common stock ofPortland Gas & Coke Co., a substantial amount of cash and othermiscellaneous assets. Portland Gas & Coke Co. has on file with theCommission an extensive plan of reorganization. Proceedings on thisplan are now in progress."Electric Power & Light Corp.

At the time the Commission issued its dissolution order against Elec-tric Power & Light Corp. (an Electric Bond & Share subsidiary),this company controlled directly or indirectly 24 subsidiaries, 10 ofwhich were public utility companies under the act. Electric's capitalstructure at that time consisted of long-term debt, 3 classes of cumula-tive preferred stock with aggregate arrearages of $53,000,000, commonstock and option warrants. Before consummation of the final section11 plan, which resulted in the dissolution of Electric during the pastfiscal year, it had already disposed of its holdings in Idaho Power Co.and Dallas Railway & Terminal Co. through sales to the public. Itsholdings in Dallas Power & Light Co. had been sold to the new TexasUtilities Co. organized by American Power & Light Co. Its holdingsin Utah Power & Light Co. were disposed of pursuant to a reorganiza-tion of the latter company which provided, in part, for the reclassifica-tion of Utah's preferred and common stocks into a new common stock. 23

United Gas Corp., Electric's principal subsidiary, was reorganizedunder section 11 in a proceeding which resolved alI claims of United

r Holding Company Act release Nos. 9359-A and 9389.,. In April 1950, the Commission granted an exemption to Texas Utilities Co. from the

provisions of the act. This exemption granted pursuant to section 3 (a) was based uponthe intrastate character of its utility operations. HoldIng Company Act release No. 9786.

21 Holding Company Act release No. 9948... Holding Company Act release No. 9366... Holding Company Act release No. 6212.


and Electric against Electric Bond & Share Co., arising out of theformation and financing of United."

In 1945, Electric retired its outstanding long-term debt with theproceeds derived from the disposition of properties described aboveand from retained earnings. In addition, the accounts and capitalstructures of Electric's remaining subsidiaries were brought into com-pliance with the requirements of the act.

The dissolution plan filed by Electric and approved by the Commis-sion on March 7, 194925 was subsequently approved by the UnitedStates district court and by the Court of Appeals for the Second Cir-cuit." Stays were denied by the court of appeals and by the SupremeCourt 21 and the plan was consummated by the end of July 1949.Under the plan a new holding company, Middle South Utilities, Inc.,was created. It acquired Electric's holdings of the common stocksof Arkansas Power & Light Co., Louisiana Power & Light Co., Mis-sissippi Power & Light Co., New Orleans Public Service Co., Il~C.,and Gentilly Development Co. The common stocks of Middle Southand of the United (Jas Corp. previously held by Electric were thendistributed to Electric's stockholders in exchange for its outstandingsecurities. At the same time, a settlement of all suits and claimsagainst Bond & Share by and on behalf of Electric and its subsidiarieswas consummated with a cash payment of $2,200,000by Bond & Share.

Thus the Electric system as such has been entirely eliminated. Theonly aspect remaining for determination arises in connection withapplications for compensation and reimbursement of expenses, aggre-gating approximately $1,300,000. These are now pending before theCommission.National Power & Light Co.

On August 23, 1941,pursuant to proceedings instituted by the Com-mission, National Power & Light Co. (an Electric Bond & Share sub-sidiary), was ordered to dissolve, because it constituted an undue andunnecessary complexity in the Bond & Share system." At the timeof the issuance of this order, National had 27 subsidiaries, 9 of whichwere public utility companies. The work of bringing about National'sultimate dissolution is now nearing completion. All of its long-termdebt has been retired through the use of treasury cash and its preferredstock has been retired partly through a voluntary exchange for com-mon stock of Houston Lighting & Power Co. and in part by cash atthe rate of $100per share derived from the sale of other shares of Hous-ton stock. In May 1946, the Commission approved a plan for thesettlement of all suits and claims against Bond & Share by or on behalfof National, its subsidiary and certain former subsidiaries, throughpayment of $750,000by Bond & Share."

This settlement was subsequently approved by the United Statesdistrict court and in August 1946, National distributed the commonstocks of Pennsylvania Power & Light Co., Carolina Power & LightCo. and Birmingham Electric Co., its principal remaining subsidiaries,

.. Holding Company Act release No. 5271.

...Holding Company Act releases Nos. 8889 and 8906.28176 F. 2d 687 (C. A. 2,1949)...337 U. S. 903 (1949).. 9 S. E. C. 978... HoldIng Company Act release No. 6663.

• •

SIKTEE~ ~AL REPORT 73pro rata to its common stockholders, including Bond & Share. Afterdistribution of these companies, National's only remaining subsidiarieswere Lehigh Valley Transit Co., the Memphis Street Railway Co.,and Memphis Generating Co.

National's interest in Memphis Street Railway was subsequentlyeliminated through a reorganization plan consummated in May 1949.In May 1950, its security holdings in Memphis Generating Co. weresold to the Tennessee Valley Authority for a consideration of$1,405,000. In April 1950, National also entered into a contract forthe sale of its holdings of common stock of Lehigh Valley Transit Co.(received as a result of the reclassification of that company's stockpursuant to a section 11 (e) plan) to Cincinnati, Newport & CovingtonRailway Co., a nonaffiliated company. Upon consummation of thissale, National's only remaining assets will consist of 34,156 commonshares of Pennsylvania Power & Light Co. and approximately$2,475,000in cash.General Public Utilities Corp.

This company is the top holding company emerging from reorgani-zation of the former Associated Gas & Electric Co. system. Asso-ciated Gas & Electric Co. and its immediate subsidiary Associated Gas& Electric Corp. registered as holding companies on March 28, 1938.At that time, the system consisted of 164 companies, including 11 sub-holding companies, and was unequalled for the complexity of itscorporate structure. Four of the utility companies were as many as6 tiers of subholding companies removed from the top holding com-pany. The system was engaged in business in 26States scattered fromMaine to Arizona and in the Philippine Islands; the businesses in-cluded such diverse activities as electric, gas, water, ice, street railway,bus, heating, hotel, insurance, real estate, engineering, marine towing,toll bridge, coal mining, and ferry operations. Associated Gas &Electric Co., itself, had outstanding 10 different kinds of fixed-interestdebt obligations, several series of income debentures, a number ofsecurities variously known as convertible debenture certificates andconvertible obligations, two different classes of preferred stock, a classA stock, a class B stock, a common stock and warrants to purchasecommon stock.

Most of Associated's subsidiaries also had senior securities outstand-ing in the hands of the public. The consolidated assets of the systemwere stated at a little over $1,000,000,000and the corporate assets ofAssociated Gas & Electric itself were stated at approximately$450,000,000.

In ID40,Associated Gas & Electric Co. and Associated Gas & Elec-tric Corp. filed petitions for reorganization pursuant to chapter X ofthe Bankruptcy Act. In 1942, pursuant to the provisions of section11 (b) (1) of the act, the trustees of Associated Gas & Electric Corp.were ordered to divest themselves of all their interests in some 114companies located primarily outside the 3 States of New York, Penn-sylvania, and New Jersey, no determination being made at that timeas to the status of the majority of the properties in these last-namedStates." Of the 114 companies, 112 have been divested. The two

lOll S. E. C. 1115.

74 SECURITIES AND EXCHANGE CO:MMISBION

that remain operate in the Philippine Islands and as to these ourdivestment order has been temporarily suspended.

As at January 1, 1946, a comprehensive plan of reorganization ofAssociated Gas & Electric Co. and Associated Gas & Electric Corp.was consummated pursuant to chapter X and section 11 (f) of theact. In place of the two companies and their many securities therewas substituted a single company, General Public Utilities Corp.,which had a security structure consisting of 10-year convertible deben-tures, bank loans, and common stock. The debentures were redeemedin 1947 and at June 30, 1950, GPU had outstanding only $3,950,000of notes payable to banks, maturing during the period 1951 to 1955,and common equity of $120,000,000.

After consummation of the plan of reorganization in 1946, theassets of GPU consisted primarily of securities of three subholdingcompanies which in turn controlled the operating utility properties.Two of these subholding companies have since been dissolved, andduring the past fiscal year, all debt securities of the third company,Associated Electric Co., totaling over $52,000,000,have been retired.

Funds for this purpose were derived principally from the pro-ceeds of sales made by GPU of its common stock holdings in NewYork State Electric & Gas Corp. ($35,282,208), Rochester Gas & Elec-tric Corp. ($22,998,726), and its preferred holdings in Staten IslandEdison Corp. ($4,000,000). With these proceeds, GPU made capitalcontributions totaling $49,000,000 to Associated Electric, less theamount of $1,492,7M representing consideration paid for 107,000 ofits common shares repurchased from Associated Electric and canceled.

In March 1950, the Commission approved the sale by GPU of itscommon stock interest in Staten Island Edison Corp. to ConsolidatedEdison Co. of New York, Inc. for $10,720,000.In May, it also approvedthe merger of Edison Light & Power Co. into Metropolitan EdisonCo. The latter company is a direct subsidiary of GPo.

Since June 1949, section 11 (b) (1) proceedings have been continu-ing before the Commission for the purpose of determining what fur-ther steps should be taken by General Public Utilities to bring itssystem mto conformity with the standards of that section. Whilethese proceedings have been in progress, GPU has completed thedivestment of all of its New York companies and contends that itshould be permitted to retain its present group of subsidiaries in NewJersey and Pennsylvania as one or more integrated public utility sys-tems and incidental businesses.International Hydro-Electric System

At the time of registration, International Hydro-Electric System(IHES), a Massachusetts voluntary association, owned directlyGatineau Power Co., a Canadian public utility company, and twowholesale electric utilities operating in the United States. It alsoowned the equity in New England Power Association, which sinceits reorganization is known as New England Electric System (NEES).NEES was a holding company in its own right and while the manage-ments of the two companies were interrelated they functioned sep-arately. Accordingly the reorganizations of the two companies werebandled in separate proceedings.


Originally, IRES had outstanding debentures due in 1944, pre-ferred stock, class A stock, class B stock, and common stock. Thecompany was in a precarious financial position, having a huge deficitin its earned surplus account. It performed no functions for its sub-sidiaries and voting control was vested in the stock junior to the pre-ferred stock. Moreover, NEES, its subsidiary holding company, hadtwo layers of intermediate holding companies beneath it, with theresult that the corporate structures of both IRES and NEES violatedthe "great-grandfather clause" of section 11 (b) (2) of the act.

The Commission initiated proceedings under section 11 (b) (2) withrespect to IRES. The first important step in these proceedings wasto cause the cancellation of the class B and common stock. Subse-quently, in 1942, the Commission directed IHES to liquidate andand dissolve." However, many system problems had to be resolvedbefore the portfolio securities of IRES could be distributed. Amongthese were litigation of claims on behalf of IHES against its formerparent, International Paper Co., the reor~anization of NEES, andthe merger of IHES's two New York subsidiaries into a single com-pany. These matters were not fully disposed of until 1947, whenthe reorganization of NEES was completed and the sum of $10,000,000,together with other considerations, was finally paid to IHES in settle-ment of the claims against International Paper Co.

The separate reorganization of NEES was, of itself, a major opera-tion. NEES had five subholding companies, in two tiers, over itsoperating subsidiaries. Under a voluntary plan filed under section11 (e) of the act the subholding companies were eliminated by the re-tirement of their securities in exchange for cash or new common stockof NEES.32 NEES emerged from the reorganization with two classesof securities, debt and common stock, which replaced 18 classes of oldsecurities. IHES now owns only 8 percent of the common stock ofNEES, and is no longer a holding company with respect to it.

While it is contemplated that NEES will continue indefinitely as aregistered holding company, steps are being taken toward the eventualliquidation and dissolution of illES. During the past fiscal year, theCommission approved the second step of the Trustee's four phase planof liquidation. This proposal was designed to eliminate all of IHESoutstanding debentures which had previously been reduced by cashpayments from $1,000 to $600 principal amount per unit. With theapproval of the Commission 33and the United States district court,the Trustee developed a plan which included (1) an exchange offerto the holders of the debentures of 600,000 shares of Gatineau PowerCo. common stock, (2) an agreement for the underwriting of thesale or exchange of a minimum of 340,000 shares of Gatineau commonwith an option to the underwriters to purchase the balance of 260,000shares and (3) the negotiation of a 2-year loan of not more than$10,000,000to secure the balance of funds required to retire the deben-tures not surrendered for exchange. Consummation of these trans-actions occurred at the close of the fiscal year.

31 11 S. E. C. 888.32 Holding Company Act release No. 6470.13 Holding Company Act release No. 9917.


Long Island Lighting Co.On March 27, 1936, pursuant to section 3 (a) (1) of the act, the

Commission granted Long Island, as a holding company, and eachof its subsidiary companies as such, an exemption from all the pro-visions of the act.34 However, on April 21, 1945, pursuant to section3 (c), the Commission modified the exemption order so as to subjectLong Island and its subsidiary companies to certain provisions ofthe act, particularly the reorganization provisions of section 11.35

The order of modification was entered in view of the fact that thefinancial situation of Long Island and its subsidiaries had deterioratedmaterially since the entry of the exemption order. As the Commis-sion noted in its opinion, Long Island, on December 31, 1935,was notin arrears on its preferred stock dividends whereas by September 30,1944, an aggregate of $10,384,075of arrears had accumulated, whichrepresented unpaid dividends for a period of 6Y2 years. Further,unpaid dividends on the publicly held preferred stocks of its publicutility subsidiary companies had also accumulated to the extent of$4,740,699. An analysis of the financial aspects of the system, includ-ing the foregoing accumulation of arrears, the grossly inflated prop-erty accounts, and the earnings history of the system, caused theCommission to conclude that the common stock of Long Island exer-cised voting control of the system with "disproportionately smallinvestment."

In addition, Long Island, on December 16, 1944, after the Com-mission had instituted the modification proceeding, had filed in theofficeof the Secretary of State of the State of New York a certificateof reduction of capital which, among other things, provided for areduction of 40 percent in the par value, redemption value, and futuredividend rights of the preferred stock, and for the cancellation ofthe then existing common stock and the issuance of 503,800shares ofnew common stock to its preferred and common stockholders on thebasis of 1 share of new common stock for each share of preferredstock and for each 12 shares of common stock outstanding. Undersuch plan of recapitalization, the holders of the preferred stock wouldhave received 50.38 percent of the new common stock and the holdersof the common stock would have received 49.62 percent of the newcommon stock. The Commission commented on the plan, althoughthe plan was not before it for determination, and the Commissionstated that the plan failed to give adequate recognition to the rightsand claims of the preferred stockholders and that it was extremelydoubtful that the plan cold be found to satisfy the "fair and equitable"standard of section 11 (e) or that the proposed capital structure couldbe approved under other standards of the act.

As a result of certain legal proceedings involving the Commissionand Long Island, none of the certificates contemplated by the certifi-cate of reduction of capital has been issued and none of the accountingentries contemplated in connection therewith has been made upon itsbooks." After the Commission entered its order modifying the ex-

.. 1 S. E. C. 345.35 Holding Company Act release No. 5746... S. E. O. v. Long Island Lighting 00., 59 F. Supp 610 (E. D. N. Y. 1944), affirmed 148

F. 2d 252 (C. A. 2, 1945), a judgment vacated and remanded to the district court to dismissthe complaint on the ground the cause became moot. 325 U. S. 833 (1945).

SIXTEENTH ANNUAL REPORT 77emption of Long Island, the company, on April 23, 1945,filed a notifi-cation of registration as a holding company pursuant to section 5 (a)of the act.

Thereafter, on October 25, 1945, pursuant to section 11 (e), LongIsland filed a plan which, as amended, provided for the consolidationof itself with its two principal subsidiary public utility companies.Or, November 9, 1945, the Commission instituted proceedings undersection 11 (b) (2) directed to Long Island and each of its publicutility subsidiary companies in order to determine whether votingpower was unfairly and inequitably distributed among the securityholders of each of the companies and what action, if any, should betaken.

The two proceedings were consolidated and, on August 25, 1948,the Commission entered an order in the section 11 (b) (2) proceedingwhich ordered each of the companies to be recapitalized on the basisof a single class of stock, i. e., common stock, and that the new com-mon stock be distributed among the holders of each company's pre-ferred and common stock in a fair and equitable manner."Subsequently, on November 16, 1949, the Commission approved thesection 11 (e) plan which provided for the consolidation of the threecompanies, the resultant consolidated company to have outstandingonly one class of new common stock, which was to be apportionedamong the common stockholders of Long Island and the preferredstockholders of the three companies." In place of the preferredstocks of the three companies, having an aggregate par value of$34,792,200with dividend arrears thereon totaling $27,406,105as atJune 30, 1950, and of old common stock having a stated value of$3,000,000,the consolidated company would have new common stockwhich at June 30,1950, would have a stated value of $33,650,848. Theaccounts of the consolidated company would be stated in such formas to exclude all items in its property accounts in excess of originalcost and all its accounts would be stated in conformity with the require-ments of the New York Public Service Commission.

The plan was approved and ordered enforced by the United Statesdistrict court on February 17, 1950."9 Upon appeal, by opinion en-tered June 1, 1950, the court of appeals affirmed the decision on allissues, except with respect to one item as to which the proceeding wasremanded to the Commission." On July 5, 1950, subsequent to theclose of the fiscal year, upon the filing with the court of appeals by theCommission of a petition for modification of decision, the court ofappeals modified its former opinion and affirmed the order of thedistrict court in all respects." A petition for certiorari was filed.The Middle West Corp.

The Middle West Corp. (Middle West), successor in bankruptcyto Middle West Utilities Co., registered under the act in December1935. At that time it had 152 subsidiaries, including 62 electric orgas utility companies and 15 subholding companies; 16of the 152sub-

31 Holding Company Act release No. 844958 Holding Company Act releases Nos. 9473 and 9510.""89 F. Bupp. 513 (E. D. N. Y.) ..., 183 F. 2d 45 (C. A. 2).61183 F. 2d 45.52 (C. .A. 2).


sidiaries were themselves in process of reorganization under the Bank-ruptcy Act, and these, in turn, controlled an additional 74 of thesystem companies. In contrast, Middle West at June 30, 1950 haddivested itself of every subsidiary company except United PublicService Corp. which is presently in liquidation.

As a result of proceedings under section 11 (b) (1) of the act,Middle West was ordered in January 1944 to sever its relations withall properties, operations, and companies except Central Illinois PublicService Co. and its subsidiaries, and Kentucky Utilities Co. and itssubsidiaries, jurisdiction being reserved to consider the retainabilityof these companies."

In 1947, however, the management of Middle West decided to dis-solve the corporation and a resolution was presented to stockholderswho voted in favor of the dissolution. Pursuant to this decision,Middle West distributed to its stockholders its principal assets, con-sisting of the common stocks of Central Illinois Public Service Co.,Kentucky Utilities Co., Public Service Co. of Indiana, and WisconsinPower & Light CO.43 Many of its smaller properties were sold ormerged into other companies in the system.

In April 1946, the Commission approved the creation of the Central& South West Corp. system 44which is comprised of four electricutility companies of substantial size. The new system was formed bymerging two subholding companies which between them had four out-standing issues of 6 and 7 percent preferred stock with dividendarrearages totaling about $16,000,000. These shares were retired atthe redemption price plus accrued dividends. The merger also re-sulted in increasing the combined common equity from 9.5 percentof total capitalization and surplus to 29.5 percent. The new Central& South West Corp. continues to be subject to the act as a registeredholdin~ company controlling an integrated electric utility system.

Durmg the past fiscal year, Middle West has completed its divest-ment program by disposing of its interest in four service companiesand selling its common stockholdings in Upper Peninsula PowerCo. and in Middle West Utilities Co. of Canada, Ltd. In addition,Sand Springs Water Co., a nonutility subsidiary, sold its water plantand distribution system and is in process of liquidation. On June 5,1950, the Commission approved the final plan of Middle West underwhich it will make an initial cash distribution to its stockholders andthereafter seek to convert all remaining assets to cash, in order toeffect a final distribution after December 31, 1951, and bring aboutits liquidation and dissolution." This plan was approved by theUnited States district court on June 29,1950.National Gas & Electric Corp.

National Gas & Electric Corp. (National) registered under theHolding Company Act in December 1935. It had nine subsidiarycompanies engaged in the production and sale of manufactured andnatural gas and oil as wen as the sale of electric energy. Its proper-ties were scattered over the six States of Ohio, Michigan, Virginia,

•• 15 SEC. 309... Hohllng Company Act releases Nos. 8642 and 8788.. Holding Company Act release No. 6606.4$ Holding Company Act release No. 9800.

•


North Carolina, South Carolina, and Colorado. At the time Nationalregistered with the Commission, the total assets of the systemamounted to $6,461,000. Thereafter, through the process of mergingsome properties and selling others, the system was reduced to foursubsidiaries, A final plan under section 11 (e) was filed in June 1949.The Commission approved the plan on November 30, 1949,46afterwhich it was ordered enforced by the United States district court.

The plan provided, among other things, for the merger of Nationalinto its subsidiary, National Gas & Oil Corp. (Gas & Oil), and for thedistribution to National's common stockholders, in respect of eachshare held, of one share of new common stock of Gas & Oil and one-half share of new common stock of another subsidiary, National Utili-ties Co. of Michigan (Michigan).

The plan effected a divorcement of Michigan from the system, elim-inated National as a holding company and resulted in Gas & Oil, anonutility, becoming the parent of Newark Consumers Gas Co., a util-ity, and the Fritz Oil & Gas Co., a nonutility. The surviving Gas &Oil and its two subsidiaries are all Ohio corporations and operatewithin the State of Ohio.

On June 16, 1950, the Commission issued an order exempting Gas& Oil and its subsidiaries from the provisions of the Holding Com-pany Act pursuant to section 3 (a) (3).41

New England Public Service Co.New England Public Service Co. (NEPSCO), at the time of its reg-

istration, had five major operating subsidiaries, of which two operatedin Maine, one in New Hampshire and two in New Hampshire and Ver-mont. It also owned, through an industrial subsidiary, five textilemills, a paper company, and a forest products manufacturing com-pany. The company was heavily overcapitalized, having outstandingtwo classes of prior lien preferred stock and, junior thereto, fourclasses of preferred stock. All these preferred issues had substantialdividend arrearages. As a result of simplification proceedings in-stituted by the Commission under section 11 (b) (2) of the act, thecompany was directed, in 1941, to reorganize on a one-stock basis, or,in the alternative at its election, to liquidate and dissolve." Thecompany did not appeal this decision and has elected to dissolve. Theindustrial compames were sold for cash. NEPSCO has merged Cum-berland County Power & Light Co. into Central Maine Power Co. Ithas also caused Public Service Co. of New Hampshire to acquire theNew Hampshire properties of the Twin State Gas & Electric Co. andCentral Vermont Public Service Corp. to acquire the Vermont prop-erties of the Twin State company.

In 1947, the Commission approved a modified plan under section11 (e) as a result of which NEPSCO paid $100 per share plus accrueddividends on its outstanding $7 series and $6 series prior lien preferredstocks and deposited in escrow the difference between these paymentsand voluntary redemption values on the two series. The Commissionat that time reserved for future determination the question as to what



.. 9 S. E. C. 239.


additional amounts, if any, should be paid on these shares. In June1950 it acted on this issue and ordered that the $7 series should receivean additional payment of $12.25 per share and the $6 series $2.25 pershare, together with compensation for delay in payment at the rateof 5.5 percent per annum from October 10, 1947.49 Since the close ofthe fiscal year application has been made to the United States districtcourt for enforcement of this order.

In February 1950,a motion was filed with the Commission by counselfor a protective committee for the holders of preferred stock requestingan order of the Commission affirmatively directing NEPSCO on orbefore May 15, 1950, to sell 200,000 shares of the common stock ofPublic Service Co. of New Hampshire, or, in the alternative, a suffi-cient number of shares of common stock of Central Maine Power Co.to raise an equivalent sum, and to apply the proceeds of such saleto the payment of outstanding notes payable to banks which thenaggregated $9,900,000.

Oral argument was held before the Commission on this motion afterwhich the Commission issued a memorandum opinion 50 in which itafforded NEPSCO an opportunity to amend a pending declarationso as to effect a sale. Subsequently, NEPSCO filed a new declarationproposing to sell, at competitive bidding, 260,000shares of its holdingsof the common stock of Central Maine Power Co.

Superimposed on NEPSCO is Northern New England Co., a volun-tary association, which owns approximately one-third of the formercompany's common stock. The Commission has approved a plan forthe partial liquidation of this company by distribution of cash to itsstockholders." At the same time it directed that the companyliquidate and dissolve. Northern New England Co. is awaiting thefiling and approval of a final plan by NEPSCO, in which the partici-pation to be accorded to the common stock of the latter company willbe determined, before it can take the required steps to complete itsliquidation.Niagara Hudson Power Corp.

In 1942,the Commission instituted proceedings under section 11 (b)(2) in respect of the Niagara Hudson Power Corp. system at whichtime it included 26 corporate entities. Among the more importantproblems under section 11 (b) (2) were those related to the system'swestern companies, which were subsidiaries of Buffalo Niagara &Eastern Power Corp. (BNE), a holding company subsidiary ofNiagara Hudson. In June 1944, an order was issued requiring BNEto recapitalize on a one-stock basis.

BNE and Niagara Hudson then filed plans providing for the con-solidation of BNE and certain of its subsidiaries into Buffalo NiagaraElectric Corp. as a surviving company," To accomplish this reor-ganization, Niagara Hudson used funds totaling approximately$63,000,000 in retiring the publicly held second preferred stock ofBNE at its call price plus accrued dividends. These funds were ob-tained from bank loans, treasury cash, and proceeds from the sale of

•• Holding Company Act releases Nos. 9931 and 9982... Holding Company Act release No. 9781.151 Holding Company Act release No. 840l.OJ Holding Company Act release No. 6083.

SIXTEENTH ANNUAL REPORT 81certain of Niagara Hudson's portfolio securities. The total effect ofplans and refinancing proposals was to eliminate, by June 30, 1949, 13corporate entities from the system and to simplify security structuresof the remaining subsidiaries.

During the past fiscal year Niagara Hudson carried forward itsprogram of merger and consolidation which has now resulted in theformation of one of the largest utility operating companies in theUnited States. Preliminary steps in this program included the mergerof Ticonderoga Electric Light & Power Co. into New York Power &Light Corp. in July 1949; and in September 1949, the mergers of OldForge Electric Corp. into Central New York Power Corp. and UnionBag & Paper Corp. into New York Power & Light Corp.

On January 5,1950, the "Consolidation plan" and the "Dissolutionplan" of Niagara Hudson became effective pursuant to the order of thisCommission 53 and the subsequent order of the United States districtcourt." An appeal taken in respect to one phase of the "Dissolutionplan" is still in litigation. In accordance with these plans, the prin-cipal remaining subsidiaries of Niagara Hudson, Buffalo NiagaraElectric Corp., Central New York Power Corp., and New York Power& Light Corp., were merged into a new operating utility company,Niagara Mohawk Power Corp. The common stocks of the formersubsidiaries were converted into shares of Niagara Mohawk which werethen reclassified into class A stock and new common stock.

Niagara Hudson also contributed to Niagara Mohawk its commonstock holdings in its other subsidiaries including Frontier Corp., theOswego Canal Co., and St. Lawrence Co., Ltd., together with miscel-laneous investments.

The class A stock of Niagara Mohawk was distributed in exchangefor the outstanding preferred stock of Niagara Hudson. Holders ofNiagara Hudson common shares had the right until July 5, 1950,eitherto exchange their shares together with a cash payment for shares ofNiagara Mohawk or to retain their shares until the final distributionof Niagara Hudson's holdings is effected. Cash payments made byholders effecting the immediate exchange were applied to the repay-ment of Niagara Hudson's outstanding bank loan.

After the closing date of the exchange period, July 5, 1950,NiagaraHudson still held 2,209,955shares of Niagara Mohawk Power Corp.common stock as compared with 7,473,172shares originally received.Its bank loan had been reduced from $9,580,000to $1,500,000.

In application for a supplemental order in connection with the"Dissolution plan," filed after the close of the fiscal year, Niagara Hud-son has proposed steps to expedite the liquidation of its remainingindebtedness and the distribution of its remaining holdings in NiagaraMohawk. The Commission issued its supplemental order on Septem-ber 7, 195055 approving the final steps in connection with the consum-mation of the "Dissolution plan," and on September 28, 1950 theUnited States District Court of the Northern District of New Yorkissued its order enforcing the supplemental order of the Commission.

113 Holding Company Act release No. 9270... 86 F. Supp. 697 (N. D. N. Y., 1949), reversed and remanded, 8ub. nom, Lerentrttt v,

8. E. a. et al .. 179 F. 2d 615 (C. A. 2, 1950l. Petition for cert, filed July 20, 1950... Holding Company Act release No. 10083.

915841-51--7


The North American Co.

At its registration in 1937, the North American Co. was the topholding company in a system, which through several subholding com-panies, controlled 36 utility and 46 nonutility subsidiaries. Electricutility operations were conducted by system companies in 10 Statesand the District of Columbia; gas utility operations were conducted in9 States. The consolidated balance sheet of North American and itssubsidiaries showed assets of over $900,000,000,and, through the directand indirect ownership of securities, North American controlled anempire whose aggregate value was stated to be approximately$2,200,000,000.

During the last 5 years, North American has taken substantial stepstoward compliance with the Commission's section 11 (b) (1) order,which was issued in 1942.56 By a number of means, including dividendpayments in portfolio securities, outright distribution, the issuance ofp_urchasewarrants to its stockholders and sale at competitive bidding,North American has disposed of nearly all of its assets except UnionElectric Co. of Missouri, Missouri Power & Light Co., and severalminor nonutility subsidiaries.

Among major interests which have been divested are those in PacificGas & Electric Co., Cleveland Electric Illuminating Co., WisconsinElectric Power Co., Potomac Electric Power Co., Detroit Edison Co.,Illinois Power Co., St. Louis County Gas Co., Northern Natural GasCo., Des Moines Electric Light Co. and Tllinois Terminal Co.

During the past fiscal year North American sold its interest in thecapital stock of Kansas Power & Light Co. and its holdings in CapitalTransit Co. Itdistributed its investment in West Kentucky Coal Co.after transferring a portion of that company's assets to the PoplarRidge Coal Co. which was organized as a subsidiary of Union ElectricCo. of M'issouri.

The North American Co. which, concurrently with its divestmentprogram, eliminated all of its outstanding debt and preferred stock,has indicated its intention to submit to the Commission 8. plan designedto effect its merger into Union Electric Co. of Missouri its principalremaining utility subsidiary. However, no formal application in re-spect to such a program had been received at the close of the fiscal year.North Continent Utilities Corp.

North Continent Utilities Corp. registered as a holding company in1938 and, at that time, owned or controlled nine utility and eight non-utility subsidiary companies. The subsidiaries were engaged in theelectric, gas (manufactured and natural), water, ice, cold storage, coal,coke, oil, feed, and telephone business. The operations of the sub-sidiary companies were conducted in seven widely separated States,Arizona, Colorado, Illinois, Kansas, Minnesota, Montana.7 and NewMexico, and in the provinces of Ontario and Alberta, Canada.

In1943,North Continent filed a plan under section 11 (e) which, asamended, provided generally for the sale or distribution in kind of itsinterests in its subsidiaries and application of the proceeds to theretirement of its bonds and preferred stock. North Continent had

"11 S. E. C. 194 (1942), affirmed Bub. nMlt. The North AflUlrwan 00. V. 8. E. 0., 133F. 2d 148 (C. A. 2, 1943), affirmed 327 U. S. 686 (1946).

SIXTEENTH ANl\"'UAL REPORT 83paid no dividends on its stock for a considerable time prior to a recap-italization effected in 1935 and had paid none thereafter. At the timethe plan was filed the company was faced with the early maturity of itsbonded indebtedness. The plan was consolidated with proceedingsinstituted by the Commission and was approved in November 1943,57the Commission ordering North Continent to take such steps as maybe necessary to cause its' liquidation and dissolution and reservingjurisdiction with respect of the treatment to be accorded the preferredand common stockholders.

The plan was enforced by a United States district court shortlythereafter. 58 Pursuant to the plan, North Continent disposed of sixelectric and gas companies, principally by piecemeal sales to coopera-tives and municipalities, and two nonutility companies by sales ofsecurities to the public. North Continent from time to time appliedthe proceeds from these sales to the reduction of its bonds and thesewere fully retired on July 1, 1947.

In February 1950, the Commission approved a supplemental plan 59which provided for the allocation of North Continent's assets betweenits preferred and common stockholders and for the immediate dis-tribution to its stockholders of all of its available cash and all of itsportfolio securities, except its investment in one foreign public utilitycompany which was not in distributable form. Pending dispositionof the foreign subsidiary, North Continent was to be recapitalized ona one-stock basis. This program was ordered enforced by the UnitedStates district court in April and was consummated on June 1, 1950.

Standard Power & Light Corp. and Standard Gas & Electric Co.

The Standard holding company system presented in extreme degreethe evils of corporate pyramiding and scatteration of properties whichthe integration and simplification provisions of the act were designedto eliminate. In 1936, the Standard system consisted of 105 activecompanies operating in 20 States and in Mexico; it contained 9 reg-istered holding companies including the 2 top companies, StandardPower & Light Corp. and its subsidiary, Standard Gas & Electric Co.By June 30, 1950, the number of active companies had been reducedto 58 (including 43 street railway companies, which are part of onetransit system) operating in 5 States. The important remaining util-ity subsidiaries of the system are Duquesne Light Co. (a subsidiary ofPhiladelphia Co.), Wisconsin Public Service Corp., and OklahomaGas & Electric Co.

The most significant developments in the Standard system duringthe last fiscalyear were concerned with subholding companies of Phila-delphia Co.

On October 10, 1949, the United States Court of Appeals for theDistrict of Columbia unanimously affirmedan order of the Commissiondated June 1, 1948, issued under section 11 (b) of the act, directingPhiladelphia Co. to dispose of its interests in the gas utility and trans-portation business and thereafter to liquidate and dissolve."

0714 R. E. C. 656 (1943).os 54 F. Supp. 527 (D. Del., 1944).59 Holdine Company Act release No 9682eoPhiladelphia CO. V. S. E. C., 177 F. 2d 720 (C. A. D. C., 1949).


In March 1950, Philadelphia Co. effected a reorganization of itsnatural gas subsidiaries by transferring its stockholdings in Kentucky-West Virginia Gas Co. and Pittsburgh & West Virginia Gas Co. toEquitable Gas CO.61and thereafter sold to underwriters the commonstock of Equitable Gas Co. for $45,755,000. Philadelphia Co. utilizedthe major portion of the proceeds from this sale to redeem all of itsoutstanding funded debt amounting to approximately $36,000,000.In the reorganization of its former gas subsidiaries, Philadelphia Co.received $17,500,000principal amount of debentures of Equitable GasCo. In June 1950,Philadelphia Co. sold $11,000,000of these deben-tures utilizing the proceeds to redeem all of its outstanding $6 cumu-lative preference stock, aggregating $10,000,000in par value. Thusduring the fiscal year Philadelphia Co. eliminated $46,000,000in faceamount of its senior securities.

Substantial progress was also made toward the reorganization ofPhiladelphia Co.'s subsidiary, Pittsburgh Railways Co., which hasbeen in bankruptcy since 1938. Pittsburgh Railways operates thetransit system in the city of Pittsburgh under lease and operatingagreements covering the properties owned by 55separate corporations.Philadelphia Co. itself has guaranteed the payment of lease rentals,bond interest, taxes, and other obligations of some of the underlyingcompanies. During 1949,hearings were held on a combined plan forreorganization of the railways system which was filed jointly by Phila-delphia Co. and the trustee of Pittsburgh Railways under section 11of the act and chapter X of the Bankruptcy Act. The plan providesfor the formation of a new company to replace all the existing com-panies; the security structure of the reorganized company would con-sist of common stock, not more than $6,000,000principal amount offirst mortgage bonds, and equipment obligations. Under the plan,Philadelphia Co. would be discharged from its guaranty obligationsand would receive 51 percent of the commonstock of the new company.The balance of the common stock, all the bonds and approximately$17,000,000of cash would be distributed to the public holders of se-curities of Pittsburgh Railways and its underliers,

The Commission approved the combined plan on March 27, 1950,subject to the subsequent reexamination of certain aspects of theplan 62 and on May 1, 1950, the United States District Court for the'Vestern District of Pennsylvania entered its order approving theplan. Thereafter, the plan was submitted to the security holdersfor their approval. Subsequent to the close of the fiscal year, thenecessary assents to the plan had been secured and it is expected thatthe plan will be consummated in the near future.

In October 1949, Standard Gas filed an amended plan for sim-plification of the corporate structure of the Philadelphia Co. system.Itprovided, among other things, for the elimination of the noncallablepreferred stocks of Philadelphia Co. and its inactive subsidiary, TheConsolidated Gas Co. of the City of Pittsburgh. Extensive hearingswere held, but were adjourned pending consummation of the reor-ganization of the gas properties and the sale of the common stock ofEquitable Gas Co. The plan was thereafter further amended to pro-

61 Holding Company Act releases NOR.9740 and 9766... Holding Company Act release No. 9759.

SIXTEENTH ANNUAL REPORT 85vide for the retirement of all of Philadelphia CO.'s remaining pre.ferred stocks and the preferred stock of The Consolidated Gas Co.of the City of Pittsburgh, having aggregate par values of approxi-mately $31,700,000.

Standard Gas & Electric Co. in September H)49, also effected thesale of 250,000 shares of its common stock holdings in Louisville Gas& Electric Co. for $7,441,250. Since this reduced Standard's votinginterest in Louisville to less than 10 percent, that company is nolonger a statutory subsidiary in the Standard system.The United Corp.

The United Corp. registered as a holding company in March 1938,at which time its portfolio was comprised largely of the commonstock of four holding company subsidiaries. These subsidiaries, withthe percentage of voting control held by United. were as follows: TheUnited Gas Improvement Co., 26.2 percent; Public Service Corp. ofNew Jersey, 13.9 percent; Niagara Hudson Power Corp., 23.4 per-cent; and Columbia Gas & Electric Corp. (now the Columbia GasSystem, IInc.), 19.6 percent.

In June 1941, the Commission instituted proceedings with respectto United under sections 11 (b) (1) and 11 (b) (2) of the act. Atthat time the 125 companies in the United system operated in 22States and in Canada. Their combined total assets approximated$2,765,000,000. Subsequently, the Commission by order dated August]4, 1943, directed United to change its existing capitalization, whichconsisted of preferred and common stocks, to one class of stock andto cease to be a holding company."

United has since retired all of its preferred stock by exchangingtherefor certain portfolio securities and cash. Through the retire-ment of its preferred stock and sales of pOltfolio securities, Unitedreduced its 'percentage of voting securities to 7.7 percent in UGI,6.41 percent IIIColumbia and 5.71 percent in Public Service. Throughthe reorganization of Public Service it had, however, acquired an-other subsidiary, South Jersey Gas Co., 28 percent of whose votingsecurities it now holds.

On October 20, 1949, the Commission approved a plan filed byUnited whereby it distributed to its stockholders, as a special dividend,one-tenth of a share of common stock of its subsidiary, Niagara Hud-son Power Corp., for each share of United common." This distri-bution reduced United's holdings of the outstanding voting securitiesof Niagara Hudson from '28.5 percent to 14.1 percent. Approvalof this plan was granted on condition that United undertake to filepromptly a comprehensive plan under section 11 (e) detailing theremaining steps to be taken, and the timing thereof, to completeits transformation into an investment company. Such a plan wasfiled in December 1949.

Among the provisions contained in this proposed program, wasthe exchange by United of its holdings of preferred stock in NiagaraHudson for the class A stock of its successor, Niagara Mohawk PowerCorp., and the exchange of its common holdings in Niagara Hudson,



86 SECURITIES AND EXCHANGE COMMIESION

together with the requisite amount of cash, for new common sharesof Niagara Mohawk. It also proposed the prompt sale of the NiagaraMohawk class A stock to be received by United. These transactionswere approved by Commission orders Issued in February and April1950.65 Jurisdiction was reserved on other matters and the planhas been amended several times since initial filing.

