~.

46th Annual Report

of the Securities and

Exchange Commission

for the fiscal year

ended September 30, 1980
For sale by the Superintendent of Documents, U.S. Government Printing 01llce

WashlnJrton, D.C. 20402
Chairman's Letter of Transmittal

The Honorable George Bush

President, U.S. Senate

Washington, D.C. 20510

The Honorable Thomas P. O'Neill, Jr.

Speaker, U.S. House of Representatives

Washington, D.C. 20515

Gentlemen:

It is my pleasure to transmit to you the Annual Report of the United States

Securities and Exchange Commission for the fiscal year ended September 30, 1980.

This is the fourth Annual Report which I have been privileged to transmit to the

Congress on behalf of the Commission. As has been my practice, I would like to

review some of the important challenges which the Commission has met, as well as

some of the additional initiatives which we have undertaken, during the past year.

Each of these matters should be viewed as illustrative of our on-going efforts to

continue to merit the reputation for excellence in public service which this Agency

has earned over nearly half-a-century.

When this Annual Report is published, I will have served as Chairman of the

Commission for close to four years -longer than all but two of my 20 predecessors.

A tenure of this length has provided me with a perspective on the work of the

Commission which may, perhaps, not be available to one serving a shorter time in

this office. It has also convinced me of the validity of my view that a long-term

commitment to service is essential if a Chairman is to have a significant impact on

the shape and character of the Commission and its work. Until this time, the average

tenure of Commission Chairmen has been two years and two months. I hope that my

term will mark the beginning of a new tradition of long-term commitment by the

chief executive officer of the Commission.

Such a commitment from the Chairman of the Commission is important for a

number of reasons. At the practical level, many issues which face the Commission

are so complex or difficult that their resolution inevitably involves a multi-year

process. A Chairman measuring his tenure in months, rather than years, might be

reluctant to take on a major task with no expectation that he would have time to

conclude it Or, if he did address such a question, he might be tempted to seek an

expedient answer which would produce more immediate results, but prove

unsatisfactory over the long term. In my experience, such issues as achieving the

integration of the disclosure systems of the Securities Act of 1933 and the Securities

Exchange Act of 1934, or helping to foster a meaningful and effective system of selfregulation for the accounting profession, are among those matters which could not

successfully have been addressed in a compressed time frame.

More subtly, it is impossible for a Chairman who remains in office only a relatively

brief time to develop a complete sense of the sophisticated scheme of Federal
securities regulation which the Commission and the private sector administer, or to

provide the necessary sensitivity and continuity of action that are required if he is to

have a significant impact on the diverse regulatory relationships which exist between

the Commission and the private sector. Since I took office in April, 1977, the

Commission has been engaged in a comprehensive effort to reexamine-and,

where appropriate, to rebalance its relationships to those segments of the private

sector with which we interface in a variety of regulatory contexts. The past year has

been characterized by a continuation of these same kinds of efforts.

Thanks to the unique disclosure and self-regulatory framework established by the

Federal securities laws, the Commission's relationship with the private sector has

traditionally been more one of oversight than prescription more cooperative than

adversarial. The high esteem in which the Commission has been held is at least in

part attributable, in my view, to the fact that its traditional regulatory objectives-that

is, its corporate disclosure and self-regulatory oversight programs-are rational and

achievable ones. Historically, we have been largely uninvolved in substantive

economic regulation or in balancing competitive interests.

The Commission's reputation as a model agency can also be traced, in part, to the

fact that it has understood the importance of a healthy private sector and

appreciated government's limitations, as well as its responsibilities. Too often,

debate about an issue centers on whether to address the real or perceived problem

through enhanced governmental regulation and, if so, what degree of externallyapplied governmental restraint should be brought to bear on the matter. Little

thought is given to refocusing the debate: The issue should not be framed solely as

one involving the appropriateness or degree of governmental involvement. Rather,

we should first focus on the legitimate needs and expectations of the American

public, as well as the respective roles which both the private sector and government

could usefully play in meeting them, ever mindful of our broader interests in

fostering and maintaining those philosophies and institutions which underpin our

free and democratic society.

Thus, the Commission has been committed to being a judicious and balanced

agency-or, in other terms, an accountable regulator. It has recognized the need for

private sector diversity, encouraging considerable discretion for those who, in good

faith, seek to comply with the spirit of the law.

Such a regulatory sensitivity and balance has fostered an atmosphere in which

private institutions respond meaningfully and constructively to societal interests

within a broad self-regulatory framework, and with a minimum of Commission or

Congressional involvement. For example, rather than seeking a legislative remedy to

concerns about the accounting profession that were raised during the late 1970s,

the Commission counseled the Congress instead to encourage and support the

accounting profession's own constructive efforts towards effective self-regulation. To

further this objective, the Commission accepted the responsibility to monitor and

evaluate the profession's efforts and undertook to report to the Congress on the

progress being made. Similarly, rather than call for new legislation, or adopt a host

of new rules and regulations itself, in response to various concerns raised about

corporate accountability in this Country, the Commission has left the initiative to

resolving fundamental questions regarding the structuring and functioning of

business enterprises, including their boards of directors, where it best

belongs-within the domains of private-sector responsibility and decisionmaking.

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Further, the Commission has appreciated that the broader interests of society and

the economy are at issue. The ultimate purpose of the Federal securities laws is,

after all, to ensure the confident, efficient, and fair securities markets that foster the

capital formation process which underpins our prosperity and our democracy. In this

light, while the Federal securities laws speak specifically only to the need for investor

protection and the maintenance of fair and orderly markets, achieving those

objectives and fostering capital formation are not inconsrstent ends. On the contrary,

when they are properly balanced, they go hand-in-hand. Adequate investor

protection and fair and orderly markets enhance the confidence and wrlhnqness of

the public to invest, while healthy and active capital markets provide the fuel for a

growing economy and offer investors a fair and efficient marketplace for a broad

range of investment media.

To achieve this regulatory balance, the Commission has been dedicated to

Improving those of its traditional core activities such as ItSinspection, market

surveillance, and enforcement programs-which are central to ensuring honest and

healthy securities markets. At the same time, however, the Commission recognizes

its responsibility to accept regulatory risks and balance competing interests so as

not to seriously discourage legitimate investment and commerce in the name of

investor protection. The Commission's adoption of Rule 242, as well as its

amendments relaxing the requirements of Rule 144, are two examples. A third IS the

Commission's recent adoption of the Rule 19c-3 experiment.

Nor has the Comrmssion been reluctant to reexamine long-standing views or

admimstrative practices when such a course seemed mdicated. For example, in

reviewing its disclosure requirements, the Commission has emphasized the most

useful information, even if It ISso-called "soft" information such as projections,

value-based disclosures, and management's discussion and analysis. Often, that has

meant fostering private-sector Innovation and allowinq experimentation even,

when necessary, estabhshmq safe harbors from exposure to liability under the

Federal securities laws. In that regard, Financial Accounting Standards Board

Statement No. 33, concerning the effects of changing pnces, IS an example of such

an innovative private-sector approach to disclosure.

Similarly, the growth of two similar but separate corporate disclosure systems over

46 years, with requirements added or deleted In an almost ad hoc manner, had

resulted in a crazy-quilt disclosure pattern difficult for registrants and the

Commission to deal with and not as useful as it could be to the investing public, the

Intended beneficiaries. The Commission's integrated disclosure response has been a

highlight of my term as Chairman and ISnow nearly complete.

A third example of the Cornrrussion's WIllingness to reexamine long-held views

can be seen in its recent efforts to reform ItS regulatron of investment companies.

The nearly 40 years of Commission administration of the Investment Company Act

of 1940 had produced a pervasive regulatory pattern that had subtly shifted

responsibility for business decisions from the private to the public sector. Yet, the

Commission's response, these last four years, has been to refashion this regulatory

system to remove the Federal government from such routine business decisions

and to place the authority-and the responsibility-for these matters where they

belong-on investment company managers and directors, especially independent

directors.

In addition to these philosophical reasons calling for Commission sensitivity and

critical self-examination, budgetary and personnel restraints during the period also

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made it imperative that the Commission consider seriously reordering its priorities

and reallocating its resources. The securities markets themselves had grown

enormously, becoming infinitely more complex and outstripping the Commission's

facilities to understand, surveil, and oversee their operation by the self-regulatory

organizations. Similarly, the number and complexity of filings by issuers and others

had grown tremendously over the past few years. The inability of the Commission to

increase staff or budget at a time of such explosive growth in the private sector, as

well as in the responsibilities assigned to us by the Congress, made it essential that

we reassess how well we were discharging our responsibilities, and that we find

better ways to do our job, including a greater degree of reliance on private-sector

initiative and good faith.

In summary, I believe that the Commission has more than satisfactorily met the

needs of the present, while at the same time preparing itself-as well as the private

sector-to confront the challenges of the future. Moreover, it has done so in ways

which have enhanced the cost-effectiveness of the Commission's many programs,

improved the sensitivity and stability of the Commission's relationships with the

private sector, and allowed that sector to begin to meet the American public's

growing expectations.

I will now touch on a few highlights of the Commission's recent efforts to be a fully

successful- and accountable regulator:

The Full Disclosure System

When the Congress enacted requirements for public disclosure of corporate

information in connection with new offerings of securities as part of the Securities

Act of 1933, and then added requirements for continuous disclosure of corporate

information as part of the Securities Exchange Act of 1934, it sowed the seeds of

two, largely uncoordinated, systems of disclosure. The earliest members of the

Commission recognized the potential problem. When William 0, Douglas resigned

as Chairman of the Commission to join the Supreme Court in 1939, he wrote to

President Roosevelt that integratmg those two disclosure systems was one task

which he regretted he had not had the opportunity to accomplish. It was a task that

remained undone until this past year, when the Commission finally took steps which

should lead us very shortly to a complete rationalization and full integration of the

disclosure systems of the Securities Act and the Securities Exchange Act

In a series of related actions at the end of August, 1980, the Commission moved

to make the yearly report on Form 10-K the centerpiece of corporate disclosure for

both the registration of new offerings, as well as the Commission's continuous

reporting requirements. Furthermore, the Form 10-K was revised and streamlined,

eliminating requirements that had led to "boilerplate" disclosure, while at the same

time placing new emphasis on such useful data as cash flow and the impact of

inflation. As a part of this same integration effort, requirements for information that

appears in both the 10-K and the less formal annual report to shareholders were

made uniform, facilitating the ability of companies to use their shareholder reports, if

they so choose, to meet significant portions of their 10-K filing obligation. The final

major piece of the integration program should fall into place some time this year

when the Commission considers adoption of a new, three-tiered system of

registration for offerings based on the minimum information package contained in

the new Form 10-K.

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The results of this major integration initiative will be to reduce costs, delays, and

other burdens associated with corporate filings, while at the same time making the

disclosure system more useful to investors. For example, given the current unsettled

state of the securities markets especially the market for corporate debt as a result

of rapidly fluctuating interest rates it is extremely important that the regulatory

scheme allow an offering to be brought to market in a timely fashion once the

business decision to proceed with the offering is reached. Reliance on an issuer's

continuous disclosure filings, as well as the availability of the technique of

incorporation by reference from such filings to satisfy 1933 Act registration

requirements, should aid immeasurably in that regard. The ultimate

objective-which I believe we are well on the way towards achieving-is, of course,

to facilitate the Nation's capital formation process.

In order to administer the new integrated disclosure system in a cost-effective

manner, the Division of Corporation Finance undertook its first major reorganization

in almost 20 years. Reorganized now along lines that concentrate review of

companies from the same industry in the same branch, the Division is developing

both reservoirs of experience in particular industries, as well as continuity in its

comments on the filings of a given company. In addition, the Division has also

implemented a "selective review" procedure. This allows increasingly-strained

Commission resources to be focused on review of the most critical registration and

continuous disclosure documents, while placing examination of other documents on

an audit, or sample, basis. In some instances, registration statements of established,

seasoned companies will be allowed to go effective with no staff review, with issuers

reminded that adequate disclosure remains their responsibility.

At the same time as we were engaged in implementing the integrated disclosure

program, and the organizational and administrative changes necessary to make it

work during a period of budgetary restraint, the Commission continued its widelyacclaimed efforts to facilitate capital formation by small businesses. The focal point

for these efforts is the Office of Small Business Policy, established in 1979 in the

Division of Corporation Finance to spearhead and coordinate the Commission's

efforts to assist smaller issuers. During the past four years, the Commission has

eased registration and disclosure burdens on such issuers to the greatest extent

consistent with investor protection and sound administrative practice.

A few examples should suffice: Prior to fiscal 1980, the Commission had adopted

a new, abbreviated Form S-18 for registered offerings of up to $5 million. A study

of the use of the streamlined Form S-18 during the first 15 months following its

adoption in April, 1979 showed that it had been used to raise more than $286

million in capital, mostly by companies which had never before sought financing

through the public securities markets.

As a further step in this area, the Commission, on January 17, 1980. adopted Rule

242. That Rule allows qualifying companies to raise up to $2 million in any sixmonth period through securities offerings totally exempt from Commission

registration. The effects of this Rule were assessed in a monitoring report issued late

last year, and consideration is presently being given to increasing the dollar limit of

the exemption.

Significant changes have also been made to Rule 144, governing resales of

securities held by affiliates of the issuer and other restricted securities. Over the past

three years, the much-criticized requirements of the Rule have been relaxed

considerably, After some of the initial changes, the Commission's staff undertook an

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empirical study to determine the impact on the markets of this deregulatory effort.

Finding no significant adverse impact from the earlier changes, the Commission

continued to relax its regulation of the area, with some of the most significant

changes coming just after the close of the last fiscal year.

Also during fiscal 1980, the Commission announced that it was considering the

advisability of defining classes of securities issuers by size In order to make possible

modified reporting requirements for smaller issuers. Public comment was sought on

the various questions involved, and the Commission ISconsidering this initiative in

coordination with its efforts to Implement the recently-enacted Regulatory Flexibility

Act.

In a related matter, the Commission actively participated, during the fiscal year, in

the development of The Small Business Investment Incentive Act of 1980. Signed

into law on October 21, 1980, the Act effects a number of statutory changes which

should have a beneficial impact on the ability of small business to raise needed

capital.

On another front, during the past fiscal year, the Commission authorized

publication of its Staff Report on Corporate Accountability, the product of a threeyear study of mechanisms of corporate accountability, shareholder communication,

and corporate governance generally. In view of the significant progress being made

voluntarily by the private sector, the staff recommended against legislation, as

suggested by some, to set standards for the composition and performance of

corporate boards. In addition, however, to the changes in the Commission's proxy

rules previously adopted as an outgrowth of the study, the staff did recommend a

number of other actions for the Commission to consider, many of which may be

pursued during the present fiscal year. Finally, the Commission will continue

monitoring information furnished in proxy statements in order to track

developments in this important and dynamic area.

The Securities Markets

The past year saw record trading volume in the Nation's securities markets,

placmq unprecedented demands upon the industry's trading, clearing, and back

office capabilities. For example, volume on the New York Stock Exchange alone

totaled 11.4 billion shares during calendar year 1980, a figure 40 percent greater

than the year before, and close to four times what it was only 10 years ago. The

other exchanges and the over-the-counter markets have experienced similar

dramatic increases in volume.

The orderly and generally very satisfactory manner in which these demands were

accommodated by the securitIes Industry is a measure of the progress which the

industry and the Commission have achieved during the past decade in rnodernizinq

and strengthening mechanisms for communication, execution, and processing. It is

also testimony to the wisdom of the evolutionary approach which the Commission

has followed towards facilitating the establishment of a national market system.

Undoubtedly, the single most important action in that regard was the

Commission's initiative to increase market maker competition in exchange-traded

securities by prohibiting application of exchange off-board trading restrictions to

newly-listed securities. In adopting Rule 19c 3 last June, the Commission hoped to

foster, among other things, a valuable experiment in competition between exchange

and over-the-counter market makers. In order to be in a position to assess this

experience-and to take appropriate regulatory action in response to trading

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developments-the Commission committed itself to a careful monitoring program

and will shortly issue its first monitoring report.

To make the 19c-3 experiment a meaningful one, however, the Commission also

recognized that there must be an efficient tradmq link between the exchanges and

the over-the-counter markets. To that end, the Commission was considering, at the

dose of the fiscal year, a regulatory measure to require the implementation of an

automated linkage between the Intermarket Trading System (ITS) and the NatIOnal

Association of Securities Dealers' (NASD) Automated Quotation System, in the event

that such a linkage is not achieved voluntarily by the parties involved. On February 5,

1981, in response to an industry initiative in that regard, the Commission issued for

public comment an order which would require the linkage to be implemented, on a

pilot basis, by September 30, 1981. In doing so, the Commission expressed its

prelirrunary belief that the prompt implementation of such a linkage would both

increase competition and efficiency in the Nation's securities markets, as well as

enhance the ability of brokers to achieve the best possible execution of their

customers' orders.

In the final analysis, however, progress towards a national market system must be

measured by the events which occur in the marketplace, rather than solely by the

development of any given facility, or by the number or frequency of overt

Commission regulatory action. In that connection, Commission adoption of Rule

19c-3 was only the most recent of a series of steps which have been taken dunng

the past four years to achieve a national market system. Among prior industry and

Commission accomplishments were the establishment of both the ITS and the allelectronic National Securities Tradmg System of the Cmcmnati Stock Exchange; the

implementation and refinement of the nationwide consolidated quotation and

transaction reporting systems; the proposal of criteria for designating securities as

"qualified" to trade in a national market system, an initiative subsequently adopted

in modified form after the close of the fiscal year; and the commitment of the

exchanges participating in ITS to develop a joint plan for the protection of public

limit orders. With the advances of fiscal 1980, it is clear that, given the contInuing

good faith cooperation of the industry, we stand on the threshold of havinq the

facilities and trading environments in place which would provide the experience

necessary to define the contours of a truly national market system.

Also during fiscal 1980, the Commission concluded a unique, and uniquely

successful, exercise in cooperation between a regulated community and a Federal

regulatory agency when it terminated the moratonum on expansion of trading in

standardized, exchange-listed options on equity securities. The rnoratonurn, adopted

voluntarily by the industry In July, 1977 at the Commission's request, provided an

opportunity for the Commission's staff to complete the most comprehensive study

ever undertaken of the options markets. The Commission and the industry selfregulatory organizations (SROs) subsequently worked in concert to Implement many

of the recommendations of the study, making possible the end of the rnoratonurn

on March 26, 1980. Following the Commission's action to end the options

moratorium, expansion of this important and fast-growing segment of the securities

rnarkets'resurned at a measured pace in accordance with a plan worked out JOIntly

by the affected SROs,

Moreover, recently, the Commission also approved, in principle, the expansion of

the standardized exchange-traded options markets to include an options contract on

a non-equity security. In approving the filing of the Chicago Board Options

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Exchange to trade options on Government National Mortgage Association passthrough certificates, the Commission recognized not only the economic value to the

housing industry and the economy of such trading, but also the fact that, with the

enhancements of recent years, there was no reason to suspect that the regulatory

environments of the registered options exchanges were not adequate to ensure that

such trading would be carried on in the public interest. Other options exchanges are

expected to file similar applications, and the Commission expressed its tentative view

in favor of allowing multiple trading of such non-equity options.

Significant progress was also made during fiscal 1980 towards implementation of

the Commission's Market Oversight and Surveillance System (MOSS). That System

will enable the Commission to oversee appropriately the securities industry SROs in

today's complex, increasingly interrelated and computerized, and mushrooming

trading markets, as well as provide the Commission with an enhanced capacity for

market and intermarket surveillance in several important areas. With a three-year

authorization from the Congress, and completion of the pilot phase of the project,

the Commission IS now ready to begin operational implementation on a limited

basis.

MOSS should be viewed as an important part of the Commission's overall

program to reassess and strengthen its SRO oversight and inspection programs. It

will not in any way supplant the work of the SROs, which will have continuing

primary responsibility for surveillance of their own marketplaces. Rather, it will

enable the Commission to carry out better its own responsibilities to provide the

constructive oversight tension necessary for the self-regulatory system to continue

functioning effectively.

Finally, just after the close of the fiscal year, the Commission was able to resolve a

complex regulatory question that had been pending since 1976 as result of a

Federal District Court decision in the case known as PapiLsky v. Bemdt. The

questions raised by this case which many felt endangered the continued viability of

the fixed-price system for underwriting new issues of securities, as well as the

Nation's capital raising capacity which had come to rely on that system-were

resolved through approval by the Commission of new rules of the NASD governing

such transactions. Again, the Commission and the industry were able to arrive at a

mutually-satisfactory resolution to a complex regulatory problem without the need

for the Commission to engage in direct rulemaking.

Accounting Matters

In August, 1980, the Commission submitted to the Congress the third of its series

of reports on The Accounting Profession and the Commission's Oversight Role.

These reports have played a key part in the Commission's efforts to stimulate

development of a system of meaningful and effective self-regulation within the

profession. Important progress has been made in this area during the past three

years, all of it achieved without adoption by the Commission of a single rule. Last

year's report concluded that, while the ultimate success of the profession's program

remains to be proven, the significant private-sector progress to date provides a basis

for continuing optimism that the objective would be achieved.

The Commission also devoted a great deal of study during fiscal 1980 to

comments by corporations and their auditors with regard to difficulties which they

were experiencing in complying with the accounting provisions of the Foreign

Corrupt Practices Act (FCPA), enacted in December, 1977. In order to provide some

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certainty about the Commission's views regarding the FCPA, and to dispel needless

anxiety in the business and professional communities concerning it, the

Commission recently took the unprecedented step of issuing a policy statement

regarding its interpretation of and enforcement intentions under these provisions. In

that statement, the Commission stressed the reasonableness standard of the Act and

its principal objective of reaching knowing or reckless conduct. We also indicated

that a wide degree of deference would be afforded issuers in their good faith exercise

of business judgment in designing, implementing, and maintaining accounting

systems to meet the requirements of the Act.

Also during the fiscal year, the Commission completed a review of the comments

which it had received on its proposal to require the filing of a statement of

management on the adequacy of internal accounting controls, to be reviewed by the

independent auditor, as part of the issuer's 10-K report. In order to encourage

private-sector initiatives in developing systems of accounting controls and reporting

upon them, and based in large part upon the advances which had already been

made by the private sector and its commitments for further progress, the

Commission, in June, 1980, withdrew its proposed rule. In doing so, the

Commission indicated that it would continue to monitor private-sector progress in

the area and would revisit the question after three years' experience.

The Commission continued, during the year, to work closely with the accounting

profession and the Financial Accounting Standards Board (FASB) on a wide range

of issues, including the FASB's important Conceptual Framework Project. One such

issue, which is key to the continued efficiency of financial disclosure, IS that of

accounting for the effects of changing prices.

Such disclosure, as a supplement to financial statements, was first required for the

largest companies by the Commission's Accounting Series Release No. 190

(ASR 190). In September, 1979, in what the Commission views as a major

breakthrough in this area, the FASB adopted Financial Accounting Statement

No. 33, which addresses essentially the same needs as, and builds upon the

experience gained under, ASR 190. The development of Statement No. 33 made it

possible for the Commission to withdraw its own requirements, in favor of those

adopted by the private sector.

The FASB's action in adopting Statement No. 33 represents a recognitIon that the

current state of the art does not at this time permit a definitive standard, but that the

urgency of the need for enhanced disclosure in this area is such that one must begin

the process and still allow for the experimentation that is the only practical source of

necessary experience and empirical data on which to build a better standard.

Accordingly, the Commission urged issuers and their advisors to provide the most

meaningful disclosure possible in this emerging area, adopting a broad safe harbor

from liability for such disclosures.

Similarly, the Commission and the FASB have been involved in on-going efforts

during this period to develop the most useful and appropriate accounting and

disclosure standards for the activities of oil and gas producers. In August, 1978, the

Commission announced its intention to begin a period of experimentation looking

towards the development of a method of Reserve Recognition Accounting (RRA) to

replace both successful efforts and full cost, the two historical-cost accounting

methods then in use. At the time the RRA initiative was first introduced, the

Commission indicated that it expected RRA to be a uniform method of accounting to

be used by all oil and gas producers in their primary financial statements, but noted

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that the feasibility of its development was not assured given the current state of

reserve estimation technology. The Commission also indicated at that time that it

would continue to explore the relevance and reliability issues raised by the

commentators concerning RRA.

Since that time, the Commission has adopted requirements that data regarding

changes in present value of estimated future revenues of oil and gas producers be

included in certain Commission filings. It has also, however, provided that such

information need not be audited and may be presented supple mentally, noting both

the need to allow addmonal time to establish and implement uniform guidelines and

standards for reserve evaluation and reporting, as well as the remaining uncertainty

concerning the costs and related benefits of having such information audited.

Recently, after reviewing the work of the Commission's advisory committee on

RRA, and consulting further with the FASB and representatives of the petroleum

engineering profession, the Commission announced that it no longer considers RRA

to be a potential method of accounting in the primary financial statements of oil and

gas producers, and that it supports an undertaking at this time by the FASB to

develop a comprehensive package of disclosures for such entities. In doing so, the

Commission reiterated its firm belief that value-based disclosures were vital to any

such disclosure package, and indicated that the issue of the appropriate method of

primary financial statement accountIng might more usefully be addressed after the

FASB has developed appropriate supplemental disclosures for oil and gas

production activities and made further progress on its Conceptual Framework

Project. With these actions regarding RRA, the Commission thus again displayed its

willingness to experiment in an emerging area, to recognize the limitations of what it

could responsibly do, and to defer to private-sector initiatives which hold the

promise of meaningful progress, in a difficult area, without the need for the

Commission itself to act precipitously or preemptorily.

Investment Companies

The Investment Company Act of 1940 is perhaps one of the most extreme of the

Commission's major regulatory statutes in terms of the degree of constraint which it

Imposes upon an industry. A major regulatory reform effort during the past three

years has been the Commission's project to cut back on the involvement of the

Commission and its staff in the business decisions of investment companies. The

objective has been to reduce the costs and burdens of regulation, while at the same

time enhancing the authority and responsibility of investment company

directors - especially the independent directors - in overseeing management

decisions.

To pursue this effort, the Investment Company Act Study Group was established in

the Divrsion of Investment Management during fiscal year 1978. The Group has

been at work since that time, reviewing the complex of statutory provisions and

Commission rules applicable to investment companies with a view towards reducing

reporting burdens and direct Commission regulatory involvement wherever possible.

One of the first major initiatives to result from this Study was withdrawal of the

policy that had resulted in detailed Commission staff review and clearance of

mvestment company advertisements. In addition, during fiscal 1980, the

Commission adopted several rules which permit, under certain circumstances,

previously-prohibited transactions between an investment company and its affiliated

persons. Shortly after the close of the fiscal year, the Commission also adopted rules

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permitting mutual funds, for the first time, to use fund assets to finance the

distribution of their own shares. This action resolved a persistent controversy and

was taken, consistent with the goals of the Investment Company Act Study, despite

long-standing doubts about both the benefits of such use of investment company

assets and whether the practice is fair to existing shareholders. Once again, ultimate

responsibility for those decisions is placed on the company's directors, where it

belongs, subject to certain safeguards,

Finally, during the past fiscal year, the Commission adopted Rule 465 under the

Securities Act, permitting amendments to the registration statements of open-end

Investment companies to become effective without any action on the part of the

Commission or Its staff. For these funds, which maintain a continuous offering of

their shares, this action will steamline the amendment process and permit the

registrants themselves to assume greater responsibility for meeting their disclosure

obligations.

Enforcement and Litigation

The individual initiatives which I have just described comprise only a small part of

the wide range of activities in which the Commission has been involved during the

past fiscal year. For example, our enforcement program continues to be the best of

its kind anywhere in the Federal government, lending credibility to all Commission

disclosure and regulatory activities. In addition, we have successfully focused much

of our enforcement efforts-which, like other Commission operations, are limited by

available resources on areas critical to the integrity of the public securities

markets, such as insider trading.

Similarly, in an area of Increasing importance to investor protection and the

orderly development of the law, the Commission's Office of the General Counsel has

strengthened the Commission's ability to identify and participate, as amicus curiae,

In legal proceedings between private parties that could have a significant impact on

the interpretation of the Federal securities laws. This effort has been increasingly

important given the adverse effects of certain recent court decisions limiting private

rights of action.

Program Analysis and Management

The Commission has also continued, during fiscal 1980, to attempt to

institutionalize empirical analysis and monitoring as fundamental tools in

rule making and assessing regulatory impact. The previously-mentioned reports on

the usage of Form S-18, Rule 242, and Rule 144, and the programs developed to

monitor such diverse areas of concern as private sector progress concerning board

composition and functioning and the effects of RUle 19c- 3, are all illustrative of the

success of this initiative. Moreover, the Commission has begun to issue expanded

yearly reports on the securities industry provided by the Commission's Directorate of

Economic and Policy Analysis.

Finally, by way of managerial improvements, the Commission implemented,

during the fiscal year, a new performance evaluation system for middle-level

managers, an automated position tracking system, an automated Case Activity

Tracking System, new financial controls, and systematic management reviews. An

internal audit function was established at the Commission for the first time; a unique

arrangement with the Office of Personnel Management has provided the

xi

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Commission with the opportunity to develop a new performance appraisal system

that will aid in manpower planning, career counseling, and management

development; upgrades of data processing and information storage and retrieval

systems have brought state-of-the-art technology to those important areas of

Commission operations; and programs to strengthen both communication with key

constituencies and public education about the Federal securities laws have helped

facilitate accomplishment of the Commission's mission. These initiatives, together

with such earlier management efforts as our development of the Commission's Staff

Time and Activity Tracking System, have improved our ability to utilize effectively

our limited resources and to enhance the professionalism with which the Agency is

managed.

*******

As the Commission approaches the completion of its first half-century, I am

pleased to be able to report that it remains the vigorous, flexible, and responsive

regulatory agency that its architects undoubtedly intended it to be. When a

reexamination of its processes, a rethinking of its policies, or a rebalancing of its

relationship to the private sector has been necessary, the Commission has shown

itself ready and able to undertake the task.

The staff-which has earned, collectively and individually, a reputation as the best

in the Federal Government-remains capable and committed. It is a tribute to what

a meritocracy can achieve in government. Its members have appreciated the need

for regulatory reform, and they have had the intelligence, creativity, and

sophistication to fashion Commission initiatives and to enforce securities regulations

in the highest traditions of this unique agency. I am proud of them and honored to

have been associated with them.

