of the

!I s.Securities and ExchangeII

Commission

Fiscal Year Ended June 30, 1959

UNITED STATES GOVERNMENT PRINTING OFFICE, WASHINGTON 1959

For IIB1e by the Superintendent 01 Docwnenu, U.S. Government PrintinS OfficeWaehiDgton 25, D.C. Price'l (paper coyer)

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II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

425 Second Street NW.

Washington 25, D.C.

COMMISSIONERS

January 6,1960

EDWARD N. GADSBY, ChairmanANDREW DOWNEY ORRICK

HAROLD C. PATTERSON

EARL F. HASTINGS

JAMES C. SARGENT

ORVAL L. DuBoIS, Secretary•

LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE Co:I\OnSSION,

Washington, D.O., January 6, 1960.SIR: On behalf of the Securities and Exchange Commission, I have

the honor to transmit to you the Twenty-Fifth Annual Report of theCommission covering the fiscal year July 1, 1958, to June 30, 1959, inaccordance with the provisions of section 23 (b) of the SecuritiesExchange Act of 1934, approved June 6, 1934; section 23 of thePublic Utility Holding Company Act of 1935, approved August 26,1935; section 46 (a) of the Investment Company Act of 1940, approvedAugust 22, 1940; section 216 of the Investment Advisers Act of 1940,approved August 22,1940; and section 3 of the act of June 29,1949,amending the Bretton Woods Agreement Act.

Respectfully,EDWARD N. GADSBY,

Ohairman.THE PRESIDENT OF THE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.O.m

TABLE OF CONTENTSPan

Foreword_________________________________________________________ XlUOriginal Commission and former eommissioners., _ _ XL

Present Commission and staff offieers; XLIRegional and branch offices_________________________________________ XLUBiographies of oommissioners., _ _ XLIII

PART I

CURRENT PROBLEMS BEFORE THE COMMISSION-___________ 1Fraud in the sale of securities___________________________________ 2Manipulation in the securities markets___________________________ 4Exemptions from registration and pre-filing publicity_______________ 4Regulation of the exohanges; _ _ 6Regulation of the over-the-counter markets_______________________ 7Inspection of investment companies______________________________ 7Other factors in the securities markets___________________________ 8

PART IILEGISLATIVE ACTIVITIES__ ___ ____ __ 9

Statutory amendments proposed by the COmmission________________ 9Other legislative proposals_______________________________________ 12Congressional hearinga, _____ _ _ __ 14

PART IIIREVISION OF RULES, REGULATIONS AND FORMS______________ 15

The Securities Act of 1933_______________________________________ 15Amendment of Rule 133_____________________________________ 15Amendment of Rule 135_____________________________________ 16Proposed rule changes relating to assessable stock______________ 17Proposed Rule 144__________________________________________ 17Adoption of Rule 151 ... 18Amendment of Rule 434A___________________________________ 18Adoption of Regulation E-__________________________________ 19Adoption of Form N-5______________________________________ 19Adoption of Form 8-14_____________________________________ 20

The Securities Exchange Act of 1934______________________________ 20Adoption of Rule 16b-8_____________________________________ 20Amendment of Form 8-K___________________________________ 21

The Investment Company Act of 1940____________________________ 21Adoption of Rule 3c-L_____________________________________ 21Adoption of Rule 10f-3-Permitting acquisition of securities of

underwriting syndicates______________________________ 22Adoption of Rule 22d-l-Relating to variations in sales load ofre-

deemable seeuritles, 23Adoption of Form N-5-Registration form for small business in-

vestment companies______________________________________ 25y

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VI TABLE OF CONTENTS

PART IVADMINISTRATION OF THE SECURITIES ACT OF 1933

Description of the registration process:Registration statement and prospectusExamina~onprocedureTime required to complete registration

Volume of securities registered..Registration statements filed..Results obtained by the registration processStop orderproceedingsExaminations and investigationsExemption from registration of small issues

Exempt offerings under Regulation ASuspension of exemptionExempt offerings under Regulation B

Litigation under the Securities Act of 1933Litigation involving violations of registration and antifraud pro-

visionsLitigation relating to stop order proceedingsParticipation as amicus curiae

PART V

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26272728313235434445464950

505657

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF1934___________________________________________________________ 58

Regulation of exchanges and exchange trading____________________ 58Registration and exemption of exchanges_____________________ 58Disciplinary actions_______ __ _____ ____ 58Commission rate study_____________________________________ 59Activities of floor traders and specialists______________________ 60

Registration of securities on exchanges___________________________ 60Statistics relating to registration_____________________________ 61

Market value of securities traded on exchanges____________________ 62Assets of domestic companies with common stocks on exehauges., 64Foreign stock on exchanges_________________________________ 65Comparative over-the-counter statistics______________________ 65

Delisting of securities from exchanges____________________________ 68Delisting proceedings under section 19(a)_____________________ 71

Unlisted trading privileges on exchanges__________________________ 71Applications for unlisted trading privileges____________________ 74

Block distributions reported by exchanges________________________ 75Manipulation and stabilizatlon., _ _ __ _________ 76

Manipula~on_____________________________________________ 76Stabilization ______________________________________________ 79

Insiders' security holdings and transactions_______________________ 80O~ership reports_________________________________________ 81Recovery of short swing trading profits by issuer______________ 82

Regulation of proxies; __ __ ____ __ 82Scope of proxy regulation___________________________________ 82Statistics relating to proxy statements________________________ 83Stockholder proposals; __ _ 83Ratio of soliciting to non-soliciting companies_________________ 84Proxy contests____________________________________________ 84

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TABLE OF CONTENTS VII

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF1934-Continued ,Page

Regulation of broker-dealers and over-the-counter markets__________ 84Registration; ______ _ _ ________ _ 84Administrative proceedings; 85Net capital rule___________________________________________ 105Financial statementa.; __ _____ _ _ _ 105Broker-dealer inspections, _______ _________ ___ _ 106

Supervision of activities of National Association of Securities Dealers,Inc________________________________________________________ 108

NASD disciplinary actions__________________________________ 109Commission review of NASD disciplinary action_______________ 111Commission review of N ASD action on membership _ __________ 113

Litigation under the Securities Exchange Act of 1934_ _ _ ___________ 114Anti-fraud litigation _ _______ __ _________ _______ 114Cases under the net capital rule_____________________________ 116Litigation involving broker-dealer registration and reporting

requirements____________________________________________ 117Proxy litigation , ____ ____ _ 118Contempt proceedings_____ __ 118Participation as amicus curiae_______________________________ 119

PART VI

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COM-PANY ACT OF 1935___________________________________________ 120

Composition of registered holding company systems-summary ofchanges____________________________________________________ 120

Developments in individual registered systems_____________________ 123Financing of active registered public utility holding companies and

their subsidiaries______ ________ __ ___ 134Competitive bidding; _______ ____ ______________ _____ 136Protective provisions of first mortgage bonds and preferred

stocks of public utility companies______ _________ ___ _ 137

PART VII

PARTICIPATION OF THE COMMISSION IN CORPORATE RE-ORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCYACT, AS AMENDED___________________________________________ 142

Summary of activities_______ __ ____ ______ _______ _ 142The Commission as a party to proceedings________________________ 143Procedural matters; ____ __ ___ _____ _____ 144Problems in connection with the administration of estates ,_____ 145'I'ruetee's investigations ~_____ 147Activities regarding protective committees________________________ 147Activities with regard to allowances______________________________ 148Advisory reports on plans of reorganization ~__________ 150

PART VIII

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939____ 156

vm TABLE OF -CONTEN',l'S

PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT PageOF 1940_______________________________________________________ 157

Companies registered under the Act______________________________ 157Growth of investment company assets____________________________ 158Program for inspection of investment companies :.__ 159Study of size of investment companies___________________________ 160Current informatlon., _ __ 160Applications and proceedings____________________________________ 161Litigation under the Investment Company Act of 1940_____________ 164

PART XADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940___________________________________________________________ 167

PART XI

OTHER ACTIVITIES OF THE COMMISSION_____________________ 171Courtproceedings_____________________________________________ 171

Civil proeeedings , __ 171Criminal proceedings________ __ 171Disciplinary proceedings against persons practicing before the

Commission.,.; __________________________________________ 184Complaints and investigations_______________________________ 185Enforcement problems with respect to Canadian securities______ 188Canadian restricted list____________________________________ 189Section of securities violations :_________________ 191Applications for nondisclosure of certain information___________ 192Activities of the Commission in accounting and auditing________ 193International Bank for Reconstruction and Development and

Inter-American Development Bank________________________ 200Opinions of the Commission________________________________ 201Statistics and special studies________________________________ 202Public dissemination of information__________________________ 205Information available for public inspection____________________ 205

Publications__________________________________________________ 207Organization__________________________________________________ 207Personnel, Budget and Finance__________________________________ 209

Personnel program__________________________ 210

PART XIIAPPENDIX-STATISTICAL TABLES

Table 1. A 25-year record of registrations under the Securities Act of 1933__ 215Part 1. Number and amount of registrations and amount registered

for cash sale for account of issuers, 1935-59______________ 215Part 2. Purpose of registration and industry classification for each five

fiscal years from 1935 to 1959 and for each fiscal year from1955 to 1959_________________________________________ 216

Table 2. Registrations fully effective under the Securities Act of 1933,fiscal year ended June 30, 1959 :..______________________ 217

Part 1. Distribution by months_________________________________ 217Part 2. Purpose of registration and type of security________________ 217Part 3. Purpose of registration and industry of registrant___________ 218Part 4. Use of proceeds and industry of registrant_________________ 219

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TABLE OF CONTENTS IX

Table 3. New securities offered for cash sale in the United States, 1934-58 Pageand by months January 1958-June 1959___________________ 220

Part 1. Type of offering________________________________________ 220Part 2. Type of security________________________________________ 222Part 3. Type of issuer _________ _____ ___ _____ _ 224Part 4. Private placement of corporate securities__________________ 226

Table 4. Proposed uses of net proceeds from the sale of new corporate secu-rities offered for cash in the United States, 1934.-58 and bymonths January 1958-June 1959_ _ __________ ___________ 228

Part 1. All corporate '____________________________________ 228Part 2. Manufacturingc , , _____ ___ _ _ 229Part 3. Extractive.; , _ _____ __ ________ __ _____ 230Part 4. Electric, gas and water__________________________________ 230Part 5, Raikoad______________________________________________ 231Part 6. Transportation other than railroad_______________________ 231Part 7. Communieation , ___________ ______ __ _ _ 232Part 8. Financial and real estate________________________________ 233Part 9. Commercial and miscellaneous___________________________ 234

Table 5. A summary of corporate securities publicly offered and privatelyplaced in each year from 1934 through June 1959____________ 235

Table 6. Notifications filed pursuant to Regulation A under the SecuritiesAct of 1933 for the fiscal years 1935-59____________________ 236

Table 7. Suspension orders issued pursuant to Regulations A and D underthe Securities Act of 1933 during the fiscal year 1959 __ ______ 236

Table 8. Brokers and dealers registered under the Securities Exchange Actof 1934- effective registrations as of June 30, 1959, classified bytype of organization and by location of principal office________ 241

Table 9. Number of stock and bond issues listed and registered on na-tional securities exchanges and the number of issuers involvedas of the close of each fiscal year, 1936 through 1959________ 242

Table 10. Number of issuers listing and registering securities for the firsttime on a national securities exchange and the number of issuersas to which the registration of pll securities was terminatedduring the fiscal years 1936 through 1959__________________ 243

Table n. Number of issuers and security issues on exchanges, as of June30, 1959_______________________________________________ 244

Part 1. Number of issuers and security issues on exchanges_________ 244Part 2. Number of stock and bond issues_________________________ 244

Table 12. Unlisted stocks on securities exchanges______________________ 245Part 1. Number of stocks on the exchanges in the various categories

as of June 30,1959___________________________________ 245Part 2. Unlisted share volume on the exchanges-calendar year 1958_ 245

'I'able 13. Dollar volume and share volume of sales effected on securitiesexchanges in the 12-month period ended December 31,1958and the 6-month period ended June 30, 1959_______________ 246

Table 14. Block distributions, 1942-58_______________________________ 247Table 15. Comparative share sales and dollar volume on exchanges, 1935-

58 and 6 months to June 30,1959________________________ 248Table 16. Number of proxy statements filed under Regulation 14, the num-

ber that included stockholder proposals under Rule 14a-8, thenumber of such proposals, and the net number of stockholderswhose proposals were included, fiscal years 1939-59_________ 249

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Table 17. Number of original and amended reports filed by directors, offi-cers, and principal stockholders under section 16 (a) of theSecurities Exchange Act of 1934, section 17(a) of the PublicUtility Holding Company Act of 1935, and section 30 (f) of theInvestment Company Act of 1940, showing their beneficialownership of, and their transactions in, equity securities of the Pageregistrant, fiscal years 1935-59_ ____________ ___ _____ 250

Table 18. Number and principal types of periodic reports filed under sec-tion 13 of the Securities Exchange Act of 1934 by issuers havingsecurities listed and registered on national securities exchangesduring the fiscal years 1939 through 1959, and the number ofsuch issuers as of the close of the fiscal year________________ 250

Table 19. Number and principal types of periodic reports filed under sec-tion 15(d) of the Securities Exchange Act of 1934 by issuershaving registered securities under the Securities Act of 1933,fiscal years 1937-59_ __ ______________________ __ 251

Table 20. Reorganization proceedings under Chapter X of the Bankrupt-cy Act in which the Commission participated, fiscal years 193!}-59____________________________________________________ 251

Table 21. Reorganization proceedings under Chapter X of the Bankrupt-cy Act in which the Commission participated during the fiscalyear 1959______________________________________________ 252

Table 22. Number of indentures filed and qualified under the "Trust Inden-ture Act of 1939 and the dollar amount of debt securities in-volved, fiscal years 1940-59__________________________ _ 253

Table 23. Number of investment companies registered under the Invest-ment Company Act of 1940 and the approximate dollaramount of gross assets at the end of each fiscal year, 1941-1959__________________________________________________ 253

Table 24. Number of annual and other periodic reports and sales litera-ture filed by registered investment companies and otherpersons under the Investment Company Act of 1940, fiscalyears 1941-59 J__________________________________ 254

Table 25. Summary of cases instituted in the courts by the Commissionunder the Securities Act of 1933, the Securities ExchangeAct of 1934, the Public Utility Holding Company Act of 1935,the Investment Company Act of 1940, and the InvestmentAdvisers Act of 1940_____ ____ _____ ______ 254

Table 26. Summary of cases instituted against the Commission, cases inwhich the Commission participated as intervenor or amicuscuriae, and reorganization cases on appeal under Chapter Xin which the Commission participated_____________________ 255

Table 27. Injunctive proceedings brought by the Commission under theSecurities Act of 1933, the Securities Exchange Act of 1934,the Public Utility Holding Company Act of 1935, the Invest-ment Advisers Act of 1940, and the Investment CompanyAct of 1940, which were pending during the fiscal year endedJune 30, 1959____ _______________ _______________ 256

Table 28. Indictments returned for violation of the acts administered bythe Commission, the Mail Fraud Statute (sec. 1341, formerlysec. 338, title 18, U.S.C.), and other related Federal statutes(where the Commission took part in the investigation anddevelopment of the case) which were pending during the1959 fiscal year_________________________________________ 257

TABLE OF CONTENTS XI

Table 29. Petitions for review of orders 'of the Commission under theSecurities Act of 1933, the Securities Exchange Act of 1934,the Public Utility Holding Company Act of 1935, and theInvestment Company Act of 1940, pending in courts of ap- Pagepeals during the fiscal year ended June 30, 1959___________ 274

Table 30. Contempt proceedings pending during the fiscal year endedJune 30, 1959_______________ ___ ______ _ 276

Part 1. Civil Contempt Proceedings., _ _ 276Part 2. Criminal Contempt Proceedings__________________________ 276

Table 31. Cases in which the Commission participated as intervenor oras amicus curiae, pending during the fiscal year ended June 30,1959____________________________________________________ 277

Table 32. Proceedings by the Commission to enforce subpoenas under theSecurities Act of 1933 and the Securities Exchange Act of1934, pending durmg the fiscal year ended June 30, 1959__ 279

Table 33. Miscellaneous actions involving the Commission or employeesof the Commission during the fiscal year ended June 30, 1959_ 280

Table 34. Actions pending during fiscal year ended June 30, 1959, to en-force voluntary plans under section l1(e) to comply withsection 11(b) of the Public Utility Holding Company Act of1935__________________________________________________ 281

Table 35. Actions under section l1(d) of the Public Utility Holding Com-pany Act of 1935 pending during the fiscal year ended June30, 1959, to enforce compliance with the Commission's orderissued under section l1(b) of that act_____________________ 283

Table 36. Reorganization cases under Chapter X of the Bankruptcy Actpending during the fiscal year ended June 30, 1959, in whichthe Commission participated when district court orders werechallenged in appellate courts , __ ___________ ________ 284

Table 37. A 26-year summary of criminal cases developed by the Com-mission, fiscal years 1934-59_ ________ __ ______ 286

Table 38. Summary of criminal cases developed by the Commission whichwere still pending at June 30,1959_______________________ 287

Table 39. A 26-year summary classifying all defendants in criminal casesdeveloped by the Commission, 1934 to June 30, 1959_____ 287

Table 40. A 26-year summary of all injunction cases instituted by theCommission, 1934 to June 30, 1959, by calendar year_____ 288

FOREWORDA little over 25 years has passed since adoption of the first Federal

securities law which, like subsequent enactments, was designed to pro-tect the interests of investors and of the public generally. On this"silver anniversary" of the organization of the Securities and Ex-change Commission to administer those laws, it is fitting in this 25thAnnual Report to review the causes, objectives and principal featuresof the statutes under which the Commission is charged with responsi-bilities in the interest of protecting investors and the public.

The Federal securities laws were not designed to prevent investorsfrom losing money in the stock market j indeed, it is extremely doubt-ful whether any laws could do this in a free economy. These lawsseek, by requiring disclosure of the facts about issues of securitiesoffered in interstate commerce or traded on exchanges, by prohibitingfraud in such transactions, and by other means, to secure the dis-semination of accurate information to investors and to foster soundsecurities markets. More fundamentally, they aim to require thatthose who deal with the investments of the American people observehigh standards of conduct.If the present financial markets are compared with those of thirty

years ago, it may reasonably be concluded that these basic objectiveshave been realized. This is so notwithstanding the fact that the pres-ent level of economic and financial activity, with resulting opportuni-ties for fraud and malpractice, puts the structure of Federal securitiesregulation to a most severe test.

One of the basic objectives of the Federal securities laws in pro-viding protection for investors was to bring about a restorationof investor confidence in securities and the securities markets. Suchconfidence had been severely shaken as a result of the stock marketdebacle of 1929 and its aftermath. Restoration of investor confidencewas important not only to those in the securities industry whose live-lihood depended upon it, but was of tremendous importance to ourwhole economy. In order to grow and prosper, business and industryrequire large amounts of capital for plant expansion, new equipmentand working capital, and the availability of such capital depends inlarge measure upon the investing public's confidence in securities as asafe and profitable medium for the investment of its savings. Therestoration and maintenance of investor confidence are thus intimatelyrelated to industrial growth and a healthy economy.

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XIV FOREWORD

On September 1, 1929, the market value of all stocks listed on theNew York Stock Exchange amounted to $89 billion. By the middleof 1932 their market value had declined to $15 billion. As of June30, 1959, stocks listed on that Exchange had an aggregate marketvalue of almost $300 billion.

Also significant are the data with respect to the public offerings.During the last 5 fiscal years (1955-59), there have been 4,336 reg-istered public offerings of securities aggregating nearly $71 billion inamount-or an average of 867 offerings amounting to $14 billion peryear. For the prior 20 fiscal years (1935-54), the number of reg-istered offerings averaged 446 and were in the average amount of$4:1h billion per year. Although figures for the years prior to 1934are not strictly comparable, it 'appears that less than $400 million ofnew issues were offered in the depression year 1933, while about $10billion were offered in the peak year 1929, much of which provedworthless.It is interesting to note in this connection that, according to avail-

able data, business invested about $11 billion in new plant and equip-ment in 1929. Capital outlays by business averaged $4% billion peryear during the 3 years 1934-35-36, increased to an average of $10billion during the years 1944-45-46 and reached an average of $30billion in the years 1954-55-56. New capital investment amounted, toa record $37 billion in 1957 and $30 billion in 1958; and it is anticipatedthat such investments will increase to $33 billion in 1959. To com-plete the picture, gross national product, which amounted to $104 bil-lion in 1929, averaged $73 billion per year for the period 1934-35-36,$212 billion for 1944-45-46, and $393 billion for 1954-55-56. Thefigure grew to $442 billion for each of the years 1957 and 1958, and isexpected to reach an all-time high of $485 billion for 1959.

A true measurement of the benefits which have derived from Federalsecurities administration is of course impossible, but some indicationof the advancements made in behalf of investor protection appearsin a comparison of the financial community and the nature of itsoperations today with that which existed prior to the federalregulation of securities.

The picture of financial and corporate practices existing in the ear-lier era, as unfolded in congressional and other investigations, someconducted by the Commission itself, demonstrated the need for legis-lation action. Responsible persons in financial institutions, corporateexecutives and many others entrusted with the savings of investors,to whom they owed a high degree of fiduciary care and responsibility,had abused the trust thus reposed in them. With respect particularlyto the sale of new securities, the House of Representatives in its report

FOREWORD xvon the first legislative enactment in the securities field (Report :No.85,73d Congress, First Session) stated, in part:

"During. the post-war decade some 50 billions of new securities werefloated in the United States. Fully half or $25,000,000,000 worth ofsecurities floated during this period have become worthless. These coldfigures spell tragedy in the lives of thousands of individuals who investedtheir life savings, accumulated after years of effort, in these worthlesssecurities. The flotation of such a mass of essentially fraudulent securi-ties was made possible because of the complete abandonment by manyunderwriters and dealers in securities of those standards of fair, honestand prudent dealing that should be basic to the encouragement of invest-ment in any enterprise. .Alluring promises of vast wealth' were freelymade with little or no attempt to bring to the investor's attention thosefacts essential to estimating the worth of any security. High-pressuresalesmanship rather than careful counsel was the rule in this most dan-gerous of enterprises."

These and other abuses contributed to a collapse of values, and theirrevelation seriously undermined the confidence of the investing publicin the capital markets and in securities as media of investment. Theorgy of speculation which had existed in the stock market, coupledwith the fraud, manipulation and other malpractices then prevalent,could lead only to disaster.

One of the evils was the artificial stimulation of interest in, and themanipulation of the market price of, a given security so that it mightbe "dumped" on unsuspecting investors at the higher price and with ahandsome profit to the manipulator. "Pool" operations were numer-ous, the operators timing their purchases and sales in a manner whichcreated market activity at increasingly higher prices and therebystimulated participation by the investing public, whose purchasesfurther accentuated the market rise. When the price reached itsdesired level, the pool operators "pulled the plug", dumping theirsecurities on the market at the higher price, whereupon the marketprice slumped to its original level or lower. The operators also par-ticipated in "bear raids", and, assuming a short position in a partic-ular stock, engaged in a series of transactions which drove the marketprice of the stock down to a level at which they could cover their shortposition at a profit.

These and similar operations resulted in a situation in which no onecould be sure that market prices for securities bore any reasonable re-lation to intrinsic values or reflected the impersonal forces of supplyand demand. In fact, the investigation record demonstrated thatduring 1929 the prices of over 100 stocks on the New York StockExchange were subject to manipulation by massive pool operations.One of the principal contributing factors to the success of the ma-nipulator was the inability of investors and their advisers to obtainreliable financial and other information upon which to evaluate securi-

XVI FOREWORD

ties, and manipulators were further aided by the dissemination offalse and misleading information, tips and rumors which flooded themarket place.

There were other factors which were shown to have con-tributed to the fundamental weakness of the pre-SEC securitiesmarket. Principal among these was the extensive use of creditto finance speculative activities or the purchase of stock on mar-gin. Speculators ignored the fact that the yield on stocks purchasedon margin was far less than the interest on their debit balances withbrokers. There was almost no limit to the amount of credit which abroker might extend to his customer. As a result, a slight decline inthe market price of securities could, and did, set off a chain reaction-the customer was sold out in a declining market at a loss because hehad insufficient funds to put up additional margin; such distress salesfurther accentuated the market decline and caused other margin cus-tomers to be sold out; and brokers who had over-extended themselveswith banks in order to finance excessive speculation by customers werehard-pressed for capital and some even became insolvent, thus furtherendangering the position of other customers.

The misuse of corporate information by management officials andother "insiders" was also common practice. Executive officers whoowed a high degree of fiduciary responsibility to the company andits stockholders withheld vital information about the company, itsoperations and earnings, while accumulating a personal position in itsstock, placing themselves in position to capitalize on any fluctuationin the price of the stock when the news was released to the public.Moreover, the entrenched position of management was fortified bylax standards governing the solicitation of proxies by means of whichmanagement perpetuated itself in power.

An extensive investigation of electric and gas utility holding com-panies conducted by the Federal Trade Commission, which has oftenbeen termed the most comprehensive study of any industry under-taken by the Federal government, had disclosed widespread abuses inthe formation and operation of utility holding company systems,including (1) inadequate disclosure to investors of the informationnecessary to appraise the financial position and earning power of thecompanies whose securities they purchase; (2) issuance of securitiesagainst fictitious and unsound values; (3) overloading of operatingcompanies with debt and fixed charges, which tended to prevent vol-untary rate reductions; (4) imposition of excessive charges uponoperating companies for various services such as management, con-struction work 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 to

FOREWORD XVII

complicate and obstruct State regulation; (6) the control of holdingcompanies and subsidiaries through disproportionately small invest-ment; and (7) the extension of holding company system control anddomination over far-flung utility properties without regard to theintegration and coordination of related properties.

Starting with operating company common stocks, representing frac-tional investments in the properties themselves, the holding companiesissued billions of dollars of debt securities and preferred stocks andpyramided holding company upon holding company in such a waythat control represented by the voting stock of the top company wasbased on little or no actual investment in the operating properties atthe bottom level, at which level alone were generated the earnings andincome to support the entire system. The imposition of leveragesecurity upon leverage security had the result that a small percentageincrease in operating company income would be phenomenally mag-nified at the level of the top holding company's most junior equitysecurities. But this factor of magnification worked in reverse whenincome declined. Electric and gas operating companies actually suf-fered less during the depression days of the early 1930s than almostany other substantial segment of our economy. Their operatingrevenues dropped no more than about 15 percent from the peak levelsof the 1920s. That drop, however, was enough to bring down in ruinsmany of the fantastic corporate superstructures that had been imposedon top of the operating companies. Several of the largest holdingcompanies were forced into bankruptcy. The investing public whichhad been induced to purchase their securities suffered tragic losses ofuntold millions of dollars.It has been estimated that, from 1924 to 1930,utility holding com-

panies floated some $5 billion of securities, the great bulk of whichwent not to build or improve utility properties but to purchase al-ready outstanding voting securities of operating utility companies.The businesses of some of the companies acquired had no remote rela-tionship to that of an electric or gas utility and one system even in-cluded a baseball team. The build-up, without any economic justifi-cation, of huge utility empires stretching across the nation was exem-pilfied by one holding company which grew in gross assets from $6million in 1923 to $1 billion in 1929, only to become insolvent andrequire years for its reorganization and rehabilitation-not, however,without tremendous losses to the investing public.

From September 1929 to April 1936, 53 utility holding companieswith about $1.7billion of securities outstanding went into receivershipor bankruptcy. An additional 23 holding companies with about $535million of outstanding securities defaulted on interest and offered re-

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XVIII FOREWORD

adjustment plans. At December 1940, registered holding companieshad about $2.5 billion of preferred stock outstanding of which $1.4billion had dividend arrearages amounting to $476million.

The financial practices of the holding companies had also resultedin serious injury to many of their operating subsidiaries. FromSeptember 1929 to April 1936, 36 utility subsidiaries, with outstand-ing securities of $445 million, went into bankruptcy or receivership.An additional 16 such companies with $152 million of outstandingsecurities offered readjustment or extension plans after defaulting oninterest. Of preferred stocks of operating subsidiaries aggregatingabout $1.6 billion at December 1940, some $453 million had dividendarearages amounting to about $165 million.

Another investigation, conducted by the Commission in the mid-1930's,of companies engaging in the business of investing, reinvestingand trading in securities and which offer their own securities forpublic sale in order to obtain investment capital, clearly indicated theneed for regulation of this important segment of our financial com-munity. Here again, the evidence showed a callous disregard by cer-tain management officials of their fiduciary obligations to investorsand, in many instances, a course of conduct which clearly constitutedfraud. Among the practices revealed by the Commission's investiga-tion were the purchase and sale of portfolio securities by and betweenthe company, its management officials and other affiliated interests,for the personal profit of the insiders. The sale of investment com-pany shares through false and fraudulent representations was acommon practice.

This investigation also disclosed that no machinery existed forenforcing fiduciary responsibilities of individuals and firms whichwere engaged in the business of advising others, for compensation,with respect to their purchases and sales of securities, and thatserious abuses were possible and probable.

Another Commission investigation disclosed practices whichevidenced a need for independent trustees to provide protectionof the interests of security holders in the areas of corporate re-organizations of insolvent corporations and the issuance and sale ofdebt securities pursuant to mortgage and other indentures.

'Yith these exposures of malpractices Congress stepped into thebreach and imposed, upon those engaged in the purchase and sale ofsecurities, standards of conduct which should long since have beenuniversally recognized by them as basic to any proper relationship topublic investors. In fact, they were based upon the fundamental con-cepts of fiduciary obligation which the law already imposed on thosemanaging other people's money and securities.

FOREWORD XIX

The first remedial measure, the Securities Act of 1933, dealt withthe capital formation process so essential to industrial growth. Inurging the passage of this legislation, which he characterized as the"Truth in Securities" law, President Roosevelt stated that what wassought was "a return to a clearer understanding of the ancient truththat those who manage ... other people's money are trustees ... "The primary aim of the legislation was to provide public disclosureof all financial and other data bearing upon the worth of securitiesso that they might be realistically evaluated by investors. It alsosought to outlaw fraud in the sale of securities under a broadenedconcept of fraud not limited by technical common law definitions.

Disclosure under the Securities Act is accomplished in a two-stepprocess: (1) by filing a registration statement with the Commissioncontaining certain required financial and other data; and (2) by mak-ing available to purchasers and to investors who receive written offersto sell through the mails, a prospectus containing all pertinent factsupon which the company's operations may be appraised and its securi-ties evaluated. Among other things, the prospectus must contain in-formation with respect to the character, size and profitableness of thebusiness; the capitalization of the issuer; the purpose of the proposedoffering of securities and the use to which the proceeds are to be ap-plied; outstanding options for the purchase of securities of the issuer;remuneration of officers and directors, including bonus and profit-sharing arrangements; contractual or other arrangements with man-agement officials or other affiliated interests; pending or threatenedlegal proceedings; and the underwriting and other terms of the offer-ing. Moreover, the prospectus must include a balance sheet andthree-year earnings statement, certified by an independent publicaccountant.

When the registration statement is filed, the securities coveredthereby may be offered for public sale, either orally or by meansof certain written instruments prescribed by Commission rules. Butthe securities may not be sold until the registration statement becomesor is made effective. The duration of this "waiting period", usuallyseveral weeks, depends upon the degree of initial compliance with thedisclosure requirements. The waiting period provides an opportunity,explicitly provided for in the statute and the Commission's rules, forwidespread dissemination in the financial community and amongdealers and the investing public, of the salient factual disclosures,financial and otherwise, contained in the registration statement.Thus, opportunity is given the investing public to be informed ofthe essential facts about the company and the securities it proposesto offer for public sale before the public investor is committed to theirpurchase.

xx FOREWORD

During this waiting period, also, the Commission conducts athorough examination of the registration statement and prospectusto determine, as best it can, that all required facts have been dis-closed, accurately and completely, and that there are no "half truths"due to the omission to state facts required to be stated in order tomake not misleading the disclosures and representations made. Ifin its examination the Commission finds that the registration state-ment is inaccurate or incomplete in respect of material fads, theCommission may, after notice and opportunity for hearing, issue a"stop order" suspending the registration statement, which operates tobar distribution of the securities so long as the stop order remains ineffect. The order may be lifted when and if the registration state-ment is amended to correct the deficienciesupon which the stop orderwas based. Normally, however, resort to the stop order procedureis not essential to a determination of compliance with the disclosurerequirement, and the issuing company is advised of and given an op-portunity to file any revision, correction or clarification of disclosureswhich the examination may show to be necessary to an understandingof the facts.

An analysis of an issuing company's balance sheet and earningsstatement is of paramount importance in the evaluation of securities.The value of financial statements is directly dependent on the sound-ness of the accounting principles and practices observed in theirpreparation and on the adequacy and reliability of the work per-formed by public accountants who certify as to their fairness. Uni-formity in auditing practices and consistency in accounting presenta-tion are essential to public reliance upon and an understanding ofthe earnings and other data presented and to a proper comparisonwith the financial statements of other companies. Therefore, a majorobjective of the Commission has been to improve accounting andauditing standards and to assist in the establishment and maintenanceof high standards of professional conduct by certifying accountants.

The accounting rules, decisions and opinions of the Commission,in conjunction with authoritative pronouncements by professionalaccounting societies and by other governmental agencies, haveachieved a substantial clarification and improvement in the accountingand auditing principles and practices generally followed in the prep-aration of financial statements throughout the financial community,whether or not the particular issuing company is directly subject tothe Commission's regulations. Moreover, the Commission's require-ment that an accountant who certifies financial statements filed withit shall be "independent" of his client, has extended and fortified theethical standards customarily observed by certifying accountants.

FOREWORn XXI

The Commission's examination relates only to the accuracy andadequacy of the disclosures. The Commission is not empowered to,and does not, appraise the merits of the securities or otherwise passupon the soundness of the venture. In fact, the Act declares it to beunlawful to represent to investors that the Commission has approvedor otherwise passed on the merits of registered securities or found theregistration disclosures accurate and complete. However, it shouldbe noted in this connection that heavy penalties attach to the filingof registration statements which are false and misleading. More-over, investors who suffer losses in the purchase of registered securi-ties have important recovery rights (which they may pursue in Fed-eral or State courts) if the disclosures contained in registration state-ments are false and misleading. 'Vhile the Commission cannot anddoes not vouch for the accuracy and adequacy of registration dis-closures, its examination, coupled with the penalties against false fil-ings and the recovery rights of investors, tend to contribute to thegeneral reliability of the disclosures.

Dissemination of information contained in the registration state-ment is basic to the statutory objective of investor protection. Thisis accomplished by the large-scale distribution of the prospectus to allmembers of the underwriting and distributing or selling groups aswell as to prospective investors. The law requires the delivery ofthe prospectus to any person to whom a written offer is made throughthe mails, and to each and every purchaser. This dissemination ofinformation is supplemented by the extensive redistribution of theregistration disclosures by the various securities manuals and otherinvestment advisory and statistical services, which are readily avail-able to all broker and dealer firms, trust departments and others.Thus, new securities may be evaluated by a broad cross-section of theinvesting public.

The registration process has been an effective instrument for therestoration of investor confidence. The fad that there has been a$15 billion average volume of public offerings of registered securitiesduring the past four years, and that capital expenditures during thatperiod have reached record heights, is eloquent testimony to thesmooth functioning of the capital formation processes today and ofthe steady flow of private capital into industry.

The second enactment in the field of Federal securities regulationwas the Securities Exchange Act of 1934, which sought to outlawmisrepresentation, manipulation and other abusive practices in our se-curities markets and to establish and maintain just and equitableprinciples of trade which would be conducive to open, fair and orderlymarkets.

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The Congress recognized that the dearth of reliable financial andother information in the pre-SEC days had made it difficult, if notimpossible, to evaluate adequately and realistically securities tradedon exchanges, and that this paucity of information facilitated the dis-semination of false information about the issuing companies and theirsecurities and the manipulation of the prices of securities. Accord-ingly, the 1934act extended the disclosure principle by requiring everycompany which has securities listed on an exchange to register withthe Commission and to file annual and other periodic reports disclos-ing financial and other data which the investing public needs in eval-uating the company's securities. A similar periodic reporting require-ment is imposed by this law upon the larger companies whose securitieshave been registered for public offering under the Securities Act,whether or not they are listed on an exchange. The Commission isgiven authority to require that these financial statements be certifiedby independent public accountants. On June 30, 1959, securities of2,236 issuing companies were listed and registered on national securi-ties exchanges. The volume of trading on the exchanges in thesesecurities during the year ended that date was about $50 billion, andtheir aggregate market value at the year end was about $350 billion.The very size of these figures is evidence of the importance to invest-ors of reliable financial and other information with respect to the is-suing companies and their securities. The data contained in thereports of these companies receives widespread dissemination throughsecurities manuals, statistical and advisory services, the financial pressand otherwise, and has an important impact upon the evaluation oftheir securities by the investing public.

The disclosure principle was further extended by two additionalprovisions of this law, applicable to "insider" trading in listed se-curities and to the solicitation of proxies from the holders of suchsecurities. 'With respect to the former, the 1934 act requires thatinsiders (officers, directors, and 10% owners) report regularly tothe Commission and the exchange their holdings of and transactionsin all equity securities of the particular issuer with whom they areaffiliated. The number of these reports of holdings and transactionsof insiders now exceeds 39,000 annually. Furthermore, in order tocurb the misuse of "inside" information by such persons which hadbeen so prevalent prior to enactment of the statute, insiders are madeliable to account to their companies for their profits on any purchaseand sale, or sale and purchase, which occurs within a six-monthperiod.

Moreover, management officialsof listed companies must disclose intheir solicitation of proxies basic financial and other information re-flecting the company's financial condition and the results of its opera-

FOREWORD XXIII

tions-information which reflects management's stewardship. Toenable investors in such companies to vote intelligently upon allcorporate matters requiring stockholder approval, whether the elec-tion of directors, authorization for the issuance of additional securi-ties, merger with another company or otherwise, the Commission haspromulgated a set of "proxy rules" which require disclosure of thebasic facts pertinent to the subject matter of the vote. In addition,the form of proxy must give the stockholder freedom of action to votefor or against different proposals, and may not bind him to vote onan all-or-none basis.

The Commission's proxy rules also entitle independent or minoritystockholders to include, in management solicitations, any proper pro-posals which they wish to have put to a vote of the stockholders.Under the rules, independent solicitations of proxies by minoritystockholders, including the solicitation of proxies for the election oftheir own nominees to the board, are also facilitated.

The 1934 act also provides for the registration of stock exchangesand of brokers and dealers who engage in the over-the-counter securi-ties business. A prerequisite to stock exchange registration is a re-quirement that the rules of the exchange shall proscribe practices bymembers which may not be just and equitable to public investors, andthe exchange must be empowered to suspend, expel or otherwise dis-cipline members for violations of those rules. The Commission has aresidual power to see that exchange rules are modified or supple-mented to accomplish these objectives. Today, 14 national securitiesexchanges are registered with the Commission.

This system of self-regulation, which recognizes that exchanges arevested with a public interest and that the exchanges themselves havethe primary responsibility for establishing, maintaining and enforc-ing just and equitable principles of trade, is an important factor inthe market place today. It also has its counterpart in the over-the-counter markets, contained in a 1938 amendment to the law providingfor the organization of associations of over-the-counter dealers whichwould "police" their membership. One such institution, the NationalAssociation of Securities Dealers, Inc. ("NASD"), has been organizedand now has over 4,000 members. Ithas adopted and enforces a codeof fair practice governing the conduct of its members and their rela-tionships to investors.

As previously indicated, brokers and dealers must register with theCommission before they may engage in the securities business in in-terstate commerce. At the end of the 1959 fiscal year, 4,907 brokersand dealers were registered with the Commission. The Commissionmay deny or revoke the registration of a broker-dealer in cases offraud in securities transactions, or other misconduct in the securities

XXIV FOREWORD

business, where the Commission, after notice and opportunity forhearing, finds such denial or revocation in the public interest. Like-wise, the Commission may, on similar grounds, suspend or expel amember from membership in the NASD or in a stock exchange.

The Commission maintains an active surveillance of securities trad-ing practices, both on exchanges and in the over-the-counter markets.It also has adopted numerous rules which establish standards of con-duct governing the activities of brokers and dealers and prohibit actsand practices inimical to the interests of investors. Two of these areworthy of special note. One prohibits short selling on an exchangewhich would tend to precipitate or accentuate a price decline. An-other requires that brokers and dealers maintain at all times a mini-mum capital position in relation to their liabilities to other personsso that the funds and securities of customers in their custody will notbe jeopardized. This rule minimizes the possibility that sudden re-verses will cause a firm to become insolvent and thereby endangercustomers' free credit balances and securities held in custody. Itmaybe noted in this connection that the Commission carries on a programof broker-dealer inspections to ensure compliance with its net capitalrule and otherwise to see that the activities of brokers and dealers areconducted properly.

No less important to the stability and orderliness of the stock markettoday are the rules of the Board of Governors of the Federal ReserveSystem which regulate the amount of credit which brokers and banksmay extend on the purchase of listed securities by investors. Themargin requirement has fluctuated over the years from a low of 25percent in 1934 to 100 percent (no margin) during the war years, inaccordance with that Board's view as to proper margin in light of theover-all credit position of the Nation. By curbing excessive specula-tion, the rules have added a stabilizing influence in the market. Thenecessity for frequent and drastic "margin calls" has thus been re-duced, offering further stability to the market. The Commission hasthe duty of enforcing compliance by brokers and dealers in securitieswith the rules so established.

Both the 1933and 1934acts authorize the Commission to take testi-mony under oath and to subpoena books and records for the purposeof developing the facts with respect to possible securities violations,and to seek Federal court orders of injunction against the continuanceof acts and practices violative of the laws or Commission rules there-under. They also provide for criminal prosecution (through theDepartment of Justice) of any individual, firm or corporation if evi-dence developed in the Commission's investigations establishes thatthey have engaged in fraud, manipulation or other misconduct inconnection with the purchase and sale of securities or have otherwisewillfully violated the law.

FOREWORD xxv

The record of investigation and enforcement actions of the C0111-

mission is a formidable one, far too long to be recited here. Thatrecord is detailed in the several annual reports which have been filedby the Commission with Congress over the years. It may be notedthat many violations of the law are discovered and stopped beforeany substantial damage to investors has occurred. In other cases, theCommission's investigations have resulted in restitution of investors'funds in substantial amount. Of perhaps even greater importance tothe investing public is the deterrent effect which the statutory sanc-tions and the Commission's enforcement powers have upon those whomight otherwise have, and exercise, a free hand to defraud innocentinvestors.

The legislation designed to meet the problems posed by the abusesdisclosed in the investigation of the electric and gas utility industrywas embodied in the Public Utility Holding Company Act of 1933.The principal objective of this statute was to free local operatingutility companies from the control and domination of absentee anduneconomic holding companies, and to permit them to be regulatedmore effectively by the States in which they operate. In 1930, 1;)

holding company systems controlled 80 percent of the privatelyowned electric generating capacity in this country, and similar con-centration existed in the gas utility field. As previously indicated,these countrywide utility empires were put together with little regardfor efficient and economic service of electricity and gas to consumersand without regard for the investors whose funds had been used toconcentrate a maximum of control and profit in the hands of a few.

The act called for a breakup of the huge utility combines and,generally speaking, sought to restrict the operations of utility holdingcompanies to one or more systems whose operations are integratedand confined to a single State and States contiguous thereto. It alsohad as one of its major objectives the simplification of the corporateand capital structures of holding company systems and the redistri-hution of voting power among security holders on a fair and equitablebasis.

In 1940, when the statutory program of integration and simplifica-tion actually got under way, 12 of the registered systems each con-ducted retail operations in 10 or more States, and 17 additional sys-tems operated in 5 to 9 States. At one time or another since 1938,these systems contained a total of 2,387 companies, many engaged inmiscellaneous unrelated nonutility businesses, and many being sub-holding companies serving no demonstrable economic function.Drastic surgery was called for to simplify these structures, to restoresome semblance of sane and sensible corporate and capital structuresand to redistribute voting power and control on a fair and equitable

XXVI FOREWORD

basis consistent with a realistic evaluation of the rights of the variousand conflicting interests of security holders.

The volume and complexity of the corporate and capital structureswhich "ere required to be simplified, and the nature and scope ofthe geographical dispersion of the properties required to be inte-grated presented extremely difficult and novel problems which it wasthe task of the Commission to resolve. Opponents of the legislationhad asserted that the law would cause dumping and forced liquidationof securities, demoralizing the market therefor, and they character-ized the integration and simplification requirements as a "death sen-tence" for the utility industry. The Congress, on the other hand,contemplated that this program should not destroy any legitimateinvestment values, and the Commission was given a mandate to bringabout the required integration and simplification in keeping withthat objective.

The opposition of industry which marked the passage of this reformmeasure was continued after its enactment. Most of the larger com-panies refused to register with the Commission, as the law required,and it was not until the Supreme Court upheld the constitutionalityof the registration requirement in 1938that these companies bowed tothe registration requirement. They continued, however, to resist thelaw's integration and simplification requirements.

The act contemplated that industry would be given an opportunityto propose voluntary plans which would effectuate the objectives ofintegration and simplification, but it also wisely empowered the Com-mission to take necessary action to that end if the industry failed soto do. For the most part, at least initially, the industry was unyield-ing, and it became necessary for the Commission to invoke its powerto issue administrative orders directing compliance with the require-ments of the law. Of course, such orders could only be issued afternotice and opportunity for hearing and after the development of anevidentiary record. Many of the orders requiring integration andsimplification were challenged in the courts, on constitutional andother grounds, but all were ultimately sustained.

After the Commission had thus established the general patternof compliance, holding company systems came forward with volun-tary plans for divestment of nonretainable properties and securitiesof nonretainable subsidiaries. Such plans had to comply with thestatutory mandate in this respect and had to be fair and equitable toall affected security holders. Plans proposed for simplification ofcorporate and capital structures also had to be tested in the same man-ner. In ruling upon these plans, the Commission developed the so-called "investment value" doctrine under which the claims of securityholders are evaluated for purposes of reorganization on u going-con-

FOREWORD

cern basis rather than on the liquidation basis followed in reorganiza-tions in equity receivership and bankruptcy proceedings where theclaims are treated as matured. Under the investment value doctrine,which was duly sustained by the courts, plans of reorganization wereapproved which accorded participation to senior claimants upon thebasis of the present worth of their securities on a going-concern basis,and similarly to junior security holders on the basis of their second-ary claim to future earnings, even though they would not have hada right to participate if the senior claims were evaluated upon thebasis of their liquidation preferences.

Compliance with the integration and simplification requirementstook various forms. They included mergers and consolidations,separation of large systems into smaller, integrated systems, divest-ment of nonutility properties unrelated to the utility business, sale ofnonretainable utility properties to other systems with whose prop-erties they could be integrated, sale of the securities of nonretainablesubsidiaries to the public at competitive bidding or pursuant to arights offering to stockholders of the parent company and distribu-tion of securities pro rata among stockholders.

The fundamental economic soundness of the act and the methodsprescribed for its administration have been demonstrated by the re-sults achieved, and the directive of Congress that the program couldand should be effectuated without injury to investors has been carriedout. Although tremendous values were salvaged by integration andsimplification, that process unavoidably entailed the realization oflosses by many investors who had purchased securities on the basisof anticipated values which had been but a mirage, or had been dis-sipated by the holding companies themselves. All the damage couldnot possibly be undone--the dollar amount of securities which hadbeen issued was in some instances vastly in excess of the values thatcould be realized by the salvage and rebuilding process.

The integration and simplification program represented the mostcomprehensive undertaking ever assumed by the Government to re-habilitate an entire major industry. In the process, the number ofcompanies now comprising the 18 active registered holding companysystems has been reduced to 176-and only 3 of the systems operate inmore than 4 States and none operates in more than 9. Today, thesecurities of the divested companies and of those registered companieswhich have completed their integration and simplification programshave an excellent market acceptance. The utility industry as a wholeis enjoying financial health and stability, and has been able to financeexpansion programs of unprecedented proportions largely out of newmoney raised from the public sale of securities. It is interesting tonote in this connection that a study made by the Commission in 1951

XXVIII FOREWORD

of the market values of the common stocks of 12 holding companiesbetween the dates of their registration with the Commission and Sep-tember 24, 1951, showed that in each instance the market value of thecompany's stock increased during that period and in almost all in-stances the rate of increase substantially exceeded the rate of increasein the Dow Jones utilities averages. Holders of utility preferredstocks have similarly benefited in that all dividend arrearages havebeen satisfied and the holders have been accorded securities and cashrepresenting the fair value of their investments.

In actuality, then, the feared integration and simplification pro-visions of the law have been vindicated and those who condemnedthe act have come to praise it. That which was once denounced as adeath sentence to the progress of the utility industry is now generallyregarded as having been the means of its regeneration .. The 176 companies which remain subject to the Commission's con-

tinuing; jurisdiction under the act must comply with its regulatoryprovisions governing their purchase and sale of utility securities andproperties, dividend payments (in circumstances where such paymentmight result in a corporate abuse), intercompany loans, solicitationof proxies, and insiders' transactions. The act also forbids registeredholding companies to charge for services to their subsidiaries and re-quires that all services performed for any company in a holding com-pany system by a mutual or subsidiary service company be renderedat cost, fairly and equitably allocated.

'With respect to the issuance and sale of securities, the act generallyprovides that the Commission shall not authorize their sale unlessit finds that the security meets certain tests, including the requirementthat the security must be reasonably adapted to the earning power ofthe company and its issuance necessary and appropriate to the eco-nomical and efficient operation of the issuer's business and not detri-mental to the public interest or the interest of investors or consumers.The Commission has adhered to the policy of requiring sound capitalstructures containing adequate common stock equity. The Commis-sion also must find that fees, commissions and other remunerationpaid in connection with the sale are not unreasonable.It is recognized that the cost of capital is an important element

of expense affecting utility rates and that utility companies are undera duty to obtain their capital at the lowest cost consistent with a soundfinancial structure. One of the evils disclosed by the investigationwas the absence of arms-length bargaining in the sale of securities andutility assets, which was in large measure an outgrowth of the "tradi-tional banker" relationships between certain large investment bank-ing firms and particular holding company systems. Such relation-ships had given these bankers a virtual monopoly over the financing

FOREWORD

of system companies and had generally resulted in exorbitant under-writing commissions.

To implement the statutory objective that underwriting fees andcommissions be reasonable in amount, to eliminate investment, bankercontrol and to assure the maintenance of competitive conditions, theCommission in 1941 adopted a rule under the act which generallyrequires that securities of registered holding companies and theirsubsidiaries be sold by means of competitive bidding. Since theadoption of that rule, there has been active competition among in-vestment bankers for the purchase of utility securities. Approxi-mately $11 billion of utility securities of various classes have been soldby means of competitive bidding under the rule in the past 17 years.The rule allows an exception from competitive bidding under specialcircumstances and upon a showing that a negotiated underwriting ora direct placement would be more advantageous and that competitiveconditions are otherwise maintained. Some $2.3 billion of securitieshave been excepted from the rule since it was adopted.

The effect of the competitive bidding rule actually extends beyondthe limited number of companies subject to its requirements, for theprices obtained and the underwriting spread paid by these companiesin their offering and sale of securities through competitive biddinghave set the standard for all security offerings, whether or not subjectto the rule. Competitive bidding is regularly required by the Inter-state Commerce Commission, the Federal Power Commission, andmany State regulatory commissions. This technique was in effect insome areas before 1941, but it is clear that its adoption by the SEChas been instrumental in achieving the wide acceptance which is nowgiven to it. Moreover, it has been employed by a number of utilitycompanies who were under no compulsion to do so. There can be littledoubt that the competitive bidding rule has been responsible in a sub-stantial degree for the noticeable decrease in the cost of flotation ofsecurities over the past two decades.

In furtherance of the statutory objectives of economy in the raisingof capital and the protection of the interests of investors, consumersand the public, the Commission has from time to time promulgatedother rules and policy statements governing the financing of registeredsystem companies. Notable among these are statements of policy gov-erning "protective provisions" which must be included in mortgageindentures pursuant to which debt securities are issued and sold andin corporate charters governing the rights and interests of preferredstockholders. 'With respect to bond indentures, for example, thebonds must be redeemable at any time at reasonable redemption pre-miums, certain asset and earnings tests must be met if a companywishes to issue additional bonds, a sinking fund is required as well as

xxx FOREWORn

a renewal and replacement Coyenant which, in effect, requires the COIU.

pany to expend for property additions an amount reflecting the de-preciation taking place in the mortgaged properties, and certain re-strictions are imposed upon the acquisition of properties subject to aprior lien and upon the amount of common stock dividends thecompany may pay.

With respect to preferred stock, the charter must include provisionsthat dividends shall be cumulative, that the preferred shall be redeem-able at any time at a reasonable redemption premium, and that thepreferred shareholders are entitled to elect a majority of the membersof the board of directors in the event of the accumulation of a year'sarrearages in the payment of dividends on the preferred. Further-more, the payment of dividends upon the common stock must be re-stricted if the common stock equity falls below a certain prescribedpercentage of the company's total capitalization and surplus, and afavorable vote of the holders of a certain percentage of the outstandingpreferred shares is required before certain corporate actions affectingtheir interests may be taken.

It is apparent that the accomplishments under the Holding CompanyAct and particularly in connection with the vast integration andsimplification program have been considerable. 'Vhile the integrationand simplification programs for some ten of the registered systemshave not been completely effectuated, the Commission is hopeful thatthe remaining problems, some of a more or less serious nature, maysoon be resolved and the overall program of utility integration andsimplification consummated. The continued expansion of utility sys-tems, of course, including the creation of new holding companiesthrough the purchase of utility securities or the acquisition by exist-ing registered systems of the assets or securities of other nonaffiliatedcompanies, has created and will from time to time continue to createnew problems of integration and simplification.

A number of holding company systems will continue to be subjectto the Commission's jurisdiction under the act for an indefinite period.The many aspects of their financial and related activities will call forthe continued exercise of the Commission's jurisdiction, as in the past,to assure that the public interest is protected and to guard against therecurrence of the evils which gave rise to the enactment of the law.In addition, new technological developments, such as the use of atomicenergy, the pooling together of facilities by various nonaffiliated sys-tems for the purpose of effecting economies in the generation of electricenergy and other similar challenges will no doubt continue to com-mand the Commission's attention in the years to come.

The Holding Company Act authorized the Commission to conducta study and investigation of investment trusts. After 5 years of in-

FOREWORD XXXI

tensive and exhaustive inquiry into the entire industry, the Commis-sion recommended comprehensive legislation for its regulation.Vigorous opposition to the extent of the regulation proposed in theoriginal bill led to conferences between the Commission and industryrepresentatives, resulting in a compromise statute which passed bothHouses of Congress unanimously as the Investment Company Act of1940. This unanimity was no doubt due in large part to the Com-mission's expose of the sordid history of the organization and opera-tion of certain investment trusts and to a recognition on the part ofthe more responsible element in the industry that Federal regulationwas not only necessary in the interest of investor protection but wasalso essential to the full acceptance by the public of investment com-panies as a feature of our financial system.

The Commission's study showed that investment companies hadall too often been organized and operated in such a way as to furtherthe selfish interests of the sponsors and insiders at the expense of thestockholders to whom they owed a high fiduciary duty. Subordina-tion of the interests of stockholders took many forms, In some cases,the promoters, management officials and controlling persons unloadedworthless securities and dubious investments upon the investment com-pany, or took for their own account profitable ventures offered to thecompany. In others, the investment company financed clients of in-siders or companies in which insiders were personally interested. In-siders also engaged in practices which permitted them to obtain largeprofits without any risk by trading in the securities issued by the in-vestment company, to the pecuniary detriment of' its investors. Theyalso engaged in practices which increased their distribution profitsand management fees and resulted in substantial dilution of the in-vestors' interests. Many other abuses came to light, including salesand promotional literature designed to create the false impression thatinvestment companies were not unlike savings banks and insurancecompanies, except that they were not limited to legal investments.The sales load in some types of companies exceeded 30 percent of thenet amount invested.

The 1940 act seeks to obtain a degree of independence in the boardof directors and to prohibit self-dealing and the taking of excessivecommissions or profits by affiliated persons or companies. It seeksto achieve greater participation by stockholders by requiringthem to act on basic policies, to restrict the types of securities whichmay be issued by investment companies and to guard against inade-quate and unfeasible capital structures, to require transmission ofinformative reports to stockholders, including financial statementscertified by independent accountants when the Commission so pre-scribes, and to eliminate improper selling practices. Persons guiltyof securities frauds are barred from serving- as officers and directors.

XXXII FOREWORD

Underwriters, investment bankers and dealers may not constitutemore than a minority of the board of directors.

Basic to Commission regulation under this law is the requirementthat companies engaged in investing, reinvesting and trading in se-curities register with the Commission and file periodic financial andother reports. The registration statement must include a declarationof policy by the investment company on various aspects of its business,including its investment policy, and the company may not deviate fromits stated policy without the consent of the holders of a majority ofits outstanding voting securities. Transactions with affiliated personsand companies are prohibited, although the Commission, upon appli-cation by the company, may grant an exemption from such prohibitionif it finds that the terms of the transaction are fair and reasonable,that no "over-reaching" on the part of any individual is involved andthat the transaction is consistent with the company's established pol-icies and with the intent and purposes of the law. A registered in-vestment company must, subject to Commission rules, maintain itsassets under a custodianship agreement with a bank or a member ofa national securities exchange, or under a safekeeping arrangementwith a bank. Officers and employees who have access to the assets ofthe company or authority to direct their disposition must be bonded.

The act also empowers the Commission, where necessary, to seekcourt injunctive orders to prevent transactions, acts and practices incontravention of its provisions or rules of the Commission thereunder.If the activity constitutes gross misconduct or gross abuse of trustin the management of investment companies, the Commission mayapply to the court for removal of management officials responsibletherefor, for the appointment of trustees or receivers where necessaryto preserve the company's assets and for an order compelling therestitution of funds to stockholders.

In one case, for example, the controlling stockholder caused theinvestment company to liquidate capital assets to meet interest require-ments and pay current expenses, including salaries and rentals tohimself, and to acquire control of a race track. In an action initiatedby the Commission, the court appointed a receiver and enjoined thecontrolling stockholder and other defendants from serving as officersand trustees of the company. Similarly, in another action brought bythe Commission an officer'who caused an investment company to makeunsecured loans to various business corporations he controlled wasenjoined from serving any investment company in any capacity in thefuture. Injunctions and appointments of receivers have been obtainedwhere the sales literature falsely stated that the investment companywas guaranteed against loss by the United States Government andwhere the officers and directors attempted to unload worthless secu-rities upon the investment company.

FOREWORD XXXIII

An important aspect of the Commission's administration of thislaw has been its insistence upon the elimination of abusive practicesin the offering and sale of investment company securities. Severalyears ago some companies were found to be employing sales literatureof a misleading character, such as representations that a particularsecurity was as safe an investment as a United States savings bond.Leading members of the industry cooperated with the Commission ina study of the sales literature and sales practices being employed.Following this study, the Commission issued a Statement of Policysetting forth various types of advertising and sales literature consid-ered to be in violation of the law, and the industry has cooperatedwith the Commission in administering it.

In the administration of the act, the Commission must rule uponvarious applications by investment companies for exemptions fromspecified provisions. The exemption most frequently sought concernstransactions involving the purchase and sale of property or securitiesbetween investment companies and affiliated interests. In order toreceive an exemption, the applicant must establish to the satisfactionof the Commission that the terms of the proposed transaction are fairand reasonable and do not involve overreaching. Many difficult prob-lems of evaluation and potential conflict of interest are presented inthese cases. Since 1940, more than 1,200 exemption applications havebeen acted upon by the Commission.

The growth of investment companies since 1940 has been phenom-enal. At June 30, 1941, 436 companies with aggregate assets of$2.5 billion were registered with th~ Commission. The number ofregistered companies has varied since that date, with a low of 352in 1947 and a present high of 512. The aggregate assets of the 512companies at June 30, 1959, was $20 billion, or eight times the sizeof the 436 companies in 1941. The Congress recognized that invest-ment companies might become so large as to raise problems concerning"concentration of control of wealth and industry" and other questions,and the act directs the Commission to conduct a study of such prob-lems and to report the results thereof to Congress. Such a study isnow in progress.

In a recent decision of the Supreme Court, it was held that "variableannuity" contracts were "investment contracts" subject to the Com-mission's jurisdiction under the Securities Act and the InvestmentCompany Act. As a result, these contracts must satisfy the registra-tion and disclosure requirements of the Securities Act, and the issuingcompanies must register as investment companies and comply withthe other provisions of the Investment Company Act. The Commis-sion is now endeavoring to resolve the problem of fitting this type of

FOREWORD

investment company into the pattern of regulation which the 1940act established.

Closely related to the Commission's surveillance of over-the-countersecurities dealers and of investment companies is its administrationof the Investment Advisers Act of 1940. The regulatory provisionsof that act, however, touch only a few aspects of a field not yet ade-quately covered. Although modeled on the broker-dealer registrationprovisions of the 1934 act, and dictated by certain abuses indicated bythe Commission's investment trust study, it has few "regulatoryteeth." It does not give the Commission the same control over theactivities of the investment advisers (including power to impose sanc-tions) now applicable to brokers and dealers, and is considered to belargely a mere "census-taking" statute. The most serious defect inthe current statute is the inability of the Commission to inspect thebooks and records of registered investment advisers, to prescribewhat books and records shall be maintained or to require the filingof reports. In light of market conditions existing today, it wouldappear contrary to the public interest to allow such a condition tocontinue. As part of its current legislative program, the Commissionhas proposed amendments to the law to include adequate regulatoryprovisions with respect to investment advisers.

Prior to the Commission's investigation of investment trusts, itundertook a study of protective and reorganization committees.This study resulted in two additional Congressional enactments, theTrust Indenture Act of 1939 and chapter X of the National Bank-ruptcy Act (1938 revision).

This study concerned itself ;vith the events which led to the in-solvency of debtor companies, and in particular with the activitiesof protective and reorganization committees organized to protect theinterests of the various classes of creditors and security holders andto participate in the reorganization of the debtor corporation. Nu-merous instances came to light where the indenture trustee, whoseprimary responsibility was to protect the interests of the holders ofindenture securities, had basic conflicts of interest, including dividedloyalties as between the debtor and its management officials on the onehand and the interests of public investors on the other. Such con-flicts precluded any effective action by the trustee to safeguard theinterests of investors prior to default or to see that their rights wereasserted in a timely and proper fashion in the event of default.

The Trust Indenture Act seeks to protect the purchasers of bonds,debentures, notes and similar debt securities when sold in amountsexceeding $1 million, by prescribing certain minimum standards gov-erning the provisions of indentures. It requires the indenture to spellout the rights of the holders of the securities and to provide reasona-

FOREWORD

ble standards of diligence and loyalty applicable to the indenturetrustee, and to facilitate its actions to protect the investor. The em-phasis of this law is upon an effective and "independent" trusteewhose interests do not conflict with those of investors and upon elimi-nating indenture provisions which might exculpate the trustee againstdereliction in carrying out duties and responsibilities prescribed bythe indenture.

The provisions of this act and the Securities Act are so integratedthat registration under the latter act of securities to be issued undera trust indenture is not permitted to become effective unless the in-denture conforms to the standards of the Trust Indenture Act. Likeregistration statements, trust indentures are examined by the Com-mission for compliance with the law. The Commission may issue anorder refusing qualification if the indenture does not conform to theprescribed standards or if the trustee has any conflicting interests.Once an indenture is qualified, enforcement of its terms is left tothe trustee and the indenture security holders.

The report of the Commission's investigation also had shown seri-ous abuses in the functioning of protective committees and the mannerin which insiders used such committees to control reorganization pro-ceedings for their personal benefit and to the detriment of public secu-rity holders.

The basic thrust of chapter X of the Bankruptcy Act (the ChandlerAct) was to eliminate the practical control of reorganization proceed-ings by inside groups and self-constituted committees and to require,in all cases in which the debtor's indebtedness exceeds $250,000, theappointment by the court of a disinterested trustee, whose attorneymust also be independent. It is the function of the trustee to as-sume charge of the debtor's operations and proceed with the prepa-ration of a plan for its reorganization. He may investigate theacts of the prior management and institute recovery actions wherethe facts justify such action. Although protective committees andother representatives of security holders are permitted to participate,their activities are subject to strict court review and control. Feesfor services in reorganization proceedings are also subject to courtapproval, which serves to prevent unwarranted and excessive fees tospecial groups while providing fair and reasonable compensation tothose whose services can be shown to have benefited the estate.

Furthermore, chapter X provides that the Commission may partici-pate in corporate reorganization proceedings if requested or approvedby the court, so as to aid the court and the independent trustee byrendering expert and independent advice and assistance on all im-port.ant phases of the proceeding. It operates in an "advisory" ca-pacity, and has the right to be heard on all matters arising in the

XXXVI FOREWORD

proceeding, but no right to appeal. It usually undertakes intensivelegal and financial studies related to the company, its operations, itsindebtedness and other outstanding securities, possible claims againstmanagement officials or controlling persons, the prospects for thecompany's future operations and the possibility of a successfulreorganization.

If the indebtedness of the debtor exceeds $3 million the court must,and if less than that amount it may, submit to the Commission allplans of reorganization deemed worthy of consideration. The Com-mission may thereupon prepare and file with the court its "advisoryreport" which analyzes the plan or plans in detail and recommendsfor or against court approval, depending upon whether the Commis-sion considers that the plan provides fair and equitable treatment toall interests affected and is feasible. In some instances the Commis-sion's recommendations are presented orally to the court through itscounsel.

The Commission's report is in no way binding upon the court, whichmay either reject the plan or approve it and submit it to a vote ofcreditors and affected security holders. In the latter event, a copy orsummary of the Commission's advisory report is transmitted to secu-rity holders along with the plan, so that they may be informed of theCommission's analysis of and views on the fairness and feasibility ofthe plan before casting their votes for or against the plan.

Since September 1938 the Commission has participated in chap-ter X proceedings for the reorganization of 457 debtor companies(371 principal debtors and 86 subsidiaries thereof) with stated assetsof more than $3.5 billion and indebtedness of nearly $2.5 billion.Over 60 of these proceedings are still pending. The proceedings haveinvolved the reorganization and rehabilitation of companies engagedin a variety of industries and businesses, including agriculture, min-ing, manufacturing, financial and investment, merchandising, realestate, construction and allied industries, transportation and communi-cation, service, and utilities. In these proceedings, the Commissionhas issued a total of 40 advisory reports and 37 supplemental reports.In most other cases, its views and recommendations on the fairnessand feasibility of the reorganization plans were presented orally byCommission counsel.

The assistance rendered by the Commission in corporate reorgani-zation proceedings has been favorably noted almost without excep-tion by Federal courts, although they do not always follow the Com-mission's recommendations. The Chief Judge of the Court of Appealsfor the Second Circuit had the following to say about the Commis-sion's advisory services 4 years ago:

"We regard the service being rendered by the Commission to the Courts inconnection with the reorganization of corporations to be most valuable, if

FOREWORD XXXVII

not indispensable, for the proper disposition of this vital segment of courtbusiness according to the Congressional intent. The Commisslon affordsthe necessary expert knowledge, the skill, and the uniform approach whichindividual judges cannot have; and to the district judges in particular, theassistance is unique in its usefulness, and not otherwise to be obtained."21st Annual Report, p. 89.

More recently, a district court judge made the following commenton the role of the Commission following a hearing on fee allowancesin which the Commission had objected to allowances in the requestedamounts exceeding $4 million and where the Court approved allow-ances of $2,068,000, some $250,000 above that recommended by theCommission:

"Though I have been forced to differ from the recommendations of the SECin many of the instances, I wish to pay tribute to the careful and helpfulanalysis that the Commission made of the claims. Indeed, I take this oppor-tunity to express my gratitude for the active and intimate participation ofthe Commission and its counsel in the reorganization proceedings. If anyproof were needed of the wisdom of Congress in providing for representa-tion of the public by the SecuritIes and Exchange Commission in reorganiza-tion proceedings, it has been furnished in this case. I would have felt help-less without the aid given unstintingly by counsel for the Commission.Each has cheerfully rendered, at the usual modest salary of a public servant,services equal in value to those of any to whom awards are made by thisdecision." In the Matter of Third Avenue Transit Corporation, S.D.K.Y.Kos. 85851,86410,86412, 86413,86537, unreported, (1958).

Upon appeal, the allowances were further reduced to a figure only$30,000 more than the Commission initially recommended, or an ulti-mate saving to the debtor estate and its security holders of nearly $2%million.

This report began with a discussion of "investor confidence." Asindicated herein, all available signs would seem to bear out the factthat investor confidence has been largely restored. In fact, it may benoted that recent estimates place the number of public investors todayat 12,500,000, nearly double the 1952 total. The record volume ofsecurities successfully offered for public sale, taken together with therecent rise in the volume of trading on the New York Stock Exchangeto the highest level in the Commission's history, is adequate evidenceof the restoration of investor confidence.

But the impact of the Federal securities laws and their adminis-tration has been felt no less by financial institutions, corporate execu-tives, professional people, and other elements in the financial COIn-

munity than by investors. It can reasonably be said that these actsand their administration have generally fostered improved standardsof business conduct among all groups in their relationship to stock-holders and investors. 'While this no doubt has been dictated in partby enlightened self-interest, it nonetheless has contributed substan-tially to investor confidence.

xxxvm FOREWORD

This, as we have seen, has had its desired effect, for the capitalformation processes have successfully served their purpose of being aconduit for the flow of investors' savings into industry in ever increas-ingvolume.

While the Commission can view with pardonable pride the recordof its contribution to the interests of the investing public, it cannotrest on the record of its past accomplishments. In a dynamic econ-omy such as this nation is experiencing, new problems of investor pro-tection are constantly arising. The very fact that securities are beingoffered for public sale in record volume and that exchange trading insecurities has reached a high level, plus the fact that more and morepeople have surplus savings, some of which is being used for invest-ment and speculation in securities, are in and of themselves adequatereasons for the Commission not to become complacent. A. boilingstock market not only attracts new investors, some of whom haveneither the resources nor the knowledge 'and skill to speculate in thestock market, but also attracts a fringe element, ever ready to takeunfair advantage of the innocent and unsuspecting investor. A sub-stantially increased record of law enforcement actions by the Conunis-sion within the past year leaves no doubt of this latter fact.

Nor would we suggest that the investing public might reasonablybecome complacent. It cannot be overemphasized that nothing in thesecurities laws or their administration can keep the market price ofsecurities from fluctuating, down as well 'as up. No reasonable per-son would wish it otherwise. It is, therefore, incumbent upon indi-vidual investors and their advisers to exercise care and even restraintin their analysis, evaluation and purchase of securities.

It is most essential that investors exercise extreme care in theirdealings with unknown brokerage firms and their salesmen, par-ticularly those who telephone long-distance with "pie-in-the-sky"promises that the investor can double or triple his money overnight,without risk of loss, through the purchase of stock of a particularcompany. Common sense would dictate that such a promise is utterlyfantastic and ridiculous. Unfortunately, foresight is never quite sogood as hindsight, particularly when the promise of quick and easyprofits is dangled before one's eyes, as many investors have learnedto their sorrow.

The Commission would like to take this occasion to express itsthanks and appreciation to a capable, industrious, and efficient staff,both past and present.

In the 1949 Task Force Report on "Regulatory Commissions" bythe first "Hoover Commission," the Commission was characterized as"an outstandt"ng eeamvple of the independent commleeion. at ite best."[Italics supplied.]

FOREWORD XXXIX

The statement, of course, applied to the Commission and its workmore than 10 years ago and was surely well-deserved. However, itis no less applicable, we submit, to the excellent 'York of a most com-petent staff during the past 10 years.

The volume of Commission business in recent years, in nearly allphases of its activities, has been on the increase. An example of thisis to be found in the record of Securities Act registration statementsfiled with and examined by the Commission. In the 26-year admin-istration of that act, a total of 15,930registration statements were filedwhich proposed offerings of securities aggregating $167 billion inamount. The past 6 years alone accounted for 5,561of the filings and$81 billion of the total amount. That the staff has been able to carryon effectively under a tremendous increase in the volume of Commis-sion business is a tribute to its ability and conscientious devotion toduty.

ORIGINAL COMMISSION

(As of July 2, 1934)

JOSEPH P. KENNEDY, Chairman"JAMES M. LANDIS

GEORGE C. MATHEWS*"

ROBERT E. HEALY""

FERDINAND PECORA

Other former members of the Commission, in order of their appointment:

J. D. Ross"""WILLIAM O. DOUGLAS

"JEROME N. FRANK*"

"EDWARD C. EWHER**LEON HENDERSON

SUMNER T. PIKE

"GANSON PURCELL

EDMUND BURKE, Jr.

ROBERT H. O'BRIEN

ROBERTK.l\IcCONNAUGHEY

"JAMES J. CAFFREYRICHARD B. :McENTIRE*"

"EDMOND 1\1. HANRAHAN

"HARRY A. McDONALD

PAUL R. ROWEN

*DONALD C. COOK

EDWARD T. l\ICCORMICK

ROBERT I. l\IILLONzICLARENCE H. ADAMS

J. HOWARD ROSSBACH

"RALPH H. DEMMLER

*J. SINCLAIR ARMSTRONG

A. J. GOODWIN, Jr

Served as Chairman.* *Deceased.

XL

•

•

COMMISSIONERS AND STAFF OFFICERS

(As of October 15, 1959)Commissioners Terj,,~~p~riM

EDWARDN. GADSBYof l\lassachusettl', ClIalllllall________________________ 1963ANDREWDOWNEY ORRICKof California_________________________ 1962HAROLDC. PATTERSONof Virginia______________________________________ 1960EARL F. HASTINGS of Arizona_________________________________________ 1964JAMES C. SARGENTof New york-______________________________________ 1961

Secretary: ORVALL. DuBOISStaff Officers

ALRERTK. SCHEIDENHELM,Executive Director.CHARLEST. KAPPLER,Associate Executive Director.

BYROND. 'YOODSIDE,Director, Division of Corporation Finance.SHARONC. RISK, Associate Director.

JOSEPH C. 'VOODLE,Director, Division of Corporate Regulation.W. ALLEN JOHNSON,' Associate Director.

PHILIP A. Lomas, Jr., Director, Division of Trading and Exchangps.RALPH S. SAUL, Associate Director.

THOMAS G. MEEKER,General Counsel.WALTERP. NORTH,' Associate General Counsel.

ANDREWBARR, Chief Accountant.LEONARDHELFENSTEIN,Director, Office of Opinion Writing.

W. VICTORRODIN, Associate Director.MANUELF. COHEN,' Adviser to the Connulssion.

1Designated: October 5, 1959.Designated: August 31, 1959. FormerlJ- Chief Counsel, Division of Corporation Finance.

XLI

•

REGIONAL AND BRANCH OFFICES

Regional Administrators

Region 1. Xew York, New Jersey.-Paul Windels, Jr.; Edward Schoen, Jr.,Associate Regional Administrator, 225 Broadway, New York 7, N.Y.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hamp-shire, Maine.-Philip E. Kendrick, Federal Building, Post Office Square,Boston 9, Mass.

Region 3. Tennessee, North Carolina, South Carolina, Georgia, Alabama,Mississippi, Florida, and that part of Louisiana lying east of the Atcha-falaya River.-William Green, Suite 138, 1371 Peachtree Street NE.,Atlanta 9, Ga.

Region 4. Illinois, Indiana, Iowa, Kansas City (Kans.), Kentucky, :\1ichi-gan, Minnesota, Missouri, Ohio, Wisconsin.-Thomas B. Hart, BankersBuilding (Room 630), 105West Adams Street, Chicago 3, Ill.

Regtou ti, Oklahoma, Arkansas, Texas, that part of Louisiana lying westof the Atcharalaya River, and Kansas (except Kansas City) .-Oran H.Allred, United States Courthouse (Room 301), 10th and Lamar Streets,Fort Worth 2, Tex.

Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota,South Dakota, Utah.-l\filton J. Blake, 802 Midland Savings Building,44417th Street, Denver 2, Colo.

Region 7. California, Nevada, Arizona, Hawaii.-Arthur E. Pennekamp.821Market Street, San Francisco 3, Calif.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. New-ton, 905 Second Avenue Building (Room 304), Seattle 4, Wash.

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, Dis-trict of Columbia.-William J. Crow, Courts Building, 310 6th StreetNW., Washington 25, D.C.

Branch Offices

Cleveland 13, Ohio. Standard Building (Room 1628), 1370 Ontario Street.Detroit 26, Mich. Federal Building (Room 1074).Houston 2, Tex. 424Bettes Building, 201 ~fain Street.Los Ang-eles 28, Calif. Guaranty Building (Room 309), 6331 Hollywood

Boulevard.Miami 32, Fla. Plaza Building (Room 440), 245 South East First Street.St. Louis 1,Mo. Arcade Building (Room 1025), 812Olive Street.St. Paull, Minn. Main Post Office and Courthouse (Room 1027), 180

East Kellogg Boulevard,Salt Lake City, Utah. Xewhouse Building (Room 1119), 10 Exchange Place.

XLII

COMMISSIONERS

Edward N. Gadsby, Chairman

Chairman Gadsby was born in North Adams, Mass., on April 11,1900. He received an .A..B.degree from Amherst College in 1923and a J.D. degree from the New York University School of Law in1928: From 1929 to 1937 he was associated with the law firm ofMudge, Stern, Williams & Tucker of New York City. From 1937to 1947 he practiced law in North Adams, Mass. In 1947 he wasappointed a Commissioner of the Massachusetts Department of PublicUtilities and held that position until 1952,serving as Chairman from1947 to 1949. From 1952 to 1956 he served as General Counsel ofthe Massachusetts Department of Public Utilities and thereafter wasa member of the law firm of Sullivan & Worcester of Boston, Mass.On August 20, 1957,he took officeas a member of the Securities andExchange Commission for a term expiring June 5, 1958 and wasdesignated Chairman of the Commission. He was reappointed effec-tive June 5, 1958 for a term expiring June 5, 1963 and was againdesignated as Chairman.

Andrew Downey Orrick

Commissioner Orrick was born in San Francisco, Calif., on Octo-ber 18, 1917. He received his B.A. degree from Yale College in1940and an LL.B. degree from the University of California (Hast-ings College of Law) in 1947. From 1942 to 1946he was on activeduty with the United States Army and was separated from theservice as a captain in the Transportation Corps. After being ad-mitted to practice in California in 1947 he was associated with thelaw firm of Orrick, Dahlquist, Herrington & Sutcliffe, in San Fran-cisco, until February 1954,when he became Regional Administratorof the San Francisco Regional Office of the Securities and Ex-change Commission. He served in that capacity until May 25, 1955,when he was sworn in as -a member of the Commission for a term ofofficeexpiring June 5, 1957. On June 12, 1957, he was reappointedas a member of the Commission for a term of officeexpiring June 5,1962. During the periods from May 27, 1957 to June 6, 1957 andfrom June 12, 1957 to August 20, 1957 he as designated as ActingChairman of the Commission.

XLIn

XLIV COMMISSIONERS

Harold C. Patterson

Commissioner Patterson was born in Newport, R.I., on March 12,1897, and attended public schools in Massachusetts and Maryland,He attended George 'Washington University after graduating fromRandolph Macon Academy. In 1918 he enlisted in the United StatesNaval Reserve for service in 'Vorld 'Val' I, was commissioned ensign,United States Naval Reserve, in 1918; in June 1919 commissionedensign United States Navy; and resigned in 1923. Prior to 1954, hehad for many years been a partner of Auchincloss, Parker & Redpath,members of the New York Stock Exchange, in Washington, D.C.He resigned from the firm June 1, 1954. He served as a Board Mem-ber of the National Association of Securities Dealers, Inc., and wasactive over the years in its securities industry policing work. OnJune 15, 1954, he was appointed Director of the Division of Tradingand Exchanges of the Securities and Exchange Commission andserved in that capacity until August 5, 1955, when he took office asa member of the Commission for a term of office expiring June 5, l{160.

Earl F. Bastings

Commissioner Hastings was born in Los Angeles, Calif., on April27, 1908, and resides in Glendale, Ariz. He attended Texas 'VesternUniversity and the University of Denver. He is a registered pro-fessional engineer. During the years 1932 to 1941 he served as a con-sulting engineer with mining and industrial firms. From 1941 to 1942he worked with Hawaiian constructors on a military installation onOahu, T.H. From 1942 to 1947 he served in various engineering andmanagerial capacities. At that time he became a general partner ofthe firm, Darlington, Hastings & Thorne, which served as industrialconsultants and managers. In 1949 he was appointed Director ofSecurities, Arizona Corporation Commission, Phoenix, and he servedin that capacity until March 1, 1956, when he was appointed a memberof the Securities and Exchange Commission for a term of officeexpiring .Iune 5, 1959. He was reappointed, effective June 5, 1959, asa member of the Commission for a term expiring June 5, 1964.

James C. Sargent

Commissioner Sargent was born in New Haven, Conn., on February26, 1916, and holds degrees of B.A. and LL.B. from the Universityof Virginia. He was admitted to the New York Bar in 1940 andbecame associated with the firm of Clark & Baldwin, New York City.From J anuary 1941 to July 1951, except for military service, he wasemployed as a trial attorney by Consolidated Edison Company ofNew York. He enlisted in the United States Army Air Force in 1942and served in this country as an Air Intelligence school instructor

COMMISSIONERS XLV

and as a combat and special intelligence officer in the SouthwestPacific. He was separated to inactive duty in January 1946 withthe rank of captain. In the fall of 1948, he served as an AssistantAttorney General of the State of New York in the Election FraudsBureau in New York City. From July 1D51 to August 1954 he wasemployed as law assistant to the Appellate Division, First Depart-ment, Supreme Court, State of New York. He was associated withthe firm of Spence & Hotchkiss, New York City, from August 1954until November 1955. In November 1955 he was appointed Admin-istrator of the Commission's New York Regional Office. He servedin that capacity until June 29,1956, when he was sworn in as a memberof the Commission for a term of officeexpiring Jnne 5, 1961. He is aLecturer at Law at the University of Virginia.

PART I

CURRENT PROBLEMS BEFORE THE COMMISSION

The foreword to this report has described the nature of the lawsadministered by this Commission, the abuses in the securities marketswhich led to their enactment and some of the problems encountered inadministering these laws during the past quarter century. During the1959 fiscal year these laws were put to their severest test for duringthat year the nation witnessed the highest level of activity in the se-curities markets since the organization of the Commission in 1934.This increase in market activity created complex enforcement prob-lems, required the adoption of new regulatory measures and techniquesand imposed heavy administrative burdens upon the staff of the Com-mission. The effects of surging securities markets upon the activitiesof the Commission are described in detail later in this report. Thissection briefly sets forth some of the more important problems createdby these conditions and the impact of these problems upon the workof the Commission.

The following salient statistics reveal the remarkable increase in ac-tivity in the securities markets and the tremendous growth of publicinterest and participation in those markets:

The total amount of new securities for which registration state-ments were filed with the Commission in fiscal 1959 totaled $16.6billion, only $300 million less than the record amount filed in fiscal195-8.

During fiscal 1959 the Commission processed 1,119 registrationstatements, the largest number of registration statements ever to beprocessed in a single year in the history of the Commission.

The number of broker-dealers registered with the Commission roseto 4,907, an increase of almost 1,000 registrants since 1951, and thenumber of representatives registered with the National Associationof Securities Dealers, Inc., on .June 30, 1959 was '7'7,91'7,the largestnumber in its 20-year history.

The aggregate market value of all stocks on all stock exchanges,which never exceeded $100 billion between 1933 and 1945, reached$337.'6billion on June 30, 1959, almost three times the market valueof all stocks on exchanges during the first decade of the Commission'shistory.

The reported volume of trading on the Kew York Stock Exchangeincreased from a daily average of 2 million shares in February 1958,to a peak of 4,100,000 shares in October and November 1958, thehighest daily average for any month since June 1933.

1

2 SECURITIES AND EXCHANGE COMMISSION

The number of holders of shares of publicly owned corporations, ac-cording to estimates by the New York Stock Exchange, increasedfrom 6,490,000 in 1952 to 12,500,000 in 1959, the largest number ofpublic shareholders in the nation's history.

The number of registered investment companies increased from 367in 1952to 512 in 1959, and"the total assets of investment companies in-creased from $6.8 billion in 1952 to $20 billion in 1959.

A number of factors appear to be responsible for this increase inactivity and interest in the securities markets. Among these are theattractiveness of these markets for financing new corporate enterprisesand the expansion of old ones, the emphasis upon capital gains in sell-ing equity securities, the fear of inflation, the growing participationin the market of the large institutional investor and an unfortunatetendency among some persons to use the stock market as a mediumfor gambling. However, the principal concern of the Commission isnot with the cause of this activity but with insuring that the securitiesmarkets, however active, are fair, orderly and honest, that prices inthese markets express the free interplay of supply and demand andthat decisions by investors to buy or sell are made in the light of fulldisclosure of all material facts. The discharge of these statutory re-sponsibilities by the Commission is complicated in present securitiesmarkets by the participation of a large number of inexperienced in-vestors and by broker-dealers and promoters unfamiliar with, or con-temptuous of, the ethical and legal obligations owed to investors.

Fraud in the Sale of Securities

Active and rising markets have raised the expectations of a substan-tial segment of the public that it is possible for the unsophisticatedinvestor to reap large and quick profits. In this atmosphere oppor-tunities for fraud and manipulation multiply. Investors become lessconcerned with the facts about the issuer and the investment charac-teristics of its securities than with the allure of a possible "killing"described to them by an unknown salesman over the telephone. Theybecome more susceptible to baseless tips and rumors, thus facilitatinga variety of deceptive and manipulative practices.

This atmosphere has attracted into the business of selling securitiesnot only the confidence man, the petty swindler and the corporateplunger, but also an outright criminal element. These persons haveseized upon the technique of selling securities to unsuspecting cus-tomers through the use of boiler rooms. The term "boiler room" refersto a firm engaged in the sale of securities primarily over the long dis-tance telephone, to persons with whom the firm has had no previouscontact and by high pressure methods ordinarily accompanied bygross misrepresentation and other fraudulent devices.

Boiler rooms may operate not only from the large financial cen-

TWENTY-FIFTH ANNUAL REPORT 3

tel'S but also in other locations around the country. There has beena noticeable increase, for example, in migratory operators movingfrom state to state. In some promotions several boiler rooms may beused to sell the spurious issue in widely scattered areas around thecountry, each boiler room being assigned to saturate its particularregion. Not infrequently the long distance telephone salesmen forthe boiler room establish themselves in hotel rooms, apartments andalleged business offices.

In many cases, the security sold by a boiler room is unknown andworthless. To create the appearance of an active over-the-countermarket for the security, the promoter will place with numerousbrokers and dealers, orders for the purchase and sale of smallamounts of the security at prices set by him, or arrange to haveothers do this, with the result that such brokers and dealers will pub-lish quotations for the security at the prices specified in the orders.The salesmen for the boiler room are now able to refer in their sales"pitch" to a market price for the security which the unsuspectinginvestor can independently verify. 'When the distribution of the pro-moter's holdings is completed, however, the orders are withdrawn andthe "market" disappears.