As amended, the pending proposals include (1) the sale by Unitedof its entire interest in South Jersey Gas Co.; (2) an offering to eachqualified common stockholder of United, owning 99 shares or less,to purchase his shares for cash; (3) an offering to holders of morethan 100 shares to exchange their stock for the common shares ofNiagara Mohawk; and (4) the sale by United of sufficient shares ofits holdings in the Columbia Gas System, Inc., the United Gas Im-provement Co. and Niagara Mohawk Power Corp. to reduce its hold-ings in each to not in excess of 4.9 percent of the voting stockoutstanding.The United Light & Railways Co.

On February 18, 1938, the United Light & Power Co. registeredas a holding company with a system comprised of 10 holding com-panies, 7 of which were registered holding companies, 21 electric andgas utility subsidiaries, 20 nonutility subsidiaries, and a service com-pany. In 1941 the Commission directed the dissolution of UnitedLight & Power Co. and United American Co., a subholding company."Bya subsequent order the Commission directed the divestment of theinterests of United Light & Power Co. and the subholding companiesin 22 subsidiaries in order to comply with the standards of section11 of the act.6T

After a series of transactions designed to enable United Light &Power to comply with the outstanding order of dissolution, the Com-mission approved a plan which provided, in substance, for the dis-tribution of United Light & Power's remaining investment, thecommon stock of United Light & Railways Co., to its common stock-holders." The residual net assets of United Light & Power weretransferred to United Railways, and United Light & Power was dis-solved. Thus, United Railways became the system's top holding com-pany with two principal subholding company systems, ContinentalGas & Electric Corp., and American Light & Traction Co.

In June 1947 United Railways and American Light filed a planwhich provided, among other things, for the divestment by UnitedRailways of its entire interest in American Light and the continua-tion of the latter as a registered holding company "controlling" an in-tegrated gas utility system. American Light had, in the interim,embarked on a program to finance -and construct a la.rge interstatenatural gas pipeline from the operating areas of its natural gas sub-sidiaries to fields in the Hugoton area. Other more important pro-visions of the plan provided for the divestment of the common stockof Detroit Edison Co. and Madison Gas & Electric Co. held by Amer-ican Light and United Railways and the retirement of the preferred

.. Holding Company Act releases Nos. 9652 and 9821.

.. 8 S. E. C. 837.07 9 S. E. C. 833... Holding Company Act release No. 3242 and 10 S. E. C. 945.

SIXTEENTH ANNUAL REPORT 87stocks of the two holding companies. After appeals were taken bytwo stockholders, this plan was approved by the court of appeals inNovember 194869 and consummated early in 1949. American Lightchanged its name and is now known as the American Natural Gas Co.

In February 1949, United Railways and Continental publicly an-nounced their intention to liquidate and dissolve and a plan undersection 11 (e) was accordingly filed with the Commission. On Decem-ber 30, 1949, the plan was approved by the Commission subject tocertain amendments including provision for cumulative voting rightsand the listing on a national securities exchange of the subsidiarystocks being distributed within 6 months after the date they becameavailable for distribution." The company filed appropriate amend-ments to comply with these requirements.

Pursuant to the plan, the common stocks of St. Joseph Light &Power Co. and Iowa Power & Light Co. have been distributed and thestock of Kansas City Power & Light Co. has been sold to the stock-holders of United Railways pursuant to a rights offering. In addi-tion, two mining company investments have been disposed of andContinental has been liquidated. Subsequent to the close of thefiscal year, distribution of the stocks of Eastern Kansas Utilities, Inc.and Iowa-Illinois Gas & Electric Co. was also effected. In connectionwith each of these divestments certain other transactions have beenrequired which were designed to strengthen the capital structures ofthose operating utilities being freed from holding company control.

THE CONTINUING BOLDING COMPANY SYSTEMS

Although enforcement of the Holding Company Act is bringingabout the complete liquidation of many of the multitiered and widelyscattered holding-company systems of the past, it will not eliminatethe holding company as a useful corporate device in the public utilityfield. A holding company system which can measure up to the physi-cal integration and corporate simplification requirements of section11 (b) is expressly permitted by the act to function and develop asa regional system. Such a system, of course, remains subject to thegeneral, regulatory jurisdiction of the Commission with respect tofinancing, intercompany transactions, servicing arrangements, andother transactions in order to insure that there will be no recurrenceof those abuses which reduced the holding company to a state of publicdisfavor prior to passage of the act.

A number of the continuing systems have completed their com-pliance programs; others still have important problems to solve. Ithas been estimated that about 20 regional systems with aggregateassets of $6 or $7 billion will remain permanently subject to the act.In general, these continuing systems are of three major types. Thefirst is the electric holdinp company system, which usually consistsof one holding company above a number of interconnected electricoperating companies. In this category one finds such systems as thoseof the American Gas & Electric Co., Central and South West Corp.,the Southern Co., and Middle South Utilities, Inc .

.. Panhandle Eastern Pipe Linc Of) v, S. E. O. ]70 F. 2d 4;:;::;(C. A. 8, 1(J48) and J,C1< isV. S. E. O. 170 F. 2d 467 (C. A. 8. 1948).

TO Holdlng Company Act release No. 9587.


The second type is the natural gas holding company system whichmay control gas transmission as well as gas distribution companies.Typical of this group are Columbia Gas System, Inc., AmericanNatural Gas Co., and Consolidated Natural Gas Co.

The third type is the operating-holding company system. The hold-ing company in this group derives a substantial portion of its totalincome from its own utility operations, but also has one or more sub-sidiary operating companies. The Delaware Power & Light Co.,Ohio Edison Co., and Interstate Power Co. are representative of thistype.

The holding company system can be justified as a continuing enter-prise only if Its component companies are knit together as a compactgroup having basic functional relationships with one another. Theremust be a showing of important economies from group operation, and,in addition, each system should be able to meet the problems of plantexpansion and to undertake the requisite financing on a sound andeconomical basis. Because it must approve all proposals for financingand supervise servicing arrangements and intercompany transactions,the Commission retains substantial jurisdiction over these systems.

The following summaries provide a review of the more importantactions taken by the Commission during the past year in respect toseveral of the continuing holding-company systems. At this pointit should be emphasized that a number of these systems still haveresidual problems to be solved under sections 11 (b) (1) and 11 (b)(2), and, in one or two cases, registered holding companies may even-tually be able to qualify for exemption from the act pursuant to theprovisions of section 3 (a).American Gas & Electric Co.

With consolidated assets of over $750,000,000, American Gas &Electric Co. is the largest of the continuing holding company sys-tems. Its operations, almost wholly electric, extend over a seven Statearea from Kentucky to Michigan. As in other systems, the rapidpost war expansion of electric power demand has required the operat-ing subsidiaries of American to carry forward a tremendous programof new construction. This, in turn, has been accomplished by theundertaking of a large amount of financing by the subsidiary operat-ing companies. Before granting approval of $18,000,000 of bankborrowings by one major subsidiary, Appalachian Electric PowerCo., the Comrnission in July 1949 gave careful consideration to theover-all financmg program of American as well as to the program ofAppalachian and devoted particular attention to the responsibilityand intentions of the holding company to preserve the balance ofunderlying equity in the system.

American, in response to this inquiry, placed before the Commis-sion the details of its 3-year construction and financing programamounting to more than $250,000,000. Proposed financing included$86,000,000of mortgage bond offerings, $10,500,000of temporary bankloans, and common stock financing to the extent of 913,150 shares.The Commission observed that the financing program" * * *appears feasible and sound in the light of the standards of the act." 71

11 Holding Company Act release No. 9234.

SIXTEENTH ANNUAL REPORT 89An important step in this program was taken with the sale in October1949 of 498,081 shares of its common shares by means of a rightsoffering. Of the proceeds derived from this sale approximately $20,-000,000 was earmarked for investment in the equity of AppalachianElectric Power CO.72 The balance was to be used for equity invest-ments in other subsidiaries and for other purposes. American con-templates the sale of the additional common shares in 1951.

In past years, American has effected several acquisitions of prop-erty in the interest of rounding out its service area. This programwas continued during the fiscal year 1950 when its subsidiary, Indiana& Michigan Electric Co., negotiated an exchange of electric propertieswith its nonaffiliated neighbor, Public Service Co. of Indiana. Theexchange of properties was arranged to promote more efficientservicein each of the companies and to achieve certain economies of opera-tion." Another subsidiary, the Ohio Power Co., purchased fromPublic Service Co. of Indiana its interest in Union City Electric Co.for a cash consideration of $294,000.74

In April 1950, the Commission approved the sale by American of$27,000,000 of serial notes with maturities of $500,000 in each of theyears 1952 to 1955 and $2,500,000 in each of the years 1956 to 1965. 75Proceeds of the issue were used by American to redeem the company's151,623 shares of outstanding preferred stock as well as to repay$10,300,000 of outstanding serial bank loan notes. The Commissionnoted, among other things, that while it generally disfavors theissuance of senior securities by holding companies, having subsidi-aries with publicly-held senior securities, the pending issue was, ineffect a, replacement of senior securities already outstanding. It,noted also that the effect of the gradual retirement of debt would beto improve the consolidated capitalization ratios of the system andthe end result would be the elimination of all corporate debt fromthe capital structure of American.American Natural Gas Co.

On December 30, 1947, the Commission approved a plan pursuantto section 11 (e) of the act which provided, in part, that AmericanLight & Traction Co. (now American Natural Gas Co.) would bedivested by its former parent, United Light & Railways Co. andwould undergo a comprehensive reorganization of its capital struc-ture. 76 American also proposed to retire its 6 percent noncallablepreferred stock, divest itself of certain nonretainable holdings andmake a substantial investment in a newly organized gas transmissionpipeline (Michigan-Wisconsin Pipe Line Co.) which was to bringnatural gas from the Hugoton field in Texas to the gas utility sub-sidiaries of American.

The past 3 years have witnessed the consummation of these pro-posals and the rapid growth of Michigan-Wisconsin Pipe Line Co.as a major long-distance transmission system. Because of the heavycash requirements and the absence of earnings income during the

'l2 Holding Company Act release No. 9371.73 Holding Company Act release No. 9758.•• Holding Company Act release No. 9776.16 Holding Company Act release No. 9819•• Holding Company Act release No. 7951.


construction period, the debt financing of Michigan-Wisconsin pre-sented the Commission with difficult regulatory problems. In thisinstance, it permitted the initial bonding of property at 75 percentof net bondable value instead of the 60 percent rate usually required;it also granted an exemption from competitive bidding and permittedprivate placement of $66,000,000 of first mortgage bonds,"

The first phase of this program is now substantially completedbut American plans to expand the capacity of Michigan-Wisconsinand to undertake other system construction which, in total, willamount to approximately $110,000,000 for the 2-year period 1950-51.This, in turn, will require some $70,000,000 of additional systemfinancing to be undertaken, subject to Commission approval.

In line with this rapid growth, American increased its commonequity in November 1949 78 through the sale by means of a rights offer-ing to common stockholders of 276,805 additional shares. A secondoffering of 380,607 shares was pending at the close of the fiscal year.On July 25, 1950, the Commission also permitted American's sub-sidiary, Michigan-Wisconsin Pipe Line Co., to enter a credit agree-ment with banks to cover note borrowing up to $20,000,000. This isan interim step after which it is contemplated that additional bondsand common stock will be issued by the company. 79

On January 24, 1950, the Commission approved the organizationof American Natural Gas Service Co. and conduct of its business asa subsidiary service company in the American Natural holding com-l)any system," The order was conditioned in several respects, how-ever, to enable the Commission to review the company's costallocations and operations at any future time and, if necessary, afternotice and opportunity for hearing, to revoke, suspend, or modifythe permission granted to continue operations.Central and South West Corp.

Central and South West Corp. and its four electric utility subsid-iaries were divested by Middle West Corp. in 1947 and have operatedsince that time as a separate holding company system, having compliedwith the integration and simplification requirements of section 11.They served a four-State area including communities in Texas, Okla-homa, Louisiana, and Arkansas.

To keep pace with the increased demand for electric service, theCentral and South West system expended over $33,000,000 during thepast fiscal year for new construction. To finance this program some$17,000,000 of senior securities were sold by the utility subsidiaries andthe parent company in November 1949 undertook its second commonstock rights offering which yielded approximately $9,000,000 in pro-ceeds." As a result of this step, common stock equity of the systemwas increased to 34 percent of total capitalization and surplus.The Columbia Gas System, Inc.

The Columbia Gas System, Inc. (formerly Columbia Gas & Elec-tric Corp.) is the parent company in a large holding company system

'I"l Holding Company Act release No. 8600.'lS Holding Company Act release No. 950l... Holding Company Act release No. 9990... Holding CGmpany Act release No. 9625.81 Hold.lng Company Act release No. 9447.


engaged in the production, transmission, and distribution of naturalgas in an area embracing seven States and the District of Columbia.Prior to the issuance of orders by the Commission under section 11 ofthe act, Columbia Gas was a subsidiary of the United Corp. and, inaddition to its gas properties, controlled through subsidiaries substan-tial electric facilities in Ohio, Kentucky, and Indiana. The holdingsof the United Corp. have since been reduced to less than 10percent anddivestment of Columbia's electric properties was completed in 1946.Columbia is expected to continue as a registered holding companysystem.

Financing procedure in the Columbia system differs somewhat fromthat of many other holding company systems. Instead of permittingsubsidiary companies to undertake public senior financing when neces-sary Columbia retains complete ownership of all outstanding securitiesof its operating subsidiaries. Public financing of the system, both inrespect to debt and equity requirements, is provided at the holdingcompany level. Thus, the senior securities of Columbia Gas take theform of unsecured debentures having a broad claim on all systemproperties rather than the mortgage bond form generally employedby operating companies for debt financing. The Commission has ap-proved this arrangement as long as overall system capitalization ratiosare maintained in accordance with statutory standards.

During the postwar period, the Columbia system has carried forwardan aggressive program of developing sources of gas supplies andexpanding its transmission service and distribution facilities. It ispresently initiating service to the city of Baltimore, Md.; Charlottes-ville, W. Va.; and Poughkeepsie, Newburg, Beacon, and Kingston inthe State of New York. Other connections are in prospect.

This growth is reflected in its active program of financing whichhas continued without interruption. In January 1950, the Commis-sion approved the sale by Columbia of 304,998shares of its commonstock.82 On June 13, 1950, Commission approval was granted toColumbia to issue $110,000,000 principal amount of debentures due1975. Proceeds of this offering were to be used in part for refundingpurposes; the balance for construction." Another declaration propos-ing an additional offering of $90,000,000of debentures was filed withthe Commission and approved by it just after the close of the fiscalyear.54

Consolidated Natural Gas Co.

Consolidated Natural Gas Co. was organized in 1942 by StandardOil Co. of New Jersey. Standard Oil then transferred to Consoli-dated its holdings in certain operating subsidiaries engaged in thetransmission and distribution of natural gas. By a subsequent dis-tribution of its holdings in Consolidated, Standard Oil completeddivestment of its utility properties."

Consolidated is expected to continue as a registered holding com-pany system. It has operations in West Virginia, Ohio, Pennsyl-vania, and New York and reports assets in excess of $360,000,000.

.. Holding Company Act release No. 9611.83 Holding Company Act release No. 9920... Holding Company Act release No. 9993.III Holdlns CQmpanr Act release Nos. 4617 and 4864.


Though the system has shared fully in the postwar growth of thenatural gas industry, it has not been required to do as much publicfinancing as other systems. This factor is explained in part by theconservative dividend policy of the management which has retainedout of net income approximately $20,000,000during the past 3-yearperiod.

However, Consolidated has sold, with Commission approval, 545,-672 shares of common stock with net proceeds of $20,270,000in July1947,and $30,000,000of debentures in 1948. In March 1950,the Com-mission approved the additional sale by Consolidated, pursuant to aloan agreement with four commercial banks, of an aggregate of $14,-000,000of promissory notes to be issued during 1950.S6 This borrow-ing was undertaken as an interim step in Consolidated's long-rangefinancing program. Proceeds will be used primarily to finance theconstruction and gas-storage programs of two of the operating sub-sidiaries. Consolidated had almost no indebtedness prior to the post-war expansion program, and, even with the $54,000,000 of debtincurred during the past year, the present debt ratio of the systemremains under 20 percent.Delaware Power & Light Co.

Delaware Power & Light Co. is an operating-holding company sub-ject to Commission jurisdiction because of its operations through sub-sidiaries in Maryland and Virginia. Delaware was formerly asubsidiary of United Gas Improvement Co., but achieved independentstatus in 1943with the distribution by the latter of its stockholdingsin the company.

Substantial growth in recent years has necessitated considerablefinancing activity by Delaware and, beginning in 1947, the Commis-sion approved five proposals submitted by the company. In March1947, the company sold $5,000,000of preferred stock at competitivebidding. This was followed by another $5,000,000in July 1949 to-gether with $10,000,000of mortgage bonds. Offerings of additionalcommon stock to shareholders were made in February 1949and againin April 1950with proceeds aggregating over $9,000,000. These of-ferings enabled Delaware, while proceeding with necessary debt financ-ing, to retain a ratio of common equity to total capitalization andsurplus in excess of 33 percent.Interstate Power Co.

Interstate Power Co. is an operating-holding company which to-gether with its two subsidiaries is engaged principally in the electricutility business in Minnesota, Iowa, South Dakota, Illinois, and Wis-consin. Pursuant to a plan filed under section 11 (e) of the act,Interstate underwent a complete financial reorganization in March1948.S7 Prior to this, the company was burdened with a very top-heavy capital structure, including excessive indebtedness and pre-ferred stocks with large dividend arrearages.

Through operation of the reorganization plan, the former parent-subsidiary relationship existing between Ogden Corp. and Interstate

.. Holding Company Act release No. 9727.81 Holding Company Act release No. 791,)&.

SIXTEENTH ANNUAL REPORT 93was eliminated and 944,961shares of Interstate's new common shareswere placed in escrow for the benefit of the holders (including Ogden)of its old securities junior to its old mortgage bonds. Proceedingsrelating to the plan for distribution of these escrowed shares are stillinlrogress before the district court and the Commission.

lthough Interstate's reorganization of March 1948 resulted in asubstantially improved financial position, the exigencies of that reor-ganization nevertheless still left the company's capital structure farfrom ideal. This situation required that subsequent security salesby Interstate be carefully scrutinized by the Commission to assurethat each successive financing operation, in connection with the com-pany's large construction program, would bring about a strengthen-ing of Interstate's common stock equity, preserve its financial integ-rity, and facilitate the economical financing of its expanding business.

In November 1949, Interstate's new money requirements were met,with Commission approval, by the sale of 300,000shares of additionalcommon stock." In May 1950, after extensive preliminary confer-ences with the Commission's staff, the company consummated a broadfinancing program, which not only satisfied its capital requirements,but greatly strengthened its capital structure. This undertakingincluded the sale of $3,000,000of mortgage bonds, 100,000shares ofnew preferred stock and 275,000shares of additional common stock."Proceeds were applied, in part, for construction needs and also to theretirement of certain outstanding debt securities. In addition, Inter-state successfully negotiated with the holder of its $5,000,000 out-standing 4% percent Debentures for a reduction of interest rate to3%,percent.

The rapid improvement in the company's credit rating is clearlyindicated by a comparison of the annual interest cost of 4.5 percenton its mortgage bonds sold in October 1948 with those sold III May1950at a cost of 2.9 percent. This substantial change is due in largepart to the fact that, in the period following Interstate's reorgani-zation in 1948, its common equity, after giving effect to the sale ofcommon stock in May 1950, has increased from 17 percent to 26.5percent of total capitalization and surplus. If the new preferredissue is included, aggregate underlying equity as a percentage ofcapitalization and surplus has now reached 37.6percent.Middle South Utilities, Inc.

Middle South Utilities, Inc. is a registered utility holding companyserving through its subsidiaries a three-State area including Arkansas,Louisiana, and western Mississippi. "Whileits revenues are derivedpredominantly from sales of electricity, it is also engaged in the saleof natural gas and in transportation operations. The company wasorganized in May 1949 and acquired from Electric Power & LightCorp., the latter's holdings in four subsidiary utility companies anda small land company. Since the divestment by Electric and itsparent, Electric Bond & Share Co., of their holdings in the company,Middle South has become an independent regional holding companysystem. The Commission has reserved jurisdiction, however, to insti-



94 SECURITIES AND E~CHANGE COMMISSION

tute such further proceedings under section 11 (b) with respect toMiddle South as it may consider necessary or appropriate.

The construction program of the Middle South system has been esti-mated to require expenditures over the 2-year period 1950-51 of morethan $92,000,000. To finance the initial portion of these requirements,Middle South sold 640,000shares of its common stock in January 1950for which it received net proceeds of $11,868,000.90 In June 1950,the Commission approved additional financing proposals. These in-cluded the sale of mortgage bonds by two subsidiaries, the sale of newpreferred stock by three subsidiaries and an offer by Middle South toholders of outstanding preferred in the three subsidiaries to exchangenew shares of Middle South common for shares of outstanding pre-ferred." The sale of new preferred by the subsidiaries and the ex-change offer by Middle South were proposed primarily to facilitateelimination of the high dividend preferred stocks of three subsidiariesand to provide funds for construction.

After submitting both the bond and preferred stock offerings tocompetitive bidding, sales of the two subsidiary bond issues were con-summated promptly, yielding approximately $13,500,000in proceeds.However, all bids on the preferred offerings were rejected as not repre-senting fair value for the securities offered. This, in turn, causedMiddle South to request a suspension of action on other related pro-posals until a further amendment could be filed.National Fuel Gas Co.

The construction program of National Fuel Gas Co., unlike mostsystems, has been on a modest scale and has not required any long-termfinancing during the past year. However, progress has been made infurther simplifying the system by effecting a reduction in the numberof subsidiary corporate entities and effecting through mergers andconsolidations a number of operating economies,

On June 15, 1949the Commission approved the merger of IroquoisGas Corp. a gas utility subsidiary of National, with Wanakah GasCorp., its wholly owned gas utility subsidiary." The merger waseffected on November 18, 1949. On August 12, 1949, the Commissionalso approved the dissolution of Hanover Gas Corp., a small produc-ing subsidiary and the distribution of its remaining assets to National."

In June 1950,National and five of its utility subsidiaries filed a jointdeclaration proposing the merger of the five subsidiaries into one gasutility company. On June 30, 1950, the Commission approved cer-tain transactions proposed to be effected prior to the merger andreserved jurisdiction over all other aspects of the proposed trans.actions." .New England Electric System

New England Electric System (NEES) has the largest number ofsubsidiary companies of all the registered holding company systems.As previously indicated, NEES underwent a major reorganization in

soHolding Company Act release No. 9595., Holding Company Act release Nos. 9916 and 9919.

.. Holding Company Act release No. 9166 .

.. Holding Company Act release No. 9272 .


•

SIXTEENTH ANNUAL REPORT 951947 and, since that time, it has been confronted with the need forextensive system expansion, which is not expected to be completeduntil 1952.

Of direct concern to the Commission has been the approach of thesystem to its problems of permanent financing for this construction.In the middle of 1948 and early 1949, the Commission permitted 23of the subsidiary companies to borrow on promissory notes as a tem-porary step in the financing program." It was represented at thattime that the subsidiaries would obtain a substantial amount of cashto retire a portion of their note indebtedness from the sale of commonstock to NEES, and that NEES would purchase these shares, in part,out of proceeds derived from the sale of its own common stock.

In 1949,however, NEES indicated that, while it contemplated theissuance of common stock, it was not able to state when additionalstock would be sold nor the amount to be sold. In April 1949, theCommission reconsidered its approval of the issuance of the promis-sory notes and ordered 96 that NEES, and the subsidiary companiesinvolved show cause why its order should not be amended to theextent necessary to terminate, in whole or in part, its authorizationwith respect to notes not already issued, or to impose additional termsand conditions with respect to such notes. In a memorandumopinion 97 the Commission stated that the system had financed itsneeds almost wholly by the issuance of debt securities and statedthat NEES should sell additional common stock. Subsequently, aspart of its financing program for the current fiscal year, NEES madea public offering of common stock in the amount of $7,029,000.

Subsequent to this offering, NEES submitted a general financingprogram proposing the sale of $7,500,000of convertible preferredstock and $5,000,000of debentures by the parent company. In asecond memorandum opinion dated September 29, 1949,98the Com-mission found that the proposal was faulty in failing to provide foradditional common equity to balance the large amount of seniorsecurities proposed to be issued. It indicated that a minimum ac-ceptable position might be reached if the $7,500,000now proposed tobe raised through convertible preferred stock were raised insteadthrough the sale of additional common shares.New England Gas & Electric Association

New England Gas & Electric Association (NEGEA), a Massa-chusetts trust, registered as a holding company in 1938. Becauseof a top-heavy capital structure, which included five debenture issuesand two classes of preferred shares with large arrearages, the Com-mission instituted section 11 (b) (2) proceedings against NEGEAin September 1941.99 Added to the capitalization problem was thepresence of a complex situation involving claims and counterclaimsbetween NEGEA and the trustees of Associated Gas & Electric Co.and Associated Gas & Electric Corp. After lengthy hearings andextensive consideration by the Commission a second plan, which was

.. Holding Company Act release Nos. 8253 and 8927.

.. Holding Company Act release No. 8995.OT Holding Company Act release No. 9212 ... Holding Company Act release No. 9377.. Holding Company Act release No. 3035.

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96 SECURITIES AND EXCl!ANGE COMMISSION

an alternate to the initial plan of recapitalization.'?" was approvedby the Commission and consummated in April 1947.101 It is expectedthat NEGEA, which now has a simplified capital structure, moreequitable voting rights for stockholders and restated investment ac-counts, will continue as a holding company system.

Like other systems, NEGEA is presently carrying on an extensiveconstruction program to meet additional demands for service andto replace existing property. An estimate of net additions to bemade in the period from 1949to 1952totals approximately $23,700,000.On September 16, 1949,the Commission approved the sale by NEGEAof 124,601 shares of additional common stock for approximately$1,400,000. At the same time it approved the sale of notes by sevensubsidiaries.>" A second sale of 173,126common shares with proceedsof $2,500,000was approved by the Commission in May 1950.103 Pro-ceeds of the second stock sale were used by NEGEA to acquire addi-tional common stock in its subsidiaries. Proceeds of the prior salewere used to retire outstanding bank debt previously incurred bythe parent company for the same purpose.

During the past fiscal year, NEGEA participated with two othernonaffiliated companies in the organization of the Algonquin GasTransmission CO.'04 The new company was organized for the purposeof building or participating in the building of a pipeline for the trans-mission of natural gas from points in New York, New Jersey, orConnecticut to the New England area. Participating with New Eng-land Gas & Electric are Eastern Gas & Fuel Associates and the Provi-dence Gas Co. Other gas companies in New England have also beeninvited to invest in the new enterprise.Northern Natural Gas Co.

The primary business of Northern Natural Gas Co. is the purchase,transmission, and wholesale distribution of natural gas which iscarried from gas fields in Texas, Oklahoma, and Kansas to utility com-panies located principally in Minnesota, Iowa, and Nebraska. Thecompany has one wholly owned gas utility subsidiary, Peoples NaturalGas Co., and as a holding company is therefore subject to regulationby this Commission. On September 25,1950, however, Northern filedan application with this Commission pursuant to section 3 (a) (3)seeking exemption for itself as a holdingcompany and for each sub-sidiary thereof as such from the provisions of the act.

Financing undertaken by the company to meet its construction needshas been planned so as to preserve the substantial equity ratio whichhas been a characteristic of the system for many years. Thus, inMarch 19-19.the company sold 406,000 common shares pursuant to arights offering and realized gross proceeds of $11,977,000.'05 Againin May HJ50, all additional 304,500shares were sold in the same manneryielding proceeds of $9,5l.J1,750ylG Subsequent thereto, the company

100 The original plan of recapita lieatron could not be consummated after its approvalby the Commission and by the United States district court because of adverse marketcondttrons,

Holding Compan\" Act releases Nos. 7181 and 7205.102 Holding Company Act release No. 9340.103 Holding Company Act release No. 9843.'0< Holding Company Act release No. 9694"ll5 Holding Company Act release No. 8963.106 Holding Company Act release No. 9833.

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SIXTEENTH A~~AL REPORT 97

completed its financing program for 1950with the sale of $40,000,000of 2% percent serial debentures after approval was granted by theCommission on May 29, 1950.107

Northern States Power Co.Northern States Power Co. is a holding operating company en-

gaged, either directly or through subsidiaries, in the electric and gasbusiness in the States of Minnesota, 'Wisconsin, North Dakota, andSouth Dakota. Incorporated in Minnesota, it was formerly controlledby a company of the same name, organized in Delaware. The lattercompany was dissolved in December 1949.10S

The construction program of Northern States (Minnesota), which in1947 was expected to amount to $96,000,000over a 5-year period, hassince been increased to the present estimate for the same period of$160,000,000. During 1948 and 1949, mortgage bonds and preferredstocks totaling $55,000,000were issued by the system. Since the sys-tem had been financed for some time by the sale of senior securities,the staff of the Commission indicated its concern over the prospectivedeterioration of the system's capital structure and its lack of equityfinancing. Before the issuance of bonds was approved by the Com-mission, Northern States amended its declaration stating that it wouldoffer common stock within the succeeding few months. On November17,1949, the company, with Commission approved, made a rights of-fering of 1,584,238shares to its stockholders. The offering yieldedproceeds of $16,238,677.109

During the past fiscal year Northern States also accomplished afurther step in the simplification of its system. Two subsidiaries, In-terstate Light & Power Co. (Delaware) and Interstate Light & PowerCorp. (Illinois) were merged with and into a third subsidiary, theElizabeth Light & Power Co. Upon effectuation of the merger inAugust 1949, the name of the surviving company was changed toInterstate Light & Power Co. The latter company will continue asa direct subsidiary of Northern States.>"Ohio Edison Co.

Upon consummation of the section 11 (e) plan of Commonwealth& Southern Corp. on October 1, 1949,1llOhio Edison Co. became anindependent operating-holding company, subject to the jurisdictionof this Commission by virtue of its stock ownership in PennsylvaniaPower Co., its only subsidiary.

Shortly after its divestment by Commonwealth & Southern Corp.,Ohio Edison made application to acquire from Cities Service Co., ata cost of $35,000,000,the latter's holdings in Ohio Public Service Co.common stock as an initial step in a program to merge Ohio PublicService into Ohio Edison. Funds for this purchase were to be de-rived from an underwritten offering of additional common stock byOhio Edison, subject to a rights offering to existing common stock-holders. Ohio Edison also proposed an exchange offer of its com.

linHolding Company Act release No. 9890.108 Holdmg Company Act releases Nos. 7950 and 7976.

Holding Company Act release No. 9484.110 Holding Company Act release No. 9305.111 Holding Company Act release No. 8633.

915841-51-8

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98 SECUlHTIES AND EXCHANGE COMMI&SION

mon stock for shares of Ohio Public Service common stock held bythe public.

In addition to financial problems posed by this application anddeclaration of Ohio Edison, substantial questions were present undersection 10 (c) (2) of the act which provides that the Commissionshall not approve an acquisition of securities unless it finds that "suchacquisition will serve the public interest by tending towards theeconomical and efficient development of an integrated public utilitysystem." On December 2, 1949, the Commission issued its findingsand opinion approving the proposed transactions.'> In reachingthis decision, the Commission considered among other things, the factthat the operating areas of the two companies were contiguous forsome 200 miles. Some interconnections had been made in the pastand combined operation offered many possibilities for additional tie-ins. Evidence indicated that substantial economies could be effectedthrough coordination of facilities and unified operations. Althoughthe resultant system would be a large one, the Commission noted thepopulous and highly industrialized area of its operations and foundit "not so large as to impair the advantages of localized management,efficient operation, and effectiveness of regulation."

In February 1950, after acquiring- about 97 percent of the commonstock of Ohio Public Service, Ohio Edison filed an application-declara-tion for authority to merge the two companies. This proposal in-volved the assumption of the debt of Public Service by Ohio Edison,an exchange of Ohio Edison preferred stock for Public Service pre-ferred stock, and an exchange of Ohio Edison common stock for the .remaining publicly held common stock of Public Service. The pro-posals were approved by the Commission on March 29, 1950,= andwere consummated shortly thereafter. The resultant Ohio EdisonCo. and its subsidiary, Pennsylvania Power Co., have a combinedgross utility plant of about $306,000,000and annual operating reve-nues approximating $80,000,000.The Southern Co.

Like Ohio Edison Co., the Southern Co. became an independentholding company upon consummation of the section 11 (e) plan ofthe Commonwealth & Southern Corp. in October 1949. The inte-grated electric system which it controls furnishes service, throughfour electric utility subsidiaries, in Georgia, Alabama, Florida, andMississippi. Consolidated system assets are about $615,000,000andannual electric revenues are in excess of $115,000,000. It is secondlargest of the continuing holding company systems.

During the calendar year 1949,capital expenditures for the systemtotal $57,345,000and the company expects to make additional expendi-tures during the period 1950-52of approximately $197,000,000. Thisrapid rate of expansion has given rise to substantial financing problemsduring the past fiscal year and will pose similar recurring problemsfor the management and the Commission in the years ahead. InNovember 1949, the Commission approved the sale by Southern of

112 Holding Company Act release No. 9539.110 Holding Company Act release No. 9771.

BIXTEENTLI ~UAL REPORT 991,500,000 additional shares of its common stock.'> Proceeds realizedfrom this sale at competitive bidding were in excess of $17,300,000. Asa result of this sale consolidated common stock equity in relation tototal capitalization and surplus was raised from 26 percent to 29percent.

In the early months of 1950, bond financings were carried out bythree of the subsidiaries and at the close of the fiscal year there waspending a declaration filed by Southern covering the proposed sale of1,000,000 additional common shares to assist further in the financing ofconstruction expenditures by the subsidiaries. After a temporarypostponement due to unsettled market conditions, this sale was con-summated in October 1950 with proceeds of approximately $10,950,000.

Subsequent to the close of the fiscal year, the Southern Co., togetherwith Electric Bond & Share Co., filed applications and declarationsproposing, among other things, that Southern acquire from Bond &Share the latter's common-stock holding in Birmingham Electric Co.through an exchange of the Southern Co.'s common shares. The ex-change proposal was also to be made to the public stockholders ofBirmingham. Alabama Power Co., a subsidiary of the Southern Co.,proposed to acquire the outstanding shares of Birmingham's preferredstock through an exchange offer of its own preferred. Other stepscontemplated the eventual disposition by Birmingham Electric of itstransportation properties and the acquisition of that company's electricproperties by Alabama Power through merger, liquidation or other-wise. Approval of these transactions was granted by the Commissionon August 24,1950.115

On September 23, 1949, the Commission approved Southern Serv-ices, Inc. as a mutual service company for the Southern system.v"

While an appropriate showing was made that Southern Serviceswould be operated economically and efficiently for the benefit of thecompanies which it proposes to serve, the Commission conditioned itsorder in several respects to permit a review of its cost allocations andoperations at any future time.Utah Power & Light Co.

Utah Power & Light Co. was removed from the control of ElectricPower & Light Corp. as a result of its recapitalization plan approvedby the Commission in 1945.117 The company is an operating-holdingcompany, subject to Commission jurisdiction by virtue of its owner-ship of securities in Western Colorado Power Co.

The expansion program of Utah Power & Light and its subsidiarycalls for expenditures of $61,000,000 during the period 1949 to 1953.During the past fiscal year, the parent company sold $3,000,000 ofmortgage bonds with Commission approval, as well as 148,155 commonshares marketed pursuant to a rights offering to stockholders withproceeds of $3,481,000.l1s In March 1950, the company receivedauthorization to borrow up to $10,000,000 from banks on a short-term

11< Holding Company Act release No 9503n8 Holding Company Act release No. 10055.n6 Holding Company Act release No. 9362.117 Holding Company Act release No. 6212.U8 Holding Company Act release No. 9309.


basis.u9 It was indicated that subsequent permanent financing to beundertaken later in 1950would include the sale of additional commonstock as well as mortgage bonds.The West Penn Electric Co.

The West Penn Electric Co. is the parent company in a utility sys-tem which derives about 90 percent of its revenues from sales of electricpower and services a territory located principally in Pennsylvania,West Virginia, and Maryland, also in small adjacent sections of Ohioand Virginia. West Penn was formerly a subsidiary of AmericanWater Works &, Electric Co., which was liquidated in January 1948.120

During the past fiscal year, .West Penn has consummated a numberof transactions designed to simplify the corporate structure of thesystem and, in addition, a thorough-going recapitalization of theparent company was successfully completed. Prior to July 1949, thecommon stock of West Penn Power Co. and the common stock ofMonongahela Power Co., two of the three principal utility subsidiariesof West Penn, were held in two separate blocks within the system.Two-thirds of West Penn Power's common stock was owned by WestPenn and 27.9percent by West Penn Railways, with a small percentagepublicly held; 45.3 percent of the common stock of Monongahela wasowned by 'Vest Penn and 54.7 percent by West Penn Power. As aresult of the section 11 (e) plan approved by the Commission on July28, 1949,121all of the cross holdings of stock in West Penn Power andMonongahela have now been eliminated and all shares held by thesystem are owned by West Penn. In addition, the same plan providesfor an accounting reorganization of West Penn Railways and theelimination of substantial inflation in the statement of its assets.

In September 1949,West Penn effected a complete recapitalization.Prior to this financing, the company had one class of debt securities,three classes of preferred stock, a "class A" stock and common stockoutstanding. Upon consummation of the refinancing, .WestPenn hadoutstanding $31,000,000 of 31/2percent sinking fund collateral trustbonds and 3,200,000 shares of common stock. A small issue of WestPenn Traction Co. bonds, assumed by West Penn in connection withthe corporate simplification, remained in its capitalization. The newcollateral trust bonds are to be retired through annual sinking-fundpayments over their 25-year life. The new common stock, to theextent of 388,274shares, was offered to holders of preferred and classA stock, in exchange for their holdings; the remaining 468,621shareswere offered to the holders of common stock. In each instance theoffers were oversubscribed and no shares remained for distributionby the underwriters. The approved plan also resulted in a downwardadjustment by West Penn of its can'yil1~ value in subsidiary companiesand necessitated charges to its earned surplus and capital surplusaccounts of $1,402,324and $14,078,119respectively.

In its opinion approving the recapitalization.t" the Commissioncommented "that the resulting consolidated common stock equity issubstantially less than we consider appropriate for utility systems"

11. Holding Company Act release No. 9731.110 Holding Com.pany Act release Nos. 7091 and 7208.121 Holding Company Act release No. 9255.12: Holding Company Act release No. 9329.

BIXTEEl-,"'TH ANNUAL REPORT 101and that "the issuance of debt by a holding company whose subsidiarieshave substantial amounts of debt and preferred stocks in the hands ofthe public also raises a serious problem under the standards of the act."Itnoted, however, that the proposed sale of new common stock by WestPenn was a substantial one which increased the number of outstandingcommon shares by 37 percent, and that the sinking-fund provisions onthe new debt called for its complete retirement by maturity. Since theprogram also facilitated the future financing of system constructionrequirements, the Commission determined that it could be approved,indicating its intention, however, to require that future financings bedesigned to strengthen the common equity of West Penn in all possibleways.

ISSUES OF SECURITIES, ASSUMPTIONS OF LIABILITY, ANDALTERATIONS OF RIGHTS

During the past fiscal year, 319 applications and declarations cover-ing issues of securities under sections 6 and 7 and assumptions of lia-bilities and alterations of rights under section 7 were filed with theCommission, Action was completed and Commission approval grantedin 337 cases, including some which were instituted prior to that period.As in the preceding year, most applications under sections 6 and 7 wereundertaken to enable electric and gas utility companies under the Com-mission's jurisdiction to proceed with their plans for extensive plantexpansion. However, there was also a noticeable increase in the num-ber of bond-refunding operations.

On an industry-wide basis, construction expenditures of electric andgas utilities, exclusive of expenditures by natural gas transmissioncompanies, are estimated to have been in excess of $2,500,000,000inthe past fiscal year. While it had been envisioned that these expendi-tures would begin to taper off within the near future as increasedfacilities approached power requirements, the recent trend of domesticand international events suggests that no early decline in the pace ofgrowth is in sight.

The sustained volume of construction has, of course, necessitated aheavy program of financing. This is demonstrated by the followingtabulation showing security sales of electric and gas utilities for thefiscal years 1948 to 1950.