In addition, those in the private sector, on the whole, have also responded to the

Commission's initiatives in a most responsible and constructive manner. Most have

shown an understanding of, and a commitment to, the necessity of maintaining an

appropriate degree of Commission presence and discipline in protecting the

integrity of the Nation's securities markets. Moreover, they have accepted their own

responsibilities most creatively and positively. As is common among people of

goodwill, we have, at times, disagreed. But, my sense is that there is a remarkably

broad consensus on common objectives.

In sum, the Commission has-with the cooperation and understanding of the

private sector- proven able to adapt to the demands of the times and the realities of

limited resources. I think that I speak for my fellow Commissioners and the

Commission's staff when I say that we are proud of the important role which we have

played in helping to keep the Nation's securities markets the best in the world, and

that we are prepared to continue doing so.

.. .

Harold M. Williams

Chairman

xii
Commissioners and Principal Staff Officers

(As of December 31, 1980)

Commissioners

HAROLD M. WILLIAMS of California, Chairman

PHILIP A. LOOMIS, JR., of California

JOHN R. EVANS of Utah

STEPHEN J. FRIEDMAN of New York

BARBARA S. THOMAS of New York

Secretary: George A. fitzsimmons

Executive Assistant to the Chairman: Daniel L. Goelzer

Term expires

June 5

1982

1984

1983

1981

1985

Principal Staff Officers

Benjamin Milk, Executive Director

George G. Kundahl, Deputy Executive Director

Edward F. Greene, Director, Division of Corporation Finance

Lee B. Spencer, Deputy Director

William C. Wood, Associate Director

Mary E. T. Beach, Associate Director

John T. Shinkle, Associate Director

Stanley Sporkin, Director, Division of Enforcement

Irwin M. Borowski, Associate Director

Benjamin Greenspoon, Associate Director

David P. Doherty, Associate Director

Theodore A. Levine, Associate Director

Douglas Scarff, Director, Division of Market Requleuon

Sheldon Rappaport, Deputy Director

Roger D. Blanc, Associate Director

George T. Simon, Associate Director

Edward A. Kwalwasser. Associate Director

(Vacant), Associate Director

Sydney H. Mendelsohn, Director, Duiision of Investment Management

Martin C. Lybecker, Associate Director

Joel Goldberg, Associate Director

Aaron Levy, Director, Division of Corporate Regulation

Grant Guthrie, Associate Director

Ralph C. Ferrara, General Counsel

Jacob H. Stillman, Associate General Counsel

(Vacant), Associate General Counsel

Michael K. Wolensky, Associate General Counsel
Paul Gonson, Solicitor to the Cornrntssron

Andrew L. Rothman. Director, Office of Public Affairs

Chiles T.A. Larson. Deputy Director

A. Clarence Sampson, Chief Accountant

LeGrand C. Kirby. Deputy Chief Accountant

Steven E. Levy. Director of Economic and Policy Analysis

William Stern. DIrector, Office of Opinions and Review

Herbert V. Efron, Assocrare Director

R. Moshe Simon. Associate Director

Warren E. Blair. Chief Administrative Law Judge

Lawrence H. Haynes. Comptroller

Richard J. Kanyan, Director, Office of Administreuoe Services

G. William Richardson. Deputy Director

James C. Foster. Director, Officer of Personnel

Wilson Butler. Director, Office of Applications and Reports

John D. Adkins. Director, Office of Data Processing

Thomas J. Whalen. Deputy Director

Robert R. Wolf, Acting Director, Office of Consumer Affairs and Information

Services

Matthew R. Schneider. DIrector of Legislative AffaIrs
Regional and Branch Offices

Regional Offices and Administrators

Region 1. New York, New Jersey -Stephen L. Hammerman. 26 Federal Plaza, New

York, New York 10007.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire,

Maine. Willis H. Riccio. 150 Causeway St., Boston, Massachusetts 02114.

Region 3. Tennessee, Virgin Islands, Puerto Rico, North Carolina, South Carolma,

Georgia, Alabama, Mississippi, Florida, part of Louisiana -Jule B. Greene. SUite

788, 1375 Peachtree St., N.E., Atlanta, Georqra 30367

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan,

Minnesota, Missouri, Ohro, Wisconsin. William D. Goldsberry. Room 1204,

Everett McKinley Dirksen Bldg., 219 S Dearborn St , Chicaqo, llhnors 60604.

Region 5. Oklahoma, Arkansas, Texas, part of LOUIsIana,Kansas (except Kansas

CJty).-Wayne M. Secore, 8th Floor, 411 West Seventh St, Fort Worth, Texas

76102.

Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, New MexIco,

Utah -Robert H. Davenport. Suite 700, 410 Seventeenth St., Denver, Colorado

80202.

Region 7. Cahfornia, Nevada, Arizona, Hawan, Guam. Leonard H. Rossen. SUite

1710, 10960 Wilshsrre Boulevard, Los Angeles, California 90024.

Region 8. Washmgton, Oregon, Idaho, Montana, Alaska -Jack H. Bookey, 3040

Federal BUilding, 915 Second Ave., Seattle, Washington 98174

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of

Columbia.-Paul F. Leonard. Room 300, Ballston Center Tower No 3, 4015

Wilson Boulevard, Arlington, Virginia 22203.

Branch Offices

Detroit, Michigan 48226 -231 Lafayette St., 1044 Federal Bldg.

Houston, Texas 77002.-Room 5615, Federal Office & Courts Bldg, 515 Rusk Ave.

Miami, Florida 33131.-Suite 1I 14, DuPont Plaza Center, 300 Biscayne Boulevard

Way.

Philadelphia, Pennsylvania 19106. Federal Bldg., Room 2204, 600 Arch St.

Salt Lake City, Utah 84 I 11. SUIte 810, Boston Bldg., One Exchange Place

San Francisco, Callforrua 94102. -450 Golden Gate Ave, Box 36042.

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Biographies of Commissioners

Harold M. Williams. Chairman

Chairman Williams was born on January 5, 1928, in Philadelphia, Pennsylvania. He

received his B.A. from UCLA in 1946, graduating Phi Beta Kappa at the age of 18.

Three years later he was awarded his J.D. degree from Harvard University Law

School. He joined a Los Angeles law firm in 1949 where he specialized in tax and

corporation law and remained until 1955 except for an interruption to serve as a U.S.

Army legal officer during the Korean emergency. He joined Hunt Foods and Industries, lnc., in 1955 as Associate Tax Counsel. He subsequently became Tax Counsel,

Vice President- Finance and Executive Vice President. In 1964, he became President

of Hunt-Wesson Foods, Inc. In 1968, he was elected President of Hunt Foods and Industries, Inc., and with the formation of Norton Simon, lnc., later that year-resulting

from consolidation of Canada Dry Corporation, Hunt Foods and Industries, lnc., and

McCall Corporation-he was named Chairman of the new company's Finance

Committee. In 1969, he assumed the additional post of Chairman of the Board of

Norton Simon, Inc. In July of 1970, Mr. Williams became Dean and Professor of

Management of the UCLA Graduate School of Management. During his administration, the School achieved national ranking, including recognition as the leading

graduate business school in a public university. During the 1973 energy crisis, Mr.

WIlliams took leave to serve as full-time Energy Coordinator for the City of Los Angeles. While at UCLA, Mr. Williams also served as Director of Norton Simon, lnc.,

Phillips Petroleum Company, ARA Services, Inc., CNA Financial Corporation, Signal

Companies, Inc., and Montgomery Street Income Securities, and as a Trustee of the

Aerospace Corporation. In his service to the community, Mr. Williams acted as CoChairman for the Public Commission on Los Angeles County Government, a subcommittee chairman of the Mayor's ad hoc Committee on Los Angeles City

Revenues, a member of the State of California Commission for Economic Development and of the California Citizens Commission on Tort Reform, and a member of

the SEC Advisory Committee on Corporate Disclosure.
Philip A. Loomis. Jr.

Commissioner Loomis was born in Colorado Springs, Colorado, on June II, 1915.

He received an A.B. degree, with highest honors, from Princeton University in 1938

and an LL.B. degree, cum laude, from Yale Law School in 1941, where he was a Law

Journal editor. Prior to JOInIngthe staff of the Securities and Exchange Commission,

Commissioner Loomis practiced law with the firm of 0' Melveny and Myers in Los

Angeles, California. Commissioner Loomis joined the Commission's staff as a

consultant In 1954, and the following year he was appointed Associate Director and

then director of the Division of Trading and Exchanges. In 1963, Commissioner

Loomis was appointed General Counsel to the Commission and- served in that capacity until his appointment as a member of the Commission. Commissioner

Loomis is a member of the American Bar Association and the American Law Institute. He received the Career Service Award of the National Civil Service League in

1964, the Securities and Exchange Commission Distinguished Service Award in

1966, and the Justice Tom C. Clark Award of the Federal Bar Association in 1971.

He took office as a member of the Securities and Exchange Commission on August

13, 1971, and is now serving for the term of office expiring June 5, 1984.
John R. Evans

Commissioner Evans was born in Bisbee, Arizona, on June 1, 1932. He received

his B.S. degree in Economics in 1957, and his M.S. degree in Economics in 1959

from the University of Utah. He was a Research Assistant and later a Research Analyst at the Bureau of Economics and Business Research at the University of Utah,

where he was also an instructor of Economics during 1962 and 1963. He came to

Washington in February 1963, as Economics Assistant to Senator Wallace F.

Bennett of Utah. From July 1964 through June 1971 Commissioner Evans was minority staff director of the U.S. Senate Committee on Bankmg, Housing and Urban

Affairs and served as a member or the professional staff from June 1971 to March

1973. He took office as a member of the Securities and Exchange Commission on

March 3, 1973, and is now serving for the term expiring June 5, 1983
Stephen J. Friedman

Commissioner Friedman was born on March 19, 1938 in New York City. In 1959

he received an AB, magna cum laude, from Princeton University where he majored

in public and international affairs (Woodrow Wilson School). He graduated from

Harvard Law School, LL.B. 1962, magna cum laude, where he was an editor of the

Harvard Law Review. Mr. Friedman began his career clerking for Supreme Court Associate Justice William J. Brennan, Jr. in July 1963. From July 1964 to July 1965,

he served as Special Assistant to the Maritime Administrator at the Department of

Commerce. He joined the New York firm of Debevoise, Plimpton, Lyons & Gates as

an associate in August 1965, and became a partner of that firm in January 1971.

From 1974 to 1977 he was also a lecturer in advanced securities regulation and corporation finance at Columbia Law School. From 1974 to 1979 he served in the

Treasury Department as Deputy Assistant Secretary for Capital Markets Policy. Mr.

Friedman is the author of a number of published speeches and articles on corporate, financial and securities law, and of An Affair with Freedom: Mr. Justice

Brennan, published in 1967. He also contributed articles on Justices Brennan and

Goldberg to The Justices of the United States Supreme Court, published in 1969,

and was the draftsman of the Revised Uniform Limited Partnership Act, prepared under the auspices of the National Conference of Commissioners on Uniform State

Laws. He has been a member of the Federal Regulation of Securities Committee,

American Bar Association and a member of the Committee on Securities Regulation

and the Ethics Committee of the Association of the Bar of the City of New York. In

addition, he has served as co-chairman of the Committee on Banking of the Administrative Law Section of the American Bar Association from 1965 to the present Mr.

Friedman took the oath of office as a member of the Securities and Exchange Commission on April 14, 1980, for the term expiring on June 5, 1981.
Barbara S. Thomas

Commissioner Thomas was born December 28, 1946. She received a B.A. cum

laude in history from the University of Pennsylvania in 1966. In 1969, she received a

J.D. from the New York University School of Law, cum laude, where she placed second in a class of 323, was a member of the Order of the Coif, and was an editor of

the New York University Law Review. A John Norton Pomroy Scholar, she received

the Jefferson Davis Prize in Public Law, American Jurisprudence Prizes for Excellence in 15 subjects and made the Dean's List every semester. Mrs. Thomas was an

associate of the firm of Paul, Weiss, Rifkind, Wharton & Garrison in New York from

September 1969 to April 1973 when she joined the firm of Kaye, Scholer, Fierman,

Hays & Handler, also of New York, as an associate. In January 1978, Mrs. Thomas

was made a partner of Kaye, Scholer, Fierman, Hays & Handler. She was Chairman

of the Corporation Law Committee of the Association of the Bar of the City of New

York, a member of the Committee on Federal Regulation of Securities of the American Bar Association and a member of the Securities Regulation Committee of the

New York State Bar Association. She is also a member of the University of

Pennsylvania Alumni Council on Admissions. On October 21, 1980, Mrs. Thomas

took the oath of office as a member of the Securities and Exchange Commission,

and is now serving for a term that expires June 5, 1985.

Table of Contents

Chairman's Transmittal Letter , . . . . . . . . . . . . .

Cornrnission and Principal Staff Officers . . . . . . . . . . . . .

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

Biographies of Commissioners . ..

Regulation of the Securities Markets . . . . . . . . . . . .. ..

Securities Markets, Facilities and Tradmg . . . . . . . . . . . . . . .. . .

National Market System. . . . . . . . .. .. . . .. . .

Natronai System for Clearance and Settlement of Secunnes Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3

Options Trading .. .. 4

Study of Government Secunties Markets. . . . . . . . . . . . . . . . . . . . . . . . . 6

Issuer Repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . .. 6

Effects of the Absence of Fixed Comrnission Rates .. .. .. .. 6

Monitormg Commission Rules . . . . . . . . . . .. .. .. 7

Regulation of Brokers, Dealers, Municipal Secunties Dealers and Transfer

Agents . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. 8

Regulatory Burdens on Small Brokers and Dealers 8

Broker-Dealer Reporting Requirements 8

Registration Requirements . .. '" . . . . . . . . . . 8

Broker-Dealer Exammations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

MUnIcipal Securities Brokers and Dealers. . . 9

Lost and Stolen Securities 9

Transfer Agents. . . . .. . . .. 10

Securities Investor Protection Corporation . . .. 10

Oversight of Self-Regulatory Organizations 10

National Securities Exchanges. . . .. . .. 10

National Association of Secunties Dealers, Inc. . . .. 11

Allocation of Regulatory Responsibility 12

Municipal Securities Rulemaking Board 13

Clearing Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Procedures for Filing Proposed Rule Changes. .. 14

Inspections and Surveillance . . . .. 14

Market Oversight Surveillance System . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

The Disclosure System 19

Integration Program , ,.,................................... 19

Revisions of Form 10-K 20

Accounting Standards 20

Proposed New Registration Forms.............. 21

Form 10-Q . 21

Form S-8 ,.,....................................... 21

Reorganization of Corporation Finance. 22

Disclosure Revisions; Interpretive Advice . . . . . . . . . . . . . . . . . . . . . .. . 22
Corporate Accountability; Management Background and Remuneration . 24

Monitoring of Existing Guidelines . . . . . . . . . . 25

Small Business 26

Form S-18 26

Long Range Studies 26

Rule 242 27

Rule 254 27

Classifying of issuers 27

Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Tender Offers. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Tender Offer Rules 28

Tender Offer Legislation . . . . . . . . . . 29

Beneficial Ownership Report 30

Accounting Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

The Accounting Profession and the Commission's Oversight Role. . 30

Scope of Services by Independent Accountants .,................ 31

Accounting Standards for Oil and Gas Producers. . . . . . . . . . . . . . . . . 32

FASB Conceptual Framework Project. . . . . . . . . . . . . . . . . . .. . . . . . . . 33

FInancial Reporting and Changing Prices . . . . . . . . . . . . . . . . . . . . . . . . 34

Reporting on Internal Accounting Control , . . . . . 35

Auditor Association with Required Supplemental Financial Information , , . . . . 36

Investment Companies and Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

DIsclosure Study and Related Matters 39

Investment Company Act Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Legislation Relating to Venture Capital 42

Significant Applications and Interpretations 42

Union Service Group 42

Union-Investment-Gesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Institutional Disclosure Program ,................. 43

Enforcement Program 45

Sanctions and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Insider Trading 46

Corporate Takeovers, Tender Offers and Beneficial Ownership.. . . . . . . . 47

Administrative Proceedings Under Section 15(c)(4) of the Securities Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Questionable Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Government and Municipal Secunties ,............. 52

Related Party Transactions 53

Energy and Tax Related Cases 55

Coordination With Other Authorities: Effective Commission Response to

Discovery of Problems , . . . . . . . . . . 58

Other Significant Enforcement Cases 59

Programmatic Utigation and Legal Work , . . . . . . . . . . . . . . . . . . . 63

Significant Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Scope of the Antifraud Provisions of the Federal Securities Laws. . . 63

Private Rights of Action Under the Federal Securities Laws. . . . . . . . 65
Standard of Culpability 66

Protection of the Shareholder's Franchise 67

Scope of Commission's Investigatory Authority. . . . . . . . . . . . . . . . . . . 67

Standard of Proof in Adjudicatory Administrative Proceedings Before

the Commission ,............................. 68

Tender Offer Litigation .,...................................... 69

Other Significant Projects 70

ALI Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Right to Financial Privacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

"Ginnie Mae" Study........................................... 71

Public Utility Holding Companies. . . . . . . . .. .. .. .. .. .. .. . . . . . . . . .. . .. . 73

Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Financing 73

Fuel Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Service Company Operations. . . . . . . .. . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . 74

General Public Utilities Corporation/Three Mile Island. . . . . . . . . .. . . . . . . 74

Acquisition of Columbus £, Southern Ohio Electric Company by American Electric Power Company. . . . . . . . . . . . .. 74

Corporate Reorganizations 75

Administration and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

General Management and Program Developments. . . . . . . . . . . . . . . . . . . . 77

Information Systems Management 77

Facilities Improvement 77

Information Systems 78

Other ADP Activities , . . . . . . 79

Financial Management 79

Internal Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Personnel Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Senior Executive Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Performance Appraisals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Merit Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Delegations of Authority 81

Merit Promotion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Incentive Awards 82

Equal Employment Opportunity 82

Part-time Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Upward Mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Space Management 82

Consumer and Public Affairs 83

Investor Complaints 83

Consumer Education and Public Information. . . . . . . . . . . . . . . . . . . . . 83

Footnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Appendix. 93

The Securities Industry 93

Income, Expenses and Selected Balance Sheet Items . . . . . . . . . . . . . 93

Table 1- Financial Information for Broker-Dealers 1975-1979 . . . . . 94

Historical Financial lnforrnation of Broker-Dealers with Securities Related Revenues of $500,000 or More 94

Table 2-Historical Consolidated Revenue and Expenses of BrokerDealers With Securities Related Revenue of $500,000 or More. . . 95

Table 3-Hlstoncal Balance Sheet For Brokers With Securities Related Revenue of $500,000 or More . .. 96

Securities Industry Dollar: 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Chart-e-Secuntres Industry Dollar: 1979 . 97

Broker-Dealers, Branch Offices, Employees. . . . . . . . . . . . . . . . . . . . . . 98

Chart-Broker-Dealers and Branch Offices. . . . . . . . . . . . . . . . . . . . . . 99

Table 4-Brokers and Dealers Registered Under the Securities Act

of 1934 Effective Registrations as of September 30, 1980 Classified by Type of Organization and by Location of Principal Office . . . . .. 100

Table 5-Pnnclpal Business of SECO Broker-Dealers 101

Table 6-Applicatlons and Reqistratrons of Brokers and Dealers and

Investment Advisers-Fiscal Year 1980 102

Table 7 -Applications and Registrations of Municipal Securities

Dealers and Transfer Agents-FIscal Year 1980......... 103

Self-Regulatory Organizations: Revenues, Expenses and Balance

Sheet Structure .. 104

Table 8-Assets, Liabilities and Net Worth of Self-Regulatory Organizations 1975-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Table 9-Revenues and Expenses of Self-Regulatory Organizations

1975-1979... 107

Table 10-Uses of Self-Regulatory Orgamzation Funds 1975-1979 108

Table 11 Sources of Self-Regulatory Organization Funds

1975-1979 110

Table 12-Self-Regulatory Orgamzations-Clearmg Agencies Revenues and Expenses Fiscal Year 1979 .. 112

Table 13-Revenues and Expenses of Municipal Securities Rulemaking Board 113

Exemptions 113

Section 12(h) Exemptions 113

Rule 10b-6 Exemptions.. 113

Exemptions for Foreign Private Issuers . . . . . . . . . . . . . . . . . . . 113

Ftnancial lnstitutrons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Stock Transactions of Selected Financial Institutions 114

Table 14 -Common Stock Transactions and Activity Rates of Selected Financial InstitutJons 115

Stockholdmgs of lnstitutronal Investors and Others 116

Table 15 Market Value of Stockholdmgs of Institutional Investors

and Others , " , ,. 117

Table 16-Compames Reqistered Under the Investment Company

Act of 1940 as of September 30, 1980 , ,. 118

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Table 17 -Companies Registered Under the Investment Company

Act of 1940 .

Table 18-New Investment Company Registrations .

Table 19-1nvestment Company Registrations Terminated .

Private Noninsured Pension Funds: Assets .

Table 20-Assets of Private Noninsured Pension Funds .

Securities on Exchanges.. .

Exchange Volume. . . .

Table 21-Market Value and Volume of Sales of Registered Securities Exchanges .. .. .. .

NASDAQ Volume .

Share and Dollar Volume by Exchange .

Chart-Market Value of Securities Traded On All U.S. Stock Exchanges. .. . .

Table 22-Share Volume by Exchanges... .. . .

Table 23-Dollar Volume by Exchanges .

Special Block Distribution. . . . . . . . . . . . . . . . . .. . .

Table 24-Speclal Block DistributIons Reported by Exchanges .

Value and Number of Securities Listed on Exchanges.. ... . .

Table 25-Securities Listed on Exchanges-December 31. 1979

Table 26- Value of Stocks Listed on Exchanges

Securities on Exchanges ... . .. . .

Table 27 -Securities Traded on Exchanges ... . .. .

Table 28-Unduplicated Count of Securities on Exchanges .

1933 Act Registrations . . .. . .. .. .

Effective Registration Statements . . . . . . . . . . . .. . ..

Table 29-EffectIve Registrations .

Chart - Securities Effectively Registered With S.E. C. - 1935-1980 ..

Purpose and Type of Registrations .

Table 30-Effective Registrations by Purpose and Type of Security:

Fiscal Year 1980 . .

Chart-EffectIve Registrations Cash Sale for Account of Issuers

1935-1980 . . . . . . . . . . . . . . .. . .

Regulation A Offerings . .. .. . .

Table 31-0fferings under Regulation A .. . .

Enforcement . . . . .. .. . .

Types of Proceedings.. . . .. .. .

Table 32- Types of Proceedmgs .. . .

Table 33 -Investigations of Possible Violations of the Acts Admmistered by the Commission .. ... .. .... . ..... . ..

Table 34 -Administrative Proceedmgs Instituted During Fiscal Year

Ending September 30, 1980 .

Injunctive Actions 1979-1980 .

Table 35-lnJunctlve Actions ..

Crimmal Proceedmgs . . . .. ..

Table 36-Crimmal Cases

Tradmg Suspensions ..

Foreign Restricted List. . ....

119

120

120

121

121

122

122

123

124

124

125

126

126

127

127

128

128

129

130

130

130

131

131

132

133

134

134

135

136

136

136

136

137

140

141

141

141

141

142

142

142
Public UtilityHolding Companies 144

System Companies............................................ 144

Table 37 -Public UtilityHolding Company Systems 145

Table 38-Key Financial Statistics of Registered Public UtilityHolding Company Systems....................................... 145

Table 39-Public Financing of Holding Company Systems-Fiscal

1980 146

Fuel Programs. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 147

Table 40-Regulated Expenditures of Holding Company Systems Fiscal 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Corporate Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Table 41 Pending Reorganization Proceedings Under Chapter X of

the Bankruptcy Act in Which the Commission Participated Fiscal Year 1980 150

Table 42 Reorganization Proceedings Under Chapter 11 of the

Bankruptcy Code in Which Commission Entered Appearance

During Fiscal Year 151

SEC Operations 152

Chart-Appropriated Funds vs Fees Collected. . . . .. . .. .. . . . . . . . . 153

Table 43 Budget Estimates and Appropriations . . . . . . . . . . . . . . . . . 154

-

-

-

-

-
Regulation of the Securities Markets

Securities Markets. Facilities and

Trading

Natural Market System -During the

past fiscal year, continued progress was

made in the development of a national

market system. Most significantly, the

Commission initiated an experiment designed to increase competition in exchange-traded securities.

On June 11, 1980, the Commission

adopted Rule 19c-3 under the Securities Exchange Act of 1934 (Exchange

Act).' The rule precludes the application of off-board trading restrictions to

certain securities that become exchange-listed after April 26, 1979,

including those securities which had

been listed previously, but failed to remain so.

In its release adopting Rule 19c-3, the

Commission noted that the rule will

provide the opportunity for competition

between over-the-counter and exchange markets. By permitting exchange members to effect transactions

in-house, the rule may also result in

cost savings for brokers, dealers and investors. Furthermore, by limiting expansion of off-board trading restrictions, the rule will maintain the

status quo pending resolution of the

broader issues associated with such

anti-competitive requirements generally. Finally, the rule will permit the Commission and the industry to gain

valuable experience regarding the effects of concurrent over-the-counter

and exchange trading. Among other

matters, experience under the rule

should enable the Commission to observe the effectiveness of existing trading systems, particularly the Intermarket

Trading System (ITS) and the Cincinnati Stock Exchange's automated

National Securities Trading System

(NSTS), in addressing the needs of

such an environment. The lessons of

this experience may provide incentives

to improve those systems or to develop

new systems to accommodate any

changes in trading patterns that occur.

In a separate release, the Commission noted that it did not expect to take

further action in the near future with respect to off-board trading restrictions

generally.2 Accordingly, the Commission withdrew an earlier proposal- proposed Rule 19c-2 under the

Exchange Act with respect to offboard trading rules. That proposal,

which was published in June 1977,3

would have eliminated all remaining exchange restrictions on off-board principal transactions and on "in-house

agency crosses," (I.e., off-board agency

transactions in which a member acts as

agent for both buyer and seller in the

same transaction), with respect to reported securities.

On December 5, 1979, the Commission proposed Rule l1Aa3-2 under the

Exchange Act, which, if adopted, would

establish procedures relating to the filing and approval of plans governing

planning, developing, operating or regulating a national market system or its

facilltles.t The rule is proposed to be

adopted pursuant to Section

l1A(a)(3)(B) of the Exchange Act,

which provides for Commission approval of Joint industry action with respect to

the establishment of a national market

system. At the close of the fiscal year,

the Commission was analyzmq the

comments received in response to pro-

-
posed Rule 11Aa3-2 and was considermq further action with respect to it.

On February 19, 1980, the Commission adopted two proposals desiqned to

refine the operation of the consolidated

transaction reporting and quotation systems First, the Commission adopted

an amendment to exrstinq Rule 17a-155

(redesiqnated as Rule 11Aa3-1) under

the Exchange Act which eliminates,

subject to one condition, the preexisting prohibrtron on retransmission

of transaction information for purposes

of creating a moving ticker display. It

also sets forth procedures for amending

transaction reporting plans filed pursuant to the rule.

Second, the Cornrnissron adopted

Rule 11Acl-2 under the Exchange Act,

which Imposes minimum requirements

regulating the manner in which securitres information vendors display transaction and quotation inforrnatron." Most

importantly, the rule requires that the

NASDAQ system disseminate, for securities traded solely over-the-counter, the

best bid and best offer as opposed to a

"representative" quotation. This provision of the rule became effective on

July 5, 1980 On June 24, 1980, in order to allow time for development of

certain quotation processing facilities

related to compliance With the rule, the

Cornrnissron extended the effective date

of portions of the rule regulating the

display of quotation and transaction information for exchange-traded secuntres.?

During the fiscal year, the Commission continued its efforts to achieve ItS

goal of intermarket price protection, initially for public hrnit orders, and ultimately for all orders. The Cornrnissron

reviewed comments received on proposed Rule 11Ac 1-3 under the Exchange Act," which, if adopted, would

prohibit any broker or dealer from executing any order to buy or sell certain

securities at a price inferior to the price

2

of any public limit order displayed at the

time of execution unless the broker or

dealer assures that those hrnit orders

are satisfie d. In addition, the Commission continued to encourage the ITS

participants to implement their commitment to develop a joint plan for protection of public limit orders. At the end of

the fiscal year, the Cornrrnsston was

anticipating the receipt of an amendment to the ITS plan that would provide

for the implementation and operation of

a pilot Lirmt Order Information System

(LOIS). LOIS would provide, on the

floor of each ITS participant, a display

of limit orders entered from all participant exchanges at various price levels.

LOIS, in combination with ITS, is intended to p rov rd e a mechanism

through which nationwide lirmt order

protection WIth respect to certain block

transactions may be achieved. Finally,

the ITS participants have, on their own

irutrative, begun dISCUSSIons about a

rule that would preclude the execution

of transactions on one ITS participant at

prices Inferior to the quotations disseminated by any other ITS participant.

The Cornrnission has also continued

to encourage the development of linkages between the ITS and the over-thecounter market and between the ITS

and the NSTS. In ItS release adopting

Rule 19c-3, the Commission stated that

It expected that the ITS partictpants and

the National Association of Securities

Dealers, Inc. (NASD) would quickly

reach agreement on an automated linkage between the ITS and the NASDAQ

system, which was recently enhanced to

provide the capability for automated execution against third market maker

quotations. The Cornrrussion also stated that it expected that the ITS participants and the NSTS would quickly

reach agreement on a linkage between

their systems.

Shortly before the end of the fiscal

year, the Commission received a status
report from each of the relevant parties

on the Implementation of a linkage In

the near term between the ITS and the

NSTS. However,the ITS participants did

not commit themselves to the Implementation of an automated linkage between the ITS and the NASDAQ system.

While hopeful of achieving voluntary industry agreement with respect to the

linkage between the ITS and the

NASDAQ system, the Commission, at

the close of the fiscal year, was considering regulatory measures to ensure the

irnplernentatron of that linkage If no voluntary agreement is reached.