In his telephone sales pitch, the boiler room salesman usually prom-ises rapid increases in the market price of the security and no riskof loss in its purchase; he may make numerous misrepresentations con-cerning the issuer and its future prospects; he may urge purchasesnotwithstanding statements on the part of the customer that he can-not afford to do so; and he may advise the customer, of whose finan-cial situation he knows nothing, to sell valuable securities in order topurchase the spurious boiler room security being offered.

The Commission has found that resort to the civil injunction and ad-ministrative proceeding, no matter how vigorously employed, is notcompletely effective in halting the operation of boiler rooms. Pro-moters easily find another worthless issue and either establish oruse an existing boiler room as a vehicle for a new fraudulent promo-tion. The Commission believes that only criminal prosecution willeffectively stop those who show such a contemptuous disregard forthe law. The Commission has, therefore, placed increased emphasisin its work upon the prosecution of such offenders. In fiscal 1959 theCommission referred to the Department of Justice 45 cases for criminalprosecution, one of the highest number of referrals in the Commis-sion's history, and referrals are continuing at approximately the samerate in fiscal 1960.

A large portion of the Commission's staff is now engaged in investi-gating, developing, and assisting in the prosecution of criminal actions.Such activity requires careful and painstaking work usually over aperiod of many months. Investors must be identified and inter-

529,5~9---4

4 SECURITIES AND EXCHANGE COMMISSION

viewed. Books and records of brokers, dealers and others must beexamined and analyzed. The information thus obtained then has tobe developed in a form permitting its introduction into evidence inlegal proceedings.

Emphasis upon developing criminal cases means that the Commis-sion with its limited resources has had to utilize staff personnel whowould otherwise devote their full attention to other urgent enforce-ment and regulatory problems. The Commission believes, however,that its policy of pressing for criminal prosecution of violators of theFederal securities laws is the most effective deterrent to fraud in thesale of securities and must be vigorously pursued.

In addition to its enforcement program against boiler rooms, theCommission has sought through a broad publicity campaign to alertinvestors to the risks involved in the purchase of securities from un-known high-pressure salesmen. Posters warning investors of boilerroom operators have been widely distributed, spot radio and televisionannouncements carrying similar warnings have 'been prepared to bebroadcast in cooperation with The Advertising Council, and brochureslisting protective measures that an investor should take before makinga purchase have been prepared for wide public distribution.Manipulation in the Securities Markets

In April 1959 the Commission issued a statement warning investorsto exercise extreme caution and self-restraint when considering thepurchase of securities upon the basis of tips and rumors,' Price fluc-tuations were occurring in certain securities on the exchanges and inthe over-the-counter markets without apparent economic reason. Alsothere appeared to be a considerable amount of speculation on the partof public investors. These conditions facilitated the manipulation ofsecurities prices and boded eventual losses to investors. Officials ofthe leading exchanges also joined in warning investors, and brokeragehouses urged their customers to exercise caution in purchasingunknown securities.

In volatile markets where prices are susceptible to swift and widechanges on the basis of rumors, manipulation is facilitated and thetask of enforcement becomes increasingly difficult. The Commissionhas therefore had to place greater emphasis upon the detection andprevention of manipulation and a substantial number of investigationsare now in progress. Some of these investigations have resulted inindictments and it is anticipated that certain other cases now underinvestigation will also lead to criminal prosecution.

Exemptions From Registration and Prefiling Publicity

One of the areas of evasion of the registration and prospectusrequirements of the Securities Act of 1933 is the claiming of exemp-

'~ecllr1ties Exchange Act Rell'IlsP No. 5927 (Apr. 7,1959).

TWENTY-FIFTH ANNUAL REPORT 5

tions which, in fact, are not available. The attempt to use theseexemptions to- evade registration requirements usually occurs wherethe issue, or the sales procedure to be employed, would not stand thelight of the full disclosure requirements of registration. In order tonarrow this area of evasion, the Commission has consistently soughtthrough its participation in litigation involving claimed exemptions,through its own decisions and through its rule-making power, to defineand clarify the proper limits of certain of these exemptions. One ofthe significant developments in this area has been the recent amend-ment by the Commission of Rule 133.

Under Rule 133, which embodies an interpretation of long standing,the issue of securities in connection with certain types of corporatemergers, consolidations, reclassifications of securities and acqui-sitions of corporate assets is not deemed to constitute a "sale" of se-curities to stockholders of corporate parties to the transactions. Thisrule has the effect of exempting these transactions from the registra-tion requirements, but not from the anti-fraud provisions, of theSecurities Act. The rule provides no exemption for subsequent distri-bution of such securities. Because of the substantial number oftransactions ostensibly effected in reliance upon the rule but whichinvolved violation of the registration requirements, the Commissionamended Rule 133 to restate the purpose and effect of that rule and toclarify its application and limitations. In addition, the Commissionadopted a new registration form to provide an expeditious registrationprocedure for securities issued in a transaction within Rule 133 wheresuch registration is required and where the issuer has solicited proxiesunder the Commission's proxy rule with respect to such transaction."

In three significant cases the courts have further delineated theboundaries of exemptions from the registration requirements of theSecurities Act. A frequently used device for evasion has been theabuse of the intrastate exemption under section 3 (a) (11) of theact. The issuer may attempt to use a resident of the state as a nom-inee for non-resident beneficial owners or the alleged sales to residentsmay he merely a step in a planned interstate distribution. In S.E.O.v, Hillsborough Investment Corporation, et al.3 the Court upheld thelimitation on the scope of that exemption, long viewed as applicableby the Commission, that a single sale to a non-resident, directly orindirectly, destroys the intrastate exemption for the entire issue,including the securities sold only to residents.

Various devices have been used in an attempt to avoid registrationon the claim that a distribution is within the "private offering" ex-emption under section 4(1) of the act. The Commission and thecourts have consistently rejected a numerical test as a conclusive basis

Securities Act Release No. 4115 (July 6, 1959).D. New Hampshire No. 1965 (Dec. 11, 1958>.

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6 SECURITIES AND EXCHANGE COMMISSION

for determining the availability of that exemption. In GiUigan, Will& 00. et al. v, B.E.O.,' the Court of Appeals for the Second Circuitfurther held that even if a numerical test did exist, persons claimingthe exemption would have the burden of establishing a reasonable andbona fide belief that the total number of individuals involved in theplacement would remain within that limit. The Court also concludedthat the private offering exemption was not available to a dealer whoassertedly acquired securities for "investment" where the dealer spec-ulatively purchased unregistered securities in the hope that the finan-cially weak issuer had "turned the corner" and then unloaded thesecurities on an unadvised public when he later determined that theirpurchase was an unsound investment.

The third case dealt with the exemption under section 4(1) of theact for trading transactions-s-an exemption frequently claimed byboiler rooms. In B.E.O. v. Oulpepper et al.,5 the Court of Appeals forthe Second Circuit held that a broker-dealer who engages in stepsnecessary to consummate a public distribution is an "underwriter"within the meaning of the act even though the broker-dealer has noprivity with the issuer or a control group.

Another area of evasion of the registration requirements is the useof publicity with respect to an issuer or its securities prior to the filingof a registration statement. In two cases coming before it last year,the Commission undertook to set forth the precise limitations on pre-filing publicity under section 5 (c) of the Securities Act of 1933.6In these opinions, the Commission pointed out that the statutory pro-cedure for disseminating information about the issue prior to thetime of sale is exclusive and that it "cannot be nullified by recourse topublic relations techniques to set in motion or further the machineryof distribution before the statutory disclosures have been made andupon the basis of whatever information the distributor deems it expe-dient to supply." 1

Regulation of the Exchanges

During the fiscal year 1959,the Commission took a more active regu-latory role with respect to exchange activities. A Commission investi-gation found, for example, that on the American Stock Exchange floortrading activities were accentuating market swings particularly inissues susceptible to extreme price fluctuations because of a small float-ing supply. At the suggestion of the Commission that Exchangeadopted a rule designed to prevent floor traders from making pur-chases of stock at successively higher prices and to restrict the impact

C.A. 2 No. 25111 (;rune 3,1959).G C.A. 2 No. 25242 (Sept. 10.19119).

OarJ M. Loeb, Rhoades cE 00. and Dominick cE Dominick, Securities Exchange Act ReleaseNo. 5810 (Feb. 9, 1959) ; First Maine corporotton, Securities Exchange Act Release No.5898 (Mar. 2, 1959).

q OarJ M. Loeb, Rhoade. <f: 00. et aJ., id., at p. 11.

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TWENTY-FIFTH ANNUAL REPORT 7of their trading upon the market for active and volatile issues," TheCommission also questioned the activities of certain specialists onthat Exchange, particularly off-floor transactions by specialists in se-curities in which they were registered. At the suggestion of the Com-mission, that Exchange adopted a number of additional rules relatingto specialists for the purpose of restricting their dealings so far aspracticable to those reasonably necessary to permit them to maintaina fair and orderly market in the securities in which they are registered.

The regulation of commission rates on the exchanges was the sub-ject of the Commission's attention during fiscal 1959. In line withthe suggestions of the Commission, the New York Stock Exchange inMarch 1959 reduced minimum commissions on small value transactionsand instituted a broad study in consultation with the staff of the Com-mission into the costs of effecting exchange transactions,"

Regulation of the Over-the-Counter Markets

The increase in new offerings traded over-the-counter and the phe-nomenal growth in the number of broker-dealers registered with theCommission and of representatives registered with the National As-sociation of Securities Dealers, Inc., evidence the growing interest inover-the-counter securities. The Commission is seeking to ascertainwhat changes, if any, may be occurring in the distribution and tradingpractices of the over-the-counter market as a result of this growth.

In recent securities markets, there has been a strong underlying pub-lic demand for so-called "glamor" stocks. These securities often sellat a substantial premium on the first day of trading. Most of theseissues are low-priced, have no public market prior to the offering andoften involve companies in the electronics, missile and related defensefields. In some instances, promoters have changed the name of thecompany and its operating divisions to suggest some connection withthese activities.

The Commission, after the end of the fiscal year, instituted a broadinquiry into the genesis and distribution of some of these issues to de-termine, among other things, whether some of these issues have beengenerated primarily to enrich the promoters, underwriters and others ;whether artificial restraints have been imposed upon the floating sup-ply of these issues in order to raise the market price; and whether cer-tain practices have developed in connection with the distribution andmarketing arrangements for these issues which violate provisions ofthe federal securities laws."

Securities Exchange Act Release No. 5981 (June 5. 1959).U Securities Exchange Act Release No. 5889 (Feb. 20,1959).10 During the course of the Inquiry the Commission. on October 23, 1959. Issued Securi-

ties Act Release No. 4150 eallmg to the attentron of the financial conununrty certainpractices disclosed by the Inquiry which. in view of its staff, may involve violations offederal securities laws.

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8 SECURITIES AND EXCHANGE COMMISSION

Inspection of Investment Companies

The rise in the number of new investment companies and the tre-mendous growth of the industry led the Commission several yearsago to develop a program for the routine inspection of investmentcompanies. Since there has been no additional staff available for thispurpose and in view of the increased workload of regular administra-tive business, the Commission has been able to conduct inspectionsonly on a pilot basis for the past few years. It is hoped, however, thatadditional personnel will be made available so that the inspectionprogram will move forward more rapidly in the future and that arealistic cycle of inspections can be instituted and maintained.

The inspections made by the Commission to date, limited in num-ber though they have been, have shown the urgent need for thismethod of assuring compliance with the Investment Company Act.In some cases failures to comply with the act or improper practiceswere discovered and corrective action requested and taken. In onecase, the violations were serious in nature and resulted in a stop-orderproceeding under the Securities Act and the issuance of an opinionand stop-order. Apart from bringing to light improprieties or fraudu-lent conduct, the institution of routine inspections should prove to beparticularly beneficial to the newly organized or smaller investmentcompany in complying with the requirements of the Investment Com-pany Act.

Other Factors in the Securities Markets

Under the statutes which it administers, the Commission has theduty to conduct inquiries into the securities markets not only forthe purpose of enforcement but also to ascertain facts to aid in theadoption of rules and regulations and for making appropriate legis-lative recommendations. I In dynamic and changing markets, theCommission must continually reassess the statutes and the rules andregulations which it administers in light of new knowledge. Forexample, the Commission has instituted an inquiry into the problemscreated by the growth in the size of investment companies for thepurpose of determining whether the increased size of investment com-panies has created problems requiring remedial Iegislation,"' An-other inquiry of somewhat less importance but of interest to thepublic is one into the "put" and "call" market. This little knownand little explored area of the securities market is now being studiedby the Commission to ascertain, among other things, who writes theseoptions, how they are marketed and who purchases them.

H See 23d Annual Report, p. 159.

PART II

LEGISLATIVE ACTIVITIES

Statutory An1enchnents Proposed by the Commission

Proposals to amend 87provisions of the Federal securities laws weresubmitted by the Commission to the 85th Congress in July and August1957. These proposals were introduced in both the Senate and theHouse of Representatives, and the bills were referred to committee,but no action was taken on the bills during the 85th Congress.'

During the latter part of 1958 the Commission reexamined theserecommendations for legislation and made some modifications, deletingcertain proposals and adding others. The modified proposals, whichwould amend the Securities Act of 1933,The Securities Exchange Actof 1934, the Trust Indenture Act of 1939, the Investment CompanyAct of 1940 and the Investment Advisers Act of 1940, were then sub-mitted in the 86th Congress to the Committee on Banking and Cur-rency, United States Senate, and the Committee on Interstate andForeign Commerce, House of Representatives. These Committeeshave the duty of exercising watchfulness over the execution of thesecurities laws under section 136 of the Legislative Reorganization Actof 1946.

The Commission's proposals were introduced in the Senate bySenator A. Willis Robertson, Chairman of the Committee on Bank-ing and Currency, for himself and for Senator Homer E. Capehart,as S. 1178, S. 1179, S. 1180, S. 1181, and S. 1182. In the House ofRepresentatives, Representative Oren Harris, Chairman of the Com-mittee on Interstate and Foreign Commerce, introduced companionbills, H.R. 5001, H.R. 2480, H.R. 5002, H.R. 2481, and H.R. 2482.2

Basically the Commission's proposals, the more significant of whichare briefly described below, are intended to strengthen the safeguardsand protections afforded the public by tightening jurisdictional pro-visions, correcting certain inadequacies revealed through administra-tive experience and facilitating criminal prosecutions and other en-forcement activities.

.The proposed amendments to the Securities Act of 1933 wouldclarify the jurisdictional basis of the civil liability provisions of the

1For a detailed discussion of the Commission's legislative program durIng the 85thCongress, see pages 10--12 of the Commission's 23d Annual Report and page 9 of the Com-mission's 24th Annual Report.

H.R. 5001 and H.R. 5002, proposing amendments to the Securities Act of 1933 and theTrnst Indenture Act of 1939, respectively, are substitutes for H.R. 2488 and H.R. 2483,respectively, which included earlier recommendations that the Commission decided to with.draw on further consideration.

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10 SECURITIES AND EXCHANGE COMMISSION

statute; extend existing civil liabilities and provide criminal liabilitywith respect to documents filed with the Commission pursuant toCommission rules in connection with exempt offerings; increase from$300,000 to $500,000 the size of offerings which may be exemptedfrom registration under section 3 (b) of the statute; and make it clearthat a showing of past violations is a sufficient basis for injunctiverelief and that aiders and abettors may be responsible in civil andadministrative proceedings,"

The proposed amendments to the Securities Exchange Act of 1934would make comparable changes with respect to injunctive relief andliability of aiders and abettors. In addition, changes proposed in thatstatute would make it a violation or the act to embezzle monies orsecurities entrusted to the care of an exchange member or a registeredbroker or dealer; clarify and strengthen the statutory provisions re-lating to manipulation and to the financial responsibility of brokersand dealers; authorize the Commission by rule to regulate the borrow-ing, holding or lending of customers' securities by a broker or dealer;make it clear that attempts to purchase or sen securities are coveredby the antifraud provisions of the statute; revise the provisions re-lating to broker and dealer registration with respect to (a) the basison which action for denial or revocation may be taken, (b) the sanc-tions which may be imposed by the Commission, (c) the conditionsunder which an application for registration may be withdrawn, and(d) the postponement of the effectiveness of an application for regis-tration; authorize the Commission to suspend or withdraw the regis-tration of a securities exchange when the exchange has ceased to meetthe requirements of its original registration; clarify the Commission'sauthority to suspend a security from exchange trading where therehas been a failure to comply with the act and where otherwise neces-sary in the public interest; prohibit trading in the over-the-countermarket for limited periods where the public interest and the protectionof investors so requires; provide that an insolvent broker or dealermay be adjudicated a bankrupt in an injunctive proceeding institutedby the Commission; and provide for a monetary :forfeiture for eachday that certain reports required under the act are delinquent.

The changes proposed in the Trust Indenture act of 1939 are de-signed primarily to conform this statute to recommendations madeunder the Securities Act.

The proposed amendments to the Investment Company Act of 1940would require an investment company to state as matters o:f funda-mental policy, which generally could not be changed without theconsent of its stockholders, the extent to which it intends to investin particular types of securities and such other basic investmentobjectives as it represents it will emphasize; strengthen the provi-

See p. 13, infra.•

TWENTY-FIFTH ANNUAL REPORT 11

sions requiring It minimum number of independent or nonmanage-ment directors; limit the extent to which a face-amount investmentcompany can include preferred and common stock in its "qualifiedinvestments" ; make clear the application of the statute to an "advisoryboard"; and modify the exception for companies subject to regula-tion by the Interstate Commerce Commission and clarify the excep-tions applicable to companies engaged in banking, insurance, smallloan, factoring, discount or real estate businesses.

The proposed changes in the Investment Advisers Act of 1940wouldexpand the basis for disqualification of a registrant because of priormisconduct; authorize the Commission by rule to require the keepingof books and records and the filing of reports; permit periodic exami-nations of a registrant's books and records; empower the Commissionby rule to define and prescribe means reasonably designed to preventfraudulent practices; extend criminal liability for willful violationof a rule or order of the Commission; and revise the provisions re-lating to the postponement of effectiveness and the withdrawal ofapplications for registration.

Many minor amendments of these statutes are also proposed.Hearings on the bills were held before the Subcommittee on Se-

curities of the Banking and Currency Committee of the Senate, onJune 15, 16, 17, 18, 23, 24, and 25, 1959, and before the Subcommitteeon Commerce and Finance of the Committee on Interstate and For-eign Commerce of the House of Representatives on June 3, July 8and 9 and August 4, 1959. The Commission and staff members pre-sented testimony at the beginning of the hearings before each com-mittee, and again after interested industry representatives and othershad been heard. As a result of conferences with industry represent-atives, similar to those held in connection with the formulation of thelegislative recommendations in the 85th Congress, and as a conse-quence of comments and suggestions made during the course of thehearings by members of Congress and witnesses, the Commission madecertain modifications in its proposals. These modifications did notrepresent abandonment of the original proposals, but essentially con-stituted clarification and statutory specification of matters in con-formity with the original intention of the Commission.

The Commission also advised the Committees that it had no objec-tion to three amendments to the Investment Advisers Act proposedduring the hearings by certain investment advisers and their repre-sentatives. One would modify the definition of the term "control"in the statute, the second would grant the Commission authority toprovide exemptions from the statute, and the third would modify theconditions under which an investment adviser may call himself an"investment counsel."

12 SECURITIES AND EXCHAlTGE COMMISSION

Other Legislative Proposals

Various other bills to amend the securities laws were introduced,and the Commission submitted comments to the committees of Con-gress. These bills, except for H.R. 4025 and H.R. 5543, renewedproposals made in previous sessions of the Congress. No hearingswere held on the bills, which are discussed briefly below.

I. Proposal to Increase Registration Fees.-On January 28, 1959,Senator Homer E. Capehart for himself and for Senator Frank J.Lausche introduced S. 737, and on April 13, .1959, RepresentativeJohn B. Bennett introduced an identical bill, H.R. 6294. Both billswould amend section 31 of the Securities Exchange Act of 1934,whichnow provides an annual fee for registration of exchanges of one five-hundredths of 1 percent of the aggregate dollar amount of stock ex-change transactions, equal to 2 cents per $1,000. Under the bills thisexchange registration fee would be increased to a rate of 5 cents per$1,000 and there would be a similar registration fee for brokers anddealers of 5 cents per $1,000 on transactions effected otherwise thanon a national securities exchange,"

2. Disclosure of Beneficial Ownership of Registered Securities inElection Contests.-On January 9, 1958, Senator Homer E. Capehartintroduced S. 132, a bill directed to identifying beneficial owners ofsecurities in proxy contests. The bill would add to section 14 of theSecurities Exchange Act of 1934 a provision making it unlawful forany person to give or to attempt to give a proxy to vote a registeredsecurity at any annual or special meeting for the election or removalof directors, with respect to which proxies are solicited by opposingnominees, unless (1) such person is the beneficial owner of the se-curity, or (2) the name and last known address of the beneficial ownerappears on the proxy. In addition, the bill would make it unlawfulfor any person knowingly to exercise or attempt to exercise any proxyin violation of this provision,"

3. Reporting Requirement of Beneficial Owners of RegisteredSecurities and Officers and Directors of Issuers Thereofv-c-On Jan-uary 28, 1959, Senator Homer E. Capehart introduced S. 736, whichwould amend section 16 of the Securities Exchange Act of 1934 torequire every beneficial owner of more than 5 percent (instead of 10percent as now provided) of any class of any equity security whichis registered on a national securities exchange to file reports of hissecurities holdings and transactions with the Commission,"

See the Commission's 23d Annual Report, pp. 12-13, for a discussion of similar pro-posals in the 85th Congress,

See the Commlsalorr's 2;),. Annual RPJlort. JI, 16, for dis.cussion of a ~imiJar proposal inthe 85th Congress.

See the Commis-ion'" 23d Annual Report, pp. 15-16, for a discussion of a similar pro-posal in the 85th ('ongTP".

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TWENTY -FIFTH ANNUAL REPORT 13

H.R. 1028 was introduced by Representative Abraham Multer onJanuary 7,1959. This bill would amend section 16(a) of the Securi-ties Exchange Act of 1934to require officersand directors of any issuerof registered securities to report periodically the extent to which, andthe purposes for which, their holdings of such securities are pledged.

4. Proposals Relating to Exempt Offerings and Civil Liabilitiesin Connection Therewith.- Two bills designed to impose additionalcivil liabilities in connection with exempt offerings under section 3(b)of the Securities Act of 1933 were introduced in the first session of the86th Congress. On January 7, 1959, Representative Leonard Farb-stein introduced H.R. 93, a bill which would augment existing pro-visions for civil liabilities by providing for specific liability on thepart of those responsible for untrue statements of material facts oromissions to state material facts in any statements or document filedwith the Commission in connection with an exempt offering undersection 3 (b) . This bill is identical with the proposal embodied in theCommission's legislative program/ except that the Commission pro-posal also encompasses false filings pursuant to section 3(c) of thestatute.

On February 17, 1959, Representative .Iohn R. Bennett introducedH.R. 4568, a bill which would raise the exemptive ceiling under section3(b) from $300,000 to $500,000 and would make applicable to suchexempt offerings the strict civil liabilities now pertaining solely toregistered offerings. 8

5. Repeal of Exemption for Intrastate Offering.-H.R. 884, intro-duced by Representative Abraham Multer of New York, would re-move the exemption provided by section 3(a) (11) of the SecuritiesAct for a security offering confined to the residents of the state withinwhich the issuer is both incorporated and doing business. The Com-mission has not submitted its views on this proposal.

6. Reduced Sales Load for Certain Purchases of InvestmentCompany Shares.-As a consequence of the Commission's promulga-tion on December 2,1958, of rule 22d-1 under the Investment Com-pany Act,9 Representative Edward W. Hiestand introduced H.R.4025 and H.R. 5543, both of which would amend section 22( d) of thestatute to authorize quantity purchases of investment company sharesby certain retirement associations at reduced sales loads. Prior to theadoption of rule 22d-1 several associations of individuals, whichwould not be exempted under the provisions of the rule, had receivedthe benefit of a smaller sales load in connection with certain quantity

; See p, 10, RlIp'-U

8 H.R. 93 and H.R. 4568, Insofar as they relate to civil lIablilties, are Identical withH.R. 173 and H.R. 4744, 85th Congress. respectively, and H.R. 11308 and H.R. 9319, 84thCongress, respectively. The background of the latter bllls is discussed In the 22d AnnualReport of the Commission, pp. 11-12.

See p. 23, infra.•

14 SECURITIES AND EXCHANGE COMMISSION

purchases and had been advised by the Commission's staff that itwould not recommend that any action be taken in respect of such pur-chases. Both H.R. 4025 and H.R. 5543 are designed to restore theearlier interpretation.

A substantial amount of time was directed to matters pertainingto other legislative proposals referred to the Commission for commentand to congressional inquiries. During the fiscal year 1959 a total of76 legislative proposals were analyzed. In comparison, 58 proposalswere analyzed during fiscal 1958 and 33 during fiscal 1957. In addi-tion, numerous congressional inquiries relating to matters other thanspecific legislative proposals were received and answered.Congressional Hearings

In addition to the hearings in connection with the Commission'slegislative program discussed above, the Commission presented to theHouse Committee on Interstate and Foreign Commerce a general dis-cussion of the Commission's activities and the particular problemscurrently facing the Commission.

The Commission appeared before the Subcommittee on LegislativeOversight of the House Committee on Interstate and Foreign Com-merce in September and November 1958 and again in June 1959.10

The Commission also appeared on May 13, 1959, before the HouseSelect Committee on Small Business to testify concerning the Com-mission's role in administering the laws governing the operation ofsmall business investment companies.

'0 See the Commission's 24th Annual Report, pp. 12-13.

PART III

REVISION OF RULES, REGULATIONS AND FORMS

The Commission made a number of changes during the 1959 fiscalyear in its rules, regulations and forms under the various statutesadministered by it. Other changes which the Commission publishedin preliminary form for the purpose of obtaining public commentsthereon were pending at the end of the fiscal year. The changesmade during the fiscal year and those pending at the end of the yearare described below.'

Changing conditions, methods and procedures in business and inthe financial practices of business make it necessary for the Com-mission to maintain a continuing review of its rules, regulationsand forms. Certain members of its staff are assigned to this task.Changes are also suggested, from time to time, by other members ofthe staff engaged in the examination of material filed with the Com-mission, and by persons outside of the Commission who are subjectto the Commission's requirements or who have occasion to work withthose requirements in a professional capacity such as underwriters,attorneys, accountants, and other representatives. With relativelyfew exceptions, provided for by the Administrative Procedure Act,proposed changes in rules, regulations and forms are announced tothe public and interested persons are invited to submit their viewsand comments thereon. These views and comments are carefullyreviewed by the staff and by the Commission and are very helpfulin connection with the Commission's consideration of proposedchanges.

THE SECURITIES ACT OF 1933

Amendment of Rule 133Shortly after the end of the fiscal year the Commission adopted

certain amendments to rule 133.2 The modification of this rule hasbeen under consideration for some time and has been mentioned in

1The rules and regulations of the Commission are published in the Code of FederalRegUlations, the rules adopted under the varrous Acts adnnnfsterad by the Commtsstonappearing in the following parts of title 17 of that Code:

Securities Act of 1933, part 230.Securities Exchange Act of 1934, part 240.Public UtilIty Holding Company Act of 1935, part 250.Trust Indenture Act of 1939, part 260.Investment Company Act of 1940, part 270.Investment Advisers Act of 1940, part 275.

Securities Act Release No. 4115 (July 16, 1959).15

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16 SECUtUT1ES ANt> EXC:ElANGE COMMISSION

previous annual reports of the Commission," Rule 133 provides ingeneral that for the purpose of determining the application of theregistration and prospectus provisions of the Securities Act, no"offer" or "sale" shall be deemed to be involved so far as stockholdersof a corporation are concerned where, pursuant to the provisionsof a statute or the certificate of incorporation, there is submitted toa vote of such stockholders a plan involving a statutory merger, con-solidation, reclassification of securities or transfer of assets of thecorporation in consideration of the issuance of securities of anothercorporation. The general purpose of the amendments to the rule isto make it clear that under certain circumstances securities distributedby persons receiving them in connection with such transactions maybe required to be registered under the act. For example, the amendedrule provides that where one company is merged into another com-pany, a stockholder in control of the merged company who receivessecurities of the surviving company with a view to making a dis-tribution of such securities to the public shall be deemed to be anunderwriter and registration of the securities is required before thedistribution can be made. However, registration is not requiredwith respect to securities sold in certain brokers' transactions asdefined in the rule.

In connection with the amendment of rule 133, a new Form S-14was adopted :for the registration of certain securities issued in a rule133 transaction. TIllS form is discussed below at p. 20.Amendment of Rule 135

This rule, as originally adopted, provided that a notice or othercommunication sent by an issuer to its security holders to informthem of the proposed issuance of rights to subscribe to additionalsecurities would not be deemed to offer any security issue for sale ifsuch notice was sent in conformity with the rule. The principalrequirements were that the notice be sent within 60 days prior tothe record date, state that the offering will be made only by theprospectus and in addition contain only certain specified informa-tion necessary to inform the security holders of the forthcomingoffering. The purpose of the rule was to enable an issuer to furnishcertain factual information to its security holders in advance ofmaking the actual offering.

The rule was amended during the fiscal year to permit the sendingof similar notices where an issuer proposes to offer securities to itsown security holders, or to the security holders of another issuer inexchange for securities presently held by them, and also where theissuer proposes to make an offering of securities to its employees orto the employees of an affiliate."

3 23d Annual Report, p. 20; 24th Annual Report, p. 14.Securities Act Release No. 4099 (June 16, 1959).•

TWENTY-FIFTH A...~AL REPORT 17

Proposed Rule Changes Relating to Assessable Stock

During the 1958 fiscal year the Commission invited public coni-ments on a proposed new rule 136 and certain proposed amendmentsto rule 140 with respect to assessable stock and the levying of assess-ments thereon. 5 The general purpose of these proposals was to makeit clear that the Securities Act of 1933 applies to the levying ofassessments on assessable stock to the same extent that it applies toother securities. Action on these proposals was deferred pending fur-ther study of the matter. During the 1959 fiscal year the Commissionpublished revised proposals with respect to the rules referred to andalso a proposed exemption Regulation F,6 which were adopted shortlyafter the close ofthe fiscal year,"

The new Regulation F, which provides an exemption from registra-tion under the act for assessments and delinquent assessment salesin amounts not exceeding $300,000in anyone year, requires the filingof a simple notification giving brief information with respect to theissuer, its management, principal security holders, recent and pro-posed assessments and other security issues. This notification couldbe prepared in a relatively short time by any officer of the companywho is familiar with the company's affairs and there is no fee orcharge for its filing. The filing may be made by mailing the notifica-tion to the appropriate regional officeof the Commission.

The only information which a company is required to send to itsstockholders, or otherwise publish, is a statement of the purposesfor which the proceeds from the assessment are proposed to be used.This information may be included in the notice of assessment givenby mail or otherwise published as required by State law. If the issuershould employ any other sales literature in connection with the assess-ment, copies of such literature must be filed with the Commission.Proposed Rule 144

During the fiscal year the Commission invited public comments ona proposed rule relating to certain transactions by the InternationalBank for Reconstruction and Development. The proposed rule, to bedesignated rule 144, would have defined the term "transactions by anissuer not involving any public offering," in section 4(1) of the act,to include certain activities of the Bank. After the close of the fiscalyear, the Commission announced that it had discontinued considera-tion of the proposed rule since there appeared to be no present needfor it.s

See 24th Annual Report, p. 16.Securities Act Release No. 4040 (Mar. 4,19(9).Secnritles Act Release No. 4121 (Jnly 30, 19(9).

8 Securities Act Release No. 4028 (Feb. 10, 19(9) and 41t31 (Nov. 30. 19(9).

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18 SECURITIES AND EXCHANGE COMMISSION

The proposed rule would also define the term "distribution" in sec-tion 2 (11) of the act as not applying to such transactions by the bankor by any dealer who is acting on an agency basis pursuant to a writ-ten contract with the bank.

The matter was still under consideration at the end of the fiscalyear.Adoption of Rule 151

TIlls rule defines the term "public offering" to exclude under cer-tain conditions the offering of stock of small business investmentcompanies to small business concerns pursuant to the requirementsof the Small Business Investment Act of 1958.9

Under section 304(d) of the Small Business Investment Act, when-ever a small business investment company provides capital to a smallbusiness concern through the purchase of the latter's convertible de-benture bonds, the small business concern is required to purchase stockof the small business investment company in an amount equal to notless than 2 percent nor more than 5 percent of the capital so provided,in accordance with regulations of the Small Business Administration.Those regulations specify certain minimum amounts of such stockwhich a small business concern is required to purchase dependingupon the amount of capital which it obtains from a small businessinvestment company through the issuance of convertible debenturebonds.

The new rule provides that a public offering of capital stock of asmall business investment company is not deemed to be involved wherethe offer or sale is made in connection with the purchase of debenturebonds from a small business concern pursuant to the requirements ofthe Small Business Investment Act, the amount of stock involved isthe minimum required by that act and the regulations thereunder inconnection with the particular transaction, and the stock is acquiredby the small business concern for investment and not with a view toits distribution.Amendment of Rule 434A

This rule permits the use of summary prospectuses which omit inpart or summarize information set forth in the more complete pro-spectus required to be used in connection with the offering and saleof securities. Summary prospectuses may be used in the form ofnewspaper advertisements, circulars, etc. as a screening device to lo-cate persons interested in receiving a copy of the complete prospectus.

The rule was amended during the fiscal year to permit the use ofsummary prospectuses by a larger group of issuers." The rule as pre-viously in effect permitted the use of summary prospectuses only by

See Securities Act Release No. 4033 (Feb. 13. 1959).10 Securities Act Release No. 4094, (Juae. 11,1959,),.•

TWENTY-FIFTH ANNUAL REPORT 19registrants which file reports under sections 13 and 15(d) of the Se-curities Exchange Act of 1934. The amended rule permits the use ofsummary prospectuses by certain other registrants which do not filesuch -reports but which meet certain standards as to size, earnings,and the publication of reports.Adoption of Regulation E

The Commission during the fiscal year adopted a new regulation,designated Regulation E, which provides a conditional exemptionfrom registration under the Securities Act of 1933 for securities ofsmall business investment companies which are licensed under theSmall Business Investment Act of 1958 or which have received thepreliminary approval of the Small Business Administration and havebeen notified by the Administration that they may submit an ap-plication for such a license." The new regulation, which exempts is-sues not in excess of $300,000 from registration under the act, wasadopted pursuant to the new section 3(c) which was added to theSecurities Act by section 307(a) of the Small Business InvestmentAct.

Regulation E is similar in many respects to the general exemptionfor certain securities, other than those of investment companies, pro-vided by Regulation A. It requires the filing of a notification withthe Commission and, except in the case of offerings not in excess of$50,000, the filing and use of an offering circular containing certainspecified information. In general, information is required in theoffering circular as to the business and investment policies of theissuer, its management and its financial condition. The financialstatements required must be prepared in accordance with generallyaccepted accounting principles and practices but need not be certifiedby independent public accountants. Provision is made for the sus-pension of an exemption in a particular case if the Commission findsthat any of the terms and conditions of the regulation have not beenmet or complied with.Adoption of Form N-S

During the fiscal year the Commission adopted a new form, desig-nated Form N-5, for the registration under the Securities Act of 1933of securities to be issued by small business investment companies whichare licensed under the Small Business Investment Act of 1958 01'

which have received the preliminary approval of the Small BusinessAdministration and have been notified by the Administration that theymay submit an application for such a license." This form is also tobe used for the registration statements of such companies filed pur-suant to section 8(b) of the Investment Company Act of 1940 ..

U Securities Act Release No. 4005 (Dec. 17, 1958).Securities Act Release No. 4,004 (Dec. 17, 1l,l58).

5~~5:l3-5~

~

20 SECURITIES AND EXCHANGE COMMISSION

The new form is a combination form which enables It small businessinvestment company to register under the Investment Company Actof 1940 and at the same time to register securities for a public offeringunder the Securities Act of 1933 by means of a single registrationstatement. If a company has already registered under the InvestmentCompany Act, the form may be used for subsequent registration underthe Securities Act. If a company desires to register under the Invest-ment Company Act prior to registering securities under the SecuritiesAct, the form may be used for this purpose also.Adoption of Form S-14

In connection with the adoption of amendments to rule 133/3 theCommission also adopted a new Form S-14.H This form is designedto provide a simplified registration procedure for securities issuedin a rule 133 transaction where such registration is required and wherethe issuer has solicited proxies under the Commission's proxy ruleswith respect to such transaction. The form provides that the pro-spectus may consist chiefly of the information set forth in the proxystatement supplemented by the necessary underwriting and distri-bution data and pertinent information regarding developments .in theregistrant's business subsequent to the rule 133 transaction.

THE SECURITIES EXCHANGEACF OF 1934

Adoption of Rule 16b-8

The Commission during the fiscal year adopted a new rule undersection 16(b) of the Securities Exchange Act of 1934.15 This sectionof the act provides that profits obtained by certain holders of thestock of a listed company from purchases and sales, or sales and pur-chases, of any equity securities of such company (other than exemptsecurities) within any 6-month period may be recovered by thecompany or by any security holder on its behalf.

The new rule, designated rule 16b-8, exempts from section 16(b)under certain conditions the receipt from an issuer of shares of stockhaving general voting power and registered on a national securitiesexchange upon the surrender of an equal number of shares of stockof the same issuer which do not have such voting power and are not soregistered, where the transaction is effected pursuant to the provisionsof the issuer's certificate of incorporation for the purpose of makingan immediate sale of the shares so received.

The conditions of the rule, briefly summarized, are that the personso receiving such shares is not an officer or director of the issuer or aperson who was a beneficial owner immediately prior to the trans-action of more than 10 percent of a registered equity security of the

13 Supra, p. 15.U SecuritIes Act Release No. 4115 (July 16, 1959).;u;,Serurlties Exchange Act Release No. 5921 (Mar. 30, 1959).

("

TWENTY-FIFTH ANNUAL REPORT 21issuer; that the shares surrendered and the shares received are freelytransferable and, entitle the holders thereof to participate equally pershare in all distributions of earnings and assets; that the sharesreceived must be registered upon issuance in the name of a person orpersons other than the holder of the shares surrendered and may berequired to be issued as of right only in connection with the publicoffering, sale, and distribution or gift of such shares; and that noshares of the class surrendered or any other shares of the class receivedare acquired by the person effecting the transaction within six monthsbefore or after the date of the transaction.Amendment of Form 8-K

The Commission during the fiscal year adopted certain amend-ments to Form 8-K, which is the form prescribed for current reportsfiled pursuant to sections 13 and 15 (d) of the Securities ExchangeAct of 1934.16 The amendments relate to the item of the form whichrequires information in regard to matters submitted to a vote ofsecurity holders, either at a meeting of such security holders or other-wise. The purpose of the amendments was to clarify the item withrespect to the circumstances under which the information specifiedin the item is required to be furnished.

The Commission also invited public comments on certain otherproposed amendments to Form 8-K designed to bring to the attentionof investors promptly information regarding material changesaffecting the company or its affairs where it appears that the changesare of such importance that they should be reported promptly and notdeferred, to the end of the fiscal year," The amendments relate tomatters such as the pledging of securities of the issuer or its affiliates,changes in the board of directors otherwise than by stockholder action,the acquisition or disposition of significant amounts of assets andtransactions with insiders. Shortly after the end of the fiscal yearthe time for submitting comments on these proposed changes wasextended to August 15, 1959.1s

THE INVESTMENT COMPANY ACT OF 1940

Adoption of Rule 3e-l

In connection with the adoption of rule 151 under the SecuritiesAct,19the Commission also adopted a new rule 3e-1 under the Invest-ment Company Act of 1940 defining the term "public offering", forthe purposes of section 3(c) (1) of that act, to exclude under certainconditions, the offering of stock of small business investment com-panies to small business concerns pursuant to the requirements of the

!

,. Securities Exchange Act Release No, 5734 (July 16, 1958).17 Securities Exchange Act Release No. 6979 (June 9, 1959).18 Securities Exchange Act Release No. 6018 (July 14,1959).

Supra, p. 18."

22 SECURITIES AND EXCHANGE COMMISSION

Small Business Investment Act of 1958.20 Section 3(c) (1) of theInvestment Company Act provides that any issuer whose outstandingsecurities (other than short term paper) are beneficially owned bynot more than 100 persons and which is not making and does notpresently propose to make a public offering of its securities is not aninvestment company within the meaning of the act. Since the re-quirements of the Small Business Investment Act and the rules andregulations thereunder require that a small business investmentcompany in its role as a provider of capital continually stand readyto sell its stock to small business concerns, a continuous disposition ofstock by such investment companies may possibly be interpreted to bea "public offering." The Commission, therefore, adopted rule 3c-1 toeffectuate the purposes and objectives of the Small Business Invest-ment Act without adversely affecting the public investor interest.The terms and conditions of the rule 3c-1 definition are substantiallythe same as those contained in rule 151.Adoption of Rule IOf-3-Permitting Acquisition of Securities of Underwriting

Syndicates

To alleviate the problems and administrative burdens involved inprocessing individual applications for relief pursuant to section 10(f}of the act, the Commission, in December 1958, adopted rule 10£-3exempting certain limited acquisitions of securities by registered in-vestment companies during the existence of an underwriting syndi-cate where such acquisitions are not made from affiliated under-writers," Notice of the proposed rule was issued in July 195822

and the comments received were unanimously in favor of the adop-tion of the rule, although a number of suggestions for its modificationwere included.

Section 10(f) of the act provides that an investment company,unless exempted by rule, regulation or order, is prohibited from pur-chasing a security during the existence of an underwriting syndicate,if any of the principal underwriters are affiliated persons of the in-vestment company. Before the adoption of rule 10f-3, investmentcompanies were required in all such cases to obtain an exemptiveruling by the Commission prior to the purchase of such securitiesor to purchase them conditioned on obtaining an exemptive orderwithin such periods of time as a particular underwriter might bewilling to ~rant even though extending beyond the date of the publicoffering. The new rule permits the investment company to makesuch purchases under certain conditions without the necessity of obtain-ing an order of exemption.

Through its experience in considering the many applications for

eoInvestment Company>Act Release No, 2828 (Feb. 13,1959)."Investment Compn ny Act Release No. 2797 (Dec. 2, 1958).

Investment Company Act Release No. 2744."'

TWENTY-FIFTH ANNUAL REPORT 23

relief filed pursuant to section 10(f) over the years, the Commissionwas in a position to determine what conditions and safeguards shouldbe imposed in such situations to insure the protection of investors.These include limitations with respect to the consideration paid, asrelated both to the amount of the offering and the assets of the invest-ment company. In addition, underwriters' commissions may notexceed stated amounts, no purchase may be made from an affiliatedunderwriter, and the offering must be effectively registered under theSecurities Act of 1933. These conditions are designed to permit pur-chases where the circumstances are such as to make it likely that thepurchases would be consistent with the protection of investors. Pur-chases that do not meet the strict conditions of the rule may, never-theless, be exempted by order upon application where the statutorystandards are satisfied.Adoption of Rule 22d-I-Relating to Variations in Sales Load of Redeemable

Securities

Section 22(d) prohibits a registered investment company, its prin-cipal underwriter, or a dealer from selling redeemable securities ofthe company to any person except at a current public offering pricedescribed in the prospectus. Rule 22d-l was adopted by the Com-mission in order to settle and codify administrative interpretationsof the provisions of section 22(d) and to provide by rule exemptionsfrom its provisions which would obviate the necessity for numerousindividual applications." Thus, the burden is removed from the in-dustry of preparing applications under section 6(c), and the Com-mission need not process such exemptions, in cases identical to thosewhere such relief had previously been granted. The result of the ruleis to ensure uniform compliance with the provisions of section 22(d) .

The rule was the product of a comprehensive review of the legis-lative history of section 22(d) of the act, and all past administrativeinterpretations and exemptive orders issued under that section. Oneof the most important objectives of the rule was to determine the ques-tion of the availability of a quantity discount (i.e., a reduced salescharge for sales exceeding an established amount) for persons whowere banded together for the purpose of making purchases as a group.

The rule permits the granting of quantity discounts and does notinsist that the amount of securities must be determined as of a singlepoint of time. In this respect the rule follows previous Commis-sion decisions which had permitted a sales load discount to be basedupon shares previously acquired and then owned plus the shares beingpurchased. Purchases made within a period of not more than 13months pursuant to a "letter of intent" may also be aggregated forascertaining the quantity entitled to a discount but the agreement

,. Investment Company Act Release No. 2798 (Dec. 2, 19(8).

24 SECURITIES AND EXCHANGE COMMISSION

under which such purchases are made must assure that the lower priceis justified by the quantity actually purchased and that adjustmentswill be made if required. In each of these instances, the inclusion ofshares of other mutual funds is permitted if the same principal under-vvriterisinvolved.

The rule, however, requires uniform prices to individual investorsand prohibits quantity discounts to groups of individuals, except inthe case of a family unit. A trustee or other fiduciary may obtain aquantity discount for a single trust estate of which there are more thanone beneficiary, but quantity discounts may not be allowed on theaggregate of sales to a trustee or representative acting for more thanone account or more than one trust. The rule specifically provides thatthe term "any person" shall not include a group of individuals whosefunds are combined directly or indirectly for the purchase of shares,whether jointly or through a representative or agent of the gT.QUp.Therule in this respect reflects a stricter interpretation than prior Com-mission views under which quantity discounts had been extended totrustees, custodians, or agents acting on behalf of members of anorganization.

The rule permits sales at reduced prices to tax exempt organiza-tions, following Commission decisions in the past granting such ex-emptive treatment. Sales at net asset value or with a lower load arealso permitted to be made to officers, directors, and employees of theinvestment company, its underwriter and investment adviser, but writ-ten assurance must be given that the purchases are for investmentpurposes and that the securities will not be resold except throughthe usual redemption or repurchase procedure. Sales to employeepension or benefit plans are included within the exemption affordedby the rule.

With respect to the reinvestment of distributions the rule per-mits the limitation of reinvestment privileges to participants in asystematic investment or dividend reinvestment plan provided allshareholders are offered the opportunity to participate in the dividendreinvestment plan at any time. All stockholders must be notified ofthe availability of the dividend reinvestment privilege once eachyear by a statement in the annual report or other document.

The rule has been helpful in stabilizing the pricing methods ofthe mutual funds. The need for individual exemptive orders hasbeen substantially eliminated, thus lightening the burdens on thecompanies and the Commission to that extent. The provisions ofthe rule are, of course, subject to review by the Commission, and spe-cific applications for relief may still be submitted.

TWENTY-FIFTH ANNUAL REPORT 25Adoption of Form N-5-Registration Form for Small Business Investment

CompaniesAs previously indicated," the new Form K-5 is a combination

form which enables a small business investment company to registerunder the Investment Company Act pursuant to section 8 (b) andat the same time to register securities for a public offering underthe Securities Act of 1933 by means of a single registration state-ment. If a company has already registered under the InvestmentCompany Act the form may be used for subsequent registrationunder the Securities Act. If a company desires to register underthe Investment Company Act prior to registering securities underthe Securities Act, the form may also be used for that purpose.

24 Supra, p. 19.

PART IV

AD:MINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is designed to provide disclosure toinvestors of material facts concerning securities publicly offered forsale by use of the mails or instrumentalities of interstate commerce,and to prevent misrepresentation, deceit, or other fraudulent prac-tices in the sale of securities. Disclosure is obtained by requiringthe issuer of such securities to file with the Commission a registra-tion statement and related prospectus containing significant infor-mation about the issuer and the offering. These documents are avail-able for public inspection as soon as they are filed. The registrationstatement must become "effective," however, before the securities maybe sold to the public. In addition the prospectus must be furnishedto the purchaser at or before the sale or delivery of the security. Theregistrant and the underwriter are responsible for the contents ofthe registration statement. The Commission has no authority tocontrol the nature or quality of a security to be offered for publicsale or to pass upon its merits or the terms of its distribution. Itsaction in permitting a registration statement to become effective doesnot constitute approval of the securities, and any representation toa prospective purchaser of securities to the contrary is made unlawfulby section 23 of the.act.

DESCRIPTION OF mE REGISTRATION PROCESS

Registration Statement and ProspectusRegistration of any security proposed to be publicly offered may

be effected by filing with the Commission a registration statement onthe applicable form containing the prescribed disclosure. 'When aregistration statement relates, generally speaking, to a security issuedby a corporation or other private issuer, it must contain the informa-tion, and be accompanied by the documents, specified in schedule Aof the act; when it relates to a security issued by a foreign govern-ment, the material specified in schedule B must be supplied. Bothschedules specify in considerable detail the disclosure which shouldbe made available to an investor in order that he may make an in-formed decision whether to buy the security. In addition, the actprovides flexibility in its administration by empowering the Com-mission to classify issues, issuers and prospectuses, to prescribe appro-priate forms, and to increase, or in certain instances vary or diminish,the information required to be disclosed in the registration statement,

26

TVVENTY-FIFTH A~AL REPORT 27

as the Commission deems appropriate in the public interest or forthe protection of investors.

In general the registration statement of an issuer other than aforeign government must set forth such matters 3S the names of per-sons who participate in the direction, management, Orcontrol of theissuer's business; their security holdings and remuneration and theoptions or bonus and profit-sharing privileges allotted to them; thecharacter and size of the business enterprise, its capital structure, pasthistory and earnings and financial statements certified by independentaccountants; underwriters' commissions; payments to promoters madewithin 2 years or intended to be made; acquisitions of property not inthe ordinary course of business, and the interest of directors, officersand principal stockholdlers therein; pending or threatened legalproceedings; and the purpose to which the proceeds of the offering areto be applied. The registration statement of a foreign governmentmust contain comparable information in regard to the underwritingand distribution of the securities being registered, the natural andindustrial resources of the country, its revenues, obligations and ex-penses, a description of the securities being registered, and similarmatters. The prospectus constitutes a part of the registration state-ment and presents the more important of the required disclosures.Examination Procedure

The staff of the Division of Corporation Finance examines eachregistration statement for compliance with the standards of accurateand adequate disclosure and usually notifies the registrant by an in-formal letter of comment of any material respects in which the state-ment appears to fail to conform to those requirements. The regis-rant is thus afforded an opportunity to file a curative amendment.In addition, the Commission has power, after notice and opportunityfor hearing, to issue a "stop order" suspending the effectiveness of aregistration statement. In certain cases, such as where a registrationstatement is so deficient as to indicate a willful or irresponsible failureto make adequate disclosure, no letter of comment is sent and theCommission either institutes an investigation to determine whetherstop-order proceedings should be instituted or immediately institutesstop-order proceedings. Information about the use of this stop-orderpower during 1959 appears below under "Stop Order Proceedings."Time Required to Complete Registration

Because prompt examination of a registration statement is impor-tant to industry, the Commission completes its analysis as promptlyas possible. Congress provided for 20 days in the ordinary casebetween the filing date of a registration statement or of an amend-ment thereto and the time it may become effective. This waitingperiod is designed to provide investors with an opportunity to be-come familiar with the proposed offering. Information disclosed in

28 SECURITIES AND EXCHANGE COMMISSION

the registration statement is disseminated during the waiting periodby means of the preliminary form of prospectus. The Commissionis empowered to accelerate the effective date so as to shorten the20-day waiting period where the facts justify such action. In exer-cising this power, the Commission is required to take into accountthe adequacy of the information respecting the issuer theretoforeavailable to the public, the facility with which investors can under-stand the nature of and the rights conferred by the securities to beregistered, and their relationship to the capital structure of theissuer, and the public interest and the protection of investors. Thenote to rule 460 under the act indicates, for the information of inter-ested persons, some of the more common situations in which the Com-mission believes that the statute generally requires it to deny accelera-tion of the effective date of a registration statement.

The number of calendar days which elapsed from the date of .filingto the effective date of the median registration statement with re-spect to the 925 1 registration statements that became effective duringthe fiscal year ended June 30, 1959, was 28. The number of suchcalendar days in the 1958 and 1957 fiscal years was 24 and 23,respectively.

These 28 calendar days for the median registration statement inthe 1959 fiscal year were divided among the three principal stagesof the registration process as follows:

(a) from the date of filing the registration statement to the dateof the staff's letter of comment, 17days;

(b) from the date of the staff's letter of comment to the date offiling the first material amendment after such letter, 6 days;and

(c) from the date of filing the first material amendment afterthe staff's letter of comment to the effective date of registra-tion, 5 days. Holidays as well as Saturdays and Sundaysare included in these numbers of days.

The increase in elapsed time is a reflection of the substantial in-crease in the number of registration statements filed, as indicatedbelow, and of the fact that a large number of these statements relatedto new or unseasoned ventures which required relatively more timeand effort in making an appropriate review. .

VOLUME OF SECURmES REGISTERED,

Securities effectively registered under the Securities Act of 1933during fiscal 1959totalled $15.7billion, 5 percent less than the record

1Does not include 149 regltsratton statements of investment companies filed andeffective as amendments to previously effective registration statements pursuant tosection 24(e) of the Investment Company Act of 1940. The number of calendar dayselapsed from the date of filing to the effective date of registration of the median (average)of these 149 registration statements was 22.

TWENTY-FIFTH ANNUAL REPORT 29$16.5 billion registered the previous year. The number of registra-tion statements filed was 1,226, 34% greater than in 1958. Duringthe 25-year history of the Commission, approximately $160 billionof registrations have become effective, $71 billion in the last 5 fiscalyears. The lowest annual volume of registrations was $659 millionin the wartime year 1943. The chart below shows the dollar amountof effective registrations by fiscal years from 1935 to 1959.

VOLUME OF SECURITIES REGISTERED WITH THE S. E. C.1935 1959

20(00110 .. Billions)

15

10

o1935 1940 1945 1950 1955 \ 1960

(Fiscol Yeo .. )

05.3972

These figures cover all securities effectively registered, includingnew issues sold for cash by the issuer, secondary distributions, andsecurities registered for other than cash sale, such as exchange trans-actions, issues reserved for conversion and issues reserved for long-term options. Of the dollar amount of securities registered in 1959,77.3 percent was for the account of issuers for cash sale, 17.5 percentfor account of issuers for other than cash sale and 5.2 percent wasfor the account of others, as shown below.

Account for which securities wereJregistered under the~Securities Act of 1933 duringthe fiscal year 1959 compared with the fiscal years 1958 and 1957

2

1959 in Percent 1958 III Percent 1957 in Percentmlllions of total millions of total millions of total

--- --- --- ---Registered for account of Issuers for cashsale . $12,095 773 $13,281 805 $12,019 82

Rif~e~f~~l~~:_~~!~~~_f~~_~~~~~. 2, 746 17.5 3, 00ll 183 2,225 152Registered for account of others than theIssuers; 815 5.2 201 1.2 380 2.6--- --- --- --- --- --Total . 15,657 100 0 16,490 100.0 14,624 100 0

-

_________•_________•___••___________

•• ___•••• _______•__•_____________

________•____ _________________

30 SECt1RITIES AN"l> ~XCHANG~ COMMISSION

Securities to be sold for cash for account of the issuer amountedto $12.1 billion in 1959, a decrease of $1.2 billion over the previousyear. This reflects a 23 percent decrease, about $1.6 billion, in thevolume of debt securities, partially offset by a small incre-ase in thevolume of common stock. Debt securities made up $5.3 billion ofthe 1959 volume, preferred stock $400 million and common stock $6.4billion. Investment company securities showed a sharp increase in1959 and accounted for 60 percent of the total for common stockcompared with less than one-half in fiscal 1958.

The number of statements, total amounts registered, and a classi-fication by type of security for issues to be sold for cash for accountof the issuing company is shown for each of the fiscal years 1935through 1959 in appendix table 1. ~fore detailed information for1959is given in appendix table 2, while 5-year summaries of such infor-mation for the 25-year period appear in part II of appendix table 1.

The amount of securities registered by investment companies in-creased almost 50 percent in 1959 over the previous year while thatregistered by communication companies decreased 80percent. Amongthe smaller groups, the trade group aggregate showed an outstandingincrease. Securities classified by industry, registered for cash salefor account of issuers in each of the last 3 fiscal years are shownbelow:

1959 In Percent 1958 in Percent 1957 In Percentmillions of total milhons of total milhons of total

--- --- ------ ---Manulacturmg $1,974 163 $2,239 169 $2,674 22.2Exrraotrve 128 I I 110 .8 283 24Electnc, gas and water 2,726 225 3,373 254 2,951 245Transportation, other than railroads 41 3 52 .4 112 .9Oommunteation 591 49 2,978 224 2,030 16.9Investment compames 4,329 358 2,919 220 2,614 21.8Other flnaneial and real estate 880 73 1,109 8.4 952 79Trade 543 45 34 .2 84 .7Service 76 .6 29 .2 33 .3Construction 75 .6 25 2 -._---------- --- --- ---Total corporate 11,31)3 93.9 12,868 969 11,733 97.6Foreign governments 732 6.1 412 3 I 286 24--- --- --- ---TotaL 12,095 100.0 13,281 100.0 12,019 100.0

Investment company issues were classified as follows:

1959 In 1958 in 1957 Inmillions nnlhons milhons

$2, 784 $2,361I~ ---------253

Open-end compames IClosed-end compames -_Face amount certificate companies

Total -_

I Periodic payment plans or their underlying secunnes are Included.

$3,760140429

4,329 2,919 2,614

Of the net proceeds of the corporate securities registered for cashsale for the account of issuers in fiscal 1959, 53 percent was desig-

___________________________ - -______________________________

____________________ ______ __________________________

____________________ ____________ _____________________________________

___________________________________ _____________________________ ------------- ---_____________________

_____________________ --- ------___________________________

_

--_

- _- __-

TWENTY-FIFTH ANNUAL REPORT 31

nated for new money purposes, including plant, equipment, and work-ing capital, 1 percent for retirement of securities, 43 percent forpurchase of securities, principally by investment companies and 3percent for all other purposes.

REGISTRATION STATEMENTS FILED

During the 1959 fiscal year, 1,226 registration statements were filedfor offerings of securities aggregating $16,622,890,371, an increase of34% over the 913 registration statements filed during the 1958 fiscalyear for offerings amounting to $16,913,744,964.

Of the 1,226 registration statements .filed in the 1959 fiscal year, 472,or 39 percent, were .filed by companies that had not previously filedany registration statement under the Securities Act of 1933. Com-parable figures for the 1958 and 1957 fiscal years were 254, or 28 per-cent, and 305, or 32 percent, respectively.

A cumulative total of 15,930 registration statements has been .filedunder the act by 7,397 different issuers covering proposed offerings ofsecurities aggregating over $167 billion from the enactment of theSecurities Act of 1933 to June 30, 1959.

Particulars regarding the disposition of all registration statementsfiled under the act to June 30, 1959, are summarized in the followingtable.

Number and disposition of reqistration statements filed

Prior to July 1, TotalJuly 1, 1958,to June 30,

1958 June 30, 19591959

Registration statements:Filed. 14,704 1,226 15,930

DISposition:Effective (net) ______________________________________________ b 12,823 0 1,064 d 13,871Under stop or refusal order __________________________________ 196 6 202Withdrawn _________________________________________________ 1,540 65 1,605Pending at June 30,1958____________________________________ 145 ------------ ------------Pending at Junc 30,1959____________________________________------------ ------------ 252Total. ____________________________________________________ 14,704 ------------ 15,930

Aggregate dollar amount:As filed \in billions) ____________________________________________ $150 7 $16 6 $167.3As effect ve (in bilhons) ________________________________________ 147 2 15 7 162.9

Includes 153registration statements eovermg proposed offerings totalling $3,774,427,154filed by mvest-ment eompames under seenon 24(e) of the Investment Company Act of 1940whrch permits registration byamendment to a previously effective regtstration statement.

b The grw, number of registration statements that became effeetrve, including such statements thatwere subsequently WIthdrawn or placed under stop order, was 13,273as of June 30, 1958.

e EXCludes10 registration statements that became effeetive durmg the year but were subsequently WIth-drawn; these 10statements are counted in the 65statements WIthdrawn durmg the year.

d Excludes 2 registration statements that became effectIve prior to July 1, 1958,which were placed understop order durmg tbe 1959fiscal year! and also excludes 14registration statements effectIve prior to July 1,1958,that were withdrawn during tne 1959fleal year; these 2 and 14 statements are couuted under stoporders and withdrawn, respectively.

___•______________________________________________________

•

•

32 SECURITIES AND EXCHANGE COMMISSION

The reasons given by registrants for requesting withdrawal ofthe 65 registration statements that were withdrawn during the 1959fiscalyear are shown in the following table:

Number of PercentReason for registrant's wrthdrawal request statements of total

withdrawn WIthdrawn

I. WIthdrawal requested after receipt of the staff's letter of comment, ___________ 12 182. Registrant was advised that statement should be WIthdrawn or stop order pro-

5 8oeedlngs would be necessary ________________________________________________ 3 Change m financing plans ________ . ___ .. __ . ______________________ . ___ . ________ 36 554. Change 10 market conditions ____ . ________________ . ___________________________ 7 105. Ftnancmg obtaioed elsewhere _________________________________________________ 1 2fl. Regulation A could be used ___________________________________________________ 1 27. Insuttierent funds raised under escrow agreement ______________________________ 2 38 Registrant was unable to negotiate acceptable agreement WIth underwriter ____ 1 2

TotaL ____________________________________________________________________ 65 100

RESULTS OBTAINED BY THE REGISTRATION PROCESS

The staff's examination of registration statements often resultsin significant changes being effected in order that adequate disclosurewill be made to the investing public. These changes cover a widerange of subject matters. Examples of disclosures made as a resultof the staff's examination are set forth below.Disclosure of Speculative Features

A registrant organized to produce electronic equipment filed aregistration statement for 175,000shares of common stock (par value of75~per share) to be offered at $5 a share, the underwriting commissionto be $1 per share. Examination of the registration statement re-vealed that certain speculative features of the proposed offering hadnot been adequately disclosed.

The prospectus, as filed, stated that the book value of the company'sshares prior to the offering was approximately 96 cents but that afterthe offering it would be approximately $1.86per share. The registrantwas required to include a further statement that such increase wouldbe contributed by the public investors. The registrant was furtherrequired to disclose that the underwriters at a total cost of $75 hadacquired 75,000 shares of the company's stock representing 15 percentof the total amount of such stock to be outstanding, whereas if allof the shares offered were sold, public investors would pay $875,000for 35 percent of the stock to be outstanding.

The company was also required to point out in the prospectus that:(1) it proposes to operate in fields where large expenditures for re-search and development are considered normal and necessary; (2)competition is intense, there being many companies, some with sub-stantially greater resources than the registrant, conducting researchand development work in the same general areas; (3) because ofresearch and development work being done, it is possible that one ormore of the registrant's proposed products may became obsolete before

TWENTY-FIFTH ANNUAL REPORT 33

production is started or at any time thereafter; and (4) only actualproduction can determine the cost at which any of registrant's pro-posed products can be produced and only marketing can determinethe prices at which they can be sold and the extent of the demand forthem.Disclosure as to Use of Proceeds

.A company engaged in the business of acquiring and developingoil and gas properties filed a registration statement covering $1,500,000of 6 percent convertible debentures due 1969, to be offered initially toits stockholders by means of subscription rights. The underwriteragreed that within 6 business days after the termination of the rightsoffering it would purchase or find purchasers for debentures not takendown by stockholders so that the company would receive the proceedsfrom at least $400,000 principal amount of debentures. The under-writer also agreed to use its best efforts for 60 days after the termina-tion of the rights offering to find purchasers for debentures not takendown by stockholders .

.As originally filed, the prospectus indicated that the great bulk ofthe net proceeds was to be used for acquisition of new properties anddevelopment of properties then held. However, an analysis made byour staff of the financial position of the company and its future cashneeds disclosed that the company was in a precarious cash position,that on the basis of the prior year's operations cash requirementsduring the next 18 months would be substantially in excess of theamount of cash that would be generated during that period and thattherefore the purpose of the offering was not to acquire and developproperties, but to remedy the company's serious financial situation ..As a result of numerous comments made by the staff, the prospectuswas extensively revised and there was set forth in the forepart thereof,a one and one-half page statement regarding the proposed offeringand the company's financial problems, including the following cate-gorical statements :

1. The purpose of the offering was to alleviate the company'sshortage of working capital;

2. The company had a working capital deficit of $488,635;3. Current liabilities included $87,835 of notes payable given for

past due accounts payable;4. Past due accounts payable and past due notes payable amounted

to $256,572 and $86,335 respectively;5. The total amount of funds required to remedy the working capi-

tal deficit and retire long term debt maturing within the next 18months was $1,195,204;

6. Since, on the basis of the previous year's financial report, thecompany's operations would generate only $335,000 of cash during

34 SECURITIES AND EXCHANGE COMMISSION

the next 18 months, cash requirements would exceed cash generatedby $860,000;

7. The minimum principal amount of debentures required to besold to meet the company's present and anticipated cash needs was$1,050,000;

8. Past due accounts and notes payable which might not be paid ifsufficient funds were not realized through sale of the debenturesmight be enforced through legal proceedings;

9. No priority would be accorded the debenture holders as to prin-cipal or interest vis-a-vis other general creditors in the event thecompany's cash needs were not met through the sale of debentures orotherwise.

'While a skilled financial analyst, after study and analysis, mighthave been able to deduce some of the information set forth above,none of the statements recited was contained in the prospectus asoriginally filed. It is fair to assume that the average investor wouldhave been materially misled by the prospectus as originally filed.Revision of Summary of Earnings

A corporation which had both domestic and foreign subsidiariesfiled a registration statement containing financial statements whichfailed to reflect significant losses from the operations of one of theforeign subsidiaries. After our staff determined this fact during thecourse of the examination procedures and discussed it with the cor-poration's representatives, the financial statements were appropriatelyamended to include provisions for the foreign subsidiary's losses.

The effect of such revision was to reduce net income for 1956, 1957,and 1958by approximately $164,000,$88,000,and $10,000respectively.After this revision net income per share for the 3 years was $0.06,$0.04 and $0.09 per share, or reductions of approximately 76, 70, and10 percent, respectively.Disclosure as to Operations

A company engaged in the development and production of certainelectronic equipment filed a registration statement covering 240,000shares of common stock at the par value of 75 cents a share. The of-fering price was $6 per share and the underwriting commission was$1 a share. In reviewing the registration statement it was noted thatthe proposed offering was to be made on an extremely high price-earnings ratio and price-book-value ratio. Accordingly the regis-trant was required to amend the prospectus to state that the price ofthe shares being offered had been arbitrarily determined by the boardof directors and did not bear any relationship to assets or earnings ofthe company. It was further required to be pointed out that theoffering price was 312 times the unaudited earnings per share for thelast fiscal year and 13.2 times the net tangible book value on the basisof the company's balance sheet.

TWENTY-FIFTH ANNUAL REPORT 35With respect to the company's operations, the company was re-

quired to state in regard to one of its lines of business that it had atall times operated substantially below production capacity and thatduring a recent month, for example, it operated at about 7.5 percentof such capacity, leaving 92.5 percent of its capacity idle. The com-pany was further required to point out that it had not yet engagedregularly in the production of certain machinery for commercial useand had no assurance as to the size of the market for such machineryor the acceptability of the company's products in such market.

STOP ORDER PROCEEDINGS

Section 8(d) provides that if it appears to the Commission at anytime that a registration statement contains an untrue statement of amaterial fact or omits to state any material fact required to be statedtherein or necessary to make the statements therein not misleading,the Commission may institute proceedings looking to the issuance of astop order suspending the effectiveness of the registration statement.Where such an order is issued, the offering cannot lawfully be made,or continued if it has already begun, until the registration statementhas been amended to cure the deficiencies and the Commission haslifted the stop order.

The following table indicates the number of proceedings under sec-tion 8(d) of the act pending at the beginning of the 1959 fiscal year,the number initiated during the year, the number terminated and thenumber pending at the end of the year:Proceedings pending at beginning of fiscal year________________________ 7Proceedings initiated during fiscal year 13 20

Proceedings terminated during fiscal year:By issuance of stop orders 1_____________________________________ 6By withdrawal of registration statemenL_________________________ 1 7

Proceedings pending at the end of the 1959 fiscal year__________________ 13

Shortly after the end of the fiscal year stop orders were issued intwo of the proceedings which were pending at the end of the fiscal yearand a third proceeding was dismissed. The two proceedings in whichstop orders were issued are included in the proceedings describedbelow.

Comico Corporation.-Comico Corporation is a Delaware cor-poration organized in 1957 for the purpose of exploiting a depositof silica material located in Arkansas and held under a leasehold as-signed to the company by its promoters. The company filed a regis-tration statement covering a proposed public offering of 750,000shares of common stock at $2 per share. The Commission instituted

lOne of these proceedings, Woodland Oil & Gas Co. Ine., was described in the Com-mission's 24th Annual Report, p. 40.

1i29i5~

36 SECURITIES AND EXCHANGE COMMISSION

investigative hearings to determine whether a stop order should issue.Following these hearings and prior to the effective date of the regis-tration statement the Commission instituted stop order proceedings.Prior to the institution of the stop order proceedings, the registrantfiled an application for withdrawal of the registration statement whichwas denied by the Commission.

The registration statement contained a lengthy and optimistic dis-cussion of the uses and markets for the minerals in the registrant'sleasehold. The Commission found this statement materially mis-leading, among other things, because it was not based upon any fac-tual engineering or market survey. The Commission found that theregistration statement was also misleading for failure to disclose priorunsuccessful attempts to develop the property leased by the registrantand for failure to fully and adequately disclose the proposed use of theproceeds of the offering, the compensation to underwriters and theinterests of management in transactions with the registrant. More-over, the registration statement failed to indicate clearly that themanagement would receive 660,000 shares of the registrant's stockfor $25,000, whereas the public would be asked to pay $1,500,000 for750,000 shares. Other deficiencies included the failure to disclosethe provisions of the lease and the obligation to pay unusually highroyalties, and the failure to set forth clearly in one place the specula-tive feature of the registrant's business and securities. The Com-mission issued a stop order suspending the effectiveness of the regis-tration statement,"

Diversified Oil and Mining Corporation.- This company was or-ganized as a spin-off from Shawano Development Corporation andengaged principally in the acquisition of interests in and the opera-tion of oil and gas properties. It filed a registration statement cover-ing a proposed public offering of 2,500,000 shares of $1 par 6 percentconvertible, noncumulative, preferred stock, and warrants to purchaseat $2 per share 500,000 shares of the company's 10 cent par commonstock. The securities were to be offered in units of 25 shares of pre-ferred stock and 5 warrants at a price of $25.50per unit.

The statement of matters to be considered at the hearing in a stoporder proceedings challenged the adequacy and accuracy of the in-formation disclosed in the registration statement in numerous re-spects, including information given with respect to the proposed planof distribution, the use of the proceeds, the description of the businessand securities of the registrant, transactions with the promoters andpossible liabilities for the previous sale of unregistered securities.Prior to the commencement of the hearing, the registrant submitted astipulation in which it waived a hearing and the post-hearing pro-cedures provided for in the Commission's rules of practice and con-

Securities Act Release No. 4050 (Apr. 27, 1959).•

TWENTY-FIFTH ANNUAL REPORT 37

sented to the entry of an order suspending the effectiveness of theregistration statement. Thereafter, the Commission issued an ordersuspending the effectiveness of the registration statement,"

Fort Pierce Port & Terminal Company.-This company was or-ganized in 1956 primarily for the purpose of acquiring harbor frontproperty at Fort Pierce, Fla., to be developed and operated as a deep-water port facility. The company filed a registration statement cov-ering a proposed public offering of 2,138,500 shares of its $1 par com-mon stock at $1.25 per share.

The company's properties, consisting of 3,000 feet of harbor frontand certain other properties on nearby Causeway Island and on themainland, were acquired by promoters of the company (includingJoseph C. Mackey, board chairman, and H. A. Ramsey, president)with the intention of selling them to the company. The promoters'cost was $155,000 in cash and the assumption of mortgages aggregat-ing $608,750. The properties were transferred to the company at anappraised value of $1,838,500, the company assuming the $608,750 ofmortgages and issuing $1,229,500 par value of stock to the promoters.Subsequently, the company acquired 64.4 acres of submerged landsfrom the State of Florida for $3,220.

Various references in the prospectus to the appraised value of thecompany's properties were questioned by the Commission's staff in-cluding the $430,000 appraised value of the property acquired fromthe State of Florida for $3,220. According to the staff there appearedto be a lack of adequate basis for the values determined by the ap-praisal. The properties acquired from the promoters were carried inthe company's balance sheet at the appraised valuation ($1,838,250)contrary to generally accepted accounting principles, and the pro-spectus failed to contain proper disclosures with respect, among otherthings, to (1) the competitive traffic situation in relation to the portdevelopment project, including the results of a study of the facilitiesmade in 195'7 by the U.S. Army Engineers; and (2) the speculativefeature of the proposed offering. The Commission instituted stoporder proceedings with respect to the registration statement.'

Prior to completion of the proceedings, the company filed an ap-plication for withdrawal of the registration statement. In its appli-cation the company conceded "certain inaccurate statements of ma-terial facts and certain omissions of material facts" and agreed thatcorrection would be made in any new registration statement whichmight be filed by the registrant, although the company stated that itdid not intend to proceed with its stock offering at that time. TheCommission concluded that withdrawal would not be inconsistent

Securities Act Release No. 3971 (Oct. 2, 1958).Securities Act Release No. 3951 (Aug. 6, 1958).

• •

38 SECURITIES AND EXCHANGE COMMISSION

with the public interest and the protection of investors and consentedto the withdrawal of the registration statement,"

Funeral Directors Manufacturing and Supply Company.-Thisregistrant was organized in Kentucky in 1954 for the purpose ofmanufacturing plastic grave vaults and plastic and aluminum caskets.It filed a registration statement covering a proposed offering of 199,-907 shares of the registrant's common stock at $100 per share. Theregistration statement represented that registrant owned no propertybut that, depending on the success of the offering, it intended to pur-chase or construct warehouses and plants and factories.

The Commission found that the registration statement containedmaterial misstatements and omissions of material facts with respectto the state of the development work necessary to effect volume pro-duction of the registrant's products and failed to disclose the lengthof time it would take to effect full production. The registrationstatement also failed to list two officers employed by the registrantand stated that the remuneration to be paid registrant's officers hadnot been determined or authorized when, as a matter of fact, suchremuneration had been authorized and the registrant had incurreda substantial contingent indebtedness to its officers. The registra-tion statement also stated that there were no agreements to recom-pense any promoter for past or future services when, in fact, regis-trant was indirectly indebted to a promoter, who was the presidentof the registrant, for accrued rents, utilities, and services.

A post-effective amendment to the registration statement not onlyfailed to correct the previously existing deficiencies but was itself de-ficient in additional material respects.

At the close of the case presented by the Commission's staff, theregistrant admitted that the disclosures made in the registration state-ment and in the post-effective amendment were inadequate and thatmaterial events and changes which had occurred since the statementbecame effective were not disclosed in the post-effective amendment.The registrant consented to the issuance of a stop order by theCommission,"

Industro Transistor Corporation.- The registrant was organ-ized in New York in December 1953 and engaged in the manufactureand sale of transistors. It filed a registration statement in 1958cover-ing a proposed public offering of 135,000 shares of lO-cent par valuecommon stock and, in addition, 36,000 transferable 5-year warrantsfor the purchase of 1 share of common stock per warrant and the36,000 shares of common stock subject to such warrants. Proceedingswere instituted to determine whether a stop order should issue sus-

Secnrlt1es Act Release No. 3960 (Aug. 27. 1958).Secnrlt1es Act Release No. 4071 (Apr. 23. 1959).

• •

TWENTY-FIFTH ANNUAL REPORT 39pending the effectiveness of the registration statement. .Among thedeficiencies found to exist are those described below.

The prospectus failed to contain an adequate and accurate state-ment with respect to the volume of the registrant's production, theamount of sales to the customers listed in the prospectus, the regis-trant's competitive position in the industry and the nature of its salesand distribution arrangements. The financial statements included inthe prospectus were not prepared in accordance with the Commis-sion's requirements and good accounting practice. For example, salesreturns were not shown as a deduction from sales but were treated aspurchases of raw material. The income statement showed a net profitfrom operations for a 4-month period of over $17,000 whereas, if ithad been properly prepared, it would have shown a substantial loss.

The prospectus failed to disclose that the compensation of theunderwriter included the difference between the exercise price of the36,000 warrants which the underwriter was to receive and the marketprice of the stock. The prospectus was also misleading in statingthat the underwriter was to pay 1 cent for each warrant, whereas itdoes not appear that any arrangement was made for such payment, inaddition, the prospectus failed to state the possible adverse effect uponthe registrant and its security holders of the granting of warrants tothe underwriter and to certain other persons, and to state adequatelyand accurately the purposes for which proceeds from the sale of thesecurities were to be used.

The Commission issued a stop order suspending the registrationstatement shortly after the end of the fiscal year." Subsequently, theregistrant amended the registration statement to make appropriatedisclosure in accordance with the Commission's decision and the Com-mission lifted its stop order, thus permitting the registration state-ment to become effective,"

Managed Funds Incorporated.-The registrant, an open-end man-agement type investment company registered under the InvestmentCompany Act of 1940, was organized under the laws of Delaware in1946. The promoters were Hilton H. Slayton, Hovey E. Slayton, andThomas W. Ruth. Hilton Slayton was president and a director, andHovey Slayton was a vice president and a director, of the registrant.The registrant filed a registration statement under the Securities Actof 1933 in 1954 and subsequently registered additional securities byamendment as permitted by section 24( e) of the Investment CompanyAct. The Commission instituted proceedings under the Securities Actto determine whether a stop order should issue suspending the effec-tiveness of the registration statement.

1 Securities Act Release No. 4116 (July 17,1959).Securities Act Release No. 4120 (July 24,1959).•

40 SECURITIES AND EXCHANGE COMMISSION

The proceedings developed the fact that although Slayton Associ-ates, Inc., all of the voting stock of which was owned by Hilton andHovey Slayton, was under contract with the registrant to act as itsinvestment advisor and had been paid for such services, it had enteredinto a contract with Stephen :M:. Jaquith, a registered representativeof a brokerage firm, under which Jaquith was to perform the servicesof investment advisor for the registrant. For his services, Jaquithand his firm received substantial compensation in the form of com-missions on securities transactions. A portion of these commissionswere, at the direction of Hilton Slayton, credited to two other in-dividual's, one his brother-in-law and the other a director of the reg-istrant and the Slayton's former attorney. This contract with J a-quith was not disclosed in the registration statement nor had it beenapproved by the stockholders of the registrant as required by theInvestment Company Act.

The record showed that the board of directors gave scant attentionto the management of the registrant; made no effort to be informedconcerning registrant's policies and whether such policies were beingfollowed; made no decisions concerning purchases and sales of port-folio securities and generally permitted the registrant to be managedby the Slay tons without consultation with or approval by the boardas a whole. None of this was disclosed in the registration statement.The prospectus represented that the operations of the registrant wereunder the supervision and direction of its board of directors andfailed to point out that the Slay tons were assuming the functions ofthe board of directors in directing the operations of the registrant.

The prospectus represented that the principal objective of the regis-trant was capital growth, that such investment policy would resultin normal turnover of portfolio securities and that dividends wouldbe paid quarterly based on the receipt of income or profits on securi-ties held. These representations were materially misleading since theregistrant did not follow the stated policies but instead followed thepolicy of investment for the purpose of providing a flow of cash toits stockholders at a high uniform rate and engaged in a policy ofexcessiveportfolio turnover.

The prospectus was also misleading in failing to disclose that theregistrant's policy of realizing capital gains for the purpose of makingquarterly distributions to shareholders was deleterious to the positionof the shareholders in several respects. First, it required a high rateof portfolio turnover which resulted in the payment of large amountsof brokerage commissions and the payment of higher prices on therepurchase of identical securities immediately after their sale. Second,it further reduced the invested capital of shareholders who reinvestedtheir distributions, since a sales load was charged on such reinvest-ment. Third, it did not take into consideration whether proper

TWENTY-FIFTH ANNUAL REPORT 41

management would require the sale of securities in which net unreal-ized depreciation existed and thus avoid making distributions whichwere taxable to shareholders. Fourth, as noted above, the policy ofdistributing capital gains quarterly was not consistent with the ob-jective of capital growth of the portfolio.Itwas registrant's policy to place a portion of the orders for trans-

actions in portfolio securities with broker-dealers who sold its shares.Reciprocal business in the volume of eight or nine million dollars wasdirected to approximately 36 dealers for the fiscal year ended Novem-ber 30,1958. The Commission held that the prospectus should havedisclosed that brokerage transactions were directed to broker-dealerswho had sold shares of the registrant. In addition, the prospectusshould have disclosed that obligations for merchandise and servicesrendered to the registrant's underwriters and investment advisorswere being satisfied by directing to the suppliers brokerage commis-sions on transactions in the portfolio securities of the registrant. Thesedisclosures should have accompanied the statements in the prospectusof the amount of sales load reallowed to dealers to make these state-ments not misleading.

On the basis of the Commission's findings, a stop order was enteredshortly after the end of the fiscal year suspending the effectivenessof the registration statement."

Mon-O-Co Oil Corporation.-Registrant, a Montana corporation,was organized in 1940 and engaged in the acquisition of oil and gasleases and exploration for oil and gas. It filed a notification and offer-ing circular under regulation A in March 1957 for the purpose ofobtaining an exemption from registration with respect to an offeringto its stockholders, pursuant to preemptive rights, of 4,000stock units,each unit consisting of one share of class A stock and 24 shares of classB stock at $75per unit and an offering of 14,474stock units in exchangefor certain working interests held by public investors. The Com-mission thereafter temporarily suspended the exemption. In July1957, the registrant filed a registration statement covering the sameoffering plus an additional offering of 4,000 stock units to the stock-holders. Prior to the effective date of the registration statement, theCommission instituted stop order proceedings which were consolidatedwith proceedings to determine whether the order suspending theregulation A exemption should be vacated or made permanent.

The Commission determined that the regulation A exemption shouldbe permanently suspended, on the grounds, among other things, thatthe offering circular contained false and misleading statements ofmaterial facts and that the amount of the offering exceeded the maxi-mum amount of $300,000permitted for offerings under regulation A.With respect to the stop order proceedings, the Commission found

Securities Act Release No. 4122 (July 30,1959).•

42 SECURITIES AND EXCHANGE COMMISSION

that the geologist's report included in the prospectus contained anexcessive estimate of recoverable reserves of oil, and that the regis-tration statement was also materially deficient in the description ofthe registrant's other properties, in stating the total estimatedexpenses of the offering and in stating the purposes for which theproceeds were to be used. It also found that the material in the pro-spectus was poorly organized and that much of the information con-tained in it was not presented in clear and understandable fashion.Material relating to the same subject matter was scattered throughoutvarious sections of the prospectus, with the result that the ordinaryinvestor would have great difficulty in ascertaining the essential ele-ments of the registrant's business and the merits of the proposed of-fering without referring to numerous portions of the prospectus andmaking independent calculations and conclusions as to the facts. Thespeculative features of the offering were not accurately and adequatelydisclosed, and there were a number of other deficiencies in the regis-tration statement.

The Commission refused to permit the registration statement to bewithdrawn and issued a stop order suspending its effectiveness."

Texas Glass Manufacturing Corporation.- The registrant, aTexas corporation, was organized in 1952 to engage in the manu-facture of window and heavy sheet crystal glass. The company'sonly property consisted of a plant site in Bryan, Tex., donated bythat city and the deed for which was held in escrow contingent uponthe execution of a contract to construct a plant. The registrant fileda registration statement in 1957 covering a proposed public offeringof 2,700,000 shares of its $1 par value common stock at $2 per share,plus 300,000shares subject to certain options at $1 per share. Amend-ments were subsequently filed which, among other things, changedthe number of shares being registered. The Commission institutedstop order proceedings with respect to the registration statement inJuly 1957.

The Commission found that the registration statement containedmany deficiencies, some of which were highly material and some ofwhich, while relatively less important, were indicative of a genera]lack of care in the preparation of the registration statement. Thus,the registration statement contained materially misleading statementswith respect to the company's stage of development, the kind of glasswhich it proposed to manufacture, the processes to be used in manu-facturing glass, the source of raw materials and the nature of themarket for the registrant's products. For example, it was stated thatthe company would produce its glass on machines and by methodsthat are unique and less time consuming, whereas it appeared that the

10 Securities Act Release No. 4024 (Feb. 4,1959).

TWENTY-FIFTH ANNUAL REPORT 43

machines and methods proposed to be used are those commonly knownand employed by the glass industry.

The registration statement indicated that certain previous sales ofthe company's stock were exempt from registration under section3(a) (11) of the act, whereas it appeared that no exemption was avail-able and that there was a contingent liability on the part of the com-pany for such sales which liability was not reflected in the company'sfinancial statements. The prospectus also indicated that 80 percentof the proceeds from the sale of the stock would be placed in an escrowfund to be returned to investors should the company fail to raiseenough funds to carry out its plans, but no further information wasgiven with respect to the nature of any escrow agreement or the circum-stances under which such fund would be returned to investors. Theprospectus also set forth statements with respect to costs applicableto plant construction contracts without indicating that such contractshad not yet been executed. The registration statement also includedhypothetical figures purporting to show production costs and revenuesfor the proposed plant and setting forth a substantial figure as theannual net profit, even though the company had not yet engaged inany business. There were also other deficiencies in the disclosuresprovided in the registration statement.

In view of the numerous and serious deficiencies in the registrationstatement the Commission issued a stop order suspending the effective-ness of the registration statement.P

EXAMINATIONS AND INVESTIGATIONS

The Commission is authorized by section 8(e) of the act to makean examination in order to determine whether a stop order proceed-ing should be instituted under section 8 (d). For this purpose theCommission is empowered to subpoena witnesses and require theproduction of pertinent documents. Six such examinations wereinitiated during the 1959 fiscal year. None were pending from theprevious fiscal year. In two cases the examinations led to stop orderproceedings under section 8(d) . Four examinations were pendingat the close of the fiscal year.

The Commission is also authorized by section 20 (a) of the act tomake an investigation to determine whether any provisions of theact or of any rule or regulation prescribed thereunder have been or areabout to be violated. Investigations are instituted under this sectionas an expeditious means of determining whether a registration state-ment is false or misleading or omits to state any material fact. Thefollowing table indicates the number of such investigations with whichthe Commission was concerned during the fiscal year.

11 Securities Act Release No. 8984 (Oct. 81, 1958).

44 SECURITIES AND EXCHANGE COMMISSION

Investigations pending at the beginning of the fiscal year 13Investigations initiated during the fiscal year________________________ 8

21Investigations in which stop order proceedings were authorized during

the fiscal year -- 3

Other investigations closed during the fiscal year_____________________ 3 6

Investigations pending at the end of the fiscal year____________________ 15

EXEMPTION FROM REGISTRATION OF SMALL ISSUES

Under section 3(b) of the Securities Act, the Commission is em-powered to exempt, by rules and regulations and subject to such termsand conditions as it may prescribe therein, any class of securities fromregistration under the act, if it finds that the enforcement of theregistration provisions of the act with respect to such securities isnot necessary in the public interest and for the protection of in-vestors by reason of the small amount involved or the limited char-acter of the public offering. The statute imposes a maximum limita-tion of $300,000upon the size of the issues which may be exempted bythe Commission in the exercise of this power.