Security issues sold for cash. and issued in el1Johangefor refunding purposes byelectric and gas utilities-fiscal years 1948 to 1950 (includes all issues subjectto provisions ot the Public Utility Holding Oompany Act ot 1935 and to regis-tration requirements under the Securities Act of 1933) 1

July 1, 1947, to July 1, 1948, to July I, 1949, toJune 30, 1948 June 30, 1949 June 3fl. 1900

Bonds ....... .. ........ _._ ... _. $1,087,266,075 $899,414, m ~953, 782, 240Debentures, ........ _. ........ ... ........ . _._ 110,307,321 241, 238, roo 104, 700, 235Preferred stock ... 229,443,828 192, 779, 280 362. 015, 050Common stock .... : :::::::::::::::::::::::::::::::::::: 226,439.06.1 364.016,666 001,460,071

Total ............ . ......•. .. _. ... 1,689,456,287 1,697,469,175 1,921,957,596

1 This table IS presented in order to ztve some data on an industry-wide baSIS. It includes Ilnaneingeffectod b)' companies subject to the [unsdietion of the Comnnsslon under the Public Utihty BoldingCompany Act as well as financing by otber public trtility eompanies whose securities were registered underthe seeunties Act of 1933. Smce pnvate placements are not registered under the latter cet the chart does notinclude data With respect to private placements of pubhc unlrties not subject to the junsdrction of the PublicUtillty Holding Company Act

The amount of private placements by companies not subject to the act is estimated to have been in thearea of $300,000,000 during the last fiscal year.

, In addrtion, utility eompames subject to the Bolding Company Act, sold notes With maturities of 5 yearSor more in the following amounts:

1948.. _._ •. .• .. .. •...• •........•.•.. _._ ...•...... , .....•.•. $79,200,0001949....•••.•....•.• _._._ _._ .. _. ._._._ ..........•. . $62,090,0001950...••......•.. •.•.... _., .•.... ._. .. .•...•......•.••....•..•• •.. $23,200,000

Total financing during the past fiscal year was higher than that ofthe two preceding years, and a portion of this increase is attributableto a renewal of refinancing activity. Of particular significance, how-ever, is the steady upward trend in the proportion of common stockfinancing from 13.4 percent for the fiscal year 1948 to 26.1 percent forthe fiscal year 1950. This trend may be accounted for irr part by thereceptivity of the market to new common stock offerings during mostof the past year, but it also reflects an awareness and responsivenesson the part of public utility management to the necessity of main-taining a strong foundation of equity capital. As a result, utilitycompanies not only are assured of meeting their cash requirementsfor near term construction needs but are afforded protection againstperiods of market uncertainty when it becomes more difficult to ob-tain funds through offering of common stock.

As the program of integration and simplification under section 11progresses and companies are divested from holding company sys-tems, that segment of electric and gas utility financing subject to theprovisions of sections 6 and 7 declmes accordingly. Although somefurther contraction is anticipated new financing undertaken by thoseholding companies and subsidiary operating companies which areexpected to remain subject to regulation by the Commission, willcontinue to represent a substantial portion of the industry total. Thefollowing tables set forth, in summary form, security sales approvedunder sections 6 (b) and 7 of the act for the fiscal years 1950and 1949.Information is provided with respect to registered holding companiesand their electric and gas subsidiaries and nonutility subsidiaries.These totals include all cash sales and refundings accomplished bydirect exchanges. Sales from portfolios and issues offered in con-nection with reorganization under section 11 are excluded.

_____________________ ____ "__ __ _ __ __

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_

_

__

__ _ _ _ _

__ _ ' _•• __

SIXTEENTH ANNUAL REPORT 103Bales of securities ana application of net proceede approvea under tile Public

Utility Holding Oompany Act of 1935 during the fiscal year July 1, 1949, toJune 30,19501

A ppheation of net p' oceedsNum- Total Refinancingberof securityissues sales , New money of short- Refundingpurposes term bank

loans'

Sales by electric and gas ututues:Bonds _______________________________ 39 $402, 095, 63,1 $219,628,040 $103,853, 561 $73,618,144De bentures 2 45,523,735 41, Oil, 210 4, 100,000Notes' 21 23,200,000 2'3,173,710 ----9~869~959-------------Preferred stock ______________________ 15 58,064, 970 42,812,177 4,018,743Common stock ______________________ 73 235,380, 176 182,875,058 46,016,170 3,006,452TotaL 150 764, 264, 516 509,500,195 163,8.39,690 80,643.339

Sales by holding companies.Bonds (eollateral trust), _____________ 1 31,783,060 8,633.353 -------------- 22,751,416De bentures __________________________ 2 125,883,050 30,990 (J.34 93,750,000Notes' 1 27,259, .168 53,887 ---T492;"20i 26,978,530Common stock ______________________ 12 114, 983, 705 87,911,631 19,717,423

Total. _____________________________ 16 299, 909, 383 127, 588, 905 3,492,201 163,197,369

Sales by nonutllity oompamesBonds. ______________________________ 4 48,010,000 43,891,620 4,001,8.50 ----.-------Notes' ______________________________ 12 17,600,000 17,594,779 ------498~iJ5i)Common stock ______________________ 4 6,812.500 5,566,660 -----675~000Total ______________________________ 20 72,422,500 I 67,053.059 4,499,000 675,000

1 Data lnmted to sales by Issuing companies: offerings from portfolio are not included., Difference between total security sales and total proceeds IS represented by notanon costs to the issuing

companies .Notes and bank loans of less than Ii years matunty, usually for construction purposes .Includes sales by registered operating-holding companies which dertve a substantial proportion of income

from their own operations, but WhICh also may have one or more utrhty subsidlanes .With matunnes of 5 years or more.

Bales Of securities ana application ot net proceeds approved uruier the PublicUtility Holding Oompany Act ot 1985 during the fiscal ywr July 1, 1948, toJune 30, 1949 1

Appheauon or net proceeds I

Num- Total Reflnancmgberor security Ncwissues sales I moncy of' short- Refundlngterm bankpurposes loans'

Sales by electric and gas utlltties.s.16 $.368,209,514 $246. 174, 609 $95, 620, 052Bonds -r $17, 955, 072Debentures __________________________ 5 l00,Ii5l,165 46,615,225 41,358,800 17,303,000Notes 31 62,090,000 44,793,050 14, 8.50,000 2,100,000Preferred stock ______________________ 17 74,859,040 43,062,350 26,254,700 4, 000, 000Common stock ______________________ 74 197,610,057 146, 218, 297 30,713,805 18,730,750

TotaL _____________________________ 183 809, 319, 776 526,863,531 208, 797,357 60,088,822

Sales by holding' companies:Debentures _________________________ 2 33,878,815 20,646,890 -------------- 12,850,000Notes' ______________________________ 6 18,272,500 3,272,500 -------------- 15,000,000Common stock 8 69,893,184 68,546,045 -------------- ------------TotaL .. 16 122. 044, 499 92, 465, 435 ------.------- 27, 8.50,000

Sales by nonutihty companies.Bonds _______________________________ 4 49,295,080 I 43,807,210 5,000,000 --575;000Common stock. ._0_. 8 9,875,000 9,279,301 ----.-.-------TotaL

12 I 59,170,080 53,086,511 5,000,000 575,000

I Data limited to sales by issuing companies; offerings from portfolio are not Included .Difference between total seeunty sales and total proceeds IS reprcsented by flotation costs to the issuing

companies.• Notes and bank loans of less than 5 years maturity, usually for construction purposes •

Includes sales hy registered operating-holding companies which derive a substantial proportion or In-come from their own operations, but which also may have one or more utilIty subsidiaries

WIth maturities of 5 y~ars or more.

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•• ___•_______________________

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•

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•______________________________

__• ___________________

_______• ___________________

___ _____________ - --_________• ___________________

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104 SECURITIES AKD EXCHANGE COMMISSION

A comparison of the security sales by electric and gas utilities, ap-proved under sections 6 (b) and 7, in the fiscal years 1949 and 1950reflects a decline in the number of offerings from 183 to 150 and in thetotal dollar volume of sales from $809,319,776to $764,264,516. Salesof both mortgage bonds and common stocks increased during 1950,whereas sales of other securities declined. Mortgage bonds, moreover,represented 52.6 percent of total security sales in 1950 as against 45.5percent in the fiscal year 1949. The proportion of common stockfinancing climbed from 24.4 percent to 30.8 percent, and the relativeproportions of other types of financing declined.

Because the common equity of so many utility subsidiary companiesis wholly owned by the parent holding companies, the subsidiaries areprimarily dependent on the holding companies as sources of equitycapital. In the fiscal year 1949, registered holding companies pur-chased common shares of subsidiary companies to the extent of $150,-000,000. During 1950, this figure amounted to $134,000,000. Theavailability of funds for these intrasystem stock purchases dependsdirectly upon the adequacy and appropriateness of public financingundertaken by the holding companies.

In past years, substantial amounts of cash have been made availablefrom the sale of nonretainable subsidiaries, but this source of fundsceases to be important as holding companies become streamlined. Asa result, sales of common stock by registered holding companies areincreasing. They rose from $70,000,000in 1949 to $115,000,000in thefiscal year 1950. (These figures exclude sales by operating-holdingcompanies.)

The Commission must bear in mind standards designed to assurethat the pressure of heavy cash requirements will not result in anyover-all deterioration in the consolidated capital structure and in thequality of securities outstanding. By insisting that parent holdingcompanies undertake common stock financing periodically to matchincreases in system debt financing, the Commission seeks to preventa return of the high-leveraged, unwieldly structures which led to thelegislation it now administers. Many holding companies have recog-nized their responsibilities in this respect and a number of the reg-ulated systems have already reached a point. where the market recep-tivity to their common stock offerings is almost comparable with thataccorded to the stock of good quality operating companies.

COMPETITIVE BIDDING

Offerings of securities by issuing companies under sections 6 (b)and 7 of the act and portfolio offerings by holding companies undersection 12 (d) are required to be made at competitive bidding inaccordance with the provisions of rule U-50. Certain types of salesare automatically exempted from the requirement. In addition, theCommission retains the right to grant exemptions in other instances,when unusual circumstances make such action appropriate.

Securities sold at competitive bidding under rule U-50 from itseffective date, May 7, 1941, to June 30, 1950,total in excess of $6,216,-000,000. A tabular presentation showing the various classes of secu-rities, number of issues, and the respective amounts, is set forth below:

SIXTEENTH ANNUAL REPORT 105Sale8 of securities pur8uant to rule U-50-May 7, 1941, to June 80, 1950

Number ofissues Amount

Bonds . '_ •.Debentures . . .Notes . .Preferred stock .Common stock . .. .

261 I $4,295,679, 00030 1 614, 43S, 0005 1 52,750,000

77 688,964.70062 , 564,807,836

TotaL •. . 435 6,216,639,536

1 Principal amount .Par value .Proceeds to company.

While the experience of the Commission during the past 9 years hasamply demonstrated the workability of rule U-50 and its effectivenessin achieving competitive conditions and minimum costs of flotation,the Commission has always recognized that appropriate admin-istration of the rule requires flexibility of application. Thus, in theperiod since the rule became effective, a total of 192 security issuesamounting to $1,414,000,000have been exempted by Commission orderfrom competitive bidding requirements. This is exclusive of the auto-matic exemptions. The following table summarizes the exemptedsales by type of security and also provides a breakdown of the totalamounts showing those issues which were underwritten and those com-pleted without an underwriting:

Sales of securities pursuant to orders of the Commission. granting exemptionsfrom competitive bidding requirements under the pl'ovi8ion8 Of paragraph (a)(5) of rule U-50 '-May 7,1941, to June 30, 1950

Underwri tten trans- Nonunderwritten 'I'otal-e-all issuesactions transactions

Num- Num- Nurn-ber of Amount' ber of Amount' ber of Amount.issues Issues Issues

onds ______________________________ 4 $27,027, 500 53 $462, 4!l4, 714 57 $489,512,214ebentures 3 83,425,000 5 36,779,939 8 120, 204, 939otes -------- -------------- 19 32,894,158 19 32,894,158referred stock _____________________ 10 60,868,70.3 2.3 257,610,344 33 318,479,047ommon stock ___________________ 31 275,074, 100 44 178, 392, 341 75 453, 466, 441TotaL ________________________ 48 446, 395, 303 144 968,161,496 192 1, 414, 556, 799

BDNPC

1 Exclusive of automatic exemptions afforded by clauses (1) through (4) of paragraph (a) of rule U-50 .Proceeds to the company.

As the foregoing table reveals, most of the exempted transactionswere not underwritten. The major portion of the underwrittenexempt sales consisted of common stock offerings aggregating $275,-074,100. While these exemptions may not be attributed to any singlefactor, they reflect the greater difficulties sometimes encountered inthe marketing of common stocks owing to either the nature of theissue or to security market conditions. By comparison, however, com-mon stock sales through underwriters at competitive bidding weretwice as much in both amount and number of issues.

_ • • ___ __ •• • _

• _ _ • _

_

• •

____________________ 00 ___

_____0 __________ 0 __________ 0 ___

_0

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The substantial number of exemptions granted with respect to bothunderwritten and nonunderwritten preferred stock transactions rep-resented principally the exchange of new lower dividend preferredstocks to refund outstanding shares of higher rate. Beginning withthe Oklahoma Gas & Electric case in March 1946,123 however, theCommission announced the policy that future preferred stock ex-change offerings would be required to be made at competitive bidding.More recently, the limited receptivity accorded to medium gradepreferred issues has also necessitated the granting of exemptions forsome underwritten issues.

Most of the exempted nonunderwritten bond and debenture offer-ings are represented by private placements made by the issuers. Theaggregate figure comprises a considerable number of issues of smallsize and a small group of very large offerings exempted because ofunique circumstances present at the time of sale. Of the note offer-ings, exempted and not underwritten, only a small portion was placedwith banks and insurance companies; the balance was represented bysales of an unusual nature to private persons or groups, to other utili-ties or holding companies, or to other parties. Exempted commonstock sales which were not underwritten consisted mainly of (1) salesto other utilities, other holding comJ?anies, or to private persons orgroups (portfolio sales) and (2) rights offerings to stockholdersmade without underwriting assistance.

Because rule U-50 covers not only sales by issuers under sections6 (b) and 7 of the act, but also portfolio sales under section 12 (d),there is substantial variety in the nature of circumstances which, overthe years, have necessitated the granting of exemptions. Each exemp-tion request, however, has been appraised in the Iight of the particularsituation under which it is made.

In general, rule U-50 is now recognized as a practical and successfulaid to regulation. The Federal Power Commission during the pastfiscal year adopted a similar rule.Cooperation With State and Local Regulatory Authorities

Despite the fact that there were 100 fewer companies subject toregulation under the act on June 30,1950 as compared with a year ago,activities involving cooperation with State and local regulatory au-thorities have continued undiminished. During the past year, therewere six Holding Company Act proceedings before the Commissionin which representatives of States or municipalities either participatedor exchanged views on questions of mutual interest. This compareswith seven such instances in the preceding year.

The cooperative efforts of the past year have encompassed a widevariety of problems. Several of the proceedings have dealt withfinancings, recapitalizations, and property sales or acquisitions, wherethe questions of mutual interest related to accounting, protective pro-visions of securities, and capital structures. An example may befound in a recent application made to this Commission by MilwaukeeGas Light Co. seeking approval of a $3,500,000bank-loan agreement.The proceeding raised four questions which required careful con-sideration by this Commission and by the Public Service Commission

,::I Holding Company Act release No. 64.9,

SIXTEENt.1'H ANNUAL REPORT 107of the State of Wisconsin. These pertained to: (a) The pendingapplication of the company before the State commission for authorityto amortize over a 10-year period the cost of converting to naturalgas; (b) the question of immediate or accelerated retirement of themanufactured gas equipment; (c) adjustments in the company's pres-ent reserve for depreciation; and (d) the company's proposal for apermanent financing program. After a helpful exchange of viewswith the chief accountant of the Wisconsin commission, the questionsraised by the application were disposed of to the satisfaction of bothcommissions. It was also agreed that a similar exchange of viewswould be sought when the company submits its permanent financingplan at a later date.

Early in 1950 'Visconsin Electric Power Co. presented an informalprogram for: (1) The acquisition by it of the electric properties ofits subsidiary, Wisconsin Gas & Electric Co., at a purchase r-rice ofabout $13,800,000; (2) the redemption of the latter company s bondsin the principal amount of $10,500,000; and (3) the issuance of$15,000,000principal amount of new bonds and 585,405shares of newcommon stock by Wisconsin Electric.

After preliminary examination of the proposals, the staff concludedthat the overall objectives were desirable, but that it would be neces-sary to work out certain accounting, indenture, and capital structureproblems before recommending favorable action by this Commission.Since these problems were also of interest to the Public Service Com-mission of Wisconsin, they were discussed at length with the chiefaccountant of that commission and, as a result, the staffs of both com-missions arrived at a mutually satisfactory position with respect toeach point. The company amended its proposals to reflect these views,and thereafter the plans were approved by both commissions.

The Portland Gas & Coke Co. filed a voluntary plan of reorganiza-tion under section 11 (e) of the act proposing a reclassification of theoutstanding preferred and common stocks into a single issue of newcommon stock. The Commissioner of Public Utilities for the Stateof Oregon was represented in the proceedings by his chief accountantwho, at the request of counsel for the division of public utilities ofthis commission, testified with respect to matters over which theOregon commissioner had jurisdiction and, in addition, participatedin several conferences with the staff of the division. These exchangesof views have been very helpful to the Commission in its considerationof the complex issues in this proceeding.

Three other proceedings during the year involved cooperation withlocal authorities. In the first, it was proposed that the InterstateLight & Power Co. (Wisconsin), a subsidiary of Northern StatesPower Co. (Minnesota), sell its Platteville division to WisconsinPower & Light Co., and that another subsidiary of Northern StatesPower Co., the Interstate Light & Power Co. (Illinois) sell all ofits properties to Northwestern Illinois Gas & Electric Co. The cityof Galena, Ill., in March 1950, submitted a request to this Commis-sion that final approval of these proposals be deferred pending furtherinvestigation by the city to determine whether its interest would beadequately safeguarded. The Commission withheld action on thematter until June 1950, when it received notice from the city that it

108 SEctJRITIES AND EXCHANGE COMMISSION

would interpose no further objection to consummation of thetransaction.

In last year's report reference was made to certain proposals byAmerican Power & Light Co. as to the disposition 'of its interests inits two subsidiaries, Pacific Power & Light Co. and the WashingtonWater Power Co. In substance, the first plan provided that Americandonate its holdings in Pacific to Washington Water Power, and inthe second American proposed that it be permitted to continue inexistence as a holding company with respect to both of the companies.The Public Service Commission of the State of Washington and theOregon commissioner were vitally concerned with these proposalsand participated actively in the proceedings.

The plans met with considerable opposition and were withdrawn.Subsequently, American filed another plan with this Commission pro-posing the sale of its holdings of all the common stock of Pacific toa purchasing group which indicated an intention to sell the physicalproperties of Pacific on a piecemeal basis to municipalities or otherinterests. The Washington commission, the Oregon commissionerand the city of Portland were represented at the hearings. Repre-sentatives of the two State commissions testified in opposition tothe plan on the ground that the disposition intended by the purchasinggroup would not be in the public interest.

This group then dissolved and a second purchase group soughtauthority to acquire the stock of Pacific, indicating an intention todispose of it at a later date through public sale. This proposal wasapproved by the Commission and consummated. Recently, the pur-chase group sold the stock to a syndicate of underwriters for publicdistribution.

On February 15, 1950,American Power & Light Co. made effectivea plan under which it distributed to its security holders all of itsassets other than the common stocks of the Washington Water PowerCo. and the Portland Gas & Coke Co., cash, and certain miscellaneousassets. In May 1950, the Washington Public Service Commissionfiled a petition requesting this Commission to enter an order re-quiring that American cease to be a holding comJ?anywith respectto 'Washington Water Power Co. by causing American to either (a)distribute to its stockholders all of its holdings of WaShington WaterPower capital stock, or (b) offer the stock for sale at competitivebidding pursuant to rule U-50. The petition further requested thatthis Commission hold a hearing on the matter. At about the sametime the Public Utilities Commission of Idaho filed a petition statingthat it joined in, and adopted the petition of the Washington PublicService Commission. On June 9, 1950,this Commission ordered thatoral argument on these petitions be heard on June 19, 1950, whichdate was later advanced to June 27, 1950. The two State commis-sions subsequently advised that it was not possible for them to enterappearance on that date, but this Commission advised them that itwould be necessary to proceed with the argument as planned sincethe issues raised by their petitions had been presented in similar peti-tions by stockholders of American. The Commission indicated, how-ever, that it would entertain any further requests by either of theState regulatory authorities subsequent to the date of the argument.

SIXTEENTH ANNUAJL REPORT 109

The argument was concluded and the proceeding is still pending beforethe Commission.

The cooperative efforts in connection with specific proceedings, how-ever, tell only a part of the story. The entire Holding Company Actwas designed to complement and strengthen local regulation. Thisobjective is clearly set forth by the Congress in paragraph (C) of sec-tion 1 where it is expressly declared to be the policy of the act that allprovisions thereof shall be interpreted to meet the problems and elim-inate the abuses enumerated in paragraph (b). From the followingquotation of paragraph (b), it is readily apparent that many of theseevils and abuses were found to be harmful to local regulation and tostem directly from the imposition of unregulated holding companiesupon operating utility companies.

The act has helped State regulation to exercise the powers necessaryto meet local responsibilities. During the 15-year period in which theHolding Company Act has been in operation, 392 electric and gasutility companies, with assets aggregating some $9,185,000,000havebeen divested and, as a result, are now operating independently ofholding-company control. Furthermore, this newly won independenceis protected by the provisions of section 2 (a) (7) (B),2 (a) (8) (B),2 (a) (11) and 9 (a) which contain appropriate safeguards againstthe recurrence of detrimental holding company and affiliate relation-ships. Section 11 (b) limits the size, character of business and cor-porate structures of existing holding companies and sections 9 and 10impose standards which must be met in the creation of new holdingcompany systems or in the enlargement of existing systems. All ofthese last three sections are expressly geared to the preservation of theeffectivenessof local management and local regulation.

Other sections of the act, principally sections 12 and 13, provide forcomprehensive supervision over transactions between companies withina holding company system. Section 13 requires that all services ren-dered to operating utility subsidiaries by system service companies berendered at cost, fairly and equitably allocated among the client com-panies and for the benefit of the client companies. Paragraph (e) ofthis section, limits the operation of affiliated servicing organizationsand paragraph (f) provides for maintenance of competitive conditionsand adequate disclosure of information by servicing organizationsprincipally engaged in the performance of services for public utilityand holding companies in interstate commerce. The statutory safe-guards contained in sections 2, 9, 10, 11, 12, and 13,by their mere exist-ence, serve as an effective barrier to any recurrence of those impedi-ments to local regulation enumerated in section 1 (b) and, in theaggregate, they constitute what may be appropriately described as animportant area of passive cooperation.

LITIGATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT

During the 1950fiscal year the Commission participated in 26 judi-cial proceedings involving issues arising under the Holding CompanyAct. Fifteen of these proceedings concerned the enforcement of vol-untary plans filed under section 11 (e) of the act, 1 was to enforce aplan under section 11 (d), 9 were initiated by petitions to review orders


of the Commission, and 1 involved an application for an injunction toprevent a subsidiary of a registered holding company from filing withthe Commission an amendment to a pending plan. The Commission'sactivity in the courts is shown in the followmg tables:

ACTIONS TO ENFORCE VOLUNTARY PLANS UNDER SEC. 11 (e)

Applications pending in United States district courts, July 1, 1919____ 2Applications filed, July 1, 1949, to June 30, 1950 13Plans approved and not appealed__________________________________ __ 9Plans approved and appeals taken to courts of appeaL_____________ __ '4Applications pending, June 30, 1950________________________________ __ 2

Totals______________________________________________________ 15 15

Appeals from orders of district courts approving plans, pending incourts of appeal, July 1, 1949____________________________________ 4

Appeals taken from orders of district courts approving plans, July 1,1949, to June 30,1950 4Appeals dismissed____________________________ _ __ 2Orders of district courts affirmed___________________________________ 2Orders of district courts reversed or modified________________________ 2Appeals pending, June 30, 1950____________________________________ 2

Totals______________________________________________________ 8 8

ACTIONS TO ENFORCE TRUSTEE'S PLAN UNDER SEC. 11 (d)

Applications filed, .Iuly 1, 1949, to June 30, W:iO____________________ 1Plans approved and not appealed__________________________________ 1

Totals______________________________________________________ 1 1

PETITIONS TO REVIEW ORDERS OF THE CO:YMISS~ONUNDER SEC. 24 (a)

Petitions pending in courts of appeal, July 1, 1949____________________ 4Petitions filed, July 1, 1949, to June 30, 1950________________________ ;,Orders of S. E. C. affirmed________________________________________ __ 3Petitions dismissed or withdrawIL_________________________________ __ 3Petitions pending, June 30, 1950____________________________________ __ :3

Totals______________________________________________________ 9 9

PETITIONS FOR DITERVENTION

Applications filed, July 1, 1949, to June 30, 1950______________________ 1Commission permitted to intervene, and Injunction denied '__________ 1

Totals______________________________________________________ 1 11In the case of 1 plan, 2 appeals were taken from separate orders of the district court,

and were pending at the end of the fiscal year., See dtseussion of Market Street Railway Co. proceedings, infra.

Enforcement Proceedings Under Section 11 (e) of the Act

Two applications for enforcement of voluntary plans under section11 (e) were pending in United States district courts on July 1, 1949.The district courts approved the two plans during the fiscal year andappeals were taken in each case, both of which were pending on June30,1950.

The first of these two plans provided for the liquidation of the Com-monwealth & Southern Corp. The district court approved the J.?lanassubmitted to it by the Commission.>' An appeal was taken, objecting

m The GommonweaUh &: Southern Gorp., 84 F. Supp. 809 (D. Del., 1949).


to that part of the plan which provided that the holders of option war-rants should not participate ill the liquidation of Commonwealth &Southern, and this appeal was pending at the end of the fiscal year.Thereafter, the court of appeals affirmed the district court order.l25

After consummation of the plan, a securities dealer petitioned the dis-trict court for leave to intervene in the proceedings on behalf of per-sons who had traded in the prospective rights of security holders to theresidual assets of Commonwealth & Southern, which, under the planas amended prior to consummation, were to go to the Southern com-pany. The district court denied the petition and an appeal was taken,which was pending in the third circuit court of appeals at the end ofthe fiscal year.

The second plan involved the liquidation of Federal Water & GasCorporation. The district court had approved the plan except as tothat part which accorded to certain former preferred stockholders of apredecessor company the limited amounts which had been approved bythe Commission in an order, affirmed on appeal,t26approving an earlierplan for the reorganization of the predecessor company. On January11, 1950, the district court approved the latter portion of the plan.v"An appeal was taken from that order of the district court and waspending in the third circuit court of appeals on June 30, 1950. Ap-pellants also petitioned the Supreme Court for direct review of the dis-trict court order. Their petition for certiorari was denied after theclose of the fiscal year.l28

During the fiscal year 1950, the Commission filed 13 applicationswith the United States district courts seeking approval of voluntaryplans under section 11(e) . Nine of the plans were approved by thedistrict courts and no appeals were taken from these orders. One ofthe nine plans involved the recapitalization of Interstate Power Co.Following approval thereof by the district court and a memorandumof the court granting certain objectors time to apply to the Commissionfor a rehearing,129the Commission requested that it be permitted toreconvene hearings upon the plan in order to determine whether cir-cumstances had so changed as to make the plan no longer fair andequitable. The court granted the petition and the plan is now underfurther consideration by the Commission.

A second plan involved a discharge of Philadelphia Co. from itsposition as a guarantor on the debt of its underliers. This plan wascombined with a plan of reorganization of Pittsburgh Railways Co.under chapter X of the Bankruptcy Act. Following the conclusionof hearings on the combined plan, the Commission made its findings,entered an order approving the plan of Philadelphia Co., and renderedan advisory report on the plan of Pittsburgh Railways. The districtcourt approved the Philadelphia Co. plan under section 11 (e) andapproved the plan of Pittsburgh Railways under chapter X}30

In one of the remaining seven cases, a holder of preferred andcommon stock of American Power & Light Co. objected to the plan

1%5_ F. 2d (C. A. 3,19(0)..68. E. C. v. Chenery Oorp., 332 U. S. 194 (1947), rehearing denied, 332 U. S. 783

(1947).1%7 In re Peaera; Water & Gas Corp., 87 F. SUllP. 289 (D. Del., 1949).128 Chenery Corp. v. 8. E. C., - U. S. - (1950).

In re Interstate Power Co., 89 F. SUIlI!. 68 (D. Del., 19(0).-.en rePhiladelph'a 00., unreported (W. D. Pa., No. 8676).

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of that company for distribution of its assets on the ground that theplan was not fair. The district court rejected these objections andapproved the plan.>" A plan for recapitalization of Eastern Gas &Fuel Associates was objected to as unfair and inequitable by certainpreferred and common stockholders. The district court, however,deemed the plan to be fair and equitable and overruled the conten-tions of stockholders that the Commission's valuation was not sup-ported by substantial evidence.i'" Court enforcement of a plan forthe merger of Iowa Public Service Co. into its parent, Sioux CityGas & Electric Co., and the acquisition by Sioux City of the proper-ties and assets of its remaining three subsidiaries, was opposed bythe secretary of state of the State of Iowa on the ground that theproposed merger did not comply with the law of the State of Iowa.The district court overruled the objections and approved the plan.l33

The remaining four plans, which provided, respectively, for the liqui-dation of the Middle West Corp., National Gas & Electric Corp., andNorth Continent Utilities Corp., and for the the elimination of cross-holdings in the West Penn Electric Co. system, were enforced withoutopposition.

District court approvals of two plans submitted during the fiscalyear were appealed to United States court of appeals. One of theseplans involved the reorganization of the Niagara Hudson PowerCorp. system by merger of three major operating companies into asingle operating-holding company, Niagara Mohawk Power Corp., andthe liquidation and dissolution of Niagara-Hudson. The plan pro-vided that holders of option warrants of Niagara-Hudson should notparticipate in the reorganization since the warrants had no valuefor reorganization purposes. The court of appeals reversed the dis-trict court, which had excluded the warrants from participation,and remanded the plan to the Commission for further considera-tion.!" After the close of the fiscal year, the United States SupremeCourt granted certiorari to review the court of appeals order.>"

The other of these plans involved a reorganization of the LongIsland Lighting Co. system which provided for the consolidation ofLong Island and two of its subsidiaries to form a new operating-holding company. Common stockholders of Long Island appealedfrom the order of the district court 136 approving the. plan on theground, among others, that the Commission in arriving at its esti-mate of future earnings had failed to give consideration to savingswhich would result from consolidated operations. The court ofappeals upheld the district court in all other respects, but remandedthe plan to the Commission upon this sole issue.':" The Commissionpetitioned for modification of the decision and filed its supplementalfindings and opinion, clarifying its discussion of savings which re-sulted from consolidated operations. After the closeof the fiscalyear,the court of appeals granted the Commission's petition, modified itsformer opinion, and affirmed the order of the district court, and the

131 In re American Power d: Light Co. unreported (S. D. N. Y., No. 52-324).In re Eastern Gas Fuet Associates, 90 F. Supp, 955 (D. Mass., 1950).

w t« re Swu,,, ou« Gas d: Electric o«, unreported (N. D. Iowa, W. D., No. 571).Leventritt v. S. E. C., 179 F. 2d 615 (C. A. 2, 191iO).

'35 S. E. C. v. Leventritt, - U. S. - (1950). ,."WI In re Long Istand Lighting Oo., 89 F. SuPP. 513 (E. D. N. Y., 1950).:I3T Common Stockholders Commitee v. S. Fl. C., 183 F. 2d 45 (C. A. 2, 1950).

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SIXTEENTH ANNU.AJL REPORT 113

Supreme Court denied certiorari.138 Two applications filed duringthe fiscal year were pending in the United States district courts onJune 30, 1950.

Four appeals were pending at the beginning of the fiscal year fromorders of United States district courts approving and enforcing vol-untary plans under section 11 (e) which had been approved by theCommission. The first of these appeals was taken from an order ofthe district court directing that dividends paid bY'Illinois Power Co.on the shares of its common stock allocated to public stockholders ofNorth American Light & Power Co., between the date of the enforce-ment order and the date of consummation, should be distributed tosuch stockholders along with the illinois Power Co. stock. On appealthe order of the district court was aflirmed.l39 The second plan in-volved the liquidation of Electric Power & Light Corp. and the or-ganization of a new holding company, Middle South Utilities, Inc.Applications for a stay of consummation had been denied during theprevious fiscal year.l40 Three appeals were taken; one was dismissedby the court of appeals, and in the others, the court of appeals affirmedthe order of the district court.l41 The appeals pending at the begin-ning of the fiscal year in the other two cases, involving plans of Elec-tric Bond & Share Co. and the United Corp., were dismissed withoutopinion.Petitions to Review Orders of the CoJllDlission

Four petitions to review orders of the Commission were pending incourt of appeals on July 1, 1949. One of these petitions, for reviewof an order of the Commission allowing fees, was dismissed duringthe fiscal year; 142 in the other three cases, the Commission's orders wereaffirmed. One of these cases involved an order of the Commissiondirecting that Pennsylvania Edison Co. pay from an escrow fund, tothe former holders of its preferred stock, the difference between theinvestment value of the stock found by the Commission to equal itscall price, and the $100 per share paid upon the retirement of thestock, together with compensation for the time elapsed between dateof retirement and payment of the balances found to be due, at ratesmeasured by the yields on the preferred stock.143

The second affirmance involved an order of the Commission denyingeffectiveness to a declaration of a common stockholders' committee ofLong Island Lighting Co., proposing to solicit funds from the commonstockholders of Long Island. The court held that the Commissionhad acted reasonably, and within the scope of its authority.>' Afterthe close of the fiscal year, the Supreme Court denied certiorari.l45

The third case in which the Commission was affirmed was an appealfrom an order directing, pursuant to section 11 (b), that PhiladelphiaCo. dispose of certain gas and transportation interests, and Iiquidateand dissolve. Philadelphia Co. urged that the gas and electric prop-

""'- u. s. (1950).uo Appeal 01 Norih American. Light & Power 00., 180 F. 2d 975 (C. A. 8. 19(0).uo In re lIlectrio Power & LfgAt OOrp" unreported (C. A. 2. No. 49-347) ; 387 U. S.

903 (1949).111 In re lllectric Power cf Light Oorp., 176 F. 2d 687 (C. A. 2. 1949) .... ct. In re National Power d Light 00" 80 F. Supp. 759 (S. D. N. Y•• 1948).""In re Penn8I1!1JaniaEdiBon 00., 176 F. 2d 764 (C. A. 8. 1949)....Halstead v. s.». 0.,182 F. 2d 660 (C. A. D. C., 19(0).UII_ U. S. (1950).

915841-51-9

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erties constituted a single system, and that their separation wouldinvolve a loss of substantial economies. The court rejected these con-tentions and affirmed the order of the Commission.>"

During the fiscal year 1950, five petitions to review orders of theCommission were filed pursuant to the provisions of section 24 (a) ofthe act. One of these petitions was dismissed for lack of jurisdictionand a second was withdrawn when the petitioner instituted a parallelproceeding in a different circuit. The other three proceedings werepending at the close of the fiscal year.Petitions for Intervention

In the action for an injunction to prohibit Market Street RailwayCo. from filing with the Commission an amendment to its pendingplan, the court granted the Commission's petition to intervene, dis-solved a temporary restraining order, and denied the requested in-junction, issuing (with the consent of all parties) an injunctionagainst the execution of a certain release except pursuant to a courtenforcement order in the plan proceedings.>" Thereafter the amend-ment was filed by Market Street and approved by the Commission;the Commission then filed an application for court enforcement, whichwas pending at the end of the fiscal year.

14. Philadelphia 00. v. S. E. C., 177 F. 2d 720 (C. A. D. C., 1949).1<1 Jones v. Market Street Railway 00., unreported (N. D. canr., No. 29, 699).

PART IV

PARTICIPATION OF THE COMMISSION IN CORPORATEREORGANIZATIONS UNDER CHAPTER X OF THE BANK-RUPTCY ACT, AS AMENDED

Chapter X of the Bankruptcy Act provides a procedure for re-organizing corporations (other than railroads) in the Federal courts.The Commission's duties under chapter X are, first, at the requestor with the approval of the court to participate in proceedings toprovide, for the court and investors, independent expert assistance,and second, to prepare for the benefit of the courts and investorsformal advisory reports on plans of reorganization submitted to itby the courts. The Commission has no statutory right of appealin a chapter X proceeding, although it may participate in appealstaken by others.

COMMISSION'S FUNCTIONS UNDER CHAPTER X

The role of the Commission under chapter X differs markedly fromthat under the acts which it administers. The Commission does notadminister chapter X. It acts in a purely advisory capacity. Ithas no authority either to veto or to require the adoption of a planof reorganization or to render a decision on any other issue in theproceeding. The facilities of its technical staff and its recommenda-tions are at the services of the judge and the security holders, affordingthem the views of experts in a highly complex area of corporatelaw and finance.

During the year the immediate supervision of chapter X mattersat the central officeof the Commission was transferred from the Divi-sion of Corporation Finance to the Division of Public Utilities.

THE COMMISSION AS A PARTY TO PROCEEDINGS

Generally, the Commission has sought to participate only in pro-ceedings in which there is a public investor interest; $250,000 ofpublicly held securities is the rough guide used in deciding if thereis enough public interest to make it worth while for the Commissionto participate. Sometimes the Commission has entered smaller caseswhere public-security holders are not adequately represented, whereit appears that the proceedings are being conducted in violation ofimportant provisions of the act, or if the Commission may otherwisebe useful by participating.

Because of its Nation-wide activity and its experience in chapter Xcases the Commission is able to respond to requests for help in theinterpretation and application of chapter X when it does not par-ticipate as a party.

115


SUMMARY OF ACTIVITIES

The Commission actively participated during the 1950 fiscal year in71 reorganization proceedings involving the reorganization of 98 com-panies with aggregate stated assets of $965,157,000 and aggregatestated indebtedness of $851,254,000.1 During the year the Commis-sion with court approval filed notices of appearance in 5 new pro-ceedings under chapter X. These 5 new proceedings involved 9 com-panies with aggregate stated assets of $24,985,000 and aggregate statedindebtedness of $29,006,000. At the close of the year, the Commissionwas actively participating in 59 reorganization proceedings involving83 companies with aggregate stated assets of $950,862,000 and aggre-gate stated indebtedness of $837,863,000.Activities Relating to the Trusteeship

A fundamental feature of chapter X is that in every case involvinga corporation of substantial size an independent trustee is ap~ointedto be primarily responsible for the operation of the corporation s busi-ness durin~ the proceeding, to examine and evaluate the reasons forthe debtor s financial difficulties, to appraise the ability and fidelityof its management and to formulate and file a plan of reorganization.The success of the reorganization depends largely on the thoroughness,skill, and loyalty with which he and his counsel perform their tasks.The Commission usually examines the qualifications of trustees in thelight of the standards of disinterestedness prescribed by the statutefor trustees and their counsel.

In one case during the past fiscal year the Commission and a securityholder petitioned for the removal of counsel for trustees on the groundthat they were not disinterested as required by the statute." TheCommission contended that the attorneys had represented creditors ofthe debtor at the time of their appointment and that the formal ter-mination of their representation of creditors could not eliminate theconflicts of interest engendered by their prior relationship. The Com-mission further pointed out that the danger of an active conflict ofinterests was accentuated in this case because actions taken by thecreditors prior to the chapter X proceedings, when the attorneys rep-resented them, gave rise to possible counterclaims on behalf of theestate which the attorneys as counsel for the trustees would be requiredto prosecute. In addition, issues had been raised between the cred-itors and other parties to the proceedings as to certain priorities andthe validity of a pledge of certain assets which also involved adverseinterests. The attorneys resigned prior to argument on the motion.