National System for Clearance and

Settlement of Se cur i ties Transactions During the fiscal year, substantial progress was made in the

Cornrmssion's effort to foster development of a national system for clearance

and settlement of securities transactions. The staff continued Its review of

the two Issues remanded by the United

States Court of Appeals for the District

of Columbia Circuit in Bradford National Cleanng Corporation u Secunties and Exchange Cornrrussron 9 In

that decision, the court affirmed the

Comrrussion's decision granting the application of National SecuritIes Clearinq

Corporation (NSCC) for registrauon as

a c1eanngagency The Cornrnissron has

viewed that registration as a key step In

achievmq a national clearance and settlement system. While not disturbing

NSCC's registration, the court remanded two issues to the Commission

for further consideration: (a) NSCCs

selection of Securities Industry Automation Corporation as the facilities manager of ItS consolidated system without

cornpetrtive bidding, and (b) NSCCs

use of geographic price mutualization

(GPM). GPM is the practice of charging

all participants the same fees regardless

of whether the participants deal with the

clearing agency at its main facility or

through a branch office.

In March 1979, the Cornrrussron sohcited public comment on those two ISsues.!" In addition to the 11 comment

letters received by the Commission In

the previous fiscal year, the Commission received three letters In fiscal 1980

from NSCC in response to those comment letters, as well as a report on the

economic aspects of competitive bidding and GPM, submitted on behalf of

NSCC. The Cornrnissron also received

an economic report submitted on behalf of Bradford National Corporation In

response to NSCCs report. The Commission IS completing Its review of

those letters, reports, and other available Information and expects to announce Its decisron on these Issues In

fiscal year 1981

The Cornrrussion continued ItSreview

of the Issues raised by proposed rule

changes submitted by Bradford Securities Processing Services, Inc. and NSCC

that would establish automated companson and clearance systems for municipal securities. Such systems have

resulted In siqrufrcant improvements In

the processing of equity and corporate

debt securities. Specifically, the proposed systems would (a) enable rnunicipal secunues brokers and dealers to

compare transactions through a central

entity rather than havinq to relate directly to each broker and dealer with whom

they execute transactions; (b) Increase

standardization In the processing of

transactions in municipal secunties,

and (c) provide the settlement and finencial benefits that accrue from the

netting of transactrons in the same secunty.

Progress toward a national system

was also evident in other areas.The expansion of interfaces among secunties

depositones was furthered by the Commission s approval of proposed rule

changes filed by The Depository Trust

Company and the Philadelphia Depository Trust Company estabhshmq an rn3

-
terface between thern.t! That interface

permits a participant in either depository to make book entry movements of

securities either to its own account, or

to an account of another participant, in

the other depository. It thus eliminates

the need for the actual withdrawal and

physical movement of securities in order to settle transactions among depository participants. In addition, the

national system was furthered by the

approval of a rule change which established procedures whereby book-entry

transfers within New England Securities

Depository Trust Company may be

used for settlement of trades clearing

through Boston Stock Exchange Clearing Corporation. 12

Options Trading -As previously reported, beginning on July 15, 1977,

there existed, at the Commission's request, a voluntary moratorium on expansion of the standardized options

markets, pendmg (a) completion of the

Commission's Special Study of the Options Markets (Options Study); (b) evaluation of the Options Study's findmgs;

and (c) resolution of Commission concerns regarding the adequacy of the

regulatory framework within which

standardized options trading o ccurred.!"

The report of the Options Study was

released to the public on February 15,

1979,14followed by a Commission release, on February 22, 1979, setting

forth the Commission's plan for implementing the Options Study's recommendations and terminating the

moratorium.P In that release, the Commission stated that, before it would permit further expansion of the options

markets, certain .recommendations of

the Options Study would have to be implemented by the options selfregulatory organizations and the

broker-dealer community. These recommendations generally called for additional self-regulatory organization

4

rules, improvements in self-regulatory

organization surveillance and compliance systems and procedures, and improved regulatory controls by brokerage

firms.

Upon finding that the self-regulatory

organizations had responsibly addressed the major regulatory deficiencies identified by the Options Study, the

Commission determined on March 26,

1980, to terminate the moratorium and

to begin to permit further expansion of

the standardized options markets.16

The Commission, therefore, approved

rule change proposals submitted by

each of the options exchanges and the

New York Stock Exchange (NYSE)P

Those rules, if complied with, should

provide significant additional protection

for public lnvestors.P The Commission

also received undertakings from the options exchanges that were found to be

generally responsive to the Options

Study recommendations to revise their

broker-dealer examination and compliance procedures. In addition, the Commission found that the surveillance

systems of the options exchanges, if effectively utilized and upgraded in the

normal course of business and in response to Commission staff requests,

would be adequate to detect most currently known trading abuses involving

options and their underlying securities.

With respect to those few recommendations that the Commission did not

believe the self-regulatory organization

rule proposals addressed adequately,

such as those relating to the establishment of a central customer complaint

file and the disclosure of commission

mformation on customer account statements, the Commission indicated that it

intended to initiate formal rule-making

proceedings to determine whether

Commission rules mandating compliance with such recommendations

should be adopted.

In its release terminating the options
moratorium, the Commission also issued a general statement of policy regarding the listing of additional put and

call options classes, the expansion of

multiple trading and the filing of expanstonary rule proposals (March policy

steternentl.!" As a result of the options

moratorium, each options exchange

had been limited to the listing and trading of five put option classes. In the

March policy statement, the Commission stated that it had not identified any

surveillance or compliance problems

unique to puts trading and perceived

certarn benefits with respect to the listmg of puts and calls on the same underlying security. To ensure that puts

expansion would occur in an orderly

manner, the Commission requested

each options exchange to furnish to the

Commission a proposed puts expansion schedule and to file proposals to

increase the number of its authorized

puts classes in accordance with that

schedule. Pursuant to the schedules

subsequently submitted by each of the

options exchanges;"?and based on representations that puts expansion would

not adversely affect exchange surveillance, operational capabilities or member firms back office operations, the

Commission approved a series of proposals to enable each options exchange

to list puts on any security underlying

that exchange's call option classes.F'

In view of the continuing restriction

on multiple trading and the limited

number of attractive stocks meetmg the

current options listing standards, the

Commission requested the options exchanges to formulate and jointly submit, an appropriate plan to allocate

additional call options. On May 30,

1980, the Commission approved proposals by the options exchanges lncorporatmg a listing procedure devised

jointly by them for the selection of 60

additional call options classes.P By the

end of the fiscal year, pursuant to Commission authorlzation.P'' the options exchanges had instituted options trading

on most of the securities selected m the

initial allocation.

One issue raised, but not resolved by

the Options Study was whether the

Commission should continue its policy

of restricting multiple trading in exchange-traded options. In the March

policy statement, the Commission

stated that, under appropriate circumstances, the benefits of multiple trading

appeared to outweigh any adverse consequences.At the same time, the Commission expressed the belief that the

near-term development of market mtegration facilities might create a more

fair and efficient market structure within

which multiple tradmg could occur. As

a result, the Commission deferred further action on the general expansion of

multiple trading in order to afford the

self-regulatory organizations an opportunity to consider whether, and to what

extent, the development of market integration facilities would rrururnizemarket

fragmentation and maximize competitive opportunities in the options markets. In this regard, the Commission

requested that the self-regulatory organizations jointly discuss the desirability of Implementing such facilities and

submit a report to the Cornmissron

which either described the facilities

needed and a plan for their implementation, or explained why such facilities

were unnecessary, unfeasible or otherwise inappropriate. In response to the

Cornrnissron's request, the options exchanges have formed a joint task force

to study options market integration

questions.

Finally, the March policy statement

announced the Commission's determination to once again begm to consider

expansionary self-regulatory organization rule proposals relating to options.

Among the regulatory mitlatives submitted by the self-regulatory organiza5
tions since the termination of the

moratorium are proposals to rescind

their respective restricted options rules

and to modify options position limits,

exercise limits and strike price intervals.

The self-regulatory organizations have

also submitted proposals involving new

options products, includmq an NASD

proposal to trade standardized options

in the over-the-counter rnarket'" and a

Chicago Board Options Exchange

(CBOE) proposal to trade options on

Government National Mortgage Association modified pass-through certificates

(GNMA).25At the end of the fiscal year,

the Commission was actively reviewing

these proposals.

Study of Government Securities

Markets -As a result of an inquiry from

Senator Harrison A Williams, the Commission staff, together with staff members of the Department of the Treasury

and the Board of Governors of the Federal ReserveSystem, conducted a study

of the government-related securities

markets. Staff members of the three

agencies assembled information about

these markets, Including abusive practices in securities transactions by market participants, and analyzed the

adequacy of existing regulation of these

markets. The agencies are preparing a

report for presentation to the Congress

that analyzes the need for increased

regulation of the government-related

securities markets and for legislation

establishing a new regulatory structure.

Issuer Repurchases Late in the fiscal year, the Commission considered

republishing for comment a revised version of proposed Rule 13e-2 under the

Exchange Act. If adopted, Rule 13e-2

would regulate purchases of an issuer's

securities by or on behalf of the issuer

and certain other persons. The rule

would generally limit the time, price and

volume of such purchases. In addition

to the purchasing limitations, the rule

would impose specific disclosure re6

quirements that would pertain to repurchase programs of substantial size. The

regulatory predicate that underlies proposed Rule 13e-2 is the need for a pattern of regulation that limits the ability

of an issuer and persons whose purchases are closely related to those of

the issuer to control the price of the issuer's securities. The rule, therefore, is

designed to assure-that the trading

markets are free from control or domination by the issuer and certain other

persons. Proposed Rule 13e-2 had been

previously published for comment in

1970 and 1973. (Subsequent to the

close of the fiscal year, on October 17,

1980, the Commission published a release asking for public comment on a

revised version of proposed Rule

13e_2.26

Effects Of The Absence of Fixed

Commission Rates -In May 1975, the

Commission prohibited the national securities exchanges from prescribing

fixed minimum commission rates to be

charged by their members. Later that

year, the Congress enacted a similar

prohibition as part of the 1975 Amendments. Pursuant to that legislation, the

Commission submitted to the Congress

five reports (through December 31,

1976), describing the effects of the unfixing of commission rates on the maintenance of fair and orderly markets and

on the development of a national market system for securities.

Analysis of cornrnission rates is now

Integrated into the Commission's ongoIng monitoring of the financial condition of the industry. In that connection,

the Commission's Directorate of Economic and Policy Analysis released to

the public in September 1980, a "Staff

Report on the Securities Industry in

1979" (Staff Report), which detailed the

results of its comrnission rate survey in

the context of a comprehensive analysis

of the basic economic dynamics of the

securities industry. The Staff Re-

-
port-the third in a continumg series of

annual reports designed to provide the

Commission with an economic basis

for anticipating the Impact of regulatory

changes upon the securities mdustry,

Investors and the broader economy-greatly expands the scope of the

previous reports on the securities industry with respect to fundamental industry trends and relationships while

continuing to monitor the impact of negotiated comrnisslon rates.

Some of the more specific findmgs in

regard to commission rates are as follows. From Apnl 1975 through June

1980, individual Investors' effective

commission rates, when measured as a

percent of principal value, declined 18.2

percent. Institutional customers, because of their larger average order size

and greater bargaining power, have

negotiated discounts averagmg 56.3

percent from the pre-May 1975 exchange-prescribed minimum rates.

When commission rates are measured

in cents per share, the declines were

10.5 percent for indivrduals and 55.3

percent for institutions. Individuals paid

an average of 26.9 cents per share on

their June 1980 orders, which averaged

427 shares in size. Institutional orders

averaged 2,513 shares m size and commissions on these orders averaged 11.6

cents per share. Individual orders of

10,000 shares or more showed commission rate discounts comparable to

similarly sized instrtutional orders.

Broker-dealers were affected by the

elimination of fixed mmimum commission rates largely depending upon the

extent to which they served mstitutional

investors. Some firms which did a large

portion of their total business with institutions have merged with more diversified firms or have gone out of business

and a new industry segment, discount

broker-dealers, has appeared. On the

whole, these changes now offer investors a broader spectrum of services with

a correspondingly broader range of

commission rates.

Monitoring Commission Rules

Monitoring of Commission rules continues with the annual Staff Report on the

Securities Industry in 1979 (the 1979

Report released in September 1980),

which describes and analyzes the securities industry's financial experience and

focuses upon major areas of concern to

the industry and the Commission. During the last fiscal year, the Comrnissron's Directorate of Economic and

Policy Analysis also developed and implemented a program to monitor the

impact of Rule 19c-3, which involves an

experimental removal of off-board trading rules; published the results of a survey measuring the impact on brokerdealers of Section 11(a) of the 1934

Act, which makes it unlawful for a

member of a national securities exchange to effect certain transactions,

and of the temporary rules promulgated

by the Commission to alleviate the

unintended effects of that section: continued to monitor and provide reports

to the Commission concerning the effects of the Intermarket Tradmg System

on the quality of markets, the routing of

order flow and intermarket competition:

provided monitoring reports to the

Commission concerning the Cmcmnati

Stock Exchange National Securities

Trading System, an automated securities trading market; compiled and reported the results on its Survey of Specialists, which has been conducted over

the past five years; and published a

study on the monitoring of the operation of Rule 144 (a "safe harbor" rule

applicable to public sales of restricted

stock In the over-the-counter market)

and its effect on securities prices.

7

-
Regulation of Brokers, Dealers,

Municipal Securities Dealers and

Transfer Agents

Regulatory Burdens on Small Brokers and Dealers The Commission IS

aware of the need to evaluate the costs

and competitive Impact of Its regulations on small brokers and dealers. Accordingly, in adopting regulatory requrrernents, the Commission weighs

the benefits to investor protection and

other statutory goals against possible

cornphance and competitive burdens.

In addition, the Commission endeavors

to tailor regulatory requirements to particular business practices so as to avoid

imposing unnecessary regulatory burdens. This effort can particularly benefit

small, more specialized brokerage

firms.

Broker-Dealer Reporting Requirements On September 9, 1980, the

Commission proposed amendments to

Form X-17A-5, the Financial and Operatrorial Combined Uniform Single

(FOCUS) Report, under the Exchange

Act, which ISfiled with the Commission

by broker-dealers.P" The proposed

amendments would revise and clarify

certain requirements of the FOCUS reporting system so that the reporting

burden is minimized, consistent with

the attainment of other public policy

objectives. In addition, they would provide more useful information that will

assist the Commission In monitoring

the operations and financial condition

of broker-dealers and In evaluating the

likely effect of proposed and exrstinq

regulations on the securities industry

and would define Items more clearly so

that Information will be reported in a

consistent manner by all firms.

Registration Requirements Form

U-4, the Uniform Application for Securities and Commodities Industry Registration, IS the personnel form that the

Commission requires to be filed on be8

half of associated persons of a broker

or dealer by a registered broker or dealer who is not a member of a registered

national securities association. Form

U-4 is also accepted as a uniform application form for associated persons by

46 states, all of the national securities

exchanges and the NASD.

During fiscal 1980, the Commission

proposed for adoption extensive revisions to Form U_4.28 These proposed

revisions include changes in format to

Improve clarity and to eliminate duplication and the addition of several questions requesting information about the

applicant. If adopted, this amended

form Will be used by the entities which

currently use Form U-4. The amended

form would also be used in implementing the operation of the Central

Records Depository (CRD). The CRD IS

a Joint undertaking by the selfregulatory organizations and 46 states,

under which an applicant will be required to file only one application in order to register with all participating

entities.

Broker-Dealer Examinations -As a

result of a reorganization within the Division of Market Regulation in January

1980, the Branch of Broker-Dealer Examinations was established in the Office of Inspections, Examinations and

Surveillance. The branch has primary

responsibility for the coordination of the

Commission's broker-dealer examination programs.

The branch plans and coordinates

the broker-dealer examinations conducted by the Commission's regional

offices and has revised and improved

the examination materials used by the

regional office staffs. All examinations

conducted in the program are reviewed

by the branch to detect unique issues or

trends in the operations or sales practices of the broker-dealer community. In

addition, the branch serves as a clearinghouse for legal and regulatory in-

-

-

-
qurr ie s from the regional office

examining staffs.

The branch also coordinates regional

office efforts to respond to changes and

events in the industry. For instance, the

branch coordinated the regional offices'

efforts to conduct a detailed review of

the operational and trading practices

activities of discount broker-dealers.

The branch also worked with the various stock exchanges in order to prepare for and alleviate strains on the

market created by the New York City

transit strike.

In March 1980, the branch conducted

a regulatory conference for the Commission's Assistant Regional Admirustrators for Regulation and Chief

Broker-Dealer Examiners. At the conference, the regional office representatives discussed varIOUS regulatory

developments and problems. The conference resulted in a number of projects

relating specifically to areas of concern

in the Commission's examination program.

In September 1980, the branch conducted the first of a new series of training sessions for the Commission's securities compliance examiners. Experts

on various aspects of examination techniques and the securities laws, drawn

primarily from the Commission's staff,

served as instructors for examiners

from all of the Commission's regional

offices.

Municipal Securities Brokers and

Dealers On January 15, 1980, the

Commission adopted amendments to

Rule 15b 10-12 under the Exchange

Act.29 The amended rule exempts the

municipal securities transactions of all

"Securities and Exchange Commission

Only" (SECO) brokers and dealers from

the Commission's fair practice rule, and

makes the SECO fair practice rules applicable to transactions in government

and other exempted securities by all

SECO brokers and dealers.

On August 28, 1980, the Commission adopted amendments to Form

MSD, the form used by municipal secunties dealers that are banks or separately identifiable departments or divisions

of banks.P? The amendments conform

a defmition In Form MSD to a definition

in a rule of the Municipal Securities

Rulemaking Board and allow, under

certain circumstances, bank municipal

securities dealers to substitute, for

forms currently required to be filed with

the Cornmissron, forms required by the

bank regulatory agencies containing

similar information with respect to supervisory personnel.

During the fiscal year, the Commission, pursuant to Section 17(b) of the

Exchange Act, jointly conducted with

the appropriate bank regulatory agency

one examination of a bank municipal

securities dealer.

Lost and Stolen Securities The

Lost and Stolen Securities Program (the

Program), which includes more than

17,000 Federally-insured banks, securities organizatIons and non-bank transfer agents as participants, uses a data

bank to monitor rnissinq secunties. Participants use the system to seek assurance of the authenticity and ownership

of the certificates they are processing.

On June 10, 1980, the Commission released a staff report containing comprehensive general statistical mformation

regarding the operation of the Program

for calendar year 1979. As stated in that

report, Securities Information Center,

Inc., of Wellesley Hills, Massachusetts,

the Commission's designee to operate

and maintain the computerized data

base of missing, lost, counterfeit and

stolen securities, received reports of

loss, theft or counterfeiting concerning

approximately 280,000 certificates valued at approximately $1.3 billion. As of

December 31, 1979, the aggregate net

value of the data base since the incep9

-

-
tion of the program was approximately

$2.6 billion.

Transfer Agents -On September 2,

1980, the Commission published a

comprehensive release31 that sets forth

staff interpretations regarding Rules

17Ad-l through 17Ad-7 under the Exchange Act. These rules establish,

among other things, minimum performance standards and record-keeping requrrernents for all registered

transfer agents. The release (a) discusses many of the Issues previously

addressed by the staff in interpretive

and no-action letters that are publicly

available; (b) sets forth prior responses

to many oral requests for interpretive

assistance; (c) further clarifies previous

written staff interpretations; and (d) provides illustrations of the practical operanon of many of the provisions of these

rules.

Securities Investor Protection Corporation The Securities Investor Protection Act of 1970 (SIPA)32 provides

certain protections to customers of brokers and dealers that fail to meet their

obligations to their customers. SIPA is

administered principally by the Securities Investor Protection Corporation

(SIPC), a non-profit membership corporation, the members of which are, with

limited exceptions, registered brokers

and dealers. SIPC IS funded through assessments on ItS members, although it

may borrow up to $1 billion from the

United States Treasury under certain

emergency conditions.

Dunng fiscal year 1980, SIPC transmitted to Congress a recommendation,

which was later endorsed by the Comrmssion, that the level of customer protection provided by SIPA be raised to

$500,000 (from the previous level of

$100,000), not more than $100,000

(previously $40,000) of which may be

for cash claims. A bin Incorporating this

recommendation was pending before

Congress at the close of the fiscal year.

10

(Just subsequent to the end of the fiscal

year, the bill was enacted into law.)

Oversight of Self-Regulatory

Organizations

Netionet Securtnes Exchanges -As

of September 30, 1980, ten exchanges

were registered with the Commission as

national securities exchanges pursuant

to Section 6 of the Exchange Act:

Arnerican Stock Exchange (Amex);

Boston Stock Exchange (BSE); Chicago Board Options Exchange (CBOE);

Cmcmnau Stock Exchange (CSE), Intermountain Stock Exchange (ISE);

Midwest Stock Exchange (MSE); New

York Stock Exchange (NYSE); Pacific

Stock Exchange (PSE); Philadelphia

Stock Exchange (Phlx); and Spokane

Stock Exchange (SSE). No exchange is

currently operating under an exemption

from registration as a national securities

exchange.

Dunng the fiscal year, the Commission completed a review of its policy

concerning applications for unlisted

tradmg privileges in listed securities.

The Commission determined to grant

applications for unlisted trading privileges where (a) transactions in the subject securities are required to be

reported in the consolidated transaction

reporting system and (b) the exchange

has the capacity for executing trades in

a fair and orderly manner. In addition,

Rules 12f-l and 12f-3, regarding information to be included in applications

for the extension or termination of unlisted tradmg privileqes, were amended

to reflect the new standards set forth in

the Securities Acts Amendments of

1975 (1975 Arnendmentsj.P''

In connection With the Cornrnissron's

oversight of the delistmg of securities

traded on national securities exchanges,

pursuant to Section 12 of the Exchange

Act, the Commission, during the fiscal

year, granted applications by exchanges

-
to strike 65 equity issues and nine debt

issues from listing and registration. The

Commission also granted applications

submitted by issuers requesting withdrawal from listing and registration for

25 equity issues and 12 debt issues

The national securities exchanges reported to the Commission, pursuant to

Section 19(d)(1) of the Exchange Act

and Rule 19d-1 thereunder, 407 final

disciplinary actions imposing a variety

of sanctions upon member firms and

their employees. On August 22, 1980,

the Commission amended Rule 19d-1

to exempt from its reporting requirements uncontested summary sanctions

imposed for violations of exchange regulations regarding floor decorum 34

During the fiscal year, the Commission received from the national exchanges 208 fllmqs pursuant to Rule

19b-4 under the Exchange Act, includrnq 177 proposed rule changes and 31

notices of a stated policy, practice or interpretation not constituting a rule

change

Among the significant exchange rule

filings approved by the Commission

durmq the fiscal year were: (a) adoption

of the Uniform Code of Arbitration by

ten self-regulatory orqanizations.:" (b)

establishment by the NYSE of an OpenIng Automated Report Service and trade

comparison procedures for orders received before the opening of trading;36

(c) a rule change of the MSE requiring

MSE specialists to guarantee execution

of orders between 100-399 shares of issues traded in the Intermarket Tradmg

Systern.P" and (e) an Amex rule recommending that Amex-listed companies

have at least two independent directors

and establish audit committees composed solely of independent dlrectors.P"

During the fiscal year, the Commission disapproved a NYSE proposed rule

change to limit the number of physical

access annual members to two because

the Commission was unable to find that

the proposed rule change was consistent with Sections 6(b)(8) and 6(b)(5) of

the Exchange Act.40 The Commission

also Initiated proceedmgs to determine

whether to disapprove proposed rule

changes of the NYSE and Amex to

make permanent their rules governing

registered competitive market makers

(RCMMs) and registered equity market

makers (REMMs), respectively.f! The

rules currently permit individual members to register as supplemental market

makers in equity securities, thereby

qualifying their on-floor proprietary

trades for the market maker exemption

from the general exchange member

proprietary trading prohibitions of Section l1(a)(1) of the Exchange Act.

National Assocrauon of Securities

Dealers, Inc. The NASD is the only

national securities association registered with the Commission. At the close

of the fiscal year, 2,888 brokers and

dealers were NASD members.

During the last nine months of the

fiscal year, the NASD reported to the

Commission the final disposition of 210

disciplmary actions. At the beginning of

fiscal 1980, 16 proceedings for review

of NASD disciplinary decisions were

pendmg before the Commission, and

durrnq the year 12 additional cases

were brought up for review. The Comrnission reviewed 22 of these cases

During the year, the Cornmission

continued to review an NASD proposed

rule change submitted In 1978 to prohibit NASD members from giving discounts to customers in distributions of

securities offered at a fixed price The

proposal would amend the NASD's

Rulesof Fair Practice to Impose a more

explicit prohibition on an NASD member's taking securities m trade (swap) at

more than their fair market price and to

hrnit the ability of members to grant or

receive discounts In connection with

fixed price offerings. The proposal was

filed in responseto a 1976 judicial deci11

-
sion, Papilsky v Berndt.v- which held

that certain discounts were not unlawful

absent a contrary Commission or NASD

ruling.

Between September and November

1979, the Commission held public

hearings on the issues raised by the

proposed rule. Based on the testimony

of the 16 witnesses at the hearings and

on the comment letters received, the

Commission determined to send the

NASD a letter requesting the NASD to

consider amending the proposal in certain respects.v' The Commission suggested that the NASD broaden the

circumstances under which a member

could be compensated in connection

with a fixed price offering for research

provided to customers and revise the

definition of fair market price as it relates to the practice of swapping securities in a fixed price offering. The NASD

fIled amendments to the proposal in

September 1980 as suggested by the

Comrnisslon.v' (Subsequent to the

close of the fiscal year, the Commission

approved the NASD's revised rules proposals.)

DUring the fiscal year, the Commission approved a proposed rule change

of the NASD to create two new categories of registration for employees of

NASD member flrms.?" The proposal

permits an individual whose activities

are limited to either investment company and variable contracts products or

tax shelter securities (direct participanon programs) to register with the

NASD as a "limited representative" in

one of those areas after passmg an appropriate specialized qualification examination.

In addition, the Commission approved a proposed rule change of the

NASD to amend the procedures for the

reporting of over-the-counter transactions in listed securities to the consolidated transaction reporting system.f"

The rule change requires NASD mem12

bers to report over-the-counter principal transactions on a "gross" basis, i.e.,

exclusive of any commission equivalent

or differential, as well as any retail

mark-up or mark-down. Previously,

those transactions were reported inclusive of any mark-up or mark-down.

Since transactions effected on exchanges are reported on a gross basis,

the rule change should provide greater

comparability of over-the-counter and

exchange transaction information in

listed securities.

The Commission also approved a

rule that authorizes the NASD Board of

Governors to adopt rules relating to the

sponsorship and distribution to the

public of tax shelter securities, or direct

participation programs, by NASD members and their affiliates.47 Such rules

adopted by the NASD Board of Governors must be submitted to the Commission for individual approval.

Allocation of Regulatory Responsibility -In fiscal 1980, the Commission

approved four plans pursuant to Section 17(d)(l) of the Exchange Act and

Rule 17d-2 thereunder, for the allocation of regulatory responsibility among

the NASD and four stock exchanges-the BSE, the CSE, the MSE,

and the PSE.48 Pursuant to these plans,

the NASD is responsible for conducting

all on-site examinations, both routine

and special, and reviewing related reports of brokers and dealers that belong

to both the NASD and one of the exchanges. Dual members designated to

the NASD after the execution of the

plans would be examined by the NASD

for compliance with the NASD's rules

and the exchange's regulatory rules. As

a result of the allocation plans, a dual

member which had previously been examined on a routine basis by the NASD

and one of the participating exchanges

would be subject to an examination by

only the NASD. The adoption of the

plans has therefore eliminated duplica-
tive examining responsibilities between

the NASD and each of the four exchanges that executed the plans.

Municipal Securities Rulemaking

Board -As in the case of national securities exchanges and the NASD, the

Commission reviews proposed rule

changes of the Municipal Securities

Rulemaking Board (MSRB). During the

fiscal year, the MSRB filed 12 rule proposals. The Commission considered a

number of those proposals and others

which were pending from previous

years.

On March 6, 1980, the Commission

approved an MSRBrule that established

standards of ethical conduct for municipal securities brokers and dealers that

provide financial advisory services for

compensation to municipal issuers.r'?

The rule requires a municipal securities

broker or dealer, acting as a paid advisor with respect to a new issue of municipal securities, to satisfy certain

conditions specified in the rule prior to

purchasing the same Issue. The rule

also requires a municipal securities broker or dealer that establishes a "financial advisory relationship" with an issuer

with respect to a new issue of municipal

securities to enter into a written agreement that sets forth the basis of compensation to the municipal securities

broker or dealer.

In addition, the Commission approved substantial changes in the

MSRB's rules pertaining to customer

and interdealer confirmations. 50 The

changes were designed to increase the

amount of information available regarding prices, yields and call features on

municipal bonds. The effective dates of

the amendments were originally delayed for six months, to September 24,

1980, to allow time to plan for the orderly implementation of the new requirements. On September 12, 1980,

the effective dates of the amendments

were extended to December 1, 1980, to

allow additional time for implementation."!

Finally, the Commission approved

amendments to the MSRB's arbitration

code which established a simplified

procedure for the resolution of intraindustry disputes involving $5000 or

less. Such disputes can now be settled

by a single arbitrator instead of the previously required three.P The amendments were also designed to conform

the MSRB rules with the uniform arbitration code developed by the Securities

Industry Conference on Arbitration. 53

Clearing Agencies -DUring the fiscal year, the Commission announced

the publIcation of standards that the DIvision of Market Regulation will use m

reviewing clearing agency registration

applications.54 The standards represent

the views of the Division regardmg the

manner in which clearing agencies

should comply with the registration proVISionsof Section 17A(b)(3) of the Exchange Act. They deal with, among

other thmgs, requirements regardmg

participation in clearing agencies, fair

representation of participants, disciplinary procedures, the safeguarding of

securities and funds and the clearing

agency's obligations to participants.

The Division will apply the standards in

making recommendations to the Comrrussion regardmg the granting or denial of registration to the 13 clearing

agencies that currently are temporarily

registered with the Commission, and

those c1earmgagencies that may apply

for registration in the future.

In December 1979, the Commission

adopted Exchange Act Rule 17Ad-8,

which requires registered c1eanngagencies to provide, upon request, securities

position listings to issuers whose securities the clearing agency holds in its

name or that of its nominee.55 A securities position listing is a list of (a) the

participants in a clearing agency on

whose behalf the clearing agency holds

13
the Issuer's securities and (b) their posinons In the Issuer's securities as of a

specified date. The Final Report of the

Street Name Study published by the

Cornrruss ion In December 1976,56

made several recornrnendations to improve the existing system for

transmitting cornmumcatrons from ISsuers to beneficial shareowners, and

Rule 17Ad-8 was adopted In response

to one of those recommendations.

