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! '. • f <: : 51st,Annuai Repor~of the

U.S. Securlties andfixchange Commission

II for the fiscal year ended September 30;/1985

--/

For Sale by the Superintendent of Documents. U.s Government Printing Office

Washington, D.C. 20402
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20S49

OFFICE OF

THE CHAIRMAN

December 31, 1985

The Honorable George Bush

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Thomas P. O'Neill, Jr.

Speaker of the House of Representatives

Washington, D.C. 20515

In Fiscal 1985 the Commission increased investor protections and reduced unnecessary paperwork and other expenses. ultimately borne by investors.

Fiscal 1985 highlights include:

Results: Through automation, paperwork reduction and other staff initiatives,

record results were achieved in the number of investment company, adviser

and self.regulatory organization inspections, corporate filings reviewed and

broker-dealer oversight examinations.

Since fiscal 1981, the annual volume of:

Appellate and other cases has been increased by over 35%;

Enforcement actions by over 40%;

Corporate filings reviewed by over 50%;

Broker-dealer oversight examinations by over 60%;

Self-regulatory organization inspections by over 70%; and

Investment company and adviser inspections by over 100%.

Budget: Since 1981, the Commission's budget has been increased by 33%.

which is more than for most independent agencies. Many have been reduced. In

any case, in each of the last three fiscal years, registration, transfer and other

fees have exceeded the Commission's budget. This has happened only once

before in the past 51 years. The 35 % fiscal 1985 excess amounted to over $35

Fiscal Years 1981.85

Ended Sept 30 1981 1982 1983 1984 1985 Change

Investment Co and

Adviser Inspections 748 1.065 1.085 1.334 1.606' +115%

SROt Inspection 12 19 18 20 21' + 75%

Broker Oversight

Examinations 278 249 324 389 447' + 61%

Corporate Filings

Reviewed 6.087 6.197 6.849 7.114 9.382' + 54'7"0

Enforcement Actions 191 254 261 299' 269 + 41%

Appellate and Other

Cases 102 115 143 167* 141 + 38%

Staff Years 1.982 1.881 1.921 1.885 1.936 2%

Fees as Percent of

Budget 81% 94% 110'7"0 129% 135%

, A record or the highest level In years t - Self Regulatory Organization
million. The Commission's budget, personnel and fees are set by Congress. The

fees are remitted to the Treasury as received.

Enforcement: The 269 enforcement actions brought was less than the prior

year, due to an increase in resource intensive financial reporting cases and a

decline in delinquent filings casesagainst individuals. Of the enforcement actions, 20% were financial disclosure cases. A number were products of the

1982 recession and 1983 "hot new issue" market. It is during such periods that

some companies and executives are tempted to "cook the books". Actions

against brokers and other regulated entities amounted to 42 % of the cases and

insider trading 7%. The balance of the cases involved stock manipulation,

failure to file or delinquent filings of periodic reports, and internal accounting

controls and books and records deficiencies. The Commission has begun to

seek fines up to three times illegal profits under the Insider Trading Sanctions

Act, proposed by the Commission and passed last year.

Edgar: This pilot electronic disclosure system has been designed by the SEC

staff, Arthur Anderson & Co., IBM and Dow Jones. Inc. to increase the efficiency and fairness of the securities markets by accelerating dramatically the filing,

processing, dissemination and analysis of corporate information. The Edgar

system commenced on schedule in September 1984. Over 1,900 electronic filings have since been received from over 170 issuers. Participants include

AT&T, Exxon, General Motors. IBM and other major corporations, as well as

small companies, limited partnerships, mutual funds and the California,

Georgia and Wisconsin securities commissions.

Shareholder Communications: To facilitate shareholder communications,

Commission rules, approved in August 1984, required brokers to begin providing corporations with the identity of their non-objecting shareholders on

January 1, 1986. The Commission also proposed the Shareholder Comrnunication Act, requiring banks and saving and loan associations to provide such information, which was signed into law on December 28, 1985.

Certificate Immobilization: The voluntary immobilization of securities certificates through the greater use of central depositories and electronic bookentry systems will save hundreds of millions of dollars per annum of expenses

ultimately borne by investors. Even in the absence of such potential savings,

the paperwork and other problems avoided more than justify simplifying the

process. Significant progress was made by industry. In addition, the Division of

Market Regulation has conducted a series of workshops to encourage corporations, municipalities and other issuers to do their future public offerings of debt

securities in the form of single "Global Certificates"-against which investors'

interests are recorded by depositories on an electronic book-entry basis.

Government Securities: Government securities dealer failures during the

past year resulted in a number of enforcement actions, and in consultation with

the Federal Reserve Board and the Department of the Treasury, the Commission prepared and delivered to Congress in June, an in-depth study of the

government securities market. The report detailed actions taken by investors,

government dealers, Federal and state regulators to prevent future problems,

and a legislative approach, if deemed necessary by Congress.

ii
Options and Futures Study: In December 1984, the Federal Reserve, the

Commodities Futures Trading Commission and the SEC submitted to Congress a joint study which concluded that options and futures serve useful hedging and arbitrage purposes and do not adversely impact capital formation. New

options and futures are permitting investors to hedge stock market, foreign

currency and other risks at a fraction of the prior costs of hedging or reducing

such risks.

Marketplace Efficiency: Efforts to increase the breadth and efficiency of the

securities markets for the benefit of investors include Commission decisions to

permit each stock exchange to grant unlisted trading privileges in up to 25

over-the-counter stocks; to permit the exchanges and over-the-counter dealers

to make competitive markets in OTC options; to test competitive side-by-side

marketmaking in OTC options and stocks, through a one-year pilot; and to permit the NYSE to make markets in certain options. Effective surveillance of

these markets is an integral part of these programs. The Commission has also

required last-sale reporting for additional OTC securities and disclosure of

dealer mark-ups.

Intermarket Surveillance: At the Commission's initiative, fully functional

transaction audit trails have been implemented by the American and New York

stock exchanges. The Chicago Board Options Exchange and National Association of Securities Dealers are also making substantial progress toward such

systems, which increase investor protections and reduce transaction reconciliation costs, ultimately borne by investors.

Internationalization: The Commission approved linkage of the Boston and

Montreal stock exchanges and the American and Toronto stock exchanges.

Other major exchanges and market systems are also discussing international

linkages. Approximately 10% of the transactions on the New York Stock Exchange are now originated abroad. With a view to facilitating the international

mobility of capital and the proper surveillance of these markets, the Commission issued two concept releases, which suggested approaches and solicited

comments on ways to coordinate and improve international disclosure,

distribution, surveillance and enforcement practices. The extensive responses

and alternatives are being analyzed.

Bush Task Group: The staff drafted legislation to implement the Bush Task

Group's securities recommendations for the benefit of investors, This legislation would provide functional regulation of securities activities and consolidate

duplicative and overlapping regulatory activities.

Banks Securities Activities: Also, to facilitate functional regulation, the

Commission adopted a rule which will require banks to conduct certain

securities activities through broker-dealers registered under the Exchange Act.

The validity of the rule has been upheld in litigation, which is on appeal.

Paperwork Reduction: In order to eliminate duplicative paperwork and increase the effectiveness of regulations, the Commission developed in cooperation with the North American Association of Securities Administrators and apiii
proved new broker-dealer and investment adviser "plain English" registration

forms, and simplified investment company forms.

Integrated Disclosure Program: This program is saving corporations for the

benefit of their shareholders over a billion dollars per annum of paperwork,

underwriting and interest costs-without reducing full disclosures to the investing public. In fiscal 1985, the Commission adopted forms which cover the

registration of securities issued in business combinations and exchange offers.

Tender Offer Regulation: The Commission proposed for comment an "all

shareholder, best price" rule which would require tender offers to be made to all

shareholders and that they be paid the best price offered to any holders. The extensive comments and alternatives are being analyzed.

Agency Coordination: In order to increase investor protections, the Divisions

of Enforcement, Investment Management and Market Regulation increased the

coordination of their efforts with those of other Federal agencies, state

authorities and self-regulatory organizations through greater referrals and

follow-up efforts.

Congressional Hearings: The staff and Commissioners testified at 23 hearings on government securities, accounting, tender offers, internationalization

of the securities markets, RICO and other matters upon which legislation is

pending.

The past year's improvements in investor protections and the efficiency of the

securities markets are a tribute to the ability, dedication and enthusiasm of the

SEC staff and Commissioners, and the cooperation and support of the self.

regulatory organizations, and the business and financial communities.

Sincerely yours,

~

John Shad

iv
Table of Contents

Chairman's Letter of Transmittal .

Enforcement Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Key 1985 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Program Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Corporate Reporting and Accounting 3

Insider Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Regulated Entities and Associated Persons 4

Securities Offering Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Market Manipulation 5

Changes in Corporate Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Other Developments 6

Transnational Securities Issues. . . . . . . . . . . . . . . . . . . . . . . . . . 6

Sources for Further Inquiry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Full Disclosure System 9

Key 1985 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Operations 10

Edgar and Computer-Assisted Review. . . . . . . . . . . . . . . . . . . . . 10

Rulemaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

The Proxy Review Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Tender Offers 11

Internationalization 11

Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Conferences 11

SEC Government-Business Forum on Small Business Capital

Formation 11

SECINASAA Cooperation 12

Accounting and Auditing Matters . . . . . . . . . . . . . . . . . . . . . . . . 12

Accounting-Related Rules and Interpretations. . . . . . . . . . . . . . . 13

Oversight of Private Sector Standards Setting 15

FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Timely Financial Reporting Guidance .. . . . . . . . . . . . . . . . . . . . 16

Accounting for Pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Consolidations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Other Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Oversight of Accounting Profession's Initiative. . . . . . . . . . . . . . . . 17

SEC Practice Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Special Investigations Committee . . . . . . . . . . . . . . . . . . . . . . . . 18

The Edgar Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

v
Regulation of the Securities Markets .. . . . . . . . . . . . . . . . . . . . 23

Key 1985 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Securities Markets, Facilities and Trading 24

The National Market System. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

National System for the Clearance and

Settlement of Securities Transactions. . . . . . . . . . . . . . . . . . . . . 25

Securities Immobilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Global Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Government Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Short Tendering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Issuer Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Regulation of Brokers, Dealers, Municipal

Securities Dealers, and Transfer Agents. . . . . . . . . . . . . . . . . . . . 27

Broker-Dealer and Transfer Agent Examinations . . . . . . . . . . . . . 27

Transactions by Distribution Participants. . . . . . . . . . . . . . . . . . . 27

Financial Responsibility Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Customer Protection Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Interpretations of the Net Capital Rule . . . . . . . . . . . . . . . . . . . . . 28

Revised Form BD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Customer Confirmation Disclosure . . . . . . . . . . . . . . . . . . . . . . . 28

Publication of Quotations by Broker-Dealers . . . . . . . . . . . . . . . . 28

Bank Securities Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Extension of Credit by Broker-Dealers on Shares

of Direct Participation Programs 29

Extension of Credit by Broker-Dealers on

Investment Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Persons Deemed Not to be Brokers . . . . . . . . . . . . . . . . . . . . . . . 29

Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Transfer Agent Regulation 30

Transfer Agent Registration Forms. . . . . . . . . . . . . . . . . . . . . . . 30

Oversight of Self-Regulatory Organizations .. . . . . . . . . . . . . . . . . 30

National Securities Exchanges 30

National Association of Securities Dealers, Inc. 30

Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . . . . . 31

Clearing Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

SRO Surveillance and Regulatory Compliance

Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Securities Investor Protection Corporation . . . . . . . . . . . . . . . . . . 34

Applications for Re-Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Investment Companies and Advisers. . . . . . . . . . . . . . . . . . . . . . 35

Key 1985 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Regulatory Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Investment Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Public Utility Holding Companies 38

vi
Holding Company Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Subsidiary Service Companies 39

Significant Applications and Interpretations . . . . . . . . . . . . . . . . . . 40

Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Guidelines for Exemptive Applications 40

Institutional Disclosure Program . . . . . . . . . . . . . . . . . . . . . . . . . 41

Other Litigation and Legal Activities (General Counsel) . . . . . . 43

Key 1985 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Appeals in Commission Enforcement Actions . . . . . . . . . . . . . . . 44

Petitions to Review Commission Orders. . . . . . . . . . . . . . . . . . . . 45

Commission Participation in Private Litigation. . . . . . . . . . . . . . . 46

Trading on Material Non-Public Information. . . . . . . . . . . . . . . . . 47

Definition of a Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Challenges to the Commission's Authority

Under the Investment Advisers Act . . . . . . . . . . . . . . . . . . . . . . . 48

Commission Action under Rule 2-(e) . . . . . . . . . . . . . . . . . . . . . . 49

Litigation Involving Requests for

Access to Commission Records . . . . . . . . . . . . . . . . . . . . . . . . . 50

Litigation Against the Commission and

Its Staff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Significant Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Financial Services Industry-Vice Presidential

Task Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Tender Offer Reform 52

Regulation of the Government Securities Markets 52

Shareholder Communications Act. . . . . . . . . . . . . . . . . . . . . . . . 53

Corporate Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Trustees and Examiners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Estate Administration 54

Plans of Reorganization/Disclosure Statements 56

Compliance with Registration Requirements of the

Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Management, Economic Analysis and Program Support . . . . . . 59

Key 1985 Management and Program Developments. . . . . . . . . . . . 59

Economic Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . . 59

Information Systems Management . . . . . . . . . . . . . . . . . . . . . . . . 61

Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Facilities Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Personnel Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Public Affairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Consumer Affairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Equal Employment Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Commissioners and Principal Staff Officers. . . . . . . . . . . . . . 67

vii
Biographies of Commissioners . . . . . . . . . . . . . . . . . . . . . . . . . 69

John S.R. Shad. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

James C. Treadway, Jr. 69

Charles C. Cox .. , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Charles L. Marinaccio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Aulana L. Peters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Regional and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Footnotes 75

Glossary of Acronyms 87

Appendices 91

The Securities Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

viii
Enforcement Program

Key 1985 Results

Enforcement is the largest program within the Commission, accounting for

one-third of the total budget. The Commission brought 269 enforcement actions during fiscal 1985, compared with 299 in 1984 and 261 in 1983.

Fiscal 1984 total enforcement actions included 31 delinquent filing actions

resulting from a special effort in that year directed at persons who failed to

comply with Section 16 of the Exchange Act.

Total Actions Initiated

FY'81 FY'82 FY'83 FY'84 FY'85 81.85

"10

Increase

Total 191 254 261 299 269 41%

Civil Injunctive Actions 114 136 151 179 143 25%

Defendants Named N.A. 418 416 508 385

Administrative Proceedings 72 106 94 114 122 69%

Respondents in Proceedings N.A. 287 189 221 199

Civil and Criminal Contempt

Proceedings N.A. 9 14 4 3

Defendants N.A. 16 19 8 6

Reports of Investigation N.A. 3 2 2 1

Criminal Indictments or

Informations N.A. N.A. 71 75 59

Criminal Convictions N.A. N.A. 72 85 93

The Commission obtained court orders requiring defendants to return illicit

profits amounting to more than $17 million, either as disgorgement or restitution

to defrauded investors. The Commission also obtained freeze orders to protect

over $89 million in assets until courts could make appropriate dispositions.

The Commission referred or granted access to its files to the Department of

Justice or state prosecutorial authorities for investigation or prosecution in 145

cases during fiscal 1985. During fiscal 1985, 59 criminal indictments or informations were obtained in Commission related cases, compared with 75 in

1984. There were 93 criminal convictions in Commission related cases during

fiscal 1985, compared to 85 in 1984.

Introduction

The Commission's enforcement program seeks to preserve the integrity, efficiency and fairness of the securities markets by enforcing the Federal

securities laws. These laws provide civil and administrative remedies designed

to rectify past, and prevent future, violations.

1
Most Commission enforcement actions are preceded by a private investigation to determine whether a violation of the securities laws has occurred or is

about to. Where necessary, the Commission may order a formal investigation,

thereby authorizing the staff to issue subpoenas compelling testimony and production of documents.

Depending on results of an investigation, the Commission may authorize the

staff to commence a civil action in a United States District Court, institute an

administrative proceeding, or refer the matter to the Department of Justice for

criminal prosecution. Matters also may be referred to state or local authorities

or self-regulatory organizations for appropriate action.

The Commission's primary civil remedy is a Federal court injunction which

directs the subject to comply with the law in the future. If it is violated, contempt of court proceedings may result in imprisonment or imposition of fines.

Courts also may issue orders providing other equitable relief such as restitution, disgorgement of illicit profits, and other appropriate remedies.

The Commission is authorized to bring administrative proceedings against

regulated entities such as broker-dealers, investment companies, or investment

advisers, as well as persons associated with such entities. Where the Commission finds that a regulated entity has willfully violated the securities laws, it may

impose remedial sanctions ranging from a censure to a revocation of the

registration required for the entity to conduct business. The Commission also

may censure or limit the activities of associated persons, or suspend or bar

such persons from association.

Issuers of securities are subject to administrative proceedings if they fail to

comply with the disclosure and certain other provisions of the Exchange Act

under legislation enacted on August 10, 1984. The Commission's authority was

extended to proxy and tender offer violations under Section 14 and to individuals causing the violations. Respondents may be ordered to comply with

applicable provisions upon specified terms and conditions, or to take steps to

effect compliance. Issuers may also be named as respondents in certain proceedings authorized by the Securities Act. In addition, the Commission may

publish reports of investigation under Section 21(a) of the Exchange Act.

Criminal sanctions for Federal securities law violations include fines and imprisonment for up to five years for each violation. The Commission has

developed close working relationships with the Department of Justice and U.S.

Attorneys' offices to assist the investigation and prosecution of such cases.The

Commission also cooperates closely with state securities regulators and self.

regulatory organizations, including the National Association of Securities

Dealers (NASD) and the various national securities exchanges.

Program Areas

The Commission investigates and brings enforcement actions to remedy a

broad range of violations. Enforcement activity during fiscal 1985 included

cases concerning corporate reporting and accountlnq;' insider tradinq:" violations by regulated entities and associated persons:" market rnenlpulations:"

securities offerings:" changes in corporate control:" related party transactions:"

and delinquent filing cases against issuers."

2
Corporate Reporting and Accounting-Financial disclosure cases continued

to be a high priority in fiscal 1985. During fiscal 1985, the Commission brought

42 cases containing significant allegations of financial disclosure violations

against issuers or their employees, compared with 33 such cases in 1984 and

25 in 1983. The Commission also brought 14 casesalleging misconduct on the

part of accounting firms or their partners or employees in fiscal 1985, including

two of the issuer disclosure cases set forth above." There were 18 enforcement

actions against accountants or accounting firms in 1984 and 11 in 1983.

Typical financial disclosure cases involve improper valuation of assets or

liabilities; improper recognition of revenue or income; failure to establish sufficient provisions for bad debts or other contingencies, or failure to provide adequate disclosure concerning the issuer's true financial position. Many of these

cases also involve violations of accounting provisions of the Foreign Corrupt

Practices Act. Financial disclosure cases are often complex, requiring more

resources than other types of cases, but effective prosecution of them is essential to preserving the integrity of the disclosure system.

In one administrative proceeding, the Commission found that an issuer had

engaged in "opinion shopping" to find an accounting firm that would allow it to

recognize immediately the revenue associated with a real estate transaction. 10

In another case, the Commission alleged that an issuer had "managed" its earnings by creating unnecessary reserves during periods when earnings exceeded

projections, and then releasing those reserves in later periods when the issuer's

actual earnings were lower than projected. 1 1

Financial disclosure cases may also involve misconduct on the part of independent accountants who examine and issue an opinion on the issuer's financial statements. In one case, the Commission alleged that an accounting firm

had failed to follow generally accepted auditing standards in its examination

and report on financial statements which allegedly overstated the issuer's pretax results of operations by at least $22 million. 12 In another case, the Commission alleged that a partner of an accounting firm lacked independence because

he had accepted at least $125,000 from the principals of a government

securities firm in connection with the issuance of an unqualified opinion on that

firm's financial statements.'?

In addition to financial disclosure cases, the Commission brought two cases

involving misrepresentation or failure to disclose information concerning

related-party transactions, the compensation of officers, or other matters during fiscal 1985. The Commission also brought 19 delinquent filing actions

against issuers during the fiscal year, compared with 15 in fiscal 1984.

Insider Trading-Individuals who purchase or sell securities while in possession of material, nonpublic information relating to such securities, in violation

of a fiduciary duty or other relationship of trust and confidence, undermine the

expectation of fairness and honesty that is the basis of investor confidence in

the nation's securities markets. Trading of standardized options contracts,

coupled with tender offers and other acquisitions, has increased opportunities

for those with material non-public information to reap large profits. The Commission brought 20 insider trading cases in fiscal 1985, compared with 13 in

fiscal 1984.

3
The Commission obtained $2 million in disgorgement in insider trading

cases brought or settled during fiscal 1985. The Commission also began to use

its authority, provided by enactment of the Insider Trading Sanctions Act in

August 1984, to seek imposition of a civil penalty of up to three times the profit

gained or loss avoided by any person who buys or sells securities while in

possession of material, nonpublic information. The Commission filed two injunctive actions seeking the imposition of civil penalties during fiscal 1985.

The defendants in those actions consented to the imposition of penalties

amounting to $158,492, in addition to disgorging their profits."

An increasing number of Commission insider trading cases have resulted in

criminal prosecutions. During fiscal 1985, for example, 17 individuals who

were defendants in Commission actions received criminal sentences. In one

case, the manager of office services at a law firm was sentenced to three and a

half years imprisonment plus five years probation after pleading guilty to an in.

dictment charging him with having tipped other defendents about prospective

mergers or tender offers involving clients of the law firm.P ln another case, two

individuals were sentenced to four years imprisonment after pleading guilty to

an information charging them with obstruction of justice during the Commission's insider trading investlqation.!"

Regulated Entities and Associated Persons- The enforcement program area

that accounts for the largest number of cases involves regulated entities such

as broker-dealers, investment companies, investment advisers and transfer

agents. As the securities markets grow and more individuals come into contact

with the financial services industry, it becomes increasingly important to ensure that regulated entities conduct their business with integrity and fairness.

The Commission commenced 120 enforcement proceedings involving

regulated entities during fiscal 1985. Twelve cases involved securities offering

violations by regulated entities. Of the other cases, 79 primarily involved

broker-dealers or persons associated with broker-dealers, 19 investment advisers, 2 investment companies and 2 concerned transfer agents. The total includes 6 actions in which customers or employees were alleged to have

defrauded a regulated entity.

The broker-dealer cases involved, among other things, fraudulent sales practices, violations of net capital and customer reserve provisions, and books and

records violations. Among the cases brought by the Commission in this area

was an administrative proceeding in which the Commission found that a

broker-dealer firm had wrongfully used customers' fully-paid securities in its

stock loan business. The Commission censured the firm, and ordered it to comply with its undertakings to establish procedures governing its stock loan

business and to make a contribution to Securities Investor Protection Corporation (SIPC) of an amount equal to ten days' profit from its stock loan

operations." The Commission also brought two administrative proceedings in

which it alleged that national broker-dealer firms had failed to exercise

reasonable supervision over one or more employees subject to their supervision who had engaged in sales practice violations. The firms in those cases

were censured and ordered to comply with undertakings designed to deter a

recurrence of the violations. 18

4
During fiscal 1985, the Commission revoked the registration of 3 firms,

suspended 7 and censured 16. This compares with 12 revocations. 10 suspensions, and 14 censures in fiscal 1984.

Also during the year, 47 individuals were barred, 49 suspended, and 4 censured, as compared to 43 bars, 40 suspensions, and 8 censures during fiscal

1984.

On five occasions during fiscal 1985, the Commission brought emergency

actions to freeze assets and prohibit further violations by firms which con.

ducted transactions in the government securities markets. In four of those actions, the Commission alleged that the firms had violated the antifraud provisions in connection with purchase and repurchase agreements involving

government securities." In the other action, the Commission alleged that the

firm had violated the net capital provisions as a result of losses from transactions in the government securities markets."

Securities Offering Violations-Some issuers fail to register public offerings

of their securities, although required to do so by the Securities Act. Some

purport to rely on exemptions to registration requirements which are not

available. Some violate anti-fraud provisions of the Federal securities laws by

making material misrepresentations or omissions in connection with a

securities offering.

There were 49 cases principally involving offering violations by issuers and

other persons brought during 1985, 48 in 1984 and 41 in 1983. (These figures

do not include 12 cases principally involving offering violations on the part of

regulated entities; see "Regulated Entities and Associated Persons.")

In one securities offering case, the Commission alleged that the defendants

had raised more than $55 million by selling unregistered securities in the

form of investment contracts in a commodities arbitrage trading program

which promised annual returns of up to 41.5%. The Commission obtained a

temporary restraining order against further violations of the registration and

antifraud provisions, the appointment of a receiver, and an order freezing approximately $25 million of investors' funds pending an appropriate judicial

dlsposltion."

In another case (filed during fiscal 1984), the Commission obtained an

order requiring the operator of an alleged Ponzi scheme to disgorge $8.2

million to investors.P The defendant in that action was also sentenced to 99

years imprisonment in a related criminal proceeding.

Market Manipulation-The Commission is charged with ensuring the integrity of trading on the national securities exchanges and in the over-the.

counter markets. The Commission's staff, the exchanges and the National

Association of Securities Dealers engage in surveillance of these markets.

The Commission brought seven cases involving market manipulation during

fiscal 1985, 12 in fiscal 1984 and 11 in 1983.

Among the cases brought by the Commission in this area was one in which

it alleged that the defendants had manipulated the price of an issuer's common stock by generating apparent trading activity, by dominating the

market, and by issuing false statements about the issuer's oil and gas pro.

spects. Allegedly as a result of these activities, the price of the issuer's stock

increased from $1.10 to $27 per share, after a two. for-one stock split, during

5
an eleven-month period in which the issuer had almost no reported

earninqs."

Changes in Corporate Control-Sections 13 and 14 of the Exchange Act

govern proxy solicitations and the filing of reports by persons or groups who

make a tender offer or acquire beneficial ownership of more than 5% of a class

of equity securities registered with the Commission. These requirements are intended to ensure that investors have the material information needed to make

informed investment or voting decisions concerning potential changes in the

control of a corporation. During fiscal 1985, five enforcement actions were

brought in this area while 11 were brought in 1984 and 5 were commenced in

1983.

In one case, the Commission found that a corporation, after disclosing the

acquisition of 11.1 % of another corporation's common stock and stating that

the purchases had been made to acquire "a significant investment position" in

the issuer, violated the disclosure provisions by failing to disclose promptly that

it had started selling its holdings in the issuer. As part of settlement, the corporation undertook to maintain a liquidating trust of at least $2.2 million in

profits to provide for potential claims by investors who are able to prove that

they would be harmed by the corporation's sales of the issuer's stock."

In another case, the Commission issued a report of investigation in which it

expressed the view that an issuer may have violated the antifraud provisions by

stating that there were no corporate developments to account for unusual

market activity in the issuer's securities, when in fact merger discussions with

another company were taking place at the time the statement was made. The

report emphasized that, where an issuer makes a public statement regarding

rumors, unusual market activity, or corporate developments, that statement

"must be materially accurate and complete." The report also stated that, in appropriate circumstances, an issuer may decline to comment in response to inquiries regarding unusual market activity or rumors."

Other Developments

Transnational Securities Issues-In July 1984, the Commission issued a concept release requesting comments on a concept to address problems in investigations and enforcement actions involving persons who purchase or sell

securities in the U.S. markets from foreign countries, particularly when such

transactions are effected through institutions in nations with secrecy laws.26

Under the "waiver by conduct" concept, the purchase or sale of securities in the

U.S. would constitute an implied consent to disclosure of information and

evidence relevant to the transaction for purposes of any Commission investigation, administrative proceeding or action for injunctive relief authorized by the

federal securities laws that may arise out of the transaction.

The Commission received 65 letters of comment in response.Approximately half were submitted by foreign governments, business associations or banks.

Virtually all commentators agreed that the importance of enforcing transnational securities law violations calls for a prompt resolution of existing problems. However, only six endorsed a legislative enactment of the "waiver by conduct" concept. The great majority urged the Commission to pursue bilateral

and multilateral negotiations with other governments.

The Commission continued to discuss issues relating to transnational

securities violations with officials of other governments. The Division of En.

6
forcement also created an Office of International Legal Assistance to serve as a

liaison on enforcement matters with officials of other governments.

Sourcesfor FurtherInquiry- The Commission publishes in the SEC Docket

litigation releases which describe its civil injunctive actions and criminal proceedings involving securities-related violations. Among other things, these

releases report the violative conduct that is either alleged by the Commission

or the Department of Justice or found by the court, and the disposition or

status of the case. The Commission also publishes orders that institute administrative proceedings or provide remedial relief in the SEC Docket.

Enforcement actions brought during fiscal 1985 are listed in the Appendix to

this report with appropriate references to the releases and orders published in

the SEC Docket.

7

Full Disclosure System

Key 1985 Results

The full disclosure system is administered by the Division of Corporation

Finance. The disclosure system is designed to provide investors with full and

accurate material information, foster investor confidence, contribute to the

maintenance of fair and orderly markets, facilitate capital formation and inhibite fraud in the public trading, voting, purchase and sale of securities.

Full Disclosure Filings Given Full Review

FY FY FY FY FY 1981-5

1981 1982 1983 1984 1985 Change

Total Filings 6,087 6,197 6,849 7,114 9,382 +54%

Securities Act

Registration

Statements 1,626 1,815 2,297 2,554 2,325 +42.9%

10-K Annual Reports 325 1,245 1,012 1,283 2,135 +556.0%

Tender Offers

(140-1) 205 116 92 121 148 -28.2%

Proxy Contests 66 68 60 60 86 +30.3%

Annual Meeting

Proxies 577 698 895 1,217 1,683 + 191.6%

In fiscal year 1985, about 11,000 publicly-held concerns made 71,663 full

disclosure filings with the Commission, an increase of 8.4 % over fiscal 1984.

Of these 1,619, or 1.4%, were made through the Edgar system. Filings given a

full review continued to reach record levels. The staff reviewed 1,111 first-time

registration statements and 1,214 major repeat registration statements filed

under the Securities Act of 1933. During the year 2,135 or 21.7% of the Form

10-K annual reports filed were fully reviewed, representing a 66% increase over

1984. Approximately 1,683 annual meeting proxy statements were fully

reviewed. an increase of 38.3 % over 1984. All proxy statements with antitakeover provisions (369 this year) are fully reviewed. Proxy contest filings increased 43.3% over 1984 (60 vs. 86), all of which were fully reviewed.

In fiscal 1985, 148 tender offer schedules were filed (22.3 % more than in 1984),

of which 100% were fully reviewed.

9
Operations

Edgar and Computer-Assisted Review-Since 1980, the staff has increasingly

used computers to screen filings to identify those which present significant

disclosure issues, to facilitate review and as a managerial tool.

The first Edgar electronic filings were received on September 24, 1984. During FY 1985, over 1,619 live electronic filings were received and processed by

the Edgar pilot branch in the Division of Corporation Finance. The filings were

submitted by registrants who volunteered for the pilot and are taking advantage of the more efficient processing for electronic submissions.

For a more in-depth discussion of the pilot and the operational Edgar

system, see page 19.

Rulemaking

The Proxy Review Program-On April 23, 1985, the Commission adopted a

new form to be used to register securities under the Securities Act in connection with certain business combination transactions." The new form, Form S-4,

replaces Forms S.15 and S-14 (Form S.14 remains in effect, however, for use

by certain registered investment companies until the adoption of Form N-14).

Form S-4 addressesdisclosure needs in mergers and exchange offers byapplying the principles of integrated disclosure, including the three-tiered registration system and incorporation by reference. A comparable form, F-4, was also

adopted for business combination transactions involving foreign private companies." These new forms improve the effectiveness of the prospectus for

business combinations by requiring the information to be presented in a more

meaningful and accessible format. The forms provide both transactional and

voting information so that they function as both registration and proxy

statements.

On July 1, 1985, the Commission issued three releases requesting comments on proposals emanating from the comprehensive proxy review pro.

gram. The first release proposes to update proxy rules to reflect current

practice, administrative policy, new laws and changes in other Commission rules as well as to enhance investor protection, particularly regarding

disclosure about accountants.P They would clarify and simplify proxy

disclosure by applying the principles underlying the integrated disclosure

system to proxy statements. The second release proposes for comment a

rule specifying filing fees for certain Exchange Act business comb inations.:'? This proposal is based upon the Commission's experience with the

new fee structure established by the 1983 amendments to the Exchange

Act, and would codify and provide guidance concerning those fees. The

third release is related to specific rule proposals in the comprehensive

proxy review project dealing with disclosure concerning changes in and

disagreements with accountants." It is a concept release responsive to

general concerns about independent public auditors and the practice of

"opinion shopping."

Also, on July 23, 1985 the House passed H.R. 1603, the Shareholder Communications Act of 1985, legislation proposed by the Commission to amend

Section 14(b)of the Exchange Act. This legislation, based on the report issued

10
by the Commission's Advisory Committee on Shareholder Communications in

1982, would authorize the Commission to regulate the proxy processing activities of banks, associations and other entities that exercise fiduciary powers,

in much the same manner that the Commission currently regulates the activities of broker-dealers.

Tender Offers-On July 1, 1985 the Commission published two releases,one

addressing third-party tender offers" and the other addressing issuer tender offers."

The proposals would codify the Commission's position concerning equal

treatment of security holders in tender offers. Specifically, they would require

that certain tender offers be open to all security holders of the classof securities

subject to the offer and that all security holders in such tender offers be paid the

highest consideration offered to any security holder at any time during the offer. The comment period on the proposals closed on September 9, 1985.

Public comments on the Commission's concept release published on June

21, 1984 concerning two-tier tender offer pricing and non-tender offer purchase

programs>' were reviewed by the Commission, and copies of the Summary of

Comments were submitted to members of the House Subcommittee on

Telecommunications, Consumer Protection and Finance and the House Committee on Energy and Commerce in November, 1984.

lntemationalization- To provide a context for public comment on internationalization, the Commission published, on February 28, 1985, a releasecontaining two conceptual approaches to facilitate multinational securities offerings: the reciprocal approach and the common prospectus approach." The

reciprocal approach would require participating countries to adopt a system

providing that an offering document used by the issuer in its own country

would be accepted for offerings in each of the other participating countries,

assuming certain minimum standards are met. The common prospectus approach would require all participating countries to agree on disclosure standards for an offering document which then could be used in any of the countries. Under either approach, the same liability provisions of the Federal

securities laws would apply to foreign issuers as apply to domestic issuers.

Interpretations

The Division provides views on exemptions and disclosure requirements to

assist filers and other parties. Advice is provided through no-action and inter.

pretive letters that apply securities laws to specific situations, through interpretive releasesthat furnish guidance on general interest matters, and through

exemptive orders. In fiscal year 1985, 1,200 requests for no-action letters and

written interpretive advice were fulfilled.

Conferences

SEC Govemment-Business Forum On Small Business Capital Formation- The fourth annual SEC Government-Business Forum on Small

Business Capital Formation was conducted in Washington, D.C. on

September 12-14, 1985. Approximately 150 small business executives, ac11
countants, attorneys, financial analysts, broker-dealers, venture capital investors, financial advisors, bankers and government officials met to discuss

issue papers containing recommendations on taxes and securities.

Background on these issues was provided to participants by means of two

panels featuring leading members of the tax and securities communities.

The Forum is conducted under the Small Business Investment Incentive Act

of 1980 in which Congress directed the Commission to conduct an annual

Government-Business Forum "to review the current status of problems

and programs relating to small business capital formation" and to include

as participants other Federal agencies and leading small business and professional organizations concerned with capital formation.

SECINASAA Cooperation-In February, 1985, approximately 35 senior

Commission staff members met with representatives of the North American

Securities Administrators Association (NASAA) in Williamsburg, Virginia

to discuss methods of cooperating in securities matters in order to improve

the efficiency and effectiveness of both Federal and state securities regulation. Further coordination of the Uniform Limited Offering Exemption

(ULOE) with Regulation D under the Securities Act was a primary matter of

discussion.

Accounting and AUditing Matters

The Federal securities laws provide for the audit of financial statements

of publicly held corporations by independent accountants. Thus, those

laws have placed upon the accountant important responsibilities in

facilitating the capital formation processes, and as a result, the economy

as a whole.

Today, the accounting profession is subject to a unique combination of

public and private sector initiatives that is designed to ensure that the profession meets its public responsibilities. These initiatives include peer

review and other membership requirements of the American Institute of

Certified Public Accountants' (AICPA) Division for CPA Firms, private sector standards-setting, the Commission's programs (including active oversight), state licensing activities and private civil litigation against accounting firms. This framework has been built over time and is subject to continued refinements and improvements.

The primary Commission programs for ensuring compliance with the

accounting and financial disclosure aspects of Federal securities laws are:

• RuLemaking initiatives which supplement accounting standards, implement financial disclosures and establish independence criteria for

accountants;

• The review and comment process which results in improvement of filings, identification of emerging accounting issues (which can result

in rulemaking or private sector standards-setting), and identification

of problems warranting enforcement actions;

• The enforcement program, which imposes legal sanctions and serves

to deter irregularities by enhancing the care with which registrants

and their accountants analyze accounting issues; and

12
• Oversight of private sector efforts to establish accounting and

auditing standards, and to improve the quality of audit practice.

The Commission's direct efforts are multiplied by the efforts of the

Financial Accounting Standards Board (FASB), the AICPA and the other

activities of the profession under Commission oversight. In addition to

Commission enforcement actions, significant numbers of actions are

brought by private litigants, many of which are a direct result of Commission actions.

The cumulative effect of the Commission's programs, private sector initiatives and civil litigation comprises a comprehensive system under

which the integrity of financial reporting for public companies is constantly being challenged, modified and improved.

The Commission's review and comment process and enforcement programs are discussed elsewhere in this report. The remainder of this section

summarizes the Commission's accounting-related rules and interpretations and the oversight function."

Accounting-Related Rules and Interpretations

Regulation SoX provides guidance as to the form and content of financial statements filed with the Commission. The Commission has also

adopted various rules that specify disclosure of financial information outside of the financial statements. For example, certain supplementary

financial information, selected financial data and a management's discussion and analysis of the company's financial condition and results of

operations are required by Regulation S-K.

To address significant accounting issues, the Commission may issue interpretive releases and, when announcing rule changes, provide guidance

for compliance with new or amended rules. In addition, the Commission

staff periodically issues Staff Accounting Bulletins (SABs) to inform the

financial community of its views on accounting and disclosure issues. For

example, in March 1985, a SAB was issued on appropriate accounting

practices under the last-in, first-out (LIFO) inventory method." In

September 1985, a SAB was issued to clarify the staffs position on situations where investments in noncurrent marketable equity securities may

have to be written down."

Recent rulemaking initiatives have shown the Commission's desire to

upgrade financial and accounting disclosures and, at the same time,

simplify that disclosure. During the past year the Commission adopted

final rules and a related guide calling for increased disclosures about loss

reserves by property-casualty lnsurers.P? The Commission also adopted

amendments to correct and clarify its accounting-related rules,"? and proposed other amendments to rescind obsolete or duplicative rules." Additionally, the Commission recently proposed an amendment to its rules

dealing with the presentation of consolidated financial statements in Commission filings.42

13
In June 1985, the Commission proposed to require disclosure in certain

circumstances of the nature and extent of a registrant's repurchase and

reverse repurchase transactions and the degree of risk involved in such

transactlons.P This action was in response to recent developments in the

government securities market and occurred in connection with several

private sector initiatives. For example, a special task force of the Auditing

Standards Board (ASB) recently published a comprehensive report containing guidance on repurchase and reverse repurchase transactions and

several recommendations, including increased disclosure in this area.v'

The AICPA's Accounting Standards Executive Committee (AcSEC) and

the Governmental Accounting Standards Board (GASB) also have initiatives dealing with "repos."

In the release proposing the above amendments, the Commission noted

that it has monitored the growing array of complex financial instruments

that have been introduced in the marketplace. Some of these instruments

raise accounting and disclosure issues. The Commission believes that it is

essential to address the broad areas of disclosure and accounting for financial assets and transactions on a comprehensive basis as expeditiously as

possible. Consequently, it has initiated a project to consider the need for

additional rulemaking or other guidance in this area to ensure that investors are provided with full and fair disclosure about financial assets and

transactions. The Commission, therefore, requested comments (particularly from users of financial statements) as to the adequacy of accounting and financial reporting in this area. Specific comment was requested

on which types of financial transactions and instruments may need to be

addressed (e.g., interest rate swaps, securitized assets and sale of assets

with "put" arrangements) and suggestions were invited as to how they

should best be addressed. Comment was also requested on the need for,

and nature of, market value disclosure for certain financial assets.