In reorganization proceedings involving two debtors, the Commis-sion filed objections to the final accounts of a trustee who had resigned,and urged that he be surcharged u~on the ground, among others, thathe had knowingly permitted certain of his employees to trade in thesecurities of the debtors and their subsidiaries despite the fact thathe was buying similar securities for the debtor," These employees

1Appendix table 19 contains a complete list ot reorganization proceedings In which theCommission participated during the year ended Jnne 30, 1950. Appendix table 18. etassl-fies these debtors according to Indnstry.

In "8 80la,. ManUfacturing co., D. N. J.81" re Federal Faoiutka Realty Trust, Natwnal Realty Trust, N. D. III•

SIX'l'E'ENTR ANNUAiL REPORT 117had access to confidential information respecting the debtor, in someinstances had actively run the debtors and subsidiaries, and had pur-chased bonds from the public and sold them to the trustee at a profit.After hearing, the special master agreed that trading in these securi-ties was a breach of fiduciary duty and that the trustee's knowledgeand acquiescence rendered him culpable and liable for surcharge tothe extent of the profits. The district court approved the recommenda-tion of the special master. On appeal, the court of appeals reversedthe decision insofar as it surcharged the trustee. A petition for re-hearing is pending.Problems in the Administration of the Estate

A major defect of section 77B (the predecessor statute to chapterX) was its failure to provide assurance that judicial supervision ofthe reorganization process and creditor and stockholder participationtherein would be based upon complete and impartial informationregarding the affairs of the debtor. Chapter X endeavors to achievethis goal by requiring the independent trustee, at the direction of thecourt, to investigate the acts, conduct, property, liabilities, and finan-cial condition of the debtor, the operation of its business, and the de-sirability of the continuance thereof, and to transmit a report of hisinvestigation to creditors and stockholders. Such reports enable se-curity holders and other parties to a proceeding to make helpful andeffective suggestions for a plan of reorganization, aid the court inconsidering problems in the administration of the estate as well asthe fairness and feasibility of a plan of reorganization, and give se-curity holders the necessary information to determine the desirabilityof accepting a proposed plan.

The Commission has continued its policy of consultation throughits staff with trustees in connection with their investigations and thepreparation of their reports. On the basis of its own investigationsand its wide experience the Commission has been able to supply dataand suggestions useful to the trustee. It has also continued to assisttrustees ill their investigation of possible claims against the old man-agement and other persons.

With respect to the operation of the companies in reorganizationthe Commission takes the position that important steps should not betaken except upon a complete disclosure to the court and the partiesof all relevant factors. Inone case, trustees had obtained competitivebids for certain paving work. However, they had delayed takingaction on the matter and making a report to the court until the lowestbidder had withdrawn his bid and the work was assigned to andpartially performed by another bidder. The Commission looked intoand brought out all the facts when the question of approval of thecontract came before the court. While the court approved the con-tract because it had been practically completed, it expressly reservedthe question of the trustees' culpability in the matter.

A recurrent question is whether the enterprise should be liquidatedthrough a sale or continued as a going concern through an internalplan of reorganization. The Commission does not support the saletype of reorganization merely because of its simplicity or certainty ofresult, but urges a decision based upon what will yield the largest


benefit for creditors and stockholders. Where the decision has beenmade to sell the assets of the debtor, there has been some tendencyto attempt to complete the sale as an administrative matter prior to,and not as part of, a plan of reorganization with its attendant safe-guards for investors. The Commission has urged that where sub-stantially all the assets of the debtor are sold the sale should be partof a plan of reorganization, unless some emergency is involved, suchas the need to dispose of perishable property.

This position was upheld by the Court of Appeals for the ThirdCircuit in the chapter X proceedings involving Solar ManufacturingCorp.' The court rejected the argument that an emergency situationcan be created simply by a condition imposed by a prospective pur-chaser that his offer of purchase must be accepted within a very shorttime. Itreversed the order of the district court which authorized thesale, saying that "the safeguarding provisions of chapter X are notto be ignored in the sale of the assets of a business unless an emergencyexists." It may be noted that the abortive proposal involved a priceof $525,000, and that subsequently the assets were sold for $815,000pursuant to a plan of reorganization subject to competitive conditions.Responsibilities of Fiduciaries

Assuring adherence to the high standards of conduct required offiduciaries has continued to be one of the important activities of theCommission in chapter X proceedings. We have indicated aboveour concern that the independent trustee be free from any conflictsof interest. The Commission is concerned also with the qualificationsof other fiduciaries in the proceeding, such as indenture trustees, com.mittees, attorneys, and other representatives of security holders. Inone case the Commission sought to disqualify members of a stock-holders' committee on the ground that their interests conflicted withthose of the stockholders," The Commission contended that the con-flicts of interest arose from the facts that: (1) The chairman andsponsor of the committee owned and controlled a large block of de-bentures, ranking prior to the stock, (2) the chairman had tradedin the stock after assuming to act as chairman, (3) companies affiliatedwith the chairman were engaged in partial competition with thedebtor and the debtor had claims against some of them, and (4) thechairman of the committee intended apparently, to acquire control

.of the debtor for purposes not necessarily compatible with the interestsof stockholders. After the Commission filed a petition for disquali-fication with the court, the committee voluntarily dissolved and re-scinded all authorizations, notifying stockholders of its action.

Where a fiduciary has traded in the securities of a debtor in reor-ganization, he has been considered guilty of a breach of trust whichcourts have punished by the denial of any fees or reimbursement ofexpenses. In such situations courts have also prevented fiduciariesfrom profiting by such trading through the limitation of their claimsto cost or through an accounting for any profits. The application ofthe sanction of limitation to cost was advocated by the Commissionin several cases in which the fiduciary purchased claims against the

In re Solar Manufacturing Corp., 176 F. 2d 493 (1949).Gln re Norwalk Tire <E Rubber Oo., D. Conn.•


corporation at a discount prior to the institution of the chapter Xproceedings but during a period when the corporation was insolvent.The Commission expressed the view that the fundamental basis ofthe rule, the clash of adverse interests created by the trading in claimsagainst the debtor, is applicable whether the corporation is not actuallyin reorganization, but is insolvent and in need of rehabilitation withrespect to its liabilities, or is actually undergoing judicial reorgan-ization. The Supreme Court, however, in a case under chapter XI ofthe Bankruptcy Act, in which the Commission filed a brief as amicuscuriae, rejected this position as applied to a purchase by directorsof "unmatured obligations of a corporation which, though techni-cally insolvent, remains nevertheless a going concern." 6 The courtheld that, on the record, the probability that an actual conflict ofloyalties arose from the opportunity to purchase claims of the debtor,while it was a going concern, was not great enough to warrant thelimitation of the purchaser's claims to cost. The court pointed out,however, that the possibilities of a conflict of interests in the purchas-ing director are intensified as the corporation becomes less a goingconcern and more a prospective subject of judicial relief, adding thefollowing significant language to its opinion:

"A word of caution as to the scope of our decision is desirable inview of Judge Learned Hand's opinion below. He suggested that ifin fact liquidation had been imminent at the time of respondents'purchases or if it were fairly demonstrable, as a matter of experience,that a director free from all potential self-interest would be morelikely to initiate liquidation proceedings or to effect a debt settlementthan one not wholly disinterested, a court of equity should exploresuch issues and not dismiss them out of hand. ThIS decision is notmeant to negative the relevance of these issues when raised by aproper record. We mention these matters because the Securities andExchange Commission urges the importance of a decision in this casefor questions that may well arise in proceedings under chapter X. Insuch proceedings the Securities and Exchange Commission, actingas the statutory advisor to the court, would be within its rightfulfunction in submitting to the court the light of its experience in deal-ings of the general kind disclosed in this case."

In another case where the Commission had urged limitation to cost,the Court of Appeals for the Seventh Circuit affirmed the decision ofthe court below which limited to cost a claim based on bonds pur-chased by a member of a bondholders' committee/ In this case, thedebtor had defaulted on its interest payments and a bondholders'committee had designated one of its own members to manage its prop-erty, when the purchases were made. The chapter X proceedingswere not commenced until 5 years after the purchases although re-habilitation or reorganization was in contemplation throughout theperiod of the purchases. The court held that the rule that a trusteecan make no profit out of his trust was absolute and should be ap-plied in the circumstances of this case. The court, as urged by theCommission, relied upon section 212 of chapter X which provides that

6 Manufacturers Trust Go. v, Becker, 338 U. S. 304 (1949)."In re Franklin Building Oo., 178 F. 2d 805 (1949), certiorari denied, June 1950.


the judge may limit claims acquired by fiduciaries "in contemplation orin the course of the proceeding."

The court in the Franklin Building case did not, however, acceptthe Commission's contention that close relatives of members of thebondholders' committee should also be limited to cost. In anothercase the district court rejected contentions of the Commission similarto those made in M'(Lnujacturers Trust 00. v. Beeker and permitteda director and his business associate to participate for the full amountof securities purchased prior to the chapter X proceeding althoughthe company was insolvent," The court did, however, limit to costclaims based upon securities purchased by the director at a time whenthe chapter X proceeding was in contemplation.Activities With Respect to Allowances

The Commission in its advisory capacity endeavors to protect theestate from exorbitant and inequitable charges for fees and expenseswhile at the same time providing fair treatment to applicants whichwill adequately compensate them for services rendered and encouragelegitimate creditor and stockholder participation in the reorganiza-tion process.

The Commission itself receives no allowances from estates in reor-ganization. It attempts to obtain a limitation of the aggregate feesto an amount which the estate can feasibly or should fairly pay. Ineach case, the applications are carefully studied and recommendationsare made in the light of apJ?licable legal standards and, in general, onthe basis of beneficial contributions to the administration of the estateand to the adoption of a plan of reorganization. Specific recommen-dations are made to the courts in cases in which the Commission hasbeen a party and in which it is familiar with the services of the variousparties and all significant developments in the case.

The role of the Commission with respect to the recommendation ofallowances was clearly delineated by the Court of Appeals for theSecond Circuit in the Ohilds 00. case." Claimants had requested feesaggregating over $1,400,000; the Commission recommended approxi-mately $750,000; and the district court awarded a total of approxi-mately $965,000. On appeal, the court of appeals pointed out thatthe allowances granted by the judge amounted to 10 percent of thevalue of the estate and 26 percent of the net income received duringthe reorganization; that in a reorganization proceeding the aggregateof fees must bear some reasonable relation to the estate's value and,hence, attorneys cannot always expect to be compensated at the samerate as in litigation of the usual kind. The court referred also to evi-dence of duplication in the representation of creditors and stock-holders and wasteful labor in matters involving the administration ofthe estate which the trustee was handling more than satisfactorily.Indicating its view that the amounts allowed were excessive, thecourt stated:

"We should have had more doubts as to our conclusions just stated,had they not been re-enforced by those of the Securities and Exchange

8 In r8 Wade Park Manor Oorp. N. D. OhIo.'In re Finn v. Ohild8 00., 181F. 2d 431 (1950).

SIXTEENTH ANNUAiL REPORT 121

Commission. In a reasoned statement discussing each petition theCommission presented grounds for limiting the various allowances tosums totaling $750,000. These amounts individually and collectivelyseem to us quite generous, indeed, perhaps more so than some of uswould have granted as judges of first instance. They appear to sup-port the statement of the Commission's able spokesman that these arenot intended as minima to be increased by the court, but that in factthe Commission has raised its standards to match the compensationawarded by other judges in other cases. * * *

"Since the Commission's recommendations represent the expert opin-ion of a disinterested agency skilled and experienced in reorganizationaffairs, they should be a valuable aid to a judge in performing a diffi-cult task. 6 Collier on Bankruptcy pp. 13.02, p. 4498, 14th Ed. 1947.Some courts have refused to give S. E. C. recommendations as to feesmore weight than the suggestions of any other party, e. g., Oooke v.Bowersock, 8 Cir., 122 F. 2d 977, 985; In re Detroit InternationalBridge 00., 6 Cir., 111 F. 2d 235, 237-8. True, the Commission'sfunction in a reorganization proceeding is purely advisory; and itdoes not have the power to fix a maximum amount for fees which ithas with regard to the reorganization of public utility holding com-panies under 11 (f) of the Holding Company Act, 15 U. S. C. A.

79k (f), and which the Interstate Commerce Commission has withregard to a railroad reorganization under 77 (c) (2), (12) of theBankruptcy Act, 11 U. S. C. A. 205 (c) (2), (12). Neverthelessthe figures presented by the S. E. C. are not 'mere casual conjectures,'but are 'recommendations based on closer study than a district judgecould ordinarily give to such matters.' Frank, supra, 18 N. Y. U. L. Q.Rev. 317, 1941. We agree with District Judge Kirkpatrick's apt state-ment "that the Commission is about the only wholly disinterestedparty in the proceeding and that, while it may not be entirely familiarwith 'the problems of making both ends meet in a law office' referredto by counsel, its experience has made it thoroughly familiar with thegeneral attitude of the courts and the amounts of allowances made inscores of comparable proceedings." In re Philadelphia & ReadingOoal & Iron Oo.?-D. C. E. C. Pa., 61 F. Supp. 120, 124. See alsoNote, 18 N. Y. U. L. Q. Rev. 399,469-70, 1941, which suggests that therecommendations as to fees of the S. E. C. may be the only solutionto the 'very undesirable subjectivity with variations according to theparticular judge under particular circumstances' which has made thefixing of fees seem often to be 'upon nothing more than an ipse dimitbasis.' And see Securities and Exchange Commission, Tenth AnnualReport 148, 1944, Fourteenth Annual Report 85-6, 1948."

The court remanded the applications for allowances "for the furtherconsideration of the district judge, particularly in the light of therecommendations made by the Commission," and directed that thoserecommendations should not be exceeded without definite findings andconclusions showing why this step is deemed necessary. To expeditethe reconsideration of the fees, the court stated that the Commission'srecommendations, if adopted, would be considered affirmatively rea-sonable and properly allowable.

~ ~

~ ~

122 SECURITIES AND EXCHANGE COMMISS'lON

In the reorganization proceedings involving Chicago SurfaceLines 10 and Chicago Rapid Transit Co. the requests for fees andexpenses totaled $6,774,695 and $1,043,235 respectively. Previousamounts allowed in these cases, primarily to trustees, receivers, andtheir counsel were extremely large, totaling $5,000,686and $1,296,590in the respective proceedings. The Commission, in a detailed memo-randum, recommended $1,918,139 and $362,673 respectively. Thespecial master designated to hear the applications recommended $3,-605,616and $656,375. The reason for the substantially lesser amountsrecommended by the Commission was partially due to the fact thatthe Commission believed that many applicants were not entitled to afee or reimbursement of expenses as a matter of law. The Commis-sion was of the opinion that certain applicants were barred fromreceiving an allowance because they represented conflicting interestsin the proceedings, because they bought or sold securities during theproceedings in contravention of section 249 of chapter X or of theequitable rule which the section codifies, because they representedclasses of securities excluded from any participation in the reorgani-zation and could show no benefit to the estate or contribution to theplan; and because of other reasons. The special master's reports inthese cases and the objections of the Commission and others theretoare pending before the district court for decision.

Another issue decided in the Ohilds 00. case, discussed previously,involved the application of section 249. The Commission argued thattwo preferred stockholders, seeking compensation for services ren-dered in the proceeding, and who had traded in the stock of thedebtor, should be denied any compensation because their activities inconnection with the reorganization placed them in a "representativecapacity" within the meaning of section 249. The Commission alsoargued that the interests of the applicants were not entirely consistentwith other stockholders of their class in that they were seeking toobtain control of the reorganized company with its accompanyingperquisites, and emoluments of management. The district court re-jected these contentions but the court of appeals agreed that the ap-plicants had acted in a "representative capacity" and were thereforebarred from receiving any compensation under the provisions of sec-tion 249. The court stated that the record was clear that applicantshad created a bloc of stockholders amenable to their directives, hadmaintained its unity by frequent communication, asserted its strengthduring the formulation and confirmation of a plan, and exerted itspower to assure the selection of a new management satisfactory tothemselves. The court reiterated the rule in chapter X that one whoundertakes to act on behalf of any part of a class becomes the repre-sentative of the whole class, and may not deal for any part of italone.

The court did not sustain the Commission's position on a differentpoint in the Ohilds 00. case. The Commission was of the view that acertain stockholders' committee and its counsel had contributed di-rectly to the reorganization proceedings and rendered services ofbenefit to the estate although they were rendered prior to the re-

'0 The constltuent compnnlos are Chicago Railways Co., Chicago City Railway Co., andCalumet & South Chicago Railway Co.

SIXTEENTH ANNUA.L REPORT 123organization proceeding. The court pointed out that the serviceshad consisted principally of defeating a voluntary reorganizationand the dismissal of a prior involuntary petition in chapter X onthe ground that it was collusive, and the court concluded that suchactivity did not seem to have been of benefit to the estate. The courtheld that chapter X did not sanction awards for uncertain and some-what problematical benefits resulting from activities prior to the re-organization and in order to be compensable such services must notonly be clearly beneficial but specifically directed to the rehabilitationof the debtor which then actually Oc~Ul'S.

In Berner v. Equitable Office Building Oorp.,ll the Court of Appealsfor the Second Circuit held that the disclosure by an attorney ofprivate information regarding the reorganization proceeding to hisbrother-in-law, on the basis of which his brother-in-law had profitedby the purchase of stock of the debtor, was a breach of trust. Itheld,however, that it was within the discretion of the district court todetermine to what extent any fees earned by the attorney should bereduced because of this breach. The court suggested that the amountof reduction might well be not less than the loss to those who hadsold stock to the brother-in-law. On remand the district judge heldthat the attorney would have been entitled to a fee of $100,000,andthat this amount should be reduced by the losses incurred by thesellers of stock to the brother-in-law, plus an amount to make up forthe cost to the estate of the litigation that grew out of the breach oftrust, an aggregate of $30,000. The resulting figure of $70,000 wassubstantially in excessof the Commission's recommendation of $15,000,although the court accepted the Commission's suggestions as to theamount of the loss. The judge sustained the Commission's view thatthe fact that the purchases were made from short sellers was notmaterial, particularly since most of those selling stock owned othersecurities of the debtor. The judge stated that a court of equityshould not be overly astute in an endeavor to relieve a tort-feasor fromresponsibility to his trust.

The doctrine of the Berner case was followed in Silbiaer v. PrudenceBonds (Iorp., decided by the Court of Appeals for the Second Circuitin March 1950. The opinion recognized that, in ordinary litigation,an attorney who has served conflicting interests must be denied allcompensation but indicated that a more lenient rule could be appliedin corporate reorganizations. In such cases the court suggested thatit is reasonable not to impose an entire forfeiture of the allowancewhen the allowance is to be paid by a group which was not prejudicedby the attorney's divided allegiance rather by those who might havebeen. The court indicated that those affected by the attorney's dis-loyalty were probably adequately represented but that the attorneyfailed in his duty when he did not present the matter to the court andasked to be freed of his responsibility. The court remanded the caseto the district court to fix the extent to which the attorney's allowanceshould be reduced. It stated that in its view a reduction of less thanone-third would be an abuse of discretion, although it did not wish toindicate that it believed that a reduction of one-third was enough.

11175 F. 2d 218 (C. A. 2, 1949).


A petition to the Supreme Court for a writ of certiorari has beenfiled by the successor corporation and the Commission has filed amemorandum as amicus curiae in support thereof. The Commission'sview is that any allowances of a fee to an attorney who representsconflicting interests in a corporate reorganization is in direct conflictwith the rule laid down by the Supreme Court in the landmark case ofWoods v. Oity Bank 00.,313 U. S. 262 (1941). The Commission feelsthat in making an exception to the requirements of loyal and disin-terested service by fiduciaries as an absolute prerequisite to receivingany compensation whatsoever the decision of the court departs fromthe fundamental principles of equity; that the nature of a corporatereorganization proceeding is such that, rather than affording a reasonfor laxity, it requires the application of the highest standards offiduciary conduct.Institution of Chapter X Proceedings

In accordance with the legislative spirit and intent with whichchapter X was enacted, the Commission generally strives for a liberalinterpretation of its provisions in order to make the benefits and safe-guards of chapter X fully available to security holders. The Com-mission opposed a motion to dismiss the chapter X reorganizationproceeding involving New Union Building CO.12 Against a conten-tion that there was no need for relief because 98 percent of the bondshad been deposited with a committee which had made no demand forpayment although principal and interest were past due, the Commis-sion argued that the insolvency of the debtor and its inability to meetits debts as they matured were sufficient to show the need for reliefand that reorganization under chapter X would preserve going-concern value for the benefit of all creditors. The Commission alsoargued that the fact that a large bondholder, who was also a directorand committee member, was charged with instituting the proceedingsto gain control of the property and avoid a foreclosure, and to continueto buy bonds at a discount, constituted no basis for a finding of lackof good faith. The Commission pointed out that the desire to effec-tuate a plan which would be binding upon dissenters, if two-thirds ofthe bondholders approved, was hardly a circumstance indicating badfaith since such a result was one of the purposes sought to be achievedby the reorganization statute to remedy a recognized deficiency inreceivership proceedings. As to the trading activities of the bond-holder, the Commission alluded to the broad and flexible powers of thechapter X court as a court of equity with jurisdiction to prevent orpunish any inequitable or unjust conduct by any insider or fiduciaryin the proceeding. The district court sustained the Commission'sposition and denied the motion to dismiss. The moving party ap-pealed but, after the Commission had filed its brief, the appeal waswithdrawn.

PLANS OF REORGANIZATION UNDER CHAPTER X

The formulation and consummation of a fair and feasible plan ofreorganization is, of course, the primary purpose Qf the proceeding

PE. D. Mich.

SIXTEENTH ANNUAJL REPORT 125under chapter X. Accordingly, the most important function of theCommission under chapter X is to aid the courts in achieving thisobjective.Fairness of Plan

Basic to the Commission's approach to questions involving the fair-ness of reorganization plans under chapter X is the fixed principle,firmly established by Supreme Court decisions, that full recognitionmust be accorded to claims in the order of their legal and contractualpriority either in cash or in the equitable equivalent of new securitiesand that junior claimants may participate only to the extent that thedebtor's properties have value after the satisfaction of prior claimsor to the extent that they make a fresh contribution necessary to thereorganization of the debtor. A valuation of the debtor is essentialto provide a basis for judging the fairness as well as the feasibilityof proposed plans of reorganization. In its oral statements and in itsadvisory reports the Commission has continued to urge that the propermethod of valuation for reorganization purposes is primarily anapproJ?riate capitalization of reasonably prospective earnings. Anexception to this general position was dealt with during the 1950fiscalyear by the Commission in an advisory report in the proceedingsinvolving Central States Electric Corp., discussed below.

In connection with the fairness of plans and the treatment of claimsagainst the estate, the Commission has given careful consideration tosituations where because of mismanagement or other misconduct onthe part of a parent company or a controlling or affiliated person theclaims of the parent or affiliate should be subordinated to the claimsof the public investors or these claims limited to cost. All thefacts and circumstances in these instances are investigated sincethey form an integral part of the concept of the "fair and equitable"plan. Plans of reorganization involving problems of this type duringthe past fiscal year were considered by the Commission b the follow-ing proceedings: Pittsburgh Railways 00./3 Industrial Office Build-ing Oorp.,u International Railway 00./5 International Power Securi-ties Oorp.,IS Silesian-American Oorp.,l1 and the related cases ofAmerican Fuel & Power 00., Inland Gas Oorp., and Kentucky FuelGas 00.,18 In the first three of these proceedings, settlements andcompromises of the subordination and limitation issues were approvedby the court, the Commission supporting the result in the first twoproceedings and opposing the result as rnadequate in the third. Acompromise offer in the fourth of the foregoing proceedings is pres-ently the subject of hearings before the district court. In the Silesian-American case, discussed below, plans of reorganization were thesubject of an advisory report.

In the related American Fuel, Inland Gas, and Kentucky Fuel casesthe Court of Appeals for the SIXth Circuit had previously ruled thatthe controlling person, Columbia Gas & Electric Corp., should besubordinated to claims of public investors. The question of the extent

uw. D. Pa."D.N.J.UN. D. N. Y.18S. D. N. Y.17D. N. J.18E. D. Ky.


of such subordination is presently the subject of an appeal. InlandGas Corp. owns practically all the assets of the system. A plan ofreorganization for that company subordinates Columbia's claims tothose of publicly held claims of Inland but permits Columbia a par-ticipation in Inland's assets prior to the claims of creditors of Ameri-can Fuel and Kentucky Fuel. The Commission urged, in an advisoryreport, that the inequities which gave rise to the decision that Colum-bia be subordinated to the public creditors of Inland also require thatColumbia be subordinated to public creditors of American Fuel andKentucky Fuel, which companies own practically all of the stock ofInland.

In the Pittsburgh Ra{!lWays 00. case, hearings on over $76,000,000of claims of the parent company, Philadelphia Co., had commencedbefore a special master in 1947. Objections to these claims had beenraised, based upon alleged misuse by Philadelphia Co. of its controlover the Pittsburgh Railways System (consisting of Pittsburgh Rail-ways Co., Pittsburgh Motor Coach Co., a wholly owned subsidiary,and 53 so-called "underlier" companies linked to the System throughintricate lease and operating arrangements). It was contended thatPhiladelphia Co.'s claims should be completely subordinated to the$27,000,000of publicly held claims and stock interests of the system,or that its claims should be limited to cost. By the end of 1948,Philadelphia Co. had not completed its affirmative case of showingthat its claims were free from infirmity although the record containedover 10,000pages of testimony and hundreds of exhibits. The pri-mary burden of investigating the claims of Philadelphia Co., thecircumstances of their acquisition and the enormously complex historyof over 50 years of control over the railways system was carried bythe Commission's staff. This was particularly necessary since theformer "independent" trustee had filed a cursory report concludingthat Philadelphia Co. should not be subordinated. Subsequently theCommission and others initiated proceedings to remove this trusteealleging, among other matters, that the trustee had permitted hisreport to be prepared for the most part by an officer of the debtor,associated with the parent company, and. hence, that it could hardlybe expected to be an impartial study, or the trustee be consideredindependent. The trustee resigned May 31, 1949, after a specialmaster had rendered a report recommending his removal.

Beginning in January 1949, the Commission's staff and other in-terested parties explored the possibilities of settling the PhiladelphiaCo. subordination litigation as well as the numerous other conflictingclaims and problems which had already delayed the reorganizationfor 10years and gave promise of delaying it for a further long period.As a result of these discussions, Philadelphia Co. submitted a com-promise proposal, agreed to by the new disinterested trustee, byvarious parties, and the Commission's staff. On the basis of this offer,a "combined plan" was filed by the trustee, contemplating a singlecompany to take over the various properties comprising the PittsburghRailways system. The new company will issue up to $6,000,000ofbonds in addition to new common stock and the estate will distributenot less than $17,000,000 in cash. To the extent that more cash isdistributed less bonds will be issued. Holders of bonds and stocks

SIXTEENTH ANNUMJ REPORT 127

secured by guarantees of Philadelphia Co. will be paid in full byreceipt of cash of almost $11,000,000, approximately equal to theprincipal amount and par value outstandmg, no interest or dividendsbeing in arrears; holders of bonds of the system not affected by guar-antees will receive cash and new bonds aggregating $11,700,000,equalto the principal amount outstanding, and will receive also 14 percentof the new stock, interest being in arrears; holders of unguaranteedstock with a par value of $4,500,000 will receive $450,000 in cash and35 percent of the new stock; Philadelphia Co. for all its claims andinterests will receive 51 percent of the new stock and will be dischargedfrom all its guarantees.

The "combined plan" was submitted to the Commission for its ap-proval under sections 11 (e) and 11 (f) of the Public Utility Hold-ing Company Act. Section 11 (e) was applicable insofar as the planrelated to the discharge and cancellation of the guarantees of Phila-delphia Co., a company subject to the Holding Company Act. Sec-tion 11 (f) was applicable since that section provides for the Com-mission's prior approval of a plan of reorganization for a companysubject to the Holding Company Act. Litigation regarding the va-lidity of the Commission's modification of an exemptive rule whichhad excluded Pittsburgh Railways Co. from the purview of the Hold-ing Company Act had, 111 the meantime, been settled by the withdrawalby Philadelphia Co. of its objections to the modification. After noticeand hearing, the Commission concluded that the "combined plan" wasfair and feasible and on March 27,1950 entered an order approving it.

Finding a value of $17,000,000 for the new company, after givingeffect to the proposed cash payments, the Commission analyzed thetreatment accorded to the claimants in the light of the contentions asbetween Philadelphia Co. and public security holders, as among publicsecurity holders themselves and as between claimants not holdingsecurities and the estate or security holders. The Commission statedthat it was impossible to treat each of the 55 companies of the systemas a separate entity or to identify the property of each company inview of the intermingling of assets, failure to keep separate records,and operation of the system as a single unit for approximately 50years. The Commission aJ>proved the realistic approach of the "com-bined plan" in dealing WIth the system as an integral whole. As tothe major problem of the standing of Philadelphia Co.'s claims, theCommission referred to the staff's summary of the various contentionsrelating to the subordination issue and an extensive statement of factsderived from the record before the special master presented in an ap-pendix to the staff's recommended findings. The Commission observedthat there was evidence supporting the claim of misuse of control byPhiladelphia Co.; on the other hand, it noted Philadelphia Co.'s de-nials, its voluntary adjustments in the system structure with allegedbenefits to security holders and its defense of laohes.

The participations accorded by the plan to Philadelphia Co. and topublic security holders were compared with parity treatment in theestate. Under parity treatment, Philadelphia Co. with two-thirdsof the outstanding bonds and stocks would receive $22,667,000 of the$34,000,000 estate and would still be liable on its guarantees of closeto $11,000,000; while public security holders would receive $11,333,000.


Under the plan, Philadelphia Co. receives 51 percent of the stock ofthe new company and is discharged of its guarantees; public securityholders receive an aggregate of $23,000,000 in cash and new bondsand 49 percent of the stock. The improvement in the position of thepublic security holders was considered to represent a reasonable set-tlement of difficult and intricate litigation. Upon approval of the"combined plan" by the Commission, It was submitted. to the districtcourt which likewise gave its approval. The plan was then submittedto security holders for a vote, the material sent including a report_pre-pared by the Commission under section 11 (g) of the Holding Com-pany Act to assist them in deciding whether to accept the plan. Se-curity holders overwhelmingly accepted the plan.Feasibility of Plan

A prerequisite to the court's approval of a plan of reorganizationis its feasibility. In order to assure sound reorganizations, which willnot result in the company's return under the "chancellor's umbrella",because of financial difficulties, the Commission gives a great deal ofattention to factors affecting feasibility. The Commission is thusconcerned with the adequacy of working capital, the relationship offunded debt and the capital structure as a whole to property values,the adequacy of corporate earning power in relation to interest anddividend requirements, the necessity for capital expenditures, and theeffect of the new capitalization uEon the company's prospective credit.The Commission's views on feasibility as relating to particular typesof enterprise have been published in some detail during the past fiscalyear in several advisory reports dealing with a transit company, amotor transportation company, an investment company and a com-pany organized to liquidate frozen assets.Consummation of Plan

The Commission gives detailed scrutiny to the corporate charters,bylaws, trust indentures, and other instruments which are to governthe internal structure of the reorganized debtor. In general the Com-mission strives to assure to investors the inclusion of protective featuresand safeguards which its experience has shown to be desirable.

The Commission's interest in the entire reorganization process in-cludes not only the consummation of the plan and the winding up ofthe affairs of the trusteeship (which may occur many years after aplan has been consummated) but may also extend to the execution ofthe terms of the plan by the reorganized company. In the proceed-ings involving PIttsburgh Terminal Coal Corp. the need for suchcontinued interest has been dramatically high-lighted. The plan ofreorganization in that case, as an alternative to bankruptcy liquida-tion or forced sales at an inopportune time, provided for the creation ofa realization corporation to liquidate the assets in an orderly manner.The plan, which was consummated in 1945, incorporated certain safe-guards for investors: The life of the corporation was limited to 5 yearsto assure reasonably expeditious liquidation, the purpose of the cor-poration was restricted to liquidation of its assets, and total compen-sation to officers and directors was not to exceed $5,000 per annum.These provisions were incorporated in the plan over the opposition of

SIXTEENTH ANNUM.. REPORT 129a large preferred stockholder and his associates who apparently an-ticipated getting control of the new corporation.

Despite the explicit nature of these provisions, evidence was ob-tained by the trustee and the Commission's staff indicating that theplan was being flouted, that salaries far in excess of $5,000 were beingpaid to near relatives of the controlling stockholder, that the reorgan-ized company, instead of liquidating, intended to finance near relativesof the controlling stockholder in mining operations on the company'sproperty, that the cost of operation of the realization corporation ex-ceeded what might be expected of that type of company, and that thecontrolling stockholder intended to change the bylaws of the com-pany to remove the $5,000 restriction so as to enable him to receiveindirectly as a bonus compensation for his services during the reor-ganization proceedings as chairman of a preferred stockholders' com-mittee, compensation which he did not request the court to allow andwhich might have been barred under section 249 of chapter X blreason of the fact that he and his family had traded in the debtor sstock.

At about the time this evidence was obtained, a special meeting ofstockholders had been called to amend the bylaws of the reorganizedcompany to extend the company's existence for a period of 5 years andto increase the salary limit. Before the date of the meeting, the Com-mission filed a petition with the chapter X court for an order authoriz-ing an investigation of the trading activities of members of the pre-ferred stockholders' committee. At the same time, the trustee, withthe Commission's support, asked for an injunction restraining the hold-ing of the stockholders' meeting and for an order authorizing an in-vestigation to determine whether the terms, intent, and purpose of theplan of reorganization were being carried out. The court grantedboth petitions in December 1949, although permitting the company'sexistence to continue for another year.

Pittsburgh Terminal Realization Corp., the reorganized company,appealed from the order staying the stockholders' meeting and au-thorizing the investigation sought by the trustee on. the ground thatthe reorganization court did not have jurisdiction to supervise theaffairs of a going enterprise which had emerged from reorganization.The Commission, in its brief in support of the district court's decision,pointed out that the reorganization court has jurisdiction to protectIts decrees, to prevent interference with the execution of the plan andto aid in its operation. The Commission contended that the factsalleged in the trustee's petition and in related affidavits clearly war-ranted the relief granted by the district judge to assure that the ob-jectives of a plan painstakingly formulated and consummated underjudicial supervision with carefully thought-out legislative safeguardsshould not thereafter be thwarted.

In an incisive opinion, the Court of Appeals for the Third Circuitaffirmed the order enjoining the stockholders' meeting and authorizingthe investigation." Holding that the reorganization court has juris-diction to see that a plan is carried out, the court stated that, in view

uIn,.6 Pittsburgh Terminal Ooal 00"".,- F. 2d (J"uly 17,1950).

915841--51----10

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of the charges made, which were not seriously disputed, the trustee"would have been remiss in his duty if he had not brought this matterto the attention of the court and urged that the charges be investi-gated." The court held that the charges concerned an important phaseof the plan in the process of being carried out, that the charges wereserious and substantial and that, under the plain mandate of the cor-porate reorganization law, the problem was definitely within theJurisdiction of the court.

ADVISORY REPORTS

The preparation of advisory reports pursuant to section 172of chap-ter X does not represent the major part of the activities of the Com-mission in chapter X proceedings. Nevertheless, because they oftendeal with complex or novel legal and analytical problems, and becausethey are usually filed in the larger cases with a greater public interest,the advisory reports occupy a prominent position in the reorganizationfield. In effect they represent a means whereby the Commission'sviews on chapter X matters are made known to the public. In fact,however, the Commission has not filed formal advisory reports in thebulk of the cases in which it has participated, but in all these cases ithas advised the court in detail, orally or by memorandum, of its viewswith respect to the various plans of reorganization proposed in theproceeding.

During the year the Commission prepared and filed three advisoryreports and five supplemental reports. Two of these supplementalreports dealt with the trustees' plan of reorganization in the proceed-ings involving International Railways Co., with respect to which theCommission had issued an advisory report during the previous fiscalyear. The supplemental reports related to amendments which hadbeen filed to the trustees' plan. Most of these amendments were inaccordance with suggestions made in the advisory report, coveringmatters such as cumulative voting in the election of directors and pre-emptive rights to subscribe to new stock. However, certain other sug-gestions recommended by the Commission and proposed by a bond-holders' committee were not adopted by the trustees and the Commis-sion reiterated its position in this respect. These recommendationswere that nominees for the new board of directors be selected bycreditors in accordance with their interests in the estate, and thatbondholders who had not collected interest prior to the chapter Xproceedings receive this uncollected interest in cash rather than innew securities in order to place them on an equal footing with all otherbondholders. The second supplemental report suggested a methodfor distribution among public bondholders and creditors of certainof the new stock of the reorganized company which was to be turnedback to the estate as part of a settlement of a subordination proceedingagainst former controlling persons. The suggestion made by theCommission were thereafter substantially adopted.

Another supplemental report related to a revision of the trustee'splan in the Inland Gas Corp. proceedings, with respect to which theCommission had issued an advisory report during the previous fiscalyear. The major points dealt with concerned a provision for creatinga capital surplus which purported to provide a cushion for the new

S[KTEE~ ~AL REPORT 131

debt of the re~rganized company, as well as for its stock, and to im-prove the feasibility of the plan. The Commission pointed out thatthe creation of the capital surplus out of the residuary equity wouldn~t in fact effect any additional protection for security holders butmight on the contrary supply the means by which some of the existingequity cushion for bondholders could be dissipated through paymentof unearned dividends or purchase of outstanding stock. In additionit was pointed out that the provision was unfair to the recipient ofthe residual equity since it transferred part of this equity into surplusin which other security holders also receiving stock under the planwould have a proportionate interest. The plan was thereafteramended to exclude the provision for capital surplus.

Another point dealt with related to the purchase of property by thereorganized company valued at $400,000 in exchange for stock of thereorganized company having a par value of $600,000. In its originaladvisory report the Commission indicated that the proposed step-upof 50 percent over the value of the property was excessive, althoughit agreed in principle that since the property was to be paid for instock rather than cash, it was appropriate to issue a greater amountof stock. However, the Commission had recommended that the stockto be issued in excess of the value of the property should be taken ona pro rata basis from the shares of stock which would otherwise havebeen allocated to the security holders of the debtor in order to avoidthe use of watered stock. The plan as amended followed this sug-gestion in its endeavor to avoid the aspect of stock watering but placedthe entire burden upon the recipient of the residual equity in the caserather than upon all of the new stockholders of the reorganized com-

-pany. The Commission's supplemental report pointed out what ap-peared to it to be the inequity of the proposed procedure. Neverthe-less, the plan was approved as amended. In this respect, as well asin others, the order approvin~ the plan of reorganization for InlandGas Corp., has been appealed, and the matter IS pending before theCourt of Appeals for the Sixth Circuit.

In the proceedings involving Keeshin Freight Lines, Inc., and threesubsidiary debtors, the district court requested the Commission toparticipate in the reorganization and to submit an advisory reporton two plans of reorganization." The Commission issued its advisoryreport on these plans in August 1949. The primary matter dealt withby the Commission was the valuation of the debtor. Reviewing theevidence relating to prospective earnings of the enterprise and to anappropriate rate of capitalization, and considering- the expert testi-mony, the Commission concluded that the valuation of the debtor,including a small amount of excess working capital, was about $2,200,-000. On this basis, the Commission concluded that the trustees' planof reorganization which provided for a sale of the property at anupset price of about $1,400,000 was unfair, the price being grosslyinadequate.

The Commission concluded that the other plan of reorganizationwas unfair in that it gave to creditors of the parent c?mpany newsecurities worth less than they wer~ entitled to. Notinz that theparent company creditors and certain creditors of the sJilisIdIarIeS,

"N. D. Ill.


consisting of a few large business corporations and individuals, hadvoluntarily agreed to receive treatment under this plan different fromthat which they were entitled to under the terms of their claims, theCommission stated that since these persons did not constitute mem-bers of the investing public, it could see no objection to their agree-ment to receive less than that which fairness required. The Commis-sion also considered the feasibility of the second plan since it providedfor the issuance of new securities in part to the creditors of the debtorand its subsidiaries. The Commission concluded that while the capi-tal structure proposed under the plan was initially top-heavy andcomplicated and should be simplified, it appeared to be feasible, par-ticularly since a good }?art of the proposed debt obligations wouldbe retired within a relatively short time under the program envisagedby the plan.