Acting under this authority the Commission has adopted the fol-lowing exemptive regulations:

Regulation A:General exemption for United States and Canadian issues up to

$300,000.Regulation A-M :

Special exemption for assessable shares of stock of mining companiesup to $100,000.

Regulation A-R:Special exemption for first lien notes up to $100,000.

Regulation B:Exemption for fractional undivided interests in oil or gas rights up

to $100,000.Regulation B-T:

Exemption for interests in oil royalty trusts or similar types of trustsor unincorporated association up to $100,000.

Regulation F :Exemption for assessments on assessable stock and for assessable stock

offered or sold to realize amount of assessment thereon, up to$300,000.'"

Under section 3(c) of the Securities Act, which was added by sec-tion 307(a) of the Small Business Investment Act of 1958, the Com-mission is authorized to adopt rules and regulations exemptingsecurities issued by a company which is operating or proposes tooperate as a small business investment company under the SmallBusiness Investment Act. During the fiscal year the Commission,acting- pursuant to this authority, adopted a new regulation E, which

12 Adopted July 30. 1959. Securities Act Release No. 4121.

TWENTY-FIFTH ANNUAL REPORT 45exempts upon certain terms and conditions limited amounts of securi-ties, not in excess of $300,000, issued by any small business invest-ment company which has received a license or a notice to proceed fromthe Small Business Administration. This regulation is substantiallysimilar to the one provided by regulation A under section 3 (b) ofthe act.

Exemption from registration under section 3 (b) or 3 (c) of the actdoes not carry any exemption from the civil liabilities for false andmisleading statements imposed by section 12(2) or from the criminalliabilities for fraud imposed by section 17 of the act.Exempt Offerings Under Regulation A

The Commission's regulation A permits a company to obtain notexceeding $300,000 (including underwriting commissions) of neededcapital in any 1 year from a public offering of its securities withoutregistration if the company complies with the regulation. Regula-tion A requires the filing of a notification with the appropriateregional office of the Commission, supplying basic information aboutthe company, certain exhibits, and except in the case of a companywith an earnings history which is making an offering not in excess of$50,000, an offering circular which is required to be used in offeringthe securities.

During the 1959 fiscal year, 854 notifications were filed under regu-lation A, covering proposed offerings of $170,241,400, compared with732 notifications covering proposed offerings of $133,889,109 in the1958 fiscal year. Included in the 1959 total were 42 notificationscovering stock offerings of $9,460,253 with respect to companiesengaged in the exploratory oil and gas business and 59 notificationscovering offerings of $11,314,184 by mining companies.

The following table sets forth various features of the regulation Aofferings during the past 3 fiscal years :

OjJenngs under Regulation A

Fiscal year

1959 1958 1957

Size:$100,000 or less __________________________________________________ 222 231 307Over $100,000 but not over $200,000 _____________________________ 162 165 163Over $200, 000 but not over $300, 000_____________________________ 470 336 449

854 732 919

Underwriters:Used ____________________________________________________________ 318 243 328Not used --_ 536 489 591

854 732 919

01Jerors:Issuing eompanles -_ 797 704 865Stockholders ____________________________________________________ 31 28 52Issuers and stockholders jointly _________________________________ 26 0 2

854 732 919

_________________________________________ -___- --- ___

____________________ - ___-- - _- - -_____- - - _-- --

46 SECURITIES AND EXCHANGE COMMISSION

Most of the offerings which were underwritten were made by com-mercial underwriters, who participated in 251 offerings in 1959, 185offerings in 1958, and 252 offerings in 1957. The remaining caseswhere commissions were paid were handled by officers, directors, orother persons not regularly engaged in the securities business.Suspension of Exemption

Regulation A provides for the suspension of an exemption there-under where, in general, the exemption is sought for securities forwhich the regulation provides no exemption or where the offering isnot made in accordance with the terms and conditions of the regula-tion or in accordance with prescribed disclosure standards. Follow-ing the issuance of a temporary suspension order by the Commission,the respondents may request a hearing to determine whether the tem-porary suspension should be vacated or made permanent. U nohearing is requested within 30 days after the entry of the temporarysuspension order, and none is ordered by the Commission on its ownmotion, the temporary suspension order becomes permanent.

During the 1959 fiscal year, temporary suspension orders wereissued in 87 cases as compared with 88 in the 1958 fiscal year. Of the87 orders, 2 were later vacated. Requests for hearing were made in 26cases. In 11 of such cases the requests were later withdrawn, and asof June 30, 1959, the proceedings in the remaining 15 cases were stillpendingY The names of the companies involved in the orders issuedduring the 1959 fiscal year 'are set forth in table 7 of the appendix.

As indicated in the 24th annual report, 11 cases were pending as ofJune '30, 1958, in which a hearing was requested after a temporarysuspension order had been issued. In four of such cases the issuerswithdrew their hearing requests and consented to the entry of perma-nent suspension orders and in three cases permanent suspension or-ders were entered by the Commission after hearings. The remainingfour cases were pending on June 30, 1959.

Certain of the above cases are summarized below to illustrate themisrepresentations and other noncompliance with the regulation whichled to the issuance of suspension orders.

Brookridge Development Corporation.-The temporary suspen-sion order alleged that the terms and conditions of regulation A werenot complied with in that the notification failed to disclose all salesof unregistered securities by the issuer or any principal securityholder within one year prior to filing. Itwas asserted, moreover, thatthe amount of securities proposed to be offered and the amount soldduring the past year in violation of section 5 of the act would exceedthe regulation A $300,000 limitation. It was also alleged that theoffering circular was materially misleading in failing to disclose:

.. Shortly after the end of the fiscal year, the suspension orders in three of these caseswere made permanent.

TWENTY-FIFTH ANNUAL REPORT 47(1) Options to which officersof the issuer were entitled; (2) securityholdings of the officers and directors; and (3) the effect of theunderwriter's participation in the market on the price of the issuer'ssecurities. In addition, the offering circular was alleged to be ma-terially misleading in its inclusion of $176,478.86described as "Invest-ment in Subsidiaries" in the December 31, 1958, consolidated balancesheet, and by the inclusion in the consolidated income statement ofdividends received from subsidiaries. The Commission's order furtheraverred that the use of the offering circular without appropriate dis-closure would be in violation of section 17 of the Securities Act of1933. The issuer requested a hearing, but this request was subse-quently withdrawn and the suspension order became permanent withthe lapse of time.

Empire Oil Corporation.- The order temporarily suspending theregulation A exemption alleged that the terms and conditions ofregulation A had not been complied with in that escrow arrangementsfor certain shares had not been made with an independent escrowagent and information was not supplied as to the issuer's predecessorsand affiliates. Moreover, it was asserted, the offering circular wasmaterially misleading in failing to disclose information with respectto the offering of securities for additional properties, the net pro-duction of crude oil and natural gas, estimated oil reserves, andexisting or threatened litigation against the issuer. Also, the offeringcircular was alleged to be materially misleading in its use of appraisalvaluations. Violation of section 17 of the Securities Act, in addition,was asserted. No hearing was requested, and the suspension orderbecame permanent with the lapse of time.

Florida National Development Corporation.- The temporarysuspension order alleged that the regulation A terms and conditionshad not been complied with in that, among other things, the $300,000ceiling was exceeded and the issuer failed to disclose that one Mac-Elrod was a promoter or predecessor, or both, of the issuer. Theissuer's offering circular was averred to be false and misleading inits failure to disclose: (1) the exact amount paid for the issuer'sproperties and whether such properties were acquired by the issuerin arms-length transactions; (2) the facts surrounding certain bro-kerage commissions; (3) the circumstances concerning a $759,660mortgage and note; and (4) the status of an option on 1,860 acresof land. Further, the financial statements included in the offeringcircular were materially misleading. The temporary suspension orderalso asserted violation of section 17of the Securities Act. No hearingwas requested and the temporary suspension order became permanentwith the lapse of time.

Gob Shops of America.-The Commission temporarily suspendedthe regulation A exemption because it had reason to believe that the

48 SECURITIES AND EXCHANGE COMMISSION

issuer's notification failed to comply with the terms and conditionsof regulation A and that the offering circular contained false andmisleading statements concerning the market and the market price ofthe stock and the underwriter's activities in the maintenance, domi-nation and control of the market and market price of the stock. Ahearing was held at the issuer's request. The issuer moved to dismissthe proceedings on the ground that its withdrawal had become effec-tive and in the alternative requested that withdrawal be permitted,asserting that its failings involved "inadvertent and empty infrac-tions of technical rules or mistaken acts." The Commission held thatthere was no right under the circumstances to withdrawal of a noti-.ficationand denied the motion to dismiss. The Commission concludedthat the omission to state that the price of the stock was artificiallyinflated and that the market was not free and open was a seriousdeficiency. Accordingly, the issuer's request for withdrawal wasdenied and a permanent suspension order was entered by theCommission.>

Inspiration Lead Company, Inc.-The temporary suspensionorder alleged numerous deficiencies in the issuer's offering circularconcerning, among other things, the issuer's past operations, are re-serves, mining costs, and assets. A hearing was held pursuant to theissuer's request. At the hearing the issuer conceded that the offeringcircular was inadequate and incomplete in a number of respects, butasserted that the deficiencies were the result of inadvertence and mis-take and asked that it be permited to withdraw its filing for thepurpose of revision and correction. The Commission, however, foundthe deficiencies and omissions to be serious and extensive. It stated,"We have previously indicated that an opportunity to amend a de-.ficient filing cannot be permitted to impair the required standards ofcareful and honest filings or to encourage a practice of irresponsibleor deliberate submission of inadequate material to be followed bycorrection of deficiencies found by our staff in its examination." TheCommission concluded that there was not such a showing of goodfaith or other mitigating circumstances in connection with the de-ficiencies as to justify a further opportunity to present an adequatetiling in lieu of a permanent suspension. The issuer's request forwithdrawal was denied and an order was issued permanently sus.pending the exemption."

Macinar, Inc.-The order of temporary suspension in this casealleged that the notification failed to disclose that Automatic TableCo. was an affiliate of the issuer; that it failed to disclose securities soldby Paul Gaston, an affiliate; and that the $300,000regulation A ceilingwould have been exceeded by the offering. It was also averred thatthe offering circular contained untrue statements of material facts

"Securities .ActRelease No. 4075 (May 6,1959).Ui Securities .Act Release No. 4076 (May 7, 1959).

TWENTY-FIFTH ANNUAL REPORT 49

and failed to disclose required information concerning a note payablein the sum of $17,400 held by the wife of the issuer's principal secu-rity holder. Moreover, there was a failure to set forth the issuer'sassumption of an affiliate's $12,854.82 note and to disclose all materialtransactions of officers, directors, and controlling persons with theissuer, its predecessors, and affiliates. The issuer filed a request forhearing and a motion to vacate the temporary suspension order. Boththe request for hearing and the motion to vacate were subsequentlywithdrawn and the temporary suspension order became permanent.

Sports Arenas (Delaware ) Inc.-The temporary suspension orderasserted that the issuer failed to disclose all promoters, controllingpersons and affiliates and their backgrounds; that the aggregate publicoffering price of the securities and the aggregate gross proceeds actu-ally received from the sale of securities to the public exceeded the$300,000 regulation A limitation; that an offering circular was notused in the offering of shares to the public; that certain sales materialwas used which was not filed with the Commission; and that the issuerfailed to file a complete and accurate report of sales as required byregulation A. The issuer's offering circular, in addition, was allegedto be materially misleading in its failure to disclose the method ofoffering, whereby the issuer's securities would be sold to the publicat a price higher than the $1.25 stated offering price, and to disclosethe profits of those participating in the distribution. Violation ofsection 17 of the Securities Act was also alleged. No hearing wasrequested and the suspension order became permanent.Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1959, 160 offering sheets werefiled pursuant to regulation B and were examined by the Oil and GasSection of the Commission's Division of Corporation Finance. Dur-ing the 1958 fiscal year, 109 offering sheets were filed and during the1957 fiscal year, 133 were filed. The following table indicates thenature and number of Commission orders issued in connection withsuch filings during the fiscal years 1957-59. The balance of the offer-ing sheets filed becameeffective without order.

Action taken 1m offering sheets filed under regulation B

FIllcaI years

1959 1958 1q57

Temporary suspension orders _______________________________________ 4 9 12Orders terminating proceeding afti'r amendment ____________________ 1 1 7Orders fixing effective date of amendment (no proceeding pending) __ 87 60 72Orders consenting to WIthdrawal of offering sheet (no proceedingpendlng) __________________________________________________________ 2 3 3Orders consenting to withdrawal of offering sheet and terminatingproceeding ____________________________________________ 2 2 --~_..._--- --

Total number of orders 96 75 94

______•• • •• •

__• ____________________________________

50 SECURITIES AND EXCHANGE COMMISSION

Reports of sales.-The Commission requires persons who makeofferinzs under regulation B to file reports of the actual sales madepursuant to that regulation. The purpose of these reports is to aidthe Commission in determining whether violations of law have oc-curred in the marketing of such securities. The following table showsthe number of sales reports filed under regulation B during the past 3fiscal years and the aggregate dollar amount of sales during each ofsuch fiscalyears.

Reports of sales under regulation B

FIScal years

1959 1958 1957

Number of sales reports filed _________________________________ 1,689 1,712 1,318Aggregate dollar amount of sales reported ____________ -------- $1,204,751 $1,093,362 $1,154,792

LITIGATION UNDER THE SECURITIES ACT OF 1933

The Commission is authorized by the Securities Act to seek injunc-tions in cases where continued or threatened violations of the act areindicated. Many such actions were brought by the Commissionduring the past year. Generally these involved violations of boththe registration and anti-fraud provisions of the act.Litigation Involving Violations of the Registration and Anti-Fraud Provisions

Among the more important of such litigation was a complex offour cases involving the sale of common stock of General Oil andIndustries, Inc. in violation of the registration and anti-fraud pro-visions. The company was originally organized in 1931 under thename of Pacific Gold Placers, Inc. All of its stock was issued priorto July 27, 1933, the effective date of the Securities Act. In 1958the company was purchased by one Sidney B. Josephson, who changedits name, and increased the capitalization by 2 million shares. There-after, the complaints alleged, Josephson, a defendant in all of thecases, caused many of these unregistered shares to be sold in inter-state commerce to the public by means of various misrepresentations.The Commission brought suits against A. G. Bellin Securities Corp.,"Stratford Securities Co., Inc.,17Phoenix Securities Corp.," StanleyBrown," registered broker-dealers, and numerous individual defend-ants, along with Josephson, to enjoin the sale of these securities.Orders of preliminary injunction have been entered in the first twocases for violation of the registration provisions, and the cases setfor hearings."

'.8.E.C. v, Bellin, et al., U.S.D.C. S.D.N.Y. No. 139-30l.11 H.E.C. v. Josephson, et al., U.S.D.C. S.D.N.Y. No. 140-193.18 H.E.C. v. Phoenix See., U.S.D.C. S.D.N.Y. No. 141-36.aeH.E.C. v. Broten, U.S.D.C. S.D.N.Y. No. 141-35.

Bellin and Josephson filed notice of appeal on April 8, 1959.'"

TWENTY-FIFTH ANNUAL REPORT 51

Two cases involved the sale of Canadian Javelin Limited stock inviolation of both the antifraud and registration provisions of the act.In the first case," the Commission brought suit against CanadianJavelin, European Fiduciary Corp., and various officers and employ-eesof these corporations. The complaint charged the defendants withselling the securities by telephone and through the mails in the UnitedStates without filing a registration statement. It further chargedthat the securities were being sold by concealing the identity of thesellers, the consideration being paid to the brokers and dealers forrecommending the securities, and also by misrepresenting their value.The corporations and three of the defendants consented to entry offinal judgment enjoining further sales." In the second case," a U.S.investment adviser and an associate were charged with similar viola-tions in the sale of Canadian Javelin. A permanent injunction wasentered against them by consent.

In another case involving the sale of Canadian securities in thiscountry,24the Commission charged Philip Newman Associates, a regis-tered broker-dealer, with selling securities of the Monarch AsbestosCo., Ltd., through the mails and by telephone to persons in the UnitedStates without filing a registration statement. The Newman firmand its officers were also charged with misrepresenting the securitieswith respect to the value of the stock and the business expectationsof the company. A permanent injunction was entered against theNewman firm and its officers and employees by consent, and a pre-liminary injunction was granted as to Monarch Asbestos and othersby default.

In S.E.O. v. L08 Angeles T1'U8tDeed and Mortgage Exchange et al.,264 F. 2d 190 (C.A. 9, 1959), the district court granted the Commis-sion's motion for a preliminary injunction and the appointment of areceiver in an action brought by the Commission based on violationsof the registration and fraud provisions of the Securities Act andthe Securities Exchange Act in connection with the sale of trust deedson individual parcels of property. See the 24th Annual Report atpages 51-52 for a discussion of the district court action. The judg-ment was reversed by the Court of Appeals for the Ninth Circuit,which did not reach the issue of whether the trust deeds constitutedsecurities. It felt that this question, as well as others, including thematter of the appointment of a receiver, should await trial on themerits, particularly since the Court believed that certain proceduralerrors had occurred on the hearing. Accordingly, the Court re-manded the case for trial, and trial was pending at the end of thefiscal year.

21 S.E.C. v. Canadian Javelin Ltd., U.S.D.C. S.D.N.Y. No. 138-85.21 The matter is pending as to the other defendants ... S.E.C. v. Loomt«, et al., U.S.D.C. D. Mass. No. 58-1210.

S.E.C. v. Philip Newman A88ociate8,Inc., et al., N.Y. 3113, U.S.D.C. D. N.J., 1397-58.

529523-59--7

'"

52 SECURITIES AND EXCHANGE COMMISSION

As in past years, many cases involved fraud in the sale of securi-ties of mining companies. In SE.O. v. Gotham Securities 25 theCommission's complaint charged the defendants with fraud in thesale of Saskalon Uranium and Oil, Ltd. common stock. The pur-chasers were told that they would "reap rich rewards," that the shareswould be listed on a national exchange, and that the company wasabout to pay a dividend. A permanent injunction was entered againstthe defendants by consent.

Permanent injunctions were also entered against the Lincoln Secu-rities COrp.26and its officers and salesmen, for fraud in the sale ofshares of Shoreland Mines, Ltd., a Canadian mining company. Judg-ment was entered upon consent of defendants. In S.E.O. v. DelMarva Oil and Gas, et al.21 a final judgment was entered by consentagainst five oil and gas companies and their controlling stockholders.The judgment permanently enjoined defendants from making mis-leading statements of the value of mining properties, the ownershipof leases, the probability of discovery of oil, etc. In S.E.O. v, ScottTaylor and 00., Inc.28 a temporary restraining order has been issuedto restrain the sale of shares of Atomic Mining Corp., a Canadiancorporation, pending a hearing of the case. A temporary restrainingorder has also been issued in S.E.O. v, Webster Securities 00rp.2'iI torestrain sales of stock of Goldfield Mines Co. of Nevada. In S.E.O.v, Gravity Science Foundation, et al.,so the complaint charged de-fendant with selling investment contracts and undivided interests inoil and gas leases without registering under the Securities Act. Vari-0us misrepresentations concerning the operations of the company werealso alleged to have been made. The Commission moved against thesale and offering of investment contracts without registration inS.E.O. v. The Donna-June 00.81 Inthis case the investment contractswere represented by limited partnership interests plus a profit-sharingagreement. In both cases, a permanent injunction was ordered withconsent of defendants.

Two important cases involved failure of defendants to meet theprospectus requirements of the 1933 act. In S.E.O. v, North Ameri-can Finance 00.,82 the complaint charged defendant with offering forsale 500,000 shares of common stock by transmitting through the mailsa prospectus which did not meet the statutory requirements. TheCommission alleged, among other things, that numerous misrepre-sentations were made as to the value of the shares, that the Commis-

.. U.S.D.C. S.D.N.Y. No. 886-58

... 8.E.C. v. Lincoln 8ecurities Corp., et at, U.S.D.C. N.Y. No. 18lS-79.21 U.S.D.C. D. Utah C-56-59.lIS U.S.D.C. N.Y. No. 142-167 ... U.S.D.C. S.D.N.Y. No. 141-887.. U.S.D.C. N.D. Ill. No. 594C484.81 U.S.D.C. E.D. Okla. No. 4520.. U.S.D.C. D. Ariz. No. 2925.

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TWENTY-FIFTH ANNUAL REPORT 53

sion had approved the price at which the securities were being sold,and that the stock was insured. The case is particularly significant inthat it is the first to hold that a prospectus does not meet the require-ments of section 10(a) of the Securities Act if the financial state-ments therein represent that an accountant is independent when infact he is not. A permanent injunction was entered upon consent ofdefendants. A permanent injunction was entered against UniversalDrilling Co., Inc. and its president, Louis J. Roussel 33 restrainingdefendants from transmitting any prospectus relating to the sale ofcommon stock in Universal until the prospectus met the requirementsof the Securities Act. Counsel for these defendants informed thecourt of their intention to make an offer of rescission to customerswho purchased the stock from the defendants J. H. Lederer Co., Inc.and Jean R. Veditz Co., Inc., registered broker-dealers. The courtcontinued the restraining order previously entered against the latter,to prevent dissipation of funds until determination of the Commis-sion's application for appointment of a receiver. A permanent in-junction was also entered by consent in S.E.C. v, Universal ServiceCorp.34for violation, inter alia, of the prospectus provisions.

A permanent injunction by consent was entered against the Vari-Pao Corporation for numerous fraudulent representations in violationof the 1933 act.'5 In a companion case, the Commission later suc-ceeded in obtaining a permanent injunction against the defendantI. B. Morton & Co., InC.36 for violation of the antifraud provisions ofthe 1933 act and the registration provisions pertaining to broker-deal-ers in the Securities Exchange Act of 1934. Two other dealers inVari-Pac stock were also enjoined from making further offers or sales.

In S.E.C. v, O.T.C. Enterprises, Inc. the defendants were offeringshares in a company purportedly developing a spaceship to fly throughthe universe utilizing "free energy." A public inaugural flight of theprototype at Oklahoma City, scheduled for April 19, 1959, failed tomaterialize. Otis T. Carr, president of the company, publicly an-nounced that a space craft designed by him would be constructed inwhich a flight to the moon would ba made on December 7, 1959, re-turning to earth on December 15, 1959. In addition to selling sharesto hundreds of investors, the promoters obtained additional income byselling plans for the spaceship and toy models at prices ranging from$5 to $10 a piece, and by organizing groups to study unidentifiedflying objects. They also attempted to promote a Space City, to belocated near Washington, D.C., and to maintain direct contact withcommunities on other planets and stars. At least half a million dol-lars was obtained from hundreds of investors. Final judgment was

IS S.E.O. v. J. H. Lederer GO.,Inc., et aJ., U.S.D.C. S.D. N.Y. 140-328, NY 3103... U.S.D.C. S.D. Texas No. 11,608 ... S.B.O.v. Albert 00., U.S.D.C. D.N.1. No. 1H~8.. S.B.O. v t. B. Morlon 00 U.S.D.C. S.D. N.Y. No. 138-899.

'" • '" ••

54 SECURITIES AND EXCHANGE COMMISSION

obtained by the Commission permanently enjoining defendants fromfurther sales or offers of sales,"

Among other cases in which fraudulent misrepresentations wereenjoined were: S.E.O. v. General Associates, Inc.,ss S.E.O. v, TheAngelique 00.,89S.E.O. v. J.P. Lord, Inc.,40 S.E.O. v. Walker-Stevens,Ino.,41 S.E.O. v, Consolidated Enterprises, Inc.,42 SE.O. v, KimlJallSecurities, Inc.48 and S.E.O. v. International Oorp., et al.44

In S.E.O. v, Aruida Oorporation 45 the Commission's complaintcharged two broker-dealers with violation of section 5(c) of theSecurities Act prohibiting public offerings of securities before thefiling of a registration statement. In enjoining any further violation,the court held that the issuance of a press release giving a number offacts concerning the development of Arvida Corporation and theproposed stock offering, and the convening of a press conferenceat which additional facts were given, including the proposed price,constituted an offer to sell within the meaning of the act and was inviolation of the act because a registration statement covering thesecurities offered had not been filed with the Commission. Judgmentwas entered upon consent of defendants. In related broker-dealerproceedings (see p. 103, infra) the Commission also concluded thatdefendants had violated the registration provisions of the 1933 actwillfully, but held that no sanction was required in the public interestunder the particular circumstances of the case. Securities ExchangeAct Release No. 5870 (February 9, 1959). After the institution ofthese proceedings a registration statement was filed and becameeffective.

In a case still pending," the Commission has brought suit to enjoinJohn Addison, Niles White, White, Green & Addison Associates, Inc.,Trans-world Mining Corporation, Murchison Ventures, Inc., andnumerous individual officers and employees, from further violatingthe registration provisions of the Securities Act of 1933, and to enjointhe defendants, their banks and depositories from dissipating or dis-bursing the assets or funds of these defendants, and particularly thesum of $146,625found in a suitcase left by Addison in a public carrierterminal. The Commission's complaint charges that since 1955 thedefendants have been selling securities, namely, notes, evidences ofindebtedness, participation in profit-sharing agreements, investment

31 u.s D.C. W.D. Okla. No. 8452.asU.S.D.C. N.D. Wash. No. 4708 .•• U.S.D.C. D. Conn. No. 7726 ... U.S.D.C. S.D. Fla. No. 9231-M .... U.S.D.C. S.D. N.Y. No. 135-313.e U.S.D.C. S.D. N.Y. No. 145-7 ... U.S.D.C. S.D. N.Y. No. 142-153 ... U.S.D.C. D.C. No. 1518-59.45 U.S.D.C. S.D. N.Y. No. 136-67.6 S.E.a. v. Addison et al., U.S.D.C. KD. Texas No. 8224.

TWENTY-FIFTH ANNUAL REPORT 55contracts, and fractional undivided interests in oil, gas, and othermineral rights, by use of the mails and in interstate commerce, with-out having first registered with the Commission. In a supportingaffidavit filed with the complaint, it was alleged that Addison and hisassociates obtained loans from approximately 400 individuals in 23States, the total of such loans amounting to nearly $1 million. Apreliminary injunction has been entered and the sum of $146,625 or-dered impounded in the registry of the Court pending a hearing on themerits of the case.

Permanent injunctions restraining sales in violation of the registra-tion provisions were decreed by consent in the following cases: S.E.O.v, Pettyjohn, et al./1 S.E.O. v, Justus, et al.,48S.E.O. v, HillsboroughInvestment Oorp.,49S.E.O. v, Robbins,50 S.E.O. v, Bonanza Oil Oorp.;et al.,51S.E.O. v, Hinsdale Raceway, bW.,52 S.E.O. v, Vanco, Ino., etal.,53and S.E.O. v, Mono-Kearsarge Oonsol.54 Permanent injunctionswere also entered in S.E.O. v, Southwest Securities Ino., et al.,55andS.E.O. v, Ben Franklin Oil and Gos Oorp., et al.,5Ilboth discussed inthe 24th Annual Report,"

In the Hillsborough case, supra, the court granted a preliminaryinjunction against defendants Hillsborough Investment Corporationand Roger Mara, its manager. The defendant corporation, incor-porated in New Hampshire, advertised in the newspapers, offeringto sell its stock to New Hampshire residents. A few advertisementscontained no such limitation. About a dozen sales were made tononresidents, in some cases after being held in the name of a residentfor 30 days. Defendants resisted the motion for a temporary injunc-tion on the ground that a small number of interstate sales, where nofuture interstate sales were contemplated, should not take the issueout of the intrastate exemption contained in section 3(a) (11) of the1933 act. The court held that even a single sale to a nonresident,whether directly or through the device of selling to a resident inter-mediary, destroyed the exemption as to the whole issue, and requiredregistration in order to make future sales to residents.

'1 U.S.D.C. D. Alaska No. 10,470.. U.S.D.C. S.D. Fla. No. 8779-M .•• U.S.D.C. D. N.H. No. 1965.eo U.S.D.C. S.D. Texas No. 12,644.61 U.S.D.C. D. Nev. No. 259 ... U.S.D.C. D. N.H. No. 1970.. U.S.D.C. D. N.J. No. 737-58.54 U.S.D.C. D. Utah No. C-58-58 ... U.S.D.C. N.D. Ark. No. 3566 ... U.S.D.C. D. N.J. No. 601-5761 At p, 46 et seq.

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56 SECURITIES AND EXCHANGE COMMISSION

The Mono-Kearsage Oonsolidated Mining Oompany case, supra,was an action by the Commission to enjoin sales of that company'sstock without registration by broker-dealers and others who had re-ceived the stock from transferees of the company who were in con-trol of the company. The defendants contended that they did notknow of the control relationship. The Court, in granting an in-junction, held that defendants were underwriters within the meaning ofthe Securities Act of 1933, that the term "underwriter" includes any-one who purchases from a person directly or indirectly controlling anissuer, or in common control with the issuer, with a view to publicdistribution of the securities of the issuer, that the defendants were tobe held to have knowledge of those facts which they could obtain uponreasonable inquiry. The Court said further:

Probably the facts directly known by them were sufficient to acquaint themwith the true situation. If not, they were sufficient to impose upon them theduty of making further inquiry. Under the circumstances, they were not entitledto rely solely on the self-serving statements of Pennington and the other Cana-dians denyiug those facts which would have indicated that they were represent-ing controlling persons, or were under common control with an issuer. Withall these red flags warning the dealer to go slowly, he cannot with Impunityignore them and rush blindly on to reap a quick proflt. He cannot close his eyesto obvious signals which if reasonably heeded would convince him of, or leadhim to, the facts and thereafter succeed on the claim that no express noticeof those facts was served upon him. 167 F. Supp. 248, 259 (D. Utah, 1958).

Litigation Relating to SlOP Order Proceedings

In Oolumbia General Investment 00. v. S.E.0.,58 the Court ofAppeals for the Fifth Circuit affirmed a Commission stop order pur-suant to section 8 (d) of the Securities Act suspending the effectivenessof Columbia's registration statement and denying Columbia's appli-cation for withdrawal prior to the effective date of the registrationstatement. Relying on Jones v. S.E.O., 298 U.S. 1 (1936), Columbiacontended that the request for withdrawal divested the Commissionof jurisdiction to issue the stop order. In upholding the Commission'sorder, the Court distinguished the Jones case on the fact that in theinstant case 1,800 members of the public held 63,000 shares of the sameclass of securities covered by the registration statement. The Courtnoted that these stockholders and members of the investing public whomight trade in these securities are proper subject of the official concernof the Commission. Moreover, the Court stated that since Jones asignificant change in the law had taken place and it could no longerbe said, as it was in Jones, that withdrawal was the concern of theregistrant alone. Under the 1954 amendments to the act a registrantmay now make offers to sell after filing but before registration. The

.. 260 F. 2d 559 (C.A. 11,1959).

TWENTY-FIFTH ANNUAL REPORT 57Court ruled that, if a registrant has an unfettered right to withdrawunder these conditions, then the machinery of the Commission couldeasily be employed as an instrument of fraud. The Court rejectedColumbia's contentions that the filing of a substantive amendmentterminates, for the purposes of stop order proceedings, the legalsignificance of the original registration statement.

Participation as Amicus Curiae

In Woodward v. Wright, 266 F. 2d 108 (C.A. 10, 1959), the Com-mission filed a brief amicus curiae in an appeal from a judgment forthe defendant-sellers of an undivided interest in oil and gas rights.The action was based on the civil liability provisions of section 12of the Securities Act, and while the lower court found that the sellers'prospectus contained a material false statement, it barred recoverysince the purchasers had failed to show their reliance on the misrepre-sentation. After concluding that the contract of sale conveyedfractional undivided interests in oil and gas and hence securities, theCourt of Appeals reversed and remanded the case to the district courton the ground that the evidence brought the appellants within theliability provisions of section 12(2). The court rejected the districtcourt's ruling and agreed with the Commission's position that Con-gress did not impose upon a plaintiff the burden of proving relianceas a condition of recovery under section 12(2). The court refusedto permit recovery under section 12(1) holding on the particular factsthat a public offering had not been made.

In 07'e8well-Keith, Ina. v. Willingham, 264 F. 2d 76 (C.A. 8, 1959),the Commission also filed a brief as amicus curiae. This was a privatesuit wherein the plaintiff involved section 12(2) of the act to rescinda commitment for securities claiming fraudulent misrepresentationswere made. The defendants filed motions for dismissal for want ofjurisdiction stating that neither the misrepresentations nor the deliv-ery of the securities was made by use of the mails or interstatecommerce. The trial court upheld this contention; however thisholding was overruled on appeal where the court held, as urged bythe Commission, that the section 12(2) "remedy is available if themails or interstate commerce is used in any manner in consummatingthe sale" and that "payment of the consideration is part of theconsummation of the sale."

PART V

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF1934

The Securities Exchange Act of 1934 provides for the registrationand regulation of securities exchanges and the registration of securitieslisted on such exchanges, and it establishes, for issuers of securities soregistered, financial and other reporting requirements, regulation ofproxy solicitations and requirements with respect to trading by direc-tors, officersand principal security holders. The act also provides forthe registration and regulation of brokers and dealers doing businessin the over-the-counter market, contains provisions designed to preventfraudulent, deceptive and manipulative acts and practices on theexchanges and in the over-the-counter markets and authorizes theFederal Reserve Board to regulate the use of credit in securitiestransactions. The purpose of these statutory requirements is to ensurethe maintenance of fair and honest markets in securities.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges

As of June 30, 1959, 14 stock exchanges were registered under theExchange Act as national securities exchanges:American Stock Exchange New York Stock ExchangeBoston Stock Exchange Pacific Coast Stock ExchangeChicago Board of Trade Philadelphia-Baltimore Stock ExchangeCincinnati Stock Exchange Pittsburgh Stock ExchangeDetroit Stock Exchange Salt Lake Stock ExchangeMidwest Stock Exchange San Francisco Mining ExchangeNew Orleans Stock Exchange Spokane Stock Exchange

Four exchanges have been exempted from registration by the Com-mission pursuant to section 5 of the act:Colorado Springs Stock Exchange Richmond Stock ExchangeHonolulu Stock Exchange Wheeling Stock Exchange

Disciplinary Actions

Each national securities exchange reports to the Commission dis-ciplinary actions taken against its members for violation of the Se-curities Exchange Act of 1934 or of exchange rules. During theyear 4 exchanges reported 23 cases of such disciplinary action, in-cluding imposition of fines aggregating $27,550 in 14 cases, the sus-

58

TWENTY -FIFTH ANNUAL REPORT 59pension of two individuals from allied exchange membership, andcensure of a number of individuals and firms.Commission Rate Study

On February 20, 1959, the Commission announced the completionby its staff of a study of commission rates charged by members of theNew York Stock Exchange undertaken as a result of an increase incommission rates adopted by the Exchange on May 1, 1958.1 Thestudy was made in view of the responsibilities and duties imposedupon the Commission by section 19(b) of the Securities ExchangeAct of 1934 with respect to the rules of national securities exchangesincluding rules relating to the fixing of reasonable commission rates,"

In line with suggestions of the Commission, the Exchange tooksteps falling into three general areas. First, the Exchange reducedcommission rates on transactions ranging from $100 to $2,400 by ap-proximately 5 percent. These modifications were suggested in viewof the fact that the May 1958 percentage increases on transactionsfrom $100 to $2,400 were relatively greater than the average percent-age increase. The Exchange also eliminated the so-called "roundturn" commission rate under which a reduced rate was granted to per-sons whose purchase and sale of the security was completed within14 days. It was the view of the Commission that this type of trans-action was not entitled to a special discount and the Exchange feltthis rate had not achieved its desired objective.

Following the action of the New York Stock Exchange otherregistered national securities exchanges, including the American StockExchange, adopted a schedule of commission rates identical with thatof the New York Stock Exchange.

Second, it was decided that an Exchange committee would studythe use of a so-called volume or block discount for transactions in-volving multiple round lot units. The Exchange also agreed to studythe possibility of further developing its income and expense surveyof member firms as a source of data in connection with commissionrates and to work with the staff of the Commission and consultantsemployed by the Exchange to prepare an outline for the basis of acost study being made by the Exchange.

Third, the Exchange amended its rules to provide that any pro-posed constitutional amendment to change commission rates or othercharges would be announced 30 days in advance of action by theBoard of Governors of the Exchange. Also, it was agreed that theCommission would be advised of any steps taken by the Exchangelooking toward changes in commission rates or other charges.

1 Securities Exchange Act Release No. 5889.Securities Exchange Act Release No. 5678.•

60 SECURITms AND EXCHANGE COMMISSION

Activities of Floor Traders and SpecialistsAs a result of a study made by the staff of the Commission of the

activities of floor traders and specialists on the American Stock Ex-change, certain steps have been taken by that Exchange to imposefurther controls upon the activities of these members. The Commis-sion concluded from the study that further restrictions were necessaryupon floor trading activities on that Exchange; that these restrictionsshould prevent floor traders from stimulating public interest in a stockby active and concerted buying; and that floor traders should be re-stricted from aggravating demand in present markets where manyissues on the Exchange are peculiarly susceptible to extreme fluctua-tions because of a small floating supply. The Commission permittedthe Exchange to put into effect on an experimental basis for six monthsa rule which the Exchange believes will minimize the undesirablefeatures of floor trading, yet preserve certain asserted benefits," Theeffect of the rule is to impose restrictions upon floor trading purchasesin a rising market.

In line with suggestions of the Commission, the Exchange has alsotaken certain steps to regulate further the activities of specialists.Several new rules relating to specialists have been adopted, the mostimportant of which makes subject to Exchange approval all off-floortransactions, with certain limited exceptions, by specialists in securi-ties in which they are registered. The Exchange also has instituteda program for making periodic inspections of specialist dealer trans-actions in the securities in which they are registered. Under the pro-gram specialists will be required to report to the Exchange severaltimes each year the details of their dealings for unannounced periodsselected at random by the Exchange.

REGISTRATION OF SECURITIES ON EXCHANGES

A member of a national securities exchange or a broker or dealermay not effect any transaction in a security on an exchange unless thesecurity is registered on that exchange under the Securities ExchangeAct or is exempt from such registration. In general, the act exemptsfrom registration obligations issued or guaranteed by a State or theFederal Government or by certain subdivisions or agencies thereof andauthorizes the Commission to adopt rules and regulations exemptingsuch other securities as the Commission may find necessary or appro-priate to exempt in the public interest or for the protection of inves-tors. Under this authority the Commission has exempted securitiesof certain banks, certain securities secured by property or leaseholdinterests, certain warrants and, on a temporary basis, certain securitiesissued in substitution for or in addition to listed securities.

Securities l!Jxcban~ 4ct Release No. 5981.•

TWENTY-FIF1'R ANNUAL REPORT 61

Section 12 of the Exchange Act provides that an issuer may registera class of securities on an exchange by filing with the Commission andthe exchange an application which discloses pertinent information con-cerning the issuer and its affairs, including information in regard tothe issuer's business, capital structure, the terms of its securities, thepersons who manage or control its affairs, the remuneration paid to itsofficers and directors, the allotment of options, bonuses and profit-sharing plans, and financial statements certified by independent ac-countants.

Form 10 is the form used for registration by most commercial andindustrial companies. There are specialized forms for certain typesof securities, such as voting trust certificates, certificates of depositand securities of foreign governments.

Section 13 requires issuers having securities registered on an ex-change to file periodic reports keeping current the information fur-nished in the application for registration. These periodic reportsinclude annual reports, semiannual reports, and current reports. Theprincipal annual report form is Form 10-K which is designed to keepup to date the information furnished in Form 10. Semiannual reportsrequired. to be furnished on Form 9-K are devoted chiefly to furnish-ing mid-year financial data. Current reports on Form 8-K are re-quired to be filed for each month in which any of certain specifiedevents have occurred such as changes in control of the registrant,important acquisitions or dispositions of assets, the institution ortermination of important legal proceedings and important changesin the issuer's capital securities or in the amount thereof outstanding.Statisties Relating to Registration of Securities on Exchanges

As of June 30,1959, a total of 2,236 issuers had 3,808 classes of secu-rities listed and registered on national securities exchanges, of which2,631 were classified as stocks and 1,177 as bonds. 1,294: issuers had1,512 stock issues and 1,124:bond issues listed and registered on the NewYork Stock Exchange. Thus, 58 percent of the issuers, 57 percent ofthe stock issues and 95 percent of the bond issues were on the NewYork Stock Exchange.

During the 1959 fiscal year, 73 issuers listed and registered securi-ties for the first time on a national securities exchange, while regis-tration of all securities of 73 issuers was terminated. The total num-ber of applications for registration of classes of securities on nationalsecurities exchanges filed during the 1959 fiscal year was 203.

The following table shows the number of annual, semiannual, andcurrent reports filed during the fiscal year by issuers having securitieslisted and registered on national securities exchanges. The table alsoshows the number of reports filed under section 15(d) of the Securi-ties Exchange Act of 1934:by issuers obligated to file reports by reason

62 SECURITIES AND EXCHANGE COMMISSION

of having publicly offered securities effectively registered under theSecurities Act of 1933. The securities of such issuers are traded gen-erally in the over-the-counter markets. As of June 30, 1959, therewere 1,503 such issuers, including 247 also registered under the In-vestment Company Act of 1940.

Number of annual and other periodic reports filed by issuers under the Securities&change Act of 1934 during the fiscal year ended JUnt 30, 1959

Number of reports filed by-

Type of reports Over-the- TotalListed Issuers counterls- reports filedflIlng reports suers tilingunder sec. 13 reports under

sec. 15(d)

Annual reports on Form IO-K, etc ____________________________ 2,223 1,480 3,703Semi-annual reports on Form 9-K ____________________________ 1,685 848 2,533Ourrent reports on Form 8-K, etc 3,650 1,719 5,368Total reports flIed 7,558 4,046 11,604

MARKET VALUE OF SECURITIES TRADED ON EXCHANGES

The market value on December 31, 1958, of all stocks and bondsadmitted to trading on one or more stock exchanges in the UnitedStates was approximately $419,585,963,000.

Number Market valueoflssues Dec. 31.1958

Stocks:

i~jl~~~l~~i£~~======================:::::::::::==:::::1,507 $276,665,191,000

855 31,729,486,000570 4, 266,569,000

Total stocks _________________________________________________________ 2,932 312,661,246,000Bonds:New York Stock Exchange 1___________________________________________ 1,149 105,866,137,000American Stock EXcha~e _____________________________________________ 59 908,340,000Exclusively on other ex anges________________________________________ 28 150,240,000

Total bonds _________________________________________________________ 1,236 106,924,717,000Total stocks and bonds. _____________________________________________ 4, 168 419,585,963,000

J Bonds on tbe New York Stock Exchange included 50 U.S. Government and New York State and OityIssues with $77,600,873,000aggregate market value.

The New York Stock Exchange and American Stock Exchangefigures were reported by those exchanges. There is no duplication ofissues between them. The figures for all other exchanges are for thenet number of issues appearing only on such exchanges, excludingthe many issues on them which were also traded on one or the other ofthe New York exchanges. The number of issues as shown excludesthose suspended from trading and a few others for which quotationswere not available. The number and market value as of December

__•__________________________

___••___________•______________________

TWENTY-FIFTH ANNUAL REPORT 6331, 1958, of preferred and common stocks separately was as follows:

Preferred stocks Common stocks

Number Market valne Number Market valne

Listed on registered exchanges __________ 586 $8, 400, 005, 000 2,028 $282,313,930,000All other Issues 1 59 493, 783,000 259 21,453,528,000

645 8, 893, 788, 000 2,287 303,767,458,000

1 Issues admitted to unlisted trading privileges only or listed on exempt exchanges.

The New York Stock Exchange has reported aggregate marketvalues of all stocks thereon monthly since December 31, 1924, whenthe figure was $27.1 billion. The aggregate market value rose to $89.7billion in 1929, declined to $15.6 billion in 1932, and was $298.8 bil-lion in June 1959. The American Stock Exchange has reportedDecember 31 totals annually since 1936. Aggregates for stocks exclu-sively on the remaining exchanges have been compiled as of December31 annually by the Commission since 1948.

Share values on exchanges, in billions of dollars

New York American 'ExclUSivelyDecember 31 each year Stock Stock on other Total 1

Exchange Exchange exchanges

1936 _. -. -. $ 59.9 $14.8 ~--_~------- $ 74 71937 _. _. -. -. ---.- 38 9 10 2 ------------ 49.11938.• -. _._ -'_ 47 5 10 8 58.31939_. •. _. -. _. 46 5 10 1 ----.-.----- 56.61940_. . -. _' _. •. -., -. 41.9 8.6 .------.---- 50.51941.. ._. .• -. •. -_._. 35 8 7.4 43.21942.• , . . -_. _' -_. -_ 38 8 7.8 ----.--.---- 46.61943_ ._._ _. . --.-- 47.6 9 9 .----------- 57.51944_. _. -_ -_ -_ _. 55 5 11.2 ----.------- 66 71945_. _._. ._._ -._ -. 73.8 14.4 .----------. 88.21946.• .• •. -'_ -. .• 68 6 13 2 .----------- 81 81947 . _. _. _. _._ -_ -. 68.3 12 1 .---.------- 80.41948 . _. -. 67.0 11. 9 $3 0 81.91949 •. 76 3 12 2 3 1 91 61950 •. _., _. ._. --_. _. -. -. 93 8 13 9 3.3 111 01951. •. -_._ -_ -. 109 5 16 5 3.2 129 21952 . -. --. -. -.-----. 120 5 16 9 3. 1 140.51953 _' _. --. -_ -. -. -. 117.3 16 3 2 8 135.41954 -. _. --._ 169.1 22 1 3 6 194. 81955 .. _. ._._._ -. _. _-- 207.7 27 1 4 0 238.81956. -_._ --.- -. -.- 219 2 31.0 3.8 254.01957 . -. -. -. -. _._. 195.6 25 5 3 1 224.21958._._. -. _. -_ . _. 276.7 31 7 4.3 312.7June 30, 1959 , ._ 298.8 34 2 4 6 337.6

1 Total values 1936-47 inclusive are for the New York Stock Exchange and the American Stock Exchangeonly.

'As reported by the New York Stock Exchange and estimated for all others.

At the time of passage of the Securities Exchange Act of 1934,stock prices were rising from their low point, reached in 1932, and asubstantial recovery occurred through 1936. Indices turned down-ward with the stock market decline in 1937. Share volumes on the ex-changes dropped from 962 million in 1936 to 221 million in 1942 anddollar volumes thereof from $23.6 billion in 1936 to $4.3 billion in1942. Thereafter, recovery set in. For the calendar year 1958, theexchange turnover reached 1.4 billion shares with $38.4 billion dollarvolume of sales, and for the first 6 months of 1959, the turnover

•• _____________________

_______________________• ___- _- - -- -- - - - - - -- ____ _________' _____• __•• ___- ___- _•• - -- -- ---

____• _____• __________' ___- ___- - - - - - - __- - - _ ------------__• ______________• __•• __________ ___- __- - ____ _______• ____ - - - _ - _-- - - - - - - - - -- - - --___ ____•• _____' ___• __ ___- - __- _ - __- - _ ------------_________________________ __ - __ __- - __•

• ___• __• ___• ___ - -__- - --- --- __ -- - - - - -- --__• __• ____• ____________• - - __• - _-- - __- - --

__________• ____- __- -- - - - - - - - - - - -- - - --___• ___' _____ ___- ___• __ - __ -- - - -- -- - - ___

_____•____ __' __• ____- - - - ••• - _- - - - - - ___ ________ ____• __• ___• ____•• __• - __- ___- _ - ___- ___• _____ ___• _____•• __• _•• _______• ___- ___- __• - __- - ____ ___• _ _________ - - ___- - - _-- - - -- _--_____• __ ___•• ____• ____• ___ - ____• - ________

__ __• ___•• __• ______• - - -- - •• - •••• - ---___• _____• ________• - __-- - - -- -- -- - - ---_________• __________• ___ __- - - - _- - - _- - •• __• __ ___ _•• _________•• ____• _____ - _- - - - --________• ___• ___- __• ___• -- - - - - - - - - ----

_____ ___• ___• _______- ___- __- - - - •• _ - - ___ ____• ___• ______• ____- __ ___- - - - ___ _____

___• ______• __•• __________• ______• ___• ___

64 SECURITIES AND EXCHANGE COMMISSION

reached nearly a billion shares with over $28 billion dollar volume.The number of stocks listed on the registered exchanges fell from2,961 in 193'7to 2,584 in 1945, and recovered to 2,643 on June 30,1959.Growth of the issuers is reflected by the increase in their outstandingshares as reported below:

Shares on exchanger, in miUions

Listed on Unlisted Total on PercentJune 30 registered and all listed on

exchanges exempted exchanges registeredexchanges

1936____________________________________________________ 2,438 (I) (I> (I)1937____________________________________________________ 2,601 (1) (I~ (1)1938 _._ 2,312 (I> (I (1)1939 2,344 (I) (I) (II1940 2,367 (1) (1) (I1941-. __________________________________________________ 2,279 (1) (1) (I)1942 2,262 (1) (I) (I)1943____________________________________________________ 2,284 393 2,677 85.31944____________________________________________________ 2,295 416 2,711 84.71945____________________________________________________ 2,320 420 2,740 84. 71946____________________________________________________ 2,458 408 2,866 85 81947____________________________________________________ 2,668 398 3,066 87.01948____________________________________________________ 2,841 390 3,231 87 91949____________________________________________________ 3,022 393 3,415 88 51950____________________________________________________ 3,156 366 3,522 89.61951- ___________________________________________________ 3,490 377 3,867 90.31952____________________________________________________ 3,685 405 4,090 90.11953 3,915 420 4,335 90.31955. 5,009 467 5,476 91. 51956. ___________________________________________________ 5,852 483 6,335 92.41957 6,247 526 6,773 92.21958. 6,465 544 7,009 92_2

1Net totals of unlisted shares on all exchanges and of shares listed on the exempted exchanges have notbeen compiled prior to 1943

December 31.

Shares listed on the New York Stock Exchange reached half a bil-lion in 1926, 1 billion in 1929, 2 billion in 1948, and 5 billion in 1958.A further increase to 5.46 billion shares listed on this Exchange dur-ing the first 6 months of 1959 brings the total shares available fortrading on all exchanges to around '7.5billion as of June 30, 1959.Assets of Domestic Companies with Common Stocks on Exchanges

The assets of all domestic companies having common stocks on thestock exchanges were roughly equal to the $291.4 billion market valueof such common stocks on December 31, 1958. The equivalence owesto the preponderance of industrial stocks on the exchanges; it is notunusual for industrial stocks to sell for as much as or more thanreported assets. The assets included about $280.8 billion for do-mestic companies with common stocks listed on registered ex-changes and $11.4 billion for domestic companies with common stocksunlisted on the exchanges or listed on the exempted exchanges. The$280.8 billion listed aggregate included $266 billion on the New YorkStock Exchange," $9.8 billion on the American Stock Exchange, and

New York Stock Exchange "Fact Book, 1959" suppUes this figure tor 1957 IncludingBOmetlscal years ending In 1M8. Figures tor the other exchanges are tor the most part asreported around December 3J., 1Qli8.

__________________• _____________________________-_________________• __________________________________ __________- ____________________-- _- -- ___________-- --

_______• ____________________________________________

_________________________• __________________________ ___________________• _______________________________

•• __________________________________________________ ____________________• _____________________________

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TWENTY-FIFTH ANNUAL REPORT 65

$5 billion exclusively on regional exchanges. The $11.4 billion un-listed and exempted aggregates included $8.2 billion on the AmericanStock Exchange and $3.2 billion exclusively on regional exchanges.The assets represent a conglomerate of individual and consolidatedcompany reports and various treatments of such matters as reservesfor depreciation.Foreign Stock on Exchanges

The market value on December 31, 1958, of all shares and certificatesrepresenting foreign stocks on the stock exchanges was reported atabout $12.5 billion, of which $11.1 billion represented Canadian and$1.4 billion represented other foreign stocks. The market values of theentire Canadian stock issues were included in these aggregates. Mostof the other foreign stocks were represented by American depositaryreceipts or American shares, only the outstanding amounts of whichwere used in determining market values.Comparative Over-the-Counter Statistics

Annual over-the-counter transactions of as much as $200 billionUnited States Government bonds, centered in the offices of 5 banksand 12 specializing dealers, are about 5 times the total bond and stockvolumes on all the stock exchanges, and earn for the over-the-counterindustry the distinction of being the world's largest securities market.Government bonds have in the past been actively traded on stock ex-changes, reaching $2.9 billion per annum on the New York Stock Ex-change in the 1919-20 price recovery, but the last significant Ex-change volume was reported 20 years ago, in 1939, and current volumeson the Exchange are around $100,000 per annum.

Securities representing upward of $50 billion State and local gov-ernment debt are, with few exceptions," sold only over the counter.These bonds are usually issued in serial form, with a comparativelysmall amount for each maturity date, and have a specialized marketowing to their tax-exemption features.

Corporate bond sales on the stock exchanges are only about $1.5billion per annum, much less than those over-the-counter.

The over-the-counter potential for dealing in stocks is enormous,since there are perhaps a million corporations whose shares mightcome into the market. 6 However, less than 1 percent of these corpora-tions appear to have the size and share distribution to command a con-tinuing public market for their stocks. The following over-the-

There 18 activity on the New York Stock Exchange in New York City Transit as or1980, and on the American Stock Exchange in Chicago Transit Authority 3%,s of 1978.

U.s. Treasury Department "Statistics of Income" reported 924,961 corporation incometax returns for 1956-57, an Increase of 82,836 over 1955-ri6. About 8.500 of the returnsaccounted for 75 percent of the $949 biillon total reported assets. There have been wellover 100,000 ne", Incorporations per annum over the past decade and th1s rate nearlydoubled In the fiDlt 6 months of lQ59 upon passage of laws granting certa1n tax electionsto l'orporations with not over 10 shareholders.

•

•

66 SECURITIES AND EXCHANGE COMMISSION

counter data are derived from a continuing survey of the standardsecurity manuals, the National Quotation Bureau Services, and re-ports to the Commission.

Somewhat over 700 domestic banks have stocks with 300 or morereported holders which are not on any stock exchange. Practically allare common stocks. Their aggregate market value on December 31,1958, was about $15 billion, which was close to 10 percent of the $155billion assets on that date of the issuing banks. The correspondingmarket value of bank stocks on stock exchanges aggregated about $237million for 24 issues,"

About 300 domestic insurance companies have stocks with 300 ormore reported holders which are not on any stock exchange. Nearlyall 'are common stocks. The aggregate market value of their quotedstocks on December 31, 1958, was about $11.5 billion, which was closeto 40 percent of their $29 billion assets on that date. The correspond-ing value of insurance stocks on stock exchanges aggregated about$1.6 billion for 17 issues of 16 issuers.

About 500 issuers are registered under the Investment CompanyAct of 1940, and their aggregate assets are about $20 billion. On De-cember 31, 1958, 39 of these issuers, with about $2.2 billion net assetvalue, had stocks on stock exchanges with about $1.9 billion aggregatemarket value," Over-the-counter market or redemption values of theremaining issuers' securities would bear a close correspondence totheir approximate $17.8 billion net asset value.

About 2,500 additional domestic industrial, utility, and miscellane-ous issuers have stocks with 300 or more reported holders which arenot on any stock exchange. The aggregate market value on Decem-ber 31, 1958, of their shares was about $32.5 billion. About $2.5 bil-lion consisted of preferred stocks. The $30 billion common stockswere of companies with aggregate assets of about $39 billion on thatdate. Nearly all widely-held railroad stocks and a preponderance ofwidely-held utility and industrial stocks are on exchanges.

In all, some 3,500 domestic corporate issuers (excluding registeredinvestment companies) 9 have stocks with 300 or more reported hold-

Of the 22 bank stocks remaining on stock exchanges on June 30, 1959, 1 was listedand registered, and 5 were listed and exempted from registration, on the Washingtonbranch of the Philadelphia-Baltimore Stock Exchange, and 16 were listed on the exemptedRichmond, Wheeling, and Honolulu Exchanges.

8 With 2 exceptions, all investment trust shares on the stock exchanges are ot closed-endissuers. Purchases and sales of closed-end investment trust shares are ordinarily made inthe open market such as a stock exchange affords. Holders of open-end Investment trustshares ordinarily buy them from distributors and redeem them at their Ilquldatlng values.The 2 open-end issuers on stock exchanges are Coca Cola International Corporation andGeneral Capital Corporation, whose shares are listed on the New York Stock Exchange andthe Boston Stock Exchange respectively, with no exchange volume reported during 1958 Ineither Issue.

The use ot registered investment company totals in computing overall securities aggre-gates would be duplicative to a great extent in that their holdings consist of other securi-ties, principally listed stocks.

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TWENTY-FIFTH ANNUAL REPORT 67

ers which are not on any stock exchange, and whose aggregate mar-ket value on December 31, 1958, was approximately $59 billion. Theassets of the issuers having over-the-counter common stocks aggre-gated about $223 billion on that date, of which nearly 70 percent($155 billion) was of banks.

As in case of issuers having securities on stock exchanges/a thenumber of such issuers of over-the-counter stocks has not changedgreatly in recent years. The constant additions are substantially off-set by losses through new listings on stock exchanges, mergers, salesof assets, liquidations and reduction innumber of shareholders in someinstances." Share price changes have kept pace with those of stockson stock exchanges. Aggregate share values of $238.8 billion on stockexchanges on December 31, 1955, were about 5.3 times the $45 billionover-the-counter values as computed for that date in our 22d AnnualReport (1956), and the $312.7 billion stock exchange values on De-cember 31, 1958, were similarly about 5.3 times the $59 billion over-the-counter values as above computed.

The domestic over-the-counter stock values of $59 billion, as com-puted above, included $15 billion of stocks of banks, which report totheir own regulatory agencies. Of the $44 billion of other stockvalues, about $24 billion, or over 50 percent, were of issuers reportingto the Commission pursuant to requirements of the Securities Ex-change Act of 1934. The $24 billion included about $20.7 billionstocks of domestic issuers reporting under section 15 (d) of the 1934Act, by reason of registrations of securities for public sale," and about

:JJ) Issuers represented on stock exchanges numbered 2,594 on .Tune30, 1956, and 2,527 on.Tune30. 1959, including issuers of both bonds and stocks.

11 Purchases of stocks for control sometimes reduce holders below 300. Holders ofpreferred stocks, of real estate stocks issued in reorganizations, and of stocks distributed("spun-olI") by large companies to their numerous stockholders tend to decrease over theyears.

U Issuers required to report under section 15(d) of the Securities Exchange Act ot1934 had aggregate quoted values of shares 011 December 31, 1958, as follows:

Value 01Over the counter: 188uer8 quoted 8hare8

Utility, industrial, etc_________________________________ 948 $18, 115, 290, 000Insurance____________________________________________ 87 2,629,900,000Foragn .___________ 42 1,909,400,000

1,077 22,654,590,000Unlisted on stock exchanges :UtU1ty. industrial, etc

Insurance .Foreign

3032

1,355.800,000790,700,000

1,465,300,000

35 3,611,800,0001,112 26,266,890,000

Registered investment companles___________________________ 225Partnerships, voting trusts. stock purchase plans, ete________ 77

1,414529523--59--8

_ _ _

68 SECURrrIES AND EXCHANGE COMMISSION

$3.3 billion over-the-counter stocks of issuers reporting because theyhave other securities listed on registered exchanges.

Taking into account the share values of registered investment com-panies which do report, and those of banks which do not report tothe Commission, it is evident that the total values of shares of do-mestic issuers reporting to the Commission is more than half of thetotal domestic over-the-counter share values, as above computed.

DELISTING OF SECURITIES FROM EXCHANGES

Pursuant to rule 12d2-1(b) under section 12(d) of the SecuritiesExchange Act, applications may be made to the Commission by issuersto withdraw their securities or by exchanges to strike any securitiesfrom listing and registration on exchanges. The Commission maynot deny such 'applications if made in accordance with the appropri-ate exchange rules, but may impose such terms as it may deemnecessary for the protection of investors.

During the fiscal year ended June 30, 1959, the Commission grantedapplications by issuers and exchanges to remove 39 stock issues and1 bond issue from listing and registration pursuant to rule 12d2-1 (b) .There were 41 removals, since 1 stock was delisted from 2 exchanges.The number of issuers involved was 37. The removals were as follows:Applications filed by : ~:~~:

Ne~ York Stock Exchange 15~erican Stock Exchange____________________________________ 4Cincinnati Stock Exchange 1*Mid~est Stock Exchange______________________________________ 3Pacific Coast Stock Exchange__________________________________ 5Philadelphia-Baltimore Stock Exchange________________________ 5Spokane Stock Exchange_____________________________________ 1San Francisco Mining Exchange_______________________________ 1Issuers______________________________________________________ 5

Total 40

.This stock was also dellsted from the American Stock Exchange.

Bond188Ue8

1oooooooo1

The applications by exchanges were based in general upon theground that the issues were no longer suitable for exchange trading,by reason of reduced public holdings, small values, few holders, incon-sequential trading volumes on the exchanges, or a combination of thesefactors. Some of the issuers were not operating, or were in processof liquidation. Failure to file reports with the exchange was citedin three instances. In six of the applications made by exchanges itwas stated that the issuers had requested the action.

The five applications by issuers were for removal of stocks fromvarious regional exchanges. The stocks remained listed on otherexchanges where the principal trading volume therein occurred.

TWENTY-FIFl'H ANNUAL REPORT 69From July 1, 1936, through June 30, 1959,13there have been 533

delistings of securities on application of exchanges and 279 on appli-cation of issuers. Delistings from the New York Stock Exchangenumbered 282 pursuant to its applications and 6 pursuant to applica-tions by issuers. Delistings from the American Stock Exchange num-bered 58 pursuant to its applications and 25 pursuant to applicationsby issuers. Delistings from the regional exchanges numbered 193pursuant to their applications and 248 pursuant to applications byissuers. Thus, about 2 percent of the New York Stock Exchangedelistings, 30 percent of the American Stock Exchange delistings, and56 percent of the regional exchange delistings were pursuant to appli-cations by issuers.

As indicated above, delisting applications filed by exchanges areordinarily based on lack of adequate public interest in the securityissues concerned. The usual exchange application cites diminutionin number of holders and publicly held shares or the moribund condi-tion of the issue or issuer. The reduction in the number of holdersand publicly held shares frequently results from acquisitions involv-ing an offer of exchange into other listed shares of the same or anotherissuer. In some cases, a company will have sold its assets for cashand distributed all but small final payments in liquidation. The spe-cific reason given in an application in case of a moribund conditionmay be that the issuer has failed to file reports required by the list-ing agreement and registration, or has discontinued transfer and reg-istrar facilities, or faces insolvency proceedings. Some exchanges,upon learning that an issuer has determined to delist an inactivelytraded issue, will make the application as a matter of good publicrelations, stating that it is made at the request of the issuer by reasonof its inactivity on the Exchange. The New York Stock Exchange,as the leading exchange in number of listings and number of removals,has developed and published criteria on the basis of which it will con-sider initiation of a delisting application. (See 24th Annual Report,p. 63.) Some of the stocks delisted upon its application have re-mained or become listed on other exehanges.> One of the stocksdelisted upon its application has since become prominent," In gen-eral, however, there are very few instances of substantial public interestin securities after their delisting upon application by exchanges.

Delistings upon application by issuers fall into three classes: thosewhich have little value, those which remain listed on other exchanges,

18 Comparable data are not ava.lIable for the period prior to July I, 1936."Examples inclnde Kalamazoo Stove and Furnaee Company and DTM Corporation stocks

remaining on Midwest Stock Exchange, and Spear I< Company, Clopay Corporation, andDavega Stores Corporation stocks which became llsted on the American Stock Exchange.

:Ja The number of holders of American ExPress Company stock, dellBted in 1939 when itwas nearly all owned by Amerex Holding Corporation, increased from nnder 100 to over25,000 in Its sPin-olf bY' the latter 11 years later.

70 SECURITIES AND EXCHANGE COMMISSION

and those which are good over-the-counter material. Upon the mar-ket break in 1937 and the subsequent drying up of exchange activity,from 962 million shares in 1936 to 221 million in 1942, and from $23.6billion to $4.3 dollar volume respectively, there was a plethora ofissuer applications. In this period, the Commission frequently re-quired issuers to notify their stockholders of the pending applicationand to advise them of their right to be heard. Response of the holderswas inconclusive," but the contents of the notifications were made thecause of denials or dismissals in some instances. For some time afterthe low point of the decline in share volumes was reached in 1942,the flow of delisting applications by issuers continued, and the Com-mission in three cases during the period 1944-46 required importantissuers to put their decisions to a vote of stockholders." However,volumes on the exchanges were recovering. New delisting applica-tions by issuers dropped to an average of about 7 per annum in the 15years to June 30,1959, compared to over 21 per annum in the 8 yearsto June 30, 1943. Notifications to stockholders were required in onlya few instances after 1943, the last being in 1954; no voting require-ment has been ordered by the Commission since 1946. On occasion,either voluntarily or in compliance with a rule of an exchange, issuershave put the matter of delisting to vote of their stockholders beforesubmitting applications. Since 1947, the Commission has held hear-ings on delisting applications only if requested by an interested party,and only three such hearings have been held since that date, all ondelisting applications of the New York Stock Exchange.

Most of the delistings pursuant to applications by issuers during theperiod have been with respect to issues having little value or issuesremaining listed on other exchanges," Excluding a number of open-end investment company stocks, originally listed to qualify for saleunder blue sky laws and not suitable for exchange trading, issueshaving a current market value of around $500 million have beenremoved to over-the-counter trading by delistings pursuant to appli-cations by issuers during the period." The reporting requirementsof the Commission pursuant to section 13 of the Securities ExchangeAct seem not to have been much of a factor in the deliberations of theissuers with respect to delisting, since about $400 million of the market

.. The letters received were about equally divided tor and against delfstlng, and personalappearances at the hearings were few in number.

17 In none of these cases did the Issuer pursue Its dellstlng application further afterimposition of the voting requirement.

18 Dellstlngs on application of issuers during the period originally comprised about 117with no substanttaf trading value, DIS remaining listed on other exchanges, and 67 whichbecame good over. the-counter trading material. Since dellstlng, about halt of the 67 last-mentioned Issues have been exchanged into listed stocks of other companies or passed outof existence In other ways.

18 This amount Is less than 0.2 percent of the market value of stocks on the exchanges.

TWENTY-FIFTH ANNUAL REPORT 71

value is of issuers continuing to file similar reports under section 15(d)of the act.Delisting Proceedings under Section 19(a)

Under section 19(a) (2) the Commission may suspend for a periodnot exceeding 12 months, or withdraw, the registration of a securityon a national securities exchange if, in its opinion, such action is neces-sary or appropriate for the protection of investors and, after noticeand opportunity for hearing, the Commission finds that the issuer ofthe security has failed to comply with any provision of the act or therules and regulations thereunder. Shown below is the number of suchproceedings during the 1959 fiscal year.Proceedings pending at the beginning of the fiscal yearProceedings initiated during the fiscal year

Proceedings terminated during the fiscal year:By order withdrawing security from regtstratlonBy order suspending registration of security

85 13

51 6

Proceedings pending at the end of the fiscal year__________________ 7

The six proceedings which were terminated during the fiscal yearwere terminated during the early part of the year and were describedin the Commission's 24th Annual Report.20

Section 19 (a) (4) authorizes the Commission summarily to suspendtrading in any registered security on a national securities exchangefor a period not exceeding 10 days if, in its opinion, such action isnecessary or appropriate for the protection of investors and thepublic interest so requires. The Commission has used this powerinfrequently in the past. However, during the 1959 fiscal year theCommission found it necessary and appropriate in connection withthree pending proceedings under section 1'9(a) (2) to use its authoritysummarily to suspend trading in securities registered on a nationalsecurities exchange. Only one of these suspensions remained in effectat the end of the fiscal year.

UNUSTED TRADING PRIVILEGES ON EXCHANGES

The classical method by which stock exchanges evolved was for agroup of local brokers to commence trading in any available securities.For more than half a century after the historic 1792 meeting underthe buttonwood tree, any security could be called up for trading onthe New York Stock Exchange at the pleasure of any member. By1856, vote of a majority of members present came to be required forthe placing of a security on the list to be called, but upon payment of

., Pp. 64-71.

_ _

_ _

72 S1!JCtJ1UTIES AND 1!JXcmNG1!J COMMISSION

a 25-cent "fine" any member could have any other security tempo-rarily inserted. Unlisted trading on the New York Stock Exchangewas finally abolished in 1910, upon the recommendation of the NewYork Governor's Committee on Speculation in Securities and Com-modities (the "Hughes Committee") and because most of the stocksin the unlisted department were in any event becoming listed.

The leading regional stock exchanges began trading in much thesame way. For example, the rule on the Philadelphia Stock Ex-change as late as 1876 was that "members may call up the variousstocks of any chartered company, whether on the regular list or not."As their growth in trading volumes and prestige enabled them toimpose formal listing agreements and listing fees upon issuers, manyof these exchanges came to abolish unlisted trading entirely, as theNew York Stock Exchange has done, or to restrict it to issues listedupon other leading exchanges," A resolution adopted by the Bos-ton Stock Exchange in 1869 provided that "securities dealt in at theNew York or Philadelphia Stock Exchanges may be called once,after the regular list, without charge ... " The rule on the Philadel-phia Stock Exchange by 1932 was that no securities could be admit-ted to unlisted trading which were not listed on the New York StockExchange, New York Curb Exchange, as it was then styled, BostonStock Exchange, Pittsburgh Stock Exchange, or Chicago StockExchange.

The American Stock Exchange (known as the New York CurbExchange until 1953) is the principal center of exchange trading onan unlisted basis. In 1931-32 it had over 1,800 stock and 850 bondissues on its unlisted roster. As a result of the New York State At-torney General's examination of unlisted trading practices, the num-ber was substantially reduced during 1933-34 by removal of issuesinactively traded on the Exchange. The New York Produce Exchangeprovided facilities for security trading from 1928 to 1935, and hadabout 750stock and 150bond issues available for unlisted trading. TheNew York Real Estate Securities Exchange operated from 1929 to1941, and had about 100 stock and 200 bond issues available for trad-ing on an unlisted basis. A number of other- exchanges on whichunlisted trading occurred ceased to operate in the early days of the

%1 The listing process has had a long evolntlon. As early as 1847, the New York StockExchange called for transfer books to be located in New York City. Its Committee onStock List, created in 1869, promulgated rules protecting against forgery and over-issuanceof securities, and sought to obtain statements of condition and Iists of officers of issuers.The regular files of printed I1sting statements date from 1884. By 1900, the Exchange hadcommenced to can upon applicants for agreements to publish detailed statements andannual reports. The issuers' agreements with the Exchange became more comprehensiveover the years, providing for periodic earnings statements, independent auditing, promptnotifications of issuer actions a1I'ecting their security holders, etc. With the advent ofthe Commission, the requtrements of the listing agreements were supplemented by therequirements for registration along with I1sting.

TWENTY-FIFTH ANNUAL REPORT 73

Commission. The net number of securities admitted to unlistedtrading on the exchanges prior to 1934 is not available, but clearly raninto thousands.

Under section 12(f) of the Securities Exchange Act of 1934 22 theCommission may approve applications by national securities exchangesto admit securities to unlisted trading privileges without action on thepart of the issuers, if it finds such admissions are necessary or appro-priate in the public interest or for the protection of investors. Suchadmissions impose no duties on issuers beyond any they may alreadyhave under the act. Section 12(f) provides for three categories ofunlisted trading privileges. Clause (1) provides for continuation ofunlisted trading privileges existing on the exchanges prior to March1, 1934. Clause (2) provides for granting by the Commission ofapplications by exchanges for unlisted trading privileges in securitieslisted on other exchanges. Clause (3) provides for granting by theCommission of applications for unlisted trading privileges condi-tioned, among other things, upon the availability of information sub-stantially equivalent to that required to be filed by listed issuers.

Included under clause (1) of section 12(f) are securities which hadunlisted trading privileges on some exchanges prior to March 1, 1934,and (a) were also listed and registered on some other exchange orexchanges, or (b) were admitted only to unlisted exchange trading.Issuers of securities ingroup (a) are subject to the statutory reportingrequirements by reason of the listing and registration of their securi-ties. Issuers of securities in group (b) mayor may not be issuingpublic reports. Of the issues in group (b), only 246 stock and 20bond issues remained in that status as of June 30, 1959. The attri-tion has been due to many factors. Bond and preferred stockissues have been retired. Companies have merged or liquidated.Marginal exchanges opening around the 1929 peak of market activityceased operations thereafter. Many leading common stocks tradedon an unlisted basis have subsequently been listed or exchanged forlisted stocks of merging companies.

The stocks with only unlisted trading privileges on the exchangeshad an aggregate market value of $21.4 billion as of December 31,1958. Standard Oil (New Jersey) held 52.5 percent of this total instocks of Creole Petroleum Corporation, Humble Oil & Refining Com-pany, Imperial Oil Limited, and International Petroleum Company,Limited. An additional 1'7.5percent of the total was of 58 issues of

.. The original bills proposed abolition ot unlisted trading on stock exchanges. Theproposals were opposed by the American Stock Exchange and other smaller exchangesas presenting too sharp a transition. Congress directed the Commission to study theproblem and submit its recommendations, which was done In a "Report on Trading InUnllBted Securities upon Exchanges," dated January 3, 1936. The recommendationswere adopted and the present section 12(t) was enacted In May 1936.

74 SECURITIES AND EXCHANGE COMMISSION

55 issuers reporting as fully as though they were listed, by reason ofregistrations under the Securities Act, the Public Utility HoldingCompany Act, the Investment Company Act, or because the issuersin some cases had other securities listed on registered exchanges. Theresidue in public hands of such unlisted stocks accordingly amountedto only about $6.5 billion, and of this amount, about $4.2 billion wasof '1'0Canadian and other foreign stocks and American depositaryreceipts for foreign shares. The reported volume of trading on theexchanges in stock admitted to unlisted trading only, for the calendaryear 1958, was about 32.3 million shares or about 2.5 percent of thetotal share volume on all the exchanges. Over 90 percent of this 32.3million share volume was on the American Stock Exchange.

Unlisted trading privileges on exchanges in issues listed and reg-istered on other exchanges, granted under clause (1), are for the lifeof the issue, while those granted under clause (2) are only for theduration of the issue's listing and registration on another exchange."The number of unlisted trading privileges 24 granted under clause(1), in issues listed on other exchanges, were 991 in stocks and '1'5in bonds on December 31, 1935. Similar privileges were thereaftergranted under clause (2) for 1,410 stock issues and 8 bond issues.Mergers of exchanges, mergers of issuers, etc., have reduced the num-ber of such privileges, which as of June 30, 1959, comprised 1,492 instocks and 1 in bonds. The reported volume of trading on the ex-changes pursuant to these unlisted trading privileges for the calendaryear 1958was about 38.7million shares or about 3 percent of the totalshare volume on all the exchanges. About 15 percent of this 38.7million share volume was on the American Stock Exchange and 85percent was on the regional exchanges.

On June 30, 1959, unlisted trading privileges existed pursuant toclause (3) of section 12(f) in only 12 bond and 4 stock issues, and 2 ofthe stock issues have also become listed on other exchanges. Therehave been no applications under clause (3) since 1949.Applications for Unlisted Trading Privileges

Applications by exchanges for unlisted trading privileges in stockslisted on other exchanges, made pursuant to clause (2) of section 12(f)of the Securities Exchange Act, were granted by the Commissionduring the fiscal year ended June 30, 1959as follows:

.. Ordinarily, delisting occurs npon termination of the existence of an issue, and so theunlisted trading privileltCS therein, whether under clause (1) or clause (2), also end,Occasionally, however, an unlisted trading privilege on one exchange granted under clause(1) has continued after the issue has been dellsted from another exchange upon applica-tion by the issuer or by the exchange or because a listing was dropped upon merger ofexchanges. Corrently, 4 such unlisted trading privileges continue in stocks which wereformerly listed on other exchanges .

.. The number of trading privileges is greater than the number of Issues because theremay be trading privileges in an issue on more than one exchange.

TWENTY-FIFTH ANNUAL REPORT 75Stock exchange: Number 01 stocks~erican__________________________________________________________ 2

Boston____________________________________________________________ 20Cincinnati_________________________________________________________ 1I>etroit____________________________________________________________ 10Alidvvest___________________________________________________________ 1PacificCoast_______________________________________________________ 7Philadelphia- Baltimore_____________________________________________ 27Pittsburgh_________________________________________________________ 1

69Rule 12f-2 under section 12(f) of the Securities Exchange Act

provides that when a security admitted to unlisted trading on anexchange is changed in more than certain stipulated minor respects,the exchange may apply for Commission determination that the un-listed trading privileges may continue on the ground that the changedsecurity is substantially equivalent to the security theretofore ad-mitted to unlisted trading privileges. During the fiscal year theCommission granted applications by the American Stock Exchangefor continuance of unlisted trading under this rule in three stockissues and two bond issues.

BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

Rule 10b-2 under the Securities Exchange Act of 1934 in substanceprohibits any person participating or otherwise financially interestedin the primary or secondary distribution of a security from payingany other person for soliciting a third person to buy any security ofthe same issuer on a national securities exchange. This rule is anantimanipulative rule adopted under section 10(b) of the act whichmakes it unlawful for any person to use any manipulative or decep-tive device or contrivance in contravention of Commission rules pre-scribed in the public interest or for the protection of investors. Para-graph (d) of rule 10b---2exempts transactions where compensation ispaid pursuant to the terms of a plan, filed by a national securitiesexchange and declared effective by the Commission, authorizing thepayment of such compensation in connection with the distribution.The Commission in its declaration may impose such terms and condi-tions upon such plan as it deems necessary or appropriate in the publicinterest or for the protection of investors.

At the present time two types of plans are in effect to permit ablock of securities to be distributed through the facilities of a nationalsecurities exchange when it has been determined by the exchange thatthe regular market on the floor of the exchange cannot absorb theparticular block within a reasonable time and at a reasonable priceor prices. These plans have been designated the "Special OfferingPlan," essentially a fixed price offering based on the market price,

76 SECURITIES AND EXCHANGE COMMISSION

and the "Exchange Distribution Plan," which is a distribution "atthe market." Both plans contemplate that orders will be solicited offthe floor but executed on the floor. Each plan contains certain anti-manipulative controls and requires specified disclosures concerning thedistribution to be made to prospective purchasers.

In addition to these two methods of distributing large blocks ofsecurities on national securities exchanges, blocks of listed securitiesmay be distributed to the public by a "Secondary Distribution" onthe over-the-counter market, after the close of exchange trading. Theexchanges generally require members to obtain the approval of theexchange before participating in such secondary distributions.

The following table shows the number and volume of special offer-ings and exchange distributions reported by the exchanges havingsuch plans in effect, as well as similar figures for secondary distribu-tions which exchanges have approved for member participation andreported to the Commission:

Total sales-12 months ended December 31, 195826

Shares In Value (thou-Number offer Shares sold sands of

dollars)

Special offerings. ________________________________ 5 93,445 88,152 3,286Exchange distributions __________________________ 38 620,806 619,876 29,454Secondary distrlbutrons __________________________ 122 9,321,712 9,508,505 361,886

6 months ended June 30, 1959 It

Special offerings __________________________________ III 28'~1 28,~ I 1,650Exchange dlstributlons __________________________ 334, 006 296, II9 14, 683Secondary distnbutlons __________________________ 89 10,214,617 10,503,726 455,764

MANIPULATION AND STABll..IZATIONManipulation

The Exchange Act describes and prohibits certain forms of mauip-ulative activity in any security registered on a national securitiesexchange. The prohibited activities include wash sales and matchedorders effected for the purpose of creating a false or misleadingappearance of trading activity in, or with respect to the market for,any such security; a series of transactions in which the price of suchsecurity is raised or depressed, or in which actual or apparent activetrading is created for the purpose of inducing purchases or sales ofsuch security by others; circulation by a broker, dealer, seller, orbuyer, or by a person who receives consideration from a broker, dealer,seller or buyer, of information concerning market operations con-ducted for a rise or a decline in the price of such security; and themaking of any false and misleading statement of material informationby a broker, dealer, seller, or buyer regarding such security for thepurpose of inducing purchases or sales. The act also empowers the

IS Details of these distributions appear in the Commtsslon's monthly ststlstl<'lll bulletin. For data forprior years 500 appendix table.

TWENTY-FIFTH ANNUAL REPORT 77

Commission to adopt rules and regulations to define and prohibit theuse of these and other forms of manipulative activity in any securityregistered on an exchange or traded over the counter.

The Commission's market surveillance staff in its Division of Trad-ing and Exchanges in Washington and in its New York RegionalOffice and other field officesstudies the tickertape quotations of secu-rities listed on the New York Stock Exchange and on the .AmericanStock Exchange, the sales and quotation sheets of the various regionalexchanges, and the bid and asked prices published by the NationalDaily Quotation Service for about 6,000 unlisted securities for anyunusual or unexplained price variations or market activity. Thefinancial news ticker, leading newspapers, and various financial pub-lications and statistical services are also closely followed.

When unusual or unexplained market activity in a security isobserved, all known information regarding the security is examinedand a decision made as to the necessity for an investigation. Mostinvestigations are not made public so that no unfair reflection willbe cast on any persons or securities and the trading markets will notbe upset. These investigations, which are conducted by the Commis-sion's regional offices, take two forms. A preliminary investigationor "quiz" is designed to discover rapidly evidence of unlawful activity.If no violations are found, the preliminary investigation is closed. Ifit appears that more intensive investigation is necessary, a forma]order of investigation, which carries with it the right to issue sub-poenas and to take testimony under oath, is issued by the Commission.If violations by a broker-dealer are discovered, the Commission mayinstitute administrative proceedings to determine whether or not torevoke his registration or to suspend or expel him from membershipin the National Association of Securities Dealers, Inc., or from a.national securities exchange. The Commission may also seek an in-junction against any person violating the act and it may refer infor-mation obtained in its investigation to the Department of Justicerecommending that persons violating the act be criminally prosecuted.In some cases, where State action seems likely to bring quick resultsin preventing fraud or where Federal jurisdiction may be doubtful,the information obtained may be referred to State agencies for Stateinjunction or criminal prosecution.

The Commission is much concerned with indications of increasedmanipulative activity in present securities markets. Accordingly, theCommission has placed greater emphasis in its enforcement workupon the detection and prevention of manipulation and a substantialnumber of investigations are now in progress in this area.26

Active securities markets are particularly susceptible to manipula-tion because of the ease with which public interest can be generated.

Securities ExchaDge Act Release No. 11927.><,..•

78 SECURITIES AND EXCHANGE COMMISSION

Devious schemes may be employed to take advantage of this publicinterest. These include schemes to increase the quoted over-the-counter prices for relatively obscure issues being distributed withoutregistration in asserted reliance upon some exemption, or the creationof fictitious markets for such issues. Such schemes are not uncommonin connection with distributions effected by "boiler rooms." Theseactivities when conducted with ingenuity through numerous inter-mediaries are difficult to detect. Persons engaged in, or proposingdistribution of a security not outstanding in the hands of the publicmay place orders for the purchase 'and sale of small amounts of asecurity with numerous brokers and dealers, or arrange to have othersdo this, with the result that such brokers and dealers will publishquotations for the security at prices specified in the orders, thuscreating the appearance of an active over-the-counter market for thesecurity, when in fact no such market exists except as generated bythe distributors. When the distribution is completed, the orders arewithdrawn and the "market" disappears.

The investigation and prosecution of a manipulation case requirescareful and painstaking work usually over a period of many months.Investors must be identified and interviewed, books and records ofbrokers, dealers and others must be examined and analyzed, and theinformation thus obtained then has to be developed in a form whichwould permit its introduction in evidence in legal proceedings.

The following table shows the number of quizzes and formal in-vestigations pending at the beginning of fiscal 1959, the numberinitiated in fiscal 1959, the number closed or completed during thesame period, and the number pending at the end of the fiscal year:

Trading investigations

Quizzes Formal in-vestfgattons

Pending June 30, 1958•••••.• 46 8InItiated during fiscal year ._. 89Total .• . . _. 135 8

gl::~e~ :;:'~~~=~~~~~~=:::=~::::::~:~::=:::::::::::::::::::::::553 3

Total.. _. . __________________________•. _.________ ._ 58 3

Pending at end of fiscal year . •. _. . 77 11

When securities are to be offered to the public, their markets arewatched very closely to make sure that the price is not unlawfullyraised prior to or during the distribution. One thousand and fifty-fiveregistered offerings having a value of $15,657 million and 854 offer-ings exempt under section 3(b) of the Securities Act, having a valueof about $170 million were so observed during the fiscal year. Twohundred and seventy-four other offerings, SUCh.as secondary distri-

__________•• _________• _________• __• ________• ________ __________•______________________•_______ ______••__

_____•________ ________•____•______• ________•______•• ____________

__• _•• ___________ • •______

__•__•________________•__________•____•_ ___ ____

TWENTY-FIFI'H ANNUAL REPORT 79

butions and distributions of securities under special plans filed by theexchanges, having a total value of $715 million, were also kept undersurveillance.Stabilization

When, in 1934, the provisions of the Securities Exchange Act werebeing drafted, Congress concluded that at times it would be necessaryto stabilize offerings of securities in order to raise funds for industryand to protect existing investors while doing so. But rather than setstabilizing standards as a matter of law, Congress delegated to theCommission the authority to adopt rules to govern this little-under-stood function.

When the Commission was organized, one of its first tasks was tostudy the subject of stabilizing, decide what was improper and con-sider the adoption of rules. The principal difficulty has been thatstabilizing is a form of market manipulation. The problem was toretain the benefits while removing those antisocial practices whichmight cause loss to investors. The Commission proceeded slowly, asmany new facets of the problem were revealed, and it was difficult todevise a simple formula which had the particularity required in arule binding on all who dealt in securities, without literally stran-gling the business.

Until it gained more expertise in the field, the Commission encour-aged issuers, underwriters and their counsel to consult with it and thestaff concerning problems which might arise in this area. Each suchproblem was judged on its own merits in the light of whether or notthe interests of investors might be adversely affected. As the Com-mission gained experience, general principles were laid down. It washeld, among other things, that stabilizing was not improper if it didno more than prevent or retard a price decline during an offering; thatstabilizing purchases should be confined to the fewest transactionsnecessary to accomplish such a purpose; that stabilizing levels mustbe based on an existing independent market and not some level be-lieved desirable by the person stabilizing; and that it was improperfor a stabilizer to follow a rise in price too closely. Releases were is-sued from time to time to publicize the Commission's viewpoint withregard to stabilizing. In addition, the Commission expressed itsviewpoint in its decisions and opinions.

From time to time it was suggested that what had now become arather extensive list of settled practices be codified in specific rules,but in various conferences, the industry claimed that any code mustnecessarily be too rigid to allow for changing conditions.

