94th Congress, 2d Session

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. ~~~Sb f\NNUALItJiS REPORT 1-f1p;L/L\'/' \ of the / .

fEEfor thefiscal

~~~ed~~June30,

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- - - •

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office500 North Capitol StreetWashington, D.C. 20549

COMMISSIONERS

RODERICK M HILLS, ChairmanPHILIP A. LOOMIS, JR.JOHN R. EVANSA. A. SOMMER, JRIRVING M. POLLACK

GEORGE A FITZSIMMONS, Secretary

'CommlSSloner Sommer resigned from the Commission, effective April 2, 1976

For sale by the Superintendent of Documents, U S Government Printing OfficeWashington, 0 C 20402-Prlce $2 30 (paper cover)

Stock Number 046-000-00106-1Class Number SE 1 1 975

•

LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.

Sirs. On behalf of the Securities and Exchange Commission,I have the honor to transmit to you the Forty-First AnnualReport of the Commission covering the fiscal year July 1. 1974to June 30. 1975, In accordance with the provrsrons of Section 23(b)of the Secunties Exchange Act of 1934, as amended,Section 23 of the Public Utility Holding Company Act of 1935;Section 46(a) of the Investment Company Act of 1940; Section 216of the Investment Advisers Act of 1940; Section 3 of the Actof June 29. 1949 amending the Bretton Woods Agreement Act;Section 11(b) of the Inter-Amencan Development Bank Act;and Section 11 (b) of the ASian Development Bank Act

Respectfully,

RODERICK M HILLSChairman

THE PRESIDENT OF THE SENATETHE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.C.

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IV

~~

COMMISSIONERS ANDPRINCIPAL STAFF OFFICERS

COMMISSIONERS Term expiresJune 5

RODERICK M. HILLS of cant., ChairmanPHILIP A. LOOMIS, JR., of Calif.JOHN R. EVANS, of UtahA. A. SOMMER, JR., of OhioIRVING M. POLLACK of New York

Secretary: GEORGE A. FITZSIMMONS

Executive Assistant to the Chairman: DAVID R. BOYDROBERT H. CRAFT JR.RALPH C. FERRARA

PRINCIPAL STAFF OFFICERS

PETER H. SHIPMAN, Executive Director

RICHARD H. ROWE, Director, Division of Corporation FinanceNEAL S. McCOY, Associate DirectorWILLIAM C. WOOD, Associate DirectorMARY E.T. BEACH, Associate Director

STANLEY SPORKIN, Director, Drvrsion of EnforcementIRWIN M. BOROWSKI, Associate DirectorWALLACE L. TIMMENY, Associate DirectorTHEODORE SONDE, Associate Director

LEE A. PICKARD, Director, Dlvrsron of Market RegulationSHELDON RAPPAPORT, Associate DirectorFRANCIS R. SNODGRASS, Associate DirectorDANIEL J. PILIERO, II, ASSOCiate DirectorANDREW M. KLEIN, ASSOCiate Director

ANNE P. JONES, Director, DIVISion of Investment ManagementRegulation

SYDNEY H. MENDELSOHN, Associate DirectorJEAN W. GLEASON, Associate Director

AARON LEVY, Director, Division of Corporate RegulationGRANT GUTHRIE, ASSOCiate Director

HARVEY PITT, General CounselPAUL GONSON, ASSOCiate General Counsel

DAVID FERBER, Solicttor to the OommlssronS. JAMES ROSENFELD, Director, Office of Public Information

CHILES T. A. LARSON, ASSistant Director

19771979197819761980

v

JOHN C. BURTON, Chief AccountantA. CLARENCE SAMPSON, Associate Chief Accountant

J. RICHARD ZECHER, Director of Economic and Policy ResearchGENE L. FINN, Chief Economist, Office of Economic Research

BERNARD WEXLER, Director, Office of Opinions and ReviewWILLIAM S. STERN, Associate DirectorHERBERT V. EFRON, Associate Director

WARREN E. BLAIR, Chief Administrative Law JudgeFRANK J. DONATY, ComptrollerRICHARD J. KANYAN, Service OfficerALBERT FONTES, Director, Office of PersonnelJAMES C. FOSTER, Director, Office of Reports and Information

ServicesFRANKLIN E. STULTZ, Associate DIrector

RALPH L. BELL, Director, Office of Data Processing

VI

REGIONAL AND BRANCH OFFICES

REGIONAL OFFICES AND ADMINISTRATORS

Region t. New York, New Jersey.-Wlillam D. Moran, 26 FederalPlaza, New York, New York 10007.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, NewHampshire, Malne.-Floyd H. Gilbert, 150 Causeway St., Boston,Massachusetts, 02114.

Region 3. Tennessee, Virgin Islands, Puerto RICO, North Carolina,South Carolina, Georgia, Alabama, MISSISSiPPi, Florida, part ofLoulstana-c-Jule B. Greene, SUite 788, 1375 Peachtree St., N.E.,Atlanta, Georgia 30309.

Region 4. lllrnors, Indiana, Iowa, Kansas City (Kansas), Kentucky,Michigan, Minnesota, MISSOUri, Ohro, Wisconsin -William DGoldsberry, Room 1708, Everett McKinley Dirksen Bldg., 219S. Dearborn St., Chicago, lllinors 60604.

Region 5 Oklahoma, Arkansas, Texas, part of LOUISiana, Kansas(except Kansas Clty).-Robert F. Watson, 503 U.S. Court House,10th & Lamar Sts, Fort Worth, Texas 76102

Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colo-rado, New MeXICO, Utah.-Robert H Davenport, Two Park Central,Room 640, 1515 Arapahoe Street, Denver, Colorado 80202.

Region 7 California, Nevada, Arizona, Hawau, Guam -Gerald EBoltz, Room 1710, 10960 Wilshire Boulevard, Los Angeles,California 90024

RegIOn 8. Washington, Oregon, Idaho, Montana, Ataska-s-Jack HBookey, 3040 Federal Building, 915 Second Ave, Seattle, Wash-rnqton 98174

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware,District of Columbia.-Paul F Leonard, Room 300, Ballston CenterTower No.3, 4015 Wilson Boulevard, Arlington, Virginia 22203.

BRANCH OFFICES

Cleveland, Ohio 44199.-Room 899 Federal Office Bldg., 1240 E 9that Lakeside.

Detroit, Michigan 48226 -1044 Federal Bldg.Houston, Texas 77002.-Room 5615, Federal Office & Courts Bldg.,

515 Rusk Ave.

VII

Miami, Florida 33131.-SUIte 701 DuPont Plaza Center, 300 BiscayneBoulevard Way.

Philadelphia, Pennsylvania 19106.-Federal Bldg., Room 2204.600 Arch St.

St. LOUIS,MIssouri 63101 -Room 1452, 210 North Twelfth St.Salt Lake City, Utah 84111.-Room 6004, Federal Reserve Bank

Bldg .• 120 South State St.San Francisco, California 94102.--450 Golden Gate Ave., Box 36042

VIII

COMMISSIONERS

RODERICK M. HILLS, Chairman

Chairman Hills was born on March 9,1931, In Seattle, WashingtonIn 1952 he received his BA degree from Stanford Unlversrty and hereceived hrs LL.B. In 1955 also from Stanford. In law school he wasnamed to the Order of the COif. DUring the period 1955-1957, Mr.Hills served as law clerk to Mr. Justrce Stanley F. Reed, SupremeCourt of the U.S.• and during 1969-1970 he was a vtsrtmq Professorat the Harvard Law School. Mr. Hills was a foundrng partner of thelaw firm of Munger, Tolles, Hills and Hrckershauser, Los Angeles,California. Between 1971 and 1975 he was on leave from the firm toserve as Chairman of the Board of RepubliC Corporation. FromApril 1, 1975, until berng named Chairman, Mr. Hills served asCounsel to the Presrdent of the United States. Mr. Hills was co-chairman of the Domestic Council Task Force on Regulatory Reformfor the President. Mr. Hills was sworn in as Chairman of the Securi-ties and Exchange Commission on October 28, 1975, for a termexpiring on June 5, 1977.

PHILIP A. LOOMIS, JR.

Commissioner Loomis was born rn Colorado Springs, Colorado,on June 11, 1915. He received an A.B degree, With highest honors,from Princeton Unlversity in 1938 and an LL B. degree, cum laude,from Yale Law School in 1941, where he was a Law Journal editor.Prior to Joming the staff of the Securities and Exchange Oornrrussron,Commissioner Loornrs practiced law With the firm of O'Melveny andMyers rn Los Angeles, California, except for the period from 1942 to1944, when he served as an attorney with the Office of Price Ad-ministration, and the period from 1944 to 1946, when he was Associ-ate Counsel to Northrop Aircraft, Inc Commissioner Loornrs jomedthe Oomrnisaron's staff as a consultant rn 1954, and the totlowmqyear he was appointed ASSOCiate Director and then Director of theDIVISion of Tradmg and Exchanges. In 1963, Commissioner Loomiswas appointed General Counsel to the Commission and served In

that capacity until hrs apporntment as a member of the Commission.Commissioner Loomis IS a member of the American Bar ASSOCia-tion, the American Law Institute, the Federal Bar Association, the

rx

State Bar of California, and the Los Angeles Bar Assocratron. Hereceived the Career Service Award of the National CIvil ServiceLeague In 1964, the Securities and Exchange Commission DIs-tmqurshed Service Award In 1966, and the Justice Tom C. ClarkAward of the Federal Bar Association In 1971. He took office as amember of the Securities and Exchange Commission August 13,1971, and IS now serving for the term of office expiring June 5, 1979.

JOHN R. EVANS

Cornrrusarorrer Evans was born In Bisbee, Arizona, on June 1,1932. He received his B S degree In Economics In 1957, and hisM S degree In Economics In 1959 from the University of Utah. Hewas a Research Assistant and later a Research Analyst at theBureau of Economics and Business Research at the University ofUtah, where he was also an Instructor of Economics durinq 1962and 1963. He came to Washington In February 1963, as EconomicsASSistant to Senator Wallace F. Bennett of Utah. From july 1964through June 1971 Commissroner Evans was a member of the Pro-tessronal Staff of the U S Senate Committee on Banking, HOUSingand Urban Affairs, serving as minority staff director He took officeas a member of the Securities and Exchange Commission on March3, 1973, for the term expiring June 5, 1978

A. A. SOMMER, JR.

Commissioner Sommer was born In Portsmouth, Ohro on April 7,1924 He received hrs B A degree from the University of NotreDame In 1948 and hiS LL.B. degree from Harvard Law School In 1950.At the time he was appointed to the Commission, he was a partnerIn the Cleveland law firm of Calfee, Halter, Calfee, Griswold & Som-mer Mr Sommer was formerly Chairman of the American BarASSOCiation's Federal RegulatIOn of Securities Committee and amember of the Committee on Corporate Laws and Committee onStock Certrtrcates He was also a member of the Board of Governorsof the National ASSOCiatIOn of Securities Dealers, a lecturer onsecunties law at Case-Western Reserve Law School and a lecturerat various institutes and programs dealing With securities law, cor-poratron law and accounting matters Oornmrssroner Sommer wasformerly a member and Past-Chairman of the Corporation LawCommittee of the Ohio State Bar ASSOCiatIOn. He has authoredarticles dealing With corporate reorganization, conglomerate dis-closure and other secunnes and accounting tOPiCS He took officeas a member of the Securities and Exchange Comrnrssron onAugust 6, 1973, for the term of office expiring June 5, 1976

IRVING M. POLLACK

Cornrrusstoner Pollack was born In Brooklyn, New York, onApril 8, 1918 He received a B A degree, cum laude, from BrooklynCollege In 1938 and an LL.B degree, magna cum laude, from Brook-lyn Law School In 1942 Prior to JOining the Cornrmssron's staff heengaged In the practice of law In New York City after serving nearlyfour years In the United States Army, where he gained the rank ofCaptain Mr Pollack JOined the staff of the Cornmrssron's General

Counsel In October 1946 He was promoted from time to trrne toprogressively more responsible positions In that office and In 1956became an Assistant General Counsel. A career employee, Mr.Pollack became DIrector of the Drvrsron of Enforcement In August1972 when the SEC's drvisrons were reorganized. He had beenDirector of the Divrston of Trading and Markets since August 1965,and previously served as Associate DIrector since October 1961In 1967 Mr. Pollack was awarded the SEC Distinguished ServIceAward for Outstanding Career Service, and in 1968 he was a co-recrprent of the Rockefeller PublIC Service Award In the field of law,legislation and regulation Mr. Pollack took the oath of office onFebruary 13, 1974 as a member of the Securities and ExchangeCommission, and is now serving for the term exprrrnq June 5, 1980

XI

TABLE OF CONTENTS

Organizational chart.Commission and principal staff officersRegional and branch officesBiographies of Comrnissroners

Part 1

IMPORTANT DEVELOPMENTSMarket regulation

The Securities Acts Amendments of 1975The national market system.. ..RegulatIOn of clearing aqencres and transfer

agents ... . . .Munclpal secuntres ,Cornmlssron ratesBrokers and dealers ..Accounts and records

Commission rates ....Development of the national market system ...Consolidated tape .. ..Composite quotation systemShort sale regulationOption market regulation ..Uniform net capital rule.Development of uniform broker-dealer reporting

system .. .Key Regulatory reportProposed Rule 17a-18 ....Proposed Rule 17a-19 ..Formation of the report coordinating groupFinancial and operational reports.Assessment forms and proceduresRegistration formsTrading forms

Broker-dealer model compliance gUideDisclosure related matters .

Beneficial ownership and tender offers.Annual reports to security holders.

IV

VVII

IX

3333

4566778

1113141517

17171718181818191919191920

XIII

IMPORTANT DEVELOPMENTS-ContinuedProjectionsThe Rule 140 series

Rule 144Rule 145Rule 146Rule 147

Adoption of Rule 240Disclosure of 011 and gas reserves

Coordination with the Federal Power Com-rnrssion on filings which Include naturalgas esn mates

Gold purchasing and investingPOSSible disclosure of environmental and other

SOCially Significant mattersInvestment Companies

Mutual Fund distnbuuonImproved communication with InvestorsPrice competition at the underwriter levelPrice competition at the retail level

Variable life InsuranceStatus of broker-dealers as Investment advrsersInstitutional DisclosureSale of Investment adviser

Significant Cases Involving Secunties Acts.Silver and gold Investments ..Cornmisston litigation.

Part 2

2122222222232324

2424

25262626272728282929293435

THE DISCLOSURE SYSTEM 45Public offering the 1933 Securities Act 45

Information provided 45ReVieWing process 46Time for reqrstratron 46Financral analysis and examination 46Office of oil and gas 47Tax shelters 47DIVidend reinvestment plans 47

Small Issue exemption 47RegulatIOn A 48Regulation B 48Regulation E 49Regulation F 49

Continuing disclosure' the 1934 Securities ExchangeAct 49

Heqrstration on exchanges 49Over-the-counter reqrstration 49Exemptions 49Penodrc reports 49Proxy soucrtanons 49Takeover bids, large acqursmons 51Insider Reporting . 52

Accounting 52

XIV

THE DISCLOSURE SYSTEM-ContinuedRelations with the accounting professionAccounting and auditing standardsOther developments

Exemptions for mternatronal banksTrust Indenture Act of 1939Freedom of Inforrnatron ActFreedom of lntorrnatron Act Lrtiqatron

Part 3

REGULATION OF SECURITIES MARKETSRegulatIOn of exchanges

ReqrstratronDelrsunqExchange disciplinary action

Exchange rulesExchange mspectrons

New York Stock Exchange specialist inspectionChicago Board Options Exchange inspection.Amencan Stock Exchange Options program in-

specnonPreliminary inspection of contemplated

Philadelphia-Baltimore-Washington Stock Ex-change Option pilot

Supervrsion of the Natronal Assocranon of SecuntresDealers

NASD rulesNASD mspectionsNASD drsctplmary actionsReview of NASD drscrpnnary actionsReview of NASD membership actronNASDAQ Issuer removal

Expenses and operations of self-regulatory orqaruza-nons

Financial results of the NASDNASD budgetFinancial results of New York Stock ExchangeBoston Stock Exchange, Chicago Board Options

Exchange and Midwest Stock ExchangeAmencan Stock Exchange, Detroit Stock Ex-

change, PBW Stock Exchange and SpokaneStock Exchange

Cincinnati Stock Exchange, Intermountain StockExchange and Pacific Stock Exchange

Broker-dealer regulationReqrstrauonRecordkeepinqFinancial responsibilityBroker-dealer exarrunationsEarly warning and surveillanceTraining programRegulatIOn of broker-dealer trading In goldRegulatory burden on the small broker-dealer

53545557595961

656565666666676768

69

69

69707172727374

74757676

77

78

78787879797980828384

xv

REGULATION OF SECURITIES MARKET5-ContinuedClearance and settlement 85Securities Investor Protection Corporation 86

litigation related to SPIC 86Commission rule changes related to SPIC. 86

SECO broker-dealers 86Exemptions 87Other Commission rule changes and developments 88

Mortgage market exemptions 88RegUlatory problems posed by "going private" 88Foreign Access to United States Securities Mar-

kets 89Real estate Investment contract secunties . 89

Confirmation Requirements for penodic transactions 89Short seiling Into secondary offering 89

Part 4

ENFORCEMENT 95Detection 95

Complaints 95Market Surveillance 95

tnvesnqanons 96litigation mvolvmq Commission investigations 96Enforcement Proceedings 97Administrative proceedings 98Applications for relief from drsquauncatrons 101Trading suspensions 101Delinquent reports program 102CIVil proceedings 103Participation as amicus currae 115Criminal proceedings 116

Organized Crime program 119Cooperation With other enforcement agencies. 121

SWISS treaty 122Foreign restricted list 122

Part 5

INVESTMENT COMPANIES AND ADVISERS 127Number of registrants. 127Legislation 128Rules 128

Amendment to Rule 17d--1 128Amendment to Rule 17a-7 129Temporary Rule 6a-2{T) 129Investment company confirmation requirements 130Brochure rule 130Investment adviser record-keeping requirements 130

Regulatory safeguards-the NASD sales load rule 131Applications 131Other developments 133

"Money market" funds 133Sale of partrcipanons In certificates of deposit 133ASSignments of Investment advisory contracts 133

XVI

INVESTMENT COMPANIES AND ADVISERS-ContinuedRegistratIOn of foreign Investment companies 134NASD ann-reciprocal rule 134Two-tier real estate companies 135Variable annuity Illustrations 135Employee Retirement Income Security 136Securities depository system 136

Part 6

PUBLIC UTILITY HOLDING COMPANIESCornposttronProceedingsFinancing

VolumeFinancing of fuel and gas suppliesCornpetmve bidding

Part?

CORPORATE REORGANIZATIONSChapter X rulesSummary of acnvines ,Administrative mattersTrustee's rnvestrqanons and statementsPlans of reorganizationActivities with regard to allowancesIntervention In Chapter XI

PartS

SEC MANAGEMENT OPERATIONSOrqaruzatronal chargesInformation handlingConsumer servicesAcnvrty under Freedom of Information ActPersonnel management

HecrurtrnentPersonnel management evaluationTraining and development

Office spaceFmarrcral management

Part 9

141141141143143143143

149149150150151153156158

167167167168169169169169170170171

STATISTICS 175The secunnes Industry 175

Income and expenses 175Table 1 Broker-dealer Income and expenses 176Securities Industry dollar 176Chart. SecurJ!les Industry dollar 1974 177Assets and habihnes 179Table 2: Assets and nabruties of broker-dealers 178Broker-dealers, branch offices, employees 179Table 3. Location of broker-dealers 180Chart: Broker-dealers and branch offices 181

XVII

STATISTlCS-ContinuedSECD broker-dealer 182Table 4. Principal business of SECD broker-

dealers 182Table 5. Consolidated Revenues and expenses of

self regulatory agencies 183Financial institutions.. ... . . . . . . . . 186

Stock transactions.. .. 186Table 6: Common stock transactions and activity

rates of selected financial msutunons: 1967-1974 186

Stockholdrnqs 187Table 7. Market value of stockholdmqs of institu-

tional Investors and others 1967-1974 187Number and assets of registered Investment com-

panies 188Table 8: Companies registered under the Invest-

ment Company Act of 1940as of June 30,1975 188Table 9' Number of Investment companies: 1941-

1975 189Table 10: Investment company reqrstratrons ter-

minated 189Table 11. New Investment company registrations 190Private nornsured pension funds: assets 190Table 12 Assets of private norunsured pension

funds book value: 1967-1974 190Table 13. Assets of private noninsured pension

funds. market value: 1967-1974 191Private non Insured pension funds. receipts and

disbursements 191Table 14 Receipts and disbursements of private

non Insured pension funds: 1967-1974 191Securities on exchanges. 192

Exchange volume 192Table 15. Exchange volume 1974 192NASDAQ volume 194Table 16 Share volume and dollar volume by ex-

changes 194Special block distribution 195Table 17. Special block distributions reported by

exchanges 195Value and number of securities listed on ex-

changes 196Table 18 Securities listed on exchanges 196Table 19 Value of stocks listed on exchanges

1936-1974 197Securities on exchanges 197Table 20 Unduplicated count of securities on ex-

changes . 198Table 21 Securities traded on exchanges. 198

1933 Act reg rstratrons 198Effective registrations statements flied 198Table 22 Effective registrations 199Chart. Securities effectively registered with SEC 200

XVIII

STA T1STICS-ContinuedTable 23. Effective registratIOns by purpose and

type of security. fiscal 1975 201Chart Effective reqistratrons cash sale for ac-

count of Issuers 202Regulation A offerings 203Table 24: Offerings under Regulation A 203Real estate Investment trusts 203Cost of flotation of registered Issuers, 1971-1972 204List of all foreign corporations on foreign re-

stricted list 204Enforcement 206

Types of proceedings 206Table 25' Types of proceedings 206Table 26 Investigations of possible violations of

the acts administered by the Cornrnrssron 208Table 27: Administrative proceedings 209Injunctive actions: 1974-1975 209Table 28: Injunctive actions 209Criminal proceedings: 1974-1975 210Table 29: Criminal cases 210

Public nlrty holding companies 211Assets 211Table 30. Public utility holding company systems 211Fmancmq 212Table 31: Fmancrnq of holding company systems 212Table 32. Issuers of holding company system

securities fiscal 1975 213Corporate Reorganizations 214

Comrmsston particrpanon 214Table 33: ReorganizatIOn proceedings under

Chapter X of the Bankruptcy Act In which theCommission particrpated 214

SEC Operations. 216Net cost 216Chart. Appropriated funds vs. fees collected 217Table 34' Budget estimates and appropnatrcn 218

XIX

PART 1POR NT

DEVE~ P ENTS

MARKET REGULATION

During the past year, the Commissionundertook several actions of far-reachingImportance to the seountres Industry, thesecurities markets and the investing pub-lic. At the same time, the Congresspassed legislation enhancing and clarify-Ing the Commission's authority over thesecurities markets and the securitiesIndustry

Perhaps the most significant actiontaken by the Commission was ItS adop-non of Securities Exchange Act Rule19b-3 on January 23, 1975. That rulerequired the elrrrunatron of fixed commis-sion rates on exchange transactions as ofMay 1, 1975--endlng a practice whichhad existed for over 175 years on thenation's securities exchanges. The deer-sron to adopt Rule 19b-3 came afternearly a decade of study by the Com-mission, the Congress and many others.In adopting Rule 19b-3, the Commissionbecame the first federal requlatory agencyto substitute competitive pricing for apreviously sanctioned system of pricefixing within an Industry.

Among other things, the system of fixedcomrrussron rates was seen as hinderingprogress toward the implementation ofa national market system. The Comrrus-sron has continued ItS efforts toward thedevelopment of such a system, includingprogress toward the introduction of aconsolidated tape for reporting securitiestransactions and a composite quotationsystem.

PART 1IMPORTANT

DEVELOPMENTS

The Commission and the Congress havebeen acting together to take all necessaryand appropriate steps to assure thatsecuntres transactions are effected fairlyand efficiently at the best available price,that competition IS enhanced within thesecunties industry, and that informationwith respect to quotations and transac-tions be made more fully available tobrokers, dealers and Investors. Much ofthe Commission's work over the past yearhas been directed toward the realizationof those goals.

The Securities Acts Amendmentsof 1975

The Securities Acts Amendments of19751, enacted June 4, 1975, significantlyrevise and expand the Securities Ex-change Act of 1934 Among other things,the Commission IS directed to facrtitatethe establishment of a national marketsystem for securities and a nationwidesystem for the clearance and settlementof securities transactions, clarify andstrengthen the Commission's oversightrole with respect to self-regulatory or-ganizations, and provide for broad regu-lation of brokers, dealers, and bankstrading In mumcrpal secuntres. The 1975Amendments further contain new pro-visrons relating to fixed commrssron rates,trading on national securities exchanges,the payment for research services withbrokerage comrmssrons, and registrationand regulation of brokers and dealers 2

The National Market System The Com-

3

rmssion IS directed to facilitate the es-tablishment of a national market systemfor securities In accordance with thefindings and objectives stated In Section11A(a)(1) The heart of the national mar-ket system will be cornrnurucatron sys-tems that dtssimmate last sale andquotation information for secuntresqualified for trading In the national mar-ket system These communication sys-tems, which will link all markets forqualified secuntres, are to be designedto foster ettrcrency, enhance competition,Increase the information available tobrokers, dealers and Investors, tacrlrtatethe offsetting of Investors' orders andcontribute to best execution of such or-ders. To acrueve those objectives. theCommission IS granted junsdrction overpersons who, by direct or indirect use ofthe malls or any other instrumentality ofInterstate cornrnerce," are engaged In thevarious stages of collecting, processing,distributing or publishing, on a currentand continuing basis, intorrnatron abouttransactions In or quotations for any se-cunty (other than an exempted security)Those persons, who are termed securitiesinformation processors, and their acnvrtlesare subject to registratIOn and regulationby the Commission. The cornmrssron alsomay prescribe rules and regulations re-lating to securities processing activitiesby self-regulatory organizations, membersthereof, brokers or dealers which utrhzeany means of Interstate commerce

Certain new provisrons require theelimination of restrictive rules and prac-trees which either prevent brokers fromobtaining the best price for their custo-mers or hinder market-making activitieswithin the national market system. Suchprovrsions as Sections 6(b), 11A(c),15A(b), 19(b), 19(c), 19(e), and 23(a) seekto prevent any unnecessary or inappro-pnate regulatory burden on competitionand to balance the anti-competitivermplrcanons of any action by any self-regulatory organization or by the Com-rnrssron with the purposes and considera-tions of the Exchange Act. Furthermore,the 1975 Amendments expand the Com-mlssron's authority to regulate marketmakers, specialists, and other dealers

4

(including the authority to prohibit a firmfrom acting both as a dealer and as abroker In a security) to promote faircompetition among such persons andequal protection of all markets for qualr-ned securmes and of all exchangemembers, brokers and dealers.

The Commission IS directed to reviewany and all rules of natronal secuntiesexchanges which hrrut or condrtron theability of members to effect transactronsIn securmes otherwise than on such ex-changes and to report its conclusions toCongress. Institution of proceedings ISrequired where any such rule Imposes aburden upon competition not necessaryor appropriate In furtherance of the Ex-change Act.

The 1975 Amendments also containcertain powers which may be exercisedwith respect to trading In listed securitiesIn the over-the-counter markets. Addr-tronally, the national secuntres exchangesare permitted to commence trading in se-cuntres not otherwise listed by the issueron such exchanges after Commissionreview and approval

Section 11A(d) requires the establish-ment of a National Market Advisory Board.It IS to advise the commrssron on whatsteps are appropriate to facilitate estab-lishment of a national market systemand on significant regulatory proposalsmade by the Commission or any self-regulatory organization. It IS also directedto study the possible need for a new self-regulatory body, the National MarketRegUlatory Board, which would adminis-ter the national market system, and toreport ItS conclusrons to Congress

Requletion of Clearing Agencies andTransfer Agents. The 1975 Amendments(Section 17A) establish a system of regu-lation extending to all facets of the se-cunnes handling process, designed topromote prompt and accurate clearanceand settlement of securities transactrons.Clearing agencies must register withand report to the Commission, which Willreview the rules of such clearing agen-cies to determine whether they complywith the statute's objectives. The primaryenforcement and inspection responsibili-ties over clearing aqencres that are

banks IS assigned to whichever bankregulatory agency is the appropriate reg-ulatory agency. Rulemakmg authorityconcern 109 the safeguardmg of funds andsecurities by bank clearing agencies ISshared by the Commission and the ap-propriate bank regulatory agency.4

The Securities Exchange Act IS furtheramended to require transfer agents, otherthan banks, to register with the Com-mlssion. Bank transfer agents must regis-ter with the appropriate bank regulatoryagency. The Commission is granted broadrulemaking power over all the aspects ofa transfer agent's activities. Nevertheless,as with clearing aqencres, where a trans-fer agent IS a bank, mspecnon and en-forcement responsibilities are vested 10

the appropriate bank regulatory agencyand rulemakmg authority concern 109 thesafeguard 109 of funds and securities bybank transfer agents IS shared by theCommission and the appropriate bankregulatory agency.

Section 17A(e) requires the Com-mission to eliminate the physical move-ment of secunties certificates during thesettlement process. In addition, the Com-rmssron IS directed, in Section 12(m), tostudy the practice of registering securrties10 "street name," i.e., 10 a name otherthan that of the beneficial owner, and toreport to Congress its conclusrons.

MUniCipal Securities. New Section 15BInitiates a comprehensive pattern for theregistration and regulation of brokers,dealers and banks that buy, sell, or effecttransacnons 10 municipal securities aspart of their regular business 10 otherthan a fidUCiary capacity. Issuers of mu-nicipal securities contmue to be exemptfrom the registration provrsions of thefederal secuntres acts.

A MuniCIpal Securities RulemakmgBoard is created to prescnbe rules regu-latmg the acnvmes of brokers, dealersand municipal securities dealers relatmgto transactions 10 mumclpal secunnes,Its scope of authority and responsibilityIS defmed in terms of enumeratedpurposes and standards. Section15B(b)(2)(K), for example, sets forth therequirement that the Board establish theterms and conditions under which any

rnurucrpal secuntres dealer may sell anypart of a new Issue of municipal securitiesto a municipal securities investment port-folio durmg the underwriting period. TheCommission IS required to take affirma-tive action on rules proposed by theBoard and is authonzed to abrogate,add to, or delete from any Board rule.The commrssron may directly regulatefraudulent, manipulative, and deceptiveacts and practices pursuant to Sections10(b) and 15(c) of the Exchange Act.

The Board Will be comprised of repre-sentatives of broker-dealers, banks andthe public, mcludmg Issuers of and in-vestors 10 muruclpat securities. (Sec.15B(b)(1).) The procedures to be fol-lowed in the nomrnatron and election ofmembers of the Board are desrqned toassure fair adrnmrstratron of the Boardand fair representation of all segments ofthe municipal securities industry (Sec.15B(b)(2)(B). The Board IS authorized tohire appropriate staff and to assessmunicipal securities dealers to coverreasonable expenses (Secs. 15B(b) (2)-(I) and (J).

The Board's rulemakmg powers areextensive (Sec. 15B(b)(2)(AHK).) Thepurposes for which the Board can exer-cise its rulemaking authority include:prevention of fraudulent and manipulativeacts and practices; promotion of just andequitable principles of trade; establish-ment of standards for entry mto themunicipal sscuntles business: regulationof selling and underwntrnq practices;procedures for arbitration of intra-Industrydisputes; and deterrninatron of the fre-quency and scope of inspections ofmunicipal securities dealers by the bankrequlatory authorities With respect tobanks and the NASD with respect tosecunnes firms.

The Board does not have any power toconduct Inspections or to enforce its rulesInstead, the Securttles Exchange Act as-signs these responsjblhtres to the NASDfor securities firms which are members ofthe NASD (Secs. 15A(b)(7) and 15B(c)(7).Similarly, such responsibilities are as-signed to the bank regulatory agenciesfor municipal securities dealers wmcnare banks (Secs. 15B(c)(5) and 17(b).

5

As of June 30, 1975, the Commissionhad taken Initial steps to Implement thestatutory goals of Section 15B. On June12, 1975, the Commission announced thesolicitation of recommendations of in-dividuals for appointment to the Munic-rpal Securities Rulemaklng Board.s TheCommission plans to continue to worktoward the creation of a registrationprocess for sscunnes firms and banks en-gaged In the murucipal securities Industryas well as the establishment of cooperativeefforts with appropriate bank regulatoryagencies

Brokers and dealers that buy, sell, oreffect transactions In municipal securitiesand banks that buy and sell such se-cuntres as a part of a regular businessother than In a fiduciary capacity arerequired to register with the Commission(Sec. 15B(a)(1). If a bank engages in thebusiness of trading murucipal securitiesthrough a separately Identifiable depart-ment or divtsion, that department or di-vision rather than the entire bank canregister with the Commission (Secs3(a)(30) and 15B(b)(2)(1I). Brokers anddealers already registered with the Com-rnrssron by reason of their general se-cuntres business are not required tore-reqrster. No person IS permitted toengage In the business of trading Inrnumcipat securities unless registeredWith the Commission and the Commissionhas the authority, In accordance Withspecified procedures, to revoke theregistration of any person found to be inViolation of the Securities Exchange Act,or any rule of the Commission or theBoard (Sec. 15B(c)(2).

Commission Rates. The 1975 Amend-ments prohibit the Imposition of anyschedule or fixing of rates of commis-sions, allowances, discounts, or otherfees by a national securities exchange tobe charged by ItS members for effectingexchange transactions A temporaryexemption postpones such prohibitionfor odd-lot dealers or for a member actingas broker on the floor of a national se-cunnes exchange for another member.The Commission may permit a nationalsecurities exchange to Impose reasonablefixed commissions (1) prior to November

6

1, 1976, If such fixed rates are found tobe in the publrc Interest, and (2) afterNovember 1, 1976, if the Commissioninstitutes a proceeding and makes cer-tain deterrrunatrons, as set forth In Sec-tion 6(e). Additional provisions, such asSection 6(f) and Section 11A(c), grantauthority to the Commission to remedyproblems affecting the orderliness oftrading on exchanges

The elimination of fixed rates raisedquestions for Investment managers whomay be required to pay a broker for re-lated research services. To protect an in-vestment manager against a claim ofbreach of fiduciary obligation if he paidmore than the lowest available price forexecution and research services, Section28(e) permits him to pay a cornrrusstonfor executing a transaction above thelowest available price If he determines Ingood faith that It was reasonable consrd-ering the value of the brokerage andresearch services provided. The legisla-tive history of that provrsion makes Itclear that Section 28(e) applies only topayments made by a money manager toa member of a national securities ex-change, broker, or dealer for servicesrendered by that particular member,broker or dealer, and that It has no ap-plication whatsoever to a situation Inwhich payment IS made by an Investmentmanager to one broker or dealer forservices rendered by another broker ordealer."

Brokers and Dealers. A Significantamendment to Section 11(a) of the Ex-change Act prohibits, With certain ex-cepnons, any member of a nationalsecuntres exchange from effecting anytransaction on such exchange for its ownaccount, the account of an associatedperson, or an account over which It or anassociated person thereof exercises in-vestment discretion For members of anational securities exchange as of May 1,1975, the proscriptions do not applyuntil May 1, 1978. The Commission ISauthorized to regulate transactions exe-cuted off an exchange or otherwise notprohibited.

The 1975 Amendments expand thescope of the Commission's authonty un-

der Section 15(a) to Include the registra-tion and regulation of brokers and deal-ers who trade exclusively on a nationalsecurities exchange. With respect to newregistrations of all brokers and dealers,the Commission IS required within 45days either to Issue an order grantingsuch registration or institute a proceed-Ing to determine whether registrationshould be denied. Among other sectionsamended, secnon 15(b) authorizes theCommission to adopt uniform standardsfor persons engaged in the securitiesindustry.

Accounts and Records. Section 17 ofthe Exchange Act has been expanded toprovide for record-keeping and reportingrequrrements of the various new regu-lated entities and that certified tmancralfinancial statements of brokers and deal-ers be filed with the Oommlssron andsent to their customers. Section 17(e)(2)permits the adoption of rules prescribingthe form and content of financial state-ments filed pursuant to the Exchange Actand the accounting principles and stand-ards employed in their preparationSection 17(f) requires, in part, (1) theImplementation of a system of reportinginformation about missing, lost, counter-feit, or stolen sscunnes and (2) the finger-printing of the partners, directors, officers,and employees of every member of anational securities exchange, broker,dealer, registered transfer agent, andregistered clearing agency.

Commission Rates

As noted above, the Commission, be-fore passage of the 1975 Amendments,adopted Rule 19b-3,7 eliminating fixedcomrnissrons on exchange transactionsas of May 1,1975. The Commission madea preliminary announcement on August27, 1974,8 of ItS plan to eliminate fixedcornmrssron rates. In September the Com-mtssron formally requested each nationalsecurmes exchange to effect necessarychanges in ItS constitution, rules andpractices so as to eliminate those ele-ments which required exchange membersto charge any person any fixed rate ofcornmrssron.v Only one national securi-

ties exchange indicated that It wouldcomply With the Commission's request,other national sscunnes exchanges in-dicated that they would not comply vol-untarily With the Commission's request.Consequently, the Commission proposedRules 19b-3 and 10b-22 under the Ex-change Act for comment and heldhearings to receive Views, data and ar-guments from interested persons on boththe proposed rules and the proposedeffective date of May 1, 1975.

.......As a result of the hearings, the Com-mission adopted Rule 19b-3 With modi-fications from the form first published forcomment Specifically, the required elimi-nation of "floor brokerage" rates wasdelayed until May 1, 1976. The Commis-sion determined not to adopt proposedRule 10b-22, which related to agreementsamong exchange members for the settingof brokerage rates. The Commission'sadministrative action has been legisla-tively affirmed In Section 6(e) of the 1975Amendments.V After carefu I consideration of all the

arguments advanced In the hearings onRule 19b-3, of the numerous studies madeconcerrunq cornmlssron rates, and of therecent experience of both the Commis-sion and the securities Industry Withfixed rates, the Cornrnisaron set forth asItS basic reason for the adoption of Rule19b--3 the conclusron that, under presentcircumstances, the free play of competi-tion can provide a level and structure ofcornmrssion rates which would betterserve the Interests of the Investing public,the securities markets, the secunnes in-dustry, the natronal economy and thepublic interest than any system of pricefixing which can reasonably be devised.lO

In March 1975, the Oornrnlssron an-nounced a program to morutor the Impactof ItS decision to eliminate fixed rates ofcomrrusslon.'! The program IS designedto determine what effect the absence ofany schedule or fixed rates of commis-sions may have on the pubuc Interest,protection of Investors, and maintenanceof fair and orderly markets. The program,as announced, Included publication forcomment of a proposed rule under theExchange Act reqUiring certain broker-

dealers to file with the Commission reve-nue and expense data and relatedfinancial and other information and noti-fication of changes In membership in-terests In national securities exchanges

The monitoring program has beenanalyzing a sampling of firms to developinformation on effective cornmrssron ratesbeing paid by mdrvtdual and institutionalcustomers to different types of broker-dealer firms; reviewing volume reportsfrom national securities exchanges andthird market firms to determine the drs-tnbution of trading among the variousmarket places; compiling additional in-formation about revenue sources andexpenses of national securities exchangesand registered national securities asso-ciations; and studying the Income, ex-penses, assets and liabilities of specialistsand the activity of certain stocks.

On May 2, 1975, the Oornmrssron an-nounced the adoption of Rule 17a-20and related Form X-17A-20, the approvalof two plans submitted pursuant to para-graph (a)(3) of Rule 17a-20, and theImplementation of other aspects of theprogram to monitor the Impact of theehmmatron of fixed ccmrrussron rates onexchange transactions 12

For the months of May and June, NewYork Stock Exchange (NYSE) broker-dealers Incurred a revenue loss fromcornrrussron rate discounts of approxr-mately $42 million. Thrs revenue loss wasapproximately 7.6 percent of total se-cunnes commission revenue and 4 per-cent of total revenue dunnq thiS periodlndivrdual customers paid slightly moreon small size orders and slightly less onlarge orders. The net effect in June wasa decline averaging 1.5 to 2 percent Inthe cornrnlssron rate charged on all in-divrdual orders. Institutional customers,on the other hand, received discounts Inall order size categories and receivedan average discount of 19 5 percent In themonth of June. The experience With com-petitive rates for non-NYSE firms durrnqthe May and June period was Similar tothat of NYSE member firms.

Based upon the preliminary and in-complete evidence of two months'experience (May-june, 1975) With com-

8

petitrve rates during a period of risingtrading volume, historical trading pat-terns among exchanges and over-the-counter markets appear not to havealtered Similarly, the tmancral conditionof self-regulatory organizations does notappear to have been materially affected.

Development of the NationalMarket System

Advisory Committee on the Implementa-tion of a Central Market System. Asdescnbed In last year's Annual Report,13the Commission established an AdvisoryCommittee on the Implementation of aCentral Market System to assist It In con-nection With ItS proposals for a centralmarket system and to ensure that such asystem would meet the needs of thenation's capital markets In the future,consistent With the publrc Interest and theprotection of Investors.

Specrtrcalty, the Committee was askedto study and to submit recommendationsto the Cornrnissron on such matters as:

a. The appropriate structure forregulatory supervrsron of the centralmarket system;

b The nature and scope of theOomrmssron's role during the processof Implementing the central marketsystem;

c. The ways in which a central mar-ket system should be structured Inorder effectively to meet the needs ofour capital markets, the public interest,the protection of investors and themaintenance of fair and orderly marketsfor securities;

d. The needs and perspectives ofusers of a central market system, in-cluding Issuers of and Investors Insecurities, as well as securities pro-tessronats: and

e. The appropriate resolution offundamental policy Issues relating tothe central market system's operations.The Committee, composed of twelve

persons, eight of whom are from the se-curities Industry, was assisted by mem-bers of the Oommlssron's staff The staffattempted to Identify for the Committeea number of unresolved Issues which the

Committee might consider, including(1) the registration requirements andcaprtal standards appropriate for market-makers granted access to the system,(2) the responsibthtres of market-makerswhen acting as agents in the system;and (3) the responstbtlrtles of market-makers acting as dealers In the system

Certain structural questions were alsoraised: Whether lrrrut orders for pubuccustomers should be held In a consoli-dated limit order book and, If so, whoshould be permitted access to the book,whether specialists or market-makersshould be prohrbited from dealing directlyWith public customers; and how the roleof transactions between customers wouldbe effected Without the use of brokers orspecialists In the central market system.In addition, the staff suggested that theCommittee consider rules on auctiontrading and priorities for public custom-ers' orders in the new central marketsystem.

In a preliminary statement Issued De-cember 11, 1974, 14 the Committee notedthat Its suggestions would be made With-out regard to whether It was feasible toutrhze exrstinq technology to ImplementItS suggestIOns and that although notunanimous its preliminary views didreflect the sense of the Committee as awhole. Particular emphasis was placedon auction-market principles in a centralmarket system, which were consideredthe most effective means of encouragingcompetition among buyers and sellers.The preliminary statement of the Com-mittee set forth specific conclusionswith respect to specialists' net capital,market oontinuity and public preferanceobligations, outlined the manner in whichlimit orders entered with specialistsshould be treated, and descnbed possibletrading limitations to be imposed onspecialists. Stressing the importance ofpreserving the dealer function of brokers,the Committee recognized the importanceof the role played by over-the-counterdealers in the markets and the necessityof providing an adequate opportunity andIncentive for their continued participationin a central market system.

On July 15, 1975, the Comrmttee sub-

mltted to the Commission, In preliminaryform, a Summary Report of its finalconclusrons The Summary Report re-emphasized that the views enunciatedwere not unanimous or endorsed by allmembers without reservation

The Summary Report defined the ob-jectives of the central market system asfollows:

a To provide all Investors WIth themaximum opporturnty to buy and sellsecuritres at the best possrble price,

b To provide the depth and Irqutdrtynecessary to tacrlrtate the ralsrnq ofcapital by issuers; and

c To provide a mechanism for theconsurnrnanon of transactions at areasonable cost.

To accomplish these objectrves, theSummary Report envlsioned that the cen-tral market system must include all trans-acuons In securities listed on exchangesand permit access to all specrahsts,qualified market-makers and qualifiedbroker-dealers

The Committee emphasized thatauction-market principles, including pref-erence for all public orders, would beessentral to the central market systemThe system's rules, according to theSummary Report, should provide that allorders entered for the account of personsother than brokers or dealers would havepreference over orders entered by pro-tesstonals. Among system professionals,however, the orders of specralrsts andmarket-makers would be permitted todisplace orders of other broker-dealersdealing for their own account

An Important role was recommendedfor specialists on the various stockexchanges. The Cornrruttee also recom-mended that the system permit partici-pation of all market-makers, includingthose now dealing In the third market(i.e , over-the-counter trading In secun-nes listed on exchanges). The reportspelled out In some detau respcnsrbrlrnesof specialists and market-makers enter-ing quotations in the system, includingtheir minimum net capital. The SummaryReport indicated that there should betrading and competition among special-

9

IStS and market-makers dealing in thesame secuntres.

The Summary Report stated that bothspecialists and market-makers should berequired to maintain continuous, fair andorderly markets In those securities Inwhich they are registered to deal. TheCommittee, however, drew an Importantdistinction between the two. specraltstswould be assigned to deal In particularsecunues, so that at least one specialrstwould be responsible for maintaining amarket in every listed security; registeredmarket-makers would be permitted to se-lect the secunties In which they dealtMarket-makers would also be permittedto deal with all types of customers, whilespecialrsts would be prohibited from deal-Ing directly with institutional customersand with insiders, officers and directorsof the Issuers of the securities In whichthey made markets

Thrs restriction on speciausts' dealingswas seen to be directly related to theirrole as agents for the limit orders of pub-uc customers. The Committee envrsronedthat limit orders would be guaranteedexposure to all transactions In systemsecunues only if they were placed withspecransts. Although market-makerswould be permitted to hold and executelimit orders, they would guarantee ex-posure of such orders to all system trans-actions only by usmq a specialtst. TheSummary Report recognized "best execu-tion" as the primary duty of brokers In thesystem, detailing certain aspects of thatduty In the context of an operationalcentral market system. The SummaryReport also indicated that the systemshould maximize the opportunities forbrokers to execute orders for their cus-tomers without a specianst or otherqualified market-maker participating Inthe transaction.

A central self-regulatory authority, withthe responsibility and authority to Imposerules and regulations on all specrausts,market-makers and broker-dealers trad-Ing In listed securities was deemed Im-portant by the Committee. Early In ItSconsrderatron. the Committee had recom-mended that such a body be establishedas soon as posstble, In view of the opera-

10

non of the consolidated tape, the diS-semrnatron of quotations In listed se-cunnes and the unftxrnq of commissionrates. SUbsequently, however, the Com-mittee recognized that creation of sucha board would be inappropriate so longas the National Market Advisory Board,called for by the seounnee Acts Amend-ments of 1975, was assiqned responsr-bility to study the governance of thecentral market system. Therefore, it urgedthat the Board and the Oomrrussronmonitor the events taking place towardthe development of a central marketsystem to Insure the existence of an ap-propriate regulatory framework.

The Committee believed the most ef-ticrent and effective structure for govern-Ing the central market system would beprovided by the merger of presentlyexrstrnq exchanges dealing In secuntrssto be Included In the system. The Com-mittee pointed out, however, that while atrue central market system Involves someform of centralized control, a merger ofthe exchanges would not be a pre-requisrte

The Committee concluded ItS summaryreport With a series of recommendationsfor Oornrnlssron action. Included wererecommendations, made early In theCommittee's deliberations, for Impositionof rules dealing with short-seiling andminimum capital requirements for spe-cralrsts and market-makers. The Com-rmssron has already taken action on thesematters. In addition, the Committeerecommended that all specratlsts andmarket-makers be required to maintainbona fide, continuous and competitivetwo-srded quotations for each securityIn which they make a market and thatsuch quotations bear a reasonable rela-tionship to the last sale in those secunnes.

The Committee recognized as par-ticularly important ItS recommendationthat the New York Stock Exchange andthe American Stock Exchange be per-mitted to retain their present rules caus-Ing members to bring all trades Insecurities on those exchanges to therespective trading floors. The Committeerecognized that such rules pertaining tospecmc market centers Will be map-

propriate in the central market systembut concluded that they should not beeliminated until such time as a similarrule can be imposed for the system as awhole A system-wide rule was thoughtto be appropriate when a compositequotation system was In operation, fa-Cilitating members' efforts to achieve bestexecution, and when a consolidated limitorder book was established, makingpossible the execution of public ordersin all market places.

The Commission expects to receive afinal report, with dissenting Views, fromthe Committee In the fall of 1975. It ISanticipated that the work of the CommitteeWill constitute a beginning POint fordeliberations by the new NatIOnal MarketSystem Advisory Board called for by theSecurities Acts Amendments of 1975.15

Consolidated Tape

As previously reported.!" a plan for theconsolidated reporting of price and vol-ume data, filed jorntly by the Amerrcan,Midwest, Pacific, PBW and New YorkStock Exchanges and the National As-sociation of secunues Oealers, Inc.("NASO"), was declared effective by theCommission as of May 17, 1974.17 Thejoint industry plan (the "Plan") providedfor a tape consisting of two separateticker "networks," displayed concur-rently. Network A would report transac-tions In stocks listed on the New YorkStock Exchange ("NYSE") and NetworkB, transactions In stocks listed on theAmerican Stock Exchange ("Amex") andcertain stocks listed only on the partici-pating regional exchanges. Both networkswould report all trades in their respectivestocks, regardless of whether they tookplace on an exchange or In the so-called"third market." In addition, Informationdisseminated over Networks A and Bwould also be available through in-terrogation devices, enabling investorsand market professionals to obtain themost recent last sale price for any stockcovered by the system regardless of themarket of execution. The system was de-signed to be compatible With equipmentpresently found in most brokerage offices.

The Plan contemplated that the con-solidated tape would be put Into opera-tion In two phases beglnnrng Within 20weeks after Commission approval of thePlan. The pilot phrase was to be a 20-week period of experimental operationcovering a limited number of stocks, afterwhich full operation of the consolidatedtape would begin, by reporting and dis-seminating last sale data of eligiblesecurities to be Included in Networks Aand B by means of a high-speed line.Thrs would permit reception of reportedinformation on a current baSIS, regardlessof any delay In the dissemination of theinformation over Networks A and Bcaused by the servicrnq of interrogationdevices.

Actual Implementation of the consoli-dated tape lagged behind the 40-weektime period contemplated by the Plan,pnncipally because the Original estimatewas overly optimistic and failed toanticrpate the technical problems in-herent In the development of the newcomputer system that was required. Also,both the sponsors and the Commissionbelieved that certain regUlatory prob-lems should be addressed before theImplementation of the consolidated tape.

Phase I of the consolidated tape sys-tem was Originally scheduled to com-mence on October 4, 1974. It was deferredfor a two-week period by the Commission,In response to a request by the NYSE, topermit resolution of certain mechanicalproblems the NYSE believed would havearisen as a result of the Commission'samendments to ItS short sale rules-Securities Exchange Act Rules 3b-3,10a--1, and 10a--218 The amendments tothe short sale rules had the effect ofprohibrtmq short sales of a securitylisted on an exchange at a price belowthe last pnor sale (a "minus tick"), or atthe last sale price if the preceedingdifferent sale price had been at a higherprrce (a "zero minus tick"), as reportedon the consolidated system. The amend-ments applied the Commission's shortsale regUlation, for the first time, In auniform manner to all markets In whichtransactions In listed securities occurred,and were part of the Oornmrssron's efforts

11

to resolve certain regulatory problemsbefore the Implementation of the con-solidated tape But after reviewing theproblems created by the uniform shortsale rule, the Commission determined tosuspend the operation of the amend-ments, and the pilot phase of the con-solidated system began operation asrescheduled on October 18,1974

Although full operation of the con-solidated tape system was Originallyscheduled for February 21, 1975, It be-came obVIOUSto all the Plan participantsby mid-January that the February 21deadline could not be met. On February19, 1975, the Consolidated Tape Associa-tion ("CTA"), the governing body for theconsolidated system, Informed the Com-mrssion that, because of testing de-lays and recent problems with the MarketData System of the NYSE, the CTA ex-pected to be able to Implement onlycertain elements on or before June 16,1975.19 Specrncally, It expected that onor before June 16, 1975' (1) last sale dataregarding transactions in all eligible se-cuntres required to be Included In Net-work A of the consolidated system wouldbe reported In accordance with the Planby all Plan participants (other than theAmex) and by four other "reportingparties" (r.e., the Boston Stock Exchange,the Cincinnati Stock Exchange, the De-troit Stock Exchange, and the InstitutionalNetwork Corporation ("Instinet"» to theSecurities Industry Automation Corpora-tion ("SIAC"), the Plan processor, and(2) such last reports would be transmittedby SIAC to vendors of market informationon a low-speed basis. The CTA's letterindicated that maximum effort was beingexpended on making Network A opera-tional as soon as possible, and that SIACwas continuing to program for therequirements of Network B and thehigh-speed line.

On March 3, 1975, after indicating thatit would not object to the delay, the Com-mission stated that It was disappointedby the delay but that It understood thatcertain of the reasons for the delay werebeyond the control of the CTA. The Com-rnissron also stated that the staff wouldbe making inquiry of the CTA as to the

12

reasons for the delay and the future plansof the CTA with respect to the full imple-mentation of the Plan. The CTA responseof March 26, 1975, to staff mqurries re-garding the delay, which detailed de-scnptions of the reasons for testingdelays, was released by the Oomrrussronon May 1, 1975.20The Oornmlssion issuedan Interpretative release specrtymq therequirements 'regarding displays on in-terroqauon systems,21 which helped re-solve questions concerning applicationof Rule 17a-15 to vendors and problemsCited by the CTA In Its March 26 letter.22

Between February and June 1975, thePlan participants conducted an extensivetest program to Insure the accuracy, re-liability and integrity of programming forNetwork A. Personnel from the variousexchanges, SIAC and the vendors sub-jected the system to a broad range ofSimulated market condiuons. All the testsproved successful, and the CTA was ableto fully Implement Network A reportingon a low-speed baSIS on June 16, 1975.The CTA IS currently continuing work onthe remaining elements of the consoli-dated system-Network B and the hlgh-speed line. A final date, however, hasnot yet been set for full implementationof all elements of the consolidated system.Implementation of Network A of the con-solidated tape, while not constitutingfull Implementation of the Plan, IS amajor step toward the eventual achieve-ment of a central market system. Trans-actions executed In markets other thanon the floor of the NYSE are now appear-Ing on moving tickers for the first time.Such transactions are Indicated on thetape by an ampersand tollowrnq thesymbol for the NYSE-listed stock Theampersand, In turn, IS followed by a letterthat Identifies the specrnc market place.

Those letters are' M for Midwest; Pfor Pacrnc: X for PBW; C for Cincinnati;T for NASD (r.e., the third market); ando for Insllnet. The Boston Stock Exchange-Identified by the letter B--was addedto the consolidated tape on July 14, 1975,and the Detroit Stock Exchange--Identi-fled by the letter D-IS expected to beadded to the system sometime In latesummer or early fall, 1975.

The inclusion of NYSE, regional andthird market transactions on a singleconsolidated tape, even on the limitedscale currently In place, enables investorsto make more Informed Judgments regard-ing which market centers offer the mostadvantageous price at a particular time.Even though the Information presented onthe consolidated tape IS essentially his-toncal information, i.e., prices at whichtransactions were effected In the pastrather than prices at which future trans-actions may be effected, such informationshould be useful to Investors In indicatinggeneral trends and temporary price dis-parities between market centers.

In addition to its benefits to Investors,the consolidated tape represents a sig-nificant technological achievement Inthe processing of securities information.The consoltdated tape IS not Just a me-chanical merger of exrstinq ticker net-works but a completely new computersystem tying together all the nation'smarket centers. Sophisticated and com-plex programs had to be developed toInsure that the different equipment andprograms of various exchanges andthe NASD could be accommodated, and,perhaps more important, to Insure that alllast sale reports would be reported on theconsolidated tape in the proper se-quence. All the complex programmingchanges were accomplished successfully,and the CTA and the Commission arepresently looking forward to Implementa-tion of the high-speed line, which for thefirst time Will provide Investors with lastsale reports on a current baSIS, even Inthe event of delays In ticker disseminationdue to mechanical limitations.

Composite Quotation System

When the Commission issued ItS firstproposed rule on composite transactionreporting in March 1972, it also proposeda companion rule-e-Secuntles ExchangeAct Rule 17a-14-governlng the de-velopment of a composite quotationsystem.23 Rule 17a-14, as Originallyproposed, would have required all na-tional securities exchanges to makequotations of their registered specialists

available on a current and contmumqbaSIS to vendors of market Information.Similarly, the NASD would have beenrequired to make available to such ven-dors on a current and continuing baSISquotations of market makers With respectto over-the-counter quotations In se-cunties listed or traded on exchanges.

On August 14, 1974, the Commissionreleased for public comment a substan-tial revrsion to proposed Rule 17a-1424

as a result of the many comments whichhad been received, the recommendationsof the Commission's Advisory Committeeon Market Disclosure regarding a com-posite quotation system, and the Com-mission's experience With Implementationof a consolidated transaction reportingsystem under Rule 17a-15.

The major change In Rule 17a-14 fromthe original proposal was that the revisedrule required the reporting of quotationspursuant to a plan Similar to that requiredby Rule 17a-15. Accordingly, Rule 17a-14,as revised, would have required everynational securities exchange and theNASD to report to the Commission quota-tions of their market makers or specialistsIn listed securities. The quotations wereto be available on a real-time, currentand continuing baSIS.

The Commission received many publiCcomments With respect to ItS August 1974proposal. After considering all of the pub-lic comments, the Commission determinedto adopt a new approach desiqned to in-crease the availability of quotation in-formation without potentially burdensomefederal requlation. On March 11, 1975,the Commission announced that It hadrequested all national secuntrss ex-changes to effect changes in their rulesand practices to be effective on or beforeMay 1, 1975, to eliminate those whichrestricted, or had the effect of restricting,access to or use of quotation informationdisseminated by such exchanges to anyquotation vendor.25 At the same time, theCommission announced that It was defer-ring further consrderation of proposedRule 17a-14 until It had had an oppor-tunity to observe the effects of eliminatingrestrictions on quotation drssemmatron.

In announcing ItS new approach, the

13

Oommrssron reiterated ItS view that quo-tation information, such as that currentlyprovided by some exchanges to theirmembers, IS essential to broker-dealers,whether members or not, In dischargingtheir duty of reasonable diligence In theexecution of customers' orders.26 By re-questing the elimination of exchangerestrictions on quotation drssernrnanon,the Commission Intended that as a resultof competitive forces a composite quota-tion system would develop with a mini-mum of federal regulation.

On May 7, 1975, the Commission an-nounced that It had received responses(to ItS March 11, 1975 request) from allnational secuntres exchanges and that allexchanges either had taken the acllonrequested by the Commission or hadInformed the Commission that they didnot have any rules or practices whichrestricted access to, or use of, such In-torrnatrcn.s" In making ItS announcement,the Commission added that, In ItS View,the actions taken by the various ex-changes would tacrlrtate the establishmentof a central market system, as contem-plated by the Market Structure State-ment 2H and the PolIcy Statement,29 bymaking possible the composite display ofquotation information for multiply tradedsecurities.

Short Sale Regulation

On March 6, 1974, the Commissionproposed amendments to Securrties Ex-change Act Rules 3b-3, 10a-1 and 10a-2In order to establish uniform short salerules, which were considered to be anecessary element of the consolidatedreporting system.30 After analyzing thecomments received on the proposedamendments and concluding that no seri-ous objections had been raised, the Com-mission announced their adoption to beeffective October 4, 1974 (the "OctoberAmendments")."! In a letter to the Com-rrussron, dated October 11,1974, the NewYork Stock Exchange asserted that theOctober Amendments would create in-surmountable technical, operational andregulatory problems

In view of the problems noted by the

14

NYSE, the Commission temporarily sus-pended the effectiveness of the OctoberAmendments to Rules 10a-1 and 10a-2.32The effect of that suspension was to leavethe regulallon of short sales on exchangemarkets as it had existed before adoptionof the October Amendments, while theCommission continued to study the mostefficient, effective and fair manner toachieve uniform short sale regulation Ina central market system.

On March 5, 1975, the Commissionpublished for comment additional pro-posed amendments to Rule 10a-1, (the"March Proposals").33 The Commissionnoted that many persons believed thatshort selling should not be regulated atall, except to the extent It IS used as amanipulative devlce.34 Consrderatron ofsuch arguments, however, had beenhampered by a lack of current statisticalstudies of the pattern of short seiling intoday's markets, particularly on regionalsecurities exchanges and In the thirdmarket. In any event, the Commissionthought It would be premature to considerelimination of short sale regulation (alto-gether or for any class of short sellers)before additional progress was made to-ward the establishment of a centralmarket system. Nevertheless, the Com-mrssron specmcalty encouraged com-ments on the feasibility and probableeffects of exempting from regulation shortsales by persons other than brokers anddealers, or of eliminating short saleregulation entirely.

The Commission acknowtedqed in theannouncement of the March Proposalsthat use of the proposed rules In the con-solidated system might pose certainoperational problems for those exchangema'rkets which regularly experienced ahigh volume In reported securities buthad not yet modernized their facilities sothat access to intormanon reported in aconsolidated system was not immediatelyavailable on the floor of the exchange.For that reason, the March Proposalsprovided, as an alternative to the Com-mrssron's general rule, that any nationalsecurities exchange, by rule, might pro-hibit short sales of reported sscunnesIn ItS own market (i) below the last sale

price on that exchange, or (ii) at the lastsale price, unless that price was abovethe next preceding different sale price.The March Proposals also provided thatshort sa es of reported secuntres effectedon any exchange having such a rulewould have to comply With that exchange'srule and that such compliance wouldconstitute compliance With paragraph (a)of Rule 10a-1, as amended.

Network A of the consolidated systemcommenced operation on June 16, 1975.In order to ensure comparable short saleregulation of all transactions in reportedsecuntres In all markets reporting trans-actions to that system, the Commissionannounced on June 12, 1975, the adop-tion of amendments to Rules 10a-1 and10a-2 (effective June 16, 1975), whichwere Identical, In all material respects, tothe March Proposals.35

Paragraph (a) of Rule 10a-1 will notapply to short sales of any reported se-cunty until last sale information on thatsecurity is made available to vendors ofmarket information on a real-time basis.When such information becomes avail-able on a real-time basis, paragraph (a)of Rule 10a-1 will govern short sales Inall markets (including transactions ef-fected on national secuntres exchangesand In the over-the-counter market)Additionally, national securities ex-changes will have an option either toadopt their own short sale rules, subjectto the Commission's power under Section19 of the Securities Exchange Act, or begoverned by paragraph (b) of Rule 10a-1,the tradrnonal form of the rule, whichapplies only to short sales effected onnational securities exchanges.

Option Market Regulation

By the end of fiscal year 1975, theChicago Board Options Exchange, Inc.("CBOE"), whose option plan were ap-proved by the Commission In the preced-ing fiscal year, had 1,025 members andlisted call options on 67 stocks.36 Theaverage dally volume of options tradedon CBOE reached approximately 53,000contracts, representing 5,300,000 sharesof the underlying stocks."

DUring the past fiscal year, the Com-mission declared effective option plansof two other exchanges, the AmericanStock Exchange (Amex) and the PBWStock Exchange, Inc. ("PBW"). The Com-rmssion declared the Amex option planeffective In December 1974,38 and thatexchange began trading call options onJanuary 7, 1975. By the end of the fiscalyear, the Amex listed options on 40stocks, and had an average dally volumeof 17,016 contracts, representing 1,701,600shares of underlying stock.

In May 1975, the Oomrrussron declaredPBW's option plan effective and that ex-change began trading options on June27,1975.39

In addition to the three exchanges Witheffective option plans, the Pacrtrc StockExchange ("PaCifiC") announced ItS in-tention to initiate options trading and heldseveral discussions with the Oommrssron'sstaff regarding ItS preliminary work on aplan for such a program.

DUring the fiscal year, the CBOE, WithCommission approval, made numerouschanges In ItS option plan under Rule9b-1. For example, In response to Com-mission and CBOE concern about emerg-ing trading patterns in options where theexercise price had fallen substantrallybelow the market price, the CBOErestricted opening transactions In suchoptions.w At the same time, the CBOEprohibited market makers from quotingspreads In such options greater than Y4of $1.41 It also adopted provrsions totacrlrtate more orderly openings of trad-Ing and to eliminate market-makers'ability to gain priority over public ordersThe CBOE also strengthened ItS netcapital and margin rules.

The Arnex option plan, like that of theCBOE, calls for trading In options onstocks with a substantial number ofshares outstanding, Widely held and ac-tively traded. Members of the Amex, atthe time ItS option plans were declaredeffective, automatically obtained optiontrading pnvileqes on that exchange. Ingeneral, the Amex applied contractstandardization methods substantiallyIdentical to those used by the CBOE-that IS, options were made fungible by

15

limiting the contract variables such asexpiration months and the exercise, or"striking", prices.

The Amex options generally are tradedIn a manner very srrmlar to that for othersecuntres traded on that exchange. A rna-jor difference between the Amex's pro-gram and the CBOE's IS that the Amexuses, with certain modifications, a singlespecralist both to make a market and tohandle agency limit orders In Its options,while the CBOE splits the specraustsfunctions between a market-maker(dealer) and a board broker, performingthe agency tuncnon.« One modificationAmex made In ItS floor trading procedureIS that ItS registered floor traders whotrade options are required tp trade In away that assists the spscraust In main-taining a fair and orderly market In op-tions, and may be called upon by eithera floor official or floor broker to makecompetitive quotations In the market.

The PBW's program IS Similar to that ofAmex and CBOE In such areas as thecharacteristics of underlying stocks forItS options, clearing principles, and con-tract term standardization for ItS options.like the Amex, the PBW utruzes its exist-Ing specialrsts for market making in ItSoptions and requires ItS regIstered floortraders to assist the specralrsts PBW'splan, however, Involves for the first timeoptions traded on the same exchange asthe one on which the underlying secuntresare traded Because of this distinctivecharacteristic, the PBW has separated ItSoption floor from the rest of Its tradingfloor to prevent VIsual and direct audi-tory comrnumcatron between the twotrading areas. The PBW also protubrts ItSfloor members who have learned ofcertain large transactions about to beexecuted In an optron or an underlyingsecurity of an option class traded on thePBW from initiating orders In the sameoption until two minutes after the trans-action has been printed on the transactiontape.43 These measures were desiqnedprimarily to bar possrble misuse In PBW'soptron market of mtorrnatron obtained byfloor members relating to activity in anunderlying stock or In a block of options

16

before the information has been publiclydisseminated.

As previously reported,44 on the basisof conclusrons reached tollowmq thecomrmssron's hearings In early 1974 onmultiple-exchange options trading andoptions trading in general, the staff hadsuggested SUbject matters to be ad-dressed by all exchanges concernedbefore the initiation of multiple-exchangeoptions trading or the expansion of theCBOE (which was the only exchange thentrading options). One such recommenda-tion called for a common national clear-ing system. In declaring the Amex optionplan effective, which authorized the initia-tion of multiple-exchange option trading,the Commission noted and approved thejoint establishment by the Amex and theCBOE of the Options Clearing Corpora-tion ("OCC") to Implement a nationalclearing system for all exchange-listedoptlons.ss All exchange-traded optionswere thereafter issued, guaranteed andregistered by the OCC in compliance withfederal securities laws. Moreover, theOCC currently clears and settles alloption transactions effected In exchangetraded options, now also including thoseon the PBW, and it will perform the sametuncnons for those exchanges whichmay later initiate options programs andbecome partlcipants in OCC.

Another recommended prerequisite tomultiple-exchange trading of options wasthe achievement of a common tape forreporting transactions in all listed options.In response, the exchanges concernedset up a policy-making body, the OptionsPrice Reporting Authority ("OPRA"), tocoordinate the establishment and on-gOing administration of a separate com-mon options tape on the floor ofexchanges trading options and after atrial period, If econormcal, to offer ac-cess to the tape to subscnbers, OPRAalso administers orssermnanon of lastsales data concerning options from theparticipating exchanges to vendors ofautomated interrogation devlces.46 Fur-thermore, In response to Oornrrussronstaff recommendations, all the parnclpat-

Ing exchanges have agreed to make op-tion quotations available through thevendors to qualified non-members as wellas to their own members and havereached general agreement regardingstandardization of terms of exchange-traded options These actions have allbeen approved by the Comrmssron.s?

Uniform Net Capital Rule

On June 26, 1975,48 the Commissionannounced the adoption of a Uniform netcapital rule, Securities Exchange ActRule 15c3-1 , effective September 1,1975,subject to transitional provisions whichdelay the effective date of certain pro-vrsrons until January 1, 1976. The adop-tion of the rule followed consideration ofcomments received In response to a re-lease In. which the proposed rule hadbeen re-published for comment 49

The new rule discontinues the exemp-tion previously embodied In the net capi-tal rule for members of designated na-tional secuntres exchanges (other thancertain specialists), required to complyWith net capital rules of such exchangesIn order to ease the transition to a uni-form net capital rule, the CommissionIncorporated provrsrons from supersededcapital rules of national securities ex-changes. These Include the concepts ofsecured demand note capital and amodified flow-through of capital fromsubsidiaries.

The rule, as adopted, continues thebasic net capital concept under which thesecurities Industry has operated for manyyears and, in addition, Introduces an al-ternative concept to measure the capitaladequacy of broker-dealers. The ap-proaches to capital adequacy and nnan-ciat responsibility embodied In the ruleare designed to balance the need forflexible and efficient use of the fmancralresources of the securities Industry.

Development of a UniformBroker-DealerReporting System

Recognizing the need to eliminate

duplicative and otherwise unnecessaryreporting and regulatory requirements forbroker-dealers, the Commission has beenworking on the development of a uniformreporting and regulatory system to achievethat goal. The Comrnrsston began itsstudy of the problem in September of1972, when it created an Advisory Com-mittee on Broker-Dealer Reports andRegistration Requirements to review theexisting reporting and regulatory require-ments of the brokerage industry and toIdentify those requirements that wereunnecessary, duplicative or undulyburdensome.

After a Commission Staff Task Forcereviewed the recommendations of theAdvisory Committee, the CommissionIssued a release In January 1974 an-nouncmq a program to Implement Virtuallyall the proposals contained In the Ad-visory Committee's Report.5o

The Commission's program, as an-nounced by the January 1974 release,Included the totlowmq measures:

Key Regulatory Report. The Com-rnlsston undertook to devise a keyregulatory report, a Uniform reportingform Unifying and Simplifying the re-porting requirements. The Oomrmsstonanticipated that the report would bethe foundation of the reporting systemand would Incorporate the concept oflayering, whereby greater Incrementsof detail are required as the scope andcomplexity of a broker-dealer's opera-tions Increase

Proposed Rule 17a-18. In order toformulate methods of Simplifying thereporting requirements and to developthe key regulatory report, the Com-mission thought It essential to have Inits possession and subject to ItS reviewall reports, forms, questionnaires andSimilar reporting documents requiredof broker-dealers. The self-regulatoryorganizations agreed to supply all re-ports, forms and questionnaires then In

use, many of which had already beensupplied to the Commission. In orderto provide a formal structure for thesubmission of new forms, reports andquestionnaires or substantive mooui-

17

cations of exisnnq ones thereafterproposed, the Commission publishedproposed Rule 17a-18. Proposed Rule17a-18 would require every nationalsecurities exchange and every regis-tered national secuntres association tofIle with the Oornrrnsston each proposednew form, report, questionnaire, orsimilar document or any substantiveamendment to or substantive modifi-cation of an exrstinq form which Itrequires of ItS members or any class ofmembers, whether on a regular, one-time, or "for-cause" basis.

Rule 17a-19. The Commission hasproposed Securities Exchange ActRule 17a-19 and related Form X-17A-19 In order to eliminate duplicativeexarnlnanon of and reporting by broker-dealers about their financial responsi-bility and related record keeping wherethey change their membership statusthereby affecting the relationship withtheir desrqnated examining authontyor any other self-regulatory orqarnza-non The proposed rule would requireeach national securities exchange andeach registered national secunnesassocranon promptly upon the happen-ing of certain changes in the member-ship status of any of ItS members orupon learning that such changes wouldoccur to file Form X-17A-19 With theCommission and the Securities InvestorProtection Oorporatron ("SIPC").

Formation of the Report CoordinatingGroup. The Commission Intended tosubmit the filings received pursuant toRule 17a-18, If adopted, and otherforms and reports to a Report Coordi-nating Group organized under theFederal Advisory Committee AcP' TheReport Coordinating Group, formed InMay 1974,52 divrdeo their responsibili-ties Into four work areas. uniformtmancral/operatronar forms, uniformtrading forms, urutorrn assessmentforms and uniform reqrstranon formsThe function of this Group was to re-

view such forms, reports and question-naires, and to provide expert advice tothe Oomrmssron on such matters asuruformrty of definitions and reportingformats, the extent of the anticipated

18

administrative burden to be caused byany new form, and such other matters asmight be appropriate to a program de-signed to streamline, unify and improvethe quality of the reporting system. TheGroup was to advise the Commission asto areas where unnecessary or duplica-tive reports could appropriately beeliminated. In additron, the Group was toadvise the Cornmlssron on the develop-ment of a uniform state, federal, andIndustry form for the reqrstratlon ofbroker-dealers and a uniform registrationform for pnncipals and agents. The Groupwas also to be asked at a later date toassist In development of the proposedkey regulatory report.

In August 1974, the Commission an-nounced ItS approval of a preliminaryoutline of a Ftnanctal and OperationalCombined Urutorrn Single Report (FOCUSReport) and issued it for public comment.It also announced the adoption of Rule17a-18, Rule 17a-19 and Form X-17A-19.53

The Group Issued for publrc comment aDISCUSSIonPaper In October 1974, con-taining the pnncrples and an outline ofthe contents of a FOCUS Report.54 InDecember, the Group presented to theComnussron ItS Interim Report, contain-Ing several interim recommendationsfrom each of the four working subcorn-mlttees.55 PubliC comments were re-ceived on the December Report and werereviewed by the Group. The Group'sFirst Annual Report to the CcmmtssronIn June, 197556 was Issued for publiccomment 57 Several recommendations ofthe Group, set forth In ItS First AnnualReport, were summarized in the June1975 release as follows:

Financial and Operational Reports. TheReport made specific recornrnendatronsfor the adoption of a FOCUS Report offinancial and operational information.

Assessment Forms and Procedures. Inthe area of assessment forms, the Grouprecommended, among other things, thateach regulatory organization study theposarbrlrty of eliminating assessmentforms based on net cornmrssron revenueand consider collecting assessmentsbased on data captured at the source

through the clearing mechanism of eachrespective exchange. An AssessmentsForm Task Force has been created.

RegistratIon Forms. The Group's rec-ommendation that Form lJ-3, the uniformbroker-dealer registration form, andForm lJ-4, the uniform agent registrationform, be adopted has been largely im-plemented. Forty-five states, the Com-mission, and the NASD have adopted therecommended uniform broker-dealerregistration form; and forty-eight states,the Commission, all registered nationalsecurities exchanges, the NASD, andcertain commodity exchanges haveadopted the recommended uniform agentregistration form.

Trading Forms. The Group has ascer-tained that there are 104 exrstrnq tradingforms which could be reduced to 29 suchforms.

The Commission believes that signifi-cant progress has been made In develop-Ing a Uniform, ettlcient, streamlined andthorough reporting system.

Broker-Dealer ModelCompliance Guide

In October 1972 the Commission es-tablished the Broker-Dealer Model Com-pliance Program Advisory Committee toadvise the Commission concerning thedevelopment of a model complianceprogram to serve as an Industry gUide forthe broker-dealer cornrnuruty.w

The Committee completed the firstdraft of ItS report In the form of a GUideto Broker-Dealer Compliance In January1974. Approximately 2,500 copies of thedraft were distributed to the publrc andcomments were sollcrted The Committeereviewed all comments received, con-srdered the recommendations containedtherein and completed the final reviseddraft In October 1974.

The Committee submitted the final draftof the Guide to the Commission InNovember 1974.59 The Commission dis-tributed over 1,400 copies of trus draftfor the purpose of solrcrtlnq public com-ment. The Committee's charter expiredon December 31, 1974.

In ItS recommendations to the Com-

mission, the Committee ernphasrzed thebenefits of the Industry-regulator dialoguewhich took place In the development ofthe Guide. The Committee supported andurged the continuation and expansion ofItS cooperative efforts In order to providethe Industry With a better understandingof the Commission's views and the Com-mrssron with a better understanding ofthe Industry's problems. The Committeealso stressed the need for the GUide tobe updated on a fairly frequent basis Inorder for It to retain Its usefulness. Tothat end, the Committee recommendedthat the Commission appoint a standingcommittee which would be responsiblefor regular and periodic updating of theGuide 60

In response to the Commission's di-rective that the aim of the Committee'srecommendations should be "to educatebroker-dealers as to existmq require-ments and how they may comply Withthem," the GUide has been designed toInform management and supervisorypersonnel In the secuntres Industry ofapplicable requtatory requirements. toIdentify special compliance problems,and to suggest procedures for acruevmqcompliance.

The public comments, on balance,concluded that the GUide fulfills ItS gen-eral purpose Favorable comments havealso been received from members of theCongress. In other subrnlssrons, one ac-counting firm and two law firms wrote toexpress their opinion that the GUide ISan extremely useful tool for the brokeragecommunity.