Finally, the Commission believes that there are broad-based accounting

measurement and recognition issues involved in repurchase and reverse

repurchase and other financial instrument transactions that may best be

addressed by the private-sector standards setters. Therefore, recognizing

that these issues affect SEC registrants as well as other entities (including

publicly held banks and savings and loans that report to other government

agencies), the Commission authorized the Chief Accountant to send a letter to the FASB recommending that the FASB add a project to its agenda

to deal with the accounting issues involved in the broad area of financial

assets and transactions.

In addition to requiring financial disclosure about a particular

registrant, the Commission's rules address the qualifications of accountants, including their independence and accountants' reports on financial

statements, and require disclosure about a registrant's independent accountants. In July 1985. the Commission proposed to require additional

disclosure related to independent public accountants in proxy statments

and certain other filings.45 The proposed changes would improve investor

protection by enhancing disclosure in two areas.

The first change would require registrants to disclose whether their independent auditors are members of a voluntary professional organization

which has both a peer review program and an independent oversight function, both of which are subject to review by the Commission. If the auditor

is a member of such an organization, a statement would be made as to

14
whether the auditor has had such a review and, if so, the date of the most

recent peer review report.

Disclosure of membership in a professional organization (such as the

SEC Practice Section [SECPS) of the AICPA's Division for CPA firms) and

whether or not the firm has had such a review would be relevant to an investor's understanding of the auditor's commitment to quality of practice.

The Commission recognizes that, since peer reviews examine only a sample of the firm's engagments, they are not a guarantee that a firm will perform all future engagements in accordance with professional standards.

Nonetheless, the Commission believes that a peer review function is an

important element of a voluntary program to maintain and improve quality controls.

The second proposed change relates to the requirement to disclose

whether a disagreement with the prior accountant over accounting principles has occurred in connection with a change of accountants. This

change would not affect registrants who were reporting under the Exchange Act at the time the change in accountants occurred. However, it

would enhance investor protection by requiring disclosure in initial public

offering documents, and in filings under the Exchange Act by registrants

who were not subject to Form 8-K46 filing requirements at the time the

change occurred, to include the same disclosure that is presently required

only if there is a Form 8-K obligation at the time of the change.

In addition to the proposed changes discussed above, the Commission's

concerns about the manner and circumstances in which companies

change accountants, the impact of such changes on the integrity of the

financial statements, and the adequacy of disclosure about "opinion shopping" were reflected in the issuance of a separate concept release." That

release requested comments on the practice of registrants who seek an

auditor willing to support a proposed accounting treatment which is intended to accomplish the registrant's reporting objective, but which is not

necessarily in accordance with GAAP. The Commission also requested

comments on the most practical, cost-effective manner of obtaining better

public disclosure about "opinion shopping."

Oversight of Private Sector Standards-Setting

In addition to its direct action through rulemaking and other programs,

the Commission monitors the structure, activity, and decisions of the

private sector standards-setting organizations.

FASB-Although the Commission has adopted Regulation SoX, promulgated other rules and disclosure requirements in the financial reporting area, and has published interpretations and guidance where

necessary, it has generally refrained from prescribing the accounting

methods to be followed in the preparation of financial statements.

In lieu of specifying accounting principles, the Commission has presumed financial statements to be misleading or inaccurate unless prepared in

accordance with accounting principles which have substantial

authoritative support. Under this concept, the Commission looks to the

FASB to provide the initiative in establishing and improving accounting

principles. Oversight of the process involves not only Commission review

of the standards set, but also the direct participation of staff members and,

15
in some instances, the Commission itself in the initial setting of standards.

Staff members monitor developments closely and are in frequent contact

with the FASB, participate in meetings, public hearings, and task forces.

The Commission monitors progress of FASB projects and meets

periodically with the FASB to discuss topical issues.

When the staff identifies and resolves specific registrant accounting problems in the review process, such problems are often referred to the FASB

for consideration if they appear to be emerging accounting problems. In

the past year these referrals have resulted in the FASB issuing a standard

to clarify the accounting for induced conversions of convertible debt and

proposing a technical bulletin on accounting for certain aspects of

business comblnations.:" Both of these issues surfaced in the Commission's review process. As discussed previously, the Commission has

recently referred to the FASB a project on the broad area of financial

assets and transactions. Other significant developments during the past

year and current agenda items are discussed below.

Timely Financial Reporting Guidance-The Commission has encouraged

the FASB to provide more timely guidance on emerging issues and is supportive of recent initiatives in this area: (a) broadening the scope of FASB

technical bulletins (issued by the FASB staff without formal deliberations

by FASB members and without the entire due process procedures required

of FASB statements or interpretations), and (b) establishing an Emerging

IssuesTask Force (EITF) to assist the FASB in identifying and often resolving emerging accounting and reporting issues.

During the past year the FASB has used these new procedures to provide timely guidance on a number of occasions. For example, accounting

guidance for a special dividend of Federal Home Loan Mortgage Corporation preferred stock to financial institutions who are members of the

Federal Home Loan Bank system was issued in an unprecedented time of

three weeks."

The Commission's Chief Accountant is a participant in the EITF which is

composed of accounting practitioners and representatives of major

associations of preparers, such as the Financial Executives Institute and

the National Association of Accountants.

The Emerging Issues Task Force now has over one year of experience.

The results of the EITF so far are encouraging. The Task Force has

discussed over 75 issues since its inaugural meeting in July 1984. Predictably, the types of issues discussed have been relatively narrow in focus

and have involved issues such as Government National Mortgage Association "dollar rolls," instantaneous in-substance defeasance, unique financing transactions such as debt payable in common stock, and a host of

issues relating to financial instruments and financial institutions. On many

issues, the group reached a consensus that either (i) a single method of accounting is preferable based on existing literature, (ii) existing guidance is

adequate, or (iii) the issue does not present a pervasive problem. Other

issues have been referred to the FASB or the AICPA for action or further

consideration. The Commission expects the positions agreed upon at

those meetings to be followed by registrants; those that do not follow

them will be asked to justify departure from consensuses reached.

Accounting for Pensions-The FASB's current project on pensions may

result in significant changes ir.. the way companies account for, and

disclose information relating to, employee pension obligations. The FASB

16
has issued two related exposure drafts and held public hearings in July and

August on this project. The exposure drafts have generated interest and

controversy in the business community. The FASB is making every effort

to complete this project in calendar 1985.

Consolidations-The FASB project on consolidations is dealing with a

fundamental question-in what circumstances should the financial

statements of investee entities be combined with those of the reporting entity. During 1985 the FASB staff has been meeting with an advisory task

force and expects to expose for comment, a discussion document with tentative conclusions this year. The Commission believes that determinations

to be made in the project are important ones and should help resolve many

of the important accounting issues encountered by registrants and their

accountants.

Other Projects-Last year the FASB issued standards on accounting for

induced conversions of convertible debt, disclosure of employee

postretirement benefits, and computer software development costs,

among others. Other important items on the FASB's technical agenda include cash flow reporting, accounting for income taxes, employee stock

compensation plans, as well as important accounting issues for the insurance and utility industries.

Oversight of The Accounting

Profession' s Initiatives

In addition to oversight of the private sector process for setting accounting standards, the Commission also oversees various activities of the accounting profession conducted primarily through the AICPA. These include the Auditing Standards Board, which establishes generally accepted

auditing standards; the Accounting Standards Executive Committee,

which provides guidance on specific industry practices and prepares

issues papers on accounting topics for consideration by the FASB; and the

Division for CPA Firms, which seeks to improve the quality of accounting

firms through various membership requirements including peer review.

During the past year, the accounting profession has undertaken a

number of initiatives designed to improve the quality of independent

audits. These initiatives include: (1) reconsideration of existing auditing

guidance in areas such as the auditor's responsibility for the detection and

reporting of fraud, auditing repurchase transactions, loan loss reserves,

related party transactions, and uncertainties and contingencies; (2) consideration of a revised code of ethics; and (3) sponsorship, along with other

organizations. of the National Commission on Fraudulent Financial

Reporting, an independent commission to study the detection and prevention of fraud in the context of financial reporting. The Commission strongly supports these and other initiatives to maintain and enhance the integrity of financial reporting.

SEC Practice Section (SECPS)- The Commission oversees the activities

of the SECPS through frequent contact with the Public Oversight Board

(POB) and members of the executive and peer review committees of the

SECPS. In addition, the staff reviews POB files and selected working

papers of the peer reviewers. The Commission believes the peer review

process contributes significantly to Ifmproving quality controls of

members and thus should enhance the consistency and quality of practice

17
before the Commission. According to the POB's Annual Report as of June

30, 1985, 403 firms have voluntarily become members of the SECPS, including all firms with 30 or more SEC-reporting clients."?

The peer review process continues to evolve. During the current year the

following initiatives (some of which were suggested by the Commission,

by the POB or in the report of a Special Committee on the review and

structure of the SECPS)51were effected or underway: (1) membership requirements have been revised so that concurring partner review, audit

partner rotation, etc. will be required for certain banks and other lending

institutions and sponsors or managements of investment funds even

though they may not be SEC registrants; (2) additional guidance to improve the uniformity in reporting peer review results is being considered;

(3) the scope of the review by the second partner has been clarified; and (4)

consideration is being given to a requirement for member firms to adopt a

code of conduct, compliance with which should be tested during peer

reviews. The Commission strongly encourages continuing refinements in

the program and its staff will continue to suggest modifications where appropriate.

Special Investigations Committee-Activities of the Special Investigations Committee (SIC) supplement peer review. They determine whether

allegations of failure in the conduct of an audit indicate need for improvements in, or compliance with, quality control systems of the reporting firms or whether changes in professional standards are required. If

specific members of the firm's professional staff may have failed to follow

established policies and procedures, the SIC considers whether corrective

action taken by the firm is appropriate.

The POB monitors the activities of the SIC and has complete access to

the process and to SIC files. In its 1984-85 Annual Report, the POB concludes that the SIC has effective operational procedures and that the Committee's decisions are well-reasoned and in the interest of the public and

the profession."

During the past year, the SECPS has: (1) expanded the requirement for

reporting cases to the SIC to include entities that are not SEC registrants

but where there is, nonetheless, a "significant public interest;" (2) issued a

public report on the activities of the SIC;53and (3) initiated discussions

with the SEC staff concerning arrangments for SEC access to the SIC's

process to enable the SEC to effectively oversee this aspect of the profession's program.

The Commission is encouraged by these initiatives. The ultimate test,

however, is the extent to which the SECPS is able to achieve sufficient

public credibility in this area.

18
The Edgar Project

Introduction

The Commission began the Edgar pilot electronic disclosure system in 1983.

(Edgar stood for Electronic Data Gathering, Analysis and Retrieval.) Edgar is intended to increase the efficiency and fairness of the nation's securities markets

by accelerating dramatically the filing, processing, dissemination and analysis

of corporate information. As such information is filed with the Commission,

Edgar will afford investors, securities analysts and others instant access on

home and office computer screens.

Telecommunication technology has enabled the securities industry to move

from 20 million to 100 million share trading days without incident and to accommodate global trading in so-called "world class" securities. However, the

filing and dissemination of corporate information has not changed significantly

in 50 years. Edgar is the next step in the application of telecommunications

technology to dissemination of information vital to the securities markets.

Benefits anticipated from Edgar are:

• Increasing the efficiency and fairness of the securities markets by affording investors, securities analysts and others equal access to corporate in.

formation;

• Accelerating corporations' access to the capital markets;

• Accelerating the dissemination of corporations' information to investors;

• Enhancing the state securities commissions' regulatory activities and the

self.regulatory organizations' marketplace surveillance capabilities;

• Accelerating the Commission's ability to process and analyze corporate

filings more efficiently at computer work stations; and

• Reducing errors and other costs by eliminating the frequent need to

transfer data manually from one format to another.

Work on the Edgar project has been under way at the Commission for almost

three years. In February 1983, Chairman Shad formed a task force of key Com.

mission personnel to study means of increasing Commission productivity and

the feasibility of an electronic filing system. In April 1983, the Commission

published a release for an experimental "paperless" electronic filing, storage

and retrieval system. Over twenty written responses were received. Meetings

were held with interested vendors, Itwas concluded that a number of significant

questions needed to be explored, but that a paperless filing system was

technically feasible.

In September 1983, the Commission engaged the MITRE Corporation, a

private not-for-profit organization. MITRE was assisting the U.S. Patent and

Trademark Office on a several hundred million dollar computerized patent

library. The knowledge gained from that project was readily transferable to

Edgar.

Once satisfied that an electronic disclosure system was feasible, using ex.

isting technology and hardware, a pilot operation was initiated to test various

19
approaches and technology. By November 1983, the staff had developed the

configuration of the pilot Edgar system. In January 1984, bids were solicited.

Onsite inspections and interviews were conducted by the Commission staff

with four bidders. In May 1984, a contract for development and operation of a

two-year pilot was awarded to Arthur Andersen and Company. The pilot accepted its first electronic filing on September 24, 1984, on schedule.

The Edgar Pilot

In developing the pilot Edgar system, it was determined to begin with the filings of a small number of volunteer companies. Additional volunteers would be

added over the two-year life of the pilot.

To obtain indications of interest in participating in the pilot, the Commission

published a release in March 1984, discussing the system. It requested that interested companies complete a questionnaire regarding their computer

capabilities and invited comments from securities analysts, other potential

users, registrants, and others regarding estimated benefits and costs of the

system, including how the information would be used. Over 300 responses

were received. The staff contacted interested companies in August 1984, and

discussed the mechanics of participating in the pilot.

Over 170 companies are now participating in the pilot. They represent a

broad cross-section of registrants, ranging from AT&T, Exxon, General Motors,

IBM and other major industrial, utility and financial corporations to small com.

panies and limited partnerships. (Shortly after the close of the fiscal year, investment companies began test filings on the Edgar project, with a goal of

becoming full participants during the coming year.)

The Commission's experience with the pilot and that of the volunteer com.

panies has been highly successful. The Commission has received over 1,700 filings (1,619 from issuers, the remainder from public utility holding companies).

Filings are accepted in three different electronic media: (1) direct transmissions over telephone lines or two public networks using a number of different

communication protocols (47 percent); (2) diskettes prepared on over eightyfive different types of word processors or personal computers (49 percent); and

(3) magnetic tapes (4 percent). Accepting this wide variety of media keeps the

participation costs low for registrants by permitting them to use their existing

equipment. Although this was one of the most technically difficult aspects of

developing the system, it has worked very well in practice.

Under the pilot, as will be the case in the operational system, the contractor

manages the receipt function under the supervision and direction of Commission staff. The contractor does not decide whether to accept or reject filings.

These decisions are made by Commission personnel, as is the case with paper

filings.

Electronic dissemination to the public under the pilot is through computer

terminals in the Commission's Public Reference Rooms in Washington,

Chicago and New York, and its press room in Washington. In addition,

computer-generated microfiche is produced overnight. Microfiche of electronic

filings is thereby produced 14 to 20 days faster than for paper filings.

20
Electronic filings are processed by a new pilot branch in the Division of Corporation Finance, staffed by experienced Commission personnel who

volunteered to work on Edgar and are actively involved in its development.

These staff members process the filings at computer work stations that permit

instant access to external data bases.

The same criteria for review are applied to both electronic and paper filings,

but it is easier and faster to review Edgar filings. The instant availability of filings and external data bases at the work stations expedites review. Edgar also

facilitates the management of resources by automating workload statistics and

other management information.

The benefits to participating companies are that their filings are received,

reviewed and commented upon faster than paper. One of the most frequent

Edgar filers has also indicated that Edgar has enabled them to respond more

rapidly to changing market conditions, and get to the market faster.

The pilot is being enhanced continuously in a phased approach. Most recently, internal and external electronic mail capabilities were added, along with the

ability to do full-text searches of information filed with the Commission.

In early 1986, a number of significant enhancements will be tested: (1) indexing and analysis of financial statements, (2) automated registrant notification of

SEC acceptance or rejection of filings, (3) addition of a pilot program to receive

and process investment company filings, such as registration statements, posteffective amendments, and proxies from a selected group of registrants, and (4)

inclusion of Williams Act filings. The major objectives of 1986 activities are to

improve the utility of the intelligent workstations, increase filer support, and

test data tagging experiments. Also, through the Commission's dissemination

contract with Bechtel Group Inc., Edgar pilot data will become available to the

public electronically in addition to the standard microfiche and paper.

Steps are also being taken to include the state securities administrators,

securities exchanges, and National Association of Securities Dealers in the

Edgar system. The North American Securities Administrators Association.

adopted a resolution in support of Edgar in September 1984, and chose three

states, California, Georgia and Wisconsin, to participate in the pilot. These

states' access to pilot filings in their respective offices began on February 15,

1985. Discussions also have been held with the exchanges and the NASD

regarding their access to the data to ensure that Edgar meets their needs. In the

operational system, a single filing with the Commission will suffice for all the

states, the exchanges and the NASD. This will reduce the cost of financings, accelerate the dissemination of information, and enhance investor protections.

Operational Edgar

Based on its positive experience with the pilot, the Commission is moving

forward with plans for a fully operational Edgar system that will encompass all

required filings. In addition to expanding electronic receipt and internal processing capabilities, the operational system will offer widespread, instantaneous electronic dissemination to the investing public.

In mid 1986, the Commission will select a contractor for the Edgar operational system. The process of contractor selection began when the SEC releas21
ed for public comment a pre-solicitation procurement document on July 1,

1985. Based on the comments, experience with the Edgar pilot, and numerous

discussions with filers, potential bidders, and users, revisions are being made to

the functional and financing requirements.

Conclusion

Data processing technology has already had a dramatic impact on the

domestic and international securities markets. It has permitted global trading

in world class securities, high-speed electronic execution and confirmation of

the record volumes of securities transactions and financings; and hundred

million dollar savings, through the use of electronic book-entry delivery

systems. Edgar is the next step. It has the potential to improve the manner in

which investment decisions are made and executed, and the efficiency and

fairness of the securities markets. Moreover, it has the potential to revolutionize

the manner in which investment decisions are made and executed.

* NASAA is an association of securities administrators from each of the 50

states, the District of Columbia, Puerto Rico, the Canadian provinces and territories, and Mexico.

22
Regulation of the Securities Markets

Key 1985 Results

The Division of Market Regulation, with the assistance of the Regional Offices, is charged with the responsibility of overseeing the operations of the nation's securities markets and market professionals. In fiscal year 1985, over

11,000 broker-dealers, and 10 exchanges were subject to the Commission's

oversight.

Market Value of Equity Securities Transactions

in billions

FY'81 FY'82 FY'83 FY'84 FY '85 81-85

%

Increase

$564 $534 $1,005 $1,013 $1,113 97%

BID Oversight Examinations

FY'81 FY'82 FY'83 FY'84 FY '85

278 249 324 389 447 61%

Surveillance and Regulatory Compliance Inspections of SRO's

FY'81 FY '82 FY'83 FY'84 FY '85

12 19 18 20 21 75%

Matters referred by the SEC Regional Offices to SROs

FY '81 FY'82 FY'83 FY'84 FY'85

N.A. N.A. 132 186 343

The number of broker-dealers registered with the Commission increased approximately 10% in fiscal year 1985. Expansion of products offered in the

securities markets and of institutions offering securities to the public con.

tributed to this increase.

Fiscal year 1985 saw major structural changes in the options markets. The

Commission approved a proposal by the New York Stock Exchange (NYSE) to

trade options on listed stocks, proposals by several exchanges to trade options

on over-the-counter (OTe) stocks, and approved in general a proposal by the

National Association of Securities Dealers to trade options on OTC stocks. The

SEC also approved a proposal to allow NYSE specialists to buy and sell options

for hedging purposes.

23
In fiscal year 1985, the Commission completed two major studies of the

trading markets. Following a two-year joint effort with the Federal Reserve

Board and the Commodities Futures Trading Commission (CFTC), the Commission submitted The Special Study of the Futures and Options Markets to

Congress in December, 1984. As requested, the Commission submitted its

report, Regulation of the Government Securities Market, to Congress in June,

1985. These reports provide data and insights that will facilitate the legislative

and rulemaking processes.

In response to the increased role of banks in the securities business, the

Commission undertook rulemaking to require registration with the Commission for those banks engaging in certain kinds of securities activities. These

regulations increase investor protections and implement the "functional regulation" approach to financial institution regulation, as espoused by The Task

Group on Regulation of Financial Services, chaired by Vice President Bush.

The Commission's efforts to enhance investor protection were furthered in

FY '85 through the broker-dealer oversight examination program. Capital and

reserve additions of $60.6 million were secured from broker-dealers in financial

difficulty, increasing protection of customer assets in those firms' custody.

Finally, in fiscal year 1985, the Commission made progress in its efforts to

increase the immobilization of securities certificates in securities depositories.

As a result of a three day workshop, issuers, transfer agents, broker-dealers and

clearing agencies are cooperating to identify ways to increase the immobilization of securities certificates and to experiment with uncertificated book-entry

systems.

Securities Markets, Facilities and Trading

The National Market System-Rule 11Aa2.1 under the Exchange Act requires

transactions in national market system (NMS) securities to be reported in a real.

time system, increasing market efficiency and improving execution of

customers' orders. In response to a petition by the National Association of

Securities Dealers, Inc. (NASD), the Commission approved amendments to

Rule l1Aa2.1 to increase substantially the number of securities eligible for

designation as NMS securities." Currently over 2000 over-the-counter (OTC)

securities are designed as NMS securities, twice the number of last year. Noting

that last-sale reporting has become an established part of the OTC market, the

Commission issued a release soliciting comment on the manner in which cur.

rent NMS securities should be integrated into additional NMS facilities and in.

itiatives, and whether Rule l1Aa2.1 should be amended to focus on additional

groups of securities or to achieve different purposes."

The Commission adopted several other important NMS initiatives. First, it

amended its confirmation rule to require the disclosure of the mark-up or

mark-down in customer principal transactions in reported securities.P" Second,

the Commission indicated its willingness to grant exchanges unlisted trading

privileges in a pilot group of OTC securities under certain conditions." Third,

the Commission determined to permit, in certain circumstances, a security to

be traded on an exchange and concurrently designated as an NMS security. 58

Fourth, the Commission solicited comment concerning an amendment to Rule

24
11Aa2-1 that will allow the NASD to add corporate governance standards for

NMS securities.".

The Commission also continued to further the goal of an NMS to assure

economically efficient execution of transactions in securities. The Commission

issued a release discussing the issuesraised by the trading of securities through

home brokerage systems, in which investors are linked through personal computers (or similar systems) to broker-dealers." The Commission also studied

automation in the OTC market, and issued no-action positions on regulation of

these systems which may technically fall within the statutory definition of "ex.

change." In a related matter, the Commission approved on a temporary basis

the National Association of Securities Dealers, Inc.'s Small Order Execution

System."

National System for the Clearance and Settlement of Securities Transactions-In fiscal year 1984, the Commission adopted Rule 17Ad.14 under the

Exchange Act which requires registered transfer agents acting as tender agents

for bidders during tender and exchange offers to establish accounts with

registered securities depositories to permit book-entry delivery of tendered

securitles.P With Commission approval of two securities depositories' bookentry tender agent service programs during fiscal year 1985,63those services

now are available throughout the National Clearance and Settlement System.

The Commission approved a proposed rule chanqe'" that enhances the National Municipal Securities Comparison System, approved in fiscal year 1984

to implement amendments to MSRB Rules G-12 and G.15.65The proposal ex.

tends automated comparison services to when-issued municipal securities

trades and to municipal securities trades that settle beyond the five-business.

day industry standard.

Securities Immobilization-In February and March 1985, the Division of

Market Regulation hosted three days of Workshops on depository immobilization of securities and the use of book-entry systems. At the Workshops,

representatives from the securities issuance and processing communities

discussed ways to expand the use of central depositories to immobilize

securities certificates and reviewed recent developments involving book-entry

systems. On June 24, 1985, the Division made available for public comment its

draft report on the Workshops, "Progress and Prospects: Depository Immobilization of Securities and Use of Book-Entry Systems.'?" (For statistics on

immobilization, see Table 23 on page 120.)

Global Trading- The Commission issued a release requesting comment on

issues concerning the increasing internationalization of the world's securities

markets." Noting the accelerating movement towards global trading markets

for certain securities and the increasing flow of investments across national

borders, the Commission solicited comment on what conditions and structures

should characterize international trading markets and the comparison,

clearance and settlement of resulting international trades.

Govemment Securities-In the wake of several government securities dealer

failures, the Commission reviewed the operations of the government securities

market to determine whether additional regulation was needed.To this end, the

Commission (1) issued a releaseseeking public comment on the need for additional regulation of government securities market." (2) conducted extensive in25
terviews with government securities investors and dealers, (3) held an Open

Forum to obtain directly the views of representatives of investors, dealers, industry groups, and regulators, and (4) consulted extensively with the Federal

Reserve Soard ("FRS") and the Department of the Treasury. Based on these

studies and discussions, the Commission submitted its report to Congress on

the operations of the government securities markets." The Commission

recommended that, if Congress determined legislation was required, it should

be drafted narrowly to address areas in which there have been demonstrated

abuses and to fill gaps in existing regulations. Since all bank and many nonbank dealers are already subject to a broad regulatory scheme, new regulation,

if deemed necessary, should, wherever possible, neither conflict with existing

regulation nor add new burdens on those dealers. The Commission's approach

included registration, statutory disqualifications, and rulemaking by the

Treasury, in consultation with the FRS, over capital adequacy and independent

audit and recordkeeping standards.

Options-During fiscal year 1985 the Commission received 136 SRO rule filings concerning the options markets. Among the significant rule filings approved by the Commission was a proposal by the NYSE to permit stock specialists

to trade options on their specialty stocks for limited hedging purposes."?

In addition, the Commission approved proposals submitted by the NYSE to:

(1) establish an options trading program for standardized options on individual

listed stocks and (2) become a participant in the options allocation plan which

provides procedures for the selection and replacement of stocks underlying individual equity options for the existing equity options exchanges."!

Further, the Commission approved proposals by the NASD and several options exchanges to trade standardized options on over-the-counter ("OTC")

securities as well as an OTC stock index."

As of September 30, 1985, the Commission also approved 93 other rule filings submitted by the options exchanges and, pursuant to provisions of the

Commodity Exchange Act, sent six letters to the Commodity Futures Trading

Commission commenting on applications by boards of trade for designation as

contract markets to trade futures contracts on indices or groups of securities.

Finally, in December 1984, the Commission, along with the Federal Reserve

Soard and the CFTC, submitted to Congress the Special Study of the Futures

and Options Markets.

Short Tendering-On February 28, 1985, the Commission adopted an

amendment to Exchange Act Rule 10b-4, the short tendering rule." The

amendment requires tendering persons to exclude from their "net long position" those shares underlying certain standardized call options that they have

written after the announcement of a tender offer. The amendment is intended

to prohibit hedged tendering through the use of call options.

Issuer Tender Offers-On July I, 1985, the Commission published for comment amendments to Exchange Act Rules 13e-4 and 14e-J.74 Rule 13e-4

regulates tender offers and exchange offers by issuers for their own securities.

Rule 14e-1 defines unlawful tender offer practices. The proposed amendments

would codify that an issuer tender offer must be extended to all holders of the

subject securities and that all security holders must be paid the highest consideration offered. The amendments would also conform the minimum offering

withdrawal and proration periods required of issuer tender offers to those required of third party offers, and require the offer to remain open for ten

business days from an increase in the number of shares sought.

26
Regulation of Brokers, Dealers, Municipal Securities Dealers,

and Transfer Agents

Broker-Dealer and Transfer Agent Examinations-The number of brokerdealer registrations has continued to rise at a significant rate. In fiscal year

1985 such registrations increased 10%. The Commission has continued to

respond to its increasing regulatory role by, among other things, fostering

greater partnership roles with the self-regulatory organizations ("SROs"). In

this regard, the Commission has expressed to the SROs, and they in turn are

responding to, the need for expanding their examination staffs since the initial

"watchdog" responsibility for assuring their member firms' compliance with the

Federal securities laws rests with them. The Commission also has encouraged

the SROs to enhance investigative and enforcement commitments in the sales

practices area. In addition, the Commission has continued the referral of

"cause" matters to the SROs (where appropriate) to investigate and take

disciplinary action. The number of such referrals increased 84% from 186 in

FY 1984 to 343 in FY 1985. Nevertheless, the Commission will continue to

handle those matters where it appears that SROs lack jurisdiction, have inadequate remedies or are unable to investigate fully or prosecute aggressively.

During 1985, the Commission developed guidelines for the broker-dealer

oversight examination program designed to coordinate and strengthen the

regional offices' oversight program. The Commission also began a pilot test to

determine the feasibility of using portable computers in conducting various

aspects of a broker-dealer examination and has gained on-line access to the

NASD's Central Registration Depository, a computer file with regulatory information on securities industry employees registered with the NASD.

The staff completed 447 oversight examinations of SRO members, the

highest level of oversight examinations ever reached and more than 10%

above the previous record level set last fiscal year.The staff also completed 145

cause examinations, down from 228 last fiscal year. The decreasednumber of

cause examinations is attributable to increased referrals to SROs of matters

more appropriate for SRO review and sanction. The staff also examined 79

transfer agents. These examinations were conducted following guidance from

the staff designed to improve examination selection and thoroughness.

Examination programs were augmented by coordinated SECISROefforts in

the government securities and money laundering areas.

Transactions by Distribution Participants-During the year, the staff

developed proposed amendments to Exchange Act Rule 10b.6, which proscribes certain conduct by participants in a distribution of securities. The proposed amendments would permit broker-dealer distribution participants to

engage in solicited brokerage until specified cooling-off periods; define the

rule's applicability to affiliates of distribution participants; reduce the restrictions on the exercise of standardized call options by distribution participants;

and revise the rule's preamble to more fully reflect authority for the rule and to

codify that the rule's exceptions may be relied upon only if the contemplated

transactions are not made for manipulative purposes. The proposed amendments were issued for public comment by the Commission on October 10,

1985.75

Financial Responsibility Rules-On January 11, 1985, the Commission issued

a release soliciting comments on a broad range of questions regarding the

Commission's financial responsibility rules for brokers and dealers that would

27
assist the Commission's reexamination of the scope, adequacy and necessity of

those rules.?" The Commission received a number of comments which are being analyzed by the Commission staff.

Customer Protection Rule- The staff proposed that the Commission adopt

amendments to Rule 15c3-3 under the Exchange Act affecting a

broker-dealer's computation of the Formula for Determination of Reserve Requirement for Brokers and Dealers." The Commission approved the amend.

ments on October 3, 1985. The amendments were designed to provide greater

protection of customer funds held by broker-dealer against misuse or insolvency and to ensure that customer funds are used only to service bona fide

customer accounts. In effect, the amendments prohibit broker-dealers from using free credit balances to finance either the transactions of certain household

members of principals of the firm or certain concentrated accounts.

Interpretations of the Net Capital Rule-On December 3, 1984 the Division

issued a no-action letter to the NYSE, CBOE and AMEX in which it

acknowledged the risk reducing features of maintaining cross-hedged and

spread positions between security options on stock market indices against

futures contracts and commodity options on futures contract on such indices.

On January 15, 1985, the Division issued a letter to the Philadelphia Stock Exchange (PHLX) expanding that no-action position to include cross hedged and

spread transactions involving foreign currency options offset by futures con.

tracts and commodity options on the same foreign currency.

On September 25, 1985, the Division proposed to issue a no-action letter to

the Securities Industry Association implementing a premium-based haircut

methodology for all proprietary options positions, which was approved by the

Commission on October 22, 1985.

Revised Form BD-On September 26, 1985, the Commission adopted revisions to Form BD which, among other things, reduce the regulatory burden on

broker-dealers by rewriting the disciplinary question in "plain English" and

limiting the scope of that question to the broker-dealer itself and its control affiliates. The new form becomes effective on January 1, 1986. At the same time,

the Commission simplified its broker-dealer successor rules."

Customer Coniirmetion Disclosure-On September 11, 1985, the Commission amended Rule 1Ob-I a governing customer confirmation disclosure to require more complete disclosure for principal transactions in reported

securities. The amendments require broker-dealers to report on confirmations

the trade prices and mark-ups in principal (e.g., O'TC) transactions with

customers, thus providing customers with additional information regarding the

quality and costs of broker-dealer services."

Publication of Quotations by Broker-Deeiers-s-Cm November 15, 1984, the

Commission adopted amendments to Exchange Act Rule 15c2-11.80 The rule

generally requires that a broker-dealer have certain information concerning an

issuer before initiating quotations for the issuer's securities. The amendments

make the rule applicable to the publication of quotations without a specified

price and to the publication of quotations for certain foreign securities. Exceptions to the rule provide for the publication of quotations for NASDAQ

securities.The amendments also revise the scope of the rule's "piggyback" exception.

28
On April 10, 1985, the Commission issued a release identifying questions

and soliciting comments and data on the costs and benefits believed to be

associated with Rule 15c2.11 as amended." Comments were also requested on

any alternative regulatory approaches that, in light of cost/benefit data, would

better achieve the rule's objectives.

Bank Securities Activities-On July 1, 1985, the Commission adopted Rule

3b.9 under the Exchange Act. The rule requires a bank to conduct certain

securities activities through a broker-dealer registered under the Exchange Act.

These activities are 1) public solicitation of brokerage for transaction-related

compensation, 2) receipt of transaction. related compensation for providing

brokerage services for trust, managing agency or other accounts to which the

bank provides advice or 3) dealing in or underwriting securities. The rule also

contains several exceptions for banks that conduct only limited securities activities.B2

Extension of Credit by Broker-Dealers on Shares of Direct Participation Pro.

grams-On November 16, 1984, the Commission published for public comment proposed Rule 3a12.9 under the Exchange Act. The proposed rule would

exempt the securities of certain direct participation programs from those provisions of the Exchange Act which currently prohibit broker-dealers from arranging extensions of credit to investors to purchase securities. This would allow

broker-dealers, subject to certain conditions, to participate in public offerings

of securities of direct participation programs that provide for mandatory install.

ment payments by purchasers."

Extension of Credit by Broker-Dealers on Investment Company Shares-On

December 18, 1984, the Commission adopted Rule l l d l-Z under the Exchange Act. The rule exempts any security issued by an open-end management

investment company or unit investment trust registered under the Investment

Company Act of 1940 from certain credit restrictions of the Exchange Act, provided that the security has been owned for more than thirty days by the security

holder."

Persons Deemed Not to be Brokers-On June 27, 1985, the Commission

adopted Exchange Act Rule 3a4-1 specifying a non-exclusive safe harbor under

which persons associated with an issuer of securities who participate in sales of

that issuer's securities will not be considered to be acting as "brokers" as that

term is defined in the Exchange Act. Accordingly, these persons would not be

required to register with the Commission pursuant to the Act. The Commission

adopted the rule in order to provide guidance concerning the applicability of

the broker-dealer registration requirement in situations where an issuer

chooses to sell its securities through its associated persons."

Lost and Stolen Securities-The Lost and Stolen Securities Program, which

includes as participants nearly 19,200 securities organizations, Federallyinsured banks, and nonbank transfer agents, usesa data bank to monitor miss.

ing securities. Participants use the system to validate the authenticity and

ownership of the certificates coming into their possession. On September 19,

1985, the Commission issued a press release containing comprehensive

general statistical information regarding the operation of the Program for

calendar year 1984. As stated in that release,the Securities Information Center,

the Commission's designee to operate and maintain the computerized data

29
base of missing, lost, counterfeit and stolen securities through September 30,

1990, received loss reports for 491,944 certificates totaling $1,636,541,701.

The dollar value of lost, missing or stolen securities located through the Program increased by 31.4% during calendar year 1984, representing an aggregate dollar value increase from $12,135,068 in 1983 to $15,947,001 in

1984. As of December 31, 1984, the aggregate net value of the data base since

the inception of the program was approximately $8 billion.

Transfer Agent Regulation- The Commission approved rule changes proposed by the New York and American Stock Exchanges that generally eliminated

the requirement that certain issuers appoint both transfer agents and independent registrars. B6

Transfer Agent Registration Forms-On April 23, 1985 the Commission

published for comment several new forms for the registration of transfer

agents: a simplified Form TA-l designed to conform the Commission's

registration form to that used by the bank regulatory agencies; (2) a new SEC

Supplement to Form TA-I providing information about persons associated

with non-bank, non-issuer transfer agents; and (3) an annual report providing

essential information about each transfer agent's activltles.'" The new forms

are designed to enhance the Commission's oversight of transfer agents.

Oversight of Self-Regulatory Organizations

National Securities Exchanges-As of September 30, 1985, ten exchanges

were registered with the Commisison as national securities exchanges. During

the fiscal year, the Commission granted applications by exchanges to delist 68

equity and debt, and 8 options issues, and granted applications by issuers requesting withdrawal from listing and registration for 39 issues. In addition, during the fiscal year the Commission granted 816 applications by exchanges for

unlisted trading privileges.

The exchanges reported to the Commission 530 final disciplinary actions imposing a variety of sanctions upon member firms and their employees. This

compares with 394 final disciplinary actions in fiscal 1984.

During the fiscal year, the Commission received 243 proposed rule changes

from exchanges. Among the significant rule filings approved by the Commission were: (1) international trading linkages between the Boston Stock Exchange and the Montreal Exchange, and between the American Stock Exchange and the Toronto Stock Exchanqe," (2) a New York Stock Exchange

minor disciplinary fine systern.'" (3) amendments to Amex listing standards

relating to unit investment trustsr" and (4) Pacific Stock Exchange procedures

for appointing and evaluating specialists in connection with PSE's specialists

post expansion program."

National Association of Securities Dealers, Inc.- The NASD, with over 5700

members, is the only national securities association registered with the Com.

mission. In fiscal 1985, the NASD reported the disposition of 348 formal and

summary disciplinary actions and 93 formal and summary actions by the

Association's NASDAQ Trading Committee.

In addition, the Commission received 36 filings of proposed rule changes

from the NASD. During 1985, the Commission approved major revisions of the

30
NASD's By-Laws" and Code of Procedure." In addition, the Commission approved an NASD proposal creating a Market Surveillance Committee, which

hears all cases throughout the United States in which the NASD alleges that a

member violated a market-related rule.P' Formerly, these cases were heard by

local District Business Conduct Committees.

The Commission also denied a petition from four broker-dealers that sell

securities issued by their affiliates ("self-underwriting"), to amend the NASD's

rules regulating those offerinqs." The petitioners, former SECO broker.

dealers, requested that the Commission amend the NASD's rules to be consistent with the Commission's self-underwriting rules under the obsolete SECO

program. Subsequent to this action, one petitioner requested the Commission

to review its decision; that request is still pending."

Municipal Securities Rulemaking Board-In fiscal 1985, the Commission

received 24 filings of proposed rule changes from the MSRB. The Commission

approved one MSRB rule change of particular note:" the rule change

underscores the responsibilities of dealers that sell new issue municipal

securities as well as strengthens and facilitates enforcement of MSRB Rule

G-32. Rule G.32 is designed to ensure that a purchaser of new issue securities is

provided with all available information relevant to his investment decision. The

Commission also proposed amendments to Rule 15Bc7-1 under the Exchange

Act that would provide the Commission and the MSRB more efficient access to

relevant and useful information contained in inspection reports of municipal

securities brokers and dealers while reducing the administrative burdens of the

examining authoritles."

Clearing Agencies

During the year, the Commission approved 87 proposed rule changes

generally reducing clearing costs and enhancing clearing agency systems for

controlling their financial exposure. Other approved proposed rule changes

enabled clearing agencies to admit foreign broker-dealers to clearing agency

rnembership," to establish a wholly-owned commodities clearinghouse sub.

sidiary, 100 and to offer a clearing fund letters of credit program. 101 The Commission also approved a proposed rule change of the Boston Stock Exchange

Clearing Corporation 102 that completely revised its rules in response to the

Commission's order granting the Clearing Corporation full registration as a

clearing agency under the Exchange Act. 103

SRO Surveillance and Regulatory Compliance Inspections

During the fiscal year, the staff conducted 21 inspections of SRO market

surveillance, disciplinary, compliance, and operational programs.

The 1985 inspection program continued to emphasize improving automated

surveillance through transaction audit trails. The staff inspected the NYSE,

Arnex, CBOE, and NASD to monitor the progress in their respective audit

trails. An NYSE equity audit trail was operational during the year; however,

monitoring visits revealed that problems due to summarization of clearing data

and failure by exchange members to supply all of the necessary trade informa31
tion hampered the audit trail's accuracy. To correct those problems, the NYSE

is contacting members to improve compliance and has begun to collect audit

trail data independently of the trade comparison system. The Amex's equity

audit trail has experienced problems similar to those faced by the NYSE, and

the Amex is taking similar corrective action. The CBOE has developed an audit

trail transaction journal over the past year, and is working on improving the accuracy of the journal for market reconstruction and automated surveillance

purposes. In July 1985, the initial phases of the NASD's audit trail became

operational, with firms required to submit routinely, to clearance, the time of

each trade and whether the firm acted as principal or agent.