However, on December 30, 1952, the Committee on Interstate andForeign Commerce of the House of Representatives recommendedthat the "Commission should earnestly and expeditiously grapplewith the problem of stabilization with the view of either the early

80 SECURITIES EXCHANGE COMMISSION

promulgation of rules publicly covering these operations, or of recom-mending to the Congress such changes in legislation as its experienceand study show now to be desirable." The Commission thereforeundertook to codify the stabilizing practices which had been developedover the years.

The Commission requested and obtained the assistance of the securi-ties industry in formulating its stabilizing rules. .An ad hoc com-mittee of the public was formed. This committee conferred with andsubmitted proposals to the staff, which were considered by the Com-mission together with the recommendations of the staff and views ob-tained in a public hearing held prior to the adoption of the rules.

The rules as finally adopted are extremely technical. They have,however, served well their purpose of facilitating distributions andpreventing unlawful manipulations. Rule 10b-6 restricts the tradingactivities of those who issue or participate in the distribution of securi-ties. Rule 10b-7 governs the times, methods and prices at whichstabilizing transactions are permissible. Rule 10b-8 deals with thepeculiar problems arising in an offering of securities through rights.The Commission is continuously reexamining the effect of these rulesand if it appears necessary, it will amend them to conform to anydeveloping practice of the industry which appears to be in the publicinterest.

During 1959 stabilizing was effected in connection with stock offer-ings aggregating 32,097,212 shares having an aggregate public of-fering price of $770,503,662 and bond offerings having a total offeringprice of $129,038,300. In these offerings, stabilizing transactions re-sulted in the purchase of 710,015 shares of stock at a cost of $18,146,077and bonds at a cost of $2,938,340, and 4,461 stabilizing reports show-ing purchases and sales of securities effected by persons conductingthe distribution were received and examined during the fiscal year.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Section 16 of the act is designed to prevent the unfair use of confi-dential information by directors, officers and principal stockholders bygiving publicity to their security holdings and transactions and byremoving the profit incentive in short term trading by them in equitysecurities of their company. Such persons by virtue of their positionmay have knowledge of the company's condition and prospects whichis unavailable to the general public and may be able to use such infor-mation to their personal advantage in transactions in the company'ssecurities. 'Provisions similar to those contained in section 16 of theact are also contained in section 17 of the Public Utility HoldingCompany Act of 1935 and section 30 of the Investment Company Actof 1940.

~

TWENTY-FIFTH ANNUAL REPORT 81

Ownership ReportsSection 16(a) of the Securities Exchange Act requires every person

who is a direct or indirect beneficial owner of more than 10 percent ofany class of equity securities (other than exempted securities) whichis registered on a national securities exchange, or who is a director orofficer of the issuer of such securities, to file reports with the Commis-sion and the exchange disclosing his ownership of the issuer's equitysecurities. This information must be kept current by filing subsequentreports for any month in which a change in his ownership occurs.Similar reports are required by section 17 (a) of the Public UtilityHolding Company Act of officers and directors of public utility hold-ing companies and by section 30(f) of the Investment Company Actof officers, directors, principal security holders, members of advisoryboards and investment advisers or affiliated persons of investmentadvisers of registered closed-end investment companies.

All ownership reports are available for public inspection as soon asthey are filed at the Commission's office in Washington and reportsfiled pursuant to section 16 (a) of the Securities Exchange Act mayalso be inspected at the exchanges where copies of such reports arefiled. In addition, for the purpose of making the reported informa-tion available to interested persons who may not be able to inspectthe reports in person, the Commission summarizes and publishes suchinformation in a monthly "Official Summary of Security Transactionsand Holdings," which is distributed by the Government PrintingOffice on a subscription basis. Increasing interest in this publicationis evidenced by the increase in the total circulation from a rate of about6,000 at the end of the 1958 fiscal year to more than 8,000 at the end ofthe 1959 fiscal year.

During the fiscal year, 39,275 ownership reports were filed. Thisrepresents a considerable increase over the 33,126 reports filed duringthe 1958 fiscal year. The following table shows details concerningreports filed during the fiscal year ended June 30, 1959.

Number of reports filed during fiscal year 1959

Securities Exchange Act of 1934 : erForm 4 33,848Form 5_________________________________________________________ 660Form 6 3,550

Total 38,058

...Form 4 Is used to report changes In ownership; Form II to report ownership at thetime an equity security of an Insurer Is tlrst registered on a national securities exchange;and Form 6 to report ownership of persons who subsequently become officers, directors orprincipal stockholders of the Issuer.

82 SECURITIES AND EXCHANGE COMMISSION

Public UtilityHolding Company Act of 1935: 2.Form U-17-1 --_ 23Form U-17-2 --_ 343

Total_________________________________________________________ 366

Investment Company Act of 1940 :211Form N-30F-1__________________________________________________ 488Form N-30F-2 -- 363

Total_________________________________________________________ 851Grand total- 39,275

Recovery of Short-Swing Trading Profits by IssuerIn order to prevent insiders from making unfair use of information

which may have been obtained by reason of their relationship with acompany, section 16(b) of the Securities Exchange Act, section 17(b)of the Public Utility Holding Company Act, and section 30(f) of theInvestment Company Act provide for the recovery by or on behalfof the issuer of any profit realized by insiders from certain purchasesand sales, or sales and purchases, of securities of the company withinany period of less than 6 months. The Commission has certain ex-emptive powers with respect to transactions not comprehended withinthe purpose of these provisions, but is not charged with the enforce-ment of the civil remedies created thereby.

REGULATION OF PROXIES

Scope of Proxy Regulation

Under section 14(a) of the Securities Exchange Act, 12(e) of thePublic Utility Holding Company Act of 1935, and 20(a) of the In-vestment Company Act of 1940the Commission has adopted regulation14 requiring the disclosure in a proxy statement of pertinent informa-tion in connection with the solicitation of proxies, consents andauthorizations in respect of securities of companies subject to thosestatutes. The regulation also provides means whereby any securityholders so desiring may communicate with other security holderswhen management is soliciting proxies, either by distributing theirown proxy statements or by including their proposals in the proxystatements sent out by management.

Copies of proposed proxy material must be filed with the Commis-sion in preliminary form prior to the date of the proposed solicitation.Where preliminary material fails to meet the prescribed disclosurestandards, the management or other group responsible for its prepa-

28 Form U-17-1 is used for initial reports and Form U-17-2 for reports of changes ofownership.

28 Form N-30F-l is used for initial reports and Form N-30F-2 for reports of changesof ownership.

TWENTY-FIFTH ANNUAL REPORT 83

ration is notified informally and given an opportunity to avoidsuch defects in the preparation of the proxy material in the definitiveform in which it is furnished to stockholders.Statistics Relating to Proxy Statements

During the 1959 fiscal year 1,975 proxy statements in definitive formwere filed under the Commission's regulation 14 for the solicitation ofproxies of security holders; 1,959 of these were filed by managementand 16 by nonmanagement groups or individual stockholders. These1,975 solicitations related to 1,814 companies, some 150 of which hadmore than one solicitation during the year, generally for a specialmeeting not involving the election of directors.

There were 1,790 solicitations of proxies for the election of directors,152 for special meetings not involving the election of directors and 33for assents and authorizations for actions not involving a meeting ofsecurity holders or the election of directors.

In addition to the election of directors, the decisions of securityholders were sought through the solicitation in the 1959 fiscal yearof their proxies, consents and authorizations with respect to thefollowing types of matters:Mergers, consolidations, acquisitions of businesses, purchases and sales of

property, and dissolutions of companies 103Authorizations of new or additional securities, modifications of existing

securities, and recapitalization plans (other than mergers, consolida-tions, etc.) 270

Employee pension and retirement plans (including amendments to exist-ing plans)___________________________________________________________ 71

Bonus, profit-sharing plans and deferred compensation arrangements (in-cluding amendments to existing plans and arrangements) 21

Stock option plans (including amendment to existing plans) 178Stockholder approval of the selection of management of independent audi-

tors_________________________________________________________________ 608Miscellaneous amendments to charter and by-laws, and miscellaneous other

matters (excluding those Involved in the preceding matters) 410

Stockholder ProposalsDuring the 1959 fiscal year, 48 stockholders submitted a total of 156

proposals which were included in the 99 proxy statements of 99 com-panies under rule 14a-8 of regulation 14.

Typical of such stockholder proposals submitted to a vote of securityholders were resolutions relating to amendments to charters or by-lawsto provide for cumulative voting for the election of directors, limi-tations on the granting of stock options and their exercise by keyemployees and management groups, the sending of a post-meetingreport to all stockholders, changing the place of the annual meetingof stockholders and the approval by stockholders of management'sselection of independent auditors.

The management of 20 companies omitted from their proxy state-ments under the Commission's rule 14a-8 It total of 65 additional pro-

5291123-59---9

84 SECURITIES ANV- EXCHANGE COMMISSION

posals submitted by 25 individual stockholders. The principal reasonsfor such omissions and the numbers of times each such reason wasinvolved (counting only one reason for omission for each proposaleven though it may have been omitted under more than one provi-sion of rule 14a-&) were as follows:

(a) 1&proposals related to the ordinary conduct of the company'sbusiness;

(b) 17proposals involved the election of directors';(c) 13 proposals concerned a personal grievance against the com-

pany;(d) 11 proposals were not a proper subject matter under State law;(e) 5 proposals were resubmitted after not having received suffi-

cient affirmative votes at a previous meeting; and(f) 1proposal was not submitted timely.

Ratio of Soliciting to Non-Soliciting Companies

Of the 2,236 issuers that had securities listed and registered onnational securities exchanges as of June 30, 1959, 1,985 had votingsecurities so listed and registered. Of these 1,985 issuers, 1,544 or78.7 percent, solicited proxies under the Commission's proxy rulesduring the 1959 fiscal year for the election of directors.Proxy Contests

During the 1959 fiscal year, 19 companies were involved in proxycontests when nonmanagement persons filed detailed statements asparticipants, or proposed participants, under the requirements ofrule 14a-11 when proxies are to be solicited from stockholders for theelection of directors. A total of 259 persons, including both manage-ment and nonmanagement, filed such statements in 11 cases for controlof the board of directors and in 8 cases for representation on theboard.

Management retained control in 8 of the 11 contests, oppositionnominees won in 2, and 1 was settled by negotiation. Of the 8 caseswhere representation on the board was involved, management retainedall places on the board in 5 and in the other 3 cases nonmanagementpersons were elected to the board.

REGULATION OF BROKER-DEALERS AND OVER-THE-COUNTERMARKETS

Registration

The Securities Exchange Act requires under section 15(a) thatbrokers and dealers, with certain exceptions, using the mails or in-strumentalities of interstate commerce to engage in securities trans-actions on the over-the-counter market must register with the Com-mission. Brokers and dealers whose business is exclusively intrastateor exclusively in exempt securities are not required to register.

TWENTY-FIFTH ANNUAL REPORT 85

'The chart below sets forth statistics regarding the registration ofbrokers and dealers and applications for such registration during thefiscal year 1959.Effective registrations at close of preceding fiscal year 4,752Applications pending at close of preceding fiscal year___________________ 60Applications filed during fiscal year___________________________________ 944

Total 5, 756

Applications denied__________________________________________________ 4Applications withdra wn_____________ __ 21Applications cancelled_______________________ 1Registrations withdra wn_________________ _ _ 632Registrations caneeljed.i.L; __ 59Registra tions revoked_________________ ______ 41Registrations suspended________________________________ 5Registrations effective at end of year 4,907Applications pending at end of yeaL___________________________________ 87

Less: 5,757Suspended registrations revoked during year_______________________ *1

Total 5,756

*23 registrations were in suspension at close of the fiscal year.

Administrative Proceedings

Section 15(b) of the Securities Exchange Act provides that theCommission shall revoke a firm's broker-dealer registration or denybroker-dealer registration to an applicant if, after appropriate noticeand opportunity for hearing, it finds such action is in the public in-terest and that the registrant or applicant or any partner, offic-er,di-rector or other person directly or indirectly controlling or controlledby such broker-dealer or applicant is subject to one or more of the dis-qualifications set forth in the act. In addition, pending final deter-mination whether any registration shall be revoked, the Commissionshall by order suspend such registration if after appropriat-e noticeand opportunity for hearing, suspension shall appear to the Commis-sion to be necessary or appropriate in the public interest or for theprotection of investors.

The disqualifications referred to above, are briefly:(1) conviction in the past 10 years of a felony or misdemeanor

involving the purchase or sale of securities or any conductarising out of business as a broker-dealer;

(2) willful false or misleading statements in the application ordocuments supplementing the application;

(3) injunction by a court of competent jurisdiction from engag-ing in any conduct or practice in connection with the pur-chase or sale of securities; and

~----------------------------

_

86 SECURITIES AND EXCHANGE COMMISSION

(4) willful violation of any of the provisions of the SecuritiesAct of 1933 or the Securities Exchange Act or any of theCommission's rules and regulations thereunder.

Under section 15A of the Securities Exchange Act brokers anddealers may be suspended or expelled by the Commission from mem-bership in a national securities association, and under section 19(a) (3)from national securities exchanges, for violations of the federal secu-rities laws or the regulations thereunder. Registration may not bedenied to an applicant absent evidence of misconduct specified in theact. Other factors, such as bad reputation or character, lack ofexperience in the securities business or even conviction of the appli-cant of a felony unrelated to securities transactions, do not constitutestatutory grounds for denial of registration as a broker-dealer.

Section 15A(b) (4) of the Securities Exchange Act of 1934providesthat in the absence of the Commission's approval or direction, nobroker or dealer may be admitted to or continued in membership ina national securities association if the broker or dealer or any partner,officer, director or controlling or controlled person of such broker ordealer was a cause of any order of revocation or suspension or expul-sion from membership which is in effect. An individual named assuch a cause often is subject to one or more statutory disqualificationsunder section 15(b) and his employment by any other broker-dealerthus could also become a basis for broker-dealer revocation proceed-ings against the new employer.

The following statistics deal, among other things, with adminis-trative proceedings instituted to deny and revoke registration andto suspend and expel from membership in an exchange or a nationalsecurities association:Proceedings pending at start of fiscal year to :

Revoke registration________________________________________________ 20Revoke registration and suspend or expel from NASD or exchanges.Lc., 25Deny registration to applicants______________________________________ 5

Total proceedings pending________________________________________ 50

Proceedings instituted during fiscal year to:Revoke registration________________________________________________ 60Revoke registration and suspend or expel from NASD or exehanges.Lc., 43Deny registration to applicants_____________________________________ 8

Total proceedings instituted______________________________________ 111

Total proceedings current during fiscal year______________________ 161

TWENTY-FIFl'H ANNUAL REPORT 87Disposition of Proceedings

Proceedings to revoke registration:Dismissed on withdrawal of registration____________________________ 5Registration revoked_______________________________________________ 21

Total____________________________________________________________ 26

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

Registration revokedL______________________________________________ 6Registration revoked and firm expelled from NASD___________________ 14Dismissed on withdrawal of registration____________________________ 3Dismissed-registration and membership permitted to continue in

effect____________________________________________________________ 5Suspended for a period of time from NASD________________________ 1

Total____________________________________________________________ 29

Proceedings to deny registration to applicant:Registration denied________________________________________________ 4Dismissed on withdrawal of application_____________________________ 1Dismissed-application permitted to become effectlve_________________ 2

Total____________________________________________________________ 7

Total proceedings disposed of_____________________________________ 62

Proceedings pending at end of fiscal year to:Revoke registration________________________________________________ 54Revoke registration and suspend or expel from NASD or exehangea.c.,., 89Deny registration to applicants_____________________________________ 6

Total proceedings pending at end of fiscal year______________________ 99

Total proceedings accounted for 161

Administrative proceedings in which action was taken during the yearincluded the following:

SU8pension Proceeding8

During the past year the Commission suspended the registration ofseveral broker-dealers pending final determination as to whether theirregistrations should be revoked. Since suspension has the effect ofstopping all securities business by the registrant, this sanction is im-posed only in the most serious type of cases where the Commissionfinds, on the evidence adduced at a hearing, that such action is re-quired, in the public interest and for the protection of investors.

A. G. Bellin Securities Corp.-The registrant was found, in connec-tion with the sale of unregistered stock in General Oils & Industries, tohave made false and misleading statements regarding, among other

88 SECURITIES AND EXCHANGE COMMISSION

things, prospects of profits, payment of dividends, increase in marketprice, listing on exchange, merger, interest of officials of prominentoil companies in General, and the issuers' ownership of and productionfrom oil and gas properties. In addition, registrant was preliminarilyenjoined from selling stock of General.

The Commission, on the basis of these findings, held that a sufficientshowing had been made to require suspension of registration in thepublic interest and for the protection of investors. In determiningthis the Commission stated, " ... we are required ... to suspendregistration where the record before us on the suspension issue con-tains a sufficient showing of misconduct to indicate the likelihood thatafter hearings on the revocation issue registrant will be found to havecommitted willful violations or any of the other grounds prescribedwith respect to the revocation in section 15(b) will be established, andthat revocation will be required in the public interest.": "The Com-mission also stated that under the suspension. provision, "... we areonly directed to inquire into the question of whether the public interestor the protection of investors warrants suspension, and there is no re-quirement that suspension be based upon findings of willful violationor the other grounds specified with respect to revocation." 30 At theclose of the fiscal year revocation proceedings were pending againstregistrant.

Herman Bud Rothbard, doing business as Jonathan & Com-pany.-Rothbard admitted that he filed a false and misleading finan-cial statement with his application for registration, violated the netcapital rule, failed to amend his registration "to disclose transfer ofcontrol of his business, failed to file a required financial report, andmaintained materially deficient books and records and he consentedto suspension of his broker-dealer registration. The Commission con-cluded that suspension was appropriate in the public interest and forthe protection of investors." In addition, on June 30,1959, the Com-mission revoked Rothbard's registration. This is discussed in moredetail later in this report.

Jean R. Veditz Co., Inc.-Registrant consented to suspension of itsbroker-dealer registration. The Commission found suspension to beappropriate in the public interest and for the protection of investors.The order instituting proceedings charged registrant, Jean R. Veditz,its president and sole stockholder, and Ben Goldstein, its sales man-ager, with violation of the antifraud provisions of the federal securi-ties laws in the offer and sale of stock of Universal Drilling Company.Registrant and Veditz were stated in the order to have been enjoinedby the Supreme Court of New York, County of New York, from en-!l'aging in certain activities in connection with the purchase and sale

.. Sl\curltlC\l Exchange Act Release No. 5966 (May 18.1959).31 Securities Exchange Act Release No, 5797 (Oct. 11, 1958).

TWENTY-FIFTH ANNUAL REPORT 89of securities. Revocation proceedings against registrant were pend-ing at the end of the fiscal year."

Philip Newman Associates, Inc.-In the latter part of 1958 regis-trant's books showed sales through the use of the mails of 124,520unregistered shares of the common stock of Monarch Asbestos Co.,Limited. Evidence at the suspension hearing established that, toinduce purchase of this stock, registrant made numerous false repre-sentations, including among other things, that Monarch was an oper-ating company with highly profitable production, and that Monarch'sasbestos mine was adjacent to that of Johns-Manville Corporation andcontained asbestos superior to that produced by the latter. Itwas alsofalsely represented that Johns-Manville Corporation had determinedto acquire or to merge with Monarch and that the market price ofMonarch stock had risen and would increase from $5 to $16 per sharein from 1 to 6 months. The Commission held that there had been asufficient showing of willful violations by registrant, including acourse of conduct replete with fraud, to make it necessary and appro-priate in the public interest and for the protection of investors thatregistrant's registration be suspended until final determination on thequestion of revocation. Proceedings on the question of revocation ofregistrant's broker-dealer registration were pending at the end of thefiscal year. 33

Alexander Dvoretsky, doing business as Dennis & Company.-The Commission found on the basis of stipulations entered into byDvoretsky that he employed individuals who were permanently en-joined from engaging in certain securities practices and that he will-fully violated provisions of the Securities Exchange Act and rulesthereunder in that his application for registration denied existenceof such injunctions and that he failed to file any correcting amend-ment to the application to state their existence. He was also foundto have willfully violated the Commission's net capital rule and booksand records requirements. These violations, the consent and therecord so far made, were held to be a sufficient showing to require sus-pension of registration in the public interest and for the protection ofinvestors. At the end of the fiscal year proceedings to revokeDvoretsky's registration were still pending."Denial Proceedings

Kelly Rubenstein, Inc.-William Rubenstein, president and a di-rector of applicant, was found by the Commission to have willfullymade. a false and misleading statement in the broker-dealer applica-tion of Washington Securities Corporation. Both Rubenstein andWashington were found to have willfully violated section 15(b) of theSecurities Exchange Act of 1934 and rule 15b-2 thereunder in not

.. Securities Exchange Act Release :No.5843 (Dec. 23, 1958)

.. Securltles Exchange Act Release No 5856 (Jan. 15, 19(9) .

.. Securities Exchange Act Release No. 59052 (lIIay 12. 1959).

•

90 SECURITIES AND EXCHANGE COMMISSION

promptly filing an amendment correcting the inaccuracy of this in-formation. In addition, the Commission found that Rubenstein, whilepresident, treasurer and a director of Keith Richard Securities Corp.caused that firm to willfully violate Commission rules concerningkeeping of books and records. Under all the circumstances, the Com-mission found it in the public interest to deny the application ofapplicant and found Rubenstein to be a cause of the denial. How-ever, the order stated that the above findings did not necessarily meanthat Rubenstein was permanently barred from registration or fromemployment by a registered broker-dealer in a supervised capacityupon a proper showing."

Alan Russell Securities, Inc.-The Commission denied broker-dealer registration to applicant and named Nathan L. Batterman andamos Maiers as causes of the denial. The action was based on a per-manent injunction issued by the United States District Court for theSouthern District of New York against applicant, Batterman andMaiers. The decree, entered by consent, enjoined applicant, Batter-man and Maiers from making untrue and misleading statements inconnection with the sale of International Ceramic Mining Limitedstock in violation of the antifraud provisions of the Securities Act.36

Leonard Burton Corporation.-Broker-dealer registration wasdenied applicant and Leonard Burton was named the cause of denialbased on willful violations of the antifraud provisions of the Securi-ties Act of 1933and the Securities Exchange Act.

The Commission found that Leonard Burton while employed as asecurities salesman by Steven Randall & Co., Inc. made misleadingrepresentations in connection with the offer or sale of Texas UnionOil Company stock. Burton represented that there would be no com-missions on the sale of the stock and failed to state that Steven Ran-dall & Co., Inc. was selling the stock as principal. Burton alsopresented an optimistic picture of large and quick increases in themarket value of the stock based on actual production without ap-prising investors of the speculative and contingent factors known byhim. The statement that a stock is likely to go up was deemed toimply, " ... that there is an adequate foundation for such predictionand there are no known facts which make such a prediction dangerousor unreliable." The Commission rejected registrant's allegation thatthe practicalities of merchandising the stock excused the registrantfrom the requirements of disclosure necessary to render the statementsmade not misleading."

.. Securities Exchange Act Release No, 5770 (Sept. 8. 19(8)

.. Securltles Exchange Act Release No. 5779 (Sept. 25. 19(8).Securities Exchange Act Release No 5978 (June 4. 19(9).

•

'"

TWENTY-FIFTH ANNUAL REPORT 91

Washington Securities Corporation.- The Commission deniedbroker-dealer registration to applicant and named Joseph Freundelas a cause of denial. Freundel, president, director and sole stock-holder of applicant, was permanently enjoined, with others, on August19, 1958, by the United States District Court for the District of NewJersey from making untrue or misleading statements in connectionwith the sale of common stock of Saskalon Uranium and Oils Limited.On the basis of the injunction against Freundel and his control ofapplicant, it was found in the public interest to deny applicant'sregistration. 88

Revocation ProceedingsPilgrim Securities, Inc.-This broker-dealer registration was re-

voked by the Commission on findings of fraud in the sale of securities,sales of unregistered securities, making of false records, failure tokeep required records, failure to file promptly an amendment to theregistration application, filing of an amendment containing a falsestatement and failure to file a report of financial condition for 1957as required.

The Commission found that registrant and Joseph Leo Gruber, Jr.spresident of registrant, sold over 23,000 unregistered shares of EagleOil and Supply Company to at least 32 investors. Inconnection withsome of these sales Gruber and registrant made false representationsregarding a stock split, dividends, sales quotas and expected profits.The Commission found Gruber to be a cause of the revocation."

John D. Ferris, doing business as Ferris & Co.-The Commissionfound that Ferris engaged in the securities business without disclos-ing that he was insolvent, issued bad checks, failed to pay for securi-ties sold and delivered, and failed to meet his obligations arising fromthe purchase and sale of securities. In addition, registrant failed tofurnish a customer a confirmation of sale, failed to comply with thenet capital rule, failed to maintain accurate and current books andrecords and failed to file a report of financial condition for 1956. Ac-cordingly, the broker-dealer reg-istration of Ferris was revoked. TheCommission held, "The conduct of a securities business involves im-plied representations of solvency and a readiness and ability to meetall attendant obligations as they arise and to consumate transactionsin the usual manner in accordance with trade custom." By failure todisclose his insolvency and repeated failure to meet his responsibilitiesin connection with his securities transactions, Ferris was heIc1to haveengaged in a course of conduct which operated as a fraud and deceit

II Securities Exchange Act Release No. 5899 (Mar. 16. 1959) ... Securities Exchange Act Release No. 5958 (May 15. 19511).

92 SECURITIES AND EXCHANGE COMMISSION

upon persons with whom he conducted business in violation of theantifraud provisions of the Securities Act of 1933 and the SecuritiesExchange Act.40

Sills and Company.-In this case also revocation was in part basedon e:ffecting securities transactions without disclosing insolvency. Inaddition, the Commission found that registrant converted to its ownuse customer's funds in connection with the purchases and sales ofsecurities, filed a false financial report, failed to comply with the netcapital rule, failed to keep accurate books and records, and failed tocorrect information in its registration application. Itwas determinedthat registrant and Robert Bernard Sills, president and a director ofregistrant, converted to their own use funds of 19 customers, totaling$28,240, which had been obtained upon the false representation thatregistrant would use funds for the purpose of purchasing securitiesfor the customers. The Commission named Sills as a cause of theorder of revocation."

William Rex Cromwell, doing business as Cromwell & Co.-Revocation of Cromwell's registration was based in part on his retain-ing funds received from the sale of securities for customers, amount-ing to $15,700, for periods of from 2 to 5 years. Also, Cromwell mis-appropriated funds received from customers for the purchase ofsecurities amounting to almost $9,000 and failed to return the moneyor deliver the securities for periods of about llh to 4 years. In addi-tion, Cromwell was found to have failed to comply with the net capital

.. Securities Exchange Act Release No. 5947 (May 8, 19,59)

.. Securities Exchange Act Release No. 5919 (Mar. 27, 1959). On February 5, 1959,Sills and Arthur P. Green, sales manager for S111sand Company, were indicted by theUnited States District Court for the Southern District of Florida. Both were chargedwith violating the Securities Exchange Act by filing false information with the Commis-sion and with violations of the antifraud provisions of the Securities Act and the MallFraud Statute.

•

TWENTY-:FIFTH ANNUAL REPORT 93rule, to make and keep current required books and records and to makehis books and records available for reasonable inspection. He failedto file a report of financial condition for the year 1957 and failed tocorrect information in his registration application."

William Harrison Keller, Jr., doing business as W. H. Keller,Stoc'kbroker.-The Commission revoked the broker-dealer registra-tion of Keller based in part on the sale of securities to customers atprices not reasonably related to and substantially in excess of prevail-ing market prices as evidenced by registrant's contemporaneous cost.In 54 transactions with customers while acting as principal, Kellersold securities at markups over cost ranging from 6.25 to 40 percentwith profits to Keller of over $20,000, representing an average markupof over 16 percent. Thirty-seven of these sales took place on thesame day that Keller purchased the securities, and in 13 of the trans-actions involved the purchases were effected from other customers.In connection 'Withall of these sales, Keller failed to disclose to thecustomers the prices paid for the securities or the current marketprice established by other broker-dealers. In addition, Keller failedto comply with the net capital rule, to make and keep current requiredbooks and records, and to amend his application for registration todisclose employment of a person subject to a court injunction. Also,on April 29, 1958,he was permanently enjoined from effecting seeuri-ties transactions in violation of the net capital rule by the UnitedStates District Court for the Southern District of Indiana. Kellerwas also expelled from membership in the National Association ofSecurities Dealers, Inc.43

Allied Securities Corporation.- The Commission revoked thisbroker-dealer's registration and expelled it from membership in theNational Association of Securities Dealers, Inc., naming Jack R.Parkman and William E. Powell causes of the order of revocationand expulsion. The Commission found that registrant sold unregis-tered securities of Life Insurance Company of South Carolina andGeorgia Pacific Underwriters, Inc., and made false and misleadingstatements concerning the market prices and value of these securitiesand the financial condition of the issuer. Additional grounds forrevocation were violation of the net capital rule, failure to keep accu-rate books and records and violation of regulation T.44

Richard A. Sebastian, doing business as Sebastian & Company.-Sebastian sold shares of Canada General Fund to a customer withoutrevealing that the stock was pledged to secure a loan and would notpromptly be released from such lien. In addition, Sebastian violatedthe net capital rule and failed to keep current required books and

.. Securities Exchange Act Release No. 5911 (Mar. 25, 1959) .

.. Securities Exchange .Act Release No. 5909 (Mar. 18, 1959) .

.. SecurIties Exchange .Act Release No. 5880 (Feb. 16, 1959).

94 SECURITIES AND EXCHANGE COMMISSION

records. Consequently, the Commission revoked Sebastian's regis-tration and expelled him from membership in the National Associa-tion of Securities Dealers, Inc.45

Graham & Company.-The broker-dealer registration of Graham& Company was revoked based on various false and misleading repre-sentations made to purchasers of stock of Hard Rock Mining Co. andTexas Adams Oil Company. These false representations includedstatements concerning the market for and the price of Hard Rockstock and statements that securities would be delivered to customerspromptly; no disclosure was made of the fact that the registrant andHard Rock were under common control. In addition, registrantoffered, sold and delivered stock of Hard Rock in violation of theregistration provisions of the Securities Act of 1933. Also, securitiesin both these companies were sold at prices not reasonably related tothe current market prices. The Commission expelled registrant frommembership in the National Association of Securities Dealers, Inc.and found E. W. Sterling Graham and Susan P. Graham causes ofthe order of revocation and expulsion.v'

J. H. Lederer Co., Inc.-Registrant was found by the Commissionto have sold over 1 million shares of stock of Continental MiningExploration, Limited at prices ranging from $2.85 to $3.10 per sharein violation of the registration requirements of the Securities Act of1933. The shares were sold through long distance telephone solicita-tion in which false and misleading statements were made concerning,among other things, dividends to be paid, appreciation in the marketprice and registration of the securities. The Commission revoked thebroker-dealer registration of J. H. Lederer Co., Inc., expelled regis-trant from membership in the National Association of SecuritiesDealers, Inc. and found Joseph Herbert Lederer a cause of the orderof revocation and expulsion;" In addition, pursuant to a complaintfiled by the Commission, the United States District Court for theSouthern District of New York permanently enjoined J. H. LedererCo., Inc., and Lederer from further violations of the registration pro-visions of the Securities Act of 1933 in the offer and sale of the com-mon stock of Continental Mining Exploration Limited.

Shelley, Roberts & Company of California.-The Commissionfound that Billy E. Boyle, president and controlling person of regis-trant, while an officer and a director of another broker-dealer, causedthat broker-dealer to make various false and misleading statementsin the sale of stock of United Mercury Corporation in violation of theantifraud provisions of the Securities Acts. These misrepresenta-tions concerned, among other things, prospective increases in marketprices, guarantees against loss, and listing on an exchange. Also,

.. Securities E:l.change Act Release No. 5876 (Feb. 12, 1959).48 Securities Exchange Act Release No. 5864 (Jan. 27, 1959).41 Securities Exchange Act Release No. 5848 (Dec. 29,1958).

TWENTY-FIFTH .ANNUAL REPOR'!' 95

Boyle was found to have caused the other broker-dealer to extendcredit in violation of regulation T. Registrant was found to haverefused to make its books and records available for reasonable inspec-tion. The Commission revoked the broker-dealer registration ofShelley, Roberts & Company of California and found Boyle a causeof the revocation."

Gill.Harkness & Co.-This broker-dealer registration was revokedby the Commission on findings that registrant solicited and effectedsecurities transactions without disclosing it was insolvent. Bruce A.Johnston, registrant's president and controlling stockholder, inducedcustomers with whom he was in a relationship of trust and confidenceto lend him funds and securities for purposes of supplying capitalto registrant and sold to other customers shares of stock in registrant,and failed to inform any of these customers of the registrant's oper-ating losses and insolvency. Alan D. Selditch, general manager ofregistrant's securities department, made false and misleading state-ments in the offer and sale of registrant's stock to two customers inviolation of the antifraud provisions of the Securities Acts. Herepresented that registrant was in good shape, had a capitalizationof $100,000,was expanding and would pay dividends, none of whichwas true. Registrant was found to have failed to keep accuratebooks and records, violated the net capital rule and failed to correctinformation in its registration application. The Commission's orderof revocation also expelled registrant from membership in the Na-tional Association of Securities Dealers, Inc., and found Johnston andSelditch causes of the order of revocation and expulsion."

Benjamin and Company, Ine., David Joel Benjamin, doing busi-ness as Benjamin and Company.-David Joel Benjamin was foundby the Commission to have sold and delivered 243,000shares of stockof Hardy-Griffin Engineering Corporation in violation of the regis-tration provisions of the Securities Act of 1933. Furthermore, anotification and offering circular used in selling the securities con-tained untrue statements concerning the sale of unregistered stockwithin the previous year, Benjamin's ownership of shares of the stock,payments made to Hardy-Griffin by its officers, directors, and pro-motors, and the number of shares that would be outstanding uponcompletion of the offering, all in violation of the antifraud provi-sions of the Securities Acts. David Joel Benjamin was also foundto have violated the net capital rule and failed to make and keepcurrent required books and records. Based on this record, the Com-mission revoked the broker-dealer registration of Benjamin, and Ben-jamin & Company, Inc. In addition, the latter was expelled from

.. Securities Exchange Act Release No. 11837 (Dec. 22, 19118).AI Secur1t1es Exchance Act Release No. 11822 (NOT. 24, 19118).

96 SECURITIES AND EXCHANGE COMMISSION

the National Association of Securities Dealers, Inc. and Benjaminwas found to be a cause of the order of revocation and expulsion."

Whitney Phoenix Company, Inc.-The Commission revoked.thebroker-dealer registration of registrant and found Strabo V. Claggett,president and director of registrant, a cause of the order of revoca-tion.

Registrant and Claggett offered and sold stock of Selevision weSt-ern, Inc. nVestern) and its parent, Selevision Corporation of Amer-ica (Selevision) by means of false and misleading information inwilful violation of the antifraud provisions of the Securities Acts.The Western offering circular and other sales literature falsely statedthat registrant had increased its stock holdings in Selevision by pur-chase of an additional 65,000 shares and contained optimistic state-ments regarding Selevision's business prospects and future opera-tions, but failed to disclose that Selevision had recently discontinuedan important part of its business. Also, Claggett falsely stated totwo purchasers of Selevision's stock that the stock would double ortriple in price and, "that things were rolling along like a house afire."

Registrant sold Western's securities pursuant to a filing with theCommission under regulation A. However, in the offer and saleof these securities, it used letters soliciting the purchase of the stockwhich were not filed with the Commission as required. In addition,registrant sold the stock in jurisdictions other than those indicated inthe filing. Since it failed to comply with the provisions of regulationA, the exemption from registration was not available and the saleand delivery of Western stock by registrant and Claggett was inwilful violation of the registration requirements of the Securities Actof 1933.

In addition, registrant violated the net capital rule, failed to com-ply with record requirements and refused to permit inspection of itsrecords,"

Herman Bud Rothbard, doing business as Jonathan & Co.-TheCommission revoked the broker-dealer registration of Rothbard 'andexpelled him from membership in the National Association of 'se-curities Dealers, Inc. The Commission had previously suspendedhis broker-dealer registration."

Rothbard, in the sale of about 40,000 shares of stock of U.S. Elec-tronics Development Corporation (EDCOR), used circulars whichstated that ED COR was operating at a profit and that a dividendmight be expected when in fact EDCOR had suffered losses and hadan earned surplus deficit. Based on these findings the Commissionheld that Rothbard wilfully violated the antifraud provisions of theSecurities Acts.

1Io Securities Exchange Act Release No. 5798 (Oct. 21,1'958) .... Secnrltles Exchange Act Release No. 5995 (June 26,1959).

Secur1t1ell Exchange Act Release No. 5797 (Oct. 17,19(8).•

TWENTY-FIFTH ANNUAL REPORT 97

Rothbard also violated the registration requirements of the Se-curities Act of 1933 in that he sold 93,333 unregistered shares ofEDCOR's stock. The sale of these shares was held not to be anexempt private offering for it was clear that the purchasers took forresale and not for investment and the ultimate offerees were membersof the general public.

In addition, Rothbard was in violation of the net capital rule onseveral occasions, filed a false financial statement with his registra-tion application, failed to amend his registration application to re-flect a change in control, failed to keep required books and records andfailed to file a report of his financial condition for 1957.63

J. A. Latimer & Co., Inc.-The revocation of this broker-dealerregistration was based in part on false and misleading statements inits application for registration concerning control of registrant. Inaddition, the Commission found that registrant effected wash sales inthe stock of U.S. Hoffman Machinery Company and Artloom Com-pany on the New York Stock Exchange, while Hyman Marcus, theperson who controlled registrant, was Chairman of the Board of eachof these companies. Moreover, registrant was found to have madepurchases of these securities while participating in the distributionof such securities in violation of section 10(b) of the Securities Ex-change Act and rule 10b-6 thereunder, and to have borrowed moneyon these securities from unqualified persons in wilful violation ofsection 8(a) of the Securities Exchange Act and regulation T there-under. Besides revoking registrant's registration, the Commis-sion expelled registrant from the National Association of SecuritiesDealers, Inc. and found John Albert Latimer and Marcus to be causesof the order of revocation and expulsion. 54

Gotham Securities Corporation.- The Commission revoked thisbroker-dealer registration on the basis of a permanent injunction ob-tained in the United States District Court for the District of New Jer-sey barring registrant, Joseph Fruendel, a director and president ofregistrant, and Rico Tomasco, Jr., a director and secretary-treasurerof registrant, from making various untrue or misleading statementsin connection with the sale of stock of Saskalon Uranium and OilsLtd. Fruendel and Tomasco were named as causes of the revocation. 55

Steven Randall & Co. Inc.-The broker-dealer registration of reg-Istrant was revoked and it was expelled from membership in the

.. Securities Exchange Act Release No. 5998 (June 30,1959) .

.. Securities Exchange Act Release No. 5849 (Dec. 29, 1958). On July 2, 1959, subse-quent to the close of the fiscal year, Latimer was indicted by the United States DistrictCourt for the Southern D1strict of New York. The indictment contained 51 counts andcharged violations of the anttmanlpulattve provisions of the Securities Exchange Act of1934 in connection with a serles of transactions in the stock of the American TractorCompany listed on the American Stock Exchange .

.. Securities Exchange .ActRelease No. 5899 (Mar. 16, 1959).

98 SECURITIES AND EXCHANGE COMMISSION

National Association of Securities Dealers, Inc., with Frank M.Naft, its president, being named a cause of the order. Registrant andNaft were subject to a permanent injunction issued by the UnitedStates District Court for the Southern District of New York, pursu-ant to a complaint filed by the Commission, barring further sales ofunregistered stock of Swan-Finch Oil Company. Another permanentinjunction was issued by the Supreme Court of the State of NewYork, New York County, barring Steven Randall & Co., Inc. fromconducting a securities business in the state of New York. The com-plaint filed by the Attorney General of the State of New Yorkcharged registrant with distributing fraudulent literature and en-gaging in other fraudulent practices in connection with the sale ofsecurities of Texas Union Oil Corporation. In addition, registrantwas found to have faBed to amend its registration statement to indi-cate existence of the injunctions."

Frederick Securities Corporation-Fred Kaufman, doing busi-ness as Fred Kaufman Cu.-The broker-dealer registrations of theseregistrants were revoked based on findings by the Commission thatregistrants were permanently enjoined by the United States DistrictCourt for the District of New Jersey from offering and selling stockof Ben Franklin Oil & Gas Corporation in violation of the registra-tion provisions of the Securities Act of 1933. In addition, bothregistrants failed to file a report of financial condition for 1957. FredKaufman, president and sole stockholder of Frederick SecuritiesCorporation, was found to be a cause of the order of revocation issuedagainst that corporation."

William Harold HiIbert.-Hilbert was found to have sold stock ofGreat Fidelity Life Insurance Company (Great Fidelity) and Farm& Home Agency, Inc. (Agency) to customers in several states in vio-lation of the registration requirements of the Securities Act of 1933and while he was not registered as a broker-dealer. The United StatesDistrict Court for the Southern District of Indiana in an action in-stituted by the Commission permanently enjoined Hilbert and othersfrom selling unregistered shares of Great Fidelity. Later, the samecourt permanently enjoined Hilbert and others from selling unregis-tered stock of Agency. Hilbert failed to send customers confirmationsof transactions, failed to maintain and preserve books and records andfailed to correct his registration application to state his correct busi-ness address and the existence of the injunctions. Accordingly, theCommission revoked Hilbert's broker-dealer registration."

James C. Graye, doing business as J. C. Graye Co.-The broker-dealer registration of Graye was revoked based on three injunctions

.. Securities Exchange Act Release No. 5872 (Feb. 11, 1959).M Securities Exchange Act Release No. 5861 (Jan. 20, 1959).158 Securities Exchange Act Release No. 5860 (Jan. 21, 1959).

TWENTY-FIFTH ANNUAL REPORT 99entered against him. On April 3, 1958, the United States DistrictCourt for the Southern District of New York, pursuant to complaintsfiled by the Commission, issued two permanent injunctions againstGraye barring him from further violations of the antifraud provi-sions of section 17 of the Securities Act of 1933 in the sale of stock ofAtlas Gypsum Corporation Limited (Atlas) and from further viola-tions of the Commission's net capital rule. The decree enjoining thesale of Atlas stock barred the use of false statements and misleadingomissions concerning the market price of Atlas stock, listing on anational securities exchange and plans to merge Atlas with other cor-porations, among other things. An injunction was also entered bythe Supreme Court of New York on February 17, 1958, permanentlyenjoining Graye from engaging in securities transactions in the stateof New York. In addition, Graye was found to have failed to amendhis application for registration to indicate existence of the injunctionsand failed to file a financial report for the year 1957as required."

Tannen & Co., Inc.-Registrant and Philip Tannen, president,director and sole stockholder of registrant, were subject to two perma-nent injunctions issued by the United States District Court for theSouthern District of New York pursuant to complaints filed by theCommission. On June 27,1957, registrant and Tannen were enjoinedfrom the sale of unregistered shares of stock of Swan-Finch Oil Corp.and on October 11, 1957, from selling unregistered shares of stock ofCornucopia Gold Mines, in violation of the registration provisions ofthe Securities Act of 1933. The Commission revoked the broker-dealer registration of registrant and found Tannen to be a cause ofsuch revocation. 60

Carl J. Bliedung.-Bliedung was subject to a permanent injunctionentered in the United States District Court for the District of Colum-bia on March 16, 1955, barring him from effecting financial trans-actions unless promptly recorded in his books and records pursuantto Commission rules and requiring him to account for and record allfinancial transactions not recorded in his books and records. Bliedungalso used customer funds for his own benefit, failed to deliver cus-tomers' securities promptly and sold securities at prices not bearingit reasonable relationship to the market prices. In addition, he soldsecurities to a customer and prior to delivery permitted securities ofa like kind owned by him to remain subject to a lien for a loan madeto him, in violation of the Commission's rule prohibiting hypotheca-tion of customer securities. The broker-dealer registration was re-voked and Bliedung was expelled from membership in the NationalAssociation of Securities Dealers, Inc.61

fill Securities Exchange Act Release No. 5888 (Dec. 29, 1958).Securities Exchange Act Release No. 5761 (Aug. 21, 1958)

, Securities Exchange Act Release No. 5745 (.JUly 30. 1958).

529023--59--10

"" • •

100 SECURITIES AND EXCHANGE COMMISSION

McGrath Securities Corporation.- The Commission found thatregistrant and Robert C. Leonhardt, its president and sole stockholder,sold 447,614shares of stock of Micro-Moisture Controls, Inc. (Micro-Moisture) in violation of the registration provisions of the SecuritiesAct of 1933. As a result of a complaint filed by the Commission,registrant and others had been enjoined from selling and deliveringthe stock of Micro-Moisture in violation of the registration provisionsof the Securities Act of 1933. Registrant stipulated that the Court'sfindings and conclusions be considered as facts in the administrativeproceeding. The Commission accordingly found that Micro-Moistureissued over 2 million shares of its unregistered common stock to aCanadian corporation in exchange for the latter's assets and the latterin turn distributed such stock to its shareholders. Shortly thereaftera group of these stockholders who were then in control of Micro-Moisture sold over 700,000shares to various broker-dealers, includingthe shares later sold by registrant and Leonhardt. The Commissionconcluded that registrant and Leonhardt were underwriters withrespect to the unregistered shares sold by them. Accordingly, theCommission revoked the broker-dealer registration of McGrath Se-curities Corporation, expelled it from membership in the NationalAssociation of Securities Dealers, Inc., and found Leonhardt a causeof the order of revocation and expulsion."

Keith Richard Securities Corp.-Registrant was found by theCommission to have sold stock of Arliss Plastics Corporation (Arliss)to purchasers in over 30 States principally through the use of localand long distance telephone calls. The Commission concluded that inconnection with these sales, Julius Silver, president and sole share-holder of registrant, Samuel Goldberg, former sales manager, andG. Norman Waldman and Hyman Germanowitz, salesmen of regis-trant, made false and misleading representations concerning, amongother things, prospects of a merger, payment of dividends, listing on astock exchange, increase in market price of Arliss' stock and Govern-ment contracts held by Arliss. In addition, registrant, aided andabetted by Silver and William E. Rubenstein, former president ofregistrant, was found to have failed to keep current required booksand records. Registrant, aided and abetted by Silver, was also foundto have wilfully violated the net capital rule.

In February 1959, based on a complaint filed by the Commission,the United States District Court for the Southern District of NewYork preliminarily enjoined registrant from engaging in the securitiesbusiness while not making and keeping current books and recordsrequired by Commission rules. The Commission revoked the broker-

... SecurItIes Exchange Act Release No. 5783 (Sept. 26. 1958).

TWENTY-FIFTH ANNUAL REPORT 101

dealer registration and found Silver, Rubenstein, Goldberg, Waldman,and Germanowitz causes of the order of revocation."

In separate actions, the Commission revoked the broker-dealerregistration of Owens & CO.64(Owens) and Churchill SecuritiesCorp.65 (Churchill), and denied requests for withdrawal of regis-tration. Revocation in each instance was based on a permanent injunc-tion and violation of the net capital rule. Owens was enjoined bythe United States District Court for the District of Colorado onJanuary 24, 1958, from further violations of the net capital rule.Churchill was enjoined on May 2, 1957, by the Supreme Court of theState of New York, County of New York, from engaging in the secu-rities business in that State. In addition, the Commission expelledChurchill from membership in the National Association of SecuritiesDealers, Inc. and found Nat Girsky, Emanuel Bisgeier and MelvinHeiman, officers of Churchill, to be causes of the order of revocationand expulsion. John Cuthbert Owens, president, director and con-trolling stockholder of Owens, was found to be a cause of the orderof revocation entered against Owens.

The Commission determined that J. D. Creger & CO.66had vio-lated the Commission's net capital rule, failed to make and keepcurrent required books and records, and kept inaccurate records. Also,pursuant to a complaint :filedby the Commission, registrant was per-manently enjoined from doing business with inadequate net capitalby the United States District Court for the Southern District ofCalifornia, Central Division, on September 16, 1957. The Commis-sion revoked the registration of J. D. Creger & Co. and found JamesD. Creger, president, director and controlling stockholder of regis-trant, a cause of the order of revocation.

The Commission revoked the broker-dealer registration of WilliamWhitehead 67 upon a determination that he had failed to comply withthe net capital and record keeping requirements of the SecuritiesExchange Act of 1934 and was permanently enjoined by the UnitedStates District Court for the State of New Jersey from further viola-tions of these provisions on the basis of a complaint :filed by theCommission.

The registration of Vickers Brothers 68 was revoked by the Com-mission based on findings that between December 31, 1957, and Octo-ber 30, 1958, registrant was in violation of the Commission's netcapital rule on eight different occasions. In addition, VickersBrothers was expelled from membership in the National Association

.. Securities Exchange Act Reles.se No. 5988 (June 17, 1959) .

.. Securities Exchange Act Release No. 5916 (Mar. 25, 1959) .

.. Securities Exchange Act Release No. 5871 (Feb. 10,1959) .

.. Securities Evchange Act Release No. 5953 (May 15,1959)."''Securitles Exchange Act Release No. 5135 (July 11, 1958) ... Securities Exchange Act Reles.se No. 5945 (Apr. 30, 1959).

102 SECURITIES AND EXCHANGE COMMISSION

of Securities Dealers, Inc. and Henry G. Vickers and Norman L.Martin, general partners in registrant, were found to be causes ofthe order of revocation and expulsion.

Lynne B. Fenner, president and principal stockholder and a directorof The Fenner Corporation;" had been permanently enjoined by theSupreme Court of the State of New York on April 30, 1957, fromengaging in securities transactions in that State. On January 24,1958, the United States District Court for the Southern District ofNew York entered a decree of consent permanently enjoining Fennerand registrant from violations of the Commission's net capital rulebased on a complaint filed by the Commission. Accordingly, theCommission revoked the broker-dealer registration of The Fenner Cor-poration and found Fenner to be a cause of revocation.

The Commission revoked the broker-dealer registration of John T.Pollard & Co., Inc., now known as Webb Securities, Inc.70 Registranthad misstated its capital in a financial statement filed with its appli-cation for registration, engaged in transactions while in violation ofthe Commission's net capital requirements and made false entries inits books and records. The Commission, in addition, found John T.Pollard, president and a director of registrant, and Louis H. Green-berg, vice president, treasurer and a director of registrant, to becauses of the order of revocation.

The broker-dealer registration of Arthur R. Gilman 71 was re-voked for failure to file a report of his financial condition, to keepand preserve current books and records and to correct informationregarding his business address in his application for registration.

Ross Natale Barengo 72 had his broker-dealer registration revokedbased on findings that he made false and misleading statements in hisapplication for registration regarding the name under which he wouldconduct business and the persons who controlled his business. Inaddition, he failed to file an amendment correcting such statementsand failed to file required annual financial reports for the years 1956and 1957.

The following broker-dealer registrations were revoked by the Com-mission for failure to file financial reports as required by section 17(a)of the Securities Exchange Act of 1934 and rule 1'7a-5 thereunder:George D. Clarke, Ltd.,73Walter O'Donnell,74James A. Heaney, Jr.,75

69 Securities Exchange Act Release No. 5757 (Ang. 21,1958).70 Securities Exchange Act Release No. 5777 (Sept. 24, 19(8).n Securities Exchange Act Release No. 5859 (Jan. 21,1959).72 Securities Exchange Act Release No. 5866 (Feb. 2, 19(9).7' Securities Exchange Act Release No. 5939 (Apr. 22,19(9).7< Securities Exchange Act Release No. 594() (Apr. 22,19(9).70 Securities Exchange Act Release No. 5941 (Apr. 22. 19(9).

TWENTY-FIFl'H ANNUAL REPORT 103

Staey, Bell & Co., Inc.,76David Handel," and John B. Sullivan doingbusiness as John B. Sullivan Company,"Other Sanctions

Carl M. Loeb, Rhoades & Co.-Dominick & Dominick.- TheCommission instituted broker-dealer revocation proceedings againstregistrants, based upon offers to sell or solicitation of offers to buysecurities of the Arvida Corporation (Arvida) in violation of sec-tion 5(c) of the Securities Act of 1933. Registrants were the primeunderwriters of the offering. Prior to the filing of a registrationstatement with the Commission, a partner of one of the registrants,with the consent of the other and of the issuer, composed a releasefor use in the New York papers. The release stated, among otherthings, that Arthur Vining Davis, holder of considerable real estatein Florida, was going to convey some 100,000 acres of properties, de-scribed in the release as in an area of the Gold Coast in three namedFlorida counties, to Arvida, that Arvida would have assets of over100 million dollars, and that within 60 days there was going to be apublic offering of Arvida's securities through an investment bankinggroup headed by registrants. In addition, newspaper reporters werecalled to the officeof one of the registrants, were told that the offeringprice would be in the vicinity of $10 or $11 per share and were givenfurther information about Davis and his career. The informationcontained in the release, together with the additional information fur-nished orally, appeared in three New York newspapers on September19, 1958, and in numerous other news media throughout the country.

A limited survey indicated that for the two business days of Sep-tember 19 and 22, Loeb, Rhoades received indications of buying inter-est amounting to $500,000with a total of 101 securities firms express-ing an underwriting interest in the offering. Loeb, Rhoades madenotations of seIling group interest on the part of about 25 securitiesdealers. In addition, registrants received, prior to September 30, atleast 58 expressions of interest from members of the public, includ-ing at least 17 specific orders to buy. Arvida did not file a registra-tion statement under the Securities Act until October 27, 1958.

The Commission concluded that publicity, prior to the :filing of aregistration statement, by means of public media of communication,with respect to an issuer or its securities, emanating from broker-dealer firms who as underwriters or prospective underwriters havenegotiated or are negotiating for a public offering of the securitiesof such issuer, must be presumed to set in motion or to be a part ofthe distribution process and therefore to involve an offer to sell or asolicitation of an offer to buy such securities prohibited by section

.. Securities Excbange .Act Release No. 5886 (Feb. 17. 1959).ff Securities Excbange .Act Release No. 5887 (Feb. 17. 1959) ... Securities Excharu:e Act Release No. 5815 (Nov. 5. 1958l.

i'

I ,

l

~ t

104 SECURITIES AND EXCHANGE COMMISSION

5(c) of the Securities Act of 1933. Therefore, the Commission heldthe press release and meeting and resultant publicity wilfully violatedsection 5(c) of the Securities Act. However, under all the circum-stances, including registrant's excellent reputation, and the fact thatthey acted on reliance of counsel and that no investors appeared tohave been injured, the Commission found that no sanction was neces-sary in the public interest or for the protection of investors."

A related action brought by the Commission in the United StatesDistrict Court for the Southern District of New York, in which aconsent decree was entered permanently enjoining violation of sec-tion 5(c) by Arvida, registrants, and others, is discussed at p. 54,supra.

First Maine Corporation.-Registrant, in violation of section 5(c)of the Securities Act of 1933, was found to have offered to sell or tohave solicited offers to buy unregistered securities of Life InsuranceSecurities Corporation (LISCO) for a period of over 3 months beforea registration statement was filed with the Commission. Burton M.Cross and Herbert L. Rackliff, president and beneficial owner ofequity securities of registrant, respectively, were found to have causedregistrant to distribute by mail, notices, circulars and other publicitywhich constituted the illegal offers to sell or solicitations of offers tobuy LISCO's stock. In addition, registrant, Cross and Rackliff werefound to have violated section 5(b) (1) of the Securities Act by trans-mitting improper prospectuses after LISCO's registration statementwas filed.

Also registrant, Cross and Rackliff were held to have made falseand misleading statements of material facts in offering the securitiesof LISCO, thereby violating the antifraud provisions of the Securi-ties Act. The Commission found that the material distributed byregistrant contained two general themes, (1) the attractiveness ofstock of life insurance companies in which it was stated LISCOwould invest, and (2) the knowledge, experience, ability and com-petency of LISCO's officers and directors, particularly Cross. Thisliterature was materially misleading in stressing the investment op-portunities of life insurance companies without disclosing that thefunds of investors would be invested in a casualty insurance companyorganized by Cross and Rackliff and not yet in operation. Theinformation in regard to the experience of LISCO's management wasmisleading for failure to state that the active officers have had onlyvery limited experience with an operating insurance company.

The Commission, in view of the nature of the violations, orderedthat registrant be suspended from the National Association of Secu-rities Dealers, Inc., for 20 days and that Cross and Rackliff be namedcauses of the suspension. 80

'II 'Securities Exchange Act Release No. 5870 (Feb. 9, 1959).80 Securities Exchange Act Release No. 5898 (March 2,1959).

•

TWENTY-FIliTH ANNUAL REPORT 105Net Capital Rule

The Commission has adopted under section 15(c) (3) of the Secu-rities Exchange Act rule 15c3-1, commonly known as the net capitalrule, which is intended to provide safeguards for securities and fundsof customers dealing with broker-dealers by limiting the amount ofindebtedness which may be incurred by a broker-dealer in relationshipto net capital. A broker-dealer subject to the rule may not allowhis "aggregate indebtedness" to be more than twenty times his "netcapital," as those terms are defined in the rule.

When it appears, from an examination of reports filed with theCommission or through inspection of books and records, that a broker-dealer is in violation of the net capital rule, an opportunity is gen-erally afforded the registrant to correct such capital deficiencies.Failure promptly to bring the capital position into compliance withthe rule may result in injunctive action to restrain further violationsor the institution of proceedings to determine whether or not theregistrant's broker-dealer registration should be revoked. Violationsof the net capital rule were alleged in 13 injunctive actions filed by theCommission in the last fiscal year and in 22 revocation proceedings.

Broker-dealers participating in "firm commitment" underwritingsmust have sufficient net capital to permit participation in the under-writing for the amount they have agreed upon. The staff, in orderadequately to protect issuers and customers of broker-dealers partici-pating in such underwritings, carefully analyzes the latest informa-tion concerning the capital position of such a broker-dealer in orderto determine if assumption of the new obligations involved in theunderwriting is possible without violating the net capital rule. TheCommission will refuse to accelerate the effectiveness of registrationstatements filed under the Securities Act when it appears that any ofthe underwriters would, by virtue of commitments in the underwrit-ing, be in violation of the net capital rule. Broker-dealers named asunderwriters in offerings of securities registered with the Commissionwho appeared to be inadequately capitalized to fulfill their commit-ments and, at the same time, remain in compliance with the net capitalrule, were informed of the potential violation of the rule and the effectthis would have upon the pending registration statement. Suchbroker-dealers either obtained sufficient additional capital, complyfully with the rule, reduced their commitments in the underwritingto such an extent as to participate in the underwriting without viola-ing the rule, withdrew as underwriters, or participated in the under-writing on a "best efforts" basis only.Financial Statements

Under section 17(a) of the Securities Exchange Act, the Commis-sion has promulgated rule 17a-5 requiring the filing of periodic finan-cial statements by registered brokers and dealers. Under this rule,

106 SECURITIES AND EXCHANGE COMMISSION

every financial report filed must be certified by a certified public ac-countant or a public accountant who is in fact independent, with cer-tain limited exemptions applicable to situations where certificationdoes not appear necessary for customer protection. Thus, under cer-tain conditions, a member of a national securities exchange need notfile such a certified report. Also, if since his previous report a brokerhas limited his securities business to soliciting subscriptions as anagent for issuers, transmitted funds and securities promptly, and hasnot otherwise held funds or securities for or owed monies or securitiesto customers, he is exempt from the certification requirement. An ex-emption from the certification requirements is also given a broker-dealer who, from the date of his last report, has only bought and soldevidences of indebtedness secured by liens on real estate and has notcarried margin accounts, credit balances, or securities for securitiescustomers.

The requirements for filing financial reports enable the Commissionand the public to determine the financial responsibility of broker-dealers and enable the staff to analyze the reports in order to deter-mine whether the registrant is in compliance with the Commission'snet capital rule. Revocation proceedings are instituted against regis-trants who :fail to make the necessary filing. However, it is the prac-tice of the Commission to first inform a registrant of his obligationsunder rule 17a-5 prior to taking such action against him. During thepast fiscal year, 4,560 reports of financial condition were filed, an in-crease of 87 over fiscal 1958.Broker-Dealer Inspections

Section 17(a) of the Securities Exchange Act provides for regularand periodic inspections o:f registered broker-dealers. The Commis-sion has continued to place emphasis on this program to insure a moreadequate protection of investors. Inspection serves to assure compli-ance by broker-dealers with the securities acts and the rules and regu-lations promulgated by the Commission. The inspection device is oneof the most useful instruments at the Commission's disposal in pro-tecting investors and preventing and detecting violations of the Fed-eral securities laws.

Generally, inspections involve, among other things: (1) review of abroker-dealer's pricing practices; (2) a determination of financialcondition; (3) a review of the safeguards used in handling customers'funds and securities; and (4) a determination of whether adequatedisclosures relating to transactions are made to customers.

In addition, the inspectors also determine whether brokers anddealers keep their books and records in compliance with the Federalsecurities laws and conform to the margin and other requirements ofRegulation T as prescribed by the Federal Reserve Board. Further-more, a check is made to see if excessive trading in customers' accounts

TWENTY-FIFTH ANNUAL REPORT 107

involving "churning" or "switching" has occurred. Inspections oftenturn up evidence of sale of unregistered securities or the use of fraud-ulent practices, including the use of improper sales literature or salesmethods. Frequently, the inspections enable the Commission to nipin the bud situations which if not corrected, could result in loss tocustomers.

In 1956, the Commission inaugurated a policy of increasing thenumber of inspections over that of previous years. The same policyhas been followed in the past fiscal year. Inspections completed dur-ing the year numbered 1,47l.

In determining whether to institute action against a broker-dealerfound to be in violation of the statutes or rules as a result of an in-spection, consideration is given to the nature of the violations and tothe effect such violations may have upon members of the public. It isnot the Commission's policy to take formal action against broker-dealers for every violation. For example, inspections frequentlyreveal various inadvertent violations which are discovered before be-coming serious and before customers' funds or securities are en-dangered. Where no harm has come to the public in such situations,the matter is usually brought to the attention of the registrant andsuggestions made to correct the improper practices. If the violationappears to be willful and the public interest or the protection ofinvestors is best served by formal action, the Commission promptlyinstitutes the appropriate proceedings.

The following table shows the various types of violation disclosedas a result of the inspection program during the fiscal year 1959:

7'lIpe NumberFinancial ditficulties_____________________________ __ __ ___ ___ _ 180I!ypothecation rules__________________________________________________ 53Unreasonable prices for securities purcbases___________________________ 255Regulation T of the Federal Reserve Board___________________________ 170"Secret profits"______________________________________________________ 7Confirmations and bookkeeping rules 1,081l1iscellaneous________________________________________________________ 824

Total indicated violatiollB 2,070

Total number of inspections_____________________________________ 1,471

The principal stock exchanges, the National Association of Secu-rities Dealers, Inc. and some of the States each have somewhat similarbut not identical inspection programs to that of the Commission.Each agency conducts its inspections, examinations or audits inaccordance with its own procedures and with particular reference toits own regulations and jurisdiction. Inspections by other agenciescannot be adequate substitutes for Commission inspections since theyare not primarily concerned with the detection and prevention ofviolations of the Federal securities laws and the Commission's regula-

108 SECURITIES AND EXCHANGE COMMISSION

tions thereunder. However, the inspection programs of these otherorganizations do afford added protection to the public. For thisreason, the Commission and certain other inspecting agencies maintaina program of coordinating inspection activities to obtain the widestpossible coverage of brokers and dealers and to avoid unnecessaryduplications of inspection. By this program, each inspecting agencymakes available to all such agencies advice that it has started a par-ticular inspection but the reports or findings of such an inspectionare not exchanged between the parties. Information discovered inthe course of such inspections or examinations indicating serious vio-lations of regulations administered by another agency may, however,be called to the attention of such other agency. The program doesnot prevent the Commission from inspecting any firm recently in-spected by another agency and such inspections are made wheneverthere exists good cause.

Agencies now participating in this coordination program includethe American Stock Exchange, the Boston Stock Exchange, the Mid-west Stock Exchange, the National Association of Securities Dealers,Inc., the New York Stock Exchange, the Pacific Coast Stock Ex-change, the Philadelphia-Baltimore Stock Exchange, and the Pitts-burgh Stock Exchange.

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OFSECURITIES DEALERS, INC.

Section 15A of the Securities Exchange Act of 1934 ("the MaloneyAct") provides for the registration with the Commission of nationalsecurities associations and establishes standards for such associations.The rules of such associations must be designed to promote just andequitable principles of trade, to prevent fraudulent and manipulativeacts and practices and to meet other statutory requirements. Suchassociations serve as a medium for the cooperative self-regulation ofover-the-counter brokers and dealers. They operate under the generalsupervision of this Commission which is authorized to review dis-ciplinary actions and decisions which affect the membership of mem-bers, or of applicants for membership, and to consider all changes inthe rules of associations. The National Association of SecuritiesDealers, Inc. ("NASD") is the only Association registered underthe act.

In adopting legislation permitting the formation and registrationof such associations, Congress provided an incentive to membershipby permitting such associations to adopt rules which preclude a mem-ber from dealing with a nonmember, except on the same terms andconditions as the member affords the investing public. The NASDhas adopted such rules. Accordingly, membership is necessary tothe profitable participation in underwritings and over-the-counter

TWENTY-FIFTH ANNUAL REPORT 109

trading since members may properly grant price concessions, discountsand similar allowances only to other members. Loss or denial ofmembership due to expulsion or suspension or other ineligibility dueto a statutory disqualification, or to failure to meet standards ofqualification established in N.ASD rules, thus imposes a severe eco-nomic sanction .

.At June 30, 1959, there were 4,018 N.ASD members, an increase of198 during the year, as a result of 542 admissions to and 344 termi-nations of membership. .At the same time, there were registered withthe N.ASD as registered representatives 77,917 individuals, includinggenerally all partners, officers, traders, salesmen and other personsemployed by or affiliated with member firms in capacities which in-volved their doing business directly with the public. The number ofregistered representatives increased by 12,603 during the year as aresult of 19,071 initial registrations, 11,043 re-registrations and 17,511terminations of registrations. The membership and registered repre-sentative figures as of June 30, 1959, both represent all-time highmarks.NASD Disciplinary Actions

The N.ASD furnishes the Commission summaries of decisions on alldisciplinary actions against members and registered representativesof members. Each such decision is considered by the Commission'sstaff to determine whether the underlying facts indicate conduct inviolation of the statutes administered by the Commission or the rulesthereunder and whether the Commission should, on its own motion,call up a particular case for review. This staff consideration oftenincludes an examination of the .Association's complete file on a par-ticular case. Where such action appears warranted by the availablefacts, independent Commission inquiry or action is initiated throughthe appropriate regional office.

During the fiscal year the N.ASD forwarded to the Commission 248disciplinary decisions on 209 formal complaint cases. It is not un-usual for there to be more than one decision on a particular case forall decisions of District Business Conduct Committees are appealableto or reviewable by the Board of Governors which may affirm, modify,or reverse such decisions or remand them for reconsideration. Final.Association decisions were reported to the Commission during theyear in 175formal complaint cases.

Each formal complaint must rest on allegations that a member firmhad violated specified provisions of the N.ASD Rules of Fair Practice,although registered representatives of members and other personscontrolling or controlled by members may also be cited for violationsor for having been the cause of violations. Of the 175 decided cases,103 were based on complaints solely against members. Eight suchcomplaints were dismissed on findings that the allegations had not

110 SECURITIES AND EXCHANGE COMMISSION

been sustained, whereas in 95 cases it was found that the alleged viola-tions had occurred, and a penalty was imposed on the member. Theremaining 72 cases involved allegations of violations against the mem-ber firms concerned and 108 of their registered representatives orassociates. Two such complaints were dismissed as to the two mem-bers and three individuals concerned and 21 others were dismissed asto the members involved, while 11 other individuals were found notto have been guilty of the alleged violations. Violations were foundand a penalty was imposed on 49 members and 94 individual asso-ciates of members involved in this category of complaints. In all,there were disciplinary decisions adverse to 144 members and to 94registered representatives.

The penalties imposed included censure, fine, suspension or expul-sion of the member or suspension Or revocation of the registrationof a registered representative and in some cases a finding that an indi-vidual had been a cause of an expulsion, suspension or revocation. Inmany instances more than a single penalty was imposed and in a sub-stantial majority of the cases some or all of the costs of the proceed-ings were assessed against those found to have acted improperly.

Thus 31 members were expelled; 4 were suspended for periodsranging from 1 week to 18 months; the registrations of 28 registeredrepresentatives were revoked and 9 were suspended, also from 1 weekto 18 months; and 16 individuals were held to have been the cause ofan expulsion, suspension, or revocation. Moreover, 88 members wereassessed fines as were 10 registered representatives, in amounts vary-ing in each category from $25 to $5,000. The minimum penalty ofcensure was imposed on 18 members and 18 registered representatives.In the fiscal year the Association collected a total of $77,658.66 as aresult of fines and costs imposed in disciplinary actions. In somecases, of course, fines or costs imposed on an expelled member or arevoked representative are never paid.

In addition to disciplinary action by formal complaint procedure,as described above, action was also taken against members pursuantto the Minor Violation Procedure, provided in the Association's Codeof Procedure for Handling Trade Practice Complaints, for the dis-position of disciplinary cases where the facts are not in dispute andwhere the matter involves minor or technical violations of the ruleswith no significant damage to customers or other parties. Under thisprocedure a member charged with violation of the rules may waive ahearing, admit the violations as alleged and accept a penalty not inexcess of censure and a fine of $100. A member's rights of appealare preserved as is the right of the Board of Governors to reviewaction by a District Business Conduct Committee. A member, how-ever, is not required to follow the Minor Violation Procedure and mayelect to face formal charges and to require a hearing.

TWENTY-FIFTH ANNUAL REPORT 111The Association reported to the Commission during the year the

disposition of 31 complaints pursuant to Minor Violation Procedure.In 20 cases fines were imposed in amounts ranging from $25 to $100and aggregating $1,325 and in 8 other cases the only penalty imposedwas censure. In another case after the member admitted allegedviolations and paid a fine of $100 under Minor Violation Procedure,the Board of Governors remanded the case to the appropriate com-mittee for formal complaint treatment on the grounds that minorviolation treatment was inappropriate where a member was chargedwith the repetition of acts for which it had previously been dis-ciplined. The remand resulted in the filing of a formal complaintand a finding of violations for which a fine of $200 was imposed.

In two other cases members rejected Minor Violation Procedureand required the filing of formal complaints. In one such case, themember demonstrated to the committee's satisfaction at a hearing thatit had not acted improperly and the committee dismissed the com-plaint. In the remaining case, the member rejected an offer to admitalleged violations and to pay a fine of $25. A formal complaint wasthen filed and the district committee found violations and imposeda $25 fine. The member appealed this decision to the Board of Gov-ernors which affirmed the findings of violations and increased thepenalty to a fine of $300 plus costs.Commission Review of NASD Disciplinary Action

Section 15A(g) of the act provides that disciplinary actions by theNASD are subject to review by the Commission on its own motion oron the timely application of any aggrieved person. The effectivenessof any penalty imposed by the NASD is automatically stayed pend-ing determination in any matter which comes before the Commissionfor review. At the beginning of the fiscal year, two such review caseshad been pending before the Commission. During the year eight othersuch petitions were filed and three cases were disposed of, leavingseven petitions pending at the year end.81

The Commission dismissed an application filed by Samuel B. Frank-lin & Company seeking review of disciplinary action by the Asso-ciation which had found that the firm had violated the Association'sRules of Fair Practice by selling securities to, and purchasing securi-ties from, customers at prices which were not fair in view of all therelevant circumstances." An NASD District Committee had censuredthe firm, fined it $1,000 and assessed costs amounting to $773.80. The

81 Tbe pending cases concerned applications filed by Sterling Securities Co., Marc Ster-ling, et al, (File 16--1A77) ; Raymond G. Challklan (File 16-1A79) ; A. J. Grayson & Co .•Ine, and Albert J. Grayson (File 16-1A80) ; Gerald M. Greenburg and Robert Leopold(File 16-1A81) ; L. C. Flsber Co. (File 16-1A82) ; Whitney & Co., Inc. (File 16-1A83) ;and Franz Bachmann (File 16-1A85).. After the close of the fiscal year, the L. C. Fisherappltcatlon was remanded to the NASD for reconsideration on the joint request of theNASD and Fisher .

.. Securities Exchange Act Release No. 5916 (Mar. 24, 1M9) and File 16-1A72.

112 SECURITIES AND EXCHANGE COMMISSION

NASD Board of Governors on appeal affirmed this action and assessedan additional $153.29 in connection with the costs of the appeal.

According to the Commission's decision, the basic facts were not indispute. Out of 731 transactions in which Franklin & Co. as prin-cipal sold securities to customers during the period between Januaryand May 1956, not including sales of investment company shares andother securities sold in a public offering pursuant to a prospectus, 642transactions involved markups in excess of 5 percent. The company,as principal, purchased securities from customers in 428 transactionsand in 159 of these transactions its markdown exceeded 5 percent. Inthe 642 sales transactions the markups were more than 10 percent in549 instances, more than 15 percent in 402 cases, more than 20 percentin 260 transactions, and ranged from 30 to 62 percent in 99 cases. Onits 159 purchases from customers, the markdown in 68 transactionsexceeded 10 percent, in 32 it exceeded 15 percent, in 20 it exceeded20 percent, and in 6 cases it ranged from 30 to 37 percent. In dis-cussing the gross dollar amount of transactions, the Commissionpointed out that of the 731 sales, 498 were in the $100-$500 category,and 108 each involved more than $500, and that of these 606 trans-actions, the markups were 30 percent or more in 55 cases and in excessof 20 percent in 184 cases. The price range of the securities sold wasless than 10 cents per share in 127 transactions, less than 50 cents in477 transactions, and less than $1 in 499 transactions.

These markups were computed on the basis of the firm's own coston same day or contemporaneous purchases of shares of the samesecurities except that, in a relatively small number of instances wheresuch information was not available, the computations were made onthe basis of quotations obtained from the National Daily QuotationService. The markdowns on the firm's purchases from customerswere computed on the basis of same day or contemporaneous sales bythe firm of shares of the same securities for its own account.

The applicant urged, among other things, that most of the trans-actions involved purchases or sales of so-called "penny" stocks sellingfor less than $1 per share; that in most cases the dollar value of atransaction was small; that the NASD 5 percent markup policy shouldnot be applied to low priced securities sold in small dollar trans-actions; that it was justified in charging an amount over cost suffi-cient to cover expenses; and that its markups over cost were notgreater than the differences between the published bid and askedquotations on typical penny stocks.

In its findings and opinion the Commission concluded that Franklin& Co.'s pricing practices clearly were unreasonable, at least in thosetransactions where the markups or markdowns were greater than 20percent, as there was no showing of special circumstances such as un-usual expenses, extraordinary services to customers or acquisition of

TWENTY-FIFTH ANNUAL REPORT 113

inventory at special concessions. The Commission sustained theNASD finding that the firm had purchased and sold securities atprices which were not fair under all the relevant circumstances andwhich were not reasonably related to current market prices, that suchconduct was inconsistent with just and equitable principles of tradeand that the penalties imposed were not excessive, having due regardto the public interest."

Two other applications for review of Association disciplinary ac-tion were dismissed by the Commission, consideration having beenstayed pending determination of administrative proceedings againstthe parties concerned. These petitions had been filed by Batkin &CO.54and Churchill Securities Corp.55 Dismissal of the petitions asmoot followed action by the Commission revoking the broker-dealerregistration of Batkin & Co. and expelling it from the Association S6

and similar action as to Churchill Securities Corp."Commission Review of NASD Action on Membership

Section 15A(b) of the act and the by-laws of the NASD providethat, except where the Commission finds it appropriate in the publicinterest to approve or direct to the contrary, no broker or dealer maybe admitted to or continued in membership if he, or any controllingor controlled person, is under any of the several disabilities specifiedin the statute or the by-laws. By these provisions Commission ap-proval is a condition to the continuance in Association membershipof any broker-dealer who, among other things, controls a person whoseregistration as a broker-dealer has been revoked or who was found tohave been a cause of a Commission order of revocation.

A Commission order approving or directing admission to or con-tinuance in Association membership, notwithstanding a disqualifica-tion under section 15A (b) (4) of the 'act or under an effective Associa-tion rule adopted under that section Orsection 15A(b) (3), is generallyentered only after the matter has been submitted to the Associationby the member or applicant for membership. Where, after considera-tion, the Association is favorably inclined, it ordinarily files with theCommission an 'application on behalf of the petitioner. A broker-dealer whose application is refused Association sponsorship, however,may file an application directly with the Commission. The Commis-sion reviews the record and documents filed in support of the applica-tion and, where appropriate, obtains additional evidence. At thebeginning of the fiscal year one such petition was pending before the

.. After the close of the tlscal year the tlrm filed a petition for review of the Commis-sion's decision with the Court of Appeals for the Ninth Circuit .

.. Securities Exchange Act Release No. 5763 (Aug. 22, 1958) and File 16-1A61

.. Securities Exchange Act Release No. 5951 (May 11,1959) and File 16-1A11 .

.. Securities Exchange Act Release No. 510!J.(June 9, 1958) .srSecurities Exchange Act Release No. 5811 (Feb. 10, 19,59).

•

114 SECURITIES AND EXCHANGE COMMISSION

Commission; during the year six petitions were filed and three weredisposed of; and four were pending at the year end.

The three disqualified individuals whose employment was thus ap-proved were: William A. Spanier," formerly president of Bennett,Spanier & Co., Inc., a firm revoked as a broker-dealer and expelledfrom the NASD by the Commission on May 28, 1952, on findings that,among other things, it had engaged in manipulative activities and hadsold unregistered securities; S9 Kenneth E. Goodman," formerly solestockholder of Kenneth E. Goodman & Co., a firm similarly revokedand expelled by the Commission on April 23, 1958, on :findings that ithad falsely stated its bank balance on its books and had effected securi-ties transactions in violation of the Commission's net capital rule; 91

and Leonard H. Whitaker,92 whose registration as a broker-dealer hadbeen revoked by the Commission in 1952 because of certain securitiesviolations, including, among other things, the sale of unregisteredsecurities and conversion to his own use of a payment from a customerfor securities." Whitaker's employment by another NASD memberfirm had earlier been approved by the Commission under specifiedconditions. 94 This second approval petition was necessary becauseWhitaker had changed employers. In each case the Commission foundit appropriate in the public interest to approve the NASD applica-tions in view of all the circumstances, including the lapse of time andsupervision of the representatives.

LITIGATION UNDER TIlE SECURITIES EXCHANGE ACT OF 1934

In order to protect the public, the Commission is authorized to in-stitute actions to enjoin broker-dealers and other persons from en-gaging in activities which violate the provisions of the SecuritiesExchange Act of 1934. Some of these activities also violated pro-visions of the Securities Act of 1933 and are discussed above.Anti-Fraud Litigation

In discharging its obligation to prevent frauds upon the public, theCommission filed a number of complaints during the past year. Finaljudgment enjoining Louis E. Wolfson from further violating the anti-fraud and antimanipulative provisions of the Exchange Act was ob-tained." This case is discussed at length in the 24th Annual report.96

The complaint alleged that ",Volfson and others had attempted to

.. securities Exchange Act Release No. 5778 (Sept. 25, 1958) and File 16-1A46 .

.. Adams &; Co., Bennett, Spanier & Co., Inc. and Ray T. Haas, 33 S.E.C. 444 (1952) .

.. Securities Exchange Act Release No. 5828 (Dec. 5, 1958) and File 16-1A73 .

.. Securities Exchange Act Release No. 5684 (Apr. 23, 1958).osSecurities Exchange Act Release No. 5989 (June 16, 1959) and Flle 16-1A78 ... Leonard H. Whitaker, 33 S.E.C. 72 (1952).DC Securities Exchange Act Release No. 5581 (Sept. 3, 1957) and Flle 16-1A64 ... USDC SD NY No. 135-30."At p. 100.

TWENTY-FIFTH ANNUAL REPORT 115

defraud the public and to manipulate the market of .American Motorsstock; that he and his associates caused to be published in a financialnewspaper an article stating that they owned 460,000 shares of thatstock at a time when they had disposed of 200,000shares, and that theylater caused an article to be published stating that Wolfson had dis-posed of one-quarter of his 400,000 shares and would sell the rest dur-ing the coming months. Wolfson, according to the complaint, omittedto disclose that he had disposed of all his holdings in American Motors,had in fact sold short, and was attempting to buy stock to cover hisshort position. Judgment against Wolfson was entered by consent.

In E.E.O. v, Wilkes,91 the Commission's complaint charged viola-tions of the short selling and antifraud provisions of the ExchangeAct and the Commission's rules in that defendant caused four broker-dealers to sell for his account on the American Stock Exchange anaggregate of 29,100 shares of Hazel Bishop, Inc. common stock, byfalsely representing to the brokers that he owned such stock. A finaldecree enjoining further violations of the act was entered on consentof defendant,"

Three cases involved violations of the Exchange Act with regardto over-the-counter sales. In E.E.O. v. McDonald 99 the complaintalleged that the corporate defendant broker-dealer accepted moneysand securities and represented that it would fulfill its obligation todeliver securities or moneys due when in fact it could not and did notintend to do so. Affidavits filed in support of a motion for a temporaryrestraining order alleged, among other things, that a broker-dealerfirm had paid defendant $50,000 for the purchase of securities whichwere never delivered, that employees of defendant stated that membersof the public had paid more than $250,000 for securities which werenot delivered, and that the Dayton Aviation and Radio EquipmentCorp., which had engaged defendant as underwriter for its offeringof some 500,000 shares of common stock, had received proceeds fromthe sale of only 274,200 shares although in fact the whole issue hadbeen sold. A permanent injunction was obtained by default againstthe firm and its president.

In E.E.O. v. Oampbell1°O and in E.E.O. v. Rosen 101 the Commissioncharged defendant brokerage firms with accepting customers' ordersand deposits of money and securities upon the representation thatthey were ready and able to meet all obligations, when in fact theywere insolvent and unable to meet current liabilities. Permanentinjunctions were entered in both cases,

8'1 USDC SD NY No. 145-163.os In a companion case. S E.a ..... Brtnrn; USDC SD NY. No. 140-236. thp dpfplHlant was

permanently enjoined from further short-sales of Hazel Bishop, Inc. stock,99 USDC SD NY. No. 139-190.100 USDC SD Texas, No. 12.347.101 USDC D Mass., No. 0S-S69-A.

029523--59----11

116 SECURITIES AND EXCHANGE COMMISSION

Cases under the Net Capital Rule

The "net capital rule" provides an important protection to investorsagainst loss of securities or monies, due to financial straits of broker-dealers, by requiring every broker-dealer to limit his aggregate in-debtedness to all persons to 2,000 per centum of net capital. Duringthe year injunctions were obtained to enjoin broker-dealers from fur-ther violations of the net capital rule in S.E.O. v. Trigg,102 S.E.O.v. Wagner,103 S.E.O. v. Sano?04 S.E.O. v. The Ohristopher Oorp.,1058.E.O. v. Empire State Mutual Sales, !'lUJ./06 and 8.E.O. v. Green.107

In the Empire State and Green cases, and in S.E.O. v. Aronson 108and S.E.O. v. Oa1'1'oll109the Commission charged defendants with vio-lations of the fraud and record-keeping provisions of the ExchangeAct, as well as the net capital rule.

M. J. Shuck v. S.E.O., 264 F. 2d 358 (C.A. D.C., 1958), involved apetition for review of a Commission order denying withdrawal andrevoking petitioner's registration as a broker-dealer. The Commis-sion's revocation was based on findings that petitioner had been en-joined by a district court from violating the Commission's net capitalrule and that revocation would be in the public interest. The Courtof Appeals for the District of Columbia, in affirming the Commission'sorder, held, first, that the Commission had observed the fundamentalpurposes of section 9(b) of the Administrative Procedure Act and,second, that under the circumstances of this case, the Commissionproperly found revocation was in the public interest. Service on thepetitioner of the temporary restraining order and the Commission'scomplaint in the action for the preliminary injunction as well as theissuance of the injunction itself met the requirement in 9(b) thatwritten notice of the facts warranting a revocation be sent to the li-censee prior to the agency proceeding. The Court stated that therecord shows that even prior to the district court proceedings theCommission's staff had discussed with Shuck the matter of compliance.In addition, the court proceedings, the Court held, afforded petitionera further opportunity to demonstrate compliance.

Moving to the merits of the case, the Court concluded that it is notrequired that the injunction contain an express finding of wilfulnessas petitioner had contended where revocation is based on the entryof an injunction. Evidence of wilfulness, however, might be con-sidered by the Commission in applying the public interest criterion.The record of Shuck's action in the past supported the Commission's

102 USDC SD Texas, No. 12,236.203 USDC SD NY, No. 138-41.UK USDC SD NY, No. 147-363.10lI USDC SD Fla., No. 8982-M.100 USDC SD NY, No. 142-291>.207 USDC ND Texas, No. 8060.208 USDC SD Calif., No. 988-1>8 HW."» USDC D Mass., No. 59-194A.

TWENTY-FIFTH ANNUAL REPORT 117

findings that the violation of the net capital rule was not unintentionalor inadvertent. This past record coupled with the District Court'sfinding that Shuck would not maintain the required standards in thefuture could properly justify the Commission's revocation for thefuture protection of the investing public. Nor did the Court feel thatShuck's expressed wish to withdraw from the securities business orhis alleged satisfaction of creditors precluded the Commission fromtaking this step. The Court stated that the Commission could holdits hearing which would reflect the facts shortly after they occurredand take prompt and appropriate action without waiting until Shuckre-entered into business. The Court of Appeals restated its rulingin Hughes v, B.E.Opo that wilfulness means "no more than that theperson charged with the duty knows what he is doing."

Litigation Involving Broker-Dealer Registration and Reporting Requirements

Gilligan, Will &: 00., et alp V. B.E.O., 267 F. 2d, 461 (C.A. 2, 1959)involved a petition for review of the Commission's order suspendingGilligan, Will & Co. for 5 days from the National Association of Se-curities Dealers, Inc. for violations of section 5 of the Securities Actand finding James Gilligan and William Will causes of the order.v'Petitioners challenged the Commission's findings that they were un-derwriters with respect to 1955 and 1956 transactions in Crowell-Collier debentures and stock. The Court upheld the findings andconclusion of the Commission that the resale of securities contem-plated and executed by petitioner was a distribution or public offeringand hence petitioners were underwriters. The Court rejected peti-tioners' argument that they took for investment where they intendedto retain the stock only if the issuer continued to operate profitably.

Some of the cases brought by the Commission involved failure ofthe defendants to file the reports required by the Exchange Act. InB.E.O. V. Alexander L. Guterrna, and F. L. Jacobs 00.112 the complaintsought to enjoin the company and its then president and controllingstockholder, Guterma, from continuing to violate the antifraud andreporting requirements of the 1934 Act and the antifraud and regis-tration requirements of the 1933 act. After Guterma resigned anddisposed of his interest in the company, the new management con-sented to entry of a mandatory injunction ordering the company toprepare and file with the Commission all information, documentsand reports required by the act.

110 174 F. 2d 969,977 (1949).111 For a discussion of the Commission's Findings and Opinion see 24th Annual Report,

pp.83-84.112 USDC SD NY, No. 144-363. A criminal indictment is also pending against Guterma.

See the discussion of erfmlnal Ilttgatton, infra, this report.