DISCLOSURE RELATEDMATTERS

Beneficial Ownershipand Tender Offers

V'On September 9,1974, the Commissionannounced that it had ordered publichearings to ascertain facts, conditions,practices and other matters relating tobenencrat ownership, takeovers andacqursmons by foreign and domesticpersons in light of the statutory purposesunderlying the Securities Act and the Ex-

19

change Act, particularly certain amend-ments to the Exchange Act which wereenacted In 1968 and 1970 ("the WilliamsAct"). The purpose of the inquiry was todevelop a factual basis for determiningwhether It was necessary or appropnateIn the public Interest or for the protectionof Investors to adopt or amend rules orto recommend further legislation to theCongress with respect to these areas.

./ The Drvrsron of Corporation Financeconducted the month-long hearings dur-109 whIch testimony was received from49 witnesses, Includmg representativesfrom the securities Industry, the academiccommunity, the legal profession andpublicly held corporations. In addition,letters of comment from approxirnatety75 Interested persons were received andmade part of the public record.

The following specrnc tOPICS, amongothers, were examined dUrIng the courseof the proceeding scope of the term"beneficial owner" for purposes of thereporting and disclosure requirementsof the Securities Act and the ExchangeAct (except for purposes of Section 16 ofthe Exchange Act), scope of the terms"tender offer" "group" and "acqursmon"for purposes of Sections 13(d) and 14(d)of the Exchange Act; adequacy of thedisclosure requirements of Schedules13D and 140, necessity for disclosurerequirements when Issuers make tenderoffers for their own secuntres, includingwhen Issuers attempt to "go private",adequacy of the publication, notice anddrssemrnanon requirements WIth respectto tender offers, necessity for rules fa-crutaunq communications between Issuersand the benencral owners of their se-cannes: and the necessity for addinonatlegislation relating to any of the above.

As a result of this proceeding, the staffof the DIVISIOnof Corporation Finance IScurrently preparing rule and form changeswhich wIll be published for comment.

Annual Reports to SecurityHolders

Based In part on the Industrial IssuersAdvisory Report,"2 the Cornrmssron pro-

20

posed amendments to ItS proxy rules In1974 in order to Improve the disclosure10, and disserrunanon of, annual reportsto security holders and to Improve thedissemination of annual reports filed withthe Oomrnrssron on Forms 1D-K or 12-K.63The Commission received 165 letters ofcomment from Interested personsregarding these proposals

On October 31, 1974, the Cornmrssronamended Rules 14~3 and 140-3 underthe Securines Exchange Act of 193464 torequrre that annual reports to securityholders con tam at least the followmg in-tormatron: certrfred financial statementsfor the last two fiscal years, a summaryof operations for the last five fiscal yearsand management's analysts of the sum-mary With specrat attention to Significantchanges occurring during the most re-cent three years, a brief descnptlon ofthe company's busmess WhICh, In theopinion of management, indicates thegeneral nature and scope of the com-pany's business: a nne of busmessbreakdown of total revenues and ofIncome (or loss) before mcome taxes andextraordinary Items for the last nve fiscalyears; the name and prmcrpal occupationor employment of each director andexecutive officer of the company, and themarket price ranges and drvidends paidfor each quarterly period during the lasttwo fiscal years With respect to eachclass of equity secuntres entitled to voteat the company's annual meetmg.

In addrtron, the new rules require thatannual reports to security holders, or theproxy statement, must contam an under-takrng that the company will provide,without charge, to any security holderas of the record date, upon written re-quest, a copy of the company's Form1D-K or 12-K annual report, except forthe exrubrts thereto, as filed wllh theCornmrssron. Companies must also under-take to make copies of the exhibits totheir Form 1D-K or 12-K available, butcompanies may Impose a fee limited totheir reasonable expenses for providmqsuch copies. Fmally, these companieswIll be required. to contact known recordholders. such as brokers, banks and theirnommees, who may be reasonably ex-

pected to hold secunnes on behalf ofbeneficial owners; to inquire of them asto the number of sets of material neededfor distribution to beneficial owners forwhom they hold securities; to furnishthe material to them; and to pay thereasonable expenses of the record hold-ers for distributing the material to thebeneficial owners

Projections

On April 28, 1975 the Commissionpubhshed for comment a series of ruleand form proposals Intended to Implementthe "Statement by the Commission on theDisclosure of Projections of Future Eco-nomic Peformance" .65 The proposalswould require the filing of Form 8-K todisclose changes in control of a regis-trant and certain projections within 10days of such events.66 The proposed ruleswould define a "prolectron" under bothActs to be a statement made by an Issuerregarding material future revenues, sales,net income or earnings per share of suchIssuer, expressed as a specrtic amount,range of amounts or percentage variationfrom a specific amount, or a confirmationby an Issuer of any such statement madeby another person. Proposed rules wouldrequire a filing of a report on Form 8-Kwithin 10 days of the time a registranthas furnished a projection to any person,with certain exceptions including privatefinancing, preliminary negotiations withunderwriters, business combinations andgovernment agencies which have af-forded non-public treatment to the pro-jections. A report on Form 8-K wouldalso be required when the registrant hasreason to believe Its publrc projectionsno longer have a reasonable basts, or theregistrant has ceased drsclosrnq or revis-Ing projections A report on Form 8-Kcould also be filed, at the registrant'soption, If the registrant disassociatedItself from another person's projectionsHowever, the registrant would not berequired by any of the proposals to dis-associate Itself from a projection madeby another person.

Proposed amendments to Form 1o-Kunder the Exchange Act and Forms &-1,

&-7, &-8, &-9 and &-14 under the Se-cunties Act would require the registrantto furnish in the report or registrationstatement those projecllons previouslyfiled or required to be filed with the Com-rrussron covering the year-end resultsfor the registrant's last fiscal year, to-gether with comparisons with correspond-Ing hrstoncal results. The registrationstatements would also Include any pro-jections for the registrant's current fiscalyear and/or future periods If they hadbeen filed or were required to have beenfiled. Any registrant that had made pro-jections for ItS last or current fiscal yearor for any future period, which were filedor were required to be filed, would berequired to Include In lis annual reporton Form 1o-K projections for at leastthe first six months of the current fiscalyear, or for the full fiscal year, or to ex-plain why It had determined to ceasedrsctosmq projections. The proposalswould permit a registrant to commencedisclosmq projections In the annual re-port or registration statement only If(1) the registrant had a history of filingunder the Exchange Act and budgetingexperience for at least three years, and(2) the projections and related disclosuresmet certain standards.

To alleviate the concerns of registrantsover the possrble liability for dlsclosmqprojections, proposals under both Actswould define the criteria under which aprojection shall be deemed not to be anuntrue or misleading statement of a ma-terial fact or a manipulative, deceptive orfraudulent device, contrivance, act orpractice as those terms are used in thevarious liability provrsrons of the federalsecurities laws. In general, these pro-posed rules would establish certaincriteria for the Issuer of secunties towhich the prolecnon pertains and to theprojection rtselt The Issuer criteria relateto reporting and budgeting experienceand the projection Criteria relate gen-erally to ItS preparation, form and mannerof disclosure, and possible review bypersons other than officers, directors oremployees of the Issuer

Proposed amendments to Rules 14a-3and 14cr3 under the Exchange Act would

21

require that all projection information,other than exhibits, contained 10 theregistrant's report on Form lO-K be 10-eluded 10 the registrant's annual reportto security holders. Ftnally, a proposedamendment to the note to Rule 14a-9under the Exchange Act would delete theword "earn rnqs" from paragraph (a) ofthe note which presently refers to pre-dictions of earnings as possibly rrusleadrnqIn certain situations.

The Rule 140 Series

In the Commission's 1969 DisclosurePolicy Study 67 a number of recommenda-lions were made to Improve the overalldisclosure process and promote ob-jectivity 10 the operation, adrnmistrationand enforcement of certain provrsrons ofthe Securities Act. The princrpal recom-mendatrons of the Study are embodied 10a series of Commission rules known asthe "Rule 140 Series", comprised ofRules 144, 145, 146 and 147, adoptedpursuant to the Securrtles Act. Rules 144and 145 were adopted 10 1972 and 1973,respectively; 6" and Rules 146 and 147were adopted 10 1974.69

Rule 144

Rule 144, "Persons Deemed Not to beEngaged 10 a Distribution and ThereforeNot Underwriters," provides a methodof resale of securilles acquired 10 privateplacements and for secuntres held byaffiliates During the fiscal year, the Com-mission's staff has monitored the appli-cation of the rule. Also, an amendmentto Rule 144 was adopted to specify thatsecuntres sold pursuant to new Rule 240would be deemed to be "restricted se-cunties" for the purpose of Rule 144and COUld, therefore, be resold pursuantto Its provisions 70 Rule 240 providesexemptions from reqrstratron of secunnesrnvolvmq certain limited offers and salesby closely held Issuers

Rule 145

Rule 145, generally, provides that an"offer" or "sale" of secuntres is deemed

22

to be involved when there IS submittedfor the vote or consent of security hold-ers a plan or agreement for (1) reclassi-fications other than stock splits andchanges 10 par value; (2) mergers,consolidations and similar plans of ac-quisltron except where the sole purposeof such a transacllon IS to change anIssuer's dcrrucrle: and (3) certain trans-fers of assets for securities where thereIS a subsequent distribution of suchsecurities to those voting on the transferof assets. On July 2, 1974, the Commis-sion published a second mterprettve re-lease reqardrnq the registration proced-ures applicable to open-end rnvestrnentcompanies issuing securities 10 businesscornbinanon transactions subject toRule 134.71

Rule 146

The so-called "private ottennq" ex-emption from registration under the Se-cunnes Act, Section 4(2), provides thatoffers and sales by an Issuer not 10-volvrnq any public offering will be exemptfrom registration. The section has longbeen a source of uncertainty for Issuerswantmq to sell their secunnes in privateplacements. In April 1974, the Commis-sron adopted Rule 146 under the Securi-ties Act, "Transactrons by an IssuerDeemed Not to Involve Any Public Offer-109," which IS desrqned to protect 10-vestors while at the same time provldrnqmore objective standards to curtail un-certainty as to the meaning of Section4(2) to the extent feaslble.72

In general, the rule provides that trans-actions by an Issuer rneetrnq all the con-dmons of the rule do not rnvolve "anypublic offering." Major conditions to bemet are essenllally that (1) there must beno general advertising or sotlcrtatron 10connection with the offering; (2) offerscan be made only to persons the Issuerreasonably beheves have the raquisrteknowledge and experience in nnancratand business matters, or can bear theeconomic risk; (3) sales can be madeonly to persons the Issuer reasonably be-lieves have the reqursrte knowledge andexperience, or who can bear the economic

risk and have an advisor (meeting cer-tain standards) who can provide theraqursrta knowledge and experience;(4) all offerees either must have accessto or must be furnished with the type ofinformation that registration would dis-close; (5) there can be no more than 35purchasers of securities in the offering;and (6) reasonable care must be taken toprevent resale of the secuntres In Viola-tion of the registration provisrons of theSecurities Act

Rule 146 does not provide the exclu-sive means for offering and seiling securi-ties In reliance on Section 4(2). Issuersmay continue to rely on the Section 4(2)exemption by complying With relevantadministrative and judicral criteria at thetime of a transaction. The staff of theCommission will Issue interpretativeletters to assist persons in complyingWith the rule, but will issue no-actionletters relating to Section 4(2) only In themost compelling circumstances

In June 1975, the Commission amendedRule 146 to clarify, and in some Instancesto modify, paragraph (c) of the rule,"limitations on Manner of Offering;"paragraph (e) of the rule, "Access to orFurnishing of Information" for non-reporting companies; paragraph (f) of therule, "Business Combinations," andparagraph (g) of the rule, "Number ofPurchasers." The purpose of the amend-ments IS to decrease burdens on issuersIn complying with the rule, consistentwith Section 4(2) of the Act and the pro-tection of Investors.

Rule 147

Section 3(a)(11) of the Secunties Act,the Intrastate offering exemption, whichexempts from registration secunnes thatare part of an issue offered and sold onlyto persons resident In a specrnc state byan Issuer that is also resident and doingbusiness In that state, has been widelyrelied upon, but has also been the sourceof inquiry, misunderstanding, and uncer-tainty over the years On January 7, 1974,the Commission adopted Rule 147 underthe Securities Act which defines certainterms In, and clarifies certain conditions

of, the Intrastate offering exemptlOn.73

The rule provides some objective stan-dards for determining when a person ISconsidered a resident Within a state andwhether an issuer IS "doing businesswithin" a state for purposes of the exemp-tion The rule does not define which offersand sales constitute "part of an Issue"but relies instead on the traditionalunderstanding of when offers and salesWill be Integrated, It does, however, pro-Vide a "safe harbor" as to certain offersand sales. The rule benefits only IssuersSince the adoption of Rule 147, the staffof the Commission has ceased respond-Ing to requests for no-action letters underSection 3(a)(11) except In the most com-pelling circumstances; but the staff doesprovrde Interpretative guidance as to theuse of the Rule.

Adoption of Rule 240

On January 24, 1975, the Commissionadopted Rule 240 (and related Form 240),"Exemption of Certain Limited Offers andSales by Closely Held Issuers," whichexempts from registration under theSecurities Act limited offers and sales ofsmall dollar amounts of securities by anIssuer, that, after the transactions pur-suant to the rule, would continue to havea small number of benencral owners of ItSsecurities 74 The rule was adopted pur-suant to Section 3(b) of the Act. TheRule IS not available for resales.

In general, the rule exempts transac-tions by an Issuer (other than an invest-ment company) where (a) there IS nogeneral advertising or solrcrtanon: (b) nocornrrussron or Similar remuneration ISpaid for soncrtlnq prospective buyers orIn connection With the sales; (c) the ag-gregate sales price of unregistered secu-rities of the Issuer sold by the issuer ISnot more than $100,000 In the precedingtwelve months; (d) the securities of theIssuer are beneficially owned, before andafter the transaction, by 100 or fewerpersons, and (e) the Issuer Informs thepurchasers of restrictions on resale Inaddition, the Issuer IS required to file anotice of sales on Form 240. However,the exemption provided by the rule would

23

be available for up to $100,000 of securi-ties sold In transacnons complying withall the conditions of the rule other thanthe notice requirement, In connectionwith the rule, the Commission adopted anamendment to Rule 144 that makes thatrule available for securities acquired In aRule 240 transaction

Disclosure of Oil and GasReserves

On May 30, 1975, the Oornrmssron pub-hshed for comment proposed amend-ments to Forms &-1 and &-7 under theSecurities Act and to Forms 10 and 1o-Kunder the Exchange Act to require thedisclosure of 011 and gas reserves and toprovide definitions and classifications ofthe term "reserves." 70 In general, theseproposals would make explrcrt the dIS-closures WIth respect to 011 and gas re-serves already required under Forms&-1, &-7 and 10 and, for the first nrne,require such disclosures to be made onan annual baSIS In a report on Form 1o-K.In connection With the proposed amend-ment to Form 1o-K, GUide 2 under theExchange Act which relates to disclosureof natural gas reserves would also beamended to make It applicable to re-serves disclosed In a report on Form1o-K. The staff is now considering thecomments received on these proposals.

Coordination with the FederalPower Commission on FilingsWhich Include Natural GasReserve Estimates

In early 1974, the Oornrrusston an-nounced that It will request registrants toexplain differences between natural gasreserve estimates contained In filingsWith trus Commission and estimates re-ported to any other regulatory authorityWithin one year prior to the filing. In addr-non, copies of prospectuses filed by reg-istrants SUbject to the Federal PowerCommission would be submitted to thatagency for comments and, generally,appropriate technical personnel from theFPC would be invited to attend confer-ences where supplemental natural gas

24

reserve mtorrnatron submitted by a regIs-trant IS revlewed!6

The Commission refined the aboveprocedures In announcing new steps tobe taken for coordmation by the DIVISionof Corporation Finance With the FPC Inconnection With the review of fIlingswhich Include natural gas reserve esti-mates. The Oornrrussron stated that theDIVISion had been authonzed to providecopies of letters of comments on filings,which Include natural gas reserve esti-mates, and any written responses andcommunications In connection therewitnto the FPC, with the understanding thatthey Will remain non-publrc unless theCommlssron determines otherwise!7

Gold Purchasing and Investing

On December 31, 1974, the restrictionson the purchase, sale and ownership ofgold by American Citizens Imposed In1933 by the Federal government werelifted In response thereto, the comrms-sion took two steps desiqned to gUide theacnvines of both purchasers and sellersof gold and gold-related securities In thisnew Investment area. First, because in-vestment In and the purchase of gold IS apotentially fertile area for unscrupulouspromoters and fraudulent schemes, theCornrrussron together With the President'sSpecial ASSistant for Consumer Affairs,the Department of Justice, the FederalTrade Commission and the U.S. PostalInspection Service suggested certaingUidelines to be followed In purchasmqor investing In gold!" These gUidelinesstressed caution In purchasrnq gold andcare In selection of seller, and advisedpotential investors of the information theyshould seek concerning the programthrough which the gold was being offeredIn order to assure themselves of all factsnecessary to make a reasoned invest-ment decrsion

Secondly, the Commission announcedthe adoption by the DIVISion of Corpora-non Finance of a no-action position withrespect to the appucaburty of the regis-tration provisions of the Securities Act of1933 to gold Investment programs meet-Ing certain cntena.?v

It was Indicated that the Divisron wouldtake a no-action positron where (1) It didnot appear that the economic benefits tothe purchaser were derived from themanagerial efforts of the seller, promoteror a third party, and (2) where thoseservices being offered in connectionwith the gold program did not appear torise to the level of being the essentialmanagerial efforts upon which the pur-chaser must rely in order to make a profitfrom his purchase. The release indicatedthat among the facts considered In con-cluding that the services provided did notrise to the level of being the essentialmanagerial efforts were that the pur-chaser pay full value In cash and notpurchase on margin; that any depositoryarrangement be limited to the storage ofthe gold with a reputable facility, insur-ance against loss or theft from the stor-age facility, and the Issuance of a docu-ment which would evidence the right ofthe purchaser or his successors and as-signs to take possession of the gold; andthat the seller have no obliqatron to re-purchase the gold or ownership docu-ments from the purchaser, nor to sellsuch gold or ownership for the pur-chaser's account.

Possible Disclosure ofEnvironmental and Other SociallySignificant Matters

V""0n February 11, 1975, the Commissionannounced a public proceeding, rnclud-Ing public hearings, concerning possibledisclosure In registration statements andother documents filed with the Commis-sion or furnished to Investors of informa-tion bearing on corporate environmentalpractices or other matters of primarilysocial rather than financial concern.w Theprimary objective of this proceeding wasto permit the Commission to determine,with the benefit of comment from inter-ested persons, what, If any, rnodrflcationsIn the Commission's disclosure require-ments are appropriate in light of theprovisions of the National EnvironmentalPolicy Act (NEPA) 81 In addition, the Com-mission sought to determine the desir-ability of amending ItS disclosure require-

ments with regard to corporate equalemployment practices and any othermatters of social significance.

Thrs proceeding was initiated pursuantto the order and opinion of Judge CharlesR. Richey In Natural Resources DefenseCouncil, Inc. v. Securtttes and ExchangeCommtseion r? That action arose from theCommission's denial of a rulernakrnqpetition submitted by Natural ResourcesDefense Councrl (NRDC) which wouldhave required reporting companies to filewith the Oomrnlssron information con-cerning the effects of corporate actrvmeson the environment, and statlstrcs re-flecting equal employment practices. TheCommission subsequently proposed 83

and Issued 84 more limited environmentaldisclosure rules wrnch, NRDC alleged,failed to fulfill the Commission's respon-srbrlrtres under NEPA. Plaintiffs alsoalleged that the Commission, In denyingthe petition and promulgating ItS owndisclosure requirements, had not com-piled with the requirements of the Admin-rstratrve Procedure Act (APA)

The court held that the Commissionhad Inadequately Informed the public thatItS proposed requlattons were Intended tosatisfy fully the Commission's mandateunder NEPA and that It had not provideda proper statement of the basis and pur-pose for ItS rulernakmq action. Further,the court held that the Commission failedto articulate adequately the reasons fordenial of the equal employment portionof the NRDC petitron. Accordingly, JudgeRichey remanded the matter to the Com-mission for further rulernakinq action,and expressly ordered the Commissionto determine the extent of "ethical inves-tor" Interest In environmental and equalemployment information, and the avenuesof action which such Investors may pur-sue to eliminate corporate practicesInimical to the environment and equalernployrnent.w

While the Commission did not agreewith Judge Richey that It had failed tosatisfy the procedural requrrernents ofthe APA, It has attempted to comply tullyWith hrs order In response to the noticeannouncmq the proceeding, the Commis-sion received over 350 written comments

25

In addition, at the public heanngs con-ducted dunng Apnl and May, 1975, testi-mony was received from 54 witnesses.The documents compiled In the proceed-Ing exceed 10,000 pages. The particr-pants included public corporations,mstrtutional and individual Investors,special Interest groups, state and federallegislators, representatives of the ac-counting and legal professions, andothers. The public proceeding closed onMay 14, 1975, and the Commission subse-quently proposed rules regarding dis-closure of environmental matters anddeclining to promulgate rules requiringspecific disclosure of other social mat-ters Hb

MUTUAL FUND DISTRIBUTION

In November 1974, the Commissionannounced a comprehensive program torevise the laws and regulations affectingmutual fund drstnbutron.r'? Its programwas based upon a report of the DIvisionof Investment Management Regulation on"Mutual Fund Dtstnbution and Section22(d) of the Investment Company Act of1940" ("Staff Report") In transmitting theStaff Report, the Commission stated thatItS program was "Intended to reduce oreliminate many of the inequities and met-trcrencies of the present fund drstnbutronsystem while, at the same time, avordrnpthe dangers of a sudden abolition of re-tail price maintenance." The Commissionadded that ItS plan was to "Iay thegroundwork for the gradual and orderlyintroduction of retail pnce competitionInto the mutual fund distribution sys-tem" MM

The Commission's three-fold programInvolved: (1) Increased use of Its exrstrnqadministrative powers to permit greaterpnce fleXibility and Improved communica-tion with Investors; (2) a recommendationthat Congress enact legislation to expandthe Commission's authority to select froma broad vanety of long-range options toremove mhrbrnons on competition In thefuture; and (3) the adoption of proposedrules by the NASD to prevent excessivesales loads, as a regulatory safeguard

The Commission's program utilizes ItS

26

exrstlnq administrative authority to en-courage (a) Improved communicationWith investors through expanded fundadvertrsrnq and more Informative por-trayal of fund Investment results and (b)voluntary pnce competition by permit-ting greater opportunities for mass-merchandising and more pnce vanatronsIn the current sales load structure.

1. Improved commumceuon With In-vestors

The Commission adopted amendmentsto Rule 134 under the Securities Act of1933,M9 which expand the scope of mate-nal permitted in Investment companyadvertisements and which also emphasizethe Importance of the prospectus to po-tential Investors. As amended, Rule 134permits registered Investment companiesto Include In their advertisements adescnption of their Investment objectives,pohcies, services, and method of opera-tion, pictorial illustrations which areappropnate for Inclusion In the company'sprospectus and not Involving performancefigures; and descnptive matenal relatingto economic conditions, or to retirementplans, or other goals to which an invest-ment In the company could be directed,but not directly or indirectly relating topast performance or implying achieve-ment of investment objectives. However, alegend calling attention to the company'sprospectus must be Included In advertise-ments containing such newly permittedinformation The liberalized rule shouldfoster more interesting and informativefund advertisements and may encourageInvestment companies to devote more oftheir promotional budgets to mass media

These amendments are the fourth in asenes of Commission efforts designed toallow a Wider degree of advertising by in-vestment companies which Issue redeem-able secunties. Rule 134 adopted In195590 was amended In 197291 to permita general dsscnptron of an Investmentcompany. At the same time the Commrs-sion adopted Rule 135A 92 expanding in-vestment company genenc advertisingand Rule 434(a) to permit investmentcompanies to use a summary prospectus

The Commission also published for

comment a proposed amendment to theStatement of Policy under the SecuritiesAct of 193393 wruch, If adopted, wouldpermit use of four new types of perfor-mance charts thereby giving mutual fundsand variable annuities the opportunity toportray past Investment results in terms ofcompound rates of total return (assumingdividends and capital gains are rein-vested). These charts would also incor-porate such features as standardcompansons with the Standard & Poor's500, serrn-loqanthrruc presentations, andthe Illustration of the Investment resultsfrom market highs to market lows. Theproposed charts are designed to helpInvestors to understand better the re-turns, nsks and expenses of mutual fundand vanable annuity Investments and tomake comparisons among the vanousfunds and annuities offered. At year end,the comments on the proposal were beinganalyzed by the staff.

2. Price Competition at the UnderwriterLevel

The Comrnlssron adopted amendmentsto Rule 22d-1 94 which permit funds, attheir option, to provide the benefit ofsales load discounts to certain additionalgroups of persons. To be eligible underone of the amendments, a group musthave been In existence for at least SIXmonths, have a purpose other than pur-chasing mutual fund shares at a discount,and must satisfy other cntena selectedby the fund relating to the realization bythe fund of economies of scale In saleseffort and sales related expense. Theseamendments enable funds and theirunderwnters to Introduce mass-marketingtechniques and to pass on to Investorseconomies of scale and cost savingsfrom group sales.

As part of the program, the Oommrssionpublished for comment proposed Rule22d-4, an exemptive rule which wouldpermit a fund and ItS underwnter toutilize "open seasons" dunng which per-sons who have held shares of the fundfor a specified penod of time could pur-chase specified amounts of additionalshares at a reduced sales load or at noload.95 Thrs was designed to enable cost

savings to be passed on to qualifyingfund shareholders who make additionalInvestments.

The Commission also encouraged ap-plications for exemption from Section22(d) to permit sales load reductions topersons who have previously or contem-poraneously purchased another invest-ment product or an Insurance product,distributed by the same underwnter. Suchexemptions would permit funds to passon to Investors the cost savings frommarketing several financial productsdunng one sales effort, and would alsopermit underwnters to expenment Withvaned financial packages.

Shortly after the close of the fiscalyear, the Commission adopted Rule22d-3,96 which provides a conditionalexemption from Section 22(d) to permitvariations of the sales load and certainother deductions from purchase paymentsfor variable annuities, based upon dif-ferences In costs or services. Such pncevanatrons would be subject to the condi-tions that the prospectus disclose theamount of the vanations and the circum-stances in which such variations areavailable, or describe the basis for suchvariations and the manner In which en-titlement shall be determined, and thatany vanations reflect differences In costsor services and do not unfairly discnrnr-nate against any person.

3. Price Competition at the Retail LevelThe Commission has also authorized

its staff, on an expenmental basis, to viewfavorably interpretive requests With re-spect to proposals that brokers which actIndependently of funds and their under-wnters be permitted, under certain cir-cumstances, to charge reasonable feesfor services rendered in connection withthe purchase of shares of "no-load"funds. The staff has taken a "no-action"POSition based upon the tollowrnq safe-guards being met In connection With theImposition of such a service fee'

(1) the broker must not be an affiliatedperson of the fund, Its Investmentadvrser or prrncipal underwnterand have no formal or Informalagreement With the fund, its In-

27

vestment adviser or principal underwriter to distribute its shares;

(2) the fund must not enoourage bro- kers to make such a charge or give any special treatment to orders received through brokers:

(3) the fact that such a charge may be made must be disclosed in the fund's prospectus;

(4) the prospectus must make clear that it the shares are purchased directly from the fund without the intervention of a broker, there will be no charge; and

(5) any broker who makes such a charge must inform his customer. In writing, that the shares could be purchased directly from the fund at no load.

interpretations are being issued as re-

1 quests are received. i Though the restrictions of Section 22(d)

do not apply to sales of fund shares by one person to another through a broker, no secondary brokerage market in mutual funds has developed. Provisions con-tained in uniform sales agreements be-tween underwriters and broker-dealers effectively prohibit such activity.

The Commission has asked the NASD to;amend its Rules of Fair Practice to prohibit contractual restrictions which would prevent broker-dealers from engag- ing in brokered transactions in fund shares."' If necessary, the Commission will alSv consider the adoption of its own rules pursuant to Section 22(f) under the lnvestment Company Act to prevent funds from restricting the transferability of their shares in a secondary brokered market. Broker-dealers would not be required to set up special procedures to match orders for fund shares, and it is not anticipated that such a market will be- come so significant as to disrupt the primary distribution system. However, i t will introduce some retail price variations in the industry and provide some insight into whether a secondary dealer market could function effectively.

1 Variable Life Insurance t In February 1975, the Comm~ss~on an-

I SF 28

nounced withdrawal of its proposed amendments to Rule 3 d under the In- vwtment Company Act and Rule 202-1 under the Advisers Act both of which concerned regulation of variable life insurance. The Commission also an-nounced its intention to propose a rule under Section 6(e) of the lnvestment Company Act" which would conditionally exempt certain variable life insurance 1 Separate accounts from particular sec-tions of the lnvestment Company Act and the rules thereunder while requiring full compliance with all other provisions of this Act and rules. A short time thereafter the Commission rescinded Rules 30-1 and 202-1, effective July 30. 1975.'0° The rescission of these exemptive rules will result in the application of the lnvestment Company Act and lnvestment Advisers Act to variable life insurance contracts, their issuers and related persons until a new rule is adopted or other relief is granted.

Status of Broker-Dealers as lnvestment Advisers

AS a result of the elimination of fixed commission rates on exchange transac- tions on May 1, 1975, some broker-dealers may elect to charge separately I

for investment advisory services which I

they had previously provided solely inci- dentally to their business and without special compensation. The change to charging separately for investment advice would cause such broker-dealers to b* come "investment advisers" within the meaning of the lnvestment Advisers Act.

Temporary Rule ZO6A-l(T), adopted by the Commission prior to May 1, tempo- rarily exempted broker-dealers registered under the Securities Exchange Act of 1934 (except broker-dealers already registered as investment advisers on May 1, 1975) from the provisions of the Ad- visers Act and the rules and regulations thereunder from May 1, 1975, until August 31, 1975."" The exemption provided by the Rule was intended toenable broker- dealers to furnish research and other in- vestment advice for a separate fee for a period of four months without the need to

Ii

j

I

comply with the provisions of the Ad-visers Act.

A result of charging separately for in-vestment advice was that such brokersand dealers would be subject to Section206(3) of the Advisers Act, which makes itunlawful for an Investment adviser, if heis acting as such In relation to a particu-lar transaction, to effect the transactionwith or for his client under circumstanceswhere the adviser acts either as principal,or as broker for a person other than hisclient, unless the adviser furnishes hisclient with prior written disclosure of thecapacity in which the adviser is actingand obtams the client's consent to thetransaction.

On March 31, 1975, the Commissionproposed the adoption of new Rule206(3r--1 under the Act 102 to exempt in-vestment advrssrs who are also registeredWith the Commission as broker-dealersfrom the disclosure and consent require-ments of Section 206(3) of the Act Withrespect to certain Investment advisoryservices If such advisers comply With theconditions set forth In the proposed rule.ThiS rule was adopted substantially un-changed after the close of the fiscal year.

Institutional Disclosure

Under the Securities Acts Amendmentsof 1975, a new Section 13(f) was added tothe Exchange Act, which provides theCornrnissron with authonty to requiredisclosure and reporting of securitiesholdings and transactions from all typesof msntunonat Investors. As such, theamendment Implements a recommenda-tion which the Commission had made InItS letter transmitting the InstitutionalInvestor Study to the Congress In 1971.103

The new section gives the Commissionbroad rulernakrnq authonty to determine,inter alia, the size of the Institutions whichwill be required to file reports, the formatand frequency of the reporting require-ments, and the Information to be dis-closed In each report. The Commission isalso directed to provide for publtc dis-semination of the information collected,subject to confidential treatment In ap-propriate cases, and IS empowered to

exempt any instrtunonal investment man-ager or security from any or all of theprovrsrons of the section

The reports will provide the Commis-sion with a continual flow of Information,thereby creating a uniform, centralizeddata base With respect to the Investmentactivity of large institutions. Among otherthings, the Commission and the publiccan consider "parallel" institutional trad-ing and related price impacts, block trad-Ing and direct trading between mstitu-nons, the Impact of institutional tradingon brokerage services and functions,different techniques of valuation of largesecunnes holdings, and managers' prac-tice In the allocation of Investmentopportunities among their different typesof accounts.

Investment Companies--Sale ofInvestment Adviser

The Securities Acts Amendments of1975 amended the Investment CompanyAct, In part, to clarify the ambiguity cre-ated by the decrsion of the Court of Ap-peals for the Second Olrcuit in Rosenfeldv. Black.104 In that case, the court heldthat the general principle that a fiduciarycannot sell his office for personal gain ISImpliedly Incorporated Into Section 15(a)of the Act, which requires shareholder ap-proval of any new Investment advisorycontract Consequently, a retiring invest-ment adviser of an Investment companyviolates the Act by receiving compensa-tion which reflects either (1) a paymentcontingent upon the use of Influence tosecure approval of a new adviser or (2) anassurance of profits for the successoradviser under a new advisory contractand renewals. The sweep of the court'slanguage cast doubt, however, on whetheran Investment adviser, Without incurringliability to the company or its share-holders, could profit when It sold itsbusiness by sellmg ItS assets.

SIGNIFICANT CASES INVOLVINGSECURITIES ACTS

Gordon v. New York Stock Exchange 105

In this case the Supreme Court affirmed

29

a decision of the Court of Appeals for theSecond Circuit which had upheld the dis-missal of a private antitrust damage ac-tion challenging the fixed commissionrate structures of the New York Stock Ex-change (NYSE) and the American StockExchange (AM EX) as violative of theSherman Act The Court of Appeals hadconcluded that exchange rules and prac-tices which prescribe fixed rates fellwithin the exclusive supervisory JUrisdic-tion of the Commission, and were thusImmune from antitrust attack 106

The Commission filed a brief amicuscunee with the Supreme Court In whichIt expressed the view that It would beImpossible for the Commission to exer-crse the broad discretionary Jurisdictiongranted to It under the Securities Ex-change Act to regulate rules and practicesof national securities exchanges In thepublic Interest, If ItS decisions, and ex-change activities within its JUrisdiction,could be subjected to simultaneous anti-trust attack In federal district courts. TheCommission emphasized that It must anddoes consider competitive factors, to-gether with other purposes and potrcresof the Act, In exercising ItS authority un-der the Act. In ttus context, the Commis-sion pomted to its regulation of theexchanges' comrrnssron rate structure asan example of the complex and technicalmatters which Congress saw fit to entrustto ItS expertise under the ActUntted Housmg Pcuntietron v Forman 107

The Supreme Court, In a 6-3 decrsion,reversed the decrsion of the Court of Ap-peals for the Second Orrcurt In Forman vCommunny Services, Inc. 10K which hadheld that shares of stock In a non-profit,state-supported, cooperative housmqcorporation were secuntres within themeaning of the federal secuntres laws.

The Oomrrussion first participatedamicus curtee In trus case In the SupremeCourt The Court summarily rejected theargument that the shares were securitiesby virtue of their denomination as "stock"since, In the Court's View, they lackedcertain of the common features of stock,such as the right to receive drvidendscontingent upon an apportionment ofprofits and the ability to be negotiated,

30

pledged or hypothecated. The Court, thus,reaffirmed the doctrine that whether a"security" exists Will not turn upon thelabel that an Instrument IS given, but onthe economic realities of the situation.

Regarding the economic reality of theSituation, the Court was heavily Influencedby what It believed to be the sole motiva-tion of shareholders In purchasmq theirshares; namely, the prospect of acquiringa place to live and not the tlnancrat re-turns on their Investment. In this con-nection, the Court concluded that thevarious ways by which Investors mightsave on their expenses were not thekinds of profits traditionally associatedWith securities. According to the Court,those types of profits which would berelevant to determine whether a securityexists would Include profit "derived fromthe income Yielded by an Investment aswell as from capital appreciation." Sincethe shares of stock could not be resoldat a price higher than that which theywere bought, there could be no capitalappreciation. Although the commercialtenants generated Income to the corpora-tion, that Income was found to be toospeculative and insubstantial to bring theentire transaction Within the federalsecunties laws.

In Blue Chip Stamps v, Manor DrugStores,109 the Supreme Court, three JUs-tices dissenting, upheld the so-calledBIrnbaum rule 110 that a person whoneither purchased nor sold securities hasno standing to seek damages for injuriescaused by a violation of Section 10(b) ofthe Securities Exchange Act and Rule10b-5. The Commission, amicus curiae,had urged that the rule was arbitrary,since a Victim of a Violation should beable to recover damages, whether hewas Induced to purchase shares or in-duced not to Pursuant to an antitrustdecree, plaintiffs in tms case had beenoffered stock allegedly at a bargain pricebut failed to purchase It because of anallegedly misleading prospectus over-stating the risks InvolvedUntted States v National Assocteuon ofSecurnies Dealers, Inc. III

In thrs Civil injunctive action, the JusticeDepartment challenged, as Violative of

the antitrust laws, the activities of variousmutual funds, fund underwriters andbroker-dealer distributors of the funds'shares, which allegedly inhibited the de-velopment of a secondary brokerage mar-ket In the funds' shares. Specifically,the Department of Justice alleged (1) thatthe funds, underwnters, and dealers con-tracted among themselves to prohibit thedealers and underwrrters from engagingIn secondary brokerage transactions inthe funds' shares at other than the publicoffering price of those shares prevailingIn the primary market, and (2) that thefunds, underwrrters, dealers, and the Na-tional Association of Securities Dealers(NASD) engaged In a conspiracy to re-strain the development of a secondarybrokerage market In fund shares. Thedistrict court granted defendants' motionsfor summary judgment and dismissed thecomplaint. The Department of Justicethen appealed to the Supreme Courtunder the Expediting Act.

While the Commission did not partrci-pate in the district court proceeding, Itfiled a brief, emtcus curiae, In the Su-preme Court. In that brief, the Commissionurged that the contractual restrictionschallenged by the Department of Justice,although not mandated by Section 22(d)of the Investment Company Act, wereshielded from anti-trust attack because ofthe Jurisdiction granted the CommissionIn Section 22(f) of that Act to superviseindustry imposed restrictions on thetransferability and negotiability of theirshares. The Ocmmisston took no positionwith respect to the alleged conspiratorialactivities of the funds, underwriters,dealers, and NASD.

In affirming the district court's dismissalof the complaints, the Supreme Court, Inaccord with the Commission's position,held that the contractual provrsion chal-lenged in the complaint was Immune fromantitrust attack, since It was subject tothe supervisory JUrisdiction granted theCommission In Section 22(f). The Courtalso held that the alleged conspiratorialactivity In the complaint was in factlegitimate conduct aimed at the further-ance of the policies underlying Sections22(d) and 22(f) of the Investment Com-

pany Act and subject to the pervasiveexercise of Commission requlanon underthe Investment Company Act and theSecurities Exchange Act.

In Securtues Investor Protection Corp.v Barbour, et al.,112 the Supreme Courtreversed a lower court ruling and agreedwith the Commission and SIPC that theCommission's statutory right to bring anaction under the Securities Investor Pro-tection Act of 1970, to require SIPC todischarge ItS duties IS exclusive and thatcustomers have no Similar Implied rightof action The Court also recognized, butleft open, the Commissron's suggestionthat ItS dscrsron not to institute proceed-mqs against SIPC In a particular mattermight be reviewable for abuse ofdiscretion.

The case Involved an attempt by thereceiver for a broker-dealer, who was ap-pointed In a Cornmlssion enforcementproceeding, to compel SIPC to assumeand complete the liqurdatron of the broker-dealer and thereby to make available toItS customers the protections of the ActAs previously described, the Court ofAppeals for the Sixth Oircurt had heldthat the protections of the Act were avail-able where a broker-dealer, althoughInsolvent prior to the effective date of theAct, continued to transact a substantialbusmess in secuntres after the Act hadbecome effective, and that the receiverhad standing to bring an action on be-half of customers of the broker-dealer tocompel SIPC to initiate Irqurdatronproceedings under the Act,l13Securittes and Exchange Commission v.FIrst Secunttes Co. of Chicago I H

The Commission instituted thrs equityreceivership action Immediately after Itlearned of a suicrde note left by thepresident of the defendant broker-dealer,First Securities Co. of Chicago, In whichhe stated, among other things, that hehad misappropriated the funds of thoseFirst Securities customers whom he hadInduced to Invest In a special "escrowaccount" that he operated as a personalventure apart from the firm. The Court ofAppeals had held In an earlier opinion(463 F.2d at 985-988) that First Securitieswas liable to the escrow Investors for the

31

president's fraud both because, as thefirm's president, he had acted with ap-parent authority of First Securities inadvismq the Investors to lrqurdate theiraccounts at the firm and Invest In theescrow, and because the firm aided andabetted the president's Violation of Rule10b-5. Accordingly, the escrow Investorshad a valid claim against the estate ofFirst Securities.

In this latest appeal, the Court of Ap-peals held, in accordance With the POSI-tion urged by the Commission, thatSection 60(e) of the Bankruptcy Act,which governs the distribution of a broker-dealer's assets In a bankruptcy proceed-ing, was properly applied by the districtcourt by analogy In this receivershipproceeding because "the same reasonsfor the Section 60(e) treatment exist Inthe instant stockbroker Irqurdation asCongress must have consrdered in choos-Ing to provide specially for stockbrokerbankruptcies." Section 60(e), the Courtobserved, "was Intended to protect, andsecure equality of treatment for, 'thepublic customer who has entrusted se-curmes to a broker-dealer for somepurpose connected With participation Inthe secuntres markets,''' and the Courtnoted that "a considerable portion of theIFirst Securities] assets on hand repre-sents cash or the proceeds of securitiesentrusted to First Securities by customers"for such a purpose. In support of theapplication of Section 60(e), the Courtalso relied upon the "Interest in UOl-torrmty of treatment of Insolvent brokeragehouses," the Court noting that the Se-curities Investor Protection Act of 1970,enacted after First Securities' failure,adopted to a large degree the provisronsof Section 60(e).

In affirming the lower court's rulingthat the escrow Investors fell Into thecategory of general creditors rather thanthe higher category of "customers," whoare defined In Section 60(e) to includepersons who have claims on account ofsecuntres received, acquired or held bythe stockbroker for the account of suchpersons, the Court of Appeals noted thatthe Investors' transactions with respectto the escrow account were "on their

32

face directly with Nay [the president],personally, and were neither In fact norunderstood to be a deposit of fundsWith First Securities."EqUity Funding Corporation of America

During 1975, Criminal proceedingsagainst those Involved in the fraud atEquity Funding Corporation of America(Equrty Funding) were successfully com-pleted With the conviction and sentencingof all 22 persons Indlcted.'15 EqUityFunding, which has been termed by com-mentators as the largest financial fraud inhistory, pioneered and sold a packageInvestment Involving life Insurance andmutual funds. Over the years it had soldhundreds of millions of dollars of its se-cuntles to the publrc and had expandedthrough life insurance company and otheracquisrtlons In exchange for ItS securities

The government alleged a colossal se-cunnes fraud which lasted and expandedthroughout almost the entire ten-yearhistory of the company. In early 1973,investigation by the staff led to a tradingsuspension by the S E.C. and a S.E.C.complaint seeking an injunction and re-ceiver. Shortly thereafter, the companywent Into Chapter X proceedings.Further Investigation revealed that thecompany Inflated its earnings by record-ing non-existent receivables. ThiS con-tinued on an increasing scale until thefraud was discovered. The company alsoborrowed millions of dollars without re-cording the amounts borrowed as liabili-ties on Its books. The company repaidthese obligations by further undisclosedborrowings. The company structuredcomplicated, sham, foreign transactionsto record bogus income and assets.

Beginning in 1969, the company beganthe Insurance phase of the fraud by rein-suring Insurance polrcres of questionablevalue with other Insurance cornparues.Thrs generated badly needed cash forthe company and helped It Increase itsreported sales and insurance-in-forcefigures. In 1970, the company started theoutright creation of bogus Insurancepolrcres and the reinsurance of thesepollcres ThiS practice continued and in-creased until the company collapsed.Under the company's reinsurance agree-

ments, the company received a significantcash payment from Its reinsurers at thetime the policies were reinsured. In suc-ceeding years. however. the company wasrequired to pay to reinsurers the renewalpremiums It received from policyholders.In the case of the bogus policies. therewere no policyholders and the companyhad to pay these renewal premiums Itself.The company paid these renewal premi-ums by reinsuring more bogus policies.Thus, the company's cash flow and liabili-ties problems increased In geometricproportions. In 1972, the company re-corded at least $14.667.000 in fictitiouspremrurn income. The company's lastannual report was for ItS year endedDecember 31, 1972. The company'sbalance sheet at that time reported$737.511,000 in assets of which approxi-mately one-third was fictitious.

In November 1973. as a result of acoordinated investigation by the UnitedStates Attorney in Los Angeles, theS.E.C., the United States Postal Service,the Federal Bureau of Investigation, theFederal Reserve Board, and the Insurancedepartments of the States of Californiaand ltlmors, 19 former Equity Fundingofficers and employees and three mem-bers of the auditing firm that certifiedthese false tlnancrals were indicted oncharges of conspiracy. secunnes fraud,making false filings with the S E.C. andthe New York Stock Exchange, mail fraud.bank fraud. and other charges. EighteenEquity Funding conspirators pleadedguilty before trial. Stanley Goldblum.Chairman of the Board, and President ofEquity Funding, entered a gUilty pleaafter five days of his trial.

The three members of the auditing firmthat certified these false financial state-ments were convicted by a jury after afour-month trial of various charges of se-cuntres fraud. The court instructed theJury that reckless. deliberate, indiffer-ence to, or disregard for, truth or talsrtyon the part of the auditors. when con-sidered In the light of all other evidencerelating to Intent, might lead to an in-ference that the auditors acted Willfullyand knowingly. The Jury also was in-structed that the auditors could be found

to have acted In such fashion If theydeliberately closed their eyes to the ob-VIOUS, or to facts that certainly wouldhave been observed in the course of theiraccounting work, or. If they recklesslystated as facts matters of which theyknew they were ignorant.

Stanley Goldblum was sentenced toeight years imprisonment and fined$20.000. The other Equrty Funding con-spirators received various prison terms.Each of the auditors received two-yearsentences suspended on the conditionthey serve three months Imprisonment,four years probation, and perform 2.000hours of community service work Theauditors have filed notices of appeal.Securities and Exchange Commissum v.Emanuel Fields. 116

Emanuel Fields, an attorney, was en-JOined by the United States District Courtfor the Southern District of New Yorkfrom further Violation of the Cornmlsston'sRule 2(e), which provides for disqualifica-tion of an attorney from appearing orpracticing before the Commission. TheCommission had disqualified Fields byorder Issued June 18,1973

In consenting to the Final Judgment,Fields admitted that he had appeared andpracticed before the Commission Incontravention of Rule 2(e) and the Com-mission's order, but he asserted that, atthe time he engaged in the conduct al-leged, he did not believe the acts allegedto be In Violation of either Rule 2(e) or theOomrnrssron order.

The Final Judgment prohibits Fields(1) from representing or adVising anyperson In any Cornmlssron proceeding,whether investigatory or administrative,In any informal rnqurry conducted by thestaff, In any conference. drscussron orcommunication With the Commission orIts staff. and In any proceeding, investiga-tion or hearing conducted by a nationalsecunties exchange or a national securi-ties assccranon: (2) from preparing onbehalf of any person, or adVISing anyperson In connection with the prepara-tion of, any document to be filed With theComrmssron under the federal secunneslaws; and (3) from representing or ad-VISing, in connection With any matter

33

arising under or relating to the federalsecurities laws.

Exceptions are provided With respectto all of the foregoing, however, to permitFields to represent persons, including theregulated entities enumerated above, Incourt litigation or In proceedings beforeother government agencies.

In addition, the Final JUdgment ordersdlsgorgement of any and all fees, com-pensatron or other consrderatron Fieldsmay have received, or as to which he mayhave a claim, not only for the servrcesalleged In the complaint, but also for allservices rendered by him since June 18,1973, that are encompassed Within theconduct descnbed In the preceding para-graph The Final JUdgment also directsFields to Inform any Issuer or other per-son who seeks to, or In fact does, employhim In connection With any matter arisingunder or relating to the federal securitieslaws of the fact that he has been perma-nently disqualified from appearing orpracticing before the Oomrrusston andfurther requires him to provide such IS-suer or other person With a copy of theCommission's order of June 18, 1973that permanently disqualified him fromappearing or practicing before theCommission.

Silver and Gold Investments

DUring the year the Cornrnisston filedseveral injunctive cases concerning thesale of Investments In COinS, silver andsilver futures.

On December 12, 1974 the Cornrmsstonfiled a lawsurt against Monex InternationalLtd., d/b/a Pacific Coast COin Exchangebased upon alleged Violations of thesecurities registration and anti-fraud pro-vrsrons of the Federal secuntres laws Inconnection With margin sales of bulksnver COinS. The Oomrrussron allegedthat the defendants had made false andmisleading statements concerning non-existent purchases, fees for non-existentservices, Investments prospects, and thefirm's comparability With other exchanges.The defendants have consented to aTemporary Restraining Order.

In ItS first major lawsuit mvolvmq goldsales the Comrmssron obtained a tem-

34

porary restraining order against BrentFields, Daniels & Martin, Ltd (an Atlanta-based firm Incorporated In England) andUnited States BUllion, a wholly-ownedsubsrdrary, based upon violations of thesecurities registration and anti-fraudprovrsrons of the Federal securities laws.The defendants had offered for sale 6,000ounces of gold worth more than one mil-lion dollars when In fact they only had200 ounces.

With respect to rare COinS, a prelimi-nary injunction against Federal COinReserve was Issued on February 10, 1975,based on Violations of the securitiesregistration provisions In connection Withthe sale of rare COin portfohos.t!? Thecourt noted that, although the portfolioswere advertised by the defendants asInvestments In publications of a general(vs. numismatic) nature, the defendantsoffered a number of servtces, the mostSignificant of which was the selection ofthe COinS by the sellers, which gave riseto an Investment contract, under themeaning of Section 2(1) of the SecuritiesAct of 1933. The opinion states that "thedependence of the Investor on the ex-pertise of the seller to produce the ex-pected profit" was suftrcrent to meet theHowey tests for Investment contracts. Thecourt rejected the notion that possessionof the COin portfolios reconverted an in-vestment contract into a commodity. Thefact that Investors were not required toavail themselves of the proffered serviceswas declared irrelevant inasmuch asthe terms of the offer, not the acceptance,determine whether any particular invest-ment vehicle IS a security within themeaning of the Federal securities laws.Defendant's proposition that none ofits services affected the value of theCOinS and therefore secunnes were notInvolved, was also rejected by the court.

On April 21, 1975 the Commodity Fu-tures Trading Commission came Intoexistence. The new Cornmtsston, In addi-tion to regulating commodity futures,has exclusive junsdrctron over marginand leveraged sales of Silver and gold,however, Congress specrncally mandatedthat pending proceedings Will be un-affected by the new Commodity Act.

On November 20, 1974, the United

States Attorney for the Middle District ofFlorida filed a one-count criminal mtorma-tron against James E. Tolleson and Exert-Ing Life, lnc., charging them With wilfully,and without just cause, failing and refus-Ing to attend and testify and producecertain records in obedience to a sub-poena duces tecum issued by a Comrrus-sron officer In the course of aninvestigation. liB This IS only the secondsuch action instituted in recent years, andonly the third such case in Commissionhistory Upon convicnon, the defendantsare subject to a maximum fine of $1,000.00and up to one year imprisonment.

On March 26, 1975, EXCiting Life, Inc.,pleaded guilty to the violation as chargedIn the information and was fined$1,000.00. On March 11, 1975, the Courtentered an order drsmrssrnj; the Informa-tion as to James E Tolleson for lack ofproper service. That order has been ap-pealed by the Government to the Court ofAppeals for the Fifth crrcun and a de-crslon on the appeal IS expected dunnqfiscal year 1976.

Commission Litigation

SEC v. Stirling Homex Oorporetton-r-the Cornrnlssron filed a Complaint In theUnited States District Court for the DIS-trict of Columbia 119 seeking an injunctionand certain ancillary relief againstStirling Homex Corp., SIX of ItS officersand directors and Merrill Lynch, Pierce,Fenner & Smith, Inc. ("Merrill Lynch"),a New York broker-dealer The Com-rrussron's complaint alleged that from1970 through 1972, the financial state-ments of Stirling Homex Corp, a com-pany which was engaged In the manufac-turing and installing of multi-familymodular Units ready for occupancy, werematerially talsrtred by the fradulent re-cording and reporting of fabricated ornctrtious sales and application of in-appropriate accounting principles. Inaddition, It was alleged that as part of thefraudulent scheme In which some of thedefendants participated, Illegal politicalcontributions were made, Illegal electrorucSurveillance equipment was used, and

corporate funds were used for thepersonal benefit of some of the manage-ment of Stirling Homex.

With respect to defendant MerrillLynch, It was alleged that they were in-volved, directly and indirectly, In the filingWith the Ccmrrussron and the dissemina-tion to the public of a false StirlingHomex reqrstratron statement and theyknew or should have known of materialfacts which were not disclosed In theregistration statement and that the in-qurry made by Merrill Lynch With respectto the registration statement was inade-quate. Also alleged were violations ofthe Federal securities laws In the dis-semination by Merrill Lynch to ItScustomers of Inaccurate or misleadingresearch reports, wire flashes and opin-Ions, earnings and price predictions andstatements concerning Stirling Homexand ItSsecurities.

Simultaneously With the filing of thecomplaint, the SIX officers and directorsof Stirling Homex, Without admitting ordenying the allegations, consented topermanent injunctions enjoining themfrom Violations of the reporting and anti-fraud provrsrons of the Federal securitieslaws With respect to the securities ofStirling Homex or any other Issuer. Inaddition to the Injunction the court or-dered three of the officers and directorsnot to be associated With any corporationwhose securities are publicly held Withoutprior Commission approval and to fore-bear from receiving any assets, propertiesor monies of Stirling Homex in any dIS-tnbution which they would be entitled toparticipate In as a security holder orcreditor of Stirling Homex. Further thecourt ordered the former Comptroller andVice President of Stirling Homex not tobe associated With any corporation whosesecurities are publicly owned as a chieftmancral officer for two years Withoutprior Oornrmsston approval. In addition,the former Director, General Counsel andExecutive Vice President undertook notto practice before the Cornrnissron asdefined by Rule 2(e) of the Commission'sRules of Practice Without prior Oommrssronapproval.

Also, Merrill Lynch consented, Withoutadmitting or denying the alleqanons, to

35

a permanent injunction enjornmq themfrom violations of the anti-fraud provisionsof the Federal secunties laws and to anorder of the court requiring them to adoptwithin 60 days, Implement and maintainpolicies and procedures relating to itsunderwriting, research and retailing ac-tivities, which are reasonably calculatedto prevent the recurrence of the mattersalleged In the Complaint.

After the final disposition of the civilactions now pending with respect to thesecurities of Stirling Homex In whichMerrill Lynch IS a defendant, the Com-mission may apply to the court for a de-termination of the profits earned byMerrill Lynch as a result of the activitiescomplained of In the Commission's com-plaint. Upon a determination by the courtof such profits, Merrill Lynch shall dis-gorge such profits pursuant to an orderand plan to be determined by the courtplus Interest thereon at 6% per annumfrom the date of entry of said order andplan, provided however, that the courtlimit the amount of such drsqorqernent ornot require any disgorgement based on aconsideration of the findings In such Civilactions With respect to the matters com-plained of In the Commission's com-plaint, including actions wherein de-terminations favorable to Merrill Lynchhave been rendered, and after giVingeffect to all settlements and moneyJudgments which may have been enteredand satisfied by Mernll Lynch.

The Commission also issued a Reportof Investigation relating to the activitiesof the Board of Directors of StirlingHomex Corporation ("Report") whichdealt In particular With the role of StirlingHomex's two outside directors, TheodoreW. Kheel and John W. Castelluccl.120

The Report was issued pursuant to Sec-tion 21(a) of the Securities Exchange Actof 1934 which allows the Commission topublish at its discretion information gath-ered dUring an Investigation concerning"any facts, conditions, practices or mat-ters which It may deem necessary orproper" In fUlfilling ItS responsibilities.Solely for the purpose of the Report,Kheel and CastellUCCI consented to ItSIssuance, Without admitting or denying

36

the findings set forth therein.The Report outlines the background of

Stirling Homex, details the compositionand functions of its Board of Directorsand comments on the role of Kheel andCastellucct as outside directors.

SEC v United Brands Company--0nApril 9, 1975, the CommiSSion filed aComplaint In the United States DistrictCourt for the District of Columbia seekingan injunction and other relief againstUnrted Brands Company alleging viola-tions of Sections 10(b) and 13(a) of theSecurities Exchange Act of 1934 andRule 10b-5, 12b-20, 13a-1, 13a-11 and13a-13 thereunder In connection WithUnited Brands failure to disclose sub-stantial payments to officials of foreigngovernments in order to secure favorabletreatment In connection with its businessoperations in those oountrles.is! UnrtedBrands contested the Commission's rightto proceed With trus action during thependency of a criminal investigation be-Ing conducted by the United States At-torney for the Southern District of NewYork and on July 18, 1975, the UnitedStates Court for the District of Columbiaheld that the criminal investlqatron wasno bar to the Commission's CIVil suit.The Commission IS now pursuing pre-trial discovery In this matter.

S.E.C.v. Phi/ltps Petroleum Company-On March 6, 1975 the Commission filed acomplaint against Phillips Petroleum Com-pany, William F. Martin, ItS present chair-man, W. W. Keeler, a former chairman,John M. Houchin, one of Its directors,and Carstens Slack, the vice-president In

charge of ItS Washington, DC offlce.122

The Commission's complaint allegedthat the defendants violated Section 13(a)and 14(a) of the secunnes Exchange Actand certain rules prornulqated there-under by filing With the Commission an-nual reports and sotrcmnq proxies fromshareholders of Phillips Petroleum Com-pany which failed to disclose that thedefendants and others had created asecret fund of corporate monies whichwas used for unlawful political con-trtbutions and other purposes, and,addrtionally, that Phillips Petroleum Com-pany tmancrat statements filed With the

Commission falsely stated the incomeand expenses of the Company andunderstated its assets.

The complaint further alleged that thedefendants and others, by means of falseentries on the books and records ofPhillips Petroleum Company had causedto be disbursed In excess of $2.8 millionIn corporation funds into two Swissbearer-stock repository corporations andthat, after this sum was converted Intocash, in excess of $1 3 million of thisfund was returned to the United Stateswith approximately $600,000 being ex-pended on political contributions andrelated expenses, a substantial portionof which were unlawful. The complaintalso alleged that the balance of the fundschannelled into the SWISS corporationswas distributed overseas In cash.

The order of permanent injunction en-Joins Phillips Petroleum Company fromfurther Violations of Sections 13(a) and14(a) of the Exchange Act. The order alsorestrains Phillips Petroleum Companyfrom use of corporate funds for unlawfulpolitical contributions or similar unlawfulpurposes, from making false or nctmousentries In its books and records and fromestablishing or maintaining any secret orunrecorded fund or corporation morues orassets or making payments of disburse-ments therefrom.

The orders entered against the indi-vidual defendants restrain them fromIdentical practices with respect to PhillipsPetroleum Company or any othercompany.

As part of the order entered against It,Phillips Petroleum Company undertook toprepare promptly and file, With the Com-rnissron and with the court, a reportdescribing the investigations it has madeof this matter, the results thereof and theactions taken with respect thereto. Phil-lips Petroleum Company also undertookto make appropriate disclosure to ItSshareholders of the matters involved Inthe report and that the Company's Boardof Directors shall independently reviewthe report and take such further action asIt deems necessary and proper based onthe report

The Oommlssron reserved the right to

seek such further relief as may be neces-sary or appropriate If It IS not fully satis-fied that Phillips Petroleum Company hascomplied With and implemented itsundertaking.

S.E.C. v. Allegheny Beverage Corpora-tion-Qn January 8, 1975, Chief U.S.District Judge for the District of Columbia,George L. Hart, Jr., entered a consentorder granting rnjuncnve, mandatory andancillary relief against Allegheny, ValuVend, Inc. ("VV"), Valu Vend CreditCorporatlon ("VVCC"), and Morton M.Lapides, chief executive officer of thedefendant corporations for Violations ofthe anti-fraud, reporting, registration andproxy provislons of the Federal secuntieslaws Besides enjomlnq future miscon-duct, the order (1) directed Lapides todisgorge $70,000 in unlawful gains result-ing from insrder sales and personal useof corporate funds, (2) provided for theappointment of a special agent to con-

. firm the return to Allegheny by Lapides of$540,000 of corporate funds, (3) providedfor the appointment of a specral auditcommittee to select an Independent certi-fied public accountant for and morutorrelations between the accountant andAllegheny management, and (4) directedAllegheny to file amended reports rn ac-cordance with the allegations of theamended complaint. The amendedcomplaint included charges of misappro-priation of corporate funds, the Issuanceof false tmancral reports, and the perpe-tration of a fraudulent publrc offering ofdebentures in 1971 and 1972.

As previously reported, the CommissionInstituted an injunctive action againstAllegheny and 24 other defendants In1973 alleging violations of reporting, anti-fraud and registratIOn provlsrons of thesecunties acts.123 The complaint wasamended in January 1975 to chargeproxy violations and a rrusappropnatronof corporate funds by the chief executiveofficer of Allegheny. In addition to Al-legheny, the defendants Included two ofItS SUbsidiaries, four officers, the com-pany's auditors, the underwriter of asubSidiary's public offering, counsel forthe underwriter, counsel for the Issuer,the escrow agent for the public offering

37

and several othersOn July 1, 1975, the Commission went

to trial against defendants C GordonHaines, Wright, Robertson & Dowell("WRD"), A. Jeffry Robinson and Mc-Laughlin & Stern, Ballen and Miller("MSBM"). After the trial began, settle-ment was reached with these four de-fendants, bringing to a successfulconclusion all litigation instituted againstthe 25 defendants. As a result of the set-tlements, WRD, which represented theIssuer In the public offering of deben-tures, and Haines, the partner responsiblefor that firm's representation of the IS-suer, were ordered to make adequateinquiry to Insure full and accurate dis-closure in securities offerings In thefuture, were required to adopt new pro-cedures to prevent the recurrence offraud, and were required to refrain fromtaking any new business involvingpractice before the Commission for 60days.

MSBM, which represented the under-writer for the offering, consented to anorder pursuant to Rule 2(e) of the Com-mission's rules of practice directing It toundertake Internal procedures to preventthe recurrence of fraud, and censuring Itfor ItS failure to supervise an associateadequately and for the failure of the as-sociate to make adequate inquiry con-cerning the facts of a closing with respectto the offering. The amended complaintcharged that the terms of the offeringrequired the Issuer, VVCC, to sell $10million In debentures within a specifiedtime, or return the proceeds to Investorsand terminate the offering It alleged thatat a closing on January 3, 1972, the de-fendants engaged In a series of shamsales transactions designed to create theappearance that $10 million In debentureshad been sold, when In fact only $525,000In debentures had been sold, In order tocontinue the offering and retain theproceeds.

The following additional defendantssettled prior to trial: Allegheny officersHarry J. Conn, Anthony Joseph Hering,and William Kane, First Duso SecuritiesCorporation, Miles Bahl, Benjamin Bot-wrruck & Company, Alvrn L. Mlr1des, David

38

S. Klein, Barry L. Dahne, Klein & Dahne,Southern Capital Corporation, ClaudeLeroy Dixon, Paken Enterprises, lnc.,Kenneth Denson, W.F.S., Inc., Walter F.Sparks, and Suburban Trust Company

SEC v. Penn Central Co., et al.124 OnMay 2, 1974, the Commission filed a civilInjunctive complaint alleging vrolationsof the federal securrnes laws In connec-tion with events relating to the financialcollapse of the Penn Central railroad In1970. The actron named Penn CentralCompany, Penn Central TransportationCo., two subsldlarles, several officers ofthe companies, three non-officer direc-tors, several other individuals and theIndependent auditing firm for these com-panies. The complaint was based on aninvestigation which was previously thesubject of a report entitled "The FinancialCollapse of the Penn Central CO.-StaffReport of the SEC to the Special Sub-committee on Investigations of the HouseCommittee on Interstate and ForeignCommerce."125

The complaint alleged that the anti-fraud provtsrons and periodic filing re-qurrements were violated In that duringthe period prior to the filing of a petitionfor reorganization under the bankruptcylaws in June 1970 by Penn Central Trans-portatron Co., the financial results andcondition of the companies were misrep-resented and the extent of the deteriora-tion In the affairs of the companies wasnot disclosed. It was also alleged thatas a part of the fraudulent conduct someof the officers of a subsidiary Improperlyreceived payments based on the Inflatedearnings of the subsidiary and that anofficer of the Transportation Co. soldPenn Central stock on inside information.It was also alleged that certain railroadfunds had been Improperly diverted to asmall European country. In its complaint,the Commission sought miuncnonsagainst further violations and the dis-gorgement of monies Improperly received.

Since the filing of the action, one of-ficer, the two subsidiary companies andthe Independent auditing firm have con-sented to permanent rnjunctrons withoutadmitting or denying the allegatIOns. Thesettlement with the Independent auditing

firm, Peat, Marwick, Mitchell & Co., waspart of a combined settlement arrange-ment involving other actions and relatedremedies which is described elsewhereIn this report

In SEC v. Goldman, Sachs & CO.,126

an action related to the Penn Central ac-tion, the Comrnissron alleged In a com-plaint filed In the Southern District ofNew York on May 2, 1974 that Goldman,Sachs & Co, Penn Central's commercialpaper dealer, violated the anti-fraudprovisions In connection with the sale ofPenn Central Transportation Co. com-mercial paper prior to the filing of thepetition for reorganization. Simultane-ously with the filing of the action, Gold-man Sachs consented to a injunctionwithout admitting or denying the allega-tions of the complaint and undertook, aspart of th.e relief, to Implement certainprocedures relating to the collection ofinformation about issuers of commercialpaper and the dissemination of such in-formation to its customers who purchasethe commercial paper.

SEC v. National Student Marketmg Cor-poration, Cortes W. Randell, the formerpresident of National Student MarketingCorporation, Bernard J. Kurek, its formerchief financial officer, John G. Davies, ItSformer general counsel and Robert C.Bushnell and Dennis M. Kelly formersales executives of National were con-victed of conspiracy to violate mail fraudstatutes and filing provlsrons of the Se-curities Exchange Act In connection withthe issuance in 1968 of false and mislead-ing financial statements and reports con-cerning the assets and earnings ofNational.

Also convicted were Anthony M. Nateln,then a partner In the firm of Peat, Mar-wick, Mitchell & Co., outside auditors forNational, and Joseph Scansarolr, a formeremployee of that firm, Randell, Bushnell,Kelly and Kurek with making false andmisleading statements With the Commis-sion In mld-1969.

NOTES TO PART 11 Pub. L. No. 94-29 (1975) [hereinafter

referred to as the "1975 Amendments"].2 Not discussed In ttns section of the

Annual Report are the provisrons of the1975 Amendments concerning uniformcriminal penalties under the federal se-curities laws, Commission enforcementand investigative powers, the alterationof Commission administrative powers Withrespect to those who are not securitiesprofessionals, judicial review of ordersand rules of the Commission, consolida-tion of Commission actions for equitablerelief pursuant to Section 1407(a) of Title28, United States Code, the cessation ofComrrussron authonty to suspend tradingIn the securities of bank holding com-panies, annual reports to Congress, trans-action fees paid by national securitiesexchanges, arbitration proceedings be-tween self-regulatory organizations andtheir participants, members, or personsdealing with members or participants,institutional disclosure, and amendmentsto the Securities Act of 1933, SecuritiesInvestor Protection Act of 1970, Invest-ment Company Act of 1940, InvestmentAdvisers Act of 1940, Act of August 20,1962, PubliC Utility Holding Company Actof 1935, and Trust Indenture Act of 1939.

3 The 1975 Amendments changed thedetinltron of "interstate commerce" InSection 3(a)(17) of the Securities Ex-change Act to include intrastate use of(A) any tacrhty of a national securitiesexchange or of a telephone or other in-terstate means of communication and(B) any other Interstate instrumentality.

4 The 1975 Amendments allocate cer-tain rulemakrnq, enforcement and otherresponsibilities between the Oornrrussronand bank regulatory agencies Thrs ISaccomplished by Introducing a new term,"appropriate regulatory agency," whosedefinition delineates which agency hasauthorrty over which persons or trans-actions. Other provisions seek to promotecooperation between and ettrciencyamong the several regulatory agenciesconcerned With rnurucrpal secunnes deal-ers and the activities of transfer agentsand clearing agencies.

5 Secunties Exchange Act Release No.11469 (June 12,1975),7 SEC Docket 157

6 Securities Acts Amendments of 1975,Conference Report to Accompany S.249,Joint Explanatory Statement of the Comm.of Conference, H.R. Rep. No. 229, 94thCong., tst Sess. 108 (1975).

7 Securities Exchange Act Release No.11203 (January 23, 1975), 6 SEC Docket147. See also, 40th Annual Report, p 5.

8 Secunties Exchange Act Release No.10986 (August 27,1974),5 SEC Docket 64

9 Securities Exchange Act Release No.11019 (September 19, 1974), 5 SECDocket 156.

10 When the Commission commencedits Inquiry Into the commission rate struc-tures at the time of the Special Study,

39

fixed comrrusston rates were assumed byeveryone, including the Commission, tobe a normal and necessary feature of theexchange markets It only became clearin light of later experience and thoroughstudy that this was not the case. Whilethe virtues of the traditional system wereat first staunchly defended, by the timeof the hearings on Rule 191>-3 the exist-ing system had few defenders. Those whoopposed Rule 19b-3 largely confinedthemselves to either asking for delay, orsuggesting that the initiation of com-petitive cornmtssron rates should awaita more prosperous period, or be deferredpending the taking of certain furthersteps toward a central market system, orthe adoption of certain proposed safe-guards for the auction market process.A few witnesses suggested that somevaguely outlined better system of fixedcomrmssron rates should be developed.No one who testified at the hearings onRule 19b-3 supported any extendedcontinuation of the status quo, at leastWith respect to public rates.

II Securities Exchange Act Release No.11293 (March 13, 1975), 6 SEC Docket431.

12Securities Exchange Act Release No.11395 (May 2, 1975), 6 SEC Docket 841.

1340th Annual Report, p.4.14Securities Exchange Act Release No

11131 (December 11,1974) 5 SEC Docket672.

15Securities Exchange Act Release No.11505 (June 30,1975),7 SEC Docket 287.

1640th Annual Report, p. 7; 39th An-nual Report, p. 9.

17Securities Exchange Act Release No.10787 (May 10,1974),4 SEC Docket 271.

18Securities Exchange Act Release No.11036 (October 3, 1974), 5 SEC Docket213. Amendments to the short sale ruleswere announced In Securities ExchangeAct Release No. 11030 (September 27,1974),5 SEC Docket 189.

19Securities Exchange Act Release No11273 (March 3, 1975), 6 SEC Docket 375.

20Securities Exchange Act Release No.11389 (May 1, 1975),6 SEC Docket 787.

21Securities Exchange Act Release No11317 (March 28, 1975), 6 SEC Docket544.

22DUring the year, the Commissionadopted an amendment to Securities Ex-change Act Rule 17a-15 (See 39th An-nual Report, p 9) to establish proceduresfor appeal to the Commission from cer-tain actions which may be taken pursuantto the Joint Industry plan, (Securities Ex-change Act Release No. 11097 (November13, 1974) 5 SEC Docket 471) declaredeffective plans filed under the Rule by theBoston, Cmcmnati, and Detroit Stock Ex-changes and Instrnet, and granted anexemption to the Intermountain Stock

40

Exchange from the reporting requirementsof the Rule (Securities Exchange Act Re-lease No. 11385 (April 30, 1975) 6 SECDocket 782) The Intermountain StockExchange is required, by the terms of itsexemption, to report to the Commissionon a weekly basis details of its transac-tions (if any) in securities which wouldotherwise be required to be reportedpursuant to Rule 17a-15.

23Securities Exchange Act Release No.9529 (March 8,1972).

24Securities Exchange Act Release No.10969 (August 14, 1974), 5 SEC Docket735.

25Securities Exchange Act Release No.11288 (March 11, 1975), 6 SEC Docket425.

261d. at 2.27Securities Exchange Act Release No.

11406 (May 7,1975),6 SEC Docket 859.28Secunties and Exchange Commis-

sion, Statement on the Future Structureof the Securities Markets (February 2,1972),37 Fed. Reg. 5286 (1972).

29Securities and Exchange Commis-sion, Policy Statement on the Structureof a Central Market System (March 29,1973).

30Securities Exchange Act Release No.10668 (March 6, 1974),3 SEC Docket 650.

31Securities Exchange Act Release No.11030 (September 27, 1974), 5 SECDocket 189.

32Securities Exchange Act Release No.11056 (October 7, 1974), 5 SEC Docket286.

33Securities Exchange Act Release No.11276 (March 5,1975),6 SEC Docket 378.

34 See, Lorie, Public Policy for Amer-teen Capital Markets 10 (Department ofthe Treasury, Feb. 7, 1974); Letter fromWeeden and Co. to Lee A. Pickard, Di-rector of Division of Market Regulation,Securities and Exchange Commission,November 15,1974 (File No. S7-515).

35Securities Exchange Act Release No.11468 (June 12,1975),7 SEC Docket 150

36Securities Exchange Act Rule 9b-1provides that a national securities ex-change whose tacilrnes are to be used toeffect transactions In options must firstfile with the Commission a plan whichcontains those rules or requirements ofthe exchange that relate solely or sig-nificantly to transactions in options on theexchange. Under that rule, the plan mustbe declared effective by the Commissionbefore any transaction in options cantake place on that exchange. At the endof fiscal year 1975, the Commission'sstaff was working on a proposal for anew rule under Section 19 of the Act, asamended by the 1975 Amendments, which,If adopted would result In resclssron inItS entirety of Rule 9b-1. Amended Sec-tion 19 and the new rule would provide

procedures for submission for Oomrrus-sron approval of proposed exchange rulesgenerally, and since these would be es-sentially the same as those of Rule 9b-1,that rule would be rescinded.

37 See 40th Annual Report, P. 8.38 Securities Exchange Act Release No.

11144 (December 19,1974),5 SEC Docket734.

39 Securities Exchange Act Release No.11423 (May 15, 1975), 6 SEC Docket 894.

40 As defined by CBOE, these optionsare those seiling for below $.50 wherethe underlymg security IS 5 points ormore below the exercise price (CBOERule 4.17). There was evidence of in-creased uncovered writing activity in suchoptions which raised regulatory questionsof surtabrlity, financial responsibility andexcessive speculation. The Amex andPBW have adopted Similar restrictions aspart of their option plans (Amex Rule910 and PBW Rule 1052).

41 The PBW and the Amex subse-quently adopted similar restrictions.

42 See 40th Annual Report, p, 8; n. 40,p.21.

43 PBW Rule 1016.44 See 40th Annual Report, p. 9.45 Securities Exchange Act Release No.

11144 (December 19,1974),5 SEC Docket734.

46/d.47 See Securities Exchange Act Release

No. 10981 (August 22, 1974), 5 SECDocket 224.

48 Securities Exchange Act Release No.11497 (June 26,1975),7 SEC Docket 241.

49 Securities Exchange Act Release No.11094 (November 11,1974),5 SEC Docket448. The rule had previously been pub-lished for comment in Securities Ex-change Act Release No. 9891 (December5, 1972) and Securities Exchange ActRelease No. 10525 (November 29, 1973),3 SEC Docket 103.

50 Securities Exchange Act Release No.10612 (January 24, 1974), 3 SEC Docket423.

51 5 U.S.C. App. I.52 See Securities Exchange Act Re-

lease No. 10808 (May 16, 1974), 4 SECDocket 304.

53 See Securities Exchange Act Re-lease No. 10959 (August 9, 1974), 4 SECDocket 304.

54 FOCUS Report (prepared by StaffWork Group of the Informal FOCUS Re-port Subcommittee of the Report Co-ordinating Group (October 15,1974).

55 Interim Report of the Report Coordi-nating Group to the Securities and Ex-change Commission (December 16, 1974).

56 Report Coordinating Group First An-nual Report to the Securities and Ex-change Commission (June 16, 1975).

57 See Securities Exchange Act Release

No. 11499 (June 26, 1975), 7 SEC Docket282.

58 Securities Exchange Act Release No.9835 (October 25,1972).

59 Securities Exchange Act Release No.11098 (November 13, 1974),5 SEC Docket472.

60 The necessity to update the GUidewas repeated in many letters from thepublic and the Congress. Both Congress-man John E. Moss and CongressmanLionel Van Deerlin wrote to the Chairmanexpresslnq the necessity to keep theGUide current. In a letter dated May 22,1975 to the Chairman, Congressman VanDeerlin wrote:

The House and Senate have approvedthe conference report on S.249, theSecurities Acts Amendments of 1975,and we anticipate that the Presidentwill sign it promptly. The changes inthe law made by that bill makes inac-curate certain parts of the Broker-Dealer Compliance Guide ....There has been considerable discus-sion between thiS Subcommittee andthe Commission concerning the needto keep that Compliance GUide up-to-date. I trust that you will take the oc-casion of the passage of this legislationto arrange to maintain the ComplianceGUide current.61 Securities Act Release No. 5526

(September 9,1974),5 SEC Docket 115.62 See 39th Annual Report, pp. 16-1763 Securities Exchange Act Release No.

10591 (January 10, 1974),3 SEC Docket359. See 40th Annual Report, pp. 15-16.