The district court disagreed with the Commission's conclusions as tovaluation and reached a determination that the property was worthonly $1,'700,000. The court concluded that both plans were unfairand that in addition the second plan was unfeasible. The trustees'plan providing for sale at an upset price was amended to conform tothe court's determination of value. However, before this plan couldbe acted upon, an offer to purchase all the assets of the debtor and itssubsidiaries was received from another trucking concern which hadpurchased all the claims against the parent company. Under this planall creditors of the subsidiaries would be paid in full. While the totaleffective price to be paid by the purchaser could not be determined,because the amount of claims against the subsidiaries could not bedetermined until objections to claims were passed upon, the maximumcommitment of the proposed purchaser exceeded $2,000,000. A plan ofreorganization embodying the proposed purchase was approved andconfirmed by the court.

In the proceedings involving Central States Electric Corp., the Com-mission's advisory report covered five plans of reorganization. Theissue arising in the case were both varied and complicated. On the sub-ject of valuation, the Commission departed from the customary pro-cedure of capitalizing the reasonably expected earnings of theenterprise, on the ground that an investment company which deals inmarketable securities, none of which represents a controlling interest,cannot be valued on this basis. The Commission rejected as sheerprophesy arguments that future capital gains had to be considered,and pointed out that a capitalization of earnings would result in alower figure than a market valuation. It was further held that thepyramided structure of the system of the debtor, which has two sub-sidiaries, American Cities Power & Light Corp. and Blue Ridge Corp.,the former holding 42 percent of the stock of the latter added no addi-tional value to the enterprise. Itwas the Commission's view that thereis no justification or economic basis for piling one investment com-pany upon another, with needless increase in expenses, duplication,and potentialities for abuse; that the common stockholders of the topcompany might have some speculative advantage at the expense ofsenior security holders but that all investors in the aggregate do notbenefit therefrom.

SIXTEENTH ANNUAL REPORT 133The Commission severely criticized four of the proposed plans

because they involved retention of the three-tiered system of invest-ment companies, having as its objective the interposition of debt obli-gations or preferred stock in the bottom and intermediate companyso as to increase the leverage, or speculative potentialities, of thecommon stock of the top company if the stock market should rise.The Commission also criticized the failure of these four plans (pro-posed by the junior classes of the debtor, with little or no equity onthe basis of market values) to provide adequate asset coverages for thebonds and preferred stocks contemplated by their plans. In con-sidering both of these economic problems, the Commission recom-mended that the court should impose as minimum standards offeasibility, those provisions of the Investment Company Act of 1940regarding asset coverage for senior securities and prohibition ofpyramiding even though that act itself provided exemption in the caseof a reorganization. The Commission pointed out that the exemptiondid not modify the findings of the Congress that the interests of inves-tors are adversely affected by the undue speculation resulting from theissuance of excessive senior securities and from pyramiding and theabuses flowing therefrom.

The trustees' plan of reorganization, contemplating the emergencyof a single investment company with a single class of stock, after thedissolution of American Cities Power & Light Corp. and the merger ofBlue Ridge Corp. with Central States Electric Corp., was considered tobe sound and feasible. The claim of the 7 percent preferred stock, nextin rank to the debentures, will be measured by its liquidating preferenceand accrued dividends. The Commission expressed the opinion thatthis treatment was required in equity and by judicial precedent. Alawsuit against the former controlling person of Central States wassegregated, the suit to be handled by the trustee and any recovery to bedistributed to those classes of securities which had not been paid, inpart or in full, in the order of their priority. The Commission consid-ered this appropriate and fair in order not to delay the reorganization,pointing out that continued delay in consummating the reorganizationplaces in jeopardy the interests of the senior securities and permits thejunior interests to speculate at the risk of the seniors. Since the pro-ceedings have been pending 8 years, any further unnecessary delay wasconsidered inequitable. The Commission discussed each of the otherproposed Elans in detail and concluded that they were unfair in that,in genera, they provided for participation by junior classes at theexpense of senior security holders.

The district court thereafter adopted the recommendations of theCommission, approved the trustees' plan, subject to suggested mod-ifications, and disapproved all plans proposed by the junior interests.The trustees thereupon amended their plan accordingly and the Com-mission in a supplemental report stated that the plan was fair andfeasible in all respects. The court approved the plan and directedthat it be sent to security holders for a vote. In the meantime, thequestion of the dissolution of American Cities Power & Light Corp.came before the court. The Commission urged that that company bedissolved immediately as an administrative step in the proceeding 00-


cause it was an uneconomic and unjustified complexity in the CentralStates system. The junior interests argued for a delay on the groundthat their plans were based on the continued existence of AmericanCities and that the status guo should be maintained pending appealsfrom the order disapprovrng their plans. The Commission pointedout, however, that the insistence that American Cities be retained in thesystem could only mean that the junior interests intended to reinstatethe highly complicated, speculative system that had originally broughtfinancial collapse to the debtor and imposed heavy losses on securityholders; and that in no event could any plan be considered feasiblethat did not eliminate American Cities as an unwarranted corporatemonstrosity. The district court denied the stay and authorized thetrustees of Central States to vote the stock of American Cities infavor of the proposed dissolution. The Court of Appeals for theFourth CirCUIt affirmed the approval of the trustees' plan and theauthorization to proceed with the dissolution of American Cities, anddissolved the stay it had granted pending appeal. Applications tostay the proposed dissolution pending the filing of petitions for writsof certiorari to review the approval of the trustees' plan were filedin the Supreme Court.

In the proceedings involving Silesian-American Corp.," the ques-tions confronting the Commission in reporting on various plans of re-organization were primarily legal questions. The debtor was promotedas an aftermath of World War I by W. A. Harriman & Co and Ana-conda Copper Mining Co. It acquired its principal asset, a Polishmine, from a German mining company which received $5,000,000 ofthe debtor's preferred stock and 49 percent of its common stock aswell as a $6,000,000 loan from the debtor. The promoters received$7,000,000of the debtor's preferred stock and 51 percent of its commonstock for a cash contribution of less than $38,000. The promotion wasfinanced by selling $15,000,000of the debtor's bonds to the public. In1937, the German mining company ceased making payments on itsindebtedness to the debtor, now amounting to $5,000,000.

After World War TI, the Polish properties of the debtor were takenby Poland without compensation and at present the debtor has onlya claim for compensation under the Polish nationalization law. Cer-tain transactions occurring during the war, however, giving rise toadditional claims on behalf of the estate, were uncovered. WhenWorld War II broke out, Germany seized the Polish properties ofthe debtor and placed them under the supervision of the Germancompany, which exploited them until hostilities ceased in 1945. Soonafter the seizure, the German company and the Hitler governmentdeveloped a scheme for the German repatriation of the Americaninterest in the Polish mine and the indebtedness from the Germancompany. To accomplish this scheme, an arrangement was made witha syndicate of Swiss banks, to whom the German company was alsoindebted, to act as a cloak for the Germans. Funds for the repatria-tion were to be supplied by shipments to Switzerland of zinc extractedfrom the Polish and German mines. With the consent of the Swissand German Governments, the proceeds of the metal shipments were

"'S.D. N.Y.


exempted from the restrictions of the Swiss-German clearing treaty,thus leaving the proceeds with the Swiss banks.

As an initial step in the repatriation scheme, the Swiss banks ac-quired $640,000 of the debtor's bonds. These purchases, however,caused market rises in the price of the bonds which rendered it im-practicable and unprofitable to the Swiss banks (whose profit dependedupon the price of the bonds) to continue the acquisitions. Accord-ingly, the Swiss banks entered into negotiations with the Anaconda-Harriman promoters, who held a majority of the debtor's stocks, fora cash purchase of their interest and full payment of the remainingbonds outstanding against the debtor. This transaction requiredlicenses from the United States Treasury Department, from whomthe Swiss banks concealed the German interest. The licenses weredenied.

Despite this obstacle to consummation of the German repatriationprogram, the zinc shipments to the Swiss banks continued untilGermany's surrender. The shipments were made as a result of repre-sentations to the German Government that the repatriation had beeneffected in part and would be completed as soon as feasible. The netproceeds of the shipments approximated $6,000,000. Out of thesefunds, the Swiss banks reimbursed themselves attar for the $640,000of the debtor's bonds although the securities ha been purchased atprices ranging from 28% to 71. Additionally, they used substantialportions of the funds as credits against principal and interest onprewar obligations of the German company to them. During thesame period, the debtor received nothing on its unpaid indebtednessfrom the German company.

After the termination of hostilities, a Dr. Schulte, who had origi-nally conceived the repatriation plan in his capacity as the Germancompany's chief executive, worked with the Swiss banks to cometo some agreement with the trustee of the debtor. The remainder ofthe :funds accumulated in Switzerland (approximating $1,700,000in cash plus the $640,000of the debtor's bonds) had been exemptedfrom Swiss-German clearing for the express purpose of acquiringthe debtor's securities. It was feared that unless used for the in-tended purpose, the moneys would be regarded as German assetssubject to seizure by the Swiss Government. If an arrangement withthe trustee could be effectuated, it would be represented that the ob-jectives of the clearing exemption had been achieved and the Swissbanks would be free to use the remainder of the fund for their ownpurposes. The trustee's plan embodied a Swiss proposal under whichabout $650,000 would be released for a cash distribution to bond-holders. For this, the Swiss banks would receive first-lien securitieson a parity with the balance due to public bondholders (over$2,000,000); for the $640,000of the debtor's bonds, they would receivesecond-lien securities.

By reason of the questions raised in the case as to the possible liabil-ity of the promoters of the debtor arising from its organization, theissuance of its securities, and the management of its affairs, and as tothe claims against the Swiss banks, the Commission's advisory reportportrayed in some detail the history of the debtor as revealed by an


extensive and largely documented record, though lacking the complete-ness that can usually be attained in a domestic situation. In an appen-dix to the report the Commission set forth the evidentiary factssurrounding the promotion and organization of the company and inanother appendix the history of the transactions involving the ~bment of metals to Switzerland and the activities of the Swiss baand the German mining company in relation thereto. Against thisbackground the Commission concluded that the trustee's plan wasneither fair nor feasible.

The report concluded that the plan was unfair in the followingprincipal respects: It embodied an inadequate compromise of claimswhich were believed to be legally and practicably enforceable againstthe Swiss banks; 22 it accorded to the Swiss banks a dominant interestin the reorganized company on terms unfair to public bondholders;it made participation of stockholders dependent upon an arbitraryvalue for the Polish claim instead of giving stockholders certificatesof interest contingent upon possible recoveries after satisfaction ofcreditors; it failed to provide for prosecution by the trustees of causesof action against the promoters of the debtor and instead recognizedtheir bonds, stock, and other claims in full; it failed to provide for theprosecution by the trustee of claims against the German mining com-pany; it failed to limit to cost bonds acquired by certain insiders dur-ing the proceeding; it disfranchised security holders through thecreation of a voting trust. The trustee's plan was also considered notfeasible in that it provided for the issuance of interest-bearing debt ob-ligations with a fixed maturity although there is no assurance or basisfor expecting that the interest and principal will be paid when due.The plan also failed to provide adequate working capital to enable theproper prosecution of claims constituting the primary assets of theestate.

The Commission considered that a plan proposed by a bondholders'committee was fair in rejecting the Swiss compromise and in providingfor the prosecution of causes of action against the Swiss banks, thepromoters, and the German mining company, but it suggested that theplan might appropriately provide for the issuance of contingent cer-tificates of interest to stockholders in the event that a sufficient recov-ery was had upon the claims against Poland and others. The plan was

.. As to the SwiBBtransactions, the CommiBBionconclnded trom the record that Dr.Schulte's connection with the negotiations was tor the probable purpose ot salvaging aninterest tor the German company in these funds as well as to aid in getting some participa-tion tor the Swiss banks in the debtor's reorganization. The proposal embodied in thetrustee's pian, which the United States Officeot Alien Property regarded as in furtheranceof the German repatriation scheme and thus Violative of the Trading with the Enemy Act,was considered the culmination of these negotiations. The CommiBBionpointed out thatthe record showed that the funds in controversy were deriVed in substantial part frommetals extracted trom the Polish mines belonging to the debtor; that they were intendedto be used tor the benefit of the debtor's security holders; and that they were accumulatedby a German company heavily indebted to the debtor. It was also pointed out that the$640,000 ot bonds, originally purchased by the Swiss banks, were paid tor out of thesefunds and, at a minimum, as property ot the German company, were SUbject to cancellationon account of the unpaid obligations to the debtor.

On the merits ot the SwiBBproposal, the Commission concluded :"In view ot what has already been said, we believe the so-called compromise must be

rejected. The bait which it holds out in the torm ot an immediate partial cash distribu-tion to public bondholders, who have long been deprived of any return on their Investment,cannot be permitted, in the light of the tacts as they now appear, to serve as a lure forapproval of a proposal deficient in satisfying objective equitable standards. What mayappear on the surface as a benefit is shown by analysis and inquiry into the facts to be ameans ot accomplishing a gross preference in favor ot the SwiBBbanks. It the Swiss banksare not wiIiing to make a superior proposal, the machinery is at hand to deal with thempromptly in the reorganization court."

SIXTEENTII~AL REPORT 137

considered not feasible, however, because it failed to provide adequateworking capital. Other plan proposals offered by the debtor andstockholders were considered unfair and unfeasible for reasons sub-stantially similar to the reasons for considering the trustee's planunfair and unfeasible.

Despite the views urged by the Commission in its advisory report,the district court in April 1950 approved the trustee's plan, subjectto certain minor modifications, and disapproved all other proposals.The trustee then filed an amended plan which was submitted to theCommission for a supplemental report. The supplemental report,filed in May: 1950, found the plan still unfair and unfeasible. Someof the modifications met certain objections raised by the Commissionbut these related to relatively small matters. The basic features ofthe trustee's plan, unfair and unfeasible in the Commission's view,remained the same.

A bondholders' committee, among others, appealed from the orderapproving the plan. Contending that certain aspects of the votingon the plan contemplated by the trustee were unfair, the committeemoved for a stay of the voting pending the appeal from the planapproval as well as the manner of votmg. The Commission sup-ported the motion for a stay on two principal grounds. The Com-mission objected to the classification of the $640,000 of bonds heldby the Swiss banks in the same category as publicly held bonds becauseof the direct conflict of interest of the two groups. The manifestunfairness which would result if the votes of the Swiss banks wereconsidered in determining whether bondholders wished to accept theoffer of the Swiss banks was discussed. Additionally, the refusalto permit the bondholders' committee to communicate with bond-holders regarding acceptance or rejection of the plan concurrentlywith the trustee was urged as another reason for the stay. Thestatute, judicial precedents, and the equity of the case were reliedupon to support the Commission's view that an equal opportunityto the committee was required and that thelrocedure contemplatedby the trustee was unjust. The Court of ppeals for the SecondCircuit granted the stay without opinion.

PART V

ADMINISTRATION OF THE TRUST INDENTUREACT OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, deben-tures, and similar securities publicly offered for sale, sold, or deliveredafter sale through the mails or in interstate commerce (except asspecifically exempted by the act) be issued under an indenture whichmeets the requirements of the act and which has been qualified withthe Commission.

NATURE OF TRUST INDENTURE REGULATION

Individual holders of bonds, notes, debentures, and similar debtsecurities often find it difficult and expensive to enforce their rightsunder indentures and generally must rely upon the trustee named inthe trust indenture to protect them. The Trust Indenture Act of1939 requires the inclusion in the trust indenture of specified provi-sions which facilitate the protection and enforcement of such rights.Thus, there must be a corporate trustee free from stated conflictsof interest; such trustee must not after default, or within 4 monthsprior thereto, improve its position as a creditor to the detriment of theindenture securities; it must make annual and periodic reports to bond-holders; it must maintain bondholders lists to provide a method ofcommunication between bondholders as to their rights under the in-denture and the bonds; and it must be authorized to file suits and proofsof claims on behalf of the bondholders. The act prohibits exculpatoryclauses used in the past to eliminate the liability of the indenture trusteeto the indenture security holders and imposes on the trustee, after de-fault, the duty to exercise the rights and powers vested in it, and touse the same degree of care and skill in their exercise, as a prudentman would use or exercise in the conduct of his own affairs. Specifiedevidence must be supplied by the obligor to the indenture trusteewith respect to the recording of the indenture and with respect toconditions precedent to action to be taken by the trustee at the requestof the obligor.

INTEGRATION WITH SECURITIES ACT OF 1933

The exemption provisions of the Trust Indenture Act of 1939 in-corporate most of the exemptions contained in the Securities Act of1933 and include certain other exemptions. The provisions of theseacts are so integrated that registration pursuant to the Securities Actof 1933 of securities to be issued under a trust indenture and notexempt from the Trust Indenture Act of 1939, is not permitted tobecome effective unless the indenture conforms to the requirementsof the latter act, and such an indenture is automatically "qualified"

138

SIXTEENTH ANNUAL REPORT 139when registration becomes effective as to the securities themselves. Anapplication for qualification of an indenture, covering securities notrequired to be registered under the Securities Act of 1933, which isfiled with the Commission under the Trust Indenture Act is processedsubstantially as though such application were a registration statementfiled pursuant to the Securities Act of 1933.

STATISTICS OF INDENTURES QUALIFIED

There was a drop in the number and dollar amount of debt securitiesTor which qualification under the Trust Indenture Act wassought in the 1950 fiscal year. Thus, during the year there were 96new indentures filed representing an aggregate dollar amount of$1,741,775,670,compared with corresponding figures in the 1949 fiscalyear of 127 new filings representing $2,605,823,365. However, theaddition of the year's new filings to the 9 indentures (aggregating$298,141,600), which were pending at the beginning of the periodmakes a total of 105 indentures aggregating $2,039,917,270 whichrequired examination by the staff during the past year and which weredisposed of as shown in the table below:

Total number of indentures filed under the Trust Indenture Act of 1999

AggregateNumber amount

Indentures pending June 30, 1949____________________________________________ q $298, 141, 600Indentures filed during fiscal year _________________________________________ 96 1,741,775,670TotaL ---.----- 105 2,039,917,270

D~~:~~~=J-:~~------------------------------_________________97 1,865,254,799Amount reduced by amendment ________________________________________ ----------- 3,130,596Indentures deleted by amendment or withdrawn ________________________ 4 116,531,875Indentures pending June 30,1950 ________________________________________ 4 55,000,000

TotaL _________________________________________________________________ 105 ~,039, 917, 270

During the 1950 fiscal year the following additional material relat-ing to trust indentures was filed and examined for compliance withthe appropriate standards and requirements:Statements of eligibility and qualification under the Trust Indenture AcL 121Amendments to trustee statements of eligibility and qualification_________ 13Supplements SoT, covering special items of information concerning indenture

securities registered under the Securities Act of 1933__________________ 90Amendments to supplements S-T_______________________________________ 17Applications for findings by the Commission relating to exemptions from

special provisions of the Trust Indenture Act of 1939___________________ 15Reports of indenture trustees pursuant to sec. 313 of the Trust Indenture Actof 1939 -_________ 608

_________• _____________________________________________

PART VI

ADMINISTRATION OF THE INVESTMENT COMPANYACT OF 1940

The Investment Company Act of 1940 requires registration andprovides for certain types of regulation of investment companies-companies engaged primarily in the business of investing, reinvesting,and trading in securities. Among other things, the act requires dis-closure of the finances and investment policies of these companies inorder to afford investors full and complete information with respectto their activities; prohibits such companies from changing the natureof their business or their investment policies without the approval ofthe stockholders; bars persons guilty of security frauds from servingas officers and directors of such companies; regulates the means ofcustody of the assets of investment companies and requires the bondingof officers and directors having access to such assets; prevents under-writers, investment bankers, and brokers from constituting more thana minority of the directors of such companies; requires managementcontracts in the first instance to be submitted to security holders fortheir approval; prohibits transactions between such companies andtheir officers and directors except on the approval of the COmmission;forbids the issuance of senior securities of such companies except inspecified instances and prohibits pyramiding of such companies andcross-ownership of their securities. The Commission is authorized toprepare advisory reports upon plans of reorganizations of registeredinvestment companies upon request of such companies or 25 percentof their stockholders and to institute proceedings to enjoin such plansif they are grossly unfair. The act requires face amount certificatecompanies to maintain reserves adequate to meet maturity paymentsupon their certificates.

REGISTRATION UNDER THE ACT

During the 1950 fiscal year, 26 new investment companies registeredunder the Investment Company Act of 1940-predominantly open-endmanagement companies (companies which redeem their shares onpresentation by the stockholders). During the nearest comparableperiod for which data are available, the 12 months ended March 31,1950, about 196 registered open-end management and closed-end man-agement investment companies reported to the Commission sales tothe public of approximately $440,000,000 of their securities, and re-demptions and retirements of approximately $135,000,000, leaving anet investment by the public in such companies over the period ofapproximately $305,000,000. As of June 30, 1950, 366 investment com-panies were registered under the act, and of that date it is estimatedthat the value of their total assets was approximately $4,700,000,000

140

~


This represents an increase of $1,000,000,000 in such valuation overthe corresponding total at the beginning of the year.

The 26 investment companies registered during the 1950 fiscal yearare classified as follows:

~anageDlent open-end______________________________________ 18lIanageDlent closed-end_____________________________________ 4lJnit --________ 4

Total________________________________________________ 26The 366 investment companies registered at June 30, 1950, are

classified as follows:lIanageDlent open-end______________________________________ 150ldanageDlent closed-end_____________________________________ 105lJnit_______________________________________________________ 95Face 8D1ount_______________________________________________ 16

Total________________________________________________ 366

TYPES AND INVESTMENT POLICIES OF COMPANIES FORMED

As indicated above, most of the investment companies formed duringthe period have been of the open-end type, investing primarily incommon stocks. Three of these companies have adopted a policy ofinvestment in so-called "growth stocks" (variously defined by each ofthem) and one company has adopted a policy of investing primarilyin companies owning or engaged primarily in the development ofnatural resources.

The year was also marked by the appearance of brokers and dealersas direct sponsors and investment advisers of open-end companiesformed primarily as an investment medium for customers of the firmsand characterized by either the absence, or only a nominal amount,of, sales load. Two such companies were formed, one in New York bya member firm of the New York Stock Exchange and one in Boston.Another interesting development during the year has been the forma-tion of funds designed to enable investors to purchase on the install-ment plan over a period of 10 years common stock of a single companyin whose securities there is local interest. For example, a fund hasbeen formed in Washington, D. C., for investment in the common stockof Potomac Electric Power Co. on the installment plan; a similarfund was formed in Winston-Salem, N. C., for investment in thecommon stock of R. J. Reynolds Tobacco Co. Both plans were char-acterized by the fact that over a half of the first year's installmentpayments were not invested in the underlying stock, but were absorbedas selling loads and other charges.Semng Literature

The act requires literature (other than the statutory prospectus)used by issuers or underwriters in selling open-end investment com-pany shares to be filed with the Commission within 10 days after suchliterature is first employed as selling material. During the 1950 fiscalyear there was a substantial increase in the use of both literaturepurporting to describe investment companies generally and literaturepurporting to describe a specific company. Of considerable concernto the Commission was the fact that in a substantial number of cases


this literature used by issuers, underwriters, and dealers to attractinvestors might be materially misleading in many respects. In addi-tion, there was serious doubt that certain of such literature could begenerally circulated under the Securities Act of 1933. Accordingly,during the year the Commission with the cooperation of the NationalAssociation of Securities Dealers undertook a study of such literaturein an attempt to eliminate any misleading elements contained therein.After the close of the year there was promulg-ated, as a result of thecooperative effort of the Commission and the National Association ofSecurities Dealers, a statement of policy governing the contents ofsuch literature.Other Data

The number of documents filed under the act by registered invest-ment companies during the 1949 and 1950 fiscal years, together withother related statistics, are tabulated below:

Number of registered investment companies:~~=~acg=-yoor ~~~~:::::::::::::::::::::::::::::::::::::::~ ~~~:::::::::::Terminations of registrations during yearNumber of cotnpames registered at end of year

Notifications of regtstrationRegistration statementsAmendments to registration statementsAnnual reports

~:~SI;~~rts~-~~I-~:~~~::::::::::::::::::::::::::::::::::::::::::::::::::::::Periodic reports, containing financial statements sent to stockholdersReports of repurcbase of securities by closed.•md management companiesOopies of sales literatureApplications for exemption from various provisions of the actApp1Jcations for determmation that registered investment company has ceased to be

A::~~~~Ser;~~W~~roiiS~.; :::: ::::::::::::::::::::::::: ::::::::::::::::::: :~::Total appheatlons:Beguming of year

~~ie:::~~;g~~:~~~ ===========:: ::=:::::::::::: :==== :::::

Fiscal year endedJune 30-

1949 1950

359 35812 2613 18

358 36612 2612 2631 51

228 22446 23

788 818662 63772 73

1,910 2,12149 77

14 1835 38

44 3263 9575 9332 34

APPLICATIONS FILED

One of the functions of the Commission under the act is to pass onapplications by investment companies for exemptions which the actpermits under appropriate standards.

Some of the most complex problems arise out of the provisions ofthe statute which forbid, III the absence of approval by the Commission,purchases or sales of property or securities among investment com-panies and their affiliated persons. To approve such transactionsthe Commission must find that they are fair as to price and involveno overreaching. As a result, the applications in many instancesinvolve unusual questions of valuation and inside influence. Duringthe year 30 applications of this type were filed.

During the year 95 applications were filed under the various pro-visions of the act, 77 of these for orders of the Commission relating to

_ _ _ _ _ _

_ _ _ _

_

============== == =

SIXTEENTH ANNUAL REPORT 143exemption from requirements of the act, and the remaining 18 for adetermination by the Commission that the applicant has ceased to bean investment company within the meaning of the act. At the be-ginning of the year 32 applications were pending, which (togetherwith the 95 filed during the year) made a total of 127 applicationsrequiring examination and consideration by the Commission duringthe year. As a result of the Commission's action 93 of these appli-cations were disposed of during the year and 34 were pending onJune 30, 1950. The various sections of the act under which theseapplications were filed, and the disposition of the applications duringthe fiscal year, are shown in the following table (since an applicationmay involve more than one section of the act, the numbers are nottotaled) :

Nature and. disposition of various appUcatio1ts (iled. under the Investment Com-pany Act of 1940 during year ended. June 30, 1950

Number Filed NumberSection of the act under which appllcation pendmgat dunng Disposed of during year pending

was filed June 30, at June1949 year 30, 1950

3 (b) (2) Determination that :applieant is 1 1 0__________________________ 2not an investment company.

6 (b) Employees' security company exemp- 1 1 1 granted __________________ 1tion.

6 (c) Various exemptions not speeiflcally 8 zr 25granted, 3 withdrawn ___ 7~rovided for by other sections of the act.

8 f) Determlnation that a registered invest- 3 18 16granted, 2 withdrawn __ 3ment company has ceased to be an invest-ment company.

9 (b) Exemption of Ineligible persons to 13 2 I granted __________________ 14serve as directors, officers, etc.

10 (f) Exemption of certain underwriting ------------ 1 1 granted __________________ --------_.transactions.

11 (a) A~rOVal of terms of proposed seen- --------.--- 2 2 granted __________________ ---------.rity ex ange offers.17 (b) Exemption of proposed transactions 7 30 30 granted, 2 withdrawn .. 5

between investment companies and affili-ates.

17~d) Approval of certain bonns and profit- 2 16 13granted, 1 withdrawn ___ 4acing plans.

23 (c) (3) Terms under which closed-end 1 4 4 granted __________________ 1Investment company may purchase itsoutstanding securities.

LITIGATION UNDER THE INVESTMENT COMPANY ACT

In only two instanc-es during the 1950 fiscal year did the Commis-sion resort to injunction proceedings to enforce the obligations de-volving on investment companies and their officers under the Invest-ment Company Act. In S. E. O. v. F. L. Andrews Investment Trust(Civil Action No. 8845,D. Mass. Nov. 30, 1949) the officer,who servedas president, treasurer, and sole trustee of the investment company,caused the company to make unsecured loans to various business cor-porations which he controlled. According to the complaint, he re-ceived rebates, secret profits, and commissions for arranging theseloans, and received salaries from both the investment company andthe corporations he controlled for serving as an officer of these enter-prises. The Commission brought an action which sought to prohibitthe officer from being employed by any investment company in anycapacity, and a consent decree was entered granting the relief re-

_


quested. In addition, on motion of the Commission, the court ap-pointed a receiver to hold the assets of the investment company subjectto an order to liquidate and distribute them.

In 8. E. O. v, Trusteed Funds, Ina. (Civil Action No. 8622, D. Mass.,Sept. 9, 1949) an action was brought to enjoin the sponsor and prin-cipal underwriter of an investment company from selling its securitiesby means of sales literature which had not been filed with the Com-mission and which contained the false statement that the investmentcompany was guaranteed against loss by the United States Govern-ment. In this case, too, an injunction was entered as requested anda receiver was appointed.'

1The complaint also charged violation of the prospectus standards, sec. 15(b) (2). andthe antifraud provisions, sec. 11 (a) (1), (2) and (3), of the Secnrities Act of 1933.

PART VII

ADMINISTRATION OF THE INVESTMENT ADVISERSACT OF 1940

The Investment Advisers Act of 1940 requires the registration ofinvestment advisers, persons engaged for compensation in the busi-ness of advising others with respect to securities. The Commissionis empowered to deny registration to or revoke registration of suchadvisers if they have been convicted or enjoined because of misconductin connection with security transactions or have made false state-ments in their applications for registration. The act makes it unlaw-ful for investment advisers to engage in practices which constitutefraud or deceit; requires investment advisers to disclose the nature oftheir interest in transactions executed for their clients; prohibits profit-sharing arrangements; and, in effect, prevents assignment of invest-ment advisory contracts without the client's consent.

Statistics of i1l/Vestment adviser registrations, 1950 fiscal yearEffective registrations at close of preceding fiscal year 1, 044Applications pending at close of preceding fiscal year__________________ 14Applications filed during fiscal year__________________________________ 119

Total 1,177

Registrations cancelled or withdrawn during year______________________ 116Registrations denied or revoked during year____________________________ 1Applications withdrawn during yeaL_________________________________ 4Registrations effective at end of year 1,043'Applications pending at end of year___________________________________ 13

Total 1,177

Approximately 242 registered investment advisers represent in theirapplications that they engage exclusively in supervising their clients'investments on the basis of the individual needs of each client. Theservices of about 335 others are chiefly through publications of varioustypes; 232 investment advisers are registered also as brokers and deal-ers in securities. Most of the remainder offer various combinations ofinvestment services.Administrative Proceedings

Two proceedings, involving investment advisers, one of which waspending at the be~ing of the 1950 fiscal year and the other whichwas instituted durmg the year, were determined during the year. Thelatter case, Assured Warranty Corp., is discussed in the section ofthis report on the regulation of brokers and dealers under the Securi-ties Exchange Act.

915841--51----11 145


In the other case, the Commission brought action to determinewhether it was necessary in the public interest to revoke the registra-tion of Frederick N. Goldsmith, doing business as F. N. GoldsmithFinancial Service, who was permanently enjoined by a decree ofthe supreme court of New York from actingas an investment adviser,broker, or dealer. At the hearing, Goldsmith stipulated the facts andfiled a notice of withdrawal.

Goldsmith's subscribers were led to believe that he was a skilled in-vestment adviser applying his judgment to generally accepted objec-tive data and that he was in a position to obtain additional or advanceinformation by his close contacts with particular issuers and largeholders of securities. In view of these representations, the Commis-sion found that his dissemination of advice, admittedly based in parton the comic strips in which he believed there existed a code which,interpreted by him, would reflect future movements of certain securi-ties on the stock exchanges, was fraudulent, reckless, and without con-cern for the public welfare. However, the Commission concludedthat, under all the circumstances, including Mr. Goldsmith's advancedage of 84 years and the fact that there had been no previous complaintsabout the conduct of his business, it would be consistent with the publicinterest to permit him to withdraw from registration as an investmentadviser. The Commission noted that the existence of the injunctionwould supply a statutory basis for reviewing the public interest if heshould seek re-registration at some future time.

PART VIII

OTHER ACTIVITIES OF THE COMMISSION UNDERTHE VARIOUS STATUTES

THE COMMISSION IN THE COURTSCivil Proceedings

Complete lists of all cases in which the Commission appeared beforea Federal or State court, either as a party or as amicus curiae, duringthe fiscal year, and the status of such cases at the close of the year, arecontained in the appendix tables.

At the beginning of the 1950 fiscal year there were pending in thecourts 20 injunctive and related enforcement proceedings instituted bythe Commission to prevent fraudulent and other illegal practices inthe sale of securities, 34 additional proceedings were instituted duringthe year and 36 cases were disposed of, so that 18 of such proceedingswere pending at the end of the year. In addition, the Commission par-ticipated in a large number of reorganization cases under chapter Xof the Bankruptcy Act ;" in 22 proceedings in the district courts undersection 11 (e) of the Public Utility Holding Com'pany Act and in 38miscellaneous actions, usually as amicus curiae, or intervenor, to advisethe court of its views regarding the construction of provisions of stat-utes administered by the Commission which were involved in privatelawsuits. The Commission also participated in 53 appeals. Of these,12 came before the courts on petition for review of an administrativeorder; 14 arose out of corporate reorganizations in which the Commis-sion had taken an active part; 4 were appeals in actions brought by oragainst the Commission; 12 were appeals from orders entered pur-suant to section 11 (e) of the Public Utility Holding Company Act;and 11 were appeals in cases in which the Commission appeared asamicus curiae or intervenor.

Certain significant aspects of the Commission's litigation duringthe year are discussed in the section of this report devoted to thestatute under which the litigation arose.Criminal Proceedings

The statutes administered by the Commission provide for the trans-mission of evidence of violations to the Attorney General who mayinstitute criminal proceedings. The Commission, largely throughits regional offices, investigates suspected violations and, in cases wherethe facts appear to warrant criminal proceedings, prepares detailedreports which are forwarded to the Attorney General. The Commis-sion, primarily through its employees who have participated in theinvestigation, also assists the United States attorneys in many of

1For comment on some of these cases see section herein on the participation of theCommission in corporate reorganlsattons under chapter X.

147


these cases in the presentation to the grand jury, the conduct of thetrial, and the preparation of briefs on appeal. It also transmitsparole reports prepared by its investigators relating to convictedofl'enders. Where the investigation discloses violations of statutesother than those administered by the Commission, reference is madeto the appropriate Federal or State agency.

Indictments were returned against 2,601 defendants in 453 casesdeveloped by the Commission prior to June 30, 1950.2 This includes37 defendants in 22 cases in which indictments were returned duringthe past fiscal year. At the close of the fiscal year 422 cases had beendisposed of as to one or more defendants, and convictions had beenobtained in 370 cases 3--over 87 percent--against a total of 1,271defendants. Convictions were obtained against 20 defendants in 15cases during the past year.' In addition, criminal contempt proceed-ings were instituted during this period against two defendants in twocases. One such defendant was convicted and the other is awaitingtrial," Judgments of conviction were affirmed on appeal as to twodefendants during the year, and one case involving a single defendantremained pending in the court of appeals at the close of the fiscal year.

Criminal cases developed and prosecuted by the Commission duringthe past year covered a wide variety of promotions. In general, theyincluded fraudulent promotions of various mining ventures, fraudin the sale of securities relating to oil and gas properties, new busi-nesses and inventions, and frauds perpetrated by securities brokersand dealers and their representatives. Frequently, the defendants,in employing these fraudulent schemes, wilfully avoided compliancewith the registration provisions of the Securities Act of 1933, whichare designed to provide investors with a full and fair disclosure ofmaterial facts about the securities being sold. As a result, a numberof fraud cases involved violation of these registration provisions.

In one of the cases dealing with mining securities the fraudulentrepresentations made to investors were characterized by the trial courtas more fantastic than the tales of Baron Munchausen (U. S. v.lng-wold S. Steensland (D. Minn.j ), Steensland was convicted of de-frauding investors of an estimated $100,000 in connection with thepromotion of what he represented to be a coal mining -and timberproject in British Columbia, Canada. The defendant sold securitiesin a fictitious corporation claimed to have been organized under a"Canadian Secret Corporations Act." There is no such statute. Ac-cording to the testimony of investors, the defendant represented tothem that the late President Roosevelt was obligated to an associatein the venture by reason of his services in recovering for the FederalGovernment some $23,000,000from persons who had committed fraudsagainst the Government. Investors were told that as a result of theintercession of the late President on behalf of the venture and becauseof their gratitude for American participation in World War II, the

The status of all criminal cases pending during the past fiscal year is set forth inappendix tables. Condensed stattstteal summaries of alI criminal proceedings developedby the Commission is set forth in the appendix.

The 52 remaining cases. which resulted in acquittals or dismissals as to all defendants.included a number where the indictments were dismissed because of the death of defendantsinvolved.

One of these cases is still open as to six defendants.The criminal contempt proceedings are set forth in the appendiL

•

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SIXTEENTH ANNUAl. REPORT 149

British and Canadian authorities had approved a grant of 10,000square miles of British Columbia land to the defendant containingvast coal and ore deposits and tremendous timber reserves. Investorswere told that the governments of China, Australia, India, and NewZealand were interested in the project and that the World Bankwould advance many millions of dollars to finance it.

Other convictions involving mining promotions were obtainedduring the past year in U. S. v. William A. Snyder et al. (D. Colo.)and U. S. v, Walter A. Stogsdill (N. D. Okla.). The first involvedsales of the stock of the Southern Potash Co., an insolvent company,as to which it was charged misrepresentations were made regarding,among other things, the status and value of the company's leases ofacreage from which it proposed to extract potash. In the secondcase the conviction was obtained on a plea of nolo contendere to chargesof violation of the registration provisions of the Securities Act of1933 in selling interests in a purported lead and zinc mining ventureknown as the Little Beaver Mining Co.

Convictions were obtained in several cases involving the fraudulentsale of securities relating to the promotion of oil and gas properties.The indictments in such cases alleged false representations concern-ing, among other things, the options and leases purportedly ownedby the corporation and the status of its oil production and earnings(U. S. v. Robert L. Burch et al., N. D. Tex.) ; 6 the use to which moneyreceived from investors would be put (U. S. v. Galen B. Finch, S. D.CaL), and the qualifications of a geologist (U. S. v. Glaude OleoeAlfred, E. D. Tenn.). In the Finch case the defendant was chargedwith diverting to his own use funds which he represented would beused solely for the purpose of drilling wells. The defendant in theAlfred case told investors that he had been a geologist in the FederalGovernment, that he had discovered an oil pool in a particular area,and that in the past he had drilled 42 wildcat oil wells of which 40were commercially producing wells. An additional conviction wasobtained during the year in the Oactue Oil 00. case 7 where the chargesagainst the defendants included the payment of corporate "dividends"out of capital for the purpose of inducing investors to make repeatedpurchases of stock.

The fraudulent sale of securities in the promotion of a so-called"kickless automatic sport shotgun" was the basis for the convictionduring the past year in U. S. v. William Ray Baldwin (D. Del.).Among other things, it was charged that Baldwin falsely informedinvestors that the promotional corporation shortly would receivefrom the United States Government some $800,000 for the use ofpatents owned by the corporation which would make it possible forthe corporation to pay dividends to stockholders and that the moneyreceived from the sale of securities would be used to develop andmanufacture a new sport shotgun. Itwas alleged that the defendant

Three individual defendants were convicted. On motion of the United States attorneythe indictment was dismiBBedas to the corporation, the remaining defendant.

Misrepresentations respecting the quantity of oU being produced are included in thecharges in U. 8. v. George E. Baldwin (N. D. Ill.), a pending case, in which an indictmentwas returned during the past year.

7 See 14th Annual Report of Securities and Exchange Commission, p, 101. Subsequentto the conviction of the two individual defendants the indictment as to the corporatedefendant was dismissed.

•


omitted to disclose to investors that the corporation was insolvent,that all money received from them was being used for the promoters'personal use and benefit, and that the Government had advised thatit did not owe any money to the corporation.

Other allegedly fraudulent activities involving the promotion ofmechanical devices were the subject of indictments obtained in thepast year in U. S. v. Doak Norwood, (N. D. Ill.) (desk pad device)and U. S. v. Philip M. Carter et al. (S. D. N. Y.) (acoustical material),both of which cases are pending.