The staff also completed an oversight inspection of the NYSE's specialist

surveillance program. It revealed that while surveillance and investigations had

generally improved since the last inspection, the NYSE needed to be more aggressive in its discipline of specialists' violations. The staff also recommended

several refinements to the NYSE's surveillance procedures and that a study be

conducted of problems resulting from stop order executions.

A comprehensive inspection of the PHLX equity options surveillance program conducted during the year disclosed that some significant weaknesses

continue to exist while others have arisen due to increased volume. The staff

found the surveillance procedures to be manually intensive and in need of

automation, and noted weaknesses in the investigatory and disciplinary programs of the exchange. The PHLX was requested to advise the Commission

within 90 days of its plans to address these problems.

The staff also conducted a comprehensive inspection of the CBOE equity option surveillance program. The inspection revealed that, although the CBOE's

surveillance procedures continue to be manually intensive, the exchange has

begun a substantial program to automate its surveillance capability. The staff

noted several minor problems in the CBOE surveillance capability and made

recommendations to improve the program. In addition, the staff requested the

exchange to strengthen its discipline of trading violations. Late in the year the

Division began inspections of the Amex and Pacific Stock Exchange (PSE) options surveillance programs.

A series of inspections of various programs at the NASD was conducted during the year. These inspections noted weaknesses in the NASD programs for

enforcement of its free-riding and with-holding restrictions, and for detection of

abuses in pink sheet stocks. The NASD agreed to take corrective action recommended by the Commission. These inspections also found the programs administered by NASD's Corporate Finance Department and its Market

Surveillance Committee to be well designed and effectively administered.

A series of compliance inspections of the NYSE's Enforcement Department

was conducted on matters identified by the NYSE's broker-dealer examination

program which were referred for enforcement follow-up. These inspections

revealed a need for improvement by the NYSE's Enforcement Department in

review of supervision by member firms, in timely investigation and prosecution

of violations of Exchange rules and in documentation. The inspections,

however, did conclude that the Exchange takes appropriate disciplinary action

in most cases originating from its broker-dealer examination program. The

staff also reviewed the NYSE's written procedures for investigating customer

32
complaints and found that those procedures, even if consistently implemented,

fail to assure thorough and adequately documented investigations. Changes

were recommended to the NYSE.

Also during fiscal year 1985, the staff completed an inspection of the NYSE's

and CBOE's handling of numerous customer complaints against a registered

representative. This inspection disclosed weaknesses in the procedures for

communicating between these SROs, in the investigation of the customer complaints, the disposition of the complaints, and in the procedures used by these

SROs to communicate with each other.

A full oversight inspection at the CBOE to review investigations of customer

complaints, terminations of registered representatives for cause, routine examinations and formal disciplinary actions was in progress at the end of the

fiscal year.

The staff also conducted compliance inspections of six of the fourteen NASD

district offices, as well as a review of the NASD's Anti-Fraud Program. During

fiscal year 1985, guidelines for the inspection of NASD district offices were

developed to permit implementation of a new management program under

which regional offices assume primary responsibility for field inspections of

NASD district office broker-dealer examinations, investigations of customer

complaints and terminations for cause, financial surveillance of member firms

and formal disciplinary actions. Inspections of NASD districts in Seattle, San

Francisco, New Orleans, Dallas, Atlanta, and Washington, D.C. were conducted

by the regional offices and revealed various deficiencies in each district office,

including delays in conducting and processing examinations, miscellaneous

deficiencies in examinations and financial surveillance of member firms, instances of delays and inadequate investigations of customer complaints and

terminations for cause and instances of inadequate sanctions in formal

disciplinary actions. In addition, the staff reviewed the operation of the NASD's

Anti-Fraud Unit and recommended that additional staff be added to permit

completion of complex investigations in a more timely manner. Finally, the

staff met with the NYSE and NASD on a quarterly basis to discuss current

regulatory issues.

During the summer of 1985, the staff conducted a review of the member

monitoring and risk assessment programs of Depository Trust Company,

Midwest Securities Trust Company, Pacific Securities Depository Trust

Company, and Philadelphia Depository Trust Company. These inspections

identified some weakness in their risk assessment programs. The staff is

recommending that these depositories conduct formal risk assessments and

report the results to their Boards of Directors, and that they establish a task

force to develop consistent programs to address common risk.

In response to increasing concerns over the number of investor complaints

concerning delays in the transfer of their accounts at major brokerage firms,

the Division held a meeting with senior staff from the NYSE, NASD, NSCC and

OCC to discuss what steps were being taken to alleviate the existing backlog of

delayed account transfer requests and to indentify long term solutions for the

industry. The NYSE and NASD agreed (1) to propose modifications in their

rules to require more timely response by the securities industry, (2) to outline

procedures for transferring those categories of securities which are non-D'TC

33
eligible such as limited partnerships and foreign securities, and (3) to develop

standardized customer account forms for industrywide use. By the end of the

fiscal year, both the NYSE and NASD had proposed amendments to their rules

governing transfer of accounts. Implementation of a pilot automated transfer

system is now being tested. Because of the Division's concern over the extent

of account transfer delays, the NYSE met regularly with representatives from

the eleven largest firms between May 1984 and the early part of fiscal year

1985. As a result, the number of accounts delayed over six months was reduced

from 30,000 to 1,000.

Also during fiscal year 1985, the Commission concluded its Market Oversight and Surveillance System (MOSS), an automated surveillance system for

stock and options trading, due to the joint development by the SROs of a viable

intermarket surveillance program. The Commission has incorporated the

MOSS pilot into its market information data base which supports numerous

Commission activities.

Securities Investor Protection Corporation ("SIPC'')- The SIPC Fund amounted

to $308 million on September 30, 1985, an increase of $82 million from

September 30, 1984. In the fall of 1983, the SIPC Board of Directors ("SIPC

Board") determined to continue assessments on SIPC member broker-dealers

at the annual rate of one-fourth of one percent of aggregate gross revenues

from the securities business until the SIPC Fund total reaches $300 million. 104

At the direction of SIPe's Board, SIPC has formed a broad-based task force to

make recommendations to the SIPC Board on (1) the appropriate size of the

SIPC Fund and (2) the nature of the assessments on members both before and

after the appropriate size of the SIPC Fund is reached. Preliminarily, the Commission has expressed its view to SIPC that the SIPC Fund should be increased

above $300 million.

During the fiscal year, the Commission staff completed a review of SIPC liquidation proceedings. Based on that review, the Commission believes that SIPC

(1) is doing a good job in selecting trustees to handle liquidations, overseeing

their activities and monitoring the progress of liquidations, and (2) is properly

exercising its responsibilities and authority under the Securities Investor Protection Act of 1970. Nevertheless, the Commission encouraged the expanded

use of automation by SIPC, the development of an operations manual for liquidation proceedings, and the possible commitment of more resources in

overseeing liquidation proceedings. The Commission also supported SIPe's

development of a program for efficient liquidation of large firms should such a

liquidation ever be necessary. SIPC has taken steps that indicate that it is

responsive to these issues.

Applications for Re-entry-During the fiscal year, the Division of Market

Regulation received 75 SRO applications to permit persons subject to statutory

disqualifications, as defined in Section 3(aX39) of the Exchange Act, to become

associated with broker-dealers. This represented a 19% decrease in applications from fiscal 1984. The distribution of filings among the SROs was the

following: NASD (55), NYSE (16) and Amex (4). Of the total filings made, 4 applications were subsequently withdrawn, 65 were processed and 6 were pending at year end. Two applications were denied by the Commission.

34
Investment Companies and Advisers

Key 1985 Results

The Division of Investment Management oversees the regulation of investment companies and investment advisers under two companion statutes, the

Investment Company Act of 1940 and the Investment Advisers Act of 1940 (Investment Company Act and Investment Advisers Act, respectively). During

1985, the Division also assumed responsibility for administration of the Public

Utility Holding Company Act of 1935 (Holding Company Act).

The number of registered investment companies and investment advisers as

well as the amount of assets under management increased rapidly in 1985,

continuing the trend of the past several years. At the end of fiscal 1985, there

were 2,458 registered investment companies and 11,146 registered investment

advisers, increases of 11.2% and 22.7% respectively. From 1981 to 1985, the

number of investment companies and investment advisers grew by 56.1 %and

77.9%, respectively. Combined assets under management reached $1,695

billion in 1985, a 121% increase from 1981.

Number of Active Registered Investment Companies

and Investment Advisers

FY '81 FY'82 FY'83 FY'84 FY'85 81-85

%

Increase

InvestmentCompanies 1,574 1,830 2,057 2,210 2,458 56%

InvestmentAdvisers 6,265 5,445 7,043 9,083 11,146 78%

Investment Company and Adviser Assets Under Management

(in billions)

FY '81 FY '82 FY '83 FY '84 FY '85 81-85

%

Increase

InvestmentCompanies

InvestmentAdvisers

$315

$450

$315

$670

$360

$780

$370

$850

$ 525

$1,170

67%

160%

Inspection/Examinations of Investment Companies and Advisers

FY '81 FY '82 FY '83 FY '84 FY '85 81-85

%

Increase

InvestmentCompany

InvestmentAdviser

Total Examinations

236

512

748

355

710

1,065

348

737

1,085

497 567105

837 1,039

1,334 1,606

140%

103%

115%

In response to this growth, the Division increased staff productivity through

technological and procedural improvements. Use of personal computers on an

35
experimental basis provided excellent results in the planning, examination and

report-writing stages of the inspection process. Continued emphasis on

streamlining examinations permitted the staff to complete 1,606 investment

company and investment adviser inspections in 1985, significantly exceeding

the record performance of 1,334 examinations in 1984. These inspections

resulted in the recovery of an estimated $2.4 million for investment company

shareholders and advisory clients.

The Division and the Regional Offices also conducted a joint investment ad.

viser training program with interested states throughout the year as part of an

effort to improve communication and encourage the sharing of workload between state and Federal authorities with jurisdiction over investment advisers.

This program will be continued in the upcoming fiscal year.

Disclosure Requirements

During fiscal 1985, the Commission proposed a new simplified registration

form under the Securities Act of 1933 (Securities Act) and the Investment Company Act for all unit investment trusts, other than insurance company separate

accounts.P" Like Form N-1A for mutual fund prospectuses, Form N.7 would

establish a two-part disclosure format consisting of a simplified prospectus and

a Statement of Additional Information available to prospective investors upon

request. The Commission also proposed Form N-14, a simplified form for

registering securities issued by management investment companies and

business development companies in business combination transactlons.v"

The Commission proposed and adopted an amendment to Form N-lA, the

registration form used by open-end management investment companies other

than insurance company separate accounts to revise the method of computing

portfolio turnover'?" and proposed another amendment to the form to consolidate all expense-related information in the prospectus and add a tabular

presentation of major expense data.'?" The Commission also proposed to

amend Rule 6-07 of Regulation SoX to require registered investment companies

to account for net costs incurred as a result of a Rule 12b-1 distribution plan as

expenses.':"

The Commission proposed and adopted a rule amendment and new rule

relating to the pricing of redeemable securities by investment companies. III

The revisions simplify and clarify pricing and redemption requirements for

mutual funds, especially those with portfolio securities trading in foreign

markets.

Regulatory Policy

In October 1984, the Commission adopted a revised version of Rule 2a-5

under the Investment Company Act (redesignated as Rule 2a19-1) to provide

broader exemptive relief from the definition of "interested person" for brokers,

dealers and their affiliates. At the same time, the Commission adopted Rule

10b.1 to define the term "regular broker or dealer."1\2 On December 14,1984,

the Commission adopted Rule 3a-5 to exempt the finance subsidiaries of U.S.

36
and foreign private issuers from the definition of "investment company" under

certain circumstances. I 13

A new streamlined semi-annual reporting form for registered investment

companies, N-SAR, was adopted in January 1985, replacing five annual report

forms. In July, the Commission eliminated the quarterly reporting obligations

of investment companies and incorporated the contents of Form N-IQ, the

quarterly report form for management investment companies, into the new

semi-annual form.'!" The Commission also conformed the calculation of portfolio turnover rate prescribed in Forms N-IA and N-2, the registration statement forms for open-end and closed-end investment companies, respectively,

to the method set forth in the new form. lIS

A revised version of Rule 22d-l was adopted in February 1985, to permit investment companies to sell their redeemable securities with scheduled variations in sales loads. The Commission simultaneously amended the sales load

items in the registration forms for open-end investment companies and unit investment trusts to require adequate disclosure of scheduled variations in their

prospectuses.i"

On May 31, 1985, the Commission extended the date by which investment

companies must conform their foreign custodial arrangements with Rule 17f.5

until September 1, 1985.117 The Commission simultaneously proposed amendments to clarify certain aspects of Rule 17f-5.116 [These should be adopted in

September.]

Amendments to Investment Company Act Rule 2a.7 were proposed on July

1, to permit investment companies to acquire put options to enhance portfolio

liquidity, subject to certain conditions. The Commission simultaneously proposed amendments to Rule 12d3-1 and proposed for public comment Rule

2a41-1 to permit investment companies to acquire standby commitment put

options from persons engaged in securities-related activities and to assign a fair

value of zero to those options.':"

Investment Advisers

The Commission proposed and adopted revisions to Form ADV, the investment adviser registration form 120 to permit uniform registration with the Commission and the states. The revised form was developed by the Commission

and the North American Securities Administrators Association (NASM) to

remove unnecessary administrative burdens and provide cost savings to invest.

ment advisers registering with more than one governmental entity. The Commission and NASAA intend to develop an electronic system for processing adviser registrations so that one registration form can be filed with a central

depository for transmission to all the jurisdictions in which the adviser is

registering.

The Commission adopted a rule amendment to permit advisers to preserve

required records on microfilm and in computer systems under prescribed

conditions!" and proposed Rule 205-3 to permit registered investment ad.

vlsers, under certain conditions, to receive performance-based

cornpensatlon.v" If adopted, proposed Rule 205.3 would allow registered in.

37
vestment advisers and their clients considerably more flexibility in structuring

compensation arrangements.

The Commission also proposed and adopted a safe harbor rule, Rule

203(bX3).I, which specifies certain circumstances in which a limited partner.

ship, rather than each of its limited partners, will be counted as a "client" of a

general partner acting as investment adviser to the partnership for purposes of

an exemption from registration provided by the Investment Advisers Act. 123

The rule provides guidance on a longstanding interpretive question concerning

the ~ailability of a registration exemption to a general partner acting as an investment adviser to a limited partnership.

The Commission adopted amendments to Form 13F under the Securities

Exchange Act of 1934 which prescribes the reporting requirements for institutional investment managers exercising investment discretion over accounts

having, in the aggregate, more than $100,000,000 in exchange-traded or

NASDAQ-quoted securities. 124 The amendments simplify the procedures for requesting confidential treatment of certain risk arbitrage positions reported on

the form and limit the time for which confidential treatment of commercial information may be requested.

Insurance Requirements

In November, 1984, the Commission temporarily adopted and solicited

public comment on a rule that permits a new type of life insurance product call.

ed flexible premium variable life insurance. 125 The temporary rule provides extensive exemptions from the Investment Company Act and rules thereunder to

insurance company separate accounts offering this product.

As part of a continuing effort to simplify compliance with the Investment

Company Act, the Commission proposed a new rule to permit insurance company separate accounts offering variable annuity contracts to deduct charges

for an insurer's assumption of mortality and expense risks. 126 The Commission

also adopted new integrated registration forms, Forms N.3 and N.4, specifically

designed for variable annuity contracts offered by insurance company separate

accounts.!" The new forms feature a shorter and simpler prospectus.

To clarify the status of certain annuity contracts that generally include

guaranteed investment contracts and single premium deferred annuities, the

Commission proposed Rule 151 under the Securities Act.l28 The rule would

create a "safe harbor" under which annuity contracts having certain

characteristics would be exempt securities.

Public Utility Holding Companies

There are presently 13 registered holding companies with aggregate assets,

as of June 30, 1985, of $78.2 billion, an increase of $5.5 billion, or 7.6% over

the previous year. Total operating revenues, as of June 30, 1985 were $34.4

billion, a $.2 million decrease from the previous year. There are 65 electric or

gas utility subsidiaries, 72 nonutility subsidiaries, and 22 inactive companies in

38
the 13 registered systems, a total of 172 companies operating in 24 states (excluding seven power supply subsidiary companies).

During the year, a number of measures were adopted to increase staff productivity, permitting significant reductions in staff devoted full-time to Holding

Company Act matters. Improved review procedures allowed the staff to process

approximately the same number of applications, on an annualized basis since

January 1985, as in fiscal 1984, with 45% fewer personnel.

In January 1985, the Commission initiated a review of its rules under the

Holding Company Act to eliminate restrictions unnecessary for consumer and

investor protection. In May 1985, the Commission published for public comment a revision of Rule 70 which would permit a limited number of persons affiliated with investment bankers or commercial banking institutions to serve as

directors or officers of public utility holding companies and their

subsidiaries. 129 The purpose of the proposed rule change is to simplify, clarify,

and expand the existing rule to give holding companies and their subsidiaries

more flexibility in the selection of their officers and directors.

In June 1985, the Commission published for comment an amendment to

Rule 22 which would require registered holding companies to provide a draft

notice with any application or declaration filed with the Cornmission.P? The

Commission also adopted temporary rules and forms under the Holding Company Act to facilitate participation of public utility holding companies in the

Commission's pilot electronic disclosure system, Edqar.!" On July I, 1985,

the Commission began accepting electronic filings of documents under the

Holding Company Act.

Holding Company Fmancings-During fiscal 1985, the Commission authorized approximately $4.2 billion of senior securities and common stock financing

for the 13 registered systems: approximately $3.6 billion in long-term debt

financing; $600 million in common and preferred stock. Over $2.2 billion of

pollution control financing and $5.7 billion of short-term debt financing was approved. The pollution control financing represented a 57% increase over

amounts authorized in fiscal year 1984. Short-term debt increased by 32 percent over the previous year. Total financings in fiscal 1985 of $12.1 billion exceeded financings authorized in fiscal 1984 by $3.6 billion, an increase of over

42%

The Commission authorized $656.9 million for fuel exploration and development activities during 1985.

Subsidiary Service Companies-At the end of calendar year 1984, 12 subsidiary service companies provided managerial, accounting, administrative and

engineering service to 11 of the 13 registered holding companies. Billings for

services rendered to the holding company systems amounted to $1.4 billion or

4.1 percent of the total revenues generated by the electric and gas operating

utilities. Subsidiary service companies are heavily labor-intensive, employing

17,603 people, and have assets of over $739.6 million.

During fiscal 1985, the Commission completed the audit and examination of

two subsidiary service companies. The Commission's examination of holding

company fuel procurement activities and approval of fuel service contracts between associate companies resulted in savings to consumers during the fiscal

year of approximately $32.3 million.

39
Significant Applications and Interpretations

Government Securities-During the fiscal year, Division reminded investment companies of the conditions under which they may enter into repurchase agreements with brokers, dealers or other entities engaged in securities

related businesses. In three letters to the Investment Company Institute, the

Division reiterated and elaborated upon a staff no-action position which permits such transactions, provided that the repurchase agreement is fully collateralized and the investment company's board of directors has evaluated the

credit-worthiness of the other party to the transaction. The letters state that

in order to ensure that a repurchase agreement is fully collateralized, an investment company should perfect and maintain an adequate security interest in the

securities underlying the agreement, i.e. take actual or constructive possession

of the securities, and mark them to market.

Guidelines for Exemptive Applications- The Commission, on April 30, 1985,

issued a release explaining guidelines and procedures to be followed by applicants seeking exemptive relief under the Investment Company Act and the

Investment Advisers Act. The new guidelines will help streamline the review of

such applicants.

The Commission issued an order permitting members of an association of

closed-end internally managed investment companies to offer their employees

deferred equity compensation in the form of stock options and stock appreciation rights. The conditions of the order included all protections previously irnposed by the Commission on issuance of stock options by small business in.

vestment companies as well as the requirements of the Investment Company

Act that apply to stock options issued by business development companies.

The order will allow members of the association to compete more effectively

with external managers of mutual funds, banks, broker-dealers and certain

other investment advisory organizations.

On February 7, 1985, the Commission issued an order permitting the

Vanguard STAR Fund ("Fund") to acquire shares of other mutual funds in the

Vanguard Group of investment companies in excess of the limitations imposed

on "funds of funds" in Section 12(dX1) of the Investment Company Act. The

Fund was created to provide a diversified program of mutual fund investments

to investors seeking retirement income.

The terms of a previous Commission order were amended to permit several

registered investment companies to lend their portfolio securities to their affiliated sub-advisers and principal broker, Neuberger & Berman. The amended

order: (1) establishes a new, more competitive formula for calculating the transaction price for securities loans and (2) allows Neuberger & Berman to lend

securities it borrows from its affiliated investment companies provided, among

other things, that Neuberger & Berman repays the investment companies for

excess earnings as determined under a formula specified in the order.

The Commission authorized Central and South West Financial, Inc. (CSWF), a

nonutility subsidiary company of Central and South West Corporation, a

registered holding company, to enter into leveraged leases for the purpose of

reducing forecasted consolidated income tax llablllty.P" CSWF entered into a

joint venture arrangement with Manufacturers Hanover Leasing Corporation to

40
create a new company that could finance up to $1 billion of leased property. The

venture is structured so that CSWF can claim all the tax credits and deductions

arising from ownership of the leased property and thereby reduce its consolidated tax liability by serveral hundred million dollars over the next five years.

The Commission authorized the Southern Company to acquire an interest in

Integrated Communication Systems, Inc. (ICS),a new corporation organized by

a group of companies to perfect a new two-way communications system over

local telephone lines.':" ICS intends to develop a wide range of energy-related

services in the residential and small commercial markets; in addition, other services could include home security, education, and electronic banking.

Columbia Gas Transmission Corporation (Transmission), the wholly owned

transmission subsidiary of The Columbia Gas System, Inc., a registered holding

company, has been burdened with marketing problems due to contract obligations to purchase quantities of gas at prices which exceed those the market can

accept. Pursuant to Federal Energy Regulatory Commission settlements arising out of various lawsuits, Transmission has agreed to pay certain pipeline

suppliers their fixed costs for purchases below minimum bill levels and to advance to the suppliers Transmission's allocable share of take or pay payments

made by the pipeline suppliers in connection with Transmission's reduced purchases, with such advances to be repaid to Transmission as the pipeline suppliers work their way out of their take or pay situation. In order to finance

Transmission's needs during this critical period, the Commission authorized an

extensive financing package totalling in excess of $1.2 billion including up to

$450 million in inventory financing notes, up to $400 million from the sale of

interests in the proceeds of production from certain proved reserves, and $350

million in first mortgage bonds. 134

Institutional Disclosure Program-Section 13(f)(5)of the Securities Exchange

Act requires certain "institutional investment managers" to file reports on

Form 13F on a calendar quarterly basis. Managers required to file 13F reports

disclose certain equity holdings of the accounts over which they exercise investment discretion. As of June 30, 1985, Form 13F reports had been filed on

behalf of approximately 1,464 managers for holdings totaling $788 billion.

Form 13F reports are available to the public at the Commission's Public

Reference Room promptly after filing. Two tabulations of the information contained in the Form 13F reports are available for inspection: (1) a listing, arranged according to the individual security, showing the number of shares held and

the name of the money manager reporting the holding; and (2) a summary

listing showing the number of shares of a security reported by all institutional

investment managers filing reports. Both tabulations normally are available approximately two weeks after the date on which Form 13F is required to be filed.

The tabulations are produced by an independent contractor selected through

the competitive bidding process. The contractor provides its services to the

Commission without charge, and is required to make a variety of specified

tabulations available to the public at reasonable prices within ten days after

receipt of the reports.

41

Other Litigation and Legal Activities

Key 1985 Results

FY'81 FY'82 FY'83 FY'84 FY'85

Win Loss Other Win Loss Other Win Loss Other

Supreme Court

and

Appellate Courts NA, N.A 38 6 3 37 8 6 37 4 6

District Court NA. N,A. 40 4 4 43 1 3 35 2 2

Other" N.A. NA 6 1 6 13 0 0 12 0 0

•• State Courts and Administrative Tribunals

The General Counsel represents the Commission in all litigation in the

United States Supreme Court and the Courts of Appeals, defends the Comrnission and its employees when sued, prosecutes administrative disciplinary pro.

ceedings against professional persons under Rule 2(e) of the Commission's

Rules of Practice, and appears amicus curiae on behalf of the Commission in

significant private litigation involving the Federal securities laws. In addition,

under the supervision and direction of the General Counsel, the Regional Of.

fices represent the Commission in corporate reorganization cases which have a

substantial public investor interest under the Bankruptcy Code. The General

Counsel also seeks to ensure that objectives of the Commission's enforcement

and regulatory programs are accomplished, that judicial interpretations of the

Federal securities laws afford adequate protection to investors, and that the

Commission is able to discharge its statutory responsibilities, unimpeded by

lawsuits against the agency or its staff.

The General Counsel represented the Commission in 289 litigation matters

during the past fiscal year, less than half of which are still pending. During the

fiscal year, 47 Court of Appeals and Supreme Court cases were concluded, all

but four favorably to the Commission. There were 37 appeals before the

Supreme Court and Federal courts of appeals of cases in which a party subject

to a Commission injunctive action challenged the lower court's resolution of

the case in a manner favorable to the Commission or, much less frequently, the

Commission challenged an adverse decision. Of these appeals, 18 were con.

eluded, with only 2 outcomes unfavorable to the Commission. The foregoing

compares with the following cases in fiscal 1984: a total of 276 matters, of

which 42 were appeals of injunctive action cases, Of those appellate cases, 19

were concluded, with only two outcomes unfavorable to the Commission.

There also were 20 appellate and district court actions seeking to overturn

Commission orders, primarily those issued in administrative proceedings or affirming self. regulatory organization disciplinary proceedings against regulated

entities such as broker-dealers. Of these appeals 13 were concluded, with one

adverse result. In fiscal 1984, there were 16 actions, seven of which were con.

c1uded. In each of these cases, the outcome was favorable to the Commission.

The Commission filed amicus curiae briefs in 44 cases during the year (com.

pared to 52 such instances in fiscal year 1984). The Commission participated in

43
16 private cases which were decided; only three of these resulted in a decision

adverse to views advocated by the Commission.

The General Counsel also handled more than 185 other proceedings before

the Commission or in the Federal district courts, compared to 180 in fiscal year

1984. These included 63 suits brought against the Commission or its staff, and

78 suits, including actions under various public information statutes, seeking

access to Commission documents. Of the latter, 54 involved discovery subpoenas in private actions in which the Commission is not a party. In fiscal year

1984, there were 31 suits brought against the Commissioners or the Commission's staff, and 81 suits (including 59 third-party subpoenas) under the various

public information statutes.

In addition to litigation, the General Counsel is involved in significant

legislative and regulatory work. For example, the Office assisted the Chairman

in his participation as a member of the Task Group on Regulation of Financial

Services. This year, the Group released a report, "Blueprint for Reform," and

the Chairman testified in support of its securities law proposals. The Office also

assisted the Commission in considering changes in tender offer regulation, and

in supporting adoption of the Shareholder Communications Act.

During the fiscal year, 138 debtors with securities registered under the

Securities Exchange Act of 1934 (Exchange Act) in the hands of the public

commenced Chapter 11 reorganizations. The Commission entered its appearance in 49 of these cases involving aggregate assets of $6.3 billion and

about 160,000 public investors. In addition, the Commission entered an appearance in five cases to pursue a specific law enforcement interest. A list of

these cases is set forth in Table 34 in the Appendix to this Report.

Litigation

Appeals in Commission Enforcement Actions- This litigation consists

primarily of attempts by defendants in Commission injunctive actions to obtain

reversal by a Court of Appeals of district court decisions finding that they have

violated the law, enjoining them, and/or ordering other ancillary relief such as

disgorgement. In addition, there are occasionally cases where the Commission

is denied relief and takes an appeal.

In SEC u. Blaum, 135 the United States Court of Appeals for the Sixth Circuit

upheld a district court order requiring an investment adviser found to have

engaged in scalping-i.e., buying securities, then recommending them for pur.

chase by customers without disclosing his interest in the stock, and seIling

them after the expected price increase-and other misconduct, to disgorge

$581,000 in illegally obtained profits. The appellate court also approved a plan

that permitted victims of the defendant's fraud to make claims to the disgorge.

ment fund. The court rejected the defendant's argument that he had a constitutional right to challenge claims to the fund and to receive any unclaimed

money, agreeing with the Commission that the purpose of disgorgement is to

force the defendant to give up the amount by which he was unjustly enriched.

In SEC u. Drysdale Securities COrp.,136 the Commission has appealed the

district court's dismissal of the Commission's complaint for injunctive relief

against an audit partner at a major accounting firm for his participation in a

fraud which resulted in the collapse of a government securities dealer, causing

44
losses to institutional investors of almost $300 million. The Commission's

complaint alleged that the accountant engaged in securities fraud by preparing

false financial statements which concealed the dealer's insolvency and induced

institutional investors to trade with it. The district court dismissed the complaint, holding that since the alleged misrepresentations did not pertain to the

government securities traded or to their issuer, they did not occur "in" or "in

connection with" the offers, purchases or salesof securities, and therefore were

not a violation of the Federal securities laws.P? The Commission argues in its

appeal that the district court's construction of the "in" and "in connection with"

requirements is unduly restrictive and contrary to established precedent.

In SEC v. Carter Hawley Hale Stores, 138the Commission sought to enjoin an

issuer's offer to purchase over half of its own common stock in the open

market, made in response to a hostile tender offer by another corporation. The

Commission argued that the issuer's offer was subject to the requirements of

the Commission's tender offer rules, with which the issuer had not complied.

The United States Court of Appeals for the Ninth Circuit affirmed the district

court's finding that the issuer was not conducting a tender offer. The Commission argued on appeal that Carter Hawley's offer was a tender offer under Rule

13e-4,139because the offer was designed to inflict on shareholders the same

harmful economic effects that Congress sought to eliminate in enacting the

Williams Act. The Commission urged that any offer designed to pressure

shareholders into selling precipitously constitutes a tender offer. The Commission also argued that the eight-factor test proposed by the Commission in 1979

and adopted in the case of Wellman v. Dickinson, 140applied flexibly and with a

view toward the purposes of the Williams Act, also established that the Carter

Hawley offer was a tender offer. The Court of Appeals held that the appropriate

standard is the eight-factor test, but that Carter Hawley's offer was not a tender

offer under that standard.

Petitions to Review Commission Orders-Petitions to review Commission

orders arise from Commission administrative proceedings conducted under

various provisions of the Federal securities laws, including orders on review of

disciplinary action by national securities exchanges and the National Association of Securities Dealers, Inc. (NASD), and orders issued under the Public Utility Holding Company Act of 1935 (Holding Company Act). These administrative

appeals may involve, among other things, issues central to the Commission's

enforcement program and thus to the integrity of the securities markets, or

questions of interpretation of the securities statutes.

For example, in Mister Discount Stockbrokers v. SEC,141the United States

Court of Appeals for the Seventh Circuit held that it would not entertain

arguments concerning alleged constitutional defects in the NASD's disciplinary

process that petitioner had not raised before the Commission in its review of

the NASD's decision. The court also addressed and rejected petitioner's contention that the NASD's failure to provide for discovery violated his due process

rights. The court held that petitioner had failed to show any prejudice resulting

from a lack of discovery, let alone prejudice so significant as to result in a

denial of due process.

In Eichler v. SEC, 142the United States Court of Appeals for the Ninth Circuit

affirmed a Commission decision which upheld NASD sanctions against two of45
ficers of a brokerage firm that took customer orders for stock, and then failed

to fill the orders promptly and completely, in violation of just and equitable

principles of trade.

And in Arkansas Public Service Commission v. SEC, 143 the United States

Court of Appeals for the D.C. Circuit was asked to review Commission orders

under the Holding Company Act, approving $560 million in continued financing for a nearly operational nuclear powered generating plant being constructed by a utility holding company system. The Commission determined

that the assignment of an indemnity obligation, as part of the collateral for

bonds to be issued, was not the issuance or sale of a security for purposes of the

Holding Company Act. The petition for review was later voluntarily dismissed.

Commission Participation in Private Utigation- The Commission also participates as a friend of the court in selected private litigation that involves

significant securities law issues. This is an important supplement to the enforcement program. Because the Federal securities laws provide for private

remedies as well as governmental enforcement actions, decisions in private

cases may have precedential effect on the Commission's own regulatory activities.

In Austin Municipal Securities v. National Association of Securities Dealers, 144

the Court of Appeals, as urged by the Commission, held (1) that the NASD, a

securities association registered with the Commission, and its officials are absolutely immune from damage suits alleging torts committed during the NASD

disciplinary process; and (2) that, in view of the pervasive regulatory structure

created by the Exchange Act, the Federal antitrust laws are impliedly repealed

with respect to the NASD's disciplinary process.

In Moran v. Household International, 145 the Commission filed an amicus brief

in the Supreme Court of Delaware urging that a "poison pill" defense to tender

offers adopted by Household International's board without submission to its

shareholders is not in the interests of the corporation's shareholders. The Commission argued that the poison pill plan would have the effects of entrenching

management and preventing any tender offer for the corporation that is not approved by management, and would also deter proxy contests against management. Such results, the Commission argued, based on its experience in enforcing and administering the Williams Act, is contrary to the interests of

Household's shareholders in that it is in the shareholders' interests to be able to

consider tender offers on their merits.

In Austin v. Lottsqearden, 146 the United States Court of Appeals for the Eighth

Circuit, sitting en bane, reaffirmed its earlier decision that in calculating rescissionary damages in a private action under Section 12(2) of the Securities Act of

1933 (Securities Act) for fraud in the sale of a tax shelter investment, the plaintiffs losses should be offset by the amount of the plaintiffs tax savings. The

Commission had urged, in an amicus brief, that the plaintiffs losses should not

be offset by tax savings; the Commission would, however, permit prejudgment

interest to be adjusted to account for net tax savings. This issue has divided the

Courts of Appeals, with the Second Circuit agreeing with the Eighth Circuit,

and the Ninth Circuit disagreeing. A petition for a writ of certiorari is pending.

In Angelastro v. Prudential-Bache Securities, 147 the United States Court of Appeals for the Third Circuit, agreeing with the views expressed by the Commis46
sion as amicus curiae, held that misrepresentations and omissions concerning

the margin interest rates charged by a brokerage firm on a customer's margin

account are "in connection with" the customer's purchase and sale of securities

through that account. This establishes a violation of the antifraud provisions of

Section 1O(b)of the Exchange Act and Rule lOb-5 thereunder. The court of appeals also held, as urged by the Commission, that a private right of action exists

under Commission Rule lOb.16, which requires brokerage firms to disclose

margin account credit terms to their customers.

In Busch v. Cerpenier.r'" the Commission filed an amicus brief in the United

States Court of Appeals for the Tenth Circuit. The brief reiterated the Cornrnission's longstanding view that the intrastate offering exemption from securities

registration under the Securities Act is only available where the distribution of

the issuer's stock (including any distribution made by persons buying from the

issuer with a view to resale) occurs exclusively in its state of residence, and

where the issuer does the predominant part of its business, and uses the

predominant part of the offering proceeds, in that state. The district court had

held the exemption available to an issuer which had not proven it satisfied

those criteria.

In Michaels v. Michaels, 149 the Commission submitted for filing an amicus

memorandum, in connection with a rehearing petition, in which the Commission urged the Seventh Circuit to delete dictum in its decision stating that

merger negotiations by publicly held companies do not become material, and

need not be disclosed, until there is agreement on price and structure. The

Commission reiterated its view, traditionally accepted by the courts, that the

materiality of merger negotiations must be judged on the facts of each case,

looking to the significance of the merger to the company and the probability of

its occurrence, and may become material well before there is agreement on

price and structure. Following submission of the Commission's memorandom,

the Seventh Circuit amended its decision to delete that dictum. 150

Trading on Material Non-Pudic Information-The issue of when trading on

material non-public information violates the Federal securities laws continues

to be actively litigated. This year the Commission submitted amicus briefs in

support of the prosecution in two criminal cases in which it was charged, and in

which the courts agreed, that the defendants violated the antifraud provisions

of the Federal securities laws when they traded, or tipped others who traded, on

the basis of misappropriated information. In United States v. Reed,151 the court

refused to dismiss a count of an indictment charging securities fraud, finding

that if, as alleged, the defendant traded in securities on the basis of information

he misappropriated from his father, a corporate director, in breach of their confidential relationship, it would constitute a violation of Section 10(b)of the Exchange Act and Rule lOb-5 thereunder. Similarly, in United States v. Winans, 152

the court held, in finding the defendants guilty of violating Section 10(b) and

Rule lOb-5, that they had traded on material non-public information that one

defendant, a newspaper columnist, misappropriated from his employer and tipped to the others, and that such trading violated those provisions.

In Bateman Eichler, Hill Richards, Inc. v. Berner, 153 the Supreme Court held, as

urged by the Commission as amicus curiae, that a securities salesman and a

corporate insider could not use the in pari delicto, or "equal fault," defense to

47
bar a private Rule lOb-5 action by investors to whom they allegedly gave

fraudulent "tips" of purported inside information. Because of the important role

played by private Rule 1Ob-5 actions in the effective enforcement of the Federal

securities laws, the Court held that the in pari delicto defense should be narrowly limited to bar such actions only when the plaintiffs truly bear at least substantially equal responsibility for their injuries and where precluding them from suing would not significantly interfere with the effective enforcement of the

securities laws. The Court found neither condition met.

And in Bianco v. Texas tnstruments,'?' the Commission submitted a

memorandum amicus curiae urging that prior to the 1984 amendments to the

Exchange Act, corporate insiders who traded in options rather than stock of

their corporation while in possession of material, nonpublic information

violated Section 10(b) and Rule lOb-5 thereunder. The 1984 amendments expressly provided that such trading is illegal. The Commission argued that these

amendments did not change prior law, but clarified it. Given the interrelation

between the options market and the stock market, and the fact that trading in

options can generate far greater profits than trading in the underlying stock, the

Commission urged the court to reject the defendants' contention that, prior to

1984, there was a loophole in the law permitting insider options trading. The

case is pending.

Definition of a Security- The question of what constitutes a security continues to be litigated. This year, the Supreme Court resolved one issue that had

sharply divided the Courts of Appeals.

In Landreth Timber v. Landreth, 155 and Gould v. Reuienecht, 156 the Supreme

Court agreed with the Commission, which participated in the cases as amicus

curiae, that the sale of a controlling stock interest in a business is a securities

transaction subject to the antifraud provisions of the Federal securities laws. In

Landreth, the Court held that the sale of 100 percent of the stock of a business

was subject to the antifraud provisions. In Gould, the Court held that the sale of

a controlling, but less than 100 percent interest, was subject to those provisions. In so ruling, the Court resolved a split in the Courts of Appeals over

whether stock sold in such transactions constitutes securities under the Federal

securities laws.

In another case, SEC v. Goldfield Deep Mines,157the Court of Appeals, in affirming a permanent injunction obtained against the defendants by the Commission, held that sales of gold ore coupled with refining contracts constituted investment contracts, and thus were securities subject to the Federal securities

laws. The court held that because the investment was in a common enterprise

in which both the promoter's and investors' profits were dependent on the success of the promoter's efforts, and because the investors expected profits from

those efforts, an investment contract, which is defined as a security under the

Federal securities laws, existed.

Challenges to the Commission s Authority Under the Investment Advisers

Act-In two challenges to the Commission's authority under the Investment

Advisers Act of 1940 (Investment Advisers Act) to protect the investing public

from abusive practices by publishers of investment advisory services, the

courts dealt with important issues.

48
In Lowe v. SEC, 158 the Supreme Court held, construing the statutory exclusion from the definition of "investment adviser" in the Act, that impersonal investment advisory publishers are exempt from the coverage of the Act so long

as their advice is disinterested and they publish on a regular basis. On the other

hand, covered by the Act are "touts" and "tipsters," that is, publishers whose

advice is not disinterested or whose publications are timed to take advantage of

market events. The decision overturns a ruling by the United States Court of

Appeals for the Second Circuit that Lowe's advisory publications were subject

to the Act and could be enjoined consistent with the First Amendment for

failure to comply with the Act's registration requirements. The Court did not

find it necessary to reach Lowe's First Amendment challenges, although three

members of the Court indicated in a concurring opinion that, if applied to

Lowe, the Act's registration provisions would violate the First Amendment as

an improper prior restraint on speech.