64 Securities Exchange Act Release No.11079 (October 31, 1974), 5 SEC Docket356.

65 Securities Act Release No. 5362,February 2, 1973.

66 Securities Act Release No. 5581,April 28, 1975.

67 See 35th Annual Report, p. 21.68 See 38th Annual Report, p. 12; 39th

Annual Report, p. 15.69 See 40th Annual Report, p. 13.70 Securities Act Release No. 5560

(January 24,1975),6 SEC Docket 132.71 Securities Act Release No. 5510

(JUly 3,1974),4 SEC Docket 524.72 Securities Act Release No. 5487

(April 23,1974),4 SEC Docket 154.73 Securities Act Release No. 5450

(January 7,1974),3 SEC Docket 349.74 Securities Act Release No. 5560

(January 24,1975),6 SEC Docket 132.75 Securities Act Release No. 5588

(May 30, 1975), 7 SEC Docket 62.76 Securities Act Release No 5504

(June 14, 1974), 4 SEC Docket 417; See40th Annual Report, p. 15.

77 Securities Act Release No. 5564(January 31, 1975),6 SEC Docket 210.

78 Securities Exchange Act Release No.

41

11125 (December 9, 1974), 5 SEC Docket667

79Securities Act Release No 5552 (De-cember 26,1974),6 SEC Docket 2.

80Secunties Act Release No. 5569(February 11, 1975), 6 SEC Docket 257.

HI 42 U.S.C. 4321 et seq.H2389 F. Supp. 689 (D. D.C., 1974)83Secunties Act Release No. 5235

(February 16,1972)H4Securrtres Act Release No. 5386

(Apnl 20, 1973), 1 SEC Docket No. 12, p. 1.H5389 F. Supp. at 701H6Secunties Act Release No 5627

(October 14,1975),8 SEC Docket 41H7Investment Company Act ReI. No

8570 (November 4, 1974), 5 SEC Docket423.

HHLetter transmitting Staff Report to theU.S. Senate Committee on Banking, Hous-Ing and Urban Affairs, November 4, 1974.

89 Investment Company Act ReI. No8568, (November 4, 1974) 5 SEC Docket388, Investment Company Act ReI. No8824, (June 16, 1975) 7 SEC Docket 187

90Secuntres Act ReI. No 3568, (August29,1955).

91Secunties Act ReI. No 5248, (May 9,1972)

921d.93 Investment Company Act ReI. No

8571 (November 4, 1974), 5 SEC Docket390

44 Investment Company Act ReI. No.8569 (November 4, 1974),5 SEC 420.

95 Investment Company Act Rei No.8894 (August 19, 1975), 7 SEC Docket 639.

96 Investment Company Act Rei No8878, (August 7, 1975) 7 SEC 528.

97 Letter to Gordon Macklin, President,NASD, November 22, 1974. 74-75 DecI-srons, CCH Fed. Sec. L.R para 80,019.

9HInvestment Company Act ReI. No8690, Investment Advisers Act ReI. No.439 (February 27, 1975), 6 SEC Docket362

99 Investment Company Act Rei No8826, Investment Advisers Act ReI. No.463 (June 18, 1975), 7 SEC Docket 221.

100Investment Company Act ReI. No.8691, Investment Advisers Act Rei No.440 (February 27, 1975), 6 SEC Docket364

42

101Investment Advisers Act ReI. No.455 (Apnl 23,1975),6 SEC Docket 726.

102Investment Advisers Act ReI. No.448 (April 2, 1975), 6 SEC Docket 549.

103SEC, Institutional Investor StudyReport, H.R. Doc. 64, 92d Cong., tst Sess.Vol. 1 at X, XI (March 10,1971).

104445 F. 2d 1337 (1971)10595 S.Ct. 1598 (1975).106 Gordon v. New York Stock Ex-

change, Inc., 498 F.2d 1303 (C.A. 2, 1974).107Sup. Ct. Nos 74-157 and 74-647

(June 16,1975).108500 F.2d 1246 (C.A 2,1974).109Supreme Court, October Term, 1974,

No. 74-124.110Based on Birnbaum v. Newport

Steel Corp., 193 F. 2d 461 (C.A.2, 1952).11195 S Ct. 2427 (1975).112421 U.S. 412 (1975).11340th Annual Report, p. 65.114507 F.2d 417 (C.A 7,1974).115U.S. v Stanley Goldblum, et et

U.S.D C. (C D. Calif) Cnm 70 13390; seealso SEC v Equity Funding Corp. ofAmence, US D.C (C.D. Calif), CIvil Ac-tion 73-714.

116S.D.N.Y., No 75 Civ. 1299 (LPG).117SEC v. Bflgadoon Scotch Distribu-

tors, Ltd., Docket No. 74-5422, SDNY.IIH U.S. v James E. Tolleson, litigation

Release No 6598 (November 22, 1974),5 SEC Docket 686

119See litigation Release No. 6960(July 2,1975),7 SEC Docket 370.

120Secunties Exchange Act ReleaseNo. 11516 (July 2, 1975), 7 SEC Docket298.

121See litigation Release No. 6827(Apnl 9, 1975), 6 SEC Docket 635.

122litigation Release No. 6770 (March6,1975),6 SEC Docket 419.

12339th Annual Report, p. 76. See also40th Annual Report, p. 84.

124litigation Release No 6349 (May 21974), E.D. Pa. CIvil Action No. 74-1125.

125U.S. Government Printing OfficeWashington, 1972

126litigatIOn Release No. 6349 (May 21974), S.D N.Y. 74 Civ. 1916.

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PART 2THE DISCLOSURE SYSTEM

PART 2THE DISCLOSURE SYSTEM

A basic purpose of the Federal secun-ties laws IS to provide disclosure of ma-terial, financial and other information oncompanies seeking to raise capitalthrough the public offering of their se-cunties, as well as companies whosesecurities are already publicly held.This aims at enabling investors to evalu-ate the securities of these companieson an informed and realistic basis.

The Securities Act of 1933 generallyrequires that before securities may beoffered to the public a registration state-ment must be filed with the Commissiondisclosmg prescribed categories of in-formation. Before the sale of securitiescan begin, the registration statement mustbecome "effective." In the sales, in-vestors must be furnished a prospectuscontaining the most significant mtormatronm the registration statement.

The Securities Exchange Act of 1934deals m large part with securities al-ready outstandmg and requires theregistration of securities listed on a na-tional securities exchange, as well asover-the-counter securities rn which thereis a substantial public Interest. Issuers ofregistered securities must file annualand other periodic reports designed toprovide a public file of current materialinformation. The Exchange Act also re-quires disclosure of material Informationto holders of registered securities Insolicitations of proxies for the election ofdirectors or approval of corporate actionat a stockholders' meeting, or In attempts

to acquire control of a company througha tender offer or other planned stockacquisltion. It provides that Insiders ofcompanies whose equity securities areregistered must report their holdings andtransactions in all equity secuntres oftheir companies.

PUBLIC OFFERING: THE 1933SECURITIES ACT

The basic concept underlying the Se-cunties Act's registration requrrernentsis full disclosure The Commission has noauthority to pass on the merits of thesecurities to be offered or on the fairnessof the terms of distribution. If adequateand accurate disclosure is made, it cannotdeny registration. The Act makes It un-lawful to represent to Investors that theCommission has approved or otherwisepassed on the merits of registeredsecurities.

Information Provided

While the Securities Act specifies theinformation to be Included In registrationstatements, the Commission has theauthority to prescribe appropriate formsand to vary the particular Items of infor-mation required to be disclosed. To fa-crlltate the registration of securities bydifferent types of Issuers, the Commissionhas adopted special registration formswhich vary in their disclosure require-ments so as to provide maximum dis-

45

closure of the essential facts pertinent Ina given type of offering while at the sametime minimizing the burden and expenseof compliance with the law. In recentyears, It has adopted certain short forms,notably Forms &-7 and &-16, which donot require disclosure of matters alreadycovered In reports and proxy materialfiled or distributed under provisions ofthe Securities Exchange Act.

Another short form for registration un-der the Securities Act IS Form &-8 forthe registration of securities to be offeredto employees of the Issuer and ItS sub-sidranes. The Commission has proposedamendments to thrs form designed to re-duce the cost and burden of registrationto Issuers consistent with the protectionof Investors by increasing the availabilityof the form to more types of employeeplans, particularly certain option planswhich may not receive specral tax treat-ment under the Internal Revenue Code.The relaxed standards may be used byIssuers pending final action on the pro-posals.' Comments on the proposals arepresently being reviewed by the staff.

Reviewing Process

Registration statements filed with theCommiseron are examined by ItS DIVISionof Corporation Finance for compliancewith the standards of adequate and ac-curate disclosure Various degrees ofreview procedures are employed by theDlvlslon." While most deficiencies arecorrected through an Informal letter ofcomment procedure, where the Commis-sion finds that material representations Ina registration statement are misleading,Inaccurate, or Incomplete, It may, afternotice and opproturuty for hearing, Issuea "stop-order," suspending the effective-ness of the statement.

Time for Registration

The Oornrnissron's staff tries to com-plete examination of registration state-ments as quickly as possible. The Se-cuntres Act provides that a registrationstatement shall become effective on the20th day after It is filed (or on the 20th

46

day after the filing of any amendment).Most registration statements require oneor more amendments and do not becomeeffective until some time after the statu-tory 2D-day period. The period betweenthe filing and effective date IS Intendedto give Investors an opportunity to becomefamiliar With the proposed offeringthrough the dissemination of the pre-liminary form of prospectus. The Com-mission can accelerate the effective dateto shorten the 2D-day waiting perlod-taking Into account, among other things,the adequacy of the information on theIssuer already available to the publicand the ease With which facts about theoffering can be understood.

During the 1975 fiscal year, 2,781registration statements became effective.Of these, 266 were amendments filed byInvestment companies pursuant to Sec-tion 24 (e) of the Investment CompanyAct of 1940, which provides for theregistration of additional securitiesthrough amendment to an effective regis-tration statement rather than the filing ofa new registration statement. For theremaining 2,515 statements, the mediannumber of calendar days between thedate of the Original filing and the effectivedate was 33.

Financial Analysisand Examination

During the fiscal year, the Office of theChief Financial Analyst of the DIVISionof Corporation Finance reviewed electricand gas utilities; the bank holding com-panies Industry; and the fire and casualtyInsurance Industry.

Three new dirnensrons were added dur-Ing the fiscal year to the penodic re-views of specrnc industries. First, theInput was enlarged by incorporating viewsof federal and state agencies and regu-latory cornmrssrons, academicians, tradeassocratrons, research analysts and in-dustry speciansts. Secondly, the Officeof the Chief Financial Analyst providedthe DIVISion's examining staff With ratios,averages and standards for each industryunder review Thirdly, certain statisticaldisclosure formats were redesiqned to

reflect the Impact on financial reportingof dynamic changes In the currenteconomic climate

Office of Oil and Gas

The DIvision's Office of all and Gashas processing responsibility for all 011

and gas drilling program filings, as wellas filings covering fractional undividedinterests In oil and gas rights. Seventy-two registration statements were filedduring fiscal 1975 for oil and gas drillingprograms, totaling $638,282,035 Andfifteen registration statements coveringfractional undivided Interests in 011 andgas rights were filed aggregating$9.098,000.

In addrtron to the direct processing ofthose filings, the Office of all and Gas ISresponsible for reviewing the disclosurerelating to 011 and gas busmess andproperties, including data on productionand reserves, contained In other filingsdirectly processed by the several branchesof the Division. In fiscal 1975, such otherfilings consisted of 198 registration state-ments under the Securities Act and 17offering circulars pursuant to the Regula-tion A exemption thereunder, as well asregistration statements and proxy state-ments under the Exchange Act.

Additional information regarding offer-Ings of fractional undivided interests IScontained under Regulation B In thisPart.

Tax Shelters

DUring the year, a significant number ofregistration statements relating to realestate limited partnerships and other taxshelter offerings were filed With the Com-mtssron, All registration statements relat-Ing to real estate limited partnershipswere processed by one branch within theDivision of Corporation Finance, whileregistration statements relating to othernon-oil and gas types of tax shelters,such as cattle feeding and breeding,agri-business and leasmq, as well ascondominium offerings, were processedIn a separate branch. A third branch, theOffice of all and Gas, has processing

responsibility for tax shelters relating to011 and gas.

In all of these types of offerings, thedisclosure generally emphastzed has in-cluded the compensation paid to theprogram sponsors, the conflicts of InterestInherent in many such offerings, therecord In prior offerings of the sponsorsof the offering, and the tax ramificationsof the offering.

Dividend Reinvestment Plans

In recent years, an increasing numberof Issuers provide a means by whichsecurity holders might automatically re-Invest drvidends In additional secuntiesof the issuer. In response to this IncreasedInterest In divrdend reinvestment plans,the Oomrnlssron In August 1974, an-nounced a revised interpretative posmonof ItS Drvisron of Corporation Financeconcerning secuntres offered and soldWithout registration under the SecuritiesAct pursuant to drvidend reinvestmentand similar plans 3 The release states thatuntil further notice, the DIVISion Will takethe position that the issuer or ItS affiliatesmay perform bookkeeping and Similaradministrative functions In operating suchplans and that these activities, in and ofthemselves, will not cause the participa-tion of the issuer or its affiliates to ex-ceed the limitations set forth In SecuritiesAct Release No. 4790. The revised in-terpretation requires that the agent notbe affiliated With the Issuer, and thatsecunties acquired on behalf of the planbe acquired through such agent.

SMALL ISSUE EXEMPTION

The Commission is authorized underSection 3(b) of the Securities Act toexempt secunties from registration If Itfinds that registration for these securrtresIS not necessary to the publrc mterestbecause of the small offering amount orlimited character of the public offering.The law Imposes a maximum limitationof $500,000 upon the size of the Issueswhich may be exempted by theCommission.

The Commissron has adopted the fol-

47

lowing exemptive rules and requlatrcns:Regulation A: General exemption

for U.S. and Canadian Issues up to$500,000.

Regulation B: Exemption for frac-tional undivided Interests In 011 orgas rights up to $250,000.

Regulation E. Exemption for se-cunties of a small business invest-ment company up to $500,000.

Regulation F: Exemption for assess-ments on assessable stock and forassessable stock offered or sold torealize the amount of assessmentup to $300,000.

Rules 234-237; 240: Exemptions offirst lien notes, secuntres of co-operative housmq corporations,shares offered In connection withcertain transactions, certain securi-ties owned for five years and cer-tain limited offers and sales ofsmall dollar amounts of securitiesby closely-held Issuers.

Regulation A

Regulation A permits a company toobtain needed capital not In excess of$500,000 (including underwriting com-missions) In anyone year from a publicoffering of ItS secuntres without registra-tion, provided specified condrtrons aremet. Among other things, a notrfrcanonand offering circular supplying basic in-formation about the company and thesecuntres offered must be filed with theCommission, and the offering Circularmust be used In the offering. In addition,Regulation A permits seiling shareholdersnot In a control relationship with the IS-suer to offer In the aggregate up to$300,000 of securmes which would not beIncluded In computing the Issuer's$500,000 ceiling.

DUring the 1975 fiscal year, 265 notifi-cations were filed under Regulation A,covering proposed offerings of $91,287,-296, compared with 438 noutrcanons cov-ering proposed offerings of $147 rmllionIn the prior year. A total of 675 reports ofsales were filed reporting aggregatesales of $49,369,171 Such reports mustbe filed every SIX months while an offer-

48

Ing IS In progress and upon ItS termina-tion. Sales reported dunnq 1974 hadtotaled $69 million. Various features ofRegulation A offerings over the past threeyears are presented In the statisticalsection of this report.

In fiscal 1975, the Commission tem-porarily suspended 9 exemptions whereIt had reason to believe there had beennoncompliance with the conditions of theregulation or with disclosure standards,or where the exemption was not availablefor the securities. Added to 17 casespending at the beginning of the fiscalyear, trus resulted In a total of 26 casesfor drspositron Of these, the temporarysuspension order became permanent In18 cases: In 7 by lapse of time, In 2 casesafter hearings, and In 8 by acceptance ofan offer of settlement. One temporarysuspension order was vacated Eightcases were pending at the end of thefiscal year.

Regulation B

Regulation B provides an exemptionfrom registration under the SecuritiesAct for public offerings of fractional un-drvrded interests In 011 and gas rightswhere the initial amount to be raised doesnot exceed $250,000, provided certainconditions are met. An offering sheetdisclosing certain baSIC material informa-tion of such offering must be filed wrththe Cornmissron. Copies of the final of-fering sheet must be furnished toprospective purchasers at least 48 hoursIn advance of sale of these securities.

Form &-10 IS available for the regis-tration of fractional undivided Interests in011 and gas rights where the Initial amountto be raised exceeds $250,000 or wherethe exemption IS unavailable for anyother reason.

During the 1975 fiscal year, 625 offer-Ing sheets and 672 amendments theretowere filed pursuant to Regulation Bandwere examined by the Office of Oil andGas of the DIVIsion of Corporation Fi-nance. Sales during 1975 under theseofferings aggregated $354 million. DUringthe 1974 fiscal year, 625 offering sheetsand 751 amendments were filed covering

aggregate sales of $29.1 million. For thefiscal year 1973, 725 offering sheets werefiled with 1,020 amendments thereto,covering aggregate sales of $199 million.

In fiscal 1975, the Commission tem-porarily suspended the Regulation Bexemption for one offeror where It hadevidence that the offeror had failed tocomply with certain requirements. At yearend, the suspension had not yet becomepermanent. In the prior fiscal year, therewas one temporary suspension of theRegulation B exemption which becamepermanent when the offeror Withdrew ItSrequest for a heanng.

Regulation E

Under Section 3(c) of the SecuritiesAct, the Commission IS authonzed toadopt rules and regulations exemptingsecurities Issued by a small business in-vestment company under the Small Bust-ness Investment Act. Pursuant to thatsection, the Commission has adoptedRegulation E, which conditionally exemptssuch securities Issued by companiesregistered under the Investment CompanyAct of 1940 up to a maximum offeringprice of $500,000. The regulation is sub-stantially similar to Regulation A, de-scnbed above. No notifications were filedunder Regulation E for the two precedingfiscal years.

Regulation F

Regulation F provides exemptions fromregistration for two types of transactionsconcerning assessable stock. First, anassessment levied upon an existinq se-cunty holder may be exempted under theregulation, provided the assessable stockIS Issued by a corporation incorporatedunder the laws of and having ItS principalbusiness operations in any State, Tern-tory or the District of Columbia. Regula-tion F provides an exemption also whenassessable stock of any such corporationIS sold publicly to realize the amount ofan assessment levied thereon, or whensuch stock is publicly reoffered by anunderwriter or dealer. The exemption isavailable for amounts not exceeding

$300,000 per year The Regulation re-quires the filing of a notification andother rnatenals describing the offering.

During the 1975 fiscal year, 15 notifi-cations were filed under Regulation F,covering assessments of stock of$380,318, compared With 12 notificationscovering assessments of $408,652 In 1974.

CONTINUING DISCLOSURE: THESECURITIES EXCHANGE ACT

The Securities Exchange Act of 1934contains significant disclosure provislonsdesigned to provide a fund of currentmaterial Information on companies inwhose securities there IS a substantialpublic Interest. The Act also seeks to as-sure that secunty holders who are so-licited to exercise their voting nghts, orto sell their securrtres In response to atender offer, are furnished pertinentinformation.

Registration on Exchanges

Generally speaking, a security cannotbe traded on a national secunties ex-change until It is registered under Section12(b) of the Exchange Act. If it meets thelisting requirements of the particularexchange, an Issuer may register a classof secunties on the exchange by filingWith the Commission and the exchangean application which discloses pertinentinformation concerning the Issuer andItS affairs. During fiscal year 1975, atotal of 114 Issuers listed and registeredsecurities on a national securities ex-change for the first time and a total of575 registration applicatrons were filedThe registrations of all securities of 192Issuers were terminated. Detailed statts-trcs regarding secunties traded onexchanges may be found In the statisticalsection of this report.

Over-the-Counter Registration

Section 12(g) of the Exchange Act re-quires a company With total assets ex-ceeding $1 million and a class of equitysecunties held of record by 500 or morepersons to register those secuntres with

49

the Commission, unless one of the ex-emptions set forth In that section IS avail-able, or the Oornmrsston Issues an ex-emptive order under Section 12(h) Uponreqrstratron, the reporting and otherdisclosure requirements and the insidertrading provrsrons of the Act apply tothese companies to the same extent asto those with securities registered onexchanges

DUring the fiscal year, 372 registrationstatements were filed under Section 12(g)Of these, 144 were filed by Issuers al-ready subject to the reporting require-ments, either because they had anothersecurity registered on an exchange orthey had registered securities under theSecurities Act Included are companieswhich succeeded to the businesses ofreporting companies, and thereby becamesubject to the reporting requirements

Exemptions

Section 12(h) of the Act authorizes theCommission to grant a complete or partialexernptron from the registratIOn provrsionsof Section 12(g) or from other disclosureand msider trading provrsions of the Actwhere It IS not contrary to the publicInterest or the protection of Investors

At the beginning of the year, 10 ex-emption applrcattons were pending, and44 apphcatrons were filed dUring theyear. Of these 54 applications, 15 wereWithdrawn, 18 were granted, and 4 denied.The remaining 17 applications werepending at the end of the fiscal year

Periodic Reports

Section 13 of the Securities ExchangeAct requires Issuers of secuntres regis-tered pursuant to Sections 12(b) and 12(g)to file penodic reports, keeping currentthe information contained In the regis-tratron applrcanon or statement Similarreports are required pursuant to Section15(d) of certain Issuers which have filedreqrstratron statements under the Se-cunties Act which have become effective.

In 1975, 54,640 reports-annual, quar-terly and current-were flied.

In December 1974, the Oornrrusston

50

rescinded the requirement that registrantsfurnish an EDP attachment as an exhibit 4

The EDP attachment, which was requiredIn certain reports on Forms 1Q-K and10-0, had been used by the Commissionto gather Information generally reflectedIn the report to which It was an exhibitThe Commrsston determined the func-tional justification for the attachment didnot warrant ItS continued use and accord-Ingly rescrnded any requirement that itbe furnished

Proxy Solicitations

Where proxies are solicited from hold-ers of securities registered under Section12 or from security holders of registeredpublic-utility holding companies, sub-sidiaries of holding companies, or regis-tered Investment companies, the Com-mission's proxy regulation requires thatdisclosure be made of all material factsconcerning the matters on which the se-curity holders were asked to vote, andthat they be afforded an opportunity tovote "yes" or "no" on any matter otherthan the election of directors Wheremanagement IS soucmno proxies, a se-cunty holder desrrmq to communicateWith the other security holders may re-quire management to furnish him With alist of all security holders or to mall hiscommunication for him A security holdermay also, subject to certain limitations,require the management to Include In

proxy material an appropriate proposalwhich he wants to submit to a vote ofsecurity holders, or he may make anIndependent proxy sohcrtatron.

Copies of proposed proxy materialmust be filed with the Commission inpreliminary form prior to the date of theproposed solicitation. Where preliminarymaterial fails to meet the prsscnbed drs-closure standards, the management orother group responsrbte for ItS prepara-non IS notified informally and given anopportunity to correct the deficiencies inthe preparation of the definitive proxymaterial to be furnished to securityholders.

Issuers of secunties registered underSection 12 must transmit an Information

statement comparable to proxy materialto security holders from whom proxiesare not solicited with respect to astockholders' meeting.

DUring the 1975 fiscal year, 6,826proxy statements In definitive form werefiled, 6,801 by management and 25 bynon management groups or individualstockholders. In addition, 127 informationstatements were filed. The proxy and in-formation statements related to 6,762companies, and pertained to 6,685 meet-Ings for the election of directors, 216special meetings not involving the elec-non of directors, and 27 assents andauthorizations.

Aside from the election of directors,the votes of security holders were solic-rted with respect to a variety of matters,Including merger, consolidations, ac-qutsrtions. sales of assets and dissolutionof companies (191); authorizations of newor additional securities, modifications ofexrsnnq secuntres, and recaprtalrzattonplans (474); employee pension and re-tirement plans (65); bonus or profrt-sharing plans and deferred compensationarrangements (217), stock option plans(705); approval of selection by manage-ment of Independent auditors (3,366) andmiscellaneous amendments to chartersand by-laws, and other matters (1,868)

DUring the 1975 fiscal year, 370 pro-posals submitted by 68 stockholders foraction at stockholders' meetings wereIncluded In the proxy statements of 198companies. Typical of such proposalssubmitted to a vote of security holderswere resolutions on amendments to chart-ers or by-laws to provide for cumulativevoting for the election of directors, pre-emptive rights, limitations on the grant ofstock options to and their exercise by keyemployees and management groups, thesending of a post meeting report to allstockholders, and Irrnttatrons on charitablecontributions.

A total of 185 proposals submitted by87 stockholders were omitted from theproxy statements of 90 companies Inaccordance with the provisrons of therule governing such proposals. The mostcommon grounds for omission were thatproposals were not submitted on time

or were not proper SUbjects for stock-holders' action under the applicable statelaw

In fiscal 1975, 25 companies were in-volved In proxy contests for the electionof directors which bring special require-ments Into play. In these contests, 303persons, lncludrnq both managementand non management, filed detailed state-ments required of partrcipants under theapplicable rule. Control of the board ofdirectors was Involved In 20 Instances. In10 of these, management retained con-trol. Of the remainder, three were settledby negotiation, one was won by non-management persons, and six were pend-Ing at year end. In the other five cases,representation on the board of directorswas Involved. Management retained allplaces on the board In three contests,opposttion candidates won places on theboard In two cases.

Takeover Bids, LargeAcquisitions

Sections 13(d) and (e), and 14(d), (e)and (f) of the Securities Exchange Act,enacted In 1968 and amended In 1970,provide for full disclosure In cash tenderoffers and other stock acqu ismons in-volvmq changes In ownerstup or con-trol These provrsions were desiqnedto close gaps In the full disclosure pro-visrons of the secuntres laws and tosafeguard the interest of persons whotender their secunties In response to atender offer.

During the 1975 fiscal year, 1,165Schedule 13D reports were filed by per-sons or groups which had made acqursi-nons resulting In their ownership of morethan five percent of a class of securities.One hundred thirteen Schedule 13D re-ports were filed by persons or groupsmaking tender offers (including 24 tenderoffers filed With the Commission by for-eign nationals), which. If successful,would result In more than five percentownership. In addition, 73 Schedule 14Dreports were filed on solrcttatrons orrecomrnendatrons In a tender offer by aperson other than the maker of the offerTwelve statements were filed for the re-

51

placement of a majority of the board ofdirectors otherwise than by stockholdervote. SIX statements were filed under arule on corporate reacqursmons of se-cunnes while an Issuer IS the target of acash tender offer.

Rule 14d-2 under the Exchange Actexempts certain communications InvolvedIn a tender offer from the provisrons ofRegulation 140. Among such communica-tions are those from an Issuer to ItS se-curity holders which do no more thanIdentify the tender offer, state that man-agement IS studying the proposal andrequest the security holders to defer rnak-Ing a decrsron on the tender offer untilthey receive management's recommenda-tion Such recommendations must bemade no later than 10 days before expira-tion of the tender offer, unless the Com-rmssron authorizes a shorter period.

DUring the fiscal year, the Commissiondelegated to the Director of the Divisionof Corporation Finance authority to permitmanagement recommendations to bemade within less than the ten-day periodof Rule 14d-2(f).5 rms procedure wasadopted to expedite the Commission'shandling such requests because theyusually need prompt action

Insider Reporting

Section 16 of the Securities ExchangeAct and corresponding provrsrons In thePublic Utility Holding Company Act of1935 and the Investment Company Act of1940 are designed to provide other stock-holders and Investors generally withinformation on Insider securities trans-actions and holdings, and to prevent un-fair use of confidential information byinsiders to profit from short-term tradingIn a company's securities.

secnon 16(a) of the Exchange Act re-quires every person who beneficiallyowns, directly or indirectly, more than 10percent of any class of equity securitywhich IS registered under Section 12, orwho IS a director or an officer of the IS-suer of any such security, to file state-ments with the Commission disclosingthe amount of all equity securities of theIssuer of which he IS the beneficial owner

52

and changes In such ownership. Copiesof such statements must be filed with ex-changes on which the securities arelisted Similar provisions applicable toinsiders of registered public-utility hold-Ing companies and registered closed-endInvestment companies are contained Inthe Holding Company and InvestmentCompany Acts.

In fiscal 1975, 91,298 ownership re-ports were filed. These Included 11,953initial statements of ownership on Form3, 74,303 statements of changes in owner-ship on Form 4, and 5,042 amendmentsto previously filed reports.

All ownership reports are made avail-able for public inspection when filed atthe Commission's office In Washingtonand at the exchanges where copies arefiled In addition, the information con-tained In reports filed with the CommissionIS summarized and published in themonthly "Official Summary of SecurityTransactions and Holdings," which isdistributed by the Government PrintingOffice to about 11,500 subscribers.

ACCOUNTING

The securities acts reflect a recoqru-non by Congress that dependable finan-cial statements of a company areindispensable to informed Investmentdecrsrons regarding its securities. A ma-jor objective of the Commission has beento Improve accounting, reporting andauditing standards applicable to the fi-nancial statements and to assure thathigh standards of professional conductare maintained by the public accountantswho examine the statements. The primaryresponsibility for thrs program rests withthe Chief Accountant of the Commission

Under the Commission's broad rule-making power, it has adopted a basicaccounting regulation (Regulation S-X)which, together with interpretations andgUidelines on accounting and reportingprocedures published as "AccountingSeries Releases," governs the form andcontent of financial statements filed Incompliance with the securities laws.The Oommrssron has also formulatedrules on accounting for and auditing of

broker-dealers and prescribed uniformsystems of accounts for mutual and sub-sidiary service companies related toholding companies subject to the PublicUtility Holding Company Act of 1935.The accounting rules and opinions of theCommission, and its decrsions in par-ticular cases, have contributed to clarifi-cation and wider acceptance of theaccounting principles and practices andauditing standards developed by theprotessron and generally followed In thepreparation of financial statements.

However, the accounting and fmancralreporting rules and regulatlons--exceptfor the uniform systems of accounts whichare regulatory reports-prescribe account-Ing principles to be followed only in cer-tain limited areas. In the large area oftmancial reporting not covered by ItSrules, the Commission's principal meansof protecting investors from inadequateor Improper financial reporting IS byrequiring a report of an Independentpublro accountant, based on an auditperformed in accordance with generallyaccepted auditing standards, which ex-presses an opinion whether the financialstatements are presented fairly In con-formity With accounting pnnciples andpractices that are recognized as soundand have attained general acceptance.The requirement that the opinion berendered by an independent accountant,which was initially established under theSecurities Act of 1933, is desrqned tosecure for the benefit of public Investorsthe detached objectrvity and the skill ofa knowledgeable professional person notconnected With management.

The accounting staff reviews the n-nancral statements filed with the Com-mission to insure that the requiredstandards are observed and that theaccounting and auditing procedures donot remain static in the face of changesand new developments in financial andeconomic conditions. New methods ofdoing busmess, new types of busmess,the combining of old bustnesses, the useof more sophisticated securities, andother innovations create accounting prob-lems which require a constant reappraisalof the procedures

Relations With the AccountingProfession

In order to keep abreast of changingconditions, and In recognition of the needfor a continuous exchange of views andInformation between the Commission'saccounting staff and outside accountantsregarding appropriate accounting andauditing polrcras. procedures and prac-tices, the staff maintains continuing con-tact With individual accountants and vari-ous protesstonal organizations. The latterinclude the American Institute of CertifiedPublic Accountants (AI CPA) and the FI-nanciat Accounting Standards Board(FASS), the pnncrpal professional or-ganizations concerned With the develop-ment and Improvement of accounting andaudrtlnq standards and practices. TheChief Accountant also meets regularlyWith his counterparts In other regulatoryagencies to Improve coordination onpollcres and actions among the agencies.

Because of ItS many foreign registrantsand the vast and Increasing foreign opera-tions of American companies, the Com-mission has an Interest In the Improve-ment of accounting and auditing prin-ciples and procedures on an lnternatronalbasis To promote such Improvement, theChief Accountant corresponds with for-eign accountants, lntervisws many whovlsrt this country and, on occasion,particrpates In foreign and Internationalaccounting conferences.

Protessronal efforts are being made toImprove and harmonize accounting stan-dards among countries through vanousinternational accounting conferences andcommittees. One committee, comprised ofrepresentatives of accountancy groupsfrom twenty-seven countries, was estab-lished to promulgate international ac-counting standards. This committee hasadopted one standard, has proposed anumber of other standards and IS develop-Ing additional proposals. The Oommrssronwill cooperate closely with these com-mittees and groups which have as theirlong-term objective the development ofa coordinated worldwide accountingprotessron with Uniform standards.

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Accounting and AuditingStandards

The FASB supplanted the AccountingPrinciples Board of the AICPA, whichceased operations on June 30, 1973, asthe orqaruzatron which establishes stan-dards of financial accounting and presen-tation for the gUidance of Issuers andpublic accountants. The new orqaruzatronwas established on the basis of recom-mendations by a cornrmttee appointedby the AICPA rn early 1971 to exploreways of rrnprovrnq this function. A finan-cial accountrng foundation, sponsored bythe AICPA and consrstrnq of representa-tives of leadrng professional organiza-tions, appornts the seven members of theFASB who serve on a salaned, full-timebasts, and the members of an advisorycouncil to the Board who serve on avoluntary basts The Commission en-dorsed h the FASB, which It believes willprovide operational efficiencies and In-sure an Impartial viewpornt m the devel-opment of accounting standards on atimely basts, and stated that the FASB'sstatements and rnterpretanons would beconsidered as berng substantial authorr-tatrve support for an accountrng practiceor procedure

As of June 30, 1975, the FASB had IS-sued seven Statements of FinancialAccounting Standards and SIX Interpreta-tions relatrng to accounting oprrnons orstandards. In addition, It had under activeconsideration a heavy agenda of techni-cal projects which Included. nnancralreportrng for segments of a businessenterprise, accountrng for leases; cntenafor determrnrng rnatenalrty, conceptualframework for accountrng and reportrng;accountrng for translation of foreign cur-rency transactions and foreign currencytmanciat statements; nnancral reportrngin units of general purchasrng power;business combinations and purchasedintangibles, accountrng for mterest costs;accounting and reportrng for employeebenefrt plans; accounting for the cost ofpension plans, and accountrng for rncometaxes-s-ou and gas producing companres.It had held public hearings on five of the

54

projects and had issued exposure draftsof three proposed statements of stan-dards.

The FASB recently appointed a perma-nent screening committee to assist It Inidentifying emerging practice problems,evaluating their magnitude and urgency,and assessrng pnontres for their resolu-tion. The Chief Accountant and the FASBmaintain liaison procedures for consulta-tion on projects of either the Board or theSEC which are of mutual rnterest. Whenthe FASB Issues improved standards ofaccountrng and financial reporting, theCommission updates its rules and regula-tions to conform to the Improved stan-dards, rn accordance with ItS statedpolicy Such amendments have beenproposed 7 to effect conformity with thestandards established in FASB StatementNos. 2 and 7, "Accountrng for Researchand Development Costs" and "Account-rng and Reporting by Development StageEnterprrses."

The AICPA appointed another commit-tee rn early 1971 to study and refine theobjectives of financial statements. Itstudied the baSIC questions of who needstmancral statements, what informationshould be provided, how It should becommunicated, and how much of It canbe provided through the accountingprocess. The committee's report on theobjectives of financial statements, whichwas published rn October 1973, IS berngutilized by the FASB as the baSIS of ItSstudy of the conceptual framework foraccountrng and reporting

More recently the AICPA established aCommission on Auditors' ResponsibilitIescharred by former SEC Charrman ManuelCohen which will determine whether agap exists between what the public ex-pects of auditors and what auditors canreasonably be expected to accomplish.Specific questions to which this Commis-sion seeks answers mclude: Shouldauditors monitor all financial mtorrnatronreleased to the public and, If so, whatshould be the extent of their responsibili-ties? Should the auditor's standard re-port, particularly the phrase "presentfairly," be changed to express better the

responsibilities of auditors? Is thernacharusrn for developing auditing stan-dards adequate?

The Chief Accountant also maintainsliaison with other senior committees ofthe AICPA on projects of mutual Interest,principally, proposed audit guides andstandards of the Auditing StandardsExecutive Committee and the proposedstatements of position of the AccountingStandards Executive Committee. Regularmeetings are held with the Committee onSEC Regulations to provide informationand gUidance to the protessron concern-ing the Interpretation of and compliancewith the Commission's accounting andauditing requirements applicable to regis-trants and their Independent accountants.

Other Developments

The Commission has developed a newpublication series entitled "Staff Account-Ing Bulletins" to provide information tothe public regarding informal and adrnm-rstratrve practices and gUidelines devel-oped by the accounting staff with respectto specific accounting and auditingproblems considered In the review oftmancral data flled.s

During the fiscal year, the Commissionissued 16 Accounting Series Releases toprovide interpretations or guidelines onmatters of accounting principles andauditing standards, to require Improveddisclosure of financial information byamendment of reporting forms or Regula-tion S-X, or to announce decisrons Indisciplinary proceedings under Rule 2(e)of the Commission's Rules of Practiceconcerning accountants appearing beforeIt.

Four interpretative or advisory releasesdealt with requirements for financialstatements of limited partnerships Inannual reports filed with the Commis-slon,9 disclosure of unusual risks anduncertainties In financial reportmq.!vfinancial disclosure problems relating tothe adoption of the LIFO Inventorymetnod,n and amendments of guidelinespertaining to classification of short-termobligations expected to be refinanced.I

Three releases were Issued In whichamendments to Regulation S-X wereadopted to effect improved disclosures In

specific areas of financial statements.one release 13 dealt With the capitaliza-tion of Interest by non-utility companies,including Imposition of a moratorium oncapitalization by such companies whichhad not previously followed that policy:another release 14 dealt With the com-ponents of accounts receivable andinventories relating to defense and otherlong-term contract activities, and a thirdrelease 15 With the relationships betweenregistrants and their Independent ac-countants Thrs latter release also con-tained amendments to a report form andrules under the Exchange Act regardingthose relationshtps.

In conjunction With the DIVISion ofCorporation Finance, a release was IS-sued adopting gUides for the textualanalysis of the summary of earnings oroperations In the preparation of registra-tion statements and reports under theSecurities Act and the Exchange Act. Inconjunction With the Drvlsion of CorporateRegulation, a release 17 was Issued re-SCinding the uniform system of accountsfor registered holding companies underthe Holding Company Act, In order totacurtate adjustment of their accounts togenerally accepted accounting standards.In lieu of the uniform system of accounts,the requirements of Regulation S-X forthe form and content of tmancral state-ments were made applicable.

Shortly after the end of the fiscal year,an amendment to Article 4 of RegulationS-X was adopted 18 relating to the re-qurrernents for consolidated and com-bined tmancrat statements In filings withthe Commisston Also after the end of thefiscal year, amendments to RegulationS-X and filing forms were adopted 19which require Increased disclosure ofinterim tmancral data. Condensed frnan-cial statements and a narrative analysisof the results of operations are to beincluded In quarterly reports filed andsummary data regarding the quarterlyresults In a fiscal year are to be Includedin a note to the tmancial statements filed

55

'

for a fiscal year. These requirementswere adopted after public constderatronof proposals 20 and subsequent alterna-tive proposals 21 and public hearings re-garding increased disclosure of Interimresults by registrants and review of suchdata by independent accountants. In con-nection with the adoption of these re-quirements, the Commission Issued 23 forpublic comment revised proposed stan-dards and procedures to be applicable tothe review of the interim financial data bythe Independent accountants In theabsence of adequate standards andprocedures promulgated by the account-Ing profession.

Dunng the fiscal year, other proposalswere Issued for public comment, one 24

of which would effect a general revisionof Article 7 of Regulation S-X, pertainingto the form and content of financial state-ments of title Insurance and mortgageguarantee Insurance companies, to reflectdevelopments In accounting practice, in-cluding the requirements that the finan-cial statements be prepared In accor-dance with generally accepted accountingpnnciples. Another proposal 25 wouldeffect minor amendments In vanous sec-tions of Regulation S-X regarding disclo-sures of leases, compensating balancesand short-term borrowing arrangements,and Income tax expense.

The Commission Issued opinions Inseven proceedings under Rule 2(e) of itsRules of Practice during the fiscal year.Under that rule, the Commission maydisqualify an attorney or accountant frompracticing before It, either temporarilyor permanently, or It may censure him ongrounds specified In the rule. In one pro-ceeding 26 an accounting firm was cen-sured for failing fully to disclose to theCommission and the public the factsrelating to a settlement negotiated be-tween the firm and a client regarding anaudit of certain Inventories that were mis-stated In the tmancral statements of theclient filed with the Comrmssron.

In three proceedings 27, accountantswere permanently suspended from ap-peanng or practicing before the Comrrus-sron. In each case the accountant hadbeen permanently enjoined by a Federal

56

court In a Cornmissron injunctive actionfrom violating antifraud provlsrons of theFederal securities laws. In one instancethe accountant was given the nght toapply for reinstatement after September20,1976.

In another proceedlng,28 an account-Ing firm, which had been permanentlyenjoined by a Federal court from Violatingantifraud provrsrons of the Federal securi-ties laws, was censured and remedialsanctions were imposed. The firm wasrequired to employ a consultant for oneyear, who will be available for specialconsulting requests, will review approxi-mately 15 percent of the firm's auditsdunng the year of publicly held compa-nies, report to the Oommrssron regardingthe adequacy of the audit work performedIn such audits, and require the firm toadopt auditing procedures to determinewhether its clients have entered Intomatenal transactions With related parties.In the event the firm should merge withanother firm at least twice as large theabove requirements would terminate andthe combined firm would be required toapply its quality control standards to theaudits of the financial statements of thepublicly held former clients of the originalfirm and to render progress reports onsuch application to the CommiSSion.

In a proceeding 29 pertaining to an ac-counting firm which had failed to complyWith generally accepted auditing stan-dards and the Oommrssron's InstructionsIn Form X-17A-5 In the audit of a broker-dealer's tmanciat statement, the firm anda partner of the firm were suspendedfrom appeanng or practicing before theOornmrssron for 18 months. They wererequired to request a review of theirauditlnq procedures under the qualityreview program of the Amencan Instituteof Certified Public Accountants and tocorrect any deficiencies reported. Thefirm was also required to give notice Inwntlng of these findings to any client whorequests auditing services for the purposeof registratIOn With or reporting to theCornrmssron.

In another proceeding sanctions wereImposed 30 against an accounting firmand a partner of the firm on the basis of a

consent injunction involving violations ofthe antifraud provisrons of the ExchangeAct. The firm was required to request theAICPA to designate persons satisfactoryto the Commission's Chief Accountant toreview audit work papers, personnel andother records of the firm to determinewhether audit and professional proce-dures are adequate. The firm was pro-hibited from accepting engagements for aperiod of 10 months with new clientsinvolving auditing or accounting servicesIn connection with filing of financial state-ments with, or submissions or certifica-tions to, the Commission. In addition, thefirm was ordered to require, for a nve-year period, each of its partners to attendcourses or seminars In subjects relatingto public accounting or auditing to theextent of at least 40 hours per year. Theenjoined partner was prohibited frompracticing' before the Commission for aperiod of 10 months as an accountantother than as an employee or consultantunder supervision, and in no case to actas or be a partner of the accounting firm.He was also required to complete a pro-gram of continuing professional educa-tion by attending at least 100 hours ofacceptable courses or seminars in publicaccounting and auditing subjects withina period of 10 months.

Shortly after the close of the fiscalyear, three opinions were Issued In pro-ceedings Instituted against accountingfirms pursuant to Rule 2(e). One proceed-ing involved a major accounting firm,against which the Commission had filedfour crvn injunctive complaints concern-ing the firm's examinations of financialstatements of four companies and ques-tions raised in an investigation regardingthe firm's audit of the financial statementsof another company."! The firm was re-quired to have an investigation made ofits audit practices with respect to thefinancial statements of client-registrantsof the Commission and to promptly adoptand Implement any recommended correc-tive actions. The firm was also requiredto conduct a study of the percentage ofcompletion method of accounting andestablish guidelines to be applied In theconduct of future audits. For a period of

six months, the firm was not permitted toaccept engagements from new clients(with certain exceptions) to examinefinancial statements to be filed with theCommission. In addition the firm is re-quired to have reviews conducted in 1976and 1977 In conformity with the AICPA'sprogram for the review of quality controlprocedures of multi-office firms to deter-mine whether the firm has adopted andImplemented procedures agreed upon Inthe proceedings and any corrective ac-tions recommended in the prior investiga-tion

The other proceedings were institutedon the baSIS of investigations In whichthe Commission found that accountingfirms did not perform the audits of finan-cial statements of registrants filed withthe Commission In accordance with gen-erally accepted auditing standards. In oneproceeding 32 the accounting firm wascensured by the Commission. In thesecond proceeding 33 the accounting firmwas ordered to employ consultants toreview and evaluate ItS auditing proce-dures and professional practice in con-nection with the audits of publicly heldcompanies with a report of conclusions tobe made to the Commission, and the firmwas ordered not to accept engagementsto examine new clients' tlnancrat state-ments to be filed with the Commissionuntil one month after the report of theconsultants IS submitted to the Commis-sion.

EXEMPTIONS FORINTERNATIONAL BANKS

Section 15 of the Bretton Woods Agree-ments Act, as amended, exempts fromregistration securities Issued, or guaran-teed as to both principal and Interest, bythe International Bank for Reconstructionand Development The Bank is requiredto file with the Commission such annualand other reports on securities as theCommission determines to be appropri-ate. The Commission has adopted rulesrequiring the Bank to file quarterly re-ports and copies of annual reports of theBank to ItS Board of Governors. The BankIS also required to file advance reports of

57

any distribution In the United States of Itsprimary obligations. The Commission,acting In consultation with the NationalAdvrsory Council on International Mone-tary and Financial Problems, IS authorizedto suspend the exemption for securitiesIssued or guaranteed by the Bank Thefollowing summary of the Bank's activitiesreflects information obtained from theBank Except where otherwise indicated,all amounts are expressed In U.S. dollarequivalents as of June 30, 1975.

Net Income for the year was $275 mil-non, compared with $216 million theprevious year. Of the $275 million netincome, the Executive Directors allocated$165 million to the Supplemental ReserveAgainst Losses on Loans and from Cur-rency Devaluations and recommended tothe Board of Governors that an amount of$110 million be transferred by way ofgrant to an affiliate of the Bank, the Inter-national Development Association

Repayments of principal on loans re-ceived by the Bank dUring the yearamounted to $569 million, and a further$80 million was repaid to purchasers ofportions of loans Total principal repay-ments by borrowers through June 30,1975, aggregated $6.5 billion, including$43 billion repaid to the Bank and $2.2billion repaid to purchasers of borrowers'obuqations sold by the Bank.

Outstanding borrowings of the Bankwere $12.3 billion at June 30, 1975. Dur-Ing the year, the Bank borrowed $440rnrlhon through the Issuance of 2-yearU S dollar bonds to central banks andother governmental agencies In some 65countries; $500 million In the UnitedStates; OM 1,228.3 million (U.S. $5122muuon) In Germany; 35.9 billion yen (U.S.$122 million) In Japan; U.S. $150 millionIn Iran, U.S. $240 rmlllon In Nigeria, SRCs500 million (U.S. $140.8 million) and US$750 million In Saudi Arabia; Bs 430 mil-lion (U S $100 million) and U.S $400million In Venezuela; and the equivalentof US. $35 million In other countries out-Side the United States. The above U.S.dollar equivalents are based on otncralexchange rates at the times of the respec-tive borrowings

These borrowings, In part, refunded

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maturing issues amounting to the equiva-lent of $959 million. After retirement of$68 million equrvalent of obligationsthrough sinking fund and purchase fundoperations, the Bank's outstanding bor-rowings showed a net increase of $2,637million from the previous year after add-Ing $275 million representing adjustmentof borrowings as a result of currencydevaluations and revaluations In terms ofU. S dollars of the value of the non-dollar currencies In which the debt wasdenominated.

The Inter-American Development BankAct, which authonzes the United States toparticipate In the Inter-American Develop-ment Bank, provides an exemption forcertain securities which may be Issued orguaranteed by the Bank similar to thatprovided for secuntres of the InternationalBank for Reconstruction and Develop-ment. Acting pursuant to this authonty,the Commission adopted Regulation lA,which requires the Bank to file with theCommission SUbstantially the same typeof information, documents and reports asare required from the International Bankfor Reconstruction and Development. Thetoltowmq data reflects information sub-mitted by the Bank to the Comrrussron.

On June 30, 1975 the outstandingfunded debt of the Ordinary Capital re-sources of the Bank was the equivalent of$1.606 billion, reflecting a net IncreaseIn the past year of the equivalent of $290million. DUring the year, the funded debtwas Increased through two publrc offer-rnqs In the United States totalling $225million as well as private placements InItaly, Trinidad and Tobago for the equiva-lent of $17 million. In addition, there weredrawings totalling $208 million underarrangements entered Into dUring previ-ous years With Finland, Japan and Spain.Additionally, $55.6 million of two-year andfive-year bonds were sold to Latin Amer-rca and Caribbean Central Banks, essen-tially representing a roll-over of amaturing borrowing of $534 million. Thefunded debt Increased by approximately$78.2 million due to upward adjustment ofthe U.S dollar equivalent of borrowingsdenominated In non-member currencies.The funded debt was decreased through

the retirement of approximately $53.2million from sinking fund purchases andscheduled debt retirement.

The Asian Development Bank Act,adopted In March 1966, authorized UnitedStates participation in the ASian Develop-ment Bank and provides an exemptionfor certain securities which may be Issuedor guaranteed by the Bank, similar to theexemptions accorded the InternationalBank for ReconstructIOn and Develop-ment and the Inter-American Develop-ment Bank. Acting pursuant to thisauthority, the Commission has adoptedRegulation AD which requires the Bankto file with the Oornrmsaron. documentsand reports as are required from thosebanks. The Bank has 41 members withsubscriptions totaling $3.08 billion

Through June 30, 1975, the Bank's bor-rowings totaled the equivalent of $567million. In 1975 the Bank issued obliga-tions of the equivalent of $103.6 million InJapan, $14.4 million In Saudi Arabia and$70 million to various Central Banks In1975, borrowing in the United States was$75 million at 8.5 percent. Before seilingsecurrtres in a country, the Bank mustobtain the country's approval.

As of June 30, 1975, 12 countries hadcontributed or pledged a total of $270million to the Bank's concessionary loansfund. A total of $57.4 million from Ordi-nary Capital resources have been setaside by the Board of Governors for con-cessionary loan purposes. In additionCongress has authorized a further $50million contribution and is consideringthe appropriation of these funds In fiscal1976.

TRUST INDENTURE ACT OF 1939

Ttus Act requires that bonds, deben-tures, notes and similar debt securitiesoffered for public sale, except as specifi-cally exempted, be Issued under an in-denture which meets the requirements ofthe Act and has been duly qualified Withthe Commission.

The provrsrons of the Act are closelyIntegrated with the requirements of theSecurities Act. Registration pursuant tothe Securities Act of securities to be

issued under a trust Indenture SUbject tothe Trust Indenture Act is not permittedto become effective unless the Indentureconforms to the requirements of the latterAct designed to safeguard the rights andInterests of the purchasers. Moreover,specified information about the trusteeand the indenture must be Included Inthe registration-statement.

The Act was passed after studies bythe Commission had revealed the fre-quency With which trust Indentures failedto provide minimum protections for secu-nty holders and absolved so-called trust-ees from minimum obligations In thedischarge of the trusts It requires, amongother things, that the Indenture trustee bea corporation With a minimum combinedcapital and surplus and be free of con-flicting interests which might InterfereWith the faithful exercise of its duties onbehalf of the purchasers of the secuntres,and It imposes high standards of conductand responsibility on the trustee. Duringnscat year 1975, 528 trust Indenturesrelating to securities In the aggregateamount of $34.9 billion were filed.

INFORMATION FOR PUBLICINSPECTION; FREEDOM OFINFORMATION ACT

On November 21, 1974, Congresspassed over President Ford's veto amend-ments to the Freedom of lntormatronAct 34 which Significantly changed theprocedures governing the handling ofrequests made pursuant to the Freedomof lntorrnatron Act (5 U.S.C. 552) as wellas the scope of certain of the exemplionsfrom the Act's provisions These amend-ments became effective February 19,1975. The Oornmrssron amended ItS rulesunder the Freedom of Information Act(17 CFR 200.80) 35 to reflect the amendedprovisions of the Freedom of IntorrnatronAct; these rules specify the categones ofavailable matenals and those categonesof records that are generally considerednon pubtrc. These rules establish theprocedure to be followed In requestingrecords or copies and provides for amethod of adrninlstranve appeal from thedenial of access to any record. They also

59

provide for the Imposition of duplicatingfees and search fees when more thanone-half man-hour of work IS performedby the Commission's staff to locate andmake records available. In addition to therecords described, the Commissionmakes available for inspection and copy-Ing all requests for no-action and inter-pretative letters received after December31, 1970, and responses thereto (17 CFR200.81). Also made available since No-vember 1, 1972 are materials filed underProxy Rule 14a-8(d), which deals withproposals offered by shareholders forinclusion In management proxy-solicitingmaterials, and related materials preparedby the staff (17 CFR 200.82).

Followrnq the effective date of theamendments to the Freedom of Informa-tion Act, the Commission instituted thepractice of rssurnq a publrc release, In aseries desrqnated Freedom of Informa-tion Act Releases, In most administrativeappeals decrded under the Act TheCommission hopes that this series ofreleases Will serve to Inform the pubhcas to ItS disclosure polrcres under theFreedom of Information Act and of themanner In which It has Interpreted andapplied the Act to the many types ofrecords maintained by the Commission.

Most of the administrative appealsdecided by the Comrnissron from theeffective date of the amendments to theclose of the fiscal year were concernedWith investigatory records. The seventhexemption of the Act, as amended, pro-vices that the Freedom of InformationAct "does not apply" to such records tothe extent that their production would"Interfere With enforcement proceed-ings," "deprive a person of a right to afair trial or an Impartial adjudrcanon,""constitute an unwarranted rnvasron ofpersonal privacy," or cause other typesof harm specifically enumerated an theexemption. The Cornrnlssron, In theadministrative appeals It has decided,has determined that investigatory recordsWill generally be Withheld on the groundthat production Will "mtertere With en-forcement proceedings" only If judrcral oradministrative proceedings brought bythe cornrmssron or other law enforcement

60

authonnes are In progress or there IS aconcrete prospect that law enforcementproceedings will be instituted.36 Eviden-tiary materials contained In Investigatoryfiles closed after the completion of publiclaw enforcement proceedings Will gen-erally be available to any person request-Ing access to them.37 In those caseswhere investigations are closed by theCornmisston without the institution ofpublic enforcement action, the Commis-sion has recognized that consrderatronsof personal privacy often require thatsuch records not be disclosed to mem-bers of the publlc,38 except where ademonstration of particularized need foraccess to the records suttrcrent to out-weigh oonsrderatrons of personal privacyhas been made.39

Registration statements, applications,declarations, and annual and periodic re-ports filed with the Oomrmssron each year,as well as many other public documents,are available for publrc Inspection andcopying at the Commission's publre ref-erence room in its principal offices inWashington, D.C. and, in part, at ItS re-gIOnal and branch offices.

The Oornrmssron has special public ref-erence facilities In the New York, Chicagoand Los Angeles Regional Offices andsome facilities for public use in other re-gIOnal and branch offices. Each regionaloffice has available for public examina-tion copies of prospectuses used In re-cent offerings of secuntles registeredunder the Securities Act; registrationstatements and recent annual reportsfiled under the Securities Exchange Actby companies having their princrpal officeIn the region, recent annual reports andquarterly reports filed under the Invest-ment Company Act by management in-vestment companies having their prlncipaloffice in the region; broker-dealer andInvestment adviser applications onqmat-Ing In the region; letters of notificationunder Regulation A filed In the region,and Indices of Oommlsston decrsions.

During the 1975 fiscal year, 19,186 per-sons examined material on file In Wash-Ington; several thousand others examinedfiles in New York, Chicago, Los Angeles,and other regIOnal offices. More than

47,282 searches were made for Informa-tion requested by Individuals, and ap-proximately 4,949 letters were written onInformation requested.

The public may make arrangementsthrough the Public Reference Section ofthe Commission in Washington, D.C. topurchase copies of material in the Com-mission's public files. The copies areproduced by a commercial copying com-pany which supplies them to the publicat prices established under a contractwith the Oomrrusston. Current prices be-gin at 15 cents per page for pages notexceeding 8%" x 14" in size, with a $2minimum charge. Under the same con-tract, the company also makes microficheand microfilm copies of Commissionpublic documents available on a sub-scription or individual order basis to per-sons or firms who have or can obtainviewing facilities. In microfiche services,up to 60 Images of document pages arecontained on 4" x 6" pieces of film, re-ferred to as "fiche."

Annual microfiche subscnptrons are of-fered In a variety of packages covering allpublic reports filed on Forms 1Q-K, 10-0,8-K, N-1Q and N-1R under the SecuritiesExchange Act or the Investment CompanyAct, annual reports to stockholders; proxystatements; new issue registration state-ments; and final prospectuses for new IS-sues. The packages offered Includevarious categories of these reports, in-cluding those of companies listed on theNew York Stock Exchange, the AmericanStock Exchange, regional stock ex-changes, or traded over-the-counter.Reports are also available by standardindustry classifications. Arrangementsalso may be made to subscribe to reportsof companies of one's own selection.Over one hundred million. pages (rnr-croimagery frames) are being distributedannually. The subscription services maybe extended to further groups of filings inthe future if demand warrants. The copy-Ing company will also supply copies Inmicrofiche or microfilm form of otherpublic records of the Commission desiredby a member of the public.

Microfiche readers and reader-printershave been Installed In the public refer-

ence areas In Washington, D.C. and theNew York, Chicago, and Los Angelesregional offices, and sets of microficheare available for Inspection there. Visitorsto the public reference room In Washing-ton, D.C. may also make immediatereproduction of matenal on photostatrc-type copying machines. The cost to thepublic of copies made by use of allcustomer-operated equipment is 12 centsper page. The charge for an attestationwith the Commission seal IS $2. Detailedinformation concerning copying servicesavailable and prices for the various typesof services and copies may be obtainedfrom the Public Reference Section of theCommission.

FREEDOM OF INFORMATIONACT LITIGATION

In Wolfson v. S.E.C.,40 plaintiff re-quested access to the contents of twoinvestigatory files compiled In the early1950's. Following the enactment of theamendment to the Freedom of InformationAct relating to the exemption for investi-gatory records, the Commission recon-sidered its earlier denial of access to therequested records, and granted plaintiff'srequest with respect to all investigatoryrecords in Its pcssessron, with the excep-tion of inter- and Intra-agency memo-randa contained in the file, which In theCommission's view were exempt by virtueof the fifth exemption of the Freedom ofInformation Act. The court thereuponallowed plaintiff a period of time toamend his complaint, and upon his failureto do so, the action was dismissed.

In Ptrst Mid America v. S.E.C.,41 theCommission was named In a SUIt seekingan Injunction to prohibit the disclosure ofcertain Investigatory records It had pre-viously determined to produce to a thirdparty who had requested access pursuantto the Freedom of Information Act. In ItScomplaint, plaintiff claimed that therecords the Commission proposed todisclose were protected by the attorney-client privilege and that disclosure wouldbe an unwarranted Invasion of personalprivacy. After stipulating that It would notdisclose the records pending resolution

61

by the court of the Issues raised by thecomplaint, the Commission filed an An-swer and Counterclaim for Interpleaderseeking to bring Into the SUIt as the realparty In Interest the person seeking therecords under the Freedom of InformationAct. Before the Commission's motion toadd the requester as a party had beenacted upon, however, plaintiff withdrewItS claim and the parties stipulated to thedismissal of the action

At the close of the fiscal year, SUitSbrought pursuant to the Freedom of Infor-mation Act were pending against theCommission In American tnstttute Coun-selors, lnc., et et. v. S.E.C.42 and Sahleyv. Federal Bureau of tnvestiqetton, et al.41

In both of these cases, subjects of Com-mrssron investigations are seeking accessto the contents of active investigatoryfiles concerning them

NOTES FOR PART 2I Secunties Act Release No. 5530 (Oc-

tober 3,1974),5 SEC Docket 208.2 Securities Act Release No 5231 (Feb-

ruary 3, 1972).I Securities Act Release No 5515 (July

22,1974),4 SEC Docket 623.4 Securities Exchange Act Release No.

11124 (December 6, 1974), 5 SEC Docket626.

, Securities Exchange Act Release No.11419 (May 14,1975),6 SEC Docket 893

6 Accounting Series Release No. 150(December 20, 1973), 3 SEC Docket 275.

7 Securities Act Release Nos. 5541(November 21, 1974), 5 SEC Docket 499,and 5601 (July 31, 1975), 7 SEC Docket457.

M Accounting Series Release No 180(November 4, 1975) and Staff AccountingBulletin No 1 (November 4, 1975)

q Accounting Series Release No. 162(September 27, 1974), 5 SEC Docket 181and 387

IU Accounting Series Release No. 166(December 23, 1974),5 SEC Docket 772.

II Accounting Series Release No 169(January 23,1975),6 SEC Docket 130.

12 Accounting Series Release No 172(June 13, 1975), 7 SEC Docket 143.

I I Accounting Series Release No 163(November 14,1974),5 SEC Docket 436

H Accounting Series Release No. 164(November 21,1974),5 SEC Docket 500.

t> Accounting Series Release No. 165(December 20,1974), 5 SEC Docket 767

In Accounting Series Release No. 159(August 14,1974),5 SEC Docket 1

J7 Accounting Series Release No 171(May 1, 1975),6 SEC Docket 801

1M Accounting Series Release No 175

62

(July 10, 1975), 7 SEC Docket 339.19 Accounting Series Release No. 177

(September 10, 1975), 7 SEC Docket 816.20 Securities Act Release No. 5549 (De-

cember 19,1974),5 SEC Docket 727.21 Securities Act Release No. 5579

(April 17, 1975), 6 SEC Docket 670.22 Securities Exchange Act Release No.

11354 (April 17, 1975), 6 SEC Docket 682.23 Securities Act Release No. 5612

(September 10,1975),7 SEC Docket 825.24 Securities Act Release No. 5513

(July 11, 1974),4 SEC Docket 551.2'; Securities Act Release No 5587

(May 27,1975),7 SEC Docket 58.2617 C F.R. 201.2(e) Accounting Series

Release No. 157 (July 8, 1974), 4 SECDocket 547.

27 Accounting Series Release No. 158(July 19, 1974), 4 SEC Docket 591; No.161 (August 29,1974),5 SEC Docket 61;and No. 170 (January 27, 1975) 6 SECDocket 188.

2M Accounting Series Release No. 167(December 24,1974),5 SEC Docket 780.

29 Accounting Series Release No. 160(August 27, 1974), 5 SEC Docket 89.

30 Accounting Series Release No 168(January 13, 1975),6 SEC Docket 76.

31 Accounting Series Release No 173(July 2,1975),7 SEC Docket 301

32 Accounting Series Release No 174(July 2,1975), 7 SEC Docket 293.

33 Accounting Series Release No. 176(July 22,1975),7 SEC Docket 432.

34 Pub L. No. 93-5023, See Securities Act Release No. 5571

(February 21, 1975), 6 SEC Docket 286.36 See, e.g., In the Matter of Request of

I Walton Bader, FOIA ReI. No.1, (April 3,1975) 6 SEC Docket 541, In the Matter ofRequest of Jeffrey B. Albert, FOIA ReiNO.10 (June 11, 1975), 7 SEC Docket 138.

37 Securities Act Rei, No. 5571 (Feb-ruary 21, 1975), 6 SEC Docket at 288. Inthe Matter of Request of John A. Jenkins,FOIA ReI. No. 11 (June 11, 1975), 7 SECDocket 139.

3M In the Matter of Request of John AJenkins, FOIA ReI. No. 11, (June 11,1975),7 SEC Docket 139

39 In the Matter of Request of Jung JaMalandns. FOIA ReI. No.8, (May 29,1975), 7 SEC Docket 58.

40 D.D.C, No. 74-1372.41 D D.C, No 75-031442 D. Mass., No. 75-1578-F For the

Commission's drsposmon of the adrrurus-trative appeal In thrs matter, see In theMatter of Request of American InstituteCounselors, FOIA ReI. No 3 (April 24,1975),6 SEC Docket 718.

41 E.D. La., No. 75-1831. For the Com-mission's disposrtton of the administrativeappeal In tms case, see In the Matter ofRequest of Lloyd William Sahley, FOIARei NO.4 (April 24, 1975), 6 SEC Docket719

REGULATION OF SECURITIES MARKETS

In addition to the disclosure provisions discussed in the preceding chapter, the Securities Exchange Act assigns to the Commission broad regulatory responsi-bilities for securities markets and persons in the securities business. That Act, among other things, requires securities exchanges to register with the Commis- sion, provides for Commission suparvi-sion of the self-regulatory responsibilities of registered exchanges, and permits registration of associations of brokers or dealers exercising self-regulatory func-tions under Commission supervision. The Act requires registration and regula- tion of brokers and dealers doing a business in securities. i t also contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets.

The Securities Acts Amendments of 1975 (the "1975 Amendments") 1 estab-lish a new self-regulatory organization, the Municipal Securities Rulemaking Board, to formulate rules for the munici- pai securities industry subject to the oversight of the Commission. The amend- ments also authorize a national system for the clearance and settlement of secu- rities transactions and require municipal securities dealers, certain securities in-formation processors, clearing agencies and transfer agents to register, keep records, and file reports with the Commis- sion. These recent developments con-cerning regulation of the securities markets are discussed in Part I.

REGULATIONOF EXCHANGES Registration

The Securities Exchange Act generally requires a securities exchange to register with the Commission as a national secu- rities exchange unless the Commission exempts i t from registration, because of the limited volume of its transactions.2 As of June 30. 1975. the followina- 13 securltles axcnangas were reglsterea wllh the Commdsslon

Amerlcan Srock Exchange Ing Board of Traoe of the C ty of Chlcago Boston Stock Exchanae Chicago Board options Exchange,

Incorporated Cincinnati Stock Exchange Detroit Stock Exchange Midwest Stock Exchange. inc. National Stock Exchange New York Stock Exchange, Inc. Pacific Stock Exchange, Inc. PEW Stock Exchange, inc. intermountain Stock Exchange Spokane Stock Exchange

On January 31. 1975 the National Stock Exchange ceased operations and has since been proceeding with the necessary steps under New York State law for cor- porate dis~oiution. That exchange is also in the process of seeking delisting of its listed securities and will then withdraw its registration as a national securities ex-change.

In March 1975 the Executive Committee of the Board of Trade of the City of

Chicago adopted a resolution to closethe Board's secunties market The Com-mission's staff has been Informed thatthe Board IS now prepared to file a writ-ten notice of withdrawal from registration.

Delisting

Pursuant to Section 12(d) of the Ex-change Act, securmes may be strrckenfrom listing and registration upon applica-tion to the Commission by an exchange,or withdrawn from listing and registrationupon application by an Issuer, in accor-dance with the rules of the exchangeand upon such terms as the Commissionmay Impose for the protection of inves-tors It IS the Commission's view that Inevaluating dellstlng applications, It IS notgenerally the Commission's function tosubstitute ItS Judgment for that of an ex-change, and that where there has beenfull compliance with the rules of an ex-change with respect to delisting, theCommission IS required to grant a dehst-Ing appncation The authority of the Com-rnrssron In such cases IS limited to theImposition of terms deemed necessaryfor the protection of Investors 3

The standards for delistrnq vary amongthe exchanges, but generally delistmqactions are based on one or more of thefollowing factors. (1) the number ofpublicly held shares or shareholders ISinsufficient (often as a result of an acqui-sition or merger) to support a broad-based trading market, (2) the marketvalue of the outstanding shares or thetrading volume IS Inadequate; (3) thecompany no longer satisfies the ex-change's cnteria for earnings or financialcondition; or (4) required reports have notbeen filed with the exchange.

During fiscal year 1975, the Comrrus-sron granted exchange applications forthe delrsnnq of 125 stock Issues and 14bond Issues The largest number of ap-plications came from the American StockExchange, 41 stocks and 4 bonds Thenumber of applications granted otherexchanges were: New York, 24 stocksand 8 bonds, Pacific, 16 stocks and 1bond, National, 15 stocks; PBW, 14stocks, Midwest, 9 stocks, Boston, 4

66

stocks; Cmcrnnati, 1 bond; Detroit andIntermountain, 1 stock each.

Exchange Disciplinary Actions

The 1975 Amendments adds a newSection 19(d) to the Securttres ExchangeAct requmnq exchanges to report to theCommission, and authorizing the Com-rnissron to review. any final disciplinarysanction Imposed by an exchange that (I)denies membership or participation toany applicant, (II) prohibits or limits anyperson access to services offered by anexchange or member thereof, or (IIi)Imposes final disciplinary sanctions onany person associated with a member orbars any person from becoming asso-ciated with a member. Before the Amend-ments, the Securities Exchange Act didnot explicitly authorize the Oommlssionto review exchange disciplinary actions,although each natronal secuntres ex-change did report voluntarily to the Com-rnrssion disciplinary action taken againstmembers and member firms and theirassociated persons.

Durmq the fiscal year, five exchangesreported a total of 107 separate drscr-phnary actions, Including the impositionIn 81 cases of fines ranging from $25.00to $20,000, the expulsion of 6 individuals;the suspension from membership (forpenods of 3 to 36 months) of 5 memberorqaruzatrons and 8 individual members;and the censure of 20 member organiza-tions

EXCHANGE RULES

The Commission's staff continually re-views the rules and practices of thenational securrtres exchanges to deter-mine the adequacy and effectiveness ofthe self-regulatory scheme To facilitateCommission oversight, each nationalsecuntres exchange has been required tofile with the Oornrmsston a report of anyproposed change In rules or practicesnot less than three weeks (or such shorterperiod as the Commission may authorize)before Implementing a change Thesefilings have been available for publicinspection

Under the 1975 Amendments, nationalsecurities exchanges are now required tofile with the Commission any proposedchange In exchange rules accompaniedby a concise general statement of thebasis and purpose of such proposed rulechange. In general, the Commission mustthen publish notice of the proposed rulechange together with the terms of suchchange or a description of the subjectsand issues involved and give interestedparties an opportunity to submit theirviews concerning such proposed rulechange. No proposed rule change maytake effect unless approved by the Com-miSSIOn or otherwise permitted by theSecurities Exchange Act.

DUring the fiscal year, the Commissionreceived 153 letters from exchanges pro-posing amendments involving over 500rules and stated practices. The followingwere among the more significant:

1. All the registered exchangesadopted rule amendments which providefor competitive commission rates onpublic transactions, and several ex-changes adopted rule amendments whichprovide for competitive commission rateson intra-member transactions. For furtherdiscussion of competitive commissionrates, see Part I.

2. The American Stock Exchange("Amex") and the PBW Stock Exchangeadopted rule changes which allowed theestablishment of odd-lot markets in U.S.government debt obligations on therespective exchanges.

3. The New York Stock Exchange("NYSE") adopted rule changes whichIncreased fees for persons who electedto utilize the NYSE's arbitration tacrhnesand also modified certain arbitrationprocedures.

4. Most of the national stock exchangesadopted rule amendments which ex-tended their trading hours from 3:30 P M.to 4:00 P.M. EST

5. The NYSE, the Amex, the Mid-west and Pacinc Stock Exchangesadopted rule changes which increasedthe original and annual maintenance list-Ing fees paid to the respective exchangesby companies which have securitieslisted on those exchanges.

6 The NYSE, the Amex, and theiraffiliated clearing corporations submittedfor Commission review rule changesdesigned to Implement continuous netsettlement systems for the clearing ofexchange-listed securities. For a furtherdiscussion of the development and opera-tion of continuous settlement systems,see Part I

7. The NYSE, the Amex and the Chi-cago Board Options Exchange adoptedminimum margin maintenance require-ments for options earned by broker-dealers for their customers, as well as formarket makers, specialists or registeredtraders for whom such broker-dealerclear transactions on an exchange. Therules of each of the three exchangesdealt with margining uncovered optionsand various spread or hedged optionpositions.

EXCHANGE INSPECTIONS

NYSE Specialist Inspection

On June 19, 1974, the Commission'sstaff wrote a letter to the NYSE to informIt of the findings of an inspection of thatexchange's specialist surveillance andstock allocation programs which wasbegun with a VISit to the NYSE on May29,1973.4

The letter summarized the DIVIsion'sconclusions with respect to (1) theNYSE's use of the "New Measures ofSpecralrst Performance" ("New Mea-sures"), (2) the basis for judging spe-cialist performance developed by theNew Measures, (3) the use of samplingtechniques, (4) the use of disciplinaryaction in cases of poor performance, (5)the allocation of securities to specrallstsand (6) the need for more completeminutes of NYSE Floor Committee meet-inqs,

On June 16 and 17, 1975, the Commis-sion's staff conducted a further on-siteinspection to review procedures adoptedby the NYSE in response to the staffletter of June 19, 1974 In a June 26, 1975letter to the NYSE, the Commission staff,after noting that only preliminary resultsfrom the inspection were then available,

67

expressed concern that the NYSE ap-parently dId not Implement procedures toprovide for more detailed and InformativeNYSE Floor Committee minutes until longafter the staff made the request In theJune 19, 1974 letter. In addrtron, the staffnoted that the mitral exchange efforts tomaintain more extensive records snit didnot reflect suttrcrent lnforrnatron aboutstock allocation decisrons. The staffstated that until quesnons relating to thespecialrst system were resolved satis-factorily, a number of procedures shouldbe adopted to better enable the NYSEBoard of Directors to Insure that thecurrent system of allocating stocks to apartrcular specialrst urut was adrrurus-tered adequately.

More specrtrcally, the Commission'sstaff suggested that a transcript be keptof those portions of NYSE Floor Oomrrut-tee meetings which related to the alloca-non or reallocation of stocks to or fromspecralrst units or to proposed mergersof such units. It was also suggested thatthe entire record, including copies of allmemoranda and reports considered bythe Floor Committee regarding suchmatters, be made available to the NYSEBoard of Directors along With the FloorCommittee's recommendations, and thatthose recommendations be supported bya statement of the factors the Floor Com-mittee considered In concluding that aparticular unit, as opposed to any otherUnits, should have stocks allocated to It.The Dlvrsron also urged again that minor-Ity views be reflected. The Division fur-ther requested an early status reportregarding thiS interim action.

Chicago Board OptionsExchange Inspection

From August 19-22, 1974, members ofthe Commission's staff Inspected variousaspects of the Chicago Board OptionsExchange ("caOE") options pilot pro-gram. The purpose of the Inspection wasto gain a general familiarity With theoperation of the CBOE's floor, includingtracing the handling of an order from thetime of receipt on the floor through ItSbeing filled and printed on the transac-

68

tion tape. The Oornrnlssron's staff notedthe crowded conditions of the CBOE floorand reviewed with CBOE ottlcrals theirplans for a new trading floor. In accor-dance With those plans, the CBOE moveddurinq the frscal year to a new, greatlyenlarged floor which opened for optionstrading on December 2,1974.

The Oornrmsslon's staff also took noteof problems relating to the reporting ofoptions transactions and the inability ofInvestors to obtain quotations and lastsale data With respect to options transac-tions. Followinq the Oomrmssron's inspec-tion, the CBOE installed high speed linesfor reporting transactional data and,along With the Amex, engaged the Secu-rities Industry Automation Corporatron asa central processor for that data. As aresult of the CBOE's corrective measures,slqrnncant progress has been made to-ward resotvinq the problems relating tothe reporting of transactional informationand obtaining quotations and last salesdata

The Cornrnisston's staff also InspectedCBOE's floor surveillance program. Dur-Ing that Inspection, the staff observed theCBOE's Innovative system of usmq "postcoordinators" to monitor the performanceof market makers. Under the CBOE'smorutorinq system, post coordinatorsstand at each trading post located on thefloor of the exchange to Insure that bidsand offers are properly recorded and todetect and report possible violations ofexchange rules In the trading crowd. TheCommission's mspection group Informallyrecommended expansion of the post co-ordinator function; because of staff prob-lems, however, the CBOE substantiallyeliminated the surveulance role of theserndrvrduals. At the end of the fiscal year,the Comrrusslon's staff planned to holdfurther diSCUSSIons WIth ofhcials of theCBOE about reinstating the post coordi-nator inspection system. In connectionwith the CeOE's floor surverllance, theCornmrsston's staff recommended, andthe CBOE instituted, a floor members'discrplmary action bulletin to descnbeactron taken by the BUSiness ConductCornrruttee of the CBOE for VIolations offloor practice rules and to keep ItS floor

members abreast of the conduct pro-scribed by the CBOE.

American Stock ExchangeOptions Program Inspection

On April 1 and 2, 1975, members of theCommission's staff conducted an inspec-tion of certain aspects of the Amex pilotprogram for listing and trading call op-tions. Special emphasis was given to anexamlnatron of the Amex's market sur-veillance of options trading, Its surveil-lance of registered options traders andoptions specialists, and observation ofoptions trading as conducted on the ex-change floor. The Commission's staffalso examined the Amex's methods forconducting Inquiries into such matters asunusual trading activity and/or vrolatrons(if any) of exchange rules of policy.

Partly as a result of tms Inspection, theCommission's staff recommended that theAmex elaborate upon the responsibilitiesof floor members in assisting the special-ist in his options market-making capacity.The Amex responded that it would againinform all parties, i.e., registered traders,specialists, and floor brokers, of theirobligations In that regard.s Furthermore,through a special exchange bulletin onthis subject sent to its floor members, theAmex outlined ItS policies concerning theresponsibilities of those mernbers."