Other business promotions resulting in criminal proceedings duringthe past year were involved in U. S. v. Alfred L. Lodge et al. (W. D.Okla.) (production, manufacture, and sale of brooms), U. S. v. JimMay (S. D. Tex.) (grain trading venture), and U. S. v. Paul A.Schumpert et al. (M. D. Tenn.) (small loan company). The de-fendants in the first two cases were indicted during the year andconvictions were obtained after the close of the fiscal year. In theSchumpert case convictions were obtained during the year on anearlier indictment," and another indictment was returned during theyear against additional defendants. In the Lodge case the misrepre-sentations included such matters as the use to be made of the proceedsobtained from securities sales, the profits and property owned bythe corporations, and the approval of the securities by the Commis-sion. Both the May and Schumpert cases involved, among otherthings, a "Ponzi" type of swindle where, to induce further investment,capital was returned to investors in the guise of profits.

Convictions involving securities brokers and dealers and theirrepresentatives were obtained during the past year in U. S. v, D. S.Walldy (W. D. Ark.), where the defendant operated a securities busi-ness while insolvent, converted customers' funds and securities, filedfalse and misleading financial statements with the Commission, andfailed to keep the books and records required by section 17 (a) of theSecurities Exchange Act of 1934 and by the Commission's rules there-under; in U. S. v. Louis A. Starling et al. (W. D. Va.), where thedefendants, under the pretense of rendering impartial investmentadvice, induced their customers to purchase the defendants' personallyowned shares of a tobacco company by misrepresenting, among otherthings, the financial condition of the company and by failing to disclosethat the stock was being sold for the personal profit of the defendants;and in U. S. v. Stanley M. Brown (D. D. C.), U. S. v, Alvis Roy Davis(W. D. Mo.), and U. S. v. Otto F. Herald (N. D. Ill.), in which casesthe conversion of customers' money or securities constituted a part ofthe frauds charged. The defendant in the Herald case was convictedalso of violating the broker-dealer registration provisions of the Secu-rities Exchange Act of 1934, since he had engaged in the business ofeffecting securities transactions without being registered with theCommission as required by section 15 (a) of the act.

Indictments involving securities brokers and dealers are presentlypending in U. S. v. Frederick F. March (N. D. IlL), U. S. v. Ed1lJin R.Hawley (D. Ariz.), and U.S. v.EugeneF. Luck (S. D. Fla.). Marchis accused of fraudulently selling interests in a purported investment

8 See 15th Annual Report of Securities and Exchange Commission. p. 165.

SIXTEENTH ANNUM.. REPORT 151

plan to be operated by him by misrepresenting, among other things,the nature of the investment plan and the profits which investors wouldmake on their investments in this plan. In fact, according to theindictment, the defendant converted to his own use and benefit, andused for gambling purposes, a large part of the money which he ob-tained from investors. In addition, the indictment charges him withpaying back to investors, as "profits" resulting from the operation ofhis plan, portions of their capital contributions. The frauds chargedin the Hawley and Luck cases involve, among other things, the conver-sion of customers' funds and securities. As a part of the alleged fraudemployed in the latter case, it is charged that the defendant forgedvarious documents and sold stock of his securities brokerage firm tohis customers by means of various false representations.

Criminal contempt proceedings were instituted during_ the year inu.S. v, James Nelson (S. D. Cal.) and U. S. ex rei. SEO v, JosiahMarshall Kirby (N. D. Ohio). Nelson was convicted for violating a1944 injunction decree which enjoined him from selling securities inviolation of the registration provisions of the Securities Act of 1933.Despite this decree, Nelson sold securities, which had not been regis-tered with the Commission, relating to certain syndicates known as the"Apache Golden Treasure Syndicate" and the "Tayopa Golden Treas-ure Syndicate." The contempt proceeding in the Kirby case ispending. The petition alleges that Kirby continued to act as an over-the-counter securities broker and dealer, without registration undersection 15 (a) of the Securities Exchange Act of 1934, in violation ofpreliminary and final injunction decrees obtained in 1948 and 1949respectively.

In the only appellate case involving criminal prosecution decidedduring the fiscal year, Nemec et a. v, U. S., 178 F. 2d 656 (C. A. 9,1949), certiorari denied 339 U. S. 985, the conviction of defendentsfor the fraudulent sale of securities in connection with the promotionof a purported gold mining venture was sustained.

COMPLAINTS AND INVESTIGATIONS

The Commission is authorized under the acts it administers to in-vestigate possible violations. Among the sources of information aboutviolations are the examination by the staff of material filed with theCommission (e. g., ownership reports indicating transactions in equitysecurities by officers and directors) information furnished by othergovernmental agencies, better business bureaus, State authorities, andcomplaints made by members of the public. Complaints from thepublic provide the chief source of leads with respect to such viola-tions. During the 1950 fiscal year 9,335 letters were received by theprincipal office relating to possible violations of the Securities Act of1933 and the Securities Exchange Act of 1934. This volume of com-plaints represented an increase over the preceding year of more than30 percent.

Investigations are classified generally as preliminary or docketedinvestigations. A preliminary mvestigation is one instituted for thepurpose of determining whether probable violations have occurredand this type of investigation is carried on largely through corre-


spondence, office research, or limited interviews. If the informationdeveloped in the preliminary investigation indicates such violationsof the law as to require a full-scale field investigation, the, case istransferred to a docketed investigation. In a great many instances,however, the preliminary investigation discloses that the violation, ifany, is of a minor nature warrantmg neither a full-scale investigationnor the imposition of any of the sanctions provided by law. These in-clude situations in which the violation comes to the attention of theCommission shortly after its inception, where the violation appearsto be inadvertent, and where immediate steps have been taken by theoffender to comply with the law.

The Commission has subpena powers and designates officers for thepurpose of conducting investigations, issuing subpenas, and adminis-tering oaths. Subpenas are used only where the investigation cannotbe concluded without their use and only after a preliminary report andreasons for the necessity of issuance of the subpenas have been pre-sented to the Commission. During the 1950 fiscal year the Commis-sion authorized use of subpenas by issuance of formal orders for in-vestigation in 35 cases.

The extent of the investigatory activities of the Commission duringthe 1950 fiscal year under the Securities Act of 1933, the SecuritiesExchange Act of 1934, sections 12 (e) and (b) of the Public UtilitiesHolding Company Act of 1935, the Investment Company Act of 1940,and the Investment Advisers Act of 1940 is shown in the followingtable:

Investigations of violations of the acts administered by the Commission 1

Preliminary , Docketed' Total

Pending at June 30, 1949__________________________________________ 536 1,050 1,586Opened July I, 1949to June 30, 1950:New cases____________________________________________________ 341 159 500Transferred from preliminary -----p 50 50

Total number of cases to be accounted Cor___________________ 877 1,259 2, 136Closed________________________________, ___________________________ 511 718 1,229TransCerred to docketed 50 50Pending at June 30,1950------------------------------------------

1316 541 857

1 Tbese figures include 011 and gas investigations wlI1ch are separately tabulated and discussed elsewherein this report.

'investigations carried on through correspondence and limited field work.Investigations assigned to field investigators.

Canadian Situation

During the 1950 fiscal year illegal offerings in the United Statesof oil and mining securities emanating from Canada continued to beof grave concern to the Commission. Practically all of these offeringsare made by mail from Toronto, Ontario. Complaints from the pub-lic, better business bureaus, and State authorities have been receivedin large numbers from all parts of the United States. State authori-ties have continued to issue cease and desist orders where solicitationshave been made inviolation of their securities laws. Newspapers andmagazines have performed a valuable service by warning the publicabout these violations. The Post Office Department has continuedto cooperate with the Commission in trying to prevent the losses caused

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SIXTEENTH ANNUM, REPORT 153by these illegal mass mail campaigns. During the year the Post OfficeDepartment issued orders against 14 individuals and firms who haveconducted such mail campaigns, based upon the use of fictitious names.In addition, the Post Office Department, based upon information fur-nished by the Commission, issued fraud orders to stop the deliveryof mail to 27 firms in Toronto who, were offering shares by means offraudulent representations and omissions.

All of these cases involved violations of the registration provisionsof the Securities Act of 1933. Every full investigation has shown thatunregistered securities being offered and sold in the United States fromToronto have been offered and sold by means of false and fraudulentrepresentations.

It is believed that the vigorous campaign by the Commission, withthe cooperation of other governmental agencies, has been effective inreducing these violations. However, they have not been completelyeliminated. The Commission has continued its efforts to improvethe extradition provisions of our treaties with Canada so as to enablethe Government of the United States to bring the fraudulent opera-tors to trial.Section of Securities Violations

Inthe first year of its existence the Commission established a sectionof securities violations for assistance in the enforcement of the variousstatutes which it administers and to provide a further means of pre-venting fraud in the purchase and sale of securities. This section hasdeveloped files which provide the basis of maintaining a clearinghouse of information concerning persons who have been charged withviolations of various Federal and State securities statutes. The spe-cialized information in these files has been kept current through thecooperation of the United States Post Office Department, the FederalBureau of Investigation, parole and probation officials, State securi-ties commissions, Federal and State prosecuting attorneys, policeofficials, and members of the United States Chamber of Commerce.By the end of the 1950 fiscal year these records contained data concern-ing 53,162 persons against whom Federal or State action had beentaken in connection with securities violations.

During the past year alone additional items of information relatingto 6,324 persons were added to the records of this section, includinginformation concerning 1,997 persons not previously identified therein.

Extensive use is made of this clearing house of information. Dur-ing the past year, in connection with the maintenance and preventiveapplication of these records, the Commission received 4,298 "securitiesviolations" letters or reports (apart from those which are classified~s "complaint enforcement") and dispatched 3,007 communicationsIII turn to cooperating agencies,

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

Many of the reports or documents required to be filed each yearwith the Commission contain financial data, mostly in the form offinancial statements and related schedules. These are always a vital,often the most significant, element of the information the investormust have upon which to predicate investment decisions. Because


the Congress recognized that accounting and accountants perform suchan important role in achieving the statutory purpose of disclosure,and because financial statements lend themselves readily to misleadinginferences or even deception, whether or not consciously intended, thestatutes administered by the Commission deal extensively with ac-counting, and activities of the Commission in the field of accountingare necessarily significant.

Thus, for example, the Securities Act not only provides for inclu-sion in prospectus of balance sheets and profit and loss information"in such form as the Commission shall prescribe," 9 but authorizes theCommission to prescribe "the items or details to be shown in the bal-ance sheet and earning statement, and the methods to be followed inthe preparation of accounts. * * *" 10 Similar authority is con-tained in the Securities Exchange .Act,ll and more comprehensivepower is embodied in the Investment Company .Act 12 and the HoldingCompany .Act.13

The Securities Act provides that the required financial statementsshall be certified by "an independent public or certified accountant." 14

The other three statutes above mentioned provide that the Commissionmay require that such statements be accompanied by a certificate ofindependent public accountants." The Commission's rules requirethat statements filed pursuant to the Securities Exchange Act andthe Investment Company .Act be so certified. The value of certificationhas for many years been conceded but the requirement as to inde-pendence, long recognized by some individual accountants, was for thefirst time authoritatively and explicitly stated by its introduction intothe statutes. Out of this initial provision in the Securities Act andthe resulting rules established by the Commission 16 there have grownconcepts that have materially strengthened the protection affordedinvestors by eliminating certain unhealthy accountant-client rela-tionships which theretofore were quite common.

Although the statutes administered by the Commission give it widerule-making power, accounting, based as it is largely upon conventionand existing financial and business concepts, is of such a nature thatthe Commission has not yet found it necessary or desirable in mostareas to establish extensive accounting rules and regulations dealingwith accounting problems. The Commission has prescribed uniformsystems of accounts for certain public utility holding companies andfor public utility mutual and subsidiary service companies. It hasadopted rules under the Securities .Act governing accounting andauditing of exchange members, brokers, and dealers. In the widerarea dealing with industrial, commercialhand investment companiesunder the Securities Act, Securities Exc ange .Act, and InvestmentCompany .Act the form and content of most financial statements aregoverned by the Commission's regulation S-X.

Sec. 10 (a) (1) (Schedule A, par. 25, 26).10 Sec. 19 (a).11 Sec. 13 (b).:12 SeC6.30, 31.13 Sees. 14, 15.l< Sec. 10 (a) (1) (Schedule A, par. 25, 26).15 SecurIties Exchange Act. sec. 13 (a) (2): Investment Company Act, sec. 30 (e);

HoldIng Company Act, sec. 14.18 See, for example, rule 2-01, regulation S-X.

•

SIXTEENTH ANNUAiL REPORT 155The rules and regulations thus established do not prescribe the

accounting to be followed except in certain basic respects. In thelarge area not covered by such rules the Commission's principal re-liance for the protection of investors is on the determination andapplication of accounting standards which are recognized as soundand which have come to have general acceptance. This policy of theCommission is expressed in accounting series release No.4 (1938) (oneof the series of such releases inaugurated in 1937to publish accountingstatements and opinions which are of general interest).

One of the inevitable results of this policy has been constantcontact and cooperation between the Commission and other govern-mental agencies and accountants both individually and through suchgroups as the American Institute of Accountants, the American Ac-counting Association, the Controllers Institute of America, the Na-tional Association of Railroad and Utilities Commissioners and others.The importance of this cooperation is emphasized by the great influenceand responsibility inherent in the Commission's authority over the sev-eral thousand financial statements filed every year with it by most ofthe important commercial and industrial companies in the UnitedStates.

The accounting staff of the Commission is organized to handle themany day-to-day accounting problems that arise in the course of itswork and to provide central responsibility for aiding the Commissionin matters of accounting policy. The chief accountant has generalsupervision with respect to accounting and auditing policy and itsapplication. He is assisted directly by a staff of trained accountants,and, in addition, by assistant chief accountants assigned to and re-sponsible for the examination of financial data and other operatingwork in the Division of Corporation Finance, Division of Trading andExchanges and Division of Public Utilities.Examination of Financial Statements

The majority of the accounting problems with which the Commissionis concerned arise from examination of financial statements or otherdata required to be filed with the Commission. In general, deficienciesrevealed by examination are called to the attention of the registrantby letter. These letters of comment and the corresJ?ondence or con-ferences that follow have proved to be a most convement aid in effect-ing corrections and improvements in financial reporting. Few mattersinvolve prolonged discussion or dispute in spite of the tremendousvolume of financial data reviewed each year by the Commission; andit is only in rare instances that formal procedures are necessary inorder to procure disclosure.

Many problems arise as a result of inquiry by representatives ofregistrants, their accountants or counsel in advance of the actualfiling of the material involved. Advance discussion of this kind isencouraged and experienced practitioners regularly follow this proce-dure in dealinz with unique problems-thus saving valuable time forthemselves and their clients. As a natural outgrowth of the fact thatthe Commission studies and is the repository of a vast reservoir offinancial data, the staff is frequently called on to aid in the preparation


of studies of current problems such as those involved in formulatingthe background of legislative proposals.Proposed Amendment of Regulation SOX

Regulation S-X is the Commission's basic accounting rezulationrelating to the form and content of financial statements filed undertbe Securities Act, the Securities Exchange Act, and the InvestmentCompany Act. This regulation was promulgated in February 1940and in many respects simply brought together requirements thereto-fore contained in the separate registration and annual report forms.The only major changes in the regulation since its issuance in 1940have been the addition in 1942 of article 6A relating to unit invest-ment trusts, the complete revision in 1946 of article 6 relating tomanagement investment companies and a new article 5A, adopted in1948, applying to commercial, industrial, and mining companies inthe promotional, exploratory, or development stage.

Many accounting and reporting problems have arisen during the10 years that have elapsed since the adoption of regulation S-X. Boththe incidence and solution of some of these matters have involvedchanged viewpoints, not only of industry and the accounting profes-sion, but also of the Commission. Furthermore, entirely new situa-tions have developed requiring the establishment of new procedures.For these reasons it has been thought desirable to revise the regulation.

When the present proposal to amend regulation S-X was made inSeptember 1949, copies of the preliminary draft were sent to 325 per-sons and an additional 15 or more were sent to persons who requestedcopies, mostly as a result of an item in the October 1949 Journal ofAccountancy which invited readers to obtain and comment upon thepreliminary draft. Several accounting firms and professional groupsrequested additional copies so that, in all, approximately 600 copieswere sent out. Approximately 115 persons, including 46 controllersor principal accounting officers of corporations, submitted comments.

The large number of comments and recommendations received wasgiven a great deal of careful study. Amendments originally proposedwere reconsidered as a result of these comments and the final revisionof the proposed amendments was sent out and formal notice of amend-ment was given under the Administrative Procedures Act on July12, 1950. In view of the ~reat importance of the regulation, themost careful consideration will be given to the additional commentsand suggestions expected to be received before enactment of amend-ments.Other Developments in Accounting and Auditing

The Commission's fifteenth annual report mentioned the disclosureand accounting problem that arose from the increasingly popularform of financrng by means of long-term leases or more particularlythe sell-and-Iease-back device. To a considerable extent the Com-mission's disclosure requirements applicable to such transactions havebeen in existence for a number of years. Thus, item 5 of the scheduleof "Supplementary Profit and Loss Information," rule 12-16 of regu-lation S-X, requires that there be stated certain minimum data as toannual rentals, if significant. In view of the very important nature


of lease-type financing, particularly the fixed character of the com-mitment undertaken, the Commission has in the past several yearsasked that there also be given, by a brief reference in a footnote tothe balance sheet, the principal details of significant transactions oc-curing within the year or years covered by the report. The Com-mission also has indicated that where the transaction is such that itis in substance a purchase of property, the transaction must, despitethe lease form, be accounted for as a purchase. The principles werealso adopted in the recommendation of the Committee on AccountingProcedure, American Institute of Accountants, in its Accounting Re-search Bulletin No. 38 issued in October 1949.

Although the Commission had earlier indicated its position withrespect to accounting for the obligations created by corporate pensionplans, during the current year it was found desirable to give furtherconsideration to the matter. This did not involve the one-timetroublesome question of the proper disposition of expenditures to fundpayments or liabilities determined upon the basis of past services ofemployees. The propriety of charging such amounts direct to incomerather than to surplus is no longer challenged. Accounting ResearchBulletin No. 36 in November 1948 by the American Institute of Ac-countants is, in principal, in agreement with the Commission's view.

However, there arose again the problem of the accounting for pos-sible or implicit liabilities associated with past service elements ofpension plans where the corporation is under no contractual obliga-tion to continue the plan beyond the current year or few years im-mediately following. In the case of actual liability arismg froman irrevocable commitment to the future payment of pensions it wasnot difficult to conclude that any unfunded liability for past servicebenefits, actuarily determined, should, under accepted accountingprinciples, be set up in the accounts. At the date of adoption of theplan such liability would, of course, relate not only to employeesactually retired or qualified for retirement but also to the past serviceof those employees who would not qualify for retirement until a futuredate.

Such completely irrevocable commitments apparently occur rarely,if at all. In recent months union-management negotiations, particu-larly in the steel industry, have led to the adoption of various planswhich might not legally bind the employers to fund past-service ele-ments even though in a typical instance the plan is, by contract, tocontinue for 5 years. Question arose as to the extent of disclosure re-quired to be given in proxy statements coming before the Commissionfor examination.

As an accounting matter the Commission had earlier concluded thateven though there is no contract, or the pension contract may run fora short period only, it would be unrealistic to ignore the probabilitythat, once having installed a plan or entered into a short-term contract,the company will continue it. Accordingly it was believed that thereshould be disclosed in a brief footnote to the balance sheet not only theimportant terms of the plan, including estimates of amounts pay-able annually, but also the company's best estimate of the amount thatwould be necessary to fund, or complete the funding of, past serviceobligations at the balance sheet date on the assumption that the plan


is to be continued. In the case of employees who have retired or areeligible to retire, an equally realistic approach seems to require that,apart from any question as to legal liability, balance sheet provisionshould be made in an amount equal to the sum necessary to fund theobligation.

Upon request, in connection with the proxy material filed with it,the Commission informally reconsidered its position and concludedthat it could find no sound and reasonable basis for a different viewthan that held earlier as to the appropriate treatment in financialstatements. The Commission also indicated that the disclosure re-quirements in proxy material, to be furnished to stockholders as a basisfor stockholder action on the pension plan, are essentially the same asin the case of financial statements and that therefore substantially thesame treatment should be given to the facts.

InSeptember 1949, the British Government announced a very mate-rial devaluation of its currency in terms of the United States dollar.Devaluations were almost immediately announced by many other for-eign governments with the result that a large number of domesticcorporations engaged in business in these countries were presented withproblems as to how to state the accounts of their foreign subsidiariesand branches in terms of United States currency. Since many of thesecorporations publish quarterly financial data for the benefit of stock-holders and others, prompt decisions were necessary. Although theCommission generally does not exercise jurisdiction over stockholders'reports as such, many inquiries as to the Commission's views werereceived from registrants in anticipation of the later filing of theirannual reports.

The first problem presented in many instances was whether to con-tinue the previous practice of consolidating foreign and domestic op-erations. The Commission recognized that the decision on this pointis one primarily to be reached by the company and its independentaccountants, having due regard for all the facts, and having in mindthe objective of most clearly exhibiting the financial condition and re-sults of operations of the parent company and its subsidiaries. Whilenot then called upon to make a decision in any particular case, the staff,in answer to a number of inquiries, indicated its general conclusionthat the consolidation question might well be determined upon thebasis of the degree of integration of the foreign operations withdomestic operations.If such foreign operations are essentially an arm or extension of do-

mestic operations, and are actively being conducted, the view held isthat there is a presumption in favor of the consolidation thereof, de-spite the probable impact upon the foreign operations of unfavorablepolitical and economic factors. If, in an instance of this kind, re-mittances to the parent company are restricted, appropriate disclosureof the facts would be necessary and the consolidated profit and lossstatement should reflect only earnings of foreign subsidiaries which areavailable to the parent in terms of United States dollars. If, on theother hand, the foreign operations constitute a complete and separatebusiness unit in and of themselves, and serious economic problems arepresented, nonconsolidation would generally appear to be indicated.In the examination of reports filed with the Commission since these

SIXTEE~ ~AL REPORT 159developments it has been observed that in a substantial number ofcases foreign operations previously included in consolidation havebeen removed therefrom and, where falling within the Commission'stests of significance, have been reported on separately.

A more persistent question was whether, as a result of widespreaddevaluations and foreign conditions generally, any new principles wereapplicable with respect to the conversion of foreign assets into a dollarequivalent. It was the staff's opinion, expressed in numerous in-stances, that no new problem existed and that the well-establishedpractices of the past are quite adequate and appropriate to cope withany situation that has come to its attention. The general principlesapplicable in the case of conversion of foreign net assets are well ex-pressed in Accounting Research Bulletin No.4 (1939) of the AmericanInstitute of Accountants. Question arose, however, concerning theextent to which losses recognized in connection with the devaluationshould be recognized by charges against income. The staff's position,concurred in by the Commission in a recent informal ruling, is thatlosses of this nature, even though large in amount, are a risk incidentto doing business and are therefore proper charges against income.This conclusion was arrived at independently of the general questionof the propriety of charges and credits to earned surplus.

Among the proposed amendments to regulation S-X are provisionsdealing in certain important respects with the above described prob-lems as to long-term lease commitments, pension plans, accountin~ foroperations of foreign subsidiaries, and the impropriety of directcharges to earned surplus.

Several of the annual reports of the past few years have commentedupon a group of accounting cases that arises in the administration ofrules X-17A-3 and X-17A-5 under the Securities Exchange Act,governing securities brokers and dealers. As has been noted, most ofthe difficulties encountered in this field of regulation are due to thelarge number of small firms and the fact that many of the requiredaudits are performed by accountants unfamiliar with the Commission'srequirements and apparently not well trained in the improved proce-dures of brokerage accounting and auditing practice. During the pastyear the Commission's staff, through correspondence and through di-rect contact by regional office representatives, continued to devoteconsiderable time to improvement in this area. In most cases it wasapparent that inexperience rather than deliberate evasion was thecause of the unsatisfactory reports filed. There were a number ofcases involving certifying accountants, however, in which, althoughformal proceedings under rule II of the rules of practice were not nec-essary, the audit work failed completely to approach generally ac-cepted auditing standards and required that informal action, usuallywarning or admonition, be taken.

The various changes by the Commission in its forms are describedin the preceding sections discussing the administration of the variousacts. There were no material changes affecting the work of account-ants although of interest was the elimination of the well-known FormI-MD and the extension of Form 10-K to annual reports pursuant toboth sections 13 and 15 (d) of the Securities Exchange Act.


DIVISION OF OPINION WRITING

The Division of Opinion Writing aids the Commission in thepreparation of findings, opinions, and orders promulgated by theCommission in contested and other cases arising under the SecuritiesAct of 1933, the Securities Exchange Act of 1934, the Holding Com-pany Act of 1935, the Trust Indenture Act of 1939, the InvestmentCompany Act of 1940, and the Investment Advisers Act of 1940.These statutes provide for a wide variety of administrative proceed-1~ which require quasi-judicial determination by the Commission.Formal opinions are issued in all cases where the nature of the matterto be decided, whether substantive or procedural, is of sufficient im-portance to warrant a formal expression of views.

The Division of Opinion Writing is an independent staff officewhich is directly responsible to the Commission. It receives allassignments and instructions from and makes recommendations andsubmits its work to the Commission directly. It is headed by a di-rector, who is assisted by an assistant director, supervising attorneys,and a staff of drafting attorneys and a financial analyst.

While engaged in the preparation of opinions assigned to the Di-vision of Opinion Writing, the members of this division are completelyisolated from members of the operating division actively participatingin the proceedings and it is an invariable rule that those assigned toprepare such an opinion must not have had any 'prior participationm any phase of the proceedings with respect to which the opinion is tobe prepared. Commission experts are from time to time consulted ontechnical problems arising in the course of the preparation of opinionsand findings, but these experts are never individuals who have par-ticipated in the preparation of the case or testified at the hearing.

The director or assistant director of the Division of Opinion Writ-ing, together with the members of the staff of the division who areassigned to work on a particular case, attend the oral argument ofthe cases before the Commission and frequently keep abreast of currenthearings. Prior to the oral argument, the division makes a prelim-inary review of the record and prepares and submits to the Commissiona summary of the facts and issues raised in the hearings before thehearing officer, as well as in any proposed findings and supportingbriefs, the hearing officer's recommended decision, and exceptionsthereto taken by the parties. Following oral argument or, if no oralargument has been held, then at such time as the case is ready fordecision, the Division of Opinion Writing is instructed by the Com-mission respecting the nature and content of the opinion and orderto be prepared.

In preparing the draft of the Commission's formal opinion, theentire record in the proceedings is read by a member of the staff ofthe Division of Opinion Writing_and in some cases he prepares anarrative abstract of the record. Upon completion of a draft opinionand abstract of the record, and after review and revision of theopinion within the Division of Opinion Writing, they are submittedto the Commission. If the study of the record in the case by theDivision of Opinion Writing has revealed evidence of violations war-ranting a reference to the Attorney General for criminal prosecu-tion, or has disclosed the desirability or th~ 'need for any changes in

SIXTEENTH ANNUA,L REPORT 161

administrative procedures or techniques, appropriate recommenda-tions are made to the Commission at the time the draft opinion in thecase is submitted.

The draft opinion as submitted may be modified, amended, or com-pletely rewritten in accordance with the Commission's final instruc-tions. When the opinion accurately expresses the views and conclu-sions of the Commission, it is adopted and promulgated as the officialdecision of the Commission. In some cases concurring or dissentingopinions are issued by individual Commissioners who wish to expresstheir separate views on matters covered by the opinion adopted bythe majority of the Commission. In such cases the Division of OpinionWriting is occasionally instructed to prepare drafts of such concur-ring or dissenting opinions and confers respecting them with theindividual Commissioners involved, submits drafts directly to them,and makes such modifications and revisions as are directed.

The findings of fact, opinions, and orders adopted and promul-gated by the Commission serve as an aid and guide to the bench andbar. With minor exceptions (e. g., certain opinions dealing withrequests for confidential treatment) all are publicly released anddistributed to representatives of the press and persons on the Com-mission's mailing list. In addition, the findings and opinions areprinted and published bic the Government Printing Office in boundvolumes under the title' Securities and Exchange Commission Deci-sions and Reports."

The creation of the Division of Opinion Writing as an independentstaff unit in 1942 was based on the view that the fair exercise of theCommission's adjudicatory functions in many types of cases made itappropriate that it be assisted in that function by members of its staffwho were independent of units engaged in investigation or prosecu-tion of cases. Originally initiated as a matter of Commission policy,the desirability of this arrangement was subsequently given expressrecognition in specific provisions of the Administrative ProcedureAct, which in certain types of cases requires that there be a completeseparation of function between quasi-prosecutory functions and quasi-judicial functions. The existence of the Division of Opinion Writingthus made it possible for the Commission, even before the passage ofthe Administrative Procedure Act, to meet fully the separation offunction requirements contained in sections 5 (c), 7 and 8 of the act.

The Commission, through its revised rules of practice, has soughtto provide a flexible J?rocedure which will be suited to the needs anddesires of the participants in the proceeding before it, as well asguarantee to them the procedural safeguards required by the gen-eral principles of due process and the provisions of the AdministrativeProcedure Act. Thus, at the request of some participants, the Com-mission has in many cases availed itself of the assistance of the Divi-sion of Opinion Writing in the preparation of its findings even thoughseparation of functions was not required by law.

Further, under rule In of the Commission's rules of practice, themoving party may, subject to a contrary determination by the Com-mission, specify the procedures considered necessary or appropriatein the proceedings, with particular reference to (1) whether there

9l58fl--51----1~


should be a recommended decision by a hearing officer; (2) whetherthere should be a recommended decision by any other responsibleofficer of the Commission; (3) whether the interested division ofthe Commission's staff, or only the Division of Opinion Writingmay assist in the preparation of the Commission's decision; and(4) whether there should be a 30-day waiting period between the issu-ance of the Commission's order and the date it is to become effective.Other parties may object to the procedures or specify other pro-cedures, but in the absence of such objection or specification of addi-tional procedures they may be deemed to have waived objection tothe specified procedure and to the omission of any procedure notspecified.

In addition to its primary function, the Division of Opinion Writ-ing is also given assignments of a general nature which are not incon-sistent with the objective of the separation of the investigatory andquasi-judicial functions. Thus, the division has been assigned con-tinuing joint responsibility with the officeof the General Counsel indealing with problems arising under the Administrative ProcedureAct. It has also been given the responsibility of preparing a com-pilation of administrative decisions and other authorities under thevarious statutes administered by the Commission.

The Division of Opinion Writing assists the operating divisionsof the Commission in the preparation of opinions in certain uncon-tested cases where participation by the operating division in thedecisional process is proper under the Administrative Procedure Act.In some instances members of the Division of Opinion Writing areassigned to assist the Officeof the General Counsel in connection withcourt appeals taken from Commission decisions initially drafted inthe Division.

Some of the more significant opinions issued by the Commissionduring the year are commented upon in this report under the discus-sions of the various statutes.

FOREIGN FINANCIAL AND ECONOMIC MATI'ERS-THE INTERNATIONALBANK

Registration statements covering $230,738,915 of securities issuedby foreign issuers, private and governmental, were filed during thefiscal year 1950under the Securities Act of 1933. About $190,000,000of these securities were issued by governments; and about $175,000,000of these governmental issues emanated from Canada.

Upon the outbreak of World War II United States national se-curities exchanges suspended dealings in all securities of German,Japanese, Italian, and other axis origins. Shortly thereafter theCommission, after consultation with the Departments of State andTreasury, requested that brokers and dealers refrain from effectingtransactions in these securities. Following the filing of a registra-tion statement by the Republic of Italy in December 1947, coveringan offer of exchange for outstanding dollar bonds of the Kingdomof Italy and certain municipal and corporate obligations, the Com-mission withdrew its cease-trading request as it affected Italiansecurities.

SIXTEENTH ANNUAL REPORT 163In recognition of the interest of United States bondholders the

Commission has consulted with the Departments of State, Treasury,Justice, and with the Armed Services on the questions involved inthe eventual resumption of trading in German, Japanese, and otherformer Axis issues. Events which have taken place since these bondswere suspended from trading have been reviewed. The uncertainstatus of prewar dollar obligations of Germany, the lack of a peacetreaty, and the substantial dollar obligations it had incurred duringthe period of occupation have been noted.

Through the supreme commander of the Allied Powers the Com-mission has (in consultation with the Ministry of Finance of theJapanese Government) endeavored to get current information filedwith respect to the status of Japanese dollar bonds which were out-standing prior to the war. The Japanese Government has expressedthe intention of complying with the Commission's requirements forthe filing of data so that United States investors will be fully informedas to the status of these bonds. The public availability of reliableinformation of this kind is a necessary condition of any resumptionof dealings in the bonds.

The Commission has continued its representation on the staff com-mittee of the National Advisory Council on International Monetaryand Financial Problems and has continued to cooperate with otheragencies concerned with the development of the Government's foreigneconomic program.

The Commission has also contributed to the development of thePresident's Point IV program for the provision of technical assistanceto and the encouragement of private investment in underdevelopedcountries. It has participated in studies relating to the revival ofprivate foreign investment for developmental projects. It has alsoconsulted with the Department of State on the inclusion in Treatiesof Friendship, Commerce and Economic Development of clauses in-tended to protect investors in foreign securities.

The Commission, as a member of the Board of Visitors of theForeign Bondholders Protective Council, Inc., continued consultationwith the Department of State on problems referred to the Board byofficersof the Council.

The Commission has during the year had discussions with repre-sentatives of several foreign governments on the laws, regulations, andprocedures applicable to the issuance of and trading in foreign securi-ties in United States capital markets.

By amendment to the Bretton Woods Agreements Act securitiesissued or guaranteed as to principal and interest by the InternationalBank for Reconstruction and Development are deemed to be exemptedsecurities under the Securities Act of 193317 and the Securities Ex-

17 Because of the exemption from the SecurIties Act the bank Is not required to registerIts securitIes III connection wIth any public offerIng thereof, nor does it have to registersecurIties guaranteed by It as to principal and Interest.

The crimInal sanctions for fraudulent sales of securitIes under thc SecurIties Act con-tinue to apply to transactions in the bank's securIties and In securItIes guaranteed by thebank-In spite of the exemption. However, the exemptIOn has the effect of eliminatingcIvil llabllltIes under the Securities Act. SInce the CIvil liabilities provIsions of section11 apply only In cases of inadequate registration statements, and those of section 12 (1)apply only in the event securIties are sold in vIolation of the regIstratIon provIsIons, exemp-tIon of these securities from registratIon has the effect of avoiding the application of thesesanctions.

164 SECURITIES AND EXCHANGE CQlMMISSI0N

change Act of 1934.1S The Commission in consultation with theNational Advisory Council on International Monetary and FinancialProblems is authorized to suspend the provisions of this amendmentat any time.

Pursuant to regulation BW, adopted by the Commission underthe amendment to the Bretton Woods Agreements Act, the bank fileswith the Commission information comparable to that which would berequired if its securities had been registered under the Securities Actof 1933 and the Securities Exchange Act of 1934:. The amendmentrequires the Commission to include in its annual reports to Congresssuch information as it shall deem advisable with regard to the opera-tion and effect of the amendment, and in connection therewith toinclude any views submitted for such purpose by any association ofdealers registered with the Commission. The Commission has re-ceived no views from such association of dealers.

In January 1950, the bank refunded $100,000,000of its outstanding10-year 2% percent bonds by selling an issue of serial bonds in thesame amount. The 2% percent bonds, originally issued at par in 1947,were replaced by a 2 percent issue and the refunding bonds were origi-nally sold at a premium resulting in a net interest cost to the bank of1.92 percent.

The refunding bonds were sold at competitive bidding. Syndicatesconsisting of investment houses, securities dealers, and banks, with awide geographical distribution, participated in the bidding. Thewinning syndicate consisted of 37 commercial banks and 99 securitiesdealers located in 25 States and the District of Columbia. In all,bidding groups had an aggregate membership of 393-0f which 63were commercial banks and 330 were securities dealers.

The bank made available to .bidders and to participating dealerscopies of a prospectus relating to the new serial bonds giving informa-tion about the bank's structure and operations and including auditedfinancial statements. The bank thus gave effect to representationsmade by it in connection with the adoption of the amendments to theBretton Woods Agreements Act which exempted securities issued andsecurities guaranteed as to principal and interest by the bank. Inconnection with the adoption of this legislation its proponents had

Section 12 (2) provides for civil llabillties for sales of securities (whether or not regis-tered) made through material misrepresentations and omissions. Ilowever, securities ex-empted by section 3 (a) (2) of the Securities Act do not fall within the proviSions of section12 (2). Since the amendment to the Bretton Woods Agreements Act requires thesesecurities to be deemed exempted "within the meaning of" section 3 (a) (2), the e1fect ofthat amendment is to eliminate civil liability pursuant to section 1ll (a).

81 The amendment to the Bretton Woods Agreements Act requires that securities issuedor guaranteed as to principal and interest by the bank shall be deemed to be exemptedwithin the meaning of section 3 (a) (12) of the Securities Exchange Act of 1934.

The elfect of this exemption is to take these securities out of the purview of rules fixingmargin requirements and of rules relating to borrowings on securities by brokers anddealers. As exempted securities. these securities may be traded on exchanges without theformalities of reglstratton or literal compliance with information requirements or otherexemptive provisions.

Brokers or dealers doing a business exclusively in the bank's exempted securities andother exempted securities, would not be required to register with the Commission.

Section 10 (b) of the Securities Exchange Act makes it unlawful to use deceptive ormanipulative devices, in contravention of ruies and regulations of the Commission, inconnection with the purchase or sale of secnritie&--whetlier or not registered on a securi-ties exchange. Pursuant to this provision the CoIllJu1ssionhas adopted rules which applywhether or not securities are exempted.

Recent litigation has emphasized the poss1billty that these rules a1ford civil relief aswell as a basis for criminal action.

The exemption of the bank's securities does not dect the operation of this provision.

SIXTEENTH ANNUAL REPORT 165stated to the Congress that the bank intended to give purchasers fullinformation about the bank and its securities.

A fuller discussion of the operations of the bank is contained in thesecond special report of the National Advisory Council on Interna-tional Monetary and Financial Problems (May 1950).

Since this issue is the only issue of the bank's bonds effected sinceenactment of the amendment the Commission does not, in this report,comment upon the operation and effect of the amendment.

ADVISORY AND INTERPRETATIVE ASSISTANCE

The Commission has continued to make freely available to the publicthe informal advisory and interpretative assistance of its professionaland technical staff, on matters arising under the statutes. Correspond-ence, conference, and telephone inquiries are handled by staff expertsfamiliar with the problems involved. It is impossible to estimate thenumber of inadvertent violations forestalled as a result, or the amountof time that goes into work so intimately related to the regulatoryduties of the Commission.

CONFIDENTIAL TREATMENT OF APPLICATIONS, REPORTS,OR DOCUMENTS

Under five of the acts which it administers-the Securities Act of1933, the Securities Exchange Act of 1934, the Public Utility HoldingCompany Act of 1935, the Investment Advisers Act of 1940, and theInvestment Act of 1940-the Commission is authorized to grant con-fidential treatment, upon application by registrants, to informationcontained in reports, applications, or documents which they are re-quired to file under these statutes. Under the Securities Act of 1933the Commission has adopted rule 580, which provides that informationas to material contracts, or portions thereof, will be held confidentialby the Commission if it determines that disclosure would impair thevalue of the contracts and is not necessary for the protection of in-vestors. The other four statutes, in general, empower the Commissionto hold confidential under certain conditions any information con-tained in any reports required to be filed under those statutes. Dis-closure of information confidentially filed under the latter statutes ismade only when the Commission determines that disclosure is in. thepublic interest.

The following table indicates the number of applications for con-fidential treatment received and acted upon during the 1950 fiscal yearand the number pending at its close:

AppZications for confidential treatment-1950 jiscalllear

Number Number NumberAct under which filed pending Number Number derned or rundlng

July I, received granted with- une30.1949 drawn 1950

Securities Act of 1933 1 15 16 ----------4- -----------8Securities Exchange Act ofl934 .- 10 26 24Investment Co. Act 00940 1. 65 65

TotaL -. 11 106 105 4 8

Flied under rule 485, Securities Act of 1933Filed under rule X-24B-2 and role X-13A-6B, Seeurities Exchange Act of 1934.