During the fiscal year, the Commission staff conducted oversiqht mspecnons of Stock Clearing Corporation of

Philadelphia, Philadelphia Depository

Trust Company and Pacific Clearing

Corporation. The staff also conducted a

joint inspectron of Pacific Depository

Trust Company (PSDTC) with the

Board of Governors of the Federal Reserve System (FRS), which IS PSDTC's

appropriate regulatory authority. The

conduct of this examination on a JOint

baSIS furthered the statutory goal of

avoiding unnecessary regulatory duplication and unnecesary regulatory burdens on clearing agencies that are

subject to Inspection by both the Comrrussion and Federal bank regulators.

The findings of these inspections

were discussed with the respective

clearing agencies and they either have

been or are being addressed.

Procedures for FIling Proposed Rule

Changes Section 19( b) of the Exchange Act, as amended by the 1975

Amendments, requires self-regulatory

organizations to file all proposed rule

changes with the Commission for approval. Shortly after Section 19(b) became effective, the Commission

adopted Rule 19b-4 and related Form

19b-4A establishing procedures for selfregulatory orqaruzations to file proposed rule changes and desiqnatrnq the

types of proposed rule changes that

may become effective upon filing. In

May 1979, the Cornrrussion proposed a

number of amendments to Rule 19b-4

14

and Form 19b-4A57 which were designed to improve and srrnphfy the rule

filing process, thus expediting Commission review of proposed rule changes.

The Commission received a number

of comment letters In response to its

proposed amendments to the rule filmq

requirements and during the fiscal year,

the staff revised the proposals in light of

issues raised by those comment letters.

(Subsequent to the close of the fiscal

year, the Comrmssion adopted amendments to Rule 19b-4 and Form

19b-4A 58 The amendments, to become

effective on January 1, 1981, include

(a) an amendment to Rule 19b-4 clarifying which actions of self-regulatory

organizations require proposed rule

changes; (b) an amendment to Rule

19b-4 designating certain clearing

agency rules as eliqible for summary effectiveness; and (c) amendments to

Form 19b-4A, redesiqnated as Form

19b-4, to specify, in greater detail, the

Information required by that form.)

Inspections and Surveillance

During the fiscal year, the Commission's staff continued its inspection program of the Nation's securities markets.

The purpose of this inspection program

IS to evaluate, on an ongoing basis, the

adequacy of the operational, market

surveillance, compliance, and drsciplinary programs of the various stock and

options exchanges and the NASD.

A total of 12 inspections focusing on

market surveillance programs were

conducted during the fiscal year. These

Included Inspections of the equity tradIng programs of the Amex, the BSE, the

National Securities Trading System

(NSTS) of the CSE, the Intermountain

Stock Exchange, the MSE, the

NASDAQ trading program of the NASD,

the NYSE, the Phlx, the PSE, and the

Spokane Stock Exchange. In addition,

the staff inspected the options trading

programs of the Amex, the CBOE, and

the Phlx.

-

-
Since September 1979, the staff has

also conducted inspections of the operations of NASD district offices located

in Atlanta, Boston, Seattle, Cleveland,

Los Angeles and Dallas. The focus of

these Inspections was on the overall

quality of the NASD's programs to insure compliance by Its member firms

with the securities laws. Specifically, the

staff reviewed all NASD district office

programs including not only the district

offices' routine examination programs,

but also their programs for (a) investigating customer complaints and terminations of registered representatives

from employment for cause; (b) monitoring the financial condition of member firms; (c) processing Regulation T

extension requests; and (d) disciplining

member firms.

The Commission's inspection program disclosed a number of deficiencies in the current programs of the

self-regulatory organizations examined

during the fiscal year. In the surveillance

area, these included: (a) inadequate

market surveillance techniques for particular categories of trading violations at

some self-regulatory organizations; (b)

Inadequate trading information and

trade processing systems at several

marketplaces; and (c) inadequate prosecution of disciplinary cases by some

securities exchanges. In addition, the

compliance inspections noted various

problems with the broker-dealer examination programs conducted by the

NASD and certain of the exchanges.

The self-regulatory organizations were

asked to address these problems, and

throughout the course of the fiscal year

significant action was taken by particular self-regulatory organizations in several of these areas.

In November 1979, an inspection report presented to the Commission regarding regulatory capabilities of the

Amex questioned the adequacy of disciplinary actions taken in several trading

lnvestrqations. The Commission sent a

letter to the Amex requesting that the

exchange undertake a general review of

its disciplinary procedures with a view

toward improving the performance of

Its disciplinary system. In response, the

Amex initiated several changes in its enforcement procedures regarding tradIng floor offenses, strengthened its

disciplinary staff, and appointed a Special Committee of the Amex Board of

Governors to review the entire disciplinary system. On September 18, 1980,

the Special Committee delivered its final report to the Commission. Although

the Committee concluded that radical

changes were not necessary, it made

several recommendations to improve

the prosecution of disciplinary matters

at the Amex. In part because of its experience with the Amex disciplinary process, the Cornrrussron staff mitrated,

shortly before the close of the fiscal

year, a study of the performance of the

disciplinary system of other selfregulatory organizations.

Similarly, dunng November 1979, the

staff presented an inspection report to

the Commission that detailed the various types of multiple and Interlocking

market maker accounts which can occur at the CBOE, and the difficulty

which the existence of such account relationships often posed for the CBOE in

enforcing many of its trading rules. As a

result, the Commission requested that

the exchange undertake a complete review of market maker account relationships on the CBOE floor and that it

evaluate whether all CBOE market

makers were actually performing in a

manner consistent with their market

making obligations. In June 1980, the

CBOE filed a proposed rule change

with the Commission to deal with these

issues.

Dunng October, November and December of 1979, the staff conducted

three separate inspections of the mar15
ket surveillance and other regulatory

programs of the NYSE. These inspections documented that the NYSE did

not have an adequate transaction audit

trail in certain respects and assessedits

effect on the exchange's surveillance

and disciplinary program. On the basis

of these inspections, the staff prepared

a report to the Commission regarding

the performance of the NYSE market

surveillance system and the Commission requested that the NYSE present a

specific plan for the creation of an adequate transaction audit trail. On September 9, 1980, the NYSE presented its

plan to the Commission's staff, including provisions for the development of

an audit trail and the enhancement of

several important market surveillance

functions during fiscal year 1981.

In February 1980, the staff conducted

an inspection of the equity trading program of the PSE.This inspection found

significant deficiencies in the surveillance system of this exchange, specifically with the lack of a complete audit

trail and any routine automated review

of trading on the PSE floor. In recognition of these problems, the PSE undertook a complete overhaul of its surveillance program for equity trading and

developed automated systems to replace ineffective manual procedures.

The Commission also brought administrative actions against the Phlx and

the SSE as a result of problems discovered at those exchanges during previous years. In its proceeding against the

Phlx, the Commission found that the exchange had failed to enforce certain of

its rules regarding equity quote dissemination and options trading, and ordered remedial action to correct these

deficiencies. In the SSE matter, the

Commission found that the exchange

had failed to develop and employ adequate surveillance procedures to detect

violations by its specialists of the margin, net capital and bookkeeping re16

quirements. (In both cases, the exchanges settled the action by agreeing

to implement certain changes as explained more fully in the "Enforcement

Program" section of this Annual Report.)

The staff also conducted an inspection of the Amex options compliance

program during September 1979. The

inspection focused on the response of

the Amex to the recommendations

made in the Comrnlssion's Options

Study. The staff found, generally, that

the Amex had made good progress in

implementing the Commission's Options Study recommendations, but

noted several areas where additional

progress was needed.

The staff also conducted an oversight

inspection of the compliance activities

of the Phlx dunnq June 1980. The inspection included a review of the Phlx's

financial surveillance of member firms,

its examination and disciplinary programs, and its response to the Options

Study. This Inspection had not yet been

closed as of the end of the fiscal year.

In its inspections of the NASD's district offices, the Commission's staff

found that those offices generally appeared to be executing their routine examination programs with reasonable

thoroughness. The staff identified, however, several areas in which remedial attention was needed to cure problems in

the examination program.

SInce September 1979, the Division

of Market Regulation has processed 50

applications pursuant to Sections

6(c)(2) and 15A(g)(2) of the Exchange

Act and Rule 19h-1 thereunder, to perrnrt persons subject to statutory disqualifications, as defined in Section

3(a)(39) of the Exchange Act, to become associated with broker-dealers.

The following self-regulatory organizations filed such applications: (a) the

NASD filed 23 applications; (b) the

NYSE filed 23 applications; and (c) the
Amex, the Phlx, the CBOE, and the

MSE each filed one application. The

Commission determined that six of

these applications were not in the public interest.

Market Oversight Surveillance System The Market Oversight Surveillance System (MOSS) is an automated

information system essential to effective

Commission oversight of the nation's

securities markets.

The system has five basic functions

which support the Commission's ongoIng programs. The first IS trade audit,

which provides the basic ability to rnonrtor trading in the nation's securities

markets on an exception basis. The

second, market reconstruction, allows

the staff on an as-needed basis to review historical trading. The third function, inspection support, assists in the

inspection of broker-dealers, investment companies/advisers and selfregulatory organizations (SROs) with

pre-inspection reports, analysis of Inspection information and follow-up. Investigation tracking, the fourth function,

assists management in the overall coordination of SRO and Commission inquiries and investigations. The final

function is the analysis/MIS function,

which gives the Commission the capability to evaluate the econormc impact

of existmq or proposed rules.

Prior to designing MOSS, the Commission conducted a study of market

surveillance and regulatory processesto

determine the feasibility of improving its

market surveillance and oversight functions. Once it was determined that surveillance and oversight could be enhanced with such an automated

system, a detailed design was formulated and presented to the Commission.

The Commission indicated two prime

interests: (1) observing certain trading

phenomena surrounding options tradIng, especially in light of lifting the options moratorium, and (2) testing the

theory and practicality of the system design. Therefore, it was decided to initiate a pilot or prototype of the system in

order to further evaluate the proposed

design.

The first elements of the pilot became operational in January 1980 In

contrast to the full MOSS design which

provides on-line features, the pilot was

limited to off-line processing. Although

it captured basic trading and clearing

data for listed securities, as well as

NASDAQ quotes, the pilot analysis

components did not include regional

trading and clearing information or

NASDAQ transactions.

During its first nine months of operation, the pilot provided the Commission

staff with data useful In both its surveillance and oversight functions. During

the life of the pilot, the staff has had an

opportunity to observe the adequacy of

SRO surveillance and data collection

systems.

Concurrent with the pilot project, the

full MOSS program underwent extensive scrutiny by OMB and Congress

during fiscal 1980. Its funding requirements were carefully examined first by

OMB, prior to Including provision for

MOSS in the President's fiscal 1981

budget, and then by the Appropriations

Committees of the two Houses. In addition, the Senate Banking and House

Commerce Committees closely examined MOSS as part of their overall review of Commission activities in

connection with the agency's authorization. The final authorization approved

Commission implementation of the first

two years of MOSS, spread over a

three-year period, 1981- 1983.

The Commission has worked closely

with the SROs in the development of

the MOSS system and has tried to be

responsive to the feedback received.

Throughout 1980, a number of briefings were conducted for the SROs and

17

-
other members of the industry in order

to introduce MOSS and provide insight

into its possible impact. Briefings of

SRO upper management, as well as

their technical counterparts, were con18

ducted at the various SROs and at the

Commission's headquarters. This will

be a continuing process throughout

MOSS development.
The "full disclosure" system administered by the Commission is designed to

assure that the securities markets operate in an environment in which full and

accurate material information about

publicly traded companies is available

to all interested investors. During the

fiscal year, the prime focus of the Commission in the area of disclosure policy

was on the integration program.

This program has several major objectives: (1) integration of disclosures

required by the Securities Act of 1933

(Securities Act) and the Securities Exchange Act of 1934 (Exchange Act); (2)

narrowing of the differences between

information supplied by registrants to

the Commission in formal filings and to

various segments of the public through

informal means; (3) improvement of

disclosure requirements by revising obsolete rules and making requirements

uniform; and (4) refocusing of the staff

review process. Substantial progress

has been made in the last year in reaching these objectives.

Other areas of particular importance

included the development of gUIdance

for special situations outside the normal

system of continuous disclosure and

the implementation of a program review

of existing disclosure rules and guides

to delete or amend unnecessary or outmoded provisions.

Integration Program

The integration program is a considered response to the need to reduce

burdens imposed by duplicative discloSure oblIgations under the Federal securities laws. The Securities Act

established a system of transactionThe Disclosure System

oriented disclosure, With the focus on

particular offermgs of securities. The

Exchange Act established a system of

contmuous disclosure, with the focus

on public companies and their ongoing

reportmg obligations to the Commission and to their shareholders. These

two systems developed and operated

independently over more than 40 years.

resulting in an unnecessary degree of

duplication in the disclosure documents

produced.

The mtegration program, an attempt

to bring the two systems together mto a

smgle, rationalized system of corporate

disclosure. ISbeing carried out at several different levels. In the Exchange Act

context, the Commission has eliminated unnecessary disclosure requirements and minimized the differences

between formal disclosure documents.

such as annual reports on Form 10-K.

and those informal shareholder communications produced outside the system of formal Commission filings, such

as annual reports to security holders.

The Commission is also further

mtegratmg the disclosure systems under the Securities Act and Exchange

Act by taking advantage of improved

Exchange Act continuous disclosure

documents to meet Securities Act disclosure needs wherever possible. Such

a system has been expanded to include

offerings of securities issued pursuant

to employee benefit plans registered on

Form S-8. Proposals to expand such 10-

tegration to nearly the entire system of

registration under the Securities Act

have also been published. Finally, the

procedures followed by the staff reviewing these disclosure documents

have been substantially revamped to

19
account for the shift in emphasis from

Securities Act disclosure to the continuous disclosure documents filed under

the Exchange Act.

Revisions of Form 1O-K During the

one-week period of August 27 to September 2, 1980, the Commission issued

seven releases designed to implement

integration of the disclosure and reportIng provisions of the Securities Act and

Exchange Act and to enhance the effectiveness of required disclosure, while

reducing attendant burdens to the extent possible. At the center of this program are the amendments to Form

10-K, the annual report form required

to be filed by most publicly owned

companies, Regulation S-K, a repository of standard disclosure instructions

covering both the Securities Act and the

Exchange Act; and Exchange Act Rules

14a-3 and 14c-3, which govern annual

reports to security holders. 59 These

amendments restructure Form 10-K

and impose content requirements on

the annual report to security holders

which are generally consistent with the

revised Form 10-K requirements, thus

encouraging and facilitating the voluntary combination of the annual report to

security holders with the formal Commission report on Form 10-K. In addition, the Form 10-K was amended to

require that a majority of the registrant's

board of directors sign the company's

Form lO-K. This requirement IS consistent with the shift in emphasis effectuated by the integration program away

from Securities Act disclosure to the

continuous disclosure scheme under

the Exchange Act.

The convenient central repository

created by Regulation S-K was expanded to include three new items previously listed separately: Management's

Discussion and Analysis of Financial

Condition and Results of Operations;

Selected Financial Data; and Market

Price of the Registrant's Common Stock

20

and Related Security Holder Matters.

These three new items, which must appear in both the Form lO-K and the annual report to security holders, unify

and give more meaning to the disclosure in both these documents. The new

Regulation S-K items, with certain limitations, also appear in Securities Act

registration statements, thereby improving the disclosure in such documents

and further providing the basis for a integration of the Form 10-K, the annual

report to security holders, and registranon statements filed under the Securities act. The result of these major

revisions to rules and forms is the establishment of a uniform, minimum

package of information to be found in

Securities Act registrations; Exchange

Act periodic disclosure reports; and the

annual report to security holders.

On August 27, 1980, the Commission adopted other amendments to

Regulation S-K and certain frequently

used forms under the Securities act and

the Exchange Act in order to standardize and improve the Commission's requirements relating to the filing of

exhibits.P? These amendmentsanother step in achieving uniform filing

requirements-deleted 13 exhibits formerly required to be filed, revised and

made uniform the requirements relating

to certain other exhibits and, with one

exception, consolidated all of the

amended exhibit requirements into a

new Regulation S-K item.

Accounting Standards -Another

critical part of the integration program

Involved the adoption of two proposals

relating to accounting matters. The first

release adopted uniform instructions to

govern the periods covered by financial

statements Included in most registration and report forms filed under the

Securities Act and Exchange Act, as

well as in annual reports to security

holders.P! The other accounting release

revised certain articles of Regulation

-
S-X, which governs the form and content of financial statements filed under

the Federal securities laws, to give fuller

recognition to the accounting standardsetting efforts of the private sector and

to react to the ever-changing needs of

users of financial steternents.v- These

actions are integral to integration because they mean that the financial

statements and certain other essential

information will be uniform whether

they appear in a Securities Act registration statement, an Exchange Act periodic report, or an annual report mailed

to security holders.

Proposed New Registration Forms

-Another Commission action Involved

the adoption of new Form S-15 and related rule arnendrnents.s" This form

demonstrates, on a limited scale, how

the integrated disclosure system operates in the Securities Act context. The

new form provides an abbreviated format for registering securities issued In

business combinations which do not

significantly affect the issuer. Abbreviation is accomplished and duplicanon IS

avoided by the delivery of multiple documents. Information about the issuer is

provided by delivering its annual report

to security holders. The prospectus (Securities Act registration statement) contains only information about the

particular transaction and about the

company being acquired. The Commission sees Form S-15 as an experiment.

Experience with its use, particularly the

use of the annual report, will be of invaluable assistance in revising the new

form as well as in the broader task of

streamlining all Securities Act registration forms.

The remaining two rulemaking actions involved proposals designed to effect some of the most significant

aspects of the integration program. The

first, in particular, calls for comprehensive revision of the major Securities Act

registration statement forrns.s" Three

proposed new forms would replace the

most commonly used existing

forms-S-1, S-7, and S-16 Three tiers

of Securities Act issuers would be established, with different levels of disclosure and delivery requirements

applicable to each trer, The content of

the registration statement In each instance would be basically the same, i.e.,

the minimum package of information

identified in the Form lO-K context plus

any additional information needed to

describe the particular offering or material changes Since such disclosure was

made. The tier system would establish

how much of this Information is required to be set forth In the prospectus,

rather than merely incorporated into It

by reference, and how much ISrequired

to actually be delivered to prospective

investors. The theory behind the varying

disclosure and delivery requirements

embodied in the three tiers ISthat previously disseminated Information can be

relied upon instead of repeated In the

prospectus only in those Instances

where the issuer ISlarge and ItS shares

are widely traded and well followed.

How close a particular issuer comes to

meeting these varIOUSqualifications will

determine the tier to which it IS assigned and which will thereafter determine how much Information it will be

allowed to incorporate by reference and

how much Information the issuer must

actually deliver In the context of offennq

its securities to the public.

Form 1O-Q The other proposal

published for comment would revise

the quarterly report on Form 1O-Q.65

These amendments would make Form

lO-Q consistent with Form 10-K, most

importantly, in the area of the Management's Discussion and Analysis. Moreover, these amendments would facilitate integration by providing for more

effective continuous Exchange Act reporting.

Form 5-8 -On November 19, 1979,

21

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the Commission issued a release requesting comments on proposed

amendments to Form S-8, the form for

registration of securities to be offered to

employees pursuant to certain plans.s"

Comments were solicited on two general topics: (1) proposed procedures

whereby filings on Form S-8 would become effective automatically, i.e., without affirmative action on the part of the

Commission or its staff; and (2) proposals to change Form S-8 into an "integrated disclosure form" which could be

automatically updated by use of periodic Exchange Act reports. In February

1980, after analyzing the comments,

the Commission adopted automatic effectiveness procedures for filings made

on Form S_8.67 It ISbelieved that these

procedures will result in sigmficant cost

savings to Issuers and will also allow

Commission staff time to be more effectively utilized reviewing other disclosure documents. Subsequently, in April

1980, the Commission adopted amendments to Form S-8 which make that

form a truly "Integrated document", i.e.,

a Securities Act registration form which

utilizes Exchange Act periodic reports

for updatmq purposes.s" The result IS

an eliminatIon of duplicative reporting

under the two Acts, with attendant cost

and time savings to issuers WIthout sacrificing the quality of disclosure made to

investors.

Reorganization of Corporation FInance -In ItSfirst major reorganization

In 20 years, the Division of Corporation

Finance restructured Its disclosure operations section to better implement the

Integration program. The overall effect

of the reorganization was to concentrate review responsibilities for reporting

companies engaged in the same industries In one of the five major operating

sections. This distribution of review responsibilities enhances the Division's

ability to focus its resources on the particular needs and characteristics of dif22

ferent Industries and thus increases the

Division's ability to respond more

quickly on filings made by industries. It

also coincides with the rulemaking irutiatives which implement integration of

the disclosure systems under the Securities Act and Exchange Act in that increased staff attention may be given to

Exchange Act filings, an area where Inadequate resources and increased filings made the ability of the staff to fully

review the filings questionable in the

past.

In connection Withthis reorganization

and the integration program, the Division is moving toward a system of selective review. The developing system

seeks to concentrate review resources

on areas of greatest priority, while

eliminating the review of other documents except on an audit or sample baSIS.In this regard, the Division created

an Office of Procedures and Review

whose principal functions are to assist

in the implementation of this system of

selective review and to develop staff

training and other methods to obtain

the maximum benefits from realignment according to industry

categorizations.

Disclosure Revisions; Interpretive

Advice

In the last year the Cornrnissron

adopted several other revisions to its

disclosure rules, mcludmq those rules

governing the annual reports filed by

certain foreign issuers, the timely reporting rules under the Exchange Act,

and certain rules applicable to insider

trading. Interpretative advice was provided on such subjects as the securities

laws Implications of pension plans and

the required liquidation disclosure in

proxy contests.

On November 29, 1979, the Commission issued four releases 69 announcing the adoption of several rules
and forms for foreign private Issuers,

The most important of these was Form

20-F which is a consolidated registration and annual report form available

for use by certain foreign private issuers

under the Exchange Act. Form 20-F

generally calls for disclosure somewhat

less extensive than Forms 10 and 10-K,

the analogous forms for domestic ISSUers, but nevertheless is a substantial increase in the disclosure previously

required from foreign private registrants. The Commission also amended

Form S-16, a short form for registration

under the Securities Act, to permit certain foreign issuers who file reports on

Form 20- F to use Form S-16 to register certain rights offerings to shareholders.

In view of these Increased disclosure

requirements, the Commission has announced that it may be feasible to develop an integrated disclosure system,

similar to the one described earlier, for

foreign registrants, The Commission

believes these actions are necessary In

light of the increasing internationalization of the world capital markets and

the growing harmonization of accountIng and disclosure practices

In April 1980, the Commission adopted amendments to Rule 12b-25, the

timely reporting rule under the Exchange Act, and to the extension application procedure previously existing. 70

The amendments instituted a system

requiring notification of a registrant's

inability to file timely ItS Exchange Act

reports. Under this system, there are no

longer applications for extensions of

time that necessitate action by the

Commission or Its staff. The Commission is therefore able to redeploy some

of its limited staff resources to the reView of Exchange Act filings, the cornerstone of the integration program,

In addition to the extensive revisions

to the Commission's forms and rules already noted, during fiscal year 1980 the

Commission revised Rules 16a-11 and

16b-3 to exempt certain transactions by

officers, directors, and ten percent beneficial owners from the msider reporting

and liability provisions of Section 16 of

the Exchange Act. Included among

these transactions were the reinvestment by such persons of dividends and

Interest pursuant to dividend reinvestment plans 71 and the delivery of stock

by officers and directors as payment for

the exercise of stock options.?"

In order to provide guidance to the

pubhc, the Cornrrussion issued a comprehensive Interpretative release setting

forth the views of ItS staff on the application of the Securities Act to pension,

profit-shannq and similar types of employee benefit plans.?" The release discussed a variety of matters, including

the circumstances under which parncipatron interests in such plans are

deemed to be secunties which are subject to the registration and antifraud requirernents of the Securities Act.

In May 1980, the Cornrrussion authorized the Division of Corporation FInance to issue a release stating the

Drvision's views With respect to disclosure In connection With proxy contests

where a principal Issue in contention IS

the liquidation of all or part of the equity

of an Issuer. 74 The release resulted

from an Increased number of such contests over the past several proxy seasons and the Division's perception that

participants did not fully appreciate the

disclosure standards applIcable with respect to a proposal to hquidate some or

all of an issuer's equity, particularly In

those instances where an attempt is

made to project or suggest drstnbution

value. The Divrsion's interpretative release, therefore, noted that in such contests inclusion by any partrclpant.

whether management or opposition, of

a distributron value in its proxy soliciting

material is only proper where the valuation was made in good faith and on a

23
reasonable basis. Further, such statements should be accompanied by disclosure which would facilitate

shareholders' understanding of the basis for and the limitations on the projected value.

The interpretative release also addressed a number of related issues,

most significant being the use of expert

opinions by participants to support distribution valuations. The release cautioned participants m proxy contests,

particularly those that have had lrmited

access to mformation concerning the

issuer, that any material limitations on

the procedure followed by such experts

in developing their opinion on valuation,

or any resultant material qualification

on the opinion the expert finds necessary in rendering it, must be thoroughly

and comprehensibly disclosed to shareholders. The release makes clear that

there may be opinions that are subject

to such qualiflcatrons and limitations as

to nullify their value as part of the support offered by a participant for the projected distribution value.

In September 1980, the Commission

issued a release75 announcing an interpretation of the Divison of Corporation

Finance which permits foreign governments or political subdivisions to register their securities on Schedule Busing

a shelf registration procedure. This

technique, which is somewhat similar to

the use of Form S-16 by domestic

companies, does not reduce the

amount of disclosure required but

streamlines the registration process. A

significant consequence of this interpretation may be to encourage the registration of offerings made in the

international bond market that have not

been registered in the past.

Corporate Accountability;

Management Background and

Remuneration

In September 1980, the Commission

authorized publication of The Staff Re24

port on Corporate Accountability, prepared by the Task Force on Corporate

Accountability in the Division of Corporation Finance. The Report analyzes the

complex issues raised during the Commission's 1977 corporate governance

proceedinqs.?" and sets forth the staff's

conclusions concerning the efficiency

of existing corporate accountability

mechanisms. In particular, the staff

concluded that in view of the changes

being made voluntarily in the composition, structure and operation of boards

of directors, and given the Commission's existing authority to encourage

shareholder participation, it would be

premature for the Commission to determine whether to recommend or support

Federal legislation relating to corporate

accountability. The staff indicated, however, that if legislation is to be enacted,

it believes that it should be directed towards raising standards of care and

providing a Federal course of action for

breaches of such standards.

The Report recommended that the

Commission take further action with respect to a number of matters including:

(1) Development of a uniform system

for distributing proxy statements and

other communications to record and

beneficial stock owners;

(2) Issuance of a concept release soliciting public comment on the need for

additional Commission initiatives to address issues growing out of the Supreme Court Bellotie decision;

(3) Monitoring the extent to which issuers consider shareholder nominations of directors for the purpose of

determining whether it is necessary to

adopt a rule requiring issuers to adopt

procedures to consider shareholder

nominations;

(4) Amending the proxy rules to require that proxy statements describe

how shareholders can obtain copies of

significant environmental compliance
reports their issuers have prepared pursuant to Federal law;

(5) Amending Regulation S-K to revise the existing requirements to describe all environmental proceedmgs

Involving a governmental authority so

that issuers are required to describe

only significant environmental proceedinqs or matters; and

(6) Monitoring the extent to which financial institutions voluntarily disclose

the proxy voting criteria and procedures

utilized when voting the stock they

manage for others. If such information

is not readily available and there is investor interest in obtaining it, the staff

recommended the Commission develop or support legislation to require such

disclosure.

In another effort to make the rules

governing disclosure relating to management more meaningful to shareholders, the Commission closely

monitored the efficacy of the management remuneration disclosure required

by Item 4 of Regulation S-K. The staff

issued numerous written and oral interpretations of these requirements."? On

May 6, 1980, the Commission proposed

for public comment amendments to the

rules concerning the disclosure of management rernuneration.t" The proposals were a result of the Commission's

monitoring of the disclosure provisions

adopted in 1978 and are part of the

Commission's effort to improve the

presentation of information regarding

executive compensation. Specifically,

these proposals address pension, option, and stock appreciation rights

plans, compensation relating to the termination of employment and certain

technical amendments. (Subsequent to

the close of the fiscal year, on November 13, 1980,)n advance of the 1981

proxy season, the Commission adopted

amendments to the management remuneration disclosure provisrons.I'')

Monitoring of Existing Guidelines

During the last year the Commission

has undertaken the task of an overall

review of its published guides to required disclosure under the Securities

Act and Exchange Act. It also focused

on the disclosure guide applicable to

one particular industry, bank holding

companies, and revised the pertinent

guide to both reduce the disclosure

burden and make the remaining disclosure more meanmgful.

In order to Implement the Commission's contmumg goal of reviewing existing rules to delete or amend unnecessary or outmoded provisions, an

advance concept release was Issued on

December 5, 1979, announcing a reevaluation of the Guides for the Preperetion and Filing of Registration Statements and Reports under the

Securities Act of 1933 and the Securities Exchange Act of 1934 and soliciting comments on the manner in which

such re-evaluation should proceed.t"

On the basis of the comments received,

the staff ISm the process of formulatmg

proposals which would recommend the

withdrawal of certain provisrons of the

GUideswhich are now obsolete and the

rearticulation of those provrsions which

continue to have procedural or substantive significance.

In August 1979, the Comrnissron ISsued a release requestmg comments on

the quality and desirability of the disclosure made under the existmg gUidelines

for "Statistical Disclosure by Bank

Holding Cornpanles."?' These particular

guidelines have been in operation since

1976. The request was part of the Commission's effort to monitor the effect

and value of Its disclosure rules and

gUideswith a view towards amending or

rescinding those rules or guides which

do not yield the expected benefits, Most

of the commentators supported these

particular guidelines and called the resulting disclosure valuable, A number of

25
amendments were made, however, to

reduce the volume of disclosure, lower

compliance costs, and Improve the

quality of the retained disclosure.V

Small Business

The Office of Small Business Policy

In the Dtvisron of Corporation Finance

was established in June 1979 to lead

the Commission's small business rulemaking initiatives, to review and comment upon the impact of rule proposals

on small businesses,and to serve as liaison with Congressional committees,

government agencies and other groups

concerned with small business.After its

first year of operation, the Office IS

continuing its efforts to alleviate, to the

degree consistent with the protection of

Investors, the problems of small business in raising capital. In this regard,

the Office has already coordinated its

efforts With (1) the White HouseConference on Small Business Financing; (2)

the Inter-Agency Task Force on Domestic Policy Reviewof Industrial Innovation, and (3) the Joint SEC-NASAA

Committee on Small Business Capital

Formation.