Preliminary Inspection ofContemplated PBW Option Pilot

On June 23 and 24, 1975, the Commis-sion's staff conducted a preliminary in-spection of the PBW Stock Exchange,Inc. ("PBW") pilot program for tradingcall options. The mspectron was con-ducted during the PBW's test simulationprogram, before the actual initiation oftrading. The staff paid particular atten-tion to the adequacy of exchange facilitiesand market surveillance systems. TheCommission's staff found two possibleImpediments to future expansion of thePBW's option pilot. The first was that theuse of a manual floor display of marketquotations on a chalkboard rather thanon a cathode ray tube might prove to be

inefficient In a period of heavy trading.Secondly, the staff questioned whetherpresently available floor space couldaccommodate additional option classesbeyond the 10 initially authorized NYSE-listed common stocks. These matterswere to be discussed with PBW officialsearly in the next fiscal year.

SUPERVISION OF NASD

The Securities Exchange Act providesthat any association of brokers or dealersmay be registered with the Commissionas a national securities associatron If Itmeets the standards and requirementsfor the registration and operation of suchassocrations contained In the Act. TheAct contemplates that such associationswill serve as a medium for self-regulationby over-the-counter brokers and dealers.In order to be eligible for registration, anassociation must have rules desrqned toprotect Investors and the public Interest,to promote just and equitable princrplesof trade and to meet other statutory re-qurrernents, Registered national securitiesassociatrons operate under the Commis-sion's general supervisory authority,which Includes the power to review dis-Ciplinary actions taken by an aSSOCiatIOn,to disapprove changes In associatronrules and to alter or supplement rulesrelating to specrtied matters The NationalAssociation of Securities Dealers, Inc.("NASD"), IS the only assocratron regis-tered with the Commission under theAct.

In adopting legislation to permit theforrnatron and registration of nationatsecuritles assocratrons, Congress pro-vided an incentive to membership bypermitting such associations to adoptrules which preclude any member fromdealing With a nonmember broker ordealer except on the same terms and con-ditions and at the same prices as themember deals with the general pubhc.The NASD has adopted such rules. As apractical matter, therefore, membershipIS necessary for profitable participationIn many underwntlnqs, since membersproperly may grant only to other membersprice concessions, discounts and similar

69

allowances not granted to the generalpublic.

By the close of the fiscal year, the num-ber of NASD firms had declined by almost11 percent from the previous year, leav-Ing 2,991 members, a net loss of 327members dunnq the year This loss re-flects the net result of 158 adrrussrons toand 485 terrrnnanons of rnembershrp. Thenumber of members' branch offices de-creased by 224, to 5,924 as a result ofthe opening of 834 new offices and theclosinq of 1,058. The reduction In thenumber of members and branch officesand the consolidation of others resultedgenerally In larger and better capitalizedorgamzalJons. During the fiscal year, thenumber of reqistered representalJves andprrncipals (these categories Include allpartners, officers, traders, salesmen andother persons employed by or affiliatedwith member nrrns In capacities whichrequire reqrstratton) decreased by 9,393to 197,702 as of June 30, 1975. ThIS de-crease reflects the net result of 14,011inItial registrations, 19,527 re-reqistranonsand 42,931 terrrunanons of registrationduring the year

DUring the trscal year, the NASD ad-ministered 40,576 quanncanon examina-tions of which 21,799 were for NASDqualification, 3,052 for the Commission'sSECD program 7 and the balance forother agencies, including major exchangesand various states

NASD Rules

Under the Securities Exchange Act, asIn effect before the enactment of the 1975Amendments, the NASD was required tofile for Commission review copies of pro-posed rules or rule amendments 30 daysprior to their proposed effectiveness."Any rule changes or additions may bedisapproved by the Comrrusaron If It findsthem to be inconsistent with the require-ments of the Act Generally, the Com-mrssron also reviews, In advance ofpubllcatron, general policy statements,drreotrves and mterpretatrons to beIssued by the Board of Governors pur-suant to the Board's power to adrrurusterand Interpret NASD rules

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During the fiscal year, numerouschanges in or additions to NASD ruleswere submitted to the Commission for ItSconsrderatrcn. Among the major filingswhich were not disapproved by theCommission were.

1. Amendments to Schedule D of theNASD's By-laws relating to the Initialstandards for mclusron of secuntles Inthe NASDAQ system. The minimum num-ber of shareholders was reduced from500 to 300 It had become Increasinglydifficult for new Issues to meet the higher500 shareholder test because of theemphasis within the Industry on the prac-tice of holding securities in "street name."At the same time the price of the securitywas eliminated as a criterion for inclusionin NASDAQ. This major liberalization ofthe requirements was made because Itwas felt that the safeguards that are im-posed by other applicable NASDAQ Cri-teria, such as the Section 12(g)( 1)registration 9 and the assets and networth standards, as well as the NASD'scontinuing and Improved market surveil-lance programs, are sufficient to preventthe various abuses at which the pricecriterion was aimed.

2. Amendments to Schedule D of theNASD's By-laws to provide for the elrrruna-non of the minimum bid quotation require-ments for Issues on the National lists forover-the-counter secuntrss published Innewspapers and other media. The prin-cipal effect of trus amendment was toallow the NASD, in face of lower marketprices during the past two years, to con-tinue to utilize available newspaper spacefor the Natronal LIsts.

3. Amendments to Schedule C of theNASD's By-laws providing for the estab-lishment of new NASD qualificationexaminations for representatives engag-Ing In general secuntres activities. Inorder to upgrade the qualification stan-dards for secunnes industry personneland to develop tests surted to specificcategories of persons, the NASD, alongwith the NYSE, developed a new com-prehensive examination for generalsecurities representatives. The examrna-non consists of two 125 question partsand IS given In separate three-hour ses-

srons, The examination IS divided Intofour subject matter areas: Industry Regu-lation and Brokerage Office Procedures,Product Knowledge, Financial and Se-curity Analysis, and the Servicmq ofAccounts. In addition, the NASD IS de-veloping separate examinations, whichwould be given In lieu of the new gen-eral securities examination to individualsselling only special types of securitiessuch as mutual funds, variable life andannuity contracts, or limited partnershipinterests.

4. Amendments to Schedule A of theNASD's By-laws providing for an IncreaseIn the gross income assessment rate formember firms, and for a special servicecharge for qualrtrcatron examinations ad-ministered by the NASD In its foreign testcenters. The gross income assessmentlevy is a. means used by the NASD toprovide for the equitable allocation ofdues among its members to defray rea-sonable expenses of administration Theservice charge for foreign test centerswas Imposed to cover the additionalexpenses Involved In administering sucha program.

5. Amendments to Schedule G of theBy-laws governing the reporting by mem-bers of over-the-counter transactions Inlisted securities to the consolidated tape,and amendments to the By-laws, Operat-ing Rules and Interim Rules of the Na-tional Clearing Corporation were adoptedto facilitate reportmq.t?

NASD Inspections

During the fiscal year, the Commis-sion's staff Inspected the NASD's districtoffices in Philadelphia and Chicago, andcommenced an inspection of the opera-tions of ItS NASDAQ and Market Sur-veillance Departments located In ItSWashington headquarters office Thoseinspections were conducted as a part ofthe Commission's oversight responsibili-ties to assure that the NASD IS properlycarrymq out ItS self-regulatory functions,and to coordinate with the NASD inregulating and enforcing activities in theover-the-counter markets.

The district office lnspectrons Involved

a review of (1) the composition and effec-tiveness of the District Committees, theDistrict Business Conduct Committees,examination subcommittees, nominatingcommittees and quotations committees;(2) the functioning of the district staffs,especially their working relationships withthe various committees; (3) the districtstaffs' coordination and cooperation withthe Commission's reqional otnces, ex-changes and other interested regulatorybodies; (4) the effectiveness of drscrpun-ary procedures; and (5) the need, If any,for new rules or amendments to existingrules, policies or interpretations. TheInspection of the operations of NASDAQand Market Surveillance Departments in-volved a review of similar areas of con-cern, with particular concentration on theeffectiveness of the NASDAQ regulatoryprocedures necessary to protect andpromote a fair and orderly marketplace

The rnspectron of the NASD's Phila-dalptua district office revealed severalareas of concern which the staff feltmerited further discussion with repre-sentatives from the NASD's headquartersoffice. Spectflcally, the staff noted prob-lems In the totlowmq areas: (1) delays Inthe preparation and subsequent process-Ing of formal complaint actions againstfirms and rndrvrduals, (2) the adequacy offollow-up inquiries based on notices re-ceived py the NASD of registered repre-sentative terminations of employmentwith member firms; and (3) a lack ofcommunications with the Commissionconcerning possible securrties actsviolations

These matters were discussed withrepresentatives of the NASD In responseto the problem of timely processing offormal complaint actions, the NASD hasmade personnel changes In the Philadel-phia district and added an attorney to thedistrict staff to help in reducrnq backlogs.In response to the other problems, theNASD has Indicated to the Commission'sstaff that greater depth would be sought''1 the future with respect to the handlingof registered representative terminationnotices and matters for referral to theCommission concerning possrble securi-ties acts vrolanons

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An inspection of the NASD's Chicagodistrict office also revealed certain areasof concern warranting drscussron with theNASD's headquarters office. Specifically,the staff noted problems In the followingareas: (1) possible over-representation ofexchange-oriented firms on the DistrictCommittee; (2) some delays In the prepa-ration of formal complaint actions and Inthe writing of District Busrness ConductCommittee ("DSCC") decrsrons againstfirms and indrvrduals: (3) Imposition bythe DSCC of apparently insufficient sanc-tions In certain cases, (4) delays by thestaff In presentation of disciplinary mat-ters to the DSCC In several Instances;(5) a continuing reluctance on the partof the District to utilize the Letters of Ad-mrssron, Waiver and Consent 11 procedureIn appropriate cases In accordance Withheadquarters policy; and (6) a possrbleneed for more frequent DSCC meetings Inorder to provide for more ettrcient dis-position of ItS disciplinary caseload.

While a report on these findings tiasbeen prepared and the Commission's staffsent a preliminary letter to the NASD,these matters have not yet been dis-cussed In detail With NASD representa-tives. A meeting With the NASD Will bescheduled for early in the next fiscal year.

NASD Disciplinary Actions

The Oornrmssron receives from theNASD copies of ItS dactsrons In all caseswhere disciplinary actron IS taken againstmembers and persons assocrated Withmembers. Generally, such actions arebased on allegations that the respon-dents Violated specttred provisions of theNASD's Rules of Fair Practice. WhereViolations by a member are found, theNASD may Impose such penalties asexputsron, suspension, fine, or censure.If the Violator IS an mdrvidual, his regis-tration With the NASD may be suspendedor revoked, he may be suspended orbarred from being associated With anymember or he may be fined and/orcensured.

DUring the past fiscal year, the NASDreported to the Cornrrnssron ItS final dis-

72

position of 486 disciplinary complaints Inwhich 330 members and 553 rndrvrdualswere named as respondents. Complaintsagainst 23 members and 53 individualswere dismissed for failure to establishthe alleged violations. Forty-stx memberswere expelled from membership and 24members were suspended for periodsranging from one day to one year. Inmany of these cases, a fine also was Im-posed. In 210 cases, members were finedamounts ranging from $25 to $50,000 andIn 27 cases members were censured. Indiscrplmary sanctions Imposed on in-dividuals associated With member firms,142 persons were barred or had theirregistrations revoked and 91 had theirregistrations suspended for periods rang-Ing from one day to eight years. Inaddition, 243 other mdrvicuats were cen-sured and/or fined In amounts rangingfrom $100 to $50,000.

Review of NASD DisciplinaryActions

DIsciplinary action taken by the NASDIS subject to review of the Oornmlsaronon ItS own motion or on the timely appli-cation of any aggrieved person. In thosecases reViewed by the Commission be-fore the enactment of the 1975 Amend-ments, the effectiveness of any penaltyImposed by the NASD was automaticallystayed pending Comrmssron review,unless the Commission otherwise orderedafter the notice and opportunity for hear-Ing}2 If the Oornmissron found that thedisciplined party committed the actsfound by the NASD and that such actsViolated the specified rules, the Com-rnissron was required to sustain theNASD's action unless It found that thepenalties Imposed were excessive oroppressive, In which case It was requiredto reduce them or set them aside,

At the beginning of the fiscal year, 26proceedings to review NASD dlecrplmarydecrsrons were pending before the Com-mission and, dunnq the year, 16 addi-tional cases were brought up for review.The Oornrmssron disposed of 11 cases.In SIX cases the Commission affirmed theNASD's action and In two other cases

dismissed the appeal because of re-spondent's failure to file a brief. In twocases, the NASD's findings and/or penal-ties were modified and In one case theNASD's action was set aside. At the closeof the fiscal year, 31 cases were pending.

In Thomas E. Jackson,13 the Cornrnrs-sron, affirming the NASD, held that aregistered representative can be dlscr-plrned for conduct not arising directlyout of securities actrvmes. Jackson wascharged with violating the requirement ofthe NASD's Rules of Fair Practice thatmembers and associated persons adhereto "high standards of commercial honorand just and equitable principles oftrade",14 because he forged the signa-tures on applications for Insurance inorder to obtain commissions to which hewas not entitled. The Commission heldthat Jackson's conduct obviously did notmeet such standards.

The Oommlssron cited the 1938 Ma-loney Act amendment to the SecuritiesExchange Act, which provided for thevoluntary reqistratron of self-regulatoryassociations of secunnes brokers anddealers and sought to eliminate abusesand up-grade standards of conduct In theover-the-counter markets by setting upa system of self-regulation. Such associa-tions were to provide rules designed toprevent fraudulent and manipulative actsand practrces, to promote just and equi-table principles of trade and In general,to protect Investors and the public in-terest. The Oornrnlssron saw no reasonwhy the NASD should be precluded fromcarrying out Its mandate to protect itsmembers and their customers against arepetition of the kind of conduct in whichJackson engaged. In addition, the Com-mlssron noted that although Jackson'swrong-doing in this Instance did not in-volve securities acnvmes, the NASD couldJustifiably conclude that on another oc-casion it might.

In Livada Securities CO.,15 the Com-rmssion affirmed the NASD's findings thatthe respondent violated the net capitalrule and failed to prepare and maintainproper books and records. It sustainedthe fine Imposed by the NASD despite therespondent's contention that the penal-

ties were excessive In light of variousmitigating circumstances, t.e., the viola-nons were Inadvertent and attributableIn part to respondent's inexperience andthere were no customer losses. The Com-rrussron observed that the Issue beforeIt was not whether it would have Imposedthe same sanctions as the NASD, butwhether the penalties Imposed were ex-cessive or oppressive, having due regardfor the public Interest The Commissionstated that It was in full accord with theNASD's stress on the Importance of afirm's compliance with the net capital andrecordkeepmq requirements. The Com-mission emphasized, furthermore, thatthe net capital rule, which was designedto assure financial responsibility of brok-ers and dealers, has been described as"one of the most Important weapons inthe Commission's arsenal to protect in-vestors," 16and that accurate and currentrecords are essential to enable a broker-dealer to determine compliance with netcapital and other requirements.

Review of NASD MembershipAction

Before the enactment of the 1975Amendments, the Securities ExchangeAct and NASD By-laws provided that,unless approved by the Commission, nobroker or dealer could become or con-tinue to be an NASD member If It or anyperson associated with It was subject tospecified dlsabllltres.!" Commission actionto approve or direct the admission of aperson to membership in the NASD, orthe continuance of membership of anyperson, IS generally sought after an initialpetition to the NASD IS made by themember or applicant for membership.The NASD in ItS discretion may then filean application with the Commission onbehalf of the petitioner. If the NASD re-fuses to sponsor the application, thebroker or dealer may apply directly to theOcrnrnisston for an order directing theNASD to admit It to, or to continue it In,membership. At the beginning of the fiscalyear, four applications were pending be-fore the Commission. During the year,seven applications were filed, five were

73

approved and two were withdrawn, leav-Ing four applications pending at the endof the year. All of the applications werefiled by the NASD

NASDAQ Issuer Removal

On March 13, 1975, the CommissionIssued an order dismissing review pro-ceedings on an application for review byTassaway, lnc.J" a publicly held companywhose common stock was removed fromthe NASD's automated quotation system("NASDAQ"),19 because the issuer failedto maintain at least $250,000 In capitalplus surplus, as required by NASD rulesTassaway's application under SecuritiesExchange Act Rule 15AJ-2 for review ofItS removal from NASDAQ was the firstever made to the Commission by aNASDAQ issuer. Tassaway conceded ItSfailure to meet NASDAQ's numericalqualitative test 20 but argued that a pro-posed acqulsmon would, when consum-mated, give It more than enough capitalto meet NASDAQ's capital test. In view ofthe fact that the acqursmon agreementwas rescinded dunnq the pendency ofthe appeal, the Commission ordered thatthe proceeding be dismissed.

Since this was the Commission's firstsuch appeal, however, It took the op-portunity to state the basic standards bywhich It would be gUided when asked toreview the NASD's actions With respect toaccess to NASDAQ. The Ccrnmlsston ex-pressed the view that the NASD's role InNASDAQ IS, In essence, the same as thatof exchanges With respect to the listingand dellstrnq of securities and, citingprior decrsrons on the latter subject, theCommission concluded that the governinglegal standards should be the same, I.e.,(1) though exclusion from the system mayhurt exisnnq Investors, primary emphasismust be placed on the Interest of prospec-tive future Investors 21; (2) the Commis-sion's review function IS solely that ofdetermining whether "the specrtrc groundson which the action of the self-regulatoryorganization is based exrst In fact andare In accord With the applicable rulesof the association", and (3) to the extentthat discretion enters Into the matter,

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the Cornmlsston IS not at liberty to sub-stitute Its discretion for that of the NASD.

EXPENSES AND OPERATIONSOF SELF-REGULATORYORGANIZATIONS

The year 1974 was a poor one for thesecunnes markets In general, and themajor self-regulatory organizations suf-fered financially as a result.22 The highnational rate of inflation seems to havebeen a primary Influence on the marketsduring the year.

In an inflationary period, It can normallybe expected that expenses, such aswages and salaries, Will rise in accordwith the general inflation rate; and dur-Ing 1974 ttus was the case with the NYSEand the NASD, whose expenses areheavily weighted With personnel costs, asmight be expected of a regulatory body.Many industries, however, pass on theseIncreased costs through higher prices forthe goods and services they market. Thesecunties Industry, however, IS almosttotally a service Industry and must financeItS self-regulatory effort very largelythrough fees and assessments levied onpersons engaged In the business. Itsrevenues, in turn, depend upon, andfluctuate With, the price and volume levelsof the secunnes being marketed. Theself-regulatory organizations, whose reve-nues must depend, in the final analysis,on the profitability of their member firmswere caught in the middle. Their revenuesdeclined while their expenses were in-creasing In line With the high rate ofinflation.

Cost-cutting measures were introducedby most self-regulatory organizations tomeet this problem; nevertheless, particu-larly in the case of the NYSE and theNASD, those measures were not fullyadequate because of their need to meeton-going and increasing regUlatory andsurveillance responsibilities.

Total share volume of secunties tradedon all national securities exchanges andover-the-counter continued to decline In1974, amounting to approximately 6.0billion shares In 1974 as compared With7.4 and 8.5 billion shares In 1973 and

1972, respectively. As a group, the self-regulatory organizations' combined totalrevenues declined to $173 mrlnon in 1974from $180 million In 1972, as a resultmostly of the decrease In trading volume.Communication fees, however, rose from$19 million to $21 million, and revenuefrom depository fees Increased by $3million pnmanly because of the activityof a newly formed Midwest Stock Ex-change subsidiary, the Midwest StockTrust Company. Changes In various otherrevenue components were as follows.

Revenues on transactions fees de-clined to $24 million from $29 million;

Revenues on listing fees declined to$25 rrullron from $26 million;

Revenues from cleanng fees declinedto $30 million from $36 million;

Revenues from tabulating servicesdeclined to $11 million from $12 mil-lion; and

Revenues from all "other" sourcesincreased to $39 million from $38million because of an Increase Inmembership dues 23

Thus, the self-regulatory organizationsas a group suffered a net loss of $1.1million (before taxes) In 1974 as opposedto net Income of $2.2 million and $18.9million In 1973 and 1972, respectively Inthe first SIX months of 1975, however, thesituation Improved In line With the in-creased market activity, resulting In netincome before taxes of $12.1 million.

Financial Results of the NASD

Each year the Commission reviews theNASO's proposed fee and assessmentschedule, ItS supporting financial state-ments for the current and past fiscalyears, and proposed budget for the fol-lowing fiscal year. The fee and assess-ment schedule is filed pursuant to Section15A of the Securitres Exchange Act, whichrequires the NASO to have an equitableallocation of dues among ItS members todefray reasonable expenses of administra-tion.

The NASO's statement of financial re-SUlts for ItS fiscal year ended September3D, 1974, revealed that the NASO's equity

declined to $7.8 million from $8.4 millionthe year before. The decline In equrtyresulted from lower net operating earn-Ings and a larger loss Incurred by theNational Clearing Corporation, theNASO's wholly-owned clearing Subsidiary,which was charged to NASO earnings.

Operating revenues of the NASO de-clined by $0.5 million to $12.2 million, adecline ot 4%. This reduction In incomewas brought about by two major factors.First, a major source of revenue, feescharged for administering qualificationexarmnatrons given pnnclpally to mdi-vrduals entenng the business, declined25%, to $3.1 million in fiscal year 1974,versus $4.1 million In fiscal year 1973.The number of examinees declined from72,598 In fiscal year 1973 to 47,212 Infiscal year 1974. Secondly, because ofpoor market conditions, the number offirms haVing public offenngs declinedSignificantly. The total dollar value ofpublic offerings in which NASO membersparticipated fell to $8.65 billion from$14.1 billion In fiscal year 1973, a 53%decline. Thrs decline caused a drop InNASO fees for underwntmq arrangementsfiled With it for review during the NASO'sfiscal year. Other NASO revenues werestable, except for a new revenue sourcethat went Into effect on June 1, 1974-the NASOAQ Issuer fee, which brought In$0.7 rnillron.

Operating expenses of the NASOdropped by $0.2 million (to $12.1 millionIn the NASO's 1974 fiscal year from $12.3million In its 1973 fiscal year) largely asa result of vanous cost-cutting measurestaken by It. Thus, the decreases In operat-Ing revenues and expenses resulted Innet operating Income of $0 1 million asopposed to $0.4 million In the prior year,down but stili POSitive, until the net NCCloss of $0.7 million ($0.3 million In theNASO's 1973 fiscal year) IS taken Intoaccount.s- ThiS addrnonat expense putthe NASO In a net loss posrtron of $0.6million In ItS 1974 fiscal year as opposedto a profit of $0.1 million In fiscal year1973.

More recently, the high trading volumefor the first six months of 1975 resultedin higher gross revenues and net income

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for the NASD Over that six-month period,both revenues and net Income beforetaxes gradually Increased, providing aJanuary-to-June gross revenue In excessof $10 million. Expenses, on the otherhand, remained relatively stable dunnqthis period, resulting In net Income of$0.6 million for the period.

NASD Budget

The review of the NASD budget IS con-ducted as a part of the Commission'sregulatory oversight responsibilities, anddunnq the past two years the Commissionhas been concerned very largely with theprogram for examination of memberbroker-dealers to assure that the NASDhas a sufficient examiner staff to carryout ItS enforcement and surveillanceresponsibilities.

In addition to ItS usual budget subrrus-sron, In September 1974, the NASD sub-mitted a "Personnel BUdget Study",which outlined the NASD's projected staffrequirements for ItS fiscal year endingSeptember 30,1975 That study concludedthat a total of 168 field examiners, notIncluding those needed to staff such de-partments and sections as Internal Re-view and Anti-Fraud, were needed tocomplete the 1975 exarnmanon program.Selective reductions of certain profes-sronal and clerical positions, as recom-mended In that study, were made toreduce the total authorized field stafffrom 349 In the NASD's 1974 fiscal yearto 285 In ItS 1975 fiscal year. That was anet budgeted decline of 64 positrons (47professional and 17 clerical) With respectto field staff then on board, however, thestudy had recommended a reduction Inforce of only 34 positrons (22 professionaland 12 clerical)

The recommended reduction was amarked change from a 1973 NASDpersonnel bUdget study, which had indi-cated that the examination program for1974 would require 213,373 examinerman-hours for completion. The 1974 studyconcluded that the fiscal year 1975examination program would require only156,058 man-hours for cornplenon. Sev-eral factors accounted for that projected

76

decrease in staff. First, the number offirms In the association's highest prioritycategory, i.e., member firms doing a gen-eral securities business whose only affili-ation with a self-regulatory organizationIS the NASD, dropped appreciably duringthe year (from 1,208 in 1973 to 1,010,or a decrease of 198 firms). That declineresulted In a "saving" of 15,246 examina-tion man-hours, or 26.6% of the total1973-1974 difference

Secondly, the reduction In requiredman-hours for 1974 was partially theoutgrowth of positive enforcement pro-grams In being since 1973, which resultedIn a decrease In the number of firms onspecial survelliance,25 i.e., a decreasefrom 90 firms In April 1973 to 48 In April1974 That resulted in a saving of slightlyunder 7,000 man-hours, or approximately12% of the 1973-1974 difference

Additionally, since the Commission'sadoption of a rule about control of cus-tomers' secunties (Securities ExchangeAct Rule 15c3-3) In January 1973, thestaff of the NASD has encouraged mem-bers to operate pursuant to exemptionsafforded by that rule. The NASD estimatesthat over 200 firms availed themselves ofsuch exemptions, which permitted a re-duction In man-hours required for exami-nation of such firms of approximately8,500 hours, or 15% of the 1973-1974difference. Also, the NASD eliminated thethree-year routine examination frequencycycle for mutual-fund retailers, which re-duced the workload by approximately8,938 examiner man-hours, or 15% of thedifference.

Finally, estimates as to the requiredamount of time for examination of differentcategories of members were reVised Inthe 1974 study. Those revrsrons werebased on actual experience gained overthe most recent eight-month periodthrough the use of the NASD's new time-recording system. That resulted in adecrease of approximately 17,839 man-hours, or 31.3% of the 57,315 man-hourdifference In the two studies.

Financial Results of the NYSE

In 1974, the NYSE had net operating

revenues of $0.66 million, on total reve-nues of $72.6 million, as compared withnet operating revenues of $3.7 million ongross revenues of $78.0 rrullron In 1973.In addition, the NYSE had a tax credit of$221,000, equity In net revenues of theDepository Trust Company of $552,000,and a credit to capital of $990,000 frominitiation fees, for a total of $1.7 million,resulting In an increase in equity to $62.8million from $61.0 million in 1973. In theprior year, the NYSE's equity hadincreased by $4.5 mlllron.

As in the case of the NASD, decliningrevenues as a result of poor market con-ditions for members In 1974 was theprimary reason for significantly loweroperating revenues, which decreased by$5.3 million from the previous year to$72.7 million, a decline of nearly 7%. Adecline in revenue from two sourcesmade up the bulk of this decrease. First,charges on commissions declined by $2.0million, to $17.0 million from $19.0 millionthe previous year. This was a direct resultof reduced trading activity on the NYSE-i.e., average dally volume fell from adally average of 16.1 million shares In1973 to 13.9 million shares In 1974, a de-cline of 14%. Secondly, Initial listing feesdeclined by $32 million, from $10.8 mil-lion In 1973 to $7.6 million In 1974. Therewere only 48 new listings In 1974 asagainst 98 In 1973 (which was also apoor year for new listings). This loss Ininitial listing fee revenue was offset Inpart by an increase In continuous listingfee revenue of $0.8 million. Thus, therewas a net decline of $2.4 million In totallisting fee revenue In 1974, to $18.9 mil-lion from $21.3 million in 1973. The NYSE'sother revenue sources, including com-murucations charges and cleanng ser-Vices, also yielded less In the aggregate,declining by a total of $0.7 million.

Partly as a result of decreased activityon the exchange and partly because ofcost-cutting measures, the NYSE reducedItS operating expenses by $1 7 million(2.3%). The NYSE reduced expendituressignificantly In the following areas.

1. Reduction in leased tacrlrties andequipment expenses by $1.6 million;

2. Elimination of the block automation

system, saving $2.2 mrtlron:3. Reduction In legal expenses by $2.3

million;4. Elimination of the NYSE's national

advertismq program, saving $1.5 million;5. Reduction of staff 26 by a total of

280 people, saving $4.5 million; and6. Reduction of other expenses by $1.0

million.These savings were offset partially by

an salary Increases of $2.2 million.Dunng the first SIX months of 1975 the

NYSE expenenced an Increase in totalrevenues as share volume Increased from388 million shares traded In January to479 million shares traded In June. Ex-penses dunng thrs perrod were held to$48 rmllron, producing a pre-tax netIncome of $8.4 million for the SIX months.

Boston Stock Exchange, ChicagoBoard Options Exchange, andMidwest Stock Exchange 27

In contrast to the NYSE and the NASD,the Boston Stock Exchange ("BSE"), theChicago Board Options Exchange("CBOE"), and the Midwest Stock Ex-change ("MSE") expenenced increasesIn revenues between 1973 and 1974. TheMSE Increase was caused pnmanly byexpansion of services offered to ItS mem-bers. The CBOE Increase was generatedmainly from cornrrussron charges on in-creased volume In listed option trading.The BSE Increase was the result of ageneral nse In all sources of revenue. Ex-penses also Increased dunng thrs penod,resulting In a decline In net Income beforetaxes between 1973 and 1974, except Inthe case of the CBOE, which reduced ItSlosses In 1974 relative to 1973. Revenuerntormatron for the MSE for the first fivemonths of 1975 showed an Increase,dipping only slightly In June. Expensesfor the MSE during these SIX months wererelatively stable. MSE net Income fromoperations for the first SIX months,which fluctuated to some degree, totaled$0.8 million. Likewrse, CBOE and BSEexpenenced greater revenues in the firstSIX months of 1975 Expenses for BSEremained stable while those for theCBOE rose because of higher salary costs.

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Net Income for the first SIX months of1975 was $0.2 million for the BSE and$0.8 million for the CBOE

American Stock Exchange, DetroitStock Exchange, PBW StockExchange and Spokane StockExchange

The Amex, the Detroit Stock Exchange("DSE"), the PBW Stock Exchange("PBW"), and the Spokane Stock Ex-change ("SSE") all experienced a declineIn revenues and expenses between 1973and 1974, primarily because of low ex-change volume and generally unfavorablemarket conditions Nevertheless, the firstSIX months of 1975 showed a reversal ofthe downward trend for these exchanges.Only the PBW showrnq renewed signs ofdecline In May and June Both the DSEand the SSE showed steadily decliningexpenses dUring the first half of 1975,while PBW and Amex expenses experi-enced an overall upswing. Of those fourexchanges, only the SSE showed a lossfor the fl rst SIX months of 1975. TheAmex, DSE and the PBW had net Incomesof $0.5 rnrltron, $4,000 and $0.3 rrullron,respectively

Cincinnati Stock Exchange,Intermountain Stock Exchange,and Pacific Stock Exchange

The Cincinnati Stock Exchange("CSE"), Intermountain Stock Exchange("ISE"), and the Pacinc Stock Exchange("PSE") all Increased their revenues anddecreased thei r expenses between 1973and 1974. The revenue Increase for CSEcame primarily from listing fees and floorusage revenues The slight rise In reve-nues for the ISE came entirety from rentalIncome. The rise In revenues for the PSEwas due to Increases In member dues,listing fees, and earnings from invest-ments. The rise In revenues for thoseexchanges caused all three to experienceIncreases In net Income between 1973and 1974.

DUring the first SIX months of 1975, theCSE revenues and expenses varied con-srdarably, resulting In a net loss for two

78

of the SIX months. The ISE experienceddeclining revenues dUring the first SIXmonths of 1975. ThiS, combined Withfluctuating expenses, resulted In lossesfor four of the SIX months. The PSE onthe other hand, experienced an upwardmovement In total revenues dUring thefirst SIX months of 1975 Expenses forthe PSE also increased, but the Increasesdid not prevent the PSE from operatingat a pront for the first half of 1975.

The combined revenues and expensesof all the exchanges and the NASD forthe years 1972, 1973 and 1974, and forthe months of January through June,1975, are presented In tables In part 9.Revenue and expenses for each ex-change and for the NASD for 1974 andfor the period January through June,1975 are also shown in Part 9.

BROKER-DEALER REGULATIONRegistration

Brokers and dealers who use the mallsor a means of interstate commerce In theconduct of an Interstate over-the-countersecuntrss busmess are required to reqrs-ter With the Commisslon.28

As of June 30, 1975, there were 3,546broker-dealers registered, compared with3,982 a year earlier. This represents adecrease of 436, or 10.9 percent, sinceJune 30, 1974. During the year, 709 regis-trations were terminated, of which 576,or 81 2 percent, were WIthdrawn by thebroker-dealer and 133, or 18 8 percent,were revoked or cancelled by the Com-missron. During the year, 274 newapplications became effective, whrle 235new applications were either Withdrawn,returned, or denied.

On May 16, 1975,29 the comrntssronannounced the adopnon of Form U-3, auniform application for reqlstratron as abroker-dealer under Section 15(b) of theSecurities Exchange Act and for theamendment of that registration. Form U-3replaced Form BD, but the desrqnatron"Form BD" has been retained. The Com-rmssion also announced adoption ofForm u-4, a urntorrn applrcatron forregistration of associated persons, whichwill replace Form SECD-2.3o

In addition, Secunties Exchange ActRule 15b3-1 was amended to providethat each registered broker-dealer berequired to file new Form BD (that IS,Form U-3 as adopted) furnishing all re-quired information at such time as thebroker-dealer's registration presently onfile requires amendment. In any case, anew Form BD would be required to befiled within 120 days after the effectIvedate of the amendment to Rule 15b3-1.

Paragraph (a)(3) of Securities ExchangeAct Rule 15b8-1 was amended to requirethat any broker or dealer whose FormSECD-2 becomes Inaccurate or incom-plete for any reason file a Form U-4Form U-4 would not have to be filed forassociated persons within any specifiedtime.

On July 10, 1975, the Commission post-poned .the effective date of the newforms and the amendments to the relatedrules until October 1, 1975, and madecertain changes in the forms and rules,including changes In Form BD requiredby the 1975 Act Arnendments.»

Recordkeeping

On May 7, 1975,32 the Commission pro-posed amendments to a portron of Securi-ties Exchange Act Rule 17a-3. Rule 17a-3(a)(12)(A)(8) presently requires brokersand dealers to obtain for each associatedperson a record of any arrests, indict-ments, or convrctions for any felony ormisdemeanor, except minor tratnc of-fenses The Oornrmssron proposed toamend Rule 17a-3(a)(12)(A)(8) to limitthe reference to arrests or Indictmentsfor crimes whrch were related to the safeoperation of the securities industry. Therule WIll continue to require employers Inthe securrtles industry to maintain recordsof all convictions other than minor tratticoffenses of their associated persons

Financial Responsibility

On January 23, 1975,33 the Comrrusstonannounced that it had under consrdera-tion a proposal to amend Secunties Ex-change Act Rule 15c3-2. Presently Rule15c3-2 prohibits a broker or dealer from

usmq customer free credit balances In tusbusiness, unless the customer IS givennotice at least once every three monthsinforming him of the sum due and thatsuch funds. (1) are not segregated; (2)may be used In the operation of thebroker-dealer's business. and (3) arepayable upon demand With the adop-tion of Securitres Exchange Act Rule15c3-3,34 which limits the extent towhich a broker-dealer can use customerfunds or secuntres In the operatron of hrsbusrness, the drsciosures required byRule 15c3-2 are no longer appropriateRule 15c3-3 permits the use of customerfunds only In limited areas of the broker-dealer's business relating to the render-Ing of services to customers. Funds notused In those limited areas are requiredto be deposited In a "Special ReserveBank Account for the Exclusive Benefit ofCustomers."

The proposal to amend Rule 15c3-2would require any broker or dealer sub-ject to the Rule to send to ItS customers aquarterly statement of account reflectingany money balances held for the cus-tomer's account, securities positions andsecunties transactions In the customer'saccount. The proposed amendmentswould further require a broker or dealerto disclose, among other things, thatcustomers' free credit balances and fully-paid securmes are available to customersIn the normal course of business opera-tions following demand and that thebroker or dealer may use any customers'free credit balances left With It In thebusiness of such broker or dealer exceptas limited by Rule 15c3-3 The Commis-sion IS presently considering the com-ments received on the proposed rule

Broker-Dealer Examinations

DUring the past few years the Commis-sion has continued to ernphasize theImportance of a strong requlatory pro-gram aimed at Improving and raIsing theregulatory standards In the industry, in-forming all registered broker-dealers oftherr responsibrlmes and, where appro-priate, detecting infractions and devia-tions from the regulatory rules and

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standards which have been established toprotect the investing publrc The Com-mission IS aided In ItS efforts by exam-iners who are employed by the variousself-regulatory organizations and whocarry out exarmnatrons, inspections andrelated functions A result of that efforthas been a substantial decrease In theannual Incidence of losses of funds orsecurities to the customers of fallingbrokerage firms requiring the assistanceof the Securities Investor ProtectionCorporation ("SIPC"), while more andmore firms which find It necessary toleave the securities business are liqurdat-ing In an orderly tashron Without loss tocustomers or creditors."

The Commission's Office of Broker-Dealer Examination Program, recentlyredesignated as the Office of Broker-Dealer Compliance and Examination, Inthe Divrsron of Market Regulation, IScharged with carrying out the Commis-sion's program to Insure compliance bybroker-dealers With applicable rulesrelating to supervrsron, sales practices,trading practices, suttabilrty, books andrecords, financial responsibility and otherrelated activities. During the past fiscalyear, the Office of Broker-Dealer Com-pliance and Examination has expandedItS efforts to Insure that the secuntresIndustry has an up-to-date, comprehen-sive early warning and surveillancesystem and examination and examinertraining programs

Early Warning and Surveillance

The Commission IS responsible for thefinancial and operational soundness of allregistered broker-dealers and membersof self-regulatory orqaruzations In thrsconnectron, pursuant to secnon 5(a) ofthe Securities Investor Protection Act of1970 (the "SIPA Act"), the Commissionrequires monthly or more frequent early-warnang lists from each self-regulatoryorqaruzanon Identifying member nrmswhrcn may be In or approaching financialdifficulty or whrch may require closer-than-normal surveillance for any reason.Ttus information IS collected on a monthlybasis and sent It to the appropriate Com-

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mission regional office for Verification. Acontinuing monitoring program Withrespect to firms on the early-warning listIS subsequently undertaken In coopera-tion With the self-regulatory organiza-tions.

Other Commission early warning andsurveillance tools used during the fiscalyear Included (1) Secuntres ExchangeAct Rule 17a-11, which requires a broker-dealer to notify the Commission If itbreaks through certain specified financialor operational parameters, (2) SecuritiesExchange Act Rule 17a-5(j), which re-quires a broker-dealer. to notify theCommission If ItS exemption from theCommission's net capital rule has ceasedbecause It no longer IS a member of anational securities exchange; and (3)Securities Exchange Act Rule 17a-1O,which requires a broker-dealer to fileForm X-17A-10 annually With the Com-rnlssron. The Commission continues tomonitor these programs, although someor all of them may eventually be incor-porated Into the Financial and Opera-tronal Combined Uniform Single (FOCUS)Report Program being developed for theIndustry by the Report coordinatingGroup.

The Commission periodically reviewsthrough on-site mapections and an-housestudies the early warning surveillancetools of the self-regulatory orqanizationsto Insure that they constitute sound,effective programs which will enableeach orqaruzatron at the earliest possibletime to detect and monitor member firmswhich are an or approachang financialdifficulty.

DUring the past fiscal year, the Com-mission's staff conducted on-site inspec-nons of the early warning and surveil-lance programs of the CBOE, BostonStock Exchange, Midwest Stock Ex-change, and PBW Stock Exchange; itcompleted on-site inspections of theAmex, the NYSE and the Pacific StockExchange in the previous fiscal year. Inaddition, the Commission's staff reviewedthe programs of the NASD, as Imple-mented by ItS district offices located inPhiladelphia, Cleveland, New York,Chicago, San Francrsco and Atlanta.

The various self-regulatory orqaruza-tions have primary responsibility for ex-amining their members with respect tocompliance with the applicable financialresponsibility rules. With respect to firmsnot belonging to any self-regulatoryorganization (SECO firms), the regionaloffice having JUrisdiction IS responsible inthe first instance for compliance monitor-Ing The responsibilities of a principalexamining authonty, and of the Commis-sion's regional offices In the case ofSECO firms, Involve routine examinationsof the broker-dealers or when necessary.The regional offices, In addition, conductoversight examlnatrons of member firmsIn furtherance of the Commission's earlywarning and surveillance efforts.

The Commission's program for exarmn-Ing the self-regulatory organizations hastwo phases Through the first phase, on-site Inspections of the self-regulatoryorqaruzatrons, the Commission's staffreviews and attempts to strengthen,where necessary, their exarrunatron, earlywarning, surveillance and training pro-grams, while at the same time evaluatingand defining the goals, pollcies, proce-dures, design, budget and staffing ofthose programs. DUring the past twofiscal years, the staff has conductedInspections of all eight major self-regulatory organizations and, dunnq thepast fiscal year, 13 out of the 14 districtoffices of the NASD In order to evaluateand, where appropriate, to recommendImprovements in the scope and desrqn ofeach of those programs.

While It IS Important for the Commis-sion to review at a national level thesystem and desiqn of the examinationprograms of the self-regulatory orgamza-nons and to recommend that those pro-grams be strengthened where appropriate,the second phase of the Commission'sexamination program, the direct examina-tion of the members of the self-regulatoryorganization, IS the entreat element of theexamination program. Among other rea-sons, the proximity of the Cornrnisston'aregional offices to the members beingexamined puts them In the best positionto judge the effectiveness of the self-regulators' examination programs and to

ascertain whether the stated pohcres andprocedures of the national offices of theself-regulatory organizations are beingImplemented. The regional offices' over-Sight programs Involve (1) examinationsof member firms to determine whethersuch firms are In compliance With thefederal securities laws, and (2) concur-rent reviews of the reports and workingpapers of the latest examinations per-formed by the various self-regulatoryorganizations of their members to deter-mine whether the self-regulators' ex-amination programs are thorough andeffective.

In addition to oversight exarmnattons,the Commission's regIonal offices con-duct cause examinatrons and SECOexaminations. Cause examinations usu-ally result from a complaint received by acustomer or another broker-dealer andare usually limited to the SUbject matterof the complaint. The examiner may,however, enlarge the scope of the ex-amination If he believes that the firm'soperations warrant further study

The regional offices have established aregular examination cycle In wtuch eachSECO broker-dealer IS examined 30 to60 days after It becomes registered Withthe Commission and on an annual basisthereafter. Such examinations are usuallyroutine examinations covering all aspectsof a broker-dealer's operations. Otherexarnrnatron goals of the regional officesare to conduct oversight examinations ofat least five percent of the members ofeach self-regulatory orqaruzatron in theirregion.

The Oornmrssron headquarters rnorutorsthe examination activities of the regionaloffices, meeting With the regional officeexaminers on a quarterly baSIS to reviewthe effectrveness of the examination pro-gram.

Of great assistance to the self-regulatoryorganizations, and to the Oornmrsston Inthe case of firms which are members ofmore than one such organization, hasbeen the designation, formerly made bySIPC, but now made by the Oommrssronas a result of amendments to Section 9(c)of the SIPC Act effected by the 1975Amendments, of one regulatory orqarnza-

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tion In each case to serve as that firm'spnncrpat examining authonty for com-pliance with the financial responsibilityrules

Another step toward eliminating dupli-cation of effort has been the Commis-sion's development of a monthlyexammation report which It transmitsboth to ItS regional offices and to anyself-regulatory organization which re-quests It The report IS a cornpuation ofall examinations of all broker-dealersconducted dunng the previous twelvemonths by either a regional office of theCommission or a self-regulatory organiza-tion. This report has aided the regionaloffices and the self-regulatory orqarnza-nons In avoiding duplicative examina-tions.

In fiscal year 1975, the Commission'sregional offices conducted a total of1,071 broker-dealer exarmnanons, whichexceeded by 14% the year's total examina-tion goal of 942. Of the 1,071 examinationsconducted, 449 were oversight examina-tions, 426 were cause examinations and196 were routine examinations (mostly ofSECO f1rms).36

In early 1972, the Commission devel-oped a revised and expanded broker-dealer exarrnnatron report form andoutlined the appropriate report proce-dures to be undertaken by an examinerIn the conduct of his duties. These proce-dures were revised a number of timesand have been updated In order to reflectthe current rules and regulations applica-ble to broker-dealers. A special procedureoutline was prepared for firms whichengage In specialized types of businessIn addition to those covered under thegeneral procedural outline.

A manual of instruction which amplifiesthe outline for the secuntres complianceexaminer In connection with the conductof an examination of a broker-dealer wasgreatly expanded and Improved In 1972and again In 1974 and 1975. In addition,the self-regulatory organizations havebeen requested to formulate, updateand/or revise appropnate proceduraloutlines for use by their employees en-gaged In the exarninanon of memberfirms The Commission's staff has also

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requested that examination manuals andother instructional matenals be preparedby each self-regulatory organization

The Commission's staff prepares andtransmits to the regional offices a monthlystatus report of current broker-dealerregulatory developments to Insure greatercontrol over and more timely coordrna-non with the Commission's exarrunationprogram. In addition, quarterly meetingsare held with the regional office employeeswho are responsible for each office'sexamination programs for the purpose ofmsunnq greater cooperation and controlover the Commission's regulatory pro-gram.

Training Program

The Commission believes very stronglyIn the need for comprehensive trainingprograms for secuntres compliance ex-aminers, both those on the Commissionstaff and those on the staffs of the vanousself-regulatory organizations. Such train-Ing efforts, by continually updating theskills and knowledge of the examiners,contnbute substantially to the effective-ness and efficiency of the examinationprograms conducted by the Oommlssionand the self-regulatory organizations.Accordingly, the Commission has utilizedIn the past fiscal year a senes of trainingcourses, some directed toward only Com-mission examiners and others towardboth Commission examiners and the self-regulatory organizations' examiners. Thetraining program IS divided Into twocategones training provided by outsideinstitutions and training provided byInternal SEC programs.

The Commission encouraged ItS ownsecurities compliance examiners to im-prove their skills through correspondencecourses, seminars and/or college coursesand has paid tumon for such study, whereappropnate. The Commission has alsoinstituted a program whereby examinersare encouraged to take a self-taughttraining course prepared by an outsideagency and has provided each examinerwith the course materials. Furthermore,the Commission IS presently assisting inthe development of a course specifically

designed to provide examiners with theskills necessary to examine a firm havingcomputerized books and records.

The internal SEC training program forsecurities compliance examiners consistsof four parts:

1 Periodic, two-day training seminarsIn the regional offices on the subject ofOomrntssron's oversight examinationsto which the self-regulators are invited.Such seminars review the results ofoversight examinations, diSCUSS anynew and Important developments ortechniques With regard to these ex-aminations, and provide an opportunityfor the regional offices to discuss Withthe self-regulators ways in which theycan further the principles and effective-ness of cooperative regulation.

2. Two-day seminars held twice eachyear In each regional office for experi-enced securities compliance examinerson the subject of exarrunatron tech-niques. Such seminars are not onlyrefresher courses, but also focus onSignificant new developments andserious recent problems in the Industryand the particular examination tech-niques that might be used to deal Withsuch developments or problems.

3. Two four-day training seminarsheld at the Commission's headquarters.These seminars increasingly employaudio-visual Instruction and provideexaminers from the Cornmissron, theself-regulatory organizations and statesecurities commissions With informa-tion on the baSIC examination tech-niques and the various rules, reputatronsand regulatory programs of the Com-rrussron which pertain to broker-dealertmancral and operational compliance.

4. Regional office continuing ex-aminer training program Involving bi-weekly, one-hour training sessions Inthe regional offices These sessionsfocus on new developments, problems,rules and examination techniquesWithin the regional offices on an infor-mal, continuing baSIS.To insure a coordinated training effort,

the Commission has adopted a programIn which the regional office chief examin-ers meet every three months to diSCUSS

new training techniques, areas whereadditional training is required, and thestrengths and weaknesses of the currentprogram.

In addrtion to incorporating the self-regulators' examiners into the Commis-sion's training programs, the Commissionhas also emphasized the need for theself-regulators to Improve their own train-Ing programs. Consequently, the Com-missron periodically reviews the trainingefforts of the self-regulators and has en-couraged each self-regulator to holdInformal, bi-monthly training programsand more formal annual training sessions.

Regulation of Broker-DealerTrading in Gold

As of December 31, 1974, the federalrestrictions upon the ownership of goldbullion by United States Citizens wereeliminated It was apparent that somebroker-dealers were planning to engageIn transactions Involving gold bullion andthat such activity might present many newproblems. The Commission Issued arelease calling some of them to the atten-tion of broker-dealers and Investors andsuggesting several gUidelines for pur-chasing or investing In gold 37 TheOommissron emphasized the extremeImportance of exercrsinq caution In suchdealings and of becoming entirely familiarWith the business reputation and cre-dentials of those seiling gold.

The Commission was concerned that anumber of broker-dealers might partrci-pate in a variety of marketing arrange-ments for Interests In gold requrrinqregistration under the Securities Act of1933 Without such broker-dealers realiz-Ing this. In view of the uncertainty as tothe market for gold which would evolveand of the risks Inherent In purcnasmqgold, the Commission proposed to adoptSecurities Exchange Act Rule 15c3-5designed to assure that broker-dealerswho effected transactrons for the ac-counts of customers would not undertakeImprudent tmancral risks when settlingsuch traneacnons.w In addition, proposedRule 15c3-5 would establish certainminimum standards for broker-dealers

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with respect to the custody and safe-keeping of gold held for customers. TheCommission's concern was based, Inpart, on the substantial volatility of theprice of gold.

The Commission considered It Impor-tant, moreover, for each self-regulatoryorganization to be certain that memberfirms were familiar with the applicablefinancial responsibility rules and regula-tions, including the recently proposedRule 15c3-5, pertaining to transactionsin gold In that connection, the Commis-sion thought it useful to review the regula-tory program of each of the self-regulatorsIn order to Insure a coordinated andeffective program of industry-wide regula-tion for broker-dealers engaging In trans-actions In gold for the accounts ofcustomers. Accordingly, the staff held ameeting with representatives from sevennational securities exchanges, the NASDand SIPC on January 21, 1975. The meet-Ing considered such Issues as the Com-mission's approach to certain Interests Ingold involving securities, its views onfinancial responsibility rules and regula-tions pertaining to transactions In gold(Including the proposed Rule 15c3-5),appropriate sustabihty standards andprocedures for supervrsron of sales prac-tices, and examination and surveillanceprocedures for broker-dealers trading Ingold.

The Commission continues to monitorthe self-regulatory orqaruzatrons' effortsto Insure proper regulation of their mem-ber firms transactions In gold Spe-cifically, the Oomrmssron has beenmonitoring self-regulatory proceduresfor requirlnq member firms to submit aplan descnbmq their proposed mannerof trading In gold, and for the subsequentexamination and surveillance of suchfirms.

In much the same way, the Oomrmssionhas coordinated the efforts of ItS regionaloffices In surveying SECD broker-dealerswith regard to their mtentrons to trade Ingold and In developing a program for theexamination and surveillance of suchfirms That program Involved the develop-ment of a specral exarrunauon checklist

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for SECD broker-dealers trading in gold.Finally, the Oornrmssron has coordinatedmany of ItS efforts In this area with thebank regulatory agencies.

Regulatory Burdens on the SmallBroker-Dealer

The Oornmtssron has analyzed the ef-fects Its rules and regulatIOns are havingon the viability of small brokers anddealers and IS aware of the need toIdentify and eliminate any unnecessaryreporting or regulatory burdens upon thesmall broker-dealer firm, without com-promising any needed protections af-forded the public. In that connection, andIn order to help to assure the continuedparticipation of small brokers and dealersIn the United States securities markets,the Commission has addressed itself tothe problems of the small broker-dealer.

Beyond the Comrnissron's continuedreview of ItS tmancial and operationalresponsibility rules, perhaps the mostVISible demonstration of the Oomrnlssron'sconcern for eliminating unnecessary orduplicative reporting burdens, particularlyfor small broker-dealers, has been itsactive participation in the work of theReport Coordinating Group. That group'sprogress is summarized in Part 1 of trusreport.

Oonstderatron of the regulatory burdenon the small broker-dealer has generallybeen part of a broader regulatory effortby the Commission and the self-regulatoryorganizations to eliminate duplicative,unnecessary and unduly burdensomeelements. Actions already taken by theCommission in this area Include:

1. ReView of the Commission's tman-cral and operational responsibilityrules, all other rules and requlatrorrs,and related reporting requirements forbroker-dealers;

2. Forrnatron of the SEC AdvrsoryCommittee on Broker-Dealer Reportsand RegistratIOn ReqUirements-ReportCoordinating Group (Advisory);

3. Formation of the SEC Broker-Dealer Model Compliance ProgramAdvisory Committee;

4. Formation of the SEC AdvisoryCommittee on the Implementation of aCentral Market System; and

5. Consideration of additional secu-rities legislation.

CLEARANCE AND SETTLEMENT

A number of clearing entities 39 anddepositories 40 affiliated with nationalsecurities exchanges or the NASD arecurrently In operation. During fiscal year1975, numerous changes and additions tothe rules and practices of these clearingand depository entities were submittedto the Commission for review and con-sideration under various provrsrons of theAct. The following are among the Signifi-cant Items on which the Commissionacted favorably:

1. Pursuant to Securities ExchangeAct Rule 9b-1, the Amex and the CBOEproposed the establishment of theOptions Clearing Corporation, whichwas Intended to act as a single clearingand settlement entity for transactionsin exchange-traded options. The sub-mission by the two exchanges was theresult of Commission urging that theydirect their efforts toward the establish-ment of a central option market system,for which common clearing facility wasone of the essential elements,

2. The NYSE proposed that its whollyowned subsidiaries, the Stock ClearingCorporation ("SCC") and the DepositoryTrust Company ("DTC"), establish andoperate a Continuous Net Settlement("CNS") System. The CNS Systemreduces, through netting, the numberof trades which a participant In SCCmust settle and makes possrble,through a link between SCC and DTC,automatic book entry settlementsthrough clearing participants' accountsin DTC.

3. The Amex proposed that ItS wholly-owned subsidiary, American StockExchange Clearing Corporation, estab-lish a CNS System which IS comparableto SCC's system and has a Similar linkwith DTC

4. The Boston Stock Exchange, theMidwest Stock Exchange, Inc., thePBW Stock Exchange, Inc and TADDepository Corporation ("TAD") pro-posed that TAD establish a transferagent depository as a tacrlrty of thoseexchanges. As a transfer agent deposi-tory, TAD accepts from particrpatinqbroker-dealers deposits of those secu-rities for which the transfer agents haveentered Into an expediting relationship.TAD holds the securities as a custodianand, pursuant to withdrawal instruc-tions, re-dellvers the securities to ItSparticrpants or to customers of ItSpartlcrpants on an expedited basts.TAD's services Include divrdend protec-non and proxy handling with respectto securities held In custody.

5. Followrnq favorable action by theCommission with respect to the TADtransfer agent depository, TAD and theNational Clearing Corporation ("NCC"),a wholly-owned subsrdrary of the NASD,proposed to establish an Interface be-tween TAD and NCC. As proposed, theinterface would enable broker-dealerparticipants in either or both TAD andNCC to effect delivery of securities toother broker-dealers In TAD or NCC bybookkeeping entry.

6. The NCC proposed to establish aNational Envelope Settlement System("NESS"). NESS would expand NCC'sextstrnq Envelope Settlement SystemIn New York to provide for inter-citydeliveries of securities and settlementof trades not qualified for clearanceand settlement through NCC's CNSsystem NCC's goal was to lower thecost of inter-city settlements to ItSparticipants through the use of NCC'sexistrnq network of regional servicecenters, comrnumcatrons and couriers.In reviewmq these matters, the Com-

mission acted with a view toward tacuuat-Ing the development of a national systemfor the prompt and accurate clearanceand settlement of sscunnes transactions,including the elimination of the use ofsecunues certificates by broker-dealersIn connection With the settlement ofsecuntres transactions.

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SECURITIES INVESTORPROTECTION CORPORATION

SIPC was established to provide cer-tain protections to customers of SIPCmembers. It IS a non-profit membershipcorporation, the members of which areregistered brokers and dealers and mem-bers of national secuntres exchangesWhile SIPC IS funded prrmarrly throughassessments on ItS members, undercertain conditions It may borrow up to $1brllron from the Unrted States Treasury

Durrng the summer of 1974, a SpecialTask Force organized by the Chairmanof SIPC made ItS report and recommenda-tions for changes In the SIPC Act to theSIPC Board of Directors 41 DUring fiscalyear 1975, the SIPC Board approvedessentially all of the report and In late1974 presented It to Congress. The legis-lative proposal was Introduced Into bothHouses of Congress In late 197442 andwas reintroduced In the first half of1975.43 The major recommendations ofthat proposal are: (1) to amend exrstrnqprocedures which require court-appointedtrustees in all SIPC lrqurdatrons to permitSIPC to make direct payments to cus-tomers In small cases, (2) to permit cus-tomer accounts to be transferred In bulkto other brokers In appropriate casesrather than to be hquidated account byaccount, and (3) to raise the dollar limitsof protection to correspond to the limitsof protection afforded depositors by theFederal Deposit Insurance Corporation.

Litigation Related to SIPC

In SEC v. Guaranty Bond and Securt-ties Corp.,H the United States Court ofAppeals for the Sixth Orrcuit held, amongother things, that the receiver of a broker-dealer appointed by the district court hadstanding to bring an action on behalf ofcustomers of the broker-dealer to compelSIPC to initiate Ilqurdatron proceedingsunder the SIPC Act. In response to SIPC'spetition, which the Commission sup-ported,» the Supreme Court agreed toreview this decisron On May 19, 1975,the Supreme Court reversed the decrsronof the Sixth Crrcurt and held that the

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Cornrrnssron's statutory right to brrng anaction to require SIPC to discharge itsduties IS exclusive and that customershave no similar Implied right of actlon.wThat decision affirms the Oomrmssron'sposition that only It may seek judrcralreview of a discretionary determinationby SIPC not to initiate proceedings.

Commission Rule ChangesRelating to SIPC

On October 8, 1974, the Commissionannounced the adoption of SecuritiesExchange Act Rule 15b5-1 and theamendments of Securities Exchange ActRule 15b6-1 and related Form BDW.47The rules and forms provided that wherethe Commission revokes or cancels theregistration of a broker-dealer, or abroker-dealer withdraws ItS registration,the effectiveness of such revocation,cancellatron, or withdrawal would bedelayed for six months for purposes ofthe SIPC Act. Thus, during that period,the protection of the SIPC Act would beavailable to the customers of the broker-dealer whose claims arose prior to theeffective date of revocation, cancellation,or withdrawal

SECO BROKER-DEALERS

Under the Securities Exchange Act, theCommission IS responsible for establish-Ing and adrmnlstennq rules on qualifica-tion standards and business conduct ofbroker-dealers who are not members ofthe NASD (referred to as SECD broker-dealers) in order to provide regulation ofsuch broker-dealers comparable to thatprovided by the NASD for ItS members.

At the close of the fiscal year, the num-ber of nonmember broker-dealers regis-tered with the Cornmrssron totaled 302and the number of associated persons ofsuch firms (i.e., partners, officers, direc-tors and employees not engaged Inmerely clerical or rntrustertal functions)totaled 21,122.

On May 1, 1975, the Oornrmssron an-nounced adoption of Securities ExchangeAct Rule 15b10-11, which establishesfidelity bonding requirements for SECO

broker-deaters.w A similar rule had beenadopted by the NASD, as described inthe Commission's 40th Annual Report.49

The primary purpose of the bonding rulesIS to prevent the unwarranted exposureof SIPC funds to certain special kinds oflosses, such as misappropriation of firmassets through employee theft and dis-honesty.

Securities Exchange Act Rule 15b1()-11requires that SECO broker-dealers carrya fidelity bond In the form, amount andtype of coverage prescribed by the Rule.The bond IS required to contain agree-ments covering at least the tollowrnqareas:

1 A "Fidelity" insuring clause toIndemnify the Insured broker-dealeragainst loss of property through anydishonest or fraudulent acts of em-ployees (this clause also generallycovers losses due to "FraudulentTrading" by employees);

2. An "On Premises" agreementInsuring against losses resulting fromcommon law and statutory crimes suchas burglary and theft and Including a"Misplacement" clause specificallycovering misplacement and "mysteri-ous, unexplainable disappearances" ofproperty of the insured (no matterwhere located),

3. An "In Transit" clause indemnify-ing against losses occurring whileproperty IS In transit,

4. A "Forgery and Alteratron" agree-ment insuring against loss due to forg-ery or alteration of various kinds ofnegotiable Instruments (includingchecks); and

5. A "Securities Loss" clause pro-tecting the insured against lossesincurred through forgery and atterationof secuntres, or written documentsrelating to securities, ownership, orconveyance.

In addition, Rule 15b1 ()-11 requiresSECO broker-dealers to obtain certainminimum coverages similar to the cover-ages set forth In the NASD's bondingrule

Securities Exchange Act Rule 15b9-2

Imposes an annual assessment to be paidby SECO broker-dealers to defray thecost of their regulation by the Commis-sion. During the fiscal year, the Commis-sion increased the fee for each associatedperson of a SECO member from $12 to$15.50 Additionally, the Form SECC-2filing fee Imposed pursuant to SecuritiesExchange Act Rule 15b9-1 , was Increasedfrom $35 to $50. These Increases weremade necessary by Increased costs ofthe SECO program.

EXEMPTIONS

DUring fiscal year 1975, the Commis-sion or ItS staff, acting pursuant to dele-gated authority, granted the toltowmqexemptions to statutory provrsrons orrules adopted under the Securities Ex-change Act.

1. Of 487 requests for exemptionunder paragraph (f) of Securrtles Ex-change Act Rule 10b-6, 347 weregranted because the transactions didnot constitute a manipulative or decep-tive device or contrivance within themeaning of the rule. Rule 10b-6 placescertain prohibitions upon trading Insecunties by persons Interested In adistribution of such securities.

2. One request for an exemptionfrom the broker-dealer registrationrequirements was received and grantedpursuant to Section 15(a)(2) as neces-sary and appropriate In the publicInterest and for the protection ofInvestors 51

3. Ten requests for exemptions underRule 17a-20 were received by theCommrssron. Rule 17a-20 was adoptedas part of the Commission's morutorrnqof the effects of the introduction ofcompetitive comrrnsston rates andrequires certain brokers and dealers tosubmit to the Cornrmssron mformatronrelating to revenues and expenses andother matters. Two exemptions weregranted (8 were pending as of June30, 1975) because the applicant did nobusiness for which a negotrated com-mission was charged.

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OTHER COMMISSION RULECHANGES AND DEVELOPMENTSMortgage Market Exemptions

As previously reported,52 the Oomrrus-sion had been working with the FederalHome Loan Mortgage Corporation(FHLMC) to clarify the applicability ofthe federal secuntres laws to Arnrrunet,Inc., which was established under FHLMCsponsorship to operate an automatedtrading Information system to promotea more liquid secondary market forresidential mortgages. FHLMC and theCommission developed proposed leqisla-non on that subject, which resulted Inthe 1975 Amendments adding an exemp-tion for certain mortgage-related securi-ties to Section 4(5) of the Securities Actof 1933.

Under the new exemption. transactionsinvolving (I) offers or sales of certainmortgage-related securities, or (ii) non-assignable contracts to buy or sell suchsecuntres which are to be completedwithin two years may be conducted, underthe conditions and manner specrned,without compliance with the registrationand prospectus requirements of Section 5of the secunnes Act The exemption ISavailable only with respect to promissorynotes directly secured by a first mortgageon a single parcel of real estate uponwhich IS located a residential or com-rnercrat structure, and participationInterests In such notes For offers or salesof such mortgage-related securmes toqualify for the exemptions, three condi-tions of sale must be satisfied: the mini-mum aggregate sales price per purchasermust be not less than $250,000, thepurchaser must pay cash either at thetime of sale or within sixty days thereof,and each purchaser must buy for hrs ownaccount. Furthermore, for the transactionto qualify for the exemption, only desiq-nated types of institutions may originatethe mortgage-related secuntres, and Incertain Instances, only designated rnstrtu-nons may purchase such securitiesFinally, the exemption does not apply toresales of secuntres acquired pursuant tothat exemption unless each of the condi-tions of sale ISsatisfied.

88

Regulatory Problems Posed by"Going Private"

On February 6, 1975, the Commissionannounced that It was ordering a publicinvestigatory and rulemaking proceedingrelating to so-called "going private"transactions by public companies or theirafflliates.53 The Commission mvited bothoral and written comments from inter-ested persons regarding rules It wasproposing and various specific inquiriesrelated to such transactions.

The Oornmlssion noted that the tworules it was proposing were desrqned toprovide an opportunity for public com-ment, but that It had not at that timereached any conclustons with respect tothe proposed rules. The Oomrmssrcn alsonoted that the announced proceeding andproposed rules should not in any way beowned subsidiary, American StockExchange Clearing Corporation, estab-to such transactions.

The first of the two proposed rules(Securities Exchange Act Rule 13e-3(A)was designed to protect Investors, par-ticularly the Interests of minority securityholders, In "going private" transactions.The Rule would make unlawful certainpurchases of an Issuer's securities, andcertain related solicitations of proxies, bythe Issuer or ItS affiliates, as defined, un-less the Issuer or its affiliate compiledWith specmc disclosure and substantiveprovlsrons

As an alternative to certain of the pro-vrsrons of proposed Rule 13e-3(A), theCommission at the same time also pub-lished for comment proposed Rule 13e-3(8). That Rule would require that, whenthe purchase of an equity security by theIssuer or an affiliate would result or wasIntended to result In any of the enumer-ated consequences, terms of the transac-tion, including any consrderanon to bepaid to any secunty holder, be fair and, Intransactions by the Issuer, that a validbusmess purpose for the transactionexist Proposed RuIe 13&-3(8), whichwould also Include some or all of thedisclosure and tender offer requirementsset forth In proposed Rule 13e-3(A), wasIntended to provide the Commission With

sufficient flexibility to deal with any typeof transaction by an issuer or its affiliateshaving the same consequences

The Commission received a substantialnumber of written comments, which arebeing reviewed and analyzed. The Com-mission noted that, after the proceeding,it might adopt or propose for commentone or more rules under the SecuritiesExchange Act and/or recommend legisla-tion to the Congress.

Foreign Access to United StatesSecurities Markets

On February 8, 1974, the Commissionsolicited public comment on Issues af-fecting foreign professional access to theUnited States securities markets. 54 TheCommission received a number of com-ments, which are being studied by thestaff together with the provisions of the1975 Amendments as they may relate tothe issue of foreign access. The Commis-sion expects to complete its study of thismatter In the near future.

Real Estate Investment ContractSecurities

On January 31, 1975, the Commissionadopted Rule 3a12-5 and amendments toRule 15c2-5,55 which served to exemptcertain investment contract secunnesinvolVing the direct ownership of specifiedresrdennal real property from the Ex-change Act's credit arrangement provi-sions when offered by broker-dealers,subject to certain conditions. The Com-mission stated that the unique charac-teristics of lhese investment contractsecurities make the existence of theconcerns about credit arrangements InSections 7(c) and 11(d)(1) of the Ex-change Act unlikely. The Commissionconsidered the lack of a secondarytrading market a significant factor Insupport of the proposed exemption.

Confirmation Requirements forPeriodic Transactions

On September 24, 1974, the Cornrrus-sion adopted an amendment to Rule

15c1-4 under the Exchange Act relatingto purchases of redeemable securitiesissued by registered Investment com-panies and unit Investment trusts.56 TheCommission had published notice of aproposal to adopt these amendments onMarch 15, 1974.57

Before the adoption of the amendment,Rule 15c1-4 required brokers and dealersto give or send to their customers wnttenconfirmations of securities transactionseffected with or for the account of suchcustomers at or before the completion ofeach such transaction. Representatives ofthe mutual fund Industry sought theamendment to make It more economicalfor registered open-end investment com-panies to sell shares to participants Ingroup plans and tax qualified pensionplans which might Involve small andfrequent purchases. They noted that theneed for tms amendment was especiallyImportant in view of the recently enactedEmployee Retirement Income SecurityAct of 1974,58 which permits the use ofmutual funds as investment media forcertain tax qualified individual and grouppension plans.

The amendments relaxed the require-ments of Rule 15c1-4 with respect tocertain purchases of shares of open-endinvestment companies and unit invest-ment trusts by permitting a broker-dealerto confirm on a quarterly basis, ratherthan Immediately, purchases of securitiesof such Issuers pursuant to (a) mdrvrduatretirement or pension plans under theInternal Revenue Code, or (b) group planswhether or not qualified under the IRC.

The Commission did not relax the con-firmation requirements for purchases ofequity securities made pursuant to cer-tain systematic accumulation plansadministered by broker-dealers. TheOornrnissron indicated that the variouspolicy issues and technical problemsrelating to a further relaxation of Rule15c1-4 In this area would continue toreceive staff study.

Short Selling into SecondaryOfferings

On April 2, 1975, the Commission pub-

89

"shed for comment revrstons of proposedRules 10l:r-20 and 10l:r-21 under the Ex-change Act and proposed amendmentsto Rules 17a-3(a)(6) and 17a-3(a)(7). ';9

Those rules were first proposed on Feb-ruary 11, 1974,&11and relate to certainpractices which were brought to theCommission's intention, partly as a resultof an mvestrqatron by the Commission'sstaff 61

Proposed Rule 10l:r-20 would prohibitunderwriters and dealers participating Ina secunties distribution from requiring apurchaser, In order to receive an alloca-tion of secuntres from the underwriter ordealer, to pay consrderatron In additionto the amount indicated In the prospectusor to perform any other act such aspurcnasmq an additional security In anunrelated offering (so-called "tie-in"arrangements). Proposed Rule 10l:r-21would Impose certain limitations on pur-chases to cover short sales where suchshort sales were effected before thecommencement of an offering mvolvmqsecurities of the same class.

Under the proposed amendments toRule 17a-3, broker-dealers would berequired to ask customers, or note If thesale was for the broker-dealer's ownaccount, whether the sale was "long" or"short" These record keeping changesare Intended to assist broker-dealers Incomplying With provrsrons relating toshort sales under the secunnes laws, andmost notably Regulalion T (broker-dealermargin provrsron) promulgated by theBoard of Governors of the Federal Re-serve System Furthermore, the amend-ments would aid the Commission'senforcement of the margin provrsions.

NOTES FOR PART 3

I Pub. L No. 94-29 (June 4,1975).! The Honolulu Stock Exchange IS the

only securities exchange presently ex-empted from registration.

I See In the Matter of EcologicalSCIence Corporation, Securities ExchangeAct Release No 10217 (June 13, 1973),1 SEC Docket No. 20, p 5, and casesCited therein DUring fiscal 1975, theCnrnrrusaton took a Similar position In ItSfirst decrsron concerning the removal of asecurity from NASDAQ, the automated

90

quotation system for trading over-the-counter securities sponsored by theNational Association of Secunties Dealers,Inc. See In the Matter of Tassaway, Inc.,Securrtles Exchange Act Release No.11291 (March 13, 1975), 6 SEC Docket427. See drscussion of the Tassawaycase at p 74.

4 For a summary and the conclusron ofthat inspection VISit, see 40th AnnualReport, pp. 4~50.

'; Amex letter to DIVISion of MarketRegulation dated May 2, 1975.

6 American Stock Exchange, Inc.,Special Bulletin to Floor Members datedJune 2,1975. See also Amex Rule 958.

7 Those registered broker-dealerswhich are not NASD members are re-ferred to as SECO (SEC Only) broker-dealers. See p. 86, mfra.

H The 1975 Amendments amended Sec-non 19 of the Securities Exchange Act toprovide that proposed rules of a self-regulatory organization may not takeeffect unless approved by the Commis-sion or otherwise permitted In accordanceWith the provrsrons of that Section.

9 Section 12(g)(1) of the SecuritiesExchange Act generally requires theregistration of equity securities with theCommission If, at the close of any fiscalyear of the Issuer, the class of securmesIS held of record by 500 or more personsand the Issuer has $1,000,000 or more Inassets Such registration causes thereporting and other requirements of Sec-non 13, the proxy requirements of Section14, and the rnsider trading provrsrons ofSection 16 to apply to the Issuer to thesame degree they apply to Issuers ofexchange-listed secunties Registrationunder Section 12{g) IS permitted to beterminated If the number of record holdersof the class of secunnes registered fallsbelow 300.

10 See part 1 page 11.II This procedure IS employed In dis-

crplrnary cases where the respondents,In lieu of Institution of complaint proceed-Ings, admit the findings made by theDBCC, waive their right of review of theDBCC's action by the NASD Board ofGovernors, the Commission and theCourts, and consent to the penaltiesImposed by the DBCC The respondentssubmit a letter to thrs effect which mustbe accepted by both the DBCC and theNatronal BUSiness Conduct Committeebefore the matter IS closed.

12 Under Section 19{d)(2) of the Securi-lies Exchange Act, as amended, an ap-pncatron for review or the institution of areview by the Commission no longeroperates as a stay unless the Commlsstonotherwise orders

I I Securities Exchange Act ReleaseNo. 11476 (June 16, 1975), 7 SEC Docket193.

14 Article III, Section I.15 Securities Exchange Act Release

No. 10894 (July 2, 1974), 4 SEC Docket529

16 Blaise D. Antoru & Associates, Inc.v. S.E.C., 289 F.2d 276, 277 (C.A 5,1961).

17 The 1975 Amendments have alteredthis procedure by adding Section 15A(g)(2), under which a registered securitiesassociation need only file notice with theCommission of ItS intention to admit amember or any person associated with itsubject to a statutory disqualification.Such notice must be filed not less thanthirty days prior to admission of suchmember or person.

18 Securities Exchange Act ReleaseNo. 11291 (Mar. 13, 1975),6 SEC Docket427.

19 Article XVI of the NASD's By-laws(which became effective on December16, 1968) describes the system and setsforth rules with respect to it.

20 Tassaway, Inc.'s annual report onForm 10K filed with the Oomrrussronshowed that by April 30, 1973, It not onlylacked the required $250,000, but had acapital deficit of over $3.4 million.

21 Compare Exchange Buffet Corpora-tion v. New York Stock Exchange, 244 F.2d 507, 510 (C A. 2, 1957), affirmingAtlas Tack Corporation 37 SEC 362(1956); Polarad ElectrOnics Corporation,Securities Exchange Act Release No.9419 (December 15, 1971); LangleyCorporation, Securities Exchange ActRelease No. 9729 (August 16,1972).

22 Section 23(b) of the Securities Ex-change Act, as amended by the 1975Amendments, requires that the Commis-sion submit "a statement and analysis ofthe expenses and operations of eachself-regulatory organization In connectionwith the performance of ItS responsibili-ties under thrs title, for which purposedata pertaining to such expenses andoperations shall be made available bysuch organization to the Commission atits request" The discussion In this sec-tion IS In response to that requirement.Thrs section of the annual report is neces-sarily less detailed than the Commissionanticipates will be the case In futureyears since the Oornrmsston did not,prior to the 1975 Amendments, requireself-regulatory organizations to compileor furnish to the Commission the datawhich the Commission will Include Infuture annual reports. The staff IS en-gaged in a study with respect to financialreporting of expenses and revenues ofthe self-regulatory organizations to deter-mine what additional Information isneeded to accommodate the needs ex-pressed by the Congress. Because of thecomplexity of the revenue studies needed,it may not be possible to collect and

analyze the data In time for the Com-mission's annual report for 1976. Weanticipate that the staff's study and ItSimplementation will be completed In timefor inclusion in the Commission's annualreport for fiscal year 1977 The data in-cluded In trns annual report were com-piled from the annual reports submittedto the Commission by the self-regulatoryorganizations and the "Survey of Self-Regulatory Organizations and Sub-stdlanes," which was conducted inconnection with the Oornmrssron's pro-gram for rnorutorinq the effects of com-petitive brokerage commission rates onthe securities Industry

23 It should be noted that other revenuesources Include revenues which are notrelated to exchange business and self-regulatory actrvrtles (e.g., real estate).

24 The selection of Bradford Computer& Systems, Inc. as the NCC tacumesmanagement contractor precludes furtherlosses In this area. NASD 1974 AnnualReport, P. 1.

25 Personnel Budget Study 19.26 Including staff reductions at SIAC.27 These exchanges are grouped ac-

cording to trends In revenues and ex-penses.

28 Section 15(a) of the Securities Ex-change Act, as amended by the 1975Amendments, now requrres the registra-tion by December 1, 1975, of brokers anddealers who were previously exempt fromregistration because they confined theirsecunues business to an exchangeBrokers and dealers who confine theiractivities to exempted secunnes, as de-fined In Section 3(a)(12) of the SecuritiesExchange Act, continue to be exemptfrom the registration requirement Effec-tive December 1, 1975, rnunlcipal securi-ties are no longer defined as exemptedsecunnss for purposes of the registrationrequirement applicable to brokers anddealers.

29 Securities Exchange Act Release No.11424 (May 16,1975),7 SEC Docket 2

30 New Form BD Will be used by ap-proximately 45 states and the NASDForm lJ--4 Will nkewrse be used by ap-proximately 45 states, as well as theNASD and the exchanges

31 Secuntres Exchange Act ReleaseNo. 11530 (JUly 10, 1975), 7 SEC Docket343.

32 Securrtres Exchange Act ReleaseNo. 11402 (May 7, 1975), 6 SEC Docket856.

33 Securities Exchange Act ReleaseNo. 11196 (January 23, 1975), 6 SECDocket 144.

34 39th Annual Report, pp 59-60Securities Exchange Act Release No.9856 (November 10, 1972)

305 In the past few years, while SIPC's

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assistance has been necessary In morethan 100 cases of firms failing and caus-ing losses of funds or securities, morethan 1,000 firms have left the securitiesIndustry without the assistance of SIPCand without losses to customers orcreditors.