In Suter v. SEC, 159 a case decided shortly after the Supreme Court decided

Lowe, the United States Court of Appeals for the Seventh Circuit affirmed the

Commission's order revoking the Investment Advisers Act registration of a

newsletter publisher because he had engaged in fraud in connection with the

publication of his newsletter. The court held that Lowe did not prevent the

Commission from revoking the registration of the publisher since revocation

did not forbid him from publishing, within the limitations set forth in Lowe. The

court also held that the publisher's First Amendment challenges to the Act

were not properly raised in a proceeding to revoke his registration. The court

reasoned that any constitutional infirmity, even if present, would not entitle the

publisher to be reinstated, and that the publisher could raise his constitutional

challenges if the Commission sought to enjoin the actual publication of his

newsletters.

Commission Action Under Rule 2(e)-Under Rule 2(e) of its Rules of Practice,

the Commission may suspend or bar from practicing before it professionals

who have willfully violated the Federal securities laws or engaged in improper

professional conduct. Accountants and lawyers play a critical role in the

disclosure of full and accurate information to the investing public, and the ability to discipline those who have engaged in violative conduct is necessary to

protect the Commission's processes.

In the last year, the Commission instituted five Rule 2(e) proceedings against

six individual accountants. Respondents in four proceedings resigned or have

been suspended from practice before the Commission. Under the

Commission's orders in these proceedings, before these professionals may be

readmitted to practice, they must demonstrate that they will be subject to adequate supervision and that they have undertaken further professional education. The one remaining proceeding is pending.

In re Coopers & Lybrand and M. Bruce Cohen, c.P.A. 160 centered on whether

consolidated financial statements are necessary to accurately depict the operations of nominally separate corporations which in fact comprise a single

economic entity. The Commission charged that Coopers & Lybrand and one of

its partners violated generally accepted accounting principles in failing to require that the financial statements of Digilog, Inc. and Digilog Business

Systems, Inc. be consolidated. Although Digilog Business Systems had been

49
set up as an "independent" corporation, the Commission alleged the contractual and operating relationships between the two companies were such that

they should have been viewed as constituting a single enterprise for reporting

purposes. Had the accounting treatment reflected the underlying economic

reality, shareholders would have seen that it was actually Digilog which was at

risk for the heavy losses incurred by Digilog Business Systems in establishing a

new marketing program for Digilog products. Coopers and Cohen consented to

a settlement which included an opinion by the Commission concluding that

consolidation would have provided the user of the financial statements with the

most meaningful presentation in accordance with generally accepted accounting principles.

In another Rule 2(e) proceeding, In the Matter of Russell G. Davy, \6\ also involving an accountant, the Commission, following an evidentiary hearing,

issued an order under Rule 2(e) permanently barring a certified public accountant from appearing or practicing before the Commission. The Commission

found that the accountant had violated the Federal securities laws and had

engaged in improper professional conduct in auditing the financial statements

of a publicly held corporation. The accountant recklessly failed to discover that

the corporation had included in the audited financial statements, assets that it

did not own and operations that did not exist. The accountant's appeal of the

Commission's decision is pending in the United States Court of Appeals for the

Ninth Circuit.162

:\. Litigation Involving Requests for Access to Commission Records-Although

the Commission received numerous Freedom of Information Act (FOIA) and

confidential treatment requests in fiscal 1985, only two of those requests

resulted in the filing of court actions against the Commission; both of these actions are pending. The Commission received 1,710 requests under the FOIA for

access to Commission records, a decrease of 2.5% over fiscal 1984. Approximately half of the 1985 results were for investigatory files. The Commission

also received 2,282 requests for confidential treatment from persons who submitted information, an increase of 13% over fiscal 1984. In fiscal 1985,77 requestors appealed the denial or partial denial of FOIA requests to the Commission's General Counsel, who has delegated authority to decide such appeals.

Additionally, 12 confidential treatment requesters appealed the denial of their

requests.

The Commission was served with 34 discovery subpoenas in fiscal 1985 in

private actions in which the Commission is not a party. These private parties

seek information from Commission investigatory files or testimony from present or former Commission employees related to their pending litigation.

Litigation Against the Commission and Its Staff-During 1985, the Commission and its staff were defendants in 18 district court actions in which persons

sought to enjoin Commission law enforcement efforts or to obtain damages

awards. The Commission prevailed in 10 decided cases; eight cases are still

pending, one of which includes 318 individual Federal tort claims.

In Kendrick v. Zenides, 163 the plaintiffs had filed suit against a number of

Federal employees, including three members of the Commission's staff, alleging violations of their constitutional and common law rights in connection with

a Commission investigation that led to plaintiffs 1983 conviction for securities

50
fraud and perjury. The district court granted the defendants' motion for sum.

mary judgment, holding that there was no basis in law or fact for plaintiffs'

frivolous claims. In addition, the court directed plaintiffs and their counsel to

pay the defendants' reasonable expenses, including attorney's fees. The Court

also ruled, sua sponte, that plaintiffs' attorneys' conduct in bringing the action

raised questions concerning their fitness to practice law and ordered them to

show cause why they should not be suspended from practice before the Federal

court.

The Commission was awarded attorney's fees in another action against the

Commission and its staff. In Sprecher v. von Stein, 164 the plaintiff sued the Commission, the Commissioners and three staff members, alleging that the staff

had commenced an informal, preliminary investigation for the sole purpose of

harassing him. The plaintiff alleged violations of his constitutional rights aswell

as various common law torts. The court dismissed the suit for failure to state a

claim. Alternatively, it granted summary judgment for the defendants, holding

that the law suit had been a bad faith attempt to thwart a lawful and legitimate

investigation by wrongly accusing the Commission employees conducting the

inquiry of engaging in improper conduct. The court ordered the plaintiff to pay

the defendants' reasonable costs and attorney's fees.

In Chicago Board of Trade v. CFTC and SEC, 165 the CBT challenged the joint

action of the Commission and the Commodity Futures Trading Commission

(CFTC) in publishing an interpretation relating to applications for designation

as contract markets for futures contracts on nondiversified stock indexes composed of securities of domestic issuers (or options on such futures contracts)

under the standards of Section 2(aX1XB) of the Commodity Exchange Act

(CEA). The CBT argued that the guidelines are contrary to the expressstatutory

provisions of the CEA and were promulgated in violation of the Administrative

Procedure Act. As urged by the Commission and the CFTC, the district court

dismissed the case under the doctrines of failure to exhaust administrative

remedies and lack of ripeness.

In addition, five actions were filed under the Right to Financial Privacy Act

seeking to block the Commission from obtaining accessto customer records at

banks and other financial institutions. In fiscal 1984, 15 such actions had been

filed. In all of these cases,the district court found that the Commission was pro.

perly seeking the subpoenaed records for a legitimate law enforcement inquiry

and enforced the Commission's subpoenas.

Finally, four motions were handled in the district courts and the Courts of

Appeals under the Equal Access to Justice Act seeking attorneys fees and expenses. Of those motions, all were decided in the Commission's favor.

Significant Legislation

Financial Services Industry-Vice Presidential Task Group-The Task Group

on Regulation of Financial Services, chaired by Vice President Bush, resulted in

part from the Chairman's proposal that a one-year task force be formed to

review the regulatory structure for the securities, banking, thrift, and insurance

industries; that financial services be regulated by functional activities rather

than by outmoded industry classification; that overlapping, duplicative, and

51
conflicting regulatory activities be consolidated; and that excessive regulations

within and between agencies be eliminated.

The Chairman participated as a member of the Task Group, and, on

November 16, 1984, the Group released its report, "Blueprint For Reform." The

report contained proposals to substantially reorganize the Federal regulatory

system for depository institutions. The securities law proposals include repeal

of the exemptions in the Securities Act for registration of securities issued by

banks and savings and loan associations and the transfer to the SEC of administration of the periodic reporting, proxy solicitation, and short-swing profits provisions of the Exchange Act as they relate to such institutions. These initiatives would consolidate administration of securities disclosure requirements

for banks and savings and loan associations, resulting in more uniform financial disclosure to public shareholders and securities analysts and facilitating

evaluation of comparative investment risks. Delays in conforming regulations

governing banks and savings and loan association filings with those applicable

to other issuers would be eliminated and duplication of agency staff requirements would be reduced. The Commission would become the repository

for filings of all publicly held banks, savings and loan associations, and holding

companies, as it is for all publicly-owned companies.

On March 25, 1985, the Chairman testified in support of the Task Group's

securities law proposals, before the House Subcommittee on Commerce, Con.

sumer and Monetary Affairs of the Committee on Government Operations.

During fiscal 1985, the Office of the General Counsel assisted the Task Group's

staff in drafting legislation to implement its proposals.

Tender Offer Reform-On May 20, 1985, the Commission voted to continue

to support its 1984 proposal to amend the beneficial ownership reporting requirements of Section 13(d) of the Exchange Act. This proposal would allow

the Commission to (a) require immediate public announcement of the acquisition of more than five percent of a class of equity securities; (b) shorten the current time period for filing of the Schedule 13D; and (c) restrict the acquisition of

additional shares for a period not to extend beyond the second business day

after the Schedule 13D filing. This proposal was developed by the Office of the

General Counsel with the Division of Corporation Finance.

The Office of the General Counsel also prepared extensive testimony on

tender offer regulation. Chairman Shad testified on tender offer regulation

before the Senate Committee on Banking, Housing and Urban Affairs on October 2, 1984, before the Senate Subcommittee on Securities on April 4, 1985,

and before the House Subcommittee on Telecommunications, Consumer Protection and Finance on May 23, 1985.

Regulation of the Government Securities Markels- The Chairman and other

Commission officials testified before several Congressional committees concerning the failures of ESM Government Securities, Inc., Bevill Bresler

Schulman Asset Management Corp., and other government securities dealers.

At the request of the Subcommittee on Telecommunications, Consumer Pro.

tection and Finance of the House Committee on Energy and Commerce, the

Commission, in consultation with the Federal Reserve Board (FRB) and the

Department of Treasury, prepared a report on the government securities

markets and the issue of additional regulation of that market.

52
The agencies differed on the necessity for legislation, but jointly reported

that, if Congress concluded legislation was necessary, the following approach

would be acceptable: (1) all currently unregulated government securities

dealers should be required to be registered (the Commission and the Treasury

differed as to which should be the registrar); (2) the Commission and the bank

regulators be given the authority to sanction those who violate either the

securities or the banking laws; and (3) the Treasury, in consultation with the

FRB, be given the authority to adopt rules concerning capital, independent

audits and recordkeeping, and collateralization and when-issued trading practices. Under this approach, inspection and rule enforcement for non-bank

dealers would be vested in existing self-regulatory organizations, under Com.

mission oversight, and for bank dealers in the banking agencies.

While the Commission did not conduct a formal cost-benefit analysis, it

recommended that if legislation was to be enacted, the joint agency approach

be followed, with two changes. First, registration of currently unregulated

dealers would be with the Commission. Second, rulemaking authority would

consist of capital, independent audit and recordkeeping requirements.

SharehoLder Communications Act-In fiscal 1985 the Commission continued

to support the adoption of the Shareholder Communications Act, introduced in

the 99th Congress and developed by the Office of the General Counsel and the

Division of Corporation Finance. The legislation would amend Section 14(b)of

the Exchange Act to authorize the Commission to regulate the dissemination

of proxy materials by banks, associations and other entities in the same fashion

as the Commission now regulates the dissemination of proxy materials by

broker-dealers. This proposal contains a one-year delayed effective date. It was

introduced in both houses of Congress in 1985, passed by the House of

Representatives on July 22, 1985, and referred to the Senate.

Corporate Reorganizations

The Commission acts in a statutory advisor's role in reorganization cases

under Chapter 11 of the Bankruptcy Code to ensure that interests of public investors are adequately represented. In these cases, administered in Federal

court, a debtor generally is allowed to continue operations under court protection while it negotiates a plan to rehabilitate its business and to pay its debts.

Reorganization plans often provide for the issuance to creditors and

shareholders of new securities in exchange for part or all of their claims or interests in the debtor under an exemption from registration under the Securities

Act provided by the Bankruptcy Code.

In its capacity as special advisor, the Commission may raise or present its

views on any issue in a Chapter 11 case, but it may not initiate an appeal.

Although Chapter 11 relief is available to businesses of all sizes, the Commission generally limits its participation to cases involving debtors that have

publicly-traded securities registered under the Exchange Act. In fiscal 1985, the

Commission presented its views on a variety of issues.

Committees-During the fiscal year, the Commission moved or supported

motions for the appointment of committees to represent investors in 12

Chapter 11 cases.166 For example, in a case having significance for the

53
representation of equity security holders, In re WheeLing-Pittsburgh SteeL

Corp., 167 the Commission moved for the appointment of a single equity security holder's committee to represent common stockholders and two classes of

preferred stockholders. The Commission recognized that the three classes of

equity interests have different legal rights, but practical considerations, in.

c1uding the substantial additional costs of administration and problems of

locating holders of each class willing to serve, made a single committee to

represent all interests appropriate at an early stage of the case.The Commission urged the court, however, to appoint a committee composed of representatives of each class proportionate to their interest in the estate, and pointed

out that if a conflict of interest later developed between the classesof equity interests, the court could at that time appoint additional committees or

reconstitute the committee. The Commission's motion is pending.

In another case appealed to the district court, In re The Charter Co., 168 the

Commission filed a brief supporting the bankruptcy court's ruling that indenture trustees are eligible to sit as voting members of a committee. The Commission argued that there was no inherent conflict between fiduciary responsibilities of an indenture trustee to represent debtholders and its fiduciary

responsibilities as a member of the committee also to represent other creditors

of the estate. The Commission pointed out that, if an actual conflict arose on a

particular matter, the indenture trustee could simply recuse itself, relinquish its

voting rights or resign. The appeal is pending.

Trustees and Examiners-Under the Bankruptcy Code, the court may appoint

a trustee either "for cause," including fraud, dishonesty, or gross mismanagement of the debtor's affairs by current management, or in the interests of

creditors or equity security holders. The trustee's primary duties are to operate

the debtor's business, conduct and report to the court the results of the investigation of the debtor and file a plan. Where there is no trustee, an examiner

may be appointed under conditions specified in the Bankruptcy Code. The

Commission participates on questions concerning the appointment of trustees

and examiners and the scope of their duties because of the important role that

these independent fiduciaries play in protecting the interests of public investors

and because information developed in a related enforcement investigation may

demonstrate the need for such an appointment. This fiscal year, the Commission supported successful motions to appoint trustees in In re Kenneth B.

Osborrour'" and In re State Capital Corp. 170

Estate Administration-In In re Air Florida Systems, 171 the bankruptcy court

found that the value of the debtor, a commercial airline, was a wasting asset

and that its going concern value was of a perishable nature. The Commission

supported, on appeal to the district court, the bankruptcy court's order approving the debtor's application to sell substantially all of its property outside a plan

of reorganization. The Commission sought to strike an appropriate balance

between the need of a debtor to have flexibility in the sale of assetsand the fact

that a sale of substantially all of the company's assets not pursuant to a plan

undermines investor and creditor suffrage, disclosure, and plan confirmation

protections in the Bankruptcy Code. On appeal, the Commission argued, and

the district court held, that the bankruptcy court's findings were consistent with

the standard enunciated in In re LioneLCorp., 172 that there must be a showing of

54
adequate business justification for sale of assetsoutside the context of a plan. A

further appeal to the United States Court of Appeals for the Eleventh Circuit, in

which the Commission did not participate, was dismissed as moot, since the

debtor had closed the sale with Midway prior to oral argument. The court

noted, however, that if it were to reach the merits of the issues raised, it would

have affirmed the ruling in question. 173

In two cases this year'?" the Commission urged that a creditor may file a

claim on behalf of a class of other similarly situated claimants, thereby invoking the class action procedures recognized in ordinary Federal civil litigation

outside of bankruptcy. The Commission maintained that the filing of a class

claim by a putative class representative is fully consistent with bankruptcy principles since it affords the debtor notice of the type and amount of potential

claims outstanding and enables the debtor to formulate a reorganization plan.

The Commission suggested that where a debtor desires more specific information concerning the nature and scope of the class claim, class action procedures permit a notice to be sent to all class members which requires the filing

of individual claims.

In the Baldwin United case the bankruptcy court rejected the Commission's

arguments that a class representative can file a claim on behalf of the class as

their agent, and found that class claims could not be used to protect the rights

of creditors who failed to file their own claims. An appeal to the district court is

pending.

In re Standard Metals"? also raised the issue of whether a debtor which had

taken no steps to effect notice to potential creditors not listed on its schedules

filed with the court, may invoke the procedures of the Bankruptcy Code to cut

off the right of such creditors to participate in the reorganization. The bankruptcy court had concluded that, since the claim based on violations of the Federal

securities laws by the debtor was unknown to the debtor prior to establishment

of the claims bar date, notice of the bar date was not required. On appeal to the

district court, the Commission urged that where there is a reasonable

likelihood that the debtor may not be able to identify all potential creditors

because of the nature and scope of the debtor's business operations, due process at least requires publication notice of a claims bar date calculated to reach

unscheduled creditors. The appeal is pending.

In two other cases the Commission objected to proposals that granted

significant managerial authority over the debtor to persons other than a trustee

or debtor in possession. The Commission was concerned that these other persons did not possessthe fiduciary duties which are imposed by the Bankruptcy

Code upon those who manage the affairs of the debtor in the interests of the entire estate. In In re Pizza Time Tbeetre.t" the bankruptcy court approved an

agreement ousting the debtor's chief executive officer and replacing him with a

"responsible officer," and removing the debtor's board of directors from any

control over the debtor's business. The Commission urged reconsideration of

the order, arguing that the powers accorded to this officer were more akin to

those of a receiver, a type of official that the court is specifically prohibited

from appointing under Chapter 11. In the Commission's view, the Bankruptcy

Code did not authorize the removal of incumbent management except through

55
the appointment of a disinterested trustee. The bankruptcy judge denied the

Commission's objection without comment.

In In re Unioll, J77 the Commission raised a similar objection to a compromise

agreement between the unsecured creditors' committee and the debtor in

possession, which would appoint a "consultant" to the creditors' committee

who was to be given extensive managerial authority over the day-to-day operations of the debtor conducted by the debtor in possession. The Commission's

objection was grounded on the fact that the appointment provided for the exercise of managerial authority by a partisan representative of the creditors, rather

than a fiduciary having duties to all the interests of the estate, including public

investors. The court overruled the Commission's objection, but noted that it

would entertain promptly any objection regarding the consultant's actions.

In In re Ale Photo, 178 the debtor's application to use cash collateral to purchase inventory for its ordinary business operations was opposed by a major

secured creditor. In approving the bulk of the debtor's application, the court

adopted the legal standard urged by the Commission that, where a secured

creditor is found to be adequately protected, expenditures for ordinary business

operations such as inventory should be approved absent a finding that the debtor should not be permitted to operate its business. The bankruptcy court noted

that to deny the debtor the ability to continue as a going concern would harm

the interests of the other creditors and the stockholders.

'Plans of Reorganization/Disclosure Statements-A disclosure statement is a

combination proxy and offering statement used in connection with the acceptance of a plan of reorganization which often includes the exchange of new

securities for claims and interests of creditors and shareholders in the debtor.

The Bankruptcy Code provides that adequate disclosure is to be made without

regard to whether or not the information provided would otherwise comply with

the disclosure requirements of the Federal securities laws. But, in recognition

of the Commission's special expertise on disclosure questions, bankruptcy

rules require service on the Commission of all disclosure statements, and the

Bankruptcy Code recognizes the Commission's right to be heard, distinct from

its special advisory role, on the adequacy of disclosure.

During the fiscal year, the Commission received approximately 3,600

disclosure statements filed in Chapter 11 cases involving both privately-held

and publicly-held corporations. The staff reviewed every statement filed in

cases in which the Commission entered an appearance, totalling 54, and 174

others.

The Commission staff reviews disclosure statements to determine whether

the plan proposed involves the issuance of securities consistent with the exemption from registration in the Bankruptcy Code or otherwise in compliance

with the Federal securities laws. The Commission also reviews disclosure

statements to determine whether there is adequate disclosure concerning the

proposed plan. Generally, the Commission seeks to resolve questions concerning bankruptcy disclosure through staff comments to the plan proponent. If

those cannot be resolved through this process, the Commission may object to

the disclosure statement in the bankruptcy court.

During the fiscal year the Commission commented on disclosure statements

in 168 cases. Two objections pressed by the Commission in the bankruptcy

56
court are particularly significant. In In re Lionel Corp.,179the Commission

reiterated its objections to a disclosure statement previously filed that failed to

include financial projections to support an opinion that the plan of reorganization was economically feasible. The bankruptcy court agreed with the Commission and ordered the inclusion of financial projections.

In In re Unioil,180 the bankruptcy court, as urged by the Commission, held that

the debtor's five-page disclosure statement, which failed to include current

financial information, projections of future performance, alternatives to the

proposed plan, or information regarding new management, was inadequate as

a matter of law. The court directed the debtor to file an amended disclosure

statement. Subsequently the bankruptcy court approved the debtor's amended

disclosure statement over the objections of the Commission. The Commission

argued that the amended disclosure statement still did not contain adequate information as that term is defined in Section 1125 of the Bankruptcy Code. The

bankruptcy court acknowledged that the disclosure statement did not itself

contain necessary information, but nevertheless found that the statement was

sufficient to put persons on "inquiry notice" and directed the debtor to furnish

additional information to persons who requested it. The Commission authorized the staff to pursue the objection, by supporting an appeal taken by a

creditor, that "inquiry notice" established a new legal standard of disclosure

which conflicts with the express provisions of Section 1125. The Commission

urged that such a rule deprives persons voting on the plan of information

necessary to make an informed judgment about whether to accept or reject a

plan. The creditor subsequently withdrew its appeal without resolution of the

Commission's objection by the appellate court.

Compliance with the Registration Requirements of the Securities Act-Section

1145 of the Bankruptcy Code contains a limited exemption from registration

under the Securities Act for the distribution of securities by a debtor, or an affiliate or successor to the debtor, pursuant to a plan of reorganization and in exchange for claims against or securities of the debtor. The issuance of securities

pursuant to a plan is deemed to be a "public offering" which means that there is

no restriction on resale of such securities unless the seller is an "underwriter" as

specifically defined in Section 1145(b). There was significant litigation in the

bankruptcy courts this year over the scope of this exemption. In In re Intemational Waste Water Management Reclamation Technologies, 181 the Commission

objected to a proposed sale of a debtor's assets in exchange for stock of an

unrelated entity on the ground that the proposed transaction violated the

Securities Act registration provisions. In the Commission's view, the proposed

sale was not within the scope of Section 1145 because(1)the shareswere being

sold to the debtor's trustee not pursuant to a reorganization plan, and (2) the

issuer was not a debtor, or an affiliate or successor to the debtor. The Commission subsequently withdrew its objections upon agreement of the issuer to

register the shares under the Securities Act.

In In re The Diet Institute, 182 the Commission objected to a debtor's request

that the bankruptcy court declare stock sold to three entities outside of a plan

of reorganization and not in exchange for claims or interests in the debtor exempt from registration under the Securities Act and freely tradeable. The Commission argued that the bankruptcy court lacked jurisdiction to enter the

57
declaratory relief sought and that, in any event, the issuance of the shares was

clearly not encompassed by the Bankruptcy Code exemption from registration.

In light of the Commission's objection, the debtor withdrew its exemption application.

In In re Amarex, 163 the Commission, in response to a request for its views, advised the bankruptcy court that a triangular merger proposed in a reorganization plan complied with Section 1145. The plan proposed that assets of the

debtor be transferred to an entity specially organized to acquire those assets,

and that the parent corporation would exchange its stock for claims and interests in the debtor. The Commission stated that the parent may be deemed to

be a "successor" of the debtor under Section 1145. The bankruptcy court, relying on the Commission's views, ruled that the proposed sale of securities by the

parent was exempt under Section 1145.

58
Management, Economic Analysis and

Program Support

With the Commission's operating environment undergoing unprecedented

change, the staff must provide objective economic and statistical analysis and

manage financial and human resources in an effective and efficient manner to

support achievement of the Commission's mission.

Key 1985 Management and Program Developments

Among the most noteworthy of the Commission's Fiscal 1985 accomplishments was the continued progress made toward an operational electronic disclosure system. See the Edgar section, page 19.

In a related effort, a series of office automation projects were undertaken.

This program is designed to demonstrate the effectiveness and utility of stateof-the-art computer applications to operations in line offices and divisions. The

demonstration results will be applied to the future implementation of

Commission-wide office automation. The Executive Director's Office conducted management studies of the Office of the Secretary and the Public Utility

Holding Company program. The latter resulted in a series of recommendations

leading to the transfer of the program to the Division of Investment Management. During the year, headquarters staff coordinated two conferences for

regional administrators to address important substantive and administrative

issues affecting the operation of the Commission's nine regional offices.

Economic Research and Statistics

The economic researchand statistics program provides the Commission and

the operating divisions with an objective economic perspective and the

technical support required to evaluate the economic aspects of the Commission's regulatory program. This task is carried out by the Office of the Chief

Economist and the Directorate of Economic and Policy Analysis.

The economics staff provides the Commission with economic advice and

research studies on rule proposals, established policy and the capital markets.

The staff assists the Commission in making decisions affecting the efficiency

and structure of our nation's securities industry and markets. In addition, the

program encompasses statistical monitoring of major program initiatives impacting the securities industry and markets and publication of the SEC's

Monthly Statistical Review.

Changes in the marketplace have increased the number and complexity of

economic issues coming before the Commission. New and more complex

market structures and trading systems are evolving, which increase the need

for economic analysis.

59
During fiscal 1985, the economic staff reviewed 89 rules and rule proposals.

Rule reviews emphasized the economic costs and benefits of alternative approaches to regulation. In addition, advice was given to the operating divisions

on requirements of the Regulatory Flexibility Act (RFA), particularly focused on

the economic effects for reducing regulatory burdens on small business entities. In fiscal 1985 the economic staff reviewed 24 RFA analyses and 33 RFA

certifications. During the same time 13 monitoring programs were developed

or maintained to study the Irnplementation of major rules, new trading facilities

or program changes implemented by self-regulatory organizations. The

economic staff also provided advice, technical assistance and empirical

analysis of many issues of concern to the Commission and its operating divisions.

Staff economists analyzed rule proposals related to the concentration of the

customers' margin debits held by broker-dealers and prepared an analysis of

the costs and benefits of possible approaches to regulating currently

unregulated dealers in government securities. Another project analyzed the

proposal by the National Association of Securities Dealers (NASD) and certain

exchanges to establish a standardized options market in NASDAQ traded

securities and examined two proposals that would permit unlisted trading

privileges on exchanges with respect to NASDAQ securities and would make

all National List securities eligible for NMS designation.

During fiscal 1985 the economic staff published a comprehensive study

(Capital Study) of the financing and regulatory capital needs of the securities industry. This sti Jy was prepared in conjunction with a concept release in which

the Commission requested public comment on a broad range of regulatory

policy issues regarding the net capital and other financial responsibility rules

for broker-dealers. The economic staff also examined the effectiveness and

costs of maintaining Rule 15c2-11.

The economics staff organized for the Commission the Economic Forum on

Tender Offers in which leading experts from academia and business aired their

views on this subject in a public forum. The economics staff produced three

major studies in the corporate control/tender offer area. One of these evaluated

the relationship between institutional ownership, tender offers, and long-term

investments. Another was an economic analysis of any-or-all, partial, and twotier tender offers. The third dealt with the economic impact of anti-takeover

charter amendments. The relationship of the length of the offer to the percent

of outstanding shares tendered was also analyzed. Shareholder receptivity to

anti-takeover proposals by management was also examined. In other areas, the

staff did a study of the Eurobond market and another of the effects of Rule 415

on revenues and profits of national and regional brokerage firms.

The economic staff continued to monitor the effect of Rule 415 (the Shelf

Rule) on corporate issues, underwriters and securities markets.

Two research projects completed during fiscal 1985 related to the statutory

requirement that investment company shares can only be sold at a price stated

in the prospectus. One project examined the shift from a market completely

dominated by funds sold with sales charges by salesmen to one in which the

majority of funds are offered to investors without a sales charge. The other

60
project analyzed the relationship of fund sales to market performance of the

investment company.

Other issues analyzed during fiscal 1985 included the proposed quarterly filing requirement of sales and net profits by business segments of corporate

issuers operating in multiple lines of business and the use of less complex rules

affecting shareholder resales of restricted securities that would encourage

capital formation while providing necessary protection to investors.

Information Systems Management

The Commission made continued progress under its Productivity Improvement by Computer (PIC) program with the design of a number of innovative

systems. Among them was an on-line Corporation Index System to provide the

staff and the public with summary information about corporations registered

with the Commission. Another enables staff members to check stock purchase

prohibitions and disclosure requirements contained in the Commission's conduct regulations prior to personal financial transactions. In addition, the Com.

mission was one of the first federal agencies to develop and implement a merit

pay information system, as required by recent changes to the federal personnel

regulations.

Efforts were also directed toward the modernization of existing systems. Of

particular note are efforts over the past year to enhance the Name Relationship

Search System and to integrate that system with all other enforcement information systems. The staff also developed a retirement component for the Com.

mission's recently revamped payroll system.

Expansion of microcomputer technology remains an important aspect of the

PIC effort. During the past year, the number of microcomputers employed by

the staff grew to 150, a 33% increase over the previous year. This growth was

accompanied by a corresponding increase in the services provided by the User

Support Information Center (USIC). Over 200 training courses were provided,

with total enrollment exceeding 1200. In addition, USIC fielded over 1300

technical assistance inquiries from staff members.

During 1985, all of the Commission's local teleprocessing terminals were

replaced with upgraded units. The Commission also acquired and installed a

high speed laser printer to replace two less efficient conventional printers.

Financial Management

For the third year in succession and only the fourth year in its history, the

Commisison collected fees in excess of its annual appropriation. By year end, a

record $144 million in fees had been collected for deposit to the General Fund

of the Treasury. This represents 135% of the agency's appropriation and ex.

ceeds by $22 million the previous record amount, collected in 1984. Fees were

derived from four sources: securities registered under the Securities Act of

1933 (53%), transactions on securities exchanges (26%), tender offer and

merger filings (17%), and miscellaneous filings and reporting fees (5%).

During fiscal 1985, the Commission expanded its use of electronic funds

transfer systems to accommodate the receipt of fees from exchanges and other

61
filers. In excess of $37 million in fees was electronically transmitted from the

exchanges to interest-bearing Treasury accounts, saving the government over

$30,000 in interest revenues. An additional $5 million in miscellaneous fees

was transmitted to Treasury under a "lockbox" arrangement with a commercial

bank, rendering further interest savings.

As part of the government-wide financial management initiative known as

Reform 88, agencies have been urged to consolidate administrative systems

wherever possible. In support of this objective, the Commission has taken steps

to make its highly regarded payroll system available to other agencies seeking

to reduce costly and duplicative administrative systems. During 1985, the

Federal Mediation and Conciliation Service became the first agency to enter into a shared system arrangement with the Commission. In addition, the Commission made presentations or provided technical assistance to 8 other agencies involved in various administrative system reforms.

A number of important steps were taken to improve internal financial controls. In particular, the staff completed revisions to the agency's accounting

system in order to permit single-entry posting and has begun development of

an automated payments subsystem. These enhancements will improve the accuracy of financial records and ultimately reduce the cost of processing

vouchers. The Commission also instituted the use of the Diner's Card by

employees on official travel. This combined with other efficiencies has reduced

the need for travel advances by 25%.

Microcomputer technology continued to playa central role in the Commission's efforts to improve financial operations. Over the past year, microcomputer applications were devised to track costs associated with temporary

employees, prepare OMB appropriation schedules, and improve contingency

budget planning.

The Comptroller's Office also worked closely with the Office of Internal Audit

to complete an Internal Control Review of the Commission's key financial

management operations.

The Commission is prohibited from accepting reimbursement from

regulated entities. The 1983 Securities Exchange Act amendments, however,

gave the Commission the authority to accept payment and reimbursement

from other organizations to defray the cost of travel and subsistence expenses

incurred by Commissioners and staff participating in meetings and conferences

related to the functions or activities of the SEC. During 1985, Commissioners

participated in 62 meetings/conferences. To pay the costs of attendance,

private entities reimbursed the SEC in the amount of $37,364, while the

government's portion amounted to $5,964. SEC staff participated in 432

meetings/conferences. The SEC was reimbursed in the amount of $156,500;

the government's portion of these costs amounted to $26,389.

Facilities Management

During fiscal 1985, the regional offices required increased administrative

support due to relocations of the Miami, Houston, and Salt Lake branch offices.

Each required considerable space planning and structural design work. In addition, extensive physical alterations were made at headquarters to support program operations of the Divisions of Corporation Finance, Enforcement, and Investment Management, the Office of Internal Audit, Administrative Services,

Public Affairs and the Directorate of Economic Policy and Analysis.

62
In an effort to improve internal control and accounting, an automated property accounting system was established and related property accountability

regulations were revised. The system improves resource planning and property

management by permitting property records to be reconciled with the Commission's financial accounting records.

To reduce the Commission's telecommunications costs, conventional office

telephone systems in the Atlanta, Denver, and Miami offices were replaced with

more efficient direct-line, touchtone systems.

Finally, the Commission's printing facility, recently rated by OMB as among

the best in the federal government, continued its impressive record of productivity improvement. During fiscal 1985, the printing plant produced 49 million

printed pages, an increase of 14% over 1984 production.

Personnel Management

In the current budget environment, it is vital that the Commission manage its

personnel resources efficiently. As a result of prudent staffing practices and an

increased emphasis on computer technology, recent years have witnessed

notable productivity improvements in many of the Commission's program

areas, despite resource limitations.

To improve staffing efficiency, the Commission sought, and was granted,

delegated authority from the Office of Personnel Management to conduct a

recruitment program for security compliance examiners. In addition, the Commission and the OPM cooperated in the design and implementation of

qualification standards for accountants that are closely tailored to the needs of

Commission. This has improved the quality and timeliness of staffing in this

important area.

During fiscal 1985, the Commission achieved a 5% staff reduction through

attrition. The Commission continued efforts to minimize "grade creep" by implementing staffing policies designed to comply with OMB's directive that

agencies reduce staff at the GS 11-15 levels by 2% by 1986. In addition, an aggressive program of position management was continued, with approximately

50% of the permanent positions subjected to classification reviews during

1985.

The Commission administered an extensive training program designed to

improve the skills and abilities of the staff. During 1985, 900 individuals received training at over 75 courses and seminars.

The staff prepared and distributed revised policy guidelines dealing with

merit promotion, performance appraisals, incentive awards, disciplinary practices, and training. In addition, programs were administered to assist

employees during enrollment periods for health and life insurance programs.

The Commisison also continued to sponsor programs designed to assist

handicapped employees. Courses were offered to improve the communication

skills of hearing impaired employees and to provide instruction to supervisors

of handicapped employees. Finally, the Employee Assistance Program was expanded to provide psychiatric counseling and accessto a greater number of inpatient and out-patient services.

63
Public Affairs

The Office of Public Affairs communicates information on Commission activities to those interested in or affected by Commission actions.

The staff prepares the SEC News Digest, published every business day. It

provides information on virtually all SEC actions: issuer filings, acquisition

reports, rule changes, actions against individuals or corporate entities, releases,

upcoming Commission meetings and events of interest. It is available in the

Public Reference Room, and is published commercially.

Press releases prior to and press briefings after Commission meetings provide insight into proposed and adopted changes in policies and regulation.

Press releases are also issued on upcoming events, on-going programs and/or

special projects. In all, 72 news releases were published during the year. Information on Commission actions is also disseminated every business day

through the Digest, notices of administrative actions, litigation releases and

other appropriate material. Where appropriate, actions are brought to the attention of the national and regional press.

The office directs publication of an annual report that provides information

on Commission activities to Congress, the securities bar and other interested

parties, and, through the Depositary Library System, to selected colleges and

universities throughout the country. A regular newsletter is published and a daily summary of news clips is prepared for Commission employees. In 1984, the

staff responded to approximately 64,500 requests for information from

members of the public and coordinated programs for more than 310 foreign

visitors. Also during the year, publications for use of investors and others interested in the Commission were updated and revised: SEC Publications Guide,

Investigate Before You Invest, What Every Investor Should Know, and The Work

of the SEC.

Consumer Affairs

During fiscal 1985, the Commission's consumer affairs staff handled more

than 30,000 complaints and inquiries. Of these, 44 % involved investor

disputes with registered broker-dealers, 20% concerned issuers of securities,

and 4% pertained to mutual funds. The remainder were related to transfer

agents, banks and investment advisers.

Matters appearing to entail violations of the Federal securities laws were

referred to an appropriate line division for direct action. Where violations were

not apparent, the staff assisted investors by forwarding complaints either to an

appropriate self-regulatory authority or to the entity that was the subject of the

complaint. In many instances, investors' problems were successfully resolved.

During fiscal 1985, the staff also prepared materials to assist investors in

understanding new investment products, such as government-backed

securities and zero-coupon bonds, and clarifying the jurisdictional responsibilities of the various government regulatory bodies.

During fiscal 1985, 1,710 Freedom of Information Act (FOIA) requests and

2,282 requests for confidential treatment were handled. The requests for confidential treatment were typically made in connection with proprietary COr64
porate information, and were carefully evaluated to prevent the indiscriminate

and unwarranted releaseof information exempt from the FOIA. In addition, the

staff processed 46 Privacy Act requests.

Finally, over 18,000 people visited the Commission's Public Reference

Room. To assist these visitors, the staff prepared a booklet explaining the

operation of the Public Reference Room and identifying the types of materials

available for public review.

Equal Employment Opportunity

The Commission continued its program of EEO instruction for the staff. Sixty staff members attended seminars in the headquarters and regional offices

dealing with the principles of equal employment opportunity law and affirmative action, the prevention of discrimination and sexual harassment in the

workplace, and methods for improving employment oportunities for minorities

and women.

While minority employment remained constant during fiscal 1985, the

number of females promoted to supervisory and managerial positions showed

a particularly strong increase.

The contributions and achievements of minority groups were recognized

with special programs highlighting Hispanic Heritage Week, Asian-Pacific

Heritage Week, Women's Week, Afro-American History Month, and Dr. Martin

Luther King's birthday. In addition, during National Secretaries Week, the staff

organized a workshop on emerging occupations and trends in the workplace.

In conjunction with the Securities Industry Committee on Equal Employment Opportunity, the Commission continued its support of a scholarship program for deserving minority students pursuing careers in the securities in.

dustry. Five scholarships were awarded in 1985. Brokerage firms, the exchanges, securities industry associations, broker-dealers and investment advisors all contributed to the scholarship fund.

65

Commissioners and Principal Staff

Officers

(As of September 30, 1985)

Commissioners

John S.R. Shad, Chairman

James C. Treadway, Jr .•

Charles C. Cox

Charles L. Marinaccio ••

Aulana L. Peters

Secretary: John Wheeler

Executive Assistant to the Chairman: Linda C. Quinn

Term Expires

1986

1987

1988

1985

1989

Principal Staff Officers

George G. Kundahl, Executive Director

Kenneth A. Fogash, Deputy Executive Director

John J. Huber, Director, Division of Corporation Finance

William C. Wood, Associate Director

Mary E.T. Beach, Associate Director

Catherine Collins McCoy, Associate Director

Ernestine M.R. Zipoy, Associate Director

Amy L. Goodman, Associate Director, Edgar

Gary G. Lynch, Director, Division of Enforcement

John C. Sture, Associate Director

William R. McLucas, Associate Director

Phillip B. Parker, Chief Counsel

Alexia L. Morrison, Chief Litigation Counsel

Michael D. Mann, Office of International Legal Assistance

Richard G. Ketchum, Director, DIVision of Market Regulation

Richard P. Wessel, Associate Director

Mark Fitterman, Associate Director

Richard Chase, Associate Director

Kathryn B. McGrath, Director, Division of Investment Management

Gerald Osheroff, Associate Director

Mary Joan Hoene, Associate Director

William C. Weeden, Office of Public Utility Regulation

Daniel L. Goelzer, General Counsel

Paul Gonson, Solicitor

Elisse Walter, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

Linda D. Fienberg, Associate General Counsel

67
Mary M. McCue, Director, Office of Public Affairs

Chiles T.A. Larson, Deputy Director

A. Clarence Sampson, Chief Accountant

Edmund Coulson, Deputy Chief Acountant

Jeffrey L. Davis, Director, Directorate of Economic and Policy Analysis

Terry M. Chuppe, Associate Director

Charles W. Bryson, Associate Director

Gregg A. Jarrell, Chief Economist

William S. Stern, Director, Office of Opinions and Review

Herbert V. Efron, Associate Director

R. Moshe Simon, Associate Director

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Henry I. Hoffman, Assistant Comptroller

Richard J. Kanyan, Director, Office of Administrative Services

James C. Foster, Director, Office of Personnel

William E. Ford, II, Assistant Director

Wilson Butler, Director, Office of Applications and Reports Services

Mary J. Kenney, Deputy Director

Jonathan G. Katz, Director, Office of Consumer Affairs and Information

Services

John D. Adkins, Director, Office of Information Systems Management

John Faith, Deputy Director

Cecile Z. Srodes, Director of Legislative Affairs

James A. Clarkson, III, Director of Regional Office Operations

Ernest G. Miller, Manager, Equal Employment Opportunity

* Resigned, effective April 17,1985

** Resigned, effective July 10, 1985

68
Biographies of Commissioners

John S.R. Shad

John Shad was appointed by President Reagan and sworn in by Vice President Bush as the 22nd Chairman of the U.S. Securities and Exchange Commission on May 6, 1981. His term expires in 1986.