Form S -18 The Office is also responsible for monitoring the content

and quality of disclosure in smaller offerings, pursuant to both Regulation A

and Form S-18, which ISthe simplified

registration procedure for small businesses. Form S-18 calls for substantially less narrative and financial disclosure than Form S-1, which ISthe form

such issuers would otherwise use for

registration of their securities. In a further effort to reduce the registration

burden on small issuers, the Form

S-18 was desiqned so as to contain all

the disclosure requirements Within the

confines of the form itself so that the

preparer need not seek out any cross

references to other rules and forms.

Form S-18 is available to certain domestic and Canadian corporate issuers

26

for the registration of up to $5 million of

their securities to be sold for cash. In

order to facilitate processing for the issuer, the form may be filed With the regional offices of the Commission as

well as in Washington, D.C. From its

adoption in April 1979,8J to August

1980, over 128 offerings were filed on

Form S-18 in Washington and the regional offices.

In March 1980, the Commission released the results of a study prepared

by Its Directorate of Economic and Policy Analysis (the Directorate). The report

examined the record of Form S-18

use dunnq 1979 and compared key aspects with a sample of Form S-1

users.It found that the new Form S 18

has largely displaced the traditional

Form S- 1 for the registration of

smaller initial offerings of common

stock, and that these S- 18 filings, covering offerings amounting in the aggregate to over $286 million, were made

by companies that for the most part

had never before sought to raise capital

through the public markets.

Long-Range Studies -Analysis of

the policy implications of the Federal

securities laws confronting small, hightechnology corporations in the capital

markets, as well as accounting disclosure, tender offers and other policy concerns relevant to such enterprises, has

been the focus of a joint project With

the Department of Commerce's Experimental Technology Incentives Program

(ETIP) and the Commission's Directorate. This project encompasses a broad

spectrum of related studies, including

several which will be published by the

Directorate in the newly launched Capital Market Working Papers series.

A Joint project With the Small Business Administration examining initial

public offerings has been completed

and reports have been distributed to the

general public and small business

firms. A new project to study the role of

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certain exemptions from securities registration in providing a source of financing to small issuers has been

undertaken and will culminate in a final

report to be published in December

1981.

Rule 242-0n January 17,1980, the

Commission adopted Rule 242, pursuant to Section 3(b) of the Securiues

Act.84 This rule provides an exemption

from the registration provisions of the

Secur rties Act for sales by domestic

corporate Issuers of securitres up to $2

million in any six-month period to an

unlimited number of "accredited investors" as defined m the rule, and to 35

non-accredited persons. The rule itself

does not require the Issuer to furrush an

offering circular to investors if only accredited persons are involved m a Rule

242 offering, based upon the presurnpnon that these types of mvestors are

able to fend for themselves. If, however,

a Rule 242 offering Involves one or

more non-accredited persons, the issuer must furnish all purchasers, in-cluding both accredited and non-accredited

persons, the same kind of information

as that specified m Form S-18 to the

extent material, except for certain fmancial information.

Rule 254 On June 19, 1980, the

Commission proposed tor comment

certain amendments to Rule 252 under

Section 3(b) of the Securities Act. 85

Rule 252 provides that a RegulatIon A

exemption from reqistration for small

public offerings of an issuer's securities

shall not be available if the issuer is

subject to one of the disqualifications

described in the rule. The Cornrmssion

solicited comments on amendments to

the rule which would, among other

things, make dtsquelifications, which

now last indefinitely, terminate automatically after five years. In addluon, the

Cornmission proposed certain amendments to Rule 242 that would conform

the disqualrfyinq provisions of that rule

to amended Rule 252.

ClassifYing of Issuers -On June 2,

1980, the Commission authorized the

issuance of a release announcmg that It

was considering the advisability of classifying Issuers under the Exchange Act

so that defined classes of smaller issuers might have modified reporting and

other requirernents.P" The release

raised a number of general questions

about the desrrability or feasibility of a

classiflcanon system and the criteria

which could be used m grouping companies. In this connection, the Commission also released certam statistical data

with respect to those companies that

are subject to the periodic reportmg

provisions of the Exchange Act for the

purpose of evaluating potential classificatron criteria. The Cornrnissron intends

to consider the public comments in

connection With any proposal of

amendments to rules or forms under

the Exchange Act.

Leqisteuon The Cornrrussion was

also active m the formulation of proposed legislation entitled, "The Small

Business Investment Incentive Act of

1980", HR. 7554. In addition to the significant amendments to the Investment

Company Act and the Investment AdVISers Act that are designed to alleviate unnecessary regulatory constraints on

venture capital undertakmgs (discussed

in the "Investment Companies and Advisers" section of this Annual Report),

the proposed legislation would also

amend the Securities Act and the Trust

Indenture Act of 1939 (Trust Indenture

Act). First, the proposed leqrstation

would create a new exemption from the

registration provision in Section 5 of the

Securities Act substantially Similar to

the "accredited investor" concept of

Rule 242. In addition, at the request of

the Cornrrussron, the legislation would

raise from $2 million to $5 million the

ceiling on the Commission's authority

27

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under Section 3(b) of the Securities Act

to exempt small issuers from the registration requirements of that Act. Finally,

based upon a legislative proposal submitted by the Commission, the proposed legislatIon would amend the

Trust Indenture Act to increase the aggregate amount of securities that may

be partially or totally exempt from the

provrsions of that Act. (Subsequent to

the close of the fiscal year, on October 21, 1980, this leqislation was signed

into law.)

Tender Offers

Tender offer Rules -In November

1979, the Cornrnrssion adopted new

tender offer rules"? which had been

published for comment in February

1979. At the same time, the Commission published for comment other proposed tender offer rules.88 This action

was part of the Cornrrussion's ongoing

program to estabhsh a comprehensive

regulatory framework WIth respect to

tender offers.

The new rules govern the actrvities of

the person making the tender offer (the

bidder) and prescribe certain obliganons for the issuer of the securities

sought in the tender offer (the subject

company). The rules regulating the bidder may be divided into four categories:

fIlIng requirements; dissemination provisions: disclosure requirements; and

substantive provisions. The operation of

these rules is triggered by the date of

commencement of the tender offer,

which is defined by Rule 14d 2 as essentially equivalent to the date the tender offer is first published or sent or given to security holders.

Rule 14d 3 requires the bidder to

file a Tender Offer Statement on Schedule 14D-1 as soon as practicable on

the commencement date, to hand dehver a copy of the schedule to the subject

company and to give telephonic notice

of certain information to the securities

28

exchanges and the NASO. Material.

changes in the information disclosed in

the Schedule 140-1 are to be filed as

amendments in the same manner as an

original filing.

Rule 14d-4 establishes three

alternative methods of disseminating a

tender offer to security holders which

involves the exchange of their securities

for cash: long-form publication; summary publication; and the use of stockholder lists and security position listings. While tender offers may be disseminated by methods other than those

specified in Rule 14d-4, the use of the

latter two methods is governed by the

requirements of this rule. The drssernination of a tender offer involving the exchange of securities is governed by the

provisions of the Securities Act if the

transaction is subject to the registration

requirements of that Act. Rule 14d 6

sets forth the specific disclosure requirements applicable to these tender

offers, which requirements are generally

based on the method of dissemination.

If summary publication, stockholder Iits

or security positions listings are used,

then the summary advertisement must

contain specified disclosure items. Substantive provisions concerning tender

offers regulate the minimum length of a

tender offer, require prompt payment or

return of the securities at the termination of the tender offer, provide additional withdrawal rights, and permit the

bidder to extend certain pro rata acceptance provisions if full disclosure is

made.

The new rules impose two duties on

the subject company. First, the subject

company must comply with Rule

14d-5 which permits the bidder to

elect to use the subject company's

stockholder list or dissemination of the

tender offer materials. The subject

company could determine to retain the

stockholder list, in which case the subject company would distribute the bid-

-

-

-
der's tender offer materials, or to furrushthe stockholder list to the bidder, in

which case the bidder would distribute

them, Second, the subject company is

required to disclose to security holders

its position with respect to the tender

offer and the reasons therefor. Such a

communication may be a solicitation/recommendation governed by Rule

14d 9 requiring the filing of Schedule

14D-9 with the Commission and transmittal to other designated persons

The rules that the Commission proposed for comment in November 1979

Included a definition of the term "tender

offer"; certain antifraud provisions concerning trading by certain persons in

possession of material non-public information relating to a tender offer; provisions requiring equal treatment of security holders in the context of tender

offers; and a prohibition on certain purchases not made by means of a tender

offer. In September 1980, the Commission adopted one of these proposals,

Rule 14e-3, which established a "disclose or abstain from trading rule" for

any person in possession of material information that relates to a tender offer

by another person, which information

he knows or has reason to know is

nonpublic and was acquired from that

other person or the issuer of the securities subject to the tender offer.89Included in the rule are exceptions pertaining

to multi-service financial institutions

and brokerage transactions. In addition,

as a means reasonably designed to prevent fraudulent, deceptive or manipulative acts or practices, an "anti-tipping"

rule was established with respect to material, non-public information relating to

a tender offer. With respect to the remaining tender offer rule proposals, the

Commission anticipates further rulemaking proceedings in the near future.

Tender Offer Legislation -On February 15, 1980, the Commission sent to

Congress, in response to requests received from Senators Pr ox rru re,

Williams and Sarbanes, a package of

legislatIve proposals relating to tender

offers and ac q uisit io n of control.

Among other things, these proposals

would make certain changes to the current scheme of regulation in the Exchange Act as established by the

Williams Act.

First, as to disclosure of beneficial

ownership, the proposed revrston of

Section 13(d), and the rules which

would be adopted thereunder, would replace current Sections 13(d) and 13(g)

and would establIsh a urufled and effective system for the disclosure of five

percent beneficial ownership of publicly-traded equity securities. Moreover,

the proposal would correct the present

situation in which a person who has become oblIged to file a statement disclosing the beneficial ownership of five

percent or more of the secunties of a

class, or who has become obliged to

amend such statement, may continue

acquinng additional securities during

the period prior to the actual filIng of

the required statement.

Second, as to Issuer repurchases,

present Section 13(e) would be reenacted with only minor, conforming

amendments. As is presently the case

under Sections 13(d) and 14(d), Issuer

repurchases would not be subject to the

reportinq requirements of proposed

Section 13(d) or the regulatory requirements of proposed Section 14(d). Rather, issuer repurchases will continue to

be regulated, as is necessary or appropriate by Commission rules adopted

under Section 13(e).

Third, the present system of regulatIng "tender offers," which are not defined by statute, would be replaced by a

system of regulating "statutory offers,"

which are defined, with appropriate exceptions, as acquisitions by any person

who is or would become the beneficial

owner of more than ten percent of a

29

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class of publicly traded equity securities. Like present Section 14(d), the

proposed revision would goven the dissemination of pertinent Information.

Fourth, proposed Section 14(i) would

create and define certain aspects of a

private right of action for damages

and/ or equitable relief for violanon of

any provisro ns of proposed Section

13(d), 13(e), 14(d), 14(e), 14(f), 14(g)

or 14(h). In addition to overruling Piper

v. Chris Craft Industries, which denied

a defeated tender offeror standing to

sue for damages under Section 14(e),

the proposal would provide needed protection to a broad range of persons aggrieved by violations of the beneficial

ownership reporting, issuer repurchases, "statutory offer," and antifraud

provisions of proposed Sections 13(d),

13(e), 14(d) and 14(e), respectively.

Finally, the proposal would provide

for an explicit preemption of the antitakeover laws enacted by the States.

Under the proposal, the only such laws

allowed would be those limited in their

application to tender offers for or acquisitrons of secunties of issuers having

their principal place of business in the

State, and having 50 percent or more of

their shareholders, who hold 50 percent

or more of the securities of the class,

residents In that State. (This legislation

was Introduced In the Senate on October 1, 1980).

Beneficial Ownership Report

In June 1980, as required by Section

13(h) of the Exchange Act, the Commission sent a report to Congress concerning the beneficial ownership reporting requirements under the Exchange

Act. The Commission concluded that in

general the beneficial ownershp reporting requirements were operating effectively to produce appropriate disclosure

of mforrnation concerning substantial

acquisitions and holdings of equity securities by certain institutional investors

30

and by officers and directors and certain beneficial owners of most publiclyheld companies. The Commission

identified certain areas where additional

rulemaking may be appropriate either

to close a disclosure gap in the present

reporting system or to make the disclosure mandated more meaningful, while

lessening the burdens and costs of

such reporting. In addition, the Commission identified one area where additional legislation would be appropriate

to improve the timeliness of certain disclosures.

The Commission also considered the

issue of whether it is feasible or desirable to reduce or otherwise modify the

five percent reporting of beneficial ownership thresholds in Sections 13(d) and

13(g) of the Exchange Act. Based upon

an evaluation of the present reporting

requirements and a comparison of the

benefits and burdens of lowered reporting thresholds, the Commission concluded that at this time it was neither

feasible nor desirable to modify these

reporting thresholds.

Accounting Matters

The Accounting Profession and the

Commission's Oversight Role The

Commission and its staff have continued to be active in overseeing the accounting profession's initiatives designed to establish meaningful

self-regulation, assure the independence of auditors, and improve the accounting and auditing standard-setting

processes. The overall objectives of the

Commission's oversight activities is to

assure that the accounting profession

continues to make substantial progress

toward its primary goal of promoting

public confidence in the integrity and

credibilIty of financial reporting by public companies.

In August 1980, the Commission

submitted to Congress Its Third Report

on the Accounting Profession and the

-
Commission's Oversight Role In that

report, the Commission concluded that

the accounting profession, under the

oversight of the Commission, has made

significant progress toward achieving its

goals. The Commission noted, however,

that the process of reform and improvement is far from over and that the programs instituted by the profession during the past few years must stand the

test of time.

With respect to the profession's selfregulatory efforts, the Commission stated that while the structure is in place, its

programs and mechanisms are not yet

fully implemented or tested. In addition,

continued commitment by members of

the profession and effective leadership

from within the private sector is necessary. Whether the profession can accomplish the ultimate goal of effective,

meaningful self-regulation is still dependent upon future developments.

While some questions and potential

problems remain, the Commission continues to believe that the profession's

efforts to create and maintain a meaningful system of self-regulation and selfdiscipline deserve the continued support of the Congress and the Commission. The Commission further believes

that allowing the profession additional

time to accomplish its objectives is appropriate since the Commission is not

convinced that comprehensive, direct

governmental regulation of accounting

or accountants would afford the public

either increased protection or a more

meamngful basis for confidence In the

work of public accountants.

With respect to the standard-setting

processes of the private sector, the

Commission stated in its August 1980

Report that it continues to believe that

the initiative for establishing and improving accounting and auditing standards should remain in the private sector, subject to Commission oversight.

The Cornrnission reaffirmed its continued strong support for and general satisfaction With the work of the Financial

Accounting Standards Board (FASB).

The Commission believes that the

FASB must contmue its efforts to provide leadership and take appropriate acnon In controversial areas, and that

members of the accounting profession

must continue to support the FASB's

decisions and join more actively In the

standard-setting process. The Commission also stated ItScontinued belief that

the Auditing Standards Board (ASB)

and ItS Advisory Council have generally

performed in a satisfactory manner and

have generally been responsive to

changing public expectations concerning the role of the auditor.

Although the Commission acknowledges that Significant progress has

been made by the accounting profession to date, the Commrsstori's statutory responsibility for the integrity of

the financial information disseminated

by public compames requires continuing attention to the accounting principles underlying that Information, the auditmg standards by which it is reviewed,

and the mdependence and competency

of the profession which performs that

review. The Commission will, of course,

continue to rnorutor the profession and

to offer guidance, comments and leadership, if necessary and where appropriate.

Scope of Services by Independent

Accountants The appropriate scope

of non-Audit services to be provided by

independent public accountants has attracted substantial attention in recent

years. Study and debate has centered

around various services performed of a

non-adult nature (tax services, accounting and review services and management advisory services), with principal

attention being focused on management advisory services (MAS) and the

potential impact that performance of

31

-
such services for audit clients may have

on auditor mdependence."''

During 1979, the Commission undertook to establish a system for monitoring the new disclosures required to

be included in proxy statements by Accounting Series Release No. 250 (ASR

No. 250). A sample of approximately

1,200 proxy statements, including both

exchange-listed and over-the-counter

registrants, were chosen statistically for

review. Emphasis was placed on obtaining a better understanding of the

nature of non-audit services being performed and the magnitude of such

services in terms of percentage relationships to aggregate audit fees.

Results of this first year review

showed that a large majority (approximately 91 percent) of companies engaged their auditors for some type of

non-audit services, with the highest incidence being in tax related areas. The

survey further indicated that the incrdence of performance of certain specifIC services (i.e., actuarial services, plant

layout, market surveys) was minimal. In

Accounting Series Release No. 264

(ASR No. 264), which presented the

Commission's views regarding factors it

believes management, the audit committee and the accountant should consider in determining the appropriate

scope of services to be performed by

Independent accountants, the Commission noted that the performance of

these specific services may, in many

cases, be difficult to justify on the basis

of the factors set forth therein. In addition, the Report of the Senate Subcommittee on Reports, Accounting and

Management of the Committee on Governmental Affairs 91 indicated that these

specific services are Incompatible with

the public responsibihtres of independent auditors.

As for the magnitude of non-audit

services performed, the survey indicated that 68 percent of the companies

32

incurred fees for non-audit services representing 0-25 percent of the total audit

fees; 21.9 percent of the companies

were In the 26-50 percent range; 7.4

percent of the companies were in the

51-100 percent range; and 2.7 percent

of the companies were over 100 percent.

While these new disclosures for 1979

contribute to an understanding of existinq practice, the Commission does

not believe that meaningful conclusions

as to the need for rulemaking or legislation can be drawn from disclosures for

a single year. The relationships need to

be reviewed and evaluated over a longer

period of time. Accordingly, the Commission plans to use, over the next several years, the disclosures provided In

proxy statements to obtain a better understanding of the nature and extent of

auditor-client relationships and to identify any trends which develop as a result

of the guidance offered by ASR No. 264

or as a result of actions taken by the accounting profession.

Although the Commission believes

that ASR Nos. 250 and 264 provide a

meaningful framework for the determination of the appropriate scope of services to be performed by independent

accountants, it has not ended its examination of the scope of services issue.

Rather, It views the issuance of ASR

Nos. 250 and 264 as part of a continuing examination of the relationships

between registrants and their independent accountants. After continued monitonnq of the practice, the Commission

will be in a better position to determine

If any further action is necessary in this

area.

Accounting Standards for Oil and

Gas Producers The Commission continues to assign a high priority to the issue of accounting practices for oil and

gas producing compemes.P" The Commission is currently experimenting with

reserve recognition accounting (RRA), a

-
new method of accounting for oil and

gas producers. In September 1979, it

adopted rules for the supplemental disclosure of a summary of changes in the

present value of estimated future net

revenues from the production of proved

reserves. Also adopted was a requirement for a summary of oil and gas producing activities prepared on the basis

of RRA. The Commission anticipates

that these supplemental disclosures, together with previously adopted disclosure requirements, will provide the basis

for evaluating the feasibility of requiring

RRAas a uniform accounting method in

the primary financial statements.

Closely related to the question of appropriate financial statements disclosures of oil and gas reserve information

is the degree of auditor association with

the information. In April 1980, the Commission considered the question of an

audit requirement regarding oil and gas

reserves. The Commission emphasized

that it considers reserve information to

be extremely important to an understanding of the financial results of a oil

and gas producinq company. At the

same time, however, It acknowledged

that uncertainty exists concerning the

costs and related benefits of requiring

an audit of the reserve information. Accordingly, the audit requirement was

further postponed until a decision is

reached on adopting RRAas a uniform

method of accounting in the primary financial statements. The postponement

of the audit requirement does not represent a conclusion on the part of the

Commission as to whether or not RRA

is feasible as a uniform method of accounting in the primary financial statements.

The Commission staff is also coordinating its activities on oil and gas accounting with related efforts of the

FASS-specifically, the FASS's efforts

to develop supplemental disclosures as

to the effects of changing prices for

specialized assets, including proved oil

and gas reserves. In making any final

determinations on accounting practices

for oil and gas producers, the Commission will also give careful consideration

to progress made by the FASS in the

development of a conceptual framework for financial accounting and reporting.

FASB Conceptual Framework Project The Commission continues to believe that the development of a conceptual framework as a basis for

addressing accounting problems IS the

most important financial reporting matter confronting the FASB and its constituents. A conceptual framework

should assist the FASS by providing

structure and direction to financial accounting and reporting through an articulation of a coherent system of interrelated objectives and fundamentals

leading to consistent standards, and

through prescribing the nature, function

and limits of financial accounting and

reporting. The existence of such a

framework should enhance the standard-setting process by accelerating the

responsiveness of the FASS to emergIng accounting problems and contribute to more timely, effective and consistent standards. In addition, a

comprehensive conceptual framework

should enhance the understanding of

preparers and users of financial information as to the purposes, content and

characteristics of such information.

During the past year, the Commission has continued to actively oversee

the FASS's standard-setting initiatives.

While the Commission has some concerns with respect to the delays that

have been experienced In the FASS's

conceptual framework project, as well

as with the lack of clarity as to which

phase or phases of the project will address certain fundamental conceptual

issues, the Commission is generally

33

-
satisfied With the FASB's overall efforts

during the past year.

The FASB IS devoting a major portion of its resources to this project

which is necessarily a long-term evolutionary effort. However, as the framework develops during the next few

years, It IS important that the evolving

principles and concepts contribute significantly m developing financial reporting standards that address the important fundamental issues presently

confronting the FASB and its constituents.

Although the Commission recognizes

the long-term nature of the project, the

Commission also believes that there are

certain basic issues that the FASB

should address within the next few

years perhaps within the maximum

five-year experimental period established by the FASB for a comprehensive re-look at Statement of Fmancial

Accounting Standards No. 33 (FAS-33),

"Financial Reporting and Changmg

Prices" In this connection. the Commission believes that the resolution of

the following two issues will be critical

to the success of the conceptual framework project:

The first Issue is the development of

concepts to govern the establishment

of accounting standards regarding the

points in time when the elements of financial statements i.e., assets, liabilities, revenues, expenses, etc. should

be recognized in the financial statements and the manner in which recognized elements should be measured. In

this connection, the Commission believes that the measurement concepts

set forth in FAS-33 are sound and that

these concepts should be developed in

a general concept statement dealing

with measurement issues. Progress in

these areas will, or should, directly affect the ultimate disposition of certain

major projects (such as business combinations, consolidation policy and in34

terim financial reporting) postponed by

the FASB pending developments in the

conceptual framework project. Development of these phases should also assist the Commission in its consideration

of appropriate accounting and financial

reporting for oil and gas producing

companies.

Second are the conceptual issues related to the determination and display

of the key components of operating

performance and cash flow, which are

highly relevant in the current economic

environment. A corollary issue is the nature of possible summary financial reporting indicators that might be developed from this project which would

Identify the key items that indicate the

success of an enterprise. The FASB

must make progress on the phase

whose objective is to determine the

kinds of information about an enterprise's flow of funds and its liquidity position that should be provided in the

context of objectives of financial reporting. The Commission believes that one

of the ultimate results of this phase

should be a revision of the statement of

changes in financial position to better

reflect cash flows.

The Commission will continue to

work with the FASB by offering its comments and criticisms, where necessary,

in an effort to ensure that the conceptual framework ultimately leads to a set of

principles and concepts, as well as

standards emanating from those principles and concepts, which will serve the

needs of users of financial information

in a constantly changing economic environment.

Finenciei Reporting and Changing

Prices The Commission continues to

view the development of financial reporting to reflect the impact of inflation

and changmg prices as one of the most

Important ongoing challenges facing

the FASB, the accounting profession

and the business community. In partial

-

-

-

-
response to the need for financial reporting which reflects the economic realities of doing business, the FASB, in

September 1979, issued its first standard to address the complex area of accounting for the effects of changing

prices. Considered by the Commission

to be a significant breakthrough in the

private sector standard-setting process,

FAS-33 represents an important addition to the historical cost-based accounting model and, perhaps more importantly, reflects the willingness of the

FASB to deal with difficult issues

requiring innovative solutions.

FAS-33 represents an experimental

effort by the FASB, requiring two fundamentally different approaches to be followed in preparing required disclosures.

Large, publicly-held companies subject

to the provisions of the new standard

are required to provide disclosure (as

supplemental Information to the primary financial statements) of both the

effects of general Inflation, and the effects of changing prices of specific

goods and services.

FAS-33 reflects clearly the FASB's

recognition that the state of the art does

not permit a definitive standard, that expenrnentation ISnecessary,and that the

urgency of the need for disclosure of

the effects of inflation cannot await a

perfect solution The FASB has undertaken to study the disclosure practices

under the new standard and to monitor

the extent to which the mformation is

used, the type of users who fmd the

data useful, and the purpose for which

it is used. The FASB plans to amend or

withdraw requirements when evidence

justifies the need and has stated that

FAS-33 will be given a comprehensive

reconsideration after a period of not

more than five years. The Commission

understands the basis for the FASB's

conclusion as to the need for experimentation and supports Its contmumq

efforts in this area In seeking the most

meaningful disclosures. As a result of

the Issuance of FAS-33, the Commission rescinded its replacement cost rule

and extended Its safe harbor provisions

to disclosures required by the new

standard.

Ultimate success in achieving meaningful disclosures concernmg the effects of Inflation and changmg prices

will depend to a large extent on the efforts of the accountmg profession and

the business cornrnuruty In applying the

new standard and expenmenting with

additional disclosures which may help

users assess the Impact of changing

pnces on particular entites and Industries. In this regard, the Commission beheves that the new standard should be

viewed as a minimum for disclosure

and that the corporate community

should strive to contribute to the private

sector standard-setting process by volunteering additional inforrnauon which

may be necessary to make the reportIng most meanmgful and useful in the

circumstances

Reporting on Internal Accounting

Control- During the fiscal year, the

Commission completed Its review and

evaluation of the numerous publIc comments received on Its proposed rules

which would have required inclusion of

a statement by management on Internal

accounting control In annual reports on

Form 10-K filed With the Commission

under the Exchange Act, and In annual

reports to security holders furnished

pursuant to the proxy rules.P"

In June 1980, the Commission, In Accounting Series Release No. 278 (ASR

No. 278), announced the withdrawal of

these rule proposals. The Commission's decision was based, In part, on a

determination that the pnvate-sector initiatives for pubhc reportmq on mternal

accounting control were Significant and

should be allowed to continue The

Commission behevesthat its action will

encourage further voluntary mrtrauves

35
and permit public companies a maximum of flexibility in experimenting with

various approaches to public reporting

on internal accounting control. Further,

the Commission urged similar experimentation concerning auditor association with such statements.

The Commission intends to give further consideration to rule proposals

concerning management reports, and

auditor association with them, based

upon three years' experience. In order

to supplement the information which

the Commission obtained in the course

of the rulemakmg proceeding and

through its analysis of reports for 1979,

the Commission intends to continue a

monitoring program through the spring

of 1982. As part of that program, the

Commission will carefully monitor

private-sector initiatives in this area, as

well as issuer practice in voluntarily providing management statements on internal accounting control and in engaging independent accountants to report

on such statements.

In conjunction with its monitoring effort, the Commission invited public

comment both on the progress beinq

made by the private sector, as well as

on what regulatory action the Commission might consider in this area. In addition, the Commission also encouraged comments on other issues and

matters discussed in ASR No. 278.

Should the Commission's monitoring

effort or the comments which it receives identify a specific need for further Commission action, the Commission stands ready to take whatever

appropriate regulatory action may be

indicated. In any event, however, a more

comprehensive reconsideration of this

area by the Commission can be expected after the Commission has had

the benefit of its analysis of three years'

experience with voluntary management

reporting and auditor involvement.

36

Auditor Association with Required

SuppLementaL FinanciaL Information The accounting profession today

is facing new challenges over and

above the traditional challenge of performing quality audits of financial statements. It is faced with the need for its

members to become involved with supplementary financial information disdosed outside the confines of traditional financial statements. The FASB

adopted a concept of finandal reporting

which recognizes that certain information, while relevant to an understanding

of a company's financial position and

results of operations, is better provided,

or can only be provided, by means of financial reporting other than in financial

statements. Recognition that the domain of financial reporting should extend beyond the primary financial statements is a significant step in the

accounting standard-setting process

and one for which the Commission has

expressed support.

Recognizing that the accounting profession must accept some degree of responsibility for the presentation of supplementary inforrmation, the ASB, in

December 1979, issued its Statement

on Auditing Standards No. 27 (SAS 27),

"Supplementary Information Required

by the Financial Accounting Standards

Board." SAS 27 provides guidance to

an independent auditor on the nature of

procedures to be performed when supplementary information is required to

be presented pursuant to FASB pronouncements. Additionally, it requires

an auditor to expand his report on the

audited financial statements, if necessary, to call attention to an inability to

complete the prescribed procedures,

the omission of required supplementary

information, or material departures

from FASB guidelines on the measurement or presentation of such information.

The Commission believes that SAS

-
27 is a positive step toward providing

the profession needed guidance in assessing the nature and extent of its association with supplementary information. However, the Commission is

troubled by the ASS's decision to adopt

requirements for exception reporting as

opposed to explicit reporting on required supplementary financial information, An accountant's explicit report

on supplementary information which

describes the nature of his review and

states whether he is aware of any material modifications that should be made

to the information for it to conform with

the FASS's guidelines should provide

an Important channel of communication between the profession and users

of financial reports.

The Commission understands that

the ASS deferred requiring explicit reporting on supplementary information

due to, among other matters, its uncertainty over the applicability of Section

11 of the Securities Act to accountants'

reports on supplementary information

which are included in registration statements. The Commission recognizes

that accountants' liability for reports on

supplementary information must be

consistent with their responsibility with

respect to such information. Accordingly, the Commission has proposed rules

which exclude accountants from liability

under Section 11(a) of the Securities

Act for their reports on the two types of

supplementary information now required in financial reporting -the effects of changing prices and data on oil

and gas reserves. The Commission believes that these proposed rules represent important steps in encouraging the

ASS to adopt requirements for explicit

reporting by auditors.