36 Few routine exarninanons are nowconducted of firms other than SECOfirms, as all examinations of memberfirms of self-regulatory orqaruzanonsmust now be oversight examinations,which go one step further than routineexaminations by their evaluation of theself-regulatory orqaruzatrons' reports ofexaminations

17See Securities Exchange Act Re-lease No. 11125 (Dec. 9, 1974), 5 SECDocket 667.

1H See Securities Exchange Act Re-lease No. 11158 (Dec. 31, 1974), 6 SECDocket 6.

19Clearing entities clear and settletransactions between participating broker-dealers. Offsetting transactions betweenbroker-dealers are netted out and settle-ment and delivery are effected only as tothe balance under the traditional balance-order system. Under the more recent andnow almost universally utilized continuousnet settlement system, balances may becarried forward and netted against futuresettling trades

40Deposttorres hold securities certifi-cates and effect delivery between partlci-pants by book entry.

41 See 40th Annual Report p. 64.42S.4255, 93d Cong., 2d Sess (1974),

H.R. 17684, 93d Cong., 2d Sess. (1974)41S.1231, 94th Cong., tst Sess. (1975);

H.R. 8064, 94th Cong., tst Sess. (1975).44 496 F.2d 145 (C.A 61974)4';40th Annual Report, p 65.

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46 Secunties Investor Protection Corp.v. Barbour, 421 U.S. 412 (1975).

47Securities Exchange Act ReleaseNo 11042 (October 8, 1974), 5 SECDocket 247.

4H Securities Exchange Act ReleaseNo. 11388 (May 1, 1975), 6 SEC Docket784.

4940th Annual Report, p. 53.50Securities Exchange Act Release

No. 11425 (May 16, 1975), 7 SEC Docket21.

51See Securities Exchange Act ReleaseNo. 11355 (Apr. 17, 1975), 6 SEC Docket683.

5240th Annual Report, p. 66.,';3 Securities Exchange Act Release

No. 11231 (Feb. 6, 1975), 6 SEC Docket261.

54Securities Exchange Act ReleaseNo. 10634 (February 8, 1974), 3 SECDocket 507.

5';Securities Exchange Act ReleaseNo 11220 (Jan 31, 1975),6 SEC Docket342. See 40th Annual Report, p. 66.

';6Securities Exchange Act ReleaseNo. 11025 (Sep. 24, 1974), 5 SEC Docket184.

,';7Securities Exchange Act ReleaseNo. 10681 (Mar. 15, 1974), 3 SEC Docket691. See 40th Annual Report, p. 67.

5H Pub. L. No. 9~06 (1974).,';9Securities Exchange Act Release

No. 11328 (Apr. 2, 1975), 6 SEC Docket552.

60Securities Exchange Act ReleaseNo. 10636 (Feb. 11, 1974), 3 SEC Docket540.

61 In the Matter of A.P. Montgomery &Co., tnc., Securities Exchange Act ReleaseNo. 10637 (Feb. 11, 1974),3 SEC Docket542.

PART 4ENF R(E E T

The Commission's enforcement actrvr-ties, which are designed to combat secu-rities fraud and other Illegal activities,continued. at a high level durrnq the pastyear These activities encompass CIViland criminal court actions, as well asadministrative proceedings conductedInternally. Where violations of the securi-ties laws are established, the sanctionswhich may result range from censure bythe Comrnisston to prison sentencesImposed by a court.

The enforcement program is designedto achieve as broad a regulatory Impactas possible within the framework of re-sources available to the Cornrnrssron. Inlight of the capability of self-regulatoryand state and local agencies to dealeffectively with certain securities viola-tions, the Commission seeks to promoteeffective coordination and cooperationbetween its own enforcement activitiesand those of other agencies

DETECTION

Complaints

The Commission receives a large vol-ume of communications from the public.These consist mainly of complaintsagainst broker-dealers and other mem-bers of the secunties community as wellas complaints concerning the marketprice of particular securities. During thepast year, some 4,000 complaints againstbroker-dealers were received, analyzed

PART 4ENFORCEMENT

and answered. Most of the above men-tioned complaints dealt With operationalproblems, such as the failure to deliversecurities or funds promptly, or thealleged mishandling of accounts. In addi-tion, there were some 5,500 complaintsreceived concerning Investment advisers,issuers, banks, transfer agents andmutual funds.

The Comrnlssron seeks to assist per-sons In resolving complaints and to fur-nish requested information. Thousands ofInvestor complaints are resolved throughstaff inquiries of the firms Involved. Whilethe Comrrussron does not have authorityto arbitrate private disputes betweenbrokerage firms and investors or directlyto assist Investors In the legal assertionof their personal rights, a complaint maylead to the mstitutron of an investigationor an enforcement proceeding, or It maybe referred to a self-regulatory or localenforcement agency.

Market Surveillance

To enable the Commission to carry outsurveillance of the securities markets, Itsstaff has devised procedures to identifypossible violative activities. These in-clude surveillance of listed secuntres,which is coordinated With the marketsurveillance operations of the New York,American and regional stock exchanges.

The Oommrsston's market surveillancestaff maintarns a continuous watch oftransactions on the New York and Ameri-

95

can Stock Exchanges and the ChicagoBoard Options Exchange and reviewsreports of large block transactions todetect any unusual pnce and volumevanatrons. Also the financial news tick-ers, financial publications and statisticalservices are closely followed. In addition,the staff has supplemented Its regularreviews of dally and perrodrc marketsurveillance reports, which provide amore In-depth analysts of the informationdeveloped by the exchanges.

For those secuntres traded by meansof the NASDAQ system, the Commissionhas also developed a surveillance pro-gram, which IS coordinated with theNASD's market surveillance staff, througha review of weekly and special stockwatch reports.

For those over-the-counter secuntresnot traded through NASDAQ, the Com-mission uses automated equipment toprovide an efficient and comprehensivesurveillance of stock quotations drstnb-uted by the National Quotation Bureau.This IS programmed to Identify, amongother things, unlisted secuntres whosepnce movement or dealer Interestvanes beyond specttied limits In a pre-established time penod When a secuntyIS so Identified, the equipment prints outcurrent and hrstonc market information.Other programs supplement this datawith information concerning sales ofsecunties pursuant to Rule 144 under theSecunties Act, ownership reports, andpenodrc company filings such as quarterlyand annual reports. This data, combinedwith other available information, is ana-lyzed for possrbte further mquiry andenforcement action.

In addition, recognizing that the com-puter provides the most expeditiousmethod of reviewing and analyzing thevolurnmous trading data generated by thesecunties markets, the Commission hasdeveloped a program which provides ananalysrs of the bid listings for each secu-nty by surnrnanzmq specified types ofactivity by each broker-dealer firm sub-mitting pnce quotations for that particularsecunty.

The staff oversees tender offers, ex-change offers, proxy contests and other

96

activities Involving efforts to changecontrol of public corporations. Such over-sight Involves not only review of tradingmarkets In the securrtres involved, butalso filings with the Commission of re-qurred schedules, prospectuses, proxymatenal and other information.

INVESTIGATIONS

Each of the acts administered by theCommission authorizes investigations byIt to determine If violations have occurred.Most of these are conducted by theCommission's regional offices. Investiga-tions are earned out on a confidentialbaSIS, consistent with effective law en-forcement and the need to protect per-sons against whom unfounded chargesmight be made. Thus, the exrstence orresults of a nonpublrc investigation aregenerally not divulged unless they aremade a matter of public record In pro-ceedings brought before the Commissionor In the courts. Dunng fiscal year 1975,a total of 490 investigations were opened,as against 382 In the preceding year.

LITIGATION INVOLVINGCOMMISSION INVESTIGATIONS

In White v. Jeeqermen,' the plaintiffshad filed SUit against the Commission'sChief Investigative Counsel, seven otherpresent or former Commission employeesand others alleging that the Chief Investi-gative Counsel had malicroualy harassedthem by, among other things, leaking tothe New York Times confidential informa-tion acqurred dunng an Investigation ofthe plaintiffs. The plaintiffs also allegedthat the Chief Investigative Counselconspired With the other defendants tocause the accounting firm for the corpo-rate plaintiff to withdraw a favorablefinancial report concerning It, to causethe Commission to suspend over-the-counter trading of the stock of the cor-porate plaintiff, and to cause anothercompany controlled by the rndivrdualdefendant to be placed on the Commis-sion's Foreign Restncted List.

On October 9, 1969, United StatesDistrict Judge McLean dismissed the

complaint against each of the former andpresent Commission employees, with theexception of the Chief InvestigativeCounsel, on the ground that the activitiesalleged In the complaint were within thescope of their official duties and theytherefore were Immune from SUIt. InJudge McLean's View, however, the al-leged leaking by the Chief InvestigativeCounsel of Information obtained by himduring a confidential investigation, whichInformation the plaintiffs alleged wasfalse, would have been outside the scopeof his employment. Judge McLean indi-cated that the plaintiffs should have theopportunity to present proof as to theseallegations and that their complaintshould not be disposed of by motion forsummary JUdgment.

On October 2 and 3, 1974, the casewas tried before Judge Bonsai sittingwithout a Jury. After the trial, JudgeBonsai dismissed the complaint againstthe Chief Investigative Counsel, who wasthe only remaining defendant, on theground that the plaintiffs had failed toprove that he acted outside the scope ofhis employment or that he intimidatedthem or otherwise engaged in Improperconduct. In order to sustain their claimsagainst the Chief Investigative Counsel,the court held that the plaintiffs had toshow "that he acted outside the limits ofthe broad investigative responsibilitieswith which he was charged." 2

Furthermore, the court held that theplaintiffs would not be entitled to dam-ages In any event Since, among otherthings, the truth of the information pub-lished In the New York Times had beenestablished In the Commission's injunc-tive action against the plalntlfts."

S.E.C. v. Csapo 4 involves the applica-tion of the Commission's sequestrationrule in a non public investigation. Thedistrict court conditioned the enforcementof a Oornmisston Investigative subpoenadirected to Mr. Csapo upon his beingpermitted to be accompanied and rep-resented by certain attorneys who alsorepresented various other persons in-volved In the investigation. The Commis-sion appealed from the portion of theenforcement order Imposing this condi-

tion, and the matter IS pending In thecourt of appeals.

In S.E.C. v. Republic National LifeInsurance Co., et al.,5 one of the defen-dants, Peat, Marwrck, Mitchell and Co.filed a counterclaim against the Commis-sion seeking, In effect, an order requiringthe Commission, whenever It uncoversinformation that might be material to anIndependent public accountant's exami-nation of financial statements that are tobe filed With the Commission, to disclosethat information to the accountant. OnOctober 18, 1974, the district court dis-missed the counterclaim finding that Itwas Within the Commission's discretionto deny Peat Marwlck access to investi-gative materials and that the exercise ofdiscretion was not reviewable.

ENFORCEMENT PROCEEDINGS

The Commission has available a Widerange of possible enforcement remedies.It may, In appropriate cases, refer ItSfiles to the Department of Justice With arecommendation for criminal prosecu-tion. The penalties upon conviction arespecmed in the various statutes andInclude Imprisonment for substantialterms as well as fines.

The securities laws also authorize theComrmssron to file injunctive actions Inthe Federal district courts to enjoin con-tinued or threatened violations of thoselaws or applicable Oomrrusston rules. Ininjunctive actions the Commission hasfrequently sought to obtain ancillaryrelief under the general equity powers ofthe Federal district courts. The power ofthe Federal courts to grant such rehefhas been judrctally recognized. TheCommission has often requested thecourt to appoint a receiver for a broker-dealer or other business where Investorswere likely to be harmed by continuanceof the existing management. It has alsorequested, among other things, courtorders restricting future activities of thedefendants, requiring that rescissron beoffered to secunnes purchasers, or re-qUiring disgorgement of the defendants'III-gotten gains.

The SEC's primary function IS to pro-

97

tect the public from fraudulent and otherunlawful practices and not to obtaindamages for Injured individuals. Thus, arequest that drsqorqernent be required ISpredicated on the need to deprive defen-dants of profits derived from their unlaw-ful conduct and to protect the public bydeterring such conduct by others.

If the terms of any injunctive decreeare violated, the Commission may filecriminal contempt proceedings, as aresult of which the violator may be finedor imprisoned

The Federal securities acts also autho-rize the Commission to Impose remedialadministrative sanctions. Most com-monly, administrative enforcement pro-ceedings Involve alleged violations of thesecurities acts or regulations by firms orpersons engaged In the secuntres busi-ness. Generally speaking, if the Cornrnrs-sion finds that a respondent willfullyviolated a provision of or rule under thesecuntres acts, failed reasonably tosupervise another person who committeda violation, or has been convicted for orenjoined from certain types of miscon-duct, and that a sanction IS In the publicInterest, It may revoke or suspend theregistration of a broker-dealer or invest-ment adviser, bar or suspend an mdrvid-ual from the secunnes business or fromassociatron with an Investment company,or censure a firm or individual. Proceed-Ings may also cover adequacy of dis-closure in a registration statement or Inreports filed with the Commission. Sucha case may lead to an order suspendingthe effecllveness of a registration state-ment or directing compliance with re-porting requirements The Commissionalso has the power summarily to suspendtrading In a security when the publicInterest requires.

Proceedings are frequently completedwithout hearings where respondentswaive their right to a hearing and submitsettlement offers consenting to remedialaction which the Commission accepts asan appropriate disposition of the pro-ceedings The Commission tries to gearItS sanctions In both contested and settle-ment cases to fit the circumstances of theparticular case. For example, It may limit

98

the sanction to a particular branch officeof a broker-dealer rather than sanctionthe entire firm, prohibit only certain kindsof activity by the broker-dealer during aperiod of suspension or only prohibit anmdivrdual from engaging In supervisoryactivities

A chart listing the various types of en-forcement proceedings, as well as statls-trcs on such proceedings are located Inthe statistical section

ADMINISTRATIVEPROCEEDINGS

Summarized below are some of themany administrative proceedings pendingor disposed of In fiscal 1975.

Financial Programs, Inc.6-The Com-mrssion instituted administrative proceed-ings against Financial Programs, Inc., aDenver-based mutual fund manager andfive of ItS former officers. Pursuant tooffers of settlement submitted by Finan-oral Programs and two of the Individualrespondents in which they neither ad-mitted or denied the charges, the Com-rnissron found that respondents violatedthe antifraud provisions of the SeCUrities,Securities Exchange, Investment Com-pany and Investment Advisers Acts.Specifically, it was found that FinancialPrograms and the two former officerscommitted over $21 million of the assetsof the four funds, for which FinancialPrograms served as investment adviser,to several over-the-counter securities thatwere speculative, unseasoned and inlimited supply. This was done on thebasis of recommendations made by asingle salesman and Without adequateIndependent study.

The Commission found that the funds'prospectuses and periodic reports dis-seminated to the public were false andmisleading because the stated investmentpolicies were disregarded. There was nodisclosure about the practices describedabove or their effect on the net assetvalues of the funds, or about the funds'inability to dispose of these securities atprices that their own trading had created.

The Commission also found that Finan-cral Programs Violated certain provisionsof the Federal securities laws by causing

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the funds It managed to maintain exces-sive cash balances with a certain bankwhich considered those balances inlending money to persons affiliated withFinancial Programs.

The Commission further found that thetwo officers of Financial Programs re-ferred to above received compensationfrom the salesman who had arranged thesales of the thinly traded over-the-countersecurities to the funds and that suchcompensation was obtained In violationof the Investment Company Act.

The Commission ordered FinancialPrograms to comply with ItS undertakingto, among other things, offer the fourfunds $2.5 rmllron In settlement of claimsagainst It and refrain for 180 days fromperforming any Investment advisoryfunction for any new client. The Commis-sion barred one of the former officers,and barred in certain respects andsuspended In other respects the otherformer officer from engaging In certainactivities in the securities Industry,

In a subsequent order, the Commissionfound, pursuant to an offer of settlementsubmitted by Financial Programs's formerpresident, that he failed to adopt ade-quate supervisory procedures, misrep-resented to shareholders that the fundswould be properly managed, and causedthe funds to maintain excessive cashbalances. He was suspended for a SO-dayperiod from engaging In certain activitiesIn the secuntres industry. The Commis-sion noted his undertaking to pay $15,000to two of the tunds.?

The proceedings against the two re-maining respondents were stili pendingat the end of the fiscal year.

Chase Investment Services of Boston,Inc.8.-The Commission simultaneouslyinstituted administrative proceedingsagainst Chase Investment Services ofBoston, Inc. (CIS), John P. Chase, Inc.(JPC), CIS's parent, and certain lndivid-uals, and issued an order Imposing reme-dial sanctions against respondents, basedupon offers of settlement In which re-spondents, without admitting or denyingthe charges against them, consented tocertain findings and sanctions. Pursuantto these offers, the Commission found

that (a) CIS, certain officers of CIS andJPC and others violated the antifraudprovrsrons of the secunties laws; and(b) JPC and the chairman of JPC's boardof directors failed reasonably to supervisewith a view toward preventing suchviolations.

The Oornrnlsston found that advertise-ments were distributed and oral salespresentations made to CIS clients whichcontained untrue and misleading state-ments relating to, among other things,the similarity between CIS's advisoryservice to the kind of service furnishedby JPC and other Investment counselfirms to wealthy Investors, the past per-formance of CIS accounts, and the risksInvolved In CIS's Investment methods.The Commission also found that invest-ment decisrons for CIS clients were madewithout regard to their SUitability for theparticular client; clients accounts werenot promptly reviewed when materialchanges occurred in CIS's researchpositions about secuntres in such ac-counts; Inducements were offered tobroker-dealers to recommend that theircustomers become clients of CIS, mclud-Ing a share of the advisory fees paid bysuch clients and the likelihood of sub-stantial brokerage Income; and that theforegoing facts were not disclosed toclients or prospective clients of CIS.

The Commission's order: (1) Sus-pended both CIS and JPC for 180 daysfrom solicrtrnq or accepting new clientsfor or on behalf of CIS; (2) Required CISto serve ItS existlnq clients at cost duringthe aforementioned 180-day suspensionperiod; (3) Suspended the chairman ofJPC's board of directors from assocrationwith an Investment advrser for 30 days;(4) Suspended the Investment adviserregistration of JPC's former executivevice-president and his right to associatehimself with any other Investment adviserfor 30 days; and (5) Precluded CIS'sformer president from associating himselfwith an investment adviser, a broker, or adealer without the Commission's pnorapproval. The Commission's order notedthat CIS and JPC have undertaken toinstitute certain remedial steps for theconduct of CIS's advrsory business and

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that JPC's former executive vice-presidenthas made a similar undertaking withrespect to his Investment advisorybusiness

Intersearch Technology, Inc.-Thedecrsion of an administrative law Judgerevoking the investment adviser registra-tions of Intersearch Technology, Inc, andIntersearch Publications, Inc and barringJesse B. Reid, who controlled both firms,from being associated with an Investmentadviser became the final decrsion of theCommission

It was found that during 1970 and early1971 respondents had violated the anti-fraud provrsrons of the Investment Ad-visers Act by uSing false and misleadingstatements in subscriptions to the invest-ment advisory publication Interscanand failing to disclose the firms' insol-vency to subscnbers or potential sub-scnbers to their publications.

Third National Corporation 9-Admln-rstrative proceedings were institutedagainst Third National Corporation, aregistered bank holding company, todetermine whether certain of ItS filingswith the Oornmrssson under the secunttesExchange Act were deficient. Third Na-tional consented, without admitting ordenying the charges, to findings that ItSfilings were detrcient In several materialrespects. The Commission ordered ThirdNational to correct ItS filings to disclose.(1) that key management of Third Na-tional's pnncrpal Subsidiary, Third Na-tional Bank, had a significant undisclosedInterest In certain acquisitions effectedby Third National, and (2) that ThirdNational Bank, in connection with ItS cor-respondent banking actrvmes, had apractice of making loans to persons Inpositrons of control or influence at cor-respondent banks, which loans were onterms more favorable than those avail-able to comparable borrowers not In aposition to Influence Third National Bank'scorrespondents

As part of ItS settlement offer, ThirdNational undertook to Inform ItS share-holders fully of these matters and to offerrescission to offerees of a current ex-change offer.

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Laidlaw & Co., Inc.-Public administra-tive proceedings were ordered against 21respondents based on charges of viola-tions of various provrsrons of the Federalsecurrties laws, primarily In connectionwith an unsuccessful public offering of200,000 shares of SaCom common stockon October 31, 1972. Named as respon-dents were the managing underwriter,Laidlaw & Co., Inc. (now known as LAC,Inc.) and Rollin F. Perry, the former headof Laidlaw's corporate finance drvrslon:two market makers in SaCom stock, A.P.Montgomery and Torpre & Saltzman, Inc.;eight of the participating underwritersin the SaCom offering and the legalcounsel for Laidlaw. The Commissionalso named NDF Securities, Inc. andseven individuals In connection withtrading actrvmes in SaCom.

It was alleged that Laidlaw and Perry,in the SaCom offering, engaged In manip-ulative activities to facilitate the distribu-tion of the SaCom offering and create thefalse rrnpressron that the offering hadbeen successfully distributed to thepublic. In thrs regard it was alleged thatmembers of the underwriting syndicatesent false "all-sold" wires to the managerof the syndicate. It was further allegedthat there were undisclosed pre-effectivedate arrangements between underwriterswhereby certain underwnters would nothave to accept unsold stock. Laidlaw,Perry and others also were alleged tohave violated the Federal securities lawsIn connection with trading activities inthe common stock of Manchester Life &Casualty Management Corp. and Dyna-lectron Corporation.

Nineteen of the respondents haveconsented to the entry of various sanc-tions against them.1O A public hearing onthe charges against the two remainingrespondents IS scheduled for October,1975.

Steadman Security Corporation (SSC)-Ttus IS an administrative proceedingagainst SSC, a registered Investmentadviser, and Its president, board chair-man, and controlling shareholder. He ISalso president and board chairman offour registered investment companies

(Steadman Funds) managed by the reg-istered Investment adviser. Also namedas respondents were certain affiliatedregistered broker-dealers.

An administrative law Judge found thatrespondents committed violations of theantifraud and other provisrons of thefederal securities laws. Specifically,respondents were found to have, amongother things, (a) caused the SteadmanFunds to maintain at or to transfer tocertain banks their custodian accountsto enable respondents to get loans andbrokerage commission business fromsuch banks instead of obtaining for theSteadman Funds the best available cus-todian services at terms most advan-tageous to such Funds, (b) causedsecurities transactions between theFunds and an off-shore fund controlledby respondents to be effected withoutobtaining approval from the Commissionas required by the Investment CompanyAct of 1940, (c) failed to see to It that thefunds filed reports required by the federalsecurities laws on time and (d) failed todisclose the above described conduct

The administrative law jUdge con-cluded that the investment adviser regis-tration of SSC should be revoked and itspresident be barred from associationwith any investment adviser or regis-tered investment company and sus-pended for one year from associationwith any broker-dealer. At the end of thefiscal year, the case was pending beforethe Commission on review of the Initialdecision.

Samuel H. Sloan II-The Commissionbarred Samuel H. Sloan from associationwith any broker-dealer and revoked thebroker-dealer registration of his firm. TheCommission's action was based onSloan's persistent violations of the Ex-change Act's recordkeeping, net capital,and reporting provrsrons and on mjunc-tive decrees restraining him from furtherviolations of the record keeping and netcapital provrsrons. The Commission con-cluded that: "Sloan's Violations areneither tnvral nor technical. They Involveflagrant and long-continued breaches of

significant duties Imposed on persons Inthe securities business."

APPLICATIONS FOR RELIEFFROM DISQUALIFICATION

On February 26, 1975, the CommissionIssued a release announcing the variousfactors which are considered when itentertains an application for readmissionto the securities business by mdlvrduaisor firms which previously have beenbarred from partrcrpatron In the securitiesbusiness or some aspect thereof.12 TheCommission noted that situations mayexrst where, In view of changed circum-stances and after the passage of a penodof time, It may appear appropriate to theCommission, In ItS discretion, to lift thedisqualification If the applicant is able todemonstrate to the Commission's satis-faction that removal of the disqualifica-tion would be consistent With the publicInterest.

The Oommissron enumerated the fol-lowing factors, among others, wrucn Itgenerally considers In exerclsinq ItSdiscretion In the review of applicationsfor relief: the period of time which haselapsed since entry of the disqualifica-tion order, the nature of the findings thatresulted In the disqualification, the ap-plicant's attempts to undo any Injuryresulting from his pnor misconduct, theapplicant's overall conduct since theentry of the disqualification order, thetype and nature of the applicant's pro-spective duties, and any other factorswhich the Commission may deem perti-nent. In addition, the Commission notedthat it may seek addrtronat rntorrnatronconcerning the applicant by conductingan mvesnqatron or by obtaining the viewsof Interested third parties.

As a final matter, the Commissionspecrtied the procedures to be followedby an applicant seeking relief from dis-qualitrcatron

TRADING SUSPENSIONS

The Securities Exchange Act autho-rizes the Commission summarily to sus-

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pend trading in a security traded oneither a national securities exchange orIn the over-the-counter market for aperiod of up to 10 days If, In the Commis-sion's opinion, such action IS required Inthe public Interest

DUring fiscal 1975, the Commissionsuspended trading In the securities of 113companies, a decrease of 59% from the279 securities suspended In fiscal 1974and a 35% decrease from the 174 securi-ties suspended In fiscal 1973. The de-creased number of trading suspensionsreflected a significant reduction in thenumber of issuers which were delinquentIn filing required reports with the Com-rrussron. In most Instances, the suspen-sions were ordered either because ofsubstantial questions as to the adequacy,accuracy or availability of public informa-lion concerning the companies' financialcondition or business operations or be-cause of transactions in the companies'secunties suggesting possible manipula-tion or other violations.

On January 3, 1975, the Commissionsuspended trading In the securities ofAmerican Agronomics Corporation 13 be-cause of questions concerning the marketactivity in the shares of the company.

On April 22, 1975, the Commission sus-pended trading In the securities of Gen-eral Retractones Corporation 14 becauseof the unavailability of current accurateInformation concerning certain businesstransactions conducted by the companywith a principal European stockholderand companies under his control, andbecause of questions concerning theIdentity of that stockholder and the extentof his holdings.

DEUNQUENTREPORTSPROGRAMFundamental to the success of the dis-

closure scheme of the Federal securitieslaws is the timely filing In proper formand content of annual and other penodicand current reports required to be filedby Issuers and indivrduats The Delin-quent Reports Program IS designed toIdentify required reports which have notbeen timely filed and, when appropriate,

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to recommend remedial enforcementaction Such enforcement action entailsalerting the public to the lack of currentand accurate Information and, wherenecessary, seeking a court order requrr-Ing the filing of the delinquent reportscoupled with an injunction against furtherviolations of the Exchange Act's reportingprovisrons.

The statutory framework within whichthrs program operates IS primarily Sec-nons 13(a) and 15(d) of the ExchangeAct and the rules thereunder which re-qurre companies whose securities areregistered under Section 12 to file peri-odrc and current reports in proper form;Section 12(k) of the Exchange Act whichauthorizes the Oomrnlssron to suspendtemporarily trading in the securities of is-suers, and Rule 15c2-11 under the Ex-change Act which requires broker-dealersmaking specrnc quotations in an Inter-dealer quotation medium to have avail-able certain Information regarding theIssuer of the securities quoted.

During the 1975 fiscal year, the Com-rnrssion temporarily suspended trading Inthe secunties of approximately thirtycompanies solely due to the lack of cur-rent and adequate Information. Theyhadn't even filed at least a Form 1o-Kannual report dlsclosmq their auditedfinancial condition and results of opera-tions.

During this fiscal year, the Commissionbrought thirteen CIVil injunctive actions 15

solely on the basis of the Issuers' failureto comply with the reporting requirementsof the Exchange Act. In some of theseactions, the chief operating officer wasincluded as a defendant for his allegedfailure to cause the company to file thedelinquent reports.

For example, on December 20, 1974 anaction was filed against Data LeaseFinancial Corporation ("Data Lease"), abank holding company, in which It wasalleged that Data Lease was delinquentIn filing its Annual Report on Form 1o-Kfor ItS fiscal year ended June 30, 1974and an amendment to its Form 1o-K forfiscal year ended June 30, 1973. TheCommission's Motion for Summary Judg-ment was granted by the court on Feb-

ruary 14, 1975. Data Lease was orderedto file the delinquent reports immediately,and a permanent Injunction was Issuedagainst further Violations of the reportingrequirements of the Exchange Act. Oneweek later, the delinquent reports werefiled with the Commission.

After an issuer has been enjoined fromviolating the reporting provisrons of theExchange Act, the program rnorutors ItSSUbsequent compliance With the court'sorder. If It continues to Violate the report-Ing requirements of the Exchange Actand the court's order to file timely andproper reports, further action may beinstituted. In the past fiscal year, pro-ceedings seeking to hold three suchcompanies and certain of their officers InCIVil contempt of prior injunctive orderswere initiated and successfully con-cluded.16

The Commission hopes this programhas succeeded in making issuers in-creasingly aware of the Importance Itattaches to the prompt filing of requiredreports, and the necessity of informingshareholders why such reports are notbeing filed on time and furnishing themwith any available preliminary financialand operational information.

CIVIL PROCEEDINGS

DUring fiscal 1975, the OomrnissronInstituted a total of 174 injunctive actions.Some of the more noteworthy injunctiveproceedings and Significant develop-ments in actions instituted In earlier yearsare reported below. Several of these en-forcement actions were achieved throughcoordination between self-regulatorybodies and the Drvlsron of Enforcement.

S.E.C. v, PhIllips Petroleum Company.On March 6, 1975, the Commission fileda complaint against Phillips PetroleumCompany and several of its past andpresent officers and directors to enjointhem from further Violations of Sections12(b), 13(a) and 14(a) of the SecuritiesExchange Act and rules thereunder. Thecomplaint alleged that the defendantsmaintained a secret fund of corporatemonies which were used for unlawfulpolitical contributions and other pur-

poses. In particular, It was alleged thatdurtnq the period from 1963 to 1975, thedefendants disbursed In excess of $2.8million In Phillips's corporate funds totwo SWISScorporations by means of falseentries on the books and records ofPhillips. These disbursements were thenconverted Into cash. In excess of $1.3million of this fund were returned to theUnited States of which about $600,000was expended for political contributionsand related expenses, a substantial por-tion of which was unlawful. The balanceof the funds was allegedly channelledInto the SWISS corporations and distrib-uted overseas In cash.

Each of the defendants consented,Without admitting or denying the facts setforth In the complaint, to the entry of apermanent injunction prohibiting futureviolations of the Federal securities laws.In addition, Phillips undertook to preparea written report descnbmq ItS Internalinvestigations Into the matters set forthIn the Commission's complaint togetherwith the results thereof and to make ap-propriate disclosure of the matters In-volved In thrs report to its shareholders.

On April 11, 1975, the Commissionfiled a complaint against Accuracy InMedia, Inc. ("AIM"), a non-partisan andnon-profit organization devoted to pro-moting accuracy and correcting errors inthe media, seeking to enjoin AIM fromviolations of the proxy provrsrons of theExchange Act and rules thereunderPThe complaint alleged that AIM solicitedproxies by means of newspaper advertise-ments while falling to furnish the share-holders of RCA Corporation and CBS,Inc., with written proxy statementscontaining certain specnlc Information.It was also alleged that AIM failed to fileWith the Commission copies of prelimi-nary proxy statements furnished to share-holders of RCA Corporation and CBS,Inc., Within the time prescribed In Rule14&-6. The complaint further alleged thatAIM's newspaper advertisements ViolatedRule 14a-9 in that such advertisementscontained statements whrcn, at the timeand In light of the circumstances underwhich they were made, omitted to statematerial facts necessary in order to make

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the statements contained therein notmisleading. In addition, the Commissionsought to require AIM to publish correc-tive advertisements and to make an offerto return all contributions received Inresponse to AIM's initial advertisements.

AIM consented without admitting ordenying the allegations of the complaintto the entry of a final Judgment of per-manent injunction enjoining it from vrolat-Ing Section 14(a) of the Exchange Actand Rules 14a-3, 14a-6, and 14a-9 there-under. The Court's order further providedthat AIM publish the corrective advertise-ments and make an offer to return thecontnbutions received In response to theinitial advertisements.

In S.E.C. v. Management DynamIcs,Inc.,18 the court of appeals affirmed apreliminary Injunction for Violation of theregistration provisions of the SecuritiesAct and the antifraud provrsrons of Sec-tion 10(b) of the Securttres Exchange Actand Rule 10b--5 by a lawyer responsiblefor the dissemination of almost a rmlhonunregistered shares of ManagementDynamics's stock in relatively small-denomination certificates. These shareswere in the name of a person who hadpurported to represent one or more for-eign Investors, but who, In fact, attemptedto sell the shares Within the United States.

The court also upheld a preliminaryInjunction against a broker-dealer firm,which had acted as market maker forManagement Dynamics's stock, for Viola-tion of the antifraud provisions of thesecurities laws. The firm's vice-presidentIn charge of trading continued tradingthe shares even though there was nological explanation for a pnce nse from$0.38 to $6 00 In a penod of about sixmonths and the company had not re-sponded to an Inquiry for Informationsent by the broker-dealer. The court ofappeals stated that It agreed With theCommission's position that Section 20(a)of the Securities Exchange Act "was notintended as the sole measure of employerliability" In an enforcement actionbrought by the Commission, becauseSection 20(a) was "enacted to expand,rather than restnct, the scope of liabilityunder the secunties laws."

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The court also explicitly held that"proof of Irreparable injury or inadequacyof other remedies as in the usual suit forinjunction" is not required in an injunc-tion action brought by the Commission.

S.E.C. v. Geon Industries, Inc.,19 in-volved trading on rnsrde informationabout a proposed merger between Geonand Burmah Oil Co., Ltd., of Great Bntam,The complaint charged violations of Sec-tion 10(b) of the Securities Exchange Actand RuIe 10b--5 In connection with sev-eral purchases of Geon stock by individ-uals who knew about the state of themerger negotiations that was not publiclyknown. It also charged violations of thoseprovtsrons and of Section 17(a) of theSecurities Act In connection with the saleof Geon stock by persons having insideknowledge that the merger might not gothrough. Also, violations of Section 10(b)of the Securities Exchange Act and Rule10b--5 were charged against Geon'ssecretary-treasurer, who, when the stockexchange on which the Geon stock wastrading mquired whether there was anyreason for a large Imbalance of sell or-ders, stated that he knew of none, thusresulting in the commencement of tradingIn Geon stock, when he knew that insid-ers had become aware that the mergermight fail.20

The district court held 21 that the com-pany's president Violated the antifraudprovrsrons by disclosing nonpublic infor-mation about the fact and progress ofthe proposed merger, which resulted inpurchases and sales of Geon stock, andthat Geon was liable for these acts of itspresident. The court refused to hold thata brokerage firm was liable for purchasesand sales made by a registered represen-tative on the basis of Inside information,although the registered representativeconsented to an injunction against him.The court also refused to hold liable thesecretary-treasurer of Geon for his al-leged misleading statements to the stockexchange. Geon and its president haveappealed, as has the Commission.

In May 1975, the Commission filed acomplaint in the United States DistrictCourt for the District of Columbia seekingto enjom General Refractories Company

("GRX"), Joseph G. Solari, Its chairman,and John E. Hartshorn, Its executive vicepresldent.22 Also named In the complaintwere Hermann Mayer, a SWISSbusiness-man, Dan Mayer, his son and a formerGRX director, several SWISS and liech-tenstein companies owned or controlledby Hermann Meyer, a Swiss attorney whoacted for several of such companies, andSwiss Bank Corporation. Preliminary andpermanent injunctions from further viola-tions of Section 13(d) of the ExchangeAct and the anti-fraud, financial reportingand proxy solrcrtatron provisions of thatAct were requested.

The complaint charged, among otherthings, that Hermann Mayer had for manyyears been a substantial stockholder ofGRX, owning or controlling as much as17% of GRX's outstanding common stock,and that In an effort to conceal theseholdings failed to file with the Commis-sion the required reports on Schedule130 when he acquired In excess of 5% ofGRX's outstanding stock. In addition, thecomplaint alleged that, with the assis-tance of SWISS Bank Corporation, hedispersed his GRX stockholdmqs to makeIt more difficult to trace its ownershipMayer subsequently caused false andmisleading Schedules 130 to be filed.Solari was also charged with violatingSection 13(d) of the Exchange Act inconnection with his purchase, as part of agroup, of in excess of 5% of GRX's out-standing stock without filing the requiredreport on Schedule 130.

The complaint further charges that thedefendants failed to disclose in filingswith the Cornmlsston that Hermann Mayerand the defendant companies owned orcontrolled by him have engaged In ex-tensive business transactions with GRXamounting to millions of dollars Thesefilings with the Commission and materialssent to stockholders also failed to dis-close that Hermann Mayer was, duringthe period 1965-1975, represented onGRX's board of drrectors, They furtherfailed to disclose that GRX had madepayments to officials of foreign govern-ments.

In addition to mjuncnve relief and drs-gorgement of Illegally obtained benefits,

the Oommrsslon IS also seeking the ap-porntment of a special counsel for GRXto Investigate the Mayer transactions andforeign payments. The Court granted theCommission's motion for a temporaryrestraining order freezing HermannMayer's GRX stock GRX stipulated that Itwould send materials to stockholdersdrsclosmq the GRX-Mayer dealings.The case ISstill pending.

S.E.C. v. Ambassador Church FinancelDevelopment Group, Inc. and Henry CAtke/son, Jr.23 ThiS case Involved abroker-dealer which engaged In the bUSI-ness of assisting churches to raise capitalthrough the sale of church bonds TheOornrruasron instituted an injunctiveaction alleging violations of the anti-fraudprovisrons of both the Securities Act andExchange Act and requested that a re-ceiver be appointed and a trust Imposedon the assets of Atkerson, the presidentand sole shareholder of the firm. A per-manent consent injunction was securedand a SIPC trustee appointed. On January16, 1975 the trustee filed a petition Withthe court requesting that Atalbe ChristianCredit Association, Inc., an affiliate ofAmbassador, and Ambassador be de-clared alter egos of Atkerson for thepurpose of liqurdauon under the Secun-ties Investor Protection Act of 1970. Thiswas done With the consent of Ambas-sador, Atalbe, Atkerson and SIPC and thetrustee is now Irqurdatmq all three estatesIn this manner

The Cornrtussion filed a CIVil injunctiveaction against James Corr III and sev-eral of his relatives and associatesalleging violations of the anti-fraud, anti-manipulative, margin, stock ownershipreporting and registratIOn provrsrons ofthe secunnes laws and seeking ancrllaryrelief 24 The complaint alleged that dUringthe latter part of 1974, the defendantsparticipated In a scheme to manipulateupwards the price of the common stock ofAmerican AgronomIcs Corporation, listedon the American Stock Exchange, pur-suant to which scheme Carr and hisgroup acquired approximately 57% ofAmerican Agronomics' outstanding stockand approximately 63% of the floatingsupply of shares.

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The complaint also charged that Clin-ton Youmans, former president of theCommunity Bank of St Petersburg,Florida, rnisappropnated approximately$4 million from the bank which fundswere used by Corr and his associates, InViolation of the margin requirements, formanipulative purchases of AmericanAgronomics stock. Alfred Hamilton, afriend of Corr's and a member of hisundisclosed group, also effected a ma-nipulative series of transactions andfurther participated In the alleged manip-ulation by, among other things, effectingwash sales and matched orders and saleswith Corr as part of the defendants'overall scheme to create a false andmisleading appearance of active tradingIn American Agronomics stock. In addi-tion, the complaint alleged that thedefendants made certain false filings,which omitted to disclose sources offunds used to buy the stock and theexistence of the group, and failed tomake certain required filings With theCommission regarding their purchases ofAmerican Agronomics stock. The com-plaint further charged that certain ofHamilton's shares had been sold In Viola-tion of the registration requirements andthat Corr and others, under the circum-stances, were about to Violate the reg-istratron provrsions. The case IS stilipending

On April 10, 1975, the Commissionfiled an injunctive action against SarutasService Corporation and five other defen-dants alleging vrolatrons of the anti-fraud,financial reporting and proxy soncitatronprovisions of the Exchange Act.2'; Thecomplaint alleged that several of theindividual defendants, who were officersand directors of samtes. caused Sarutasto pay In excess of $1 million to a com-pany owned by Sarutas' executive vice-president These funds were then con-verted Into cash and used for politicalpayments, bribes and kickbacks to localand state autnormes and others. Thecomplaint alleged that Sarutas and theother defendants made these paymentsWithout disclosing to Sarutas' stock-holders, the public and the Commission,the true nature, purpose and amounts of

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such payments. In addition, the complaintalleged that Sarutas had Improperly used"pooling" accounting for an acquisitionof a waste disposal company In 1971 andthat It misrepresented and improperlyaccounted for the sale of one of ItS majorlinen laundry divisions in 1972.

Sarutas and all but two of the otherdefendants have consented to permanentrnjunctrons. The court's order providedthat Sanrtas and ItS new Independentauditors would take various steps to de-termine the ultimate recipients of thecash payments With a view to recoupingsuch payments for the company. Theconsent order also provided that Sarutaswould maintain ItS new audit and legalcommittees which would review account-Ing procedures and review potentialclaims which Sanrtas may have againstformer employees and others after re-viewing investigations performed by itsnew counsel and auditors. Further,Sarutas was directed to file a report of ItSinvestigation of certain matters With thecourt and Commission and file amendedreports With the Commission.

The litigatIOn IS continuing against theremaining two defendants.

S.E.C. v. Minnesota Mining and Manu-facturing Co.26-ln January 1975, theCommission filed an injunctive action Inthe United States District Court for theDistrict of Minnesota against MinnesotaMining and Manufacturing Co. ("3M"),and three individuals who were officersand directors of 3M.

The complaint alleged that the defen-dants Violated the proxy rules and report-Ing provrsions of the Exchange Act Inconnection With secret funds used tomake unlawful political contributions Withcorporate montes. The complaint allegedthat these monies were falsely recordedon the books of 3M as Insurance andlegal expenses, and further alleged thatthe reports and proxy matenal of 3M filedsince 1963 failed to disclose the facts andcircumstances surrounding the operationand maintenance of the secret fund andthe Involvement of the individual defen-dants

Without admitting or denying the allega-tions of the complaint, the defendants

consented to a permanent mjunctron en-joining them from:1) usrnq corporatefunds for unlawful political contributionsor other similar purposes, 2) filing anddisseminating materrally false and mis-leading annual and other periodic reportsand proxy material, and 3) making oraiding and abetting the making of mate-rrally false and trctlcrous entries In thebooks of 3M, or establishing or maintain-ing any secret or unrecorded funds ofmonies or other assets or making anydisbursements therefrom.

The order also provides that the defen-dants arrange for the reimbursement to3M of at least $425,000 and transmit to&II .. reholders a statement descrrbing thefacts and circumstances regarding theallegations of the proceeding. 3M alsoundertook to appoint a special agent toinvestigate any Instances In which 3Mexpenses were recorded on the books forother than their actual purposes.

On December 17, 1974, the Oornrnrs-sron filed a civil injunctive action In theU.S. District Court for the Distrrct ofColumbia charging OSEC PetroleumS.A., of Luxembourg, OSEC PetroleumA.G., of Munich, West Germany, andJacques Sari re, a non-resident AmericanCitizen and lntennventa Trust, liechten-stein trust, with violations of the Ex-change Act and rules thereunderP Alldefendants, except Interinventa, haveconsented to the entry of a final judgmentwhich, in part, provides for an mjunctronand for the payment of $150,000 to per-sons who sold common stock of UlsterPetroleums, Ltd. to OSEC SA betweenSeptember 17, 1973 and January 4, 1974Ulster is a Canadian company.

The complaint charged, among otherthings, that OSEC S.A., at the direction ofItS parent, OSEC A.G., and Sari ie, pur-chased over 20% of the stock of Ulsterthrough a Canadian broker on the TorontoStock Exchange. Ulster shares are listedon varrous Canadian exchanges and onthe Pacific Stock Exchange. The com-plaint further charges that defendantsdid not file a timely report with the Com-mission when OSEC S.A. purchased morethan 5% of Ulster's stock, as requiredby law. Violation of Section 10(b) of the

Exchange Act and Rule 10b--5 was alsocharged because of their purchasing as aresult of purchases of Ulster stock with-out first disclosing to sellers and to thepublic certain material, non public infor-mation concerning OSEC's intention toacquire control of Ulster, since OSECpreviously had announced the cancella-tion of a proposed transaction with Ulsterwhich would have resulted In OSEC'sacquisition of control of Ulster. TheCommission also charged InterinventaTrust, alleged owner of approximately11% of OSEC A.G.'s shares, with refusingto release Its Identity and the identity ofits beneficial owner to OSEC SA or theCommission for inclusion in OSEC S.A.'sSchedule 130 filed with the Commission.

Under the final judgment, eligible sell-ers who submit claims to share In the$150,000 fund will receive, pro rata, thedifference between their sale price and$1.52 per share In add Ilion, OSEC SA,OSEC A.G. and Sarlie must grant a proxycovering most of OSEC's Ulster shares toan approved proxy holder who shall inde-pendently vote the shares in nearly allmatters until the fund has been paid or 14months from the date of judgment, which-ever 15 later. During trus period, OSECSA's power to dispose of the stock, In

other than ordinary brokers' transactions.is conditioned upon its disclosure Inadvance of certain information to theCommission concerning such transac-tions.

In S.E.C. v. Capital Growth Company,S.A. (Costa Rica), et al.2M, the Commis-sion filed a complaint on September 3,1974 alleging anti-fraud violations andseeking Injunctive relief and the appoint-ment of the receiver

The complaint alleged that beginningabout September 1968 and continuing tothe present, Clovis W McAlpin, CapitalGrowth Company, SA (Costa Rica) ("theCapital Growth companies"), New Provi-dence Securrties, Ltd. and their predeces-sors, along with other persons and otherdefendants, Including, Sanford C. Shultes,Sheffield Advisory Company, SheffieldAdvisory Company, SA ("Sheffield") andEHG Enterprrses, Inc., Arrel E Gutierrezand Enrique H. Gutierrez ("EHG") con-

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verted and misappropriated the assets ofthe Capital Growth companies for theirown benefit The draining of the assetsof Capital Growth companies was accom-plished through 'a series of self-dealingtransactions which Included eliminatingthe Independent trustee, the close-endingof the Capital Growth companies and thediversion of the marketable assets of theCapital Growth companies Into newly-formed entities owned or controlled bycertain of the defendants or their asso-ciates.

An order of preliminary Injunction wasentered and a receiver was appointed.Sheffield consented to a permanentInjunction and a final judgment of defaultwas entered against the remaining defen-dants, over the argument of EHG, whocontended that telephoruc notice of thetemporary restraining order was inade-quate and that service of the summonsand complaint was not made In a timelymanner. These defendants were thengranted additional time to file theiranswer and present factual evidence whythe preliminary relief granted should notstand. Ttus was not done.

Defendants appealed from the decisronof the District Court and urged the Courtof Appeals for the Second Ctrcurt tovacate the order of preliminary injunctionand the appointment of a receiver OnJune 2, 1975, the Court of Appeals forthe Second circurt, In an unwritten opm-Ion affirming the lower court's decrslonheld, among other things, that the defen-dants had received suttrcient notice ofthe proceedings and were given an ade-quate opportunity to present their objec-tions to the relief granted by the DistrictCourt.

SEC v J&B Industnes, Inc 2" On Sep-tember 3, 1974, the Commission filed acomplaint against J&B Industries, Inc.,and nine other defendants alleging that"special land rights" representing frac-tronahzed Interests In a large tract ofCanadian land constituted a security Inthe form of an Investment contract thatwas being offered and sold In Violationof the registration and anti-fraud provr-sions of the Federal securities laws.

Although each purchaser received title

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In fee Simple, the defendants retainedtotal control over all Investments byhavrnq each Investor execute an "Irrevo-cable power of attorney" and a "firmoption" In favor of the defendants con-temporaneously With each purchase.

On October 2, 1974 the court Issued apreliminary injunction and appomted atemporary receiver.

Several of the defendants have con-sented to permanent injunctions Withoutadmitting or denying the alleqanons Inthe Oommrssron's complaint.

SEC v Bull Investment Group.30 OnDecember 20, 1974 the Oornrmssron filedSUit In the Federal District Court for theDistrict of Massachusetts charging BullInvestment Group, Ronald Kimball, Rich-ard G. Grondin, Richard F. Tosti, GoldenBook of Values and James Sanford withviolating the registration and anti-fraudprovrslons of the federal securities laws.The complaint, alleging that the defen-dants sold investment contracts in theform of pyramid marketing plans, soughtInjunctive relief and the appointment of areceiver.

After an evidentrary hearing, the courtnoted the parallels between the BullInvestment Group case and the SEC vGlenn Turner Enterpnses, tnc., 474 F. 2d476 (C.A 9, 1973) and SEC v. KoscotInterplanetary, Inc., 497 F. 2d 473 (C. A5, 1974), indicated that the Commissionwould probably succeed In establishingthat the defendants pyramid plan was aninvestment contract, and accordinglyentered a preliminary injunction on March11, 1975 The Cornrnrsston's monon fordefault judgment was granted against thedefendants Bull, Kimball, Grondin, andTosti for their failure to comply With theCourt's order compelling discovery. Thematter IS stili pending against GoldenBook and Sanford.

Noteworthy collateral matters were InIssue during the course of the litigation.The Commrssron on February 4, 1975moved that the defendant's answer bestricken because It was filed In bad faithIn that It contained many patently falseassertions. The motion was subsequentlygranted, but the defendants were grantedleave to amend. During the course of the

hearing on preliminary injunction a"clean hand" defense was raised, assert-Ing that the Commission had violated Itsown rules of confidentiality by providingInformation gathered from the defendantsto other law enforcement agencies. Thecourt, after taking testimony on the Issue,rejected the defense. Finally, the Cornrrus-sron, upon learning that the defendantswere Violating the preliminary injunction,moved to modify that order to Insure thatthe injunction would be honored. After aheanng concerning these vrolatrons, thecourt entered an order which broadenedthe injunctron's scope, and Installedrnorutorrnq devices to Insure compliance.

SEC v, Howard Garfmkle, et al.31 OnJanuary 14, 1975, the Commission filed acomplaint In the Southern Drstnct of NewYork alleging that Howard N. Garfinkleand other defendants had Violated theanti-fraud and registration provrsrons ofthe secuntres laws in connection With thesale of limited partnership Interests Inapartment buudrnqs, The complaint al-leged that the offerings Involved misstate-ments and omissions to state matenalfacts concerning, among other things, thefinancial projections Inserted In the offer-Ing circulars, the failure to transfer recordtitle to the properties, the quick sale ofthe properties causing the limited part-ners to lose tax benefits and part of theirInvested capital, the commingling andrnisappropnatron of funds of the limitedpartnerships and the failure to drstnbuteproportionate shares of the proceeds ofsales to the limited partners.

The complaint also alleged that Ber-nard Tolkow, the busmess manager ofUnited Welfare Fund and another defen-dant, caused United to provide monies toGarfinkle by purchasrnq participations Inshort-term notes collateralized by mort-gages on properties sold to limitedpartnerships, and that Garfinkle rnrsap-propnated for hrs own benefit the rnorueshe received from United. It was allegedthat Garfinkle provided kickbacks toTolkow In the form of purported returnson Investments by Tolkow In limitedpartnerships. Dlsgorgement IS sought offunds received by Garfinkle from inves-tors and received by Tolkow from Gar-

tmkle as a result of the fraud.After a hearing, the Court granted

preliminary injunctions against Tolkowand the Secunty DIVISion of United Wel-fare Fund and ordered the Secunty DiVI-sron to maintain specific Investmentprocedures to limit the possibility ofImproper Investment of welfare funds.Garfinkle had consented to a preliminaryinjunction pnor to the heanng All thedefendants, except Garfinkle, Tolkowand the Welfare Fund, including a lawyerwho had procured Investors In the limitedpartnerships, have been permanentlyenjoined by consent The action con-tinues as to the remaining defendants.

In SEC v. Town Enterpnses Inc et al.,32the Commission alleged a massive fraud-ulent scheme In the offer and sale ofunregistered securities In the form of"passbook certificates" and "time certifi-cates" by Town through at least eightwholly-owned, uninsured subsrdtarlesoperating under Morns Plan and IndustrialBanking statutes of seven states TheCommission's complaint alleged, amongother things, that the defendants offeredand sold these securities durmq a penodwhen Town and ItS subsrdranes wereexperiencmq large undisclosed unancratlosses Approximately $16,000,000 ofsuch secuntres, held by at least 15,000Investors, were In the hands of Investorsat the time the complaint was filed.

All defendants, without admitting ordenying the allegations of the complaint,consented to orders permanently enjoin-Ing them from further Violations of theregistration and anti-fraud provisrons ofthe Federal securities laws. Town andseveral subsrdianes, named as defen-dants, have subsequently filed voluntarypennons In Bankruptcy under ChapterXI of the Federal Bankruptcy Act.

SEC v. Bngadoon Scotch Dtstnbutors,Ltd., et a/.3J On December 12, 1974, theCornrnrssron instituted an injunctive ac-tion against Bngadoon Scotch Distnbu-tors, Ltd. and 26 other defendants allegingviolatrons of the registration and anti-fraud provisions of the Federal securitieslaws In connection with the offer and saleby the defendants of Investment InterestsIn scotch whisky and rare COin portfoliOS.

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Of particular note, and a question of firstImpression was the charge In the Com-mission's complaint that the offer andsale of rare COin portfolios by the FederalCOin Reserve, Inc ("FCR") constitutedthe offer and sale of a security subject tothe junsdictron of the federal securitieslaws

In this regard, the court In an opiniondated February 10, 1975, after a hearingon the Commission's motion for a pre-liminary rnjunctron against FCR, ItS prin-cipals and key sales personnel, foundthat the Investment Interests in rare COinportfolios being offered and sold by thedefendants to the investing public did, Infact, constitute the offer and sale of asecurity within the province of the Federalsecunties laws, Accordingly, the courtgranted the Commission's request for apreliminary mjunctron.

In SEC v Robert Dale Johnson, et al.l~the Commission, on June 14, 1974, filedan injunctive action alleging violationsof the registratIOn and antifraud provi-sions of the Federal securities laws, vari-ously, by Robert Dale Johnson, RidgeAssociates & Co and ten other defen-dants In connection with a multi-milliondollar industrial wine Ponzt scheme. TheCommission alleged that the defendantsoffered and sold secunties In the form ofInvestment contracts to approximately400 Investors without compliance with thesecurities registration requirements Inaddition, It was alleged that Johnson andRidge engaged In a fraudulent schemernducrnq Investors by falsely representingthat their funds would be used to pur-chase European industrial wine to beresold at huge profits In fact, Johnsonand Ridge kept selling wine contractobligations, evrdencinq a promised re-turn to Investors of principal Investedand profits ranging from 30 to 100%,which were being paid off with the fundsof other Investors No wine Investmentprogram ever existed Approximately $75million was raised from approximately400 Investors under such promissorynotes Final Judgments of PermanentInjuncnon were entered against all defen-dants On August 26, 1974, Johnsonpleaded gUilty to a criminal information110

charging him With one count of securitiesfraud and one count of mail fraud arisingout of thrs scheme and was sentenced toa term of six years impnsonment.se

SEC v. North American AcceptanceCorporetion.v: On February 7, 1975, theCommission filed a complaint seeking toenjorn North American Acceptance Cor-poration (NAAC), a Georgia corporation,and 10 other defendants alleging Viola-tions of the registration and antifraudprovrsrons of the securities acts Thecomplaint alleges that NAAC and othersmade false and misleading statementsand omitted to state material facts In thesale of ItS high interest unsecured cor-porate notes to residents of Georgia.Among other things, these statementsrelated to the use of proceeds; that landdevelopment companies owned by NAACwere causing a negative cash flow forNAAC; that NAAC was having liquidityproblems; that financial statements didnot reflect substantial changes in thefinancial condition of NAAC; that NAAC'sparent corporation, Omega-Alpha, Inc.(OA) was losing money; and that millionsof dollars transferred from NAAC to OAwere being utilized by OA for workingcapital and the retirement of debt notrelated to NAAC.

NAAC sold promissory notes Withmaturity dates of one to five years andpromissory notes payable on demand InJanuary 1974, NAAC mailed an annualfinancial statement to ItS noteholderswhich contained adverse information Asthe result of thrs information, noteholdersImmediately began to demand the returnof their Investment which NAAC wasunable to repay. Thereafter, on February6, 1974, NAAC filed a petition underChapter XI of the Bankruptcy Act whichwas later converted to a Chapter X pro-ceeding. About 5,000 Investors stili holdNAAC notes aggregating $38,000,000.

In S.E.C. v Cambndge Capital Cor-poration, et al.:17 and S.E.C. v. InterstateSyndications, Inc, et al.,IS the Commis-sion Instituted injunctive actions againsttwo Atlanta-based land syndication com-panies charging Violations of the regis-tration and antifraud provrsions of thesecurities laws Both companies wereengaged In the business of seiling Invest-

ments In various tracts of raw land In theform of either limited partnership inter-ests or co-tenancy Interests In the realestate. The sales terms of these realestate syndication Interests called Ini-tially for downpayrnents and later foryearly payments by each Investor tocover the annual mortgage, Interest andreal estate tax obuqanons relating toeach tract of raw land. In order to protectthe Investors' Interests In the real estate,a court-appointed agent was needed toadminister the receipt and disbursementof the funds. In each SUit, the court, at therequest of the Commission, appointed aspecial fiscal agent to administer thevarious land syndications. Because theseInterests were frequently sold to personswho were told or led to believe that theywould not have to make more than one ortwo of the annual payments before theland was "turned over" at a profit and be-cause the raw land was not producrnqany Income, the special fiscal agentsencountered difficulties preserving theInvestors' interests Subsequent effortsmade by the court, the special fiscalagents and the Commission's staff havebeen directed toward minimizing Investorloss In the adverse climate of a tightmoney market and a general recessionIn the market for unimproved real estate

In SEC v. Strathmore Distillery Co.Ltd.39 an order of permanent injunctionwas entered against Strathmore anddefendant John B. R. Turner, both ofGlasgow, Scotland, enjoining furtherviolations of the secuntres registration,broker-dealer registration and anti-fraudprovrsrons of the federal secuntres laws

The Commission alleged in ItS com-plaint that the defendants were engagedIn a nationwide campaign to sell theScotch whisky interests and that in somecases the prices for the whisky Interestssold by the defendants were 100 percentabove the prevailing market prices forsuch interests. The complaint furtheralleged that In connection with the saleof those interests in scotch whisky thedefendants made untrue statements ofmaterial facts including, but not hrrutedto, statements that Investors would obtainprofits of 20% per year, that overproduc-

tion of scotch whisky was an Investmentrisk, and that there are no qualitativedifferences between various scotch gramwhiskies. Also It was alleged that thedefendants omitted to state certain factsnecessary to make the statements madenot misleading Among other things, thedefendants did not disclose the amountof the sales proceeds retained by thedefendants, the source of market pricequotations and the actual market pricequotations for the scotch whisky beingsold.

S.E.C. v. R. J. Allen & Associates,Inc.411-Thls case Involved the use offraudulent sales practices by a dealer oftax-exempt secunties In seiling IndustrialDevelopment Revenue Bonds Neither thedealer nor the bonds were registered Withthe Commission The firm, three of ItSprlnctpals and two sales personnel weredefendants in the action which the Com-rrussron instituted In the United StatesDistrict Court for the Southern Districtof Florida. After a trial which lasted sev-eral days and after one salespersonconsented to the entry of a permanentinjunction against her, the court foundthat the defendants had engaged invarious fraudulent practices, including:misrepresentations and omissions ofmaterial facts about the bonds; thepractices of "bucketmq't-e-not fillingorders for which customers had pald-and "swltchlng"-dellverlng bonds tocustomers other than those they hadordered. Prominent among the victimswere a number of returned prisoners ofwar from Vietnam who had Invested allor part of the back pay earned while theywere prisoners based upon the falsepromise of fully insured tax-free Income.

In addition to the entry of a permanentinjunction agamst the defendants pro-hibiting further Violations of the anti-fraudprovrsrons of the Securities Act and theExchange Act, the court also appointed areceiver, required an accountmg, frozethe defendants' assets, and ordered thefirm and ItS two principals to JOintly drs-gorge to the receiver an amount equal tothe total sales of all Industrial Develop-ment Revenue Bonds to all customers-approximately $4,500,000.41 Since the

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entry of the order, the Commission hascontinued to assist the receiver In locat-Ing assets of the defendants and to com-plete an accounting of the firm's booksand records

S.E.C. v. Prudenuet Funds, Inc.42-lnJune, 1975, In U.S. District Court for theDistrict of Columbia, the Commissionsued Prudential, ItS Executive vice-President (Finance), Winston S McAdoo,and ItS broker-dealer subsidiary, Pruden-tial Ventures Corporation, chargingviolations by all the defendants of theanti-fraud, reporting and prospectusprovrsrons of the federal securrnes laws,and the violation by Prudential of theproxy solicitation provrsions.

The Commission alleged that the de-fendants, when offering and seiling over$10 million In limited partnership InterestsIn "leveraged" 011 and gas drilling pro-grams prospectuses, misrepresented themanner In which they would conduct thebusiness of the drilling programs In away materially at variance With rep-resentations to Investors made In pro-spectuses, tax opinion letters, and seilingliterature, and Ignored the warnings oftheir tax counsel as to the possibleadverse tax consequences of such con-duct.

The Commission alleged that the de-fendants engineered a series of shamtransactions In late 1972 which were ofdoubtful validity from a tax viewpomt,and which had not been disclosed toInvestors Investors were Informed byPrudential as to the availability of lever-aged tax deductions (In excess of theircash Investment) for their 1972 tax re-turns, Without being Informed as to thenature of the transactions purportedlygiVing rise to the deductions or as to thetax risks associated With claiming thededucllons The defendants consentedto the entry of an injunction againstfurther vrolatrons Without admitting ordenying the Commission's allegations

S.E.C. v. G.C. George secumie«, Inc.43-On February 12, 1975, the Commissionfiled an injunctive action In the UnitedStates District Court for the EasternDistrict of Washington against elevenSpokane-based securities broker-dealers

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and sixteen individuals associated withthe broker-dealer firms. The suit allegedthat the defendants were Violating theanti-fraud provrsrons of the Federalsecurities laws in connection with thepublication and nation-wide drstnbutronof over-the-counter quotation sheets forthe securities of some 80 local miningcompanies, which reflected quotationsnavrnq little or no relationship to theprices at which concurrent transactionswere being effected In such secuntiesby the defendants.

The Commission's Motion for Prelimi-nary Injunction has been consolidatedWith a hearing on the merits No trial datehas been set pending the outcome ofsettlement negotiations

In S.E C. v. Western PacifIC Gold andSIlver Exchange Corporeuon, et al theUnited States District Court for the Districtof Nevada held that the offer and sale ofinvestment interests In gold and silverto Investors In several states involvedthe offer and sale of investment con-tracts, evidences of Indebtedness inInterests and Instruments commonlyknown as securities, In Violation of theregistration and antifraud provrsrons ofthe Federal secunues laws.

The court found that the defendantshad omitted to state, among other things,that: Western Pacrtrc Gold and SilverExchange Corporation was Insolvent; ItSInvestment agreements were written With-out acqumnq the corresponding goldand silver, or Silver futures contractfor each contract sold to Investors; It paidInvestors by raising funds from otherInvestors, It could not fulfill ItS guaranteeto repurchase gold and silver frominvestors; Investors' funds were notbeing used to acquire silver and goldand were being diverted and converted tothe use of the defendants, Silver was notstored In Independent storage facilities,nor was the Investors' Silver segregatedfrom the Silver of another Investor, andlittle, If any, Silver presently exrsts In orotherwise for the accounts of Investorswho requested storage

The Order of Preliminary Injunctionwas followed by a summary Judgment~;

~~

which prohibited the named defendantsfrom violating the registration and anti-fraud provrsrons of the secuntres lawsThe JUdgment also provided for certainancillary relief The defendants wereenjoined from altering, destroying, con-cealing, dissipating, disclosing, trans-ferring or moving any books, records,documents, correspondence, funds orassets of the defendants. The Judgmentcontinued the appointment of a receiverof all assets and property of, belonging to,or in possession of the defendants whichhave been received as a result of the actsand practices complained of. It requiredthe defendants to make an accounting ofall funds received from investors in con-nection with the silver investment agree-ments, and to disgorge to the receiver anyand all funds and silver which theyreceived as a result of their sales andpurchases of the secunnes described inthe complaint.

In addition, In fiscal 1975, the Commis-sion filed S.E.C. v. SIlver Mint Mortgage,Co., Ltd, et al.,~6 S.E.C. v. ConstitutionMint, Inc., et al.,47 and S.E.C. v. DouglasS. Warren, et al.~H Preliminary or finalinjunctions have been entered In theabove cases

S.E.C. v. Seaboard Corp.~9-The Com-rrussron obtained consent Injunctionsagainst all but two of the twenty-ninedefendants In this previously reported 50

case. The SUit dealt essentially with thealleged mismanagement and outrightlooting of a complex of mutual funds("Funds").

The complaint alleged that a portfoliomanager of the Funds engaged In apractice of first purchasing thinly tradedsecurities through nominees, then caus-Ing the Funds to purchase the same secu-rities In large volume, thereby causing aprice rise. He then allegedly sold hispersonal holdings either to the Funds orInto the market when the Funds werebUying As a result, the Funds were al-leged to have lost as much as $4,000,000.

The complaint also alleged that finders'fees In excess of $200,000 were Illegallypaid to affiliates of the Funds and thatsecunnes were purchased, Investment

advisers selected and other decrsionsrelating to the Investment funds made Inorder to benefit Seaboard and ItS affiliatesto the detriment of the Funds.

In additron to enjoining the defendantsfrom further violations of the antifraudprovrsrons of the federal secuntres laws,the court has Imposed other sanctions,mctudmq the payment of money to theFunds and to special funds administeredby the court for the benefit of otherclasses of persons who were Injuredtprough the defendants' actions. S.E.C. v. Republtc National Life Insur-ance Company.5t-As previously re-ported.s- the Commission instituted aninjunctive action against Hepublrc Na-tronal life Insurance Company ("Repub-Ire"), Realty Equines Corporation of NewYork ("Realty"), Peat, Marwlck, Mitchell& Company ("PMM"), Westhelmer, Fine,Berger & Co. ("Westhelmer"), and elevenmdrviduals who were employees of Re-public or Realty The Commissioncharged extensive violations of antifraudand reporting provisrons of the ExchangeAct. In essence, the complaint allegedthat Republic, In trying to conceal Itsfailing Investment In Realty, put rnuuonsof dollars Into Realty through certaintransactions The proceeds were usuallychanneled back to Republic to repayearlier Realty debt Realty was thus en-abled to retain suttrcrent funds throughthe transactrons to continue In operationRepublic and Realty and each of theirIndependent auditors were alleged tohave made and Issued false and mrstead-Ing financial statements.

Republic, Realty, PMM, Westhelmer,and eight of the eleven individual defen-dants consented to permanent injunctionsenjoining them from future vrolatrons ofvarious provrsrons of the Exchange Act.Certain of the defendants also consentedto ancillary remedies designed to preventrecurrences of VIOlative conduct. Thelitigation IS continuing With respect tothree remaining defendants.

S.E.C. v, MatteI, Inc n-In two separateproceedings dunnq 1974, Mattei, Inc, aCalifornia toy manufacturer, was enjoinedon ItS consent from Violating the antifraudand reporting provrsions of the Securities

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Exchange Act. The alleqatrons related tomaterial misstatements In MatteI's finan-cial statements durrnq 1971 through 1973and press releases Issued during thatperiod

In addrtron to the rnjunctrons, the courtordered that Mattei (1) appoint and main-tain a majority of Its directors who areunaffiliated with Mattei, (2) maintain com-mittees of such Independent directors toreview financial controls and auditingprocedures and also lrtrqatton, (3) appointa special counsel to Investigate the mat-ters alleged In the complaint, to report hrsfindings to the court and the Commissionand to Initiate actions on behalf of thecompany against management, and (4)appoint a special auditor to examine thecompany's past financial statements

S E.C. v Solnron Devices, Inc "~-In anaction filed In March 1975, the Commis-sion obtained a final order againstSolltron Devices, Inc. on allegations thatSolltron's 1967 through 1970 AnnualReports on Form 1G-K were false andmisleading because the accompanyingaudited financial statements matenallyoverstated the value of ItS Inventory,sales and accounts receivable and ItSpre-tax and net Income In addition, thecomplaint alleged that Solltron's annualand other reports from 1971 and auditedfinancial statements failed to disclosethat a substantial part of the wntedownof Solltron's Inventory described thereinwas due to, among other things, Solltron'sfalsification of ItS prior tmancral state-ments and that Solltron had a substantialcontingent liability arising out of ItSprror falsified financial statements

The court ordered Solltron, With ItSconsent, to file timely complete andaccurate annual and penodic reports Withthe Commission containing all materialfacts. Further, Solltron was ordered tomake only such public statements as arecomplete and accurate In all materialrespects.

Moreover, the court's order directedthe company to restate correctly ItS priorfilings which were the subject of theCommission's complaint. Finally, thecourt directed Solrtron to retain specralcounsel, satisfactory to the Commission,

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to accomplish the matters referred to In astrpulatron and undertaking executed bySolltron and annexed to the court's orderand to comply fully With the snpulanonsand undertakings contained therein

S.E C. v Savoy Industnes Corpora-tion ;;-Thls case exemplifies how co-operative efforts of the Commission'sstaff and self-regulatory bodies produceeffective enforcement actron. On Novem-ber 22, 1974, the Commission, after aninvestigation resulting from informationreceived from the American Stock Ex-change, instituted an injunctive actionagainst Savoy and five other defendantsalleging Violations of the reporting andanti-fraud provrsions of the Federalsecunties laws. The complaint allegedthat the defendants made numerousfraudulent misstatements of material factsand omitted to state other material factsIn reports requtred to be filed With theCommission and the Arnencan StockExchange The defendants were chargedWith failing to disclose the role of one ofthe defendants as a controlling factor In ascheme to acquire Savoy stock and thatthe real purpose of the acqursrtron was toturn Savoy Into an Insurance holdingcompany

Savoy and three other defendants,Without admitting or denying the allega-tions, consented to permanent rnjunc-nons enjoining them from further Viola-tions of the reporting and anti-fraudprovrsrons of the Federal secunnes laws.In additron, all defendants who acquiredshares of Savoy common stock haveagreed not to dispose of those shares forat least two years.

Three CIVil actions were initiated dunngfiscal 1974 by the Cornrrussron againstHonda-based Issuers of unregisteredmortgage notes and the mortgage brokersseiling the notes. These actions againsta total of 21 defendants, were captionedS.E.C v Continental Land ManagementCorp ,": S.E C v. L. T P. Properties, lnc.,"and S.E.C v Horowitz," Each of thecases Included charges of Violations ofregistration and anti-fraud provrsrons bythe Issuers and sellers of corporatepromissory notes collateralized by mort-gages or assignments of Installment land

sales contracts Typically, the lots pur-portedly mortgaged or assigned to inves-tors were, at best, much less valuablethan represented and, at worst, non-existent The Issuer in each of thesecases IS currently in receivership as aresult of the Commission action or Inbankruptcy proceedings. Approximately2,300 Investors sustained losses on thesecuntres Issued of about $20 million

PARTICIPATION ASAMICUS CURIAE

Slade v Shearson, Hemmttt & Co,Inc.fi9-ln this action brought pursuant toSection 10(b) of the Securities ExchangeAct and Rule 101>-5 thereunder, an inves-tor was seeking damages suffered whenshe purchased securities on the baSIS ofthe recommendations of a salesman ofthe defendant made at a time when thedefendant's Investment banking depart-ment was In possession of adverse mate-rial non-public information about theIssuer of the secunties, which was alsoan investment banking client. Shearsonasserted that ItS Internal poucies pro-hibited the firm from making any recom-mendations With respect to Investmentbanking clients, although individualsalesmen of the firm were permitted tomake recommendations based on theiranalyses of publicly available informa-tion. Shearson contended that It wasprecluded from uSing mside InformationIn the possession of ItS Investment bank-Ing department for the benent of ItSbrokerage customers, and that thrswould be the case If It caused its sales-men to Withdraw outstanding recom-mendations after receipt of the adversenon-publrc mtorrnatron. The lower courtdenied Shearson's motion for a partialsummary Judgment and certified a con-trolling question of law to the Secondcrrcuit for Interlocutory appeal TheSecond Ctrcurt accepted the certrtrcatron

The Ccrnmisston as emtcus curteeargued In the court of appeals that tmscase should not be viewed as governedsolely by cases where an insrder takesadvantage of inaide information In effect-Ing securities transactions In thrs case,

the Oomrrussron noted, the broker's rec-ornrnendatron did not permit hrs customerto benefit from mside information; rather,the recornendanon was that, notwith-standing material adverse information,the customer buy the securities In ques-tion In these circumstances, anotherprinciple becomes applicable, specifically,the Cornrrusston argued, Rule 101>-5 mustbe Interpreted to prohibit a recommenda-non contrary to non-public facts about thesecurity In question known by the broker-dealer The preservation of necessaryrestrictions upon the use of material in-Side information does not require that thebroker's misrepresentations be condonedThey could be avorded With no drastrcaffects on a multi-function securities firmIf, In addrtron to separating ItS depart-ments and not allowrnq non-public infor-mation to pass from the Investmentbanking department to the broker-dealerdepartment, the firm would also use adevrce such as a restricted lrst, pursuantto which the firm and ItS salesmen wouldbe prevented from making recommenda-tions With respect to securities at suchtimes as the firm may have, or IS likely toobtain, material mside information Thisdevice would enable the firm to avoidinadvertant Violations by salesmen whoare unaware of mstde information thatmay be inconsistent With the mtorrnanonwhich served as the baSIS for the recom-mendation

On December 16, 1974, the court ofappeals held that ItS acceptance of thecertification of the question for reviewhad been rmprovrdently granted, andremanded the case to the district courtNoting the Implications the resolution ofthis case had for both the secuntiesIndustry and the investing public, thecourt decided that It would proceedfurther In thrs case only on the baSIS offull findings of fact and a consequentnarrowing of the Issues

In Schltck v Penn-Dixie Cement Cor-poreuon, et al.,"<1 the United States Courtof Appeals for the Second CirCUIt re-versed a lower court ruling which haddismissed the complaint The complaintwas filed by minority shareholders ofContinental Steel Corporatron It alleged

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violatrons of sections 10(b) and 14(a) ofthe Securities Exchange Act and Rules10b-5 and 14a-9 thereunder It chargedthat Penn-DIxie, as the majority share-holder of Continental, engaged In ascheme to manipulate the business af-fairs of Continental, thereby depressingthe market price of Continental stock Inrelation to that of Penn-DIxie, In order toeffect a merger between the two com-panies on the basts of an exchange ratiothat reflected the manipulated price, andwas thus unfair to the minority share-holders of Continental. Penn-DIxie wasalso alleged to have failed to disclosecertain facts concerning the scheme Inproxy materials sent to Continental share-holders In connection with the merger

With respect to plaintiff's claim underRule 10b-5, the court of appeals held, Insubstantial agreement with the posrtrontaken by the Commission In an amicuscuriee brief, that where a majority share-holder engages In "a scheme to defraud"minority shareholders, which Includesmarket marupulatron and a merger onpreferential terms, of which alleged orrus-sions and rmsrepresentatrons containedIn proxy soliciting material are only oneaspect, a plaintiff need allege only thathe suffered economic harm In order tostate a cause of action (I.e., that theexchange ratio arguably would have beenfairer had the baSIS for valuation beendisclosed) The plaintiff did not have toallege that the merger transacnon itselfwas "caused" by material ornrssrons andmisrepresentations

The court of appeals also held, againIn substantial agreement with the positionof the Commission on the allegationsabout Rule 14a-9, that certain misstate-ments or ormssrons In the proxy materialswere material and that the proxy solicita-tion was an essential link In effecting themerger, were sufficient to plead the ele-ment of causation In the merger transac-tion and, therefore, were sufficient tostate a cause of action under thoseprovrsions In this regard, the court ob-served, among other things, that If share-holders had been fully Informed, theymay have had recourse to measuresother than the casting of proxies In op-

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posing the merger, or at least, have beenIn a better position to protect theirInterests

CRIMINAL PROCEEDINGS

As a result of investigations conductedby ItS staff, the Commission during thepast fiscal year referred BB cases to theDepartment of Justice for criminal pros-ecution This represents a substantialIncrease over the 65 cases referred dur-ing the preceding fiscal year. As a resultof these references, 53 indictments nam-ing 199 defendants were returned, ascompared to 40 indictments against atotal of 169 defendants dunng the previousyear In addition, dunng the past fiscalyear, the Commission authonzed its staffto file 17 crtrnmal contempt actions, andconvictions were obtained against 10defendants. Dunng the past fiscal year,116 defendants were convicted In the 33cnrnrnal cases that were tried. Oonvrc-nons were affirmed In 6 cases that hadbeen appealed, and appeals were stilipending In 5 other cases at the close ofthe penod.

Members of the staff of the Comrnisstonwho have investigated a case and arefamiliar with the facts Involved and theapplicable statutory provisions and legalpnncrples, are usually requested by theDepartment of Justice to participate andassist In the tnal of a cnrrunal case re-ferred to the Department, and to partrci-pate and assist In any subsequent appealfrom a conviction.

The cnrnrnal cases that were handleddunng the fiscal year demonstrated thegreat variety of fraudulent practices thathave been devised and employed againstmembers of the Investing public.