John Shad resigned as Vice Chairman of the Board of the E.F. Hutton Group

and from the boards of seven NYSE listed corporations to join the SEC. He initiated Hutton's investment banking activities in 1963 which under his direction

grew into over a five billion dollar annual principal amount of corporate finaneings and mergers.

He has served on the boards of 17 publicly owned coporations; received the

Investment Banker of the Year (1972) and other awards and honors; is a

graduate of the University of Southern California, the Harvard Business School

and the New York University Law School; a member of Beta Gamma Sigma

and Phi Kappa Phi; the author of articles on corporation finance and mergers;

and has taught Investment Banking at the NYU Graduate Business School. He

was also, in 1985, a recipient of the Harvard BusinessSchool's Alumni Achievement Award.

He was born in Utah. While attending college, he worked nights as an aircraft

riveter. During World War II, he served in the Pacific and China as a naval officer. After graduating from the Harvard Business School in 1949, he began his

business career in New York City as a securities analyst.

James C. Treadway, Jr.

James C. Treadway, .Jr., became the 61st Member of the Commission on

September 13, 1982. He was appointed to a five-year term expiring on June 5,

1987. Mr. Treadway resigned from the Commission on April 17, 1985.

At the time of his appointment, Mr. Treadway was a partner with the

Washington and New York law firm of Dickstein, Shapiro & Morin, where he

had been engaged in the practice of securities and corporate finance law,

representing corporate issuers, officers and directors. In addition, he had

represented a U.S. and a foreign securities exchange, various investment banking firms and investment companies, and both U.S. and foreign depositors and

banking institutions. He is the author of various articles on the federal securities

laws.

Mr. Treadway, a native of Anderson, S.c., was formerly an associate with the

Washington and Boston law firm of Gadsby & Hannah from 1968 to 1972 and

prior to that, he was an associate of the Atlanta law firm of Candler, Cox,

McClain & Andrews from 1967 to 1968. Mr. Treadway received his

undergraduate education from the University of Georgia, where he graduated in

1964 with an A.B. degree. He received his LL.B. degree, summa cum laude, in

1967 from Washington & Lee University where he was Editor-in-Chief of the

69
Washington & Lee University Law Review. He is a member of Phi Beta Kappa,

Order of the Coif, Omicron Delta Kappa and Omicron Delta Epsilon.

Charles C. Cox

Charles C. Cox was sworn in as the sixty-second Member of the Commission

on December 2, 1983. His term expires in June 1988. Mr. Cox joined the Commission on September 1, 1982 as Chief Economist. He organized the Office of

the Chief Economist to analyze the economic effects of proposed rules and

legislation, evaluate established Commission policy, and study various capital

market topics. Previously, Mr. Cox was a professor of management at Texas

A&M University from 1980 to 1982, and a professor of economics at Ohio State

University from 1972 to 1980. He served as a National Fellow of the Hoover Institution at Stanford University from 1977 to 1978.

During his academic career, Mr. Cox focused his research on the economics

of public regulation of economic activity. He has published various articles on

this topic in scholarly journals. Mr. Cox is a member of the American Economic

Association.

Mr. Cox was born in Missoula, Montana on May 8, 1945. He received his

undergraduate education at the University of Washington where he was elected

to Phi Beta Kappa in 1966, and earned a B.A. degree, magna cum laude, with

distinction in economics in 1967. He received A.M. and Ph.D. degrees in

economics from the University of Chicago in 1970 and 1975, respectively.

Charles L. Marinaccio

Charles L. (Lindy) Marinaccio was sworn in as the sixty-third Member of the

Commission on May 24, 1984 for a term expiring June 5, 1985. Mr. Marinaccio

resigned from the Commission on July 10, 1985.

Mr. Marinaccio served as General Counsel of the U.S. Senate Committee on

Banking, Housing and Urban Affairs from May 1975 to 1980 and thereafter as

Minority General Counsel. As Counsel to the Committee, Mr. Marinaccio worked closely with Senators and their staffs on financial institutions, securities and

international trade legislative and oversight matters. He also worked on SEC

oversight matters, and played a key staff role on legislation affecting insured

financial institutions and the Securities and Exchange Commission.

Prior to serving as Banking Committee Counsel, Mr. Marinaccio was with the

Department of Justice. He was Director of the Executive Secretariat of the Law

Enforcement Assistance Administration (October 1973 to May 1975) and Trial

Attorney-for the Antitrust Division (May 1965 to May 1969) and for the

Organized Crime and Racketeering Section of the Criminal Division (October

1963 to May 1965).

He also served on the Federal ReserveBoard staff from May 1969 to October

1973, where he was responsible for, among other matters, the implementation

of the Financial Institutions Supervisory Act.

Mr. Marinaccio began his career in April 1962 as a law clerk to Chief Judge

Hood and Chief Judge Cayton (retired) at the District of Columbia Court of Appeals. He joined the Judges' staff immediately after earning a J.D. in law with

70
honors from George Washington University Law Center. He had earned a B.A.

in history and government at the University of Connecticut.

He is past Chairperson of the Federal Bar Association Section on Financial

Institutions and the Economy and a member of the Executive Council of the

Banking Law Committee, which he has served as Chairman. He has also been

Deputy Chairman for the FBA's Continuing Legal Education of the Section on

Financial Institutions and the Economy.

Mr. Marinaccio was born in Stratford, Connecticut in December 1933.

Aulana L. Peters

Aulana L. Peters was sworn in as the sixty-fourth Member of the Commission

on June 11, 1984. Her term expires on June 5, 1989.

Until her appointment, Mrs. Peters was a partner with the Los Angeles law

firm of Gibson, Dunn & Crutcher, which she joined as an associate in 1973. As

a member of that firm's Litigation Department, she specialized in business and

commercial litigation with emphasis on the securities and unfair competition

areas, particularly class action suits. About one-third of her law practice involved cases of alleged violations of the Securities Act of 1933 and the Securities

Exchange Act of 1934, representing both defendants and plaintiffs. She was

also involved in tender offer/proxy contest litigation.

She has frequently served on legal panels and has lectured for the California

Continuing Education of the Bar and others.

Mrs. Peters, who was born in 1941, is the first black appointed to the Commission. She earned a J.D. with honors from the University of Southern California Law Center in 1973 and a B.A. in philosophy from the College of New

Rochelle in 1963.

71

Regional and Branch Offices

Regional Offices and Administrators

Region 1. New York, New Jersey-Ira L. Sorkin, Room 1028, 26 Federal

Plaza, New York, New York 10278.212-264-1636.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine-Willis H. Riccio, 150 Causeway Street, Boston Massachusetts

02114. 617-223-2721.

Region 3. Tennessee, Virgin Islands, Puerto Rico, North Carolina, South

Carolina, Georgia, Alabama, Mississippi, Florida, part of Louisiana-Michael

K. Wolensky, Suite 788, 1375 Peachtree Street, N.E., Atlanta, Georgia 30367.

404-881-4768.

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan,

Minnesota, Missouri, Ohio, Wisconsin-William D. Goldsberry, Room 1204,

Everett McKinley Dirksen Bldg., 219 South Dearborn Street, Chicago, Illinois

60604.312-353-7390.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except

Kansas City)-Wayne M. Secore, 8th Floor, 411 West Seventh Street, Fort

Worth, Texas 76102. 817-334-3821.

Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, New

Mexico, Utah-Robert H. Davenport, Suite 700, 410 Seventeenth Street,

Denver, Colorado 80202. 303-844-2071.

Region 7. California, Nevada, Arizona, Hawaii, Guam-Irving M. Einhorn,

Suite 500 East, 5757 Wilshire Blvd., Los Angeles, California 90036-3648.

213-468-3098.

Region 8. Washington, Oregon, Idaho, Montana, Alaska-Jack H. Bookey,

3040 Jackson Federal Building, 915 Second Avenue, Seattle, Washington

98174.206.442-7990.

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District

of Columbia-Paul F. Leonard, Room 300, Ballston Center Tower No.3,

4015 Wilson Blvd., Arlington, Virginia 22203. 703-235-3701.

73
Branch Offices

Detroit, Michigan 48226-Mark A. Loush, Attorney in Charge, 231 W.

Lafayette St., 438 Federal Building. 313-226-6070.

Houston, Texas 77063-Edwin J. Tomko, Assistant Regional Administrator,

7500 San Felipe Street, Suite 550. 713-266-3671.

Miami, Florida 33131-Charles C. Harper, Association Regional Administrator, Suite 500, Dupont Plaza Center, 300 Biscayne Boulevard Way.

305-350-5765.

Philadelphia, Pennsylvania 19106-Thomas H. Monahan, William J. Green,

Jr. Federal Building, Room 2204, 600 Arch Street. 215-597-3100.

Salt Lake City, Utah 84101-G. Gail Weggeland, Attorney in Charge, U.S.

Post Office and Court House, Room 505350 S. Main Street. 801-524-5796.

San Francisco, California 94102-Bobby C. Lawyer, 450 Golden Gate Ave.,

Box 36042. 415-556-5264.

74
Footnotes

'Corporate Reporting and Accounting cases include: In the Matter of Winter [; Co.,

P.A., Securities Exchange Act Release No. 22221 (July 11, 1985), 33 SEC Docket

1039; In the Matter of Edward S. Markman, CPA, Securities Exchange Act Release No.

22222 (July II, 1985), 33 SEC Docket 1045; In the Malter of David G. Rogers,

Securities Exchange Act Release No. 22311 (August 12, 1985), 33 SEC Docket 1330;

In the Matter of Weinaug [; Co., PiC; et aI., Securities Act Release No. 6603 (August

29, 1985),33 SEC Docket 1486; In the Matter of Tonka Corp., Securities Exchange

Act Release No. 22448 (September 24, 1985), 34 SEC Docket 56; SEC v.

American/Davey Cotp., et el., Litigation Release No. 10843 (August 12, 1985), 33

SEC Docket 1421; SEC v. Pepsico lnc., et el., Litigation Release No. 10807 (July 1,

1985),33 SEC Docket 1005; SEC v. Caidwell, Litigation Release No. 10839 (July 31,

1985), 33 SEC Docket 1252; SEC v. Petro-Leuns Corp., Litigation Release No. 10857

(August 29, 1985),33 SEC Docket 1556; SEC v. McMahen, et el., l.mqanon Release

No. 10867 (September 12, 1985), 33 SEC Docket 1696; In the Matter of Broadview

Finenciel Corp., Securities Exchange Act Release No. 21949 (April 17, 1985),32 SEC

Docket 1579; In the Matter of Diversified Tech, Inc., Securities Exchange Act Release

No. 21961 (April 19, 1985), 32 SEC Docket 1708; In the Malter of Terrence E. Dreiling,

c.P.A., Securities Exchange Act Release No. 21472 (November 9, 1984),31 SEC

Docket 1086; In the Malter of Hans V. Andersen, Jr., Accounting and Auditmg

Enforcement Release No. 51 (January 22, 1985),32 SEC Docket 1420, In the Matter

of John E. Harrington, et el., Securities Exchange Act Release No. 21945 (April 15,

1985), 32 SEC Docket 1576; In the Matter of Kay L. Anderson, CPA, Securities Act

Release No. 6586 (June II, 1985), 33 SEC Docket 396; In the Matter of The Charter

Company, Securities Exchange Act Release No. 21647 (January 10, 1985),32 SEC

Docket 367; In the Malter of BUITOughsCorp., Securities Exchange Act Release No.

21872 (March 20, 1985),32 SEC Docket 1221; SEC v. Tandem Computers lnc., et el.,

Litigation Release No. 10550 (October 2, 1984),31 SEC Docket 739; SEC v. Chronar

Corp., Litigation Release No. 10552 (October 3, 1984),31 SEC Docket 742; SEC v.

Aora{ax lniemetionsl; lnc., et el., Litigation Release No. 10617 (November 27, 1984),

31 SEC Docket 1425; SEC v. Astradyne Computer Industries, Inc., et aI., Litigation

Release No. 10634 (December 17, 1984),32 SEC Docket 155; SEC v. Dhawan,

Litigation Release No. 10646 (December 26, 1984),32 SEC Docket 218; SEC v. The

Zonderoan Corp., Litigation Release No. 10703 (March 5, 1985), 32 SEC Docket 1330;

SEC v. Kutz, Litigation Release No. 10722 (March 28, 1985),32 SEC Docket 1558,

SEC v. Rynco Scientific Corp., Litigation Release No. 10724 (April 15, 1985),32 SEC

Docket 1640; SEC v. Comsero Corp., et ai., Litigation Release No. 10750 (May 9,

1985), 33 SEC Docket 79; SEC v. The Miduxstem Companies, lnc., litigation Release

No. 10752 (May 14, 1985),33 SEC Docket 159; SEC v Cnme Control, lnc., et el.,

Litigation Rerlease No. 10783 (June 3,1985),33 SEC Docket 501; SEC v. Balance

Computer Corp., et el., Litigation Release No. 10790 (June 4, 1985), 33 SEC Docket

606; SEC v. Price Waterhouse, et el., litigation Release No. 10796 (June 20, 1985), 33

SEC Docket 611; SEC v. Oak Industries, lnc., Litigation Release No. 10801 (June 25,

1985),33 SEC Docket 740; SEC v. Gordon, Litigation Release No. 10574 (October

16, 1984),31 SEC Docket 954; SEC v. Young, Litigation Release No. 10639

(December II, 1984),32 SEC Docket 213; In the Matter of Magna Cotporeuoti,

Securities Exchange Act Release No. 22166 (June 24, 1985),33 SEC Docket 648; In

the Matter of Robert S. Hamson, Securities Exchange Act Release No. 22466

(September 26, 1985), 34 SEC Docket 92; In the Matter of Schoenfeld [; Mendelsohn,

Securities Exchange Act Release No. 22467 (September 26, 1985), 34 SEC Docket

108; SEC v. Petroleum Securities Fund, et el., Litigation Release No. 10876 (September

23, 1985),34 SEC Docket 226; SEC v. Baidwin.Uruted Corp., et ei; Litigation Release

No. 10878 (September 26, 1985),34 SEC Docket 229, SEC v. Generai

Electrodynamics Corp., September 30, 1985; SEC v. Horizon Technology Inc, August

75
12, 1985; In the Matter of Netionel Computer Systems, lnc., Securities Exchange Act

Release No. 22489 (September 30, 1985); and In the Matter of Teletest Corp.,

Securities Act Release No. 6559 (July 11, 1985),33 SEC Docket 1017.

21nsider Trading cases include: In the Matter of Stephen G. Karanzalis, Securities

Exchange Act Release No. 22054 (May 20, 1985),33 SEC Docket 182; In the Matter

of James Stivaietti, Securities Exchange Act Release No. 22156 (June 18, 1985),33

SEC Docket 567; In the Matter of William D. Sauut, Sr., Securities Exchange Act

Release No. 21671 (January 18, 1985), 32 SEC Docket 500; In the Matter of Stephen

R. Teuusko, Securities Exchange Act Release No. 21849 (March 13, 1985),32 SEC

Docket 1098; SEC v. Fox, et el., Litigation Release No. 10548 (October 1, 1984),31

SEC Docket 738; SEC v. Ablan, et el; Litigation Release No. 10618 (November 27,

1984),31 SEC Docket 1428; SEC v. Huff. Litigation Release No. 10624 (December 6,

1984),31 SEC Docket 1496; SEC v. Morgan, Litigation Release No. 10630 (December

12, 1984),31 SEC Docket 1557; SEC v. Stuart, et ei, Litigation Release No. 10655

(January 18, 1985), 32 SEC Docket 554; SEC v. Gaffney, et el., Litigation Release No.

10725 (April 18, 1985),32 SEC Docket 1642; SEC v. Sarzynski, et el., Litigation

Release No. 10763 (May 22, 1985), 33 SEC Docket 260; SEC v. Sharp, Litigation

Release No. 10781 (June 12, 1985),33 SEC Docket 499; SEC v. Hoss, et el;

Litigation Release No. 10789 (May 31, 1985), 33 SEC Docket 606; SEC v. Ortne,

Litigation Release No. 10799 (June 20, 1985), 33 SEC Docket 738; In the Matter of

Paul J. Williams, Securities Exchange Act Release No. 22450 (September 24, 1985),

34 SEC Docket 73; In the Matter of Adrian Antoniu, Securities Exchange Act Release

No. 22487 (September 19, 1985), 34 SEC Docket 263; In the Matter of James Mitchell

Newman, Securities Exchange Act Release No. 22488 (September 19, 1985). 34 SEC

Docket 264; In the Matter of Kenneth P. Felis, Securities Exchange Act Release No.

22289 (August 5, 1985),33 SEC Docket 1257; SEC v. Nugent, et el; Litigation

Release No. 10858 (August 29, 1985),33 SEC Docket 1557; and SEC v. Breuninqer,

et el., Litigation Release No. 10868 (September 12, 1985),33 SEC Docket 1787.

3Regulated Entities and Associated Persons cases include: In the Matter of David

Carey, Securities Exchange Act Release No. 22428 (September 19, 1985), 33 SEC

Docket 1758; In the Matter of Michel Erlichson, Securities Exchange Act Release No.

22378 (August 30, 1985), 33 SEC Docket 1569; In the Matter of Louis R. Trujillo,

Securities Exchange Act Release No. 22394 (September 10, 1985), 33 SEC Docket

1628, In the Matter of Frank Carlone, et el., Securities Exchange Act Release No.

22269 (July 28, 1985), 33 SEC Docket 1157; In the Matter of Nomura Securities

International, lnc., Securities Exchange Act Release No. 22378 (August 30, 1985), 33

SEC Docket 1570; In the Matter of Victor G. Mati, et el., Securities Exchange Act

Release No. 22395 (September 10, 1985), 33 SEC Docket 1629; In the Matter of

Paragon Planning Corp., Securities Exchange Act Release No. 22423 (September 18,

1985),33 SEC Docket 1747; In the Matter of Richard S. Field, Securities Exchange Act

Release No. 22424 (September 18, 1985), 33 SEC Docket 1752; In the Matter of

William Orr Henderson, et el., Securities Exchange Act Release No. 22242 (July 16,

1985), 33 SEC Docket 1103; In the Matter of David Ken Yoshineqe, et el., Investment

Advisers Act Release No. 988 (August 22, 1985), 33 SEC Docket 1692; In the Matter

of Jose L. Gomez, Securities Exchange Act Release No. 2293 (August 6, 1985), 33

SEC Docket 1266; SEC v. Donald Sheldon Litigation Release No. 10848 (August 21,

1985),33 SEC Docket 1468; SEC v. ITC, lnc., et ei., Litigation Release No. 10862

(September 3, 1985),33 SEC Docket 1616; In the Matter of Pietro Gsttini, Securities

Exchange Act Release No. 21402 (October 17, 1984),31 SEC Docket 849; In the

Matter of Allied Securities Corp., et el., Securities Exchange Act Release No. 21407

(October 19, 1984), 31 SEC Docket 903; In the Matter of Lylog International Energy

Corp., et el., Securities Exchange Act Release No. 21430 (October 29, 1985), 31 SEC

Docket 966; In the Matter of Raphael David Bloom, Securities Exchange Act Release

No. 21599 (December 11, 1984), 32 SEC Docket 167; In the Matter of Daniel

Brinkman Investment Securities, lnc., et ai., Securities Exchange Act Release No. 21605

(December 27, 1984),32 SEC Docket 174; In the Matter of Donald C. Henninger, et el.,

Securities Exchange Act Release No. 21666 (January 17, 1985), 32 SEC Docket 441;

76
In the Matter of Arthur H. Ross, et aI., Securities Exchange Act Release No. 21660

(January 15, 1985), 32 SEC Docket 433; In the Matter of Mid.State Securities Corp.,

Securities Exchange Act Release No. 21692 (January 25, 1985),32 SEC Docket 573;

In the Matter of Dominick J. Fiorese, Securities Exchange Act Release No. 21831

(March 8, 1985), 32 SEC Docket 1079; In the Matter of Thomson McKinnon Securities,

lnc., Securities Exchange Act Release No. 21668 (January 17, 1985), 32 SEC Docket

444; In the Matter of Helfer Broughton lnc., January 29, 1985; In the Malter of WZW

Financial Services, lnc., Securities Exchange Act Release No. 22023 (May 8, 1985),33

SEC Docket 10; In the Matter of First Monmouth Securities Corp., et el., Securities

Exchange Act Release No. 22039 (May 14, 1985), 33 SEC Docket 118; In the Matter

of First lrueruiest Securities Cotp., Securities Exchange Act Release No. 21875 (March

20, 1985), 32 SEC Docket 1278; In the Malter of Marsh & Co., et al., Securities

Exchange Act Release No. 22141 (June 13, 1985),33 SEC Docket 433; In the Malter

of Daniel R. Walters, Securities Exchange Act Release No. 22133 (June 11, 1985), 33

SEC Docket 424; SEC v. Eastem Capital Corp., et el., Litigation Release No. 10571

(October 11, 1984), 32 SEC Docket 952; SEC v. Chesley & Dunn lnc., Litigation

Release No. 10667 (December 7, 1984),32 SEC Docket 720; SEC v. Brentwood

Securities, Inc., Litigation Release No. 10688 (February 7, 1985),32 SEC Docket 967;

SEC v. Pacific Growth Securities, Inc. Litigation Release No. 10851 (February 21,

1985),33 SEC Docket 1550; SEC v. Collins Securities Corp., Litigation Release No.

10728 (April 16, 1985),32 SEC Docket 1813; SEC v. Commonwealth Securities of

Utah, Litigation Release No. 10754 (April 26, 1985),33 SEC Docket 161; SEC v.

MacRae, Litigation Release No. 10785 (June 12, 1985),33 SEC Docket 503; In the

Matter of Portfolio Strategies, lnc., Securities Exchange Act Release No. 21368 (October

5, 1984),31 SEC Docket 749; In the Malter of William Buchanan, et al., Securities

Exchange Act Release No. 21369 (October 5, 1984), 31 SEC Docket 751; In the

Matter of Peter C. Burd; et el., Secunties Exchange Act Release No. 21370 (October 5,

1984), 31 SEC Docket 753; In the Matter of Main Street Securuies, lnc., et aI., Securities

Exchange Act Release No. 21410 (October 19, 1984),31 SEC Docket 907; In the

Matter of Elizabeth J. Euler, Securities Exchange Act Release No. 21451 (November 2,

1984), 31 SEC Docket 1010; In the Malter of Glenn A. Miller, Secunties Exchange Act

Release No. 21537 (December 3,1984),31 SEC Docket 1440; In the Malter of

Waylon Max Nimmo, Securities Exchange Act Release No. 21575 (December 17,

1984), 32 SEC Docket 17; In the Matter of Samuel William Sigler, Securities Exchange

Act Release No. 21882 (March 21, 1985),32 SEC Docket 1284; In the Malter of

Joseph H. Gasperini, Securities Exchange Act Release No. 21996 (April 29, 1985), 32

SEC Docket 1842; In the Matter of D.S. Meyers & Co., Inc., ei el., Securities Exchange

Act Release No. 22030 (May 9, 1985), 33 SEC Docket 40; In the Matter of Clifford B.

Murray, Securities Exchange Act Release No. 22088 (May 29, 1985), 33 SEC Docket

283; In the Matter of Anderson & Strudwick, lnc., et aI., Securities Exchange Act

Release No. 22089 (May 29, 1985), 33 SEC Docket 286; In the Matter of Hancock

Joseph & Daniels, lnc., Securities Exchange Act Release No. 22129 (June 10, 1985),

33 SEC Docket 416; In the Matter of American Venture Securities lnc., May 21, 1985);

In the Matter of Michael J. Welsh, Securities Exchange Act Release No. 21786

(February 25, 1985), 32 SEC Docket 923; In the Matter of Roger Dennis Herrmann,

Securities Exchange Act Release No. 21812 (March 5, 1985),32 SEC Docket 993; In

the Matter of Jonathan Mitchell, Securities Exchange Act Release No. 21814 (March 5,

1985),32 SEC Docket 1014; In the Matter of AD Limited, et el., Securities Exchange

Act Release No. 21795 (February 27, 1985), 32 SEC Docket 944; In the Matter of

Jeffrey A. FIScher, Securities Exchange Act Release No. 22109 (June 3, 1985),33 SEC

Docket 342; In the Matter of Dyer J. Powell, Securities Exchange Act Release No.

22131 (June II, 1985), 33 SEC Docket 420; Sec v. Nimmo, et el., Litigation Release

No. 10586 (October 31,1984),31 SEC Docket 1073; SEC v. ESM Group, Inc.,

Litigation Release No. 10681 (March 4, 1985),32 SEC Docket 896; SEC v. Gomez,

Litigation Release No. 10705 (March 20, 1985),32 SEC Docket 1331; SEC v.

D'Angelo, Litigation Release No. 10706 (March 19, 1985), 32 SEC Docket 1414; SEC

v. Condron, et el., Litigation Release No. 10687 (February 19, 1985), 32 SEC Docket

77
965; SEC v. Parr Securities Corp., et el., Litigation Release No. 10755 (May 6, 1985),

33 SEC Docket 162; SEC v. Coastal Securities Corp., et el., Litigation Release No.

10757 (May 3,1985),33 SEC Docket 251; SEC v. Keenan [, Clarey, lric., Litigation

Release No. 10777 (June 4, 1985), 33 SEC Docket 496; In the Matter of Edward Davis,

Securities Exchange Act Release No. 21607 (December 28, 1984), 32 SEC Docket

224; In the Matter of Joseph V. Ossorio, Securities Exchange Act Release No. 21608

(December 28, 1984), 32 SEC Docket 226; In the Matter of New Capital Properties

Flotide, Inc., Securities Exchange Act Release No. 21906 (March 28, 1985), 32 SEC

Docket 1383; In the Matter of L.E. Peterson [, Co., lnc., et aI., Securities Exchange Act

Release No. 22107 (June 3, 1985),33 SEC Docket 341; In the Matter of Jacob

Ederman, Securities Exchange Act Release No. 22108 (June 3, 1985), 33 SEC Docket

341; In the Matter of Marshall [, Meyer, Inc., Securities Exchange Act Release No.

22155 (June 18, 1985),33 SEC Docket 566; In the Matter of Dennis Ruppert,

Securities Exchange Act Release No. 21857 (March 15, 1985),32 SEC Docket 1163;

In the Matter of Smith Bamey, Hams Upham [, Co., lnc., et al., Securities Exchange Act

Release No. 21813 (March 5, 1985),32 SEC Docket 999; SEC v. Ridenour, Litigation

Release No. 10731 (April 25, 1985),32 SEC Docket 1896; SEC v. Forma, et el.,

Litigation Release No.1 0766 (May 24, 1985), 33 SEC Docket 317; SEC v. Bevill

Bresler [, Schulman, et aI., April 8, 1985; In the Matter oc C. [, R. Pastor Securities, lnc.,

et el., Securities Exchange Act Release No. 21946 (April 15, 1985), 32 SEC Docket

1577; SEC v. Reid, et el., Litigation Release No. 10673 (February 11, 1985),32 SEC

Docket 826; SEC v. Kennedy, Litigation Release No. 10797 (June 20, 1985), 33 SEC

Docket 613; SEC v. Alampi, et el., Litigation Release No. 10577 (October 16, 1984),

31 SEC Docket 958; SEC v. Inland Consultants Corp., et el., Litigation Release No.

10700 (March 14, 1985), 32 SEC Docket 1328; In the Matter of E.F. Hutton [,

Company lnc., Securities Act Release No. 6562 (December II, 1984), 31 SEC Docket

1504; In the Matter of Charles J. Walsh, ei el., Securities Exchange Act Release No.

22201 (July I, 1985), 33 SEC Docket 938; In the Matter of Janis [, Associates, lnc., et

el., Investment Advisers Act Release No. 937 (October 12, 1984),31 SEC Docket 884;

In the Matter of Schultz Flnencisl Planning Systems, Inc., et el., Investment Advisers Act

Release No. 940 (November 2, 1984), 31 SEC Docket 1069; In the Matter of Joseph E.

Karrol, Investment Advisers Act Release No. 942 (November 21, 1984),31 SEC

Docket 1301; In the Matter of Sali Tada, Investment Advisers Act Release No. 944

(November 28, 1984), 31 SEC Docket 1391; In the Matter of Penny Stock Newsletter,

lnc., et aI., Investment Advisers Act Release No. 946 (December 19, 1984),32 SEC

Docket 145; In the Matter of Arthur Carlson and Associates, et al., Investment Advisers

Act Release No. 947 (December 24, 1984), 32 SEC Docket 206; In the Matter of Firs:

State Finencisl; lnc., Investment Advisers Act Release No. 948 (December 26, 1984),

32 SEC Docket 206; In the Matter of In Research lnc., et al., Investment Advisers Act

Release No. 965 (March 27, 1985), 32 SEC Docket 1410; In the Matter of KezerWolfenden, lnc., Investment Advisers Act Release No. 954 (February 13, 1985),32 SEC

Docket 817; In the Matter of Securities Management [, Research, lnc., Investment

Advisers Act Release No. 960 (March 8, 1985), 32 SEC Docket 1132; In the Maller of

Jeen-Peul Gravell, Investment Advisers Act Release No. 972 (May 15, 1985),33 SEC

Docket 157; SEC v. Key Volume Strategies, lnc., et el, Litigation Release No. 10602

(November 7, 1984),31 SEC Docket 1236; SEC v. Paragon Fmancial Corp., et al.,

Litigation Release No. 10765 (May 8, 1985), 33 SEC Docket 264; SEC v. Kuhen,

Litigation Release No. 10788 (June 11, 1985), 33 SEC Docket 605; In the Matter of

Meniin Leibowitz, et el., Investment Company Act Release of No. 14310 (January 10,

1985), 33 SEC Docket 462; SEC v. High Technology Capital Corp., Litigation Release

No. 10561 (October 4, 1984), 31 SEC Docket 888; In the Matter of Bountiful Registrar

[, Transfer Co., Securities Exchange Act Release No. 21812 (March 6, 1985),32 SEC

Docket 462; In the Matter of Chesley [, Dunn, lnc., et al., Securities Exchange Act

Release No. 22462 (September 25, 1985), 34 SEC Docket 86; In the Matter of Kanan

Securities lnc., Securities Exchange Act Release No. 22463 (September 26, 1985),34

SEC Docket 89; In the Matter of James E. Cavallo, Securities Exchange Act Release

No. 22464 (September 26, 1985), 34 SEC Docket 90; In the Maller of Robert H.

78
Philips, Securities Exchange Act Release No. 22465 (September 26, 1985),34 SEC

Docket 91; In the Matter of Deud J. Heuwetter, Securities Exchange Act Release No.

22484 (September 30, 1985),34 SEC Docket 258; SEC v. Secunues Transfer lnc., et

el., Litigation Release No. 10888 (September 30, 1985); 34 SEC Docket 395; SEC v.

Johnson, September 17, 1985; and SEC v. J. H. Stewart & Co., Inc., September 27,

1985.

4Market Manipulation cases include: SEC v. Monarch Funding Corp., et aL, Litigation

Release No. 10864 (September 9, 1985),33 SEC Docket 1693; In the Matter of

Charles M. Blair, Securities Exchange Act Release No. 21589 (December 20, 1984),32

SEC Docket 91; In the Matter of Charles M. Blair & Co., Inc., ei aI., Securities Exchange

Act Release No. 21590 (December 20,1984),32 SEC Docket 93; In the Matter of

Commonwealth Ventures, Ltd, Securities Exchange Act Release No. 21874 (March 20,

1985),32 SEC Docket 1271; SEC v. Blair, Litigation Release No. 10636 (December

14, 1984),32 SEC Docket 158; SEC v. March Resources, Ltd, ei el., litigation Release

No. 10691 (February 28, 1985),32 SEC Docket 971; and SEC v. Classic Corp., et el.,

Litigation Release No. 10882 (September 26, 1985),34 SEC Docket 235.

5Securities Offering Violations cases include: SEC v Finsncisl & Business Senxces

Inc., et aL, Litigation Release No. 10842 (July 26, 1985),33 SEC Docket 1327; SEC v.

Chapman, et el., Litigation Release No. 10823 (July 16, 1985),33 SEC Docket 1141;

SEC v. Hasty, Litigation Release No. 10829 (July 17, 1985), 33 SEC Docket 1194;

SEC v. Alvin Petroleum, Inc., et aI., Litigation Release No. 10824 (July 1, 1985), 33

SEC Docket 1142; SEC v. Croy, Litigation Release No. 10818 (July 1, 1985),33 SEC

Docket 1077; SEC v. RCH Intemationallnc., et el., Litrqation Release No. 10828 (July

22, 1985), 33 SEC Docket 1192; SEC v. Houge, ei el., Litigation Release No. 10845

(July 31, 1985),33 SEC Docket 1464; SEC v. Theron D. Nelsen, September 19, 1985;

SEC v. Professional Athletes, Inc., ei aI., Litigation Release No. 10854 (August 27,

1985),33 SEC Docket 1552; SEC v. Hydro.Wave Corp., et aI., litigation Release No

10865 (August 23, 1985),33 SEC Docket 1694; SEC v. Cruppertieid; et aI., Litigation

Release No. 10869 (September 10, 1985), 33 SEC Docket 1789; In the Matter of

Military Robot Corp., Securities Act Release No. 6572 (March 22, 1985), 32 SEC

Docket 1337; In the Matter of Peiroieb lntemeuonel inc., Securities Act Release No.

6564 (January 15, 1985),32 SEC Docket 405; In the Matter of Flre Safety Corp.,

Securities Act Release No. 6575 (April 17, 1985), 32 SEC Docket 1564; In the Matter

of Dioersfied Tech, Inc., Securities Act Release No. 6576 (April 19, 1985), 32 SEC

Docket 1657; In the Matter of CinAmerica FilmBank I, Ltd, Securities Act Release No.

6587 (June 13, 1985), 33 SEC Docket 400; In the Matter of Inter Continental MarkelIng

Corp., Securities Act Release No. 6560 (December 4, 1984),31 SEC Docket 1432,

SEC v. Melinworth Finenciel Secunties, Inc., ei ei, Litigation Release No. 10595

(November 7, 1984), 31 SEC Docket 1079; SEC v. Butcher, et el., Litigation Release

No. 10612 (November 9, 1984),31 SEC Docket 1324; SEC v. Byers, et el., Litigation

Release No. 10621 (November 20, 1984),31 SEC Docket 1494; SEC v. Resource

Royalties, Inc., et aI., Litigation Release NO. 10626 (December 3, 1984), 31 SEC

Docket 1498; SEC v. Telecom Management Intemational, lnc., et aI., Litigation Release

No. 10647 (December 21, 1984),32 SEC Docket 219; SEC v. Structured Shelters lnc.,

Litigation Release No. 10647 (December 21, 1984),32 SEC Docket 219; SEC v.

Structured Shellers lnc., Litigation Release No. 10648 (December 18, 1984),32 SEC

Docket 278; SEC v. Welker Oil Company, Litigation Release No. 10657 (December 21,

1984), 32 SEC Docket 556; SEC v. Janus Financial Group, lnc., Litrqation Release No.

10650 (December 5, 1984),32 SEC Docket 280, SEC v. OxboITOW, Litigation Release

No. 10633 (December 13, 1984),32 SEC Docket 154; SEC v. Appeleciuen Railcar

Manu{. & Repair, Inc., et el., Litigation Release No. 10685 (February 6, 1985), 32 SEC

964; SEC v. Walker, at el., Litigation Release No. 10665 (January 14, 1985),32 SEC

Docket 626; SEC v. First Oil & Gas Co., ei el., Litigation Release No. 10709 (February

27, 1985),32 SEC Docket 1418; SEC v. Zebady.Jaa{ar, et el., Litigation Release No.

10710 (March 28, 1985),32 SEC Docket 1419; SEC v. Northem Pacific Gas & Oil,

Ltd, Litigation Release No. 10716 (March 6, 1985),32 SEC Docket 1507; SEC v.

Moeller, Litigation Release No. 10735 (March I, 1985),32 SEC Docket 1899; SEC v.

79
Kodiak Energy Corp., et aL, Litigation Release No. 10737 (April 16, 1985),32 SEC

Docket 1901; SEC v. Zarcon Corp., et al., Litigation Release No. 10741 (May 2, 1985),

33 SEC Docket 68; SEC v. PC Telemart, lnc., et el., Litigation Release No. 10745 (May

7, 1985),33 SEC Docket 72; SEC v. Elbee Intemational, lnc., et aL, Litigation Release

No. 10758 (May 20, 1985), 33 SEC Docket 253; SEC v. Suter, et al., Litigation Release

No. 10764 (May 20, 1985), 33 SEC Docket 263; SEC v. Ham, Litigation Release No.

10768 (May 22, 1985), 33 SEC Docket 386; SEC v. Elmes Trading Corp., et aL,

Litigation Release No. 10771 (May 23, 1985),33 SEC Docket 389; SEC v. Great

Western Leasing Cotp., et el., Litigation Release No. 10772 (May 31, 1985),33 SEC

Docket 391; SEC v. Le-Men Corp., Litigation Release No. 10773 (June 6, 1985),33

SEC Docket 393; SEC v. Lampman, et al., Litigation Release No. 10776 (May 20,

1985), 33 SEC Docket 495; SEC v. Mid-Continental Energy, lnc., et aL, Litigation

Release No. 10806 (June 20, 1985), 33 SEC Docket 1004; SEC v. Gay, Uligation

Release No. 10812 (May 31, 1985), 33 SEC Docket 1071; SEC v. Chaney, Litigation

Release No. 10827 (May 28, 1985),33 SEC Docket 1191; SEC v. McGivney, Litigation

Release No. 10732 (March 20, 1985), 32 SEC Docket 1897; In the Matter of American

Commercial Securities Corp., Securities Exchange Act Release No. 21902 (March 28,

1985), 32 SEC Docket 1372; In the Matter of Andrew L. Evans, et aL, Securities

Exchange Act Release No. 21697 (January 30, 1985),32 SEC Docket 590; In the

Matter of Kenman Corp., et aL, Securities Exchange Act Release No. 21962 (April 19,

1985), 32 SEC Docket 171; In the Matter of Richard J. Boren, Securities Exchange Act

Release No. 21632 (January 3, 1985), 32 SEC Docket 248; In the Matter of Wtlliam G.

Walters, et aL, Securities Exchange Act Release No. 21696 (January 30, 1985),32

SEC Docket 577; SEC v. F.x.e. Investment Group, lnc., Litigation Release No. 10751

(April 30, 1985),33 SEC Docket 81; SEC v. Marsh & Co., et aL, Litigation Release No.

10786 (June 12, 1985),33 SEC Docket 504; SEC v. Edward D. Jones s Co.,

Litigation Release No. 10879 (September 26, 1985), 34 SEC Docket 232; SEC v.

Holley, Litigation Release No. 10880 (September 12, 1985),34 SEC Docket 233; SEC

v. Greer, litigation Release No. 10081 (September 18, 1985),34 SEC Docket 234;

SEC v. Clover Mini.marls, lnc., Litigation Release No. 10885 (September 24, 1985); 34

SEC Docket 238; SEC v. Holmes, September 30, 1985; SEC v. International Recovery

lnc., et ei, Litigation Release No. 10893 (September 30, 1985), 34 SEC Docket 344;

SEC v. Papaho, Corp., et al., Litigation Release No. 10891 (September 30, 1985),34

SEC Docket 341; and In the Matter of Thomas J. Allin, Jr., Securities Exchange Act

Release No. 22482 (September 30, 1985),34 SEC Docket 257.

6Changes in Corporate Control cases include: In the Matter of Carnahan Company,

Securities Exchange Act Release No. 22214 (July 8, 1985),33 SEC Docket 1025; In

the Matter of Cooper Laboratories, lnc., Securities Exchange Act Release No. 22171

(June 26, 1985), 33 SEC Docket 675; SEC v. Smuh; Litigation Release No. 10803

(June 27, 1985),33 SEC Docket 743; SEC v. XRG Intemational, lnc., et ei, Litigation

Release No. 10662 (January 30, 1985),32 SEC Docket 621; and SEC v. Eastern

Exchange Group, lnc., July 19, 1985.