1Filed under rule N-45A-l, Investment Company Act of 1940.

•_____________________ •• _______

______________ ------------ ------------ ------------_____• • - -___ __________--- -- --

• • •


Registrants may seek judicial review of decisions made by theCommission regarding confidential treatment adverse to them, butno such petition for judicial review was filed during the past year.

STATISTICS AND SPECIAL STUDIES

In general, the statistical activities of the Commission relate to(a) data of general application on groups of companies subject andnot subject to the legislation administered by the Commission and(b) operational data derived from officialfilings with the Commission.The purpose of the latter studies is to organize and present in mean-ingful form the masses of information filed with the Commission.Saving Study

The Commission continued its series of quarterly releases on thevolume and composition of individuals' saving in the United States.These releases show the aggregate volume of individuals' saving aswell as the components contributing to the total, such as changes insecurities, cash, insurance and consumers' indebtedness, etc. Thesedata have been extremely useful in the determination of fiscal policyand as a measurement of the inflationary potential.Financial Position of Corporations

The Commission, together with the Department of Commerce, con-tinued the joint series of quarterly releases on the plant and equip-ment expenditures of United States business other than agricultural.Shortly after the close of each quarter these releases present industrytotals on the actual capital expenditures of that quarter and antici-pated expenditures for the next two quarters. In addition a surveyis made at the beginning of each year of the plans of business asregards expansion during that year. These data have provided auseful index of present and future activity in the capital markets andof business in general. In view of the volatile nature of capitalexpenditures and their relation to the level of production and employ-ment, the series has been of considerable importance for businessmanagement and in the formation of government policy.

The series of quarterly releases on the working capital position ofall United States corporations exclusive of banks and insurance com-panies was also continued. These releases show the principal com-ponents of current assets and current liabilities and an abbreviatedanalysis of the sources and uses of corporate funds. These data areimportant in measuring the liquid position of the corporate segmentof the economy taken as a whole.

The Commission, together with the Federal Trade Commission,continued the joint series of quarterly industrial financial reports.These reports developed as an extension of the working capital seriesand present a complete balance sheet and an abbreviated incomeaccount for manufacturing corporations as a whole. In addition thedata are shown for various size groups of corporations and for minormdustry groups. The financial report program includes data onmanufacturers' profits, which are extremely important in the formula-tion of a tax program and renegotiation policy. The data are basicto any appraisal of corporate financial position and any analysis ofcorporation finance and the capital markets.


Capital MarketsThe Commission has also continued its monthly series on new

securities offerings published in the Statistical Bulletin, and a quar-terly series published together with a brief analysis in release form.These data show the volume and character of all securities offeringsin the United States, both registered and unregistered, public offer-ings, and private placements. Collateral studies based on these datahave been undertaken from time to time pursuant to the Commission'sneeds and requests from other branches of the government, and thepublic. These included a study of the cost of flotation of privatelyplaced securities and a survey of issues offered under regulation A.

Operational statistics (in reality organized and segregated data ona basis necessary for an understanding of the over-all facts revealedby filings with us) are regularly collected with respect to the fol-lowing matters and, except for those marked with an asterisk areregularly published:

Registration statistics.Underwriting statistics.Cost of flotation.Broker-dealer financial data.Investment company data.Accounting and financial characteristics of registrants. *Balance sheet and plant data. *

PERSONNELAs of June 30, 1950, the personnel of the Commission consisted of

the following:Commissioners___________________________________________ 5Staff:IIeadquarters oflice 677

l1egional oflices_____________________________________ 316993

Total________________________________________________ 998During the fiscal year 1950, a limited appropriation required a

reduction-in-force of 60 employees. Further staff reductions resultedby allowing positions left vacant through resignations to remain un-filled. The 998 employees on duty as of June 30, 1950, represents areduction of 129 from the total of 1,127 as of June 30,1949. Duringthe last 5 years the Commission's average employment has droppedfrom 1,204 during the 1946 fiscal year to 1,043 for the fiscal year justended.

The division of personnel is responsible for the administration ofthe Commission's personnel program. Its regular work embracerplacement and separation; job evaluation and classification; employeerelations and services; training; operation of various committees andboards such as the Committee of Expert Exammers (which conductsexaminations for positions peculiar to the Securities and ExchangeCommission); wage administration; the uniform efficiency rating.system; administration of Commission regulations governing the per-sonal securities and commodities transactions of its personnel ; am;processing, recording, and reporting of all personnel matters. Fol-lowing the reduction of four employees early in the fiscal year, these

-


functions were carried out with a staff of 8 employees-a ratio of 1personnel employee per 130 Commission employees.

In addition, the division of personnel is responsible for the conductof preappointment character investigations, leave administration andaccounting, retirement counseling, and the maintenance of an emer-gency medical unit staffed by a registered nurse. Four additional em-ployees are assigned to the division of personnel to carry out thesefunctions.

While the volume of appointments and other personnel transactionswas considerably below normal during the fiscal year, the reduction-in-force and related developments created many personnel problems.For example, every effort was made to assist employees released in thereduction-in-force in locating suitable employment. One of the majorpersonnel problems was that of allocating and reassigning availablepersonnel to achieve maximum operating efficiency throughout theCommission. In the sustained effort to preserve vital services, em-ployees were interchanged, reassigned and shifted from unit to unitas the pressure of work dictated. Supervisory officials cooperated inthis effort by releasing sorely needed employees to units where thework program was at the moment the most critical.

Just prior to the beginning of the fiscal year the Bureau of theBudget's personnel records system was installed. The system wastested during the entire fiscal year and has contributed substantiallyto the efficient operation of the personnel program. Under the systempaper work and record keeping are reduced to a bare minimum, con-serving time and money for the more productive phases of personneladministration.

FISCAL AFFAIRS

Appropriations and Expenditures

The following is a summary of the appropriation and expendituresfor the 1950 fiscal year:

llppropriation $5,878,250lUxpended 5,873,450lJnexpended balance_________________________________ 4,800

Receipts

The Commission receives fees (a) for the registration of securitiesunder the Securities Act of 1933 (1/10Oth of 1 percent of the maximumprice at which securities are proposed to be offered); (b) from regis-tered national securities exchanges (lj500th of 1 percent of the ag-gregate dollar volume of the sales of securities on such exchanges) ;(c) for applications for the qualification of indentures under the TrustIndenture Act of 1939 ($100 for each application); (d) for the saleof photocopies of documents or portions thereof filed by corporationsunder one or more of the acts the Commission administers; and (e)various receipts, such as a bonus for the award of the contract forstenographic reporting services, for which $27,000 was received duringthe fiscal year 1950, and from other sources, such as the sale of excessor surplus Govermnent property, the sale of waste papers, etc.

SIXTEENTH ANNUAL REPORT 169The following is the amount of fees received in the 1950 fiscal year:

Character of fees: .d.mOtlntRegistration of securities issues --- $520,420Qualification of trust indentures_______________________________ 800From registered exchanges____________________________________ 228,867Sale of copies of documents or portions thereof__________________ 12,411Miscellaneous receipts_________________________________________ 2:7,545

Total 790,043

Fees and other receipts must be turned in to the General Fund of the Treasuryand are not available for expenditure by the Commission.

PUBUCATIONSPublic Releases

Releases of the Commission consist primarily of official announce-ments of filings under and actions taken pursuant to the several actswhich it administers. These include notices of filings, hearings,orders, decisions, regulations, and related matters issued by the Com-mission. The Commission has endeavored to improve its service andto effect economies in connection with its mailing lists by (1) a re-classification of releases enabling persons to select releases on a par-ticular subject without receiving nonrelated matter and (2) by issuingdigests which set forth briefly the subject matter of the more volumi-nous releases. This procedure avoids the full-scale distribution of allreleases except to those persons who are sufficiently interested to makea special request therefor.

The announcements issued during the 1950 fiscal year included 33releases under the Securities Act of 1933; 193 under the SecuritiesExchange Act of 1934; 754 under the Public Utility Holding CompanyAct of 1935; 170 under the Investment Company Act of 1940; and 4under the Investment Advisers Act of 1940. In addition, nine releaseswere issued concerning the Commission's activities in corporate reor-ganization under Chapter X of the Bankruptcy Act, and four releaseswere issued under the Trust Indenture Act of 1939. The followingbreakdown of the releases for the month of June 1950 is fairly illus-trative of the general nature of releases issued throughout the year:

Announcements of filings, orders for hearing, and notices giv-ing opportunity to request hearing______________________ 32

Interim and final decisions and orders______________________ 55

The balance of the Commission's releases were of an informationalnature, the following having been issued during the year: seventy-fiveannouncements of publication of reports on corporate survey andstatistical studies; 76 reports of court actions ill injunction andcriminal prosecution cases initiated by the Commission; and 5 miscel-laneous announcements regarding appointments of Commissioners,staff officials, and related matters.Other Publications Issued Duriug the 1950 Fiscal Year

Daily Registration Record: Registration statements filed with theCommission.

Monthly Statistical Bulletin: Statistics on capital markets andsecurities exchanges. Bound volume 16 of the Decisions and Reports,May 15, 1944 to September 30, 1944: Decisions and reports issued bythe Commission.


Twelve monthly issues of the Official Summary of Securities Trans-actions and Holdings of Officers, Directors, and Principal Stockhold-ers: Summary of security ownership data required to be filed with theCommission.

The Fifteenth Annual Report of the Commission: The Commis-sion's annual report to the Congress.

List of Securities Traded on Exchanges under the Securities Ex-change Act of 1934, as of December 31, 1949.

List of Companies Registered under the Investment Company Actof 1940,as of December 31, 1949.

Accounting Series Release No. 68, July 1949.Proposal to Safeguard Investors in Unregistered Securities, Sup-

plemental Report to Congress, 1950: Proposed legislation to requiredisclosures of information by companies meeting certain standards.

Registered Public Utility Holding Companies, J nne 30, 1949: Listof companies registered under the Public Utility Holding CompanyAct of 1935.

Securities Registered under the Securities Act of 1933, Cost of Flo-tation-1950, first quarter: Study of the costs of issuing and sellingsecurities registered under the Securities Act of 1933.

Volume and Composition of Individuals Saving: Quarterly esti-mates of individuals' saving.

Plant and Equipment Expenditures of Business: Quarterly seriesshowing actual and planned expenditures for plant and equipment.

Quarterly Industrial Financial Report: Quarterly balance sheetand income account for all manufacturing corporations classified bysize of company and industry.

Net Working Capital of Corporations: Quarterly estimates of thenet working capital and components for all corporations.

New Securities Offered for Cash: Quarterly compilations of newsecurities offerings, public and private, registered and nonregistered,as well as use of proceeds.Information Available for Public Inspection

The Commission maintains public reference rooms at the centraloffice in Washington, D. C., and in its regional offices in New YorkCity, N. Y. and Chicago, Ill. Copies of all public information on filewith the Commission contained in registration statements, applica-tions, reports, declarations, and other public documents are availablefor inspection in the public reference room in Washington. In addi-tion to providing facilities for personal inspection of registered pub-lic information, the public reference room handled thousands of let-ters and telephone calls from persons requesting public informationand copies of forms, releases, and other material <if a public nature.During the 1950 fiscal year 4,195 persons visited this public referenceroom seeking such information. Through the facilities provided forthe sale of photocopies of public registered information, 1,813 ordersinvolving a total of 134,783pages were filled. In addition to the saleof photocopies, the Commission mailed 1,096,555 pieces of mail con-taining releases, forms, acts, etc., to persons requesting them.

SIXTEENTH ANNU.A:L REPORT 171

In its New York regional office,located at 120 Broadway, facilitiesare provided for the inspection of certain public information on filewith the Commission. This includes copies of (1) applications forregistration of securities on all national securities exchanges exceptthe New York Stock Exchange and the New York Curb Exchange, to-gether with copies of annual reports, supplemental reports, and amend-ments thereto, and (2) annual reports filed pursuant to the provisionsof section 15 (d) of the Securities Exchange Act of 1934 by issuershaving securities registered under the Securities Act of 1933. Duringthe 1950 fiscal year 13,324 persons visited the New York public ref-erence room and about 7,000telephone calls were received from personsseeking registered public information, copies of forms, releases, andother material.

In the Chicago regional office at 105 West Adams Street, copies ofapplications for registration of securities on the New York StockExchange and the New York Curb Exchange, together with copiesof all annual reports, supplemental reports and amendments thereto,are available for public inspection. During the 1950 fiscal year 3,301members of the public visited this public reference room and approxi-mately 1,434telephone calls were received from persons seeking regis-tered public information, forms, releases, and other material of a publicnature.

In addition to the material which is available in the New York andChicago public reference rooms, copies of all prospectuses used in pub-lic offerings of securities effectively registered under the Securities Actof 1933 are available in each of the Commission's regional offices.Duplicate copies of applications for registration of brokers or dealerstransacting business on over-the-counter markets, together with sup-plemental statements thereto, filed under the Securities Exchange Actof 1934, and duplicate copies of applications for registration of in-vestment advisers and supplemental statements thereto, filed under theInvestment Advisers Act of 1940, are available for inspection in theregional office having jurisdiction over the zone in which the regis-trant's principal officeis located. Also, inasmuch as letters of notifica-tion under regulation A (which provides an exemption from smallissues of securities from the registration requirements of the SecuritiesAct of 1933), may be filed with the regional officeof the Commissionfor the region in which the issuer's principal place of business is lo-cated, copies of such material are available for inspection at theregional officewhere filed. .

In the Commission's San Francisco regional office, in which com-plete facilities are provided for registration of securities and quali-fication of indentures, copies of registration statements and applica-tions for qualification of indentures filed at that officeare available forpublic inspection. Copies of all applications for permanent registra-tions of securities on national securities exchanges are available forpublic inspection at the respective exchange upon which the securitiesare registered.

172 SECURITIES AND EXCHANGE COMMISS10N

PUBUC HEARINGS

The following number of public hearings were held by the Commis-sion under the indicated acts during the 1950 fiscal year:Securities Act of 1933___________________________________________________ 1Securities lnxchange Act of 1934________________________________________ 24Public Utility Holding Company Act of 1935____________________________ 71Trust Indenture Act of 1939Investment Advisers Act of 1940_________________________________________ 1Investment Company Act of 1940______________________________________ 1

Total 98

Formal hearings under Commission's Rules of Practice which were madepublic during fiscal year____________________________________________ 1

Formal hearings under Commission's Rules of Practice which were not madepublic during fiscal year_____________________________________________ 1

Total____________________________________________________________ 2Total hearings for year___________________________________________ 100

_

PART IX

APPENDIXSTATISTICAL TABLES

174 SEICURITIES AlN'D EXCHANGE COMMISSION

TABLE 1.-Registrations fully effective under the Securities Act of 1933PART I.-DISTRIBUTION BY MONTHS, FISCAL YEAR ENDED JUNE 30, 1950

[Amounts In thousands of dollars] I

All effectively registered Proposed for sale for account of issuers

Year and monthNumber otlNumberot Amount Numberot Numberot Amountstatements Issues statements issues

1940July __________________________ 25 52 412,778 25 50 399,052August- ______________________ 24 29 275, 081 22 25 262,597September ____________________ 32 44 336, 8.~7 23 27 271,965October _______________________ 39 57 258,209 30 44 219,252November ____________________ 41 50 389,247 38 43 303,821December ____________________ 28 37 199,761 26 33 153,858

1950January ______________________ 39 50 558,344 31 34 484,188February _____________________ 32 37 293,488 32 36 263,409March ________________________ 63 78 707,735 48 M 523,319ApriL ________________________ 58 86 560,831 56 78 435,476May __________________________ 62 78 732,002 55 64 536,939June __________________________ 44 49 582,743 34 38 527,440

Total fiscal year 1950____ , 487 647 5,307,077 420 526 4,381,314

PART 2.-BREAKDOWN BY METHOD OF DISTRIBUTION AND TYPE OF SECURITY OFTHE VOLUME PROPOSED FOR CASH SALE FOR ACCOUNT OF THE ISSUERS, FISCALYEAR ENDED JUNE 30, 1950

[Amounts in thousands ot dollars] I

Type of securityMethod ot distnbution and group

to whom offered Secured Unsecured Preferred I Common OtherAJltypes bonds bonds stock stock types'

All methods ot distribution __________ 4,381,314 959,933 1,023,524 467,929 1, MO, 578 389,350

To general public ________________ 3,383,498 959,933 934,021 334,614 786,811 368,119To secunty holders ______________ 903,669 ----------- 79,515 129,227 694,927 ----------To other spccial groups __________ 94, 148 ----------- 9,988 4,088 58,841 21,232

Through investment bankers ________ 3,890,617 955,933 1,003,536 454, 404 1,120,687 356,056By purchase and resale __________ 2,927,787 955,933 1,000,536 447,720 523,598 ----------

To general public ____________ 2,365,089 955,933 921,771 321,383 166,002 ---------.To security holders __________ 560,279 -.--------- 78,765 126,337 355,177 ----------To other Special groups ______ 2,419 ----------- -.-------.- ----------- 2,419 ----------On best efforts basis _____________ 962,830

.3,000 6,685 597,089 356,056-----------

To general public ____________ 949,871 ----------- 3,000 6,685 684,130 356,056To security holders. _________ 12,959 ----------- ----------- ----------- 12,959To other special groups ______ ----------- ----------- ----------- ----------- -----------

By issuers ___________________________ 490,698 4,000 19,988 13,524 419,892 33,294

To general public ________________ 68,538 4,000 9,250 6,547 36,679 12,062To secunty holders ______________ 330,431 750 2,890 326,790 --.-------To other special groups __________ 91,729 ----------- 9,988 4, 088 56,422 21,232

See footnotes at end or table.

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SIXTEENTH ANNUAL REPORT 191TABLE 5.-A 17-year 8ummary of corporate bonae? publicly offered and privately

placed in each year-1934 through 1950-by calendar year

[Millions of dollars]

Total Publicly Placed Percent 01Year offerwgll offered privately total placed

privatelY

1934____________________________________________ 372 280 92 24.71935

2,225 1.840 385 17.31936____________________________________________ 4,029 3,660 369 9.21937____________________________________________ 1.618 1,291 327 20 21938 2,044 1,353 691 33.819391,979 1,276 703 35.51940 2, 386 1,628 758 31.8194L ___________________________________________ 2,389 1,578 811 33.91942____________________________________________ 917 506 411 44.81943____________________________________________ 990 621 369 37.31944____________________________________________ 2, 670 1,892 778 29.11945____________________________________________ 4.855 3,851 1,004 20.71946____________________________________________ 4,882 3,019 1,863 38.21947____________________________________________ 5,036 2, 889 2, 147 42.619485,973 2, 965 3,008 50.41949____________________________________________ 4,890 2, 437 2,453 50.219505,206 2,966 2, 240 43.0

I Bonds, notes, and debentures.1PreIrminary figures estimated on basis of figures through July 1950.

______________________________• _____________

_______• ____________________________________ ______________________________• _____________ ___• ________________________________________

___________________• ________________________

' ___________________________________________

192 SECURITIES .AND EXCHANGE COMMISSION

TABLE 6

A SEVENTEEN-YEAR SUMMARY OF NEW SECURITIESOFFERED FOR CASH IN THE UNITEO STATESAS TO TYPE OF' ISSUER, TYPE OF SECURITY. WHfTHER PUBLICLY OFFERED OR PRIVATELY PLACED,

AND THE IN1I[NDED USE OF THE PROCEEDS --1134 THROUGH 19~. 8'1' CALENDAR YEAR

GROSS PROCEEDSDOl.lAR' 8ILLI0,.S

60

50

40

30

20

10

o

1

6

o

1

6

5

o

NET PROCEEOSDOLLARS BILLIONS

7

6

o1934

ALL NEW SECURITIES CLASSIFIED BY TYPE OF ISSUER

ICORPORATE: AND OT"£R

~1i STATE AND MUNICIPAL

U 5 GOVERNMENTOUn;CT AND GUARANTEEO

NEW CORPORATE BONO ISSUES, PUBLICLY OFFERED AND PRIVATELY PLACED

j"REFUNDING ANDAl.L OTHER PURPOSES

WORICING CAPITAL

PLANT "liD EQUIPMENT

GROSS PROCEEDSDOLLARS,ILlIONS

60

50

40

30

20

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BrKTEENTH ~NL REPORT 193

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SLXTEENTH ~AL REPORT 195TABLE S.-Market value and volume of sales effected on securities exchanges for the

three 6-month periods ended June 30, 1950PART 1.-6 MONTHS ENDED JUNE 30,1949

ON ALL REGISTERED EXCHANGES

[In thousands]

Stocks I Bonds' Rights and warrantsTotal

Exchange marketvalue Market Number Market Principal Market Number(dollars) value of shares value amount value of units(dollars) (dollars) (dollars) (dollars)

---All registered exchanges_____ 4,973,402 4,631,816 206,232 321,881 443,074 19,705 16,793---Baltimore 481 414 23 67 129 ----.-----Boston 73,333 72,297 1,865 4 5 1,032 879Chicago Board of Trade _____ 134 134 14 ---------- .-.---.---- ._-------- ---.------Chicago Stock _______________ 79,737 79,531 3,171 0 0 206 214Cincinnati __________________ 6,014 5,978 192 0 0 36 71Cleveland ___________________ 6,602 6,569 230 ----.----.- 33 55Detrolt 18,048 18,026 1,281 -----_.-- . .---.------ 22 23Los Angeles_________________ 57,983 57,742 4,206 36 35 205 256New Orleans 295 253 10 42 40 --------.- _._-New York Curb ____________ 399,922 376,379 29,692 18,133 24,959 5,410 3,119New York Stock ____________ 4,193,387 3,878,782 149,263 302,526 416,787 12,079 11,322Philadelphia 24,651 24,522 886 128 127 1 57Philadelphia-Baltimore 27,523 27,056 986 169 261 298 325Pittsburgh __________._______ 6,679 6,642 372 0 0 37 46St. LouIs ____________________ 5,189 5,164 177 3 3 22 20Salt Lake . 879 879 5,690 ----.------ --------.- --------.-San Francisco Mlning 243 243 2,515 --------.-San Francisco Stock _________ 68,279 67,315 4, 570 640 601 324 406Spokane ____________________ 799 799 968 ------i33- ------.---- .-------.- ----------WashIngton 3,224 3,091 121 127 ----._----

Breakdown of 6-month totals by months

19+9January _____________________ 915,095 853,531 36,546 60,686 SO,599 878 523February. 772,313 719,267 30,841 52,009 70,OSO 1,037 668March_. ____________________ 809,738 751,761 34,692 56,225 SO,637 1,752 2,223ApriL ___________________•• __ 905,742 845,336 37,750 53,189 76,590 7,217 2,934

~~:::::::::::::::::::::::: 816,042 760,298 33,135 50,767 67,997 4,977 4,276764,472 701,623 33,268 49,005 67,171 3,844 6,169

ON ALL EXEMl'TED EXCHANGES

All exempted exchanges_____ 3,734 3,721 348 13 14 ---------- ------._-----Colorado Springs ____________ 94 94 120 ----------- --------.-Honolulu ________________ 2,029 2,016 161 13 14 ------.--- -- --------Minneapolls-St. Paul _______ 1,024 1,024 53 ---------- ----------- ---------- ----------Richmond __________________ 295 295 5 0 0 ---------- -------_ ..-Wheeling 292 292 9 ----------Breakdown of 6-month totals by months

19+96 6rr~::::::::::::::::::: 704 698 65 ---------- ----------

701 699 44 2 2 ---------- ----------594 594 56 0 0 ---------- ----------tfar:::::::::::: :::: ::::::::: 510 509 74 1 2 ---------- ----------

648 647 69 1 1 ----------1une577 574 40 3 3 ---------- ----------

See footnotes at end of table, p. 197,

' __________________ ______________________ ----------

______________________ ----------________________ ------' ______________

•____

___ _______________ ----------_______ ---------- ----------- ----------_________________ ----------

__•_______________

•__ ---------- ----------

___________________ ---------- ----------- ----------

________________________ ----------


TABLE B.-Market fJalue and volume of sales effected on securities e:cchangesforthree 6-month periods ended June 80, 1950-eontinued

PART 2.-6 MONTHS ENDED DEC. 31, 1949

ON ALL REGISTERED EXCIIANGES

(In thousands]

Stocks I Bonds' Rights and warrantsTotal

Exchange marketvalue Market Number Market Principal Market Number(dollars) value of shares value amount value of units(dollars) (dollars) (dollars) (dollars)

---All registered exchanges _____ 6,469,931 6, 082, 574 271,666 381,589 489,879 5,768 21,035---Boston ______________________ 79,934 79,911 2,034 4 6 19 41Chicago Board ______________ 40 40 7 ------iS9- -------i76- --------i- -------iasChicago Stock , _____________ 73,673 73,483 2,884Cincinnati- 7,108 7,108 203 0 0 ----------Cleveland , _________________ 5,214 5,214 181 --------.- ----.------ ....Detroit 23,801 23,671 1,797 ---------- ---------.- 130 654Los Angeles _________________ 65,058 65,016 4,404 14 13 28 47Midwest ,___________________ 32,377 32,370 1,283 6 6 1 7New Orleans 481 481 23 0 0 ----3~693-New York Curb ____________ 545,390 521,427 38,333 20,270 24,898 3,663New York Stock ____________ 5,480,612 5,119,042 204, 112 359,886 463,390 1,684 14,908Philadelphia- Baltimore _____ 62,309 61,537 2, 295 595 782 177 1,463Pittsburgh 6,995 6,995 497 0 0St. LoUIS , 4,670 4,670 160 0 0 ----------Salt Lake 544 544 5,352 -------_ ..-San Francisco Miulug _______ 112 112 1,854 ------i95- ----------- -------ii4San Francisco Stock _________ 78,148 77, 918 5,225 180 35

~~~n~::::::::::::::::527 527 905 ------430- -------428- ---------- ----------2,938 2,508 117 ---------- ----------


19.jJ}July ________________________ 608,347 624,733 33,028 72,616 87,224 998 4,923August ______________________ 867,865 806, 674 38,453 60,737 78,549 454 604September __________________ 918,344 870,487 39,811 47,468 59,560 389 646October _____________________ 1,134,148 1,081,952 48,613 51,480 68,959 716 2,842November 1,286,948 1,220,770 49,081 64,646 84, 467 1,532 6,165December 1,564,279 1,477,958 62,680 84,642 111,120 1,679 5,855

ON ALL EXEMPTED EXCHANGES

All exempted exchanges _____ 3,386 3,351 305 34 35 ---Colorado Springs 81 81 94 --------35- ----------Honolulu 1,726 1,692 149 34Mlnneapo1is-St. Paul , ______ 923 923 48 ---------- .. ..--------- ----------Rlchmond 408 408 7 0 0 ...Wheellng 247 247 7 ---------- ---------- -_.-------


19.jJ}July _________________________ 489 469 31 20 21 ..August491 487 42 4 4September 585 580 60 5 5 ---------- -------_ ..-October668 668 59 0 0 -_ ..November 654 653 46 1 1 ----------December498 494 67 4 4 ---------- ----------

Bee footnotes at end of table, p. 197.

_________________ ----------______________________ ---------- --------

________________ ----------

__________________ ---------- ----------__________________ ----------___________________ ---------- ----------- ----------

_________ • _________________• _________

---------- --~-------___• ________ ---------~ ----------___________________ ---------- ----------

__________________ ---- ------___________________ ----------- ---------- -- -------

______________________ ------ --- ----------__________________ ---------- ----------

_____________________ ---------- -------____• _____________ ___________________ ----------

SIXTEENTH ANNUAL REPORT 197TABLE B.-Market value and volume of sales effectea on securities emchangesfor

three 6-month periods endedJune 80, 1950-ContinuedPART 3.-6 MONTHS ENDED IUNE 30, 1950

ALL REGISTERRD EXCHANGES

[In thousands]

Stocks I Bonds I Rights and warrantsTotal

Exchange market'Value Market Number Market Prinelpal Market Number(dollars) valns of shares 'Value amount 'Value of units(dollars) (dollars) (dollars) (dollars)

----Tots! all exchanges 10,876,534 10,330,139 422,268 527,264 652,446 19,131 25,156----Boston Stock 117, B33 117,817 2,895 13 10 3 3Chicago Board 18 18 2 --------0- --.-------- ------785-Clnclnnatl 13,129 12, 344 316 0 163Detrolt 41,446 41,443 2,427 -_.----_.- --.-------- 3 17Los Angeles 108,493 108,225 7,371 135 131 133 282Midwest 243,990 243,593 9,114 9 10 3BB 189New Orleans 392 3B9 18 3 3 .-.-------New York Curb 792,088 762,413 58,045 19, BBB 27,364 9,787 4, 181New York Stock 9,317,797 8, B04, 105 320,418 506,262 623,767 7,430 18,878Phlladelphla-Baltlmore 96,784 96,357 3,115 349 615 78 195Pittsburgh 12, 425 12, 423 778 1 1 1 1Salt Lake 795 795 8,161 --.-.----- --._------San Francisco Mlnlng 185 185 2,364 -_.------- .-._------ ----------San Francisco Stock ._ 127,571 126,643 6,373 427 370 501 998

Wa::~ii~===== .: .: .: .: .:549 54q 735 -_.------- -------22-3,039 2,840 136 177 175 249

Breakdown of s-rnontn totals by months1950Ianuary 1,770,942 1,662,225 71,911 107,958 144,088 759 1,895

1,441,484 1,373,028 57,261 67,512 84, 939 944 1,9791,778,623 1,688,006 67,872 88,493 116,471 2,124 5,682Aprll1,885,385 1,800,521 81,301 77,916 97,114 6,948 5,038May1,950,917 1,860,689 73,184 84, 941 96,720 5,287 7,905June ._ 2,049,183 1,945,670 70,739 100,444 113,114 3,069 2, 657

34 39o 0

34 39471

185272

86

1312,409

374213

3,127

ALL E"l[EMPTED EXCHANGES

3,161 I2,m!

213

Tots! ell exchanges

Colomdo SpringsHonoluluRichmondWheellng ._

Breakdown of (;.month totals by months1950January 450 44B 61 2 2 ~.~..-_ .._- ----------

~~%~-~550 546 7B 4 4 --._------ ----------670 670 129 0 0Aprll 358 358 41 0 0 --._------May 541 539 97 2 2 --------_ ..Inne. . ._ 592 566 65 26 31 --._----.- -----.----

I "Stocks" Includes 'Votingtrust certificates, American depositary receipts, and certificates of deposit.2 "Bonds" Includes mortgage certificates and certificates of deposit for bonds. Since Mar. 18, 1944, Unltad

States Government bonds have not been Included In these data.I The Baltimore Stock Exchange and the Philadelphia Stock Exchange etfectad a plan of merger of the

businesses of the two exchanges which resulted In the termmanon of the activltles of the Baltimore StockExchange with the close of business Mar. 5, 1949. Etfecti'Ve Mar. 7, 1949, the name of the PhllsdelphiaExchange was changed to the Phtladelpbla-Baltlmore Stock Exchange. A branch 01llce is In operationIn Baltimore .

The Chicago Stock Exchange, the Cleveland Stock Exchange, the Minneapolis-St. Paul Stock Ex.change, and the St. Louis Stock Exchange etfected 8 plan of merger of the four exchanges. This resultedin the termination of actinties of the four exchanges with the cIose of business No'V. 3D, 1949, and In theformation of the Midwest Stock Exchange on Dec. 1, 1949, with main offices In Chicago and branch officesIn Cleveland, Minneapolis, and 1St. Louis. Earlier data for the Minneapolis-St. Paul Exchange are In.eluded In exemptad exchanges totals. The other three merged exchanges were registered exchanges.

N OTE.- Valua and 'Volumeof sales etfectad on registered securities exchanges are reported In counectionwith fees paid under sec. 31 of the Securities Exchange Act of 1934. For most exchanges the figures repre-sent transactions cleared during the calendar month. Figures may diller from comparable data In theStatlsticsl Bulletin due to re\'lllions of data by exchanges.

__________

_______________ ______________

__________________ ______________________

_________________ ____________________

________________ ____________ ____________

______ __________________

___________________ _______

_______

=

---------------------------------

----------

----------

_____________________

~~~ =================== ________________________ ________________________ ______________________

__ _

_ _ _

_ _

• •___________________

~=================• ••____________

______________________ _______________________________

---------- ------------------------------

•


TABLE 9.-Speoial offerings effected, on national securities ercchanges for fiscalyear end,ed,June SO, 19501

Number of shares Value Aggre- Number of offeringsof gate by duration

shares specialNum- sold com-

Exchange ber (thou- mission 'I'erml- Others Not ter-made Inorig- Sub. sands (thou. Dated termi- mi.

inal scribed Sold of dol- sands In 15 nated natedoffer of dol. min. same samelars) lars) utes day day

-' ------------------ --- --- ---Ail exchanges:

TotaL ... ___ ... _ .. __ ...• 29 440,908 534,142 430,955 11,129 266 11 15 3--- --- --------- --- ---------

Completed ........ _. 26 397,838 503,512 400,325 10,654 254 11 14 1Not completed, .... 3 43,070 30,630 30,630 475 12 0 1 2

--- --- --- --- ------= --- ---New York Curb Exchange:

TotaL ..••.....• _ .... ___ 1 26,970 21,005 21,005 168 1 0 1 0------ --- ------------ --- ---Completed ......... 0 0 0 0 0 0 0 0 0Not completed ..•.. 1 26,970 21,005 21,005 168 1 0 1 0

= --- --- --- --- ------ --- ---New York Stock Exchange:

Total. ...•.•... .... 28 413,938 513,137 409,950 10,961 259 11 14 3--------------------- --- ---Completed .•...... __ 26 397,838 503,512 400,325 10,654 254 11 14 1Not completed ...... 2 16,100 9,625 9,625 307 5 0 0 2

1 See part II of text for a description of special offerings.

TABLE lO.-Second,ary d,istributions Of listed, stocks approved, by nationalsecurities emchanges for fiscal year ended,June SO, 1949 1

Number of shares Value Number of secondariesof by duration

Num- sharesExchange ber sold Others Not

made Available (thou- Terml. terml- terml-In origt- for dis- Sold sands nated nated natednal offer trlhutlon of dol- same next nextlars) day day day--- --- --- ------------

Ail exchanges:TotaL •........•...• ___ ..• 18 3,624,327 3,708, 173 3,105,320 99,077 49 18 11

--- --- --- --- --- -------Completed ••..... __ . __ 16 3,610,927 3,695,373 3,698,475 98, 857 49 17 10Not completed .••.. .• 2 13,400 13,400 6,845 220 0 1 1

Chicago Stock Exchange:TotaL ...... ___ •..... _,,_, 3 27,650 27,650 27,650 617 1 1 1------ --- --- ------------

Completed. .. .. ,. 3 27,650 27,650 27,650 611 1 1 1Not completed .••..... 0 0 0 0 0 0 0 0------ --- --- ---

Detroit Stock Exchange:Total .••...... 3 19,388 19,388 19,388 284 3 0 0------ ---------

Completed •••... ...•• 3 19,388 19,388 19,388 284 3 0 0Not completed •.••.... 0 0 0 0 0 0 0 0

Midwest Stock Exchange:---

Total ••••••...••..•.....•.• 8 158,380 162,230 162,230 2,421 4 1 3------ ---Completed ••...••..••• 8 158,380 162,230 162,230 2,421 4 1 3Not completed •••..... 0 0 0 0 0 0 0 0

---New York Curb Exchange:

TotaL •...... .. ""'_ 22 659,483 680,963 677,510 17,597 13 5 4--------- --- ------------Completed ..•.. 20 646,083 667,563 670,665 17,377 13 4 3Not eompleted , ... __ ._ 2 13,400 13,400 6,845 220 0 1 1--- ---

New York Stock Exchange:TotaL ••....•••....• ..•.. 42 2,759,426 2,818,542 2,818,542 78,158 28 11 3------ --- --- ------------

Completed .•.....••••• 42 2,759,426 2,818,542 2,818,542 78,158 28 11 3Not completed ••••.•.. 0 0 0 0 0 0 0 0

1 Secondary distributions which exchanges have approved for member participation and have reportedto the Commission. See pt. II of text for a description of secondary offerings.

_

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SrKTEENTH ANNnJAL REPORT 199

TABLE n.-Classification by imLustry of issuers having securities registered onnational securities e3Jchangesas of June 30, 1949 and as of June SO, 1950

As of June As of June30,1949 30,1950

7 649 45

91 9488 87

127 130104 10271 7256 5577 76

207 20711\7 16219 20

223 22440 4053 5236 3640 4221 2115 1536 3452 5168 6618 18

236 228172 16926 2712 1383 90

2,194 2,182

Industry

AgrlcuItureBeverages (dlstil1eries, breweries, sort drInks)Bun~ and related companies (ineluding lumber building materials, and con-

Foreign governments and political subdivisions thereof,Foreign private issuers other than Canadian, Cuban, and PhilippineIron and steel (excluding maehmery)Machinery and tools (excluding transportation equipment)Merchandising (chain stores, department stores)

~Rnbber and leather productsServices (advertising, amusements, hotels, restaurants)~~~=~~~~~~~~~~~=====:=:::.: ::====:=:::::::::::::::::::::: ::::::::Transportstlon and communication (railroads, telephone, radio)Transportstion equipmentUtility holding comrca.mes(electric, gas, water)

gmfg ~=:~~~~-~-~~~~~~::::==============:======:=:.:=========.: :=::1----1----TotaL

TABLE 12.-Number and amount of securities classified acc07"ding to basis for theadmission to dealing on all exchanges as Of June 30, 1950

STOCKS

Column I I Column II'

Issues Number of Issues Numhcrofshares shares

Reglstered 2,573 3,147,684,318 2,573 3,147,684,318T:rarily exempted from registration 20 8,634,386 20 8,634, 386A tted to unlisted trading privileges on registered

332 329, 904, 324exchanges 877 2, 038, 851, 048Listed on exempted exchanges 116 117, 013, 924 78 33,149,815Admitted to unlisted trading privileges on exempted

35 3,093,606exchanges 40 6,681,419

Undupllcated total of stock issues and number of3,038 3, 522, 466, 449shares admitted to dealing on all exchanges

See footnotes at end of table, p. 200.

_ _

i;;i;~iif~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~_ _ _ _ _

~J~~#E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1~~~~I~~~r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~_

_

_ _ _

_

_____________________________________________ •_______________

____________________________________________ __________________________

____________________________________________

______ -------- ---------- -- ----


TABLE 12.-Number and amount of seourtue« classi{ted according to basis for theadmission to dealing on all exchanges as of June 30, 195O-Continued

BONDS

Issues Principal Issues Principalamount amount

Registered 971 $20, 898, 718, 791 971 $20, 898, 718, 791'I'emporarily exempted from registration , ._ 4 51,848,000 4 51,848,000Admitted to unlisted trading privileges on registeredexchanges . . 81 829, 231, 350 75 596, 528, 150Listed on exe:d exchanges 7 22,250,000 7 22, 250,000Admitted to ted trading privileges on an exemptedexchange 1 140,000 1 140,000

Unduplleated total of bond issues and ~ciPalamount admitted to dealmg on all exe ges ..-----.- ----------~_._-- 1,058 21, 686, 293, 681

I The purpose of column I Is to show the number and amount of securities admitted to dealing under thevarious bases for the admission of securities to dealing on exchanges under the act. (Issues exempted fromregistration under sec. 3 (a) (12) of the act, such as obligations of the United States, States, counties, cities,and United States-owned corporatrons, are not shown In this table.) Each security Is counted once undereach basis for its admission to dealing. Thus, a security which is registered on 2 exchanges and also admittedto unlisted trading privileges on 3 exchanges would be counted once under "registered" and once under"admitted to unlisted trading privileges." Because of such duplications, column I is not totaled

The purpose of column II is to show the unduplleated total of all securities admitted to dealing on allexchanges. Each security is counted only once, and the elimination of the duplication In column I is madein column II in the order In which the various bases for admission to dealing is given above.