After three weeks of tnal,hl J HarlowTucker of Spokane, Washington, pledgUilty to five counts of an indictmentchargmg securities fraud and mall fraudThe defendant defrauded In excess of1,300 mvestors, resrdmq pnrnanly In east-ern Washington, of more than $4,000,000through the sale of common stock andsubordinated convertible debentures ofThe Davenport Hotel, Inc. and other in-vestment programs related thereto. Funds

raised were purportedly to be used torenovate The Davenport Hotel, a land-mark located In Spokane, Washington,and to butld an adjacent conventioncenter, but were In fact primarily usedfor other undisclosed purposes. Thedefendant capitalized on the area's senti-mental attachment to the hotel and apromise to pay an 8% return on the deben-tures, which enabled Tucker to sell secu-rities to numerous older retired personsand many others who had never previ-ously Invested In securities.

Sentencing has been delayed by thecourt pending a pre-sentence investiga-tion report.

In u.s v. E. M. Riebold,G2 a multi-countIndictment was returned in the UnitedStates District Court for the District ofNew MeXICO alleging vrolatrons of thewrre fraud, mall fraud and Interstatetransportation of stolen property andrrusapplrcatron of bank funds statutes byE. M. Rrebold, a New MeXICO business-man; Donald T Morgan, a former NewMexico banker; Harold M. Morgan, anAlbuquerque, New Mexico, attorney;E J Hammon, a New MeXICO busrness-man, and HIlliard Crown, a Santa Fe,New MeXICO,accountant

The mdrctrnent alleged that the defen-dants obtained In excess of $5,000,000from various Victims, including banks,and the Home-Stake Production Co. ofTulsa, Oklahoma.

Harold Morgan pled gUIlty to an infor-mation charging him With one count ofsecurities fraud.G E. J. Hammon pledgUilty to an information charging him withone count of securities fraud, and HilliardCrown pled gUilty to one count of theindictment alleging that he made a falsestatement to a bank In connection With a10an.04 The case remains for trial againstdefendants E M. Rlebold and DonaldMorgan.

Gary J. Awad was the Operations Man-ager for some 9 years In the Detrortbranch of a large brokerage firm whichwas and IS a member of the New YorkStock Exchange. In August, 1970, Awadopened a secuntres trading account atthe firm In a ncnuous name and from thattime to about October, 1973, effected

numerous purchases and sales In theaccount DUring that same period, hewas able to alter the records of ms em-ployer to reflect receipt Into the accountof various secuntres, which were eithernonexistent or the property of other cus-tomers of the firm. USing these Securitiessupposedly In the account as "collateral,"Awad caused the nrm to Issue checksout of the account, the proceeds of whichAwad converted to hrs own use and bene-fit. Since Awad had authorrty to srqnchecks drawn on the firm's bank ac-counts, he was able to have checksIssued to the person In whose name theaccount was maintained, sign thrs nameon the back of the checks, and deposit orcash the checks at banks where Awadmaintained accounts In the fictitiousname. During the period the scheme wasIn operation, the purchases and sales Inthe account resulted In a loss to the firmof about $80,000. In addition, checksissued out of the account to the purportedcustomer totaled about $124,200, com-pared to deposits Into the account ofsome $42,800, or a loss to the firm of anaddrtronal $81,400.

Followmq a lengthy investigation bythe Detroit Branch Office, an Informal butdetailed report was furnished to theUnited States Attorney In Detroit OnJune 19, 1975, Awad entered a plea ofguilty to a one-count Information filedthat same day In Detroit federal court, forViolation of Section 10(b) of the SecuntresExchange Act of 1934 and Rule 10b-5thereunder oS Sentencing was deferreduntil completion of the pre-sentencereport As of the date of this resume, asentencing date has not been set.

After a tive-week trial, three defendantsIn U.S. v The Technical Fund, Inc, et a/.were found gUIlty of Violating variousprovisions of the Federal securitieslaws."" The seven counts which went tothe Jury concerned the defendants andtheir relationship With a Boston basedmutual fund, the Technical Fund, Inc.,and a Boston and New York brokeragehouse, Security Planners limited Thefund had been placed In receivershippursuant to an S.E.C action In May of1972, while the brokerage nrrn had been

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committed to a Securitres Investor Protec-tion Corporation trusteeship, again fol-lowing Commission action, In July 1971

Sumner H Wooctrow, who was counselfor both the Investment company and thebroker-dealer, was convicted of particr-patinq In the filing of a false broker-dealer registration form on ItS behalf andcertain undisclosed pnncrpals and ofemploymg a scheme to defraud In con-nection with the diversron of funds fromTechnical Funds to the broker-dealerHoward P Smolar, president of the fund,and Edward Vanasco, an undisclosedpnncipal of the broker-dealer, were con-victed of conspiracy, of the filing of falsetmancial reports and of engaging rnprohibited affiliated transactions with thefund rn vrolation of the Investment Com-pany Act Smolar and Vanasco were alsoconvicted m separate counts of partrci-patrnq in a course of conduct wherebyVanasco, who had been barred by theSEC from bemg associated with anybroker-dealer, became an undisclosedcontrolling person of Secunty Plannerslimited Vanasco was sentenced to 3years in Jail, Smolar was sentenced to 2years m Jail, one month to be served andthe balance suspended, and he wasplaced on probation for 2 years, andWoodrow was sentenced to one year mJail, sentence suspended, and he wasplaced on probation for one year. Thiscase IS significant as It resulted In con-vrctrons stemmmg from violations ofsections of the Investment Company Act

In United States v. Acton 67 four defen-dants were found gUilty of conspiracy,secunties fraud, mall fraud and the saleof unregistered stock rn connection withthe drstnbution of the common stock ofPioneer Development Corp Three defen-dants pled gUilty and charges were drs-missed as to one of the defendants Thedefendants were found to have acquiredcontrol of thousands of unregisteredshares of Pioneer stock, created anartificial market for the stock m the over-the-counter market through manipulativedevices and sold, pledged and otherwisedisposed of stock to the public All of thedefendants convicted at tnal receivedsentences of at least two years impnson-ment

118

Ira Femberg, former president of ManorNursmg Centers, Inc., was convicted aftera four week Jury tnal of 15 counts of anindictment charging him with securrtiesfraud, mall fraud and conspiracy. Anotherdefendant was acquttted.s" Previously,four other defendants, rncludmq IvanAlan Eznne had pled guilty to conspiracy.Eznne also pled gUilty to securities fraud,mall fraud and making false statementsto the Commission As a result of hisgUilty plea, Eznne, an attorney, was drs-barred. The SIX defendants had beenrndrcted for their activities m connectionWith the 1970 public offenng of the com-mon stock of Manor Nursmg Centers,Inc A previous Commission mjunctrveaction m this matter had resulted In alandmark securrtres law decisron by theUnited States Court of Appeals for theSecond Clrcult.fi9

Martin D. Nass was convicted of secu-rities fraud m connection With hrs acuvi-ties as vice-president and resident branchoffice manager of Thomson & McKmnon,Auctuncloss, Kohlmeyer, Inc ("Thomson& McKmnon") a New York Stock Ex-change member flrm.7U Nass pled gUiltyto two counts of a thirteen-count mdrct-ment chargmg him With removmg fundsand secunties from numerous customeraccounts at Thomson & McKmnon andconverting them to hrs own use. Nasshad engaged In this complicated fraudu-lent scheme to rrusappropnate at least$1,000,000 In customer funds and secun-ties from these brokerage accounts.

He was sentenced to a prrson term oftwo years and three years probation to beserve consecutively.

After a SIX week trial, Bernard Deutschand Stanley DuBoff, two former registeredrepresentatives With a New York broker-dealer, and Milton Cohen, a St Paul,Mmnesota, businessrnan and President ofRichard Packmg Company, were foundgUilty of all four counts of an mtorrnatronfiled by the United States Attorney'sOffice rn the Southern Drstnct of NewYork" Deutsch and DuBoff were sen-tenced to three year prison terms andCohen received a SIX month sentence.The convictions were affirmed by theUnited States Court of Appeals for theSecond Oircurt

Deutsch and DuBoff are currentlyunder indictment in three other casesinvolving violations of the conspiracy,mall fraud and Federal securities laws Inconnection with transactions In the secu-rities of Acnte Industnes, Inc, FrlgltempCorp., and Integrated Medical Servicesas well as an indictment for evasion, filingfalse tax returns and aiding and abettingthe filing of false tax returns for thepenod 1968 to 1972

As a result of the Oornrmssron's referralof part of ItS investigative files to theDepartment of Justice In the StirlingHomex Corporation matter, a 28 countIndictment was returned on December11, 1974 In the Western Drstnct of NewYork charging David Stirling, Jr., andHarold M. Yanowrtch with vrolations ofprovisions of the Federal labor statutes Inconnecnon with their arranging for unionofflcrals to purchase Stirling HomexCorp stock."- Stirling was formerly chiefexecutive officer of Stirling Homex, andYanowrtch was formerly ItS executive vicepresident and general counsel.

The indictment alleged that Sttrlmqarranged for seven otncrals of the UnitedBrotherhood of Carpenters and JOinersof Amenca, which represented StirlingHomex employees, to purchase StirlingHomex stock substantially below theprevailing market price and that Stirlingand Yanowitch arranged the trnancmq ofthose purchases The indictment furtheralleges Yanowrtch arranged for some ofthe union officials to sell their stock at$10 a share above the prevailing marketpnce. Both Yanowitch and StIrlingpled not guilty to all counts. A trial ISexpected In the fall of 1975

On May 2, 1975, Charles Erb andFranklin DeBoer, both former managingpartners of the defunct firm of Baerwald& DeBoer, were convicted of, amongother things, violating the Federal securi-ties laws In connection with the offer andsale of the common stock of XPnntCorporatron.t> Erb and DeBoer wereconvicted on ten counts and one countrespectively, with each count carrying apossibte prison sentence of five years.The Indictment alleged that these twopartners used nominees to conceal theirownership of XPnnt stock at a time when

their firm was underwnting the offering,and that they caused false and rrusleadmqdocuments to be nred with the Commis-sion and disseminated false and mislead-Ing prospectuses to the public.

On May 9, 1975, Charles Fischer, amoney manager who specialized In pur-chasinq and seiling government and com-mercial paper, was sentenced to one yeartrnpnsonrnent and fined $1,000 The jailsentence was suspended except for onemonth. Fischer pled gUilty to an infor-mation which charged him with makingpayments to an officer of the NeuwirthFund to purchase mtllrons of dollarsworth of certificates of deposrt In thebanks and In the amounts desiqnated byFischer 74

On April 2, 1974, James W White wasprelrmrnanly enjoined from further Viola-tions of the anti-fraud and registrationprovrsrons of the Federal securHies lawsand was prohibited from serving as anofficer or director of a public corporationas a result of the Cornmisaron's action.Subsequently, the Cornrrussron sought tohave White held In Criminal contempt ofthe court's preliminary injunction be-cause It found that White had promotedtwo shell corporatrons-e-Nortn AmericanKemcore Inc, and Engineered Construc-tion Industries Inc White was arrestedbut was released on hts own recogni-zance Dunng the interim betweenWhite's arrest and mal, the Cornrrussrondiscovered and reported to the court thatWhite had Violated the terms of hrs re-lease and was Involved In stili anotherpromotion of the corporation named theGarden Doc, Inc.

After a trial, White was convicted andsentenced to a SIXmonth sentence.>

Organized Crime Program

The prosecution of secunties cases ISoften based pnrnarrly on crrcurnstantralevidence requiring extensive investiga-tion by highly trained personnel. The dif-ficulties In such rnvestiqatrons andprosecutions are compounded whenelements of organized crime are in-volved. Witnesses are usually reluctantto cooperate because of threats or fear ofphysrcat harm Books, records, and other

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documentary evidence essential to theinvestigation and to a successful prosecu-tion may be destroyed or nonexistentThe organized crime element IS adept atdtsquistnq ItS partrcipatron In transac-tions, through the use of aliases andnominee accounts, by operating acrossinternational boundaries, and by takingadvantage of foreign bank secrecy lawsIt frequently operates through "fronts"and infiltrates legitimate business con-cerns Organized crime also has an ex-tensive network of affiliates throughoutthis country In all walks of life, and Inmany foreign nations As a result of theseproblems, civu and criminal htrqatron in-volvmq organized crime can result Inunusually lengthy proceedings. Despitethese difficulties, the Commrsston, work-Ing In cooperation With other enforcementagencies, has been able to make majorcontributions to the fight againstorganized crime

DUring fiscal year 1975, the organizedcrime program focused pnncipally on twoends (1) increasing the Commission'seffectiveness In obtaining current reliableinformation relating to organized criminalactivity In the securitres Industry; and(2) aggressively pursuing to completioninvestigations of srtuations brought to theCommission's attention as potentially in-volvmq the mnltratron of elements oforganized crime Into the Industry.

In order to Increase the flow of reliabledata, an intelligence unit was establishedlast year In the Drvtsron of Enforcement.Its pnncipal function IS to maintain chan-nels of communication With state, localand other Federal agencies, as well ascomparable agencies of foreign govern-ments, which might have information onorganized criminal activity In the securi-ties Industry Information received by thisunit IS correlated With other availableinformation and evaluated In light of theCommission's responsrbrutres under theFederal secunties laws Information indi-cating possible secunties law Violationsby organized criminal elements IS relayedby the intelligence unit to those othermembers of the staff whose pnncipalduties are to investigate activity by or-ganized crime This program has already

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generated a significant number of newcases, as well as contributing new sourcesof information to ongoing investigations

In furtherance of the intelligence func-tion, members of the staff have continuedto participate In seminars and lecturessponsored by state and local governmentsand their representatives have been in-cluded In the Commission's trainingprograms This has alerted local authorr-ties to the role of the Commission Incurtailing organized criminal activity Inthe secuntres Industry. Members of theCommission staff are also assiqnad on afull time basts to certain of the JusticeDepartment's Organized Crime StrikeForces. Both the Strike Forces and theCommission staff have thereby benefitedIn learning more about organized criminalactivity In the secuntres Industry.

As a result of the organized crime unit'senforcement efforts dunnq the past fiscalyear, there has been an Increase In thenumber and Importance of actions in thisarea In the past year, In cases wheremembers of organized crime were in-volved, the Oornrrussron filed Injunctiveactions naming 47 persons and con-tributed to the return of indictments nam-Ing 47 individuals and the convrctron of34 of them. Three persons considered tobe Important members of organized crimewere indicted and three such memberswere convicted on indictments returnedIn prior years. The Comrnlssron presentlyhas 54 matters under investigationrnvolvmq organized crime

As a result of an intensive Oornrmssroninvestigation and the efforts of the Or-ganized Cnme Stnke Force in Manhattan,a Federal grand jury In the Southern DIs-trict of New York on August 9, 1974 in-dicted 15 individuals, including John JSantiago a/k/a Sonny Santini, nine pastor present brokers and an attorney, forconsprrary to Violate and substantiveViolations of the antifraud provrsions ofthe secuntres laws, together With mallfraud In the case of U.S. v Baron, et al 71>

Eight defendants pled gUilty before trialand four more were convicted on March5, 1975 after a five week Jury tnal Onedefendant was acquitted and two remainto be tned The case Involved Issuance of

unregistered shares of common stock InElmvest, Inc. and the subsequent sale ofthis stock to the public at artificiallyInflated prices.

In another significant case, SidneyStein and 9 others were indicted In June1974 In the Southern District of New YorkIn connection With a widespread fraudu-lent drstnbution of Stern-Haskell, Inc.stock They were charged With sales ofunregistered stock, secunnes fraud, mallfraud and conspiracy In the case of U.S. v.Rubinson, et al.'i. On March 23, 1975,Stein and 6 other defendants were con-victed of these charges. As a result ofStein's role In ttus fraud and hrs longhistory of secuines Violations, he wassentenced to 10 years Imprisonment andfined $20,000.

Cooperation with OtherEnforcement Agencies

In recent years the Commission hasgiven Increased ernphasis to cooperationand coordination With other enforcementagencies, Including the self-regulatoryorqaruzattons, enforcement agencies atthe state and local level, and certain for-eign agencies. Its programs In thiS areacover a broad range. For example, theCommission believes that certain casesare more appropriately enforced at thelocal rather than the Federal level wherethe actrvrtres, while perhaps Violating theFederal secunties laws, are essentially ofa local nature. In these Instances, theCommission authorrzes the referral of thecase to the appropriate state or localagency, and members of the staff familiarWith It are made available for direct as-sistance to that agency in ItS enforcementaction. A member of the staff has beenspecrfically desrqnated as a liaison withstate enforcement and regulatoryautnonnes.

The Commission has also fosteredprograms designed to provide a com-prehensive exchange of information con-cerning mutual enforcement problemsand posstble securities Violations. DUringthe fiscal year, It continued ItS programof annual regional enforcement con-.ferences. These conferences are attended

by personnel from state secunties agen-cies, the U.S. Postal Service, Federal,state and local prosecutors' offices andlocal offices of self-regulatory associa-tions, such as the NASD. They provide aforum for the exchange of information oncurrent enforcement problems and newmethods of enforcement cooperation. Oneresult of these conferences has been theestablishment of programs for JOint in-vestigations. Although the conferenceswere initially hosted by the Commission'sregional offices, many state and localagencies are now serving as sponsors orco-sponsors. During the past severalyears, the Commission's DIVISion of En-forcement has conducted EnforcementTraining Seminars to which were mvrtedrepresentatives of all the state secunnesag~ncles and their counterparts In theCanadian provinces lnvitatrons were alsoextended to other Federal agencies hav-Ing investigative or enforcement respon-sibrhtres involvrnq laws relating to theIssuance of or transactions In securitiesA shortage of funds In fiscal 1975 resultedIn a determination not to conduct thisseminar In the past year.

The Commission's Proceedings andlitigation Records Branch continues toprovide one means for cooperation on acontinuing basis With other agencies hav-Ing securities enforcement responsibilities.The Branch acts as a clearinghouse forinformation regarding enforcement ac-tions In securities matters that have beentaken by state and Canadian authontres,other governmental and self-regulatoryagencies, and the Oornrnrssron itself Itanswers requests for speciftc informa-tion and In addition publishes a penodrcbulletin which IS sent to contributingagencies and to other enforcement andregulatory bodies During fiscal 1975, thebranch received 2,992 letters either pro-Viding or requesting information, and sentout 2,233 cornrnunrcatrons to cooperatingaqencies. Records maintained by theBranch reflect a steady Increase In re-cent years In the number of enforcementactions taken by state and Canadianauthonties. The data In the SV (SecuritiesViolations) Files, which IS computerized,IS useful In screening Issuers and ap-

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!1

! plicants for registration as securities or

i, commodities brokers or dealers or in-vestment advisers, as well as applicants for loans from such agencies as the Small Business Administration.

SWISS TREATY

As previously reported.'* the United States and Switzerland signed a treaty on Mutual Assistance in Criminal Matters in May of 1973. The treaty ratified by the lower house of the Swiss Parliment in December, 1974, and by the upper house in May of 1973. The treaty was ratified by the lower house of the Swiss Parliment in passed by the two houses are expected to be resolved in the pariimentary session starting in September, with consideration by the United States anticipated shortly thereafter.

The treaty should be of assistance to the Commission where Swiss financial institutions are utilized to engage in se- curities transactions in the United States, or where funds resulting from illegal acfivities are secreted in such institutions. A representative of the Commission has participated in the negotiations since they began early in 1969.

i l FOREIGN RESTRICTED LIST

The Commission maintains and pub-lishes a Foreign Restricted List which is designed to put broker-dealers, financial institutions, investors and others on no-tice of unlawful distributions of foreign securities in the United States. The list consists of names of foreign companies whose securities the Commission has reason to believe have recently been, or are currently being offered for public sale in the United States in violation of the registration requirement of Section 5 of the Securities Act of 1933. While most broker-dealers refuse to effect transac-tions in securities issued by companies on the Foreign Restricted List, this does not necessarily prevent promoters from illegally offering such securities directly to investors in the Unite'd States. During the past fiscal year, the following corpor- ations were added to the Foreign Re-

stricted List, bringing the total number of corporations on the list to 84:

Finansbanken a l~ .~~-Th is is a bank in Denmark subject to supervision by Danish government bank regulatory authorities. it has been advertising i n newspapers and periodicals in the United States for the purpose of publicly offering its sav- ings accounts and its shares of stock to United States investors. These advertise- ments offered 8 percent interest on sav- ings accounts of depositors not owning shares of stock of the bank and 10 per-cent intsrest to savings account deposi- tors owlping shares of its stock. The advertisements also offered 14 percent interest on savings accounts not with-drawable except on 18 months notice, if the depositor also purchases shares of stock directly from the bank.

It has been judicially recognized that the offer of a bank savings account con- stitutes the offer of a security as that term is defined in the Securities Act."" Although such accounts in United States banks are exempt from Securities Act's registration requirements. those of a foreign bank are not exempt. Since nei- ther the savings accounts nor the shares of Finanebanken als are so registered, the Commission has placed them on the Foreign Restricted List.

Alan Mac Tavish, Lid.*'-This English corporation, has been advertising and mailing solicitations to prospective inves- tors in tne United States to induce them to invest in Scotch malt whiskey in storage in casks in warehouses in Scotland for the purpose of aging the whiskey until i t becomes more valuable.

The Commission had previously ob-tained injunctions against similar offers because the offers included services to assist the investor in obtaining profits, thereby constituting the offer of an invest- ment contract that is a s e c ~ r i t y . ~

These decisions sustained the position publicly announced by the Commission on November 4, 1969.X:' that the distribu- tion of ownership interests in whiskey in this way ordinarily constitutes the offer of a security required to be registered under the Securities Act.

Since Alan Mac Tavish, Ltd. was fol-

lowing substantially the same procedures in offering Scotch whiskey investments and had not filed a Securities Act registra- tion statement with the Commission covering these securities, the Commission placed Alan Mac Tavish, Ltd. on the Foreign Restricted List.

Silver Stack Mines Ltd.seThis Cana- dian company has been engaged in gold mining exploration in Quebec. In May of 1974 it offered and sold in Canada 1,000,000 new shares of its common stock at 60 cents per share. These shares were in addition to the 1,500.000 shares already outstanding. These shares were listed and traded on the Montreal Stock Exchange. Not long after the new shares were issued, an investment adviser in the United States began publishing a "Flash Buy Recommendation" to purchase shares of this stock, and investors in the United States were found to be carrying more than 200,000 shares of the stock in their brokerage accounts at leading broker's offices.

No securities issued by Silver Stack Mines. Ltd. had ever been registered with the Commission under the provisions of the Securities Act. Due to the shortness of time following the issuance by the corporation of the 1,000,000 new shares, it appeared that the sales of shares to investors in the United States constituted a public offering of new shares that should have been registered under the Securities Act. Accordingly, the Commis- sion placed Silver Stack Mines, Ltd. on the Foreign Restricted List.

NOTES FOR PART 4

' 391 FSupp. 438 (S.D.N.Y., 1975) 2 Id at-.ddn.-. . . -, "Securities and Exchange Commission

v. North American Research and Develop- ment Corp., 280 F.Supp. 106 (S.D.N.Y.. 1968). affirmed in part and vacated i n part, 424 F.2d 63 (C.A. 2, 1970). Securities and Exchange Commission v. North American Research and Development Corp., 375 F.Supp. 465 (S.D.N.Y., 1974). 'C.A. D.C.. No. 74-1947

"4 Civ. 1097 (MP). 'Securities Exchange Act Release No.

11312 (March 24, 1975). 6 SEC Docket n ' ?

'Securities Exchange Act Release No.

11496(June26,1975), 7 SEC Docket 240. Securities Exchange Act Release No.

11322 (March 28, 1975), 6 SEC Docket <a7

j3 Securities Exchange Act Release No. 11164 (January3, 1975). 6 SEC Docket lo .

l4 Securlt~es Exchange Act Release No. 11366 (April 22,1975), 6 SEC Docket 725.

'"See Litlgatlon Release Nos. 6522, 6552, 6576, 6592, 6749, 6750 6832, 6864, 6880.6909. 691 7. 6932 and f i ~ b 6,

'"ee iit igation Release NOS. 6732, 681 9 and 6915.

"Litigation Release No. 6831 (April 11, 1975), 6 SEC Docket 708.

' 9 1 5 F. 2d 801 (C.A. 2. 19751. Is See 40th Annual Report. p.'79.

The complaint also alleged violations of the marain reouiremenis - of Section.. .. 7. .... of the SecLirities ~xchange Act by a reg- istered representative of a brokerage-firm and bv an emolovee of Gann hnth nf -, ~ -~~

whom' consenied to injunctive relief anl inr t them -a - ..-....-, , ..

2 ' The district court's opinion is reported at 381 F. Supp. 1063 (S.D. N.Y., 1974).

22 Litigation Release No. 6898 (May 21, 1975). 7 SE,C Docket 53. /

Litigatlon Release No. 6588 (Navem- ber 15, 1974), 5 SEC Docket 496. "Litigatlon Release No. 6794 (March 19.1975), 6 SEC Docket 473.

es Civil Action No. 75-0520 (D.D.C.,1975): Litigation Release No. 6829 (April 1,1975). 6 SEC Docket 707.

x6 Litigatlon Release No. 5711 (January 31.1975). 6 SEC Docket 247 - ~-~

Z'~ i v i i .Action No. 7441844 (D.D.C., 1974); Litgation Release No. 6646 (De- cember 19,1974). 5 SEC Docket 765.

Z X 74 Civ. 3779 (CES). Litigation Release No. 6502 (September 3, 1974) 5 SEC Oockef d---. . -. . ,

*VD. C. Mass. 1974), Civil Action 74- 425C-M, CCH Fed. Sec. L. Rep. (i 94, 860, 388 F. Supp. 1294: Litigation Release Nos. 6543 (October 10, 1974) and 6587 (November 14, 1974), 5 SEC Docket 268, *OE 7.7".

J"Civii Action 74-580GM (D. Mass), Litigation Release No. 6676 (January 10, 1975), 6 SEC Docket 70.

:I' Liti ation Release No. 6687 (January 15, 19757, 6SEC Docket 95,

z2 Litigation Release No. 6850 (April 23, 1975). 6 SEC Docket 740. '"lcurrent Transfer Binder] CCH Fed.

Sec. L. Rep. 194,980 (S.D.N.Y. 1975).

Release No. 6929, (June 11, 1975), 7 SEC Docket 176. "Litigation Release No. 6674 (January 10, 1974), 6 SEC Docket 69,

Litigation Release No. 6948 (June 24,1975). 7 SEC Docket 279.

Litigation Release No. 6953 (June 30, 1975),7 SEC Docket 368.

'W.S. v. Gary J. Awad, LitigationRelease No. 6947 (June 24, 1975), 7 SEC Docket 774

INVESTMENT COMPANIES

Under the investment Company Act of 1940 and the lnvestment Advisers Act of 1940, the Commission is charged with extensive regulatory and supervisory responsibilitiesoverinvestmentcompanies and investment advisers.The responsibility for discharging these duties lies with the Division of lnvestment Management Regulation.

Unlike other Federal securities taws. which emphasize disclosure, the lnvest- ment Company Act provides a regulatory framework within which investment com-panies must operate. Among other things the Act: (1) prohibits changes in the nature of an investment comoanv's busi- . , ness or its investment policies without shareholder approval: (2) protects against . . . . . management self-dealing, embezzlement or abuse of trust; (3) provides specific controls to eliminate or mitigate inequi- table capital structures; (4) requires that an investment company disclose its finan- cial condition and investment policies; (5) provides that management contracts be submitted to shareholders for ap-proval and that provision be made for the safekeeping of assets; and ( 6 ) sets controls to protect against unfair transac- tions between an investment company and its affiliates.

Persons advising others on their secu- rities transactions for compensation must register with the Commission under the lnvestment Advisers Act. This require-ment was extended by the investment Company Amendments Act of 1970 to include advisers to registered investment

AND ACV:SEi2S

companies. The Advisers Act, among other things, prohibits performance fee contracts which do not meet certain re-quirements, fraudulent, deceptive or manipulative practices, and advertising which does not comply with certain r e strictions.

lnvestment companies and assets under the management of investment advisers constitute important resources for investment in the nation's capital markets. in order to continue their role of channeling individual savings into capital needed for industrial develd~ment, in;est- ment companies and investment advisers must have the confidence of investors. and the safeguards provided by the Investment Company and lnvestment Advisers Acts contribute to sustaining such confidence.

NUMBER OF REGISTRANTS

As of June 30. 1975. there were 1,301 active investment companies registered under the lnvestment Company Act, with assets having an aggregate market value of over $74 billion. Those figures repre- sent an increase of 13 in the number of registered companies and an increase of nearly $12 billion in the market value of assets since June 30. 1974. Further data is presented in the statistical section of this Report. At June 30, 1975, 3.420 in- vestment advisers were registered with the Commission, representing an increase of 406 from a year before.

During the fiscal year, the Division's

staff conducted exarrunations of 244 in-vestment companies and 404 Investmentadvisers, 76 and 121, respectively, morethan dunng fiscal 1974. It IS the Commis-sion's ultimate objective to examine allInvestment company registrants withinthe first year after reqistranon, and toexamine each reqistered Investmentcompany and registered Investmentadviser every other year This shouldprovide effective regulatory oversight. Asa result of the Commission's examinationand investigation program In 1975, nu-merous violations of the Investment Com-pany Act and of the Investment AdvisersAct were uncovered, and approximately$4,248,976 was returned to Investmentcompanies and their shareholders. Six-teen Investment company and twentyInvestment adviser matters were referredto the Drvrsion of Enforcement for pos-sible action

LEGISLATIONSecurities Acts Amendments of1975

A recent amendment of the InvestmentAdvisers Act now requires affirmativeComrmssion action on an application forregistratIOn as an Investment adviser, in-stead of the prevrous procedure where aregistration automatically became effec-trve thirty days after receipt by the Com-rrnssron unless a proceeding to denyregistration was recommended. This newprocedure conforms with that adopted forbroker-dealer registratIOns under theExchange Act, as amended. Section203(c)(2) of the Advisers Act now providesthat, within forty-five days from the dateof filing of an application for reqrstranon(unless the applicant consents to a longerpenod), the Commission shall eithergrant registration by order or instituteproceedings to determine whether regis-tration should be denied. The types ofcrimes, conviction for which registrationmay be denied or revoked under Section203(e)(2), were expanded under the newamendments. Section 204 was broadenedto give the Commission authority to pre-scnbe rules for the making and dissem-ination of such reports and records

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deemed necessary or appropriate In thepublic Interest.

RULESAmendments to Rule 17d-1

Section 17(d) of the Investment Com-pany Act prohibits any affiliated person ofor pnncipal underwriter for a registeredInvestment company from effecting anytransactron In which the registered com-pany, or a company controlled by It, is aparticipant with the affiliated person orprrncipal underwrrter, In contravention ofany rule prescnbed by the Commissionfor the purpose of limiting or preventingpartrcipatron by the regIstered or con-trolled company on a baSIS different fromor less advantageous than that of otherpartrctpants. Rule 17d-1 prohibits affiliatedpersons of and principal underwriters forregistered Investment companies fromeffecting any transactron In connectionwith any JOint enterpnse or other JOintarrangement or profit-sharing plan Inwhich any such registered company, or acompany controlled by such registeredcompany, IS a partrcipant unless an ap-plrcatron regarding such Joint enterprisehas been flied with, and granted by, theCommission

In October 1974, the Commissionadopted an amendment to Rule 17d-1 I toenable certain affiliated companies andpersons affiliated with such cornparues topartrcrpate In JOint transactions withregistered Investment companies andcompanies controlled by registered in-vestment companies without an order ofthe Commission, provided certain condi-tions are met. The primary condition isthat the principal underwnter and certaindescribed "upstream" affiliated personsof the registered Investment companywould not partrcipate or have a financialInterest In the transaction The Commis-sion was persuaded that the conditionsof the exemption are such that there ISlittle likelihood of unfair or drsadvanta-geous treatment to the Investment com-pany or ItS controlled companies. Theamendment also provides that certainregistered small busmess Investmentcompany ("S6IC") stock option plans

may become operative without an orderof the Commission.

Amendment of Rule 17a-7Section 17{a) of the Investment Com-

pany Act generally prohibits purchasesor sales of secunnes between Investmentcompanies and affiliated persons. Exemp-tions are provided In Rules 17a-1 through17a-7 Rule 17a-7 exempted from theprohibitions of Section 17{a) of the Actpurchase and sale transactions betweenaffiliated Investment companies If, amongother things, the security involved wastraded principally on a national securitiesexchange and the price used In the trans-action was the current market price onthat exchange. In September 1974, Rule17a-7 was amended to expand ItS ex-emptive relief to transactions In securttieswhich are Included In an mterdealerquotation system, such as NASDAQ,which IS sponsored and governed by therules of a national securities associationregistered pursuant to Section 15A of theSecurrties Exchange Act of 1934 andwhich displays quotations for such secu-rity on a current and continuous baSISprovided (1) the transaction IS effectedat the average of the highest currentIndependent bid and the lowest currentIndependent offer for such security asquoted on such quotation system, and(2) at the time of such transaction, suchquotation system carries at least twoIndependent current bids and offers fur-nished or submitted by at least two bro-kers or dealers with respect to suchsecurity 2

In addition, an amendment was adoptedto the annual report form of all manage-ment investment companies requiringregistrants to describe all Rule 17a-7transactions and to Identify the personsinvolved and the nature of their affiliationwith the registrant. The amendment re-quires the registrant to state also thereasons why It was appropriate for oneinvestment company to purchase securi-ties which an affiliated Investment com-pany wished to sell.

Temporary Rule 6c-2(T) andProposed Rule 6c-2

In February 1974, the Commission

adopted Temporary Rule 6c-2{T) andproposed for public comment a perma-nent measure, Rule 6c-2.1 to providecorporations organized pursuant to theAlaska Native Claims Settlement Act of19714 ("Settlement Act corporations")blanket exemptive relief from a substan-tial number of provrsrons of the Invest-ment Company Act

The Settlement Act corporations, over200 In number, were created to receive,hold, and administer the land, minerairights and cash awarded by the UnitedStates Government to Alaska's NativeIndian, Aleut and Eskimo population Insettlement of their abonprnal claims toland In the State of Alaska. DUring thefirst few years of the exrstence of theSettlement Act corporations, only thecash portion of the award has actuallybeen distributed to the companies, andmany of the Settlement Act companieshave Invested the cash in securities.Hence, a substantial number of theseentities have become investment com-panies Within the meaning of the Act, andto date thirty-five Settlement Act corpora-tions have registered pursuant to Sectionala) of the Act and are covered by Rule6c-2{T).'i

The staff analyzed the public commentsreceived on proposed Rule 6c-2 andrevised the proposal in accordance Withsuch comments and with views expressedby other members of the staff and theCommission Itself. After the close of thefiscal year, such a revised rule was pub-lished for comment." The revised versionwould Impose additional responsibilitiesupon the large Settlement Act corpora-tions (I e., those haVing 500 or moreshareholders and total assets exceeding$1,000,000) by requiring them to complyWith the proxy sotrcrtatron, penodic re-porting and financial recordkeepingprovrsrons of the Act On the other handthe revrsed proposal would slgnlflcantl;decrease the burden of compliance uponall Settlement Act corporations register-Ing under Section ala) by instituting cer-tain limited exemptions from Section 17of the Act for affiliated transactions in-volvrnq Settlement Act corporanons Thesimpler temporary version of the rule,

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Rule 6c-2(T), will remain In effect untilthe Commission either adopts Rule 6c-2or rescinds the temporary measure

Investment CompanyConfirmation Requirements

In September 1974, the Commissionamended RuIe 15c1-4 under the Ex-change Act to permit, subject to certainconditions, the substitution of quarterlyaccount statements for Immediate con-nrrnanons In connection with the purchaseof mutual fund shares Issued pursuant totax qualified individual pension plans orany group plans 7 The adoption of thisrule amendment was significant In lightof the enactment of the Employee Retire-ment Income Security Act of 1974, whichreflects Congressional efforts to reformand extend pension benefits to retiredpersons and which permits the use ofmutual funds as an Investment media forcertain tax qualified individual and grouppension plans The relaxatron of theExchange Act confirmation requirementswill help make It economically feasiblefor mutual funds to be sold to such plansIn accordance with Congressional policy.

During the fiscal year, a number ofsignificant rules were also proposedunder the Investment Advisers Act of1940 which were designed to Improve theregulation of Investment advisers and torespond to changes In the market placebrought about by the elimination of fixedcornrrussion rates on securrtres transac-tions.

Brochure Rule

On March 5, 1975, the Commissionproposed the adoption of new Rule206(4)-4 and new paragraph (14) of Rule204-2(a) under the Investment AdvisersAct' The proposed rules are Intended toassure that existrnq and prospectiveclients of an Investment adviser obtainwritten disclosure of material rntormanonwhich would enable such persons toevaluate, among other things, the ad-viser's qualifications, methods, services.and fees They generally would requirethat Investment advisers furnish a written

130

disclosure statement to every client andprospective client (other than a registeredInvestment company) upon entering Into,extending or renewing an advrsory con-tract With such client and that copies ofeach such disclosure statement be main-tained by Investment advrsers as part oftheir record keeping obligations under theAdvisers Act. The proposed written state-ment would Include, among other things,a descripnon of the types of servicesoffered, length of time the investmentadviser has been in such business, in-vestment techniques, sources of informa-tion used, general standards of educationand business background required ofadvisory personnel and the basis of feecharges. There are addmonal disclosurerequirements for advisers providinqInvestment supervisory services or man-aging Investment advisory accounts. Asof the end of the trscal year, the staff wasanatyzmq the comments received on thrsproposal.

Investment Adviser Record-Keeping Requirements

In order to strengthen the protectionsafforded by the Advisers Act to invest-ment advisory clients, one amendment tothe record keeping rule was made andanother proposed. Rule 204-2 requiresInvestment advisers to maintain suchbooks and records as the Comrnrssronmay presence as necessary or appropriateIn the public Interest or for the protectionof Investors The record keeping require-ments of Rule 204-2 serve as an Importantsafeguard against fraudulent securitiestrading practices. Rule 204-2(a)(12) re-quires Investment advisers to maintainrecords of secu ntres transactions for cer-tain persons connected With the invest-ment adviser. In furtherance of thrspurpose, on February 21, 1975, the rulewas amended '. to Include a requirementfor the maintenance of such records foraffiliated persons of controlling personsof Investment advisers and affiliatedpersons of such affiliated persons Inaddition, the rule was amended to providefor a slrrular recordkeeping requirementfor Investment advisers primarily engagedIn non-advisory businesses

Rule 204-2(e) requires that books andrecords be maintained and preserved "Inan easily accessible place" and thatpartnership articles and corporate booksand records be maintained at the invest-ment adviser's principal office. The Com-mrssron expressed doubt as to whethercertain places outside of the territorialUnited States are "easily accessible,"and, In order to tacuitate the inspectionof books and records as contemplatedby Section 204, on May 30, 1975, theCommission announced that It was con-sidering the adoption of new paragraph(J) under Rule 204-2 under the AdvisersAct 10 The proposed rule would require anon-resident Investment adviser (1) tomaintain and preserve copies of the re-qurred books and records at a placewithin the United States and to file withthe Commission a written notice specify-Ing such place, or (2) In lieu thereof, tofile with the Commission an undertakingto furnish copies of such books andrecords upon demand by the Commission.The proposed rule IS substantially similarto Rule 17a-7 under the Securities Ex-change Act of 1934

Regulatory Safeguards-- TheNASD Maximum Sales Load Rule

The 1970 Amendments to Section 22(b)of the Investment Company Act of 1940gave the NASD the authonty, with Com-rmssron oversight, to promulgate and en-force rules preventing sales chargeswhich are "excessive." Under the statute,such sales charges must allow for "rea-sonable" compensation for sales person-nel, broker-dealers, and underwriters andfor "reasonable" sales loads to Investors.In 1972 the NASD submitted ItS proposed"full service" maximum sales load rule tothe Commission As proposed, the rule,which IS designed to prevent excessivesales loads, taking Into account all rele-vant circumstances, permits mutual fundsor single payment contractual plans tocharge a maximum sales load of 8.50%(declining to 6.25% for larger purchases),but conditions the nght to charge themaximum on the fund's offering (1) drvr-dend reinvestment at net asset value, (2)

rights of accumulatron, and (3) volumediscounts, as defined In the rule. A spe-cific reduction from the maximum ISassociated with the failure to provide

. each of the services. The proposed rulealso provides maximum sales loads rang-Ing from 8.50% down to 650% on sinqte-payment variable annurtres, and a maximumof 8 50% of total payments as of a datenot later than the twelfth year after pur-chase for multiple payment variableannuity contracts

The rule was adopted by the NASD'sBoard of Governors on January 28, 1975,and subsequently approved by the NASDmembership, and was submitted to theCommission for approval under Section15A(J) of the Securities Exchange Act of1934 on April 28, 1975. Subsequent tothat date, the Securities Act Amendmentsof 1975 substituted the procedure providedby Section 15A(J) with a new procedurefor Commission approval of rules promul-gated by self-regulatory organizationsunder Section 19(b) of the 1934 Act.Therefore, at year end, the staff hadrequested that the NASD reflle the pro-posed rule In accordance with the newprocedure Shortly thereafter It waspublished for comrnent.u

APPLICATIONS

One of the Commission's principalactrvrties In the regulation of Investmentcompanies and Investment advisers ISthe consrderanon of applications forexemptions from various provisions ofthe Investment Company and InvestmentAdvisers Acts or for certain other reliefunder these Acts. Applicants may alsoseek determinations of the status of per-sons or companies DUring the fiscal year,241 applrcatrons were filed under bothActs, and final action was taken on 241applications. As of the end of the year,178 apptrcanons were pending underboth Acts Of the totals descnbed, thepredominant number were appucanonstrled under the Investment Company ActWith respect to the Advisers Act, two ap-plications were filed, final action wastaken on three and three were pending atthe end of the year.

131

Under Section 6(c) of the InvestmentCompany Act, the Commission, by orderupon application, may exempt any per-son, security or transaction from anyprovrsron of the Act, If and to the extentsuch exemption is necessary or appro-priate In the public Interest and consistentwith the protection of Investors and thepurposes fairly Intended by the policyand provrsrons of the Act. Under Section206A of the Advisers Act, the Commissionhas Identical authority with regard toprovrsrons of that Act. Under Section 17of the Investment Company Act, affiliatesof a registered Investment company can-not participate In a JOint arrangementwith the registered company and cannotsell to or purchase from the registeredcompany unless they first obtain an orderfrom the Commission Many of the ap-plrcattons filed with the Commission relateto these sections.

Among the appucatrons disposed ofduring the fiscal year, the tollowinq wereof particular Interest.

The Commission Issued an opinion andorder under the Investment Company Actallowinq the proposed merger of ChristianaSecurities Company and E I du Pont deNemours and Company (Du Pont).12 Aspreviously reported, Christiana, a closed-end Investment company with assets Inexcess of $2.2 billion and the owner of 28per cent of Du Pont's common stock had,together with Du Pont, filed an applica-tion with respect to the merger proposalsince the affiliations of the parties wouldpreclude such a transaction withoutCommission approval. The Commissionorder, which was issued after an adrrurus-trative hearing before a Judge and anoral argument before the CommissionIn which certain objecting Du Pont share-holders participated, permits the ISSU-ance of Du Pont common stock to theChristiana common shareholders at 97 5per cent of the net asset value of theChristiana common stock, with Du Pontthe survrvinq corporation.

The Commission's oprruon In the matternoted that "The Act's requrrernent thatthe transaction be reasonable, fair, andfree from overreaching, does not meanthat the benefits to the parties must benicely balanced Such a reading would

132

be wholly Impractical and would frustratelegitimate arrangements." 13 As of theend of the fiscal year, the merger wasnot yet consummated since the objectingDu Pont shareholders who had partici-pated In the Commission proceeding havefiled an appeal of the Commission deer-sion which is pending before the UnitedStates Court of Appeals for the Eighthcircurt.«

In the past fiscal year, the complex ofeleven Investment companies, whichwere advised, distributed and managedby Wellington Management Company andwhich have Identical boards of directors,proposed to internalize their corporateadministrative functions by capitalizingand operating a service company to beknown as The Vanguard Group, Inc.("Vanguard"). No officer or employee ofVanguard could own any secunties orhave any Interests In any external invest-ment adviser or distributor. By organizingsuch a wholly-owned, Independent com-pany, the funds, headed by WellingtonFund, Inc., hoped to Increase their abilityto evaluate the performance of their ad-vrser, distributor and administrative ser-vice agents. In addrtron, each fund hopedto decrease ItS expenses, and pursuantto a new advisory contract With WellingtonManagement Company reflecting theproposed change In responsibilitieswhereby Wellington Management Com-pany would serve solely as adviser anddistributor of the funds, the funds ex-pected to realize a reduction of $300,000to $500,000 In their aggregate expensesfor the year.

Because of the attilratrons among theeleven funds, an applicanon was filed byVanguard and Wellington ManagementCompany seeking a Commission orderpursuant to Section 17(b) of the Act andRule 17d-1 permitting the consummationof such transactions The Commissionthereafter Issued such an order.!" OnMay 1, 1975, after obtaining the approvalof the shareholders of each fund, nowcollectrvely known as the Vanguard Funds,Vanguard began ItS operations.

Subsequent to the Cornrnisston an-nouncement of ItS program to revise thelaws and regulations affecting mutualfund drstnbutron, an applicatron was filed

by Putnam Investors Fund, Inc., and Itspnncipal underwnter and by two Unit in-vestment trusts and Merrill Lynch, Pierce,Fenner & Smith, Inc., their sponsor andprrncrpal underwnter. The applicantssought an order exempting them fromSection 22(d) of the Act which prohibitsan Investment company and Its principalunderwnter from seiling Its secuntres tothe publiC except at the current publicoffering pnce, Applicants proposed tooffer, on a combmatron baSIS, units ofthe bond funds along With shares ofPutnam Investors Fund, Inc. The salescharges for such combined unit repre-sented a reduction from the sales chargeapplicable to the securities when offeredseparately. The Commission granted suchexemptton.is since the reduced chargeseemed to reflect reduced costs of drstn-bution, and the standards of Section 6(c)of the Act were satisfied. At the close ofthe fiscal year, a Similar applrcatron waspending.

OTHER DEVELOPMENTS"Money Market" Funds

A recent mnovatron In the Investmentcompany Industry IS the so-called "moneymarket" fund, an Investment companywhose poucy IS to Invest prtrnanly Inshort term debt securities (e.g., Treasurybills, commercial paper, certificates ofdeposit). Such funds seek to allow inves-tors to take advantage of higher shortterm rates earned on large Investmentsby pooling their capital to permit thepurchase of larger denomination instru-ments than could normally be bought bythe average small Investor. These fundshave also attracted Significant invest-ments from corporations and non-profitinstitutions.

Money market funds have been one ofthe fastest growing segments of themutual fund Industry. At June 30, 1974,only 10 money market funds, With totalassets of approximately $454 million, hadeffective reqrstratron statements By June3D, 1975, the number of money marketfunds With effective registration state-ments had grown to 38 As of that datetotal money market fund assets had

climbed to almost $3.8 billion whichamounted to approximately 7% of theassets of the mutual fund Industry

Money market funds, because of theirshort term nature and the secuntres Inwhich they Invest, pose unique regulatoryquestions. For example, these funds aresold generally on the baSIS of "Yield", butsince they have not adhered to a uniformmethod of valumq their assets or calculat-Ing their yields, It IS difficult to makeaccurate Yield comparisons among them.In connection With this problem, theOornrnissron published for comment twoproposed guidelines 17 deSigned to stan-dardize valuation of short-term debtsecurities and money market fund yieldquotations. At year end, comments onthese proposals were stili being received.

Sale of Participations inCertificates of Deposit

A number of inquiries were receiveddunng the year concerning the status ofpublicly solicrted partrcrpatrons In largedenomination certificates of deposit andIn other money market Instruments whichoffered relatively high Interest rates Thestaff took the position that the offer andsale to the public of partrcrpatrons In suchcertificates Involves the offer and sale ofa separate secunty and that the Issuer ofsuch securities may be an Investmentcompany which must register under theAct, unless some specrtic exception orexemption ISavailable.

Assignments of InvestmentAdvisory Contracts

Among the 1975 amendments, Section15(f) of the Investment Company Act 18

permits an Investment adviser, or anaffiliated person of an adviser, to obtaina profit In connection With a transactionwhich results In an assignment of theadvisory contract If certain conditionsare met. These conditions are desiqnedto prevent an Investment adviser or anaffiliate from receiving any payment orother benefit In connection With the saleof Its busmess which Includes any amountreflecting ItS assurance that the Invest-

13a

ment advisory contract will be continuedSpecifically, It IS required that for the

succeeding three years at least 75% of theboard of directors of the Investment com-pany not be comprised of "interestedpersons" of the Investment adviser or ItSpredecessor and that the transactiondoes not Impose an unfair burden on theInvestment company, such as an arrange-ment whereby an adviser or an Interestedperson of an adviser IS entitled to receivecompensation from the company for bro-kerage, other than bona fide compensa-tion as pnncrpal underwriter, or for otherthan bona fide advisory or other services

Registration of foreigninvestment companies

Foreign Investment companies, whichgenerally are prohibited from seiling theirsecuntres In this country, offer an oppor-tunity for Investing In drversmed pools ofsecurities Issued by companies In foreigncountries On December 2, 1974, theCornrrusston Issued a release I" preparedby the Drvisron of Investment Manage-ment Regulation requesting public com-ments on whether foreign Investmentcompanies should be permitted to registerunder the Investment Company Act andallowed to sell their shares in this countryand, If so, under what conditions. TheIssues raised In this release were consis-tent With a recent recommendation of theOrqaruzatron for Economic Co-operationand Development supported by represen-tatives of the Cornrnrsston, that membercountries review their requtation of invest-ment companies and when decrdrnqwhether to permit a foreign Investmentcompany to operate In their country, givesubstantial weight to whether such com-pany IS dorrucrled In a country whichcomplies With the OECD's rules on opera-non of Investment companies The Com-mrssion also sought comments on relatedIssues, including whether such companiescould be allowed to register and sellshares In this country Without sacnncmqthe high level of Investor protectionembodied In the Act In response to therelease, the DIVISion received approxr-mately fifty comments, including comments

134

from domestic and foreign Investmentcompanies, representatives of the UnitedStates and foreign government agencies,and United States Investors. The DIVISionhas reviewed these comments and Intendsto recommend to the Commission defini-tive action on this Issue In the next fiscalyear.

NASD Anti-Reciprocal Rule

Recrprocal sales practices, allocationsof portfolio brokerage busmess by mutualfunds to broker-dealers as a reward fortheir sales of fund shares, have been asubject of Cornrmsston concern for morethan ten years. The reciprocal use ofportfolio brokerage has been Viewed bythe Cornmrssron as creating hidden in-fluences behind recommendations tocustomers by retail sellers of fund shares,rnducmq Improper portfolio managementpractices and creating undesirable anti-competitive effects.2u In ItS Statement onthe Future Structure of the SecurtttesMarkets the Oornrnrssron announced thatreciprocal sales practices must be termi-nated, and, effective July 15, 1973, theNational ASSOCiation of Securities Dealers,Inc. ("NASD") adopted a rule prohibitingthese arranqements.>'

During the prior fiscal year, the Com-mission announced that public hearingswould be held to consider suggestedinterpretatrons of and amendments to theNASD Anti-Reciprocal Rule.22 Prior to thehearings, 42 letters of comment werereceived, and at the hearings held onSeptember 10-12, 1974, 14 witnessesappeared Subsequently, representativesof the NASD indicated that the NASDwould submit a revised proposal to meetsome of the objections raised by theCommission staff.

Under the proposal as revised, abroker-dealer would be prohibited fromdemanding or requinnq any brokeragecommissions or soucrtinq a promise ofsuch ccrnrnrssrons as a condition to thesale of fund shares A pnncipal under-writer would be prohibited from offeringor promising any cornmrssrons to a broker-dealer for the sale of fund shares, butwould be permitted to request or arrange

for some (but not a specrfrc amount orpercentage of) brokerage to be paid to abroker-dealer for the sale of fund shares.The revrsions would specifically allow anNASD member to sell fund shares or actas a principal underwriter for an invest-ment company which follows a policy,described In ItS prospectus, of consider-Ing sales of ItS shares as a factor In theselection of broker-dealers to execute Itsportfolio transactions, when such broker-dealers are qualified to provide bestexecution, provided that the membercompiles with the specific provrsions ofthe Rule and any published interpretationof it. At the end of the fiscal year, the staffwas In the process of reviewing the NASDproposal.

Two-Tier Real Estate Companies

A two-tier real estate company IS acompany which Invests In companieswhich In turn Invest In real estate Thequestion of the applicability of the Invest-ment Company Act to such companieshas arisen most often In connection withlimited partnerships which Invest, aslimited partners, In limited partnershipsengaged In the real estate businessUnder Section 3(a) of the InvestmentCompany Act, an Issuer IS an Investmentcompany If it IS, or holds Itself out asbeing, engaged primarily in the businessof investing, reinvesting or trading insecurities or If It IS engaged or proposesto engage In the business of Investing,reinvesting, owning, holding or trading Insecuntres, and owns or proposes to ac-quire Investment secunties having a valueexceeding 40% of the value of such Issuer'stotal assets (exclusive of governmentsecunties and cash Items) on an uncon-solidated basts. Generally, an Issuer thatInvests In real estate can rely upon Sec-tion 3(c)(5) of the Act which excludesfrom the denrutron of Investment companypersons purchasing or otherwise acquirrngmortgages and other 'lens on and InterestsIn real estate.

In August 1974, a release was Issued 23

setting forth the positron of the DIvisionwith respect to the status under the In-vestment Company Act of two-tier real

estate companies The staff believes thatno action by the Commission IS warrantedIf a two-tier real estate limited partnershipdoes not register under the InvestmentCompany Act, In reliance upon an opinionof counsel, If certain cntena are satisfied.These cntena relate to the primary bust-ness of the limited partnership, the natureof the limited partnership's Investments,the rrghts of the limited partners In thepartnership and the duties of the generalpartner to the partnership

The staff further believes that certaintwo-tier real estate limited partnershipswhich do not qualify for the above "no-actron" positron may nevertheless, uponapplication to the Commission, be ex-empted from reqrstratron under the Invest-ment Company Act, pursuant to Section3(b)(2) or Section 6(c) of the Act, If (1)the partnership IS, In fact, engaged In thereal estate business through control ofthe underlying partnerships or (2) If thepartnership Invests In limited partnershipsengaged In the development and burldrnqof housrnq for low and moderate Incomepersons and certain requirements regard-Ing Investor surtabrlrty and fair dealingby the general partner are satisfied

Variable Annuity Illustrations

The Commission adopted an amend-ment to the Statement of Policy under theSecurities Act of 1933,24 which permitsInvestment companies ISSUing variableannuity contracts to employ standardizedIllustrations based upon hypothetical In-vestment results in sales literature andprospectuses. The amendment sets forthstandards for permissible illustrationsincluding (1) a presentation of effectiverates of return which should permit anevaluation of aggregate costs (includinghidden charges), and (2) uniformity ofpresentation to enable the Investor tomake accurate comparisons betweenissuers of such contracts Thus the Illus-trations serve as a valuable disclosuredevice provrdrnq meaningful cost infor-mation to Investors about a contractwhich IS currently little understood Theycould foster greater cornpetrtron, whichshould encourage a more rational pricing

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system than presently exrsts In the saleof variable annuity contracts.

Shortly thereafter, the Commissionpublished for comment proposed amend-ments under the Securities Act of 19332;

which would require prospectuses ofvariable annuity separate accounts toInclude Illustrations which are In accor-dance With the Statement of Poucy asamended. At year end, comments on thrsproposal were being consrdered by thestaff

Employee Retirement IncomeSecurity Act

In connection With the Implementationof the trducrary and disclosure provrsionsof the Employee Retirement IncomeSecurity Act of 1974,20 the Commissionoffered the technical assistance of ItSstaff to the Department of Labor ("Labor")and the Internal Revenue Service ("IRS")The Drvrsron was appointed as the Com-rmsston's liaison with Labor and IRS. Thisbecame an Important function, when Inearly 1975, the Commission was con-cerned that the Immediate effectivenessof certain sections of the Act proscribingcertain types of transactions would ad-versely affect the nation's securitiesmarkets. The staff of the DIVision offereddrafting and interpretive assistance withrespect to these provisions of ERISA inconnection with the various applicationsfor exemption filed by members of thesecurities industry In order to avoid suchadverse Impact.

Securities Depository System

DUring the past fiscal year, the DIVISionstudied the Impact of partrcrpatron In asecuntres depository by registered man-agement companies either directly orthrough their custodians Section 17(f) ofthe Investment Company Act defines"secuntres deposrtory" as "a system forthe central handling of securities estab-lished by a national secunties exchangeor national secunnes associatron regis-tered With the Commission" pursuant towhich securities are treated as fungibleand may be transferred or pledged by

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bookkeeping entry without physical de-livery of such securities. The Drvlsron'sstudy has Included VISitS to banks andsecurities deposrtones, and the DIVISionIS presently Involved In formulating aquestionnaire which will be sent to inter-ested persons In order to gain additionalmtormatron concerning whether rules maybe necessary or appropriate In order toInsure adequate Investor protection Aletter issued by the DIVISion took thePOSition that the Act did not precludepartrcipatron In a depository by an invest-ment company

NOTES TO PART 5

I Investment Company Act Release No8542 (October 11, 1974), 5 SEC Docket300.

2 Investment Company Act Release No.8494 (September 13,1974),5 SEC Docket140

I Investment Company Act Release No.8251 (February 26, 1974), 3 SEC Docket631

443 U.S C. 1601, et seq.'i For a description of Rule 6c-2(T) and

Rule 6c-2 as Originally proposed, see40th Annual Report, p 106.

o Investment Company Act Release No.8902 (August 22,1974), 7 SEC Docket 733.

7 Investment Company Act Release No8514 (September 24, 1974),5 SEC Docket184.

H Inv. Adv Act ReI. No 442 (March 5,1975),6 SEC Docket 414

q Inv. Adv Act ReI. No. 436 (February21, 1975), 6 SEC Docket 327

III Inv. Adv. Act Rei No. 460 (May 30,1975),7 SEC Docket 128

II Securities Exchange Act ReI. No.11593, Investment Company Act ReI. No.8893 (August 14, 1975), 7 SEC Docket570.

iz Investment Company Act ReleaseNo 8615 (December 13, 1974), 5 SECDocket 745

1'1 5 SEC Docket at 750.14 Collms v. SEC No 75-1100; Murtaugh

v. SEC Nos. 75-1262, 75-1263.I; Investment Company Act Release No.

8676 (February 18, 1975), 6 SEC Docket325.

I" Investment Company Act Release No.8741 (April 3, 1975), 6 SEC Docket 582.

17 Investment Company Act Rei No8757, (April 15, 1975), 6 SEC Docket 703and Investment Company Act Rei No.8816. (June 12, 1975), 7 SEC Docket 141

18 Securities Acts Admendments of1975, Section 28(1).

I" Investment Company Act Release No.

8596 (December 2, 1974), 5 SEC Docket640.

20 SEC, Public Policy Implications ofInvestment Company Growth, H Rep. No2337, 89th Cong., 2d Sess., at 172-182(1966)

21 Article III, Section 26(k) of the NASDRules of Fair Practice.

22 Investment Company Act Release No.8393, Secuntres Exchange Act ReI. No

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10867 (June 20, 1974),4 SEC Docket 47423 Investment Company Act Release No.

8456 (August 9, 1974),4 SEC Docket 72124 Investment Company Act Rei No.

8772 (Apn128, 1975). 6 SEC Docket 761.25 Investment Company Act ReI. No.

8784 (May 9, 1975). 6 SEC Docket 832.26 Pub. L. No 93-406 (September 2,

1974) (codified In 29 U.S.C 1001 et seqand In scattered sections of 26 U S.C.).

PART 6PUBLIC UTiliTY

HOLDING COMPANIES

PART 6PUBLIC UTILITY

HOLDING COMPANIES

Under the Public Utility Holding Com-pany Act of 1935, the Commission regu-lates Interstate public utility holdingcompany systems engaged In the electricutility business and/or retail distributionof gas. The Commission's junsdrcnonalso covers natural gas pipeline com-panies and other non-utility companieswhich are subsidiary companies of regis-tered holding companies. There are threeprincipal areas of regulation under theAct. (1) the physical integration of publicutility companies and tunctronally relatedproperties of holding company systems,and the simplification of Intercorporaterelationships and financial structures ofsuch systems, (2) the financing operationsof registered holding companies and theirsubsidiary companies, the acquisruonand drsposrtron of securitres and proper-ties and certain accounting practices,servicmp arrangements, and Intercompanytransactions, (3) exemptive provrsronsrelating to the status under the Act ofpersons and companies, and provrsionsregulating the right of persons affiliatedwith a publrc-utrlity company to becomeaffiliated with another such companythrough acqursitron of secuntres.

COMPOSITION

At the end of calendar 1974, there were22 holding companies registered underthe Act. There were 20 registered holdingcompanies within the 17 "active" regis-tered holding-company systems I The

remaining two registered holding com-panies, which are relatively small, are notIncluded among the "active" systems.' Inthe 17 active systems, there were 71electric and/or gas utility Subsidiaries,68 non-utility Subsidiaries, and 16 inactivecompanies, or a total of 175 system com-holding companies. Table 30 in Part 9lists the active systems and their aggre-gate assets.

PROCEEDINGS

New England Electric System. I Thecourt of appeals affirmed the Cornrrus-sron's approval of the sale by NewEngland Electnc System ("NEES") ofLawrence Gas Company to Bay StateGas Company and ItS denial of a requestfor hearing by the Associatron of Massa-chusetts Consumers, Inc ("Association")'The Association has flied a petition for aWrit of certioran

In a related proceeding, the Commis-sion sought enforcement of ItS order ap-proving a plan for the retirement of theminority stock Interest In Lawrence GasCompany in the United States DistrictCourt for the District of Massachusetts.'On September 15, 1975, the court enteredan order enforcing the Commission'sorder

In a separate proceeding," the Commis-sion denied the JOint applicatton of NEES,Eastern Utilities Associates, also a reqis-tered holding company, and BostonEdison Company, an operating electrrc

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utility not subject to the Act, for authorityto form a new holding company 'J

Union Electflc Company. III The court ofappeals affirmed without opinion II theCommission's order granting Union Elec-tnc Company, an exempt holding com-pany, permission to acquire the commonstock of MIssouri Utilities Company.t> Atthat time the Commission declined toorder divestiture of the gas properties ofboth companies, taking note of the adversedevelopments In gas supply, and reservedjunsdrction to reexamine the retarnabilrtyof the gas properties

Amencen Etectrtc Power Company,tnc.' I The Commission heard oral argu-ment on the application of AmericanElectric Power, a registered holding com-pany, to acquire by a tender offer thestock of Columbus and Southern OhioElectric Company, a non associate electricutility company. In light of problems en-countered by the electric utility Industrysince the record In this proceeding wasclosed In January 1972, the Commission,by supplemental order.':' has requestedthat all parties In Interest submit briefs Inresponse to questions specified In thatorder.

Northeast Utilities. Northeast Utilities("Northeast") and ItS Connecticut sub-sidiaries, The Connecticut light & PowerCompany ("CL&P") and The HartfordElectric light Company ("HELCO") havefiled a JOint application under Section11(e) of the Act pursuant to which theypropose to sell all of the gas propertiesowned by CL&P and HELCO, togetherWith those of The Connecticut Gas Com-pany, a subsidiary of CL&P, to theConnecticut Natural Gas Corporation("CNG"), a nonaffiliated gas utility com-pany, and to the Town of Wallingford,Connecticut l'i The proposed sale IS in-tended to bring Northeast Into complianceWith the integration provrsions of section11(b)(1)

In Northeast's Judgment, CNG and theTown of Wallingford were the highestbidders for the gas properties, havingoffered about 120-125% of the net bookvalue of the properties as of December31, 1972, subject to adjustment. After theclose of the fiscal year, a hearing was

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held and several parties appeared In op-POSition to the plan alleging, among otherthings, that Northeast did not maintaincompetitive conditions In soliciting bidsand that the sale IS not In the Interest ofconsumers. The matter IS pending

Empire State Power Resources, Inc.Consolidated Edison Company of NewYork, Inc., Long Island lighting Company,New York State Electric and Gas Cor-poratron, Niagara Mohawk Power Cor-poration and Rochester Gas and ElectricCorporation, five of the seven sponsorsof Empire State Power Resources, Inc.("ESPRI") have filed a JOint applicatronfor the acquisrtron of their stock interestIn ESPRI under Section 10 of the Actand for exemptions as holding companiespursuant to Section 3(a).16

ESPRI will be JOintly owned by ItSsponsors It will construct and own gen-erating tacilrtres throughout New YorkState to supply energy to its sponsors.It IS proposed that ESPRI will construct13 nuclear and 3 coal-fired baseload UnitsWith a rated capacity of 18,600 MW.Construction costs dunnq the period1980-1991 are estimated to be In excessof $20 billion No action had been takenWith respect to the application and nohearing had been scheduled at the closeof the fiscal year.

General Public Uttl) ties Corporation."The Commission permitted MetropolitanEdison Company ("Met Ed"), a subsidiaryof General Public Utilities Corporation, tomake certain amendments to ItS firstmortgage bond Indenture and authorizedthe sotrcitanon of proxies for bondholderconsent to the amendments lR TheCommission rejected arguments raised bya Met-Ed bondholder, Walplan and Com-pany, who opposed the proposal andsolrcttatron

In a related case.w the court of appealsaffirmed the district court order dismiss-Ing a SUit for an Injunction brought byWalplan of Met Ed alleging that the proxystatement was false and misleading 20

Americen Natural Gas Company. TheComrrusston authorized American NaturalGas Company ("American Natural"), aregistered holding company incorporatedunder Delaware law, to distribute to ItS

stockholders all of the stock of WisconsinGas Company ("WIsconsin") 21 The dis-tribution left American Natural with onegas utility subsrdrary, Michigan Consoli-dated Gas Company, a Michigancorporation.

The same order also granted AmericanNatural an exernption under Section3(a)(1) of the Act to be effective upondtstrtbution of the Wisconsin stock andremcorporanon of American Natural un-der MIchigan law. The order of exernpnonbecame effective on June 30, 1975.

Utah Power and Light Company 22 TheCornrnrsston approved the plan of UtahPower and light Company ("Utah"), filedunder Section 11(e) of the Act, whichprovided for the sale by Utah of the utilityassets of The Western Colorado PowerCompany, its only electnc utrlrty sub-srdrary 2 I When Utah completed the sale,the Commission Issued a supplementalorder declaring that Utah ceased to bea holding company and that ItS reqistra-non as such was terminated 24

John H Ware--Penn Fuel Gas, Inc 2;After representatives of minority stock-holders of North Penn Gas Company("North Penn") objected to the plan filedby Penn Fuel Gas, Inc ("Penn Fuel").pursuant to Section 11(e) of the Act, anew plan was negotiated and filed 2h Theobject of the plan IS the retirement of theminority stock of North Penn Ware IS thecontrolling stockholder of North Penn andPenn Fuel

Under the plan, a new holding company,Penn Fuel System. Inc., ("System"), hasbeen organized to carry out the planSystem proposes to acquire about 243,000shares of North Penn common stock at$1850 per share, payable $310 in cashand the balance of $1540 In 10% serialInstallment notes on wtncn the final pay-ment Will be due on December 31. 1979.System also WIll Issue ItS common stockto Ware and members of ms family Inexchange for about 207,000 shares ofNorth Penn common stock and up to 93%of the outstanding common stock ofPenn Fuel owned by them System re-quests an exernptron pursuant to Section3(a)(1) of the Act.

A hearing was held, and the matter

was pending at the close of the fiscalyear

FINANCINGVolume

DUring fiscal 1975, a total of 15 activeregistered holding company systems IS-sued and sold 56 Issues of long-term debtand capital stock aggregating $279 bil-lion pursuant to authonzatrons by theCommission under Sections 6 and 7 ofthe Act. Table 31 In Part 9 presents theamount and types of secunnes Issuedand sold by these holding companysystems

The dollar volume of these tmancrnqsrepresents an 11 percent Increase overthe previous year Bonds Issued and solddecreased 24 percent, and preferredstock 11 percent However, the amountof common stock and debentures Issuedand sold Increased 148 percent and 78percent, respectively

Financing of Fuel andGas Supplies

Due to curtailments of fuel supplies,etectnc and gas utilities have found Itrncreasmqly necessary to finance sub-stantial portions of their energy require-ments by capital Investment In sourcesof supply and transportation 2. DUringftscal 1975, approval was given to 8 reqis-tered systems to Invest In the aggregateover $500 rrullron In these activrnes.

Competitive Bidding

The Cornrnlssion's Rule 50, adopted in1941, requires competitive bidding Inthe sale of secunues by registered publrcutility holding companies and their sub-srdranes.> A temporary suspension of thecompetitive bidding requirements of Rule50 as applied to common stock of regis-tered holding companies was authorrzedfrom November 7, 1974, to March 31,19752'1 Thrs action was taken because itappeared to the Commission that, undermarket condttions then prevailing, com-petitive bidding might not assure a sut-ncient number of potential purchasers

143

given the volume of common stock Issuesthat utilities were offering for sale. Aheanng also was ordered to developinformation as to whether the suspensionshould be continued beyond March 31,1975.

The Commission did not extend thetemporary suspension beyond March 31,1975, except that contemplated sales ofcommon stock publicly announced byJanuary 31 could be sold without com-petitive bidding no later than April 30,1975 30 Based upon the record developedat the heanng and the expenence withofferings of debt and equity securities ofutility companies, whether sold by ne-gotiation or competitive bidding, theCommission was persuaded that com-mon stocks of registered holding com-panies again could be marketed In themanner required by Rule 50. It also notedthat the exemptive provrsrons of the Ruleprovide sufficient flexibility for Issuerswho encounter difficulties In seiling theircommon stock by competitive bidding

Of the 56 Issues of long-term debt andcapital stock sold by registered systemsreferred to above, 18 were sold by nego-tiation. The negotiated underwrinnqstotaled about $1.2 billion and consistedof one bond offenng,31 3 preferred stock .12and 14 common stock 11 Issues Nineof the common stock offenngs were solddunng the penod of the temporary sus-pension The remaining nine Issues weresold pursuant to exceptions from the Rulegranted by order. Table 32 In Part 9 setsforth statistical data with respect to allof these Issues

NOTES TO PART 6

1Three of the 20 are subhotdmq utilitycompanies In these systems. They areThe Potomac Edison Company andMonongahela Power Company, publicutility subsrdianes of Allegheny PowerSystem, Inc., and Southwestern ElectncPower Company, a public utility sub-srdrary of Central and South West Cor-poranon

2 These holding companies are BntishAmencan Utilities Corporation and Kmzua011 & Gas Corporation

1 Previously reported In 40th AnnualReport, p 115. 39th Annual Report, p. 110.

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4 Holding Company Act Release Nos.18149 (October 31, 1973), 2 SEC Docket680, and 18254 (January 11,1974),3 SECDocket 373.

5 Associetton of Massachusetts Con-sumers, Inc. v. Securiues and ExchangeCommission, 516 F. 2d 711 (C.A. D.C.,1975).

6 No. 75-607 (October 22, 1975).7 CiVil Action No. 74-2466-M.H Previously reported in 38th Annual

Report, p. 108, 37th Annual Report, p. 170;36th Annual Report, p. 160; 35th AnnualReport, p. 149; 34th Annual Report, p. 138.

9 Holding Company Act Release No.18801 (February 4, 1975), 6 SEC Docket225.

10Previously reported In 40th AnnualReport, p. 116; 39th Annual Report, p. 110;38th Annual Report, p. 109; 37th AnnualReport, pp, 172-173.

11 City of Cape Gtrerdeeu v. Securitiesand Exchange Cotnrmsston, No. 74-1590(C A D.C.) (September 22,1975).

12Holding Company Act Release No.18368 (ApnI10,1974), 4 SEC Docket 89.

13Previously reported In 39th AnnualReport, p 110, 38th Annual Report, p.108; 37th Annual Report, p. 170; 36thAnnual Report, p 160; 35th Annual Re-port, p 149; 34th Annual Report, p. 138.

14Holding Company Act Release No19145 (August 27, 1975), 7 SEC Docket731.

15Holding Company Act Release No.18874 (March 19, 1975), 6 SEC Docket484.

16Holding Company Act Release No.18994 (May 19, 1975), 7 SEC Docket 39.Only Rochester Gas and Electnc andNiagara Mohawk require approval underSection 10. All five applicants seek anexemption order.

17Prevrously reported In 40th AnnualReport, p 116.

Ih Holding Company Act Release No.18993 (May 20,1975),7 SEC Docket 32.

19Previously reported In 40th AnnualReport, p. 117.

20 Walplan and Company v. MetropolItanEdIson Company, 506 F. 2d 1053 (C.A. 3,1974)

21Holding Company Act Release No.19038 (June 12,1975),7 SEC Docket 164.

22Previously reported 40th Annual Re-port, p. 116.

23Holding Company Act Release No.18794 (January 31, 1975), 6 SEC Docket217.

24Holding Company Act Release No.19155 (September 3, 1975), 7 SEC Docket793.

2'\ Previously reported In 40th AnnualReport, p. 117.

26 Holding Company Act Release No18879 (March 19,1975),6 SEC Docket 488.

27 See, e.g., Public Servtce Company ofOklahoma, Holding Company Act ReleaseNo. 19090 (July 17, 1975), 7 SEC Docket413; lndtene & MIchIgan Electric Com-pany, Holding Company Act Release No.19064 (June 26, 1975), 7 SEC Docket 346;otuo Power Company, Holding CompanyAct Release No. 19036 (June 12, 1975),7 SEC Docket 163; AppalachIan PowerCompany, Holding Company Act ReleaseNo 18971 (May 7, 1975), 6 SEC Docket868, and No. 18363 (April 3, 1974),4 SECDocket 50; MIddle South Uttlmes, Inc.,Holding Company Act Release No 18966(May 2, 1975), 6 SEC Docket 806, No.18785 (January 23, 1975), 6 SEC Docket172, and No. 18221 (December 17, 1973),3 SEC Docket 258; Transok PIpe LineCompany, Holding Company Act ReleaseNo. 18933 (April 14, 1975), 6 SEC Docket691 Columbte Gas System, Inc., Hold-Ing Company Act Release No 18749(December 31, 1974), 6 SEC Docket 22

The need for Commission approval ofsuch non utilrty businesses has been wellestablished. See, e.g., Columbte Gas &Electnc Corporatron 17 S E.C. 494 (1944);AppalachIan Electrtc Power Company,

27 SEC 1029 (1948); General PubttcUuttues Oorporeuon, 32 S.E C. 807 (1951),cotumtue Hydrocarbon Corpotetton, 38S E.C 149 (1957), Arkansas Power & LIghtCompany, Holding Company Act ReleaseNo 17400 (December 17, 1971).

2" Holding Company Act Release No.2676 (April 7, 1941). Prevrously reportedIn 40th Annual Report, p. 118, 7th AnnualReport, pp. 98-102

2~ Holding Company Act Release No18646 (November 7, 1974), 5 SEC Docket417.

'w Holding Company Act Release No.18898 (March 28, 1975), 6 SEC Docket564

11 Georgia Power Company.12 Jersey Central Power & Light Com-

pany (2); Ohio Power Company..n Southern Company (2); Northeast

Utilities (2), Utah Power & LIght Company(2); Delmarva Power & LIght Company;Middle South Utilities, Inc., Central andSouth West Corporation; American NaturalGas Company; General Public UtilitiesCorporatron: American Electric PowerCompany, Inc; New England ElectricSystem; Ohio Edison Company.

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PART 7CORPORATE

R NIZATIONS

PART 7CORPORATE

REORGANIZATIONS

The Commission's role under ChapterX of the Bankruptcy Act, which providesa procedure for reorganizing corporationsIn the United States district courts, differsfrom that under the various other statuteswtuch It administers The Commissiondoes not initiate Chapter X proceedingsor hold its own hearings, and It has noauthority to determine any of the IssuesIn such proceedings The Commissionparticipates In proceedings under Chap-ter X to provide Independent, expertassistance to the courts, participants, andInvestors In a hIghly complex area ofcorporate law and finance. It pays specialattention to the interests of public se-cunty holders who may not otherwise berepresented effectIvely.

Where the scheduled indebtedness ofa debtor corporation exceeds $3 rrullron,Section 172 of Chapter X requires thejudge, before approving any plan ofreorganization, to submit it to the Com-rnrssron for its examination and report.If the Indebtedness does not exceed $3million, the Judge may, If he deems Itadvrsaole to do so, submit the plan tothe Cornrmssron before decrdmq whetherto approve It. When the Commission filesa report, copies of summaries must besent to all security holders and creditorswhen they are asked to vote on the planThe Commission has no authority to vetoa plan of reorganization or to requireItS adoption.

The Commission has not considered itnecessary or appropriate to participate Inevery Chapter X case Apart from the ex-

cessive administrative burden, many ofthe cases Involve only trade or bankcreditors and few public Investors. TheCommission seeks to participate prtn-cipally In those proceedings in which asubstantrat public Investor Interest ISInvolved. However, the Commission mayalso participate because an unfair planhas been or IS about to be proposed,public security holders are not representedadequately, the reorganization proceed-Ings are being conducted In Violation ofImportant provisrons of the Act, the factsrndicate that the Cornrrussron can performa useful service, or the Judge requeststhe Commission's participation.