7Related Party Transactions cases include: SEC v. Lebus, et aL, Litigation Release

No. 10874 (September 24, 1985),34 SEC Docket 224 and SEC v. Michigan National

Corp., et al, Litigation Release No. 10664 (January 24, 1985), 32 SEC Docket 624.

8Delinquent Filing: Issuer Reporting cases include: SEC v. Quadrant Corp., Litigation

Release No. 10836 (July 30, 1985),33 SEC Docket 1250; SEC v. Ran Energy Inc.,

Litigation Release No. 10835 (July 29, 1985),33 SEC Docket 1249; SEC v. Context.

Industries Inc., Litigation Release No. 10832 (July 24, 1985),33 SEC Docket 1197;

SEC v. ABF Energy Corp., Litigation Release No. 10844 (August 8, 1985), 33 SEC

Docket 1463, SEC v. Superior Care, lnc., Litigation Release No. 10853 (August 23,

1985),33 SEC Docket 1551; SEC v. Channel Industries, lnc., Litigation Release No.

10870 (September 19, 1985), 34 SEC Docket 221; In the Matter of Enerdine

Intemational Corp., Securities Exchange Act Release No. 21620 (December 18, 1984),

32 SEC Docket 235; In the Matter of Onnont Durg & Chemical Co., lnc., Securities

Exchange Act Release No. 22157 (June 18, 1985),33 SEC Docket 569; SEC v. Apexx

Investing Group, lnc., Litigation Release No. 10584 (November 1, 1984),31 SEC

80
Docket 1006; SEC v. Sovereign ChemicaI [; Petroleum Products, lnc., Litigation Release

No. 10641 (December 14, 1984),32 SEC Docket 215, SEC v. Petroleum Acreage

Corp. of Texas, Litigation Release No. 10642 (December 14, 1984),32 SEC Docket

216; SEC v. NationaI Medplex Corp., Litigation Release No. 10693 (March 12, 1985),

32 SEC Docket 1142; SEC v. Isle Resources, lnc., Litigation Release No. 10692 (March

8, 1985),32 SEC Docket Litigation Release No. 10749 (May 9, 1985),33 SEC Docket

78; SEC v. Rockwel Od Co., Litigation Release No. 10753 (May 13, 1985),33 SEC

Docket 161; SEC v. Vision Communications Corp., Litigation Release No. 10784 (April

I, 1985), 33 SEC Docket 502; SEC v. tJmuerse! Energy Corp., Litigation Release No.

10802 (June II, 1985),33 SEC Docket 743; SEC v. Puroilou: lnc., Litigation Release

No. 10886 (September 27, 1985),34 SEC Docket 337; and SEC v. TRX Industries,

lnc., Litigation Release No. 10894 (September 30, 1985), 34 SEC Docket 345.

9SEC v. Price Waterhouse, et el., Litigation Release No. 10796 (June 20, 1985),33

SEC Docket 611; SEC v. Crime Control, lnc., et aI., Litigation Release No. 10783 (June

12, 1985),33 SEC Docket 501; SEC v. Steven Kutz, Litigation Release No. 10722

(April 9, 1985),32 SEC Docket 1558; SEC v. Jose L. Gomez, Litigation Release No.

10705 (March 20, 1985),32 SEC 1331 and Litigation Release No. 10747 (May 8,

1985), 33 SEC 75; In the Matter of Jose L. Gomez, c.P.A., Securities Exchange Act

Release No. 22293 (August 6, 1985),33 SEC Docket 1266; In the Matter of Schoenfeld

[; Mendelsohn, et aI., Securities Exchange Act Release No. 22467 (September 26,

1985),34 SEC Docket 108; In the Matter of Weinaug [; Company, P.c., et aI.,

Securities Act Release No. 6603 (August 29, 1985),33 SEC Docket 1486; In the

Matter of David G. Rogers, Securities Exchange Act Release NO. 22311 (August 12,

1985), 33 SEC Docket 1330; In the Matter of Winter [; Co., P.A., Securities Exchange

Act Release No. 2222] (July ] t, ] 985), 33 SEC ] 039; In the Matter of Edward S.

Markman, c.P.A., Securities Exchange Act Release No. 22222 (July II, 1985),33

SEC 1045; In the Matter of Kay L. Anderson, c.P.A., Securities Act Release No. No.

6586 (June II, 1985), 33 SEC Docket 396. In the Matter of John E. Hanington, et el.,

Securities Exchange Act Release No. 21945 (Apnl 15, 1985),32 SEC 1562; In the

Matter of Hans Verlan Andersen, Jr., c.P.A., Accounting and Auditing Enforcement

Release No. 51 (March 26, 1985),32 SEC Docket 1420; and In the Matter of Terrence

E. Dreiling, c.P.A., Securities Exchange Act Release No. 21472 (November 9, 1984),

31 SEC Docket 1086.

lOin the Matter of Broadview Finencisl Cotp., Securities Exchange Act Release No.

21949 (April 17, 1985),32 SEC Docket 1579.

IISEC v. Oak Industries, lnc., Litigation Release No. 10801 (June 25, 1985),33 SEC

Docket 740.

12SECv. Pnce Waterhouse, et el., Litigation Release No. 10796 (June 20, 1985), 33

SEC Docket 611.

I3SEC v. Gomez, Litigation Release No. 10705 (March 20, 1985), 32 SEC Docket

1331.

l4SEC v. Ablan, et el; Litigation Release No. 10618, (November 27, 1984),31 SEC

Docket 1428; and SEC v. Gaffney, et aI., Litigation Release No. 10725 (April 18,

1985), 32 SEC Docket 1642.

I5U.S. v. lhne, see Litigation Release No. 10791, (June 18, 1985), 33 SEC Docket

608.

16U.S. v. Thayer, Criminal Action No. 85-0066 (D.D.C. 1985).

171nthe Matter of Thomson McKumon Secunlles, lnc., Securities Exchange Act

Release No. 21668 (January 17, 1985),32 SEC Docket 444.

laIn the Matter of Smith Bamey, Harris Upham [; Co., lnc., et ei., Securities Exchange

Act Release No. 21813 (Mrch 5, 1985), 32 SEC Docket 999; and In the Matter of Victor

G. Mati, et el., Securities Exchange Act Release No. 22395 (September 10, 1985), 33

SEC Docket 1629.

81
19Secv. ESM Group, lnc., et al., Litigation Release No. 10681 (March 11, 1985),32

SEC Docket 1140; SEC v. Bevill Bresler 5- Schulman, et el., Civil Action No. 85-1715

(D. N.J. 1985); SEC v. Parr Secuniies Cotp., et el., Litigation Release No. 10755 (May

16, 1985),33 SEC Docket 162; and SEC v. Donald Sheldon Group, lnc., et el.,

Litigation Release No. 10848 (August 21, 1985),33 SEC Docket 1468.

2°SEC V. Coluns Securities Cotp., Litigation Release No. 10728 (April 24, 1985),32

SEC Docket 1813.

21SECv. Elmas Tradlng Corp., et el., Litigation Release No. 10771 (June 5, 1985),

33 SEC Docket 389.

22SECv. Peggy D. Stines, et al., Litigation Release No. 10762 (May 22, 1985), 33

SEC Docket 259.

23SECv. March Resources Ltd. et el., Litigation Release No. 10691 (February 28,

1985),32 SEC Docket 971.

241nthe Matter of Cooper Laboratories, lnc., Securities Exchange Act Release No.

22171 (June 26, 1985),33 SEC Docket 675.

25lnthe Matter of Carnation Company, Securities Exchange Act Release No. 22214

(July 8, 1985), 33 SEC Docket 1025.

26Request for Comments Concerning a Concept to Improve the Commission's

Ability to Investigate and Prosecute Persons Who Purchase or Sell Securities in the

U.S. Markets From Other Countries, Securities Exchange Act Release No. 21186 (July

30, 1984).

27Securities Act Release No. 6578 (April 23, 1985), 32 SEC Docket 1665

28Securities Act Release No. 6579 (April 23, 1985),32 SEC Docket 1685

29Securities Exchange Act Release No. 22195 (July 1, 1985),33 SEC Docket 751

30Securities Exchange Act Release No. 22196 (July I, 1985), 33 SEC Docket 887

31Securities Exchange Act Release No. 22197 (July 1, 1985), 33 SEC Docket 892

32Securities Exchange Act Release No. 22198 (July I, 1985), 33 SEC Docket 894

33Securities Exchange Act Release No. 22199 (July I, 1985), 33 SEC Docket 898

34Securities Exchange Act Release No. 21079 (June 21, 1984),30 SEC Docket

1129

35Securitles Act Release No. 6568 (February 28, 1985),32 SEC Docket 914

36For further information, see Statement of John S.R. Shad, Chairman, Securities

and Exchange Commission, before the House Subcommittee on Oversight and

Investigations of the Committee on Energy and Commerce, March 6, 1985.

37Staff Accounting Bulletin No. 58 (March 19, 1985), 32 SEC Docket 1332 (LIFO

Inventory Practices).

38Staff Accounting Bulletin No. 59 (September 5, 1985), 33 SEC Docket 1702

(Accounting for Noncurrent Marketable Equity Securities).

39Financial Reporting Release No. 20 (November 27, 1984) 31 SEC Docket 1328.

40Financial Reporting Release No. 21 (June 6, 1985), 33 SEC Docket 321.

41ReleaseNo. 33-6585 (June 6, 1985),33 SEC Docket 324.

42ReleaseNo. 33-6577 (April 23, 1985),32 SEC Docket 1663.

43ReleaseNo. 33-6590 (June 27, 1985),33 SEC Docket 619.

"Report of the Special Task Force on Audits of Repurchase Securities Transactions

(June 1985), American Institute of Certified Public Accountants.

45ReleaseNo. 33-6592 (July 1, 1985), 33 SEC Docket 751.

46ld.

47ReleaseNo. 33.6594 (July I, 1985), 33 SEC Docket 892.

48Statement of Financial Accounting Standards No. 84, Induced Conversions of

Convertible Debt; Proposed FASB Technical Bulletin No. 85-c, Issues Relating to

AccounlJng for Business Combinations.

49FASB Technical Bulletin No. 85-1, Accounting for the Receipt of Federal Home

Loan Mortgage Corporation Participating Preferred Stock.

50public Oversight Board, Annual Report (1984-1985) at 21.

82
51Reviewof the Structure and Operations of the SEC Practice Section, Report of the

SECPS Review Committee (October 1984) American Institute of Certified Public

Accountants.

52public Oversight Board, Annual Report (1984-1985) at 9.

53Reporl on the Activities of the Special/nvesllgtions Committee of the SEC Pracllce

Section of the A/CPA DIVISionfor CPA Films; American Institute of Certified Public

Accountants, 1985.

54Securities Exchange Act Release No. 21583 (December 18, 1984), 32 SEC Docket

37.

55Securities Exchange Act Release No. 22127 (June 21, 1985), 30 SEC Docket

1190.

56Securities Exchange Act Release No. 21708 (February 4, 1985), 32 SEC Docket

650. See Also Securities Exchange Act Release No 21903 (March 28, 1985), 32 SEC

Docket 1379.

57Securities Exchange Act Release No. 21498 (November 16, 1984),31 SEC

Docket 1257.

58Securities Exchange Act Release No. 21703 (February 1, 1985), 32 SEC Docket

630.

59Securities Exchange Act Release No. 22505 (October 4, 1985), 34 SEC Docket

388. See also Securities Exchange Act Release No. 22506 (October 4, 1985), 34 SEC

Docket 400.

6°Securities Exchange Act Release No. 21383 (October 9, 1984),31 SEC Docket

778.

61Securitles Exchange Act Release No. 21742 (February 12, 1985),32 SEC Docket

732.

62Securities Exchange Act Release No. 20581 (March 1, 1984),29 SEC Docket

1106.

63Securities Exchange Act Release No. 21421 (October 22, 1984),31 SEC Docket

913 (Pacific Securities Depository Trust Company), Securities Exchange Act Release

No. 21747 (February 12, 1985) 32 SEC Docket 746 (Philadelphia Depository Trust

Company).

64Securities Exchange Act Release No. 22116 (June 5, 1985),33 SEC Docket 350.

65Securities Exchange Act Release No. 20365 (November 14, 1983),29 SEC

Docket 203.

66Securities Exchange Act Release No. 22168 (June 25, 1985), 33 SEC Docket 658.

67Securities Exchange Act Release No. 21958 (April 18, 1985), 32 SEC Docket

1617. The Commission extended the deadline for submitting comments to September

30, 1985. See Securities Exchange Act Release No. 22190 (June 28, 1985),33 SEC

Docket 933.

68Securities Exchange Act Release No. 21959 (April 19, 1985),32 SEC Docket

1698.

69Reporl by the Secunties and Exchange Commission to the Subcommittee on

Telecommunications, Consumer Protection and Finance of the Commlltee on Energy and

Commerce of the U.S. House of Represerueuoes, Regulation of the Government

Securities Market (June 20, 1985)

7°Securities Exchange Act Release No. 21710 (February 4, 1985), 32 SEC Docket

656.

71Securities Exchange Act Release No. 21759 (February 14, 1985),32 SEC Docket

773.

72Securities Exchange Act Release No. 22044 (May 17,1985,33 SEC Docket 171;

Securities Exchange Act Release No. 22094 (May 31, 1985), 33 SEC Docket 328;

Securities Exchange Act Release No. 22098 (May 31, 1985), 33 SEC Docket 332;

Securities Exchange Act Release No. 22103 (May 31, 1985), 33 SEC Docket 336;

Securities Exchange Act Release No. 22104 (May 32, 1985),33 SEC Docket 338;

Securities Exchange Act Release No. 22117 (June 6, 1985),33 SEC Docket 350.

73Securities Exchange Act Release No. 21782 (February 28, 1985), 32 SEC Docket

918.

83
74Securities Act Release No. 6596 (July I, 1985), 33 SEC Docket 898.

75Securities Exchanges Act Release No. 22510 (October 10, 1985), 34 SEC Docket

378.

76Securities Exchange Act Release No. 21651 (January II, 1985), 32 SEC Docket

416.

77Securities Act Release No. 22499 (October 3, 1985), 34 SEC Docket 282.

78Securities Exchange Act Release No. 22468 (September 26, 1985), 34 SEC

Docket 119.

79Securities Exchange Act Release No. 22397 (September II, 1985), 33 SEC

Docket 1643.

8°Securities Exchange Act Release No. 21470 (November 15, 1984),31 SEC

Docket 1041.

81Securities Exchange Act Release No. 21914 (April 10, 1985),32 SEC Docket

1434.

82Securities Exchange Act Release No. 22205 (July I, 1985), 33 SEC Docket 941.

83Securities Exchange Act Release No. 31495 (November 16, 1984),31 SEC

Docket 1253.

84Securities Exchange Act Release No. 21577 (December 18, 1984),32 SEC

Docket 20.

85Securities Exchange Act Release No. 22172 (June 27, 1985),33 SEC Docket 685.

86Securities Exchange Act Release No. 21499 (November 19, 1985), 31 SEC

Docket 1262 (New York Stock Exchange); Securities Exchange Act Release No.,

22064 (May 22, 1985),33 SEC Docket 201 (American Stock Exchange).

87Securities Exchange Act Release No. 21950 (April 23, 1985),32 SEC Docket 18.

88Securities Exchange Act Release No. 21449 (November I, 1984),31 SEC Docket

981 (Boston Stock Exchange). Securities Exchange Act Release No. 22442 (Sept. 20,

1985), 34 SEC Docket 46 (American Stock Exchange).

89Securities Exchange Act Release No. 21688 (January 25, 1985),31 SEC Docket

566.

90Securities Exchange Act Release No. 21863 (March 18, 1985),32 SEC Docket

1171.

91Securities Exchange Act Release No. 21578 (December 18, 1984),32 SEC Docket

22.

92See Release No. 21838 (March 12, 1985),32 SEC Docket 1088.

93See Release No. 21843 (March 12, 1985),32 SEC Docket 1094.

94See Release No. 21434 (October 29, 1984),31 SEC Docket 969.

95Letter to AFC Securities Inc. et al. from John Wheeler, Secretary, SEC, March 20,

1985.

96Letter from William O. Guffey, Metropolitan Mortgage & Securities Co., Inc. to the

Commission, received May 17, 1985.

97Securities Exchange Act Release No. 22083 (May 28, 1985), 33 SEC Docket 276.

98Securities Exchange Act Release No. 22374 (August 30, 1985),33 SEC Docket

1560.

99Securities Exchange Act Release No. 22123 (June 6, 1985),33 SEC Docket 353.

looSecurities Exchange Act Release No. 21706 (February 4, 1985), 32 SEC Docket

645.

IOISecurities Exchange Act Release No. 21908 (March 29, 1985),32 SEC Docket

1424.

I02Securities Exchange Act Release No. 22021 (May 7, 1985), 33 SEC Docket 9.

I03Securities Exchange Act Release No. 21335 (September 20, 1984),31 SEC

Docket 579.

'0450th Annual Report at 28.

'05lncludes 200 limited purpose inspections of money market fund Repurchase

Agreement practices.

I06Securities Act Release No. 6580 (May 14, 1985),33 SEC Docket 84.

I07Securities Act Release No. 6570 (March 18, 1985),32 SEC Docket 1154.

I08Securities Act Release Nos. 6563 (January 4, 1985), and 6591 (July I, 1985),32

SEC Docket 283 and 33 SEC Docket 747.

84
I09Securities Act Release No. 6556 (November 9, 1984),31 SEC Docket 1082.

IIOSecurities Act Release No. 6598 (July 10, 1985),33 SEC Docket 1015.

I1llnvestment Company Act Release Nos. 14244 (November 21, 1984), and 14559

(June 6, 1985),31 SEC Docket 1308 and 33 SEC Docket 377.

112lnvestment Company Act Release No. 14193 (October 12, 1984),31 SEC Docket

128.

1131nvestmentCompany Act Release No. 14275 (December 14, 1984),32 SEC

Docket 832.

1141nvestmentCompany Act Release No. 14299 (January 4, 1985),32 SEC Docket

289.

1151nvestmentCompany Release Nos. 14300 (January 4, 1985), and 14606 (July 1,

1985),32 SEC Docket 283 and 33 SEC Docket 747.

116lnvestment Company Act Release No. 14390 (February 22, 1985),32 SEC

Docket 949.

117lnvestment Company Act Release No. 14556 (May 31, 1985),33 SEC Docket

374.

l1Blnvestment Company Act Release No. 14548 (May 30, 1985),33 SEC Docket

364.

119lnvestment Company Act Release No. 14607 (July 1, 1985), 33 SEC Docket 986.

120lnvestment Advisers Act Release No. 967 (April 24, 1985),32 SEC Docket 1774.

1211nvestmentAdvisers Act Release No. 952 (January 11, 1985), 32 SEC Docket

493.

122lnvestment Advisers Act Release No. 961 (March 15, 1985),32 SEC Docket

1321.

123lnvestment Advisers Act Release Nos. 956 (February 25, 1985) and 983 (July 12,

1985), 32 SEC Docket 959 and 33 SEC Docket 00.

124Securities Exchange Act Release No. 22038 (May 14, 1985),33 SEC Docket 115.

1251nvestmentCompany Act Release No. 14234 (November 14, 1984),31 SEC

Docket 1113.

1261nvestmentCompany Act Release No. 14190 (October 11, 1984,31 SEC Docket

813.

1271nvestmentCompany Act Release No. 14575 (June 14, 1985),33 SEC Docket

508.

12BSecuritiesAct Release No. 6558 (November 21, 1984),31 SEC Docket 1243.

129Holding Company Act Release No. 23693, ( ), 33 SEC

Docket 130.

130Holding Company Act Release No. 23744 (June 27, 1985),33 SEC Docket 105.

131Holding Company Act Release No. 23704 (May 23, 1985), 33 SEC Docket 235.

132Holding Company Act Release No. 23578 (January 22, 1985), 32 SEC Docket

525.

133Holding Company Act Release No. 23340 (October 1, 1984), 32 SEC Docket

1234.

134Holding Company Act Release Nos. 23724 (June 7, 1985) and 00 (July 31,

1985), 33 SEC Docket 458 and 00 SEC Docket 000.

135760F.2d 706 (6th Cir. 1985).

136No.85.6111 (2d Cir. filed May 1, 1985).

137SEC v. Drysdale Securities Corp., 606 F. Supp. 295 (S.D.N.Y. 1985).

136760F.2d 945 (9th Cir. 1985).

13917C.F.R. 240.13e.4.

140475F. Supp. 783 (S.D.N.Y. 1979), atrd 602 F.2d 355, cert. derued; 103 S. Ct.

1522.

141No.83.2378 (7th Cir. July 22, 1985).

142757F.2d 1066 (9th Cir. 1985).

143No.85.1138 (D.C. Cir. filed July 17, 1985).

144757F.2d 676 (5th Cir. 1985).

145No.7730 (Del. Ch. January 29, 1985), appeal docketed, No. 37, 1985 (Sup. Ct.

Del. filed March 19, 1985).

85
146675 F.2d 168 (8th Cir. 1982). a/fd, 768 F.2d 949 (8th Cir. 1985) (en bane). cett.

pending sub nom Randall v. Lo{tsgaarden, No. 85.519. In a related case, on May 13,

1985. the Supreme Court requested the views of the United States in Salcer v. Envicon

Eqiuues Corp., 744 F.2d 935 (2nd Cir. 1984), cert. pending, No. 84-1447 (S. Ct.). On

October 9. 1985. the United States filed an amicus brief recommending a writ of

certioran in both Salcer and Loftsqeerden.

147764F.2d 939 (3rd Cir. 1985).

148No.84-2501 (10th Cir. Filed April 8. 1985).

149Nos.84.1631. 84-1714 (7th Cir. filed July 24. 1985).

150Nos.84.1631. 84.1714 (7th Cir., September 9. 1985).

151601F. Supp. 685 (S.D.N.Y. 1985).

152612F. Supp. 827 (S.D.N.Y. 1985). appeal docketed, Nos. 85.1312. 1313. 1314

(2d Cir. Aug. 15. 1985).

153105S. Ct. 2622 (1985).

I54No. 85 C 376 (N.D. III. filed May 1. 1985).

155105S. Ct. 2297 (1985).

156105S. Ct. 2308 (1985).

157758F.2d 459 (9th Cir. 1985).

158105S. Ct. 2557 (1985).

159No.83-3011 (7th Cir. July 2. 1985).

16°Admin. File No. 3.6381.

16lAdmin. Proc. File No. 3-6196 (April 15. 1985).

162RussellDavy v. SEC, No. 85-7328 (9th Cir. filed June 11. 1985).

163609F. Supp. 1162 (N.D. Cal. 1985).

164No.84-4749 (E.D.N.Y. filed May 23. 1985).

165(1984)Fed. Sec. L. Rep. (CCH) '91,437 (N.D. III. 1984).

1661nre Cook United, lnc., No. B84-2537 (Bankr., D. Colo.) (granted); In re Crompton

Co., lnc., No. 84B11496 (Bankr., S.D. N.Y.) *)granted); In re Energy Exchange Corp.

(Bankr., W.D. Okla.) (pending); In re Koss (Bankr., W.D. Okla.) (pending); In re Pizza

Time Theatre, Inc. (Bankr., N.D. Cal.) (denied); In re Salant Corp. (Bank., S.D.N.Y.)

(granted); In re Standard Metals Corp. (Bankr., D. Colo.) (granted); In re Storage

Technology, Inc. (Benkr., D. Colo.) (moot); In re Towner Petroleum Co., No. 84-02814B

(Bankr., W.D. Okla.); In re Uniod. No. 84-3959J (Bankr., D. Colo.) (granted); and In re

Wheelmg Pittsburgh Steel Corp. (Bankr., W.D. Pa.) (pending).

167No.85-793 (W.D. Pa.).

166Nos.84-289-BK.J-GP through 84-332-BK-J-GP (M.D. Fla.).

169No.84.02058.414 (E.D. Wash.).

17°No. 85.00430 (M.D. Fla.).

171No.84-01223.BKC-SMW (S.D. Fla.).

172772F.2d 1063 (2d Cir. 1983)

I73Percuriam, No. 85-5519 (11th Cir. August 13. 1985).

1741nre Baldwin-United, No. 1-83.02495. Contested Docket #3 (Bankr., S.D. Ohio.

August 7. 1985), appeal docketed, No. C-1-85-1605 (S.D. Ohio); and In re STandard

Metals Corp. (Bank., D. Colo.), on appeal, No. 84 x 396 (D. Colo.).

1751nre STandard Metals, No. 84 B00945, (Bankr., D. Colo.), on appeal. No. 84 x

396 (D. Colo.).

176No.584 00941 M (Bankr., N.D. CaL).

I77No. 84-B-3959J (Bankr., D. Colo.).

176No.18550388.90-21. 18550397-99-21 (Bankr., E.D.N.Y.).

179No.82.B-10318 through 82.B-I0320 (Bankr., S.D.N.Y.).

16°No. 84.B3959J (Bankr., D. Colo.).

161No.5.82.00914 (Bankr., M.D. Pa.).

162No.84-04985 (Bankr., D. N.J.).

163No.BK-82-02335 (Bankr., N.D. Okla.).

86
Glossary of Acronyms

AICPA-American Institute of Certified Public Accountants

Amex-American Stock Exchange

BSE-Boston Stock Exchange

CBOE-Chicago Board Options Exchange

CBT-Chicago Board of Trade

CEA-Commodity Exchange Act

CFTC-Commodity Futures Trading Commission

CRD-Central Registration Depository

EDGAR-Electronic Data Gathering Analysis and Retrieval

EFTS-Electronic Funds Transfer System

FASB-Financial Accounting Standards Board

FCPA-Foreign Corrupt Practices Act

FOIA-Freedom of Information Act

FRR-Financial Reporting Release

GAAP-Generally Accepted Accounting Principles

GSA-General Services Administration

ITS-Intermarket Trading System

ITSA-Insider Trading Sanctions Act

MOSS-Market Oversight and Surveillance System

MSE-Midwest Stock Exchange

MSRB-Municipal Securities Rulemaking Board

NASAA-North American Securities Administrators Association

NASD-National Association of Securities Dealers

NASDAQ-National Association of Securities Dealers Automated Quotation

System

NMS-National Market System

NSCC-National Securities Clearing Corporation

NYSE-New York Stock Exchange

OCC-Options Clearing Corporation

OECD-Organization for Economic Cooperation and Development

OMB-Office of Management and Budget

OTC-Over-the-Counter

Phlx-Philadelphia Stock Exchange

PIC-Productivity Improvement by Computer

POB-Public Oversight Board

PSE-Pacific Stock Exchange

RFA-Regulatory Flexibility Act

SAB-Staff Accounting Bulletin

S&L-Savings and Loan Association

SECO-SEC-Only Registration Program

SECPS-SEC Practice Section

SIC-Special Investigations Committee

SIPC-Securities Investor Protection Corporation

SRO-Self-Regulatory Organization

ULOE-Uniform Limited Offering Exemption

87

Appendix

THE SECURITIES INDUSTRY

Revenues, Expenses and

Selected Balance Sheet Items

Broker-dealers that are selfregulated through their membership in

a national securities exchange or the

National Association of Securities

Dealers produced revenues of $40.0

billion in 1984, eight percent above the

1983 level. I Almost 34 percent of this

increase in revenues stemmed from the

growth of revenues from outside the

principal securities activities

(brokerage, principal transactions and

underwriting). These "all other"

revenues, which include interest income from securities purchased under

agreements to resell and fees from

handling private placements, mergers

and acquisitions, accounted for 38 percent of revenues in 1984.

'Due to changes in FOCUS reporting

requirements, consolidated information for 1981 is not available. In order

to provide consistent information, new

financial data was developed for prior

Appendix

Trading gains on firms' securities accounts increased $1 billion, or 12 percent, and represented 24 percent of

total revenues in 1984. Profits from

underwriting decreased $842 million,

but rose as a percent of total revenues

to eight percent in 1984. Securities

commission income declined 11 per.

cent, while mutual fund sales fell to

three percent.

Pre-tax income dropped 47 percent

from the preceding year to $2.8 billion,

as expenses grew by $5.2 billion (16

percent) to $37.2 billion in 1984.

Assets rose by $64.7 billion to

$3169 billion and liabilities grew

$62.6 billion to $298.3 billion. Owner.

ship equity increased $2.1 billion during 1984 to $18.7 billion at year's end.

years and Table I now presents unconsolidated data for all years. This data

will not be comparable to the Table I

published in the SEC Annual Report

for 1981 and prior years.

91
Table 1

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER.DEALERS

1980.1984

(MIllions of Dollars)

1980 1981 1982 1983R 1984P

A Revenues

1 Securities ccmrmssrcns $ 6,800 $ 6,589 $ 7,370 $ 10,493 $ 9,343

2 Gain (Loss) In Trading 4,309 5,401 7,668 8,690 9,732

3 Gain (Loss) In Investments 807 635 867 1,178 1,125

4 Profit (Loss) from Underwriting

and Seiling Groups 1,594 1,860 2,688 4,097 3,255

5 Revenue from Sale of Investment

Company Securities 278 342 629 1,494 1,453

6 All Other Revenues 6,196 9,545 9,579 11,191 15,044

7 Total Revenues $ 19,984 $ 24,372 $ 28,801 $ 37,143 $ 39,952

B Expenses

8 All Employee Compensation and

Benefits (Except Registered

Representatives' Compensation) $ 3,402 $ 3,951 $ 4,714 $ 6,442 $ 6,809

9 Ccrnrrusstons and Clearance

Pard to Other Brokers 1,079 1,104 1,299 1,818 1,929

10 Interest Expense 3,893 6,506 6,452 6,914 10,927

11 Regulatory Fees and Expenses 100 121 149 202 225

12 Compensatron to Partners

and Voting Stockholder Offrcers 883 1,056 1,179 1,555 1,509

13 All Other Expenses (Including

Registered Representatives'

Compensation) 7,574 8,845 10,935 14,979 15,754

14 Total Expenses $ 16,931 $ 21,583 $ 24,728 $ 31,910 $ 37,153

15 Pre,Tax Income $ 3,053 $ 2,789 $ 4,073 $ 5,233 $ 2,799

C Assefs, LIabilItIes and Cap/tal

16 Total Assets $120,152 $155,063 $201,275 $252,270 $316,945

17 Lraburtres

a Total Lraburtres (Exlcudlng

Subordinated Debt) 109,742 142,865 186,028 232,551 293,257

b Subordinated Debt 1,859 1,869 2,306 3,083 4,997

c Total Liabumes (17a + 17b) 111,601 144,734 188,334 235,634 298,254

18 Ownership EqUity 8,551 10,329 12,941 16,636 18,691

19 Total LIabilities and Ownership

EqUity $120,152 $155,063 $201,275 $252,270 $316,945

Number of Forms 5,283 5,714 6,165 7,429 7,788

P= Preliminary

R= Revrsed

Note Includes only those broker-dealers self-regUlated through membership In the National ASSOCiationof secunues

Dealers or a registered secuntres exchange

Source FOCUS Report

92
Table 2

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1980-1984

(MIllIons of Dollars)

1980 1981 1982 1983R 1984P

Revenues

1 Secunties Commission $ 6,454 $ 6,163 $ 7,129 $ 9,829 $ 8,828

2. Realized and unreanzed Gains

or Losses In Trading and

Investment Accounts 4,686 5,481 8,138 9,106 9,894

3 Commodttres Revenues 669 699 731 951 764

4 Profits or Losses From Under.

wrotlng and Seiling Groups 1,519 1,797 2,673 3,990 3,197

5 Revenues From Sale of Invest.

ment Company secunues 274 338 625 1,474 1,441

6 Margin Interest 2,136 2,884 2,060 2,150 2,882

7. All Other Revenues 2,993 5,320 6,536 7,405 10,343

8 Total Revenues $18,731 $22,682 $27,892 $34,905 $37,349

Expenses

9 Salaroes and Other Employment

Costs for General Partners and

Voting Stockholder Ottrcers $ 793 $ 944 $ 1,095 $ 1,389 $ 1,354

10 All Other Employee Compensation

and Benefits (Except Registered

Representatives' Cornpensatrom' 3,116 3,749 4,592 6,166 6,549

11 Commissions and Clearance Paid 949 972 1,231 1,615 1,749

12 Interest Expense 3,778 6,016 6,389 6,513 10,016

13 Regulatory Fees and Expenses 85 103 137 170 203

14 All Other Expenses' 7,251 8,389 10,722 14,390 15,151

15 Total Expenses $15,972 $20,173 $24,166 $30,243 $35,022

16 Pre-Tax Income $ 2,759 $ 2,510 $3,726 $ 4,662 $ 2,327

Number of Forms 2,613 2,836 3,256 3,648 4,706

P = Preliminary

R= Revised

'RegIstered representatIves' compensation IS Included In "All Other Expenses" because It ISnot reported separately on

Part IIA of the FOCUS Report

Note Figures may not sum due to rounding

Source FOCUS Report

93
Table 3

UNCONSOLIDATED BALANCE SHEET FOR BROKER.DEALERS DOING A PUBLIC

BUSINESS

YEAR.END, 1980.1984

(Millions of Dollars)

1980 1981 1982 1983R 1984P

A Assets

1 Cash s 2,611 $ 2,671 $ 4,636 $ 3,755 $ 4,078

2 Receivables from Other Broker-Dealers

a sacuntres Failed to Deliver 3,280 6,257 5,899 5,860 7,024

b secunnes Borrowed 7,752 9,228 15,936 17,992 18,730

c Other 1,177 1,906 2,700 3,544 2,913

3 Receivables from Customers 23,464 21,076 24,762 31,947 30,101

4 Long POSitions In secunnes and

Commodities. 33,001 41,714 71,408 80,498 109,110

5 secunnes Owned. not Readily

Marketable 121 104 155 208 510

6 Securities Borrowed under SubordInated Agreements and Partners'

Individual and Capital Secuntres

Accounts 90 90 90 98 50

7 secuntres Purchased under Agree.

ment to Resell 32,888 45,222 53,733 78,362 108,378

8 Secured Capital Demand Notes 305 309 306 303 389

9 Exchange Memberships 213 216 286 306 295

10 Other Assets 5,579 6,771 9,716 12,121 14,444

11 Total Assets $111,082 $132,587 $189,985 $234,994 $296,022

B LIabIlitIes and EqUIty CapItal

12 Bank Loans Payable.

a Secured by Customer Collateral $ 3,892 s 3,633 $ 2,843 $ 4,416 $ 4,790

b Secured by Firm Collateral 5,592 7,583 8,749 15,606 22,728

13 Secuntles Sold under Repurchase

Agreements 34,949 55,679 77,330 93,270 135,560

14 Payable to Other aroksr-ueaters

and Cleanng Organizations

a Secuntres Failed to Receive 4,095 3,298 6,766 4,769 6,917

b secunnss Loaned 7,184 8,273 14,029 15,432 14,302

c Other 1,105 1,418 2,529 4,267 3,727

15 Payable to Customers' 14,833 12,705 16,400 18,697 19,517

16 Short POSitions In secunues

and Commodities 21,160 18,698 30,960 40,521 45,447

17 Other Liabilities 9,444 11,001 16,211 20,181 21,293

18 Total Liabilities Excluding

Subordinated Liabilities 102,254 122,288 175,817 217,159 274,281

19 SUbordinated liabilities 1,648 1,698 2,158 2,711 4,546

20 Total Liabilities $123,986 $177,975 $216,904 $219,870 $278,827

21 EqUity Capital $ 8,601 $ 12,010 $ 14,788 s 15,124 $ 17,195

22 Total Liabilities and EqUity Capital $111,082 $132,587 $189,985 $234,994 $296,022

Numberof Firms 2,613 2,836 3,256 3,648 4,706

P = Preliminary

R= Revised

Nole Figures may not sum due to rounding

Source FOCUS Report

94
Securities Industry Dollar In

1984 For Carrying and Clearing

Firms

Data for carrying and clearing firms

only are presented here to allow for

more detail, as reporting requirements

for introducing and carrying and clearing firms differ and data aggregation of

these two types of firms necessarily

results in loss of detail. Carrying and

clearing firms are those firms which

clear securities transactions or maintain possession or control of

customers' cash or securities. This

group produced 87 percent of the

securities industry total revenues.

Securities commissions and trading

gains accounted for 21 cents and 25

cents, respectively, of each revenue

dollar in 1984. Together these two

items accounted for 46 cents of each

revenue dollar generated in 1984 as

compared to 51 cents in 1983. In terms

of dollars, they accounted for $16.2

billion of the $34.9 billion of total

revenues earned by carrying and clearing firms. Margin interest income accounted for nine cents of each revenue

dollar in 1984 compared with seven

cents in 1983.

Total expenses consumed 94 cents

of each revenue dollar earned in 1984,

seven cents more than the 1983 level

of 87 cents. This cut the industry's pretax profit margin from 13 cents per

revenue dollar in 1983 to six cents in

1984.

Interest expense, again the single

largest expense item, rose in 1984 by

59 percent to absorb 31 cents of each

revenue dollar, which compares to 21

cents in 1983. In dollars, interest expense climbed to $10.7 billion, $4.0

billion more then the year before.

Employee-related expenses (registered

representatives' compensation and

clerical and administrative employees'

expenses) consumed 34 cents of the

revenue dollar in 1984, three cents

below the 37.cent level in 1983.

Registered representatives' compensation was seven percent less than the

1983 level and absorbed 18 cents of

each revenue dollar in 1984 compared

to 21 cents in the previous year. In

dollar terms, employee-related expenses accounted for $11.8 billion of

the $32.8 billion of total expenses.

Other expense categories consumed

about the same proportion of the industry revenue dollar in 1984 as they

did in 1983.

Total assets of broker-dealers carrying and clearing customer accounts

rose by $72.1 billion to $308.7 billion

in 1984. About 89 percent of this increase in assets can be attributed to

two items: resale agreements rose

$32.2 billion, and long positions increased $37.3 billion.

Total liabilities, including subordinated debt, increased $70.2 billion or

32 percent to $292.8 billion with increases in repurchase agreements of

$49.0 billion and short positions in

securities of $7.1 billion. Owners' equity rose 14 percent from $14.0 billion in

1983 to $15.9 billion, and total capital

increased 23 percent to $20.6 billion

from $16.8 billion in 1983.