The Commission intends to consider

whether it would be more appropriate

for the liability issue to be addressed

generally in the context of all types of

supplementary information rather than

specific supplementary information

which companies are now presenting in

registration statements and other documents furnished to shareholders or investors. The Inclusion by public companies of supplementary financial

information in annual reports and other

disclosure documents is a new and

evolving area of financial reporting and

one which the Commission desires to

encourage,

37

Investment Companies and Advisers

Disclosure Study and Related

Matters

The Division of Investment Management established a study group at the

end of fiscal year 1979, to undertake a

thorough review of investment company disclosure requirements under the

Securities Act of 1933 (Securities Act)

and Investment Company Act of 1940

(Investment Company Act). The objective is to reduce unnecessary burdens

on both the Industry and the staff which

may result from present disclosure requirements.

The first recommendations resultmg

from this study, Rule 465 under the Securities Act and related amendments to

the registration statement forrns.P? were

adopted by the Commission on August

25, 1980. This rule permits most posteffective amendments to registration

statements filed by open-end, management investment companies and urut

investment trusts, other than insurance

company separate accounts, to become

effective automatically, without affirmative action on the part of the Commission or its staff. Amendments which

merely register additional shares, or

which are filed to update the Issuer's

prospectus and do not discuss any material events in its operations, can become effective either immediately or on

a date chosen by the registrant within

20 days of the date of filing. All other

amendments will become effective on

the 60th day after filing, including those

which discuss material events In investment company operations. The rule is

designed to accomplish two goals.

First, it will eliminate staff review of

purely routine filings, thereby enabling

the Division to concentrate its resources

on those filings which need the review

process In order to insure complete disclosure. Second, and perhaps more importantly, it will permit registrants to assume greater responsibility for their

compliance with the disclosure requirements of the Federal secunnes laws.

ThIS disclosure study IS contmumq ItS

review of ways to elimmate duplicative

reporting requirements in documents

sent to existing shareholders and potential investors. As part of Its project to

simplify reporting requirements, the

study group IS exarmmnq ways to reconcile differences In financial statements required to be included in different disclosure documents.

The Commission was also active in

the area of money market funds during

the fiscal year. On September 30, 1980,

the Commission adopted amendments

to Form N-l, the registration statement

form for open-end, management investment companies. and Rule 434d

under the Securities Act, regarding Investment company advertlslnq.?" The

amendment to Form N-l requires the

inclusion of a yield figure computed by

a standardized method, and a quotation

based on that computation, to be included In the prospectuses of money

market funds. The amendment to Rule

434d further requires that any yield

quotations used In advertisements under that rule be computed by the same

standardized method. These amendments are based on the need of Investors in money market funds for comparable yield quotations, since such funds

are marketed primanly on the baSIS of

yield. Prior to adoption of these amendments, money market YIeld quotations

were not comparable and may have

confused investors.

39
On March 14, 1980, the Federal Reserve Board announced adoption of a

requirement that money market funds

maintain with Federal Reserve Banks

special non-interest bearing deposits in

respect of any Increase in asset size. In

response to this requirement, many

money market funds ceased further

sales to the general public, and their

sponsors filed registration statements

for new funds, known as "clone funds,"

which were substantially identical to existing funds (base funds) except for the

maintenance of the special deposit. The

Division examined and processed, on a

expedited basis, about 40 registration

statements of these so-called clone

funds. Clone funds were intended to

protect shareholders of the base funds

from the impact of lower yields, which

would have resulted from maintenance

by the base funds of the special deposit,

while simultaneously allowing investors

to continue to purchase money market

fund shares, albeit with a lower yield resulting from the special deposit. The expedited treatment procedure established by the staff made it possible for

most of those funds desiring early effectiveness to have their registration

statements declared effective by the

Commission Within two weeks after the

date of filing.

Investment Company Act Study

The Investment Company Act Study

Group (the Study) was established by

the Division at the end of fiscal year

1978 to review the regulation of investment companies under the Investment

Company Act. Through its rulemaking

proposals to the Commission and interpretive releases, the Study has proposed, consistent with the protection of

investors, a simpler, more efficient

regulatory system. This system reduces

Commission involvement in investment

company operations and concomitantly

enhances the authority and responsibil40

ity of investment company directors,

particularly disinterested directors, as

primary overseers of an investment

company's management decisions. The

recommendations of the Study have

generally taken two forms: (1) replacing

administrative review by the Commission's staff of proposed investment

company activities With rules establishing general criteria under which certain activities are permissible; and (2)

refining the Investment Company Act's

broad statutory prohibitions by interpretation so as to permit activities not originally contemplated as being within an

exemptive provision's technical scope

or underlying purpose.

Consistent with the goal of placing

greater responsibility on directors for

the operation of investment companies,

during the fiscal year the Commission

adopted several rules which permit certain transactions between an investment

company and its affiliated persons under certain circumstances and after certain findings. These rules related to purchase of liability insurance poltcies.P"

receipt of cash or securities pursuant to

a portfolio company's plan of reorganization;"? and mergers and consolidatrons.P" During that time, the Commission also adopted rules which lessen

prohibitory regulation when certain contracts for investment advisory or principal underwriting services are terminated 99 and which clarify certain

disclosure notices to periodic payment

plan participants. 100

Additionally, the Commission also

proposed rules which would:

(1) exclude from the definition of investment company, and hence from

regulation under the Investment Company Act, certain prima facie investment

companies which are primarily engaged

in a non-investment company business;101

(2) temporarily deem certain transient investment companies not to be
investment companies for purposes of

the Investment Company Act; 102

(3) deem certain subsidiaries of

operating corporations not to be investment companies for purposes of the Investment Company Act; 103

(4) deem, under specified circumstances for purposes of broadenmg the

exception for private companies from

the definition of Investment companies,

a company's owning ten percent or

more of an Issuer's outstanding voting

securities to be beneficial ownership by

one person; 104

(5) exempt the purchase or sale of

certain securities between an investment company and an affiliated person

who is so affiliated solely because of

having a common investment adviser,

common officers and/or common directors.i'" and

(6) clarify which persons are required

to be covered by fidelity bonding insurance.l06

Progress was also made during the

fiscal year toward resolving several other long-standing issues. First, the Commission continued to study whether to

permit mutual funds to finance distribution of their own shares. For many

years the Commission was reluctant to

permit such a use of fund assets because of concerns about conflicts of interest, questions about whether funds

would benefit from financing the sale of

their own shares, and doubts about

whether such a use of fund assets

would be fair to existing shareholders.

Nevertheless, consistent with the goals

of the Investment Company Act Study,

the Commission, in September 1979,

published for comment Rule 12b-1

under the Act, which proposed conditions under which use of fund assets for

distribution would be permitted. (Subsequent to the close of the fiscal year,

on October 28, 1980, the Commission

adopted Rule 12b-l.107)

Second, the Commission considered

whether to adopt Rule 17)-1 under the

Act. That proposal would require that

investment companies develop codes

of ethics governing purchases or sales

by investment company insiders of the

same secunties held or to be acquired

by the investment company. (Subsequent to the close of the fiscal year, on

October 31, 1980, the Commission

adopted rule 17j_) .108)

Finally, the staff completed Its work

on a proposed solution to the so-called

"mini-account" problem. These accounts are offered by investment advisers in the form of individual accounts

but may be operated, in practice, more

like investment companies. (Subsequent to the close of the fiscal year, on

October 10, 1980, the Commission

published for comment proposed rule

3a-4 under the Investment Company

Act dealing with how to characterize or

regulate investment management services which provide clients with indivrdualized treatrnent.I?")

Legislation Relating to Venture

Capital

In cooperation with representatives of

the venture capital industry and the

staffs of the Congressional committees

concerned with the securities laws, the

Commission's staff drafted a bill designed to afford comprehensive requirements for certain small businesses

and for certain firms that provide venture capital to developing businesses.

This bill, the "Small Business Securities

Acts Amendments of 1980", was favorably reported out of the respective

committees by the end of August, 1980.

(A discussion of the bill as it effects

small businesses is found in the Disclosure System section of the Report)

Titles I and II of the bill (which consists of five titles) amend the Investment

Company Act and the Investment Advis41
ers Act These amendments would have

the effect of relieving qualifying "business development cornparues", as defined in the bill, from many of the

regulatory restrictions imposed by those

two Acts, and substituting a carefullytailored pattern of reduced regulation

that takes Into account the special

needs of the venture capital industry

while still preserving important protections for the investing public. This new

framework should substantially reduce

the regulatory costs and Impediments

Imposed on firms that undertake to finance and manage developing businesses. (Subsequent to the close of the

fiscal year, on October 21, 1980, this

legislation was signed into law.)

Significant Applications and

Interpretations

UnIOn Service Group On September 25, 1980, the Commission granted

an application, under Section 17 of the

Investment Company Act, filed by the

Investment companies (funds) in the

Union Service Group, and various affiliated companies, which permitted the

externalization of the then internalized

advisory, management and distribution

functions of the funds. The Commission granted the application after concluding that the disinterested directors

of the funds, based on Information provided them by Independent legal counsel and an Independent financial consultant, had compared and quantified,

on a company-by-company basis, the

benefits which they anticipated would

result from the externalization against

the increased operating costs which

would, at least initially, result from it in

order to determine whether such costs

and benefits were allocated fairly

among all of the funds. The Commission also placed significant weight on

the fact that the disinterested directors,

with the assistance of their independent

counsel and consultant, had deter42

mined what value should be placed on

the right to manage the funds In order

to determine whether the benefits flowing to those companies under the externali zation exceeded the value of the

nght to manage them being acquired

by the new external manager.

Union-tnuestment-Gesellsctiett On

August 5, 1980, Union-InvestmentGesellschaft m.b.H. (Union-Investment)

filed an application for a Commission

order, pursuant to Section 7(d) of the

Investment Company Act, permitting

Unifonds, a West German investment

company which is organized, operated

and regulated in a manner substantially

different from United States investment

companies, to register and sell its

shares In the United States. (IruonInvestment advises and administers five

separate funds, including Unifonds, and

IS one of the oldest management companies in West Germany. The application is the first such filing by a foreign

investment company made subsequent

to the issuance of a 1975 Commission

release setting forth the Commission's

policy and gUidelines for Investment

Company Act reqrstratron of foreign investment company. no Thus, it presents

for the first time novel and difficult issues concerning whether it would be legally and practically feasible to effectively enforce the Investment Company

Act against the West German fund, and

whether It would be consistent With the

protection of Investors to permit the

fund to sell its shares In the United

States

Institutional Disclosure Program

The Commission's Institutional disclosure program, adopted pursuant to

Section 13(f) of the Securities Exchange Act of 1934 (Exchange Act),

has now been in operation for over a

year. Under the program, money managers that fall within the definition of an

"institutional investment manager" con-

-

-
tained in Section 13(f)(5) of the Exchange Act, and that meet certain criteria set out in Rule 13f 1 under the

Exchange Act, file reports on a quarterly

calendar basis on Form 13F. Among

the money managers that typically meet

the requirements of Section .13(f) and

file Form 13F reports, are investment

advisers, banks and insurance companies. Those managers required to file

Form 13F reports disclose certain equity holdings of the accounts over which

those managers exercise investment

discretion. Form 13F reports are not

required to be in machine readable language. The Commission decided not to

adopt such a form of reporting after

receiving public comments In 1979 indicating that some managers do not

employ computer systems and that

those managers that do use computers

employ a variety of systems. In lIght of

these comments, the Commission deterrmned that managers would frnd it

unduly burdensome to employ uniform

computer systems for the purpose of

filing Form 13F reports In machine language.

Form 13F reports are made available

to the public at the Commission's Public Reference Room as soon as possible

after filing. In most cases, reports are

available within one or two days of their

filing. Also available for public inspection at the Public Reference Room are

two tabulations of the information contained in Form 13F reports filed with

the Commission. Both tabulations are

produced by an independent contractor

selected through the competitive bidding process. The first of the tabulations Includes a listing arranged according to individual security held

showmq the number of shares of that

security held and the name of the money manager reportmq the holding. The

second tabulauon IS a summary hstmq,

also arranged accordmq to Individual

security, showmq the number of shares

of that security reported by all mstitutronal investments managers filing reports. The tabulations are normally

available at the Commission's Public

Reference Room between ten days to

two weeks after the end of the 45 day

period for filing Form 13F reports for a

particular calendar quarter. The Independent contractor produces and offers

for sale to the pubhc a magnetic tape

contaimng the informatIon Included In

the two tabulations.

Because the Institutional disclosure

program is still in its formative stages,

and because the Commission has only

limited resources to devote to the program, the staff has not yet undertaken

to analyze or otherwise use Form 13F

data on a formal basis. To date, much

of the staff time devoted to the program

has been spent: (1) answering public Inquiries concerning the substantive provisions of Section 13(1)and the requirements of Form 13F; (2) assistmq the

general public, and on occasion representatives of congressional committees,

in mterpretmq Form 13F Information;

and (3) preparing for publication the list

of equity securities, used to complete

Form 13F, that the Cornrnission is required to make public under Section

13(1)(3)of the Exchange Act. The Commission and the staff have also undertaken consideratlon of the issue of

when confidential treatment should be

granted covering information contained

In Form 13F reports.

43

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The Commission's enforcement program is designed to secure as broad a

regulatory impact as possible with the

limited resources available. To this end,

the Commission relies heavily upon civil

damage actions based upon violations

of the Federal securities laws, and upon

self-regulatory and state and local law

enforcement agencies. With respect to

those agencies, the Commission devotes substantial efforts towards promoting the effective coordination of enforcement activities. In this manner, the

Commission seeks to make maximum

effective use of available resources in

order to obtain an increased enforcement presence concerning matters

within its jurisdiction.

The cases described here are illustrauons which reflect the breadth of the

Commission's responsibilities and its

enforcement responses,and the continued vigor and effectiveness of the enforcement program.

Sanctions and Remedies

The Federal securities laws provide

administrative and civil and criminal jUdicial remedies for violations of those

laws. Sanctions in administrative proceedings for individuals subject to the

Commission's regulatory jurisdiction

may range from the imposition of a

censure to the barring of a securities

professional from the profession. Another type of administrative remedy permits the Commission to find, under appropriate circumstances, that an issuer

of securities subject to the periodic reporting provisions of the Federal securities laws, has failed to comply with

those provisions, and to order that issuer to comply upon such terms and conEnforcement Program

ditions as the Commission may specify.

The civil court remedy usually available

to the Commission is court entry of an

injunction barring further violations in

addition to which the courts often enter

orders providing for appropriate ancillary relief. Criminal sanctions Include

fines and impnsonment.

The Federal securities laws are primarily remedial in nature. In recognition

of that purpose, in the litigation and settlement of its proceedings the Commission makes every attempt to prevent a

recurrence of violative activity and to

rectify the result of past violations. The

Commission has been particularly successful in securing appropriate relief in

injunctive actions. In fiscal year 1980,

examples of such relief included: an

agreement by a defendant to return $9

million alleged to have been wrongfully

obtalned:"!' the appointment to boards

of directors of persons previously

unaffiliated with a corporetlon.'P filings

with the Commission which correct

earlier, incorrect filings; 113 undertakings

by persons to resign as officers of corporations.U" undertakings by persons

to repay monies found to be due and

owing from activities complained of in

the Commission's cornplaint.P" an affirmative undertaking by individuals to

use their best effort to have independent audit committees set up by any other companies with whom they should

become associated.v'"

In the majority of its cases, the Commission is able to settle with respondents or defendants on terms which secure the necessary remedial relief.

Generally, respondents or defendants

who consent to such settlements with

the Commission do so without admit45
tinq or denying the factual allegations

contained in the Commission's complaint or order for proceedings. Thus,

unless otherwise noted, in the discussion of the illustrative cases which

follows, It should be assumed that settlements achieved were upon that basis.

Insider Trading

The purchase and sale of securities

by persons in possession of material,

non-public insrde information has apparently increased in recent years. The

Commission's enforcement interests

have increased as well. Three of the important cases brought by the Commission are described below. Among this

group IS one case In which the Commission alleged Insider trading based

upon material information regarding

corporate takeovers and tender offers,

an area cited In last year's Annual Report 117

SEC v. Lerner, David, Littenberg &

Samuel, et al. 118 On April 2, 1980,

the Commission filed a complaint

against all of the partners and one associate of Lerner, David, Littenberg &

Samuel (LDL&S), a patent law firm, and

venous members of their families, certain persons associated with clients of

LDL&S, and friends of members of

LDL&S. The complaint alleged violations of the antifraud provisions of the

Exchange Act based on purchases by

the defendants of common stock of

Refac Technology Development Corp.

(Refac) while in possession of material,

non-public information. This information concerned the allowance by the

U.S, Patent Office of certain principal

claims In an application for the basic

patent on the laser, which was being

prosecuted by LDL&S under a joint royalty arrangement with Refac and the inventor of the laser.

In addition to the entry of the Court's

orders with respect to further violations

of the antifraud provisions of the Ex46

change Act, the Court ordered other equitable relief. In this regard, certain partners and associates of LDL&S and

certain other persons who purchased

Refac common stock undertook to

make disgorgement of approximately

$62,812 in profits derived from these

securities transactions. Other defendants undertook to make disgorgement

of $29,885 of profits derived from their

transactions in the common stock of

Refac.Moreover, LDL&S was ordered to

comply with its undertaking to adopt,

Implement and maintain policies and

procedures designed to prevent the use

or dissemination of any material, nonpublic mforrnanon received by any

member or employee of the law firm by

virtue of, or during the course of, their

employment. The Commission, in its litigation release119 issued a statement to

emphasize Its concern With respect to

the use of material, non-public mforrnanon by partners, associates and employees of law firms.

SEC v. Neuonel Kinney Corp.120

On June 30, 1980, the Commission

filed a complaint against National Kinney Corporation (NKC) and others. The

complaint alleged that various individual defendants purchased NKC stock

while In possession of material, nonpublic information concerning arrangements between certain persons and

entities In their attempt to acquire or

develop hotel-casino gaming bUSInesses in the United States, Including

the possible acquisition of the Alladin

Hotel in Las Vegas, Nevada. The complaint further alleged violations of the

antifraud provisions of the Exchange

Act, based on allegations of untrue

statements of material facts made by an

officer of NKC to an official of the

American Stock Exchange in response

to questions by the official prompted by

unusual and unexplained trading In

NKC's common stock on that exchange.

-

-
The court ordered the defendants to

comply with the antifraud provisions of

the Exchange Act, and ordered NKC to

make full, fair and accurate statements

In communications with exchanges and

self-regulatory organizations. The Court

ordered certain defendants to disgorge

profits realized on transactions in NKC

common stock.

SEC v. David H. Hall121 On February 22, 1980, the Commission filed a

complaint against David H. Hall, a practicing attorney. The complaint alleged

that Hall frequently served as a "Special

Shareholder Relations" counsel to

publicly-held companies. In this capacrty, he assisted in matters such as

preparing for annual meetings or defending against takeover attempts and

proxy contests. The complaint charged

that Hall traded in the securities of certain of these companies while In

possession of matenal, non-public information without disclosing such information. The non-public Information In

the possession of Hall related to varIOUS

aspects of the business operations or

plans of these companies, including information concerning favorable earnings reports or earnings projections,

proposed tender offers, proposed stock

splits, or cash dividend increases. The

defendant was permanently enjoined

from violations of the antifraud provision of the Exchange Act and, In addition, agreed to disgorgement of

$33,702 in profits he derived from certain of his securities transactions.

Corporate Takeovers, Tender

Offers, and Beneficial Ownership

During the fiscal year, the Commission brought a number of enforcement

cases In situations where the Investing

public was harmed as a result of various

practices by persons in connection WIth

takeovers and tender offers. Also, an increase in the number of entities and

persons holding significant amounts of

particular secunties as an Investment

strategy has led to an increasing number of enforcement actions regarding

the Cornrmssron's rules which require

the reporting of ownership of securities.

SEC v. Samuel E Wyly, Raymond E

Shea and Eldon Vaughan 122 On December 6, 1979, the Commission filed

a complaint against Samuel E Wyly,

Raymond E. Shea, and Eldon Vaughan.

The Commission's complaint alleged

that Wyly, who served as Chairman of

the Board of Directors of Wyly Corporation, entered into arrangements with

other persons designed to provide additional incentives to them to Induce the

tender of Wyly Corp. debentures In connection With an exchange offer by Wyly

Corp The Commission's complaint alleged that Wyly entered into an arrangement to provide additional compensation to Shea, in the form of a consulting

agreement, for the tender of his debentures, The complaint further alleged

that the exchange offer was part of a

plan of recapitalization of Wyly Corp.,

the success of which was the only

alternative to Wyly Corp.'s seeking relief

under the Federal bankruptcy laws. The

complaint alleged that the arrangement

With Shea and later negotiations between Shea and Wyly and Vaughn to

settle Shea's claims pursuant to his

arrangements were never disclosed by

Wyly Corp. In its reqrstration statement

for its exchange offer, in its annual and

penodic reports filed with the Commission under the Exchange Act reporting

provisrons, in Its proxy statements, or in

ItS press releases concerning Its recapitalization efforts.

The Commission also alleged in its

complaint that a business associate of

Wyly, With funds obtained by Wyly

through loans and real estate transactions made Without arms-length neqotiations and on favorable terms, purchased Wyly Corp, debentures on the

open market during Wyly Corp.'s two

47

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_
exchange offers and tendered them

pursuant to those offers. The complaint

alleged that the loans and real estate

transactions were made by Wyly with

knowledge that some of the proceeds

would be used by the business associate to purchase and tender Wyly Corp.

debentures.

The Court entered judgments of permanent injunction restramlnq and enjoining Wyly from vrolations of the

antifraud, periodic reporting, proxy and

tender offer provisions of the Exchange

Act and restraming and enjoining

Vaughan from the violation of the tender offer provisions of the Exchange

Act.

SEC v. Sun Company, Inc. In its

Annual Report for each of the last two

years, the Commission has noted this

case as one of its important actions in

the tender offer area.123 Last year, the

District Court found that the acquisition

of approximately 34 percent of the outstanding common stock of Becton

Dickinson and Company (BD) by

means of an offer to certain institutional

investors. which was not made available

to the general public, constituted an illegal tender offer. Other defendants in

this action included Salomon Brothers,

F. Eberstadt & Co. (and certain other

related entities), Fairleigh S. Dickenson,

J. Fitzgerald Dunning, and Kenneth

Lipper.

The Commission has reached a satisfactory settlement of its enforcement

action against Salomon, Dunning,

Lipper, Dickinson and Eberstadt. On

February 15, 1980, orders were entered: (1) setting forth the terms of the

stipulation of settlement between the

Commission, Salomon and Lipper and

dismissing the Commission's action

against Salomon and Lipper with prejudice; (2) setting forth the terms of the

stipulation of settlement between the

Commission and Eberstadt and certain

related entities and dismissing the

48

Commission's action against certain of

the related defendants with prejudice;

and (3) reciting the Court's liability finding and order as to Dickenson and otherwise terminating the Commission's

action against that defendant with prejudice.

On July 18, 1980, the Commission

filed a memorandum regarding a plan

of divesture of the illegally acquired securities for Sun. The Commission

sought: (1) an absolute obligation upon

Sun to divest itself of the ownership of

and voting rights in its BD stock; (2) a

plan of divestiture which would prevent

Sun from reaping any benefits from its

illegal acquisition, but would not insulate BD management from future takeover attempts; (3) undertakings by Sun

which would further minimize the likelihood that it would violate the Williams

Act in the future; (4) court supervision

of the settlement, including the plan of

divestiture; and (5) an overall settlement

which would deter others from violating

the Williams Act in the future.

A divestiture plan contained in a

memorandum of understanding between Sun and BD does require Sun to

dispose of its illegally acquired BD

shares by means of a complex series of

transactions, the major components of

which are: (1) the issuance and public

distribution by Sun, over a three-year

period, of debentures which are exchangeable into the BD shares held by

Sun; and (2) the immediate removal of

Sun's power to vote the BD shares it illegally acquired.

The Commission's proposed settlement with Sun, which incorporates the

plan of divestiture, also requires that for

ten years Sun must obtain permission

from the District Court before purchasing any BD securities. It further provides

that Sun may not acquire more than

five percent of the equity securities of a

company registered with the Commission for consideration in excess of $10

-
million without prior consideration and

approval by its board of directors and

assurances that the transaction does

not violate Section 14(d) of the Exchange Act or Rule 10b-13 thereunder.

On July 31, 1980, the court Issued an

opinion approving the settlement of five

class actions which included the plan of

divestiture, but that proposed class settlement has been objected to by two BD

shareholders. Although their objections

were rejected.P" these BD shareholders

have appealed to Judge Carter's August

15, 1980, judgment and order. Thus, as

of the close of the fiscal year, there was

no final resolution of the Commission

or the related class actions.

SEC. v. Eurrell V. Potts, et al. 125

On April 9, 1980, the Commission

filed a complaint against Joe M. Cline £.

Associates, Inc. (Cline Associates), a

broker-dealer registered with the Commission, Eurrell V. Potts (Potts), a registered representative of Cline Associates,

and certain customers of Cline Associates. The Commission's complaint alleged that the defendants failed to file

with the Commission the required beneficial ownership reports on Schedule

13D. Some of the defendants, as a

group, owned 534,190 shares or 22

percent of the outstanding common

stock of a corporation registered with

the Commission. Other customers of

Cline Associates additionally acquired

approximatelyy 241,300 shares or 10

percent of the same corporation's

shares. The Commission also alleged

that Potts and Cline Associates violated

the antifraud provisions of the Exchange Act by making materially false

and misleading representations to customers and prospective customers and

made unauthorized purchases of the

company's stock for customers. The

Commission alleged other violations

including domination and control of the

market for the shares of the corporations by Cline Associates and Potts.

The Court entered judgments of permanent injunction enjoining all defendants from further violations of the beneficial ownership provisions of the

Exchange Act. Cline Associates and

Potts were restrained from further violations of the antifraud provisions of the

Securities Act and Exchange Act and

from the recordkeepmg and transaction

reporting provisions of the Exchange

Act. In addition to injunctive relief, the

Court ordered other equitable relief,

including certain undertakmgs. Part of

this relief provided for the fair and orderly desposinon of 736,216 shares of

the corporation by a broker-dealer not a

defendant in the action.

On the same day, the Commission

announced the institution and settlement of administrative proceedings

against PottS.126 Potts consented to the

entry of an order of the Commission

suspending him from association with a

broker or dealer for 150 days. Thereafter, he may become so associated upon

a demonstration that adequate supervisory procedures have been established

conforming to the terms and conditions

set forth in the Commission's order.

Adrninisbative Proceedings Under

Section 15( c)( 4) of the Securities

Exchange Act

An important area of concern to the

Commission is that filings with the

Commission made by issuers pursuant

to the Commission rules contain required disclosures and comply in material respects with applicable sections of

the Exchange Act and with rules promulgated thereunder. Under Section

15(c)(4) of that Act, the Commission

may publish its findings and issue an

order requiring persons subject to the

provisions of Section 12, 13, or 15(d) of

that Act, to comply with such provisions

or rules promulgated thereunder.

In the Matter of Occidental Petroleum Corporation 127 The Commission

49

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-
instituted proceedings, pursuant to Section 15(c)(4) of the Exchange Act, with

respect to Occidental Petroleum Corp.

(Oxy), a California corporation, to determine whether, since January 1, 1973,

Oxy had failed to make certain required

disclosures in various filings submitted

to the Commission pursuant to Section

13 of the Exchange Act and the rules

and regulations thereunder.

In its Order, the Commission found

that various filings by Oxy with the

Cornrnissron did not contain certain required disclosures relating to: the discharge of chemical and tOXICwastes

into the environment by Oxy's Hooker

Chemical subsidiaries, or to the protection of the environment: the status of

the proposed construction by Oxy of a

hydroskirnrrunq refinery on Canvey Island, the status of Oxy's negotiations

with Libya concerning the financial

arrangement pursuant to which Oxy operated in Libya; and signed undated letters of resignation which were submitted at the request of Dr. Armand

Hammer to him by certain nominees for

election to Oxy's Board of Directors.

In the Order, the Commission ordered Oxy to, among other things,

comply with the reporting requirements

of the Exchange Act, amend and correct its reports with the Commission

within 30 days, and include In Its next

quarterly report to shareholders a summary of the contents of the Order. In Its

Offer of Settlement, Oxy undertook to

desiqnate a director satisfactory to the

Commission to: (1) prepare an environmental report with respect to certain

specified matters; and (2) assure that

potential liabilities regarding the impact

of Oxy's operations on the environment

have been identified to its board of directors, and that appropriate disclosure

has been made in filings with the Commission. Oxy also made an undertaking

and representation with respect to its

policy concerning letters of resignation

from members of its Board of Directors.

50

In the Matter of Peabody International Corporation 128 During the fiscal year, the Commission issued an Order Instituting Proceedings, pursuant to

Section 15(c)(4) of the Exchange Act,

and Findings and Order of the Commission against Peabody International

Corp. In ItS Order, the Commission

found that Peabody had failed to comply In several rnatar ial respects with

Section 13(a) of the Exchange Act and

Rules 13a-1 and 13a-13 thereunder in

connection with Its annual report on

Form 10-K for Its fiscal year ended

September 30, 1979, and quarterly report on Form 10-Q for the quarter

ended December 31, 1979. The Commission found that Peabody did not

have a sufficient basis upon which to

defer certain contract costs, attributable

to an alleged breach of contract, to

avoid recognition of the anticipated future costs and, by reason of the accounting treatment employed, overstated its income In filings with the

Commission. Further, the Commission

found that Peabody's disclosures concerning these matters in filings With the

Commission were misleading, and that

Peabody omitted to disclose material

matters.

Peabody undertook among other

things to: (1) restate certain financial

statements and amend Its filings accordingly; (2) immediately issue a press

release concerning the proceeding and

setting out the restated figures; and (3)

develop appropriate procedures and

policies concerning the deferral of certain costs. Peabody also undertook to

defer costs only if allowed by generally

accepted accounting principles, approved by its audit committee, and drsclosed in specified filings and reports to

shareholders.

The Commission ordered Peabody to

comply with the reporting requirements

of the Exchange Act, to amend its reports currently on file Withthe Comrnis-

-
sion and to comply with its undertakings.