The Oornrmssron in its Chapter X ac-tivrtres has divrded the country Into fivegeographical areas The New York,Chicago, Los Angeles and Seattle regionaloffices of the Commission each haverasponslbttity for one of these areasSupervision and review of the regionaloffices' Chapter X work IS the respon-sibility of the Drvrsron of CorporateRegulation of the Commission, wtuch,through ItS Branch of Reorganization,also serves as a field office for thesoutheastern area of the United States.

CHAPTER X RULES

The Advisory commutee on Rules ofPractrce and Procedure of the JudicialConference of the United States proposednew Chapter X Rules. The Commission,In response to a general lnvitanon forcomment, submitted a comprehensive

149

report generally entreat of many aspectsof the proposed Rules. In the Cornrrus-sron's view the Rules repeatedly abol-rshed, without comment, carefullydevised Congressional safeguards forpublic Investors Also, the Rules do notadequately reflect the differences betweenprocedures needed to bring about thereorganization of an enterpnse underChapter X In order that It may continueas a gOing-concern and proceduresnecessary to accomplish liquidation Inordinary bankruptcy proceedings.

As a result of the Oornrmssron's com-ments, substantial changes were madeand some rules were deleted or re-drafted. Thereafter the Chapter X Rulesand ottrcial forms were submitted to theSupreme Court which by order datedApnl 28, 1975, transmitted the Rules andForms to Congress pursuant to Section2075, Title 28, United States Code

The Cornrrussron continued to disagreeWith a number of proposed rules andsubmitted a memorandum to Congressobjecting to four proposed rules. Theyare: Rule 1~01 dealing With stay ofactions against debtors and lien enforce-ment; Rules 10-117 and 10-308(a), deal-Ing With the transfer of a Chapter Xproceeding to Chapter XI and conversely,and Rule 10-215(c)(4), dealing With se-cunty transactrons by nducranes TheCornrrusston opposed these rules becausethey made substantial changes In exrst-Ing law With little or no explanation andIf adopted, would Impair the effectiveadrnrrustratron of Chapter X. The Rulesbecame effective Without amendment onAugust 1, 1975.

SUMMARY OF ACTIVITIES

In fiscal year 1975, the Commrsstcnentered 14 new Chapter X proceedingsmvolvrnq companies With aggregatestated assets of approximately $657 mil-lion and aggregate Indebtedness of ap-proximately $686 million. Including thenew proceedings, the Comrrussron was aparty 10 a total of 129 reorqaruzatronproceedings dunnq the fiscal year I Thestated assets of the companies InvolvedIn these proceedings totaled approxr-

150

mately $3.8 billion and their indebtednessabout $3.4 billion.

DUring the fiscal year, 9 proceedingswere closed, leavmq 120 In which theCommission was a party at fiscal-yearend

ADMINISTRATIVE MAnERS

In Chapter X proceedings, the Com-mission seeks to protect the proceduraland substantive safeguards affordedparties In such proceedings. The Com-mission also attempts to secure judrcraluniformity In the construction of ChapterX and the procedures thereunder.

Kmg Resources compenv» The Com-mrssron supported the trustee In urgingatnrmatron of the distnct court's rulingwhich rejected a claim by unsecuredsenior creditor banks for post-petrtronInterest from funds which would other-wise have been available to holders ofsubordinated debentures under termsof the subordmatron agreements.

Since the debtor was found Insolvent,the case was governed by the generalrule that Interest on unsecured claimsceases to accrue as of the date the pe-tition IS filed 3 Therefore, to establish thenght of sernor creditors to post-petitionInterest, the subordination agreementmust unambiguously show that the gen-eral rule was Intended to be suspended 4

Since no reference to payment of post-petition Interest was contained In thesubordination agreements, the seniorcreditors presumably have no nght topoet-pennon Interest The matter was stilipending as of the close of the fiscal year

Investors Fundmg Corporetton of NewYork ;-Voluntary Chapter X petitionsfiled by the company and 33 wholly-owned subsrdranes were approved anda trustee was appointed. These debtorswere engaged pnmanly In the busmessof owning, operating, managing, purchas-mq, seiling and leasmq comrnercial andresidentral real estate Consolidated as-sets and liabilities were reported at $380million and $340 million, respectively. Theparent company has outstanding about1 6 rmllron shares of stock held by over5,000 persons and, together With IFC

Collateral Corporation, a Subsidiary, hasoutstanding over $140 million In sub-ordinated debentures held by over 27,000persons.

The Commission objected to thetrustee's relation of a certain law firmas his general counsel on the groundthat It was not disinterested under Sec-tion 158 as required by Section 157, sinceIt was concurrently representing a sepa-rately operated non-banking dlvlsron ofa large bank creditor. Prior to the hearingon drsrnterestedness held under Section161, the law firm advised the court that Itwould terminate ItS representation of thatdivrsron, and the Comrnrssron WithdrewItS objection.

Calvin cnnsuen Retirement Home, Incand Pralfe, tnc," The court approved anInvoluntary petition for reorganization ofthe debtors. The debtors had sold unreg-istered securities In the form of promis-sory notes and passbook deposits toover 800 persons, on which the debtorswere allegedly In default

The attorney for the petitioning credi-tors was appointed as general counsel forthe trustee. The Commission petitionedfor his disqualification on the ground thathe was not drsmterested by reason of hrsrepresentation of the petition Ing cred itors.The order finding the attorney drsm-terested and appointing him as generalcounsel to the trustee was Withdrawn.However, that same lawyer was retainedas specral counsel to assist the trustee Inperforming duties that would not con-flict with the statutory proscriptions TheOomrrussron did not object to such spe-oral appointment. SUbsequently, a newgeneral counsel to the trustee wasappointed.

Dolly Madison tndustrtes, Inc 7_ Thedebtor's certificate of authorrty to dobusiness In Virginia was revoked by thatstate's corporation commission for failureto file annual reports With the state andfor failure to pay required registratIOnfees. The reorganization court orderedthe state agency to reinstate the debtor'scertificate of authonty, On appeal, thecourt of appeals reversed, holding that,while property of the debtor may havebeen affected by the action of the state

agency, the revocation of the certificatedid not constitute a "claim" -against thedebtor's "property" and the reorganrza-non court lacked summary JUrisdiction toorder ItS reinstatement 6

R. Hoe & Co, Inc 9 Early In these pro-ceedings the trustee renegotiated certainof debtor's contracts for the manufactureand sale of printing presses. The trustee,pursuant to court approval. required pay-ment by the debtor's customers of apremium over the Original contract price.A customer, who had paid the premium,filed a claim for ItS recovery asserting anadmmrstratron claim or, alternatively, ageneral unsecured claim for the rejectionof an executory contract. The reorganiza-tion court disallowed the claim entirelyOn appeal, the court of appeals rejectedthe administration claim and held that thecustomer was entitled to a general un-secured claim In the amount of thepremium It had pard.!v

East Moltne Downs, Inc 11 The plan ofreorganization, which was approved bythe court dUring the pendency of an ap-peal from the court's finding that the pe-tition was filed In "good faith", failed toreceive the reqursite number of accep-tances from unsecured creditors andstockholders. After the hearing requiredby Section 236, the debtor was adjudqeda bankrupt. As a result, the parties con-sented to the dismissal of the pendingappeal as moot. 12

TRUSTEE'S INVESTIGATIONAND STATEMENTS

A complete accounting for the steward-Ship of corporate affairs by the priormanagement IS a reqursite under ChapterX. One of the primary duties of the trusteeis to make a thorough study of the debtorto assure the discovery and collection ofall assets of the estate, rncludmq claimsagainst officers, directors, or controllingpersons who may have mismanaged thedebtor's affairs The staff of the Commis-sion often aids the trustee 10 his investr-gatlon.

Famngton Manufacturing Company, etet, J.l-As a result of facts uncovered dur-Ing the course of rus extensive lnvestrqa-

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non of the debtors, the trustee brought aplenary action In the federal court In NewYork to recover for Famngton Manufac-tunng Company ("Manufactunng") about$800,000 In profits allegedly made by aretired officer and director who soldshares while In possession of matenaladverse mtorrnatron which was not pub-licly disclosed or was disclosed In amisleading manner The court held thatthe complaint stated a cause of actionunder Delaware law for common lawbreach of a director's fiduciary duty to acorporation to refrain from making per-sonal profit through the use of insidecorporate information, but that the trusteehad no standing to sue under Section10(b) of the Securities Exchange Act,since neither he nor the corporation wasa defrauded purchaser or setler.':'

The reorganization judge dismissed thetrustee and directed the successor trusteeto petition the New York court to transferthe case to the Eastern Distnct of Virginia"for hearing and determination." Subse-quently, upon JOint motion of the suc-cessor trustee and the defendant, thecomplaint was dismissed without preju-dice pursuant to Rule 41 of the FederalRules of CIVil Procedure I>

In his report, the trustee concludedthat, inter alia, the offermg circular usedIn connection with the offer and sale of$10,000,000 In Euro-dollar debenturesIssued by Farrington Overseas Corpora-tion ("Overseas"), guaranteed by Manu-facturing, contained false statements ofmatenal facts and failed to disclose othermatenal rntormatron. Based upon themtorrnatron developed dunng the Investi-gation, a debenture holder filed an actionrn the federal court rn New York on be-half of Itself and other ongmal purchasersagamst the accountants, underwriters andofficers and directors of Overseas andManufactunng alleging violations of Sec-tion 17(a) of the Secuntles Act of 1933and Section 10(b) of the Securities Ex-change Act of 1934 and the Commission'srules promulgated thereunder.!" Theplaintiff JOined the trustee as an involun-tary plaintiff pursuant to Rule 19 of theFederal Rules of CIVil Procedure, claim-Ing he was an indispensable party be-

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cause he had all of the documentaryevidence and Overseas had causes ofaction against the defendants based onthe same facts

The reorganization judge ordered thetrustee "to torthwrth pennon the NewYork court for leave to withdraw as partyplaintiff .. In an accompanYing memo-randum, the judge stated that" .. [thetrustee and his counsel) worked up theSUit, developed the evidence and draftedthe complaint and forwarded It to NewYork for fllmg." Upon learnmg of tmsmemorandum opinion and order, thejudge iiI ths New York action requestedthe parties to address themselves to theIssue of vhether It IS a coltusrve action."

The Commission was prepared to argueemtcus curiae that such an action is notcoltusrve merely because the Chapter Xtrustee shares the trurts of his rnvestiqa-non with a party to the reorganizationproceeding. Ttus argument became un-necessary when the judge ruled at theoutset of the hearing that the Euro-dollardebenture holder could remain as a partyplaintiff. The purpose of a trustee's in-vestigation IS to enable him to convey tothe court and all parties In Interest theinformation he has discovered. The Su-preme Court, while holding a Chapter Xtrustee did not have standmg to assert aclaim on behalf of debenture holders,stated that public mvestors "would beable to take advantage of any informationobtained by the trustee In reorganizationas a result of the investigation which thestatute requires that he make." 17 For acourt to hold that a trustee cannot sharefacts uncovered during ms investigationwith a representative of a class thatallegedly has been Injured would erodean Important investor safeguard ofChapter X

Subsequent to the withdrawal of theOverseas' trustee as a party, the drstnctcourt ordered the dismissal of the deben-ture holders' action for lack of subject-matter junsdrction after finding that thepurchase was "predominantly foreign"and that the antifraud provrsrons of theFederal secunties laws were not in-

tended to apply to such a purchase.!" Thecourt further found that the debenture

"

"

holders that commenced the action, aCanadian corporation, was not within thegroup of Intended or lawful offerees sincethe offering circular Involved earned aproviso that the debentures were not tobe sold to United States or Canadiannationals or residents and that thepurchasers had signed a covenant tothat effect

Arlan's Department Store, Inc.19

Prior to the proceeding, f' shareholdercommenced a derivative acnon againstthe company's manaqernent.w About fourmonths after the appointment of theChapter X trustee, the court approved,over the Commission's objection, a$150,000 cash settlement of the lawsurtin exchange for general releases fromthe defendants, because the trusteeneeded the cash to operate the business

The trustee had had little or no time toconduct the required investigation of thedebtor's attarrs or possible causes of ac-tion that existed against former manage-ment. The Commission urged that theinvestigation be made so that the trusteecould present facts from which an in-formed Judgment could be reached on theoverall merits of the settlement. In theCommission's view the cash was notsignificant In light of the debtor's overallneeds to warrant relinquishing possibleclaims.

About six months after the settlementwas approved, the trustee ceased opera-tions and announced his intention topropose a plan of orderly lrqurdatron. Atthe close of the fiscal year, neither a plannor the report of the trustee's investiga-tion had been filed.

PLANS OF REORGANIZATION

Generally, the Cornrrussron files a for-mal advisory report only in a case whichInvolves substantial public Investor in-terest and presents Significant problems.When no such formal report IS filed, theComrnrssron may state ItS views briefly byletter, or autnorrze ItS counsel to makean oral or written presentation DUringthe fiscal year the Commission publishedno formal advisory repo~t, but ItS viewson 12 plans of reorganization were pre-

sented to the courts either orally or bywritten rnernoranda.u

Dolly Madison lruiustnes 22_At theconclusron of plan hearings the courtfound the debtor Insolvent and referredan Internal plan of reorqaruzanon pro-posed by the trustee and a plan of orderlylrqurdanon proposed by a major creditorto the Commission for ItS report. Thetrustee's plan provided for, among otherthings, the Issuance of stock to creditorsand warrants to shareholders Thetrustee's plan appeared teasrble, but theCommission was unable to determinewhether It was "fair and equitable" be-cause of the Inadequacy of the record.In ItS report, the Commission objected tothe proposed Issuance of warrants,23pointed out that the warrants and under-lying secunties, If Issued, would not beexempt from the registration provrsrons ofthe Securities Act, recommended a moreSimplified capital structure for the reor-ganized company than the one pro-posed,24 and urged that provrsions forthe Issuance of non-voting stock whichViolate Section 216(12)(a) be deleted. TheCommission also advised the court thatthe plan of orderly lrqurdatton was pre-mature. At the close of the fiscal year,the court had not rendered a decrsionregarding approval of either plan.

Diverstned Mountaineer Corp, et al.2>Four plans of reorqaruzatron were pro-posed for thrs West VirgInia industrialsavings and loan business which, throughseven offices, had about $30 million In

uninsured deposits and $6.8 rmllron In

subordinated debentures to over 20,000persons.

Three plans were fIled by outsideproponents and provided for either thepurchase of the debtor's assets or anacqursmon of the company which con-templated the connnuatron of the debtor'sbusrness The trustee proposed an in-ternal plan calling for the debtor's re-entry Into the industrial loan busrness butWithout accepting savings deposits. Underthe trustee's plan creditors would receivecash and securities of the reorganizedcompany

The trustee proposed a form of con-solrdatron which treated the parent cor-

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poration separately from Its subsidianes.The subsidranes' assets would be pooledand all creditors of these subsidianesincluding depositors would be treatedas equally entitled to the pooled assetsAs a result, the parent estate was sepa-rately valued with recoqrntron given tothe subsrdranes' claims totaling almost$6 million, which represent advances tothe parent.w The court as urged by theCommission adopted thrs form of con-solidation

Holders of the debtor's common stockwould be excluded from participation un-der all plans In accordance With thecourt's finding of Insolvency, whethertreated separately or combined With ItSsubsrdranes Lrkewise the subordinateddebenture holders, due to their subordi-nation, were accorded no participationas such In the trustee's plan The planprovides that to the extent that debentureholders can establish claims based onalleged Violations of the Federal securrtreslaws, they Will participate on a panty Withdepositors as unsecured creditors

The Commission suggested that thetrustee's proposed claim procedure forsubordinated debenture holders provrd-Ing for a separate determination of eachclaim be consolidated for trral on a classaction basis and that a lead counsel beappointed Shortly thereafter a class ac-tion was filed on behalf of the debentureholders claiming that sales were made InViolation of the antifraud provrsions ofFederal secunties laws

In ItS onqinal memorandum, the Com-rrussron found the three outside planseither unfair and/or unfeasible and con-cluded that the trustee's plan was fair,equitable and teasible but indicated thatthe creditors would receive more In valueIf the estates were liquidated. The bank-ruptcy judge acting as special masteragreed With the Commission and recom-mended that the trustee amend hrs planto provide for the orderly lrqurdatron ofthe estate The estate was valued at about$23 million on a gOing-concern baSIS andabout $32 million under an orderlylrqurdatron.

Thereafter the trustee amended hisplan to provide for the orderly liquidation

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of the estates continuing the form of con-solidatron and treatment of debenturesas previously approved by the court Anoutside proponent amended rns previousplan to provide more consrderatron to thecreditors In light of the $32 million uqurda-non value. The Commission's supple-mental memorandum concluded that theorderly liqurdatron was fair to creditorsbut stili found the creditor's plan to beunfair Amendments necessary to makethe proponent's plan fair havmq not beenmade, the court approved the trustee'splan of orderly liquidation. After the closeof the fiscal year, the court confirmedthe trustee's plan.

North Western Mortgage InvestorsCorp 27_ The debtor was engaged in thebusmess of buyrnq and seiling InterestsIn vanous types of real estate ApprOXI-mately 1,700 publiC Investors purchasedabout $11 million of promissory notes,secured by tractional Interests in realestate mortgages and contracts

The trustee's mvestrqatron disclosedthat the selection of secunty for the par-ticular Investors was made In a fortuitousmanner by the debtor subsequent to pay-ment by the Investor Thus, he concludedthat the actual value of the secunty as-signed to Investors vaned greatly. Thetrustee therefore proposed an Internalplan of reorganization embodying a com-promise among the public creditors.Under the plan each Investor would re-ceive a non-Interest bearing debentureIn the principal amount equal to 50 per-cent of the secunty he holds In addition,the Investor would receive common stockof the reorganized company In exchangefor the remaining portion of hrs claim,including the other 50 percent of the valueof the claimed secunty Unsecured credi-tors would receive the balance of thecommon stock except that up to 50 per-cent of the stock may be retained forIssuance to new management The planexcludes the two present stockholdersfrom participation since the debtor wasInsolvent.

In ItS report the Commission pointedout that while compromises are "a nor-mal part of the process of reorqaruza-non," 2" the court has a duty to scrutinize

the merits of the proposed compromiseand apply Its informed Independent judg-ment.29 Thus, since further hearings onobjection to the compromise were sched-uled which could result In evidence thatwould controvert the trustee's findings,the Commission did not take a positionwith respect to the fairness of the com-promise and urged the court to hear theobjecnons before approving the com-promise.

The plan was defrcient In leaving forfuture determinations the maturity date ofthe debentures and provisrons for pay-ments Into the sinking fund,3o thus pre-venting the Commission from analyzingthe feasibility and fairness of the trustee'splan.

The Commission also objected to thereservation of common stock for compen-sation to new management, noting thatthe Supreme Court has held that becausecertain persons can provide management,Without more, "IS no legal [usntrcanon forthe Issuance of stock to them" under aChapter X reorqaruzation 31The Commis-sion pointed out that stock cornpensanonfor new management IS a matter moreappropriate for consideration by the newboard of directors of the reorganizedcompany.

In accordance With the Oomrrusston'sView, the court IS conducting further hear-rnqs on the fairness of the compromise.As of the end of the fiscal year the courthad not approved the plan.

Air/Industrial Research, Inc.32 Thedebtor sold limited partnersrup Intereststo public Investors to finance real estateacqulsrtrons The properties are encum-bered, generating a negative cash flow,primarily from agricultural leases. Thetrustee's proposed plan of reorqaruzatronsubstantially consolidated the limitedpartnership's assets With those of thedebtor, the general partner,"? and of-fered common stock of the reorganizedcorporation In exchange for the limitedpartners' interests.s- The plan also con-templated the sale of stock to the pubhcto provide a source of capital to enablethe reorganized company to service Itssecured debt and pay 'ItS operating ex-penses for a short time after emerging

from Chapter X. The Commission objectedto approval of the plan and pointed outthe senous teasrbrlrty problems; It tookthe POSition that It was Incumbent on thecourt to disapprove plans of reorganiza-tion that would perpetuate "corporateCripples" ,n It also noted that the saleof stock would not be Within the exemp-tion provided by Section 264a(2) from thereqrstratron provrsrons of the SecuritiesAct, since It was not offered In exchangefor claims against or Interests In thedebtor The trustee requested the courtto defer consrderation of the proposedplan pending the resolutron of theseproblems.

Pan American Ftnancial,lb-The court,as recommended by the Commission, de-ferred approval of the trustee's plan ofreorganization for lack of adequate n-nancral records to support proposals tosell the debtor's subdrvrsron lots. Thetrustee then filed an amended plan pro-Viding for the sale of all unsold lots In alarge Hawauan subdrvrsron. which wereencumbered by first mortgages exceeding$10 rrulllon held by 2,000 publrc investors.

The proponent, a local real estatebroker, was to sell the remaining lots atretail and pay the mortgage principal tothe Investors from the sale proceeds. TheComrmsston advised the court that therewas a question whether there would besuffrcrent funds to complete requiredsubdrvrsron Improvements It characterizedthe broker's proposal as nothing morethan a best efforts marketing programwhich could be abandoned at any timewithout recourse. In the event of default,the plan provided that the lots would bedeeded to the Investor-mortgagee In lieuof foreclosure or, at his option, sold onhIS behalf In either case, an administra-tive surcharge would be assessed

The Commission pointed out that anorderly drsposrtron of the lots through aChapter X plan was better for the Investor-creditors than foreclosures or forced salesIn straight bankruptcy '17 While the Com-rnrssion urged the court not to approvethe amended plan until the Ieasrbrtrtyproblems concerning the marketing pro-posal were resolved, the plan was ap-proved, accepted, and confirmed, but

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not consummated when the purchaserdefaulted on the down payment The agree-ment was terminated and the trusteeproceeded to formulate the alternatedeed-out program In compliance withprovrsions of the Interstate Land SalesFull Disclosure Act !X

Atlanta International Raceway, tnc.vi-«The Court of Appeals for the Fifth Crrcurt,as urged by the Commission, affirmed thedistrict court's order confirming thetrustee's amended plan of reorganiza-tion ~" The district court held that the op-portunity to receive cash In excess of theper share value of the stock as found bythe court provided "more than 'adequateprotection' pursuant to Section 216(8)"for dissenting stockholders

The Supreme Court denied a petitionfor a Writ of certiorari filed by a share-holder who also was a proponent of acompeting plan.:' The petrnoner con-tended that Section 216(8) does not applywhere a debtor has only one class ofstockholders and that class rejects thereorqanrzatron plan. The Cornrrusston,In ItS brief opposing the pennon, notedboth that petitioner did not challenge theadequacy of the cash offer and that pay-ment In cash "IS the perfect realization ofa money chose In action" H It urged thatIn the absence of reported decrsrons in-volvrnq a cram-down to dissenting stock-holders the principle of the parallelprovrsron In Section 216(7), dealing withdissenting creditors, IS equally applicableto shareholders

Continental Vending Machine Corp ~!

The district court approved an amendedplan of reorganization based on sub-stantive consolrdatron of a parent cor-poration and ItS Subsidiary, which pro-vided that no secured creditor's claimshall be Improved as a result of the con-solidation Since the plan treated unse-cured claims as consolidated and securedclaims as unconsolidated, a securedcreditor appealed contending that theplan was not "fair and equitable" Thecourt of appeals, as urged by the Com-mission and the trustee, affirmed the ap-proval order and held that the securedcreditor's right to specific assets pledgedto It In connection With loans to the two

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corporations was preserved and that theBankruptcy Act does not require consoli-dation to be complete for all purposes.«

Lyntex Cotporetion ~'-The trustee filedplans of reorganization contemplating theorderly liquidation of the debtor and ItSSubsidiaries Under the plans, costs andexpenses of administration In the super-seded Chapter XI proceedings were tobe treated subordinate to those IncurredIn the Chapter X proceedings. The Com-rrussron advised the court that the planswould be "fair and equitable" if amendedto accord equal treatment for costs andexpenses of administration of both pro-ceedings. Under Section 328 when a caseIS transferred to Chapter X from ChapterXI, It IS deemed to be a Chapter X pro-ceeding from the inception of the ChapterXI proceeding. In addition, case authoritysupports equal treatment for administra-tion costs of both proceedings ~6 At theclose of the fiscal year, the court had notrendered ItS decrsion regarding approvalof the plans.

ACTIVITIES WITH REGARD TOALLOWANCES

Every reorganization case ultimatelypresents the difficult problem of determin-Ing the compensation to be paid to thevarious parties for services rendered andfor expenses Incurred In the proceeding.The Commission, which under Section242 of the Bankruptcy Act may not re-ceive any allowance for the service Itrenders, has sought to assist the courtsin assuring economy of administrationand In allocating compensation equitablyon the basts of the claimants' contribu-tions to the administration of estatesand the formulation of plans DUring thefiscal year 411 applications for com-pensation totaling about $21.1 rmllionwere reviewed

Famngton Manufacturing Company,et al 4'-Seventeen applicants soughtcompensation and reimbursement of ex-penses aggregating about $1.3 million(including amounts previously paid) forthe period January 1971 through June1973 These requests amounted to about28% of the assets of $4,625,000 In the

'

combined debtor estates. The Commrssronrecommended fees and reimbursementstotaling about $927,000, while the specialmaster recommended about $781,000. InNovember 1974, the drstnct JUdge awardedfees and reimbursements aggregatingabout $670,000 for the entire proceeding,including addrtionat requests aggregatingabout $215,900 for services and expensessubsequent to June 30, 1973. Two appealswere pending at the close of the trscalyear, wrtn the Cornmtssron partrcrpatinqIn both.

Counsel to the trustee requested an al-lowance for services rendered throughJune 1973 of $673,200 (including aninterim payment) and retmbursement ofabout $36,100 In expenses The Com-mISSIon recommended $575,000 compen-sation and the retmbursernent of theirexpenses without regard to additionalservices whrch would be performed. Thespecral master recommended that theirfee for the period be $450,000 plus ex-penses. The drstnct judge awarded$350,000 for all services rendered andexpenses Incurred to November 1974plus $10,000 for services and expensesIn closinq the estate but gave no indica-non how much was being awardedthrough June 1973 and how much wasfor the subsequent period for whrch coun-sel sought a total of about $140,300.

Counsel, supported by the Oomrmssron,appealed from the order 48 which it cal-culated amounted to an award of about$17 per hour The Cornrrussron urged thattrustee's counsel IS a court appointeewrth certain dunes and responsrbtlrnesfor which It IS entitled to "reasonablecompensation" under Section 241 andIS not a volunteer who IS compensatedon the basis of benent to the estate Inthe Oornmrssron's VIew, the drstnct JUdgetarled to balance three factors against theneeds of economy. (1) that compensationshould be reasonable When, as In thesecases, the standard of counsel's per-formance IS not questioned, so thatcompetent counsel WIll be encouragedto participate In increasingly more com-plex reorganizatIon proceedings, (2) thatthe Section 167 rnvestrqafron is one of themost Important steps in a reorqamzanon

and IS one of the protections that ChapterX IS designed to provide for' public in-vestors to which the same court ofappeals addressed Itself over 30 yearsago In Committee v. Kent; 49 and (3) that,as a result of the mvestrqanon, a class ofFarnngton stockholders were accordeda modest partrcrpatron under the planof reorqaruzatton even though the debtorwas Insolvent, and the trustee was in-volved In several lawsuits which, If suc-cessful, would have Increased the estatesand consequently the drstributron tocreditors, including publrc investors.

The other pending matter related to theamount and manner In which fees andexpenses to the Indenture trustee wereawarded Both the Cornmrssron and thespecial master recommended that ItSpre-Chapter X expenses be paid fromproceeds available for drstnbution todebenture holders In accordance WIthterms of the Indenture rather than as acost of adrrurustration. The drstrict JUdgeagreed WIth the manner of payment but,WIthout explanation, reduced the amountby 50%. WIth respect to cornpensatron forservices that were of benefit to the estatedunnq the Chapter X proceeding andexpenses Incurred therewith. both theComrrussron and the special master madeclear that their recomrnendatrons were tobe considered costs of adrmrustratronThe drstnct judge, aqarn WIthout explana-non, directed that tnrs award, like thepre-Chapter X expenses, be borne bythe debenture holders.

The Indenture trustee, supported by theOomrrussron, appealed >II The Oomrms-sron urged that (1) In the absence of afinding that the pre-Chapter X expenseswere not properly Incurred, the Indenturetrustee is entitled to reimbursement Infull under the Indenture, and (2) com-pensanon from the estate to an Indenturetrustee for benetrcral services In con-nection WIth a reorganization proceedingIS appropriate under Sectron 242.;1

Interstate Stores, Inc. ;2_ The inde-pendent trustee sought an interim al-lowance of $24,000 for services rendereddurrnq a 4V2 month penod and theadditronal trustee requested a $25,000Increase In hts annual salary to $100,000

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Since the trustee only spent about 45%of his time on estate matters, the Com-mission recommended an award of$11,500 for the period. It opposed anyIncrease In the additronal trustee's salaryThe special master reported to the dis-trict judge that In his view the applicationsshould be granted In full.

The district Judge In an unreported de-crsron stated that the Commission'srecommendations should be followed Inthe absence of contrary reasons basedon specrtrc ftndmqs.>" Since the specialmaster had not made the necessary find-rnqs, the district judge awarded theamounts suggested by the Commission.

INiERVENTION IN CHAPTER XIChapter XI of the Bankruptcy Act pro-

vides a procedure by which debtors caneffect arrangements with respect to theirunsecured debts under court supervisronWhere a proceeding IS brought underthat Chapter but the facts indicate that Itshould have been brought under ChapterX, Section 328 of Chapter XI and Rule11-15 of the Rules of Bankruptcy Pro-cedure authorize the Commission or anyother party In Interest to make applicationto the court to transfer the Chapter XIproceeding to Chapter X

Under thrs Rule, which became effectiveas of July 1, 1974, the Commission aswell as other parties In Interest, exceptthe debtor, have 120 days from the firstdate set for the first meeting of creditorsto file a motion. The time may be ex-tended for good cause. A motion made bythe debtor for transfer, however, may bemade at any time The Rule requires ashowinq that a Chapter X reorganizationIS teasible. This In effect means that amotion can be granted only If the courtfinds both that Chapter XI IS Inadequateand reorganization under Chapter X ISpossible The prior procedure for filinga Chapter X petition after the granting ofthe motion and a separate hearing on thepennon has been abolished.

Attempts are sometimes made to mis-use Chapter XI so as to deprive Investorsof the protection which the SecuritiesAct of 1933 and the Securities ExchangeAct of 1934 are designed to provide ',~ In

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such cases the Commission's staff nor-mally attempts to resolve the problem byInformal neqottations. If thrs proves fruit-less, the Commission Intervenes In theChapter XI proceeding to develop anadequate record and to direct the court'sattention to the applicable provrsrons ofthe Federal securrtres laws and theirbearing upon the particular case.

Omega-Alpha, Inc." The debtor is apublicly held holding company whichwholly owns one operating subsidrary,The Okirute Company Since ItS orqaru-zation In 1970, debtor InCUrred agg regatelosses of approximately $115 million. Atthe inception of the Chapter XI proceed-mqs, the company's financial statementsreflected a dencrt net worth of about $50million. The company's capitalization in-cludes about $42 million In two Issues ofdebentures held by about 3,000 publicInvestors The Commission In ItS motionto transfer the proceeding to Chapter Xurged, among other things, that therewas the need for a thorough rnvestrqatronby an Independent trustee and that re-habilitation of the company required asubstantial adjustment of Widely heldpublic debt. Both Indenture trustees forthe two Issues of debentures also filedtransfer motions. The court granted themotions and transferred the proceedingto Chapter X whereupon two trusteeswere appointed

U S. Ftnenciet, Inc. ,b The Commissionand certain creditor banks filed Section328 motions to transfer to Chapter X theproceedings mvolvmq trus real estateconglomerate. The debtor's capitaliza-tion Includes $35 rrulhon In convertiblesubordinated debentures, $11 millionprincipal amount of bearer bonds and$10 million In common stock, all publrcly-held A hearing on the Commission'smotion was deferred when the debtorobtained a stipulation from the movingbanks that It would be allowed a reason-able time to attempt to formulate anacceptable arrangement, the debtor agree-Ing to consent to Chapter X If It couldnot Subsequently, however, the debtor'smotion for relief from the stipulation wasgranted by the court, and It continued InChapter XI

The Oommrssron, which was not aparty to the stipulation, had pornted outthat the debtor's potential lrabulty onpending collateral secunties fraud classSUitS filed against the debtor might proveto be Insurmountable under the hrrutedscope of Chapter XL.>' Pending thedebtor's attempt to propose an acceptablearrangement, the Commission formallyappeared In the Chapter XI proceedingSomewhat later, the banks moved for anadjudicatron, the debtor then filed a mo-tion to have the case proceed underChapter X,.>H asserting, mter alia, that"serious obstacles" to confrrmation of anarrangement existed and that It wouldbe In the best Interest of creditors toproceed under Chapter X "wherein theproblems of bars to discharge and non-discharqeabrlity of claims are not pres-ent." The banks contested the debtor'smotions; because of the lapse of timeand changed crrcumstances the Com-missron took no positron. After the closeof the fiscal year, the court granted thedebtor's motion and appointed a trustee.

Esgro, Inc.>9 The debtor is a pubucly-held holding company whose prrmaryasset IS a wholesale electrrcal productsbusiness not In Chapter XI. About 60percent of some $10 million of unsecureddebt IS represented by subordinatedconvertible debentures held by approxr-mately 700 Investors.

The debtor offered ItS creditors $1million In cash at conftrrnanon, an addi-nonal $1 rrullron within one year but onlyto the extent realized from the sales ofcertain assets, and a 49 percent equityInterest. In connection with the sotrcita-non of acceptances from debenture hold-ers, the debtor was requrred to complywith the proxy provrsrons of Sectron 14(a)of the Secuntres Exchange Act and therules tnereunoer.w

The Commission moved to transferthe case to Chapter X urging that theproposed materral moditrcatron ofpubucly-netd debt must be accomplishedunder that chapter 61 The debtor strenu-ously reststed the transfer motion andsought extensive discovery After lengthyhearings, the bankruptcy Judge denredthe Oornrrnssron's motion without preju-

dice, porntmq out the effort and progresstoward contrrrnatron of the Ghapter XIplan made by the debtor In ItS appealto the drstrict JUdge, which was pendingat the end of the fiscal year, the Cornrrus-sion argued that where the rrghts of publicInvestors will be materially affected, It isImproper to deny a motion to transferthe proceeding to Chapter X on thegrounds that the debtor has exerted ef-forts, Incurred expenses and madeprogress toward the connrrnatron of aChapter XI arrangemenl.62

Pocono Downs, Inc.,6J-Thls publiclyheld company, whrch owns and operatesa horse race track, has outstanding ap-proximately $850,000 In subordinatedconvertible debentures held by about 800public Investors. The Commission inter-vened in the Chapter XI proceeding tosupport a motion by the Indenture trusteeto transfer the proceeding to Chapter X.

The Commission urged, among otherthings, that a dismterested trustee wasneeded to conduct the debtor's opera-tions, investrqate ItS past acnvitres andascertain ItS present financial conditionAn order enjoining the voting of about65 percent of the debtor's outstandingstock had been entered as a result of amyrrad of transactions involving thatstock. No stockholders' meeting had beenheld since October 1973, and It was un-clear who had actual authorrty to act onbehalf of the debtor. In addrtron, certainofficers of the debtor had Interests In

some of ItS major creditors, which gavense to substantial conflicts of mterestFurther, the Oommrssron urged that therehatnhtatron of tms debtor IS likely tomvolve more than a mrnor adjustment tothe rrghts of the public debenture holders.SUbsequent to the end of the fiscal year,the bankruptcy court granted the motion,transferred the proceed 109 to Chapter Xand appointed a trustee.v-

EqUitable Mortgage Investment Corp,et al.b<O The debtor IS a regIstered retailland developer under the Interstate LandSales Full Disclosure Act bb and marketsrecreational land 10 Iowa. It financed ItSoperations through four Intrastate publicofferrngs of debt secunnes totalling $5rmllron purchased by approximately 1,300

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Investors Equitable's common stock ISheld by American Recreation & LandCompany ("American"), which operatesthe same busmess In MIssouri under thesame management Substantial mter-company activity between the two. cor-porations was responsible for placmgmost of the liabilities In Equitable andmost of the assets rn American.

American caused Equitable to file aChapter XI petition. Under Equitable'sproposed arrangement, preferred stockwould have been exchanged for publicdebt, and American would have retainedItS equity Interest. In addrtion, accountsreceivable from American of over $1million would not have to be repaid.

The Commission In Its transfer motionurged, among other things, that there wasa need for a thorough investigation byan mdependent trustee, that Equ rtabte'srehabilitation required a substantial ad-justrnent of publicly held debt and that aclose scrutiny of debtor's relationshipWith ItS parent, American, was necessaryThe Commission also noted that thespectre of federal secunties laws Viola-tions In the sale of debtor's debt secuntresraised the question of whether thesecontingent claims could be dischargedIn a Chapter XI proceeding. The courtgranted the Commission's motion, trans-ferred the proceedmgs to Chapter X andappointed a trustee.

"U" Dtstrtct BUilding Corporetton »Public debenture holders, supported bythe Commission, were successful In ob-tammg the transfer to Chapter X of theproceedings mvolvrnq this owner of aseven-story office burldmq. The debtorproposed the sale of the office bUildingand a plan of uqurdation In Chapter XIThe Commission questioned the fairnessof the price and objected on the groundsthat Chapter XI was not a proper ve-hicle for a nqurdatron.':" In addition,questions had been raised concerningthe conduct of management which in-dicated the need for the safeguards ofChapter X.

An Insurance company, which wasattempting to foreclose ItS first mortgageon the debtor's sole asset, argued thatunder Rule 11-44(d) the court was re-

160

qurred to reach a determination on thereclamation petition prior to holdmg ahearing on the motion to transfer theproceedings to Chapter X. The courtdisregarded the Insurance company'sargument, notmg the anomaly mvolvedIn asserting that a sole asset could bereclaimed from a debtor In Chapter XIwhen there had been no determination ofwhether Chapter XI or Chapter X was theproper avenue of relief. After a hearing,the court transferred the proceedmgs toChapter X and appointed a trustee

Amencan Beef Packers, Inc.69 TheCommission mtervened In thrs ChapterXI proceeding and Joined With the Statesof Iowa and Nebraska rn seekmg theappointment of a receiver for the debtors.American Beef, which IS publicly held,has assets of about $110 million andliabilities of over $92 million The appli-cation alleged, among other things, thatpreferential transfers of money weremade to affiliates of American Beef be-fore and after the Chapter XI filing, thatcertain officers and directors were sub-jects of investigations by various stateand federal agencies, and that AmericanBeef was mismanaged by ItS officers anddirectors In that It diverted funds fromItS pnncipal creditors, Issued checksdrawn on accounts msuttrcrent to paythe checks, and applied funds necessaryfor ItS continued operations for capitalImprovements.

The hearing on the application wascontinued several times and, as of theend of the fiscal year, had not been heard.The debtor's proposed arrangement con-templates that new management wouldtake over the operation of the businessShould It be confirmed, the appointmentof a receiver would become moot.

Investors EqUity of Iowa, Inc 7(, Debtor,a publicly held land development cor-poration With two wholly owned sub-sidranes, had Issued thrift certificatestotalling about $1.5 million to approxi-mately 375 holders The Comrmsston fileda motion to Intervene In the proceeding toseek the appointment of a receiver. InItS motion the Commission alleged, amongother things, that the thrift certificateswere Issued In vrolatron of the antifraud

provrsons of the federal securities laws,that the management of the debtor con-tinued to make false statements tosecurities holders subsequent to thetermination of the offering and that thedebtor had been mismanaged.

The debtor resisted the Commission'sapplication and specifically objected toItS standing to make such an application.The bankruptcy judge, citing S.E.C. v.Amencen Trailer Rentals CO.,71 con-cluded that the Commission does havethe right to Intervene as a party in in-terest In a Chapter XI proceeding andgranted the Ccrnrnissron's applrcatronfor the appointment of a receiver

Superior Mortgage Co. and omntvest.r»-These debtors and five other affiliatedcorporations are In the business of sellingreal estate to Investors Interested In gainsfrom apprscranon In land values or taxshelters. After the State of California fileda complaint against the debtors seekinginjunctive and other relief, alleging viola-tions of the State's laws regarding sub-dlvislOns,73 credit evaporated and reliefwas sought under Chapter XI.

Debtors' scheduled assets of more than$41 million, included almost $23 millionof land sales contracts from about 3,500lot purchasers who had the right toterminate. Liabilities aggregated about$34.5 million, of which almost $16 millionmay have been secured and were owedto some 1,500 investors. A plan of ar-rangement was proposed which providedthat creditors, including lot purchaserswho terminate their contracts and in-vestors, would be paid in full over a periodof years from a trust fund created fromremaining land sales contracts receivableplus 10% of future land sales contracts.

The Commission moved to Intervene Inthe Interest of public Investors, since Itbelieved that the proposed arrangementraised a number of questions under theFederal securities laws.74 It was con-cerned, among other things, with theadequacy of disclosure to be made toinvestor-creditors and lot purchasers andwhether the proposed partrctpatron Inthe trust fund was an evidence of in-debtedness requmnq quautrcatron underthe Trust Indenture Act.> The debtors

then disclosed additional data to in-vestors; the staff reviewed the materialsto be used In soucrtinq consents to thearrangement and changes were made Inresponse to comments, and accommoda-tions also were reached on other Issues.Since the Commission effectively ob-tained the relief It sought, It withdrew Itsmotion to Intervene without prejudice.

Cavanagh Communities coraoretton.i«-Shortly after the commencement ofthese Chapter XI proceedings, the NewYork Stock Exchange advised the debtorof Its decrslon to file an application withthe Commission to dehst the debtor'scommon stock and convertible subordi-nated debentures. Upon appllcatron ofthe debtor, the bankruptcy judge, hold-Ing that the stock exchange listing con-stitutes "property" of the debtor and thuswithin the JUrisdiction of the bankruptcycourt, entered an order enjoining theExchange from making such applicationThe Exchange appealed to the distnctcourt The Commission filed an smtcuscurtee brief urging that the order of thebankruptcy JUdge be reversed because oflack of [urrsdrcnon to grant the injunctiverelief sought against the Exchange. ThebaSIS for the Commission's posrtion wasthat the Securities Exchange Act of 1934embodies a comprehensive statutoryscheme whereby national securities ex-changes registered with the Commissionare placed under ItS regulatory control,and that Section 12(d) of that Act vestsexclusive jurrsdictron over the exchangedelisting process In the Commission, sub-ject to judrcral review of Oornrnlssion or-ders only by Federal courts of appeal.The Commission did not address itself towhether exchange listing IS "property"of the debtor because of ItS belief that,even assuming arguendo that It IS prop-erty, a bankruptcy court's junsdrcnonover stock exchange listings IS preemptedby the grant of exclusive [unsdrctron InSection 12 of the Securities ExchangeAct of 1934. At the end of the fiscal yearno decrsron had been rendered on trusappeal.

Puts & Calls, Inc.7T-Whlle the Com-rrussron, which had intervened speciallyto enforce the Federal securities laws,

161

was developing the record as to the ade-quacy of the disclosure of material facts,the nondebtor proponent withdrew ItSproposed arrangement. Since there wasno qoinq business to rehabilitate, therewas no need for a debtor-relief proceed-mq, The debtor was adjudicated a bank-rupt, and ItS more than 4,000 creditors,mostly Investors, were entitled to receivea distnbutron of a substantial portion ofttie cash fund which exceeded $600,000.

Longchamps, Inc 7k The debtor soughtcourt authority to retain a law firm, whichasserted a substantial secured claim forservices rendered prior to the Chapter XIproceeding, as Its counsel In the pro-ceeding After denying the applicationwithout prejudice, the court sought theCommission's views with respect to thismatter, since the debtor IS a publicly heldcompany The Commission concurredwith the court's decrsion disqualifying thelaw firm It pointed out that questions mayarise with respect to the amount of thelaw firm's claim and the validity of ItSsecurity Interest An attorney for a generalcreditor IS not disqualified from suchrepresentation under Section 44c of theBankruptcy Act and Bankruptcy Rule215(c), but these provrsions clearly do notapply where a creditor IS secured or hasa Priority. Subsequently, the court ap-pointed another law firm

NOTES TO PART 7

1 A table listing all reorganizationproceedings In which the Commissionwas a party dunnq the year IS containedIn Part 9.

2 D. Colo., No 71-8-2921 Previouslyreported In 40th Annual Report, p. 127and 39th Annual Report, pp 121-122.

I Vanston Bondholders Protective Com-mittee v Green, 329 U.S 156 (1946),umtea States v Edens, 189 F 2d 876(C A 4, 1951), aff'd per curtem, 342 U S912 (1952) (on basts of New York v.Saper, 336 US. 328 (1949) as controllingIn Chapter X), Urutea States v. GeneralEngmeermg & Manufacturmg Co, 188F 2d 80 (CA 8, 1951), aff'd per curtem,342 US. 912 (1952) See also, Sexton vDreyfus, 219 U S 339,344 (1910)

, In re Times Sales Fmance Corp, 491F 2d 841 (C.A 3, 1974) and In re Kmgs-boro Mortgage Corp., 379 F.Supp. 227

162

(S.D.N.Y, 1974), aff'd per cunem, No.74--2177 (C A. 2, April 3, 1975).

, S D N.Y, No. 74--8-1454, 1455 and74-8-1511-1542, mclustva.

b W.D. MICh, Nos G-74-1113-8-1 andG-74-1114--8-1.

7 E D Pa No. 70-354 Previously re-ported In 39th Annual Report, p. 122.

"In re Doll)' Madison Industries, Inc.,504 F. 2d 499 (C A 3,1974).

9 S D.N.Y., No. 69-8-461. Prevrouslyreported In 40th Annual Report, pp. 128-129, 37th Annual Report, pp. 183, 194-195;36th Annual Report, p 179

III Abarta Corp v. Knsttetmer, 508 F2d 1126 (C.A. 2, 1975).

II S.D. III., No RI-Bk-73-295 Prevr-ously reported In 40th Annual Report, p.124

12 In the Matter of East Molme Downs,Inc. C.A. 7, No. 74-1298, (May 27,1975)

1 I E.D. Va., Nos. 17-71-A, 256-71-A,and 257-71-A Prevrously reported In 39thAnnual Report, pp. 123-124; 38th AnnualReport, p 118.

14 Davidge v. White, 377 F Supp. 1084(S D N.Y. 1974).

I' Davidge v. White, No 72-CIV.-4333,S D.N.Y ,July 15, 1975

Ib F.G F Proprtetary Funds, Ltd. vArthur Young & Company, S D.N Y. No.73-Clv.-3262.

17 Caplm v. Martne Midland Grace TrustCo, 406 US 416,434, (1972). In Webb &Knapp, Inc., SDNY, No 65-8-365, thecase In which Cap ltn arose, an order wasentered on October 14, 1974, grantingplaintiffs' and defendant's counsel In aclass action on behalf of debenture hold-ers against the Indenture trustee accessto the debtor's records

Ik The dismissal was based on two re-cent decrsions of the Court of Appealsfor the Second Crrcutt Bersch v DrexelFirestone, Inc., 519 F.2d 974 (1975), andITT v Vencap, Ltd, 519 F.2d 1001 (1975).

I" S.D NY, No. 73-8-468. Previoustyreported In 40th Annual Report, p 131

211 Vmar v Cohen, et et., S.D N.Y., 72CIV 1602

21 In re Air Industnal Research, Inc.,N D. Calif., No 3-74-328-0JC; In reDiversified Mountameer Corp, S.D. W Va ,No 74-71-CH, In re Dolly Madison In-dustries, ED Pa., No 70-354, In re LyntexCorporation, S.D NY., No 73-8-75, In reNorth Western Mortgage Investors Corp.,W D Wash., No 642-73-8-2; In re PanAmencan Finenctet Corporation, D. Ha-wau, No 72-280. After the close of thefiscal year the Commission published oneadvisory report (In re Kmg ResourcesCompany, Corporate Heorqaruz atron Re-lease No 316 (August 13, 1975), 7 SECDocket 615), and supplemented a prioradvisory report (In re tmperiet '400'National, Inc, Corporate Reorganization

Release No. 315 (July 30, 1975), 7 S.E.CDocket 604).

22 E D. Pa. No. 70--354 Previously re-ported in 39th Annual Report, p, 122.

23 The Commission historically has op-posed the Issuance of warrants as anunsound financial device and as con-travening the feasibility requirement,ctutas Company, 24 SEC 85, 120--122(1946). See also Sections 216(12)(a)and (b).

24 See Consottdeted Rock Products Co.v, DuBoIS, 312 U.S. 510, 528,531 (1941).

2'; S D. W. Va, No 74-71-CH, 74-73-CH, 74-75-81-GH Prevrously reportedin 40th Annual Report, p 127.

26 ConsolIdated Rock Products Co. v.DuBois, 312 U.S. 510 (1941).

27 W.D Wash., No. 642-73-B-228 Case v. Los Angeles Lumber Products

Co., 308 U S. 106, 130 (1939).29 Section 216(12) requires, Inter alia,

that the plan contains fair and equitableprovrsion for the retirement of any se-cuntres issued pursuant to a plan.

30 Protective Committee v. Anderson,390 U S. 414, 424-425 (1968), NeuonetSecunty Co. v. Oortett, 289 U.S. 426, 436(1933).

31 Case V Los Angeles Lumber ProductsCo., supra, at 122.

32 N.D Calif., No 3-74-328-0JC33 Ct. In re lmpenet '400' National, Inc.,

429 F.2d 671 (C.A 3, 1970).34 Since the California Attorney General

had brought an action alleging Violationsof the State's Corporate Securities Act inthe Issuance of the limited partnershipInterests, the trustee considered thelimited partners as holding rescrssionclaims. See In re Los Angeles Land &Investments, Ltd., 282 F.Supp. 448 (D.Hawau, 1968).

35 Price v. Spokane Silver & Lead Co ,97 F.2d 237 (C A 8,1938)

36 D.C Hawau, No. Bk 72-280.37 See In re Pettsedes-on-the-

Desplames, 89 F. 2d 214 (C A. 7, 1937);In re Los Angeles Land & Investments,Ltd., 282 F. Supp 488 (D Hawau 1968),previously reported In 37th Annual Reportp.187.

3815 U S.C. *1701, etseq39 N.D. Ga, No. 70556 Previously re-

ported In 40th Annual Report, P 128.40 In re Atlanta tnternetionet Raceway,

Inc, 505 F. 2d 732 (C.A. 5,1974) (Mem)41 Prtce V Cotton,421 US. 976 (1975)42 Texas Hotel Securtties Corp. V Waco

Development Co., 87 F 2d 395, 400 (C.A5, 1936), cetttorert dented sub nom. WacoDevelopment Co. V Rupe, 300 U S. 679(1937). Accord, Gross v. Bush TermtnelCo., 105 F. 2d, 930, 932 (C.A 2, 1939)See also Country Life Ap'.artments v.Buckley, 145 F 2d 935, 938 (C A. 2,1944).

43 E.D.N. Y., No. 63-B-663. Previously

reported In 36th Annual Report, p, 90;35th Annual Report, p. 163, :33rd AnnualReport, p. 134; 32nd Annual Report, p 90.

44 James Talcott, Inc. v. trvtnq L.Wharton, 517 F.2d 997, (C.A. 2, 1975)

45 S.D.N. Y., No. 73-B-751. Previouslyreported In 40th Annual Report, p. 131.

4h In re Arlington D,scount Company,408 F. 2d 490 (C.A 6, 1969), In re Bar-chns Construction Corp., (1966-1967Transfer Binder) Banker. L. Rep. c: 61,793(S.D.N Y. 1966).

47 E.D. Va., Nos. 17-71-A, 256-71-Aand 257-71-A. Previously reported in39th Annual Report, pp. 123-124; 38thAnnual Report, p, 118. .

48 In re Famngton Manutactunng Com-pany (Robert E. McLaughlin and Steptoe& Johnson, Appellants), C.A. 4, No. 75-1355

49143 F. 2d 685 (1944).';0 In re Farrington Manufactunng Com-

pany (New England Merchants NationalBank, Appellant), C.A 4, No 75-1354.

51 The terms of Section 242(1) aredesrqned to carry out the CongressionalIntent of encouraging Indenture trusteesto partrcrpate actively In the reorqaruza-tron process on behalf of those whomthey represent House Hearings beforeJudrcrary Committee on H R. 6439 (rein-troduced as H. R. 8046 and enacted In1935), 75th Can g., tst Sess (1937) 186

52 S.D.N Y No. 74 B 614-802, lnclusrve.';3 See Scrtbner & MII/er v. Conway,

238 F. 2d 905, 907 (C A 2, 1956); Securi-ues Investor Protection Corp v. CharismaSecurtues Corp., 506 F. 2d 1191, 1196(C.A. 2, 1974)

54 See 40th Annual Report, p. 130; 39thAnnual Report, p. 127; 38th Annual Re-port, p. 126, 37th Annual Report, p 138.

';';N.D Texas, No. Bk-3-74-454-G.';6 S D. canr., No 17007-K.57 Under Section 17a(2) of the Bank-

ruptcy Act, fraud claims are not dis-chargeable In Chapter XI. Since they areunliquidated and contingent, they alsoare not provable (Section 57d)

58 While the SEC or any other partymust make a transfer motion Within 120days after the first date set for the firstmeeting of creditors, Rule 11-15(a) pro-Vides that a debtor may make a transfermotion "at any time."

59 C.D Calif, No 73-02510.61) Debentures convertible into common

stock are "aqurty secunties" as thatterm IS defined In Section 3(a)( 11) of theSecunties Exchange Act. When held bymore than 500 persons at the end of afiscal year, they are subject to registrationunder Section 12 of that Act which Inturn SUbjects them to the provisrons ofSection 14.

hl The Supreme Court held In SEC VAmencan Tretter Rentals Company, 379

163

US 594, 613 (1965), that" as a gen-eral rule Chapter X IS the appropriateproceeding for adjustment of publicly-held debt"

"2 Cf In re Peoples Loan & InvestmentCompany of Fort Smith, 410 F.2d 851(C A. 8, 1969)

..\ M.O Pa., No. Bk-74-437"4 First Pocono Corp v L P Properties,

No 878. January Term, 1975 (AlleghanyCounty Court of Common Pleas, orderdated February 18,1975).

... S 0 Iowa, Nos 74-509-C, 74-528-C,74-537-C

....15 USC l< 1701, et seq

.., W.O Wash, No. 8-74-11098

... See In re Northern tttmots Develop-ment Corp., 324 F 2d 104, 106-108 (C.A7,1963), cert dented, 376 U.S 938 (1964),In re Pure Penn Petroleum Co, 188 F.2d851 (C A 2,1951)

..', 0 Nebraska, No. Bk-75-Q-17 Beef-land International, Inc, a wholly-ownedsubsidrary, also filed a Chapter XI peti-non No. Bk-75-Q-18

S 0 Iowa, No. 74-464-C379 U S 594 (1965). The Court stated,

at p 613, that ". we hold that, underthe statutory scheme, while not chargedwith express statutory rights and respon-srbthtres as In Chapter X, the SEC IS en-titled to Intervene and be heard In aChapter XI proceeding"

164

72 C 0 Cal, Nos 74-9406-AAH and74-941 Q-AAH,lPeople of Celttotme v ExceptionalProperties Co., et ai, No. C-90080 (Su-perior Court of the State of Californiafor the County of Los Angeles, June 3,1974)

74 The Supreme Court has held thatthe Commission's right to intervene inChapter XI proceedings IS not limitedsolely to moving for a transfer to ChapterX Securities and Exchange Commissionv. Amencen Trailer Rentals Co, 379 U.S594, 612-613 (1965). See also Fed. RCIV P 24 .

.. An exchange of an evidence of in-debtedness for unsecured claims againsta debtor IS exempt from registration un-der Section 5 of the Securities Act pur-suant to Section 393a(2) of Chapter XI,but It IS not exempt from qualificationunder the Trust Indenture Act Cf TrustIndenture Act Release No 30 (August 28,1944), which deals with the issuance ofdebt secunties pursuant to a similarprovrsion found In Section 264a(2) ofChapter X

", S.O.N Y. No 75-8-243."C.O Cal, No. 73-03706 Prevrously

reported In 40th Annual Report, pp 131-132

S.O NY, No. 75-8-953.

"

'" "

'"

PART 8SEC MANACEMENT

OPERATIONS

PART 8SEC MANAGEMENT

OPERATIONS

A number of Important developmentsoccurred In 1975, contributing to Increasedoperating etncrency, Improved service tothe publrc, and ettective use of the Com-rrussion's resources.

ORGAN~AnONALCHANGESOne major change was aimed at

strengthening the Commrssron's capacityfor economic research and ensuringcritical support to the new NationalMarket Advisory Board. Towards thisend, the Commission has grouped ItSOffices of Econornrc Research and PolicyPlanning under a Directorate of Economicand Polley Research. The new urut ISresponsible for, among other things, col-lecting and processing reports on theholdings and trading of institutional in-vestors called for by the Securities ActsAmendments of 1975 and Improving theComrrussrcn's ability to develop timelyand accurate data on the capital markets,In order to Identify fundamental changesaffecting the markets and to helpformulate Cornmrssron polley reflectingawareness of such changes. It IS ex-pected that the consoudanon of urutsunder a Single offrce will enable the Com-mrssion to better define problems andcollect the empirical evidence neededto regulate effectively the various com-ponents of the securities Industry forwhich It IS responsible.

Shortly after the close of the fiscalyear, the Office of RegistratIons and Re-

ports and the Otnce of Records weremerged to form a new Oftrce of Reportsand Information Services, ("ORIS") Thenew Offrce's responstbrlrtres encompassa/l of the duties of the two former offices,includrnq the receipt, initial examrnatron,drstribunon and storage of all the Com-mission's otncral frlrnqs: the control ofCommission records and correspondence;the management of the Cornrnrssron'spublic reference services; the coordina-tion of responses to Investor inquiriesand complaints, the substantive examina-tion of certain reports and applications,and the maintenance of numerous com-puter records In addttion, ORIS assumedprimary responstbihty for Implementingthe provisrons of the amended Freedomof tntorrnatron Act (FOIA), and the PrivacyAct of 1974, as they relate to rnatenaltiled WIth the Cornrnrsaron FOIA requestswere formerly handled by the Office ofPubliC Intorrnatron. Due to the Increase Inthe number of requests and new demandscreated by the Privacy Act of 1974, theComrmssron decreed to centralize alloperations In these areas In ORIS. Aspecial section has been set up WithinORIS to coordinate the processing ofthese requests.

INFORMATION HANDLING

Significant progress was made durinqthe year to Improve the SEC's informationprocessing capabihnes.

In recoqruzrnq the need for an orderly

167

extension of ItS use of advanced tech-nology, the Commission, with the assis-tance of consulting support services.completed an agency-wide informationsystems review. As a result of this re-view, the Commission initiated the prepa-ration of five-year plan for developingmore comprehensive information process-Ing systems and enhancing ItS overallcomputer support capability. In addmon,the Office of Data Processing, havingdetermined that an Immediate require-ment existed for drastically Improvingthe method by which computer-basedinformation IS processed, explored thefeasibility of utilizing telecommuruca-nons 1 for accessing and maintaining theCommission's mtorrnatron systems. Thisexploration process consisted of theintroduction, on a very limited and ex-perimental basts, of telecommunicationsequiprnent and techniques to two of theCornrrussron'a most widely utilized in-formation systems, and the preparationand cornpletron of a feasibility studyreport This report sets forth recommendedcourses of action for the Comrrusston tofollow In proceeding with the expansionand further development of telecommuni-cations for Internal Information processingThe recommendations are clearly con-sistent with the short-term phases of theatorernennoned five-year plan that ISbeing developed

The Office of Data Processing also ex-pended a coasrderable amount of timeIn modifying and Improving many of ItSexistrnq information systems and the man-ner In which rntorrnauon IS processedThese rnodrtrcations and Improvementswere made possible by the additionalequipment Installed In the latter part offiscal year 1974,2 and resulted In a sub-stantial Increase In the number and time-liness of Jobs processed through thecomputer

A most Important new system was de-veloped durrnq the year Ttus system wasdesiqned to facilitate the Comrnrssron'smorutonnq of negotiated cornrrussron ratesand the Impact that such rates Will haveon the securities Industry

In the area of new legislation, the Officeof Data Processing was and continues to

168

be heavrly Involved In the torrnulatron ofCommission policy and procedures, asthey relate to automated Information sys-tems, to carry-out the provrsrons of theFreedom of Information Act Amendmentsand the Privacy Act In addrtron, pre-liminary work was cam eo-out dunnq thelatter part of the year to determine whatcomputer and analytical support wouldbe required In meeting the provrsrons ofthe Securities Acts Amendments of 1975.

CONSUMER SERVICES

The Cornmtsston took several Importantsteps In the development of a compre-hensrve consumer education programThe program IS Intended to result In thecreation of written matenals and audio-Visual aids that Will enhance effectivecommunication between the Commissionand the various constituencies It serves.

The first product of thrs program wasthe production, In conjunction with aprominent orqaruzatron for continuinglegal education, of a 3D-minute colorsound film of an actual Comrrussron meet-Ing. It IS believed to be the first suchrecord of an actual meeting by an inde-pendent regulatory agency. The film wasdeveloped for, and has been shown to,educational and legal organizations whowish to have a better understanding ofhow the Cornrmsston approaches, formu-lates and resolves problems tacinq It

On a more fundamental level, produc-non was completed of a tz-mmute nar-rated color slide program entitled "Eagleon the Street". Thrs program was de-Signed to provide lay audiences With abaSIC understanding of why the Oomrrus-sion was created, how It IS structured andoperates, what ItS rmssron IS, and how Itcan be of assistance to the general pub-lic This program has been well receivedby a number of educational and profes-sional organizations. Plans are underwayto develop a broad drstribuuon to ensurethe program's availability to any Interestedgroups

Finally, the Cornmtsston has undertakento write, publish and distribute a seriesof consumer education booklets The firstsuch booklet, "Investigate Before You

Invest", was distributed In connectionwith the Consumer Information Center.More than 10,000 copies of the bookletwere requested by and distributed tomembers of the public. A second booklet,"The SEC and the FOIA", was designedto provide answers to basic questionsconcerning the Commission's administra-tion of the Freedom of Information ActIt is available at the Commission's home,regional and branch offices Other educa-tronal publications are currently in pro-duction and are expected to be completedand distributed dUring the upcomingfiscal year.

A new consumer brochure, "How ToAvoid Ponzi and Pyramid Schemes", hasbeen prepared and IS In the process ofbeing printed It cautions Investors aboutthese schemes and suggests some waysof recognizing them. ThiS brochureshould be ready for distribution In early1976.

Among these records are portions of theBroker-Dealer and the entire [nvestmentAdvrsers and Investment Company In-spection Manuals, the Summary of Ad-ministrative Interpretations under theSecurities Act of 1933 and the Commis-sion's penodrc Securities Vrolatrons Bul-letin Moreover, the Commission hasmade available, pursuant to particularFOIA requests, staff letters of commenton registration statements or other filingsand Wells Committee submissions

Between February 19, 1975, when theCommission revised ItS rules, and June30, 1975, the close of the fiscal year, theCommission received 267 requests forinformation pursuant to the FOIA

PERSONNEL MANAGEMENTThe permanent personnel strength of

the Commission totalled 1,951 employeeson June 30, 1975, as shown below

With only a small Increase In staff, theCommission did not pursue its normalvigorous on-campus recrurtmq efforts,although It did continue active efforts torecruit secretarial and clerical employees.For protessionat POSitions, the comrrns-sion received an overwhelming numberof applications from extremely well quali-fied candidates for the vacancies that didoccur. The competition for all protessronalJobs has been extremely keen and thecredentials of the candidates outstanding.

Success of the Commission's EqualEmployment Opportunity affirmative ac-tron program was most evident In Itsattorney staffing. At the close of the fiscalyear, minority attorney employment stoodat 33, up from 11 two years earlier, andfemale attorney employment reached 55,up from 24 at the end of fiscal year 1973

The CIVil Service Commission com-pleted ItS nationwide review and rnspec-

ACTIVITY UNDER FREEDOM OFINFORMATION ACT

Amendments to the Freedom of In-torrnanon Act were enacted Into law onDecember 19, 1974. From an operationsstandpoint, the Commission had to qurcklyadjust ItS procedures and reassign man-power to cope with the flow of FOIA re-quests and the records administrationproblems that accompany such requestsThe Commission on February 19, 1975,revised ItS own Freedom of Informationrules to conform to the December 1974amendments

These revrsrons provide that the publiccan Inspect or obtain copies of all recordsmaintained by the SEC with the exceptionof certain specmed categories of in-formation. Most financial and other in-Iorrnatron filed by registered companieshas always been available for mspectionor copying by the public However, thepublic was denied access to certain cate-gOries of material, notably investigatoryrecords Pursuant to various FOIA re-quests, during thrs fiscal year, the Com-rrussron has made available for pubucinspection many records Which had tradi-tionally been considered confidential

Commissioners .Headquarters Office StaffRegional Office Staff

Total Staff

Grand Total

Recruitment

51,223

7231,946

1.951

169

non of the Commission's personnel man-agement program with a VISit to theHeadquarters Offices during October andNovember 1974 Their written evaluationreport had not been received by the endof the fiscal year

The Commission's Internal personnelmanagement evaluation program wasrevised and updated In October 1974 Inaccordance with new civrl service re-qurrements As an Intergral part of thatprogram, the Office of Personnel alsoinitiated a quarterly management report-Ing system, with statistical summariesof personnel activities In each unit beingsent to the Regional Administrators andthe Directors of the operating drvrsionand larger support offices

Training and Development

With the addition of a tun-tune Em-ployee Development Specialist to ItS staff,the Commission was able to expand ItStraining and development activities dunnqFY 1975.

The TUItIOn Support Program, underwhich employees who enroll In collegedegree programs receive tumon assistancefor courses which relate to the Com-mission's work, was expanded, as werecounselling services for employees tak-Ing courses under the program. TheCareer Opportunities Program, a basicskills program, graduated nine employeeswho were ready to move Into typist pOSI-nons. By the end of the year, four em-ployees had already been placed Inpositions offering them greater careeradvancement and opportunities to usetheir new skills.

A 12-hour Personnel Procedure Classwas inauqerated to Introduce supervisorsand managers to Commission policiesand procedures as they pertain to per-sonnel management This class will beexpanded next year Into a 40-hour basicsupervrsron class.

The emphasis on onsrte technical stafftraining continued this year Under a con-tract with the American Institute of Certi-fied Public Accountants, SIX accountingcourses were offered at the HeadquartersOffice for SEC accountants and persons

170

In related fields. The Regional Officescontinued to offer 3-5 day seminars onenforcement and regulatory matters fortheir staffs and for those of Federal, Stateand local law-enforcement agencies Intheir areas An Integrated comprehensivetraining program for securrnes complianceexaminers was instituted with develop-mental training programs for both SECexaminers and the examiners of the self-regulatory organizations; the programIncludes self-study and periodic seminarsIn regional offices. Seminars on invest-ment company and Investment advisermatters were held In two regional officesand In the Headquarters. Training gUideswere developed for the staff during thepast year covering the taking of testimonyIn investigative proceedings and sanctionsIn SEC administrative proceedings.

An Executive Development programwas developed and Implemented to pro-vide executive development training foremployees at grades GS-16 and aboveand managerial training for employees atGS-14 and GS-15 Executives (GS-16and above) are expected to attend oneexecutive development course per yearManagers and their supervisors are ex-pected to prepare Individual DevelopmentPlans to Identify the on-the-Job and formaltraining they need for performance ontheir assigned position and to maintainan overall high level of managementexpertise throughout the Commission.Funds also have been set aside for GS-14and GS-15 employees who wish to applyto receive additional training to developmanagerial skills

OFFICE SPACE

The Office of Administrative Servicesprovided assiStance to the Los Angeles,Chicago and Atlanta Regional Offices andto the Houston and Philadelphia BranchOffices In gaining larger quarters, eitherthrough relocation or expansion of exist-Ing facilities

Some progress was made In Improvingthe Commission's presently unsatisfactoryspace arrangement In Washington, whereCommission staff are scattered In threedifferent locations and many offices are

severely overcrowded. Both houses ofCongress authorized the General ServicesAdministration to obtain a new head-quarters location for the Commission,but GSA's choice of an unsatisfactorysite resulted In a time-consuming appealto the Office of Management and Budget.At the close of the year It appeared likelythat the Commission had successfultycontested the selection of this proposedsiqht, but a decrsion as to an acceptablealternative appeared to be some monthsaway.

FINANCIAL MANAGEMENTAltogether, fees collected by the Com-

rrussion In fiscal 1975 amounted to 54percent of funds appropriated by theCongress for Commission operations. TheCommission IS required by law to collectfees for (1) reqrstratron of securities IS-sued; (2) qualification of trust rdentures,(3) registration of exchanges; (4) regis-tration of brokers and dealers who areregistered with the Commission but arenot members of the NASD; and (5) certi-ncanon of documents filed with theCommission. In addition, by fee schedule,the Commission imposes fees for certainfilings and services such as the filing ofannual reports and proxy material

With reference to the fee schedule, onMarch 29, 1974, the Commission an-nounced the repeal of certain provisronsof Rule 203-3 under the Investment Ad-visers Act of 1940, which required eachInvestment adviser to pay an annual feeto the Commission during the period ofItS reqrstratron The Commission subse-quently announced, In Release IA-486,that all fees affected would be refundedto those advisers and former adviserswho paid them In any of the years Inwhich the fee was Imposed. The actionwas taken following the Commission'sconsideration of recent decisions of theUnited States Supreme Court J with re-spect to the Independent Offices Appro-priation Act of 1952, 31 U.S C. 483(a),which was thought to provide the statutorybaSISfor establishing these fees

NOTES TO PART 8

1 Telecommunications IS an on-linetechnique whereby televrsron-lrke displaydevices. called CRT terminals, are usedto directly communicate with the computertacruty,

2 40th Annual Report, p. 1393 National Cable Televtston ASSOCia-

uon, Inc. v. United States, 415 U.S 336(1974), Federal Power Commission v. NewEngland Power Co, 415 U S. 345 (1974).

171

PART 9STATISTICS

THE SECURITIES INDUSTRYIncome and Expenses

Continuing the decline which began In1973, gross revenues of broker-dealersfrom all activities fell by approximatelyfour percent to $5.3 billion In 1974 from$5.5 billion In 1973

All revenue sources except securitiescommission business, Investment com-pany secuntres, and commodities businessregistered year-to-year Increases. The13 percent decline In secuntres com-rmssion business. however, overshadowed

PART 9STATISTICS

the rise in the other revenue sources,resulting In the unfavorable gross revenuecomparison between 1973 and 1974

Total expenses declined by 11 percentto $49 billion In 1974 from $5.5 billion In1973, and all expense Items, with the ex-ceptron of occupancy and equipmentcosts, registered year-to-year declinesThe greater percentage decline In totalexpenses over that for gross revenuesresulted In operating Income before taxesshowmq a marked Improvement In 1974,$401.5 million, over that for 1973, $569million

175

Table 1

REVENUE AND EXPENSES OF BROKER-DEALERS t

(Millions of Dollars)

Revenue 1970 1971 1972 1973 1974P

Securities Commission Business $21851 $3,405 1 $3.5330 $2.9538 $2.5825

Exchange Commission Business 1.7562 2.7607 2.7778 2,4288 2.1459Floor Acnvrtres 741 944 944 694 537Over-the-Counter Business 3548 5500 6608 4556 3829

Interest Income on Customers Acct 3796 364 0 5272 6214 6235

Dealer Business and/or Trading Activities 8465 11006 1.0388 6064 7438

Over-the-Counter Markel Makers 2887 4627 4931 2403 2982MunIcipal and Government Bond Dealers 4349 4404 3496 3119 3151Traders In Non-Exempted Securities 1223 1975 1961 542 1305

underwnunc Business 6252 9822 9389 5093 5112Investment Company secunnes 2231 2339 1888 1785 1042Investment Advrsory Fees 672 859 1015 862 933Commodities Busmess 885 985 1251 1782 1685Gain or Loss In Firm Investment 657 251 1 2096 134 326Other Business 3191 3478 3589 3970 464 2

Gross Revenue $4.8000 $6.8691 $7021 8 $5.5442 $5.3238

Expenses

Commissions Paid to Other Brokers $ 1317 $ 1972 $ 2055 $ 2248 $ 1806Floor Brokerage Clearance. Commission Fees 1914 2502 2569 2269 1982Registered RepresentatIves Compensation 9029 1.2966 1.3633 1,0762 1.0075Interest 5526 5283 6409 8096 7908Clerical and Administrative Employees 1.3562 1.6505 1.7701 1.5171 1.1557Communication 3888 4510 5042 4786 477 BOccupancy and Equipment 2 3718 4338 4797 4528 4601Promotional 1730 2012 2265 1988 1839Other 4604 5814 5987 5025 4677

Total Expenses 4.5288 5.5902 6.0458 5.4873 4,9223

Operating Income or Loss Before Taxes' $ 271 2 $1.2789 $ 9760 $ 569 $ 4015

Number of Frrms 2.332 2.539 2 512 2,164 2.005

) Broker-dealers with gross sec, ..rr rnea Income 01 $20000 and over Excludes life insurance companieswith over $100 million In assets not related to the secunnes or commodities business

1. Includes depreciation and amortizationt Before Partners CompensatronP preliminarySource X-17A-10 Reports

Securities Industry Dollar

Of each dollar received by broker-dealers in calendar year 1974, a total of48.5 cents was derived from the securitiescommission business, 13.9 cents fromtrading activities, 9.6 cents from the un-derwriting business and the remaining28 cents from secondary sources of reve-nue, such as Interest income on cus-tomers' accounts, sale of investment

176

company securities and gain or loss fromfirm investments.

Total expenses amounted to 92.5 centsof each securities industry dollar. Thetwo largest components of expenses wereclerical and administrative costs, 21.7cents per dollar, and registered repre-sentatives' compensation, 18.9 cents perdollar of revenue. Operating income be-fore partners' compensation and taxesaccounted for 7.5 cents of the averagesecunties Industry dollar.

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Assets and Liabilities

Broker-dealers reported total assets of$25.2 billion at year-end 1974, as com-pared with $25.9 billion at year-end 1973.This three percent decline occurred asall but four asset components fell to levelsbelow that for 1973. Of the four com-ponents that showed an increase, one,receivables from broker-dealers, regis-tered an Increase primarily because ofaccounting practice changes and theaddition of new business activities. Thedecrease witnessed In the other assetcomponents may be explained primarilyby the decrease In the number of firmsreporting.

Total liabilities, not including sub-ordinated borrowings, declined by onepercent between 1973 and 1974 to ap-proximately $21 billion. As was the casewith assets, most liability componentsregistered declines, reflecting the de-crease In the number of firms reporting.The notable exceptions to the generalpattern of liability decline were moneyborrowed, the Industry's largest singleliability component, which Increasedslightly to $10 7 billion, and payables toother broker-dealers, which reflectschanges In accounting practices andbusmess activities.

Total capital aggregated $4.2 billion

at year-end 1974 compared With $47billion at year-end 1973, a decline of 10percent Subordinated borrowrnqs forcapital purposes-s-wtnch include sub-ordinated loans, accounts covered byequity or subordination agreements andsecured demand notes-e-dechned by 14percent to $1.1 billion. Equity capitaldeclined by eight percent to $3.1 billion.

Broker-Dealers, Branch Office,Employees

The number of broker-dealers IncreasedIn 1974, ending a series of successive de-clines beginning In 1970 Although thenumber of broker-dealers Increasedslightly, the number of branch officesoperated by broker-dealers continued ItSdownward movement In 1974.

The number of broker-dealer employeesIncreased between 1970 and 1971 andagain between 1971 and 1972. The trendsince 1972, however, has been downwardWith the number of employees for 1974being five percent below the 1972 peak

The number of registered representa-tives declined by five thousand between1973 and 1974 Registered representa-tives, however, stili accounted for 60percent of the Industry's total number ofemployees.

179

Table 3

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACTOF 1934-EFFECTIVE REGISTRATIONS AS OF JUNE 3D, 1975 CLASSIFIED BY TYPE

OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE.