I

lI

. J'".'~~

118 SECURITIES AND EXCHANGE COMMISSION

Upon application of the Commission the District Court at NewYork City appointed receivers for the assets of the company. Im-mediately thereafter a petition for reorganization under chapter Xof the Bankruptcy Act was filed and is now pending in the DistrictCourt at Detroit, Mich. The Commission is participating in theseproceedings.

In B.E.O. v. Interworld T. V. Fiime, bW.,113 the court entered amandatory injunction requiring the filing of reports on Forms 8-K,9-K, and lo-K and restraining future violations of the reportingrequirements. In a companion case, B.E.O. v. Guild Films 00.,114the court ordered reports to be filed correcting a previously filedForm 10-K and enjoined future violations.

A mandatory injunction was entered by consent in B.E.O. v, Peru-vian Oil Concessione 00., Inc.,l1s requiring the company to file annualreports for fiscal 1955,1956and 1957.

In B.E.O. v. First Lewis Oorporationr" defendant was chargedwith failing to make available for examination by representatives ofthe Commission the books and records required to be kept by theExchange Act. The Court enjoined the defendant from doing busi-ness in securities while failing to make such books and records avail-able. A permanent injunction was also entered in B.E.O. v, Brad-ford,117for failure to make available books and records and for failureto file a report of the financial condition of a brokerage firm.Proxy Litigation

The Commission appeared as plaintiff in one case of proxy litiga-tion. In B.E.O. v. Central Founa1'Y 00., et al.,us the Commission ob-tained a court order delaying the effect of votes cast by stockholders ofthe company at the Annual Meeting, charging both management andthe opposing Independent Stockholders Protective Committee withviolations of the proxy rules. The management filed a notice of ap-peal from the order and the case was set for hearing on the Commis-sion's complaint. However, before any further action was taken, thenext Annual Meeting was held from which the stockholders' factionemerged victorious by a substantial margin. Neither side was chargedwith illegal practices in connection with the second meeting. Themanagement faction then stipulated to dismissal of its appeal. There-upon the Commission stipulated to dismissal of its complaint.Contempt Proceedings

In B.E.O. v, East Boston Co., Bernard Goldfine, et al.,119 the Com-

113 USDC SD NY, No. 145--328.114 USDC SD NY, No. 145--327.110 USDC SD NY, No. 144-363-11. USDC D Mass, No. 59-479-F.I1T USDC SD Calif, No. 179-58. Bradford has filed notice of appeal.11' USDC SD NY, No. 138-110.119 USDC D Mass, No. 54-438-W.

TWENTY-FIFTH ANNUAL REPORT 119

mission found it necessary to bring a contempt action to enforce an in-junction order previously obtained. The respondents were found incivil contempt for failure to file the semi-annual report of the com-pany required under the Exchange Act. The respondents consentedto payment of a $2,500 fine by the individuals. The company hadearlier paid $3,000compensatory damages.Participation as Amicus Curiae

As noted in the last annual report, the Commission filed briefs intwo cases in which the validity of rule 16b-3, insofar as it exemptsthe exercise of stock options from section 16(b) of the Exchange Act,was brought into question. In the first of these cases, Perlman v.Timberlake, the judge of the United States District Court for theSouthern District of New York declared in dictum that the rule isinvalid, but held that the defendants were protected from liability be-cause of their good faith reliance upon the rule. The other case, VanA.alten v, Hurley, now pending before another judge of the samecourt, has not yet been decided.v"

In Taylor, et al. v, Janigan (USDC D. Mass, No. 85-1056), thecase arose out of the purchase by the President of Boston Electro SteelCasting, Inc. of substantially all of the outstanding stock from theshareholders. The plaintiffs brought suit under section 10(b) of theExchange Act and rule 10b-5 thereunder, charging that they wereinduced to sell by defendant's misrepresentation. The defendantmoved to dismiss on the grounds of lack of jurisdiction and failureto state a cause of action. Defendant also argued that 28 U.S.C.

1331, which requires a $10,000 amount to be in controversy, governsthe implied right of action under the Exchange Act and the rulesunder it.

The Commission filed a brief amicus curiae. The court supportedthe Commission's arguments, denying the motion to dismiss. Thecourt stated that section 10(b) and rule 10b-5 gave rise to the cause ofaction and to Federal jurisdiction, and that interveners need not com-ply with the requirement as to amount in controversy, because section27 of the Exchange Act grants jurisdiction without reference toamount.

1>0 After the close of the year the United States District Court for the Southern Districtof Texas held, In Oontinental Oil 00. v, Perute, that the rule Is within the Commission'sexemptive authority. The opinion expressly declined to accept the rationale of theTimberlake case. In addition, the Van Aa/ten case was decided on JUly 30, 1959, but thetrial judge held that It was unnecessary to decide the validity of the rule, and declinedto express an opinion.

~

PART VI

ADMINISTRATION OF THE PUBLIC UTILITY HOWINGCOMPANY ACT OF 1935

The Public Utility Holding Company Act of 1935 provides for theregulation by the Commission of interstate public-utility holdingcompany systems engaged in the electric utility business or in theretail distribution of gas. The matters dealt with embrace intricateand complex questions of law and fact, and generally involve one ormore of three major areas of regulation. The first of such areas coversthose provisions of the act, contained principally in section 11 (b) (1),which require the physical integration of public-utility companies andfunctionally related properties of holding company systems, and thoseprovisions, contained principally in section 11(b) (2), which requirethe simplification of intercorporate relationships and financial struc-tures of holding company systems. The second area of regulationcovers the financing operations of registered holding companies andtheir subsidiaries, the acquisition and disposition of securities andproperties, and certain accounting practices, servicing arrangementsand intercompany transactions. The third area of regulation includesthe exemptive provisions of the act, the provisions covering the statusunder the act of persons and companies, and those regulating theright of a person affiliated with a public-utility company to acquiresecurities resulting in a second such affiliation.

The staff functions under the act are performed in the Branch ofPublic Utility Regulation of the Division of Corporate Regulation.

COMPOSITION OF REGISTERED HOLDING COMPANY SYSTEMS-SUMMARY OF CHANGES

On June 30,1959, there were 21 registered holding company systemssubject to regulation under the act. Of these, 3 systems, namely, (1)Cities Service Company, (2) Electric Bond and Share Co., and (3)Standard Gas and Electric Co., do not own as much as 10 percent ofthe voting securities of any public-utility company operating withinthe United States. The remaining 18 systems are referred to hereinas "active registered systems."

Included in the 18 active registered systems there were 19 registeredholding companies of which 13 function solely as holding companiesand 6 function as operating companies as well as holding companies,'

, In one of these systems there are two registered holding companies.

120

TWENTY-FIFTH ANNUAL REPORT 121

In addition, in these systems there are 99 electric and gas utility sub-sidiaries, 42 nonutility subsidiaries, and 16 inactive companies, total-ing 176 system companies.

The following tabulation shows the number of holding companies,electric and gas utility companies and nonutility companies in eachof the 18 active registered systems as at June 30, 1959, and theiraggregate assets, less valuation reserves, as of December 31, 1958:

Classification oj companies as oj June 30, 1959

Bolelyreg- Reg- Electric AggregateIstl>red Istered and gas Non- In- Total system I

System holding holding- utility utlllty active com. assets, lesscom- operating subsldl- subsldt- com- panles valuation

panles COID- aries aries panles reserves atpanles Dcc. 31, 1958--- --- ------

I. American Electric PowerCo., Inc . .. . 1 ---.- ... 12 10 1 24 $1,390,897,2332. American Natural Gas Co .. 1 --._------ 2 5 0 8 693, 121, 3043. Central and South West

Corp ..... . 1 -----.---- 6 0 1 8 628, 684, 2844 Columbia Oas System,

5. C~~u;g>:d-Natiii-8i'Gas.1 9 8 2 20 I, 150,624,000

Co . .•... .. 1 4 2 0 7 665,873, 0426 Dclaware Power & Light

COo. ._._ •..• ._ •. .. -------_.- 1 2 0 0 3 193,602,6827. Eastern Utilities Associates. 1 5 0 2 8 105,396,0998. General Pubhc UtI1ltles

Corp. . ... ........ 1 .. 7 2 0 10 875, 438, 1239. Granite City Oenerating

Co. (VOtintt trust). ..... 1 1 0 0 2 '399,34610. Middle Sou Utilities, Inc. 1 6 0 4 11 699, 861, 42311. National Fuel Gas Co .... _. 1 -----_.--- 3 6 0 10 192,291,38812. New England Electric SYS-

tem •.... _. •.. 1 ----._---- 22 1 4 28 600, 134, 56413. Ohio Edison Co •.. .. _._ 1 3 0 0 4 587,375,00014. PhlladelphlaElectrlcPower

Co ...•.. ...•. .•.. .--------- 1 1 0 1 3 42,996, 92215. Southern Co .. The. . 1 5 2 1 9 I, 130,862,81816. Union Electric Co ..... . .--------- 1 3 1 0 5 552, 235, 00317. Utah Power & Light Co ... .--------- 1 2 0 0 3 227,445, 10018 West Penn Electric Co.,

The_. .• ._ .•...•. .... 1 1 12 6 1 21 531,419,781--- --- ---Subtotals. ._ ..•... .. 13 6 105 43 17 184 10,268,659,012

Less' Adjustment to eluninateduplication In count resultIn" from 4 companies beingsu sldlarles In 2 systems and2 companies being subsldl-aries In 3 systems.' ..•.... -6 -1 -1 -8 #_------------

Add: Adjustment to Includethe assets of these 6 jointlyowned subsidiaries and toremove the parent companiesInvestments therein whichare Included In the systemassets above ...• ... .• .------- 526, 280, 320---------

Total companies and as-6sets In active systems, 13 99 42 16 176 10, 794, 939, 332

I Represents thc consolidated assets,less valuation reserves, of each system as reported to the Oomrntsstcnon Form USS for the year 1956, except as otherwise noted..

S Represents the corporate assets of Granite City Generating Co. at March 31,1959. Assets of the votingtrustees of Granite City Generating Oo., the holding company parent of the Gencrating Co ,have not beenreported.

I These 6 companIes are Beech Bottom Power Oo., Inc. and Windsor Power House Coal Co. which areindirect subsidiaries of American Electric Power Co. and The West Penn Electric Co.; Ohio Valley ElectrlcCorp. and its subsidiary, Indiana-Kentucky Electric Oorp., which are owned 37.8 percent by AmericanElectric Power Oo., 16.5 pereent by Ohio Edison Oo., 12.5 percent by The West Penn Electric Co , and 33 2percent by otbercoropanles; Mississippi Valley Generating Co which Is owned 79 percent by Middle SouthUtilities, Inc .. and 21 percent by The Southern Co.; and Arklaboroa Corp. which Is owned 32 percent byCentral and South West Corp. system, 34 percent by Middle South UtI1lties, Inc. system and 34 percent bya third company.

, In addition to the adjustment to Include the assets of the 6 jointly owned subsidiaries rather than theIrInvestments therein, the total adjustment Includes the assets of Electric Energy, Inc., since Union ElectricCo., which owns 40 percent of tbe common stock of EEl, Is a holding company with respect to EEl.

__ __________ __ ---

•• ____•• ____ ___

________ __•• _ __ --------------------

_ __ _ ___

----------____ __ __ -------

__ --------------------

•• ____

__• __

___ ___ ____ ----------

__ _

_

___ ____ __ __

__ __

____

_

_ --- ---

__ __ ~--------- -------~--

__ ______ _ ---------- ---------- ---------- ---------- -------- •

________

122 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year the Commission granted an exemption toCentral Public Utility Corporation, a registered holding company.The exemption was granted pursuant to section 3(a) (5), which affordsexemption to companies having no domestic public-utility companies.Further discussion of this matter is at page 132 of this report. Alsoduring the fiscal year American Electric Power Company, Inc., aregistered holding company, sold the assets of a subsidiary, TheSeneca Light & Power Company, to Ohio Power Company, anothersubsidiary of American Electric Power. New England ElectricSystem disposed of one subsidiary, Pequot Gas Company, by saleto a nonaffiliate.

While most of the section 11 problems existing at the time of thepassage of the act have been resolved, there still remain a substantialnumber of issues which have not as yet been determined. Examplesare: In its order under section 11(b) (2) with respect to Cities ServiceCompany the Commission required that company to eliminate theminority interest in its subsidiary, Arkansas Fuel Oil Corporation,or to dispose of its holdings therein. A proceeding which is pendingbefore the Commission with respect to this matter is discussed at page132 of this report. In its order under section 11(b) (1) with respectto The Columbia Gas System, Inc., the Commission reserved jurisdic-tion concerning the retainability in the system of the properties of tencompanies (subsequently reduced to six) and in this connection thereis a proceeding pending before the Commission which is discussed atpage 126 of this report. There is a problem under section 11(b) (1)of the act with respect to Consolidated Natural Gas Co. relating prin-cipally to the retainability of nonutility pipe-line properties. Withrespect to Delaware Power & Light Co. there exists the question ofwhether the gas and electric facilities are retainable under commoncontrol. The Commission, by order dated April 14, 1950, directedthe disposition of the gas properties of Blackstone Valley Gas &Electric Co., a subsidiary of Eastern Utilities Associates. This systemhas pending before the Commission a plan designed to accomplishthe disposition of the gas properties required to be divested. Thatmatter is discussed at pages 126-127 of this report. There is pendingbefore the Commission an application filed by Electric Bond andShare Company for an exemption pursuant to section 3(a) (5) andthis matter is discussed on page 133 of this report. In the MiddleSouth Utilities, Inc., system there exist problems with respect to theretainability of certain gas and transportation properties and theelimination of a minority interest in a subsidiary. National FuelGas Co. system has oil, real estate, and gas transmission businesses,the retention of which has not been determined. There is also aproblem relating to a minority interest in one of its subsidiaries.

TWENTY-FIFTH ANNUAL REPORT 123There is pending before the Commission a proceeding under sectionl1(b) (1) of the act with respect to New England Electric System todetermine whether the system's gas properties are retain able togetherwith its electric properties," In addition there exists a problem inrespect of the minority interests in the common stock of five subsid-iaries. There is a problem under section 11(b) (1) of the act whichhas not been resolved whether Utah Power & Light Co. may retainits subsidiary, The Western Colorado Power Co.

The maximum number of companies subject to the act as componentsof registered holding company systems at anyone point of time was1,620 in 1938. Since that time additional systems have registered andcertain systems have organized or acquired additional subsidiaries,with the result that 2,387 companies have been subject to the act asregistered holding companies or subsidiaries thereof during the periodfrom June 15, 1938, to June 30, 1959. Included in this total were216 holding companies (holding companies and operating-holdingcompanies), 1,023 electric and gas utility companies and 1,148 non-utility enterprises. From June 15, 1938, to June 30, 1959, 2,064 ofthese companies have been released from the regulatory jurisdictionof the act or have ceased to exist as separate corporate entities. Ofthe remaining 323 companies, 176 are members of the 18 active systemslisted in the table on page 121 and 147 are members of the additional3 systems named above at page 120, which are also subject to regulationunder the act.

Of the above-mentioned 2,064 companies 924 with assets aggregatingapproximately $13 billion at their respective dates of divestment havebeen divested by their respective parents and are no longer subjectto the act as components of registered systems. The balance of 1,140companies includes 777 which were released from the regulatory juris-diction of the act as a result of dissolutions, mergers and consolidationsand 363 companies ceased to be subject to the act as components ofregistered systems as a result of exemptions granted under sections 2and 3 of the act or the grant of orders pursuant to section 5 (d) of theact finding such companies had ceased to be holding companies.

DEVELOPMENTS IN INDIVIDUAL REGISTERED SYSTEMS

There is discussed below each of the active registered systems andthe other systems in which there occurred during the fiscal year 1958significant developments other than financing transactions. Thefinancing activities of registered holding companies and their sub-sidiaries are treated below in a separate section of this report.

arI'he Commission has previously determined that the electric properties of New EnglandElectric System constitute an Integrated publlc-utUity system (Holding Company ActRelease No. 13688, Feb. 20. 1958).

124 SECURITIES AND EXCHANGE COMMISSION

A. DEVELOPMENTS IN ACTIVE REGISTERED SYSTEMS

American Electric Power Company, Inc.At December 31, 1958, this system had consolidated assets, less valua-

tion reserves, of some $1,391 million. The system had consolidatedoperating revenues of about $296,547,000 for the calendar year 1958.

Although no significant corporate changes took place in the systemduring the fiscal year, there was substantial activity with respect toits expansion program and the financing arrangements therefor. Thissystem is the largest electric holding company system subject to theact having generating capability of 5,432,000 kw. During the fiscalyear Ohio Power Company acquired the assets of The Seneca Light& Power Company, a wholly owned subsidiary of American Electric,"

The system carries on research along many avenues of technologyand, during the fiscal year, continued to concentrate on nuclear researchand development based upon a long-term, rather than a short-term,approach to the usefulness of atomic power. Three system companiesare members of the East Central Nuclear Group which consists of14 utility companies in the general Ohio Valley area. This groupis in the process of developing a program involving research anddevelopment of a high-temperature, gas-cooled, heavy water-moder-ated, pressure-tube reactor of 50,000 kw. capacity .. The AEP sys-tem's contribution to this project's pre-operational research and de-velopment is expected to be approximately $1,650,000 over a 5-yearperiod. If the reactor proves economically feasible and is built, anadditional contribution for post-operational work is expected toamount to about $650,000, likewise spread over a subsequent periodof 5 years. American Electric Power Co., Inc., is also a member ofNuclear Power Group, Inc., and, as such, continues to derive tech-nological and practical experience from the research and design activi-ties in Commonwealth Edison Company's 180,000-kw. boiling-waterreactor being installed at Dresden, Ill. The plant is expected to bein operation in 1960. Nuclear Power Group is contributing $15 mil-lion of the research and development cost of this plant, of which theAEP system's share is approximately $3 million.

The system's service corporation designed and engineer the powerplants of Ohio Valley Electric Corp. American Electric owns 37.8percent of the voting securities of OVEC, which, with its whollyowned subsidiary, Indiana-Kentucky Electric Corp., furnishes electric power to an installation of the Atomic Energy Commission nearPortsmouth, Ohio. There was pending before the Commission at theclose of the fiscal year the issue of whether the acquisition of OVEC'sstock by American Electric and other sponsoring companies meets thestandards of section 10 of the act. This issue and the organization

a Holding Company Act Release No. 13M2 (Oct. 27,1958).

TWENTY-FIFTH ANNUAL REPORT 125and financing of aVEC and Indiana-Kentucky Electric Corp. arediscussed on pages 126-129 of the Commission's 23d Annual Report.American Natural Gas Co.

This registered holding company and its subsidiary companies, asat December 31, 1958, had consolidated assets, less valuation reserves,of approximately $693,121,000. The system had consolidated operat-ing revenues of about $204,543,000 for the calendar year 1958.

On April 7, 1958, the Commission issued its findings and opinionand order directing American Natural to take appropriate steps toeliminate its outstanding $25 par value $6 nonredeemable preferredstock from the holding company system.' In November 1958. Ameri-can Natural filed a plan under section 11(e) of the act to eliminatesuch preferred stock by a payment of $32.50 per share to the holdersthereof. Public hearings on the plan have been concluded. Briefsand replies thereto have been filed. Oral argument was heard on May19,1959, and the matter was pending before the Commission for deci-sion at the end of the fiscal year.Central and South West Corp.

This registered holding {;ompany and its subsidiaries, as at Decem-ber 31, 1958, had consolidated assets, less valuation reserves, amount-ing to approximately $628,684,000. The system had total consolidatedelectric operating revenues of about $146,806,000 for the calendar year1958.

Three system subsidiaries are members of Texas Atomic Energy Re-search Foundation which consists of a group of 11 electric utilitycompanies in Texas. The Foundation was organized in 1957 for thepurpose of engaging in research in the atomic energy field as appliedto the generation of electric power. These system subsidiaries arecommitted to contribute a total of about $1 million, of a combinedtotal of $10 million, for the research program which has for its objectstudying heavy hydrogen or fusion reactions at high temperatureunder controlled conditions. Two system subsidiaries have joinedwith 13 other electric utility companies in the formation of SouthwestAtomic Energy Associates which, for research and development pur-poses is financing the construction of an epithermal thorium powerreactor.The Columbia Gas System, Inc.

This registered holding company and its subsidiaries, at December31, 1958, had consolidated assets, less valuation reserves, of about$1,150,600,000. The consolidated gross operating revenues for thecalendar year 1958 were approximately $427,443,000.

During the fiscal year Columbia's wholly-owned subsidiary, Colum-bia Gulf Transmission Company, acquired the assets of Gulf Inter-

4 RaIding Company A.ct Release No. 13726.

126 SECURITIES AND EXCHANGE COMMISSION

state Gas Company, a nonaffiliated company, in exchange for 3,574,337shares of common stock of Columbia and the assumption by ColumbiaGulf Transmission Company of Gulf Interstate's liabilities, including$141,400,000 of its publicly-held first mortgage pipeline bonds," Theassets acquired consist principally of 389 miles of pipeline which isused to gather gas purchased by the Columbia system in Louisiana,and 845 miles of transmission line, which is used to transport such gasto eastern Kentucky where it is delivered to other facilities of theColumbia system.

The Columbia system follows the policy of having its publicly-heldsecurities solely at the holding company level and the assumption ofthe Gulf Interstate Gas Company bonds by a subsidiary of Columbiawas a departure from this policy, which, if allowed to continue, wouldhave resulted in the system having substantial amounts of long-termdebt at two separate levels, creating a pyramiding of system securities,which was one of the evils the Public Utility Holding Company Actof 1935 was designed to prevent. To correct this situation, Columbiahas exchanged its debentures for the Columbia Gulf debentures,"

As indicated at page 132 of the 22d Annual Report there was pend-ing before the Commission a motion filed by Columbia requestingthe release of jurisdiction with respect to the retain ability of certainproperties controlled by the system. Both the Division of CorporateRegulation and Columbia have filed proposed findings of fact and con-clusions of law. The Division recommended that the Commissionshould not, on the basis of the record so far made in the proceeding,find the properties involved are retainable, Columbia submitted thatthe properties involved are properly a part of its integrated gas sys-tem or are reasonably incidental thereto and are retainable. Thematter was pending at the close of the fiscal year.Eastern Utilities Associates

TIllS registered holding company and its subsidiary companies, asat December 31, 1958, had consolidated assets, less valuation reserves,of about $105,396,000 and its consolidated operating revenues for thatyear were approximately $33,059,000.

On April 4, 1950, the Commission issued an order directing EUAto sever its relationship with the gas properties of its subsidiary,Blackstone Valley Gas Company.' In 1956 Valley Gas Co. wasincorporated for the purpose of acquiring and operating such gasproperties. In February 1957, an application-declaration was filedcovering several transactions designed to effectuate compliance withthe Commission's order of April 4, 1950. Included in the transac-tions was a proposal that EUA issue 25-year debt securities. The

• Holding Company Act Release Nos. 13893 (Dec. 23. 1958) and 13903 (Dec. 29, 1008) • Holding Company .Act Release No. 14030 (June 22, 1Q59).

, 31 S.E.C. 329.•

TWENTY-FIFTH ANNUAL REPORT 127

Division of Corporate Regulation opposed the issuance of the long-term debt securities by EUA and on December 15,1958, the Commis-sion published its findings and opinion in which it concluded that theproposed bonds could not be approved," On February 6, 1959,EUAfiled a plan, pursuant to section 11(e) of the act, designed to accom-plish the disposition of the Blackstone Gas properties, but which didnot include the issuance of long-term debt securities by EUA. Hear-ings on the plan were concluded and the matter was before the Com-mission for decision at the close of the fiscal year.Middle South Utilities, Inc.

This registered holding company and its subsidiaries, as of Decem-ber 31, 1958, had consolidated assets, less valuation reserves, amount-ing to approximately $699,861,000. The system had total consoli-dated operating revenues for the year 1958 of above $182,927,000.

Hearings were held in 1957 with respect to issues related to the ac-quisition by certain companies, including Middle South, of the capitalstock of Electric Energy, Inc., an electric generating company whichhas a long-term contract for the sale of firm power to an installationof the Atomic Energy Commission. During the hearings, MiddleSouth, as a result of negotiations with Kentucky Utilities Company,entered into a formal contract to sell its 10 percent stock interest inEEl. Middle South filed a declaration under section 12(d) of theact and rule 44 thereunder (file No. 70-3595), requesting Commissionpermission to sell its stock interest in EEl and Kentucky filed anapplication under section 10 of the act (file No. 70-3596) requestingCommission approval to acquire such interest. The Middle South-Kentucky proposed transactions were consolidated with the pendingproceedings and a supplemental hearing was held.

On November 28, 1958, the Commission issued its findings andopinion and order, pursuant to section 10, approving the acquisitionsby Union Electric Company, Illinois Power Company, and KentuckyUtilities Company of their proposed respective interests in the EElstock. In addition, the Commission permitted Middle South's decla-ration for the sale of its interest in EEl to become effective,"New England Electric System

This registered holding company and its subsidiaries, as at Decem-ber 31, 1958, had consolidated assets, less valuation reserves of about$600,135,000and, for that year the consolidated operating revenuesamounted to approximately $166,959,000.

On August 5, 1957, the Commission instituted a proceeding in re-spect of NEES and its subsidiaries for the purpose of determining theextent to which the electric, gas, and other business operations of the

8 Holding Company Act Release No. 13886.D Holding Company Act Release No. 13871. This matter Is discussed at pages 126-129

of the 23d Annual Report and also at pages 11~116 of the 24th Annnal Report.

128 SECURITIES AND EXCHANGE COMMISSION

NEES holding company system satisfied the integration standards ofsection l1(b) (1) of the act.10 The hearing was initially devoted ex-clusively to the issue of whether or not the electric operations of theNEES system constitute those of a single integrated public-utilitysystem within the meaning of section l1(b) (1). On February 20,1958, the Commission issued its findings and opinion and order inwhich it held that the electric properties of the NEES holding com-pany system satisfied the standards delineating an integrated public-utility system." At the close of the fiscal year, there was pending forfurther hearing and determination the question of whether the NEESsystem may retain all or any of its gas properties.

In July 1958, NEES filed a plan under section 11 (e) of the act toeliminate the minority interests in the common stocks of those of itssubsidiaries engaged solely in the electric business. Proceedings wereinstituted by the Commission under section 11(b) (2) for the purposeof determining whether the existence of the public minority interestsin these subsidiaries constituted an unfair and inequitable distributionof voting power and the two proceedings were consolidated for hear-ing and determination." On May 14, 1959, the Commission approvedthe plan 13 and on June 15, 1959, the plan was approved and orderedenforced by the United States District Court for the District ofMassachusetts,"

The system holds a 30 percent stock interest in Yankee AtomicElectric Company, which is constructing an atomic electric plant. Theorganization of Yankee and its initial financing transactions are dis-cussed at pages 162-164 of the 22d .Annual Report, and steps in theformulation of Yankee's overall financing program are discussed onpages 130-131 of the 23d .Annual Report. During the fiscal year theCommission approved the permanent financing of Yankee 15 and theplant is scheduled for completion in 1960. The total capital require-ments of Yankee, including construction costs and working capital,are estimated by Yankee at $57 million, of which $20 million will con-sist of first mortgage bonds, $17 million of unsecured promissorynotes and $20 million of common stock.Ohio Edison Company

Ohio Edison is a registered holding company and an operatingelectric utility company. The system consists of Ohio Edison itselfand three electric utility subsidiaries, Pennsylvania Power Company,Ohio Valley Electric Corp., and its wholly-owned subsidiary, Indiana-Kentucky Electric Corp. Ohio Edison and its subsidiary, Pennsyl-

Holding Company Act Release No. 184521tJ1 Rohling Company Act Release No. 18688.UHolding Company A4:t Release No. 18199 (Ang. 1, 1958).. Holdlng Company Act Release No. 14002-;If Merrimack-EIISe% ElectrIc Co. et al., Civ. No. 59-393 F.:Ill Holding Company Act Release Nos. 1398li (Apr. 15, 1959) and 14025 (.JUIIe 12, 1959).

'"

•

TWENTY-FIFTH ANNUAL REPORT 129vania Power Co., had consolidated assets, less valuation reserves, ofapproximately $587,375,000 at December 31, 1958, and their consoli-dated operating revenues for the year 1958 amounted to $137,650,000.

Ohio Edison and Pennsylvania Power are 2 of the 15 electric utilitycompanies that sponsored the organization of Ohio Valley ElectricCorp. (OVEC) and its subsidiary, Indiana-Kentucky Electric Corp.,which supply the power requirements of a gaseous diffusion plantof the Atomic Energy Commission located near Portsmouth, Ohio.The interest of Ohio Edison in the common stock of OVEC is 16.5percent. Further details with respect to OVEC are set forth at pages126-129 of the 23d Annual Report. In the Commission's order au-thorizing the acquisition of OVEC's securities, jurisdiction was ex-pressly reserved to determine at an appropriate future time whetherthe companies subject to the act could retain such securities." OnNovember 19, 1956, the Commission reopened the proceeding and or-dered a hearing in respect of the reserved issues." Hearings havebeen completed and at the close of the fiscal year, the matter was inprocess of preparation for submission to the Commission.

Ohio Edison and Pennsylvania Power and 12 other electric utilitycompanies are members of East Central Nuclear Group formed about2 years ago to formulate plans for undertaking a program of nuclearresearch and development. In December 1957, this group and Flor-ida West Coast Nuclear Group presented a proposal to the AtomicEnergy Commission for research and development on a partnershipbasis with that agency of a 50,OOO-kw.high-temperature gas-cooled,heavy-water-moderated reactor of the pressure-tube type. It will bedesigned as a prototype of a natural uranium 200,000 kw. reactor.Subject to necessary regulatory approvals, Ohio Edison and Penn-sylvania Power may be obligated to expend approximately $425,000per year over the 1958-62 period in connection with preoperationalresearch and development.The Southern Company

This registered holding company and its subsidiaries had, atDecember 31, 1958, consolidated assets, less valuation reserves, ofapproximately $1,130,863,000 and for that year the consolidated oper-ating revenues totaled about $272,134,000.

Southern and its subsidiaries have continued their participation inresearch and development of nuclear power through Power ReactorDevelopment Co., a nonprofit corporation in the process of construct-ing an experimental fast breeder atomic reactor in Michigan. Thesystem's service company is one of the 21 member companies whichformed PRDC. Further details with respect to PRDC are set forth

II Holding Company Act Release No. 11578 (Nov. 7. 19112).11Holding Company Act Release No. 13313.

130 SECURITIES AND EXCHANGE COMMISSION

at pages 164-166 of the 22d Annual Report and at pages 129-130 ofthe 23d Annual Report. The four direct subsidiaries of Southernhave agreed to contribute $2.4million over a 6-year period toward theconstruction of this atomic reactor and Southern has guaranteed thepayment of 8 percent of the principal and interest of the borrowingsmade from various banks by PRDC under a loan agreement provid-ing for such borrowings of $15 million by the end of 1958.18

Alabama Power Company and Georgia Power Company, subsid-iaries of The Southern Company, have undertaken the joint construc-tion of a 1,000,OOO-kw.steam electric generating station to be ownedand operated by Southern Electric Generating Company (SEGCO),which is to be owned equally by Alabama and Georgia. The esti-mated cost of the station, scheduled for completion in 1962, is $161million and is to be financed by the issuance and sale of $105 millionof first mortgage bonds to the public, the balance to be supplied ascommon equity by the owner companies. During the past fiscal yearthe Commission approved the first issuance and sale of first mortgagebonds of SEGCO in the principal amount of $25 million. The Com-mission noted in its findings and opinion that while SEGCO would notbe consolidated with Alabama or Georgia for the purpose of financialreporting, nevertheless, for purposes of financial analysis, the Com-mission considered it appropriate to impute 50 percent of the out-standing publicly-held securities and of the surplus of SEGCO toAlabama and 50 percent to Georgia."

On November 4, 1955, the Commission rescinded its previously is-sued order authorizing the issuance and acquisition of up to 55,000shares of the common stock of Mississippi Valley Generating Com-pany, of which 11,000shares had been issued to and acquired by Mid-dle South Utilities, Inc. and The Southern Company, leaving thebalance of 44,000 shares authorized but not yet issued. In respect of the11,000 shares already issued, the Commission reserved jurisdictionfor future determination of the action to be taken thereon."Union Electric Co.

Union Electric Co. is a registered holding company and an operatingelectric utility company. As at December 31, 1958, the consolidatedassets, less valuations reserves, of Union and its subsidiaries amountedto approximately $552,236,000and their consolidated operating reve-nues for 1958totaled about $131,650,000.

Heretofore the Commission reserved jurisdiction over the acquisi-tion by certain companies, including Union Electric, of the capitalstock of Electric Energy, Inc., an electric generating company whichhas a long-term contract for the sale of firm power to an installation

18 Holding Company Act Release No. 13883 (Feb. 12, 19(7).t. Holding Company Act Release No. 14008 (May 20, 19(9) ... Holding Company Act Release No. 13029.

TWENTY-FIFTH ANNUAL REPORT 131

of the Atomic Energy Commission. On November 28,1958, the Com-mission issued its findings and opinion and order granting approval ofthe applications of Union Electric Company to acquire 40 percent, ofIllinois Power to acquire 20 percent, and of Kentucky to acquire 20percent, of the common stock of Electric Energy, Inc., pursuant tosection 10 of the act and released the jurisdiction previously reservedunder that section. The Commission dismissed the application ofCentral Illinois Public Service Company to acquire 20 percent of theEEl stock on the ground that it was not, and would not become, as aresult of the proposed acquisition, an affiliate of EEl and of any otherpublic-utility company and that, absent such an affiliated relationship,no approval of the acquisition of the common stock of EEl need beobtained."

On March 26, 1956, Union Electric filed an application for exemp-tion from the provisions of the Holding Company Act pursuant tosection 3 (a) (2) thereof. On January 13, 1959,Union Electric filed anamendment to bring the exemption application up to date. The mat-ter was pending at the close of the fiscal year.

In the fiscal year there were four cases before the courts arising outof objections by J. Raymond Dyer, a stockholder of Union to solicita-tion of proxies by the company's management and by solicitation byDyer. For a discussion of the background of this litigation see the24th Annual Report at pages 119-120. On April10, 19[;9,the Courtof Appeals for the Eighth Circuit affirmed the Commission's ordersentered in March 1958 allowing a declaration filed by managementto become effective as a basis for proxy solicitation for the 1958stock-holder's meeting." The Court rejected all of Dyer's numerous con-tentions On the merits and held that within the scope of its reviewfunctions, there is nothing which the Commission did or failed to dowhich would entitle petitioners to have the orders reversed. More-over, the Court found that the questions presented had not becomemoot or inoperative because the stockholder's meeting had been held.As set forth in the 24th Annual Report, Dyer had filed a petition forcertiorari in the Supreme Court of the United States to review theEighth Circuit's dismissal as moot of his petition for review of theCommission's orders relating to Union's 1957 meeting." On May 18,1959,the Supreme Court granted certiorari, vacated the judgment andremanded the case to the Eighth Circuit for further consideration inview of that Court's opinion in the 1958 proceeding." At the end ofthe fiscal year the case was pending before the Court for a decision onthe merits. In addition, Dyer has filed a petition to review the Com-

:n 32 S.E.C. 202 (1951).". Dyer v. S.E.C., 266 F. 20 33 Dyer filed a petition for certiorari In the Supreme Court

III thlA case on Aug. 3, 1959.:a Duer v, S.B C., 251 F. 20 512 (e.A. 8, 19(8).0' Dyer v. S.B C., 359 U.S. 499.

529523--59----12

132 SECURITIES AND EXCHANGE COMMISSION

mission's orders in connection with the 1959 solicitation of proxies forUnion's meeting. The related injunction action in the district courtreferred to on page 120 of the 24th Annual Report was decided ad-versely to Dyer subsequent to the end of the fiscal year.

B. DEVELOPMENTS IN OTHER SYSTEMS

Central Public Utility CorporationThis company registered under the act as a holding company in

1938, at which time the system consisted of 47 operating companieslocated in 19 States and in areas outside of the United States. Inorder to effectuate compliance with section 11 (b) of the act, the sys-tem consummated a number of section l1(e) plans and on June 1,1955, filed an application for exemption under section 3(a) (5) of theact, stating that it had disposed of all its domestic public-utilitysubsidiaries and had substantially simplified its capital structure.On April 3, 1959, following several amendments to and a hearing OIl

the application, the Commission issued an order granting Cenpuc anexemption from the act,25subject to a number of terms and conditions,which included consummation of a proposed consolidation of Cenpucwith one or more companies within 6 months of the date of the order(subsequently extended for 1 month) and the right of Cenpuc share-holders objecting to the consolidation to receive $28 per share in lieuof shares of the consolidated corporation. Cenpuc agreed that theconsolidation, in and of itself, would constitute a change of circum-stances within the meaning of section 3 (c) of the act; thus, the Com-mission may revoke the exemption if the circumstances existing afterthe consolidation prove to be detrimental to the public interest or theinterest of investors. Subsequent to the exemption order, Cenpucpublicly announced and filed proxy material with the Commissionrelating to a proposed consolidation of itself, Consolidate ElectronicsIndustries Corp., and Philips Industries, Inc. into a new corpora-tion to be named Consolidated Electronics Industries Corp. and intowhose shares Cenpuc's capital stock would be converted on a share forshare basis. The Commission, after examining the proxy material,released the jurisdiction which it had reserved thereover. On Octo-ber 16, 1959, following the requisite stockholder approval, the pro-posed consolidation was consummated.Cities Service Co.

On September 20, 1957, the Commission issued an order pursuantto section 11(b) (2) of the act requiring Cities to eliminate the 48.5percent minority interest in Arkansas Fuel Oil Corporation or to dis-pose of its holdings of 51.5 percent," Cities, Ark Fuel and a stock-holder of Ark Fuel petitioned the United States Court of Appeals

.. Holding Company Act Release No. 13970.:II Holding Company Act Release No. 13549.

TWENTY-FIFTH ANNUAL REPORT 133for the Third Circuit for review of the order. On July 22, 1958, theCourt affirmed the order of the Commission." On September 18,1958, Cities filed a plan pursuant to section 11 (e) for the purpose ofeliminating the minority interest in Ark Fuel. The plan providedfor division of the assets of Ark Fuel into two new campanies, one tobe owned by Cities and the other by the minority interest. Subse-quently, the plan was withdrawn and a new plan filed providing forthe exchange of one share of Cities common stock for each 2.4 sharesof Ark Fuel common stock. Hearings on the latter plan were com-menced on March 31, 1959, and were still in progress at the closeof the fiscal year.Electric Bond and Share Company

Electric Bond and Share Company, which no longer holds as muchas 5 percent of the outstanding voting securities of any domesticpublic-utility company, has pending before the Commission an appli-cation, filed pursuant to section 3 (a) (5) of the act, for exemption asa holding company from provisions of the act. In the event suchexemption is granted, it is the intention of the company to convertits status to that of an investment company and register under theInvestment Company Act of 1940. The proceeding on the exemptionapplication involves a number of very difficult and complex issues,among which is the question as to whether Bond and Share, throughits wholly-owned engineering and consulting service company sub-sidiary, Ebasco Services, Incorporated, exercises controlling influ-ence over, or is affiliated with, certain public-utility and holdingcompany clients of Ebasco which formerly were controlled by Bondand Share. Hearings were concluded on March 26, 1959, and the mat-ter was under advisement for decision by the Commission at the close ofthe fiscal year.Standard Gas and Electric Company

Standard Gas and Electric Company, a registered holding company,was formerly a subsidiary of Standard Shares, Inc. On September23, 1958, the Commission granted an application of Standard Sharesunder section 5 (d) of the act for an order declaring it not to be aholding company and its registration as such thereupon ceased to bein effect.28 Standard Shares, formerly known as Standard Power andLight Corp., upon the issuance of such order, completed its registra-tion as an investment company under the Investment Company Act of1940 and is subject to the requirements of that act and to the Com-mission's jurisdiction thereunder.

Standard Gas and Electric owns 45.6 percent of Philadelphia Com-pany, also a registered holding company. Neither owns directly orindirectly 10 percent or more of the voting securities of a public-

.. Arkansas Fuel OU Corporation, 257 F. 2d 926.

.. Holding Company Act Release No. 18824.

134 SECURITIES AND EXCHANGE COMMISSION

utility company and both are required by orders issued under section11(b) (2) of the act to liquidate and dissolve. Each of these registeredholding companies is in a position to effectuate dissolution except thatthere exist undetermined questions relating to Federal income taxesfor the years 1942 through 1950.Other Matters

As previously reported at pages 114-115 of the 23d Annual Report,International Hydro-Electric System ("IHES") was reorganizedpursuant to section 11(d) of the act and IHES is now registered asan investment company under the Investment Company Act of 1940and subject to the Commission's jurisdiction thereunder. The onlyremaining matters under the Holding Company Act are fees and ex-penses to be awarded in connection with the reorganization. Afterhearings, oral argument was heard by the Commission and the matterwas pending for decision at the end of the fiscal year.

There are also pending before the Commission applications for theallowance of fees and expenses in connection with a plan filed andconsummated by The United Corporation pursuant to section 11(e)of the act for its conversion into an investment company. Hearingson such applications have been held, oral argument heard, and thematter was under advisement for decision by the Commission at theclose of the fiscal year.

FINANCING OF ACTIVE REGISTERED PUBLIC UTILITY HOLDINGCOMPANIES AND THEIR SUBSIDIARIES

During the fiscal year 1959active registered holding companies andtheir subsidiaries sold to the public and to financial institutions, pur-suant to authorizations granted by the Commission under sections 6and 7 of the act, 25 issues of long-term debt and of stocks aggregating$477 million." This is in contrast to fiscal year 1958when there were36 such issues with aggregate gross sales value of $583 million." Allbut five 31 of the active registered holding company systems sold long-term debt or stock to the public in varying amounts and of varioustypes in fiscal 1959.

The following table presents by systems the financing by activeregistered holding companies and each of their subsidiaries classifiedby amounts and types of securities .

.. Debt securities are computed at their principal amount and stocks are taken at grossproceeds to the company.

30 In fiscal 1959, all of the securities wei e sold to provide new capital. In fiscal 1958,two issues of debt securities, aggregating $36 million, were sold to refund other debtsecurities carrying a higher Interest rate.

31These are Delaware Power & Light Company, Granite City Generating Company,Philadelphia Electric Power Company, Union Electric Company, and Utah Power & LightCompany. Because of the nature of their business Granite City and Philadelphia requiredno new capital, and Delaware, Union and Utah met their financial requirements throughthe issuance of short-term notes.

TWENTY-FIFTH ANNUAL REPORT 135

TABLE I.-Securities issued and sold for cash to the public and financial institutionsby active reqistered holding conipames and their subsidiaries, fiscal year 1959.

[In millions 1

Holding Company System Bonds Debent ures Preferred Common

Amencan Electric Power Co, IncIndiana & Mrehtgan Elect. Co_____________________ $20OhIO Power Co 25

Amencan Natural Gas Co $28Central and South West Corp

Central Power & LIght Co_________________________ 1!southwestern Eleetrrc Power Co___________________ Ib

The Columbia Gas System. Ine________________________ $25 39Consolidated Natural Gas Co__________________________ 45 39Eastern Utilities Ao;1;oe"'tes____________________________ 4

Brockton Edison Co_______________________________ 5 ~lGeneral Public Utrhties Corp__________________________ 20Middle South Utrlrties, Inc

Arkansas Power & Light Co_______________________ SLouissana Power & LIght Co__ 8 __

National Fuel Gas Co__ 10New England Electric System

Yankee Atomic Electric Co________________________ 9OhIO Edison Co________________________________________ 30 _ _ The Southern Co __ 4l>

Alabama Power Co___________________________ 20 __ Gulf Power Co______ 7 .. ..Mississippi Power Co .. ,';

The \~~:s~ePe:;{rEf~~i.?cec';;'_~t_I:'.~_~~-~-~~:::::::::::::: ~~_ ::::::-::~:: :::::::::::: ::::::::::::Monongahela Power Co____________________________ 16West Penn Co__________ 14 __

Total .. __ $194 80 18 18-5

In addition to common stock issued for cash listed in the abovetable, The Columbia Gas System, Inc., through a subsidiary, ex-changed with the public 3,574,373shares of its stock in connection withthe acquisition by the subsidiary of the assets of Gulf Interstate GasCompany, a nonaffiliated natural gas pipeline company. The marketvalue of the stock at the time of issuance was approximately $78 mil-lion. This issuance was excepted from the competitive bidding re-quirements of rule 50, the Commission concluding that compliancewith competitive bidding was not necessary or appropriate in thepublic interest or for the protection of investors or consumers toassure the receipt of adequate consideration or the reasonableness ofthe fees or commission to be paid with respect to such issuance. De-tails of the transaction are more fully discussed at page 125 hereof.

The table also does not reflect the issuance of short-term notes tobanks by any of the system companies, nor does it include intrasys-tem financing represented by the issuance of securities by subsidiariesto their holding companies. These issuances also required authoriza-tion by the Commission except in the case of the issuance to banksof short-term notes having a maturity of less than 9 months where theaggregate amount did not exceed 5 percent of the total capitaliza-tion of the company as defined in section 6(b) of the act. The issu-ance of such securities is exempted by that section 6(b).It may be noted from the table that the total of $477 million is

made up of $194 million bonds, $80 million debentures, $18 million

_ _ _

_ _

_

_

• _ _

_ _

_ -- _ __ _

_

136 SECURITIES AND EXCHANGE COMMISSION

preferred stock, and $185million common stock. No bonds were soldduring the first half of the fiscal year; the three debenture issuesaggregating $80 million were sold during that period.Competitive Bidding

All but 3 of the 25 issues sold for cash and listed in table I wereoffered at competitive bidding pursuant to the requirements of rule50.32 An order granting exception from competitive bidding wasentered in only one of the three instances, the other two being auto-matically excepted by paragraph (a) (1) rule 50.33 General PublicUtilities Corp., a registered holding company, issued and sold 530,000shares of its $5 par value common stock for $20 million. This was anonunderwritten rights offering in connection with which it wasproposed that the unsubscribed shares would be sold through brokerson the New York Stock Exchange. Although it appeared that thesale of the unsubscribed shares would be exempt under paragraph(a) (4) ,34 the Commission granted the company an exception fromthe provisions of the rule to the extent it might become applicable tothe transaction."

Consolidated Natural Gas Company, also a registered holding com-pany, sold 821,256shares of its $10 par value common stock for $39million. This was also a nonunderwritten rights offering to its stock-holders and was automatically excepted from the competitive biddingrequirements by the provisions of paragraph (a) (1) of the rule. Itwas not proposed that the unsubscribed shares be sold.

The remaining issue not sold through competitive bidding was theissuance of $15 million of common stock by Yankee Atomic ElectricCompany, a subsidiary of New England Power Company, which inturn is a subsidiary of New England Electric System, a registeredholding company. New England Power Company purchased $4,-800,000 of the issue and Montaup Electric Company, a subsidiary ofEastern Utilities Associates, a registered holding company, purchased$720,000thereof. The remainder of $9,480,000was purchased by theother nine owner companies of Yankee Atomic Electric Company.Since this stock was offered to existing stockholders, which had agreedto subscribe for their pro rata share the transaction was excepted fromthe rule pursuant to paragraph (a) (1) thereof.

During the period from May 7, 1941, the effective date of rule 50,to June 30, 1959, a total of 767 issues with a sales value of $10,957million were sold at competitive bidding under the rule. Those totals

II As noted above, the table does not Include the issuance of Columbia Gas common stockIn connection with an exehnuge offer which was excepted from the competitive biddingrequirements of rule 50.

"'That paragraph excepts the Issuance and sale of securities pro rata to existing holdersof the company pursuant to preempttve rights .

.. That paragraph excepts the issuance and sale of securities the total proceeds whereofdo not exceed $1 million.

II Holding Company Act Release No. 13853.

TWENTY-FIFTH ANNUAL REPORT 137

compare with 224 issues of securities with an aggregate sales valueof $2,311million which have been sold pursuant to orders of the Com-mission granting exception from the competitive bidding requirementsof the rule under paragraph (a) (5) 36 thereof. The numbers of issuesand the amounts of various classes of securities which have been soldpursuant to exception granted under paragraph (a) (5) are set forthin the following table:Sales by registered holding companies and their subsidiaries of securities excepted from

competitive bidd~ng requirements pursuant to the provisions of paragraph (a) (5) ofrule 50 by orders of the Commission entered from ~May 7, 1941, to June 3D, 195937

[Dollar amounts in mlllions]

Underwntten N on-underwritten Total

Number of Amount Number of Amount Number of AmountIssues Issues Issues

Bonds ________________________ 4 $27 65 $1,171 °09 °$1,198Debentures ___________________ 3 83 0 42 9 125N otes _________________________ ------------ ------------ 21 83 21 83Preferred stock _______________ 13 III 25 272 38 383Common stock _______________ 33 279 53 243 87 522

Total 53 500 170 1,811 °224 °2,311

Tbls is exclusive of Y wee Atomic bonds of $20,000,000 for WhICh exception was granted III June 1959 butthe sale of these securities did not occur until July.

Of the total amount of securities sold pursuant to orders of excep-tion granted under paragraph (a) (5) of rule 50, 122 issues with adollar value of $1,841million were sold by the issuer and the balanceof 102 issues with a dollar value of $470 million were portfolio sales.Of the 122 issues sold by the issuers, 68 were in amount of $1 millionto $5 million and 2 bond issues were in excess of $100million."Protective Provisions of First Mortgage Bonds and Preferred Stocks of Public

Utility CompaniesIn passing upon issuances of first mortgage bonds and preferred

stocks of public-utility companies, the Commission examines themortgage indenture and charter provisions to determine whether ornot there is substantial conformity with the applicable Statements ofPolicy which were adopted by it in 1956.39 These Statements ofPolicy represent substantially a codification of certain principles or

.. Paragraph (a) (5) of rule 50 provides for exception from the competitIve biddingrequirement of the rule where the Commission finds such bidding Is not necessary or appro-priate under t.he particular circumstances of the Individual case.

n The total number of issues in the table is 224 as compared with a total of 241 issues reported in the 23d An-nual Report (page 137) for the penod ending June 30, 1957. In preparing the earlier report an exception wascounted as to each issue of securities. Insome cases one order of exception was issued although the securitieswere sold from time to time in seperate issues. To eliminate such duplication, the above table is prepared onthe basis of the number of exceptions granted from competitive bidding.

In addition, In the table in the 23d Annual Report there was a duplication in the number of exceptionsgranted for issues of preferred stock. As a result, the total figure of 38 in the above table Is the same as in theearlier table although there was one exception granted for preferred stock (Brockton Edison Co ) during thefiscal year 1958 described at pages 127-128 of the 24th Annual Report.

Ohio Valley Electric Corporation, $360 mUlion; and United Gas Corporation $116million

.. Holding Company Act Release No. 13105 (Feb. 16, 1956) as to first mortgage bondsand Holding Company Act Release No. 13106 (Feb. 16, 1956) as to preferred stock.

°

• •

138 SECURITIES AND EXCHANGE COMMISSION

policies prescribed for the protection of investors in these securitiesdeveloped on a case-by-case basis over a period of years, as modifiedin the light of experience and comments received from interestedpersons who had been invited to submit their views. Conformitywith the Statements of Policy is required except where deviations areclearly warranted by the circumstances of a particular case."

During fiscal year 1959 applications or declarations with respectto 17 first mortgage bond issues aggregating $248,950,000principalamount, and three preferred stock issues with a total par value of$10 million, were filed by public-utility companies under the act."

The Statement of Policy with respect to first mortgage bond issuesrequires a restriction, under certain circumstances, on the distribu-tion of earned surplus to common stockholders. In the case of 6 ofthe 17 bond issues with respect to which applications were filed duringthe fiscal year, existing indenture provisions adequately conformedwith this requirement of the Statement of Policy. In the case of nineissues, an additional restriction was required and was either proposedby the issuer or evolved in informal discussions between the Commis-sion's staff and representatives of the issuer. The two remaining bondissues were proposed by two newly-organized companies having noprevious records of earnings or dividends. In both cases, the inden-ture contained certain restrictions against future distributions ofearned surplus to holders of the common stock, all of which, in eachinstance, was jointly held by groups of other utility companies. Toavoid unnecessary rigidity, the restrictive dividend provisions gen-erally included the further provision that the restrictions could bemodified upon application of the issuer to, and approval by, the Com-mISSIOn.

A further provision contained in the Statement of Policy regardingfirst mortgage bonds relates to the renewal and replacement of de-preciable utility property which is subject to the lien of the mortgage.It requires, in essence, that the issuer construct additions to its prop-erty, or else deposit cash or bonds with the indenture trustee, in anamount which on a cumulative basis will provide for the replacementin cash or property of the dollar equivalent of the cost of the depreci-able mortgaged property during its estimated useful life. The State-ment of Policy provides that the requirement be expressed as apercentage of the book cost of depreciable property, except that if theexisting indenture provision expresses the requirement on a different

.. .Application of the Statements of Polley to filings from the effective date thereof toJune 30, 1958, are discussed In the 23d .Annual Report (pages 141-43) and the 24th.Annual Report (pages 128-31).

41 Of the 17 bond Issues as to which applications or declarations were filed during thefiscal year, 12 were Issued and sold to the public or financial Institutions during the fiscalyear as indicated in the table on p, 135, above: 3 were Issued and sold after the close of thefiscal year; 1 Issue was withdrawn after approval by the Commission; and 1 issue wassold to the issuer's holding companies and not to the public.

TWENTY-FIFTH ANNUAL REPORT 139basis, as, for example, in terms of operating revenues, no change willbe required if the company can demonstrate that the existing pro-vision provides an amount at least equal to a requirement based onthe book cost of depreciable property. As in the case of earned sur-plus restrictions, the Commission, in the interest of flexibility, haspermited the issuer to insert a provision under which the issuer, uponapplication to, and approval by, the Commission may modify thepercent of depreciable property requirement.

Of the 17 bond issues, the indentures of 12 expressed the renewaland replacement fund requirement as a percent of depreciable prop-eity which was deemed to be appropriate; the indentures of 4 ex-pressed the requirement as a percent of revenues and were foundacceptable by the Commission since they appeared to afford at leastas much protection to the bondholders as would be afforded by an ap-propriate percent-of-property formula; and the indenture of the re-maining 1 bond issue contained no renewal and replacement fund re-quirement in view of another requirement of the indenture-unusualfor an electric utility company-for a 100 percent cash sinking fundrepayment of the bonds by the maturity date thereof."

During the fiscal year 1959, the Commission has continued to ad-here to the principle, set forth in the Statements of Policy for bothbonds and preferred stocks, that the securities be freely refundable atthe option of the issuer upon reasonable notice and payment of areasonable redemption premium, if any.43 An exception was madeby the Commission in the case of Yankee Atomic Electric Company,a new company organized for the purpose of building and operatingan experimental nuclear power plant in New England. In light ofthe unusual circumstances of the construction and financing of theplant, the Commission approved an indenture covenant providingthat none of the company's proposed $20 million principal amountof first mortgage bonds could be redeemed for refunding purposesduring the period of plant construction; that during a 5-year periodthereafter the bonds could be refunded only upon payment of re-demption premiums higher than customary under the Commission'susual standards; but that following such 5-year period the bondswould be freely refundable by the company upon payment of thenormal lower scale of redemption premiums."

Continuing studies made by the Commission's staff of electric andgas utility bond issues sold at competitive bidding indicate that re-strictions on free refundability of bonds have had no significant bear-

.. The usual sinking fund provision for electric utlllty bonds, wblch generally have a30.year maturity, provides for annual sinking fund payments aggregating, over the lifeof the Issue, approximately 30 percent of the principal amount of the bonds.

•• The significance of the refunding privilege, both as a matter of conformity with thestandards of the act and as a matter of practical finance, was discussed at Rome lengthIn the 24til Annual Report, at page 130.

.. Holding Company Act Release No. 14025 (June 12,1959),

140 SECURITIES AND EXCHANGE COMMISSION

ing upon the interest cost to the issuer." The staff's studies also in-dicate that the presence or absence of a restriction on free refund-ability has not affected the number of bids received by an issuer atcompetitive bidding or the ability of the winning bidder to marketthe bonds. These findings were based on an examination of all elec-tric and gas utility bond issues (including debentures) sold at com-petitive bidding between May 14, 1957, and June 30, 1959, by com-panies subject to the Holding Company Act as well as those not sosubject. Itwas on the former date that a public-utility company notsubject to the Holding Company Act instituted a practice, which hasbeen followed in competitive bidding by various other public-utilitycompanies not subject to the Holding Company Act, of including aprovision prohibiting the issuer, during a period of years, generallyfive, from refunding its outstanding bonds at lower interest rates.

During the above period, there was a total of 178 electric and gasutility bond issues offered at competitive bidding, aggregating$3,763 million principal amount. The refundable issues numbered137 and accounted for a total of $2,507million, while the nonrefund-able issues-all except 1 being nonrefundable for a period of 5 years,and the one being nonrefundable for a period of 7 years-numbered41 and totaled $1,256 million principal amount. The number ofrefundable issues thus represented 77 percent of the total number ofissues, while, in terms of principal amount, the refundable issuesaccounted for 66.6percent.

The weighted average number of bids received on the refundableissues was 4.56, while on the nonrefundables it was 4.27. The mediannumber of bids on both groups was the same-i.e., 4. With respect tothe successof the marketing of the bond issues, an issue was consideredto be successfully marketed if at least 95 percent of the issue was soldat the syndicate price up to the date of termination of the syndicate.On this basis, 75.2 percent of the refundable issues were successful,while 73. 2 percent of the nonrefundables were successful. In termsof principal amount, 73.0 percent of the refund ables were successful,while 74.7 percent of the nonrefundables were successful. Extensionof the comparison to include the aggregate principal amounts of allissues which were sold at the applicable syndicate prices up to thetermination of the respective syndicates, regardless of whether a par-ticular issue met the definition of a successful marketing, indicatesthat 89.2percent of the combined principal amount of all the refund-ables were so sold, as compared with 89.1 percent for the nonre:fund-ables. The substantially similar statistics developed in respect of thetwo groups of bond issues support the Commission's policy of requir-

"This finding has also been made by others who have made Intensive studies of theproblem. See W. J. Wlnn and A. Hess, Jr., "The Yalue of the Call Privilege," The JOllrnaloj Finance, May 1959, page 189.

TWENTY-FIFTH ANNUAL REPORT 141

ing free refundability of utility bond issues subject to the HoldingCompany Act.

In the 24th Annual Report, mention was made (at page 131) of acomprehensive study of redemption provisions of corporate bondsbeing conducted at the Wharton School of Finance and Commerceof the University of Pennsylvania, and that a member of the staffof the Commission was serving on an advisory committee with re-spect to such study. A preliminary draft report on the study wascompleted shortly after the close of fiscal year 1959.

Of the three preferred stock issues with an aggregate par value of$19 million with respect to which applications or declarations werefiled during the fiscal year, two issues had charter provisions in sub-stantial conformity with the Statement of Policy. The other issuefailed to conform in certain respects relating to, among other things,restrictions against (a) amending the charter in a manner adverse tothe preferred stockholders, (b) mergers or consolidations, (c) re-acquisitions by the issuer of any of its outstanding preferred stock,and (d) issuance or assumption of short-term unsecured debt.Accordingly, the Commission, in approving the proposed issue ofpreferred stock, conditioned its order so as to require the necessaryinvestor protection."

.. Holding Company Act Release No. 18992 (Apr. 27, 1959).

PART vnPARTICIPATION OF THE COMMISSION IN CORPORATE RE-

ORGANIZATIONS UNDER CHAPTER X OF THE BANK-RUPTCY ACT, AS AMENDED

The role of the Commission under chapter X of the BankruptcyAct, which provides a procedure for reorganizing corporations in theUnited States district courts, differs from that under the various stat-utes which it administers in that the Commission does not initiatechapter X proceedings or hold its own hearings. It has no authorityto determine any of the issues in these proceedings. However, at therequest of the judge or on the Commission's own motion, if approvedby the judge, the Commission may participate in such proceedings inorder to provide independent, expert assistance to the court and in-vestors on matters arising in such proceedings and, where the Com-mission considers it appropriate, it may file advisory reports on re-organization plans. Thus, the facilities of the Commission's technicalstaff and its disinterested recommendations are simply placed at theservice of the judge and the parties, affording them the views of dis-interested experts in a highly complex area of corporate law andfinance. The Commission pays special attention to the interests ofpublic security holders, who may not otherwise be effectively repre-sented.

In any case where the scheduled indebtedness of a debtor corpora-tion does not exceed $3 million, the judge under section 172of chapterX may, before approving any plan of reorganization, submit such planto the Commission for its examination and report. If the indebtednessexceeds $3 million, the judge must submit the plan to the Commissionbefore he may approve it. "Wherethe Commission files a report, copiesof it, or a summary thereof, must be sent to all security holders andcreditors when they are asked to vote on the plan. The Commissionhas no authority to veto or require the adoption of a plan of reor-ganization and is not obligated to file a formal advisory report on aplan.

The Commission's advisory reports on plans of reorganizations areusually widely distributed and serve an important function. How-ever, they represent only one aspect of the Commission's activities incases in which it participates. The Commission, as a party to a chapterX proceeding, is actively interested in the solution of every majorissue arising therein and the adequate performance of its duties re-

142

'l'WENTY-FIFTH ANNUAL REPORT 143

quires that it undertake in most cases intensive legal and financialstudies. Even in cases where the plans are not submitted to the Com-mission and no report is filed, the Commission must consider variousreorganization proposals of interested parties while plans are beingformulated, and be prepared to comment fully upon all plans that arethe subject of hearings for approval or confirmation.

In the exercise of its functions under chapter X the Commissionhas endeavored to assist the courts in achieving equitable, financiallysound, expeditious and economical readjustments of the affairs ofcorporations in financial distress. To aid in attaining these objec-tives the Commission has lawyers, accountants and financial analystsin its New York, Chicago and San Francisco regional officeswho keepin close touch with all chapter X hearings and issues. Supervisionand review of the regional officers'chapter X work is the responsibilityof the Division of Corporate Regulation of the Commission, whichalso handles the actual trial work in cases arising in the Atlanta andWashington, D.C., regional areas.

SUMMARY OF ACTIVITIES

The Commission actively participated in 49 reorganization pro-ceedings involving 69 companies (48 principal debtor corporations and21 subsidiaries of those debtors) during the past fiscal year.' Thestated assets of these 69 companies totaled approximately $583,626,000and their indebtedness totaled approximately $540,501,000. The pro-ceedings were scattered among district courts in 18 states, as follows:11proceedings in New York, 6 in Illinois, 5 in Kentucky, 4 in Nevada,3 in Pennsylvania, 2 each in Florida, Texas and Oklahoma, and 1 eachin Washington, Iowa, Virginia, Maryland, North Dakota, New Jersey,Louisiana, Connecticut, Colorado, and Utah, During the year, theCommission entered its appearance in 14 new proceedings underchapter X involving companies with aggregate stated assets of ap-proximately $62,037,000and aggregate indebtedness of approximately$39,165,000. They involved the rehabilitation of companies engagedin such varied businesses as uranium mining, motion picture produc-tion, hotel and country club operations, and the manufacturing ofprecision instruments, building materials and miscellaneous product s.Proceedings involving 4 principal debtor corporations were closedduring the year. At the end of the year, the Commission was activelyparticipating in 45 reorganization proceedings involving 67companies.

THE COMMISSION AS A PARTY TO PROCEEDINGS

The Commission has not considered it necessary or appropriate thatit participate in every chapter X case. Apart from the fact that the

1 The appendix contains a complete list of reorganization proceedings in wbieb the Com-mission participated as a party during the fiscal year ended June 30, 1959.

144 SECURITIES AND EXCHANGE CO,MMISSION

administrative burden of participating in every one of the approxi-mately 90 cases instituted during the fiscal year would be unsurmount-able with its present staff, many of the cases involve only trade or bankcreditors and a few stockholders. The Commission has sought toparticipate principally in those proceedings in which a substantialpublic investor interest is involved. This is not the only criterion,however, and in some cases involving only limited public investor in-terest, the Commission has participated because an unfair plan hadbeen or was about to be proposed, the public security holders were notadequately represented, the reorganization proceedings were beingconducted in violation of important provisions of the act, other factsindicated that the Commission could perform a useful service or thejudge requested the Commission to participate.

PROCEDURAL MATrERS

The Commission, when a party in chapter X proceedings, has beendiligent to urge upon the court the procedural safeguards to which allparties are entitled. The Commission also attempts in its interpreta-tion of the statutory requirements to encourage uniformity in theconstruction of chapter X and the procedures thereunder.

Prior to the filing of an involuntary petition for the reorganizationof the F. L. Jacobs Oompany in the United States District Court forthe Eastern District of Michigan," the United States District Court forthe Southern District of New York appointed receivers for the d~btorcompany to preserve its assets and to protect the interests of the stock-holders, creditors, employees and the general public. This receiver-ship grew out of an extensive investigation by the Commission's NewYork regional officewith regard to possible violations of the SecuritiesAct of 1933 and the Securities Exchange Act of 1934. An injunctionto restrain the receivers was issued by the United States District Courtin Michigan on March 23, 1959. The receivers petitioned that court todismiss the chapter X petition on the grounds that it was collusivelyfiled and that the debtor's principal place of business was New York,or in the alternative, to transfer the proceeding to New York. TheCommission participated in the hearing to develop the facts regardingthe debtor's place of business. '

The court held that the petition was properly filed and denied therelief requested. An appeal by the receivers was pending in' theUnited States Court of Appeals for the Sixth Circuit at tile close ofthe fiscal year.

There was also a venue problem in the proceeding involving VerdiDevelopment Oompany, whose common stock was withdrawn in 1958from listing and trading on the San Francisco Mining Exchange byCommission order.

In the Matter oj F. L. Jacob« Company (No. 42235).•

TWENTY-FIFTH ANNUAL REPORT 145

The debtor filed a petition for reorganization in the United StatesDistrict Court of Nevada and the Commission filed a motion to trans-fer the case, on the ground that the company's principal place of busi-ness was not, as alleged, in Nevada. This motion became moot becausethe Court dismissed the petition. A new petition, filed in the CentralDistrict of Utah, was approved,"

The appeal in the Selected Investments case 4 involved the questionswhether public investors in a trust fund were creditors, despite pro-visions in their "certificate bonds" consistent with those of an equitysecurity, and whether the separate entities of the trust fund and thecorporation controlling it could be disregarded where the corporation'sonly business was the management of the fund and where, in the saleof the certificate bonds to public investors, the corporation had led theinvestors to believe that they were lending their money to it. TheCommission supported the trustee in successfully urging the Courtof Appeals to affirm the District Court's order approving the petitionfor reorganization."

In the Shanoano Development Oorporation case," the Commissionsought the removal of the president of the debtor as additional trusteeon the ground that he was a substantial stockholder and creditor ofthe debtor, and so was not a disinterested person as required by sec-tions 156 and 158 of chapter X. In addition, it was urged that nooperations were being conducted by the debtor and hence there wasno need for an operating trustee. The additional trustee resignedafter the Commission's motion was filed.

Under the act, the trustee's counsel, like the trustee himself, mustbe disinterested, since each plays a key role in the reorganization.In the previously mentioned JMobs case the Commission took theposition that the attorney for the trustees was not disinterested. TheCommission stated that the trustees' attorney had actively collaboratedwith the attorney for the debtor who had referred to him two of thethree petitioning creditors, that he had first appeared as attorneyfor the petitioning creditors, and that these facts indicated the exist-ence of a materially adverse interest. The attorney resigned whilea decision on an application for his removal was pending.

PROBLEMS IN CONNECTION WITH THE ADMINISTRATION OF ESTATES

During the course of the reorganization proceedings involvingSelected Investments Corporation,' the court sua sponte ordered a

In the Matter oj Verdi Development Co. (C.D. Utah. No. B. 89-59) .In the Matter of Selected Investments Trust Fund and Selected Investments Oorpora-

tion, (W.D. Okla., No. 16080).Selected Investments Oorporation v, Duncan, et al., 260 F. 2d 918 (C.A. 10, 1958).

eert, den. Hart, et al. v. Selected Investments Oorporation, 359 U.S. 901 (1958). TheCommission also supported the trustee In opposing an earI1er attempt to secure a writ otprohibition trom the Court ot Appeals against the assumption ot jurisdiction by theDistrict Court.

In the Matter oJ Shawano Development Oorp., (D. Wyoming. No. 3168).7 See tn. 5, IlUpra.

• •

•

•

146 SECURITIES AND EXCHANGE CO:MMISSION

distribution of one-third of the assets of the debtor to the creditors.The Commission, joined by certain creditors, objected on the groundthat a liquidation of such a substantial portion of an estate under-going a reorganization could be accomplished only pursuant to aplan of reorganization, but the judge overruled these objections. TheCommission joined a creditor on a motion for a stay to the UnitedStates Court of Appeals for the Tenth Circuit. The appellant's re-quest that no supersedeas bond be required was supported by theCommission on the ground that to require a bond in a matter such asthis would in effect defeat the right of creditors and stockholders totake appeals under chapter X." On January 30, 1959, the Court ofAppeals stayed the distribution, but the matter became moot withthe confirmation of a plan of reorganization in July 1959.

In the Swan Fi1Wh Oil Oorporation case," the court had enjoinedDoeskin Products, Inc., a former subsidiary of the debtor, from trans-ferring any of the stock or assets of Keta Gas & Oil Company, whichhad been a wholly-owned subsidiary of the debtor. There had been apurported transfer of 1,140,390shares of Keta to Doeskin in exchangefor 800,000shares of Doeskin stock. The trustees secured an orderrequiring Doeskin to show cause why it should not be required sum-marily to turn over the Keta stock and its assets to the trustees.Doeskin and Keta moved the court to vacate this order on the grounds(1) that the court lacked jurisdiction over Keta-; and (2) that sinceDoeskin had a substantial adverse claim to the Keta stock and assets,summary jurisdiction did not lie. Evidence at the hearings indicatedthe Keta stock and assets were turned over to Doeskin in an unauthor-ized manner and that consequently Doeskin had no valid claim to thestock and assets. The Commission contended that Doeskin knew orshould have known of the unauthorized nature of the transaction, andthat under these circumstances, the reorganization court had summaryjurisdiction to determine the question of title. The court denied thetrustees' motion for a summary order and an appeal was taken. TheCommission filed a brief expressing the view that the trustees' positionwas correct."

In the Ludman. Corporation. case," certain creditors petitioned thecourt to adjudicate the debtor a bankrupt. As a result of the Com-mission's representation that there was a good possibility the companycould be successfully reorganized, the reorganization proceeding was

8 See also In the Matter of Equitable Plan Company (S.D. Cal., Cen. Div. No. 86096-BH),where the trustee petitioned the court for authority to pay a dividend of 20% on unsecuredpre-chapter X debts of $9,725,083 which would have amounted to 83% of the debtor'scash and 33% of Its current assets. The Commission took the position that thisproposed dividend would be a payment out of funds provided by liquidation of loans andnot from the earnings of the company and was in effect a liquidation without a plan.A dividend of 10% was approved by the court.

In the Matter of Swan-FinCh Oil Corp., (S.D.N.Y. No. 93046).10 On Aug. 24, 1959, the Court of Appeals reversed the District Court. Pettit and

Crawford, Trustees ~. Doeskin Products 11£0.et al.-F. 2d-(C.A. 2).11 In the Matter Of Ludman Corp. (S.D. Fla., Miami Dlv. No. 4018-M-BK).

•

TWENTY-FIFTH ANNUAL REPORT 147

continued. A plan was subsequently filed with the court and referredto the Commission for an advisory report, which was under considera-tion at the end of the year.

TRUSTEE'S INVESTIGATIONS

A complete accounting for the stewardship of corporate affairs bythe old management is a requisite under the Bankruptcy Act andchapter X. One of the primary duties of the trustee is to make athorough study of the debtor to assure the discovery and collection ofall assets of the estate, including claims against directors, officers,orcontrolling persons who may have mismanaged the company's affairs,diverted its funds to their own use or benefit, or been guilty of othermisconduct. The staff of the Commission participates in the trustee'sinvestigation so that it may be fully informed as to all details of thefinancial history and business practice of the debtor. The Commis-sion views its duty under chapter X as requiring it to call the attentionof the trusteee, or the court if necessary, to any matters which shouldbe acted upon.

In the Texas Portland Oement Oompany case," the Commissionparticipated in an extensive investigation under section 167 bythe trustees into the tangled financing of the debtor and relatedquestions. The debtor had initially sold 500,000shares of unregisteredstock to residents of Texas. It issued approximately 400,000 addi-tional shares in bonuses, commissions for assistance in procuring loans,and special transactions with promoters and creditors. At the sug-gestion of counsel for the Commission the trustees secured injunctionsagainst the transfer of most of the additional shares by the holdersthereof, pending determination of the validity of their issuance andother questions involved."

The trustee's investigations in the reorganization proceedings in-volving Selected Investments Corporation and Selected InvestmentsTrust Fwrul,14 disclosed that the debtor had been subjected to fraudu-lent mismanagement by its officersand directors. The trustee obtaineda judgment against these corporate insiders for approximately $12million in damages, on which some recovery has been had, and suitsare pending against the bonding companies for the balance."

ACTIVITIES REGARDING PROTECTIVE COMMITTEES

The Commission has constantly been alert to insist upon the honestyof fiduciaries in their relationship to the estate and to investors, and

U In the Matter Of Teilla8 Portland Oement 00., (E.n. Texas, Beaumont Dlv., No. 1606hu Approximately 35 witnesses were examined. Two of the witnesses, a former director

and his business assoctate, were Indicted In the Southern District of Texas for perjuryallegedly committed In the course of their respective examinations under section 167.

t< See fn, 5, 8upra.On Oct. 22, 1958, an indictment was returned (U.S.D.C. W.D. Oklahoma) charging

certain of the debtors, officers and directors and others with violations of the antifraudprovisions of the Securities Act of 1933 and the mail fraud statute. On March 27, 1959,each of the defendants was found guilty on some or all of the counts of the Indictment.

529523--59----1J

'"

148 SECURITIES AND EXCHANGE COMMISSION

has always sought to disqualify security holder committees subject toa conflict of interest from acting in chapter X proceedings.

In the above mentioned Selected Investments T1'U8tFund and Se-lected Investments Uorporation case, a committee formed to representcertificate holders of the trust fund, had solicited from public investors$1 for each $1,000 of thrift certificates. Commission counsel objectedto this solicitation and the court required the committee to return allfunds received." After the committee qualified as a duly constitutedcommittee, representing approximately 3,000 certificate holders whoseclaims exceed $16 million, it applied to the court for permission tosolicit contributions from certificate holders to finance its activities.The Commission contended that the committee should be denied theright to make mass solicitations, recommending that the committeemake appropriate arrangements for the financing of its activities bycontributions from its members or individual security holders. TheCommission's contention was upheld.

In the Texas Portland Oement Oompany case," a common stock-holders' committee, composed of a New York attorney and four of hisrelatives, attempted to solicit powers of attorney from stockholdersgenerally. The Committee members had acquired their stock in one ofthe transactions being investigated by the trustees, in settlement of arelatively small cash advance to the debtor, and the committee chair-man was asserting a large unliquidated claim against the debtor forservices and expenses allegedly rendered in procuring a mortgage com-mitment which the debtor had rejected. The Commission joined withthe trustees in opposition to recognition of this committee, on theground of the conflict between the interests of its members and thoseof common stockholders generally. The District Court ruled thatthe committee was disqualified to act as a representative of stock-holders. There has since appeared in the proceedings another com-mon stockholders' committee, composed of local stockholders whoacquired their shares in the original public offering.

Some of the members of a creditors' committee in this proceedingowned stock of the debtor either directly or indirectly. The Com-mission joined the trustees in opposition to the recognition of thiscommittee because of the conflict of interests involved in the dualstatus of committee members. This committee also was disqualified.

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problemof determining the allowance of compensation to be paid out of thedebtor's estate to the various parties for services rendered and ex-

.. 24th Annual Report or the SecurIties and Exchange Commission, page 188.17 See fn, 12 ,"pro.

TWENTY-Fll'TH ANNUAL REPORT 149

penses incurred in the proceeding. The Commission, which undersection 242 of the Bankruptcy Act may not receive any allowancefrom the estate for the services it renders, has sought to assist thecourts in protecting debtors' estates from excessive charges and at thesame time equitably allocating compensation on the basis of a claim-ant's contribution to the administration of an estate and the formula-tion of a plan.

In the Third Avenue Transit Corporation case the District Courtgranted fees and expenses totaling $2,068,505. The Commission hadrecommended awarding fees and expenses of $1,818,476, and upon ap-peal to the Court of Appeals for the Second Circuit, that Court setthe amount at $1,849,005.18 In so doing, the Court listed the factorswhich bear on the granting of allowances in reorganization cases:(a) economy of administration, (b) the burden the estate can safelybear, (c) value of the services, (d) duplication of service by counselrepresenting the same interests, and (e) the reasonableness and fair-ness of the compensation to each applicant. It noted that the recom-mendations of the Commission "are entitled to great weight."

The District Court had found that an oral agreement between anattorney and a firm to share equally in the compensation they received:from the reorganization contemplated as well as an equal division ofwork. The Court of Appeals upheld in principle the award by thedistrict judge of separate compensation to each. The Court of Ap-peals also upheld the Commission's contention that section 249 of theBankruptcy Act prevented the awarding of a fee where the fee appli-cant had pledged securities of the debtor after assuming to act in arepresentative or fiduciary capacity in a reorganization and the securi-ties were subsequently sold.

In this case, further, the wife of an attorney in the reorganizationhad sold securities of the debtor. The District Court found that thewife's decision to sell was based on the advice of her investmentbroker and not on any inside information possessed by the husbandand held that section 249 did not bar a fee to the attorney althoughhe had knowledge of the sale of the securities by his wife. The Com-mission took the position that a fee should be denied the attorney sincehe had knowledge of his wife's transaction and derived an indirectbenefit from it. The Court of Appeals sustained the Commissionsposition and held that the facts warranted the statutorydisqualification. IS

In the Stardust, Inc. case," the court confirmed a plan of reorgan-ization which provided for a sale to reorganized Stardust, Inc. of agroup of five hotel units, in various stages of completion, for $1,500,000

11 nurtace 'I'ransnt ; Inc. v, Baee, Bacon oE O'Shea, 266 F 2d. 862 (C.A. 2, 19,c)9).,. For a discussion of the case in the District Court, see the Commission's 24th Annual

Report at pages 138-14l.In the Matter 0/ Stardust, Inc. (D. Nev.• No. 955).""

150 SECURITIES AND EXCHANGE COMMISSION

cash and a $2,800,000note secured by a deed of trust on the properties.Subsequently it appeared that the costs for completion had been un-derestimated and, as a result, the reorganized Stardust was unable tomeet the first payment on the note. A petition for modification wasapproved by the court under section 222 of chapter X.

Applications for fees and expenses in connection with the modifi-cation of the plan aggregated $58,460. The Commission took theposition that the creditors, preferred stockholders, and the trustee andhis counsel were primarily interested in preserving the terms pre-viously determined and fixed under the plan, and that the modifica-tions, as amended, were essentially a compromise and reflected, ingreater or lesser degree, the efforts of all participants. Under a com-mitment pursuant to order of the Court, the proponent of the modifi-cation, who was in control of the reorganized debtor, was obligated topay the fees and expenses in connection with the modification. TheCommission urged that nevertheless chapter X standards should befollowed, in accordance with the provisions in section 221(4) whichmake "all payments ... promised by the debtor or by a corpora-tion ... acquiring property under the plan or by any other person"subject to the governing standards of chapter X. The Commissionrecommended fees totalling $2'3,860, and the judge awarded the appli-cants $29,881P

In the Adolf Gobel, Inc. case," applications were filed for fees inthe aggregate amount of $374,370. The Commission submitted itsrecommendations aggregating $170,000 and the court awarded$1'1'8,000. The Commission recommended denial of compensation tothe debtor's attorneys who also acted as attorneys for the principalstockholder and plan proponent, and to an attorney for an individualcreditor whose claim was the subject of litigation, asserting thatthe activities of these attorneys were principally for the benefitof their clients and only collaterally of benefit to creditors generally,and therefore each should look to his client for his compensation.The court denied these requests for allowances.

ADVISORY REPORTS ON PLANS OF REORGANIZATION

During the fiscal year, the Commission issued two advisory reportsand one supplemental advisory report. Such reports represent theprincipal means by which the Commission records its views publicly.Generally speaking, an advisory report is prepared only in a case in-volving a substantial public investor interest and in which significantproblems exist. On occasion, because of the exigencies of time or forother reasons, no written report is filed but instead Commission

.. The order included a commendation relating to the Commission's partlelpat!on-"TheS.lll.C., in a workmanlike document, which is thorough and complete, •.• strikes a respon-sive chord with the court's thinking."

.. In the Malte r of Adolj Gobel, tno., (D. New Jersey, No. B-316-58).

TWENTY-FIFTH ANNUAL REPORT 151

counsel makes a detailed oral presentation of the Commission's viewsand the reasons therefor.

Usually advisory reports are prepared at the close of the hearingsafter the completed record contains sufficient material upon which toformulate an opinion as to a plan's fairness and feasibility. However,in the reorganization proceeding involving Alaska Telephone Oorpo-ration/a the judge requested the Commission to prepare written com-ments on three proposed plans of reorganization and to submit them tothe court prior to hearings on the plans. In his decision, the judgefollowed rather closely the lines of analysis and comments in thememorandum submitted to the Court by the Commission.

In proceedings in Nevada for reorganization of the San Souci re-sort hotel 24 the Commission advised the court on four plans ofreorganization. Only two plans were considered worthy of considera-tion and the Judge requested that additional views be presentedorally by Commission counsel on these plans. The trustee's plancontemplated an arrangement providing an extension of maturi-ties on the senior debt, and conversion of junior debt to stock. Thesecond plan also contemplated amortization of the existing debt, buton different terms.

A feasible plan under chapter X requires a debt structure reason-ably geared to prospective earnings. The Commission felt that theplans were not feasible on an earnings valuation, and that under theproposed plans the debtor would be insolvent or on the brink of in-solvency at the very beginning of its new life. However, the courtapproved the trustee's plan and submitted it to the creditors foracceptance.

On February 25, 1959, the Commission filed objections to a planof reorganization proposed in the Selected Investments Oorporationand Selected Investments Trust Fund case." Under the plan, thedebtor would have transferred some $10 million of assets to a newcorporation which would engage in the general loan and finance busi-ness. Creditors of the debtor were to receive $5 million of preferredstock of the new corporation and $5 million in cash which was to beborrowed by the new corporation. Additional capital was to be pro-vided to the new corporation through the private sale of $500,000ofcommon stock. The Commission pointed out, among other things,that creditors would only be entitled to elect a minority of the boardof directors for their $5 million investment, whereas purchasers of the$500,000 of new common stock would elect a majority of the board.The Commission also questioned the feasibility of the plan. The planwas approved by the court and accepted by the requisite majority of

23 (W.D. Wash., No. 41633).:u. San Soum Hotel Ino., (D. Nev. No. 259) ... See tn. 4 8upra.

152 SECURITIES AND EXCHANGE COMMISSION

creditors but it was not confirmed by the court due to the filing of anew plan of reorganization.

On April 23, 1959, the Commission filed an advisory report on thesecond plan of reorganization. The new plan proposed that the reor-ganized debtor issue to the certificate holders $11 million in 20-yeardebentures and 16,500,000shares of common stock, $1 par value pershare, out of a total of 18,150,000shares to be authorized. The re-mainder of the 1,650,000shares was reserved for options to proposedmanagement.

The stock options contemplated by the plan provided that the stockwould be available to certain specified persons at $1 per share for5 years. The plan also provided that there would be a restrictivestock option to employees at the same price as the options to proposedmanagement.

The Commission stated that the amended plan was not fair in anumber of respects, particularly in that it would permit creditors de-siring to withdraw and receive cash to receive the same amount asthose who stayed in and took securities. The Commission also ex-pressed doubts as to the propriety of including stock options in aplan of reorganization and urged that they be eliminated completelyor substantially modified.

In a supplemental report following amendments to meet the Com-mission's recommendations, the Commission concluded that theamended plan was fair and equitable and feasible. This plan wasapproved by the court, accepted by the requisite majority of creditors,and confirmed by the court. The plan is in the process of beingconsummated.

In the Inland Ga8 Corporation case 26 a petition was filed by threedebenture holders of Kentucky Fuel Gas Corporation for the alter-ation and modification of the plan of reorganization confirmed by thecourt on April 28, 1958, and affirmed on appeal, 260 F. 2d 510 (C.A.6), oert. den. April 27, 1959. The modification was based upon a pro-posed underwriting whereby the estate would receive cash in anamount greater than the valuation of the enterprise upon which theplan was based. The Commission submitted a memorandum. statingthat the court had jurisdiction to consider proposed alterations andmodifications and that the alterations and modifications proposed inthe petition appeared to have sufficient merit on their face to warranta hearing upon due notice to security holders.

The District Court denied the petition and on appeal by the credi-tors, which the Commission supported, the Court of Appeals for theSixth Circuit granted a stay of the order of consummation of theplan."

... (E.D. Ky. Nos. 98~B. 991-B and 111;).::r C.A. 6 Nos. 13.911 and 13.955.

TWENTY-FIFTH ANNUAL REPORT 153The Hudson & Manhattan Railroad Company owns and operates

officebuildings in New York City and an interurban rapid transitelectric railway between New York City and points in New Jersey.In the reorganization proceeding of this company," the trustee filedwith the court an amended plan designed to permit only the seniorbondholders to share in the value of the mortgaged assets, butrecognizing the claims of junior bondholders against certain assetsallegedly not subject to the mortgage liens (free assets). It alsoprovided for a contingent interest for junior bondholders in the pro-ceeds of the sale of the railroad, if such a sale realized more than wasrequired to meet the claims of the senior bondholders. Under theplan, the debtor would continue only as a real estate company, and anew company would be organized as a subsidiary of the real estate.

The real estate company would issue to the senior creditors $10,-038,100 principal amount of 20-year 6 percent first mortgage bondsand 590,476shares of a new class A common stock, which would con-stitute 91 percent of the common stock equity. The junior creditorswould receive 58,849 shares of a new class B common stock, whichwould represent the remaining 9 percent of the equity. The class Bstock was intended to recognize the interest of junior bondholders inthe free assets of the debtor and generally to provide for their rightto receive the remaining proceeds of any sale of the railroad companyproperty after satisfaction of the claims of senior bondholders. Noparticipation was provided for the present preferred and commonstock since the debtor was insolvent. The new class A and B stockswould be alike except in respect of the election of directors and ad-justments in relative participation of proceeds of the sale of the rail-road properties in excessof $17million.

The Commission's advisory report found the amended plan fairand equitable and feasible except in one minor respect. The amendedplan proposed that the initial boards of directors of the real estatecompany and the railroad company would be appointed by the courtafter consideration of nominations by the bondholders or their repre-sentatives, but the court was not required to accept any of the nom-inees. Representatives of senior bondholders proposed that the initialboards of directors be designated by the court from among nomineesof bondholders, with the seven class A directors of the real estatecompany and the five class A directors of the railroad company to bechosen from among nominees of senior bondholders, and the two classB directors of each of the reorganized companies to be chosen fromamong nominees by junior bondholders. The Commission believedthat this proposal was appropriate and the court agreed and incor-porated the proposal into the plan.