95
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96
Table 4

UNCONSOLIDATED REVENUES AND EXPENSES FOR BROKER.DEALERS

CARRYING/CLEARING CUSTOMER ACCOUNTS

(MIllions of Dollars)

1983R 1984P 1983-1984

Percent of Percent of Percent

Dollars Total Revenues Dollars Total Revenues Change

Revenues

1 secunnes Commrssrons $ 8,531 264% $ 7,380 211% (135)%

2 Gaon(Loss) onTradIng 7,791 241 8,795 252 129

3 Gaon(Loss) onInvestments 967 30 1,012 29 46

4 Profrt (Loss) from Underwrltong

and Seiling Groups 3,793 118 3,022 87 (203)

5 Revenue from Sale of Investment

Company SecUrilies 1,174 36 1,016 29 (135)

6 Margon Interest Income 2,271 70 3,013 86 327

7 Cornrnodrtres Revenue 947 29 823 24 (131)

8 Other Revenue Related to secuntres Busoness 5,479 170 7,810 224 426

9 Revenue from All Other Sources 1,336 42 2,034 58 523

10 Total Revenues $32,289 1000% $34,905 1000% 81 %

Expenses

11 Registered Representallves'

Compensation $ 6,611 205% $ 6,184 177% (65)%

12 Clerical and Adrmrustrauve

Employees' Expenses 5,313 164 5,643 162 62

13 Commissions and Clearance Paid

to Others 1,245 39 1,283 37 31

14 Interest Expense 6,697 207 10,654 305 591

15 Communication and Data Processing 2,066 64 2,406 69 165

16 Occupancy and Equipment 1,268 39 1,659 47 308

17 compensanon to Partners and Votong

Stockholder Officers 1,138 35 1,098 31 (35)

18 All Other Expenses 3,638 113 3,892 112 70

19 Total Expenses $27,976 866% $32,819 940% 173%

Pre- Tax Income

20 Pre-Tax Income $ 4,313 134% $ 2,066 60% (516)%

Numberof Forms 1,329 1,316 (10)%

P= Prellmonary

R= RevIsed

Note. Includes information for firms that carry customer accounts or clear secuntres transactions

Source FOCUS Report

97
Table 5

UNCONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS

CARRYING/CLEARING CUSTOMER ACCOUNTS

(MIllions of Dollars)

Year End Year End % Change

1983R Percenl 1984P Percent 1983-1984

Assets

1 Cash $ 3,660 16% $ 3,959 13% 82 %

2 Receivable From Other

Broker-Dealers 33,052 140 35,122 113 63

a Securities Borrowed 20,602 87 22,272 72 81

b Other Hecervables 12,450 53 12,850 41 32

3 Hecervables From Customers 32,852 139 30,554 99 (70)

4 Resale Agreements 78,600 332 110,788 359 410

5 Long Posrtrons In secunnes

and Spot Commodrtres 78,272 331 115,586 375 477

6 Other Assets 10,146 42 12,654 41 247

7 Total Assets $236.582 1000% $308,663 1000% 305 %

LIabilities and EqUity

Capital

8 Bank Loans $ 20,674 88% $ 28,619 93% 384 %

a Secured by Customer Sec 4,465 19 4,877 16 92

b Secured by Proprietary Sec 16,209 6.9 23,742 77 465

9 Payable to Other Broker-Dealers 22,054 93 24,072 78 92

a secunnes Loaned 17,045 72 16,922 55 (07)

bOther Payables 5,009 21 7,150 23 427

10 Payable to Customers 19,241 81 20,093 65 44

a Free Credit Balances 6,902 29 8,454 27 225

b Other Credit Balances 12,339 52 11,639 38 (57)

11 Repurchase Agreements 95,240 403 144,264 467 515

12 Short Positions In Securities 39,013 165 46,142 150 183

13 Subordinated Debt 2,780 12 4,720 15 698

14 Other LIabilities 23,570 99 24,846 80 54

15 Total liabilities 222,572 941 292,756 948 315

16 Owners' EqUity 14,010 59 15,907 52 135

17 Total Lrabrlttres

and Owners' EqUity $236,582 1000% $308,663 1000% 305 %

Total CapItal $ 16,790 $ 20,627 229 %

Number of Firms 1,329 1,316 (1.0)%

P = Preliminary

R = Revrsed

Source FOCUS Report

Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers filing

FOCUS Reports rose five percent from

7,429 in 1983 to 7,788 in 1984. During

the same period, the number of branch

98

offices increased 26 percent from

11,381 to 14,296. The number of fulltime personnel employed in the

securities industry rose from 296,000

to 330,000 in 1984, an 11 percent increase.
Broker-Dealers and Branch Offices

~-~,

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15,000

10,000

5,000

o

1976 1977 1978 1979 1980 1981 1982 1983 1984

~- -:::--t---:-:] Broker-Dealers ~_~J Branch Offices

P=Prelzmmary R<Hctnscd

SOURCE _ FORM X-17-A-10 AND FOCUS REPORTS

99
Table 6

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF

1934-EFFECTIVE REGISTRANTS AS OF SEPTEMBER 30, 1985 CLASSIFIED BY

TYPE OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE

Number of Registrants

Sole

Total Propne- Partner. Corpora.

torshrps shrps trons:

Alabama 46 2 0 44

Alaska 4 0 0 4

Arizona 68 2 I 65

Arkansas 62 3 I 58

Cahforma 1,335 336 125 874

Colorado 250 7 6 237

Connecticut 170 20 14 136

Delaware 14 I 2 II

Drstrict of Columbia 46 3 3 40

Florida 417 17 15 385

Georgia 137 3 4 130

Hawau 22 0 I 21

Idaho 13 2 0 II

Ilhnors 2,847 1,855 302 690

Indiana 77 9 I 67

Iowa 52 2 I 49

Kansas 40 2 2 36

Kentucky 27 3 0 24

LOUIsiana 90 9 5 76

Mame 15 0 2 13

Maryland 100 3 I 96

Massachusetts 248 30 15 203

Michigan 116 8 2 106

Minnesota 127 4 0 123

MISSISSIPPI 26 0 I 25

Missouri 116 7 3 106

Montana 7 I 0 6

Nebraska 26 0 I 25

Nevada 18 4 I 13

New Hampshire 10 I 0 9

New Jersey 349 66 39 244

New MeXICO 22 I 0 21

New York 2,573 779 375 1,419

North Carolina 71 7 0 64

North Dakota 8 I 0 7

Ohio 154 5 9 140

Oklahoma 61 4 0 57

Oregon 55 I I 53

Pennsylvania 454 26 95 333

Rhode Island 21 5 I 15

South Carolina 44 I 2 41

South Dakota 6 0 0 6

Tennessee 118 5 3 110

Texas 517 40 8 469

Ulah 60 3 I 56

Vermont 10 2 I 7

VIrginia 83 8 2 73

washington 128 8 2 118

West Yirgrrna 10 I 0 9

Wisconsin 101 8 2 91

Wyommg 8 I 0 7

Total 11,379 3,306 1,050 7,023

Foresgrr' 25 2 3 20

Grand Total 11,404 3,308 1,053 7,043

'Includes all forms of orparnzatron other than sole proprietorships and partnersrups

'RegIstrants whose prrncipal offices are located rn foreign count roes or olher junsdictrons not listed

100
Table 7

APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERS

AND INVESTMENT ADVISERS

Fiscal Year 1985

BROKER.DEALER APPLICATIONS

Applications pending at close of preceding year

Applications received dUring fiscal 1985

Disposition of Applications

Accepted for filing

Returned

Withdrawn

Denied

Total applications disposed of

Applications pending as of September 30,1985

BROKER.DEALER REGISTRATIONS

Effectove registrations at close of preceding year

RegistratIOns effective dUring fiscal 1985

Total Reglstratoons

Registrations terminated dunnq fiscal 1985

Withdrawn

Revoked

Cancelled

Total registrations terminated

Total registrations at end of fiscal 1985

INVESTMENT ADVISER APPLICATIONS

ApplicatIOns pending at close of preceding year

Appucatrons received durmq fiscal 1985

Total applications for disposition

DIsposition of appncanons

Accepted for filing

Withdrawn

Returned

Denied

Total applications disposed of

Appllcatoons pending as of September 30,1985

INVESTMENT ADVISER REGISTRATIONS

Effectove registrations at close of preceding year

RegistratIOns effective dUring fiscal 1985

Total registrations

Registrations terminated dUring fiscal 1985

Withdrawn

Revoked

Cancelled

Total reqrstratrons terminated

Total registrations at end of fiscal 1985

230

2,832

2,008

843

11

0

2,862

200

10,414

2,010

12,424

770

0

250

1,020

11,404

265

4,086

4,351

2,993

13

1,141

0

4,147

204

9,083

2,912

11,995

518

3

566

1,087

10,908

101
Table 8

APPLICATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES

DEALERS AND TRANSFER AGENTS

Fiscal Year 1985

MUNICIPAL SECURITIES DEALERS APPLICATIONS

Applications pending at close of preceding year

Applications received dunnq fiscal 1985

Total applications for disposmon

orsoosmon of Applications

Accepted for filing

Returned

Denied

Total applications disposed of

Applications pending as of September 30,1985

MUNICIPAL SECURITIES DEALERS REGISTRATIONS

Effective registrations at close of preceding year

Registrations ettecuve dUring fiscal 1985

Total registrations

Registrations terminated dUring fiscal 1985

Withdrawn

Cancelled

Suspended

Total registrations terminated

Total registrations at end of fiscal 1985

TRANSFER AGENTS APPLICATIONS

Applications pending at close of preceding year

Applications received dUring fiscal year 1985

Total applications for drsposrtron

DISposition of applications

Accepted for filing

Returned

Withdrawn

Denied

Total applrcatrons disposed of

Applications pending as of September 30,1985

TRANSFER AGENTS REGISTRATIONS

Effective registrations at close of preceding year

RegistratiOns effective dUring fiscal 1985

Total registrations

Registrations terminated dunng fiscal 1985

Withdrawn

Cancelled

Suspended

Total registrations terminated

Total registrations at end of fiscal 1985

102

1

27

28

24

4

0

28

0

399

24

423

12

0

0

12

411

1

83

84

83

0

1

0

84

0

1,119

83

1,202

28

31

1

60

1,142
Self-Regulatory Organizations:

Revenues, Expenses, Pre-Tax:

Income and Balance Sheet

Structure

In 1984 the total revenues of selfregulatory organizations ("SROs") rose

approximately $43.5 million to $559.9

million, a yearly increase of only 8%

compared to the 1983 increase of

27.8%. The New York Stock Exchange

("NYSE"), National Association of

Securities Dealers ("NASD") and

American Stock Exchange ("Amex") accounted for over 70% of SROs' total

revenues. Most SRO revenues came from

listing, trading and market data fees.The

NYSE reported total revenues of $223.3

million, of which approximately 55%

was made up of listing and trading fees.

The Amex reported a total revenue figure

of $75.7 million. Approximately 72% of

these revenues were derived from transaction and communications charges.

The NASD reported total revenues of

$91.4 million.

The total expenses of all SROs were

$500.2 million in 1984, an increase of

$66 million, 15% over 1983. The Cincinnati Stock Exchange ("CSE"), Chicago

Board Options Exchange ("CBOE"), and

NASD had the largest percentage increases in total expenses. Conversely,

the Philadelphia Stock Exchange

("Phlx") and the Boston Stock Exchange

("BSE") reduced total expenses by 15%

and 7% respectively.

Aggregate pre-tax income of all SROs

fell to $55.9 million in 1984, from a high

in 1983 of $82.0 million, a reduction of

approximately 30%. This can be attributed to increased operational expenses, and decreases in listing and transaction fees. The NYSE showed a

decrease in pre-tax income of $21.3

million, a reduction of 57% from 1983.

The CBOE showed a reduction of over

75% or approximately $4.5 million. This

can largely be attributed to a 34 % rise in

operating expenses at the CBOE com.

bined with lower transaction and appllcation fees. The Amex dropped in pre-tax

income by $3.6 million-28%-from

$12.9 million in 1983 to $9.2 million in

1984. The BSE's pre-tax income surged

past its 1983 figure of $2.5 million by

over 130%, to $5.8 million. This was due

largely to an increase in trading volume

and a corresponding increase in transaction fees. This was followed by an NASD

increase of 21 % or $3.4 million over

1983's figure of $16.1 million, to $19.5

million. The PSEshowed a pre-tax loss of

$1 million, a reduction of over twice the

previous year's pre-tax income figure of

$397 thousand. The CSE reported a pretax loss of $775 thousand for 1984, a

loss of $759 thousand over its $16 thousand pre-tax loss of 1983.

The total assets of all SROs were

$827.5 million in 1984, a decrease of

6% from 1983. The NYSE's total assets

were $272.6 million, an increaes of 9%

over 1983. The CBOE increased total

assetsby 30% to $88.1 million from $68

million in 1983. The NASD increased its

assets by 33% from $70.2 million in

1983 to $93.3 million in 1984. The

largest relative decrease in total assets

occurred at the PSE where assets fell

38% to $114.7 million in 1984, from

$183.8 million in 1983.

The aggregate net worth of the SROs

rose to $352.2 million from $309.0

million in 1983, an increase of 14%. The

largest percentage increases over the

previous year occurred at the Spokane

Stock Exchange ("SSE") 89%, the NASD

36%, and the BSE 29%. The only

decrease in total assets occurred at the

CSE, which decreased $152 million from

$263 million in 1983 to $111 million in

1984, a 58% reduction.

The clearing corporation and

depository SROs reported that aggregate

service revenue increased by $16.2

million in 1984, or over 9%. This consisted of increases of $9.9 million for

depositories and $6.3 million for clearing

agencies. The increase in depository service revenues was due to increases of

$6.5 million for the Depository Trust

Company ("DTC), $2.7 million for the

Midwest Securities Trust Company and

103
$1 million for Philadelphia Depository

Trust Company.

Service revenue or clearing corporations increased $6.3 million primarily

because of increases of $5.3 million at

the Options Clearing Corporation

("OCe") and a $1.1 million increase at

the Midwest Clearing Corporation. The

OCe. which is a common clearing

organization for all of the listed options

exchanges, experienced its first year-toyear decrease in the number of equity

option contracts traded of 12%, but an

increase in the number of index and currency options caused overall option

volume to increase almost 31 % to a

new high of 196.4 million contracts. Aggregate interest income at the SROswas

up almost $24 million, with the

depositories accounting for all of the increases.The increase in interest income

paralleled increases in the value of transactions at the depositories.

Depository expenses for 1984 in.

creased by $32 rnilllon, rising 23% for

the second straight year. Employee

costs accounted for almost half of this

increase, which is attributable to the

labor-intensive nature of traditional

depository operations. The total

number of all transactions at

depositories decreased by 8%, but participants continued to make net

deposits of all types of securities.

Deposits are processed manually and

therefore are expensive transactions.

Once the deposit is in the system,

however, the cost-savings associated

with book-entry deliveries of securities

betweeen participants may be realized.

The largest increase in deposits was in

debt securities which have increased

nine fold since 1980, to approximately

$550 billion. Over $500 billion of this

amount is at DTC, The costs associated

with this activity increased D'I'C's costs

by almost $30 million of the $32 million

increase in all depository expenses.

Clearing corporation cost increases

were attributable to OCe's expenses of

processing the large increases in nonequity option contracts. The aggregate

104

clearing corporation expense increase

was almost $4.5 million with OCe's increase being over $4.5 million. Their

largest increases occurred in employee

costs and data processing. The Pacific

Clearing Corporation ("PCC") and the

Pacific Securities Depository Trust

Company ("PSDTC") incurred several

losses in 1984. First, they had operational losses of $678,000 and $46,000,

respectively. These losses would have

been substantially greater had their

parent firm, the Pacific Stock Exchange, not forgiven their allocated administrative and financial costs of

$802,000 and $2.2 million respectively.

Also, PCCrecorded an additional loss of

$359,000 as the result of a participant's

inability to settle its securities trades.

Further, to reduce duplication of expense, PCC and PSDTC consolidated

their operations in San Francisco, at additional costs of $358,000 and

$795,000, respectively.

Combined clearing and depository

net worth increased 8% to almost $25

million. In case of participant default,

the net worth (or shareholders' equity)

and participants' (or clearing) funds provide financial protection to the

depositories and clearing agencies. The

depository and equity-clearing agencies' participants' funds remained unchanged at $214 million and $208

million, respectively.

OCe's participants' fund declined

from $211 million to $153 million at the

end of 1984. OCC determined that recent increases in trading volume did not

necessitate a proportionate increase in

their participants' fund, so members'

contribution requirements were reduced. OCC also reduced the minimum

clearing fund requirement for non.

equity options to reflect OCe's reevaluation of the risks associated with

this activity. In addition to the participants' fund, OCC had shareholders'

equity of $3.3 million and $7,600

million in margin deposits at the end of

1984, providing further financial protection.
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106
Table 11

MUNICIPAL SECURITIES RULEMAKING BOARD

STATEMENTS OF REVENUES AND EXPENSES AND

CHANGE IN FUND BALANCE

for the years ended September 30, 1984 and 1983

1984 1983

Revenues

Assessment fees 830,534 s 943,938

Annual fees 220,125 197,400

lrutral fees 29,800 24,200

Investment Income 113,950 133,521

Board manuals and other 30,716 21,201

1,225,125 1,320,260

Expenses

Salaries and employee benetits 556,151 570,566

Board and commutes 377,914 337,300

Operations 178,690 182199

Education and communication 228,057 212,930

Professional services 61,603 15,803

Depreciation and amortization 23,292

1,425,707 1,318,798

Revenues over (under) expenses (200,582) 1,462

Fund balance, beginning year 1,412,449 1,410,987

Fund balance, end of year $1,211,867 $1,412,449

107
EXEMPTIONS

Section 12(h) Exemptions

Section 12(h) of the Exchange Act

authorizes the Commission to grant a

complete or partial exemption from

the registration provisions of Section

12(g) or from other disclosure and insider trading provisions of the Act

where such exemption is consistent

with the public interest and the protection of investors.

For the year beginning October 1,

1984 9 applications were pending, and

an additional 13 applications were filed

during the year. Of these 22 applications, 14 were granted. and 3 were

withdrawn. Four applications were pending at the close of the year.

Exemptions For Foreign

Private Issuers

Rule 12g3-2 provides various exemptions from the registration provisions

of Section 12(g) of the Exchange Act

for the securities of foreign private

issuers. Perhaps the most important of

these is that contained in subparagraph

(b) which provides an exemption for

certain foreign issuers which submit,

on a current basis, the material

specified in the rule. Such material includes that information about which investors ought reasonably to be informed and which the issuer: (1) has made

public pursuant to the law of the country of domicile or in which it is incor108

porated or organized; (2) has filed with

a foreign stock exchange on which its

securities are traded and which was

made public by such exchange; and or

(3) has distributed to its security

holders. Periodically, the Commission

publishes a list of those foreign issuers

which appear to be current under the

exemptive provision. The most current

list is as of July 31, 1985 and contains

a total of 559 foreign issuers.

Rule 10b.6 Exemptions

Exchange Act Rule 10b-6 is an antimanipulative rule that prohibits

trading in securities by persons interested in a distribution of such

securities. During the fiscal year, the

Commission granted 25 exemptions

pursuant to paragraph (h) of Rule 10b-6

under circumstances indicating that

proposed purchase transactions did

not appear to constitute manipulative

or deceptive devices or contrivances

comprehended within the purposes of

the rule.

FINANCIAL INSTITUTIONS

There were 2,583 companies registered

under the Investment Company Act of

1940 as of September 30, 1985. New

registrations totaled 299, with 47 registrations terminated during the fiscal year.This

compares with 1984 fiscal year figures of

2,331 total registrations, 256 new registrations and 54 terminations.
Table 12

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY

ACT OF 1940 AS OF SEPTEMBER 30, 1985

Number of Registered Companies

Management open-end ("Mutual Funds")

Active

1,735

Inactlvea

56

Total

1,791

Approximate

Market Value

of Assets of

Active

Companies

(Millions)

437,000

Management closed-end

Small Busmess Investment companies

All other closed-end companies

Unit Investment trust

Face-amount certificate companies

177

541

57 234

24 565

9

10,000

76,000

2,000

Total 2,458 141 2,599 525,000

a Inactive refers to registered companies which as of September 30,1985, were In the processof being liquidated or

merged, or have filed an application pursuant to Section 8(f) of the Act for dereqrstratron, or which have otherwise

gone out of existence and remain only until such time as the Commission Issues an order under Section 8(1) terrrunatrnq their reqrstration

b Assets of Investment companies were calculated usrnq vanous published sources as well as staff estimates

109
Table 13

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY

ACT OF 1940

Approximate

market value

of assets

Registered Registered Registration Registered of active

Fiscal year ended at beginning dUring terminated at end of companies

September 30 of year year durrng year year (millions)

1941 0 450 14 436 $ 2,500

1942 436 17 46 407 2,41)0

1943 407 14 31 390 2,300

1944 390 18 27 371 2,200

1945 371 14 19 366 3,250

1946 366 13 18 361 3,750

1947 361 12 21 352 3,600

1948 352 18 11 359 3,825

1949 359 12 13 358 3,700

1950 358 26 18 366 4,700

1951 366 12 10 368 5,600

1952 368 13 14 367 6,800

1953 367 17 15 369 7,000

1954 369 20 5 384 8,700

1955 384 37 34 387 12,000

1956 387 46 34 399 14,000

1957 399 49 16 432 15,000

1958 432 42 21 453 17,000

1959 453 70 11 512 20,000

1960 512 67 9 570 23,500

1961 570 118 25 663 29,000

1962 663 97 33 727 27,300

1963 727 48 48 727 36,000

1964 727 52 48 731 41,600

1965 731 50 54 727 44,600

1966 727 78 30 775 49,800

1967 755 108 41 842 58,197

1968 842 167 42 967 69,732

1969 967 222 22 1,167 72,465

1970 1,167 187 26 1,328 56,337

1971 1,328 121 98 1,351 78,109

1972 1,351 91 108 1,334 80,816

1973 1,334 91 64 1,361 73,149

1974 1,361 106 90 1,377 62,287

1975 1,377 88 66 1,399 74,192

1976 1,399 63 86 1,376 80,564

1977" 1,403 91 57 1,437 76,904

1978 1,437 98 64 1,471 93,921

1979 1,471 83 47 1,507 108,572

1980 1,507 136 52 1,591 155,981

1981 1,591 172 80 1,683 193,362

1982 1,683 305 45 1,944 281,644

1983 1,944 287 50 2,181 330,458

1984 2,181 256 54 2,331 250,321

1985 2,331 299 47 2,583 525,000

• Began Fiscal Year Ending September 30, 1977

110
Table 14

NEW INVESTMENT COMPANY REGISTRATIONS

Management open-end

Management closed-end

SHIC's

All others

Sub-total

Umt Investment trust

Face amount certificates

Total Registered

Table 15

INVESTMENT COMPANY REGISTRATIONS TERMINATED

Management open-end

Management closed-end

SBIC's

All others

Sub-total

Unit mvestment trust

Face amount certrticates

Total term mated

1985

242

I

15

16

41

o

299

1985

37

o

5

5

5

o

47

111
SECURITIES ON EXCHANGES

Market Value and Share

Volume

The total market value of all equity

securities transactions on registered

exchanges totaled $993 billion in

1984. Of this total, $959 billion, or 97

percent, represented the market value

of transactions in stocks and $34

billion, or almost all of the remaining

three percent, the market value of options transactions. The value of equity

transactions on the New York Stock

Exchange was $823 billion, up one percent from the previous year. The

market value of such transactions

dropped 35 percent to $30 billion on

the American Stock Exchange and

declined nine percent to $141 billion

112

on all regional exchanges combined.

The volume of trading in stocks on all

registered exchanges totaled 30 billion

shares in 1984, a one percent increase

over the previous year, with 83 percent

of the total accounted for by trading on

the New York Stock Exchange.

The number of contracts traded on

options exchanges declined 11 percent

during 1984 to 119 million contracts

and the market value of such contracts

decreased 43 percent to $34 billion.

The volume of contracts executed on

the Chicago Board Options Exchange

decreased 17 percent to 59 million;

trading on the American Stock Ex.

change went down eight percent;

Philadelphia Stock Exchange contract

volume decreased three percent; and

Pacific Stock Exchange contract

volume went up two percent.
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113
NASDAQ (Volume and Market

Value)

NASDAQ share volume and market

value information for over-the-counter

trading has been reported on a daily

basis since November I, 1971_At the

end of 1984, there were 4,723 issues in

the NASDAQ system, an increase of six

percent during the year. Volume for

1984 was 15 billion shares, down four

percent from the 16 billion shares traded in the previous year. It was the second highest volume in NASDAQ's

14-year history. This trading volume

encompasses the number of shares

bought and sold by market-makers

plus their net inventory changes. The

market value of shares traded in the

NASDAQ system was $207 billion at

the end of 1984.

114

Share and DoIlar Volume by

Exchange

Share volume in 1984 for stocks,

rights, and warrants on exchanges

totaled 31 billion, an increase of three

percent from the previous year. The

New York Stock Exchange accounted

for 83 percent of the 1984 share

volume; the American Stock Exchange, five percent; the Midwest

Stock Exchange, SIX percent; and the

Pacific Stock Exchange, three percent.

The market value of stocks, rights,

and warrants traded was $960 billion,

slightly higher over the previous year.

Trading on the New York Stock Exchange contributed 86 pecent of the

total. The American Stock Exchange

accounted for two percent of dollar

volume. The Midwest Stock Exchange

and Pacific Stock Exchange obtained

SIX percent and three percent, respectively.
Market Value Of Securities Traded On

All U.S. Stock Exchanges

Dollars Billions

750

700

650

600

550

500

450

400

350

300

250

B

Stocks, Rights

& Warrants

Options

9583 959.6

r::8

200

150

1974 75 76 77

115
Table 17

SHARE VOLUME BY EXCHANGES'

In Percentage

Total Share Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX SSE CSE Other'

1935 681,971 7313 12.42 191 269 110 096 003 7.76

1940 377,897 7544 1320 211 278 133 119 008 387

1945 769,018 6587 2131 177 298 106 0.66 005 6.30

1950 893,320 7632 1354 216 311 097 065 009 316

1955 1,321,401 68 85 1919 209 308 085 048 005 541

1960 1,441,120 6847 2227 220 311 0.88 038 0.04 265

1961 2,142,523 6499 2558 2.22 341 079 030 004 267

1962 1,711,945 7131 2011 2.34 295 087 0.31 004 207

1963 1,880,793 7293 1883 2.32 282 083 029 0.04 194

1964 2,118,326 7281 1942 243 265 093 029 003 144

1965 2,671,012 6990 2253 263 233 081 026 005 149

1966 3,313,899 6938 2284 256 268 086 040 005 1.23

1967 4,646,553 6440 2841 235 246 087 043 002 106

1968 5,407,923 6198 2974 263 2.64 089 078 001 1.33

1969 5,134,856 6316 2761 284 347 122 051 000 119

1970 4,834,887 7128 1903 316 368 163 051 002 069

1971 6,172,668 7134 1842 352 372 191 043 003 0.63

1972 6,518,132 7047 1822 371 413 221 059 003 0.64

1973 5,899,678 7492 1375 409 368 219 071 004 062

1974 4,950,833 7847 1027 439 348 182 066 004 067

1975 6,381,669 8092 896 405 325 154 084 013 031

1976 7,125,201 8003 935 387 393 141 078 044 019

1977 7,134,946 7954 973 395 371 149 066 064 028

1978 9,564,663 8008 1075 358 314 149 060 0.15 021

1979 10,977,775 7978 1082 329 338 164 0.54 027 028

1980 15,584,209 7995 1079 383 280 151 0.56 032 024

1981 15,969,398 8068 932 460 287 155 051 037 010

1982 22,500,576 8119 696 508 362 2.18 0.48 042 008

1983r 30,316,014 8037 745 548 356 220 0.65 019 010

1984 30,547,814 82.54 526 603 331 179 085 018 004

'Share volume for exchanges Includes stocks, rights, and warrants Source SEC Form R.31

'Other Includes all exchanges not listed above r=revlsed

Table 18

DOLLAR VOLUME BY EXCHANGES'

In Percentage

Total Dollar Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX SSE CSE Other'

1935 $ 15,396,139 8664 7.83 132 139 088 134 004 056

1940 8,419,772 8517 768 207 152 111 191 009 045

1945 16,284,552 8275 1081 200 178 096 116 006 048

1950 21,808,284 8591 685 235 219 103 112 011 044

1955 38,039,107 8631 698 244 190 1.03 078 009 047

1960. 45,309,825 8380 935 272 194 103 060 007 049

1961 64,071,623 8243 10.71 275 199 103 049 007 053

1962 54,855,293 8632 681 275 200 1.05 046 007 054

1963 64,437,900 8519 751 272 239 106 041 006 066

1964 72,461,584 8349 845 315 248 114 042 006 081

1965 89,549,093 8178 991 344 243 112 042 008 082

1966 123,697,737 7977 1184 314 284 1.10 0.56 007 068

1967 162,189,211 7729 14.48 308 279 113 066 003 054

1968 197,116,387 7355 1799 312 265 113 104 001 051

1969 176,389,759 7348 17 59 339 312 143 067 001 031

1970 131,707,946 7844 1111 376 381 199 067 003 019

1971 186,375,130 7907 998 400 379 229 058 005 024

1972 205,956,263 7777 1037 429 394 256 075 0.05 027

1973 178,863,622 82.07 606 454 355 245 100 006 027

1974 118,828,272 83.62 439 489 350 202 123 006 029

1975 157,555,469 8504 366 482 3.25 172 118 017 016

1976 195,224,815 8435 387 4.75 382 168 093 053 007

1977 187,393,082 8396 460 479 353 162 073 074 003

1978 249,603,319 8435 617 4.19 2.84 183 061 017 004

1979 300,728,389 8365 693 382 285 180 056 035 004

1980 476,416,379 83.54 732 4.32 227 159 051 040 0.05

1981 491,017,044 8474 5.41 504 232 160 050 040 0.00

1982 603,361,387 85.28 3.27 583 305 159 0.51 047 0.00

1983r 958,304,188 85.13 332 628 286 155 066 016 004

1984 . 959,646,874 85.76 224 649 291 156 0.84 0.19 001

'Dollar volume for exchanges Includes stocks, rights and warrants Source SEC Form R.31

'Other Includes all exchanges not listed above r= revised

116
Special Block Distribution

In 1984, there were 23 special block

distributions with a value of $681 million.

Secondary distributions accounted for all

of these special block distributions.

Table 19

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value onThousands)

Secondary tnstnbunons Exchange Drstnbutrons Special Offerings

YEAR

Number Shares Value No Shares Value No Shares Value

sold sold sold

1942 116 2,397,454 $ 82,840 0 0 0 79 812,390 $22,694

1943 81 4,270,580 127,462 0 0 0 80 1,097,336 31,054

1944 .. 94 4,097,298 135,760 0 0 0 87 1,053,667 32,454

1945 115 9,457,358 191,961 0 0 0 79 947,231 29,878

1946 100 6,481,291 232,398 0 0 0 23 306,134 11,002

1947 73 3,961,572 124,671 0 0 0 24 314,270 9,133

1948 95 7,302,420 175,991 0 0 0 21 236,879 5,466

1949 86 3,737,249 104,062 0 0 0 32 500,211 10,956

1950 77 4,280,681 88,743 0 0 0 20 150,308 4,940

1951 88 5,193,756 146,459 0 0 0 27 323,013 10,751

1952 76 4,223,256 149,117 0 0 0 22 357,897 9,931

1953 68 6,906,017 108,229 0 0 0 17 360,680 10,488

1954 84 5,736,359 218,490 57 705,781 $ 24,664 14 189,772 6,670

1955 116 6,756,767 344,871 19 256,348 10,211 9 161,850 7,223

1956 146 11,696,174 520,966 17 156,481 4,645 8 131,755 4,557

1957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,845

1956 122 9,508,505 361,886 38 619,876 29,454 5 88,152 3,286

1959 148 17,330,941 822,336 28 545,036 26,491 3 33,500 3,730

1960 92 11,439,065 424,688 20 441,644 11,108 3 63,663 5,439

1961 130 19,910,013 926,514 33 1,127,266 56,072 2 35,000 1,504

1962 59 12,143,656 656,780 41 2,345,076 65,459 2 48,200 588

1963 100 18,937,935 814,984 72 2,892,233 107,498 0 0 0

1964 110 19,462,343 909,821 68 2,553,237 97,711 0 0 0

1965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 0

1966 126 29,045,038 1,~23,373 52 3,042,599 118,349 0 0 0

1967 143 30,783,604 1,154,479 51 3,452,856 125,404 0 0 0

1968 174 36,110,489 1,571,600 35 2,669,936 93,528 1 3,352 63

1969 142 36,224,799 1,244,186 32 1,706,572 52,198 0 0 0

1970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,666 30,156 0 0 0

1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662,111 79,889

1974 45 7,512,200 133,836 4 82,200 6,836 33 1,921,755 16,805

1975 51 34,149,069 1,409,933 14 483,846 8,300 14 1,252,925 11,521

1976 44 20,568,432 517,546 16 752,600 13,919 22 1,475,842 18,459

1977 39 9,848,986 261,257 6 295,264 5,242 18 1,074,290 14,519

1978 37 15,233,141 569,487 3 79,000 1,429 3 130,675 1,820

1979 37 10,803,680 192,256 3 1,647,600 86,066 6 368,587 4,708

1980 44 24,979,045 813,542 2 177,900 5,101 4 434,440 7,097

1981 43 16,079,897 449,600 0 0 0 0 0 0

1982 76 40,024,988 1,284,492 0 0 0 3 717,000 11,112

1983 85 70,600,731 2,245,465 0 0 0 0 0 0

1984 23 21,180,207 680,543 0 0 0 0 0 0

Source NYSE and AMEX

117
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds

listed on U.S. exchanges at the end of

1984 was $2.6 trillion, an increase of four

percent over the previous year. The

market value of stocks was $1.6 trillion,

a decrease of one percent during the

year. The value of listed bonds increased

14 percent. Stocks with primary listing

on the New York Stock Exchange had a

market value of $1.5 trillion and

represented 96 percent of the value of

common and preferred stocks listed on

registered exchanges. Those listed on

the American Stock Exchange accounted for almost all of the remaining

four percent of the total and were valued

at $52 billion, a decrease of 35 percent

over the previous year.

Table 20

SECURITIES LISTED ON EXCHANGES'

December 31,1984

EXCHANGES COMMON PREFERRED BONDS TOTAL SECURITIES

Market Market Market Market

Value Value Value Value

Registered Number (Million) Number (Million) Number (Million) Number (Million)

American 763 $ 49,793 108 $ 2,209 284 $ 9,522 1,155 $ 61,524

Boston 87 1,423 0 0 2 10 89 1,433

Cincinnati 5 113 3 11 6 43 14 167

Midwest 15 341 6 19 0 0 21 360

New York 1,458 1,484,090 803 45,368 3,637 1,012,485 5,898 2,541,943

Pacrfrc 51 1,400 28 988 79 2,689 158 5,077

Philadelphia 19 400 21 1,026 35 872 75 2,298

Intermountain 28 60 0 0 0 0 28 60

Spokane 26 9 0 0 0 0 26 9

Total 2,452 $1,537,629 969 $49,621 4,043 $1,025,621 7,464 $2,612,871

Includes Foreign

Stocks

New York 53 $ 56,522 5 $ 117 114 $ 9,306 172 $ 65,945

American 50 17,338 3 119 6 124 59 17,581

Pacrtic 3 52 0 0 1 20 4 72

Total 106 $ 73,912 8 $ 236 121 $ 9,450 235 $ 83,598

'Excludrnq securities which were suspended from trading at the end of the year, and secunnes which because of

inactivity had no available quotes

Source SEC Form 1392

118
Table 21

VALUE OF STOCKS LISTED ON EXCHANGES

(B.1l10ns of Dollars)

New York Amencan Exclusively

Dec 31 Stock Stock On Other Total

Exchange Exchange Exchanges

1936 $ 599 $ 148 $ 747

1937 389 102 491

1938 475 108 583

1939 465 101 566

1940 419 86 505

1941 358 74 432

1942 388 78 466

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 670 119 $30 819

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405

1953 1173 153 28 1354

1954 1691 221 36 1948

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 4417

1964 4743 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 612 60 7595

1969 6295 477 54 6826

1970 6364 395 46 6807

1971 7418 491 47 7956

1972 8715 556 56 9327

1973 7210 387 41 7638

1974 5111 233 29 5373

1975 6851 293 43 7187

1976 8583 360 42 8985

1977 7767 376 42 8185

1978 8227 392 29 8648

1979 9606 578 39 1,0223

1980 1,2428 1035 29 1,3492

1981 1,1438 894 50 1,2382

1982 1,3054 776 68 1,3897

1983 15222 801 66 1,6088

1984 1,5295 520 58 1,5873

Source SEC Form 1392

119
Securities on Exchanges

As of September 30, 1985, a total of

7,570 securities, representmg 2,995

issuers, were admitted to trading on

securities exchanges in the United States.

This compares with 7,270 issues, involving 3,064 issuers a year earlier. Over

5,000 issueswere listed and registered on

the New York Stock Exchange, accounting for 62.6 percent of the stock issues

and 86.9 percent of the bond issues.Data

below on "Securities Traded on Exchanges" involved some duplication since

it includes both solely and dually listed

securities.

Table 22

SECURITIES TRADED ON EXCHANGES

Issuers Stocks Bonds!

Temporarily

Registered exempted Unlisted Total

American 902 993 21 1,014 300

Boston 1,205 159 1,103 1,262 10

Chicago Board of Trade 4 1 6 7 45

cmcmnan 1,111 34 1,102 1,136

Intermountain 43 54 3 57

Midwest 1,418 318 1,204 1,522 27

New York 1,868 2,441 2 2,443 3,198

Pacific Coast 846 761 266 1,027 161

Philadelphia 926 255 802 1,057 105

Spokane 38 36 3 39 3

'Issuers exempted under Section 3(a)(12) of the Act, such as obligations of U S Government, the states, and Cities,

are not Included In thrs table

Table 23

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(September 30, 1985)

Issuers

Stocks Bonds Total Involved

Registered and Listed 3,887 3,678 7,565 2,995

Temporarily Exempted from Registration 2 2 2

Admitted to Unlisted Trading PriVilege 11 5 16 2

Total 3,900 3,683 7,583 2,999

Certificate Immobilization

The securities industry continued to

immobilize certificates during 1984. For

example, the number of certificates

withdrawn from Depository Trust Company (DTC) declined almost 26% from

13.6 million to 10,1 million. In addition,

book-entry deliveries of securities

decreased 4% from 50 million to 48

120

million transactions at DTC, despite an

8% decline in total trading transactions

reported by the Consolidated Tape

Association. As a result, the ratio of

book-entry deliveries to total certificates

withdrawn increased to 4.8 deliveries per

certificate from 3.7 in 1983 and 1.8 in

1980.
Table 24

IMMOBILIZATION TRENDS

1984 1983 1982 1981 1980

Book-entry Dehvenes at DTC

(In thousands) 43000 50,000 37,000 35,000 28,000

Total Certificates Withdrawn

from OTC (In thousands) 10100 13,600 12,500 14,400 15,800

Book-entry Dehvenes per

Certificates Withdrawn 48 37 30 24 18

1933 ACT REGISTRATIONS

Effective Registration

Statements

During the fiscal year ending

September 30, 1985, 4,805 reqistration

statements valued at $285 billion

became effective. This represents a

decrease in registrations of 282

statements; however, total dollar valued

increased by $75 billion.

Among issuers whose registration

statements became effective, there were

1,143 first-time registrants in fiscal year

1985, a decrease of 618 registrants (35

percent) from previous fiscal year's total

of 1,761.

121
Table 25

EFFECTIVE REGISTRATIONS

(Millions of Dollars)

------------- --------

Cash Sale for Account of Issuers

Total

---------- Bonds,

Fiscal Year Number of Common Debentures Preferred

Statements Value Stock' and Notes Stock Total

------ ---------------

Fiscal Year ended June 30

1935 284 $ 913 $ 168 490 28 $ 686

1936 689 4835 531 3,153 252 3,936

1937 840 4851 802 2,426 406 3,634

1938 412 2101 474 666 209 1,349

1939 344 2579 318 1,593 109 2020

1940 306 1,787 210 1112 110 1,432

1941 313 2,611 196 1,721 164 2,081

1942 193 2,003 263 1,041 162 1,466

1943 123 659 137 316 32 485

1944 221 1760 272 732 343 1,347

1945 340 3,225 456 1,851 407 2,714

1946 661 7,073 1,331 3,102 991 5,424

1947 493 6,732 1,150 2,937 787 4,874

1948 435 6,405 1,678 2,817 537 5,032

1949 429 5333 1,083 2.795 326 4,204

1950 487 5,307 1,786 2,127 468 4,381

1951 487 6,459 1,904 2,838 427 5,169

1952 635 9500 3,332 3,346 851 7,529

1953 593 7,507 2,808 3093 424 6,325

1954 631 9174 2,610 4240 531 7,381

1955 779 10960 3,864 3,951 462 8,277

1956 906 13096 4544 4,123 539 9,206

1957 876 14624 5,858 5,689 472 12,019

1958 813 16490 5998 6,857 427 13,282

1959 1070 15,657 6,387 5,265 443 12,095

1960 1,426 14367 7260 4,224 253 11,737

1961 1,550 19070 9,850 6162 248 16,260

1962 1844 19,547 11,521 4,512 253 16,286

1963 1 157 14790 7,227 4372 270 11,869

1964 1 121 16,860 10,006 4,554 224 14,784

1965 1,266 19437 10,638 3,710 307 14,655

1966 1523 30109 18,218 7,061 444 25,723

1967 1,649 34,218 15,083 12,309 558 27950

1968 2,417 54,076 22092 14,036 1,140 37,268

1969 3,645 86,810 39614 11,674 751 52,039

1970 3,389 59137 28,939 18436 823 48198

1971 2989 69562 27,455 27,637 3,360 58452

1972 3,712 62,487 26,518 20,127 3,237 49,882

1973 3,285 59,310 26,615 14,841 2,578 44,034

1974 2,890 56,924 19,811 20,997 2,274 43,082

1975 2,780 77,457 30502 37,557 2,201 70,260

1976 2813 87733 37,115 29,373 3,013 69,501

Transinon Quarter

July Sept 1976 639 15,010 6767 5,066 413 12,246

Fiscal Year ended

September 30

1977 2,915 92,579 47116 28026 2,426 77,568

1978' 3,037 65,043 25,330 23,251 2,128 50,709

1979 3,112 77 400 22,714 28,894 1,712 53,320

1980 3402 110,583 33,076 42,764 2,879 78,719

1981 4,326 144123 49,276 40,163 2,505 91,944

1982 4846 164455 50486 63,950 3,939 118,375

1983 5,503 240,058 77,403 80,718 9,339 167,460

1984 R 5087 209,866 66,571 74,136 4,984 145,691

1985 P 4,805 284583 70,044 114,062 6,737 190,843

Cumulative Total 90,488 $2,347236 $845,407 $810,893 $68,903 $1,725,203

R = Revrsed

P = Preliminary

'Includes warrants. shares of beneficial Interest, certificates of participation and all other equity Interests not

elsewhere Included

For 10 months ended June 30, 1935

'The adoption of Rule 241.2 (17 CFR 270 24f 2) effective November 3 1977 made It Impossible to report the dollar value

of secunties registered by Investment companies

Note The Total Cash Sale differs from earlier presentations due to changes In rounding procedures

Source 1933 Act RegistratIOn Statements

122
Securities Effectively Registered With S.E.C.

1935-1985

300

p

250

:r ::

200

BILLIONS OF OOLLARS

150

100

50

1935 40 45 50 55 60 65 7D 75

::::::::::::::::::

..................