Number of Proprietors,Number of Registrants Partners, Officers, Etc 1 1

location of Principal Offices Sole Solepro- Part- Cor- pro- Part- Cor-

Total prr- ner- pora- Total Prl- ner- pora-etor- ships lions -I etor- ships lions -Iships ships

Alabama 23 3 1 19 123 3 3 117Alaska 1 1 0 0 1 1 0 0Arizona 18 3 1 14 71 3 9 59Arkansas 15 3 0 12 69 3 0 66Cautorrua 392 67 30 295 2646 67 229 2350Colorado 56 6 4 46 383 6 62 315Connecticut 54 5 7 42 442 5 105 332Delaware 12 2 1 9 33 2 2 29District of Columbia 31 2 6 23 303 2 41 260Flonda 92 10 4 78 358 10 g 339Georgia 40 1 1 38 400 1 2 397Hawau 21 1 0 20 105 1 0 104Idaho 5 0 0 5 18 0 0 18rumors 172 13 23 136 1282 13 231 1038Indiana 50 8 1 41 278 8 2 268Iowa 37 2 3 32 216 2 11 203Kansas 21 2 2 17 134 2 9 123Kentucky 12 3 0 9 72 3 0 69t.oursrana 24 8 3 13 180' 8 14 158Maine 12 1 3 8 501 1 19 30Maryland 34 5 4 25 213 5 66 142Massachusetts 153 31 14 108 1008 31 102 875Michigan 56 8 4 44 386 8 105 273Minnesota 70 2 1 67 611 2 2 607MISSISSiPPi 13 2 5 6 57 2 13 42MIssouri 66 4 7 55 753 4 145 604Montana 4 2 0 2 21 2 0 19Nebraska 19 1 0 18 156 1 0 155Nevada 4 1 0 3 12 1 0 11New Hampshire 3 1 0 2 11 1 0 10New Jersey 155 33 19 103 509 33 49 427New MeXICO 4 1 0 3 25 1 0 24New York (excluding New York

City) 288 81 27 180 793 81 76 636North Carolina 26 7 1 18 142 7 2 133North Dakota 5 0 0 5 27 0 0 27Ohio 93 5 15 73 772 5 218 549Oklahoma 20 5 0 15 101 5 0 96Oregon 25 3 1 21 105 3 3 99Pennsylvania 172 18 31 123 1116 18 209 889Rhode Island 18 5 2 11 42 5 8 29South Carolina 14 0 2 12 72 0 9 63South Dakota 2 1 0 1 12 1 0 11Tennessee 37 2 1 34 238 2 27 209Texas 143 21 5 117 1079 21 23 1035Utah 39 3 4 32 164 3 12 149Vermont 5 2 1 2 24 2 2 20Vlrgln,a 42 7 5 30 360 7 17 336Washington 59 7 2 50 289 7 6 276West Virginia 6 2 0 4 23 2 0 21WisconSin 36 2 0 34 359 2 0 357Wyoming 6 2 0 4 19 2 0 17

Total (excluding New YorkCity) 2705 405 241 2059 16663 405 1842 14416

New York City 811 63 195 553 10686 63 2383 8240

Sub Total 3516 468 436 2612 27349 468 4225 22656Foreign I 30 2 2 26 254 2 2 250

Grand Total 3546 470 438 2638 27603 470 4227 22906

I Registrants whose principal offices are located rn foreign countries or other JUriSdictions not listed! Includes directors, officers trustees and all other persons occupymq similar status or performing

Similar tunctronsAuocations made on the baSIS of tocanon of pnncrpat offices of registrants, not actual rocanons of

personsI Includes all forms of organizations other than sole proprietorships and partnerships

180

l

1970

1971

1972

1973

1974

o

BROKER-DEALERS AND BRANCH OFFICES

3000

Broker-Dealers IBranch Offtces

Pv Prelunmorv Rv Revi scd

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o 100

EMPLOYEES(Thousands)

200 300 400

1970

1971

1972

1973

1974

RegisteredRepresentatives

p:- Prelumnarv

SOURCE X-17A-l0 QEPORTS

____IOther Employees

Rs Revi sed

05.5051

181

_

_

SECO Broker-Dealers

The number of broker-dealers who arenot members of a registered national se-cunties association Increased from 300 to302 during the past fiscal year. This wasthe second consecutive year In which thenumber of SEeO broker-dealers Increasedby a small number despite an overallcontraction In the size of the total broker-dealer firm community. This Increase is

attributable primarily to the" continuedregistration as broker-dealers of spe-cialty firms, such as firms seiling realestate-related securities, which attainfewer competitive advantages in Joiningthe NASD than do traditional broker-dealers. On the other hand, a substantialdecrease in the number of condominiumand put and call broker-dealers wasnoted. (See attached Table).

Table 4

PRINCIPAL BUSINESS OF SECO BROKER-DEALERS

FIscal year-end

1971 1972 1973 1974 1975Exchange member primarily engaged

floor activities 16 15 17 17 21Exchange member primarily engaged In

exchange cornrrussion business 37 33 28 20 19Broker or dealer In general secunnes

busmess 79 69 66 65 67Mutual fund underwnter and distributor 27 27 24 18 19Broker or dealer sell,"g variable

annurtres 22 21 18 18 15Sotrcrtor of savings and loan accounts 15 10 9 7 7Real estate syndicator and mortgage

broker and banker 16 18 21 33 43Broker or dealer sethnq 011and gas

Interests 4 3 3 6 4Put and call broker or dealer or

option writer 23 22 20 15 7Broker or dealer seiling securities of

only one Issuer or associated Issuers(other than mutual funds) 15 17 18 19 20

Broker or dealer seiling church securities 21 15 16 17 16Government bond dealer 4 3 3 7 8Broker or dealer In other securities

business 19 30 26 31 42Broker or dealer In Interests In

condominiums 14 6Inactive 3 11 7 13 8

Total 301 294 276 300 302

"Not separately tabulated In prior years

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-~

Stock Transactions of SelectedFinancial Institutions

During 1974, private norunsured pen-sion funds, open-end Investment com-panies, life insurance companies, andproperty-liability Insurance companiespurchased $27.2 billion of common stockand sold $24.4 billion, resulting In net

purchases of $2.8 billion This compareswith purchases of $46.9 billion, sales of$39.4 billion, and net purchases of $7.5billion In 1973. Their common stock ac-tivity rate, defined as the average of grosspurchases and sales divided by the aver-age market value of holdings, fell to19.1 percent from 23.9 percent a yearearlier.

Table 6

COMMON STOCK TRANSACTIONS AND ACTIVITY RATES OFSELECTED FINANCIAL INSTITUTIONS

(Millions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Private Nonmsured Pension Funds I

Purchases 10,037 12,286 15,231 13,957 21,684 23,222 20324 11758Sales 5656 7,815 10,271 9,370 12,800 15,651 14,790 9346Net purchases (sales) 4,381 4,471 4,960 4,587 8884 7571 5,534 2412

Activity rate 172 187 213 205 221 197 173 141Open-End Investment Cornparues !

Purchases 14,926 20,102 22,059 17128 21,556 20,943 15,561 9,085Sales 13,325 18,496 19,852 15,901 21,175 22,552 17,504 9,372Net purchases (sales) 1,601 1606 2,207 1,227 381 (1,609) (1,943) (287)

Acuvuy rate 407 484 510 456 482 448 390 305Life Insurance Oornparues

Purchases 1,683 2,932 3703 3,768 6,232 6,912 6,492 3,930Sales 877 1725 2,184 1975 2,777 4,427 4,216 2439Net purchases (sales) 806 1207 1,519 1,793 3,455 2,485 2,276 1,491

Acuvity rate 182 268 294 278 310 295 259 187Property-liability Insurance Companies

Purchases 1,165 2,243 3,781 3613 4171 5,128 4519 2400Sales 979 1,644 2,879 2,722 1,944 2,738 2,856 3,223Net purchases (sales) 186 599 902 891 2,227 2,390 1,663 (823)

Activity rate 97 160 267 281 232 238 239 215

Total Selected InstitutionsPurchases 27,811 37,563 44,774 38,466 53,643 56,205 46,896 27,173Sales 20,837 29,680 35,186 29,968 38,696 45,368 39,366 24,380Net purchases (sales) 6,974 7,883 9588 8,498 14947 10,837 7530 2,793

Activrty rate 247 294 324 298 308 278 239 191Foreign Investors 1

Purchases 8,033 13,118 12,428 8,927 11,625 14,360 12,768 7,618Sales 7,276 10,849 10,941 8,301 10,893 12,173 9,977 7,094Net purchases (sales) 757 2,269 1,487 626 732 2,187 2,791 524

I Includes pension funds of corporations unions, rnutnemployer groups, and nonprofit orqaruzatrons.also Includes deferred profit sharing funds

! Mutual funds reporting to the Investment Company Institute, a group whose assets constitute aboutninety percent of the assets of all open-end Investment companies

I Includes both general and separate accountsI Transactions of foreign mdrvrduats and insutuuons In domestic common and preferred stocks Acnvrty

rates for foreign Investors are not calculableNOTE Activity rate IS detrned as the average gross purchases and sates divrded by the average market

value of holdingsSOURCE PensIOn fundS and property-natnlrty insurance cornparues, SEC, Investment companies,

Investment Company Institute life msurance companies, Institute of life Insurance, foreign Investors,Treasury Department

186

~

Stockholdings of InstitutionalInvestors and Others

At year-end 1974, the institutionalgroups listed In the table below held $248billion of the corporate stock, both com-mon and preferred, versus $339 billion ayear earlier Even though the value ofstock held by these institutions declined

26.7 percent, their share of total stockoutstanding rose from 37.5 percent In1973 to 389 percent at the close of 1974.DUring the same period, the share held byother domestic Investors, individuals andinstrtutrons not listed, declined from 584percent to 57.0 percent, while the foreignInvestors share remained stable at 4 1percent.

Table 7

MARKET VALUE OF STOCKHOLDINGS OFINSTITUTIONAL INVESTORS AND OTHERS

(Buuons of Dollars End of Year)

1967 1968 1969 1970 1971 1972 1973 1974

1 Pnvate Nonmsured Pension Funds 51 1 615 614 671 887 1152 905 6332 Open-End Investment Companies 428 509 450 439 526 580 433 3033 Other Investment Companies 75 83 63 62 69 74 66 444 life Insurance Companies 109 132 137 154 206 268 263 2225 Properly-liability Insurance

Companies 130 146 133 132 166 218 197 1266 Common Trust Funds 39 48 46 46 58 74 66 537 Personal Trust Funds 759 836 796 786 941 1102 947 7098 Mutual Savmqs Banks 25 28 27 31 4 1 54 44 339 State and Local Retirement Funds 39 58 73 101 154 222 206 168

10 Foundations 202 220 200 220 250 285 245 18411 Educational Endowments 77 85 76 78 90 107 88 62

12 Subtotal 2393 2761 2616 2720 3387 4137 3460 253613 Less Institutional Holdings of

Investment Company Shares 28 34 40 49 60 67 67 57

14 Total Institutional Investors 2365 272 7 2575 267 1 332 7 4069 3393 247915 Foreign Investors J. 240 288 269 287 327 408 366 26316 Other Domestic Investor s I 5634 6744 5749 5570 6305 6892 5285 3639

17 Total Slack Outstanding I 8239 9759 8593 8528 9959 11369 9044 6380

I Excludes holdings of insurance company stock1. Includes esurnate of stock held as direct Investment'Computed as residual (line 16= 17-14-15) Includes both mdrvrduats and Institutional groups not listed

aboveI Includes both common and preferred stock Excludes Investment company shares but Includes foreign

Issues outstanding 10 the U S

187

J

Number and Assets ofRegistered InvestmentCompanies

As of June 30, 1975, there were 1,301active Investment companies registeredunder the Investment Company Act, withassets having an aggregate market valueof over $74 billion. Those figures repre-

sent an increase of 13 In the number ofregistered companies and an increase ofnearly $12 billion in the market value ofassets since June 30, 1974. At June 30,1975, 3,420 Investment advisers wereregistered with the Commission, repre-senting an Increase of 406 from a yearbefore.

Table 8

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS OFJUNE 30,1975

ApproximateMarket Valueof Assets of

ActiveNumber of RegIstered Companies Companies

Management open-end ("Mulual Funds")

Funds having no loadVan able annuity-separate accountsCapital Leverage CompaniesAll other load funds

Management closed-end

Small business Investment companiesCapital leverage companiesAll other closed-end companies

Unit Investment trusts

vanabre annurty-separate accountsAll other Unit Investment trusts

Face-amount certrncate companies

Total

Active

792

24860

2482

193

427

144

310

56254

6

1.301

39

36

20

3

98

Total

831

229

330

9

1.399

(Millions)

55,475

10.8261.220

3343,416

8.953

281297

8.374

8.685b

6058.080

1.060

74.192

a "Inactive" refers to regIstered cornparues which as of June 30. 1975. were In the process of beingliquidated or merged. Or have filed an apphcation pursuant to Section 8(f) of the Act for dereqrstratton,or which have otherwise gone out 01 existence and remain registered only until such time as the Com-rmssion Issues order under Section 8(1) terminating their registratIOn

b Includes about $48 billion of assets of trusts which Invest In secuntoes of other Investmentcompanies. substantoally all of them mutual funds

188

Table 9

Number of companies Approximatemarket value

Registration of assets ofRegistered Registered terminated Registered active

Fiscal year at beginning dUring durmq at end of companiesended June 30 of year year year year (millions)

1941 00 450 14 436 $ 2,5001942 436 17 46 407 2,4001943 407 14 31 390 2,3001944 390 8 27 371 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 14.00(11957 399 49 16 432 15.0001958 432 42 21 453 17,0001959 453 70 11 512 20.0001960 512 67 9 570 23.5001961 570 118 25 663 29.0001962 663 97 33 727 27.3001963 727 48 48 727 36.0001964 727 52 48

1

731 41.6001965 731 50 54 727 44.6001966 727 78 30 775 49.8001967 775 108 41 842 58.1971968 842 167 42 967 69.7321969 967 222 22 1,167 72.4651970 1.167 187 26 1,328 56,3371971 1,328 121 98 1,351 78,1091972 1,351 91 108 1,334 80,8161973 1,334 91 64 1.361 73,1491974 1.361 106 90 1.377 62,2871975 1.377 88 66 1.399 74,192

Table 10

INVESTMENT COMPANY REGISTRATIONS TERMINATED

1975

Management open-endNo-loads 8Variable anrnntres 2All others 41

Sub-total 51

Management closed-endsarc:e 1All others 11

Sub-total 12

Unit Investment trustVariable annuities 0All others 3

Sub-total 3Face amount certificates 0

Total Terminated 66

189

-

Table 11

NEW INVESTMENT COMPANY REGISTRATIONS

1975Management open-end

No-loads 31Variable annuures 4All others 22Sub-total 57

Management closed-endSBIC's 4All others 4

Sub-total 8Unit investment trust

Variable annurtres 8All others 14Sub-total 22Face amount certificates

Total Registered 88

Private Noninsured PensionFunds: Assets

The assets of private noninsured pen-sion funds totaled $133.7 billion at bookvalue and $111 7 billion at market valueon December 31, 1974. A year earliertheir comparable asset totals were $126 5

billion and $132.2 billion. The book valueof common stockholdings declined from$80.6 billion at the end of 1973 to $79.3billion last year. At market value, holdingsof common stock fell from $89.5 billion atthe end of 1973 to $62.6 billion last year,the lowest level since year-end 1969.

Table 12

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

Book Value, End of Year

(MIllions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Cash and Deposits 1,320 1,592 1,619 1,804 1,641 1,857 2,336 4,286U S Government Securities 2,324 2,756 2,792 3,029 2,732 3,689 4,404 5,533Corporate and Other Bonds 26,355 27,000 27,613 29,666 29,013 28,207 30,334 35,029Preferred Stock 980 1,332 1,757 1,736 1,767 1,481 1,258 1,129Common Stock 34,946 41,740 47,862 51,744 62,780 74,585 80,593 79,319

Own Company 2,563 2,836 3,062 3,330 3,608 3,868 4,098 NAOther Companoes 32,383 38,904 44,800 48,414 59,172 70,717 76,495 NA

Mortgages 4,083 4,067 4,216 4,172 3,660 2,728 2,377 2,372Other Assets 4,232 4585 4,720 4,860 4,826 4,983 5,229 6063Total Assets 74,240 83,072 90,579 97,011 106,419 117,530 126,531 133,731

N A Not AvailableNOTE Includes deferred profit sharing funds and pension funds of corporations, unoons, rnultiemployer

groups, and nonprofit orqaruzanons

190

Table 13

ASSETS OF PRIVATE NON INSURED PENSION FUNDS

Market Value, End of Year

(Millions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Cash and Deposits 1,320 1,592 1,619 1804 1,641 1,857 2,336 4,286U S Government secunnes 2,207 2,615 2,568 2,998 2,772 3,700 4,474 5,582Corporate and Other Bonds 22,612 22,437 21,262 24,919 26,111 26,232 27,664 30,825Preferred Stock 1,027 1.351 1.598 1.631 2.014 1.869 985 703Common Stock 50.077 60,105 59,827 65.456 86,636 113.369 89.538 62,582

Own Company 5,000 5.764 5,775 6.038 7,691 8,750 6947 NAOther Companees 45,077 54,341 54,052 59,418 78,945 104.619 82.591 NA

Mortgages 4.001 3,578 3,461 3.504 3.184 2,427 2.108 2.063Other Assets 4,206 4332 4295 4422 4560 4 908 5140 5681Total Assets 85.452 96.013 94,632 104.737 126.921 154,363 132,247 111.724

N A r~ot AvailableNOTE Includes deferred profit sharing funds and pension funds of corporations, unions rnultrernployer

groups, and nonprofit orqaruzatrons

Private Noninsured PensionFunds: Receipts andDisbursement

Information on the receipts and drs-bursements of private nonrnsured pensionfunds for 1974 is not yet avauable In1973, net receipts were $10.1 billion. Of

the $197 brlhon In total receipts. $14.4billion was contributed by employers and$1 3 billion by employees. Investment in-

come (interest, dividends, and rent) andnet loss on sale of assets were $4 8 billionand $0.9 billion, respectively. Of the $9.5billion In total disbursements, $9,3 billionwas paid out to beneficiaries.

Table 14

RECEIPTS AND DISBURSEMENTS OF PRIVATE NONINSURED PENSION FUNDS

(MillIOns of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Total ReceIpts 11825 13152 14 151 13.195 17545 20070 19673 21063Employer Contributions 7.038 7702 8487 9717 11324 12745 14368 16971Employee Contributions 790 893 1.011 1.074 1,120 1 199 1 273 1460I nvestment Income 2937 3.193 3549 3866 4.102 4302 4843 5982Net Profit (loss on

1723 (3477)Sale of Assets 995 1265 991 (1 592) 904 (924)Other ReceIpts 65 99 113 130 95 101 113 127

Total Disbursements 3994 4621 5.428 6180 7.263 8493 9539 11030Benefits Pard Out 3877 4503 5290 6030 7.083 8.297 9313 10740Expenses and Other

290Disbursements 117 118 138 150 180 196 226Net Receipts 7831 8531 8723 7015 10282 11577 10134 10033

NOTE Includes deferred profit sharing funds and pension funds of corporations unions and multi-employer groups and nonprofit orqamzanons

191

SECURITIES ON EXCHANGESExchange Volume

Dollar volume of all securities transac-tions on registered exchanges totaled$125.1 billion in 1974, down 33 percentfrom the $1872 billion volume in 1973.Of this total, $1183 billion representedstock trading, $8.5 billion, bond trading,and the balance, trading in rights andwarrants. The value of New York StockExchange transactions was $105.6billion

in 1974.This figure represents a declineof 31.7 percent from 1973. NYSE sharevolume declined 11.8 percent from the1973 total. On the American Stock Ex-change, value of shares traded dropped51 percent to $5.0 billion. The AMEXshare volume of 475 million shares wasoff 35.3 percent from the 1973 figure.Share volume on the regional exchangesdeclined 16.9 percent from the 1973 fig-ure to 541.9 million shares, valued at$14.0billion.

Table 15

EXCHANGE VOLUME:1974

(Data In thousands)

Bonds Stocks Rights and warrantsTotaldollar Dollar Principal Dollar Share Dollar Number

volume volume amount volume volume volume of Units

All registered exchanges 125,102,024 6,456,771 8.120,182 18.251,700 4,839.198 393,552 104,343

American 5,416,521 193.028 279.864 5.048,294 475.297 175.199 33,456Boston 1.470.005 0 0 1,468.869 42.578 1,135 174Chicago Board of Trade 0 0 0 0 0 0 0Cincinnati 79.703 199 295 79,504 2,438 0 0Detroit 268.902 0 0 268,900 9.596 2 1Intermountain 1.284 0 0 1.284 5,100 0 0Midwest 5,642.780 3,548 1.921 5.638.678 210,375 554 298National 5,257 1 37 5.255 3.158 1 5New York 105.566,489 6.194,092 7,740.993 99.180.709 3,822.021 191.688 62.966Pacrfrc 4.228.174 65.615 96,792 4.139.771 165.615 22.788 6.679Phlladelph ra-Bat IImore-

Washington 2,411,049 288 280 2,408.576 89,478 2.185 764Spokane 11,860 0 0 11860 13542 0 0

Exempted Exchange--Honolulu 1.174 0 0 1.174 149 0 0

192

MARKET VALUE OF SECURITIES TRADED ONALL U. S. STOCK EXCHANGES

Dollar. 811110ns

~-------------f\Jv-..

200

160

120

80

Stocks, "Ightsr, & Worrant.

Bonds

40 "~ 'r ..

o1964 65 66 67 68 69 70 71 72 73 1974 05 15070

193

•

~

NASDAQ Volume

NASDAQ share volume and price in-formation for over-the-counter trading hasbeen reported on a dally basis sinceNovember 1, 1971 At the end of 1974,there were 2,593 Issues In the NASDAQ

system, a decrease of 11.6 percent fromthe previous year-end figure. Volume for1974 was 1.2 billion shares down 27 per-cent from 1973 This trading volume re-flects the number of shares bought andsold by market makers plus their netInventory changes

Table 16

SHARE VOLUME BY EXCHANGES ,In Percentage

Total Share VolumeYear (Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others .!

1935 681971 7313 1242 191 269 1 10 96 85 03 6911940 377.897 7544 1320 211 278 133 119 82 08 3051945 769018 6587 2131 1 77 298 106 66 79 05 5511950 893320 7632 1354 216 311 97 65 55 09 2611955 1 321 401 6885 1919 209 308 85 48 39 05 5021956 1.182487 6631 2101 232 325 83 47 49 05 5271957 1.293022 7070 1814 233 273 111 40 39 06 4141958 1 400579 71 31 1914 213 2991 84 45 35 05 2741959 1.699697 6559 2450 200

i97 37 31 04 341

1960 1 428552 6908 2246 222 89 39 34 05 1411961 2.121 050 6566 2584 225 345 80 31 31 04 1341962 1 699.346 71 84 2026 236 298 88 32 37 05 951963 1.874.718 7317 1890 234 283 84 30 47 04 1111964 2.118.326 72 81 1942 244 265 93 29 55 04 861965 2663.495 7010 2260 264 234 82 27 53 05 641966 3306386 6954 2289 257 269 86 40 46 06 521967 4.641.215 6448 2845 236 246 88 43 33 03 581968 5406.582 6200 2975 263 265 90 79 32 01 961969 5.133.498 6318 2762 285 348 123 51 13 01 1001970 4.834523 7129 1903 316 368 163 52 11 02 551971 6172 668 7134 1843 353 372 192 43 16 03 441972 6.518132 7048 1823 371 413 222 59 15 04 451973 5899.679 7493 1375 409 368 220 72 18 05 401974 4.943686 7858 1029 426 349 183 86 19 05 45

I Share Volume for Exchanges Includes Stocks Rights and Warrants! Others Include Intermountain Stock Exchange Spokane Stock Exchange. National Stock Exchange

and Honolulu Stock Exchange

DOLLAR VOLUME BY EXCHANGES I

In PercentageDollar Volume

Year ($ Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others!

1935 $ 15.396139 8664 783 1 32 1 39 88 1 34 40 04 161940 8419.772 8517 7 £8 207 1 52 111 191 36 09 091945 16284 552 8275 1081 200 1 78 96 1 16 35 06 131950 21 808284 8591 685 235 219 1 g~1 112 39 11 051955 38039107 8631 698 244 1 90 78 39 09 081956 35 143 115 8495 777 275 208 108 80 42 08 071957 32214846 8551 733 269 202 1 12 76 42 08 0719'8 38419.560 8542 745 271 211 1 10 71 37 08 05H..:>~ 52001.255 8366 953 267 1 94 109 66 33 07 051960 45.276616 8387 936 273 1 95 104 60 34 08 041961 64.032924 8249 1072 276 200 104 50 38 07 051962 54823153 8638 682 276 200 105 46 42 07 051963 64403991 8524 752 273 240 107 42 52 06 041964 72415297 8355 846 316 249 1 15 43 67 06 041965 I 89.498711 8183 992 345 244 1 13 43 70 08 031966 123.643475 7981 1185 314 285 111 57 57 08 021967

I162136387 77 32 1449 308 280 1 13 67 44 04 04

1968 197061 776 7358 1800 3 12 266 1 14 104 35 02 091969 176343 147 7351 1760 340 313 1 44 68 12 01 131970 131 708.7981 7845 1111 376 381 200 68 11 03 051971 i 186375172 7907 998 400 379 229 59 19 05 041972 205 956 263 77 77 1038 429 395 257 76 18 05 061973

I178.863 622 82 07 606 455 356 246 100 21 07 02

1974 118646428 i 8375 440 475 351 203 124 23 07 02

I Dollar Volume for Exchanges Includes Stocks Rights and Warrants.! Others Include Intermountain Stock Exchange Spokane Stock Exchange Nanonai Stock Exchange

and Honolulu Stock Exchange

194

~ ~~

Special Block Distributions

In 1974, the total number of specialblock distributions declined 64.4 percentThe value of these distributions declined87.3 percent to $157 million from $1 2billion in 1974.

Secondary distributions accounted for54.9 percent of the total number of spe-cial block distributions in 1974 and 85percent of the total value of thesedistributions.

The special offering method was em-

ployed 33 times accounting for 40 percentof the total number of all special blockdistributions In 1974, but with an ag-gregate value of $16.8 million, theseofferings accounted for only 10.7 percentof the value of all special block distribu-tions.

The exchange distribution method wasemployed only 4 times In 1974. The valueof exchange distributions was $6.8 mil-lion, representing a decline of 25 2percent from the 1973 figure.

Table 17

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary distributions Exchange distnbutrons Special ottermqs

Year Number Shares Value Number Shares Value Number Shares Valuesold sold sold

1942 116 2,397,454 $ 82,840 79 812,390 $22,6941943 81 4,270,580 127.462 80 1,097,338 31,0541944 94 4.097,298 135.760 87 1 053,667 32,4541945 115 9,457,358 191,961 79 947,231 29,8781946 100 6,481,291 232,398 23 308,134 11,0021947 73 3,961.572 124.671 24 314270 9,1331948 95 7,302,420 175991 21 238,879 5,4661949 86 3,737249 104,062 32 500211 10,9561950 77 4,280.681 88,743 20 150,308 49401951 88 5,193,756 146,459 27 323,013 10,7511952 76 4,223,258 149,117 22 357897 99311953 68 6,906,017 108,229 17 380,680 10,4861954 84 5,738,359 218490 57 705,781 $ 24,664 14 189,772 6,6701955 116 6756,767 344,871 19 258,348 10,211 9 161850 7,2231956 146 11,696,174 520,966 17 156,481 4,645 8 131755 4,5571957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,8451958 122 9,508,505 361,886 38 619,876 29454 5 88,152 3,2861959 148 17,330,941 822,336 28 545,038 26491 3 33,500 3,7301960 92 11,439,065 424,688 20 441,644 11,108 3 63,663 5,4391961 130 19.910,013 926,514 33 1,127266 58,072 2 35,000 1 5041962 59 12,143,656 658.780 41 2,345,076 65459 2 48,200 5881963 100 18937,935 814,984 72 2,892,233 107498 0 0 01964 110 19,462,343 909,821 68 2553237 97711 0 0 01965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 01966 126 29,045,038 1,523,373 52 3,042,599 118,349 0 0 01967 143 30,783,604 1 154,479 51 3,452856 125,404 0 0 01968 174 36,110,489 1 571,600 35 2,669,938 93,528 1 3,352 631969 142 38,224.799 1244,186 32 1 706,572 52198 0 0 01970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 01971 204 72.801,243 2,007,517 30 2,595,104 65,765 0 0 01972 229 82,365,749 3,216,126 26 1,469,666 30,156 0 0 01973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662111 798891974 45 7512200 133838 4 82,200 6,836 33 1 921 755 16,805

195

Value and Number of SecuritiesListed on Exchanges

The market value of stocks and bondslisted on U. S. Stock exchanges at year-end 1974 was $795 billion, a decrease of10 percent over the previous year-endfigure of $888 billion. The total was com-pnsed of $537 billion In stocks and $258billion In bonds. The value of listed stocksdeclined by 30 percent In 1974 and thevalue of listed bonds increased over 108percent. Stocks with pnmary listing onthe New York Stock Exchange werevalued at $511 billion and represented 95percent of the common and preferredstock listed on all U. S stock exchanges.

The value of NYSE listed stocks declinedfrom their 1973 year-end total by $210billion or 29 percent. Stocks with pnmarylisting on the AMEX accounted for 4 per-cent of the total and were valued at $23billion. The value of AMEX stocks de-clined $15 billion or 40 percent in 1974.Stocks with' primary listing on all otherexchanges were valued at $2.9 billion anddeclined 30 percent over the 1973 total.

The net number of stocks and bondslisted on exchanges Increased by 204Issues or 3 percent In 1974. The largestgain was recorded on the NYSE, wherelistings Increased by 214 Issues. Data onthe number and value of foreign secunuesare In a footnote following Table 16.

Table 18

SECURITIES LISTED ON EXCHANGES I

(December 31, 1974)

Common Preferred Bonds Total Securities

Exchange Market Market Markel MarketValue Value Value Value

Number MIllions) Number Millions) Number Millions) Number Millions)

Re9,steredAmerican 1.222 $ 22,011 83 $ 1.303 202 $ 2.250 1.507 s 25.564Boston 62 159 3 1 1 1 66 161cmcinnan 6 11 4 52 7 67 17 130Detrort 5 13 1 0 0 6 13Midwest 28 208 8 79 1 13 37 300National 102 145 0 0 3 2 105 147New York 1,543 493.293 537 17,762 2.380 255,449 4.460 766,504Pacific 62 1.089 8 31 22 373 92 1.493P-B-W 28 87 100 644 5 28 133 759Intermountain 34 20 0 0 0 0 34 20Spokane 27 7 0 0 0 0 27 7

ExemptedHonolulu 19 $ 353 7 $ 7 5 $ 6 31 $ 366

Total 3.138 $517,396 751 $19.879 2,626 $258.189 6,515 $795,464

<Less than 5 million but greater than zeroI Excludes securities wtucf were suspended from trading at the end of the year, and secunties which

because of rnac ttvrty had no available Quotes Includes the followln9 forel9n stocks and bonds

Number Market Value Number Market ValueExchange Stocks (Millions) Bonds (Millions)

New York 34 $12.385 148 $2,332Amencan 70 9,237 4 85Pacmc 5 89 0 0National 4 61 0 0Honolulu 2 8 0 0

Tolal 115 $21 780 152 $2417

196

Table 19

VALUE OF STOCKS LISTED ON EXCHANGES

(Dollars In billions)

New York Amencan ExclusivelyDec 31 Slack Stock on other Totats

Exchange Exchange Exchanges

1936 $ 599 $148 $ 7471937 389 102 4911938 475 108 5831939 465 101 5661940 419 86 5051941 358 74 4321942 388 78 4661943 476 99 5751944 555 112 6671945 738 144 8821946 686 132 8181947 683 121 8041948 670 119 $30 8191949 763 122 31 9161950 938 139 33 11101951 1095 165 32 12921952 1205 169 31 14051953 1173 153 28 13541954 1691 221 36 194 81955 2077 271 40 23881956 2192 310 38 25401957 1956 255 31 22421958 2767 31 7 43 31271959 3077 254 42 33731960 3070 242 41 33531961 3878 330 53 42611962 3458 244 40 37421963 4113 261 43 441 71964 4743 282 43 50681965 5375 309 47 57311966 4825 279 40 51441967 6058 430 39 65271968 6923 612 60 75951969 6295 477 54 68261970 6364 395 48 68071971 741 8 491 47 79561972 871 5 556 56 93271973 7210 387 41 76381974 511 1 233 29 5373

Securities on Exchanges

As of June 30, 1975, a total of 6,559secuntres, representing 3,404 issuers,were admitted to trading on securitiesexchanges In the United States. Thrs com-pares With 6,459 Issues, mvolvrnq 3,482Issuers, a year earlier Over 4,500 Issues

were listed and registered on the NewYork Stock Exchange, accounting for 55.3percent of the stock Issues and 90 per-cent of the bond Issues Data below on"Securities Traded on Exchanges" in-volves some duplication since It Includesboth solely and dually listed securities.

197

Table 20

UN DUPLICATED COUNT OF SECURITIES ON EXCHANGES

(June 30 1975)

Registered exchanges IssuersStocks Bonds Total Involved

Registered and listed 3.832 2.642 6474 3349Temporarily exempted from registration 3 2 5 2Admitted to unlisted trading privileges 43 3 46 31Exempted exchanges

Listed 22 5 27 15Admitted to unusted trading privileges 7 0 7 7

Total 3907 2652 6559 3404

Table 21

SECURITIES TRADED ON EXCHANGES

StocksIssuers Bonds I

TemporarilyRegistered exempted Unlisted Total

American 1 280 1292 1 45 1338 205Boston 863 149 751 gOO 16Chicago Board Optrons 1 1 1Chicago Board of Trade 3 1 2 3cincmnan 334 29 316 345 14Detroit 381 66 334 400Honolulu 2 36 45 5Onter rnountam 55 53 2 55Midwest 629 388 1 327 716 13New York 1 892 2120 3 2.123 2.383Pacruc Coast 881 852 1 198 1 051 85PBS 970 317 835 1 152 61Spokane 37 35 5 40

I Issues exempted under Section 3(a)(12) of the Act such as obuqatrons of U S Government. thestates and cities are not Included In this table

, Exempted exchange had 38 listed stocks and 7 admitted to unlisted trading

1933 ACT REGISTRATIONSEffective RegistrationsStatements Filed

DUring fiscal year 1975, 2,780 securitiesregistration statements valued at $77 bil-lion became effective. While the numberof effective registrations declined nearly4 percent from fiscal 1974, the dollar valueIncreased 36 percent.

Although there were 2,912 registrationstatements filed In fiscal 1975 as com-pared with 3,149 filed in the previousyear-an 8 percent declme-e--the dollarvalue rose from $63 billion to $80 billion.Among these statements, there were 507Irrst-trrne registrants In fiscal 1975 ascompared with 731 In fiscal 1974. Thus,

198

almost all of the decline In the numberof filings IS accounted for In the drop-offof nrst-trme registrants, whose issue sizeIS typically smaller than average.

Purpose of Registration

Effective registrations for cash sale forthe account of Issuers rose 63 percent.In this category there were substantialdifferences In the rates of Increase asbetween equity and debt offerings, I.e,equity offerings Increased from $22 billionIn 1974 to $33 billion In fiscal 1975-a 48percent nse-e-and debt offerings rosefrom $21 billion to $38 blllion-a 79percent Increase

Among the secunties registered for

cash sale, almost all debt Issues were forImmediate offering, whereas three-fourthsof the equity registrations were for ex-tended cash sale. Registrations of ex-tended offerings totaled $24.8 billion withInvestment companies accounting for$15.7 billion and employee plans $78billion. Corporate equity registrationsaccounted for only 19 percent of Imme-diate cash sale reqrstratrons, down from40 percent In fiscal 1972, 48 percent In1973, and 29 percent In 1974

Securities registered for the accountof the Issuer for other than cash sale are

primarily common stock Issues relating toexchange offers, mergers and consolida-tions In fiscal 1975 common stock ef-fectively registered for this purposetotaled $3 billion, or only one-third asmuch as a year earlier

Registrations for the purpose of sec-ondary offerings (proceeds gOing to seil-Ing security holders) typically concernsales of common stock. In fiscal 1975these registrations amounted to $1 3billion, representing a decline of 22percent from fiscal 1974

Table 22

EFFECTIVE REGISTRATIONS

(Dollars In millions)

Cash sale for account of issuers

Total BondsCommon debentures Preferred

Fiscal year ended June 30 Number Value stock and notes stock Total

1935 284 $ 913 $ 168 S 490 S 28 $ 6861936 689 4835 531 3153 252 39361937 840 4851 802 2426 406 36351938 412 2101 474 666 209 13491939 344 2579 318 1593 109 20201940 306 1 787 210 1112 110 1 4331941 313 2611 196 1721 164 20811942 193 2003 263 1041 162 14651943 123 659 137 316 32 4861944 221 1 760 272 732 343 1 3471945 340 3225 456 1851 407 27151946 661 7073 1 331 3102 991 54241947 493 6732 1 150 2937 787 48741948 435 6405 1 678 2817 537 50321949 429 5333 1083 2795 326 42041950 487 5307 1 786 2 127 468 43811951 487 6459 1 904 2838 427 51691952 635 9500 3332 3346 851 75291953 593 7 507 2808 3093 424 63261954 631 9174 2610 4240 531 73811955 779 10960 3864 3951 462 82771956 906 13096 4544 4 123 539 92061957 876 14,624 5858 5689 472 120191958 813 16490 5998 6857 427 132811959 1070 15657 6387 5265 443 120951960 1 426 14367 7260 4,224 253 11 7381961 1 550 19070 9850 6162 248 162601962 1 844 19547 11 521 4512 253 162861963 1 157 14790 7227 4372 270 118691964 1 121 16860 10006 4554 224 147841965 1 266 19437 10638 3710 307 146561966 1 523 30109 18218 7061 444 25 7231967 1649 34216 15083 12309 558 279501968 2417 54 076 22092 14036 1 140 372691969 3645 86810 39614 11674 751 520391970 3389 59137 28939 18436 823 481981971 2989 69562 27455 27637 3360 584521972 3712 62487 26518 20127 3237 498821973 3285 59310 26615 14841 2578 440341974 2890 56924 19811 20997 2274 430821975 2780 77 457 30502 37557 2201 70260

Cumulative Total 50003 855802 359509 280490 28828 668833

I For 10 months ended June 30 1935.! Includes registered lease obnqat.ons related to industrial revenue bonds

199

'

Dollars Billions90

75

60

45

30

15

30

20

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.1935 1975

BILLIONS OF DOLLARS

200

1935 40 45 50 55(F.scal Years)

60 65 70 197505 A737 11I.7S1

-

Table 23

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:FISCAL 1975

(Dollars In millions)

Type of security

Bondsdebentures Preferred Common

Purpose of regIstratIOn Total and notes stock stock

II reqrstratrons (estimated value) 77 457 38452 2376 36630For account of Issuer for cash sale 70260 37557 2201 30502

Immediate ottermq 45477 37169 2190 6117Corporate 42856 34 549 2190 6117

altered toGeneral public 42 109 34 527 2184 5,398Security holders 747 21 6 719

Foreign governments 2621 2621 0 0Extended cash sale and other

Issues 24 783 387 11 24 384For account of Issuer for other than

cash sale 5925 836 137 4951Secondary otterrnqs 1 273 59 37 1 177

Cash sale 637 0 0 637Other 636 59 37 540

A

201

EFFECTIVE REGISTRATIONS CASH SAlE FOR ACCOUNT OF ISSUERSOollors Bt l l re ns40

30

20

10

o

",

", ,, I, ,, \I,J

ICommon Stock l I

~\I , ,,,,

}

\ I\I•

.... ....,..Preferred Stock :' ......c.;> <...1-.••••..•.•••.••••••••.••....•.....••...........•...•.•••...•

202

1935 40 45 50 55 60 65 70 1975

~

Regulation A Offerings

During fiscal year 1975, 265 notifica-tions were filed for proposed offenngs

under Regulation A. Issues between$400,000 and $500,000 In size pre-dominated

Table 24

OFFERINGS UNDER REGULATION A

FIscal Year

1975 1974 1973

Size$100,000 or less 28 40 69$1 00,OOG-$200, 000 42 79 107$200, 00G-$300, 000 39 66 96$300,OOG-$400,OOO 24 39 86$40000G-$500,OOO 132 214 459

Total 265 438 817

UnderwritersUsed 44 115 402Not Used 221 323 415

Total 265 438 817

OfferorsIssuing companies 227 394 787Stockholders 7 34 18Issuers and stockholders j omf ly 31 10 12

Total 265 438 817

Real Estate Investment Trusts

Dunng the fiscal year, the Office ofEconomic Research published three eco-nomic staff papers covenng real estateInvestment trusts (REITs), condominiumsregistered under the Securities Act of1934 and the Cost of Flotation of Regis-tered Issues, 1971-1972.

Early In the fiscal year, the staff con-ducted an analysis of condominiumsregistered under the 1933 Secuntres ActTrus report IS believed to be the mostcomplete statistical profile of condominiumreqrstrattons assembled to date. It con-tains a concise analysis of managementorganization and compensation, with alisting of all registrations studied Ac-cording to the figures compiled In thepaper, In the penod from 1967 to June,

1974, there were 75 condominiums regis-tered with the Commission valued at$7133 rrulhon. Since that time, registeredoffenngs In condominium projects havedeclined sharply.

The REIT paper contains an analystsof the REITs and discusses managementorganization, compensation plans andSecuntles Act registrations Since 1968,REITs have become a large source ofconstruction loans Statistics compiled Inthe report indicate that REIT Industryassets total about $21.2 billion In con-trast, Industry assets were Just $4.7 bil-lion as of year-end 1970. Recently, how-ever, a large segment of the Industryshows a leveling off In asset growth, withany Increases In loanable funds pnrnanlycoming from sources other than secuntresreg istratrons

203

Cost of Flotation of RegisteredIssues, 1971-1972

This report examines Initial costs offlotation of all effectively registered debtand equity secuntres offered for Immedi-ate cash sale dUring the period 1971-1972. It covers Issues offered to the gen-eral public by corporate-Issuers (primaryofferings) and those being sold by exist-Ing shareholders (secondary offerings)which encompass Issues offered throughsecurities dealers, Issues offered directlyby the ISSUing corporation as well as IS-sues offered through privileged subscnp-non, The five most prevalent types ofsecuntres covered are common stock,preferred stock, limited partnership in-terests, nonconvertrble and convertibledebentures.

Costs covered by the analysis are thosestrictly associated with transmitting fundsfrom the investor to the Issuer. There aretwo major categories of costs coveredcompensation paid to secuntres dealers,finders or agents for the services theyprovide In merchandising registered se-cunties offerings; and "other expenses"associated with the preparation and IS-suance of new securities; e.g., legal,accounting and engineering fees, Securi-ties and Exchange Commission registra-tion fees, printing and engravingexpenses etc. Noncash compensation Inthe form of warrants or option IS coveredto a slightly greater extent than has beenthe case In the past.

List of All Foreign Corporationson the Foreign Restricted List

The complete list of all foreign corpora-tions and other foreign entities on theForeign Restricted list on June 30, 1975,IS as follows

Alan Mac'Favrsh, Ltd. (England)Allegheny Mining and Exploration

Company, Ltd (Canada)Allied Fund for Capital Apprecratron

(AFCA, SA) (Panama)Amalgamated Rare Earth Mines, Ltd

(Canada)

204

American International Mining (Ba-hamas)

American Mobile Telephone and TapeCo., Ltd (Canada)

Antel International Corporation, Ltd.(Canada)

Antoine Silver Mines, Ltd. (Canada)Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)Banco de Guadalajara (MeXICO)Bank of Sark (United Kingdom)Briar Court Mines, Ltd. (Canada)British Overseas Mutual Fund Cor-

poration Ltd. (Canada)California & Caracas Mining Corp.,

Ltd. (Canada)Canterra Development Corporation,

Ltd. (Canada)Cardwell 011 Corporation, Ltd. (Can-

ada)Caribbean Empire Company, Ltd.

(British Honduras)Caye Chapel Club, Ltd. (British Hon-

duras)Central and Southern Industries Corp.

(Panama)Cerro Azul Coffee Plantation (Pan-

ama)Cia. RIO Banano, S A. (Costa Rica)City Bank A.S (Denmark)Claw Lake Molybdenum Mines, Ltd

(Canada)Claravella Corporation (Costa Rica)Compressed Air Corporation, Limited

(Bahamas)Continental and Southern Industries,

S A (Panama)Crossroads Corporation, S.A. (Pan-

ama)Darien Exploration Company, S A.

(Panama)De Veers Consolidated Mining Cor-

poranon, S.A. (Panama)Durman, Ltd., formerly known as

Bankers International InvestmentCorporation (Bahamas)

Ethel Copper Mines, Ltd. (Canada)Eurotorerqn Banking Corporation,

Ltd. (Panama)Finansbanken ajs (Denmark)First Liberty Fund, Ltd. (Bahamas)Global Explorations, Inc. (Panama)Global Insurance Company, limited

(British West Indies)

Globus Anlaqe-Verrmttlunqspesetl-schaft MBH (Germany)

Golden Age Mines, Ltd (Canada)Hebrlla Mining Corporation (Costa

Rica)lnternanonal Communications Cor-

poranon (Brtttsh West Indies)Ironco Mining & Smelting Company,

Ltd (Canada)James G Allan & Sons (Scotland)J P Morgan & Company, Ltd., of

London. England (not to be con-fused with J. P Morgan & Co,Incorporated, New York)

Jupiter Explorations, Ltd. (Canada)Kenilworth Mines, ltd. (Canada)Klondike Yukon Mining Company

(Canada)Kokanee Moly Mines, Ltd. (Canada)Land Sales Corporation (Canada)Los Dos Hermanos, S A (Spain)Lynbar Mining Corp, Ltd (Canada)Norart Minerals Limited (Canada)Norrnandre Trust Company, S A

(Panama)Northern Survey (Canada)Northern Trust Company, S A (SWit-

zerland)Northland Minerals, Ltd (Canada)Obsco Corporation, Ltd (Canada)Pacrtrc Northwest Developments. Ltd

(Canada)Pan amen can Bank & Trust Company

(Panama)Paul pre Gold Mines, Ltd (Canada)Pyrotex Mining and Exploration Co,

Ltd (Canada)

Radio HIli Mines Co , Ltd. (Canada)Rodney Gold Mines Limited (Canada)S A Valles & Co , Inc. (Ptulhprnes)San Salvador Savings & Loan Co,

Ltd (Bahamas)Santack Mines Limited (Canada)Security Capital Fiscal & Guaranty

Corporation, S.A. (Panama)Silver Stack Mines, Ltd (Canada)Societe Anonyme de Refmancement

(Switzerland)Strathmore Distillery Company, Ltd.

(Scotland)SWISS Caribbean Development &

Finance Corporation (Switzerland)Tam O'Shanter, Ltd (Switzerland)Timberland (Canada)Trans-American Investments, limited

(Canada)Trrhope Resources, Ltd (Canada)Trust Company of Jamaica, Ltd

(West Indies)United Mining and Milling Corpora-

non (Bahamas)Urutrust Limited (Ireland)Vactlonland (Canada)Valores de lnversron. S.A. (Mexrco)Victoria Oriente, Inc (Panama)Warden Walker WorldWide Investment

Co (England)Wee Gee Uranium Mines, Ltd. (Can-

ada)Western lnternatronal Explorations,

Ltd (Bahamas)Yukon Wolvenne Mining Company

(Canada)

205

ENFORCEMENTTypes of Proceedings

As the table below reflects, the securi-ties laws provide for a wide range ofenforcement actions by the CommissionThe most common types of actions areinjunctive proceedings instituted In theFederal district courts to enjorn con-

trnued or threatened secuntres law vio-lators, and administrative proceedingspertaining to broker-dealer firms and/orindividuals associated with such firmswhich may lead to various remedial sane-nons as required In the public interest.When an injunction is entered by a court,violation of the court's decree IS a oasisfor criminal contempt action against theviolator.

Table 25

TYPES OF PROCEEDINGS

I ADMINISTRATIVE PROCEEDINGS

Basrs for enforcement action Sanction or relief

Broker-dealer, mvestment adviseror associated person

Wilful violation of secunties acts provisron or Revocation suspension, or denial of broker-dealerrule aiding or abetting of such violation failure or Investment adviser registration, or censure ofreasonably to supervise others willful misstate- broker-dealer or Investment adviser (1934 act,rnent In filing with Commission. conviction of or sec 15(b)(5) Advisers Act, sec 203(d))injuncnon against certain secuntres or secuntres-related vrotatrons

Member of registered securoties association

v.otanon of 1934 Act or rule thereunder willful Expulsion or suspension from assoc.anon (1934vrolanon of 1933 act or rule thereunder act sec 15A(1)(2»

Member of national securities exchange

VIOlatIOn of 1934 act or rule thereunder Expulsion or suspensron from exchange (1934 act,sec 19(a)(3))

Any person

Same as first Item Bar or suspension from assocratron with a broker-dealer or Investment advrser, or censure (1934act sec 15(b)(7) Adviser Act sec 203(1)

v.oianon of 1934 act or rule thereunder Willful Bar or suspension from assocranon with memberviotanon of 1933 act or rule thereunder of registered securrtres assocranon (1934 act.

sec 15A(1)(2))

Willful vroianon of secunnes acts provisron or Prohibition, permanently or temporarily. from serv-rule aiding or abetting of such violation Willful Ing In certain capacities for a registered Invest-misstatement In filing with Commission ment company (Investment Co Act, sec 9(b)

Principal 01 broker-dealer

Appomtrnent of SIPC trustee for broker-dealer Bar or suspension from associ all on with a broker-dealer (Securities Investor Protection Act, sec10 (b»)

Registered securities assocratron

Rules do not conform to statutory requirements Suspension of registration (1934 act, sec 15A(b))

Violation of 1934 act or rule thereunder failure Revocation or suspension of reqistration (1934 act,to enforce compliance WIth own rules engagmg In sec 15A(1)(1))activity tending to defeat purposes of provrsron of1934 act autnorrz.nq nanonal secuntres assocra-nons

206

Table 25-Conlinued

Basis for enforcement act.on Sanction or relief

NatIonal seeunnes exchange

vrotanon of 1934 act or rule thereunder failure Withdrawal or suspension of registratIon (1934)to enforce cornpuance tber ewuh by member of act sec 19(a)(1))

Officer or director of registered secunnesassociation

Willful failure to enforce aSSOCiatIOn rules or Removal from office (1934 act sec 15(AI(11(3))willful abuse of authority

OffIcer of national seeuntres exchange

Violation of 1934 act or rule thereunder Exputsron or suspension from exchange (1934 actsec 19(a)(3))

1933 Act regIstratIon statement

Statement materially Inaccurate or Incomplete Stop order suspending effectiveness (1933 actsec 8(d))

Investment company has not attained $100 000 Stop order (Investment Co Act sec 14(a))net worth 90 days after statement became effectIve

1934 Act reporting requirements

Materra! noncornpnance Order directing compliance (1934 act sec15 (c)(4))

Securities issue

Noncompliance by Issuer with 1934 act or rules Denial suspensron of effectIve date suspensionthereunder or WIthdrawal of reqrstr atron on national secuntres

exchange (1934 act sec 19(a)(2))

Pubuc mterest requrres fradlng suspensron Summary suspension of over-the-counter orexchange tradIng (1934 act secs 15(c)(51 and19(a)(4))

Registered Investment company

Failure to file 1940 act reqistrauon statement or RevocatIOn or suspension of reqistratron (Invest-

requrred report fIling materially Incomplete or ment Co Act sec B(el)misleading statement or report

Company has not attained $100 000 net worth 90 RevocatIon or suspension of registratIon (Invest-

days after 1933 act regIstratIOn statement became ment Co Act sec 14(a))effectIve

Name of company or of security Issued by It ProhIbitIOn of adoption of such name (Investment

deceptive or misleading Co Act sec 35(d))

Attorney, accountant, or other profeSSIonalor expert

Lack of requisite quauticancns to represent Permanent or temporary denial of privilege to

others lackrnq In character or Integrity unetruca! appear or practice before Co rnrruasron (RuleS of

or Improper protessronal conduct willful vrotanon Practice Rule 2(e)(1))of secur me s raws or rules or aiding and abettingof such VIOlatIOn

Allorney suspended or disbarred by court ex- Automatic suspension from appearance or prac nceperf s license revoked or suspended convrcuon of before Co rnrru s s ron (Rules of Practice Rule

felony or misdemeanor rnvotvmq moral turpitude 2(eI121)

Permanent rruuncnon 01 finding of vrol an on In Temporary suspension from appearance or practiceComrru ss ron-c--m su tuted action finding of Violation before CommiSSIon (Rules of Practice Ruleby Cornrrus sron In adrrurustranve proceeding 2(e)(3))

207

Table 25-Continued

II CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Basra for enforcement action

Any person

Person engaging or about to engage In acts orpractices violating secunties acts or rules there-under

Noncompliance with provrsrons of law, rule orregulation under 1935 act order Issued by Com-rrussron, or undertaking In a registratIOn statement

Issuer subject to reporting requirements

Failure to file reports required under section15(d) of 1934 act

Registered Investment company or affiliate

Name of company or of security Issued by Itdeceptive or misleading

Officer, director, adviser, or underwnter engag-Ing or about to engage In act or practice con-stituting breach of nducrary duty involving personalmisconduct

Breach of nducrarv duty respecting receipt ofcornpensation from Investment company by anyperson havinq such duty

Sanction or relief

Injunction against acts or practices which con-stitute or would constitute violations (plus an-cillary relief under court s general equity powers)(1933 act sec 20(b) 1934 act, sec 21(e) 1935act, sec 18(f) Investment Co Act, sec 42(e)Advisers Act, sec 209(e»

Writ of mandamus drrecnnq compliance (1933 actsec 20(c) 1934 act sec 21(1) 1935 act, sec16(g»

Forfeiture of $100 per day (1934 act, sec 32(b»

I njunction against use of name (I nvestment CoAct, sec 35(d»

Injunction against acting In certain capacmes forInvestment company (I nvestment Co Act sec36(a»

Award of damages (Investment Co Act, sec 36(b)

III REFERRAL TO ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIS for enforcement action

Any person

Willful vrotauon of secunties acts or rulesthereunder

Sanctron or relief

MaXimum penal lies $5,000 fine and 5 years im-prrsonrnent under 1933 and 1939 acts, $10,000 fineand 2 years' rrnnnsonrnent under other acts Anexchange may be tined up to $500,000, a public-utrh ty holding company up to $200,000 (1933 actsecs 20(b), 24 1934 act secs 21(e). 32(a) 1935act secs 18(f) 29 1939 act, sec 325 InvestmentCo Act, secs 42(e), 49 Advisers Act, secs 209(e)217 )

Table 26

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS ADMINISTERED BY THECOMMISSION.

Pending June 30 1974 1 115New Cases 490

Total 1605

Closed 317Pending June 30 1975 1288

208

During the fiscal year ending June 30,1975, 277 formal orders were Issued by

the Commission upon recommendation ofthe Drvisron of Enforcement

Table 27

ADMINISTRATIVE PROCEEDINGS

Admrrustratrva Proceedings Instituted DUring Fiscal Year Ending June 30, 1975

Broker Dealer ProceedingsInvestment Adviser ProceedingsSlOP Order Reg A Suspension and Other Disclosure Cases

851542

Injunctive Actions: 1974-1975Durmg fiscal 1975, 174 SUits for in-

Junctions and 18 miscellaneous actionswere instituted In the United States dis-trict courts by the Commission, and 19district court proceedings were broughtagainst the Commission. DUring the year15 appellate cases mvolvrnq petitions forreview of Commission decisions were

handled, as well as 11 appeals In reor-ganization matters and 55 appeals In in-junction and miscellaneous cases. SECparticipated as Intervenor in 1 case andfiled 12 amicus curiae briefs rn 12 cases

DUring fiscal 1975, the General Counselreferred to the Department of Justice 88cnrmnal reference reports. (This figureIncludes 12 criminal contempt actions)

Table 28

INJUNCTIVE ACTIONS

Injunctions DefendantsFIscal Year Cases Instituted Ordered Enjoined

1966 67 63 2581967 68 56 1891968 93 98 3841969 94 102 5091970 111 97 4481971 140 114 4951972 119 113 5111973 178 145 6541974 148 289 6131975 174 453 749

209

Criminal proceedings: 1974-1975

During the past fiscal year, 88 caseswere referred to the Department of Justicefor prosecution. (this figure Includes 12criminal contempt actions). As a resultof these and prior referrals, 53 indict-ments were returned against 199 de-fendants dUring the fiscal year Therewere also 116 convrctrons In 33 casesConvrotions were affirmed In 6 cases that

had been appealed, and appeals werestili pending In 5 other criminal cases atthe close of the period Of 17 defendantsin 17 criminal contempt cases handleddurrnq the year, 10 defendants were con-victed, and 7 defendants In 6 cases arestili pending. Twenty-three cases arepending In a Suspense Category. (ThiSfigure Includes 2 criminal contemptcases)

Table 29

CRIMINAL CASES

Number of CasesFiscal Referred to Number of DefendanfsYear Justice Dept Indictments Indrcted Convicnons

1966 44 50 193 761967 44 53 213 1271968 40 42 123 841969 37 64 213 831970 35 36 102 551971 22 16 83 891972 38 28 67 751973 49 40 178 831974 67 40 169 811975 88 53 199 116

210

PUBLIC UTILITY HOLDINGCOMPANIESAssets

At the end of calendar 1974, there were17 active holding companies registered

under the Public Utility Holding CompanyAct of 1935 There are 175 companieswithin the 17 active holding companysystems Aggregate consolidated assets,less valuation reserves, approximated $39billion at December 31, 1974.

Table 30

PUBLIC-UTILITY HOLDING COMPANY SYSTEMS

Electnc AggregateSolely Registered and/or gas Non- In- System Assets

registered hOldmg utility utility active Total Less Vatuanonholdmq operating subsrd- subsid- com. com- Reserves at

companies cornpanres lanes lanes parues parues Oec 31 1974"Allegheny Power

System Inc 1 2 1 6 0 10 $ 1 758437000Arnencan Electnc Power

Company, Inc 1 0 9 17 2 29 5923 106000Amencan Natural Gas

Company 1 0 2 5 0 8 2340526000Central & Soulhwest

Corporation 1 1 3 2 1 8 1 788 708000Columbia Gas System

Inc. The 1 0 8 11 0 20 2838138000Consolidated Natural

Gas Company 1 0 5 4 0 10 1 635751 000Delmarva Power & Light

Company 0 1 2 0 0 3 801 946.000Eastern Utilities Associates 1 0 4 1 2 8 269.970000General PubliC Utilities

Corporation 1 0 5 3 1 10 3.424 555.000Middle South unnnes Inc 1 0 6 4 3 14 3124342000Nanonal Fuel Gas Company 1 0 1 3 0 5 415626000New England ElectriC

System 1 0 4 2 0 7 1 562.580000Northeast Utilities 1 0 5 8 6 20 2551 482.000Otuo Edison Company 0 1 1 0 0 2 1 835267.000Philadelphia Electrrc

Power Company 0 1 1 0 1 3 57.591 000Southern Company The 1 0 5 2 0 8 6574 744 000Utah Power & Light

Company 0 1 1 0 0 2 798.954000

Subtotals 13 7 63 68 16 167 $37 701 723000Adjustments <a) to take

account of JOlOtly.ownedcompanies (b) to add netassets of eight jorntty-owned companies notIncluded above' . 0 0 ra) -8 0 0 a) +8 894050000

Total companies and assetsIn ac uve systems 13 7 71 68 16 175 $38 595 773.000

.Aepresenls the consolidated assets less valuation reserves of each of system as reported to theCommission on torm U5S for the year 1974 The figures for National Fuel Gas Company are as atSeptember 30 1974

.. These eight companies are Beechbotlom Power Company Inc which IS an indirect suosrdrarv ofAmerican ElectriC Power Company Inc and Allegheny Power System Inc orno Valley ElectriC Corpora-tron and Its subsrdiary Indiana-Kentucky ElectriC Corporation which are owned 378 percent by AmericanEtectrrc Power Company Inc 165 percent by Otuo Edison Company 125 percent by Allegheny PowerSystem Inc and 332 percent by other companies The Arkanorna Corporation which IS owned 32 per-cent by Central & Southwest Corporation system 14 percent by Middle South unnnes Inc system and34 percent by an eiectnc uu l rfy company not associated With a registered system Yankee Atomic

Company Connecticut Yankee Power Company Vermont Nuclear Power Corpora-non, and Mame Yankee Atormc Power Company. which are statutory utruty subsidranes of Northeastunnnes and New England ElectriC System

211

El ectr rc Atomic Yanke e

Financing

The volume of external financing bythese companies aggregated $2.79 billionIn fiscal 1975, an Increase of 11 percentfrom the previous year Bonds Issued and

sold decreased 24 percent, and preferredstock 11 percent However, the amount ofcommon stock and debentures Issued andsold Increased 148 percent and 78percent, respectively.

Table 31

FINANCING OF HOLDING-COMPANY SYSTEMS I

(Fiscal 1975)

Holdmq-Cornpany Systems In MillIOns of Dollars'

Preferred CommonBonds Debentures stock stock

S S S SAlleghany Power System Inc

Monongahela Power Co 546 I

West Penn Power Co 399American Electric Power Co 1638

Appatactuan Power Co 891 I

Indiana & MichIgan Electric Co 150Ohio Power Co 298 650

American Natural Gas Co 723Michigan Consolidated Gas Co 794 I

Michigan WisconSin Pipe Line Co 494Central and South West Corp 688

PublIC Service of Oklahoma 496Transok PIpe line Co 119

Columbia Gas Co 739 1012Consoudated Natural Gas Co 992 510Delmarva Power & light Co 298 150General Public Utili lies Corp 322

Jersey Central Power & light Co 601 I 500Metropolitan Edison Co 503Pennsylvania Electric Co 250

M,ddle South Utilities 980Arkansas Power & light Co 600Loursiana Power & light Co 500

Nanonal Fuel Gas Co 208New England Electric System 400

Narragansett Electric Co The 401 I

New England Power Co 803Northeast Utilities 732 I

Connecticut light & Power Co The 844Hartford Electric light Co The 199Western Massachusetts Electric Co 100

Ohio Edison Co 1487 400 565Pennsylvania Power Co 50 80

Southern Co , The 3038Georgia Power Co 1288MISSISSIPPI Power Co 139

Utah Power & LIght Co 398 419 529 I

Tolal 12398 1939 3821 9765

I The table does not Include securities Issued and sold by Subsidiaries to therr parent holding com-panies short-term notes sold to banks portfolio sales by any of the system companies. or securitiesIssued for stock or assets of nonatnnated companies Transacuons of this nature also require authoriza-tion by the Commission except. as provided by Sec '(b) of the Act, the Issuance of notes havmg amaturity of 9 months or less where the aggregate amount does not exceed 5 percent of the pnncrpatamount and par value of the other secunnes of the Issuer then outstanding

s Debt securrues are computed at prrce to company preferred stock at offering prrce common stockat offerrng or subscrrption price

Two or more IssuesI Private placement

212

'

'

'

'

~

Table 32

The table below shows statistical data relatIng to sales of about $1 2 billion of secunues by negotiationdu"ng fiscal 1975 Nine common stock Issues between November 13 1974 and Ap,,1 23 1975 were solddurmg the temporary suspension of the competitive bIddIng requrrements on common stocks and theremaining Issues were sold pursuant to exceptions granted by order under the Pubuc Utility HoldmgCompany Act of 1935

Dollar 0;'

Number of Total Prtceto Compen- PIE %Shares Dollars Company san on RdtlO Yield

First Mortgage Bonds

I8/01/74 Georgia Power Co NA s 130 000 000 $99 08 93 NA 110

Preferred Stocks12112/74 Jersey Central

Power" Light 250 000 25 000 000 96 05 3 95 NA 13512/20/74 Ohio Power Co 250 000 25 000 000 96 05 395 NA 14 a6/17/75 Jersey Central

Power & Light 250 000 25 000 000 9650 350 NA 110

Common Stocks9/18/74 The Southern

Company 17500 000 166250 000 874 80 48 14710/01/74 Utah Power &

light 1 000 000 22 250 000 20 84 63 61 10 610/23/74 Northeast Utilities 4 500 000 27 563 000 549 10 4 44 16711/13/74 Delmarva Power &

light 1 500 000 15000000 925 75 61 12 a1/21/75 Middle South

UtIlities 7 000 000 98 000 000 1326 53 63 902/04/75 Central s Southwest 4300 000 68800 000 1522 49 91 732/25/75 Arnerrcan Natural

Gas 2 000 000 72250 000 3436 49 7 2 703/19/75 General PubliC

Utilities 2300 000 32200 000 1332 49 62 12 a3/26/75 Arnencan Erectrrc

power 10 000 000 163 750 000 1552 53 84 1224/08/75 New England

1522 7 a 111Electflc System 2500 000 40 000 000 494/15/75 Onio Edison 4 000 000 56500 000 1344 49 85 1184/23/75 Utah Power & Light 1 200 000 30 600 000 2431 47 79 936/10/75 Northeast Utilities 5 000 000 45625 000 858 60 63 1116/17/75 The Southern

73 11 2Company 11 000 000 137500 000 1189 49

$1 181 288 000

N A Not Applicable

213

=

CORPORATEREORGANIZATIONS

Commission Participation

DUring fiscal 1975, the Commissionentered 14 new Chapter X proceedingsinvolving companies with aggregate

stated assets of approximately $657 mil-lion and aggregate Indebtedness of ap-proximately $686 million. Including thenew proceedings, the Commission was aparty In a total of 129 reorganizationproceedings dunnq the fiscal year Duringthe year, 9 proceedings were closed,leavmq 120 pending

Table 33

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACTIN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1975

Debtor

Air Industrial Research IncAldersgate Foundation Inc I

American ASSOCiated Systems IncAmerican Land CorporationAmerican Loan & Finance Co :

American Mortgage & Investment Co I

American National Trust !.

Arizona Lutheran Hospital I

Arlan s Dept Stores IncAtlanta tnternanonat Raceway Inc

Bankers Trust I

Beck Industries IncBermec CorpBeverly Hills BancorpBubble Up Delaware Inc

Burreson & Co Inc I .!

BXP Construction CorpC I P Corp I

Calvin Christian RetIrement Home Inc I

Carolina Caribbean Corp I

Coast 1nveators I nc I

Coffeyville Loan & Investment I

Combined Metals ReductIOn CoCommonwealth Corp I

Commonwealth Fmancral Corp I

Community BUSiness Services IncContinental Land Development One Inc I

Continental Vending Machine CorpCosmo Capital Inc I

Cybern Education Inc.!

Davenport Hotel IncDrver srtred Mountaineer CorpDumont-Airplane & Manne I

E T & T Leasrnq Inc I

Eastern Credit Corp'

East MolIne Downs rnc :Educanonal Computer Systems IncEIchler Corp I

Et-Trorucs Inc I

Equrtable Plan Co I

214

District Court

N D CalM 0 FlaED KySO OhioED Va

D SCS D IndD ArrzSDNYN D Ga

S D lndSDNYSDNYCD CalCD Cal

CD CalSONYS D OhioW D MlchWD N C

W D WashD KansD NevN D FlaED Pa

ED CalS D FlaEDNYN D IIIN Dill

ED WashS D W VaSDNYD MdED Va

S D IIID AriZN D CalED PaS D Cal

Petition Flied

March 14 1974Sept 12 1974Dec 24. 1970Aug 8 1973July 31 1972

Dec 13 1974Feb 13 1968May 11 1970

March 8 1974Jan 18 1971

Oct 7 1966May 27 1971

April 16 1971April 11 1974Aug 31 1970

June 10 1974Jan 15 1974May 23 1975

Aug 8 1974Feb 28 1975

Apnl 1 1964July 17 1959

Sept 30 1970June 28 1974Dec 4 1967

June 8 1972Nov 27 1974July 10 1963July 22 1963

Sept 11 1970

Dec 20 1972Feb 8 1974Oct 22 1958Dec 20 1974

March 4 1974

Sept 11 1973April 26 1972Oct 11 1967Nov 25 1958

March 17 1958

SEC Notice ofAppearance Filed

May 6 1974Oct 3. 1974Feb 26 1971

Sept 25 1973Aug 30 1972

Feb 6 1975March 27 1968

May251970March 8 1974

Feb 3 1971

Nov 1 1966July 30 1971

April 19 1971May 14 1974Oct 19 1970

Aug 1 1974June 10 1974June 26 1975Nov 4 1974April 17 1975

June 10 1964Aug 10 1959

Sept 7 1972July 17 1974Dec 13 1967

April 30 1973May 8. 1975

Aug 7 1963April 22 1963Sept 25 1970

Jan 26 1973April 24. 1974Nov 10 1958June 5 1975April 22 1974

Oct 17 1973Nov 3 1972Oct 11 1967Jan 16 1959

March 24 1958

Debtor

Table 33-Continued

Drstnct Court Peu uon FliedSEC Notice 01

Appearance FIled

EQUIty Funding Corp of AmencaFarr mqton Manufacturing CoFirst Baptrst Church tnc of Margate FtaFirst Home Investment Corp of Kansas IncFirst Research Corp

Wm Gtuckin Co LtdGro-Plant incusmes IncGulfeo I nvestrnent CorpGulf tjruon Corp IHarmony Loan Inc

Hawkeye Land ltdR Hoe & Co IncHome-Stake Pr oductron CoHouston Educational Foundation IncHuman Reianons Research Foundation

lmperiat-Amenc an Resources Fund IncImpenal '400 Natrcnat IncIndiana Business & Investment TrustInterstate Stores IncInvestors Associated rnc:

Investors Funding Corp of New York rJade Od & Gas Co IJ D Jewell IncKtng Resources CoKrrchoter & Arnold I

Lake Winnebago Development Co InclIt1le Mtssoun Minerals Assn IncLos Angeles Land & Investments LtdLOUISiana loan & Thrrtt IncLusk Corp

Lyntex CorpDolly Madison Industries IncMagnolia Funds IncMammoth MountaIn Inn CorpManufacturer s Credu Corp,

Maryvale Cornrnuruty Hospital I

Mayer Central Burldrnq IMId-CIty Baptrst ChurchMorehead CIty Shrpbuudmq IMount Ever e st Corp

NatIonal VIdeo Corp!Nevada Industrial Guaranty CoNorth American Acceptance CorpNorth Western Mortgage tnvestors CorpOmega-Alpha Inc I

Pan American Financial CorpParkvrew Gem IncParkwood inc :Pno eru x Mortgage Co .!RIC rnternanona: rndustnes Inc

John Rich Enterprises IncRiker Delaware Corp (Roberts Company I

Royal I nns of American I nc I

Scranton Corp'

Sequoyan Industries IncEdward N SIegler & CoSierra Trading Corp I

60 M .nure Systems Inc.!Sound Mortgage Co Inc

Southern Land Title CorpStanndco Developers IncStuf rnq Homex CorpSunset International Petroleum CorpSwan-FInch all Corp .!

CD CalED VaSOFiaD KanSOFia

SONYNO FlaW 0 OklaM 0 LaEO Ky

S D IowaSDNYNO OklaS D TexS D Cal

D ColoD N JS D rnoSDNYW 0 Wash

SDNYCD CalN D GaD ColoED N C

W D MoD N DD HawauED LaD ArIZ

SDNYED PaED LaCD CalD N J

D AnzD A"zED LaED N CED Pa

N DillD NevN D GaW D WashN D Texas

D HawauWD MoD DCD AozNO Tex

D UtahD N JM D N CS D CalM D Pa

W D OklaN D OhroOCalaM D FlaW 0 Wash

ED LaWDNYWDNYN D TexasSDNY

Ap,,1 5 1973Dec 22 1970

Sept 10 1973Ap"l 24 1973

March 2 1970

Feb 22 1973Aug 30 1972

March 22 1974Aug 29 1974Jan 31 1973

Dec 19 1973July 7 1969

Sept 20 1973Feb 16 1971Jan 31 1964

Feb 25 1972Feb 18 1966Oct 10 1966

June 13 1974March 3 1965

Oct 21 1974June 28 1967Oct 20 1972Aug 16 1971Nov 9 1959

Oct 14 1970July 18 1966Oct 24 1967Oct 8 1968Oct 28 1965

Ap"l 15 1974June 23 1970Nov 18 1968

Sept 16 1969Aug I 1967

Aug 1 1963July 15 1965July 30 1968Nov 9 1959May 29 1974

Feb 26 1969May 7 1963

March 5 1974Dec 12 1973Jan 10 1975

Oct 2 1972Dec 18 1973June 13 1966Aug 14 1967

Sept 16 1970

Jan 16 1970Ap,,121 1967Feb 12 1970Ap,,124 1975Ap,,1 3 1959

Jan 21 1974May 23 1966July 7 t 970July171970July 27 t965

Dec 7 1966Feb 5 1974July 1I 1972May 27 1970Jan 2 1958

Ap,,1 9 1973Jan 14 1971Oct 1 1973

Ap"l 24 1973Ap,,114 1970

March 6 1973Sept 13 1972

March 28 1974Nov 5 1974Jan 31 1973

Jan 21 1974July 14 1969Oct 2 1973

March 2 1971Feb 14 1964

March 6 1972Feb 23 1966Nov 4 1966June 13 1974

March 17 196b

Oct 22 1974Aug 16 1967Nov 7 1972Oct 19 1971Nov 12 1959

Oct 26 1970Jan 29 1968Nov 28 1967Oct 8 1968Nov 15 1965

Jan 28 1974July 6 1970May 26. 1969Feb 6 1970JUly 30 1968

Sept 11 1963Jan 19 1966Oct 23 1968Nov 12 1959June 28 1974

March 26 1969JUly 2 196:1

March 28 1974Dec 12 1973Jan 10 1975

Jan 9 1973Dec 28 1973June 17 1966Ap"l 17 1968Sept 23 1970

Feb 6 1970May 23 1967

March 2:1 1970June 24 1975Ap"l 15 1959

Jan 30 1974June 7 1966July 22 1970July 29 1970Aug 31 1965

Dec 31 1966March 7 1974

July 24 1972June 10 1974Jan 23 1958

TMT Trader Ferry Inc'Tele- Tr oruc s CoTexas Independent Coffee Orcatuz auonTlleo IncTower Credit Corp

S D FlaED PaS D Texo x ansM 0 Fla

June 27July 26Jan 5Feb 7

April 13

1957t962196519731966

NovSeptJanFeb

Sept

22 195712 196213 196522 t973

6 1966

215

t

~

t

t

Table 33-Continued

SEC Notice ofDebtor District Court Petition Filed Appearance Filed

Traders Compress Co W 0 Okra May 12 1972 June 6 1972Trans-East Air Inc o Me Aug 29. 1972 Feb 22. 1973Trans-International Computer Investment NO Cal March 22 1971 July 26. 1971Trusters Corp' CD Cal Sept 13. 1961 Oct 9 1961

U District BUilding Corp I W 0 Wash Dec 9 1974 Dec 9 1974

uruservrces, Inc SO Ind Dec 4.1970 Jan 28. 1971v.atron Computer Systems Corp o Mass April 29. 1971 April 29. 1971Vinca Corp I ED M,ch March 29 1963 April 9.1963Virgin Island Properties, Inc o V I Oct 22.1971 April 11. 1972Waltham Industries Corp CD Cal July 14. 1971 Aug 19 1971

Webb & Knapp Inc I SONY May 7 1965 May 11. 1965HR Weissberg Corp , NO III March 5 1968 April 3.1968Westec Corp I SO Tex Sept 26 1966 Oct 4.1966Western Growth Capital Corp o Am Feb 10 1967 May 16 1968Western National Investment Corp I o Utah Jan 4 1968 March 11. 1968

Westgate-Callforma Corp SO Cal Feb 26. 1974 March 8.1974Wonderbowl Inc CD Cal March 10. 1967 June 7 1967Wood moor Corp o Colo Feb 25 1974 March 25 1974Yale Express System Inc I SONY May 24 1965 May 28. 1965

I Cornrmssron filed notice of appearance In fiscal year 1975.! Reorganization proceedings ctoseo during fiscal year 1975: Plan has been substantially consummated but no final decree has been entered because of pending

matters

SEC OPERATIONS

Net Cost

Altogether, fees collected by the Com-rrussron In fiscal 1975 amounted to 54percent of funds appropriated by the Con-gress for Comrrusston operations, TheComrnrsston IS required by law to collectfees for (1) registration of secunties IS-sued; (2) qualmcatron of trust Identures,(3) registration of exchanges, (4) reqistra-non of brokers and dealers who are regis-tered with the CommisSion but are notmembers of the NASD, and (5) certifica-tion of documents filed with the Commrs-sion In addition, by fee schedule, theOornrrussion Imposes fees for certain ttl-inqs and services such as the filing ofannual reports and proxy material.

216

With reference to the fee schedule, onMarch 29, 1974, the Commission an-nounced the repeal of certain provisionsof Rule 203-3 under the Investment Ad-visers Act of 1940, which required eachInvestment adviser to pay an annual feeto the Commission during the period ofItS registration. The Cornrrusston subse-quently announced, In Release 1A-486,that all fees affected would be refundedto those advisers and former advisers whopaid them In any of the years In which thefee was imposed. The acnon was takenfollowing the Commission's considerationof recent decisions of the United StatesSupreme Court With respect to the In-dependent Offices Appropriation Act of1952,31 USC 483(a), which was thoughtto provide the statutory baSIS forestablishing these fees.

~

APPROPRIATED FUNDS vs FEES COLLECTEDDollors Millions

-

-

......

APPROPRIATION

-

NET COST OFCOMMISSION

I- OPERATIONS •-

"}

FE ESCOll ECTED

'-

50

40

30

20

10

o1969 70 71- 72 73 74 1975

217

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