A notice of appeal has been filed by common stockholders .

.. In the Matter of Hudson & Manhattan RR Co., (S.D.N.Y. 1'\0.90460).

154 SECURITIES AND EXCHANGE COMMISSION

Frank Fehr Brewing Company," a relatively small, long-estab-lished brewery in Louisville, Ky., filed a voluntary petition for reor-ganization under chapter X on August 16, 1957, following severalyears of losses. Its preferred stock was widely held by publicinvestors.

A plan of reorganization was filed on December 26, 1958, based onan offer by a group of local business men to supply a substantialamount of cash for all the common stock of a reorganized company.Creditors were to be paid in cash and 5-year mortgage bonds and therights of the preferred stockholders altered. The old common stockwas excluded. The Commission initially opposed the plan, primarilyon the ground that the preferred stockholders were not being fairlytreated. The Commission counsel participated in a series of negotia-tions culminating in amendments satisfactory to a preferred stock-holders committee and upon Commission recommendation the courtconfirmed the amended plan.

The president of the debtor, who was also the majority commonstockholder, appealed from the order of confirmation. The trusteemoved to dismiss the appeal on the grounds, among others, that theappellant had failed to object formally to the order of confirmationand had failed to appeal from the order of approval. The appellanthad participated actively in the proceedings and had made his oppo-sition to the plan known at several stages, but had remained mute atthe hearing on confirmation. The appellant's counsel had withdrawnprior to that hearing.

The Court of Appeals for the Sixth Circuit denied the motion todismiss on May 26, 1959, saying-"The preliminary approval of theplan by the court is but one step in a continuous process leading toconfirmation." It held that appellant's statements at the prior ap-proval hearing "adequately presented to the district judge, and pre-sents to this court also, applicant's contentions and objections to theplan." This decision was in accordance with the position taken bythe Commission on this issue in its brief.

Thereafter, on the merits, the Court of Appeals affirmed on June16, 1959,80the order of confirmation, and the plan is now beingconsummated.

The Commission had advocated affirmance of the order in its brief,with ?ne reservation, The trustee, apparently by inadvertance, hadsupplied the preferred stockholders group, which was then solicitingrejection of the plan, with an old stockholders list and had subse-. ,quently made available a current list to a group soliciting acceptances.It was contended that enough acceptances had been received to makethe discrepancy between the two lists immaterial and the objecting

: In the Matter of Frank Fehr BI"cwing Co. (W.D. Ky No. 19515).In re Frallk Fehr Breloing Oo., 268 F. 2£1. 170; petition for certiorari pending.

TWENTY-FIFTH ANNUAL REPORT 155

preferred group later withdrew its opposition to the plan as the resultof further amendments.

The Commission considered that these circumstances would requirereversal of the order of confirmation, on the ground that the plan hadnot been properly accepted, in the absence of a showing that the errorwas not prejudicial. The Court of Appeals concluded "Althoughthat might be the proper remedy under some circumstances, we donot think the particular circumstances of this case warrant takingthat procedure." It stressed the fact that the old list was deliveredin good faith and clearly dated, that no request was made for a laterlist and there was no indication that it would have not been suppliedif requested, and that the parties directly involved had withdrawntheir objections and were not supporting the plan. The Court said:"Under the circumstances, we find no such unfairness which wouldcause us to invalidate the entire vote of the preferred stockholdersat the request of one who appeals as a common stockholder only ... "

In the Magnolia Park case 31 the Court approved a plan of reorgani-zation which included a provision for the trustee to enter into an agree-ment with outsiders to operate the track. Sportservice Corporation,which held a concession agreement with Magnolia and was a creditorand stockholder, had objected to the plan unless it could continue asoperator of the concession. As a result of Sportservice's vote againstthe plan, there was not the requisite majority voting acceptance of theplan. Sportservice by the actions and statements of its representa-tives appeared to be primarily interested in upsetting the plan becauseit was not given the concession, and Commission counsel urged thatthe vote of Sportservice had not been in good faith and should bedisregarded pursuant to section 203of chapter X. All other creditorsvoted in favor of the plan. The vote of Sportservice was disqualifiedby the Court. Sportservice has filed notices of appeal," and appliedto the Court of Appeals for a stay. An agreement was reachedwhereby the motion for stay was withdrawn. Subsequently, a com-promise was effected with the aid of Commission counsel and the planwas confirmed after the closeof the fiscal year .

, In the MatteI' of Magnolia Park, Ino., (E.D. La., New Orleans Dlv., No. 9010)."Ill the Matter Of Magnolia Park, Inc., (e.A. 5, No. 17734).•

PART VIII

ADMINISTRATION OF TIlE TRUST INDENTURE ACT OF 1939

Bonds, notes, debentures, and similar securities publicly offered forsale, except as specifically exempted by the Trust Indenture Act of1939,must be issued under an indenture which meets the requirementsof the act and has been duly qualified with the Commission. In-dentures to be qualified are required to include specified provisionswhich provide means by which the rights of holders of securitiesissued under such indentures may be protected and enforced. Theseprovisions relate to designated standards of eligibility and qualifica-tion of the corporate trustee to provide reasonable financial responsi-bility and to minimize conflicting interests. The act imposes on thetrustee, after default, the duty to use the same degree of care andskill "in the exercise of the rights and powers invested in it by theindenture" as a prudent man would use in the conduct of his ownaffairs. Exculpatory provisions formerly used to eliminate allliability of the indenture trustee are outlawed.

The provisions of the Trust Indenture Act are closely integratedwith the requirements of the Securities Act. Registration pursuantto the Securities Act of securities to be issued under a trust indenturesubject to the Trust Indenture Act is not permitted to become effectiveunless the indenture conforms to the requirements of the latter act, andnecessary information as to the trustee and the indenture must becontained in the registration statement. In the case of securities issuedin exchange for other securities of the same issuer and secunities issuedunder a plan approved by a court or other proper authority which,although exempted from the registration requirements of the Securi-ties Act, are not exempted from the requirements of the Trust Inden-ture Act, the obligor must file an application for the qualification ofthe indenture, including a statement of the required informationconcerning the eligibility and qualification of the trustee.

Indentures .filedunder the Trust Indenture Act oj 1939 during the fiscal yeor endedJune 30. 1959

Number of Aggregateindentures dollar amount

Indentures gr:dlng June 30, 1958________________________________________ 30 $1, 002, 264, 600Indentures ed during tIsca1 year. ______________________________________ 202 3, 686, 135, 830Tots1s 232 4, 686, 400, 430

Disposition during tIsca1 year:Indentures quallfied _________________________________________________ 192 4, 229, 058, 550Indentures deleted by amendment or wlthdrawn ____________________ 13 184, 617, 900Indentures pending June 30,1959 ____________________________________ 27 274,723,980

Tots1s _____________________________________________________________ 232 4, 686, 400, 430

156

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PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF1940

Companies engaged primarily in the business of investing, reinvest-ing, holding and trading in securities are subject to registration andregulation under the Investment Company Act of 1940. This act,among other things, prohibits such companies from changing thenature of their business or their investment policies without the ap-proval of their stockholders, requires disclosure of the finances andinvestment policies of these companies, regulates the means of custodyof the companies' assets, requires management contracts to be sub-mitted to security holders for their approval, prohibits underwriters,investment bankers and brokers from constituting more than a minor-ity of the directors of such companies, and prohibits transactions be-tween such companies and their officers, directors and affiliates exceptwith the approval of the Commission. The act also regulates theissuance of senior securities and requires face-amount certificate com-panies to maintain reserves adequate to meet maturity payments upontheir certificates.

Investment companies which offer securities to the public must fileappropriate registration statements under the Securities Act. Regis-tered investment companies must also file periodic reports and aresubject to the Commission's proxy and insider trading rules. Boththe Division of Corporation Finance and the Division of CorporateRegulation assist the Commission in the administration of this statute,the former being concerned with the disclosure provisions and thelatter with the regulatory provisions.

COMPANmS REGISTERED UNDER THE ACT

During the fiscal year ending June 30, 1959, 70 new companiesregistered under the act while the registrations of 11 companies wereterminated. The following classes of companies were involved:

Registered Regrstrationduring the terminatedfiscal year during the

fiscal year

~i=:~:~~~~-e.:d::::::::::::::::::::::::::::::::::::::::::::::::::::::: 25 628 2Unit Investment trust __________________________________________ 17 3Face-amount certificate compames 0 0

TotaL ._70 11

157

•______________ ________________ • __________• ________________

____________________________• _____________________• ___• ____• _____

158 SECURITIES AND EXCHANGE COMMISSION

None of the 70 new registered companies were deregistered duringthe year. Eight of the new registrations were filed by small businessinvestment companies which had received from the Small BusinessAdministration notice to proceed to qualify for a license under theSmall Business Investment Act of 1958.

As of June 30, 1959,there were 512 investment companies registeredunder the act, and the estimated aggregate market value of theirassets on that date was $20billion. These figures represent an overallincrease of 59 registered companies and an increase of roughly $3billion in the market value of assets over the corresponding totals asof June 30, 1958. The total registered companies by classification area.sfollows:Management open-end; _ 261Managenlent closed-end 132Unit investment trust 107Face-amount certtfleate_______ __ __ 12

Total 512

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of registeredinvestment company assets during the past 18 years, and particularlyin recent years :

Number of investment companies registered under the Investment Company Act andthe estimated aggregate assets at the end of each fiscal year, 1941 through 1959

Number of companies Estlmatedaggregatemarket

FIscal year ended June 30 Registered Registration value ofat begin. Registerod terminated Registered assets atnwgof during during at end of end of year

year year year year (In mil-lions)"

1941_____________________________________ 0 450 14 436 $2,5001942 436 17 46 407 2,4001943_____________________________________ 407 14 31 300 2.3001944 300 8 Tl 371 2,2001945_____________________________________ 371 14 19 366 3,2501946_____________________________________ 366 13 18 361 3,7501947 361 12 21 352 3,6001948_____________________________________ 352 18 11 359 3,8251949 359 12 13 358 3,7001950_____________________________________ 358 26 18 366 4,7001951 366 12 10 368 5,6001952_____________________________________ 368 13 14 367 6,8001953_. ___________________________________ 367 17 15 369 7,0001954. ____________________________________ 369 20 5 384 8,7001955. _. __________________________________ 384 37 34 387 12,0001956_____________________________________ 387 46 34 399 14,0001957 399 49 16 432 15,0001958_____________________________________ 432 42 21 453 17,0001959 453 70 11 512 20,000

TotaL------------ 890 378 ------------ ------------

"'rile Increase In aggregate assets reflects the sale of new securities as well as capital appreciation Byway on Ilustratton, the National Associatron of Investment Companies reported that during the callmdnlyear 1958 its open-end Inves~ment company members, numbering 151 and representing the bulk of tlu-industrv, had net sales of their secuntles amounting to $1.1 lulhon

__• __________________________________

__• __________________________________

____• ________________________________

______• ___________• __________________

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TWENTY-FIFTH ANNUAL REPORT

PROGRAM FOR INSPECTION OF INVESTMENT COMPANIES

159

The Commission, as indicated in its 23d and 24th Annual Reports,has initiated a program for the periodic inspection of investmentcompanies pursuant to the statutory authority under section 31of the Investment Company Act. Up to the fiscal year 1958, 16 com-panies had been inspected. Fourteen companies were inspected infiscal 1959, the third year of the inspection program. These inspec-tions were undertaken by staff teams usually consisting of one at-torney or analyst from the Division of Corporate Regulation and onesecurities investigator from the appropriate field office in order tocombine the specialized training and knowledge of the staff concern-ing the regulatory requirements of the Investment Company Act withthe field experience and investigative expertness of field officepersonnel.

Inspections made in the past 3 years indicated, in some instances,noncompliance with regulatory provisions of the Investment Com-pany Act. For example: (1) improper selling practices by salesmenwho promoted the sale of mutual fund shares just prior to dividendpayment dates without explaining that the amount of dividend to bepaid was included in the purchase price of the shares on which a sales-load was paid and that receipt of the dividend would represent areturn of capital on which the shareholder would be liable for incometaxes; (2) deviations from fundamental policy without approval ofstockholders; (3) improper composition of boards of directors be-cause of the affiliation of directors; (4) acquisition of securities dur-ing an underwriting where an affiliated relationship existed betweenunderwriter and company; (5) sale of securities to a company by anaffiliated person acting as a principal; (6) failure to file appropriatefidelity bond; (7) noncompliance with the requirements for the cus-tody of the portfolio securities of a company under section 17 of theact; and (8) failure to obtain approval of stockholders or the Boardof Directors for an investment advisory contract,

In addition to noncompliance with various regulations and stand-ards required under the act, there were instances where books andrecords of the companies were inadequate or lacking. For example:(1) failure to record the date and time of requests for redemption,thus making it impossible to determine whether the investors receivedtheir correct net asset value; (2) failure to maintain purchase andsales journals; failure to maintain ledger accounts for broker-dealersused by the company for its portfolio security transactions; and (3)failure to keep proper vouchers for out-of-pocket expenses. In addi-tion, the staff noted instances where the custodian did not adhere tothe terms of the custodianship agreement, or the Commission's regu-lations on the safekeeping of portfolio securities of the company.In some instances, there was a considerable delay in the transmission

160 SECURITIES AND EXCHANGE COMMISSION

to the investment companies of funds received by dealers selling mu-tual fund shares.

In cases where deficiencies are noted, unless other action is indicated,they are brought to the attention of the investment companies in-volved so that corrective steps may be taken. The Commission'sexperience to date shows that this aspect of the inspection programwill prove to be particularly helpful to the newly organized or thesmaller investment company, and of benefit to the investing public.

STUDY OF SIZE OF INVESTMENT COMPANIES

On behalf of the Commission, the Securities Research Unit of theWharton School of Finance and Commerce of the University ofPennsylvania is now conducting a fact-finding survey in connectionwith a study of the problems created by the growth in size of invest-ment companies (see 24th Annual Report, p. 148). This inquiry,made pursuant to the direction contained in section 14(b) of theInvestment Company Act, is being conducted, at present, throughthe use of a questionnaire directed to the various investment com-panies. The questionnaire was prepared by the staff of the WhartonSchool after discussion with the Commission and representatives ofthe investment company industry and was distributed by the Com-mission early this year. Shortly before the close of the past fiscalyear the Wharton School submitted to the Commission a progressreport on its size and study activities.

The report indicates that substantial data in reply to the earlyphases of the questionnaire have been obtained and are being proc-essed. In the initial stage of the work, detailed processing is beingconcentrated on the replies of open-end companies. A preliminaryreport on certain phases of the size study is planned early in the nextfiscal year. It is anticipated that later other preliminary reportscovering other aspects of the study will be available.

When it receives the full report :from the Wharton School on thesize study survey, it is expected that the Commission will be in a po-sition to determine whether the increased size of investment com-panies has created any problems which require specific remedial]f>gis]ativerecommendations by the Commission to the Congress.

CURRENT INFORMATION

The Commission's rules promulgated under the act require thatthe basic information contained in notifications of registration andin registration statements of investment companies be kept up-to-date, through periodic and other reports except in cases of certain. . . ,inactive unit trusts and face-amount companies. The followingcurrent reports and documents were filed during the 1958 fiscal year:

TWENTY-FIFTH ANNUAL REPORT 161~ual reports______________________________________________________ 349Quarterly reports____________________________________________________ 179Periodic reports to stockholders (containing financial statements) 1,003Oopies of sales literature 2, 722

The foregoing statistics do not reflect the numerous filings ofrevised. prospectuses by open-end mutual funds making a continuousoffering of their securities. These prospectuses, which must bechecked for compliance with the act, are required to show materialchanges which have occurred in the operations of the companiessince the effective date of the prospectuses on file. In this respectthe registration of the securities of such companies is essentiallydifferent from the registration of the usual corporate securities.

In addition to these recurring activities, the Commission in thepast year has performed other duties in connection with the SmallBusiness Investment Act of 1958. Pursuant to an arrangement withthe Small Business Administration, the staff of the Commissionexamines a copy of each Proposal to Operate as a small businessinvestment company, filed on SBA Form 414, to determine the statusof the Proposed Operator under the Investment Company Act andthe other statutes administered by this Commission. Both the Pro-posed Operator and the SBA are notified as to the staff's conclusionin each case.

APPUCATIONS AND PROCEEDINGS

The Investment Company Act prohibits certain types of transac-tions, in the absence of an exemptive order by the Commission issuedupon a determination that specified statutory standards have beenmet. For this reason one of the principal activities of the Commis-sion in its regulation of investment companies is the processing ofapplications for such exemptive orders. Under section 6(c) theCommission, by rules and regulations, upon its own motion or byorder upon application, may exempt any person, security or trans-action from any provision of the act if and to the extent that suchexemption is necessary or appropriate in the public interest and con-sistent with the protection of investors and the purposes fairlyintended by the policy and provisions of the act. Other sections,such as 6(d), 9(b), 10(f), H(a), 17(b), and 23(c), contain specificprovisions and standards pursuant to which the Commission maygrant exemptions from particular sections of the act or may approvecertain types of transactions. Also, under certain provisions ofsections B, 3, and 8 the Commission may determine the status ofpersons and companies under the act.

There were 145 applications under various sections of the Invest-ment Company Act pending before the Commission during the fiscalyear 1959. The various sections of the act with which these applica-

162 SECURITIES AND EXCHANGE COMMISSION

tions were concerned and their disposition during the fiscal year areshown in the following table:

Ap plicaiions filed with and acted upon by the Commission under the InvestmentCompany Act of 1940 during the fiscal year ended June 30, 1959

Pending PendmgSe~tlons Subject Involved July I, Flied Closed June 30,

1958 1959--- ---

3 and/or 6. Status and exemption" 4 8 6 67(d) Registratron of foreign Investment companies, 2 4 3 38(0- 'I'errnmation of registration. 20 11 11 209,10, 10 Regulation of affihation of directors, officers, 3 19 21 1

employees, Investment advisers, under-writers, and others.

16 1412,13,14(a),I5-- Regulation of Iunctions and activltres of 1 3investment companiesli Regulation of transactions with affihated 8 20 20 Hpersons

17 1318, 19,21,22, 2:L Requirements as to capital structures, loam. 5 9distnbutions and redemptions, and relatedmatters20, 30 PrOXIes, reports and other documents re- O 2 1 1VIewed for cornphanee.

1 128. . Regulation of face amount certificate com- 1 1pames

0 3 3 032 Accountmg superYl~'"lOn

Totals -------------------.-.-------------------------. 44 101 93 52

'Includes only those section 6(c) cases in WhICh exempuon is requested from all provisions of the act.

Although, as a rule, the applications for exemptions under theact are processed without holding formal hearings, there are oc-casions when the applicant will request a hearing, or the Commis-sion feels that the relief sought is such that a hearing should beheld.

Two hearings resulted from applications pursuant to section 17(b)of the act, requesting exemptions from the statutory prohibitionagainst dealings between investment companies and their affiliates orbetween persons controlled by an investment company. In Atlas(lorporation, the applicant, a closed-end investment company, re-quested an exemption for certain transactions incident to a merger offive companies engaged in uranium mining.' Four of the five com-panies involved are affiliates of, and presumed to be controlled by,the investment company under the act. Consequently, they are pro-hibited by section 17(a) from dealing with each other in connectionwith the merger in the absence of an exemptive order. The Commis-sion before granting an exemptive order in such a case must determinewhether the terms of the proposed transactions, including the consid-erations to be paid or received, are reasonable and fair and donot involve overreaching on the part of any person concerned. Inaddition, it must decide whether the proposed transactions are con-sistent with the policies of the investment company, Atlas Corpora-tion, as recited in its registration statement and reports filed pursuant

1Investment Company Act Release No. 2778 (Oct. 21, 1958). The notice of and orderfor hearing on the application contains a summary of the proposed transactions and otherpertinent details of the case.

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TWENTY-FIFTH ANNUAL REPORT 163

to the act, and are consistent with the general purposes of the act.Hearings were held and the Commission is considering the record todetermine whether there has been compliance with the above-listedstatutory requirements.

Another hearing, involving an application under section 17(b), inwhich the Commission determined that the terms of a merger of aninvestment company with its affiliate were in compliance with thestatutory standards was held in New York Dock Oompany.2 In thatcase New York Dock Company, a closed-end investment company, re-quested the order in connection with its merger into its affiliate, Dun-hill International, Inc. After considering the record the Commissiongranted the exemption. Another hearing held pursuant to an applica-tion filed during the past fiscal year involved Dunhill International,the surviving corporation of the above merger. After acquiring NewYork Dock Company's securities portfolio as a result of the merger,the surviving company conceded that it came within the statutorydefinition of an investment company in that it owned investment secu-rities valued at more than 40 percent of its total assets. However, itfiled an application pursuant to section 3 (b) (2) of the act for anorder declaring it to be primarily engaged in a business other thanthat of an investment company. A public hearing was held, but be-fore its completion, Dunhill International registered under the actand withdrew the application it had filed under section 3(b) (2).s

Another hearing resulted from an application by Investors Diversi-fied Services, Inc. and others for an order of exemption permittingsale of their shares on the basis of a reduced sales load to certain asso-ciations for the account of the individual members of the associations.'A decision is pending.

Other hearings held during the year which resulted from applica-tions filed in prior years included cases involving National Depart-ment Stores Corporation and Civil and Military Investors MutualFund, Inc. In National Department Stores Corporation 5 the hear-ings were concluded and the Commission handed down its findingsand opinion during the past year. The company, which previouslyhad engaged directly and through wholly-owned subsidiaries in theretail department store business, had disposed of most of such inter-ests and invested the proceeds so that directly and through a con-trolled subsidiary it engaged primarily in the mining and oil business.The Commission held that the company was primarily engaged di-rectly or through a controlled company in business other than that ofan investment company .

Investment Company Act Release No. 2811 (Dec. 23, 1958).a Investment Company Act Release No. 2891 (June 18. 1959)

Investment Company Act Release No. 2881 (June 11. 1959).Investment Company Act Release No. 2812 (May 1.1959).

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164 SECURITIES AND EXCHANGE COMMISSION

In Oivil and Military Investors Mutual Fund, Inc.6 a hearing washeld pursuant to the application of the investment company for modi-fication of the Commission's order 1 finding and declaring that theabove name was deceptive and misleading in violation of section 35(d)of the act. Exceptions have been field to the decision of the hearingexaminer and it is expected that the case will be argued before theCommission some time next year.

In The Great American Life Underwriters, Ino., where the appli-cant is seeking an order pursuant to section 6 (c) or in the alternativean order under sections 8 (f) and 6(c) s, the hearing examiner filed hisrecommendations shortly before the end of the last fiscal year. Ex-ceptions have been filed to the recommended decision and the matterwas pending before the Commission at the end of the fiscal year.

UTIGATION UNDER THE INVESTMENT COMPANY ACT

Variable AnnuitiesIn S.E.O. v. Variable Annuity Life Insurance Oompany of Amer-

ica, et al., 359 U.S. 65 (1959), the Supreme Court reversed the Courtof Appeals for the District of Columbia which had upheld the districtcourt's dismissal of the Commission's complaint charging violationof the registration provisions of the Investment Company Act andthe Securities Act of 1933. The district court had held that theMcCarran-Ferguson Act placed exclusive regulatory jurisdictionOver the defendant's sale of variable annuity contracts in the insur-ance authorities of the State and the District of Columbia," TheCourt of Appeals had affirmed the district court's decision on theground that the variable annuity contracts sold by the defendants areexempt from registration by section 3 (a) (8) of the Securities Act,which excludes the ordinary annuity contracts issued by insurancecompanies. In addition, the Court of Appeals had held that de-fendants were insurance companies within the provision of section3(c) (3) of the Investment Company Act. The Supreme Court heldthat the defendants were not issuing contracts of insurance withinthe exemption provisions of the Securities Act, Investment CompanyAct and the McCarran-Ferguson Act. In so holding the court con-cluded that insurance involved some investment risk-taking on thepart of the insurer and noted the absence here of such an assumptionby the companies, since in these contracts they guarantee essentiallyonly an interest in a portfolio of common stock which interest "maybe a lot, a little or nothing" depending on the investment results ofthe company. In a concurring opinion, Justice Brennan added that

Investment Company Act Release No. 2858 (Apr. 3, 1959). See pages 154-155 in 24thAnnual Report for further details.

Investment Company Act Release No. 2723 (June 9, 1958).8 The 24th Annual Report, page 154, contains a dtsensalon of the case.

See 23d Annual Report at page 164.

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TWENTY-FIFTH ANNUAL REPORT 165

he considered the contracts as containing elements of both insuranceand investment contracts and since they raise regulatory problems ofthe sort contemplated by the Congress when it passed the SecuritiesAct and the Investment Company Act, he concluded that Congressdid not intend to exclude these contracts by reason of the insuranceexemption. Four dissenting judges viewed the contracts as a bonafide experiment in the insurance field, and even though this particulardevelopment has securities aspects, felt that regulation should be leftto the states as contemplated by the exemptions in the federallegislation.

The effect of the Supreme Court decision is to make the defendantssubject to registration as investment companies under the InvestmentCompany Act. Prior to the close of the fiscal year extensive staffconferences were held with these entirely new kinds of investmentcompanies to consider proposals for changing their methods of opera-tion so as to bring them into compliance with the underlying pur-poses and provisions of the Investment Company Act. Administra-tive proceedings were instituted after the close of the year, andare pending, in connection with applications of these companies toexempt them from literal compliance with certain provisions of theact.Other Litigation

During the year, the American-Hawaiian Steamship Company fileda notification of registration under the Investment Company Act, andthereby became a registered company under the terms of the act.Previously the Commission had filed suit to enjoin the company fromengaging in any securities transactions until it had registered."

Prior to 1953 the company either directly or through subsidiaries,was engaged in intercoastal shipping operations. Thereafter thecompany sold its vessels, suspended its intercoastal shipping services,closed its branch offices,and cancelled its intercoast tariffs on file withthe Interstate Commerce Commission. It engaged in no shippingwhatever in 1957 or 1958. In the years prior, it had incurred operat-ing deficits from shipping, while its principal income was obtainedfrom dividends and interest on its investments. As of December 31,1957, the company and its two wholly-owned subsidiaries had con-solidated assets of about $30 million, of which 95 percent was in cashand securities, the rest in officeand other equipment.

The object of the Commission having been achieved, a stipulationwas entered into, discontinuing the action.

In S.E.O. v. McPhail (S.D.N.Y.) the Commission brought suitunder section 36 of the Investment Company Act against the directorsand officers of the McPhail Candy Corporation, a registered invest-

10 8.E.O. v. American-Hawaiian SteamBhip Company, S.D.N.Y., No. 139-3In.

166 SECURITIES AND EXCHANGE COMMISSION

ment company." The Commission's complaint, which sought to enjointhe defendants from serving as directors or officers of the corpora-tion, as well as an accounting and the appointment of a receiver,charged Russell McPhail, the president and controlling stockholderof the corporation with the fradulent diversion, waste and misuseof corporate assets, and charged the other defendants with failureto discharge their obligations to enforce the corporation's rightsagainst McPhail. The complaint also stated that the corporation hadbeen an investment company since 1953 but had failed to registerunder the act until 1957in violation of section 7.

In October 1957, the defendants moved to dismiss the complainton the ground that the acts complained of by the Commission hadoccurred prior to registration, but the motion was denied. Thereafterthe defendants offered to settle the Commission's action on the basisof (1) the entry of a consent decree enjoining the defendants fromacting as officers or directors of any investment company; (2) thepayment by McPhail to the Corporation of $325,000; (3) the extensionby McPhail of an offer to purchase publicly held common shares ofthe corporation at their net asset value, and publicly held preferredshares of the corporation at their redemption price, including all un-paid dividends. The settlement was accepted by the Commission andapproved by the Court subject to the acceptance of the purchase offerby a sufficient number of stockholders to cause the corporation to falloutside the scope of the Investment Oompany Act 12 and the com-promise of a stockholder's suit now pending in the Delaware ChanceryCourt.

11 S.D.N.Y. CIvil Action No. 13ti-203. Pages 157-158 of the 24th Annual Report alsocontain a discussIon of thls case.

11 Section 3(c) (1) of the act provides an exception to the statutory definitIon of aninvestment company If the outstanding securities of an issuer are beneficIally owned bynot more than 100 persons and It Is not makIng and does not propose to make a publicofferIng of Its securitIes.

PART X

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF1940

The Investment Advisers Act of 1940 requires persons engaging forcompensation in the business of advising others concerning securitiesto register as investment advisers. The registration requirements,however, do not apply in certain limited situations. For example,an investment adviser is not required to register when he furnishesinvestment advice only to persons who are residents of the state inwhich he maintains his principal place of business and he does notprovide advice or analysis concerning securities listed on a nationalsecurities exchange or admitted to unlisted trading privileges onsuch an exchange. The act also provides an exemption for any invest-ment adviser whose only clients are investment companies and insur-ance companies. An investment adviser who in the last 12 monthshad fewer than 15 clients and does not hold himself out generallyto the public as an investment adviser, is likewise exempt fromregistration.It is unlawful for registered investment advisers to engage in prac-

tices which constitute fraud or deceit upon clients or prospectiveclients. Registered investment advisers violating any of the variousprovisions of the act are subject to appropriate administrative, civilor criminal remedies. Investment advisers who also effect transac-tions as brokers or dealers, are required to disclose any interest theymay have in transactions effected for clients, if acting as an investmentadviser in regard to such transaction. In addition, the act prohibitsa registered investment adviser from entering into an agreementwith his clients, under which his compensation is based on a share ofcapital gains or appreciation, and also prevents him from assigningan investment advisory contract without the consent of the client in-volved. Likewise, a registered investment adviser partnership whichchanges its membership must notify clients of such an occurrence.

The Investment Advisers Act does not empower the Commission toinspect the books and records of an investment adviser. Nor, underthe act, may the Commission deny or revoke the registration of aninvestment adviser unless: (1) he has been enjoined by a court ofcompetent jurisdiction from activities in connection with his conductas an investment adviser or from action involving securities or certain

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168 SECURITIES AND EXCHANGE COMMISSION

other activities; (2) he has been convicted in the past ten years of acrime involving securities, the securities business or certain relatedactivities; or (3) has falsified his application for registration.

During the past fiscal year, the number of registered investmentadvisers increased substantially, reaching a total of 1,671, an increaseof 7 percent over the previous year. The following table containsstatistics concerning registration of investment advisers and applica-tions for such registration during the fiscal year:

Stati8tws of Investment Adviser Registrations-1959 Fiscal YearEffective registrations at close of preceding fiscal year 1,562.Applications pending at close of preceding fiscal year___________________ 22.Applications filed during fiscal year___________________________________ 278

Total 1,862

Registrations cancelled or withdrawn during year 156Registrations denied or revoked during year__________________________ 3.Applications withdrawn during year__________________________________ 2Registrations effective at end of year 1,671.Applications pending at end of year___________________________________ 30

Total 1,862

ADMINISTRATIVE PROCEEDINGS

Security Forecaster Co., Inc.-Registrant, publisher of a weeklyinvestment letter known as Financial Forecaster, devoted an entireissue of the latter to an article on Anacon Lead Mines, Ltd. (Anacon).This article recommended the purchase of Anacon stock in extrava-gant and enthusiastic terms, stating that for several weeks registranthad been conducting an extensive research program on Anacon whichshowed beyond a shadow of a doubt that, among other things, Anaconwas the "sleeper" of the year among Canadian mining stocks. It alsoprojected a potential recovery of gold in Anacon properties of some$50 million or more, stated that Anacon had paid more than a milliondollars in dividends, and that Anacon's investments had a value ofmore than $16 million as of December 31, 1957. The report failed todisclose that Anacon had no proven gold deposits on these properties,that no dividends had been paid since 1952, and also failed to disclosethat in contrast with the reported $16 million estimated value ofAnacon Investments in shares of a mining corporation, the same shareshad a value as indicated by a then existing market price of only$2,212,000. Registrant was also found to have willfully filed an ap-plication for registration incorrectly listing an individual as adirector.

In an action brought by the Commission, a permanent injunctionwas issued by the United. States District Court for the SouthernDistrict of New York against registrant and Melvin A. Johnson, its

TWENTY-FIFTH ANNUAL REPORT 169president, director and sole stockholder. 1 The decree barred themfrom using false and misleading statements concerning the potentialrecovery from Anacon's investments, profits realized in stock of othercompanies managed by the president of Anacon, profits that couldbe realized from investing in Anacon, and the present financial con-dition of Anacon and its history of dividend payments. Registrantconsented to entry of the decree without admitting any of the allega-tions of violations contained in the complaint.

In the revocation proceeding, which followed the injunction, regis-trant urged that Jolmson was the subject of a continuing investiga-tion and had properly, and on advice of counsel, refrained fromtestifying in the revocation proceeding in order to avoid the pos-sibility of waiver of his constitutional privilege against self-incrimi-nation. Accordingly, it was contended registrant was deprived ofthe testimony of the person most qualified to present registrant'sdefense. The Commission rejected this argument, holding that reg-istrant was given due notice of the hearing on the charges againstit and at that hearing registrant had participated with counsel.

Based on the injunction, finding of a willful violation and sub-stantial departure from the standards of care and responsibility andfair and impartial analysis expected of a registered investmentadviser, the Commission revoked the investment adviser registrationof Security Forecaster Co., Inc. 2

William H. Keller, Jr., doing business as Insurance Stock Infor--mation Service.-Keller's investment adviser registration was re-voked based on an injunction issued by the United States DistrictCourt for the Southern District of Indiana, Indianapolis Division 3

permanently enjoining him from violations of the Commission's netcapital rule in connection with his activities as a broker-dealer.' TheCommission also revoked Keller's broker-dealer registration based onthe injunction and violations of the antifraud, record keeping, andother provisions of the federal securities laws.5 That action isdescribed in a prior portion of this report.

Albert J. Gould, doing business as Gould Investment Service.-The Commission revoked the Investment Adviser registration ofGould based on a finding that he was permanently enjoined by theUnited States District Court for the Southern District of New Yorkfrom effecting transactions in securities at a time when A. J. Gould& Co., Inc. was in violation of the Commission's net capital rule." In

1S.D.N.Y., No. 130-239 (Feb. 28, 1958).Investment Advisers Act Release No. 103 (May 20, 1959); petition for review of

Commission order filed May 26, 1959; ClvU No. 25, 693, United States Court of Appeals(2 Cir.) ; pending at close of fiscal year.

S.D. Ind., No. I P 58--c-46 (Mar. 20,1958).Investment Advisers Act Release No. 101 (Mar. 18, 1959).Securltles Exchange Act Release No. 5909 (Mar. 18,1959).S.D.N.Y., No. 113-87 (Sept. 18, 1956).

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170 SECURITIES AND EXCHANGE COMMISSION

that injunctive action, the court found that A. J. Gould & Co., Inc.,a registered broker-dealer firm of which Gould was president and adirector, had wilfully violated the net capital rule,"

T Investment .Advisers .Act Release No. 95 (Sept. 2, 1958).

PART XI

OTHER ACTIVITIES OF THE COMMISSION

COURT PROCEEDINGSCivil Proceedings

At the beginning of the fiscal year 1959 there were pending in thecourts 54: injunctive and related enforcement proceedings institutedby the Commission to prevent fraudulent and other illegal practices inthe sale or purchase of securities. During the year 60 additionalproceedings were instituted and 58 cases were disposed of, leaving56 such proceedings pending at the end of the year. In addition theCommission participated in a number of corporate reorganizationcases under chapter X of the Bankruptcy Act, in 7 proceedings inUnited States District Courts under section 11(e) of the Public UtilityHolding Company Act and in 18 miscellaneous actions. The Com-mission also participated in 59 civil appeals in the United StatesCourts of Appeals. Of these, 20 came before the courts on petitionfor review of an administrative order, 17 arose out of corporate re-organizations in which the Commission had taken an active part, 17were appeals in actions brought by or against the Commission, 1 wasan appeal from an order entered pursuant to section 11(e) of thePublic Utility Holding Company Act, and 4 were appeals in casesin which the Commission appeared as amicus curiae. The Commis-sion also participated in 4 appeals or petitions for certiorari beforethe United States Supreme Court resulting from these or similaractions.

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.

Certain significant aspects of the Commission's litigation duringthe year are discussed in the sections of this report relating to thestatutes 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 regional offices of the Commis-sion prepare detailed reports in cases where the facts appear to war-rant criminal prosecution. After careful review by the GeneralCounsel's Office, these reports are considered by the Commission, and

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if it believes criminal prosecution is appropriate they are forwardedto the Attorney General. Commission employees familiar with thecase often assist the United States attorneys in the presentation to thegrand jury, the conduct of the trial, and the preparation of briefs onappeal. The Commission also submits parole reports prepared by itsinvestigators relating to convicted offenders.

During the past fiscal year, 45 new cases were referred to the De-partment of Justice for prosecution. This represents the highestnumber of criminal referrals in the past 17 years and the 5th highestin the Commission's history. Also during the fiscal year 27 indict-ments were returned against 111 defendants, the highest number sincefiscal year 1943,and there were 24 convictions in 13 cases. There weresix appeals in criminal cases during the fiscal year. In three instancesthe appeals were dismissed. The conviction was affirmed in the onlyappeal decided on the merits. The remaining two cases were stillpending at the close of the period. Two criminal contempt proceed-ings were instituted during 1959, which were still pending at the endof the year.'

From 1934to June 30, 1959,2,487 defendants have been indicted inthe United States District Courts in 602 cases developed by the Com-mission and 1,319 convictions obtained in 555 cases. Thus, over thepast 25 years, convictions have been obtained and upheld in over 85percent of the cases completed,"

As in past years, the criminal cases developed and prosecuted dur-ing the year covered a wide variety of fraudulent practices. They in-cluded frauds in the sale of securities of established as well as newbusinesses, frauds on the part of securities broker-dealers and theirrepresentatives, frauds in the sale of securities relating to oil and gaspromotions and mining ventures, and fraudulent securities promo-tions of alleged inventions. In addition, defendants in a number ofcases also were charged with violating the registration provisionsof the Securities Act. The filing of a false registration statementunder the Securities Act and the failure to file reports required underthe Securities Exchange Act also were charged in certain of the cases.The "Ponzi" technique whereby promoters pay back to investors out ofthe investors' own funds monies which are falsely represented to beprofits or interest on their investments was a part of the fraud allegedin a number of the cases in which convictions were obtained duringthe year.

In U.S. v. Selected Investment Oorporation et oi.; (W.D. Okla.),after 3 weeks of trial, Hugh A. Carroll was convicted and sentenced to

1See Criminal Contempt Proceedings, appendix table 30, Part II.2 A condensed statistical summary of all criminal cases developed by the Commission

from the fiscal year 1934 through the fiscal year 1959 Is set forth in appendix table 37.The status of criminal cases developed b~' the Commission which were pending at theend of the fiscal year is set forth in appendix table 88.

TWENTY-FIFTH ANNUAL REPORT 173

a term of 7 years 8 on all counts of a 31-count indictment whichcharged violations of the antifraud provisions of the Securities Actof 1933, violations of the Mail Fraud Statute and conspiracy to vio-late both statutes. Three other defendants received sentences rang-ing from a suspended sentence with 5 years probation to 5 yearsimprisonment;' The two corporate defendants were each fined $1,500and one defendant was acquitted. The indictment alleged that thedefendants employed a scheme to defraud in connection with the saleof certificate bonds of Selected Investments Trust Fund by means offalse and misleading representations and by concealment of materialfacts. It was charged that the defendants paid dividends out ofcapital while representing to investors and prospective investors thatsuch dividends were paid from profits earned by the trust fund createdand managed by defendant Selected Investments Corporation; thatfalse financial statements of the trust fund were distributed to in-vestors; that the defendants illegally converted to their own use prop-erties of the trust fund; that the defendants falsely represented thatthere were adequate safeguards to protect investors from loss andthat their funds were invested in sound income producing securities,"

Convictions also were obtained after trial against two defendantsin V.S. v. Monarch Radio and Television Oorporation et al. (S.D.N. Y.) . Prior to trial one defendant pleaded guilty. Two defendantswere acquitted and the case dismissed as to the four remaining de-fendants. This indictment charged the defendants with making vari-ous misrepresentations in the sale of Monarch stock and with issuingfalse financial statements and paying dividends out of stock sale pro-ceeds while representing that such dividends came from companyearnings when the company had no earnings.

A sentence of 18 months imprisonment was imposed upon Roy W.Adams (N.D. Texas) following his conviction of charges arising outof the fraudulent sale of stock of Central Finance Service, Inc. Acodefendant, Council Mayo Forsyth, had previously been sentenced to2 years imprisonment for the fraudulent sale of the same stock. Theindictment charged that the defendants falsely represented to inves-tors that the Central stock being offered was unissued stock and thatthe money received from the sale of such stock would be used byCentral in its business operations; that Central was realizing substan-tial profits from its business operations and would pay substantialdividends and that investors would receive a return of all moneyinvested in Central stock upon request.

The promotion of alleged inventions resulted in convictions in Ii.S,v. Arnold E. Vandersee et al. (D.N.J.) and V.S. v, Gailon A. Bell

Sentence was later reduced to 5 years and notice of appeal was withdrawn .Appeal ppndlng by one defpndan t.The Commission Is participating In reorganization proceedings of Selected Investment

Corporation under chapter X of the Bankruptcy Act

• • •

174 SECURITIES AND EXCHANGE COMMISSION

(S.D. Calif.). After 6 weeks of trial in the Vandersee case defend-ants Vandersee and the Vandersee Corporation were found guilty on11 counts of a 15-count indictment charging fraud in the offer andsale of common stock of the Vandersee Corporation The indictmentalleged that as part of a scheme and artifice to defraud purchasers thedefendants falsely represented, among other things, that the Vander-see Corporation had contracts with General Motors, General Electric,Ford Motor Company and other large corporations; that the corpora-tion was producing equipment used in the manufacture and productionof atomic energy, radio tubes, aircraft engines, printed circuits, andother electrical equipment; that the corporation had an order for$1 million from Bell Telephone and General Electric; and that thecorporation had obtained title to two patents issued to Arnold E.Vandersee. The indictment also charged that the defendants failedto advise the public investors that some of the shares being offered byVandersee were his personally owned shares, or the personally ownedshares of other defendants. Vandersee was sentenced to a total termof 8 years and fined $5,000. The defendant corporation was fined$5,500. Two remaining defendants were found not guilty.

In the Bell case defendant was found guilty on three counts charg-ing violations of the antifraud provisions of the Securities Act, andtwo counts charging violations of the registration requirements ofthat act in connection with the sale of stock of Nu-Form Batteries,Inc. A sentence of 5 years probation was imposed upon Bell whowas also ordered to make restitution. The indictment charged thatBell falsely represented that funds invested in Nu-Form Batteriesstock would be used to acquire additional production facilities when,in fact, the defendant intended to and did appropriate such funds tohis own use and benefit; that Bell had invented the Nu-Form Battery;that the battery would soon be distributed nationwide; that an affili-ate of Nu-Form Batteries was equipped to assemble 2,000 batteriesper day; and that Nu-Form stock would be listed on a nationalsecurities exchange. The indictment further charged that defendantfailed to disclose that earlier attempts to manufacture and marketthe Nu-Form Batteries on a commercial basis had been unsuccessfuland that earlier experience had indicated that the company could notgenerate sufficient revenue to cover operating expenses.

In U.S. v. Albert Hefferan (W.D. Mich.) the defendant was sen-tenced to a prison term of 3 years following his plea of guilty tovarious counts of an indictment charging violations of the antifraudprovisions of the Securities Act in connection with the sale of prom-issory notes purportedly secured by shares of stock. The indictmentalleged that as part of a scheme and artifice to defraud, the defendantplaced a series of newspaper advertisements soliciting investors toadvance him sums of money. It was represented in these advertise-

TWENTY-FIFTH ANNUAL REPORT 175

ments that the defendant would furnish collateral variously describedas "listed, highgrade securities" and "grade A negotiable listed se-curities," having values substantially in excess of the amounts of theinvestments solicited. The indictment charged that the defendantdid not intend to and did not pledge genuine securities as collateralfor his promissory notes issued to investors, but delivered to themforged certificates which he falsely represented to be genuine. Inaddition, the indictment alleged that Hefferan falsely represented toinvestors that investments in his notes collateralized by purportedshares of stock would be absolutely safe and involve no risk of loss;and that he had ample income from his business and investments topay the monthly instalments of principal and interest provided in hisnotes.

In U.S. v. PUIUlH. Oollilns (S.D. Ill.) the defendant, who was therepresentative of a broker-dealer, pleaded guilty to ten counts of atwenty count indictment charging him with violations of the Securi-ties Act and the Mail Fraud Statute. Collins' sentence was suspendedand he was placed on probation for 3 years.

Hugh O. Van Valkenburgh (D. Neb.) entered a plea of nolo con-tendere to four counts of an indictment charging fraud in the sale ofsecurities of Instant Beverages, Inc. The defendant was fined $11,500and placed on probation for 3 years. The other defendant, AbrahamSchapiro, had previously pleaded guilty to eight counts of the indict-ment and had been placed on probation for 30 months and fined $2,000.The indictment charged that the defendants employed a scheme todefraud purchasers of the securities of Instant Beverages, Inc. bymisrepresenting that the proceeds from the sale of defendants' sharesof stock would be used by Instant Beverage, Inc. to begin production,whereas the defendants converted the proceeds to their own use j andthat formulae held by the company for an effervescent soft drinkwere perfected and that Instant Beverage, Inc. would soon cause tobe produced a stable product in marketable quantities, whereas thedefendants knew that the formulae and processes were incomplete andnot perfected and that a stable product could not be produced there-from. In addition, it was charged that the defendants sold stock tothe public at $5 a share for which they had paid 1 cent per share,without disclosing to the investors the original cost of the shares.

In U.S. v. Harold W. Danser r-; et al (D. Mass.) the defendantsare charged with violations of the antifraud provisions of the Securi-ties Act in the sale of the common stock and warrants of UltrasonicCorporation, and with conspiracy to file false registration statementsunder the Securities Act pursuant to which the stock offering wasmade and to defraud the United States by impeding and obstructing

176 SECURITIES AND EXCHANGE COMMISSION

the Commission in its protection of public investors. The indictmentcharges, among other things, that the defendants, in the offer andsale of the Ultrasonic securities used .financial statements, includedin the prospectuses furnished to investors, which represented that theUltrasonic Corporation was operating at a profit and had substantialassets, when in fact the corporation had suffered substantial losses andthe assets were substantially less than the amount stated.

In U.S. v, Charles M. Berman, et al. (S.D.N.Y.) numerous defend-ants were indicted for violations and conspiracy to violate the Securi-ties Act. The indictment charges the defendants with employinga scheme to defraud investors in the offer and sale of shares of JohnInglis, Ltd. and other securities. The indictment alleges that as apart of this scheme defendants caused Cornelis de Vroedt, Inc. toobtain a broker-dealer registration with the Commission and arrangedto supply securities to be sold through Cornelis de Vroedt, Inc. Ac-cording to the indictment, defendants caused Cornelis de Vroedt, Inc.to contract to sell, as commission agent for certain foreign trusts,large quantities of the John Inglis, Ltd. shares and defendants in-serted advertisements in financial journals, newspapers and periodi-cals, purchased mailing lists and distributed literature to the saidmailing list to condition the public for the extensive telephone salescampaign that followed.

It is further charged that the defendants, in effecting the sale ofthe Inglis shares, falsely represented to investors that the defendantCornelis de Vroedt, Inc. was a long established securities firm; thatthe purchasers could place their trust and confidence in the firm;that the firm maintained an independent research department whichissued impartial advice to its customers; that the firm was advisingthe purchasers to invest and reinvest in the Inglis shares as a resultof an impartial analysis of that security by its research department,which analysis was based upon facts and information not generallyavailable to the public at large; that the firm, the officers thereof andthe salesmen had purchased large quantities of Inglis shares for theirown accounts; that the firm was offering and selling Inglis shares toa special group of customers at bargain prices with no commissioncharge to said customers in order to add such customers to its existingregular clientele; that the purchasers would suffer no loss and wereassured of immediate large specified profits because of imminentlyimpending designated mergers, increased earnings, declarations ofdividends and new listings on registered securities exchanges; andthat in order to participate in these guaranteed profits, it was neces-sary for the customers to make immediate purchase of the Inglisshares since they were "blue chips" in short supply and soon would beunavailable at the then existing low prices.

TWENTY-FIFl'H ANNUAL REPORT 177The indictment charges further that the defendants would send

confirmations to persons who had not ordered securities and there-after threaten to make trouble for them with the Securities and Ex-change Commission if they did not buy the securities, and that thedefendants destroyed or falsified records of the company for thepurpose of impeding, impairing and obstructing the investigativefunctions of the Commission.

The indictment in V.S. v. Alexander L. Guterma, et al (S.D.N.Y.)charged violations of, and conspiracy to violate, the reporting require-ments of the Securities Exchange Act of 1934. The indictmentcharges that Guterma, Robert J. Eveleigh, and Comficor, Inc., unlaw-fully failed to file with the New York Stock Exchange and the Com-mission a statement indicating beneficial ownership and the changesin such ownership in the common stock of F. L. Jacobs Co. at theclose of specified calendar months. The indictment further chargesthat Guterma and Eveleigh delayed and obstructed the filing of theannual report of F. L. Jacobs Co. for the fiscal year ended July 31,1958, and that Guterma and Eveleigh, who were officers, directorsand owners of securities of F. L. Jacobs Co., unlawfully delayed andobstructed the making and filing of monthly reports of F. L. JacobsCo. which would have disclosed the disposition by F. L. Jacobs Co.of a significant amount of assets otherwise than in the ordinary courseof business.

Indictments in two cases charge fraud in connection with the trans-action of business as a broker-dealer. Bryan H. Kyger was chargedin an indictment returned in the Southern District of Texas withviolations of the Securities Exchange Act, as well as the SecuritiesAct and the Mail Fraud Statute. According to the indictment,Kyger solicited customers to purchase securities from his firm uponthe representation that the firm was financially able to execute suchorders and to deliver securities and money due customers when he didnot intend to and did not execute such orders or deliver to customersthe securities ordered by them, The indictment also charges thatKyger appropriated to his own use and benefit the monies receivedby him from his customers in payment of securities purchased bythem, and that he sold securities belonging to his customers withouttheir knowledge and similarly misappropriated the proceeds.

In an indictment returned in V.S. v, Robert Bernard Sills et al(S.D.Fla.), the defendants were charged with similar violations. Theindictment in this case charges, among other things, that the defend-ants, operating through Sills and Company, a registered broker-dealer of which Sills was president and controlling stockholder andfor which defendant Green was sales manager and a salesman of se-curities, employed a scheme and artifice to defraud by soliciting and

178 SECURITIES AND EXCHANGE COMMISSION

inducing customers to purchase from and sell to Sills and Companycertain securities, and that, instead of effecting such transactions, thedefendants converted to their own use and benefit the funds receivedfrom customers in payment for such securities and the securities ob-tained from customers for the purpose of such sales. It is further al-ledged in the indictment that the defendants concealed from theircustomers that the firm was insolvent and that the defendants madeand caused to be made false statements in a financial report filed withthe Commission.

Indictments were returned in a number of cases involving allegedfraudulent promotions regarding securities of insurance companies.An indictment was returned in the District of Nebraska chargingOharles F. Newell and others with violations of the antifraud andregistration provisions of the Securities Act in connection with thesale of stock of Unity Insurance Company. The defendants arecharged with investing funds derived from the sale of Unity Insur-ance Company stock in business ventures unrelated to the organiza-tion of an insurance company. According to the indictment, in thecourse of the sales of these securities the defendants falsely repre-sented, among other things, that the purchaser of the stock couldhave his money back at any time; that the money raised from the saleof the stock would be placed in escrow until the insurance businesslicense or franchise was issued by the State of Nebraska; that thestock was going to rise in price; that the company had the money toqualify and get its insurance license; that the company was doing sowell that they would refund the money of the purchaser at any timewith 5 percent interest; that the company was allowed by state lawto spend only 24 cents per share for expenses; and that certain personshad made substantial investments in the Unity Insurance Company.In addition, the indictment charged that the defendants concealedthat the principal organizers, officers and directors of the companydid not invest any money in the company, and that the stock pur-chased by investors was stock optioned to an officer or director, andthat the greater portion of the purchase price would be retained bythe officeror director making the sale.

In Ii.S, v. James Lamar McMichael (D. Ala.}, the indictmentcharges the defendant with violations of the antifraud provisions ofthe Securities Act, the Mail Fraud Statute and the Fraud by WireStatute. McMichael, who had been a fugitive, was apprehended inJanuary 1959 in Miami, Fla. The charges as laid in the indictmentarose, in part, out of the sale of preorganization subscriptions andcertificates for stock of United Security, Inc., a corporation proposedto be organized under the laws of South Carolina, which was pro-moted by McMichael for the purpose of acquiring a number of finan-cially unstable insurance companies and consolidating them into one

TWENTY-FIFTH ANNUAL REPORT 179

company; also, in part, out of personal transactions of McMichaelwith individual investors involving securities in their portfolios. Itis alleged in the indictment that the defendant engaged in a schemeto sell preorganization subscriptions and certificates for both theoriginal stock of United Security, Inc., and personally owned stockof the defendant to be issued after the corporation would be formed,by falsely representing to investors, among other things, that moneypaid for such securities would be deposited in escrow with TheSouth Carolina National Bank at Greenville, S.C., and that if thecorporation did not obtain a charter before a specified date, thefunds of the investors would be returned to them. The indictmentfurther alleges that the defendant falsely represented to investorsthat if they would turn over to him certain stocks of establishedcorporations which they owned, he would be able to sell them atadvantageous prices, and that he would accept one-half of the profitsas his commission. It is also alleged that he purchased securitiesfrom investors and gave them worthless checks in payment therefor.

Violations of the antifraud provisions of the Securities Act andof the Mail Fraud Statute also are charged in the indictment in V.S.v, William Isaac Lowry, et al. (D. Ariz.), This indictment chargesthe defendants with a scheme and artifice to defraud policyholdersand stockholders of American Buyers Insurance Company, the bene-ficiaries of a certain trust of which the defendants were the trustees,and the stockholders of The American Buyers Insurance Company(a separate corporation). According to the indictment, the schemeto defraud was devised by the defendants for the purpose of obtain-ing control and ownership of the property, assets and insurance busi-ness of a group of insurance companies of which defendants werethe principal officers and directors, and for the enrichment of defend-ants at the expense of investors and policyholders. As part of thescheme defendants induced those persons to invest funds in the insur-ance companies and to forego rights to which they were entitled aspolicyholders and stockholders. Further, it is alleged the defend-ants diverted insurance business from companies in which such per-sons were policyholders or stockholders to companies wholly orsubstantially owned by the defendants.

An indictment charging violations and a conspiracy to violate theregistration provisions of the Securities Act was returned againstPhilip H. Meade and others (S.D. Ind.) in connection with the saleof the stock of Farm and Home Agency. According to the indict-ment, the defendants sold the stock to non-residents of the State ofIndiana, which destroyed their claim to an intrastate exemption, andconspired to conceal the true identities of the purchasers of suchsecurities and to create the appearance of sales to Indiana residentsby the use of dummies and nominees.

529523--59-15

180 SECURITIES AND EXCHANGE COMMISSION

An indictment was returned in the District of North Dakotacharging Samuel Parker Pandolfo and others with violations of theantifraud and registration provisions of the Securities Act, viola-tions of the Securities Exchange Act and violations of the MailFraud Statute in connection with the operation of a securities broker-dealer business. The indictment charges, among other things, thatthe defendant Samuel Parker Pandolfo acquired for himself and hisclose associates large quantities of securities of Great Northern In-vestment Company, Inc., and thereafter caused to be formed Uni-versal Securities, Inc., to engage generally in the business of a broker-dealer, and particularly to make, maintain and support a market forthe Class "A" stock of Great Northern Investment Company, Inc.The indictment also charges that the defendants engaged in a schemeto sell securities through Universal Securities, Inc. by falsely repre-senting to the investors that the prices at which the securities weresold were prices determined by an actual bona fide demand for suchsecurities; that a further rise in the prices of the securities could beexpected in the near future because of a rapid rise in the intrinsicvalue of the shares; and that a rise in the market prices of the securi-ties sold was sure to occur. In addition, the indictment charges thatthe defendants falsely represented that the Great Northern stockwould double in value within a specified period; that investors couldresell the securities any time at the price at which they paid forthem; and that the price at which such securities were sold was themarket price thereof, when in fact said market price was an artificialmarket price maintained by the defendants, which fact was notdisclosed.

Abraham Rosen and another defendant were indicted in the Districtof Massachusetts on charges of violation of the antifraud provisionsof the Securities Act and the Securities Exchange Act and the Fraudby Wire Statute. The indictment charges that the defendants solic-ited funds and securities from customers with the representation thatthe defendants would invest the funds and the proceeds from thesecurities for the benefit of the customers, when in truth and in fact,as the defendants well knew, they did not intend to, and did not, investthe moneys as represented, but appropriated the funds to their ownuse and benefit.

An indictment was returned in the Northern District of Tennesseecharging Robert Lee Proffer and others with violations of the anti-fraud provisions of the Securities Act and the Mail Fraud Statute.The indictment charges, among other things, that the defendants in-duced investors to purchase shares of Old Line Legal Reserve Trust(later the Teachers-Professional Investment Company) by falselyrepresenting to investors that the books of the corporation would beaudited by a certified public accountant and that financial statements

TWENTY-FIFTH ANNUAL REPORT 181

would be furnished to stockholders at least once each fiscal year; thatas of a specified date the corporation had an earned surplus of$13,278.30; that moneys received from the sale of corporation stockwould be used primarily to finance and refinance loans on automobilesfor the school teachers of Texas; and that in the event investors whopurchased stock on the instalment plan failed to complete their pur-chase contracts, such investors would receive shares of stock of thecorporation to the extent of the amount paid in. The indictment alsoalleges that as a further part of the scheme to induce school teachersto purchase stock of the corporation the defendants caused printedprospectuses to be distributed to school teachers, and that such pro-spectuses contained names and photographs of well-known educatorsthroughout the State of Texas and representations that some of theseindividuals were directors of the corporation and that others were"Regional Directors of Areas."

In the Eastern District of New York an indictment was returnedcharging William Spiller and others with violating the antifraud pro-visions of the Securities Act and the Mail Fraud Statute in the saleof the 7 percent cumulative preferred stock of Budget Funding Cor-poration. The indictment charges that in the offer and sale of thosesecurities the defendants falsely represented that the moneys investedwould be used to place second mortgages on residential properties forhome improvements on such properties and to place chattel mortgageson chattels owned by established businesses, that a dividend would bedeclared on the common stock of Budget Funding Corporation, thatthe common stock was in short supply and would soon be traded onthe open market, and that the preferred shares would be called backat a higher price than the purchasers paid for them. In fact, theindictment charges, the defendant concealed from purchasers of thesecurities that the money received was being directed to the use of thedefendant Spiller and corporations controlled by him.

As in the past, cases involving alleged fraudulent oil and gas pro-motions and mining ventures were numerous. In U.S. v, DudleyPritchett South (D.N.J.) an indictment was returned charging viola-tions and conspiracy to violate the registration and antifraud provi-sions of the Securities Act in connection with the sale of the commonstock of Texas-Western Oil Company, Inc. The indictment chargesthat in the sale of that stock the defendants misrepresented thatTexas-Western had acquired oil producing properties in Kansas andOklahoma and had a working interest in other specified oil properties,that Texas- Western had a partnership interest in leases located inNevada and in a 10,000-acre block in Wyoming, that Texas-Westernowned a 55 percent interest in a mercury and antimony mine locatedin Mexico and was building an ultrasonic ore reduction mill on thesite of that mine, that the company had an income from its oil produc-

182 SECURITIES AND EXCHANGE COMM:ISSION

ing properties in Kansas and Oklahoma, that dividends would be paidon the Company's stock, that the value of the stock would increasesharply in a short period of time and that the stock would be regis-tered and listed on the New York and American stock exchanges.

In U.S. v, Thomas E. Robertson, et al (S.D.N.Y.) the indictment al-leges that the defendants, in violation of the antifraud provisions ofthe Securities Act, employed a device, scheme and artifice to defraudinvestors in the sale of the common stock of American-Canadian Oiland Drilling Corporation; that Thomas E. Robertson, Inc., in ex-change for certain oil and gas leases, acquired 500,000 shares of com-mon stock of American-Canadian which it sold to the investing publicat various prices without a registration statement being in effect withrespect to said shares, and without disclosing that the shares beingsold were shares already issued to Thomas E. Robertson, Inc., and thatthe proceeds from the sales would inure to the use and benefit ofThomas E. Robertson, Inc., and Thomas E. Robertson; and that thedefendants made false and fraudulent representations concerningthe payment of dividends, the value of the stock, approval by theSecurities and Exchange Commission, listing of the stock on a nationalsecurities exchange, the value of the properties and their cost ofacquisition. Numerous other misrepresentations and omissions alsowere charged.

Violations of the registration provisions of the Securities Act aswell as the Mail Fraud Statute are charged in the pending indictmentin U.S. v. Texas-Adams Oil Oompany (S.D.N.Y.) which also in-volved an oil promotion venture.

Alleged fraudulent promotions involving mining ventures led toindictments in U.S. v. Olement G. Oafarelli, et al, (D. Utah) ; U.S. v,Silas M. Newton et al, (D. Colo.) ; U.S. v. Arthur L. Damon, et al(S.D. CaL); and U.S. v. William J. Oonrad (N.D. Ohio). In theOafarelli case the indictment charges fraudulent sales of the commonstock of Comstock Uranium Tungsten Co., Inc. According to theindictment, a Regulation A notification and offering circular coveringthe proposed public offering of 440,000 shares of common stock ofComstock were filed with the Commission, and defendants, instead ofproceeding with the Regulation A offering, sold personally ownedstock to the public using as an inducement false representations tothe effect that the stock would appreciate in market value when it wasoffered for "public sale" and that the persons approached were beinggiven a special prepublic offering price not afforded to the generalpublic. Other false representations also are charged.

In the Newton case a superseding indictment was returned whichcharges, among other things, that the defendants devised a schemeto defraud investors by means of misleading and false statements and

TWENTY-FIFTH ANNUAL REPORT 183pretenses, which induced them to purchase participation certificatesin trusts known as the Yellow Cat Royalty Trust and the TennesseeQueen Royalty Trust, and in fractional undivided interests in miningclaims held by the Tennessee Queen Mining Company. The indict-ment also charges that in connection with the sale of these securitiesthe defendants falsely represented that the properties were of greatvalue; that the company was shipping ore, and the investors were ab-solutely assured of royalty returns on their investments; that the oper-ators and their associates were highly experienced mining operators;that the operators agreed that they would repurchase or refund thepurchase price to some of the purchasers upon demand; and that theinvestment to be made by the prospective purchasers was safeguardedbecause of bank trusteeship.

In the Damon case the indictment charges that the defendant madefraudulent representations to investors concerning the financial statusof Nev-Tah Oil and Mining Company, the potential oil reserves ofmining properties owned or leased by the mining company, and thecompany's earnings and ability to pay dividends. The indictmentfurther charges that Damon acquired control of the company andcaused the market price of its stock on the Salt Lake Stock Exchangeto rise above 45 cents per share through -the use of flamboyant andmisleading reports, letters and oral statements; that he caused thecompany to issue stock into a series of escrows for release at pricesranging from 9 cents to 45 cents per share, and that he offered andsold escrowed stock at prices in excess of the escrow prices and atartificial exchange prices.

In the Oonrad case, the defendant was apprehended after the closeof the fiscal year, and pleaded guilty to an indictment charging himwith the fraudulent sale of unregistered common stock of CondonnaUranium Mines Limited. In connection with the sale of that stock,according to the indictment, the defendant falsely represented to in-vestors that Kennecott Copper Company would pay more than $10million for the uranium mining properties owned by Condonna; thatthe profit to the investors would be more than $8,000 for each $100invested; that a deal to sell the uranium mining properties to Stand-ard Ore and Alloys Corporation was "signed, sealed and delivered"and the profit to the investors would be $60 for each $1 invested; thatthat Brush Beryllium Company would advance $500,000 to developsome beryllium mining claims allegedly owned by Condonna UraniumMines Limited and would buy all the beryllium ore produced at $600a ton.

The Court of Appeals for the Ninth Circuit affirmed the convictionof Helen A. Davenport for conspiracy arising out of a securities fraudinvolving Edgar Robert Errion and Mount Hood Hardboard and

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Plywood Cooperative," The scheme to defraud the investing publicincluded the sale of $1,000 memberships in Mount Hood. AppellantDavenport participated in the fraudulent scheme by allowing hername to be used as a cloak of respectability and her corporation as aconduit by which to siphon off the proceeds from the sale of thememberships. The Court of Appeals rejected appellant's attack onthe indictment and held that it sufficiently charged her with a crime.In addition, the Court reviewed the evidence and found it sufficientto sustain the verdict of guilty.

In Tellier v. U.S. and Walters v, U.8. the Supreme Court of theUnited States denied petitioners' writs of certiorari. Tellier had beensentenced to 4% years imprisonment for his activities in running aboiler-room. Walters had received an 1S-month sentence in connec-tion with insurance company promotions. Both these cases are dis-cussed in the 23d and 24th Annual Reports.

DISCIPLINARY PROCEEDINGS AGAINST PERSONS PRACIlClNG BEFORETHE COMMISSION

Private proceedings were instituted pursuant to rule II (e) of theCommission's rules of practice to determine whether James T.DeWitt should be temporarily or permanently denied the privilege ofpracticing as an attorney before the Commission. DeWitt was re-tained by Cushman Foods Co., Inc. to represent it in connection witha proposed public offering under Regulation A under the SecuritiesAct of 1933. He was given authority by his client to execute allpapers necessary to qualify such offering under Regulation A for thepurpose of obtaining an exemption from registration with respect tothe proposed offering. Included in the notification were financialstatements which, together with subsequent amendments thereto, wereprepared and filed by DeWitt. These financial statements were false,and DeWitt knew that they were false when he filed them. In addi-tion, he advised Cushman to sell the shares covered by the notifica-tion, although the time at which such sales would commence underthe regulation had not arrived, and pursuant to that advice Cushmansold over 4,000 shares. DeWitt requested of Cushman moneys whichhe represented were to be distributed among employees of the Com-mission. Pursuant to this request he received $100, which he there-after represented to Cushman he had "passed along" to such employ-ees, whereas in fact, no moneys, gifts or inducements of any kind weregiven to any Commission personnel. At the private hearing there wasentered of record DeWitt's "consent to order of disqualification", andthereafter the Commission issued its opinion 7 in which it found that

Four other convicted defendants did not appeal. Errfon on his plea of guilty receivedsentences totaling 12 years. See the 23d and 24th .Annnal Reports for discussions ofthis case.

r Secnrltles .ActRelease No. 4041.

•

TWENTY-FIFTH ANNUAL REPORT 185

DeWitt had filed false financial statements, which he knew to be false,that he obtained moneys from his client under the false pretense thathe proposed to use that money to exert an illegal influence on theCommission staff, and that in so doing he had engaged in unethicaland improper conduct. Itordered that DeWitt be permanently deniedthe privilege of appearing or practicing before the Commission.

Proceedings under rule II(e) with respect to Bollt and Shapiro,accountants, are discussed below at p. 197 in connection with the activ-ities of the Commission in the field of accounting.

COMPLAINTS AND INVESTIGATIONS

Each of the acts administered by the Commission specifically au-thorizes investigations to determine whether violations of law haveoccurred. In most instances, the investigations conducted by theCommission are private and nonpublic. However, the Commissionmay, in its discretion, order a public investigation.

It is the policy of the Commission to conduct its investigationsprivately for a number of reasons. Such a policy is necessary foreffective law enforcement and in the interest of fairness to personsagainst whom unfounded or unconfirmed charges may be presented.Effective enforcement requires that investigations be private in orderthat suspected violators may not be warned and thereby frustrate theinvestigation. This policy is similar to that of most law enforce-ment agencies. The Commission investigates many situations whereno violation is ultimately found to exist. To conduct such investiga-tions publicly would ordinarily result in hardship or embarrassmentto many innocent persons and might affect the market for the secu-rities in question, resulting in injury to public investors with no coun-tervailing public benefit. Moreover, members of the public wouldhave a tendency to be reluctant to furnish information concerning vio-lations if they thought their personal affairs would be publicized. Pri-vate investigations protect both those who furnish information andsubjects of investigation against whom the evidence fails to warrantaction. Accordingly, the Commission does not generally divulge theresults of any investigation until they are made a matter of publicrecord through proceedings before the Commission or in the courts.

The nine regional officesof the Commission, with the assistance oftheir branch offices,are chiefly responsible for the conduct of investi-gations. In addition, the special investigations unit of the Divisionof Trading and Exchanges of the Commission's home officeconductsinvestigations dealing with matters of particular interest or urgencyeither independently or assisting the regional offices. Because of"boiler-room" operations in the New York area, much of the workof the special investigations unit is devoted to that area. The Divi-

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sion of Trading and Exchanges exercises general supervision overand coordination of the investigative activities of the regional offices.It examines and analyzes periodically the results of investigationsand recommends appropriate action to the Commission, giving seriousconsideration to the recommendations of the regional offices in eachinstance.

There are several sources of information which eventually lead toinvestigations. A primary source of information comes from com-plaints of members of the public concerning the activities of personsinvolved in the offer and sale of securities. The Division of Tradingand Exchanges and the regional officesof the Commission give care-ful attention to this information and if it appears that violations ofthe federal securities laws may have occurred, an investigation iscommenced. H the complaint is received by the Division of Tradingand Exchanges, the information contained in the complaint is for-warded to the appropriate regional office for such investigative ac-tivity as may be deemed advisable. Other sources of informationwhich are of great help to the Commission in carrying out its en-forcement responsibilities are national securities exchanges, brokeragecompanies, state and Canadian securities authorities, Better BusinessBureaus and the National Association of Securities Dealers, Inc.Many times information from these sources is helpful, for it comesfrom persons who are often familiar with the operation of the federalsecurities laws and are interested in seeing full protection of theselaws afforded to the investing public.

H, after careful consideration of information received from theseand other sources, it appears that violations may have occurred, apreliminary investigation may be made. Many times this investiga-tion discloses a violation due to a misunderstanding or ignorance ofthe law. In these cases, where no harm to the public has occurred,it is the policy of the Commission to inform the offender of the viola-tion and to make sure that necessary steps are taken for future com-pliance. Should the offender fail to conform with the requirementsof the law, then the Commission takes appropriate action.

When the preliminary investigation indicates a serious violation,or appears to require more extensive investigation, including exami-nation of books and records or interviews with more than a few per-sons, a case is docketed and a full investigation is made. At times itis necessary for the Commission to issue a formal order of investiga-tion which appoints members of the staff as officersto issue subpoenasand take testimony under oath. As is often the case, this step is takenwhen the principals and others involved in the investigation are un-cooperative, and it is necessary to use the subpoena power in orderto determine the exact nature of the activities involved. During the

TWENTY-FIFTH ANNUAL REPORT 187

past year, 94 formal orders were issued in connection with the inves-tigations handled through the Division of Trading and Exchanges,an increase of nearly 25 percent over the previous year.

In addition investigations are initiated and conducted by the staffof the Division of Corporation where necessary to assist in ascertain-ing facts with respect to disclosures required to be made or omissionsof material information in connection with its examination of regis-tration statements filed under the Securities Act and preliminaryproxy soliciting material and reports required to be filed under theSecurities Exchange Act. Where necessary, such investigations areconducted with the assistance of the staff of other divisions andregional offices.

Upon completion and review of an investigation by the regionaloffice concerned and the Division of Trading and Exchanges, or theDivision of Corporation Finance, the Commission takes under con-sideration the recommendations of its staff concerning the investiga-tion. The Commission, where action is necessary, has the choiceof several avenues. When required in the public interest, the Com-mission may refer the case, including evidence and exhibits, to theDepartment of Justice for criminal prosecution. Should this occur,members of the staff familiar with the case assist the Departmentof Justice and the United States Attorney handling the case inpresenting it to the grand jury. When an indictment is returned,members of the staff aid in the trial of the case.

The Commission may, when appropriate, authorize institution ofcivil proceedings for injunctive relief. In such event, the complaintis filed in the appropriate United States District Court and the casepresented by a member of the Commission's staff. The Commissionmay also institute administrative proceedings when the investigationindicates that a registration statement or report filed with it is falseor misleading or omits required information or that a broker-dealeror investment adviser registered with the Commission is violatingthe federal securities laws.

The following table reflects in summarized form the investigativeactivities of the Commission during fiscal 1959.

Investigations of possible violations of the acts administered by the Commission

Preliminary Docketed Total

Pending June 30,1958 •••.•..• _____________________________________ 191 770 961New cases . '_ 142 384 526Transferred from preliminary ."' ., ._~ __________ r 24 24

TotaL . . .. . 333 1,178 1,511C1osed . _. . 140 339 479Transferred to docketed .• . . 24 .-------839- 24Pending at June 30, 1959. '_ 169 1,008

____ • _____' __________' ________________ _______________ _________________ __ ____• _______

__ ______________________• __ ____• ________ ______ ___

___________________________________ ______________• ______ _____' ___ ______________________________ ________________________••• ____________

188 SECURITIES AND EXCHANGE COMMISSION

ENFORCEMENT PROBLEMS WITH RESPECI' TO CANADIANSECURITIES

Enforcement problems relative to the unlawful offer and sale ofsecurities by Canadian issuers and broker-dealers continue to be seri-ous. In such enforcement activities the Commission is severelyhandicapped in that ordinarily both the violator and essential evidenceare in Canada, where persons, books and records are beyond ourinvestigative and subpoena powers. It is therefore difficult, and inmost instances, impossible to obtain admissible evidence with respectto such violations. Even when evidence is obtainable, sanctions, suchas civil or criminal prosecution or administrative proceedings, cannotbe utilized unless personal jurisdiction over defendants can be secured.

Despite these difficulties, the Commission, acting within its juris-dictional limitations, has made aggressive efforts to deal with thesituation. Hundreds of investigations have been made, injunctionshave been secured whenever jurisdiction over violators could be ob-tained, and a substantial number of criminal indictments have beenentered. However, in a test case under the Supplementary Extra-dition Convention consummated in July 1952, the details of whichwere furnished in our 22d Annual Report, the Canadian courts deniedextradition of a person who engaged in the fraudulent sale of secu-rities by mail and telephone to United States residents. Throughappropriate diplomatic channels negotiations are still continuing inan effort to correct this situation. In the meantime the Commissionis almost wholly dependent upon voluntary cooperation of the Cana-dian provincial enforcement authorities.

Canada does not have federal securities legislation nor a federalregulatory body. Such matters are regulated on a provincial basissomewhat similar to the blue sky laws administered by State com-missions. In general excellent cooperation has been obtained duringthe fiscal year from the provinces in the enforcement work of theCommission.

One of the most encouraging developments in this area has beenthe outstanding cooperation afforded by the Saskatchewan SecuritiesCommission. On May 1, 1959, this Commission concluded an arrange-ment with the Saskatchewan Securities Commission under which thelatter will require broker-dealers in that Province to refrain from dis-tributing issues of securities into the United States unless the broker-dealer is registered in compliance with the Securities Exchange Act of1934 and the security is registered in compliance with the SecuritiesAct of 1933. This is the only such arrangement which the Commissionhas with any province in Canada and reflects the desire of theSaskatchewan Securities Commission that only legitimate issues bedistributed from that Province into the United States.

TWENTY-FIFTH ANNUAL REPORT 189During the past fiscal year the Commission has brought 10 civil

actions and instituted three criminal actions in which the illegal saleof Canadian securities in the United States was involved. Detailsconcerning these actions: S.E.O. v, Ralph L. Loomis and F. PaysonTood, SE.O. v. Oanadian Javelin Limited et al, U.8. v. Robert M.Sherwood, S.E.O. v. Scott Taylor and 00., Ino., S.E.O. v. Sidney B.Josephson et al, S.E.O. v. A. G. Bellin Securities Oorp, et al, S.E.O.v. Albert and Oompany, Inc. et al, S.E.O. v.I. B. Morton and Oom-pany, Inc. et al, S.E.O. v. Gotham Securities Oorp, et al, S.E.O. v.Philip Newman Associates et al, U.S. v, Oharles M. Berman et al,S.E.O. v. Lincoln Securities Oorp. et al, and U.S. v. William J. Oonradare described above in the section on Litigation under the SecuritiesAct of 1933and the section on Criminal Proceedings.

To cope further with the Canadian problem the Commission con-tinues to maintain its Canadian Restricted List, which is a list ofCanadian issuers whose securities the Commission has reason to be-lieve currently are being, or recently have been, distributed in theUnited States in violation of the registration requirements of theSecurities Act of 1933. The list and supplements thereto are issuedto and published by the press, copies are mailed to all registeredbroker-dealers and are available to the public. They serve as a warn-ing to the public and alert broker-dealers to the fact that transactionsin the securities named therein may be unlawful. As a practicalmatter most United States broker-dealers refuse to execute transac-tions in such securities. During the fiscal year 1959, 27 supplements(compared to 14 in fiscal year 1958) were issued in which 85 names(compared to 50 names in fiscal year 1958) were added to the list.On May 20, 1959, the list was revised and consolidated, resulting inthe deletion of 29 issuers concerning whose securities the Commis-sion had no evidence of a public offering or sale in the United Statesduring the past 3 years. In many instances the companies wereno longer in existence due to mergers, charter surrenders, etc. Thenumber of names on the list as of June 30, 1959,was 210.

The current list, reflecting additions and deletions to November 25,1959, follows:

CANADIAN RESTRICTED LIST

Aero Mining CorporationAlba ExploratioIlB LimitedAldor Exploration and Development

Company LimitedAlgro Uranium Mines LimitedA. L. Johnson GrubstakeAlonette Mines LimitedAmador Highland Valley Coppers

LimitedAmerieanadian Mining & Exploration

Co. Limited

Amican Petroleum and Natural GasCorporation Limited

Anthony Gas and Oil ExploratioIlBLimited

Apollo Mineral Developers Inc.Arean Corporation LimitedAtlas Gypsum Corporation LimitedAugdome Exploration LimitedAva Gold Mining Company LimitedBaranouri Minerals LimitedBarbary Gold Mines Limited

190 SECURITIES AND EXCHANGE COMMISSION

Barite Gold Mines LimitedBasic Lead and Zinc Mines LimitedBeaucoeur Yellowknife Mines LimitedBengal Development Corp. LimitedBlack Crow Mines LimitedCable Mines and OIls LimitedCameron Copper Mines LimitedCanada Radium Corporation LimitedCanadian .Alumina Corporation LimitedCanadian Natural Resources LimitedCan .American Copper LimitedCanso Mining Corporation LimitedCartier Quebec Explorations LimitedCasa Loma Uranium Mines LimitedOasgoran Mines LimitedCavalier Mining Corporation LimitedCenturion Mines LimitedOessland Gas and Oil Corporation

LimitedColville Lake Explorers LimitedOoneor-Chtbougamau Mines LimitedConsolidated Easter Island Mines

LimitedConsolidated Exploration and Mining

Co., LimitedConsolidated Quebec Yellowknife Mines

LimitedConsolidated Woodgreen Mines LimitedContinental Consolidated Mines and

Oils Corporation LimitedCopper Prince Mines LimitedCourageous Gold Mines LimitedCove Uranium Mines LimitedCree Mining Corporation LimitedDavid Copperfield Explorations LimitedDemers Chibougamau Mines LimitedDencroft Mines LimitedDerogan .Asbestos Corporation LimitedDesmont Mining Corporation LimitedDeVille Copper Mines LimitedDiadem Mines LimitedDolmac Mines LimitedDolsan Mines LimitedDuBar Exploration LimitedDuMaurier Mines LimitedDupont Mining Company LimitedEagle Plains Developments LimitedEagle Plains Explorations LimitedEast Trinity Mining CorporationEastern-Northern Explorations LimitedEmbassy Mines LimitedExplorers .Alliance LimitedExport Nickel Corporation of Canada

LimitedFile Lake Explorations, LimitedFleetwood Mining and Exploration

LimitedFont Petroleums LimitedFranksin Mines LimitedGasjet Corporation LimitedGolden .Algoma Mines LimitedGolden Hope Mines LimitedGoldmaque Mines LimitedGranwick Mines LimitedHallmark Explorations LimitedHalstead Prospecting SyndicateHarvard Mines Limited

Hercules Uranium Mines LimitedHoover Mining and Exploration

LimitedHuddersfield Uranium and Minerals

LimitedInlet Mining Corp. LimitedInternational Ceramic :Mining LimitedIrando Oil and Exploration LimitedJacmar Explorations LimitedJaylac Mines LimitedJilbie Mining Company LimitedJ omae Mines LimitedJudella Uranium Mines LimitedKaiser Development Corporation

LimitedKamis Uranium Mines LimitedKateri Mining Company LimitedKelkirk Mines LimitedKelly-Desmond Mining Corporation

LimitedKey West Exploration Company

LimitedKimberly Copper Mines LimitedKipwater Mines LimitedKorich Mining Company LimitedKordol Explorations LimitedKukatush Mining CorporationLake Kingston Mines LimitedLake Otter Uranium Mines LimitedLama Exploration and Mining Com-

pany LimitedLambton Copper Mines LimitedLandolac Mines LimitedLangis Silver and Cobalt Mining Com-

pany LimitedLarutan Petroleum Corporation Ltd.Lavandin Mining CompanyLa vant Iron Mines LimitedLee Gordon Mines LimitedLindsay Explorations LimitedLithium Corporation of Canada LimitedLucky Creek Mining Company LimitedLynwatin Nickel Copper LimitedMack Lake Mining Corporation LimitedMadison Mining Corporation LimitedMallen Red Lake Gold Mines LimitedMarian Lake Mines LimitedMarple Explorations LimitedMarpoint Gas & Oil Corp. LimitedMasters Oil and Gas LimitedMegantic Mining CorporationMercedes Exploration Com pan y

LimitedMexicana Explorations LimitedMexU8can Development CorporationMid-West Mining Corporation LimitedMilmar-Island Mines LimitedMina-Nova Mines LimitedMin-Ore Mines Limited (formerly

Ryan Lake Mines Limited)Monarch .Asbestos Company LimitedMonpre Mining Company LimitedMontclair Mining Corporation LimitedMontco Copper Corporation LimitedMylake Mines LimitedNationwide Minerals LimitedNew Campbell Island Mines LimitedNew Faulkenham Mines Limited

TWENTY-FIFTH ANNUAL REPORT 191New Goldvue Mines LimitedNew Hamil Silver-lead Mines LimitedNew Jack Lake Uranium Mines

LimitedNew Metalore Mining Company LimitedNew Spring Coulee Oil and Minerals

LimitedNew Surpass Petrochemicals LimitedNew Vinray Mines LimitedNew West Amulet LimitedNorcopper and Metals CorporationNormalloy Explorations LimitedNormlngo Mines LimitedNorseman Nickel Corporation LimitedNorth American Asbestos Company

LimitedNorth Gaspe Mines LimitedNorth Lake Mines LimitedNorth Tech Explora tions LimitedNorthwind Explorations LimitedNortoba Mines LimitedNu-Gord Mines LimitedNu-Reality Oils LimitedNu-World Uranium Mines LimitedObabika Mines LimitedOrdala Mines LimitedPalliser Petroleums LimitedPantan Mines LimitedParamount Petroleum and Minerals

Corporation LimitedPeace River Petroleums LimitedPlexterre Mining Corporation LimitedPrestige Lake Mines LimitedPrinciple Strategic Minerals LimitedPrudential Petroleums LimitedPurdex Minerals LimitedQuebank Uranium Copper CorporationQuebeck Developers and Smelters

LimitedQuebec Graphic CorporationQueensland Explorations LimitedQuinalta Petroleum LimitedRegal Minerals LimitedRegal Mining & Development LimitedResolute Oil and Gas Company LimitedRidgefield Uranium Mining Corpora-

tion LimitedRiobec Mines LimitedRoberval Mining CorporationRockroft Explorations LimitedRothsay Mines Limited

Saskalon Uranium and Oils LimitedSastex Oil and Gas LimitedSavoy Copper Mines LimitedSentry Petroleums LimitedSenvil Mines LimitedSheba Mines LimitedSheraton Uranium Mines LimitedShoreland Mines LimitedSico Mining Corporation LimitedSkyline Uranium and Minerals Cor-

poration LimitedSt. Pierre & Miquelon Explorations Inc.St. Stephen Nichel Mines LimitedStackpool Mining Company LimitedStrathcona Mines LimitedSudbay Exploration and Mining

LimitedSurety Oils and Minerals LimitedTabor Lake Gold Mines LimitedTaiga Mines LimitedTamara Mining LimitedTamicon Iron Mines LimitedTaurcanis Mines LimitedTemanda Mines LimitedTerritory Mining Company LimitedThree Arrows Mining Explorations

LimitedTorbrook Iron Ore Mines LimitedTrans Nation Minerals LimitedTrenton Mines LimitedTri-Cor Mining Company LimitedTrio Mining Exploration LimitedTrojan Consolidated Mines LimitedUnited Copper and Mining LimitedUnited Uranium Corporation LimitedUpper Ungava Mining Corporation

LimitedVal Jon Exploration LimitedValray Explorations LimitedVanguard Explorations LimitedVenus Chlbougamau Mines LimitedVieo Explorations LimitedViscount Oil and Gas LimitedWakefield Uranium Mines LimitedWebbwood Exploration Company

LimitedWestville Mines LimitedWhitney Uranium Mines LimitedWindy Hill Mining CorporationYukon Prospectors' Syndicate

SEcrION OF SECURITIES VIOLATIONS

A Section of Securities Violations is maintained by the Commissionas a part of its enforcement program to provide a further means ofdetecting and preventing fraud in securities transactions. The Sec-tion maintains files providing a clearing house for other enforcementagencies of information concerning persons who have been chargedwith violations of various Federal and State securities statutes. Con-siderable information is also available concerning violators resident inthe provinces of Canada. The specialized information in these files iskept current through the cooperation of the United States Post Office

192 SECURITIES AND EXCHANGE COMMISSION

Department, the Federal Bureau of Investigation, parole and proba-tion officials, State securities authorities, Federal and State prosecut-ing attorneys, police officers, better business bureaus, chambers ofcommerce and other agencies. At the end of the fiscal year these rec-ords contained information concerning 69,013 persons against whomFederal or State action had been taken in connection with securitiesviolations. In keeping these records current, there were added dur-ing the fiscal year items of information concerning 9,576 persons, in-cluding 3,450 persons not previously identified in these records.

The Section issues and distributes quarterly a Securities ViolationsBulletin containing information received during the period concern-ing violators and showing new charges and developments in pendingcases. The bulletin includes a "Wanted" section listing the namesand references to bulletins containing descriptive information ofpersons wanted on securities violations charges. The bulletin is dis-tributed to cooperating law enforcement and other agencies in theUnited States and Canada.