Questionable Payments

The Foreign Corrupt Practices Act of

1977 [Sections 13(b)(2), 30A and 32(c)

of the Exchange Act] was signed into

law in December 1977. That Act prohibits issuers from, among other things,

corruptly making payments to officials

of foreign governments in order to induce such officials to use either their

authority or influence to obtain business

for the issuer in that country. The Act

also requires corporations to maintain

systems of internal accounting controls

which provide reasonable assurance

that certain objectivesare met

During the past year, the Cornrrusslon's enforcement Interests in this area

continued and two of the important

cases brought are described in the followinq summaries:

SEC v. Textron 129 On January 31,

1980, the Cornrruss io n filed a civil

injunctive action in the U.S. District

Court for the District of Columbia

seeking to enjoin Textron from further

VIolationsof the antifraud, reporting and

proxy provisions of the Exchange Act

and of certain rules thereunder.

The CommISSIOn'scomplaint alleged

that during the period from at least

1971 to 1978, Textron engaged In a

course of business pursuant to which

payments which totalled at least

$5,400,000 were made to Textron sales

agents. According to the complaint,

Textron made such payments knowing,

or having reason to know, that the payments to such sales agents would be

shared in whole or in part with foreign

government officials or employees, or

members of rulIng farnihes, In order to

Induce those individuals to use their influence or position to secure business

for Textron. In addition, the Commission's complaint alleged that Textron

failed to disclose this course of business and the concornrnitant risks to

earnings and profits occasioned by

such practices.

It also alleged that, In furtherance of

these actlvrtres,Textron made false and

misleading representations to the

United States government in connecnon with at least three contracts, and eIther falsely recorded or drd not make

and keep books, records and accounts

which accurately reflected the true nature and drsposrtion of most or all of the

payments.

Textron consented to the entry of a final judgment of permanent injunction

enjoining the company from further violations of Sections 1O(b), 13(a) and

14(a) of the Exchange Act and rules

thereunder. In addition, the judgment

required that Textron file with the Commission a report which describes the

procedures recommended to Textron

by a special committee of the Textron

board of directors intended to prevent

reoccurrence of matters of the nature

alleged in the complaint, and which

Textron intended to or had adopted.

SEC v. International Systems &

Controls Corporation, et al. 130 As

discussed in last year's Annual Report,131on July 9, 1979, the Commission fried a cornplamt seekmq to enjoin

lnternational Systems & Controls Corporation (ISC) and five mdlviduals. The

Commission's complaint alleged Violations of the antifraud, reporting and

proxy provisions of the Exchange Act,

as well as of the accounting and bookkeeping provisions of the Foreign

Corrupt Practices Act. The complaint

charged, among other things, that ISC

made false and misleading disclosures

or failed to disclose ISC commitments

to pay a total of $33 milhon and its payment of approximately $23 million in

connection with the securing of or solicitation of business in, among other

countries, Iran, Algeria, Saudi Arabia,

Nicaragua, Chile and the Ivory Coast.

51

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-
The complaint also alleged that ISC

overstated Its assets, earnings, and

shareholders' equity by including unbilled receivables which as of ISC's fiscal 1973 year end totaled $31 million

and which reflected cost overruns on

fixed-price contracts, sham claims for

escalation and kickback arrangements,

The complaint further alleged that the

corporation failed to disclose that certain officers were the prime beneficiaries of a deferred compensation plan

and that corporate funds were used to

purchase, furnish and maintain a summer residence for the Chairman of the

Board of the firm,

On December 17, 1979, ISC and two

of the individual defendants consented

to a final judgment and undertaking.

The relief obtained included the appointment of three directors, who would

form the membership of ISC's audit

committee, and who were satisfactory

to the Commission, The staff is continuing htiqatron against the three remaining individual defendants.

Government and Municipal

Securities

As indicated In last year's Annual Report,132 the trading of government and

municipal securities has increased significantly In recent years. Due to the

continuation of questionable issuing

and trading practices in this area, the

Commission's enforcement interest has

also continued.

SEC v. G. Weeks Securities, Inc. 133

On October 26, 1979, the Commission filed a complaint against G. Weeks

Securities, Inc. (GWS), G. Weeks [, Co.,

lnc., and several individuals. The complaint alleged that the defendants had

violated the registration provlsions of

the Federal securities laws in the offer

and sale of investments referred to as

"standby with pair off' transactions by

GWS. The complaint alleged that standby with pair off transactions, in which

GWS would purportedly enter into a

52

commitment to sell a specified amount

of Government National Mortgage Association securities to a customer at a

future date and simultaneously agree to

repurchase the same securities on the

same future date from the customer at

a higher price, were "securities" in the

form of evidences of indebtedness and

Investment contracts in GWS.

The Court enjoined the defendants

from violations of the registration provisions of the Federal securities laws. A

previous order which enjoined the defendants from violating the antifraud

provisions of the Federal securities laws

has been appealed by the defendants.

SEC v. Harwell 134 This action was

previously noted in last year's Annual

Report.13S During the last fiscal year,

various developments occurred in this

so-called "University of Houston" case.

In this action, the Commission's complaint alleged numerous violations of

the Federal securities laws based upon

the channelling by a university employee of securities transactions through secuntles firms and individuals, who were

also defendants, for the benefit of these

parties and to the detriment of the university. The complaint alleged that one

securities firm charged excessive fees

to the university and charged commissions to both sides of the transactions

while purportedly acting as a broker for

the university. The complaint also

charged that another firm had defrauded the university by charging excessive fees and by interpositioning with

respect to $35 million in government

security transactions, The complaint

further alleged that another firm was

needlessly interpositioned with respect

to the university's trades in government

securities to the financial detriment of

the university and that excessive fees

were charged to the university in connection with reverse repurchase transactions.

On February 1, 1980, the Commission ordered public administrative pro-

-

-
ceedings instituted pursuant to the

Exchange Actl36 concerning Roger

Kenneth Knox, a one-third shareholder

of Covington-Knox, Inc. (CKI), one of

the securities firms enjoined in SEC v.

Harwell.

In these proceedings, the Commission found that Knox was convicted in

November, 1979, of a felony involving

the purchase and sale of securities and

arising out of conduct of a business as

a broker-dealer and that he was given a

probated sentence; that Knox is permanently enjoined by order of the United

States District Court for the Southern

District of Texas from violating the

antifraud provisions of the Securities

Act and the Exchange Act; that Knox

wilfully violated and wilfully aided,

abetted and procured the violation by

others of the antifraud provisions of the

Securities Act and the Exchange Act;

and that Knox wilfully caused false and

misleading statements with respect to

material facts to be made in CKl's application for registration as a brokerdealer and reports to be filed with the

Commission under the Exchange Act.

The Commission ordered that Knox

be barred from association with any

broker or dealer.

Related-Party Transactions

An area of continuing concern to the

Commission is that of transactions between persons who are related to a

publicly-held corporation and that corporation which, directly or indirectly,

serveto benefit the related party without

regard to the interests of the corporation or its shareholders or without sufficient disclosure of all material facts.

Transactions involving broker-dealers

and customers can raise similar problems and are also of continuing concern to the Commission.

SEC v. Jack M. Catain, Jr. and

Rusco Industries, Inc. 137 On July 8,

1980, the Commission instituted a civil

mjunctive action against Jack M. Catain,

Jr. and Rusco Industries, Inc. The action

alleged that, between 1975 and 1980,

Catain engaged in a course of conduct

in which Rusco funds were used in connection with transactions in which

Catain, and! or certain of his friends or

associates, had an undisclosed interest.

Such transactions were for the benefit

of Catain or his friends without regard

to the interests of Rusco and its pubhc

shareholders. The transactions included

Catain's causing Rusco to: (l) purchase

the assets of a corporation owned principally by Catain, thereby satisfying the

corporation's obligations which Catain

had guaranteed and retrievmq for

Catain a substantial portion of his investment in the losing venture; (2)

make substantial advances to distributorships owned by Catam's relatives

and associates; (3) cause a Rusco subsidiary to enter into a substantial lease

and financial guarantee agreement with

a company in which Catain had an

undisclosed interest; and (4) lease cars

from a separate entity formed by

Catam,

The Court entered judgments of permanent injunction enjoining Catain and

Rusco from further violations of the

antifraud, reporting and proxy provisions of the Exchange Act. In addition,

Catain and Rusco have agreed to certain undertakings which, among other

things, require Catain to resign immediately as Chairman of the Board and

Chief Executive Officer of Rusco and

repay to Rusco any monies found to be

due and owing from the activities complained of in the Commission's complaint.

SEC v. General Resources Corporation, et al. 138 On October 31, 1979,

the Commission filed a complaint

seeking preliminary and permanent injunctions along with any other appropriate relief against General Resources

Corporation (GRC), other corporate de53

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fendants and various individual defendants. All of the individual defendants are

either officers and/or directors of one

or more of the corporate defendants, all

of which are affihated.

In the complaint, the Commission alleged violations by GRC and the affiliated corporate defendants of the antifraud provisions of the Securities Act

and the Exchange Act, and violations of

the penodic reporting and proxy provisions of the Exchange Act. The complaint alleged that the individual defendants violated and aided and abetted

violations of the antifraud provisions

and aided and abetted violations of the

periodic reporting and proxy provisions

in the course of their activities as officers and directors of GRC and the affiliated companies.

The complaint alleged that: (1) some

of the corporate defendants who are

publicly-held companies acquired, and

thereafter caused to transfer, valuable

assets for inadequate consideration; (2)

agreements and transactions were entered into which were contrary to the

companies' Interests and the interests

of their public shareholders; and (3) appropriate disclosure to the stockholders, the Commission, and the investing

public was not made concerning these

transactions and agreements.

The individual defendants are also alleged to have sustained the operation of

insolvent and nearly insolvent upper-tier

cornparues through a complex series of

Inter-company transactions in which

cash of the acquired companies was

exchangged for mortgages, coal leases

and other property of dubious value.

An accounting IS being sought of all

monies or other property received by

one individual defendant, W. Bennett

Collett, and from some of the corporate

defendants. An order of permanent injunction was signed against all of the

corp po rate defendants and individual

54

defendants. However, litigation in this

matter is continuing concerning defendant Roy E. Stephens.

SEC v. Investment Information, lnc.,

et ai. 139 On March 19, 1980, the

Commission filed a complaint seeking a

final order of permanent injunction

against Investment Information, Inc. (III)

and Frederick P. Oman, the company's

president and majority stockholder. The

complaint alleges that IIIand Oman violated the antifraud provision of the Exchange Act and aided and abetted violations of Section 206 of the Investment

Advisers Act.

The allegations were based on an

arrangement whereby III brought together money managers, investment

advisers and bank trust departments

with broker-dealers. Participating brokers remitted 50 percent of commissions to III,which used a majority of the

money to pay for goods and services

purchased elsewhere by the money

managers. Some $11.7 million in commissions were paid under this arrangement between January 1973 and June

1978, with about half $5.8 million remitted to IIIfor the credit of the

money managers' accounts. IIIretained

a fee of between 10 and 17 percent of

the gross commissions paid. The complaint alleged that the money managers

also had the option of directing III to

pay the related portion of the commission to the beneficial owner of the securities whose account paid the original

commission Instead of paying for

goods and services purchased by the

money manager.

The complaint alleged that III prepared and sent to money managers a

suggested customer consent form

which made inadequate and incomplete

disclosure concerning the arrangement,

in that the consent form erroneously

stated that the arrangement operated at

"no cost" to the customer, and failed to

disclose that IIIin some cases returned

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cash to the beneficial owner of the secunties rather than pay for goods and

services acquired by money managers.

III and Oman were ordered by the

District Court to comply with their undertakmgs to refrain from engaging in

any business activity which involves the

provision of cash, goods or services to

fiduciary money managers in return for

directing brokerage transactions for accounts under their management to any

particular broker unless such business

activity specifically conforms with a

general Commission rule, release or

specific Commission interpretive letter

to Oman or III. However,III may arrange

for a partial return in cash of commissions charged on directed brokerage

transactions provided that such rebate

is directly returned to the account of the

beneficial owner of the securities involved in the transaction and provided

that adequate disclosure ISmade to the

beneficial owner of securities.

In addition to the civil action, the

Commission issued a Report of Investigation pursuant to Section 21(a) of the

Exchange Act, detailing the conduct of

seven investment advisers, five banks,

and twelve broker-dealers, all of whom

undertook remedial actions. The investment advisers and banks agreed to

reduce cornrnlssions on certain transactions for a period of time. The Commission has also filed complaints

against two banks alleging violations of

Section lO(b) of the Exchange Act and

Rule 1Db 5 thereunder in connection

with the III and other similar arrangements. Both cases are currently In litigation.

Energy and Tax Benefit Related

Cases

Due to the tax consequences of certain investments such as those in

energy-related products or real estate,

such investments may be inherently attractive to many investors. As a result,

the Commission devotes substantial enforcernent resources to the control of

fraudulent offerings in these fields. With

the advent of the nation's energy cnsis,

fraudulent offerings of energy-related

securities (and the Commission's response to them) have mtensified,

Investors in these offermgs are often

initially contacted by salesmen as part

of a nationwide, long-distance telephone sohcitation campaign. These

campaigns are typified by offermqs

which fall to comply with the registration requirements of the Securities Act

of 1933 (Securities Act) and fraudulent

solicitation statements. Individuals are

often persuaded to make an investment

on the basis of false statements or

ormssions concerning, among other

things, the amount of busmess to be

conducted by the Issuer,140 the risks associated with the investment; the experience of the Issuers' prmcpals: and the

use of investors' funds.':" One of the

major inducements to Investors IS the

purported availability of special tax benefits.142

SEC v. Stewart Energy Systems of

Idaho, lnc., A. Lamont Nibarger, et

al.143-On October 23,1979, the Commission filed a complaint seeking to enjoin Stewart Energy Systems of Idaho,

Inc. (Stewart of Idaho). A. Lamont

Nibarqer, President of Stewart of Idaho,

and a number of other entities and mdividuals related to Stewart of Idaho, from

violations of the registration and antifraud provisions of the Federal secunties laws. In addition, the Cornrnission

sought disgorgement and other ancillary relief,

The Commission's complaint alleged,

among other things, that in the offer

and sale of notes, royalty mterests and

dealerships, the defendants made untrue statements of material fact and

failed to state material facts relatmg to

the use of investor funds for the personal benefit of Nibarger, his relatives, and

companies owned or controlled by him.

55

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In addition, it alleged that no working

prototype of the Stewart cycle engine

system had ever been tested in an applied working situation and, therefore,

that statements regarding the time

frame in which the Stewart engine system would pay for itself and provide a

return on investments could not be

made with any accuracy. The complaint

further alleged that the defendants

failed to tell investors that in order for

them to obtain any return on their investment, It would be necessary to have

engine sales ranging from $100 million

to $1 billion.

The entry of a decree of permanent

injunction on October 23, 1979, enjoined all defendants, except Robert C.

Stewart, from further violations of the

registration and antifraud provisions,

with such defendants agreeing to certam anctllary relief. On June 3, 1980,

the court entered to a decree of permanent injunction prohibiting defendant

Robert C. Stewart from further violations.144

Nibarger agreed to resign as president of the company and to relinquish

control of Stewart of Idaho. Stewart of

Idaho agreed to appoint a new board of

directors, the majority of which will be

independent of past management. In

addition, Stewart of Idaho and Nibarger

have agreed to the appointment of an

independent special agent to report and

make recommendations on the amount

of disgorgement to Stewart of Idaho to

be made by Nibarger and companies

owned and controlled by him. The special agent will also recommend to the

court the extent to which investors

should receive an equity position in

Stewart of Idaho, and Nibarger agreed

to make an accounting to the court, the

Commission, and the special agent.

The company further agreed to employ

an accounting firm to conduct a certified audit, and to make full and fair disclosure to investors as to all activities of

56

Stewart of Idaho and related corporations.

SEC u. CAL-AM Corp., et at. 145 On

August 11, 1980, the District Court issued final judgments of permanent injunction against the various remaining

defendants in this action which was

filed in 1977. The Commission's complaint charged that CAL-AM Corporation and various individuals violated the

registration, antifraud, and reporting

provisions of the Federal securities laws

by engaging in a massive nationwide

scheme, beginning in January 1975, to

solicit and obtain money from the investing public in return for unregistered

securities. The complaint alleged that,

in 1975, the defendants sold unregistered securities in the form of limited

partnerships allegedly formed to obtain

tax and other economic benefits from

the operation of resort condominiums

in Hawaii, and raised over $2.5 million

from 400 public investors. The complaint also alleged that the defendants

offered and sold over $30 million worth

of unregistered securities to public investors through false and misleading

materials which offered interests in approximately 3,000 limited partnerships

allegedly formed to obtain tax and

economic benefits from the mining of

coal and the operation of oil wells. The

complaint further alleged that, in 1977,

defendants offered and sold over $5

million worth of unregistered securities

to 500 public investors through false

and misleading materials which described interests in leases and related

agreements allegedly designed to obtain tax and other economic benefits

from coal mining and the sale of coal.

The Commission had obtained several final judgments of permanent injunction in 1978.146 Under the terms of the

final judqrnent entered by the District

Court in 1980 the remaining defendants

were enjoined from violating certain

antifraud and registration provisions.

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SEC v. The Intemational Mining Exchange, Inc. et al. 147 On September

12, 1980, the Commission filed a complaint against the International mining

Exchange, Inc. (Mining), Trenton H.

Parker & Associates, Inc., MansIOn

Properties Corporation, Mansion Properties Management Corporation, and

Trenton H. Parker, an individual, alleging violations of the registration and

antifraud provisions of the Securities

Act and certain of the antifraud, filing

and reporting provisions of the Exchange Act.

The complaint alleged that, in connection with the offer and sale of Mining's securities, namely investment contracts in the form of a "gold tax shelter

investment program," Mining and Parker made untrue statements of material

fact to the effect that: (1) investors in

Mining would acquire a leasehold interest in mining concessions; (2) investors

would profit from gold to be mined; and

(3) investors could take a 500 percent

Federal income tax deduction based on

mining developmental expenses incurred on the investor's behalf. The

complaint also alleged that Parker and

Mining omitted to Inform investors that:

(1) some purchasers of the investment

contracts acquired no interest in any

gold concession; (2) no payments were

made on behalf of the purchasers for

mining developmental expenses; and

(3) the purchaser's investments were diverted by Mining and Parker to uses

unrelated to mining developmental expenses.

The complaint further alleged that

Trenton H. Parker & Associates, Inc.,

Mansion PropertIes Corporation, Mansion Properties Management Corporation, and Parker, in connection with the

offer and sale of interests in limited

partnerships organized by Parker to

purchase and renovate historical mansions, made untrue statements of material fact. The statements claimed that:

(1) purchasers could reasonably expect

a 25 to 50 percent annual cash return

on their investments; (2) could reasonably expect approximately 100 to 200

percent capital appreciation in six to

nine months; and (3) could reasonably

expect to recover their investments by

the end of the following year. The complaint alleged that the defendants

omitted to disclose that the Investments

involved a high degree of risk, and that

the funds would be diverted to Parker's

own use and benefit.

As of the close of the fiscal year, a

date for hearing has not been set.

SEC v. Murphy 148_ln 1975, the

Cornmlssron brought suit against

Stephen Murphy and other defendants

charging violations of the registration

and antifraud provisions of the securities laws and seeking injunctive relief.

On March 5, 1978, the District Court

granted summary judgment for the

Commission on the registration count

and issued a permanent injunction. On

September 19, 1978, the Court entered

judgment for the Commission on the

antifraud counts and enjoined Murphy

from future Violations. In addition, the

District Court directed Murphy to send

copies of the Court's order to: (1) each

investor in a limited partnership that

had a relationship with Intertie, a corporation he formed and controlled; (2) all

present and future officers and directors

of Intertie and another related corporation, Xanadex; (3) the general partner of

any limited partnership which leases

equipment or assets to Intertie or

Xanadex; and (4) any securitIes brokerage firm engaged by Murphy, Intertie, or

Xanadex to sell interests In limited partnerships which have relationships with

Intertie or the related corporation.

Murphy appealed all of the Court's

decisions. In a substantial opinion reviewing all the issues, the Court of Appeals of the Ninth Circuit affirmed the

judgments of the District Court.

57

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Coordination with Other

Authorities; Effective Commission

Response to Discovery of Problems

The ever increasing mternational nature of commerce continually causes

the Commission to coordinate with authonties of foreign countries, such as

Canadian authorities, as one summarized case illustrates. In other situations,

the discovery of imminent loss to 10-

vestors requires that the Commission

act quickly If it is to effectively preserve

investor's assets

SEC v Alexander Kasser 149 The

Commission oriqmally filed a cornplamt

agamst Alexander Kasser in 1974. This

complaint and a later amended complaint were both dismissed by the DIStrict Court, and pursuit of the action was

halted until reversal of the decrsion of

the District Court by the Court of Appeals in 1977

The Commission had alleged violations of various antifraud provisions of

the Federal securities laws through a

scheme to defraud the Manitoba Development Fund, a corporation owned by

the Province of Manitoba, Canada, and

engaged 10 the busmess of fmancing 10-

dustnal resources development.

Kasser had fled the United States 10

the early 1970'5 and his exact whereabouts in Austria, where he became a citizen, was unknown until 1977, at which

time letters rogatory for Service of the

complaint were filed In Austria. The

Austrian courts obtained service of

process on Kasser 10 1979.

Kasser entered into a coordinated

settlement with the Commission and

Canadian prosecutors In settlement,

Kasser agreed to pay approximately $9

million (Canadian) to the Manitoba Development Fund. In addition, Kasser

consented to a permanent injunction 10

the Commissron's action which was entered on August 4, 1980. The Canadian

provincial authorities also accepted the

settlement.

58

SEC v. Philip R. Cohn and Deuid E.

Lyon 150 On March 12, 1980, the

Commission filed a complaint against

Philip R. Cohn and David E. Lyon

alleging that, on or about March 1,

1976 to the present, Cohn and Lyon offered for sale and sold over $8 million

10 unregistered sec unties in the form of

evidences of mdebtedness, "buy back"

agreements, and promissory notes in

connection with certain real estate

transactions, and investment contracts

10 the form of interests and participations in multi-family housing projects,

In addition, the Commission alleged VIolations of the antrfraud provrsions of

the securities laws based upon misrepresentations of material fact and omissions of rnatarra! facts concerning

commingling, conversion and diversion

of proceeds, the source of funds used

to payoff investors, profits to be realized by investors, the guaranteed return

of investors' funds and the placing of

proceeds in escrow. The cornplamt also

alleged that in furtherance of the conduct described therein, defendants

Cohn and Lyon engaged in transactions, practices and a course of business which operated, or would operate

as a fraud, mcluding paying off prior investors with the proceeds of the sale of

securities to subsequent investors, and

solIciting new investors by citing the

profits realized by earlier investors without Informing them that such profits

were paid from the proceeds of sales of

securities to subsequent investors.

On April22, 1980, and July 3, 1980,

the District Court entered orders permanently enjoining Cohn and Lyons, respectively, from further violations of the

registration and antifraud provisions of

the Federal securities laws. In addition,

on April22, 1980, the Court ordered

various assets frozen and ordered

various books and records frozen. On

July 3, 1980, the Court ordered an accounting of all proceeds from the sale

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of securities in connection with certain

multi-family housing projects and monies received from the period March 1,

1976, to present.

Other Significant Enforcement

Cases

SEC u. The Fundpack, lnc., et al. 151

On March 21, 1979, the Cornrnission

filed a complaint against the Fundpack,

Inc. (Fundpack), Holdmg Trust (Trust)

and Holdings of U.S. Government Securities, Inc., a complex of mutual funds

(the Funds), together with the Funds'

investment adviser, Fundpack Management, Inc. (Management), its two

broker-dealer subsidiaries and several

indlviduals. The complaint alleged VIOlatio.ns of the antifraud, registration, reportmg, proxy and fiduciary obhqation

provisions of the Federal securities

laws, based principally on the implementation in the Funds of an investment arrangement known as "switching" which imposed largely undisclosed

costs and performance burdens on

Fundpack. These burdens have included borrowmg expenses, high transaction costs, and mvestment losses due to

a leveraged condition in the Fundpack

portfolio during stock market declines.

The switchmg program permitted and

encouraged the Funds' shareholders to

transfer their investments among the

Funds Immediately upon placing a telephone order to that effect. It resulted in

frequent fluctuations in the assets of

Fundpack which had, on some occasions, reduced its net assets by as

much as approximately 70 percent in a

single day. The total operating costs

and investment losses as a result of the

switching program had on occasion

been as high as 12 percent of Fundpack's average net assets on an

annualized basis.

Additionally, the complaint alleged

self-dealing practices by Management

and breach of fiduciary duty by the

Fundpack directors. The complaint also

alleged that the Funds' prospectuses,

annual and periodic reports, proxy materials and other literature were materially false and rrusleadmq with respect to

the above matters and that Fundpack

and Trust offered and sold unregistered

secunties to the public. Five major acnons have been taken by the Court In

this litigation

On August 10, 1979, an order of prehrrunary Injunction was entered, apporntinq an independent master to

oversee and approve certain of the operations of the Funds and Management,

providing that proxies, solicited for the

Funds' annual meeting of shareholders

on June 28, 1978, were VOid, and ordering the Funds to resohcit proxies in

compliance with the Federal securities

laws under the supervision of the independent master.P"

Followinq the preliminary Injunction,

the action was settled as to the Funds

Management and Its subsldianes, and

Victor H Polk, former president and

chairman of each of the defendant corporations. On September 29, 1979, the

Funds consented to a Final Order pursuant to which the Funds were required, among other things, to appoint

and thereafter nommate and recommend for election to their respective

boards of directors four lndivrduals satisfactory to the Cornmissron. The order

of the Court also required that the

Funds 'report to shareholders concerning the Commission's complaint, the

history of the htiqatron, and the actions

taken pursuant to the final order.153

On December 13, 1979, the Court

entered into a final judgment of permanent injunction against Polk, Management, and its subsidianes P" which permanently enjoined them from engaging

In conduct VIolative of the antifraud.

proxy, reporting, registration, and fiduciary obligation provisions of the Federal secuntles laws. In addition, the final

judgment ordered Polk and Manage59

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ment to liquidate an unregistered investment company established by Polk

and Management following the institution of the Commission's action,

On March 5, 1980, former controlling

stockholders, officers and employees of

Management consented to final judgments which permanently enjoined

them from engaging in conduct violetIng certain of the antifraud, registration

and fiduciary obligation provisions of

the Federal securities laws.155

On August 6, 1980, several former

"disinterested" directors of the funds

consented to a final judgment which

prohibited them from engaging in conduct violating certain of the registration

and fiduciary obligation provisions of

the Federal securities laws, and ordered

them to take all steps reasonably necessary to cause any Investment company

with which they become affiliated to file

with the Commission and disseminate

to shareholders complete and accurate

prospectuses, proxy materials and periodic reports.P"

The Commission's action continues

against another former officer and director of Management and its subsidiaries.

SEC v. First Independent Stock

Transfer Agent, Inc. and Terry E.

Kirchner 157 On August 4, 1980, the

Commission filed a complaint against

First Independent Stock Transfer Agent,

Inc. (Transfer) and Terry E. Kirchner,

the company's president. The Commission sought to enjoin Transfer and

Kirchner from violating, among other

things, provisions of the Exchange Act

relating to: (1) recordkeeping requirements; (2) the time during which

turnaround must be made of all securities classified as routine items; (3) notice required to be given to the defendants' issuer clients for failure to meet

turnaround requirements; and (4) limitations on business expansion when

60

failing to comply with turnaround requirements.

The Court entered a final judgment of

permanent injunction which required

the defendants, in substance, to: (1) establish and keep current recordkeeping

and other procedures designed to ensure compliance with transfer agent

rules; (2) retain independent public

acccountants in order to review the defendants' recordkeeping system and

transfer agent procedures; (3) furnish

the Commission with written certifications with respect to the establishment

and implementation of recommended

recordkeeping and transfer agent procedures; (4) give notice to the Commission and to the defendants' clients of

past failures of the defendants to comply with the Commission's turnaround

requirements; (5) refrain temporarily

from an expansion in business; and

(6) furnish to the Commission semimonthly reports about the time required

by the defendants to turnaround items

presented for transfer.

Staff Report of the Securities and

Exchange Commission on Proxy Solicitetions in Connection with Compass Investment Group 158 On November 15, 1979, the Commission

issued a report, pursuant to Section

2l(a) of the Exchange Act, with respect

to the Compass Investment Group. The

report was the result of a staff inquiry

into proxy solicitations made in connection with the annual meeting of Compass Investment Group (Compass).

Proxy solicitation materials were issued primarily on behalf of two individuals who had amassed 48 percent of

the outstanding shares of Compass.

They represented that there were no future arrangements or understandings

with respect to future employment with

Compass, nor any transactions or proposed transactions with the company in

which these individuals had any direct

or indirect material interest. After the

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proxy materials were issued, but prior to

the shareholder meeting, these individuals had determined that one would

serve as chairman and that he would receive compensation In the amount of

$60,000 per annum In the form of a

consulting contract. These individuals

made other determinations concerning

the company as well. These lndivrduals

took no action either prior to or at the

annual meeting to advise the shareholders of the proposed arrangements.

After the staff commenced its inquiry,

the participants determined to solicit

the shareholders for approval of the

compensation arrangements. The individual who was to serve as chairman

agreed not to receive any compensation

for the period from the shareholder

meeting until the date of shareholder

approval of the compensation arrangements.

In the report, the staff restated the obligations upon those who solicit proxies

to take appropriate steps to disseminate

material information with respect to

events which occur between the time of

the mailing of a proxy solicitation regarding a shareholder meeting and the

date of the shareholder meeting, particularly when, as a result of such events,

material statements contained in the

proxy are rendered false and misleading.

In the Matter of Philadelphia Stock

Exchange, Inc.l59 On March 17,

1980, the Commission issued an Order

Instituting Administrative Proceedings

pursuant to Section 19(h) of the Exchange Act and Findings and Order of

the Commission against the Philadelphia Stock Exchange, Inc. (Phlx), a registered national securities exchange located in Philadelphia, Pennsylvania.

In its Order, the Commission found

that the Phlx had violated Section

11A(c)( 1) of the Exchange Act, the

Commission's quotation rule, and Section 19(9) of the Exchange Act, by its

failure without reasonable justification

or excuse, to enforce compliance by its

members and persons associated with

its members with: (1) the Commission's

quotation rule and the exchange's own

quotation reporting rule; (2) the exchange's option position limit rule; (3)

the exchange's options spread parameter rules; and (4) the exchange's rules

regarding registered options traders'

quarterly trading requirements.