, Includes securities for which the Oommlssion has granted, by general rules, temporary exemption fromregistration for stated periods and under certain conditions, such as stock Issues of certain operating banksand securities resulting from modification of previously listed securities

Includes 8 bond issues In pounds sterling In the aggregate amount of £16,808,740. This amount insterling has been excluded from the amount m dollars given above.

TABLE 13PART I.-NUMBER AND AMOUNT OF SECURITIES CLASSIFIED ACCORDING TO THE

NUMBER OF REGISTERED EXCHANGES ON WHICH EACH ISSUE WAS ADMITTEDTO DEALING AS OF JUNE 30, 1950

Stocks Bonds

Issues Shares Issues Principalamount

1. Registered on 1 exchange 1,608 I, 113, 280, 658 892 $17, 597, 834, 3912. Unlisted on 1 exchange. .•. _._ ._. 321 305,999,574 75 596, 528, 1503. Registered on 2 or more exchanges . . 420 325, 456, 936 73 3,068, 181,4. Unlisted on 2 or more exchanges 11 23,904,750 ---'--82;"385;5005. Registered on 1 exchange and unlisted on 1 exchange, 208 216, 376, 795 66. Registered on 2 or more exchanges and unlisted on 1exchange. . 66 148, 148, 738 1 150, 317, 7007. Registered on 1 exchange and unlisted on 2 or moreexchanges. _. . _. 167 706, 659, 413 ... -._--8. Registered on 2 or more exchanges and unlisted on 2or more exchanges . 104 637,761,778 --------.-9. Temporarily exempted from registration on 1 ex-

2, 125, 205 3 46,106,000change 1610. Temporarily exempted from registration on 2 or

6, 509, 181 1 6, 742,000more exchanges. 4Total ••. 2, 925 3, 486, 223, 028 1,050 21,547,094,941

PART 2.-PROPORTION OF REGISTERED ISSUES THAT ARE ALSO ADMITTED TOUNLISTED TRADING PRIVILEGES ON OTHER EXOHANGES AS OF JUNE 30, 1950

1. All registered issues (pt. l,lines I, 3, 5, 7, and 8) 2, 573 3, 147, 684, 318 971 $20, 898, 7111, 7912. Registered issues that are also admitte to unlisted

trading privileges on other exchanges (pt. 1, lines232, 703,~6,6,7, and 8) ._. 545 I, 708, 946, 724 6

3. Percent of registered Issues that are also admitted to1.1unlisted trading privileges on other exchanges. 21.2 54.3 .6

•__________________________________• _________

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________________________• _______ __

_____


TABLE 13--ContinuedPART 3.-PROPORTION OF ISSUES ADMITTED TO UNLISTED TRADING PRIVILEGES

THAT ARE ALSO REGISTERED ON OTHER EXCHANGES AS OF JUNE 30, 1950

Stocks Bonds

Issues Shares Issues Principalamount

1. All Issues admitted to unlisted trading privileges(part l,lines 2, 4, 6, 6, 7, and 8)___________________ 877 2,038,851,048 81 $829,231,350

2. Unlisted issues that are also registered on other ex-changes (part 1,llnes 5, 6, 7, and 8)_______________ 545 I, 708,946, 724 6 232, 703, 200

3. Percent of issues admitted to unlisted trading privi-leges that are also registered on other exchanges ___ 62.1 83.8 7.4 28.1

PART 4.-PROPORTION OF ALL ISSUES ADMITTED TO DEALING ON REGISTEREDEXCHANGES THAT ARE ADMITTED TO DEALING ON MORE THAN 1 REGISTEREDEXCHANGE AS OF JUNE 30,1950

1. All issues admitted to dealing on registered ex-changes (pt. I, totalj., ___________________________ 2,925 3, 486, 223,028 1,050 $21, 547,094, 9412. Issues on more than 1 exchange (pt. I, all lines ex-eept I, 2, and 9) _____________________ ._._ . ___ . ___ 980 2, 064, 817,591 80 3,307, 626, 4003. Percent of all Issues admitted to dealing on all regis-

tered exchanges that are admitted to dealing onmore than 1 registered exchange ______ __ . ._______ 33.5 59.2 7.6 15.4

TABLE H.-Number of issuers having securities admitted to dealings on alle31changesas of June 80, 1950, cla8sified according to the basis f01' admis8ionof their seeurttie« to dealing

Column I I Column If s

Basis of admission of secunties to dealingNumber of Number of

issuers Issuers

1. Registered ________________________________________________________ 2,182 2,1822. Temporarily exempted from registration _____________________________________ 22 183. Admitted to unlisted trading privileges on registered exchanges ___ ... _________ 847 3074. Listed on exempted exchanges ______________________________________________ . 100 676. Admitted to unlisted trading privileges on exempted exchanges _______________ 38 34

6. Total number of issuers having securities admitted to dealing on all ex-changes. ______________________________________________________________ ------------ 2, fI08

J The purpose of column I is to show the number of Issuers having securities adrmtted to dealing on ex-changes under tho varlons bases for the admission of securities to deallng under the act. (Issuers whosesecurities are exempted under sec. 3(a) (12) of the act, such as obhgatlons of the United States, States,counties, cities, and United States-owned corporations, are not shown in this table.) Each Issue iscounted once under each basis for admission of secunties to deahng. Thus, an issuer having seeuntresregistered on two or more exchAnges and unlisted on 2 or more exchanges is counted once under "registered"and once under "unlisted." Because of these dupllcatlons, column I is not totaled.

J The purpose of column II Is to show the net number 01 issuers having securities admitted to dealing onall exchanges under tho aet, Each Issuer JS counted only once, and the elimination of the duplications Ineolumn I Is made In column II In the order of the various bases for admission to dealing given above.

TABLE 15.-Number of tseuer« having stocke only, bond8 only, and both stooksand bond8 admitted to dealing8 on all eeebanoee as of June 80,1950

Numherof Percent ofissuers total issuers

1. Issuers having only stocks admitted to dealings on exchanges _____________ 2, 123 81.42. Issuers having onl[; bonds admitted to dealings on exchanges ______________ 262 10.03. Issuers having bot stocks and bonds admitted to dealings on exchanges ___ 223 8.6

Totallssuers ________________________________________________________ 2,608 100.04. Issuers having stocks admitted to dealings on exchanges (lines 1 plus 3) ____ 2,346 9006. Issuers having bonds admitted to dealings on all exchanges (lines 2 plus 3)_ 485 18.6

' ___________


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SIXTEENTH ANNUM:. REPORT 203

TABLE 17.-Number of issues admitted to unlisted trading pursuant to clauses2 and 3 of sec.12 (f) of the Securities El1Jchange.4.ctof 1934 and volume oftransactions therein 1

[Stock volumes in shares; bond volumes in dollars of prtnclpaljamount]

Number of Issues Percent of AggregateVolume total 1949 volumereported volume on reported

each ex- for theName of stock exchange Remain- for the change In calendarAdmlt- calendarted total ing June year 1949 stocks and years 1937

30,1950 hands re- to 1949,spectively inelusrve

Stocks pursuant to clause 2:546,313 14.0 4, 768, 326Boston ______________________________ 118 2108CinclnnatL _________________________

46 45 155,050 39.2 991,280Cleveland ___________________________ 35 0 199,051 48.5 980,048Detroit ______________________________ 85 78 533,275 17.3 4,271,109Los Angeles _________________________ 82 75 943,420 11.0 5,518,391Midwest ____________________________ , 82 '75 2,071,189 28.2 13,685,528New York Curb _____________________ 6 1 194, 325 .3 6,870,635Philadelphia- Baltimore ______________ 117 '107 583,933 14. 0 3,473,026Pittsburgh __________________________ 70 55 127,009 14. 6 1,603,358St. Louis ____________________________ 6 0 61,975 18.4 157,683Salt Lake __________________________ 1 0 0 0 35,633San Franclsco Stock 55 '50 597,377 6.1 3,961,634Washington_._. _____________________ 2 2 28,222 11.9 34, 084Wheeling ____________________________ 6 '3 1,598 100 17,692

---Total 692 599 5,962,737 46,368,427---

Stocks pursuant to clause 3:Midwest ____________________________ 1 1 16,714 .2 30,700New York Curb _____________________ 9 6 1,631,529 2.4 4, 508, 415Salt Lake ___________________________ 1 1 4,971 .05 11,684

---Total stocks _______________________ 703 , 607 7,615,951 ------------ -- 50,919,226---

Bonds pursuant to clause 2:Los Angeles _________________________ 1 1 $47,400 100.0 $63,400New York Curb _____________________ 3 1 $817,000 1.6 $14, 928, 000San Franclsco Stock _________________ 4 0 $769,500 98.5 $3,423,600

Bonds pursuant to clause 3:New York Curb _____________________ 45 15 $17,824, 000 35.8 $162, 163,000---Total bonds 53 17 $19, 457, 900 $180, 578, 000

I For enactment of clauses 2 and 3 and procedure thereunder, see tenth annual report under "UnlistedTrading Privileges on Securities Exchanges." For volume reported in each of the years 1937 through 1944,see eleventh annual report appendix table 18. For subsequent volumes see tables in subsequent reports .

Only odd-lot trading Is permitted in 6 of these issues .Includes 19 issues acquired from Cleveland Stock Exchange and the volumes therein subsequent to the

merger of Dec. I, 1949. The 692 admitted total excludes this duplication, The 599 remaining total Is thosum of the figures as shown

Only odd-lot trading is permitted in 1 of these issues., Includes San Francisco Curb figures prior to the 11138merger., Wheeling is an exempted exchange. All others shown are registered., This figure included duplications arising from admission of various Issues to unlisted trading on more

than 1exchange.

•

________________~

____________________________•• --------------

_______________________ --------------

• •

• •


TABLE 18.-Reorganization cases institutetZ untZer chapter X antZ sec. 71-B ot theNationaZ Bankruptcy Act in which the Commission filed notice oj appearanceand in which the Commission activeZy participated dU1'ing the fiscal year endedJune 30,1950

DISTRIBUTION OF DEBTORS BY TYPE OF INDUSTRY

Number of Total assets 1 Total indebtedness 1debtors

IndustryPrlnei- Subsid- Amount Percent Amount I Percent

pal lary (thousands of grand (thousands of grandomitted) total omitted) total

AgrleulturaL ------if ------i- -----$6;476- -------ii~67- -----$i;485- --------ii:i7Mining and otber extractive __________ Manufacturing _______________________ 13 2 25,001 2.59 17,793 209Financial and InvestmenL ___________ 5 1 124,222 12.1>1 121,078 14.22Mercbandising ________________________ 2 1 1,452 .15 1,720 .20Real estate ____________________________ 24 3 87,337 9.05 75,528 8.87Construction and allled _______________ ______ r_ ------------ .-----------Transportation and communication ___ 9 12 404,750 41.94 328,469 38 59Service. ______________________________ 6 1 25,043 2.59 13,070 1.54Utilities' electric, water, and gas 9 6 290,876 30.14 292,111 34.32Otber: ReligIOUS, charitable, etc ______ ------------ ------------ .----------- ---------------Grand total 71 27 965,157 100.00 851,254 100.00

I As of latest dates figures are availableIncludes no electric utility companies. Represents principally investment and holding companies

and gas pipeline companies and a few gas distributing companies.

TABLE 19.-Reorganization proceetZings in whiCh the Commission participatedduring the fiscal year entZedJune 30, 1950

Petition Securities andExchange

Debtor District court CommissionFiled Approved notice of ap-

pearanee filed

Aireon Manufacturing Corp D. Kans ________ Nov. 22, 1947 Nov. 22, 1947 Jan. 7,1948American ACOUStiCS,Inc D. N. 1.________ Mar. 21, 1947 May 5,1947 Apr. 21,1947

"American Fuel and Power Co, .• ________ E. D. Ky _______ Dec. 6,1935 Dec. 20,1935 May 1,1940Buckeye Fuel Co ___________________ _____ do .. _________ Nov. 28,1939 Nov. 28,1939 Do.Buckeye Gas Service Co _____ do ___________ _____ do __ .. ____ _____ do ________ Do.Carbreatb Gas Co .... .. .. do .. do .. do .. Do.Inland Gas DIstributing Co _____ .. __ _____ do ___________ _____ do .. ______ .. ___ do .. ______ Do.

American Silver Corp .... ______ .. ___ ... _ S. D. CaIlL ____ May 6,1948 May 7,1948 May 11,1948Bankers Building, Inc ___________ .. _ .. __ N. D. I1L. ______ Sept. 21, 1943 Oct. 5,1943 Oct. 19,1943

"Bellevue-Stratford Co _________________ ._ E. D. Pa .. ______ Oct. 31, 1936 Oct. 31,1936 Feb. 24,1939Brand's Restaurant Control Corp ___ .. __ S. D. N. Y______ Aug. 2, 1939 Aug. 10,1939 Aug. 30,1939Broadway Garage, Inc. _________________ S. D. Ohlo ______ Apr. 26, 1946 Apr. 26, 1946 June 24, 1946Calumet & South Chicago Railway Co __ N. D. IIl ________ June 29,1944 Sept. 18, 1944 Oct. 20,1944Central States Electric Corp, .. _________ E. D. Va .. ______ Feb. 26,1942 Feb. 27, 1942 Mar. 11,1942Cenwest Corp .. S. D. N. Y______ Mar. 17,1942 Apr. 3,1942 Mar. 21, 1942Chicago City Railway Co .. ___ .. ________ N. D. I1L. ______ Nov. 27,1939 Sept. 18, 1944 Oct. 20,1944Chicago Railways Co . .. do, .. ________ Oct. 15,1938 _____ do .. ______ Do.Ohleago &; West Towns Railways, Inc __ ___ .. do ...... _____ June 30,1947 July 1,1947 July 24, 1947Childs Co. S. D. N. Y .. ____ Aug. 26, 1943 Aug. 27, 1943 Aug. 26,1943Cosmo Records, Inc .. _________ .. ________ E.D.N. Y _____ Jan. 27,1947 Jan. 27,1947 Jan. 30,1947

Cosmopolitan Records, Inc __________ _____ do, .. _. ___ .. _ _____ do ________ ___ .. do ________ Do.Automatic Industries, Ine., ______ ... ___ .. do ____ .• _____ __ .• .do .. ______ _____ do ________ Do.Dorbsnk Corp . .. do ___________ _____ do. .. _____ do .. Do.

Diversey Hotel corp.. __________________ N. D. IIl ________ May 29,1947 June 13,1947 June 13,1947Douglas Mill, Inc _______________ . _______ N. D. Ga Sept. 7,1949 Sept. 7.1949 Oct. 12, 1949Drake Stadium & Field House Corp __ ._ S. D. Iowa ______ Dec. 27,1947 Dec. 27,1947 Feb. 16,194880 John Street Corp .. ___________________ S. D. N. Y ______ Sept. 14, 1945 Sept. 14, 1945 Oct. 8,1945Equitable Office Building Corp _____ do ___________ Apr. 10,1941 Apr. 10, 1941 Apr. 14,1941

'Federal Facilities Realty TrusL ________ N. D. IIl ________ Dec. 26, 1934 Apr. 25,1935 Oct. 29,1940Franklin Building Co ___________________ E. D. WIS .... ___ May 5, 1947 May 5,1947 Aug. 18,1947General Public Utilities Corp. (formerly S. D. N. Y ______ Jan. 10, 1940 Jan. 10,1940 Jan. 15,1940

Associated Gas & Electric Co.).Associated Gas & Electric Corp do ________________ do. ____________ do ________ Do.Gramott Corp , .. ____________________________ do Mar. 1,1946 Mar. 4, 1946 Mar. 21, 1946

"Hotel Martin Co. of Uti08 N. D. N. Y _____ June 6, 1935 June 19,1935 June 24,1939

See footnote at end of table, p. 205.

_________________• _______

' ____

______•_________•• _••

• •

__•_____• ____ ____________•• __

__• _________ __• _________ _ ___

_____________ ___________•

__• _______________ ___

____________________• ______• __

_____• ______ _________ ___

________•

______ •• __

_______ •••• ___

_~ _____ w_~ __

___•____ _ _____ ____ __ _____ ______

___•• ______

___ • ___

__________•


'I'ABLE 19.-Reorganization proceedings in which the Oommission participatedduring the fiscal year endedJune SO,1950-Continued

Petition Securities andExchange

Debtor DIStrict court CommissionFiled .Approved notice of ap-

pearance filed

.Hotels Majestic, Jnc ____________________ E. D. Pa ________ Oct. 30,1936 Oct. 31,1936 Feb. 26,1942Industrial Office Building Corp _________ D. N. L________ Oct. 3,1947 Oct. 3,1947 Oct. 10,1947.Inland Gas Corp ________________________ E. D. Ky _______ Oct. 14,1935 Nov. 1,1935 Mar. 28, 1939International Mming & Milling Co. D. Nev ________ June 29,1939 June 29,1939 Aug. 7,1939Mount Gaines Mining Co__________ ____ do ___ do _____________ do ________ Do.International Power Securities Corp ____ D. N. L________ Feb. 24, 1941 Feb. 24,1941 Mar. 3,1941International Railway Co_______________ W. D. N. Y_____ July 28, 1947 July 28, 1947 Aug. 4,1947Isham Garden Apartments ______________ S. D. N. Y______ Apr. 7, 1943 Apr. 8, 1943 Apr. 13,1943Keeshin Freight Lines, Inc ______________ N. D. TIL_______ Jan. 31,1946 Jan. 31,1946 Apr. 25,1949

Keeshin Motor Express Co., Inc ____ _____ do________________ do_____________ do________ Do.Seaboard Freight Lines, Inc _________ _____ do________________ do_____________ do________ Do.National Freight Lines, Inc _________ _____ do________________ do_____________ do________ Do.Kellett Aircraft Corp ____________________ E. D. Pa ________ Oct. 18,1946 Oct. 18,1946 Dec. 4,1946

.Kentuck~Fuel Gas C~ ______________ E. D. Ky _______ Oct. 25,1935 Nov. 1,1935 Mar. 28,1939Majestic adio & Tele on Corp ______ N. D. TIL ______ Mar. 31,1948 June 24,1948 Sept. 15,1948Manufacturers Tmding Corp ___________ N. D. Ohio_____ Oct. 15,1948 Oct. 15,1948 Oct. 25,1948

Manufacturers Discount Corp ______ _____ do_______________ do ____________ do ______ . Do .Midland United Company D. DeL ________ June 9,1934 June 9,1934 Jan. 10,1940.Midland Utilities Company ___ . ____ ____ .do ______________ .do ____________ do _______ Do.

Momence Milk Cooperative AssoCIation. E. D. TIL ______ June 18,1949 June 18,1949 Sept. 12,1949Moorhead Knitting Co_________________ M. D. Pa _______ June 19,1941 June 24, 1941 Aug. 6,1941"National Realty Trust. _________________ N. D. TIl________ Dec. 26,1934 Apr. 25,1935 Oct. 29,1940Neville Island Glass Co., Inc ____________ W. D. Pa _______ Mar. 1,1948 Mar. 1,1948 Mar. 17,1948New Union Bnilding Co________________ E. D. Mich _____ May 5,1949 May 6,1949 June 20,1949Northwest Carolina Utilities Co________ . W. D. N. Car ___ July 8,1942 July 8,1942 Mar. 3,1943Novo Engine Co________________________ E. D. Mich _____ Mar. 14,1949 Mar. 14,1949 Apr. 25,1949Norwalk Tire & Rubber Co_____________ D. Conn ________ May 20,1949 May 20,1949 June 8,1949P. R. Holding Corp _____________________ S. D. N. Y______ Apr. 24,1942 May 21,1942 May 21,1942.Plttsburgh Railways 00 ________________ W. D. Pa _______ May 10,1938 May 10,1938 Jan. 4, 1939.Pittsburgh Motor Coach Co________ _____ do __________ _____ do ____________ do_______ Do.Pittsburgh Terminal Coal Corp ____ .do ___________ Dec. 4,1939 Jan. 2,1940 Jan. 6,1940Portland Electric Power Co_____________ D. Oreg________ . Apr. 3,1939 Apr. 3,1939 Apr. 16,1939Pratt's Fresh Frozen Foods, Inc D. N. L________ Apr. 13,1948 Apr. 13,1948 May 29,1948Pratt's Distributors, Inc ____________ _____ do _________ . May 17,1948 May 17,1948 Do.Quaker City Cold Storage Company _____ E. D. Pa ________ Dec. 17,1941 Feb. 13,1942 Jan. 28,1942R .A. Security Holdings Inc E. D. N. Y _. ___ May 7,1942 July 31,1942 May 22,1942Realty Associates Securities Corp _______ _____ do __________ Sept. 28,1943 Sept. 28,1943 Oct. 4, 1943Espade Realty Corp ________________ _____ do _________ . Mar. 17,1944 Mar. 20,1944 Apr. 19,1944Silesian American Corp _________________ S. D. N. Y ______ July 29,1941 July 29,1941 Aug. 1,1941Solar Manufacturing Corp ______________ D. N. L________ Dec. 14,1948 Dec. 14,1948 Dec. 27,1948Sonth Bay Consolidated Water 00., Ine, S. D. N Y ______ Apr. 26,1949 Apr. 26,1949 May 23,1949ThIrd Avenue Transit Corp ____________ _____ do ______ . ___ Oct. 25,1948 Oct. 25,1948 Jan. 3,1949Surface TransportatIon Oorp., ______ ___ ._do _______. __ June 21,1949 June 21,1949 July 7,1949

Westchester Street 'I'ransp, 00., Inc. _____ do. ________ . ____ .do ______ . _____ do _______ Do.Westchester Electric Railroad Co. ___ . ____ do ____ _____. _____ do____________ do _______ Do.Warontas Press, Inc ________________ . ____ do Sept. 8,1949 Sept. 8, 1949 Oct. 24,1949Yonkers Railroad Co_______________ _____ do __________ June 21,1949 June 21,1949 July 7,194932 West Randolph Oorp , ; ______________ N. D. TIl______ ._ Apr. 15,1946 Apr. 29,1946 May 20,1946Thomascolor Inc.. ______________________ S. D. Call!.. ___ . June 20,1949 June 21,1949 Aug. 5,1949

Trinity Buildings Corp. ofNew York ____ S. D. N. Y_____ . Jan. 18,1945 Jan. 18,1945 Feb. 19,1945Union League Club of Chlcago __________ N. D. TIl________ Feb. 14,1950 Feb. 14,1950 Apr. 10,1950U. S.= & Improvement Co. _______ S. D. N. Y_____ . Feb. 1,1944 Feb. 1,1944 Feb. 7,1944.Van R aer Estates, Inc _____________ _____ do __________ July 12,1935 July 12,1935 July 12,1941.Van Swerlngen Corp ____________________ N. D. Ohio ____ . Oct. 13,1936 Oct. 15,1936 Jan. 23,1940

.Cleveland Termfnal Bulldings Co__ . ____ do do do Do.Wade Park Manor Corp ________________ _____ do __________ June 28,1947 June 30,1947 July 28,1947Warner Sugar Corp. ____________________ S. D. N. Y ______ June 7,1940 July 9,1940 July 9,1940washi~n Gas &. Electric Co _____ do __________ S~t. 29,1941 ~t. 29,1941 Oct. 14,1941Wilkes arm Rallwap co~--.------.-- M. D. Pa _______ J y 1,1943 J y 1,1943 July 15,1943Wilkes Barre Railway 0___________ _____ do . do do Do.

Wilkes Barre Tmckless Trolley Co___ _____ do_______________ do____________ do _______ Do.Wyoming Valley Autobus 00. ______ . ____ do __________ _____ do_______ _____ do_______ Do.Wyoming Valley Puhlic Service Co__ ____ .do ____ .do ____________ do _______ Do.

WIndsor WDson Llqnidatlon Trost _____ N. D. Ill ________ Mar. 18,1941 May 28,1941 June 12,1941

Instituted under sec. 77-B.

• ______________

__•______

_______•

• ____________

_

____•__•__

•

_________•_

____•_____

_______•__ _____ ____________ _______

__•______ _____ ____________ _______

______•__


TABLE 20.-Summary of cases instituted in the courts by the Oommission underthe Securities Act of 1988, the Securities El1JchangeAct of 1984, the PublicUtility Holding Oompany Act of 1935, the Investment Oompany Act of 1940,and the Investment Advisers Act ot 1940

Total Total Cases Cases Cases in- Total Casescases in. cases pending pending stituted cases closedstatuted closed pendingTypes or cases up to end up to end at end at end dunng durIng during

ot 1950 of 1950 of 1950 of 1949 1950 1950 1950fiscal fiscal fiscal fiscal fiscal flscal fiscalyear year year year year year year

----- --- --- --- --- --- ---ActIons~o enjoin violations of

the above:acts_ .......... .•. 570 554 16 18 32 50 34Actions to enforce subpenas

under the secunttes Act andthe Securities Exchange Act.. 51 49 2 2 2 4 2ctions to carry out voluntaryplans to comply with sect.on11 (b) of the Holding Com.pany Act_ .... __ .............. 83 71 12 10 12 22 10iscellaneous actions __ ..•• _. _. 13 11 2 2 1 3 1---- ---- ----------- ---- ----

Total •... .............. _. 717 685 32 32 47 79 47

A

M

TABLE 21.-Summary ot cases instituted against the Oommission, cases in whichthe Oommission participated as intervenor or "amicus curiae", and reorganiza-tion cases on appeal under chapter X in which the Oommission participatedpenlling during the ttscalyear ended J1l1'le80, 1950

Types ot cases

Totalcases in-stituted

nptoendof 1950fiscalyear

Totalcases

closedup to end

ot1950fiscalyear

Casespendingat endor 1950flscalyear

Casespendingat endof 1949fiscalyear

Cases in.statutedduring

1950fiscalyear

Totalcases

pendingduring

1950flscalyear

Casesclosedduring

1950fiscalyear

o

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o

7

46

30

o

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13

35

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6

27

11

10

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7

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o

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4

5

7

16

8

64

452

149

131

100

8

64

468

153

136

107

Actions to enjoin enforcementof Securities Act, SecuritiesExchange Act and PublicUtility Holding CompanyAct with the exception ofsnbpenas issued by the Com-mission

Actions to enjoin enforcementof or compliance with sub-penas issued by the Com-mission _. .. _.

Petitions tor review of Com-mission's orders by circuitcourts of appeals under thevarious acts administered bythe Commisslon _._._ .

Miscallaneous actions againstthe Commission or officersor the Commission and casesin which the Commissionparticipated as intervenor oramicu8 curiae .......••. _ •.... _

Appeal cases under chapter Xin which the Commissionparticipated .. . _. . ...

--- -------- ------- ---- ----TotaL _._._

_

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•• ••• _•••• _

SIXTEENTH ANNUM, REPORT 207

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SIXTE'E1I.1'H L~1I;tTAL REpORT 229TAnu: 31.-ReOl-uanization cases under ch, X of Bankruptcy Act pending during

the fiscal year endinu June 30, 1950, in which the Oommission. participated whenappeals were taken from district court orders

Kame of case and United States CireurtCourt of Appeals

Central States Electric Corp (Fourth). __

Childs co., debtor; Childs co., petitioner-appellant (Second).

Equitable Office BUIlding Corp., debtor,Aranow, Brodsky, Einhorn & Dann,petfttoner-appellant (Second).

Eqmtable Office Building Corp., debtor;T. Roland Berner, petrttoner-appellent(Second).

Franklin Building Co. (seventh)

Inland Gas Corp, debtor (sn.th)

International Mining & Milling Co.-Rosin v. Hart (nmth).

National Realty Trust, debtor-Sullivan,Trustee et aI, appeUanls v. Mosser, suc-cesser trustee et al, appellees (seventh).

National Realty Trust-Darrow v. Mos-ser, GUIld v, Darrow (seventh).

New Uuion Buildmg Co., debtor. Leoand Alfred Kuschinski, appcIlants(sixth).

Pittsburgh Terminal Coal Corp, debtor,Pittsburgh Terminal Rea1Jzation Corp,appellant (third).

Nature and status of case

Consohdnted appeals from order of Apr 24, 1950, approvingplan of reorgamaation and order of May 24. 1950, authorrzmgtrustees of Central State. to proceed with hquidatron ofAmerican CIties, a subsid iary holdmg company of CentralStates. On June 14, 1950, CA-4 grante-I stay of order of May24,1950, but scheduled oral argument for July G, 1950 on bothappeals. Pending,

Appeal from order of .\ug 5, 1949, thing final allowances forservices. Comrrussion filcd brief taking posuion that totalallowances were too high ann that oompensation should bewhoIly denied to certain applicants On Apr 5, 19;;0, CA-2reversed order of the district court m part and remandedcause for further proceedings. Petttron for recall of mandatedated Apr 21,1950, filed by John F. X. Fmn, et al , pennon-ers-appellees. Pend mg.

Appeal from Jan. 14, 1949, order which dented petitioner com-pensanon for services rendered m eonnecnon With the re-organization of the debtor under ch X of the BankruptcyAct. Comrmssion filed a brref takmg the position that thedistrict court properl y denied com pensutiou to petitionerOn July I, 1949, CA-2 affirmed order. Petition for rehearingdenied July 11, 1949. Closed.

Appeal from Jan. 14, 1949, order which denied petitioner com-pensation for services rendered as attorney for 2 commonstockholders m the eh, X bankruptcy reorgaruzatron ofdebtor Commission filed hnef Apr 10, 1949, m support ofdistrict court order. On June 9, 1949, CA-2 reversed orderand remanded case for reconsideratton of request for allow-ance ill hght of opmion. Petitioner applied for rehearingWhich was demed June 'n, 1949. Closed.

Appeals from orders of Dec 30, 1948, Dec. 31, 1948, and Jan. 4,1949, relstmg to claims based on bonds of tne debtor. Com-mission filed hnef taking position that order Ilrnrung claim ofLena Sunonsen to cost should be affirmed and that orderallowing in full the claims of Mollie Schroeder, June Kuptz,and Robert W. Schroeder should be reversed and partieipa-tion On their claims limited to cost. Orders of distriot courtaffirmed Dec. 8, 1949. Petition of Lena Simonsen for rehear-ing demed Jan. 16, 1950. Petitions of Lena Sunonsen andJohn W. Emmerling for writs of certioraTl filed Apr. 10, 1950,and Apr. 17, 1950, respectively. CertiOrari demed June 5,1950. Closed.

Consolidated appeals from order of Oct. 1, 1949, approving planof reorganization Comnnssion filed brief m support ofappellants primarily With regard to the clauns of the Colum-bia Gas System, Inc. WhICh were subordinated under the planonly to clauns or other creditors of Inland lind not to creditorsof Inland's parent companies, American Fuel & Power Co.and Kentucky Fuel Gas Corp. Pending.

Appeal from order of June 28, 1949, dlSallowmg attorney fees toappellant, CommISSIOn filed brief Mar. 3, 1950, m support ofdistrict court order. On May 29, 1950, CA-9 allirmed orderof distrret court. Petition for rehearing demed June 21, 1950.Pending.

Appeals from Dec. 10, 1948, and Feb 15, 1949, orders allegingthat the district court m nommating and appointmg successortrustees committed substantial error in executing the mandateot CA-7. CommISSIOn filed a memorandum supportingmotion to dismiss appeal or to affirm orders OnJuneI,I949,CA-7affirmed orders or district court, With costs Closed.

Appeals from order of Apr. 12, 1949, approving the findmgs oftact, oonelusions of law, and recommendations of the specialmaster on the account and report of Paul E. Darrow, trustee.Commission filed brief in support of dlstnct court order'Pendmg.

Appeal from order ofJuly 15,1949, denying motion of appellantsto dismiss petitron for reorganizatron, Oommission filedbrief Jan. 9, 1950, in support of district court order Appealdismissed Jan. 30, 1950, pursuant to stipulatron. Closed

Appeal from order of Dec. 9, 1949, preliminarily enjolmng, pend-ing final hearing, proposed aenon of the Realizanon Corp ata stockholders' meeting and authorizmg the trustee to conductan rnvestlgatlon of the business and affairs of tbe RealizationCorp. Cornrnlssron filed brief in support of district courtorder. Pending.

_

_


TABLE 31.-Reorganization cases under ch, X of Bankruptcy Act pending duringthe fiscal year ending June 30, 1950, in which the Commission participated 1vhenappeals were taken from district court orders-Continued

Name of case and United States CircuitCourt of Appeals

Silesian-American Corp., debtor (second);

Solar Manufacturing Corp. (third)

Third Avenue Transit Corp., debtor (sec-ond).

Nature and status of case

Appeal from order of May 29, 1950, approving the trustee'samended plan of reorganization. Motion for stay filed byboudholders committee. Memorandum m support of stayfiled by Commission In which It took position that classiflca-tion for voting purposes was erroneous and communlcatmgbetween security holders unduly restricted. Pending.

Appeal from order of July 19,1950, authorizing trustees to acceptoffer of Sprague Electric Co. for assets of Solar ManufacturmgCorp. Commission filed brief In support of appellants. Opin-Ion Aug. 24, 1949, revcrslng ordcr of distnet court and reomandlng case. Closed.

Appeal by debtor and 2 creditors from Mar. 16, 1949, orderdenymg motion for dismissal of the amended petition forreorgarnzation. Closed.

TABLE 32.-A 17-year summary of criminal cases developed by the Commission-1934 through 1950, by fiscal year

[See separate chart for classification of defendants as broker-dealers, etc.]

Number NumberNumber of such of these

Number of per- cases m Number defend. Numberof cases sons as whICh of Number Number ants as of thesereferred to whom indict- defend- of these of these to whom defend-

Fiscal year to De- prosecu- ments ants In- defend- defend- proceed- ants aspartment tlon was were dlcted In ants con- ants mgswere to whomof Justice reeom- obtained such vieted acquitted dis- eases areIn each mended by missed by pend-

year In each Umted cases I Umted Ing tyear States States

attorneys attorneys---- ---- -------- -------- ----

1934 7 36 3 32 17 0 15 01935_________________ 29 177 14 149 84 5 60 01936 43 379 34 368 164 46 158 01937 ._ 42 128 30 144 78 32 34 01938. ________________ 40 113 33 134 75 13 44 :I1939_. 52 245 47 292 199 33 59 11940_________________ 59 174 51 200 96 38 66 01941_________________ 54 150 47 145 94 15 36 01942_________________ 50 144 46 194 108 23 48 151943 31 91 28 108 61 10 33 41944_ 27 69 24 79 47 6 19 71945 19 47 18 61 36 10 13 21946_________________ 16 44 14 40 13 8 3 161947_________________ 20 50 13 34 9 5 12 81948_________________ 16 32 15 29 19 3 5 21949 27 44 25 57 15 10 3 291950_________________ '18 28 11 19 5 1 2 11-------- ---- -------- -------- ----

Total_. 550 1,951 '453 2,085 1,120 258 '610 97

I The number of defendants m a case Is sometimes Increased by the Department of Justice over the numberagainst whom proseoutlon was recommended by the Commission, For the purpose of this table, an mdivid-ual named as a defendant in 2 or more mdlctments In the same case Is counted only as a single defendant.

, Sec separate chart for breakdown of pending cases.14 of these references as to 7 proposed defendants were still being processed by the Department of Justice

as of the close of the fiscal year.« 422 of these cases have been completed as to 1 or more defendants Convictions have been obtained In

370 or 87.5 percent of such cases. Only 52 or 12.5 percent of such cases have resulted In acquittals or dis.-nlssals as to all defendants.

'InclUdes 42 defendants who died after Indictment.

_

___________• _____

__• ___• __________ ___• ___________

________• ______

__• __• ___________ • _______________

__• _______• __• ___

___• _____________

_____• __

SIXTEENTH .A1I<'NUAiL REPORT 231TABLE 33.-Summary of criminal cases developed by the Oommission which were

still pending at June 30, 1950-by fiscal year

Number Number of such defendants as toNumber of such whom cases are still pending and

of defendants reasons thereforCases defendants as to whom

msuch cases have Not yetcases been Awaitmg Awaitingcompleted sppre- tnsl appealhcnded I

Pending, referred to Departmentof Justice in:'1938___________________________ 1 2 0 2 0 01939___________________________ 1 1 0 1 0 01940___________________________ 0 0 0 0 0 01941. __________________________ 0 0 0 0 0 01942___________________________ 2 18 3 14 1 01943___________________________ 2 8 4 3 , 1 01944___________________________ 2 8 1 7 0 01945 . . . 2 4 2 1 1 0

1946_____ __________ . . _____ . ____ 4 16 0 16 0 01947 . 3 9 1 8 0 01948_____________ _____________ . 2 4 2 1 0 11949_____________________ _____ . 10 32 3 15 14 01950. __________________________ 7 11 0 3 8 0TotaL ______________________ , 36 '113 16 71 25 1

SUMMARYTotal cases pending , .___________ 40Total defendants' _ .__ ________________________ _______ ___ __ __ ___ 120Total defendants as to whom cases are pending , .___ 104

I Almost WIthout exception these defendants arc residents of Canada and cannot be extradited., FIScal year ended June 30 of the year indicated., Except for 1950, indictments have been returned in all pending cases. Indictments have not yet been

returned as to 7 proposed defendants in 4 cases referred to the Department of Justice in 1950. These arereflected only in the recapitulation of totals at the bottom of the table.

TABLE 34.-.1 17-year summary classifying all defendants in criminal ca8esdeveloped by the Oommission-1934 to July 1,1950

Registered broker-dealers I (includingprincipals of such firms)

Employees of such registered broker.dealersPersons in general securities business but

not as remstered broker-dealers (includesprincipals and employees)

All others ,

Total . __ . _

Numbermdicted

328

107

686964

2,085

Numberconvicted

203

55

349513

1,120

Numberacquitted

23

15

55165

258

Number asto whom

cases weredismissedby Umted

Statesattorneys

91

36

254229

610

Number asto whomcases arepending

11

1

I Includes persons registered at or prior to time of indictment.I The persons referred to in this column, while not engaged In a general business in securities, were almost

without exception prosecuted for violations of law involving securities transactions.

__• _________ _______ _____

_____ ____• ________________

•

• _

• • _

_ _

--

--

232 BECWITIES AND EXCHANGE COMMISSION

TABLE35.-A l7year surnmavy of all hiurnt ion caaea instituted by the Comnbission 1994 to July 1.1950, by calendar gear

Number of csses in whlch ~ n m h ~ r ~ r c ~ ~ e s l n s t l t ~ ~ t e d ou the cammission and injunnlans wcre qmnted the number of dalead- and thenumberoldelend-

Calendar year ants involved. ants enjo1ned.l

Cases Dsf~ndsntrI I

SUMM4RY

I IOases Delendantn

~ ~ t i 6 ~ . ~ i n ~ t i t ~ t , ~ d . . , ........................................................ 510 1,689rojnnetlrms obtained .................................................... 514 1,304 Actions wnding 8 S 30 Other dispositions C . ~................................................... 48 355

TOtd.....:............................................................ 5m 1,689

I Tt.w rn1mm.o d . 0 ~~llr.,oi~c:on01cat<$hp year of diip.,rir$?na n l clo not nvcagjarUg reEm rho Slapo-snl- l o r t~>..c&..siuwnxs i ~ ~ v ~ n n VPII..ken insrlrtj.. I i n rhe .amp

I intl~ldss7 ms,~ lu ~LC(LLLI- ~ n j ~ l , . e t i ~ ~ i d>deren! defend- lie', w\.nn .n~xrltc1 !ha c , l l i # ~ l ~ & ~ L O J L ant,i3 d.csw.a.rrrar vrrr mhmbd indtn nrc y e e i

I l n i l n d ~ ~ d r l , ~ ~ , i I a n t rI ;)yes I:, W I ~ ~ I ~ to 1201kfanlant3I:, 11,1 1 .tl..ns hare i. .i~nhta,ueiln a Inrludrs la ~ r t l r n s '* r o ? i s p b ~ ~ d r o c j . : ,!~rr(>:r+~d hi a<ci?nr%li?ror,rI:l'lad,aham?, rruswd, abxn.

donhl.nr acr1.d ,a\ M 51 iclrnd,ntr irl nna:is In wl>i.:h I Iicrnenr m?cl+il;.d lhr M . l..l..~lnnr*,. I d )~ ~ t i o n s ~ . ~ ~ # a r , uin w ~ t ~ h war w g p l ~n st:l$ulrl!or. to is onflnuo m8srlr# lucl dlr.nel O9 lu 3 lle. fen lank).

Annual Report 1950 - SEC.gov

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