........... ..

..................

. .

......... .

::0::::'::::::::::

..................

1!lili!lil!lli!l:i ................

IIIiIijI!!~I:!ij iI

80 1985

(Fiscal Years)

,;" '; In 1977 Fiscal Year End Changed From June To September

Data For Transition Quarter Julv-Septernber 1976 Not Shown On Charts

Number Of Registrations 639

1/ Does Not Include Investment Companies As Of 1/1/78 Due To Rule Change

r= Revised

p=Prelimlnary

123
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Purpose and Type of

Registration

Effective registrations for cash sale for

the account of issuers in fiscal year 1985

amounted to $191 billion, a 31 percent

increase from $146 billion registered a

year ago. Some $60 billion (31 percent)

was intended for immediate cash, an increase of $21 billion (54 percent) from

fiscal year 1984. Nearly all of this

amount consisted of securities registered

by business to be offered to the general

public. Such registrations totalled $59

billion, an increase of $21 billion (55 percent).

Of this $60 billion, debt securities accounted for $30 brllion (50 percent),

common stock and other equity accounted for $26 billion (43 percent) and

preferred stock $5 billion (eight percent).

Cash right offerings (offerings to security

holders) came to $523 million, a

decrease of $37 million (seven percent)

of such offerings from the previous fiscal

year. Immediate cash offerings by

foreign governments in fiscal year 1985

totalled $600 million, an increase of

$351 million (141 percent) from 1984.

Delayed and extended cash sales

registered for the account of the Issuer

totalled $131 billion (46 percent of all

registrations). Registrations pursuant to

Rule 415, (or so-called "shelf registrations") amounted to $96 billion, or 73

percent of this amount. Securities

registered for the account of Issuers

other than cash sale (in conjunction with

exchange offers for example) amounted

to $85 billion for fiscal year 1985 (30 percent of all registrations). Registrations of

secuntres for secondary offerings (for the

account of security holders rather than

issuers) amounted to $9 billion (three

percent) In fiscal year 1985. Of these latter registrations $3 billion (33 percent)

were for cash sale and $6 billIon (67 percent) were other secondary offerings.

The value of registrations aggregating

$285 billion in fiscal year 1985 consisted

of $121 billion in bonds, debentures and

notes, $13 billion In preferred stock and

$150 billion in common stock and other

equity. Of the $121 billion of debt

securities registered, $30 billion (25 percent) were registered for immediate cash

sale to the general public for the account

of the issuer. Delayed and extended cash

sales accounted for $84 brllion (69 percent). Fifty percent of $13 billion in

preferred stock registrations consisted of

immediate cash offerings, while delayed

and extended registrations for cash sale

for the account of Issuer comprised 16

percent of the total. The $150 billion

volume for common stock and other

equity consisted of $26 billion in Immediate cash, $44 billion in delayed or

extended cash sale, $72 bilhon of noncash registrations for the account of the

issuer and $7 billion of secondary offerings.

125
Table 26A

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL YEAR 1985P

(Millions of Dollars)

Type of Secunty

Bonds.

Debentures Preferred

Total and Notes Stock

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

$284.583 $121.359 $13.473

190.843 114.062 6737

60.264 29.986 4.541

59.664 29.386 4.541

Purpose of RegistratIOns

All reqrstranons (estimated value)

For account of Issuer tor cash sale

Immediate offenng

Corporate

Offered to

General Public

Secunty Holders

Foreign Governments

Delayed and extended cash sale and other Issues

Corporate Delayed ("Shelves")

Other

For account of Issuer for other than cash sale

Secondary Offenngs

Cash Sale

Other

59.141

523

600

130.579

95683

34.896

84.723

9.017

3.451

5.566

29.383

3

600

84.076

84034

42

5,717

1.580

240

1.340

4.535

6

o

2196

2195

1

6661

75

3

72

Common

Stock and

Other

EqUity'

$149.751

70.044

25.737

25.737

25.223

514

o

44.307

9454

34853

72.345

7.362

3.208

4.154

'Includes warrants. shares of benetrcial interest, certificates of participation and all other equity Interests not

elsewhere Included

P:;;;Preliminary

Source 1933 Act Registration Statements

Table 268

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL YEAR 1984R

(Millions of Dollars)

Type of Secunty

Purpose of Registrations Common

Bonds Stock and

Debentures Preferred Other

Total and Notes Stock Equrty'

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

All registrations (estimated value) $209.866 $78.229 $8618 $123019

For account of Issuer for cash sale 145.691 74.136 4.984 66571

Immediate offenng 38.946 17.169 3.047 18730

Corporate 38.697 16.920 3.047 18,730

Offered to

General Public 38.137 16908 3038 18.191

Secunty Holders 560 12 9 539

Forerqn Governments 249 249 0 0

Delayed and extended cash sale and other Issues 106745 56.967 1937 47.841

Corporate Delayed ("Shelves") 69027 56.823 1937 10.267

Other 37.718 144 0 37.574

For account of Issuer for other than cash sale 58.725 3,778 3313 51.634

Secondary Offenngs 5.450 315 321 4.814

Cash Sale 2.145 0 25 2.120

Other 3.305 315 296 2694

'Includes warrants, shares of benefrctal Interest certrncates of partrcrpatron and all other equity Interests not

elsewhere Included

R = Revised

Source 1933 Act Registration Statements

126
Dollars Billions

.ov--

Effective Registrations

Cash Sale For Account Of Issuers

1935 • 1985

p ''J

110

90

80

70

60

,

,

:\ p

i .....

.... r

....................

o

1935 40 45 50 55 60 65 70 75 * 80 1985

(Fiscal Years) *

In 1977 Fiscal Year End Changed from June to September

Data for Transition Quarter July-September 1976 Not Shown on Chart

Bonds $5 1 Billion, Preferred Stock $ 4 Billion, Common Stock $6 B Billion

r = Revised

p = Prellmmary

10 -------~

50

20

30

40

127
Regulation A Offerings

During the first eleven months of fiscal

year 1985, 87 offering statements for pro.

posed offerings under Regulation A were

processed and cleared.

Table 27

OFFERINGS UNDER REGULATION A (CLEARED)

Fiscal

1985 Fiscal FIscal

(Thru August) 1984 1983

Size

$500,000 or Less 36 40 58

500,001.$1,000,000 23 24 30

1,000,001.$1,500,000 28 42 41

Total 87 106 129

Underwnters

Used 14 37 67

Not Used 73 69 62

Total 87 106 129

Offerors

IssUIng Companies 87 106 129

Stockholders 0 0 0

Issuers and Stockholders

JOintly 0 0 0

Total 87 106 129

FIscal

1982

82

55

83

220

129

91

220

220

o

o

220

ENFORCEMENT

Types of Proceedings

As the table reflects, the securities laws

provide for a wide range of enforcement

actions by the Commission. The most

common types of actions are injunctive

proceedings instituted in the Federal

district courts to enjoin continued or

128

threatened secunties law violators, and

administrative proceedings pertaining to

broker-dealer firms and/or individuals

associated with such firms which may

lead to various remedial sanctions as reo

quired in the public interest. When an in.

Junction is entered by a court, violation of

the court's decree is a basis for civil or

criminal contempt against the violator.
Table 28

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Brcker-dealer, municipal securities

dealer, Investment adviser or associated person

Willful violation of secunnes laws or rules, aiding or abetting

such violation, failure reasonably to supervise others. willful

misstatement or orrnssion 10 filing with the Commission convrcnon of or Injunction against certain cnmes or conduct

Registered secuntres association

Sanction

censure or limitation on acnvmes, revocation, suspension or denial of registration, bar or suspension from association {1934

Act, 99 158{cX2)-(6), 15(bX4)-(6), Advisers Act, 9 200(e)- (m

Violation of or Inability to comply with the 1934 Act, rules there- Suspension or revocation of registration, censure or hmrtatron of

under, or ItS own rules, unjustllied failure to enforce compliance acnvmss, functions, or operations (1934 Act, 9 19(hX1))

with the foregOing or with rules of the MUniCipal Secunltes

Rulemaklng Board by a member or person associated With a

member

Member of registered securities

assocratsen, or associated person

Entry of Commission order against person pursuant to 1934 Act, Suspension or expulsion from the associanon, bar or suspsn

9 15(b), Willful Violation of securmes laws or rules thereunder or sion from association With member of association (1934 Act, 9

rules of MUnicipal Securities Rulemaklng Board, effecting trans. 19(hX2H3))

action for other person With reason to believe that person was

committing Violations of securrties laws

National securities exchenge

Violation of or inability to comply With 1934 Act, rules thereunder Suspension or revocation of registration, censure or limitation of

or ItS own rules, unjustified failure to enforce compliance With acuvmes, functions, or operations (1934 Act, 9 19(hX1))

the foregOing by a member or person associated With a member

Member of national securities

exchange, or associated person

Entry of Commission order against person pursuant to 1934 Act, Suspension or explusron from exchange, bar or suspension from

S 15(b), Willful Violation of secunnes laws or rules thereunder, association with member (1934 Act, ~ 19(hX2H3})

effecting transaction for other person With reason to believe that

person was committing viotanons of secunties laws

Registered clearing agency

Violation of or inability to comply With 1934 Act, rules thereunder, Suspension or revocation of regIstration, censure or limitation of

or ItS own rules, fatlure to enforce compliance WIth ItS own rules actrvrtres, functions, or operations (1934 Act, 9 19(hX1))

by participants

Participant In registered cleanng egency

Entry of CommISSIOn order against participant pursuant to 1934 Suspension or expulsion from cleannq agency (1934 Act, 9

Act, 9 15(bX4), WIllful viotation of cleanng agency rules, effecling 19(hX2))

transaction for other person With reason to believe that person

was committing Violations of secunties laws

129
Table 28-Contlnued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constituting,

and Basts for, Enforcement Actions

Securities information processor

Vrotatron of or maorhty to comply wIth provrsions of 1934 Act or

rules thereunder

Transfer agent

Sanction

Censure or limitation of activrtres, suspension or revocation of

registration (1934 Act, 9 11A(bX6))

Willful violation of or inability to comply with 1934 Act, 99 17 or Censure or limitation of activities, deruat, suspension, or revoca17A, or rules thereunder lion of registration (1934 Act, 9 17A(cX3))

Any person

Willful violation of 1933 Act, 1934 Act, Investment Company Act

or rules thereunder, aiding or abetting such violation, wIllful

misstatement In filing with Cornrrussion

OffICer or director of self

regulatory organIZation

Temporary or permanent prohibition against serving In certain capacities with registered Investment company (Investment Company Act, 9 9(b)

Willful violation of 1934 Act, rules thereunder, or the orqarnza- Removal from office or censure (1934 Act, 9 19(hX4)

lion's own rules. willful abuse of authority or uruustmed failure to

enforce compliance

Principal of broker-dealer

Engaging In business as a broker-dealer after appointment of

SIPC trustee

1933 Act registration statement

Statement materially Inaccurate or Incomplete

Bar or suspension from being or becoming associated With a

broker-dealer (SIPA, 910(b»)

Stop order refusing to permit or suspending effectiveness (1933

Act, 9 8(d»)

Issuer sUbj8Clto U 12, 13, 14

or 15(<1)of the 1934 Act or

8SSOC18ted person

Failure to comply With such provisions or havmq caused such Order directing compliance or steps effecting compliance (1934

failure by an act of ornrssion that person knew or should have Act, 9 15(cX4)

known would contnbute thereto

Secunties reglstlll8d

pursuant to i12 of the

1934 Act

Noncompliance by Issuer With 1934 Act or rules thereunder

Public Interest requires trading suspension

Registered Investment company

Denial, suspension of effective date, suspension or revocation of

registration, prohibition against trachng In secunnes when

registration suspended or revoked (1934 Act. 9 12(1))

Summary suspension of over-tne-counter or exchange trading

(1934 Act, 9 12(k)

Failure to file Investment Company Act registration statement Suspension or revocation of registration (Investment Company

or required report, filing matenally Incomplete or misleading Act, 9 8(e)

statement or report

Company has not attained $100,000 net worth 90 days after Stop order under 1933 Act. suspension or revocation of reqrstra1933 Act reglstrallon statement became effective non (Investment Company Act, 9 14(a»)

130
Table 28-Continued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constrtutmq,

and Basis for, Enforcement Action

AUomey, accountant, or other

professIonal or expert

sancuon

Lack of requisrte qualrncatrons to represent others, lacking In Permanent or temporary dental of pnvllege of appeanng or

character or mteqnty, unethical or Improper protessronat con- practicmq before the Comrmssion (17 CFR 201.2(eXl))

duct, wIllful viotatron of secunnes laws or rules, or aidIng and

abeUlng such violation

Attorney suspended or disbarred by court, expert's license re- Automanc suspension from appearance or practice before the

voked or suspended, convictron of a felony or of a rrusderneanor Cornrrussion (17 CFR !i 201 2(eX2»

mvolvmq moral turpitude

Permanent mjuncnon against or finding of securities VIolation In Temporary susoension from practicmq, censure, permanent or

Cornrrussron-mstrtuted action, findIng of secuntres viotanon by temporary drsquahftcatron from pracncmq before the CornmrsCornrrussion In adrmrustranve proceedings sion, (17 CFR!i 201.2(eX3»

Member of Municipal Securtlies

Rulemaking Board

Willfu' violation of 1934 Act, rules thereunder, or rules of the Censure or removal from otnce (1934 Act, !i 158(c)(8»

Board, abuse of authonty

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Any person

Persons Subject to, Acts Constrtutmq,

and BasIS for, Enforcement Action

Sanction

Engaging In or about to engage In acts or practices violatmq

secunnes laws, rules or orders thereunder (Includ",g rules of a

regIstered self-regulatory orqaruzanon]

Noncompliance WIth provisions of the law, rule, or regulatIon

under 1933, 1934, or HoldIng Company Act, order ISSUed by

Cornrmssron, rules of a regIstered self.regulatory orqaruzatron,

or undertaking In a registration statement

TradIng whIle In possession of matena! non-public mforrnanon In

a transactton on an exchange or from or through a broker-dealer

(and transaction not part of a public offerIng), or aidIng and abet.

tlng such tradIng

Securtlies Investor Protection

Corporation

truuncnon against acts or practices wtuch constitute or would

constitute vrolatrons (plus other equitable relief under court's

general equity powers) (1933 Act, !i 2O(b), 1934 Act !i 21(d),

HoldIng Company Act, !i 18(0, Investment Company Act,!i 42(e),

AdVIsers Act, !i 209(e), Trust Indenture Act, !i 321)

Wnt of mandamus, mjunction, or order direcnnq compliance

(1933 Act, !i 2O(c), 1934 Act, !i 21(e), Holding Company Act !i

18(g))

MaxImum CIVI' penalty three times profit gaIned or loss avoided

as a result of transactron (1934 Act, !i 21(d)

Refusal to cornrrut funds or act for the protection of customers Order dorectlng discherpe of obhqanons and other appropnate

rehet (SIPA, !i 7(b))

Netional securtlies exchange or

registered securities association

Failure to enforce compliance by members or persons Wnt of mandamus, injunctIon or order directmq such exchange

associateo WIth us members WIth the 1934 Act, rules or orders or assoctanon to enforce cornpnence (1934 Act, !i 21(e»

thereunder, orrules of the exchange or association

Registered cleartng agency

Fauure to enforce compliance by Its partrcipants WIth ItS own Wnt of mandamus, mjuncuon or order dorectlng cleanng agency

rules to enforce compliance (1934 Act, !i 21(e))

131
Table 28-Continued

TYPES OF PROCEEDINGS

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to Acts Constituting,

and Basis for, Enforcement Action

Issuer subject to reporting rqulrements

Failure to file reports required under 9 15(d) of 1934 Act

Registered Investment company

sancnon

Forfeiture of $100 per day (1934 Act, 9 32(b))

Name of company or of security ISSUed by It deceptive or 1015- Injunction against use of name (Investment Company Act, 9

leading 36(d»)

OHlCer, director, member of advtSOlY

board, advtser, deposltor, or underwriter of

,nvestment company

Engage In act or praclice constituting breach of hduciary duty Injunction against acting In certain capacities for Investment

mvolvmq personal misconduct company and other appropnate relief (Investment Company

Act, 9 36(a))

III CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Basis for for Enforcement Action

Any person

Willful Violation of secunues laws or rules thereunder, Willful

misstatement In any document required to be filed by secunties

laws or rules, Willful misstatement In any document required

to be filed by self-regulatory orqarnzanon In connection With

an application for membership or association With member

Persons who engage In

Foreign Corrupt practices

Sanction or Relief

Maximum penalmes $l00,tXXl fine and 5 years irnpnsonrnent,

an exchange may be fined up to $5OO,tXXl,a pubuc-unhtv holdIng company up to $2OO,tXXl (1933 Act, 99 2O(b), 24, 1934 Act,

99 21(d), 32(a), Holding Company Act, 99 18(f}, 29, Trust Indenture Act, 99 321, 325, Investment Company Act, 99 42(e), 49,

Advisers Act, 99 209(e), 217)

Any Issuer (which has secunnes subject to reporting require- Maximum penalty- $l,tXXl,tXXl fine (1934 Act, 9 32(cX1))

ments of the 1934 Act) which Violates 9 3OA(a) of the 1934 Act

Any officer or director of an Issuer, of any stockholder acting on Maximum penalty $10,tXXl fine and 5 years Impnsonment (1934

behalf of such Issuer who Willfully Violates 9 3OA(a) of the 1934 Act, 9 32(cX2))

Act

Any employee, or agent subject to the JUrisdiction of the United Maximum penalty $10,tXXl fine and 5 years Imprisonment (1934

States of an Issuer found to have Violated 9 3OA(a) of the 1934 Act, 9 32(cX3))

Act, who Willfully carned out the act or practice consututmq such

Violation

'Statutory references are as follows "1933 Act", the Securities Act of 1933, "1934 Act", the Securities Exchange Act of 1934,

"Investment Company Act", the Investment Company Act of 1940, "Advisers Act", the Investment Advisers Act of 1940,

"Holding Company Act", the Public Ulility Holding Company Act of 1935, "Trust Indenture Act", the Trust Indenture Act of 1939,

and "SIPA", the secunnes Investor Protection Act of 1970

132
Table 29

NATIONWIDE ENFORCEMENT PROGRAM

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL 1985 IN VARIOUS PROGRAM AREAS

% of Total

Total' Cases

21 (a)

Reports'

Adrnmrstrauve

Proceedings

CIvil

Actions' 1

(Each case initiated has been Included In only one category listed below, even though

many cases Involve multiple allegations and may fall under more than one category)

Program Area In Which

Civil Action, Administrative

Proceeding, or 21(a) Report

Was Initiated

Broker-Dealer Cases

(a) Backoffrce

(b) Fraud against customer

(c) Stock Loan

(d) Other

Total Broker-Dealer Cases

7 (10)

10 (27)

2 (6)

3 (3)

22 (61)

19 (38)

28 (37)

10 (14)

57 (89)

26 (48)

38 (64)

2 (6)

13 (32)

79 (150) 294%

Secunttes Offering Cases

43 (120) 6 (6)

6 (23) 6 (12)

49 (143) 12 (18)

----

22 (62) 17 (21)

2 (2)

3 (3)

25 (65) 19 (23)

120 (177)

122 (179)

15 (24)

1 (2)

1 (1)

17 (2)

8 (8)

3 (5)

3 (6)

(1)

227%

49 (126)

12 (35)

61 (161)

39 (83)

2 (2)

3 (3)

44 (88) 163%

19 (35)

2 (3)

2 (6)

23 (4) 86%

/ ,

\ 39) (40)/ 74%

(23) 26%

6 (17) 22%

(1) 5 (15) 19%

3 (6) 11%

2 (7) 07%

(1) 250 (551)

19 (20) 71%

(1) 269 (571) 100%

2 (2)

4 (11)

1 (1)

1 (5)

6 (17)

17 (18)

12 (32)

(18)

(11)

3 (13)

3 (6)

2 (7)

129 (373)

GRAND TOTALS 146 (391)

(a) Non-regulated Entity

(b) Regulated Entity ,

Total secunnss Offenng Cases

Issuer Ftnenctet Statement

and Reporting Cases

Fraud Against Regulated Enflty

Other Regulated EntIty Cases

Market ManipulatIOn Cases

(a) Issuer Financial Disclosure

(b) Issuer FCPA Violation

(c) Issuer Reporting Other

Total Issuer Frnancral Statement

and Reporting Cases

Corporate Control vioteuons

tnsuier Trading Cases

Delinquent FIlings

Issuer Reporting

Related Party Trensecttons

SUBTOTALS

(a) Investment Advisers

(b) Investment Companies

(c) Transfer Agents

Total Other Regulated Entity Cases

Contempt Proceedings-CIVIl

'The number of defendants, respondents or subjects IS noted parenthetically

'ThIs category Includes injunctive actions, court orders pursuant 10 Section 21(e) of the Exchange Act, and contempt

proceedings

133
Table 30

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1,1984

Opened In nscal year 1985

Total

Closed In fiscal year 1985

Pending as of September 30,1985

During the fiscal year ending

September 3D, 1985, 119 Formal Orders

of Investigation were issued by the Commission upon recommendation of the

Division of Enforcement.

Table 31

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30, 1985

Broker Dealer Proceedings

Investment Adviser, Investment Company and Transfer Agent Proceedings

Stop Order and Regulation A Proceedings

Rule 2(e) Proceedings

Disclosure Proceedings (Section 15(c)(4) of the Exchange Act)

Total Proceedings In fiscal year 1985

Table 32

INJUNCTIVE ACTIONS

737

339

1,076

356

720

76

16

7

11

7

117

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

Fiscal Year Actions Initiated

174

158

166

135

108

103

115

136

151

179

143

Defendents Named

749

722

715

607

511

387

398

418

416

508

385

Trading Suspensions

During fiscal year 1985, the Commission suspended trading in the securities of

6 companies. This compares with 4 in

fiscal year 1984. In most instances, the

trading suspension was ordered because

134

of substantial questions as to the adequacy, accuracy or availability of public

information concerning the company's

financial condition or business operations, or becausetransactions in the company's securities suggested possible

manipulation or other violations.
Foreign Restricted List

The Securities and Exchange Commission maintains and publishes a Foreign

Restricted List which is designed to put

broker-dealers, financial institutions, investors and others on notice of possible

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 been, or are being offered for

public sale in the United States in possible

violation of the registration requirement of

Section 5 of the Securities Act of 1933.

The offer and sale of unregistered

securities deprives investors of all the protections afforded by the Securities Act of

1933, including the right to receive a prospectus containing the information required by the Act for the purpose of enabling the investor to determine whether the

investment is suitable for him. While most

broker-dealers refuse to effect transactions

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 United States by mail, by

telephone, and sometimes by personal

solicitation. The following foreign corporations and other foreign entities comprise

the Foreign Restricted List.

1. Aguacate Consolidated Mines, Incorporated (Costa Rica)

Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration

Company, Ltd. (Canada)

4. Allied Fund for Capital Appreciation

(AFCA, SA) (Panama)

5. Amalgamated Rare Earth Mines,

Ltd. (Canada)

6. American Industrial Research S.A.,

also known as Investigation Industrial Americana, S.A. (Mexico)

7. American International Mining

(Bahamas)

8 .American Mobile Telephone and

Tape Co., Ltd. (Canada)

9. Antel International Corporation, Ltd.

(Canada)

10. Antoine Silver Mines, Ltd. (Canada)

11. ASCA Enterprisers Limited (Hong

Kong)

12. Atholl Brose (Exports) Ltd.(England)

13. Atholl Brose Ltd. (England)

14. Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, Channel Islands,

U.K.)

16. Briar Court Mines, Ltd. (Canada)

17. British Overseas Mutual Fund Corporation Ltd. (Canada)

18. California & Caracas Mining Corp.,

Ltd. (Canada)

19. Caprimex, Inc. (Grand Cayman,

British West Indies)

20. Canterra Development Corporation,

Ltd. (Canada)

21. Cardwell Oil Corporation, Ltd.

(Canada)

22. Caribbean Empire Company, Ltd.

(British Honduras)

23. Caye Chapel Club, Ltd. (British Honduras)

24. Central and Southern Industries

Corp. (Panama)

25. Cerro Azul Coffee Plantation

(Panama)

26. Cia. Rio Banana, SA (Costa Rica)

27. City Bank A.S. (Denmark)

28. Claw Lake Molybdenum Mines, Ltd.

(Canada)

29. Claravella Corporation (Costa Rica)

30. Compressed Air Corporation,

Limited (Bahamas)

31. Continental and Southern Industries,

SA (Panama)

32. Crossroads Corporation, S.A.

(Panama)

33. Darien Exploration Company, S.A.

(Panama)

34. Derkglen, Ltd. (England)

35. De Veers Consolidated Mining Corporation, SA (Panama)

36. Doncannon Spirits, Ltd. (Bahamas)

37. Durman, Ltd. Formerly known as

Bankers International Investment

Corporation (Bahamas)

38. Empresia Minera Caudalosa dePanama, SA (Panama)

39. Ethel Copper Mines, Ltd. (Canada)

135
40. Euroforeign Banking Corporation,

Ltd. (Panama)

41. Finansbanker a/s (Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining SA (Canada)

44. Global Explorations, Inc. (Panama)

45. Global Insurance, Company, Limited

(British West Indies)

46. Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

47. Golden Age Mines, Ltd. (Canada)

48. Hebilla Mining Corporation (Costa

Rica)

49. Hemisphere Land Corporation

Limited (Bahamas)

50. Henry Ost & Son, Ltd. (England)

51. Hotelera Playa Flamingo, S.A.

52. Intercontinental Technologies Corp.

(Canada)

53. International Communications Corporation (British West Indies)

54. International Monetary Exchange

(Panama)

55. International Trade Development of

Costa Rica, SA

56. lronco Mining &Smelting Company,

Ltd. (Canada)

57. James G. Allan & Sons (Scotland)

58. Jojoba Oil & Seed Industries SA

(Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon Mining Company

(Canada)

62. KoKanee Moly Mines, Ltd. (Canada)

63. Land Sales Corporation (Canada)

64. Los Dos Hermanos, SA (Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bank and Trust & Co.,

Ltd. (Cayman Island)

68. J.P. Morgan s Company, Ltd., of

London, England (not to be confused

with J.P. Morgan & Co., Incorporated, New York)

69. Norart Minerals Limited (Canada)

70. Normandie Trust Company, SA

(Panama)

71. Northern Survey (Canada)

72. Northern Trust Company, S.A.

(Switzerland)

73. Northland Minerals, Ltd. (Canada)

74. Obsco Corporation, Ltd. (Canada)

136

75. Pacific Northwest Developments,

Ltd. (Canada)

76. Pan-Alaska Resources, S.A.

(Panama)

77. Panamerican Bank & Trust Company (Panama)

78. Pascar Oils Ltd. (Canada)

79. Paulpic Gold Mines, Ltd. (Canada)

80. Pyrotex Mining and Exploration Co.,

Ltd. (Canada)

81. Radio Hill Mines Co., Ltd. (Canada)

82. Rancho San Rafael, SA (Costa Rica)

83. Rodney Gold Mines Limited

(Canada)

84. Royal Greyhound and Turf Holdings

Limited (South Africa)

85. SA Valles s Co., Inc. (Philippines)

86. San Salvador Savings & Loan Co.,

Ltd. (Bahamas)

87. Santack Mines Limited (Canada)

88. Security Capital Fiscal & Guaranty

Corporation S.A. (Panama)

89. Silver Stack Mines, Ltd. (Canada)

90. Societe Anonyme de Refinancement

(Switzerland)

91. Strathmore Distillery Company, Ltd.

(Scotland)

92. Strathross Blending Company

Limited (England)

93. Swiss Caribbean Development &

Finance Corporation (Switzerland)

94. Tam O'Shanter, Ltd. (Switzerland)

95. Timberland (Canada)

96. Trans-American Investments,

Limited (Canada)

97. Trihope Resources, Ltd. (West Indies)

98. Trust Company of Jamaica, Ltd.

(West Indies)

99. United Mining and Milling Corporation (Bahamas)

100. Unitrust Limited (Ireland)

101. Vacationland (Canada)

102. Valores de Inversion, SA (Mexico)

103. Victoria Oriente, Inc. (Panama)

104. Warden Walker Worldwide Investment Co. (England)

105. Wee Gee Uranium Mines, Ltd.

(Canada)

106. Western International Explorations,

Ltd. (Bahamas)

107. Yukon Wolverine Mining Company

(Canada)
Right to Financial Privacy

Section 21(hX6) of the Securities Ex.

change Act of 1934 [15 U.S.c. 78u(hX6)]

requires that the Commission "compile

an annual tabulation of the occasions on

which the Commission used each

separate subparagraph or clause of [Sec.

tion 21(hX21)] or the provisions of the

Right to Financial Privacy Act of 1978 [12

U.S.c. 3401-22 (the "RFPA")]to obtain access to financial records of a customer

and include it in its annual report to the

Congress." During the fiscal year. the

Commission successfully made two applications to courts for orders pursuant to

the subparagraphs and clauses of Section

21(hX2) to obtain access to financial

records of a customer. In these appllcations, the provisions of Subsections

21(hX2XAXiv)and (AXv).(8) were relied

upon. The table below sets forth the

number of occasions upon which the

Commission obtained access to the flnancial records of a customer using the procedures provided by: (i) Section 1104 of

the RFPA [12 U.S.c. 3404]. applicable to

customer authorizations; (ii) Section 1105

of the RFPA [12 us.c 3405]. applicable

to administrative subpoenas; and (iii) Sec.

tion 1107 of the RFPA [12 U.S.c. 3407].

applicable to judicial subpoenas.

Section 1104 Section 1105 Section 1107

17 201 8

137
PUBLIC UTILITY HOLDING

COMPANIES

System Companies

During fiscal year 1985, there were 13

holding companies registered under the

Public Utility Holding Company Act of

1935 of which 12 were "active." The

registered systems include 65 electric

and/or gas utility subsidiaries, 72 nonutility subsidiaries and 22 inactive companies, or a total of 172 system companies including the parent but excluding

seven power supply company subsidiaries. The following table lists the active systems.

Table 33

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Solely Registered Electnc

Registered Holding and/or

Holding Operating Gas Utollty Nonutollty Inactove Total

Companies Companies Subsrdianes Subsrdianes Companies Companies Other

Allegheny Power System

1

d 2 (APS) a 4 4 0 9

American Electnc Power

2 Company (AEP) a 0 12 15 5 33

Central and South West

1

d 1 Corporation b (CSW) 4 13

Columbia Gas System

(CGS) 0 8 13 23 0

Consolidated Natural Gas

Company (CNG) 0 5 9 0 15 0

Eastern Utilities ASSOCiates

4

c (EUA) 0 3 0 5

General PubliC Utilities

(GPU) 0 6 2 10 0

Middle South Utilities

1

b (MSU) 0 6 4 3 14

National Fuel Gas Company

(NFG) 0 4 0

New England ElectriC

4 System c (NEES) 0 5 3 3 12

Northeast Utilities (NEU) 0 5 5 6 17 4

c

Pmladelptua ElectriC Power

Company (PEP) 0 1 1 0 1 3 0

Southern Company (SC) 1 0 5 5 0 11 0

Total Companies 12 3 65° 72 22 172 18

aOhlO Valley Elec Corp & Subs

lndsana-Kentucky Elec Corp

etectrrc utility

378% AEP

12.5% APS

497% Other Companies

dWest Penn Power Co In APS and

Southwestern Electnc Power Co

In CSW are both eiectnc

utilities and holding companies

138

bArklahoma Corp

32% CSW

34% MSU

34% Oklahoma Gas & Elec

cYankee Atomic Electnc Co

30% NEES, 31 5% NEU,

45% EUA

Connecticut Yankee A'Iorruc Power

Co 15% NEES, 44% NEU,

45% EUA

Vermont Yankee Nuclear Power

Corp 20% NEES, 12% NEU

12% EUA

Maine Yankee Atomic Power Co

20% NEES, 15% NEU, 4% EUA

Statutory utility subsrdianes
Table 34

KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY

HOLDING COMPANY SYSTEMS

Name of Company

As of June 30, 1985 (000) Omitted)

Total Assets Operating Revenues

Allegheny Power System

American Electric Power Company, Inc

Central and South West Corporation

Columbia Gas System, Inc

Consolidated Natural Gas Company

Eastern Utilities Associates

General Publrc Utilities Corp

Middle South Utilities, Inc

National Fuel Gas Company

New England Electric System

Northeast ununes

Philadelphia Electric Power Company

Southern Company, The

$ 3,928,436

13,554,679

6,850,605

4,975,644

3,376,002

672,316

6,149,647

12,944,442

910,266

3,548,333

5,794,918

65,238

15,425,665

Total = $78,196,191

$ 1,777,592

4,951,936

2,710,028

4,194,213

3,370,651

342,633

2,819,437

3,180,839

978,507

1,451,782

2,099,532

11,319

6,496,480

$34,384,949

139
CORPORATE

REORGANIZATIONS

During the fiscal year the Commission

entered its appearance in 53 reorganization cases filed under Chapter 11of the

Bankruptcy Code involving companies

with aggregate stated assets of about $6.3

billion and close to 165,000 public investors. Including these new cases, the

Commission was a party in a total of 113

Chapter 11 cases during the fiscal year. In

these cases the stated assets totalled approximately $33 billion and about

620,000 public investors were involved.

During the fiscal year, 31 cases were concluded through confirmation of a plan of

reorganization or liquidation, leaving 82

cases in which the Commission was a party at year-end.

Table 35

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Fiscal

Debtor District Year Filed

A H RobinS Co , Inc ED VA 1985

AlA Industries, Inc ED PA 1984

AIC Photo ED NY 1985

Air Florrda System, Inc S D FL 1984

Air One Inc ED MO 1985

Airlift International, Inc S D FL 1981

Altec Corp CD CA 1985

AM InternattonaP N D IL 1982

Amarex Inc WD OK 1983

Anglo Energy, Ltd SD NY 1984

ATI,Inc D NJ 1985

Baldwin United Corp S DOH 1984

Bear Lake West Inc' D ID 1982

Beehive International D UT 1985

Berry Industries Corp CD CA 1985

The Bishop's Glen Fndtn , Inc' N D FL 1985

Branch Industries, Inc SD NY 1985

Briggs Transportation' D MN 1983

Capitol Air Inc S D NY 1985

Chalet Gourmet Corp CD CA 1985

Charter Co M D FL 1984

Crtet, Inc N DCA 1985

Citywide Securities Corp' S D NY 1985

Colohral Discount Corp' SD IN 1982

Columbia Data Products, Inc D MD 1985

Commodore Corporation N DIN 1985

Commonwealth Oil Refining Co , Inc WD TX 1984

Computer Oornmurucanons, Inc 1 CD CA 1981

Computer nevrces, Inc D MA 1984

Computer Usage Co N DCA 1985

Consolidated Packaging Corp D CO 1984

Continental Airlines Corp S D TX 1984

Cook United, Inc N DOH 1985

Crompton Co , Inc S D NY 1985

The Diet Institute, Inc D NJ 1985

Dreco Energy Service Ltd S D TX 1982

Emons Industries, Inc S D NY 1984

Empire Oil & Gas Co D CO 1982

Energetics Inc 2 D CO 1985

Energy Exchange Corp WD OK 1985

Enterprise Technologies, Inc SD TX 1984

ESM secunnes, Inc) S D FL 1985

EVANS Products Co S D FL 1985

Fiscal

Year Closed

1985

1985

1985

1985

1985

1985

140
Table 35-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Frscal FIscal

Debtor Drstnct Year Filed Year Closed

Equestnan Ctrs of America, Inc CD CA 1985

Fidelrty American FinanCIal Corp' ED PA 1981

Flight Transportation Co ' D MN 1983 1985

General Resources Corp N D GA 1980

Grove Finance Company' 2 D UT 1981 1985

Hardwick Cos, Inc' SD NY 1984 1985

Haven Properties. Inc I D OR 1981

ICX, Inc D CO 1984

lntorrnatron DIsplays, Inc' SONY 1984 1985

International Waste Water' M 0 PA 1985

Internat'llnst of App Tech Inc D DC 1983

Interstate Motor Freight Systems' WO MI 1984 1985

K-Tellnternatlonal, Inc D MN 1985

Kelly-Johnson Enterprises, Inc WO OK 1985

Koss Corp D WI 1985

Robert C LaBine/Pro Assoc ' ED MI 1983

The Lionel Corp' SONY 1982 1985

Magic Circle Energy Corp WO OK 1985

Manoa Finance Co , Inc I D HA 1983

Mansfreld Tire & Rubber Co NOOH 1980

Manville Corp SONY 1982

Manon Corp SO AL 1983

Midwestern Companies Inc WD MO 1984

Mobile Home Industnes, Inc NO FL 1985

ND Resource, Inc D AZ 1985

New Brothers, Inc SO GA 1985

North Atlantic Airlines, Inc' D VT 1984

Nucorp Energy Inc SO CA 1982

Ornmlrentex Systems Corp' D MA 1985 1985

Pacific Express Holding, Inc ED CA 1984

Paiute 011 & Mining Corp D UT 1985

Peoples Restaurants, Inc M D FL 1985

Pizza Time Theatre, Inc' NO CA 1984 1985

Provincetown-Boston Airline M 0 FL 1985

Ouickpnnt of Amenca, Inc 1 CD CA 1984 1985

Revere Copper & Brass Inc' S D NY 1983 1985

Roblin Industries, Inc WO NY 1985

Ronco Teleproducts, Inc NOlL 1984

SPW Corporation NO TX 1985

Sambo's Restaurants, Inc' CD CA 1982 1985

saiant Corp SONY 1985

Satelco, Inc NO TX 1985

Saxon lndustnes, Inc 1 SONY 1982 1985

Seatrain Lines, Inc SONY 1981

Seneca 011 Co WO OK 1985

Shelter Resources Corp' NOOH 1982 1985

South Atlanuc Financial Corp' SO FL 1983 1985

Southern Industrial Banking Corp' , ED TN 1983 1985

Standard Metals Corp D CO 1984

State Capital Corp M D FL 1985

Stewart Energy Systems' , D ID 1982 1985

Storage Technology,lnc D CO 1985

Swanton Corp S D NY 1985

Taco Eds, Inc' N DOH 1984

Taurus 011 Co ' D CO 1984 1985

Texas General Resources, Inc' S D TX 1983 1985

Tomlinson 0,1 Co , Inc' SO NY 1984 1985

Towner Petro WO OK 1985

Trans Western Exploration NOOK 1985

Transcontinental Energy Corp NO TX 1985

141
Table 35-Contlnued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Total Cases Opened (FY 1985)

Total Cases Closed (FY 1985)

'Debtor's securities not registered under Section 12(g) of the Exchange Act

Plan of reorqamzanon confirmed

'Debtor hqurdated under Chapter 7

-cnaoter 11 case dismissed

Debtor

UnlOIIZ

Victor Technologies, Inc 1

Vrdeostatron. Inc

Visa Energy Corp'

Wheatland Investment Co '

Wheeling-Pills Steel Corp

Wickes ComparuesWoods Cornrnurucauon Corp'

Wright A" Lines, Inc

XOOlCS, Inc 1

District

D CO

N DCA

CD CA

D CO

ED WA

WD PA

CD CA

ED MI

N DOH

N D IL

Fiscal Fiscal

Year Filed Year Closed

1985 1985

1984 1985

1985

1984 1985

1985

1985

1982 1985

1984 1985

1985

1984 1985

53

31

142
SEC OPERATIONS

During fiscal 1985, the Commission

estimates that it will collect a record $144

million in fees for deposit into the General

Fund of the Treasury. Such fees will

amount to nearly 136% of the Commission's fiscal 1985 appropriation, compared with 111.5% in fiscal 1984. The

four sources of fees were registration of

securities under the Securities Act of

1933 (53%), transactions on securities exchanges (26%), tender offer and merger

filings (17%) and miscellaneous filings

and reporting fees (5%).

143
Appropriated Funds vs Fees Collected

Dollars MillIons

150

90

70

50

30

10

o

1975 76 77 78 79 80 81 82 83 84 1985

144
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UU.S. GOVERNMENT PRINTING OFFICE: 1986-499-222 145