Extensive use is made of the information available in these recordsby regulatory and law enforcing officials. Numerous requests arereceived each year for special reports on individuals in addition tothe information supplied by regular distribution of the quarterlybulletin. All available information is supplied in response to in-quiries from law enforcement agencies. During the fiscal year theCommission received 3,730 "securities violations" letters or reportsand dispatched 944 communications to cooperating agencies.

APPLICATIONS FOR NON-DISCLOSURE OF CERTAIN INFORMATION

The Commission is authorized under the various acts administeredby it to grant requests for nondisclosure of certain types of informa-tion which would otherwise be disclosed to the public in applications,reports or other documents filed pursuant to these statutes. Thus,under paragraph (30) of schedule A of the Securities Act of 1933, dis-closure of any portion of a material contract is not required if theCommission determines that such disclosure would impair the valueof the contract and is not necessary for the protection of the investors.Under section 24(a) of the Securities Exchange Act of 1934, tradesecrets or processes need not be disclosed in any material filed withthe Commission, and under section 24(b) of that act written objectionto public disclosure of information contained in any such materialmay be made to the Commission which is then authorized to makepublic disclosure of such information only if in its judgment suchdisclosure is in the public interest. Similar provisions are containedin section 22 of the Public Utility Holding Company Act of 1935 andin section 45 of the Investment Company Act of 1940. These statu-tory provisions have been implemented by rules specifying the pro-

TWENTY-FIFTH ANNUAL REPO:RT 193

cedure to be followed by persons who apply to the Commission for adetermination that public disclosure is not necessary in a particularcase.

The number of applications granted, denied or otherwise actedupon during the year are set forth in the following table:

Applications for non.di8clo8ure during 1959 fiscal year

Number Number Numberpendmg Number Number derned pendingJuly I, received granted or with- June 30,

19.58 drawn 1959

Securities Act of 1933 1_____________________ 2 31 26 4 3SecuritIes Exchange Act of 1934 ,___________ 4 14 8 7 3Investment Company Act of 1940 0 6 6 0 0

Totals _______________________________ 6 .'il 40 11 6

1 FIled. under rule 485., Filed under rule 24b-2., Filed. under rule 4.5a-l.

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

Successive reports of the Commission have called attention to thefact that the detailed provisions of the several acts administered bythe Commission recognize the importance of dependable informativefinancial statements which disclose the financial status and earningshistory of a corporation or other commercial entity. These statements,whether filed in compliance with the statutes administered by the Com-mission or included in other material available to stockholders or pros-pective investors, are indispensable to investors as a basis forinvestment decisions.

The Congress recognized the importance of these statements andthat they lend themselves readily to misleading inferences or evendeception, whether or not intended. It accordingly dealt extensivelyin the several statutes administered by the Commission with financialstatement presentation and the disclosure requirements necessary toset forth fairly the financial condition of the company. Thus, forexample, the Securities Act requires the inclusion in the prospectusof balance sheets and profit and loss statements "in such form as theCommission shall prescribe" s and authorizes the Commission to pre-scribe the "items or details to be shown in the balance sheet and earn-ings statement, and the methods to be followed in the preparation ofaccounts * * *." 9 Similar authority is contained in the SecuritiesExchange Act,IO and more comprehensive power is embodied in theInvestment Company Act 11 and the Holding Company Act.12

8 Sections 7 and 10 (a), Schedule A, paragraphs 25 and 26.Section 19(a).

,. Section 13(b).n Sections 30, 31.uSections 14, 15.

•________

•

194 SECURITIES AND EXCHANGE COMMISSION

The Securities Act provides that the financial statements requiredto be made available to the public through filing with the Commissionshall be certified by "an independent public or certified accountant." 13

The other three statutes permit the Commission to require that suchstatements be accompanied by a certificate of an independent publicaccountant," and the Commission's rules require, with minor excep-tions, that they be so certified. The value of certification by qualifiedaccountants has been conceded for many years, but the requirementas to independence, long recognized and adhered to by some individualaccountants, was for the first time authoritatively and explicitly in-troduced into law in 1933. Out of this initial provision in the Securi-ties Act and the rules promulgated by the Commission," and the actiontaken by the Commission in certain cases," have grown concepts ofaccountant-client relationships that have strengthened the protectiongiven to investors.

As shown above, the statutes administered by the Commission giveit broad rule-making power with respect to the preparation and pres-entation of financial statements. Pursuant to authority contained inthe statutes the Commission has prescribed uniform systems of ac-counts for companies subject to the Holding Company Act; 17 hasadopted rules under the Securities Exchange Act governing account-ing and auditing of securities brokers and dealers; 18 and has promul-gated rules contained in a single, comprehensive regulation, identifiedas Regulation S-X,I9 which govern the form and content of financialstatements filed in compliance with the several acts. This regulationis implemented by the Commission's Accounting Series Releases, ofwhich 82 have so far been issued. These releases were inauguratedin 1937, and were designed as a program for making public, from timeto time, opinions on accounting principles for the purpose of con-tributing to the development of uniform standards and practice inmajor accounting questions. The rules and regulations thus estab-lished, except for the uniform systems of accounts, prescribe account-ing to be followed only in certain basic respects. In the large areanot covered by such rules, the Commission's principal reliance for theprotection of investors is on the determination and application ofaccounting principles and auditing standards which are recognizedas sound and which have attained general acceptance.

Sections 7 and 10(a), Schedule A, paragraphs 25 and 26.1< Securities Exchange Act, section 13(a) (2) ; Investment CompllllYAct. section 30(e) ;

Holding Company Act, section 14.15 See, for example, rule 2-01 of regulation S-X.1.See, for example. Securities Exchange Act Release No. 3073 (1941); 10 S.E.C. 982

(1942) ; and Accounting Series Release No. 68 (1949).17 Uniform System of Accounts for Mutual Service Companies and Subsidiary Service

Companies (effective Aug. I, 1926) ; Uniform System of Accounts for Public Utility HoldingCompanies (effective Jan. I, 1937; amended e1l'ectiveJan. 1. 1943).

:18 Rule 17a-5 and Form X-17A.-5 thereunder.. Adopted Feb. 21. 1940 (Accounting Series Release No. 12); revised Dec. 20. IMO

(Accounting Serles Release No. 70).

'"

•

TWENTY-FIFTH ANNUAL REPORT 195

Since changes and new developments in financial and economic con-ditions affect the operations and financial status of the several thou-sand commercial and industrial companies required to file statementswith the Commission, accounting and auditing procedures cannotremain static and continue to serve well a dynamic economy. It isnecessary for the Commission to be informed of the changes and newdevelopments in these fields and to make certain that the effects there-of are properly reported to investors. The Commission's accountingstaff, therefore, engages in studies of the changes and new develop-ments for the purpose of establishing and maintaining appropriateaccounting and auditing policies, procedures and practices for theprotection of investors. The primary responsibility for this programrests with the Chief Accountant of the Commission who has generalsupervision with respect to accounting and auditing policies and theirapplication.

Progress in these activities requires constant contact and coop-eration between the staff and accountants both individually andthrough such representative groups as, among others, the AmericanAccounting Association, the American Institute of Certified PublicAccountants, the American Petroleum Institute, the Controllers In-stitute of America, the National Association of Railroad and Utili-ties Commissioners, the National Federation of Financial AnalystsSocieties, as well as other government agencies. Recognizing the im-portance of cooperation in the formulation of accounting principlesand practices, adequate disclosure and auditing procedures which willbest serve the interests of investors, the American Institute of Certi-fied Public Accountants, the Controllers Institute of America, andthe National Federation of Financial Analysts Societies regularlyappoint committees which maintain liaison with the Commission'sstaff.

The many daily decisions of the Commission require the almostconstant attention of some of the chief accountant's staff. These in-clude questions raised by each of the operating divisions of the Com-mission, the regional offices and the Commission. This day-to-dayactivity of the Commission and the need to keep abreast of currentaccounting problems cause the chief accountant's staff to spend muchtime in the examination and re-examination of sound and generallyaccepted accounting and auditing principles and practices. Fromtime to time members of this staff are called upon to assist in field in-vestigations, to participate in hearings and to review opinions, insofaras they pertain to accounting matters.

Prefiling and other conferences, in person or by telephone, withofficials of corporations, practicing accountants and others, occupy aconsiderable amount of the available time of the staff. This pro-cedure, which has proven to be one of the most important functions

529523---69---16

196 SECuRITIES AND EXCHANGE COMMISSION

of the Officeof the Chief Accountant, and of the Chief Accountant ofthe Division of Corporation Finance and his staff, saves registrantsand their representatives both time and expense.

Many specific accounting and auditing problems arise as a resultof the examination of financial statements required to be filed with theCommission. Where examination reveals that the rules and regula-tions of the Commission have not been complied with or that applica-ble generally accepted accounting principles have not been adheredto, the examining division usually notifies the registrant by an in-formal letter of comment. These letters of comment and the cor-respondence or conferences that follow continue to be a mostconvenient and satisfactory method of effecting corrections and im-provements in financial statements, both to registrants and to theCommission's staff. Where particularly difficult or novel questionsarise which cannot be settled by the accounting staff of the divisionsand by the Chief Accountant, they are referred to the Commission forconsideration and decision. By these administrative procedures theCommission deals with many accounting questions.

Inquiries in ever-increasing volume as to the propriety of particularaccounting practices come from accountants and from companies notpresently subject to any of the acts administered by the Commissionwho wish to have the benefit of the Commission's views and thusutilize and apply the Commission's experience to the facts of their owncase. Teachers of accounting and their students also use the publicfiles and confer with the staff in the study of accounting problems.

Shortly before the opening of the year under report the Commis-sion amended rule 2-01 of regulation S-X relating to the independ-ence of accountants certifying financial statements filed with theCommission for the purpose of giving formal recognition to adminis-trative practices which have been in the process of development forsome time. The revision makes no material change in the policyset forth in prior decisions of the Commission and in publishedopinions of the Chief Accountant.

In the revision of this rule the Commission has recognized the im-pact of mergers and the growth of corporations through widespreadaffiliations, The emphasis in the rule has been changed to make itclear that where relationships described in the rule exist the Com-mission will find that an accountant is in fact not independent withrespect to the company involved, but in those instances where lack ofindependence is not established the Commission will make no findingwith respect to the accountant's independence.

A few months after the revision of rule 2-01 of regulation S-Xmentioned above, the Commission announced the publication of anadditional release in its Accounting Series dealing with independence

TWENTY-FIFTH ANNUAL REPORT 197

of accountants," In connection with the revision of rule 2-01 prac-ticing accountants had indicated that an interpretative release similarto Accounting Series Release No. 47 would be a helpful guide to theprofession. TIns new release, which summarizes previously unpub-lished rulings on independence in the Commission's experience underrule 2-01 since the publication of Accounting Series Release No. 47on January 25, 1944, together with prior releases and Commission de-cisions reflects the development of policy regarding the practice ofaccountants before the Commission over a period of some 25 years.

In Accounting Series Release No. 47 it was stated that it was notfeasible to present adequately in summarized form the circumstancesexisting in particular cases in which it was determined not to questionan accountant's independence. The growth of the accounting pro-fession since 1944 and the number of inquiries received from publicaccountants unfamiliar with the rules suggested the need for publica-tion of rulings in this category. In view of this development it wasdetermined to review the administrative rulings in this area and tostate briefly in the new release the relationships which existed inselect cases where an accountant was not denied the right to certifythe financial statements because under the circumstances it was con-cluded that the independence of the accountant was not prejudiced.

During the fiscal year the Commission issued its Findings, Opinionand Order in a proceeding instituted under rule II (e) of its rules ofpractice against Bollt and Shapiro, Theodore Bollt and Bernard L.Shapiro." The Commission found that the respondents had failedto comply with rules and regulations of the Commission and withgenerally accepted accounting standards, and had engaged in im-proper and unethical professional conduct. Specifically, the Com-mission found that where a partner of an accountant certifying thefinancial statement in a registration statement pursuant to the Securi-ties Act of 1933 is the principal officer and controlling stockholder ofthe registrant, the certifying accountant is not independent with re-spect to the registrant. The Commission concluded that where thepartner in the firm of certified public accountants who was the princi-pal officer and controlling stockholder of the company which filed aregistration statement with the Commission caused the other partnerto certify registrant's financial statements as an independent publicaccountant knowing that the certifying partner was not qualified tofurnish an independent certification and sought to conceal the part-nership relationship, the privilege of practicing before the Commis-sion should be denied to the firm and the partner controlling theregistrant until they obtain the prior approval of the Commission topractice before it in the future. The Commission further concluded

III Accounting Series Release No. 81. Dec. 1l" 19.158.II Accounting Series Release No. 82, Jan. 28. 1Qll9.

198 SECURITIES AND EXCHANGE COMMISSION

that the privilege of practicing before the Commission of the certify-ing accountant should be suspended for 30 days.

During the year the conflicting views of public utilities, publicaccountants, and regulatory agencies with respect to accounting fordeferred taxes reached a stage requiring formal public review by theCommission. The matter arose because the effect of section 161 (liber-alized depreciation) and section 168 (accelerated amortization) of theInternal Revenue Code of 1954 is to permit the tax-free recovery fromoperations of capital invested in a plant at a faster rate than wouldbe possible by depreciation methods previously permitted for incometax purposes 22 and because there is a lack of uniformity in the re-lated accounting regulations issued by the several state utility com-missions. A tax deferral is recorded when liberalized and acceleratedmethods of depreciation and amortization are adopted for tax pur-poses and straight line methods are followed on the books. Mostpublic utility companies have classified the resulting accumulatedbalance sheet credits to reserves or deferred credits or other nonequityaccounts. Others have classified the accumulated amounts as apart of restricted earned surplus in the equity capital section of thebalance sheets, while a few others, although identifying them asrestricted earned surplus, have not included them in the equity sec-tion of the balance sheet. Still other utility companies have not em-ployed deferred tax accounting but have followed what has been calledthe "flow-through" method and have shown in the income statementnormal depreciation charges and the actual current income tax pro-vision without provision for future income taxes.

In September 1958 a public utility subsidiary of a registered hold-ing company filed with the Commission a registration statement un-der the Securities Act of 1933 and a declaration under the PublicUtility Holding Company Act of 1935 with respect to the proposedissue and sale of first mortgage bonds at competitive bidding. In thefinancial statements submitted by the registrant company, which arealso subject to the accounting jurisdiction of the Federal Power Com-mission," the balance sheet carried the accumulated credits arisingfrom the use of deferred tax accounting in respect of both liberalizeddepreciation and accelerated amortization as restricted earned surplusand stated them as a part of the equity capital of the company. TheCommission's staff questioned the classification in light of Order No.

.. That this wall the intent of these sections of the Code is disclosed by the Report ot theHouse Committee on Ways and Means and Report ot the Senate Committee on Finance.See H. Rep. No. 1337 (S3d Cong., 2d Sess.), p, 24, and Sen. Rep. No. 1622 (S3d Cong.•2d Sess.), p. 26.

.. Federal Power Commission Orders No. 203 and No. 204 do not make mandatory theuse of deferred tall: accounting for financial accounting purposes by those companies whichelect to deduct lIberal1zed depreciation or accelerated amortization in their income taxreturns. Rather they provide that where the company /Iou employ deferred tax account-Ing, the balance sheet credit shall be classlfled in a new account (Account No. 266) entitled"Accumulated Deferred Taxes 011 Income."

TWENTY-FIFTH ANNUAL REPORT 199

204 of the Federal Power Commission. It should be noted that anorder of a state regulatory commission to which this company issubject as to a minor portion of its utility operations authorized arestricted earned surplus classification. The state commission havingjurisdiction over the company's major distributing facilities had re-cently issued an order directing the company to transfer the accumu-lated credits from restricted earned surplus to a reserve account. Thecompany initiated an appeal from this order.23a

Rule 28 promulgated by this Commission under the 1935 Act pro-hibits a registered holding company or a subsidiary thereof fromdistributing to its security holders, or publishing, financial statementswhich are inconsistent with the book accounts of such company orwith financial statements filed by it with the Commission. One of theconsiderations raised by the staff of the Commission in the abovedescribed case was whether the applicability of Order No. 204 of theFederal Power Commission to the registrant rendered the publishingof any financial statements inconsistent therewith violative of theprovisions of rule 28.

In view of the controversial nature of the subject matter and itsimportance to many registrants, the Commission permitted the regis-tration statement to become effective and the securities to be sold onthe basis of full disclosure in footnotes to the financial statements ofthe different positions taken by the several regulatory agencies con-cerned with this company's affairs.

As a result of this case, the substantial amounts involved in theindustry;" and in consideration of differences of opinion as to theproper interpretation of Accounting Research Bulletin No. 44 (Re-vised),25 the Commission issued on December 30, 1958, a "Noticeof Intention to Announce Interpretation of Administrative Policy.?"

The notice proposed that any financial statement which designates asearned surplus or its equivalent or includes as a part of equity capital(even though accompanied by words of limitation such as "restricted"or "appropriated") the accumulated credit arising from deferred taxaccounting in respect of liberalized depreciation or accelerated amorti-zation would be presumed by the Commission "to be misleading or

23a Later, on September 8, 1959, the State commission issued a supplemental order amend-ing its earlier order to permit each utility subject to its jurisdiction to elect to followeither the reserve or the restricted retained income treatment for accumulated deferredtaxes .

.. Federal Power Commission statistics indicate that as of Dec. 31, 1957, the aggregateamount of accumulated balance sheet credits attributable to both liberalized depreciationand accelerated amortization in respect of electric utility companies and natural gasand pipe line companies is $792,755,000 .

.. The import of this bulletin, issued in July 1958 by the Committee on AccountingProcedure of the American Institute of Certified Public Accountants, has since been clari-fied by a statement of that Committee that: "A provision in recognition of the deferral ofIncome taxes, being required for the proper determination of net income, should not atthe same time result in a credit to earned surplus or to any other account included In thestockholder's equity section of the balance sheet" .

.. Securities Act Release No. 4010. Dec. 30. 1958.

200 SECURrrIES Am> EXCHANGiJ COMAtISSION

inaccurate despite disclosures contained in the certificate of the ao-countant or in footnotes to the statements provided the matters in-volved are material." 21

Many comments were received in response to the Commission's in-vitation for views and comments. These views have been analyzedand summarized. Public hearings on the proposed policy statementwere held before the full Commission on April 8 and 10, 1959, andthe Commission has the matter under advisement.

INTERNATIONAL BANK. FOR RECONSTRUCTION AND DEVELOPMENTAND INTER-AMERICAN DEVELOPMENT BANK

Section 15 of the Bretton Woods Agreements Act, as amended,exempts from registration under both the Securities Act of 1933 andthe Securities Exchange Act of 1934 securities issued or guaranteedas to both principal and interest by the International Bank for Re-construction and Development. The bank is required to file withthe Commission such annual and other reports with respect to suchsecurities as the Commission shall determine to be appropriate inview of the special character of the bank and its operations and neces-sary in the public interest or for the protection of investors. TheCommission has, pursuant to the above authority, adopted rules re-quiring the bank to file quarterly reports and also to file copies ofeach annual report of the bank to its board of governors. The bankif:'also required to file reports with the Commission in advance of anydistribution in the United States of its primary obligations. TheCommission, acting in consultation with the National Advisory Coun-cil on International Monetary 'and Financial Problems, is authorizedto suspend the exemption at any time as to any or 'all securities issuedor guaranteed by the bank during the period of such suspension.

By virtue of Public Law 86-147, approved August 7, 1959, whichauthorizes United States participation in the new Inter-AmericanDevelopment Bank, a similar exemption has been provided for cer-tain securities which may be issued by the new bank. The Commis-sion is considering appropriate rules and regulations with respectto the new bank of the character presently in effect with respect tothe International Bank.

The International Bank for Reconstruction and Development soldin the United States during the fiscal year only one issue of itsprimary obligations, in the amount of $100 million, of which$4,300,000 was for delayed delivery. At the end of the fiscal yearthe total funded debt of the bank was approximately the equivalentof $1.9 billion, of which $1.6 billion was payable in United Statesdollars. At the same time the subscribed capital stock of the Bankaggregated $9.6 billion of which $7.6 billion constituted the uncalledportion of the subscriptions.

rt Accounting Series Release No.4 (1938).

TWENTY-FIFTH ANNUAL REPORT 201

Bank lending during the 12 months ended on June 30, 1959, con-tinued at the high level reached in the previous fiscal year aggregatingthe equivalent of approximately $703 million. As indicated in thebank's 14th Annual Report, because of the implications of the newlevel of bank lending in recent years, the governor of the bank for theUnited States proposed during the fiscal year consideration of an in-crease in the capital of the bank. This resulted in a proposal by theexecutive directors of the bank that member countries should be invitedto double their capital subscriptions. The executive directors alsoagreed to recommend additional increases over and above the general100 percent increase in the subscription of 17 member countries. Itwas proposed that the authorized capital of the bank be increased from$10 billion to $21 billion. The proposal envisaged that the entireamount of the additional general subscription would be left subject tocall and that the board of governors of the bank should decide thatcalls would only be made if required by the bank to meet its obliga-tions on borrowings or guarantees.

These proposals were adopted and, at the end of the fiscal year, legis-lation necessary to carry the increased subscriptions into effect wasbeing enacted in many member countries. As of September 10, 1959,the proposal to increase the capital of the bank became effective when34 countries had increased the subscribed capital by $7,664.7 million.At that date total subscribed capital was $17,221.2 million.

OPINIONS OF THE COMMISSION

Opinions are issued by the Commission in contested and other casesarising under the statutes administered by it and under the Commis-sion's rules of practice, where the nature of the matter to be decided,whether substantive or procedural, is of sufficient importance to war-rant a formal expression of views. These opinions include detailedfindings of fact and conclusions of law based on evidentiary recordstaken before a hearing examiner who serves independently of theoperating divisions, or, in an occasional case, before a single Commis-sioner or the entire Commission. In some cases, formal hearings arewaived by the parties and the findings and conclusions are based onstipulated facts or admissions.

The Commission is assisted in the preparation of findings andopinions by its Office of Opinion Writing, a staff office completelyindependent of the operating divisions of the Commission and directlyresponsible to the Commission itself. The independence of the staffmembers of this office reflects the principle, embodied in the Adminis-trative Procedure Act, of a separation between staff members perform-ing investigatory or prosecutory functions and those performingquasi-judicial functions. In some cases, with the consent of all parties,

202 SECURITIES AND EXCHANGE COMMISSION

the interested operating division participates in the drafting ofopinions.

Opinions are publicly released and distributed to representatives ofthe press and to persons on the Commission's mailing list. In ad-dition, the opinions are printed and published by the GovernmentPrinting Office in bound volumes entitled "Securities and ExchangeCommission Decisions and Reports."

During the fiscal year 1959, the Commission issued 143 opinionsand other rulings of an adjudicatory nature.

STATISTICS AND SPECIAL STUDIES

At its inception the Commission organized a large Research Divisionto assist in the drafting of rules and regulations to carry out the pro-visions of the Securities Act and the Securities Exchange Act. Thedivision was staffed with a large number of experts from variousphases of the securities business, economists, and statisticians. Manyof the Commission's policies and rules, as well as further securitieslegislation, were based on special studies prepared by the researchstaff. By 1940most of the initial research work required by the Com-mission for the formulation of rules and regulations had been com-pleted, and the Research Division was dissolved and certain of itsactivities and general statistical work was transferred to the Divisionof Trading and Exchanges.

While subsequent research and statistical work was of a more routinenature and was chiefly carried out for internal purposes, the Com-mission began to provide more information of a broader economiccharacter as related to the capital markets. During this period theCommission began publication of its series on individuals' saving,corporate liquid position, plant and equipment expenditures andquarterly financial report for manufacturing corporations. Severalof these series are joint undertakings with other Government agencies.As public interest grew in the various data prepared and collected bythe SEC, more of the statistical material was released and the publica-tion of a monthly statistical bulletin was begun.

In recent years, the statistical activities have been co-ordinatedwith the overall Government statistical program under the directionof the Bureau of the Budget. As the need arises, new surveys aremade. One of the most significant in the last few years is the Com-mission's survey of corporate pension funds. All of the series pub-lished by the Commission are studied continuously in order to expandand improve them in answer to demands of Government agencies,business and the general public.

The regular statistical series which are prepared include data onsecurities effectively registered under the Securities Act of 1933,offer-ings of securities by all corporations in the United States (including

TWENTY-FIFTH ANNUAL REPORT 203issues not registered with the Commission, such as privately placedissues and railroad securities), retirements of corporate securities, netchange in corporate securities outstanding, stock prices and trading.In addition, the research and statistical activity carried out underthe direction of the Bureau of the Budget includes individuals' sav-ing in the United States, income flow and investments of private pen-sion funds of United States corporations, current liquid positionof United States corporations, sources and uses of corporate funds,anticipated expenditures for plant and equipment by United Statesbusinesses, and a quarterly financial report for all United Statesmanufacturing concerns.

The statistical series described below are published in the Com-mission's statistical bulletin and in addition, except for data on reg-istered issues, current figures and analyses of the data are publishedin quarterly press releases. The Commission's stock price index isreleased weekly, together with the data on round-lot and odd-lottrading on the two New York stock exchanges.Issues Registered Under the Securities Act of 1933

Monthly and quarterly statistics are compiled on the number andvolume of registered securities, classified by industry of issuer, typeof security, and use of proceeds. A summary covering the entire25-year period of the Commission's history appears on page 215, ap-pendix table 1.New Securities Offerings

This is a monthly and quarterly series covering all new corporateand noncorporate issues offered for cash sale in the United States.The series includes not only issues publicly offered but also issuesprivately placed, as well as other issues exempt from registrationunder the Securities Act such as intrastate offerings and railroadsecurities. The offerings series includes only securities actually offeredfor cash sale, and only issues offered for account of issuers. Annualstatistics on new offerings beginning with 1934 as well as monthlyfigures from January 1958 through June 1959, are given in appendixtables 3,4 and 5.

Estimates of the net cash flow through securities transactions areprepared quarterly and are derived by deducting from the amountof estimated gross proceeds received by corporations through thesale of securities the amount of estimated gross payments by corpora-tions to investors for securities retired. Data on gross issues, retire-ments and net change in securities outstanding are presented for allcorporations and for the principal industry groups.Stock Market Data

Statistics are regularly compiled on the market value and volumeof sales on registered and exempted securities exchanges, round-lot

204 SECURITIES AND EXCHANGE COMMISSION

stock transactions of the New York exchanges for accounts of mem-bers and nonmembers, odd-lot stock transactions on the New Yorkexchanges, special offerings and secondary distributions. Indexes ofstock market prices are compiled, based upon the weekly closing mar-ket prices of 265 common stocks listed on the New York Stock Ex-change. The indexes are composed of 7 major industry groups, 29subordinated groups, and a composite group.Individuals' Saving

The Commission compiles quarterly estimates of the volume andcomposition of individuals' saving in the United States. The seriesrepresent net increases in individuals' financial assets less net increasesin debt. The study shows the aggregate amount of saving and theform in which the saving occurred, such as investment in securities,expansion of bank deposits, increase in insurance and pension re-serves, etc. A reconciliation of the Commission's estimates with thepersonal saving estimates of the Department of Commerce, derivedin connection with its national income series, is published annually bythe Commerce Department as well as in the Securities and ExchangeCommission Statistical Bulletin.Corporate Pension Funds

An annual survey is made of pension plans of all United Statescorporations where funds are administered by corporations them-selves, or through trustees. The survey shows the flow of money intothese funds, the types of assets in which the funds are invested andthe principal items of income and expenditures.Financial Position of Corporations

The series on working capital position of all United States corpo-rations, excluding banks, insurance companies and savings and loanassociations, shows the principal components of current assets andliabilities, and also contains an abbreviated analysis of the sourcesand uses of corporate funds.

The Commission, jointly with the Federal Trade Commission,compiles a quarterly financial report of all United States manufactur-ing concerns. This report gives complete balance sheet data and anabbreviated income account, data being classified by industry andsize of company.Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, con-ducts quarterly and annual surveys of actual and anticipated plantand equipment expenditures of all United States business, exclusiveof agriculture. Shortly after the close of each quarter, data are re-leased on actual capital expenditures of that quarter and anticipatedexpenditures for the next two quarters. In addition, a survey is made

TWENTY-FIFTH ANNUAL REPORT 205

at the beginning of each year of the plans for business expansionduring that year.

PUBUC DISSEMINATION OF INFORMATION

Public disclosure and dissemination of information with respect tosecurities offered for public sale and those traded on exchanges isessential if public investors generally are to benefit by the disclosurerequirements of the Federal securities laws and if an evaluation of theworth of securities is to be made by a broad segment of the investingpublic. This is accomplished in part by distribution of the prospectusof offering circular on new offerings, and by filing of annual andother periodic reports with exchanges and the Commission by listedcompanies. Much data filed with the Commission obtains widespreadcurrency through published securities manuals, investment advisoryservices, statistical services and otherwise.

To facilitate public dissemination of the financial and other pro-posals filed with and actions taken by the Commission, a daily NewsDigest is issued which contains a resume of these findings and actions.This digest is distributed initially to the press, and is distributed ona semiweekly basis to a mailing list comprising nearly 7,000 names.The daily digest, for example, contained a summary of the pertinentfacts with respect to the proposals for public offering of securitiescontained in the 1,226 registration statements filed during the pastfiscal year. During the year, also, the daily digests contained an in-formative discussion of each of the 888 orders, decisions and rulesissued by the Commission. Much of the information is published inthe daily newspapers and in financial and other periodicals. Otherreleases of an informational nature issued by the Commission includeits various Statistical Series releases and announcements of actions,civil and criminal, which arise out of the enforcement of the laws.

Members of the Commission and its staff also deliver addresses fromtime to time before professional and other.groups, and participate inradio or television discussions, to explain the nature and scope of theCommission's functions and activities.Information Available for Public Inspection

During every fiscal year thousands of requests for information arereceived by mail and through telephone calls and personal visits.Most of these requests are answered by employees in the Commission'spublic reference rooms in Washington, Chicago, and New York City.

The files of the Commission provide information of interest to alarge cross section of the public. Numerous people visit the publicreference rooms seeking information on which to base decisions tobuy or sell securities; they are furnished the files which containfinancial and other information about the issuers of the securities.Many other visitors consult Commission records. They may be repre-

206 SECURITIES AND EXCHANGE COMMISSION

sentatives of legal and accounting firms, corporations and laborunions; they are interested largely in gathering information to be usedas specimens, as precedent material, or for other specialized purposes.The inquiries received through the mails and over the telephonefollow the same pattern.

Copies of any public information filed with the Commission may beexamined at the principal office in Washington, D.C. Such in-formation includes registration statements, applications and declara-tions filed under the various statutes administered by the Commission,together with the records of agency action. In Washington, as inthe regional offices, space considerations have necessitated the transferof some of this material to warehouse-type space in nearby federalrecords centers. Files from these centers are usually available within24 hours.

The New York Regional Office has copies of recent filings made bycompanies having securities listed on exchanges other than the NewYork Stock Exchange and the American Stock Exchange, and copiesof current filings of many companies which have effective registrationstatements under the Securities Act of 1933. The Chicago RegionalOffice has copies of recent reports of companies which have securitieslisted on the New York and American stock exchanges. Reports oflisted companies on the New York, American and Midwest stock ex-changes may be seen at the exchange offices.

All regional offices have copies of prospectuses used in recent publicofferings of securities registered under the Securities Act, of activebroker-dealer and investment adviser registration applications origi-nating in their respective regions and of regulation A letters of notifi-cation filed in their respective regions.

The public reference room in Washington had 4,800 visitors duringthe fiscal year. Requests were filled for an additional 30,513 personswho were sent 630,869 copies of Commission publications. Duringthe fiscal year 128,149 photocopy pages were sold pursuant to 2,021orders. Additional thousands of persons made use of the facilitiesprovided by the New York and Chicago public reference rooms.

TWENTY-FIFTH ANNUAL REPORT

PUBLICATIONS

207

Publications currently being issued include:Monthly:

Statistical Bulletin.Official Summary of Security Transactions and Holdings of

Officers, Directors, and Principal Stockholders.Quarterly:

Financial Rep 0 r t s, U.S. Manufacturing Corporations(jointly with the Federal Trade Commission).

Plant and Equipment Expenditures of U.S. Corporations(jointly with the Department of Commerce).

New Securities Offered for Cash.Volume and Composition of Individual's Saving.Working Capital of U.S. Corporations.

Annually:Annual Report of the Commission.Securities Traded on Exchanges under the Securities Ex-

change Act of 1934.Companies Registered under the Investment Company Act

of 1940.Corporate Pension Funds.

Other publications:Decisions and Reports of the Commission.The Work of the Securities and Exchange Commission.

ORGANIZATION

The Commission's staff consists of attorneys, security analysts andexaminers, accountants, engineers and administrative and clericalemployees. An organization chart of the Commission is set forth onthe following page.

Under the Commission's program of continuing review of its func-tions and organization, several changes were made in the Division ofCorporate Regulation. In March 1959, the position of Chief Finan-cial Analyst was established, and a Branch of Reorganization wascreated in the Office of the Chief Counsel of the Division.

Action taken on bu.dget e8timates and appropriation from fiscal 1950 through fiscal 1960

Fiscal 1950 Flseal1951 FIscal 1952 Flscal1953 Fiscal 1954 Fiscal 1955 Fiscal 1956 Fiscal 1957 Fiscal 1958 Fiscal 1959 Fiscal 1960, estimated

ActionAverage Average Average Average Average Average Average Average Average Average Averageemploy- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money employ- Money

ment ment ment ment ment ment ment ment ment ment ment

Estimate submitted to tbe Bureau of tbeBudget. 1,307 $6, 789, (0() 1,175 $6,675,000 ],127 $6,605,000 1,092 $6,360,000 1,080 $6,810,000 780 $5,124,760 734 $4,997,000 794 $5,749,000 935 $7,178,000 974 $7,500,000 995 $8,437,000

Action by tbe Bureau of tbe Budget -177 -819,(0() -40 -250,000 -77 -681,000 -157 -410,000 -142 -810,000 -63 -299,760 -58 -400,000 -17 -162,000-----

Amount allowed by tbe Bureau of tbe Budget._ 1,130 6,970,000 1,135 6,425,000 1,050 5,924,000 935 5,950,000 938 6,000,000 717 4,825,000 734 4,997,000 794 5,749,000 935 7,178,000 916 7,100,000 978 8,275,000Action by tbe House of Representatlves _______ -70 -220,000 -95 -295,000 -50 -226,000 -125 -704,920 -152 -754, 920 -26 -125,000 -9 -122,000 -8 -49,000 -80 -478,000 -46 -300,000 -56 -475,000

--- ---- ----SubtotaL ._._. _. 1,060 5,750,000 1,040 6,130,000 1,000 5,699,000 810 5,245,080 786 5,245,080 691 4,700,000 725 4,875,000 786 5,700,000 856 6,700,000 870 6,800,000 923 7,800,000

Action by tbe Senate_._ -_ .......---- - ... ----------- +« +200,000 -93 -320,520 - ..------- ------------- -42 -245,080 +14 +75,000 +9 +122,000 +8 +49,000 --------- ------------- +46 +300,000 +56 +475,000

Subtotal 1,060 6,750,000 1,084 6,330,000 907 5,378,480 810 5,245,080 744 6,000,000 706 4,775,000 734 4,997,000 794 5,749,000 855 6,700,000 916 7,100,000 978 8,275,000Action by conferees

... ... .. -22 -100,000 ... -6 -25,000 -4 -42,000 .. ---._ .... _- -._ ... _------_ .. --_ .... ... _- ._-_ ......... ... ...... -24 -175,000

Annualapproprlatlon 1,060 5, 750, 000 1,062 6,230,000 907 6,378,480 810 6,245,080 744 5.000,000 699 4,750,000 730 4,955,000 794 5,749,000 855 6,700,000 916 7,100,000 954 8, 100, 000Supplemental appropriation for statutory pay

mereesea.; _. ._. ... --_ ........... l28,250 ....-.- ...... .._-~..---_ ..... ......... _-- .. .. 43ti, 000 ... .. ....... _- .._-- ...... .. .._- ..... ----_ ..... ... _---- .. .. .... 93,180 323,000 235,000 ..-_ ..._--- 605.000 -_ .._----- ---_._-------Totalapproprlatlon __________ ._. ________ 1,060 6,878,250 1,062 6,230,000 907 5,813,480 810 5,245,080 744 5,000,000 699 4,843,180 730 6,278,000 794 5,749,000 856 6,935,000 916 7,705,000 954 8, 100,000

Mandatory reserve requlred In 1952 ._. .. .. .. ...._------ .. -32 -150,000 ..._---------- ..... _---_ .. .. .. .. --_ ... ---_ ..._------ ... ... _------_ ... _- .....----

... .. ..---_ ...... ... 1,030 6,080,000 ........ _- ... ...._--- .. .. ......... .. -_ .._--_ ........ ..---_ .. ..-_ ... ... ----_ .. .. .. .... .. ----_ .... ..I

529523-59 (Facc p, 2(9)

_________• ____________• _____________•

___________ --------- ------------- --------- ------------- --------- -------------

_____• _______• ___ ________

•• __• __________________

__•______• __________________• ____ ____________________________ _ _ _ ----- - -- - ----------- --------- ------------- --------- ------------- -------- ------------- --------- - ---------~-

__ •• _____• ___• __• ____• __

_••• _____•___•_______ ________- - ~ - - -- - - _ __ -- _ ------ --------- --------- ------------- --------- -

_________ ---- - _ - -- --------- - - ------------- - - __ -- ------------- --------- ------------- --------- ------------- --------- ------------- ----- --------- - _ ------ -------------

------ -- - - - -- ------------- _ - ------------- - - _ -- --- - _ _ ------- ------------- --------- - ----------- ------ - ------------- --- ----- ------ --------- --------- ---

TWENTY-FIFTH ANNUAL REPORT 209PERSONNEL, BUDGET AND FINANCE

The following comparative table shows the personnel strength ofthe Commission as of June 30, 1958 and 1959:

lune 30, 1959 June 30. 19li8

Oomrmssioners ______________________________________________________________ 5 5Staff:Headquarters office ______________________________________________________ 567 M3Regions! offices __________________________________________________________ 365 331

TotaL _________________________________________________________________ 937 879

The table on the opposite page shows the status of the Commission'sbudget estimates for the fiscal years 1950 to 1960, from the initialsubmission to the Bureau of the Budget to .final enactment of theannual appropriation.

The Commission is required by law to collect fees for registration ofsecurities issued, qualification of trust indentures, registration of ex-changes, and sale of copies of documents filed with the Commission."

The following table shows the Commission's appropriations, totalfees collected, percentage of fees collected to total appropriation, andthe net cost to the taxpayers of Commission operations for the fiscalyears 1957, 1958, and 1959 :

Percentage offees collected Net cost of

Year Approprl- Fees col- to total Commissionation lected appropriation operations

(percent)

1957 $5,749,000 $2,243,580 39 $3,505,42019li8 16,935,000 2,334,370 34 4,600,6301959 7, 705,000 2,407,706 31 5,297,294

I Includes a supplemental appropriation of $235,000 to cover statutory pay increases .Includes a supplemental appropriation of $605,000 to cover statutory pay Increases .Fees are deposited in the general fund of the Treasury and are not available for ezpenduure by the

Oomrmsslon,

2Il Prlnclpal rates are (l) !Aoo of 1 percent of the maximum aggregate price of securitiesproposed to be offered but not less than $25: (2) of 1 percent of the aggregatedollar amount of stock exchange transactions. Fees for other services are only nominal.

•

__________• ____________________•• ____________________________• ____________________• ________•• ____• _______• __________________________ •

• •

~

210 SECURITIES AND EXCHANGE COMMISSION

A chart showing the ratio of average employment in the fieldoffices to total average employment for fiscal years 1951-59 follows.

S. E. C. PERSONNEL-UNUMBER

1000

800

DEPARTMENTAL600

Ratio Of Field To Total Personnel50

40

400

200

o1951 52 53

.!I Avereoe E"'o!oynenf

10

o I I195152 53

54 55 56 57(FISCAL YEAR)

58 59

Personnel ProgramIn fiscal 1959, the Commission continued to emphasize the recruit-

ing of outstanding college and law school students with the specializedacademic training required for the Commission's fields of work. Bymaintaining close contact with placement offices of various collegesand universities, and through on-campus interviews, the Commission

TWENTY-FIFTH ANNUAL REPORT 211

placed a substantial number of applicants of college caliber for itsstarting professional level positions.

In January 1959, the Commission adopted four Merit PromotionPlans covering the following groups of employees:

1. Professional and technical employees in the Headquarters Office.2. Secretarial, wage board and clerical employees in the- Head-

quarters Office.3. Professional and technical employees in the regional offices.4. Clerical employees in the regional offices.

The purpose of these plans is to apply the Commission's promotionpolicy systematically and otherwise to comply with Civil ServiceCommission requirements in that area. Members of the staff wereconsulted and afforded opportunity for review and comment prior toformal adoption. In April 1959, representatives of the Civil ServiceCommission inspected the Commission's operation under the plans andfound them to be effective and in compliance with its Government-wide Merit Promotion Program.

As required by the Government Employees Training Act of 1958,a review was made of the Commission's overall training needs andplans were formulated to meet these needs. On a cooperative basiswith other regulatory agencies, arrangements were made for a super-visory training course for middle and top management officials. Inaddition, the Commission's Division of Corporation Finance and NewYork Regional Office continued to conduct training sessions for theirprofessional staffs.

Under its Incentive Awards Plan the Commission recognized thelong service of its career employees by presenting 10- and 20-yearservice pins and certificates for service with the Commission to a totalof 90 employees. In addition, cash awards totaling $6,325and certifi-cates of merit were presented to 55 employees.

The outstanding achievements of members of the Commission'sstaff continued to receive public recognition in the form of awardsmade by other organizations. In February 1959 Thomas G. Meeker,General Counsel of the Commission, received an Arthur S. FlemmingAward of the Junior Chamber of Commerce of Washington, D.C., as1 of the 10 outstanding young men in the Federal service. In March1959, the National Civil Service League awarded certificates of meritto 5 Commission employees-William Green, Atlanta Regional Ad-ministrator; Vito Natrella, Chief Economist, Division of Tradingand Exchanges; J. Arnold Pines, Chief Financial Analyst, Divisionof Corporate Regulation; Harry Pollack, Director of Personnel; andByron D. Woodside, Director, Division of Corporation Finance. InApril 1959, a Rockefeller Public Service Award, 1 of 11 such awardsmade throughout the Federal service, was granted to Harry Heller,

529523--G9----11

212 SECURITIES AND EXCHANGE COMMISSION

Assistant Director, Division of Corporation Finance. In May 1959,an attorney in the Chicago Regional Office, Sidney Sosin, was awardedIt Certificate and Citation of Merit by the 'William A. Jump MemorialFoundation. The Commission is justifiably proud of these distinc-tions earned by members of its staff whose loyal and efficient servicehas made such a significant contribution to accomplishing the statu-tory objectives for which the Commission was established.

PART XII

APPENDIXSTATISTICAL TABLES

TABLE I.-A S5-year record of registrations under the Securities Act of 19S5PARr 1. NUMBER AND AMOUNT OF REGISTRATIONS AND AMOUNT REGISTERED

FOR CASH SALE FOR ACCOUNT OF ISSUERS, 193&-59

[Amounts in mIlllons of dollars)

Amount for cash sale for account of IssuersNumber of Number of Amount of

Fiscal year ended statements statements all registrs-June 30 flIed full}' tlons fully Bonds, de- Preferred Common

effective effective Total bentures stock stockand notes

1935 1_____________ 440 284 $913 $686 $490 $28 $1681936______________ 781 689 4,835 3,936 3,153 252 5311937______________ 967 840 4,851 3,635 2,426 406 8021938______________ 459 412 2,101 1,349 eee 209 4741939______________ 375 344 2,579 2,020 1,593 109 3181940______________ 338 306 1,787 1,433 1,112 110 2101941. _____________ 337 313 2,611 2,081 1,721 1M 1961942______________ 235 193 2,003 1,465 1,041 162 2631943______________ 150 123 659 486 316 32 1371944______________ 245 221 1,760 1,347 732 343 2721945______________ 400 340 3,225 2,715 1,851 407 4561946______________ 752 661 7,073 5,424 3,102 991 1,3311947______________ 567 493 6,732 4,874 2,937 787 1,1501948______________ 449 435 6,405 5,032 2,817 537 1,6781949______________ 455 429 5,333 4,204 2,795 326 1,0831950______________ 496 487 5,307 4,381 2,127 468 1,7861951______________ S« 487 6,459 5,169 2,838 427 1,9041952______________ 665 635 9,500 7,529 3,346 851 3,3321953______________ 621 593 7,507 6,326 3,093 424 2,8081954______________ M9 631 9,174 7,381 4,240 531 2,6101955______________ 849 779 10,960 8,277 3,951 462 3,8641956______________ 981 833 13,096 9,206 4,123 539 4, '441957______________ 943 860 14,624 12,019 5,689 472 5,8581958______________ 913 809 16,490 13,281 6,857 427 5,9981959______________ 1,226 21,055 15,657 12,095 5,265 443 6,387

I For 10 months ended June 30, 1935.2 The 1.055 fully effective registrations differ from the l,OM net reglstratlons shown in the text table "Num-

ber and dlspositJon of registration statements filed" by reason or (a) the exclusion of 15 regrstranons or Ameri-can Depository Receipts, (b) the exclusion of 2 statements subject to amendments which were not fliedprior to the end of the fiscal year, (c) the inclusion of 2 statements which became effective during the 1958flseal year subject to amendments which were filed In fiscal year 1959 and (d) the mc1uslon of 6 statementswhich became effective during the 1lscal year but were later withdrawn.

215

216 SECURITIES AND EXCHANGE COMMISSION

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TWENTY-FIFTH ANNUAL REPORT 217TABLE 2.-Registration8 fully effective under the Securities Act of 1933, fiscal year

ended June 30,1959PART I.-DISTRIBUTION BY MONTHS

[Amounts in thousands of dollars ')

All registrations Proposed for sale for account of ISSUCrs

Year and monthNumber of Number of Amonnt Number of Number of Amountstatements ISSUes statements ISSues

1958July __________________________ 85 113 $1,256,119 74 96 $1,128,170August ____ __________________ . 43 67 1,543,109 37 57 824,642September ____________________ 62 95 1,398,501 55 78 1,255,888October _______________________ 98 118 923,240 85 99 828,828November ____________________ 66 83 869,672 55 65 708,3S0December ____________________ 81 125 1,047.287 65 95 750,667

1959January88 104 1,088,546 78 85 914,613February _____________________ 73 92 1,414,927 66 83 1,294,481

March ________________________ 96 122 1,579,115 79 92 934,364ApnL ________________________ 130 167 2,125,560 114 136 1,577.947May __________________________ 103 136 1,401,389 92 110 1,196,311June __________________________ 130 168 1,009,167 109 124 681,099

Total, llscal year 1959___ 21,055 1,390 15,656,631 909 1,120 12,095,390

PA.RT 2.-PURPOSE OF REGISTRATION AND TYPE OF SECURITY

[Amounts in thousands of dollars ')

Type of security

Purpose of registrationBonds, de-

An types bentures, Preferred Commonand notes 3 stock stock of

All registratrons (estnnated value} ____________________ 15,656,631 5,315,915 542,802 9,797,914

For account of issuers for cash sale ________________ 12,095,390 5,264,768 443,352 6,387,270Oorporate, 11,363,114 4,682,492 443,352 6,387,270

Offered to:General public _______________________ 9,333,574 4,208,723 367,198 4,757,668Security holders ______________________ 1,275,032 306,697 74,877 893,458Other special groups _________________ 7f>4,509 17,072 1,277 736,160

Foreign governments _________________________ 732,276 732,276 ~------_.._-- ------------

For account of Issuers for other than cash sale ____ 2,745,997 26,105 86,336 2,W3,550

For account of others than Issuers ________________ 815,244 25,042 13,115 777,087For cash sale _________________________________ 703.284 12,268 12,871 678,100For other purposes ___________________________ 111,960 12,789 244 98,927

See footnotes at end of table,

__• ___________________

•• _________________________________•

218 SECURITIES AND EXCHANGE COMMISSION

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TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securitiesofferedfor cash in the United States

PARTI.-ALL CORPORATE

[Amounts in thousands or dollars ']

Proceeds New moneyCalendar year or Retire- Other

month mentor purposesTotal gross Total net Total new Plant and Working securitiesproceeds' proceeds' money equipment capital

1934______________________ 397,240 383,547 57,453 31,729 25,724 231.164 94, 9321935______________________ 2.331,630 2, 265, 760 207,649 111,246 96,404 1,864,769 193,3411936______________________ 4,571,680 4,430,522 858,233 380,460 477,773 3,368,427 203,8631937______________________ 2,309,524 2. 238, 786 990,542 573,949 416,594 1,100,341 147,9021938______________________ 2,154,864 2, 109,519 681,303 504, 084 177,219 1,205,788 222,4291939______________________ 2,164,007 2,115,012 324,889 170,145 154,743 1,695,339 ll4. 7851940______________________ 2,677,173 2,615,279 568,884 423,968 144, 915 1,854,109 192,2801941. _____________________ 2, 666,887 2,623,199 868,288 660, IlO4 207,385 1,532, 526 172,3841942______________________ 1,062,288 1,042.556 473,652 287.039 186,613 396,160 172,7441943______________________ 1,169,69:! 1,146,914 307,953 140,889 167,069 739,147 99,8091944______________________ 3,201,691 3,141,847 656,967 251,757 405, 210 2,388,991 95,8891945______________________ 6,010,985 5,901,744 1,079,844 637,803 442,042 4, 554,814 267,0851946______________________ 6,899,646 6,756, 53:! 3,278,828 2,114,682 1,164.146 2,867,516 610,2381947_. ____________________ 6,576,824 6,466,053 4, 590, 540 3,408, 523 1,182, 017 1,351,627 523,8861948______________________ 7,077,820 6,959,046 5,929,280 4,220,880 1,708,400 307,445 722,3211949______________________ 6,051,550 5,959,260 4,606.326 3,724,165 882,160 400,966 951,9681950 _. 6,361,043 6, 261,444 4, 006. 480 2;005,598 1,040,881 1,271,230 983,7351951____________ . _________ 7,741,099 7,606,520 6,531,403 5,110,105 1,421,298 486,413 588.7031952______________________ 9,534,162 9,380,302 8,179,MB 6,311,802 1,867,746 864,056 .=:~1953 8,897,996 8,754, 7:11 7,959,966 5,646,840 2, 313, 126 260,0231954______________________ 9,516,168 9,365, OlIO 6,780,196 5,110.389 1,669,806 1,875,398 709,4961955. 10,240,155 10,048,855 7,957,394 5,333,328 2,624,066 1,227,494 863,9671956 10,938,718 10,748,836 9,662, 95:! 6,709,126 2, 953,826 364,459 721,4241957______________________ 12,883,533 12, 661, 300 11,783,879 9,039,778 2, 744, 101 214, 294 663,1271953. _____________________ 11,553,343 11,371,563 9,907,135 7,792, 008 2, 115, 127 548, 952 915,475

1958Jannary 826,525 815,735 713,773 605,221 108,552 87,246 14, 716Febrnary _______________ 876,725 858,053 844,289 580,412 263,877 1,040 12, 724March _. _________________ 1,614, 781 1,598, 999 1,508,033 1,379.954 l28,079 45,600 45,367AprIL ___________________ 1,229,845 1,210,884 1,035,572 885,663 149,909 70,934 104,378May _____________________ 707,006 691,622 527,281 452,279 76, 001 94,989 69,351June _____________________ 960,669 945,657 717,857 695,416 l22,442 69,144 168, 656July 1,198,870 1,176,486 1,029,254 889,363 139,891 69,866 77,365August_. _________________ 674, 673 564,237 489,121 405,364 83,756 24,688 60,429September _______________ 1,136,960 1,120,806 1, 016, 829 605,760 411,069 6,698 97,279October __________________ 890,001 873, 200 744,349 603,580 .240,769 10,771 118,079November 542, 170 533,126 460,295 346, 749 113,546 15, 244 67,537December _______________1,000,218 982,753 820,482 642, 248 278,234 62, 733 99,644

1959J annary __________________ 885,430 869, OlIO 794,005 489,713 304,292 29,060 46,{):l5February ________________ 770,083 763,733 699,968 461,237 138, 732 9,187 144,678March ___________________ 655,679 639,847 639,082 404,568 134,616 8,731 92,034Aprll ________________•• ___ 927,952 907,966 832,335 612, 198 220,137 9,266 66,365May _____________________ 828, 560 808,879 764, 216 656,100 208, 116 17,385 27,278June _____________________ 910,497 889,678 814,010 657,183 256,827 15,276 60,294

See footnotes at end or table.

________________• ___

_________• ____________

____• _____• __________ __________________• ___

_______•__________ •

•

____•_________________

__________•___• •

TWENTY-FIFTH ANNUAL REPORT 229TABLE 4.-Proposed uses of net proceedsfrom the sale of new corporate securities

offeredfor cash in the United States-ContinuedPART2.-MANUFACTURING

[Amounts In thousands of dollars ']

Proceeds New moneyCalendar year or Retlre- Other

month I mentof purposesTotal gross Total net Total new Plant and Working securitiesproceeds' proceeds' money equipment capital

1948 2, 225, 757 2,180,005 1,726,297 762,778 963,519 53,919 399,8791949_______________ . ______ 1,414, 176 1,390,872 851,257 542,078 309,180 44,303 495,3111950_. _. ___________ . ______ 1,200,017 1,175,363 688,074 312,701 375,374 149,010 338,2791951. . 3,121,853 3,066,352 2,617,233 1,832,777 784,456 220,828 228,2911952 4,038,794 3,973,363 3,421,892 2, 179, 563 1,242,329 260,850 290,6211953_____________ . ________ 2, 253, 531 2, 217, 721 1,914, 853 1,324,675 590,178 90,115 212,7531954_____________ .• _______ 2, 268,040 2, 234,016 1,838, 907 1,000,495 829,413 189,537 205,5711955______________________ 2,993,658 2,929,734 2,020,952 1,265,272 755,680 532, 571 376,2101956 3,647,243 3,578,502 2,944,378 1,928,034 1,016,344 242,684 391,4401957 4, 233, 70s 4, 153, 534 3,764, 423 2,644,460 1,119,963 49,131 339,9801958 . ._ 3,515,407 3,459,399 2, 851, 033 2,027,328 823,705 194,629 413,738

1968:ranuary _. . 156,735 154,968 136,292 116,783 19,500 9,620 9,056February ________________ 179,297 172, 634 169,366 110,462 58,904 60 3,208March 239,933 236,296 189,190 121,038 68,152 40,493 6,614

~!:===========

631,560 623,035 535,772 433,681 102,091 10,559 76,704191,939 188,750 121,055 98,699 22,356 26,502 41,193296,142 292,734 211,592 156,137 55,455 39,521 41,620:ruly 557,387 548,352 482,899 381,505 101,393 22,225 43,228August._. 129,398 127,582 99,370 73,987 25,383 14,380 13,832September 483,375 477,451 390,439 335,785 54,653 4,346 82,666October . 277,250 271,432 216,713 102,150 114, 563 6,644 48,074November 131,285 128,853 105,550 43.948 61,603 8,936 14,367December _._. ._. 241,lOS 237,313 192,794 53,152 139,643 11,342 33, 177

1969:ranuary ._. 168,953 165,846 139,694 50,601 89,093 17,410 8,743February ________________ 131,699 127,995 67,853 39,652 28,201 4,877 55,265March 100,328 97,483 83,482 52,381 31,101 5,642 8,359AprIL 290,143 283,618 236,691 162, 437 74,254 6,762 40,164May 268,120 258,168 231,833 153,905 77,928 9,704 16,632:rnne _______________ 236,031 227,175 204,139 80,100 124,040 5,999 17,036

Bee footnotes at end of table.

____________• _________

_______• ______ ______ ________• _____• _______

______• _______________ _____• _____________•__ ____• ________ ______

___________••••

__•______' _______••

____•__••• ___________ ========= ________•_______ _•• ________•__•

__•______________ _______' ______• •• _____ __

••__•__•____ ___

••• _______________•____•______•__•_____

_______•_____________ ____• •

230 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed use of net proceeds from the sale of new corporate securitiesofferedfor cash in the United States-Continued

PARr3.-EXTRACTIVE.

[Amounts In thousands of dollars s]

Proceeds NewmoueyCalendar year or Retire- Other

month' mentof purposesTotal gross Total net Total new Plant and Working securitiesproceeds' prooeeds' money equipment capital

1948-195'1958 235,368 222,051 199,151 113,104 86,048 1,912 20,9881954______________________ 538,597 513,596 334,704 215.758 118,946 45,624 133,2681911S415,289 390,758 325,490 197,394 128,096 3,921 61,3471956______________________ 455,523 435,691 304,909 211,029 93,880 37,849 92,9341957______________________ 288,574 276,809 242,826 159,783 83,042 6,833 27,1451958246,565 239,274 184,092 95,221 88,871 2,033 58,149

1958January __________________ 14,225 13,620 13,194 8,017 5,177 0 326

r::'r%a~:==: .:18,059 17,712 13,473 9,886 3,587 0 4,23922,406 22,094 21,603 20,464 1,139 67 424ApriL ._ 41,298 40,083 32,441 13,243 19,198 0 7,643May _____________________ 6,882 6,560 6, 136 3,240 2,896 0 424June 16,139 15,562 15,361 9,825 5,586 0 200July 3,954 3,800 3,637 2,249 1,388 0 163August 38,813 38,078 22,341 10,824 11,518 998 14,739September 12,801 12,232 10,339 3,019 7,320 500 1,393October 17,457 16,418 14,676 4,841 9,834 6 1,736November 40,929 40,385 18,389 3,646 14,743 362 21,~December 13,603 12,829 12,501 5,967 6,535 100

1959January 19,492 18,975 18,659 15,795 2,864 0 316February ________________ 4,145 3,914 3,322 1,001 2,321 0 59ZMarch ___________________ 9,821 9,499 7,841 2,574 5,267 596 1,062

tfar:::===================8,927 8,692 8,047 2,205 5,842 168 476

25, 245 24,535 24,288 6,005 18,283 0 247J une14, 946 14,458 11,608 6,358 5,250 1,130 1,720

PARr4.-ELECTRIC, GAS AND WATER

19482,187,390 2,149,672 1,871,931 1,840,599 31,33119492, 319,828 2,275,898 1,837,545 1,818,560 18,98619502,648,822 2,608,491 1,728,378 1,711,320 17,0581951. _____________________ 2,454,853 2,411,714 2,186,248 2,158,823 27,4251952 2,674, 694 2,626,377 2,457,823 2,441,862 15,96119533,029,122 2, 971, 911 2,755,852 2,737,082 18,7701954______________________ 3,713,311 3,664,922 2,597,651 2,582,366 15,2851955______________________ 2,463,729 2,428,158 2,218,094 2,205,655 12, 4391956_. 2,529,175 2,487,493 2,409,885 2,394, 928 14, 9571957 3,938,087 3,871,899 3,659,189 3,645,919 13,2711958_._. '_' 3,804, 105 3,743,395 3,441,074 3,411,355 29,719

1958January 326,067 321,782 319,314 319,243 71

r:~=================375,314 367,756 367,756 350,210 7,547408,040 402,141 378,922 378, 922 0

tfar:::::_:::==============319,700 315,469 292,877 285,880 6,997345,017 339,325 301,683 300,157 1,527J nne ._ 430,719 424,663 359,062 359,061 11uly401,961 393,544 325,761 325,642 118August ._ 286,604 281,487 276,562 274,823 1,739Seplember 183,361 180,812 178,646 178,605 41October 316,455 311,105 266,643 265,516 1,128N ovem ber _. 129,713 127,987 125,567 125,348 219December _. ______________ 281,154 277,323 248,280 237,949 10,330

1959January 301,940 296,756 273,300 273,163 137

r:~=::::::=:====:===190,756 187,593 183,074 182,436 588335,721 330,963 290,229 268,590 21,639

~!::::::==:::::::::::: 319,583 313,802 305,795 305,467 329348,144 342,378 337,804 330,363 7,441316,760 312,996 312,348 311,580 768

See footnotes at end of table.

144,388 133,354233,390 204, 964681,577 198,58785,439 140,02787,726 80,82767,034 149,025

989,799 77,473174, 015 36,04913, 'i94 63,81451,280 161,430

138,392 163,928

234 2,2340 00 23,219

22,452 14037,547 9515,924 49,67746,369 21,414

162 4,7630 2, 1660 44, 462

1,844 57613,860 15,183

1,955 21,5020 4, 5190 40,7340 8,007

4,218 3560 648

• _____•• _______________

_________•____________

___________________• __

========== __________• _______

______ • ___• _____• ___ _____ • ___________• ___

___• _____• _____• ___ ____•• _____• ___

______________• ___ _____• _____• ___

• _____• _________

__• ______• _______•

________________• ____

____• ___• _____________ __________•______• ____ __________•___________

___• __________________ __________• ___________

____• _______________ •• _____• _____• _____• __

__•• _____• ___ __

___• __•__• _____• __

___•___• ____________ _____________• _____• __

__ • ______________ ___•_________•• _

__• _______________ __•________• __

______•______' ____

TWENTY-FIFTH ANNUAL REPORT 231TABLE 4.-Proposed uses of net proceeds from the sale of new corporate securities

offered for cash in the United States-Continued

PART 6.-RAILROAD

[Amounts In thousands of dollars I]

Proceeds New moneyCalendar year or Retire. Other

month' mentof purposesTotal gross Total net Total new Plant and Working securitiesproceeds proceeds' money equipment capital

1948______________________ 623,348 616,758 645,871 485,694 60,177 56,726 15,1611949______________________ 459,982 456,353 441,392 441,392 0 11,lM 3,7971950. 564,100 648,300 301,408 281,800 19,618 192,651 64,3071951._. ___________________ 335,081 331,864 296,917 291,886 6,030 34,214 7331952______________ ._. _____ 625,205 520,817 286,526 286,476 50 223,532 10,7581953 . . . 302,397 298,004 267,024 244,254 22,770 31,879 01964__ ._ .. _ . _______ . ______ 479,322 474, 180 209,585 202,441 7,144 261,345 3,2501965_. ______ . __________ .• _ 647,777 640,345 215,702 214,411 1,291 318,965 5,6791956. _________________ .. _. 382,012 378,159 365,447 365,447 0 12,713 01957._ .. ___ . ___ . __________ 343,647 340,244 326,409 326,409 0 13,835 01958._ ... _. ____ ._ ._. ______ 238,352 235,542 206,381 188,784 17,597 29,161 0

1968January _. _____ . __________ 68,562 67,810 43,659 43,559 0 24,251 0February . 17,252 17,074 17,074 17,074 0 0 0March . _._. 40,036 39,410 34,500 18,858 15,641 4,910 0

tf:---~::::::::::::::::: : 19,649 19,393 19,393 19,393 0 0 012,~ 11,845 11,845 9,889 1,956 0 0

June , ._ .. _. ._ 487 487 487 0 0 0July. ________ . ___ ....• ___ 28,179 27,816 27,816 27,816 0 0 0August _._. . 11,280 11,136 11,136 11,136 0 0 0September . 3,921 3,892 3,892 3,892 0 0 0October .. _ .• _________ . ___ 11,122 11,002 11,002 11,002 0 0 0November . 14,483 14,324 14,324 14,324 0 0 0December . ._ .•. 11,468 11,352 11,352 11,352 0 0 0

1969January . . .. •. 20,597 20,351 20,351 20,351 0 0 0February ...... 24,193 23,993 23,993 23,993 0 0 0March .... .• _._ 7,337 7,270 7,270 7,270 0 0 0ApriL. _. ______ ._. __ .• _._ 17,288 17,132 17,132 17,132 0 0 0

~t:::::::::::::::::::: 19,509 19,291 19,291 19,291 0 0 020,391 20,153 20,153 17,223 2,930 0 0

PART 6.-TRANSPORTATION OTHER THAN RAILROAD

1948_. _. 131,924 130,918 126,463 114,705 11,758 745 3,7101949 . 340,315 338,695 302,320 298,865 3,455 272 36,1021950 . ._. 259,057 257,182 242,902 241,599 1,303 3,420 10,8601951. __________________ . __ 159,227 158,240 131,009 123,217 7,792 18,478 8,7531952 . ._ ._ 467,094 462,006 410,778 377,064 33,713 1,119 50,1091953_. .•• _._ 298,036 289,859 264,880 260,568 4, 312 3,949 21,0311964_ 299,432 296,907 270,342 267,042 3,300 9,073 17,4931956 345,280 341,717 237,300 220,971 16,395 18,769 85,5821956_._. 342,000 335,772 322,856 298,537 24,318 7,147 5,7701957 ._ 479,921 475,421 465,095 456,665 8,430 204 10,1221958 _. 585,539 580,031 474,438 458,345 16,093 8,505 97,088

1968January _. _______ ._. ______ 39,081 38,961 38,634 38,568 71 0 327February ... . 25,418 25,354 24,549 23,698 851 0 806March. _. ___ •.. __ . _______ 26,081 25,956 25,108 24, 761 347 0 847ApriL _._ •••.•. .•• 69,218 68,211 68,167 67,774 393 0 44

~t :::::::::::::::::::: 12,363 11,892 11,892 8,245 3,647 0 0106,228 105,130 42,457 36,327 6,131 0 62,673

July ._ ..• _._ 30,941 30,784 30,784 30,1111 604 0 0August_ .. 21,999 21,884 15,128 14, 766 362 6,448 308

~~:~~::::::::::::::::28,858 28,790 28,288 28,019 269 0 50271,274 70,304 68,101 65,695 2,406 88 2,115

November _______________ 11,348 11,216 11,118 10,804 314 48 48December . 142, 730 141,550 110,213 109,513 700 1,920 29,418

1969January 62, 572 62,125 58,027 51,641 6,387 2, 049 2,049February 134,127 133,273 127,458 123,182 4,276 2,908 2,908March 45,651 44,228 36,384 35,497 887 549 7,296

~t:======= ======:

58,040 67,931 56,956 56,431 526 487 48719,926 19,239 18,010 16,912 1,098 394 83576, 701 76,263 76,113 75,998 116 75 75

See footnotes at end of table.

•

_____________• _______

____ __ __ ____• ___• __

___ ___• ________•• _____ _______

•_________ __

•• ____ _____••_•• ___________

• __________ ___ •• __ __ ____

•__ ____ ____ _ _____ _•• __

••• ______ _

_________••• ______ ____ ___••• __• ________ ____• ___________ __

____ __• __ •• ___• __ ___•••• _______

•• __• ________________ ••••• _•• _____••••• ____

_____________• ____ •••• ___• ___ ••• ______ •• _____•••• _______••

_••• __ ______

•• ______

••• _•• ________•••• _________ ___

•• _________ ____

______••••• _•• ____••• __••• _•• ____•

••• ________________

=== ==

232 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses of net proceeds from the sale of neto corporate securitiesofferedfor cash in the United States-Continued

PUT 7.-00MMUNICATION

[Amounts in thousands of dollars IJ

Proceeds New moneyCalendar year or Retire- Other

month I ment of purposesTotal gross Total net Total new Plant and Working securitiesproceeds. proceeds. money equipment capital

1948______________________ 901,663 891,373 870,321 868,470 1,8:;0 1,714 19,3371949______________________ 571,080 566,566 504, 557 502,679 1,877 49,Z17 12,13219.'iO______________________ 399,391 395,172 304,006 300,264 3,741 81,002 10,1641951.. ____________________ 612,080 605,095 594,324 574, 417 19,907 5,231 5,5401952 760,239 753,169 738,924 736,996 1,928 6,095 8,1511953 881,853 873,726 860,967 841,600 19,367 3,164 9,5!l61954______________________ 720,102 710,819 641,487 639,376 2,111 60,089 9,2431955______________________ 1,132, 271 1,121,408 1,039,611 1,038,092 1,520 76,567 5,2301956 1,419,457 1,405,006 1,371,471 1,369,832 1,639 20,674 12,8611957______________________ 1,461,748 1,444,446 1,427,977 1,425,696 2,281 3,904 12,5661958______________________ 1,423,776 1,411,831 1,265,315 1,262,382 2,933 118,112 28,404

1958January __________________ 85,564 84,459 34,4:;9 34,374 85 00,000 0February ________________ 35,834 3:;,476 35,476 35,431 45 0 0March __________________ 800,418 796,756 79:;,300 795,3liO 0 0 1,406ApriL __________________ ._ 78,807 77,190 39,529 39,467 62 37,236 425May ___________________ 41,662 41,216 10,457 10,457 0 29, see 793June. ____________________ 12,490 12,349 11,952 11,875 76 397 0JuIy ___________________ ._ 102, 141 100,854 100,301 100,199 102 0 552August.. _________________ 14,0:;11 13,912 8, 462 7,670 792 0 5,400September _______________ 10, 1M 9,742 6,612 5,488 1,125 513 2, 617October __________________ 48,241 47,733 30,918 30,460 458 0 16,815November _______________ 90,256 89,134 88,935 88,890 45 0 198December ________________ 104, 147 103,011 102,863 102, 721 142 0 147

1959January __________________ 35,212 33,985 33,787 33,730 57 0 198

r:~~:_=:::::::=:::::: 62,805 61,927 61,853 61,853 0 0 749,760 9,429 9,379 9,379 0 0 00A pnl, ____________________ 16,313 15,989 15,989 15,899 90 0 0May _____________________ 6,070 5,896 5,846 5,846 0 0 00June _____________________ 21,900 21,678 21,306 21,306 0 0 371

See footnotes at end 01 table.

_________________•• ___ __• _______~___• _______

____________________••

TWENTY-FIFTH ANNUAL REPORT 233TABLE 4.-Proposed uses oj net proceeds Jrom the sale oj new corporate securities

offered [or cash in the United States-Continued

PART 8.-FINANCIAL AND REAL ESTATE

[Amounts In thousands of dollars 1]

Proceeds New moneyCalendar year or Retire- Other

month. ment of purposesTotal gross Total net Total new Plant and Working seeuntlesproceeds' proceeds' money equipment capital

1948______________________ 593,649 587,180 484, 779 12,717 472,062 30,275 72,1261949______________________ 599,105 592,559 440,453 43,079 397,374 34,530 117,5761950______________________ 746,740 739,263 480,154 24,309 455,846 loo,42ll 158,6791951______________________ 524, 616 515, 2£>7 368,485 15,686 352,800 66,030 80,7511952______________________ 515,178 508,18-1 409,630 14,243 395,387 60,498 38,0561953______________________ 1,576,048 1,560,672 1,452,279 32,116 1,420,162 24,225 84, 1681954______________________

1,075,818 1,061,015 619,155 29,547 689,608 273,043 168,8171955______________________ 1,898,677 1,867,887 1,606,145 33,472 1,572,672 56,010 205,7311956______________________ 1,855,953 1,831,550 1,703,487 39,038 1,664,449 16,947 111,1161957______________________ 1,795,413 1,768,353 1,635,740 241,48-l 1,394,276 67,314 65,2981958______________________ 1,088,299 1,060,792 900,109 186,773 713,336 46,887 113,796

1958January __________________ 121,328 119,995 114,523 33,843 80,630 3,104 2,368February ________________ 218,486 215,335 210,294 18,524 191,770 980 4,061March ___________________

51,501 50,788 40,297 7,871 32,42£> 130 10,361AprlL ____________________ 40,289 38,473 22,615 5,877 16,737 35 15,824

~t80,055 75,604 52,474 14, 247 38,227 294 22,83683,742 80,367 69,395 17,791 51,604 1,954 9,018Juiy ______________________ 36,560 34,866 24, 618 11,845 12,773 1,272 8,976August ___________________ 51,647 50,749 41,766 5,556 36,211 799 8,185September _______________ 33,798 32,121 2£>,656 3,404 23,252 139 5,326October __________________ 119,530 117,251 114,354 16,303 98,051 437 2,460November _______________ 89,297 87,592 72,730 44,114 28,617 3,921 10,941December ________________ 162,065 157,651 110,388 7,398 102,990 33,823 13,439

1959January 226,451 222,752 208,563 12, 911 195,653 1,803 12,386February ________________ 115,653 113,874 106,319 12,942 93,377 1,165 6,389March ___________________ 106,898 102,844 70,312 13,302 57,010 1,101 31,430AprlL ____________________ 143,179 139,967 127,940 14, 827 113,114 746 11,282

~t .:107,892 105,968 99,881 10,119 89,762 1,142 4,94699,794 95,568 66,821 11,022 55,799 722 28,025

See footnotes at end of table.

====================

_____• ____________

==================

234 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Proposed uses oj net proceeds from the sale oj new corporate securitiesoffered [or cash in the United States-Continued

PART9.-COMMERCIAL AND MISCELLANEOUS

[Amounts In thousands of dollars II

Proceeds New moneyCalendar year or Retire. Other

month' mentof purposesTotal gross Total net Total new Plant and Worlong securitiesproceeds' proceeds' money equipment capital

1948 414,090 403,049 303,619 135,917 167,701 20,676 78,7541949 ,_____________________ 347,064 338,317 228,801 77,513 151,288 28.030 81,4861950 ,_____________________ 552, 916 537,606 261,559 93,516 168,043 63,139 212,9081951 ,_____________________ 533,383 517,988 337,187 113,299 223,888 56,194 124,6071952 ,_____________________ 552, 958 536,386 453,975 275,598 178,377 24,235 58,1761953. _____________________ 326,640 319,877 244, 960 93,441 151,519 37,745 37,1721954______________________ 421,547 409,635 268,364 164,365 104,000 46,889 94, 3821955______________________ 443,473 428,848 294,035 158,061 135,974 46,676 88,1381956______________________ 307,355 296,663 240,521 102,281 138,239 12,652 43,4911957 342, 435 330,593 262,220 139,382 122,838 21,788 46,5851958. _____________________ 656,299 641,298 584,692 161,819 422,873 11,234 45,372

1968January __________________ 14,964 14,241 13,798 10,839 2,959 37 405February 7,065 6,711 6,301 5,128 1,173 0 410March. 26,365 25,558 23,063 12,689 10,374 0 2,496AprIL 29,423 29,029 24,778 20,347 4,431 652 3,599May 17,087 16,431 11,740 7,346 4,395 680 4.010June.; 14,710 14,366 7,551 3,912 3,639 1,348 5,468July 37,748 36,470 33,439 9,927 23,512 0 3,031August, 20,773 19,408 14,355 6,603 7,752 1,900 3,153September 380,690 375,765 371,956 47,546 324,409 1,200 2, 610October 28,672 27,954 21,941 7,612 14.329 3,596 2,417November 34,859 33,636 23,681 15,676 8,005 132 9,823December 43,944 41,730 32,090 14,196 17,895 1,688 7,952

1969January 50,212 48,300 41,623 31.521 10,102 5,844 833February ________________ 106,805 101,164 26,097 16,128 9,969 236 74,831March. 40,263 38,132 34,184 15,574 18,610 844 3,104

tfa~:~~.: .:74,478 70,835 63,783 37,801 25,983 1,102 5,95035,655 33,403 27,263 13,659 13,604 1,927 4,213June _____________________ 123,974 121,288 101,521 33,596 67,925 7,349 12, 418

I Sllght discrepancies between the sum of figures In the tables and the totals shown are due to rounding .Total estimated gross proceeds represent the amount paid for the securities by Investors, whlIe total

estimated net proceeds represent the amount received by the issuer after payment of compensation to dis-tributors and other costs of flotation .

For earlier data see 18th Annual Report., For the years 1948 through 1952lssues of extractive companies are Included In the category" Commercial

and miscellaneous

' •• ___________________

__________•___________

___ • ____________ __• _______________

__________________• • ____• _______________

____•______________ ___________________• __

______•___________ __• ____________

_______________• __ ____•____• _____

__________• _____

_________________•

______________• ___

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236 SECURITIES AND EXCHANGE COMMISSION

TABLE 6.-Notifications filed pursuant to regulation A under the Securities Act of1939 for the fiscal years 1995-59

FiScal year ended June 30

Sept. I, 1934to June 30, 1935"1936"1937" :_.1938" _.1939" _.1940" ._. ._1941"1942* •.1943"1944" ._.1945"1946 . ,1947 ._. .1948 ._1949 _'1950 ._._. ._ ._.1951 ._.1952 ._. _._. ._1953. ~. _.1954 _, .1955_ . ._ _. ._._1956 ,1957 ._. ._. .•

~~gg= ==: :=::::= .; :::: ::===:= :==:=::===== :====Totals_ ..

Number ofnotl.flea-

tlons filed

193388475353515338

1,006558353427678

1,3481,5131,6101,3921,3571,3581,4941,5281,1751,6281,463

919732854

23,555

Dollar amountof securitiesproposed tobe offered

$16, 734, 81232, 122, 08137,738,58926,827,79337,738,58922, 602, 69432, 287, 76226,399,63017,986,98721,933,94438,848,893

181, 600, 155210.791, 114209, 485, 794186, 782, 661171,743,472174,277,762210, 672, 956223, 350, 026187, 153, 226296,267,000273,471,548167,269,900133, 889, 109170, 241, 400

3, 107, 217, 897

Proposed dollar amountof securities proposed tobe offered under regula-tion A as a percent ofproposed offering. underregistration for the samellscaIyear

Percent1.0.7.7

1.21.41.21.01.41.91.2.9

2.53.03.43.63.32.72.32.12.12.72.11.1.8

1.0

1.8

"Prior to May 15, 1945, the maximum amount which the Commlssion could exempt from registrationunder secnon-atb) was $100,000. On that date section 3(b) was amended by the Congress to substitute$300,000 for $100,000

Effective January 2, 1941, the Commission adopted Form S-3(b)-1 for notl.flcatlons under regulation.. A" and directed that they be filed in the regional offices. Prior to sucb date no written notlftcationswere required to be filed for offerings of less than $30,000.

TABLE 7.-Su8pen8wn orders i8sued pursuant to RegUlations A and D under theSecurities Act of 1993 during the fiscal year 1959

Temporary Suspension Orders-Regula tion A:

Academy Uranium & Oil Corp., Salt Lake City, Utah; Securities ActRelease No. 4011 (December 29,1958).

Acme Tool and Engineering Corp., Kensington, Md.; Securities Act Re-lease No. 4091 (June 5,1959).

Amber Oil Co., Inc., Fort Worth, Tex.; Securities Act Release No. 3977(October 14, 1958).

American Horse Racing Stables, Inc., Carson City, Nev.; Securities ActRelease No. 3994 (November 18, 1958).

American Television & Radio Co., St. Paul 1, Minn.; Securities Act Re-lease No. 4096 (June 12, 1959).

Arizona Aviation & Missile Oorp., Phoenix, Ariz.; Securities Act ReleaseNo. 3964 (September 8, 1958).

Arizona Uranium Corporation., Las Vegas, Nev.; Securities Act ReleaseNo. 4027 (February 4, 1959).

Armed Forces Investment Fund, Inc., Scottsdale, Ariz.; Securities ActRelease No. 4036 (February 17,1959).

Atlantic County Development Corp., Brigantine, N.J.; Securities ActRelease No. 4065 (April 6, 1959).

_ __ • • • __ _ • __• • __• __• _ _ • • •• _•• •••

•• •• __• • _ • __• • • •• __

•• • __• • __ _ •• •__ • __• • • __• _

•• • • • • __ • __•• • __

• • • • • __ • •• • __

• • _ • • • • __• __• _

_ • ••• • • • __ •• ••• •• •• __

__ • • • •••• • • • __

" __• __•• • • • _ _ • • • • __•• __ •• • __ •• • •• _

• • _•• __• • __• _ • • _

= = • • •• • _

• •

TWENTY-FIFTH ANNUAL REPORT 237TABLE 7.-Buspension orders issued pursuant to Regulations A and D under tbe

Becarities Act of 1933 during the fiscal year 1959-Continued

Temporary Suspension Orders-ContinuedRegulation A-Continued

Avalon Investors Oorp., Levittown, N.Y.; Securities Act Release No.4065 (April 6, 1959).

Ben Hur Gold, Inc., Boise, Idaho; Securities Act Release No. 4070 (April20,1959).

Big Horn Mountain Gold and Uranium Co., Boulder, Colo.; Securities ActRelease No. 4006 (December 11, 1958).

Bonus Uranium, Inc., Denver 4, Colo.; Securities Act Release No. 4069(April 15, 1959).

Brookridge Development Corp., Queens, N.Y.; Securities Act Release No.4087 (May 26, 1959).

The Brown-Miller Enterprises, Inc., Denver, Colo.; Securities Act ReleaseNo. 4027 (February 4, 1959).

Brown Mineral Research, Ine., Denver, Colo.: Securities Act Release No.4027 (February 4, 1959).

Central Publications Service, Ine., New York, N.Y.; Securities Act Re-lease No. 408-A (May 19, 1959).

Colorado Reduction Corp., Columbus 15, Ohio; Securities Act Release No.4052 (March 13, 1959).

Coltex Uranium Co., Inc., Canon City, Colo.; Securities Act Release No.4090 (June 8, 1959).

Condor Petroleum Co., Inc., Dover, Del.; Securities Act Release No.3944 (July 11, 1958).

Consolidated Petroleum Industries, Inc., San Antonio, Tex.; SecuritiesAct Release No. 4095 (June 10, 1959).

Cordillera Mining Co., Denver, Colo.; Securities Act Release No. 4105(June 26,1959).

De Lys Theatre Associates, Inc., New York 23, N.Y.; Securities Act Re-lease No. 4082-A (May 19,1959).

De-Vel-Co Mineral Development Co., Denison. Tex.; Securities Act Re-lease No. 4043 (March 2,1959).

Desert Treasure Uranium Co., Midvale, Utah; Securities Act Release No.4090 (June 8,1959).

Dinosaur Uranium Corp., Salt Lake City, Utah; Securities Act ReleaseNo. 4011 (December 29, 1958).

Dogs of The World, Inc., Baltimore 2, Md.; Securities Act Release No.3983 (October 29, 1958).

Easy Lift, Ine., Salt Lake City, Utah; Securities Act Release No. 4090(June 8, 1959).

Economart, Ine., Jamaica, N.Y.; Securities Act Release No. 4065 (April 6,1959).

Electronics Industries, Ine., Phoenix, .Ariz.; Securities Act Release No.3981 (October 20, 1958).

Elijo Oil and Mining Corp., Las Vegas, Nev.; Securities Act Release No.4016 (January 13, 1959).

Empire Exploration Limited, Ine., Gooding, Idaho; Securities Act ReleaseNo. 4007 (December 22, 1958).

Empire Oil Oorp., New York, N.Y.; Securities Act Release No. 4068 (April14,1959).

-

238 SECURITIES AND EXCHANGE COMMISSION

TABLE 7.-Suspensron orders issued pursuant to Regulations A. and D under theSecurities .Act of 1939 during the fiscal year 1959-oontinued

Temporary Suspension Orders-ContinuedRegulation A-Continued

Far West Oil and Exploration Co., Portland 11, Oreg.: Securities ActRelease No. 4029 (February 6, 1959).

Ferris Records, Inc., New York, N.Y.; Securities Act Release No. 4065(April 6, 1959).

Florida National Development Corp., Miami Beach, Fla.; Securities ActRelease No. 3966 (September 12, 1958) .

Forest Grove Homebuilder & Investors, Ine., Forest Grove, Oreg. ; Securi-ties Act Release No. 3976 (October 13, 1958).

Greenlite Uranium Corp., Las Vegas, Nev.; Securities Act Release No.4105 (June 26, 1959).

Russell Gulch Uranium Co., Inc., Central City, Colo.; Securities Act Re-lease No. 4003 (December 10, 1958).

Hamilton Oil and Gas Corp., Denver 2, Colo.; Securities Act Release No.4093 (June8,1959).

The Haratine Gas & Oil Co., Ine., Euclid 17, Ohio; Securities Act No.3987 (October 31, 1(58) .

Helicopter Transports, Ine., Reno, Nev.; Securities Act Release No. 3963(September 5, 1958).

Inter-River Corp., Las Vegas, Nev.; Securities Act Release No. 4011 (De-cember 29, 1958).

Macinar, Inc., Washington 5, D.C.; Securities Act Release No. 4063 (April1,1959).

Mastex Oil Oorp., Holyoke, Mass.; Securities Act Release No. 8962 (Sep-tember 18,1958).

Mecca Uranium and Oil Corp., Denver, Colo.; Securities Act Release No.4027 (February 4, 1959) .

Micro-Mechanisms, Livingston, N.J.; Securities Act Release No. 4065(April 6, 1959) .

Missile Oil Corp., Los Angeles, Calif.; Securities Act Release No. 3947(July 21,1958).

Mountain States Uranium, Inc., Denver (Lakewood) Colo.; Securities ActRelease No. 4082 (May 19, 1959) .

National Land Co. of Ariz., Scottsdale, Ariz.; Securities Act Release No.4036 (February 17, 1959).

Niagara Uranium Corp., Salt Lake City, Utah; Securities Act Release No.4027 (February 2, 1959).

North American Exploration Co., Inc., Spokane 1, Wash.; Securities ActRelease No. 4065 (April 6, 1959).

O'Bannon Uranium Co., Odessa, Tex.; Securities Act Release No. 4027(February 4, 1959).

Old Faithful Uranium, Ine., Casper, Wyo.; Securities Act Release No.4105 (Jnne26, 1959).

Oregon Uranium Corp., Portland Oreg.; Securities Act Release No. 4035(February 16, 1959).

Peneal Oil Corp., New York, N.Y.; Securities Act Release No. 4029(February 6,1959).

Plateao Uranium Oorp., Farmington, N. Me:x:.; Securities Act ReleaseNo. 4090 (June 6, 1959).

TWENTY-FIFTH ANNUAL REPORT 239TABLE 7.-Suapenawn oraers isaued purauant to Regulationa A and D under Ihe

Securitiea Act of 1933 during the fiscal year 1959-Continued

Temporary Suspension Orders-ContinuedRegulation A-Continued

Pumpkin Buttes Uranium Oo., Inc., Rapid City, S. Dak.; Securities ActRelease No. 4105 (June 25, 1959).

Red Lane Calcareous Sinter Co., Ine., Thermopolis, Wyo.; Securities ActNo. 4069 (Apri115, 1959).

Research Mutual Oorp., New York, N.Y.; Securities Act Release No. 3950(July 29,1958).

Security Electronics Corp., New York, N.Y.; Securities Act Release No.4065 (April 6, 1959).

Sheldon Enterprises, Inc., Paterson, N.J.; Securities Act Release No. 4065(April 6, 1959).

Silvaire Aircraft and Uranium Co., Fort Collins, Colo.; Securities ActRelease No. 4090 (June 8,1959).

Southcoast Ine., Charleston, S.C.; Securities Act Release No. 4003 (De-cember 10, 1958).

Sports Arenas (Delaware) Ine., Yorktown Heights, N.Y.; Securities ActRelease No. 4001 (December 8, 1958).

Stanway Oil Corp., Los Angeles 46, Calif.; Securities Act Release No.3993 (November 17, 1958).

Starfire Uranium and Development Corp., Tooele, Utah; Securities ActRelease No. 4069 (April 15, 1959).

Stillman Uranium, Ine., Hayward, Calif.; Securities Act Release No. 4003(December 10, 1958).

Summit Finance, Ine., Summit, N.J.; Securities Act Release No. 4065(April 6, 1959).

Surety on Co., Provo, Utah; Securities Act Release No. 3982 (October21,1958).

Texas General Corp., New York 7, N.Y.; Securities Act Release No. 4053(March 17,1959).

United Drive-In Theatres Oorp., New York 51, N.Y.; Securities ActRelease No. 3950 (July 29,1958).

United Standard Corp., Brenham, Tex.; Securities Act Release No. 3983(October 29, 1958).

Universal Fuel and Chemical Corp., Farrell, Pa.; Securities Act ReleaseNo. 3994 (November 18, 1958).

Universal Securities, Inc., Bismarck, N. Dak.; Securities Act ReleaseNo. 3958 (August 20,1958).

Uran Mining Oorp., Rochester, N.Y.; Securities Act Release No. 4035(February 16,1959).

Uranium Enterprises, Ine., Denver, Colo.; Securities Act Release No. 4027(February 4, 1959).

George Wiener as "Dis Mus Be Der Place Co.", New York, N.Y.; Securi-ties Act Release No. 4082-A (May 19, 1959).

Western Factors, Ine., Salt Lake City, Utah; Securities Act Release No.4067 (April 13, 1959).

Western Lead Products Co., Los Angeles, Calif.; Securities Act ReleaseNo. 3974 (October 10, 1958).

Wey-Do-Manufacturing Co., Inc., Brooklyn 1, N.Y.; Securities Act ReleaseNo. 3997 (November 24,1958).

240 SECURITIES AND EXCHANGE COMMISSION

TABLE 7.-Suspemion orders issued pursuant to Regulations A and D under theSecurities Act of 1999 during the fiscal geM 1959-Continued

Temporary Suspension Orders-ContinuedRegulation D:

Bishu Mines, Ltd., Toronto, Canada; Securities .Act Release No. 4047(March 9, 1959).

Bullet Hill Mining Co., Ltd., Sudbury, Canada; Securities .A~ ReleaseNo. 4047 (March 9, 1959).

Caneonti Mines, Ltd., Toronto, Canada; Securities .Act Release No. 4047(March 9,1959).

East Lemhi Mining Co., Spokane, Wash.; Securities .Act Release No. 4047(March 9, 1959).

Empire Exporations, Ltd., North Vancouver, B.C., Oanada r Securities.ActRelease No. 4047 (March 9,1959).

Triumph Mines, Ltd., Seattle, Wash.; Securities .Act Release No. 3946(July 15,1958).

Permanent Suspension Orders :Findings, opinions and orders permanently suspending the exemption after

hearing were issued during the fiscal year in the following cases underRegulation .A:

North Sta-r Oil .E Uranium Oorp., Securities Act Releases Nos. 3952 and 3995(August 7 and November 25,1958).

Profile Mines, tne; Securities Act Release No. 3953 (August 8, 1958).Arliss Plastics Oorp., Securities .Act Release No. 3979 (October 17, 1958).New England Uranium-Oil Oorp., Inc., Securities .Act Release No. 4008

(December 24, 1958).Salesology, Inc., Securities Act Release No. 4019 (January 22, 1959).Mon-O-Oo Oil Oorp., Securities .Act Release No. 4024 (February 4, 1959).Bald Eagle Mining 00., Securities .Act Release No. 4048 {March 12, 1959).Gob Shops of America, Inc., Securities Act Release No. 4075 (May 6, 1959).Inspiration Lead 00., Inc., Securities Act Release No. 4076 (May 7, 1959).

In Mid-Hudson Natural Gas Oorp., Securities Act Release No. 3985 (Novem-ber 3, 1958) the temporary suspension order was vacated after hearing.

TWENTY-FIFl'H ANNUAL REPORT 241

TABLE 8.-Brokers and dealers registeredunder the Securities and Exchange Act of1984 l-effective registrations as of June 80, 1959, classified by type of organiza-tion and by location of principal office

Number of registrants Number of ~OPrietors. partners.o eers, etc. :I I

Location of principal officeSole Part- 801e Part-

Total proprl- nero Oorpo- Total proprl- ner- Oorpo-etor- ships rations' etor- ships rations'ships ships

---------Alabama

36 12 6 18 107 12 20 75Alaska I 1 0 0 1 1 0 0A:rIzoDa30 5 9 16 114 5 21 88Arkansas 23 6 3 14 69 6 6 57Callfornla

353 142 83 128 1.250 142 449 659Colorado 93 31 8 64 312 31 29 252COnnecticut. 43 15 13 15 188 15 62 111Delaware 14 3 4 7 69 3 22 44District of Columbla 102 34 21 47 399 34 97 268Florlda102 42 15 45 269 42 37 190Georgla 44 10 6 28 228 10 26 192HawalL39 15 11 13 135 15 26 94Idaho 15 9 1 5 32 9 3 20DlInols

185 41 62 82 872 41 298 533Indlana 52 23 5 24 164 23 9 122Iowa

36 15 5 16 95 15 11 69Kansas34 10 6 18 138 10 17 111Kentucky 18 7 5 6 65 7 18 40Loulslana69 37 13 9 112 37 42 33Malne 31 10 2 19 89 10 7 72Maryland48 22 13 13 155 22 85 48Massacbusetts 199 78 32 89 910 78 215 617

Mlcblgan 68 11 18 29 272 11 94 167MInnesota 52 9 9 34 270 9 32 229MissIssIppI. 22 10 6 6 47 10 16 21Mlssourl 90 22 19 49 464 22 117 325Montana. 11 7 1 3 25 7 2 16N ebraska 27 9 1 17 130 9 3 118N evade 7 6 0 2 9 6 0 4New Hampshlre 10 8 0 2 17 8 0 9New Jersey227 130 38 59 477 130 106 241

New Mexlco 13 6 4 3 33 6 12 15New York State (excluding New

N ~J~k c~~Jna::==== :=============:=404 258 40 106 786 258 121 40740 15 5 20 168 15 13 140

Nortb Dakota 6 2 1 3 13 2 2 9Oblo 134 27 38 69 571 27 181 363Oklahoma 44 26 7 11 84 26 15 43Oregon.29 6 6 17 100 6 14 80

Pennsylvania 209 68 81 70 872 68 383 431Rbode Island 16 2 10 4 42 2 29 11South Carollna 26 10 4 12 78 10 9 59South Dakota 10 7 0 3 19 7 0 12Tennessee 42 12 10 20 161 12 29 120Texas 222 95 27 100 652 95 85 472Utab. 40 7 6 27 141 7 25 109Vermont 3 2 0 1 11 2 0 9Vlrglnla 46 19 14 13 151 19 66 66Wasblngton 84 45 7 32 241 45 16 180West VIrgInIa 13 8 3 2 29 8 9 12Wisconsln 47 11 5 31 208 11 26 171Wyoming 9 7 1 1 16 7 3 6--- ------

Total (excluding New YorkCity) 3,498 1,402 684 1,412 11,850 1,402 2,908 7,540New York City 1,356 360 591 405 6,239 360 3,699 2, 180--------- ------Total -. 4,854 1,762 1,275 1,817 18,089 1,762 6,607 9,720

I Does not Include 53 registrants wbose principal offices are located In foreign countries or other territorialJurisdictions not listed

Includes directors, officers, trustees, and all other persons occupying stmtlar status or performing similarfunctions.

J Allocations made on tbe basis of location of prtncipal offices of registrants, not actual location of persons.InCorxnatlon taken from latest reports Clled prior to June 30, 1959

Includes all forms of organizations other than sole proprietorships and partnerships.

--- --- --- ---____________________________

______________________________ ______ • ______________________

_______________• _________• __ ___________________________

____________________________ ________________________

____________________________ ________________

______________________________ •_____________ _______________

_____________________________ • ________ ______________________

• ________________________ ____

• ------- --- -----_____________________________________________ ______________________________

_______________• ___________ •__________________________

-________________________ ______ ___________________________

• ______________________•____________ _______________

__________________________ _________________________

__ • _________•_______________ ___________• _______________

• __________ _________________ _____________________________

_____________________ __________________________

________________________

_______• ____________•__ ________________________________

___________________________ _____________________________

_______________________ ________________________

______•_______________ _______________________

___________________________ •_______________ _______________

---______________________ ______ ____• _______• ____• __________

_____________________________ _________________________

_______________________ ___________________________ ___________•_______--------

--- --- --- --- ---________________________

_____________________

--- --- ---________________________

• •

• •

242 SECURITIES AND EXCHANGE COMMISSION

TABLE 9.-Number of stock and bond issues listed and registered on national securitiesexchanges and the number of issuers involved as of the close of each fiscal yearended June 80, 1936 through 1959

[UndupUcated count]

Total stockFiscal year ended June 30 Stock Bond and bond Number of

Issues ISSUes Issues Issuers

1936_. . . ._ 2,662 1.533 4,195 2,3031937 2,867 1,501 2,368 2.4891938 2, 847 1,467 4,314 2, 4851939 . _. . 2,798 1,450 4,248 2.4491940______________ . _________ . __________ . ________________ 2,747 1,411 4,158 2,4081941.. __________________________________________________ 2,694 1,342 4,036 2, 3501942 . 2,661 1,307 3,968 2,2991943 . 2,607 1,259 3,866 2,2441944 . ._. 2,550 I, 18S 3,735 2, 1961945_. .. . 2,541 1.134 3,675 2, 1851946 _. .• . _. .. . .• 2, 552 1,033 3,585 2,1881947 . _. . 2, 562 998 3,560 2, 2151948 ._. 2, 557 964 3,521 2,:m91949 _. _. . _. . _. . ._ 2,570 979 3,549 2, 1941950. . ._. 2,573 971 3,544 2, 1821951. _. . 2, 581 942 3,523 2,1881952. _. _. 2,624 964 3,588 2, 1921953 _. 2,651 1.002 3,653 2, 2101954 _. 2. 641 1,009 3,650 2,2041955 . 2,645 1,013 3.658 2, 2191956 . 2,659 1,027 3,686 2,2531957. 2,667 1,063 3.730 2,2561958 2,663 1,132 3,795 2,2361959_._ _. ._ 2, 631 1,177 3,808 2,236

________ ____• ____• ___ _________• ______• ___• ____ ____• _____• ___• __________• _______• ____• _____________ ______________________________________• _________• ___ _____________ _______•• _______• _________' ____' ___

__________ __________________________• ____• _________ •• ________ _________________________________________ ______________________• ____• ______ __ ____________

_________________ _______ ________• ____• ____• ____ ________• ___• _ __ ____• ___ ____ ___ _________ _______• _________• _________• __ _____________ _____ __• __ ____• ______• __• ____• ____• _________• _________ _____• __• ____• __ ____• __ ____• __• ___ _•• __ __' ___• __ ________________• ____ _____••• _________ •• _•• ______• __• ______ __• ________________________

__• ______• _______• ____• ____• ___________________ __• _•• ____• __• ___________• _____________________• __ __• _•• ______• ___' ____' _____• ___' _________' ________ _____• _______•• _________________ ___________________ ____•• ______________________________ _____• _________ ___• ______• __• _________________• ___________________

___• _______• ___________________________________• ____ ••• ____• ___• ___• ___•• _____• __________________

TWENTY-FIFTH ANNUAL REPORT 243

TABLE lO.-Number of issuers listing and registering securities for the first timeon a n{ltional securittes exchanqe and the number of issuers as to uihsch. the regis-tration of all secunties was terminated during the fiscal years 1936 through 1959

[Undupllcated count]

Number of issuers as to which-

Fiscal year ended June 30Securities LIStingand Becuntieswere listed registratlonof were listed

and registered all seeurrties and registeredfor the first was termi- on a national

time on a na- nated during securities ex-tronal securl- the fiscal year change as oftie>exchange 1nne 30

193619371938193919401941.19421943194419451946 _.19471948194919501951195219531954195519561957 -_19581959

52911~9>---19

2,353266836736251714232578884937495851713700

109835473

5080871037783686971367561555261524753437575807473

2,3032,4892,4852,4492,4082,3502,2992,2442,1962,1852.1882,2152,2092,1942,1822,1882,1922,2102,2042,2192,2532,2562,2362,236

• • • • _ •

" • _ _ _

• • _ • _

• • _ • • _

• _ • • _

• • • _ • _ • 0 _

_ 0 • _

_ _ _

• - - _- _ _

• _ • - - _ • •

0 _

_

244 SECURITIES AND EXCHANGE COMMISSION

TABLE ll.-Number of issuers and security issues on exohanqe«PART 1.-UNDUPLICATED NUMBER OF STOCK AND BOND ISSUES ADMITTED TO

TRADING ON EXCHANGES AND THE NUMBER OF ISSUERS INVOLVED, AS OF JUNE30, 1959

Total IssuersStatus under the act" Stocks Bonds stocks Involved

and bonds

Registered pursuant to sections 12 (b), (c),and (d) _____ 2.631 1,177 3,808 2.236TempornrllY exempted from registrataon by Commis-

sion rule .. ___________________________________________ 12 6 17 9Admitted to unIlsted tradlng privileges on registered

exchanges pursuant to section 12(1)___________________ 233 33 266 211Listed on exempted exchanges under exemption ordersof the CommISSIOn. . . . ._. . 70 8 78 56Admitted to unlisted trading privileges on exempted

exehsnzes under exemption orders of the Commission.. 16 0 15 15Total. •.

2, 961 1.223 4.184 2.527

"Registered: Section 12(b) of the set provides that a security may be registered on a national securitiesexchange by the issuer filing an application with the exchange and with the Commission eontainlne certaintypes of specified mformation, Section 12(c) authorizes the Oomnnssion to require the submisslon ofmformatron of a comparable character If In its Judgment information speeifled under section 12(b) Is map-plleabla to any specified class or classes of lssners. Beotion 12(d) provides that If the exchange authoritiescertify to the Commission that the security has been approved by the exchange for Iistmg and registration,the registration shall become effective 30 days after the receipt of such certification by the Commission orwithin such shorter period of time as the Oornmlssion may determine.

Temporanly exempted: These are stocks of certain banks and other securities resulting from mergers,consolidationsl etc., which the Commission has by published rules exempted from registration undetspecified cond tlons and for Stated periods.

Admitted to unlisted trading privileges: Section 12(1) provides, In effect, that securities which were ad-mitted to uoltsted trading privileges on March 1, 1934 (Le., without applleatrons for listing filed by the issu-ers) may continue such status. Additional securities may be granted unlisted trading privileges. Onexchanges only If they are listed and registered on another exchange or the issuer Is subject to the reportingrequirements of the act under section 15(d).

Listed on exempted exchanges: Certain exchanges were exempted from fnIl registration under section 6of the act because of the limited volume of transactions. The Commission's exemption order specifies thatsecurities which were listed on the exchange at the date of such order may continue to be hsted thereon, andthat thereafter no additional seeurrtles may be listed except upon compliance with section 12 (b), (c) and (d).

Unlisted on exempt exchanges' The Commission's exemption order specifies that securities which wereadmitted to unlisted trading privileges thereon at the date of such order may continue such privileges, andthat no additional securities may be admitted to unlisted trading privileges except upon compliance withsection 12(1).

PART 2.-NUMBER OF STOCK.AND BOND ISSUES ON EACH EXCHANGE AND NUMBEROF ISSUERS INVOLVED, AS OF JUNE 30, 1959.

Stocks BondsExchanges Issuers

R X U XL XU Total R X U XL Total----- -- -- -- -------- -- -- ---

American. 814 632 5 234 --.--. 871 25 2 33 -----. 60Boston 436 73 2 372 --. 447 16 ------ -.---. 16

C~~~_~~~~_~~ ____ 12 7 -----. 5 12 -----jj- ----i- ------ ---.-.ClnclnnatL 133 46 1 95 ------ ------ 142 ------ ------ 10Colorado Sprlngs ____ 11 12 ---_ ...- 12 --.. ------Detrolt 222 103 1 125 ---53- ---ie- 229 -- ..---- ------ ------ ----g-Honolulu 58 69 ----is- ------ 8Midwest. ____________ 454 398 2 113 ------ ------ 513 ------ ------ ------ 15New Orleans 13 4 14 18 1 ------ 1New York Stock 1,294 1,512 2 ------ ------ ------ 1,514 1,214 3 ------ ---- ...- 1,127PllClllc Coast. 482 298 5 248 ------ ------ 551 20 ------ ------ ------ 20Phlladelphla-Baltt-more _______________ 531 154 10 443 607 53 ------ 53Plttsburgh 116 47 1 75 ---26- ------ 123 1 ------ ------ ------ 1Richmond 17 ------- ------ ------ 26 -- ..---- ------ ------ ------ -------Salt Lake. 90 88 4 92 .. ------ ------San FrancisCOMlnlng ____________

46 47 ------ .. 47 .. ------ ------ -------Spokane 26 23 ------ 6 29 -- ..---- ...----- ~------- ..----Wheellng 13 ---_ .._- ------ ----_ ... 12 3 15 .. -------Symbols: R-reg!stered- X-tempomrlly exempted: U-sdmltted to unlisted trading privileges; XL-

listed on an exempted exchange; XU-sdmltted to unlisted trading privileges on an exempted exchange.N OTE.-Issues exempted under section 3(a)(12) of the act, such as obligations of the United States Govern-

ment, the States and cities, are not Included In this table,

_ __ ___ __• ___• ____• __ __• ____

__•___ ___• _______________________________

___________ ------______________ -- ------ -------

_________ ------ ------______________ ------- ------ ---- ------ ------ -------

____________ ------- ------ ------_________ ------ ------ ------ ------ ------____•

______•

__________• ------ ------ ------ ------__________• ___________ ------ ------ ------ -- ---- ------ -------

_____________ ------ ----- -- ---- ------____________

-- --~------------- ------ ------

TWENTY-FIFl'H ANNUAL REPORT 245

TABLE 12.-Unli8ted 8wck8 on 8eeuritiu exchanges 1

PART I.-NUMBER OF STOCKS ON THE EXCHANGES IN THE VARIOUS UNLISTEDCATEGORIES a AS OF JUNE 30, 1959

ExchangesUnlisted only' Listed and registered on another exchange

Clause 1 Clause 3 Clause 1 Clause 2 Clause3'

Amerlcan _______________________ 192 2 35 ( 1Boston __________________________

1 0 149 222 0Chicago Board or Trade _________ 3 0 2 0 0Clnclnnati ______________________ 0 0 0 95 0Detroit __________________________ 0 0 14 111 0Honolnlu ________________________ 16 0 0 0 0Midwest ________________________ 0 0 0 U3 0New Orleans ____________________ 8 0 4 2 0Pacific COIlSt____________________ 26 0 59 163 0

Philadelphia- Baltimore __________ 4 0 241 198 0Pittsburgh _______________________ 0 0 16 59 0Bait Leke _______________________ 3 0 0 0 1Spokane _________________________ 4 0 1 1 0Wheellng ________________________ 0 0 0 3 0

Total' ____________________ 257 2 521 971 2

PART 2.-UNLISTED SHARE VOLUME ON THE EXCHANGES-CALENDAR YEAR 1958

Unlisted only S Listed and registered on another exchangeExchanges

Clause 1 Clause 3 Clause 1 Clause 2 Clause 3'

American _______________________ 29,595,131 16,290 5,332,025 391,700 14,500Boston __________________________

6,563 0 2, 320, 414 2, 028, 213 0Chicago Board of Trade _________ 0 0 0 0 0CincinnatI. _____________________ 0 0 0 366,4113 0Detrolt __________________________ 0 0 219,191 1,743,802 0Honolulu- _______________________ 67,772 0 0 0 0Midwest ________________________ 0 0 0 9,886,215 0New Orleans ____________________ 45,839 0 195 100 0PaCific Coast. ___________________ 2,454,581 0 3,648, 773 5,509,029 0Phl1adel phla- Baltimore __________ 573 0 3,946,683 2,902,552 0Plttsburgh ______________________ 0 0 247,222 179,833 0Salt Lake _______________________ 61 0 0 0 68

~::g:::::::::::::::::::::::: 178, 314 0 6,782 65 00 0 0 2,904 0

TotaL __________ 32,348,884 16,290 15,721,235 22,990,876 14,568

1 Refer to text under heading "Unlisted Trading Privileges on Exchanges." Volumes are as reported bythe stock erehanges or other reporting agencies and are exclusive of those In short-term rights.

a The esteeortes are according to clauses I, 2, and 3 or sec. 12 (0 of the Securities Exchange Act.a None of these Issues has any listed status on any domestic exchange, except that 9 of the 26 Pacific Coast

Stock Exchange Issues are also listed on an exempted Exchange., These Issues became listed and registered on other exchanges subsequent to their adm!sslon to unlisted

trading on the exchanges as shown.I Dupllcatlon of Issues among exchanges brings the figures to more than the actual number of Issues In-

volved.

__________0

246 SECURITIES AND EXCHANGE COMMISSION

[Amounts In thousands)

PART 1.-12 MONTHS ENDED DEC. 31,1958

TABLE 13.-Dollar volume and share volume of 8aleB effected on securities exchangeBin the le-month period ended Dec. 31, 1958 and the 6-month period ended June30, 1959

Stocks I Bonds' Rights andwarrants

'I'otal rnar-ket vatue(dollars) Market Number Market Principal Market Num-

value of shares value amount value ber of(dollars) (dollars) (dollars) (dollars) units

---Registered exchanges, 39,961,671 38, 264, 291 1,306,297 1,553,627 1,583,051 143,754 93, 302---American. 2,884,580 2,792,990 256,541 20,094 21,449 71,496 11,556Boston 271,601 269,545 5,610 107 80 1,948 707

Chreago Board of Trade 0 0 0 0 0 0 0Cmcmnatf , ____________ 31,189 31,013 654 148 271 29 36Detrolt. ________________ 141,933 141,826 4,818 0 0 107 64Mldwest _______________ 1,039,687 1,037,997 28, 549 0 0 1,689 1,267New Orleans ___________ 981 980 49 1 1 0 0New York _____________ 34,350,996 32,754,299 921,526 1,532, 556 1,560,560 64,141 77,236Paerfle CoasL 811,867 808,002 40,095 474 358 3,392 1,732Phlladelphla-Baltrrnors 388,454 387,272 9,636 247 332 935 616Pittsburgh 33,901 33,898 1,561 0 0 4 24SaJt Lake ._. 2, 474 2,460 19,877 0 0 13 63San Francrseo Mming __ 2,015 2,015 14,169 0 0 0 0Spokane, 1,993 1,993 3,209 0 0 0 0

Exempted exchanges, 11,579 11,256 876 64 71 259 103---Colorado Springs 22 22 205 0 0 0 0Honolulu, 10,421 10,098 636 64 71 259 103Richmond. 662 662 17 0 0 0 0Wheeling_. 474 474 17 0 0 0 0

PART 2.-6 MONTHS ENDED 1VKE 30, 1959

Registered exchanges, 29,181,840 28, 111,810 906,968 993,147 920,825 76,883 68,850---American ____________ ._ 2,885,449 2,817,607 248, 456 14,776 19,906 53,007 7,608Boston. ________________ 181,953 181,953 3,288 0 0 0 0Chicago Board ofTrade ______ ._. _______ 0 0 0 0 0 0 0Cinclnnatl, ____________ 18,494 18,400 368 63 107 31 64Detroit __ ._._. __________ 93,145 93,137 2, 801 0 0 8 34MId west, ______________ 745,581 745,356 18, 226 1 2 223 255New Orleans ___________ 779 779 34 0 0 0 0New York _____________ 24,402,677 23,402,701 563,656 978,193 900,679 21,783 56,758Pacifle Coast ___________ 539,774 b38.614 28,070 5 2 1,155 535Philadelphia-

606Baltlrnore ____________ 285,318 284,603 6,190 109 129 3,546Prttsburgh.,., 23,962 23,962 652 0 0 0 0SaJt Lake 2,406 2, 396 21,152 0 0 10 50San Frsncisco Mlnmg __ 1,514 1,514 12, 852 0 0 0 0Spokane _______________ 788 788 1,223 0 0 0 0

=Exempted exchanges, 9,627 9,588 720 40 34 0 0---Colorado Springs 28 28 231 0 0 0 0Honolniu 9,023 8,983 474 40 34 0 0

RIchmond. 378 378 8 0 0 0 0Wheellng 198 198 7 0 0 0 0

I "Stocks" include voting trust certIficates, Amcrican depository receipts, and certificates of deposit .U.S. Government bonds are not Includea In these data

NOTE.-VaJue and volume of sales effected on registered secuntles exchanges are reported In connectionwith fees paid under section 31 of the Securities Exchange Act of 1934. For most exchanges the figuresrepresent transactions cleared during the calendar month. FIgures may dl1Ier from comparable data Inthe Btatlstreal Bulletin due to revisions of data by exchanges. Figures have been rounded and will notnecessarl1y add to totals shown.

_____• _______ ______• __• _______

___• __• __

____• ________ ___ ___• ____

• _____________

__•____ •• __________• __•_____•• __ ________•• __

______• ___ ___• __________

______• ___ • __________

_• ______• __• _______ •• _____

•

=

TWENTY-FIFTH ANNUAL REPORT

TABLE 14.-Block distributions(Value In thousands of dollars]

247

Special offerings Exchange distributions Secondary distributions

Calendar yearShares Value ValueNum- Num- Shares Num- Shares Value

ber soid ber sold ber sold

1942' ....•...... 79 812,390 22,694 -------- ------------ -------- 116 2,397,454 82,8401943............. 80 1,097,338 31,054 -------- --.--------- -------- 81 4,270,580 127,4621944............. 87 1,053,667 32,454 ---.---- ---.----.--- -------- 94 4,097,298 135,7601945••........... 79 947,231 29,878 ------.- ------------ -.-.---. 115 9,457,358 191,9611946•..........•. 23 308,134 11,002 -------- .----------- ------.- 100 6,481,291 232,3981947••...•....... 24 314,270 9,133 -------- -------_.--. -.--- ..- 73 3,961,572 124,6711948.....•.....•. 21 238,879 5,466 ------.- ------------ -------- 95 7,302,420 175.0011949............. 32 500,211 10,956 -------- -.---------- ------.- 86 3,737,249 104,0621950....... ____ ._ 20 150.308 4,940 -------- .----------- -._----- 77 4.280,681 88,7431951. __ . _________ 27 323,013 10,751 ---.---- .----------- -----.-- 88 5,193,756 146,4591952. .. _. 22 357,897 9,931 ---.-.-- 76 4,223,258 149,1171953. . 17 380,680 10,486 -.-----. -------.---- 68 6,906,017 108,2291954___ . _________ 14 189,772 6,670 57 705,781 24,664 84 5,738,359 218,4901955 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,8711956. ____________ 8 131,755 4,557 17 156,481 4,645 146 11,696,174 520,9661957_____________ 5 63,408 1,845 33 390,832 15,855 00 9,324, 500 339,0621958. ____________ 5 88,152 3,286 38 619,876 29,454 122 9,508,505 361.886

1 The first Special Offering Plan was made effective Feb. 14, 1942; the Plan of Exchange Distributionwas made effective Aug. 21, 1953

bsecondary distributions are not made pursuant to any plan hut generally

exchanges require members to 0 tam approval of the exchange to participate In a secondary and a reporton such distribution is llled with this Oomrmsslon,

_____ ___ -------- ------------___ ________ --------______• ______

'

248 SECURITIES AND EXCHANGE COMMISSION

TABLE I5.-Comparative share sales and dollar volumes on exchanges[Annual sales, including stocks, warrants and rights, as reported by all United ststes exchanges to the

Commission. Figures for merged exchanges are Included In those of the exchanges Into which theywere merged}

Year Shares sales ~YS AMS MSE PCS PBS BSE DSE PIT CIN Other% % % % % % % % % %

I- -- ---- - -- -- -- --1935_________ 681, 970, 500 73.13 12.42 1.91 2.69 0.76 0.96 0.85 0.34 0.03 6.1111936_________ 962, 135, 940 73.02 16. 43 2.18 2.96 .69 .72 .74 .32 .04 2.901937_ 838, 469, 889 73.19 14. 75 1.79 3.23 .70 .83 .59 .38 .03 4.511938_. _______ 543,331,878 78. 08 10.55 2.27 2.67 .79 1.03 .75 .25 .04 3.571939. ________ 468, 330, 340 78.23 11.39 2.26 2.35 .93 1.18 .76 .25 .05 2.601940 377, 896, 572 75.44 13.20 2.11 2.78 1.02 1.19 .82 .31 .08 3.051941._. ______ 311, 150, 395 73.96 12. 73 2.72 2.69 1.24 1.50 .87 .36 .14 3.791942_________ 221, 159, 616 76.49 11.64 2.70 2.62 1.08 1.39 .90 .29 .12 2.771943. ________ 486, 290, 926 74.58 16.72 2.20 1.92 .85 .76 .64 .20 .07 2.061944. ________ 465, 523, 183 73.40 16.87 2.07 2.40 .79 .81 .86 .26 .06 2.481945. ________ 769, 018. 138 65 87 21. 31 1.77 2.98 .66 .66 .79 .40 .05 5.511946.. _______ 603, 076, 532 66.07 19.37 174 3.51 .68 .84 .63 .28 .05 6.831947_________ 513,274, 867 69.82 16.98 1.67 4.22 .90 1.05 .66 .19 .08 4.431948_________ 571, 107, 842 72.42 15.07 1.63 3.95 .87 .76 .68 .18 .08 4.361949_ .. ___ .. _ 516,408,706 73.51 14. 49 1.67 3.72 1.21 .93 .73 .18 .09 3.471950_____ .. __ 893, 320, 458 76.32 13.54 2.16 3.11 .79 .65 .55 .18 .09 2.611951. .. _ .... _ 863, 918, 401 74.40 14. 60 2.10 3.54 .76 .70 .58 .16 .08 3.081952.. __ .... _ 732, 400. 451 71.21 16. 08 2.43 3.85 .85 .73 .55 .16 .09 4.051953__ .. _____ 716,732,406 72.64 15.85 2.28 3.90 .83 .81 .55 .15 .11 2.881954_________ 1,053,841,443 71.04 16.87 2.00 3.24 .88 .50 .53 .13 .07 4. 741955.. _______ 1.321,400,711 68.85 19.19 2.09 3.08 .75 .48 .39 .10 .05 5.021966_... _____ 1, 182. 487, 085 66. 31 21.01 2.32 3.25 .72 .47 .49 .11 .05 5.271957_. _______ 1,293,021,856 70.70 18.14 2.33 2.73 .98 .40 .39 .13 .06 4.141958..... ____ I, 400, 578, 512 71.31 19.14 2.13 2.99 .73 .45 .35 .11 .05 2. 74Six months

to June 30.1959 976, 538, 000 63.53 26.22 1.89 2.93 1.00 .34 .29 .07 .04 3.69Dollar volume(000 omitted)

1935.. __ .... _ $15,396. 139 86.64 7.83 1.32 1.39 .68 1.34 .40 .20 .04 .161936_____ .. __ 23,640.431 86.24 8. 69 1.39 1.33 .62 1.05 .31 .20 .03 .141937.... _____ 21,023,865 87.85 7.56 1.06 1.25 .60 1.10 .24 .20 .03 .111938.. _______ 12,345,419 89.24 5.57 1.03 1.27 .72 1.51 .37 .18 .04 .071939_________ 11,434,528 87.20 6.56 1.70 1.37 .82 1. 70 .34 .18 .06 .071940.. _______ 8,419,772 85.17 7.68 2.07 1. 52 .92 1.91 .36 .19 .09 .1191941. .. ______ 6,248,055 84.14 7.45 2.59 1.67 1.10 2.27 .33 .21 .12 .121942.. _______ 4,314,294 85.16 6.60 2.43 1.71 .96 2.33 .34 .23 .13 .111943______ .. _ 9,033,907 84. 93 8.90 2.02 1.43 .80 1.30 .30 .16 .07 .0919« .. ____ .. _ 9,810,149 84.14 9.30 2.11 1. 70 .79 1.29 .34 .15 .07 .111945_____ .. __ 16,284,552 82 75 10.81 2.00 1.78 .82 1.16 .35 .14 .06 .131946.. __ .... _ 18,828,477 82.65 10.73 2.00 1.87 .79 1.23 .33 .16 .07 .171947........ 11,596,806 84.01 8.77 1.82 2.26 .91 1.51 .36 .14 .11 .111948.. _______ 12,911,665 84.67 8.07 1.85 2.53 .88 1.33 .34 .14 .10 .091949...... ___ 10,746,935 83.85 8.44 1.95 2.49 1.11 1.43 .39 .13 .12 .091950.... _____ 21,808.284 85.91 6.85 2.35 2.19 .92 1.12 .39 .11 .11 .051951.. _______ 21,306,087 85.48 7.56 2.30 2.06 .89 1.06 .36 .11 .11 .071952....... __ 17,394, 395 84.86 7.39 2.67 2.20 .99 1.11 .43 .15 .12 .081953.. _______ 16,715,533 8525 6.79 2.84 2.20 1.06 1.04 .46 .16 .13 .071954.. _______ 28, 140,117 86.23 6.79 2.42 2.02 .94 .89 .39 .14 .10 .081955.. _______ 38,039,107 86.31 6.98 2.44 1.90 .90 .78 .39 .13 .09 .081956. _____ .. _ 35,143,115 84. 95 7.77 2.75 2.08 .96 .80 .42 .12 .08 .071957.. _______ 32,214,846 85 51 7.33 2.69 2.02 1.00 .76 .42 .12 .08 .071958.. _______ 38,419,560 85.42 7.45 2.71 2.11 1.01 .71 .37 .09 .08 .05Six months

to June 30..33 .08 .061959.. _ ... _ 28, 198, 281 83.07 10.18 2.64 1.91 1.01 .65 .07

Symbols: NYS, New York Stock Exchange; AMS, American Stock Exchsnge; MSE, Midwest StockExchange; PCS, pacifto Coast Stock Exchange; PBS. Philedelphla.Baltlmore Stock Exchangej" BSE.Boston Stock Exchange; DSE, Detroit Stock Exchange; PIT, Pittsburgh Stock Exchange; OIN, ulnoln-nat1 Stock Exchange.

-

•• ______

__• ______

____• __

_

TWENTY-FIFTH ANNUAL REPORT 249TABLE l6.-Number oj proxy statement» filed under Regulation 14, the number that

included stockholder prop08als under Rule 14a-B, th, number oj 8uch prop08al8.and the net number oj stockholder« who8e prop08als were included

Numberot Numberotmanage- Number ot stockholders Number ormoot's such whose definitive

F1SC8lyear ended lune 30 proxy state- stockholder proposals proxymenta that proposals were In- statementsIncluded eluded (net tiled

stockholder number 1)proposals

19391.5951940

.. 1.62619411,6201942

-----------00- .------ .. _----- 1.6551943'Zl 19 1.4271944.. 20 38 17 1,5011945____________________________________________ 14 34 17 1,6301946____________________________________________ 19 34 9 1.670lW715 29 13 1.6771943____________________________________________ 38 57 18 1.6771949____________________________________________ 43 68 21 1,7021950____________________________________________ 57 97 24 1.6681951 40 68 24 1.8051952____________________________________________ 45 70 29 1,8181968 M 90 39 1,81719M____________________________________________ 68 87 31 1,8581955____________________________________________ 63 92 36 1,9341956____________________________________________ 65 102 III 2.0161957____________________________________________ 77 1'Zl 33 1,9911958____________________________________________ 95 165 39 1,929195999 156 48 1.975

1 Each stockholder was counted only once each year regardless ot the number of companies and proposalsInvolved.

'The first substantive proxy rules were effective on Oct. 1. 1938.and revised to Inclnde stockholder pro-posals tor the 1943proxy season.

' ___________________________________________ ____________________________________________-------------- -------------- --------------____________________________________________ -- ----------- -------------- --------------____________________________________________ -------------- -------------- --------------____________________________________________--------------____________________• ______________________

_____________________________________- ______

________________• ___________________________

________________• ___________________________

_______________________________________• ____

250 SECURITIES AND EXCHANGE COMMISSION

TABLE l7.-Number oj original and amended reports filed by directors, officers, andprincipal stockholders under sec. 16(a) of the Securities Exchange Act of 1934,sec. 17(a) of the Public Utility Holding Company Act oj 1935, and sec. 30(f) ojthe Investment Company Act oj 1940, showing their beneficial ownership oj, andtheir transactions in, equity securities oj the registrant

Fiscal year ended June 30 Sec. 16(a) of Sec. 17(a) of Sec. 3O(f) of Total reports1934 act 1935 act 1940 act filed

1935 •... .... .... .. •... ..... 12,638 12,6381936____ .... _. _ .. ____ ... __ .. _. __ .. ___ . _. __ ... ___ 43,263 509 -------------- 43,7721937___ ..... __ . ______ ._. __ ... ___ .. _ .•. _____ . __ .. 30, 123 460 ------.------- 30,5831938 . .. •. .... _. ._ .•. •. ._ 21,810 929 22,7391939__ ...• __ ... , __ ..•. __ ... __ •.•.. __ ., __ ..•. ___ . 18,323 1,043 --.----------- 19,3661940_. _______ . _' __________ . ____ •. _ .. _. ____ . __ .. _ 18,342 903 -------------. 19,2451941.... _. __ ... _ ....•. _______ ..• ____ .,. __ .•..... 16,312 693 2,413 19,4181942 .. .. . . .• _. .. .... 16,412 742 1,446 18,6001943__ . _______ . _________ .. _. _____ . __ ., _. ___ . __ .. 13,363 445 1,164 14, 9721944 . . •. . 13,183 539 1,043 14, 7651945__ ... _____ .- ____ •. _" _ .. ____ . __ .. __ . ___ . __ .. 15,045 498 1,070 16,6131946 .. . ... .. _. .. ... 17,838 447 1,265 19,5501947_... ____ ... _. _ .. __ . _ .. ___ ..• ____ .. __ ..•. _ ... 18,620 553 916 20,0891948 .. .. ._ . . .. 16,570 557 664 17,7911949_. ___ •. __ . __ .... _____ . __ ...• _________ . __ . ___ 17,976 675 702 19,3531950___ . _____ . ___ . __ ... ____ ....• _._ . __ ._. ___ .. __ 18,314 721 774 19,8091951.. __ . __ . ____ .. ___ . ______ . ___ . __ . __ .... __ . ___ 20,776 509 833 22, 1181952. .. .. ._ .. .. _. ._ .. .. 20,013 420 628 21,0611953____ .... _____ . __ ., ______ . ____ . ___________ . __ 21,516 393 424 22,3331954_... ___ . ____ . ______ ... __ .... _. _ ..• __ .. __ ... _ 22,583 331 285 23,1991955_. ___ ... ____ .. ____ .. _ ._ ..... _. ______ .. _' ... _ 28,010 532 433 28,9751956___ . __ ... _._ ._. ___ . _____________ . ___________ 31,003 322 676 32,0011957_... ____ .. __ . _. _____ . _____ .. ____ ._. __ .. ___ .. 33,486 296 661 34,4431958_. ____ ..... ___ . _____ ... _ .... ________ .... __ .. 32,290 361 475 33,1261959________ . ___ .. ____ . _____ . __ . ___ .. ________ .. _ 38,058 366 851 39,275

25-year total ______ ____ . .. __ ... ______ . ____ . 555,867 13,244 16,723 585,834

TABLE 18.-Number and principal types of periodic reports filed under sec. 13 of theSecurities Exchange Act of 1934 by issuers having securities listed and registeredon national securities exchanges during the fiscal years 1936 through 1959, and thenumber of such issuers as oj the close of the fiscal year

Annual re- Quarterly Number ofports on and semi- Current re- Issuers hav-

Fiscal year ended June 30- Form IO-K annual reo ports on ing securitiesor its equiv- ports on Form SeK listed andalent forms Form ll-K I registered as

ofJune 30

1936.•••.... _ ...•. __ . __ .• _ .••• ____ .. __ •. __ .. _ ••. 1,500 -------------- --------i;7oo. 2,3031937.• __ ... __ .. _______ . ______ .. _ .• ________ .. ____ 2,231 -------------- 2,4891938. ______ .. __ .•........•.•... _. __ ..•••...... __ 2,310 -------------- 2,319 2,4851939__ . __ ... __ ..•.. _ ....... _ ... _ .•.... _ •. ____ . __ 2,315 -------------- 2,342 2,4491940.• __ .... ___ . __ . ___ ... ___ .... _ ..... ____ ... ___ 2,289 ---------.---- 2,448 2,4081941.. __ .... ____ •.. _ •..... __ .... __ .... _. _ ..... _. 2,390 -----.-.------ 2,295 2,3501942_.. _. _ .. _____ ... ___ ... __ ..........•.. _ .... _. 2,148 2,470 2,2991943_... __ . ____ . __ .. __ .... __ .... ___ ...•. _ •.••..• 2,073 2,340 2,2441944. __ . __ . _ ..• __ . ___ ..... __ ... ____ ..... _ •..• ___ 1,996 2,572 2,1961945__ .. ___ •. __ •...... __ .... ____ .••..... _. __ •. __ 2,167 -._-----~----- 2,752 2,1851946 . .... _. .. ... .. . 2,029 1,654 3,394 2,1881947._ •.. __ •.....•..... _. ______ ..•••... __ ... _ .. _ 2,189 5,832 3,302 2, 2151948. _. •. _. .•... .• ....•. .•• 2,123 5,545 3,214 2,2001949 .•• . . _. .......• .• 2,139 5,559 3,207 2,1941950..•.. ___ •••.• _ ••.. _. _ .. __ . __ .•. _. _ .•...••. __ 2,091 5,562 3,252 2,1821951. .•• ____ ••..... __ .•...••..••. __ ..•.• __ ..• __ . 2,184 6,042 2,750 2,1881952. •. ••....•.. .. .. ••. . 2,150 5,734 2,861 2,1921953.••.... _ ....... ______ . __ . __ •.••.• _. __ .••• __ . 2,134 6,080 3,513 2,2101954.• _ .. __ •... ____ ... ___ ... _ •...• __ ..... ____ ..• 2,050 --_.~--------- 3,440 2,2041955. ....•....••. .. ...•.... ......• . 2,123 -------------- 2,857 2, 2191956.. _ •.. __ ...... ____ •. __ . __ .• _ .•...••. ________ 2,154 1,554 3,367 2,2531957____ ...• ______ ....... __ . _ •... _ ..... __ ._ .•. __ 2,178 1,466 3,575 2,2561958..•..... __ . ____ . ___ . __ ..•. __ ..... _ .•.. ____ .. 2,269 1,884 3,427 2, 2361959..• __ ....•...• _ •.. ___ ...•. ___ . _. __ .• ______ .. 2,223 1,685 3,650 2,236

I QuarterlY reports of gross sales were required from 1946 through 1953, and Form ll-X semiannual con-densed earnings for first 6 months of the registrant's fiscal year were required beginning tn 1956 fiscal year.

__________ __ __ __ __ _ __ -------------- --~----------~

___ ______ ____ ___ __ ____ __ --------------

__ ___ __' _____ __ _____ __ _____ _

_____ ________ _ ________ ______- _____- ____

________ ___ __• __ __ _______ __ __

________ _________ ______ ___ _____' __

_ __ __ ____ _____' ______ __ __

------~-----~---------~------------~------

___________ _______ __ __ __ __• __

__ ___• ____ __ __• _ _____ __• __ ___ _____ ____• ____•• _ _ _

__ __ __• __ ___ ____ _____• __

__ __ __ __ _•• __

TWENTY-FIFTH ANNUAL REPORT 251TABLE 19.-Number and principal types of periodic reports filed under sec. 15(d)

of the Securities Exchange Act of 1934 by issuers having registered securities underthe Securities Act of 1933

Annualre- Quarterly Number oCports on and senu- Cnrrent re- issuers re-

Fiscal year ended June 30 Form IG-K annual reo ports on qulred to fileor its equtv- ports on Form ll--K reports underalent Corms Form If-K I sec. 15(d) as

of June 30

1937 .. . _. . . 30 ----.- ----------.-_. 801938 .• . .• . _._ 150 .------ 1651939_. .. . _. _. •. . . . 172 .----- .--- .-------- 1801940 ._ . .• . ... . 252 .--------- 2741941. . _. _. . . 255 .------------- 2791942 . . .. . .-. 324 .-------- .------------ 3371943.. . . .. . . . 327 241 3701944 . ._. •. .. .. . . ... . 348 250 ----.------- 3821945_. . .. _. . 377 300 42.11946 . . .• :::::::::::::::::::: :::::::: 436 260 5581947_. .. ._. . . ._ 601 296 -----_.-- 8391948. ._. . . .. ... . 680 298 8751949 . 744 833 180 9761950 .• _. ._. . . . _. ._ .. 753 2,094 284 9771951 . . . 735 2,596 400 9711952 •. . . . . ._ ._. .• ._ 715 2,594 604 9781953 . _. . _. _. _. •. . . . 825 2,615 916 1,0141954_. .• . .. . .. •. ._ 834 .------------- 973 1,0581955 .. . _. . _" _. 950 .---------_.-- 970 I, 1641956 . . 1,02.1 .112 1,066 1,1671957 . •. . . . . . . . 1,159 633 1,299 1,2741958.... _. _. _. .•• . 1,270 886 1,405 1,3651959 .• . _. _. .. _. _. . 1,480 848 1,718 1,503

I Quarterly reports o~vestment companies from 1943 through 1948.'lJRequlrement to file Form If-Kquarterly reports or gross sales was added In the 1949 fiscal year and continued through the 1953 fiscal year.Semiannual condensed earnings reports for the first 6 months oC the registrant's fiscal year were requiredbeginning In the 1956 fiscal year.

TABLE 20.-Reorganization proceedings under chapter X of the Bankruptcy Act inwhich the Commission participated, fiscal years 1939-59

Number of appearances filed Aggregate A!.~egateFL~cal year June 30 assets (000 In e tedness

omitted) (000Principal SubSidiary Total omitted)

1939-43_. .• ... ._ ..... 243 50 293 $2,625,791 $1,639,1631944 ._. 19 9 28 130,995 73,6981945. _" ._ ._ 9 0 9 280,589 256,9701946. _. ._. _._ 9 0 9 9,615 11,6361947 ._._ ._. _. 9 5 14 15,457 13,1351948 _._. ,_, 10 1 11 28,487 32,6201949 _. ._ ... _._ 9 4 13 108,390 99,4171950 _. ._. 5 4 9 24,985 29,0061951_. , ._ 5 0 5 3,243 3,0281952 _. _._._ , 6 2 8 8,834 5,6251953 _._._ , 3 7 7,761 3,6611954 "'_' ..... , 2 6 8,520 17,37319M "". ._ ._ --_ 2 4 6 112, 769 112,3431956 _._ _._ 6 0 6 15,578 16,8371957 _. 9 0 9 61,136 67,9281958 ...... _. _'_ 9 0 9 76,499 67,9871959 .......... _" . 13 2 15 62,037 39,165

Totals _._. ._ ....... 371 86 457 3,580,686 2,489,692

__________________ ____ __ _________ ____ ' ~---- -- -___ __ _______ ___ __________________

------- ------- ------_ _ _________ ____ __ ______ _______ -- ----______• ______ ___ ________ _____ __ ___ ---- --------------_________ ____•• ___•

____• ' __ __ _____________

___ ______ __ __ _____ ______ ______ ------------_____ ____ _________ ___ _____ ____ _____ - - -~-- - -- ---__• _ __• _ ___ ___ __ ____ ___ __ ___

--__ __ ___ ----------------------- ----________ ___ _

________ _ __ ________ ______________ ---_______ _______ ___ ____ ________ ___ -- - - -~-- - - - - --__________• ____- _________• _____________ ____ _________ _____ _____ ___ ___ __ _ _____• ____• ____• ___•• _____ __ ___________ __ _____ ___• _ _____ __ __ __ ______ __ __ _______• ___ __ _____ __ _______

__ ___ _________ _____ __ ____ _____ ___ _______________ ___ __• _____•• __ __ _•• ____• ____•• ____• ___• _____________ ____ __ __ _ __• • __ __ __ __ _____ ___ ___ ______

__• • ___•• " __________ __ __ _____ ____ ____ __• ___• __• ___" _____ __

__• _ •• _ _____ __ ____ •• __••••••••• _••• •• ___• ____ ___ __

_ • ___•• __ •• ___•• _ •• _____ ••• _____•••• __•• _______ __ ••••

•••• ___••• •• __ ___••• ____ __ ••• _•• _•••••• _•••• __• _•• _•• _ _•• _•••• _ •• _•• ____ __ ••••• ••• _•• _••• __• • ____• ____• ___ ___

__•• •• ___••• • •• " " ____ __ _____ •• ____••• •• ___••• ' ___• __ ••• __ •• __••••••• _•• ____••• ••••••• ••• _•__• ___• __••• ___• __ __ •• _____ ••• _•• _•• _ ••• ___ ••••• •• _•• •• __•••• __••• __•• __ •• _•• _•• __•• __• _••••• _•• ___ ___••• ••• __••• _•• _ _•••• '" • ___ ••• _•••• _••• _ _•• ' ____

••• _ _"" __'"

252 SECURITIES AND EXCHANGE COMMISSION

TABLE 21.-Reorganization proceedings under Chapter X of the Bankruptcy Actin which the Commission participated during the fiscal year 1959

Securitiesand Ex-

Petition change Com-Debtor District court Petition filed approved mlsslon

notice ofappearance

filed

Alaska Telephone Corp W D. Wash Nov. 2,1955 Nov. 21,1955 Nov. 7,1955American Fuel & Power Co E.D. Ky Dec. 6,1935 Dec 20,1935 May 1,1940Buckeye Fuel Co do Nov. 28,1939 Nov. 28,1939 Do.

Bnckeye Gas Service Co .do do do Do.Carbreath Gas Co do do do Do.Inland Gas Distributing Co do do __do Do.Automatic Washer Co S.D. Iowa Oct. 17,1956 Nov. 2,1956 Nov. 2,1956

Brookwood Country Club , N.D IlL Feb. 17,1959 Mar. 3,1959 Mar. 19,1959Central States Electric Corp E.D Va Feb. 26,1942 Feb. 27,1942 Mar 11,1942Coastal Fmance Corp D.Md Feb. 15,1956 Feb. 18,1956 Apr. 16,1956Columbus Venetian Stevens Bulldings, N.D. IlL Aug. 30, 1955 Aug. 31,1955 Oct. 3,1955

Inc.DePaul Educational Aid Society , do Jan. 1,1959 Jan. 13,1959 Feb. 4,1959Dumont-Airplane & Marme Instru- S.D. N Y Oct. 27,1958 Oct. 27,1958 Nov. 10,1958

ments, Inc'La John ManufacturIng Co do Oct. 31,191>8 Oct. 31,1958 DoEl-T'mnles Inc.l. E.D Pa Nov 25,1958 Nov. 25,1958 Jan. 16,1959

Empire Warehouses, Inc N.D. IlL. June 15,1956 June 15,1956 July 19,1956Equitable Plan Co S.D. CallL Mar. 18,1958 May 29,1958 Mar. 27, 1958Frank Fehr Brewing Co W.D. Ky Aug. 13,1957 AUI!. 14,1957 Nov. 8,1957General Stores Corp S.D. N.Y. Apr 30,1956 May 1,1956 May 23,1956Adolf Gobel, Inc D. N.J._- July 23,1953 Dec. 28,1953 Sept. 8,1953Eastern Edible Refinery Corp do June 23,1951 June 23,1954 Oct. 14,1954Gobel's Q F. Distrfbutors do do do Do.Gobel Pharmaceuticals, Inc do do do Do.Metropohtan ShortenIng Corp do do do no,

Green Rlver Steel Corp W. D. Ky Sept. 13. 1956 Sept. 18, 1956 Oct 5,1956Horstlng 011 Co D.N. Dak, Mar. 17,1952 Mar. 17,1952 Sept. 30, 1955Hudson & Manhattan Rallroad Co S.D. N.Y Aug. 11,1954 n-e, 14.1954 Jan. 7,1955Inland Gas Corp E.D. Ky Oct. 14, 1935 Nov. 1,1935 Mar. 28,1939Intemational Power Securities Corp.' D. N.J. Feb. 24,1941 Feb. 24,1941 Mar. 3,1941International Railway Co W.D. N.Y July 28,1947 July 28,1947 AUI(. 4,1947F. L. Jacobs Co.' E.D. Mich Mar. 17, 1959 Mar. Ill, 1959 Mar. 20.1959Keeshln Freight Lines, Inc N D ill Jan. 31, 1946 Jan. 31,1946 Apr. 25 1949

Keeshln Motor E¥f.CSS Co., Inc do do do DoSeaboard Freight Ines, Inc do do do Do.National Frelzht Lines, Inc do do do Do.

Kentuckl Fuel Gas Corp ED. Ky Oct. 25, 1935 Nov. 1,1935 Mar. 28,1939Liberty aklng Corp S.D. N.Y Apr. 22, 1957 Apr. 22,1957 Mav 2,1957Ludman Corp.' S.D. Fla ._ Sept. 18,1958 Oct. 9,1958 Oct. 21. 1958Magnolia Park, Inc E,D. La Oct. 16, 19,~7 Feb. 26, 1958 Oct. 24,1957Muntz TV, Inc N.D. IlL ._ Mar. 2,1954 Mar. 3,1954 Mar. 4,1954Tel.A Vogue do do .do Do.Muntz Industries, Inc.; do do do Do.Northern Steel Corp.'. Conn Feb. 1,1957 Feb. 5,1957 Feb. 19,1957Parker Petroleum cOc Inc W.D. Okla._. May 6,1958 May 6,1958 June 9,1958Pittsburgh Rallways 0 W.D. Pa May 10,1938 May 10,1938 Jan. 4,1939

Pittsburgh Motor Coach Co do do 00 Do.San Souci Hotel, Inc.' D. Nev Aug. 1,1958 Aug. 1,1958 Sept. 16,1958Scranton Corp.' M.D. Pa Apr. 3,1959 Apr. 3,1959 Apr. 15,1959Hal Roach studtos., do do do Do.Seaboard Drug Co S.D. N.Y .. May 7,1957 May 10,1957 June 25,1957

Selected Investments Trust Fund }N.D.Okla Mar. 3,1958 Mar. 3,1958 Mar. 17,1958Selected Investments Onrp.,Shawano Development Co D. Wyo Apr. 3,1959 Apr. 13,1959 May 20,1959Sierra Nevada 011 Co D_ Nev June 22,1951 June 22,1951 Jnly 25, 1951Silesian American Corp S.D. N.Y July 29,1941 July 29,1941 Aug. 1,1941South Texas Oil & Gas Co.' S.D. Tex Feb. 2,1958 Feb. 2,1958 Feb. 15,1958

~~dB:l g'.:;-p~i_-_~~======================Nev July 19,1956 Sept. 10, 1956 Sept. 7,1956D. Utah .. May. 13, 1958 Aug. 12,1958 Sept. 30, 1958Swan FInch Oil Corp S D. N.Y Jart. 2,1958 Jan. 2,1958 Jan. 27,1958

Texas Portland Cement CO.I RD. Tex July 7,1958 July 7,1958 Aug. 12,1958Third Avenue Transit Corp S.D. N.Y. Oct. 25, 1948 June 21,1949 Jan. 3,1949

Surface Transportation Corp do. June 21,1949 do July 7,1949Westcbester St. Transportation Co., do do do Do.Inc.Westchester Electric R R. Co do .do do Do.Warontas Press, Inc do Sept. 8, 1949 Sept. 8,1949 Sept. 8,1949Yonkers Rallroad Co .do June 21,1949 June 21,1949 July 7,1949TMT Trailer Ferry, Inc S.D. Fla June 27,1957 Nov. 15,1957 Nov. 25,1957

TrInity Butldlngs Corp. of N.Y S.D. N.Y Jan. 18,1945 Jan. 18,1945 Feb. 19, 1945U.S. Durox Corp, of Colorado D. Colo Feb. 4,1959 Feb. 9,1959 Mar. 31,1959Verdi Development Co.' C.D. Utah Feb. 25,1959 Mar. 11,1959 Apr. 3,1959

, Commission Illed notice of appearance In fiscal year 1959Reorganization proceedIng closed during IIscal year 1959.

, An earller petition was filed in the District of Nevada on Oct. 17, 1958. Tbe CommissIon filed a noticeof appearance In Nov. 18, 1958. Upon dlsmlssa1, petition was filed In Utah.

__________________ _____ ______________ ________

____________________ _____ ___________ _____________ ____ ________________ ________ ____ ________

________________________ ________________ _______ ____ _______ __________ _____ ________________ _______ ____

___________________ _______ _____________ _______ _____________ ________

____________________ __________ _______

_____ ___________ _______ _______

_____ ___________ _________ ________________________ _______

_________________ ______ _______________________ _____

_________________ _______ ______________________ _____

_________________________ _______ _____ ___________ _______

____________ _____ ___________ _____ ________ ____ ________ __________ _____ ________________ _____________ ________

_____ __________ _____ ______ _____ _______ _______ __________________ _______

__________________________ _____ ______ _______

_________________________ ________ ____ _________

_______________ ______ _________________________ ______

______________ _________ _____ ________________ _______ ____ _______ _____

__________ _____ ________________ _______ ____ ________ __________ _____ ________________ ______ _____ _______

________________ ________ ____________________ _______

__________________________ ______ ______________________ ________

__________________________ ______ - •___________ _____________ _____ ___________ _____ ____________ ________

_____________ _____ ___________ _____ _____________ ________ ___________________ ___________

• ________ ______ ___ _________________ ________

_____ ________________ _____________ ________ _________ •__ _________________ _________

•_________________________ ________ •___ _____________ _____ ________________ _____________ ________

_______________________ _____ ________ ______ _____________

•______________ _________ ____________________ _________

__________________ _______ ______________ ________

____________ ______

____________________ _______ _____________ _______

______________ ______ _____ __________ _____ ________ _________

_____ ________________ _____________ ________

________ _____ ___________ __•• ________ _____ ________ _________________ _____ ___________ ___• ____________ ____ ___________ _________________ ________

__________ _______ ' __________ _________

•

•________________

•

______

TWENTY-FIFTH ANNUAL REPORT 253TABLE 22.-Number of indentures filed and qualified under the Trust Indenture

Act of 1989 and the dollar amount of debt securities involved, fiscal years 1940-59

Number of Dollar Nurnberof Dollarmdentures amount of Indentures amount of

Fiscal year ended June 30 filed for debt seeurt- that were debt securi-quahflcation ties involved qualIfied ties Involvedduring the (in b1lllons) during the (In billions)

year year

1940____________________________________________ 43 $0.663 30 $0 4401941____________________________________________ 93 2.101 94 1. 6701lI42____________________________________________ 84 1 101 73 1. 1071943___________________________________________ 46 .400 37 .3121944..67 .690 70 .7171946____________________________________________

117 2 207 98 1. 7911946____________________________________________ 132 2.838 136 2.9881947108 2 692 96 2.6661948____________________________________________ 121 2 564 122 2 4461949____________________________________________ 127 2.606 124 2.5581950____________________________________________ 96 1. 742 97 1. 8651951___________________________________________

109 2.025 103 1.9221952163 3 308 164 3 0631953144 2 751 141 2 8381954. ___________________________________________ 145 3 688 139 3 3781955____________________________________________ 163 3 675 157 3 7211956183 4 495 168 3 9921957____________________________________________ 244 5.466 237 5 5071958____________________________________________ 252 7.066 237 6 4141959___________________________________________ 202 3 686 192 4 229

TABLE 23.-Number of investment companies registered under the InvestmentCompany Act of 1940 and the approximate dollar amount of gross assets at theend oj eachfisool year, 1941-59

Registered New regis. Regtstra- R~tered Gross assetsFiscal year ended June 30 at the be- trations tlons ended at t e close at the end

ginning of during the during the of the year of the yearthe year year year (billions)

19411 ____________________________ 0 450 14 436 $2 51942

436 17 46 407 2 41943407 14 31 390 2 31944_____________________________ 390 8 27 371 2.21945. ____________________________ 371 14 19 366 3.31946_____________________________ 366 13 18 361 3.81947_____________________________ 361 12 21 352 3.61948 352 18 11 359 3 81949_____________________________ 359 12 13 358 3.71950 358 26 18 366 4.71951_____________ . _______________ 366 12 10 368 5.61952______________________ . ______ 368 13 14 367 6 81953_____________________________ 367 17 16 369 7.01964_____________________________ 369 20 5 384 8.71965_____________________________ 384 37 34 387 12.01956_____________________________ 387 46 34 399 14 01957_____________________________ 399 49 16 432 15 01958 432 42 21 453 17.01959 453 70 11 612 20.0

I The act became effective as of Nov. I, 1940.

• ___________________________• _______________

___________________________________________•

________• ___________________________________ ___________________________________________•

___________________•________________________

________________________• ____ ________________________- ____

________________• ____________

________________________- ____

________________________- ____ _______________________-- ____

254 SECURITIES AND EXCHANGE COMMISSION

TABLE 24.-Number of annual and other periodic reports and sales literature filedby registered investment companies and other perS01lSunder the Investment Com-pany Act of 1940, fiscal years 1941-59

Annualre. OwnershIpports on Quarterly

s~rt,tJfd::SSales and

FIscal year ended June 30 Form reports literature transactionsN-30A-l, on Form pursuant to pursuant to reports

etc. N-JOB-l sec.30(d) sec.24(b) pursuant tosec. 30(0

1941 .. -----------.- .. _--_.------- 264 .. ..--_._----- 2, 4131942. 196 196 633 947 1,4461943 215 911 1,078 1,069 1,1M1944 248 809 706 910 1,0431945_. 235 768 671 1,489 1,0701946 213 780 710 1,752 1,2651947. . 226 790 718 1,935 9161948_____________________________ 219 762 688 2,110 6641949__________________________ . __ 228 788 662 1,910 7021950. ________ .. __________________ 224 818 637 2,121 7741951. 251 869 673 2,596 8331952 . . 245 871 625 2,106 6281963________ . _________ . __________ 245 888 664 1,769 4241954___ .• ________ . ___ . ___________ 252 868 686 1,829 28519M . .. . 260 197 674 1,829 4331956____ .. ___ . _________ . _________ 267 195 698 1,935 6761957 . . . 280 172 734 2,164 6611958_. . 305 163 887 2, 416 4751959. 349 179 1,003 2, 722 851

TABLE 25.-Summary of cases instituted in the courts by the Oommission under theSecurities Act of 1988, the Securities &change Act of 1984, the Public UtilityHolding Company Act of 1935, the Investment Company Act of 1940, and theInvestment Advisers Act of 1940

Total Total Cases Cases Cases In- Total Casescases In. cases pending pending stituted cases closedstttuted closed at end at end during pending during

Types of cases up to end up to end of 1959 of 1958 1959 durmg 1959of 1959 of 1959 fiscal fiscal fiscal 1959 fiscalfiscal fiscal year year year fiscal yearyear year year------ --- --- ------

Aetions to enjoin violatrons ofthe above acts.,____________ ._ 900 844 56 63 58 III 55

Actions to enforce subpenasunder the Secunties Act andthe Seeuritles Exchange Act. 71 71 0 1 2 3 3

Actions to carry out voluntaryplans to comply WIth sec.ll(b) of the Holding Com.pany Act 127 125 2 5 2 7 5

MIscellaneous scncna., _______ 133 127 6 4 3 7 1--- ------ --- --- --- ---TotaL ___________________ 1,131 1,067 M 63 65 128 M

1 ThIS Includes civll and cnmlnal contcmpts not Included In prior statistics.

•• _•• ___• ____________________ _ ___• ________• ______________• ••••• __•• ____• _____• ________• ••• ________________• _________

____________• _____________• ____• ____________________• ___ _____• _______ _________•• ___

________• ___________________ __ __________•• _____________

____ ____ ____ _________• ___

____ ____ _____ _________• ___ __ ___________________•• ___

___• _________• __________• ___

____• _________• ______

- _

TWENTY-FIFl'H ANNUAL REPORT 255TABLE 26.-BummaTlI oj ca8es instituted against the Commission, ecses in which

the Commission participated a8 intervenor or amicus curiae. and reorganizationca8e8on appeal under ch, X in which the Commission participated

Total Total Cases Cases Cases In- Total Casescases In- cases pending pending stltuted cases closedstltuted closed at end at end during pending during

Types of cases up to end up to end of 1959 of 1958 1959 during 1959of 1959 of 1959 fiscal fiscal fiscal 1959 fiscalfiscal fiscal year year year fiscal yearyear year year

--- --- ------ --- ---Actions to enjoin enforcement

of Securities Act, SecuritiesExchange Act. and PublicUtility Holding CompanyAct with the exception ofsubpenas Issued by the Com-mlssIon ______________________

M 64 0 0 0 0 0Actions to enlr: enforcement

of or camp ee with sub.penas Issued by the Oommts-

0 0 0 0ston __________________________

8 8 0Petltlons for review of Com.

mlsslon's orders by courts ofappeals under the variousacts ad.mlnlstered by theCommlsslon __________________ 215 206 9 14 6 20 11

Miscellaneous actions agalnstthe Commission or officers ofthe Commlsslon and cases Inwhich the Commission par.ticlpated 1I8 Intervenor or

11 12 16 6am/CUI cur/at _________________ 208 197 4Appeal cases under ch. X In

which the Commlsslon par-13 17 5tlclpated ___________________ ._ 167 155 12 4--- --- --- --- --- --- ---Total. ________ ._. ________ 662 630 32 22 31 53 21

256 SECURITIES AND EXCHANGE COMMISSION

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TABLE 36.-Reorganization cases under ch, X of the Bankruptcy Act pending duringthe fiscal year ended June 30, 1959, in which the Commission participated whendistrict court orders were challenged in appellate courts

Name of case and UnIted StatesCourt of Appeals

El-Tronles, Inc., debtor; Charles R.Frost and Connecticut Telephoneand Electrical Oorp., appellants(3d Clrcmt).

Frank Fehr Brewing Co., debtor;Fehr Kramer, appellant (6th CIr-cult),

General Stores Oorp., debtor; LewisJ. Ruskin, appellant (2<1 Circuit).

Adolph Gobel, Inc, debtor; GeorgeKraus, MIchael DeAngelis, An-thony DeAngelis, and Trans-WorldRefining Oorp., appellants (3dCircuit).

Hudson & Manhattan Railroad Co.,debtor; George Spitzer, HenryMiller, Sr., Ellis & Co , and Gres-ham Street Nominees, Ltd., appel-lants (2<1 Circuit).

Inland Gas Corp., et al., debtors;Thomas Choate and Harmon L.Remmel, Charles J. Gregory andClyde L. Paul, Paul E. Kern, ElmoE. Allen, George H. Greenwald andEdward D. Spilman, appellants(6th Circuit).

Inland Gas Corp., et al., debtors;Paul E. Kern, Jerome Prince,Charlotte Heine, and the AllenCommittee, appellants (6th Cir-cuit).

F. L. Jacobs Co., debtor; Milton S.Gould, Lazarus Joseph, appellants(6th Circuit).

MagnolIa Park, Inc., debtor; StephenGoldring and Malcolm Wolden-berg, appellants (5th Circuit).

Magnolia Park, Inc'l debtor; Sport-service Oorp., ana New OrleansBportservlee, Ine., appellants (5thOlrcuit).

Nature and status of case

Appeals from orders of Feb. 9, 1959, and Feb. 26, 1959, authorizingthe assignment of certain government contracts to PIaseckiAircraft Oorp., and referring matters to Thomas J. Curtin asreferee and special master to make findings of fact and conclusIonsof law with his report and recommendations thereon. Thedistrict court, In April 1959, approved the stlpulatlon for dismis-sal of appeals. Closed.

Appeal from order of Mar. 17, 1959, finding value of debtor suchthat common stockholders' Interests could be eliminated, andcon1lrmlng the amended plan of reorganization. MotIon bytrustee to dismiss appeal, served May I, 1959; denIed by CA-6,May 26, 1959. Appellant's brIef served May 15, 1959. Com-mission's brief supporting distrIct court order served May 20,1959. Appellant's reply brIef filed May 25, 1959. CA-6 on June16, 1959, allirmed the order of the district court.

Appeals from orders of June 12, 1958, and July 1, 1958, fixing appel-lant collateral trustee's lien for compensation and expenses,and denying appellant's motion for leave to receive compensationfrom Ford Hopkins Co. and Stlneway Drug Oo., subsidiariesof debtor. Commission's brief, In support of the district court'sorders, filed Feb. 27, 1959. Appellant's reply bnef filed Mar.10, 1959. Case argued Mar. 11, 1959, decision reserved. Pending.

Appeal from order of Mar. 6, 1959, denying motion of appellants toquash certain subpoenas IsSUed to them. Appellants' motion,Mar. 16, 1959, for an order to continue the stay In the distrIctcourt pending appeal. Trustee's motion, Mar. 24, 1959, to dis-miss the appeal. Appellants' memorandum In support of motIonfor continuance of stay, served Mar. 30, 1959. Trustee's memo-randum In support of motion to dismtss appeal and In oppositionfor stay, served Apr. 1, 1959. Stipulation, Apr. 16, 1959, byall parties for dismissal of appeal. Closed.

Appeal from order of May 1, 1959, approving the modIfied amendedplan of reorganization. Pending.

Appeals from orders of May 13, 1958, and June 2, 1958, finding theplan for reorganization of Feb. 25, 1958, as amended, fair, equit-able and feasible. Oomrmsston's memorandum opposing motionto dismiss the appeals, filed July 24, 1958. Commission's briefsupportmg the appeals filed Oct. 15, 1958. Reply briefs tiledIn Dec. 1958. Order Jan. 15, 1959, by CA-6, dismissing all appealsand alllrmlng orders of the district court. Petitions for wrIts ofcertiorari filed In Supreme Court, Mar. 1959. Commission'smemorandum supporting petitions for writs of certiorari, tiledApr. 14, 1959. Supreme Court, Apr. 27, 1959, denied petitions forwrits of eerttorart. Petition for rehearing filed May 22, 1959, Inthe Supreme Court, and denied June 8, 1959. Closed.

Appeals from order of June 1, 1959, In aId and consummation ofplan of reorganizatlon, and denying leave to tile proposed altera-tions and modifications to plan. Motion In CA-6 for advance-ment of hearing of case and stay pending appeal. BrIef of Colum-bia Gas System, June 13, 1959,In opposition to appellants' motion.Commission's response, June 16, 1959, In support of motion.Order, June 26, 1959, granting motion for stay pending appeal.Pending.

Appeal from order of Apr. 15, 1959, denymg the receivers' motion tovacate tbe order approving tbe petition for reorganizatron or todismiss the petition and transfer tbe ch. X proceedings to theSoutbern DIStrict of New York. Order, June 23,1959, extendingtime to docket record on appeal. Pending.

Appeal from order of Feb. 25, 1958, approving petition for reorgan-ization. Commission's memorandum, May 2, 1958, In opposlttonto appellants' petition for writ of mandamus and probibitlon or fora supersedeas or stay of the dlstnct court's order of Feb. 25, 1958.Order, May 21 1958, denying leave to file petition for writ ofmandamus and refusing the alternative application for super-sedeas. Appelants' brief filed Nov. 14, 1958. CA-5, Jan. 8, 1959,granted motion by appellants and trustee for postponement ofhearing pending settlement negotlattons and Instructed counselto advise court by Mar. 15, 1959, whether appeals will be dis-missed. Pending,

Appeals from orders of Dec. 1811958, Dec. 19, 1958, and Jan. 22, 1959,

approving and confirming p an of reorganization, and disallowingvote of Sportservlce, Ine., against the plan as not made In goodfaith. Pending.

TWENTY-FIFTH ANNUAL REPORT 285TABLE 36.-ReorganizatiOn cases under cb. X 01 the Bankruptcy Act pending dur-

ing the fl,scal year ended June 30, 1959, in which the Oommission participatedwhen district court orders were challenged in appellate courts-Continued

Name of case and United StatesCourt of Appeals

Selected Investments Oorp., andSelected Investments Trust Fund,debtors; Selected InvestmentsCorp., Selected Investments TrustFund, Hugb A. Carroll, Julia L.Moore Carroll, William A. Rigg, C.M. Holliday and Herschel Hillery;O'Bryan, O'Bryan & O'Bryan,Walter, D. Hart, Jack Hart, Lin-wood O. Neal, appellants (10thOlrcurt),

Selected Investments Oorp., andSelected Investments Trust Fund,debtors; Walter D. Hart and JackHart, appellants (10th Circuit).

Swan-Finch Oil Oorp., debtor;.American Leduc Petroleums, Ltd.,American Canuck Petroleums,Ltd., Orleans Industries, Ine., andPenn Canadian Oil Co, SwanFinch Oil Corp. Trustees, appel-lants (2<1 Olrcurt),

Third A venue Transit Corp. andsubsidiary corporations, debtors;Hiram S. Gans; Hays St. Johu,Abramson and Heilbron; SurfaceTransit, Inc., et al; Reus & Chand-ler, Inc., James Hodes, Lester T.Doyle, I. Howard Lehman, appel-lants (2<1 Circuit).

Third A venue 'I'ransit Corp., et al.,debtors, A. PbIllp Woo)fson, appel-lant (2<1 Circuit).

Third A venue Transit Oorp., et ~'ldebtors; JulIUS Ksss, appellant ('"lCircuit).

TMT Trailer Ferry, Inc., debtor;Protective Committee for Indepen-ent Stockholders, appellants (5thCircuit).

Nature and status of case

Appeal from order of Mar. 3, lQ58, findmg certain trust certlficatesto be debt securities, findlug debtors bankrupt and approvingch, X pennon: and appeal from orders dated May 2, IQ58, June23,lQ58, and July 18, iQ58, denying debtors' objections to retentionin office of trustee and overruling objection of certain cortiflcateholders to ch X proceeding. Petttion for writ of prohtbttion seek-ing to stay lower court proceeding filcd Apr. 4, tQ58, denied byCA-lO S.E.C. motion dated July 3, IQ58, to djsmtss appealson procedural grounds. CommISSIOn's bnet, Sept. 4, lQ58, sup-porting the orders of the district court. Opnuon, Oct 14, IQ58,

affirming the orders of the dlstnct court. Petition for rehearingfiled Oct. 31, lQ58; Commission's response served Nov. 7, lQ58;petition for rehearing darned Nov. 10, lQ58 Petition for writ ofcertiorari filed Dec. 21, lQ58; Commission's and respondent'sbriers m opposition filed Jan. lQSQ;and petition for writ of certi-orari deuied by the Supreme Court on Feb. 24, lQ59. Closed.

Appeals from order of Jan. 14, lQS9, directing the trustee to makedtstnbutlon of substannal part of the assets of the trust fund.CommiSsion's memorandum supporting motion for stay filed Jan.2Q, 1959. Trustee's response opposing motion for stay filed Jan. 2Q,1959. Order by CA-lO, Jan. 30, 195Q,staymg distrlbutron of fundsuntil further order ofthe court. Oomnnssion's response to motionto vacate stay, Mar. 13, 195Q. Order, Mar. 26, 195Q, denyingmotion to vacate stay. Pending.

Appeal from order of July I, 1958, directing certain assets and pro-ceeds therefrom which appellants received as a pledge be tnrnedover to the trustees; and determtnation that reorganization courthad summary [unsdienon to determine ownership: and appealby trustees from order of Nov. 21, 1958, determirung summarilyownership of certain other property. Order by CA-2, Aug. 6,1958, denying application for vaeatmg tnjuneuve provisions ofthe 2 orders entered on July I, 1958. Order, Sept 5,1958, denyingmotion for a stay of July I, order pending appeal. CommISSIOn'sbricf in support of Juiy I, order of the dlstrrct court, filed In Dec.lQSS. CommiSsion's memorandum opposing Nov. 21, order,filed Feb. 6, lQ59. Oplu1on by CA-2, Apr. 2Q, lQS9, affirming theJuly I, order. Appeal from Nov. 21, order still pending,

Appeal from oplnion of Feb. 6, lQ58, denying applleation of Amen,Gans, Weisman and Butler for compensation and denying theapplleatron for approval of a certain transfer of securlties; andappeal from order of July 22, lQ58, awarding and denying finalallowances. Oommlssron's memorandum Oct. 6, 1958, on appli-cations for leave to appeal from order of final allowances. Briefsfiled in Jan. and Feb. lQSQ. Oommtssion's brief filed Mar. 12,195Q, on final allowances. Opinmn, May 11, lQ59, affirmrng inpart, modifying and reversing in part, decision of the districtcourt. Pattnons for rehearing filed in May, lQ5Q. Commission'sanswering letter to petition for rehearing of Baker, Obermeier& Rosner, filed in May, lQS9. Order June 8, lQ59, denying petl-tions for rehearing. Petitions for writ of certiorari filed. Pendlug.

Appeal from order of Dec. 23, lQ58, denying motions for ordersvaeatmg order of Dec. 17, lQOO;and order of July 18, lQ58, andmotion to compel the Oommtssion to institute erlminal proceed-ings against the New York Stock Exchange. Briefs filed inMar. and Apr. lQS9. CommiSsion's motion, Mar. 31, 1959, fordismissal of appeal. Order, Apr. 10, lQ59, granting motion fordismissal of appeal. Petition for writ of certiorari filed Apr. 2Q1959; Commission's brief in opposition filed May zr, lQ59; dernedby the Supreme Court in June 8, lQ59. Petition, June 1959, forrehearing of order denying petition for a writ of certiorari.Pending.

Appeal from order of June ~l 1959, directing appellant to repay acertain sum of money to me trustee which he received for pastlegal services after petition for reorganization had been filed.Pending.

Appeal from order of Mar. 6, 19S9, confirming trustee's plan ofreorganization. Pending.

286 SECURITIES AND EXCHANGE COMMISSION

TABLE 37.-A 2B-year 8ummary of criminal casu developed bytheCommisBion-fiscalyear81934-59

[See table 39 for cIassification of defendants as broker-dealers, ete.l

NumberNumber Number of these

Number of persons of such defend-of cases as to eases III Number Number Number ants as to Numberreferred whom which of de- of these of these whom of these

Fiscal year to De- proseeu- indlct- fendants defend- defend- proceed- defend-partment bon was ments indicted ants con- ants ac- Ingswere ants as toof Justice reeom- were ob- in such vlcted quitted dismissed whomin each mended tained by cases I on motion eases are

year in each United of pending syear States United

attorneys Statesattorneys

---------------- ---- ---- ----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 45 11939_________________ 52 245 47 292 199 33 60 01940_________________ 59 174 51 200 96 38 66 01941. ________________ M 150 47 145 94 15 36 01942_________________ 50 144 46 194 108 23 49 141943_________________ 31 91 28 108 62 10 33 31944_________________ 27 69 24 79 48 6 20 511145 _________________ 19 47 18 61 36 10 14 11946_________________ 16 44 14 40 13 8 4 151947_________________ 20 50 13 34 9 5 16 41948_________________ 16 32 15 29 20 3 6 01949_________________ 27 44 25 57 19 13 25 01950_________________ 18 28 15 27 21 1 5 01951. ________________ 29 42 24 48 37 5 6 01952_________________ 14 26 13 24 17 4 3 01953_________________ 18 32 15 33 20 6 5 219M_________________ 19 44 19 52 29 10 6 71955_________________ 8 12 8 13 7 0 6 01956_________________ 17 43 16 44 27 5 10 21951_________________ 26 132 18 80 26 1 2 511958_________________ 15 51 12 25 7 2 0 161959_________________ J 45 217 20 75 6 1 1 67---- ---- ---- ---- ---- ---- ---- ----TotaL ________ 741 2,550 602 2,487 1,319 295 , 665 188

I The number of defendants III a ease is sometimes increased by the Department of Justioe over the numberagainst whom prosecution was recommended by the Commission. For the purpose of this table, an indi-vidual named as a defendant In 2 or more Indictments in the same ease Is counted as a single defendant.

J See table 38 for breakdown of pending eases.p 22 of these references as to 131 proposed defendants were still being processed by the Department of

Justice as of the close of the fiscal year, and also 5 of the 1957 and 1958references as to 79 proposed defendants .555 of these eases have been completed as to 1 or more defendants. Oonvretrons have been obtained in

481 or 87 percent of such cases. Only 14 or 13 percent of such eases have resulted III acquittals or drsmissalsas to all defendants, this includes numerous eases III which indictments were dismissed WIthout trail becauseof the death of defendants or for other admmlstratlve reasons. See note 5, Infra.

, Includes 56 defendants who died after indictment.

•

•

TWENTY-FIFTH ANNUAL REPORT 287TABLE 38.-Summary of criminal cases developed by the Commission which were

still pending at June 80, 1959

Number Number of such defendantsof such as to whom cases are 'till

Number defend. pending and reasons thereforof de- ants as

Cases fendants to whomin such cases Not yet Awaiting Awaiting

cases have been appro- trial appealcom. hended

pleted--- --- --- --- ---

Pending, referred to Department of Jus-tice In the fiscal year:

1938.•......•...............••......... 1 2 1 1 0 01939.•................................. 0 0 0 0 0 01940................................... 0 0 0 0 0 01941. .................................. 0 0 0 0 0 01942•.•.....................•.......... 2 18 4 13 1 01943.•................................. 1 6 2 2 1 01944.•.... ............................ 1 7 2 6 0 01946......•............................ 1 1 0 1 0 01946..•............. ..... ....... 4 16 1 16 0 01947.......................•.........•• 1 6 1 4 0 01948.•...............................•• 0 0 0 0 0 01949...................•.............•• 0 0 0 0 0 01960.•...........................•.•... 0 0 0 0 0 01951•...•........................••.... 0 0 0 0 0 01962.....•............................. 0 0 0 0 0 01963..•.•• ............................ 2 12 10 1 1 019M .••...•............................ 1 7 0 7 0 01966.•...••.................•.......... 0 0 0 0 0 01966.•....•............................ 2 2 0 0 2 01967................................... 10 52 1 4 43 41968......•..........•.......•......... 6 16 0 1 15 01959......•..•.•.....•..••....•••••••.. 19 75 8 7 69 1--- --- --- --- --- ---

TotaL .•............................ 161 1218 30 61 122 6

SUMMARY

~g~~:r~~.~-..-.'::=::= ==: .: : =:: .. .: : : ==:::::::= =::::: =::::::::::::: .: =::::::: 4~Total defendants as to whom cases are pending 1••••••••••••••••••••.••••••••••••••••••••••••••.•••••• 446

1 Except for 1967, 1968, and 1959 indictments have been returned In all pending cases. As of the close ofthe fiscal year, indictments had not yet been returned as to 210 proposed defendants In 27 cases referredto the Department of Jnstlce In 1957, 1968, and 1909. These are re1Iected only In the recapitulation of totalsat the bottom of the table.

TABLE 39.-A. ~6-year summary classifying all defendants in criminal cases developedby the Commission-1834 to June 30. 1858

Numberssto

whom NumberNumber Number Number cases were sstoindicted convicted acquitted dismissed whom

on motion cases areof United pending

Statesattorneys

--- --- --- ---Reglstered broker-dealers 1 (Including principals of

377 226such firms) ...•••••......•......•••......•••••..•.. 24 100 27Employees of such registered broker-dealers ..•.•..•. 163 66 17 43 28Persons In general secunties bnslness but not as regis-

tered broker-dealers (Includes principals and em.736 370 62

ABIglh~i.:==:= =:====== .:261 42

1,222 668 192 281 91--- --- --- --- ---TotaL •••••...•...•••.•...••••••...•••••...•••• 2,487 1,319 295 686 188

1 Includes persons registered at or prior to time of indictmentThe persons referred to In this column, while not engaged In a general business In securities, were almost

without exception prosecuted for violetlons of lew mvolvlng securities transactions.

_

_ """

_

=== = = = ==== = = ==

=== === === === ==== ========= =

• •

288 SECURITmS AND EXCHANGE COMMISSION

TABLE 40.-S8-year eummaru of all injunction esses instituted by the Commission,1934 to June 30, 1959, by calendar year

Number of cases instituted Number of cases In whichby the Commission and injunctions were grantedthe number of defend. and the number of de-

Calendar year ants involved fendants enjoined I

Cases Defendants Cases Defendants

1934 ._. _. 7 24 2 41935 _. 36 242 17 561936 -_ -_ 42 116 36 1081937 96 240 91 2111938 -. -. 70 152 73 1531939 . -._ •. 57 154 61 1651940 -_ 40 100 42 991941. . -. -. _. 40 112 36 901942 _._. -. 21 73 20 541943 -. -. 19 81 18 721944 ._. 18 80 14 351945 21 74 21 571946 -_ --.-- 21 45 15 341947 ._ _. 20 40 20 471948 -_ -. 19 44 15 261949 _. -. -. -. _. ._. 25 59 24 551950 -. 27 73 26 7l1951. -. -. -_ 22 67 17 431952 -. -_ -. -. -._ ._. 27 103 18 501953 ._._. ._ 20 41 23 681954 ._. --. -. ._ ._. 22 59 22 621955 -. -. -. 23 54 19 431956 _. _._. ._ 53 122 42 891957 ._. -. -. -. _" 58 192 32 931958 ._. 7l 408 51 1581959 (to June 30) ._._. _. 25 109 43 130

Total. ._ 900 2,864 J 798 2,073

SUMMARY

Cases Defendants

Actions tnsntnted., ................. ......... ... .. 900 2,864Injunctions obtamed. __________ _ ... ___________________________ ......... 783 2,073Actions pending., ........................ ._. ._ .......... 29 J 289Other dlsposlnons , .... ............ .-.- -----.-- -. .- ... 88 502

TotaL. ... 900 2,864

I These columns show disposition of cases by year of disposition and do not necessarily reflect the disposl-tlon of tbe cases shown as having heeu Instituted In the same years

Includes 15 cases which were counted twice In this column because injunctions against different defend.ants In the same cases were granted In dlfierent years

Includes 45 defendants In 12 cases In which Injunctions have been obtained as to 129 codefendants., Includes (a) actions dismissed (as to 434 defendants); (b) actions discontinued, abated, vacated, aban-

doned, stipulated, or settled (as to 53 defendants); (c) actions In whIch judgment was denied (as to 11 de.fendants); (d) actions ill which prosecution was stayed on stipulation to discontinue misconduct charged(as to 4 defendants).

o

_______________________• ___ ______• ____• ______________________- _- - - ___- ________• __ ______________________ - _________________ _____________________- - - - _- _- _- _- ___________ _____________________- -- -- - - - - - _- _______ ____________ ________- - - - - - - _- _________ ______________________- - -- - - - _- _- _________ ____• ______ _____- __- - - - - - - -- - _ __• ___

____• ____________• - _- _- _ ____•_________ ___________• _________- - _- _ - _- ______• ____ ______________________- ___________ ____•• _ ______________________- _- _- ___- ________• _•• _ ________- _- ___ - ____- - ---- ___ __• ______ _____________________----- - ________ •• ___ _____________________- - - - - -- - _______• ___ ______•• _____• ______ - _- _- ___ ___ _____________________- - --- -- -- - _- _ __- _- ___ ____• ________________- _- - - __- -___• ___

__•• ______________• __- - - - - ____ ____________•_________- ____• _______ __ _____• __________ __- - - - ___ - •••• _ __•• ____________- ___- - - - -- - - - - __ - _____ __• ___________________- ________• _• __ ___••• ____________• ___- - - - - ___•• ______________________- -- - -- -- - __ -___• ___

•• ____• ___ ___• ___•• _____

____________________________• ____

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