The Cornmissron censured the Phlx

and ordered it to fully comply with certain undertakings made in its Offer of

Settlement. In its undertakings, among

other things, the Phlx represented that it

has made, and has undertaken to make,

extensive revisions in organizational

structure, personnel commitment of resources, programs, policies and procedures designed to strengthen its market

surveillance and enforcement capabilities.

In the Matter of Boston Stock Exchange,

lnc., Boston Stock Exchange Clearing

Corporation, Inc. leo_On the first day of

the 1981 fiscal year, October I, 1980,

the Commission issued an Order

Instituting Administrative Proceedings

pursuant to Section 19(h) of the Exchange Act against the Boston Stock

Exchange, Inc. (BSE) a registered national securities exchange and the Boston Stock Exchange Clearing Corporation Inc. (Clearing Corporation), a

wholly-owned subsidiary and member

of the BSE, and which is registered with

the Commission.

In Its order, the Commission found

that the BSE without reasonable justification or excuse failed to employ adequate surveillance procedures for monitoring the activity of its specialists, and

failed to discover on a timely basis violations by its members of Commission,

BSE and Federal Reserve Board regulations, which continued over a thirteen

month period. Although the Comrnis61

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sion noted that the BSE retained special counsel to investigate the violations

and ultimately sanctioned various

members, the Commission found that

the failure to maintain adequate surveillance procedures and to detect and terminate the violative conduct constituted

a failure to enforce Commission and

BSE regulations In violation of Section

19(9) (1) of the Exchange Act. In addition, the Commission found that the

Clearing Corporation extended credit to

specialists in violation of Section 7(c)

(l) of the Exchange Act and Federal

Reserve Board Regulation T.

The Commission censured the BSE

and the Clearing Corporation and ordered the BSE to fully comply with certain undertakings made in its Offer of

Settlement. In its undertakings, among

other things, the BSE represented that

the Board of Governors of the BSE

would appoint a Special Management

Review Committee composed of persons who are not officers of the BSE

and who shall review, among other

things: procedures for nominating

members for the BSE Board of Governors; and, the Board of Governor's oversight of the management of the BSE,

including adequacy of internal controls

and integrity of the BSE disciplinary

process. The Special Management Review Committee was to be formed within 30 days of the date of the Commission's Order and the Committee was to

deliver a final report to the BSE Board

and to the staff of the Commission.

SEC v. Ian T Allison, et at. 161 On

September 29, 1980, the Commission

filed a complaint against Ian T. Allison

and a number of other entities and individuals for violations of the antifraud

62

and registration provisions of the secunties laws and the penodic reportmq,

stock ownership reporting, and antimanipulative provisions of the Exchange Act. The Commission's complaint alleged that Allison and other

defendants participated in a scheme to

defraud by promoting two corporations

which had no substantial operations.

The complaint also alleged that the

defendants: (1) made false and misleading statements in registration statements concerning shareholder ownership and contribution of assets by the

new majority owners of the companies;

(2) manipulated the markets in two securities at the time of the opemng of

over-the-counter tradmq: (3) made false

and misleading statements during television interviews and in press releases

and research reports; and (4) made

false and misleading statements in filings of both companies with the Commission, certam of which included balance sheets in which assets were

presented at inflated values, and income statements in which sales and

cost of sales were overstated.

Several of the defendants were permanently restrained and enjoined from

violating the antifraud, registration, and

reporting provisions of the Exchange

Act. In addition, the Court ordered one

of the corporations to make corrective

filings and appoint two independent directors satisfactory to the Commission.

As of the close of the fiscal year, the

case was pendinq against the rernaming

defendants. The Commission sought

both preliminary and final relief againt

all of the remaining defendants including injunctive relief and orders freezing

assets and requiring disgorgement of

profits.

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Programmatic Utigation and Legal Work

The Commission, through Its Office

of the General Counsel, participates in a

substantial amount of litigation in addition to its enforcement actions. This litigation includes numerous appellate

cases before the Supreme Court and

Federal circuit courts of appeals where

the Commission appears as a party or

as amicus curiae, and distnct court litigatIOn where the Commission, its Commissioners, or ItS employees are party

defendants. Commission litigation,

whether as a party or an arnrcus, often

involves questions of great significance

concerning the proper interpretation

and scope of the Fderal secunties laws.

The Cornrnission's participation in this

litigation has worked to strengthen the

Investor protections afforded by the securities laws and the enforcement and

regulatory programs it has undertaken

to achieve that goal. The Office of the

General Counsel is also involved in important legislative and regulatory work.

The following is a summary of some of

the important actions which were litigated in the past year, and the status of

other projects of significance to the

Commission and the public.

Significant Litigation

Scope of the Antifraud Provisions of

the Federal Securities Laws The

antifraud provisions are the principal

statutory basis through which the Commission seeks to protect the public

against deception in secunties transactions The proper scope of these statutory provisions is a continuing program

of importance to the Commission's litigation efforts. For example, the Commission has worked with the Department of Justice in connection with

Rubin v. Uruted States, a cnrrunal case

presently before the Supreme Court

which raises the question of whether a

pledge of securities ISa sale under Section 17(a), the general antifraud provision of the Securities Act of 1933 (Securities Act). Resolution of that question

will determine whether Section 17(a) affords protection against deception

which occurs in the pledge of securities.

In this case, the Umted States did not

oppose the granting of Rubin'S petition

for certioran on the pledge/sale quesnon, in view of the conflict among the

Federal courts of appeals on the issue,

and the Importance of that Issue to enforcement of the Federal securities

laws. The Supreme Court granted the

petition, lImiting ItS review to the

pledge/sale question, and the case was

pending at the close of the fiscal year

In addressmg the merits, the United

States urged that the plain meaning of

the statute encompasses pledges within

the term "sale," which IS defined to include the disposition of a security or interest in a security for value. That interpretation, the United States argued, is

also supported by legal principles well

recognized at the time the Securities

Act was enacted by Congress, as shown

by the legislative history and by the policies and purposes underlying the statute

In another facet of this Program, the

Commission has addressed in a different context the Important question of

whether the securities laws will protect a

person who is deceived into parting

with money in exchange for an interest

in a security. The Commission filed an

amicus brief in the Umted States Court

of Appeals for the Fifth Circuit in First

Neuonal Bank of Las Vegas v. Estate

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of Russell, urging that a transaction is

covered by Section 1O(b), the general

antifraud provision of the Securities Exchange Act of 1934 (Exchange Act),

where a brokerage firm's agreement to

sell United States Treasury notes was

coupled with an agreement to repurchase them. The Commission is concerned that a holding to the contrary

would leave a large class of public

investors those who invest in United

States Government securities under

these circumstances - without the protections provided by the antifraud provisions. This case is currently pending

before the Court of Appeals for the Fifth

Circuit.

The question of whether the basic

antifraud provisions of Section 1O(b)

and Rule 10b-5 thereunder of the Exchange Act prohibit securities transactions by a person who knows material,

nonpublic information with respect to

an issuer, but not as a result of any relationship with that issuer, was addressed

by the Supreme Court in Chiarella v.

United States. In that criminal case, an

employee of a financial printer, by virtue

of the fact that prospective tender

offerors would provide his employer

with confidential information about

forthcoming bids, gained access to

such information and, prior to the public announcement of the bid, purchased

shares in the subject companies for

quick resale. The Department of Justice, assisted by the Commission, argued that, in trading on the basis of this

nonpublic information, Chiarella engaged in a fraudulent act or practice in

violation of Section 1O(b) and Rule

10b-5. But the Court reversed his conviction, holding that a duty to either disclose or refrain from trading does not

arise from the mere possession of

non public market information the

theory, the Court believed, on which he

had been convicted. The Court did not

reach the question of whether the de64

fendant committed a violation by trading while in possession of information

that was misappropriated or otherwise

obtained by unlawful means, finding

that the jury had not been properly

charged on these theories. In its decision, however, the Court clearly appeared to recognize that in cases where

a fiduciary relationship is present between the person trading on confidential information and the class of defrauded buyers or sellers as in the

traditional insider trading case - then

liability for nondisclosure under the

antifraud provisions is appropriate.

Application of the antifraud provisions where a securities transaction has

both domestic and foreign elements is

another significant aspect of this program. For example, the Commission

participated amicus before the United

States Court of Appeals for the Second

Circuit in 1fT v. Cornfeld, urging that the

district court had erred in holding that

the antifraud provisions of Section

10(b) of the Exchange Act and Rule

10b-5 did not apply to the transnational

transactions at issue. The Commission

believed that the potential adverse consequences of the district court's decision could be grave in light of the increasingly international character of

securities transactions and securities

frauds. The Commission expressed the

view that the antifraud provisions were

applicable because, as to certain of the

transactions, the sale of securities

occurred within the United States and

the alleged fraud, which involved securities that were American in every

meaningful sense, was furthered by

substantial activity within this country.

In its decision, the Court of Appeals

upheld the applicability of Section 1O(b)

and Rule 10b-5, finding that prior cases

dealing with this subject were not dispositive. As to transactions involving

sales of American securities which were

consummated in this Country, the court

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stated that the presence of both factors

weighed heavily in favor of applying

United States law. As to transactions

involving foreign securities, the court

upheld jurisdiction, pointing to such

facts as the convertability of the securities into American securities, that they

were guaranteed by an American company, and that they were issued by a

foreign subsidiary of that company

which had no operating assets. The

court also relied on the relative dominance of American (compared to foreign) activity.

Also within this program ISthe Commission's particrpation amicus curiae

in Weiss v, Marshall Field & Co. and

Panter v, Marshall Field & Co., two related cases pending before the United

States Court of Appeals for the Seventh

Circuit. The Marshall Field cases involve claims by present and former

shareholders of Marshall Field that the

company's management made fraudulent statements in response to a publicly announced tender offer proposal.

The Commission participated amicus

curiae because the Seventh Circuit's

resolution of certain legal issues concerning application of the antifraud provisions to takeover contests may have a

significant impact on the goal of investor protection embodied in the Federal

securities laws. Thus, the Commission

urged that the district court erred In

apparently restricting Section 1O(b) of

the Exchange Act and Rule 10b-5 to situations where the defendant purchased

or sold securities or acted with the intent to manipulate the price of securities. In addition, the Commission urged

that Section 14(e) of the Exchange Act,

an antifraud provision applicable to deception in tender offer transactions,

applies to deception during the entire

tender offer process at least from the

time of the public announcement of a

tender offer proposal and applies to a

tender offer, whether conditional or unconditional. With respect to the scope

of the disclosure obliqatron imposed by

Section 14(e), the Commission urged

that facts concerning management's

actions which may have a srqniflcant

bearing on the likehhood that a particular tender offeror, or any tender offeror,

will successfully consummate a tender

offer proposal, are not so obviously

unimportant to an investor that they are

immaterial as a matter of law.

Private Rights of Action Under the

Federal Securities Laws The Commission's participatron in the Marshall

Field cases discussed above IS also

within another program of continuing

importance to the Cornrrnssion-c-avatlability to injured parties of private

causes of action under various provisions of the Federal securities laws.

Such actions provide a vehicle through

which Injured Investors can obtain redress for violations of the securities

laws. Moreover, since the Commission's

staff can bring only a lirrnted number of

enforcement actions, and may not normally recoup investor losses in those

actions, private actions must serve as a

necessary supplement to Commission

enforcement actions. In the Marshall

Field cases,the Commission submitted

a supplemental brief in which it urged

that there is an implied right of action

for damages in favor of shareholders

under Section 14(e) of the Exchange

Act, a right of action that exists regardless of whether a tender offer proposal

is defeated before shareholders are given an opportunity to tender.

During the fiscal year, the Commission also participated amicus before

the United States Court of Appeals for

the Third CirCUIt in Zetfiro v. First

Pennsylvania Bank, the first Federal

appellate case to address whether the

Trust Indenture Act provides injured debenture holders with a Federal cause of

action for the breach of indenture terms

mandated by the Act. The Comrnissron

65

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urged that, because of the unique structure of the Act, the question was not

whether an implied right of action existed, but whether the existing private

right of action for breach of contract

presented a Federal question so that

the action could be brought In Federal

court. In reaching its decision that debenture holders have a Federal cause

of action, the Third Circuit utihzed many

of the factors emphasized by the Commission, but under an implied right of

action analysis.Among other things, the

court reasoned that the interpretation of

indenture provisions required by the

Trust Indenture Act depends on an interpretation of that statute, and, thus,

Federal court jurisdiction is necessary

to achieve the Uniform standards intended by Congress.

In Transamerica Mortgage Advisors,

Inc. v. Lewis, where the Issue was

whether a private cause of action was

Implied for violations of the antifraud

provision of the Investment Advisors Act

of 1940 (Investment Advisers Act), the

Supreme Court held that a private

cause of action for equitable relief was

implied under Section 215 of the Investment Advisers Act (governing the

validity of contracts), but not under Section 206 of the Act (the antifraud provision) for equitable rehef or damages.

The Commission has continued to

monitor appellate cases concerning irnphed causes of action in the wake of

Transamerica, as well as district court

opinions which have considered whether a private cause of action for equitable

relief ISImplied for violations of Section

13(d) of the Exchange Act This provision requires that a report containing

certain information be filed with an ISsuer and the Commission by any person who acquires more than five percent of the issuer's securities, so that an

issuer can consider the impact of such

potential shifts of control upon the

company and its shareholders. Prior to

66

Transamerica, each of the courts of appeals that had considered the issue had

concluded that a private action could

be maintained for a violation of that

section. The Commission filed a bnef,

amicus curiae, with the Court of Appeals for the Seventh Circuit in Gateway Industries, lnc.. v. Agency Rent-aCar, lnc., urging that an action could be

maintained subsequent to Transamerice, and has filed copies of its brief with

distnct courts considering that issue.

The appeal was withdrawn before a decisron was rendered by the Court.

Standard of Culpability -Aaron v.

SEC raised the important issue of

whether the Commission must prove

scienter In injunctive actions brought to

restrain further violations of Section

17(a) of the Securities Act and Section

1O(b) of the Exchange Act, and Rule

10b-5 thereunder, the principal antifraud provisions of those statutes. In

light of the importance of this issue, the

uncertainty as to its resolution, and the

frequency of lItigation concerning the

question, the Commission had urged

the Supreme Court to grant Aaron's petition for certiorari. The Supreme Court,

based primarily on analysis of the statutory language, ruled unanimously that

the Commission need not prove scienter under the broad antitrust provisrons

found in Sections 17(a) (2) and 17(a)

(3) of the Securities Act, but ruled six to

three that proof of scienter is required

under Section 17(a) (1), Section lOtb),

and Rule 10b-5. The Aaron decision,

read In combination with an earlier Supreme Court decision (United States v.

Naftalin) concerning the coverage of

Sections 17(a) (2) and 17(a) (3), provides the Commission with effective enforcement tools. Those statutory provisions should provide protection against

most deceptive conduct.

The standard of culpability program

also involves much litigation with respect to other provisions of the Federal
securities laws. In Adams v. Standard

Kruttinq Mills, lnc., the Commission

filed a memorandum amicus curiae In

support of plaintiffs' suggestion for rehearing en bane and petition for rehearing, which was denied by the

United States Court of Appeals for the

Sixth Circuit. The Commission had

urged that the Sixth Circuit panel erred

In defining scienter as a desire to deceive, defraud, or manipulate. in searchIng the record for evidence of a "motive" for deception, and in concluding

that scienter must be shown to recover

damages from the defendant accountmq firm under Section 14(a) of the Exchange Act and Rule 14a-9, which prohibit deception in connection with proxy

solicitations.

Protection of the SharehoLder s

Frenchise The proxy provisions at issue in Adams playa singular role in

ensuring that shareholders asked to

vote on important corporate decisrons

can do so In an Informed fashion. This

issue is within the Commission's litigation program in which the Commission

seeks to ensure that shareholders are

provided with accurate disclosure in

making such decisions. For example,

SEC v. Falstaff Brewing Corp. involved

the issuance by Falstaff's management

of a misleading proxy statement solicItIng shareholder approval of the sale of

control of the company to Paul Kalrnanovrtz, and the election of Kalrnanovitz to the board of directors. At the

time of the proxy statement, Kalrnanovitz was a nominee director of Falstaff,

but not part of its management.

The United States Court of Appeals

for the District of Columbia Circuit concluded, as the Commission had urged,

that Falstaff and Kalrnanovitz violated

the proxy provisions, and the Court enjoined both from future violations of

Section 14(a) of the Exchange Act. as

well as Sections 10(b). 13(a), and 13(d)

of that Act. The principal srqruficance of

this case IS that It IS the first reported

appellate decision to hold a nominee

director liable under Section 14(a), and

it will be an Important precedent In the

future. both for the Commission and

private plaintiffs, where a person who is

responsible for deception IS a nominee

director of the company Issuing the

proxy. but not then a director In holdmq that Kalrnan ovitz was liable for

proxy violations, the Court applied a

substantial connection test between the

use of a person's name In a proxy statement and the sohcrtation effort. and it

found that the connection between the

use of Kalrnanovitz's name and the solicitation of approval of his taking control was pivotal. The Court flatly rejected

the argument that Kalmanovitz should

not be held liable because the rnatenal

rnisrepresentatrons and ormssions in

the proxy statement were known to

Falstaff's management.

Scope of Commission's lnoesuqetory Authority The proper scope of the

Cornrmssron's investigation authority

has been challenged unsuccessfully In

several forums in the past year. For example. Dresser Industries. Inc. v. SEC

Involved a challenge to the Commission's authority to enforce an admirustrative subpoena issued pursuant to a

Commission investigation, where a

grand jury independently investigating

Dresser also had sought documents

from the company.

The district court had ordered that

Dresser comply with the Commission's

subpoena, and a panel of the (Iruted

States Court of Appeals for the Distnct

of Columbia Circuit affirmed, but modified the order to prohibit the Commission from transmitting the fruits of Its

mvesnqation to the Department of JusIce. Upon rehearing sought by the

Commission, the United States Court of

Appeals for the District of Columbia, en

bane, unanimously affirmed the distnct

court's order requinnq Dresser to com67

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ply with the Commission's investigative

subpoena and struck down the modification placed on transmittal of evidence

by the Commission to the Attorney

General. In so doing, the Court broadly

defined the scope of the Commission's

appropriate investigatory authority, emphasized the importance of expeditious

investigation of violations of the Federal

securities laws by both the Commission

and the Department of Justice, and approved close interagency cooperation in

this area. Adopting the position urged

by the Commission, the Court h-eldthat

an earlier Supreme Court decision,

which precluded the Internal Revenue

Service from using its summons authority in a civil investigation after it had

determined to refer the matter to the

Department of Justice for criminal

prosecution, has no applicability to the

Commission, given its distinctive statutory authority to investigate and enforce

the Federal securities laws. A petition

for certiorari to the Supreme Court has

been filed by Dresser and the Commission has filed an opposition thereto,

urging the correctness of the decision

by the Court of Appeals and the absence of any conflict in the Federal

courts of appeals on this issue.

Petitions for certiorari to the Supreme

Court have been filed in at least two

other instances, with regard to the

Commission's investigative authority. In

SEC v. OKC Corp., the United States

Court of Appeals for the Fifth Circuit

rejected a challenge to the Commission's authority to utilize, in the course

of its investigation, a report prepared by

OKC Corporation's directors by an outside law firm and upheld the Commission's investigation. In SEC v. Blackfoot

Bituminous, lnc., the United States

Court of Appeals for the Tenth Circuit

held that the Commission need not

show the likelihood of a violation before

seeking enforcement of its subpoenas.

The Commission's broad authority was

68

also upheld by the United States Court

of Appeals for the Third Circuit in SEC

v. Wheeling Pittsburgh Co., despite an

allegation by the targets of the Commission's investigation that the person

submitting information to the Commission had been politically motivated.

That decision was vacated by the en

bane court, however, when it granted a

petition for rehearing en bane.

Standard of Proof in Adjudicatory

Administrative Proceedings Before the

Commission The question of which

standard of proof should be utilized in

Commission administrative proceedings was another important litigation

program area during the past year. For

example, in Collins Securities Corp. v.

SEC. the United States Court of Appeals

for the District of Columbia Circuit held

that the Commission had erred in

utilizing the "preponderance of the evidence" standard of proof in this brokerdealer proceeding. The Court believed

that "clear and convincing evidence" is

required in administrative proceedings

involving charges of fraud, at least

where the sanction is expulsion from

the securities industry.

But, the United States Court of Appeals for the Fifth Circuit later disagreed in Steadman v. SEC. The Fifth

Circuit held, among other things, that

the Commission properly utilized the

preponderance standard in an administrative proceeding brought against an

investment adviser and broker-dealer

for violations of the antifraud provisions

of the securities laws, even where one

of the sanctions imposed was a permanent bar from association with any registered investment adviser or investment company. In Steadman, the Court

accepted the Commission's argument

that, applying the balancing test for

determining the proper standard of

proof announced by the Supreme Court

in Addington v. Texas, the risk of injury

to Steadman did not significantly out-

-
weigh the interest of the investing public, who might be inadequately protected if the Commission's ability to

police the securities industry were impaired by requiring the higher "clear

and convincing evidence" standard of

proof.

On April 28, 1980, the Supreme

Court granted certiorari in Steadman in

order to resolve the conflict between the

Fifth Circuit's decision and the decision

of the District of Columbia Circuit in

Collins. In its brief to the Supreme

Court, the Commission argued that the

standard of proof prescribed by the

Administrative Procedures Act is satisfied by a preponderance of the evidence, and the determination whether

to employ a higher standard of proof is

the responsibility of the Commission, as

it is the agency entrusted by Congress

with the administration of the securities

laws, which responsibility includes the

promulgation of fair procedures in connection therewith. The Commission further argued that under the balancing

test of Addington, neither the potential

injury to the investment adviser, nor the

fact that the antifraud provisions are involved, justifies a departure from the

traditional preponderance standard, in

view of the commission's need to protect the investing public from dishonest

flduciarles entrusted with their money.

Since the decision of the United

States Court of Appeals for the Fifth

Circuit in Steadman, the question of

which standard of proof should be utilized in Commission administrative proceedings has arisen in a number of other contexts. For example, in Investors

Research Corp. v. SEC, the District of

Columbia refused to extend its own

Collins "clear and convincing evidence" standard to a Commission

proceeding where an affiliate of an investment company was censured for violations of Section 17(e) (1) of the Investment Company Act. The Court

explained that, since there was neither a

finding of fraud nor a severe sanction,

use of the higher standard was not required. Shortly thereafter, in Decker v.

SEC, a case Involving the same type of

violation and sanction as Investors Research, the United States Court of Appeals for the Tenth Circuit, applying the

Addington balancing test, followed the

lead of the District of Columbia Circuit

and held that the proper standard of

proof in such a proceeding was the

"preponderance of the evidence"

standard,

Tender Offer Litigation The Commission's adoption, in December 1979,

of extensive and detailed rules governing the conduct of tender offers subject to the Williams Act, has resulted in

litigation concerning the effect of these

rules on state takeover statutes, The

Commission has participated as

amicus curiae or as a party in a number of these lawsuits, which generally

arise in the context of hostile takeover

attempts, and which focus upon the

preemptive effect of Rule 14d-2(b) (the

rule concerning the early commencement date of a tender offer) on state law

provisions requiring extended precommencement delay. The rule requires a tender offer to commence

shortly after a public announcement of

its material terms. It was designed to

thwart a developing practice by which

bidders would make public announcements about their offers without actually

commencing these offers for purposes

of the Williams Act, which contains

various provisions designed to afford investors protection in tender offer

situations.

The Commission recognized when it

adopted Rule 14d-2(b) that it might

conflict with certain state laws, and in

IitJgation the Commission has supported the position of tender offerors

challenging these laws as unconstitutional due to such conflict. However, the

69

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Cornrmssion has also recoqruzed that

states may have a valid interest In

regulating tender offers for truly local

cornpames, and it has therefore supported the efforts of state secur itie s

laws administrators to harrnoruze the

operation of their statutes with Rule

14d-2(b)

In actions in which the Commission

has participated and where a court has

reached the merits of the substantive

preemptive Issue, the results have been

uniformly favorable for the Cornrnissron In Eure v Grand Metropolitan,

Ltd., the North Carolina Superior Court

found Rule 14d-2(b) and the state

30-day pre-commencement waiting requirement to be In diirect conflict, makIng complIance WIth both a physical

lrnpossiblhty The Court therefore held

the state provrslon preempted and

unenforceable.

In Sun Life Group, Inc. v. Standard

Life Insurance Co. of Indiana, the

United States DIstrict Court for the

Southern DIstrict of Indiana upheld the

state's interpretation of its takeover statute, which permitted commencement

of the tender offer In compliance WIth

Rule 14d-2(b), but provided for postcommencement review of the transacnon by state officials. The court noted

that absent such a harmonizing interpretation, the state law could not survive

consntunonal challenge.

In a Delaware case, GM Sub Corp. v.

Liggett Group, Inc., the Chancery Court

entered an Injunction against the conduct of a tender offer that had already

commenced under Federal law. On appeal, the Delaware Supreme Court stated that Rule 14d-2(b) is entitled to a

presumption of validity, and the principles of Federal supremacy mJlitated

against the contlnuatron of injunctive

relief that had the effect of precluding a

tender offeror from complying with the

rule

70

Other Significant Projects

ALI Code Over the past ten years,

the American Law Institute (ALI) has

sponsored the drafting of a Federal Securities Code, under the direcnon of

Professor Louis Loss of the Harvard

Law School. In May 1978, the ALI's

membership approved a 766-page

"Proposed Official Draft" of the Code,

which IS de srqned to replace the six

separate Federal statutes administered

by the Commission with a Single comprehensive and unified piece of legislation.

The Comrmssion and Its staff have

spent a great deal of time and effort

during the fiscal year analyzing and

studying the proposed Code in preparation for its expected introduction in

Congress. The task of evaluating the

benefits the Code would offer and the

possible difficulties it rrnqht create, in

terms of maintaining an effective

scheme of Investor protection, IS exceedingly complex. While in many respects the ALI draft seeks simply to codify exrstinq law, in other respects it

would make SIgnificant substantive

changes.

During the initral review of the proposed Code, members of the Commission staff held a series of meetings with

Professor Loss and his group of adVISers to discuss concerns about both substantive posrtions taken In the Code and

the drafting of varIOUS Code provisions.

In response, Professor Loss made a

substantial number of technical amendments to the Code. In September 1979,

the Commission itself began meeting

WIth the Code's drafters, In sessions

open to the public, to discuss the larger

issues raised by the staff. Further

discussions followed these meetings,

culminating in an agreement between

Professor Loss and a group of his advisers and the Commission as to a

series of further, more substantive

amendments that would be made to the

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Code pnor to Its introduction. As a result of these agreements, the Comrrussion issued a release on September 18,

1980, supporting enactment of the

Code as so revised.

Right to Financial Privacy When

Congress enacted the Right to Financial Privacy Act of 1978, It included a

two-year exemption for the Cornrnission, to allow time to study how best to

reconcile privacy interests of bank customers with the need of the Cornrmssion for access to the account records

of such customers in the course of Its

investigations. With that exemption

about to expire, the Commission staff

began working with members of varIOUS

Congressional staffs to develop a permanent legislative proposal.

The resultmg bill provides that the

Commission will be subject to the Right

to Financial Privacy Act, except in

specified cases where it is important to

afford the Commission prompt access

to financial records in order to exercise

its responsibilities under the Federal securities laws. In such cases, and subject

to prior ex parte court approval, the

Commission would be entitled to subpoena financial records of a customer

from a financial institution without prior

notice to the customer. After obtaining

these records, the Commission would

be required to afford the customer in

question notice that access to hIS records had been obtained, and the customer would be entitled to bring SUit

against the Commission for appropriate

civil penalties and injunctive relief if the

Commission's access was not for purposes authorized by the Federal securities laws. In addition, the bill contains

provisions governing the transfer of fInancial records by the Commission to

other governmental authorities, and requires the Commission to report annually when it obtains access to financial

records. (Subsequent to the close of the

fiscal year, on October 10, 1980, this

bill was signed into law.)

'Glnnle Mae" Study DUring the

past year, the Commission, along WIth

the Department of the Treasury and the

Federal Reserve Board, undertook a

study of the government-related securities markets which, among other thmgs,

detailed abusive tradmg practices m

such markets. The participants m the

Gmrne Mae study concluded that increased regulation of these markets IS

necessary to correct the abuses, and attached to their reports proposed leqislat io n which would e s t ab hs h a new

regulatory structure applicable to forward trading and other transactions

with rnatunties of 30 days or longer in

Government National Mortgage ASSOCIanon and Federal Home Loan Mortgage

Corporation securities. The proposed

legislation was drafted so that ItS provrsions could be extended, as necessary,

to other government-related secunties

Under the proposed le qrs latro n, a

self-regulatory or qarnz anon (SRO),

composed primarily of industry representatives, would exercise rulemaking

authonty, subject to governmental overSight by a "Council" composed of the

Secretary of the Treasury, the Chairman

of the Federal Reserve Board and the

Chairman of the Securities and Exchange Commission, or their respective

de srqne e s The SRO would have authority to establish fair practice standards that would pr ovide for, among

other thmgs, SUitability rules, recordkeeping requirements, pr of e ssro nal

qualification and competency requirements, and flnancial responsibrlity rules

The leqrslation would also require the

registration of brokers and dealers effectmg transactions In those government secuntres subject to regulation. In

addition, investors would receive greater protection by the establishment of

margm requirements by the Federal Reserve. At the close of the fiscal year, the

proposed legislation was under review

by the Office of Management and

Budget.

71

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Public Utility Holding Companies

Composition

Under the Public Utility Holding Company Act of 1935 (Holding Company

Act), the Commission regulates interstate public utility holding company systems engaged in the electric utility business or in the retail distribution of gas.

The Commission's jurisdiction also covers natural gas pipeline companies and

nonutility companies which are subsidiaries of registered holding companies.

There are presently 14 registered

holding company systems with aggregate assets, as of June 30, 1980, of

$52.5 billion. Total holding company

system assets increased by over $5.0

billion in the twelve-month period

ended June 30, 1980. The increase was

attributable to several coal and nuclear

fired generating plants entering service.

Total operating revenues, as of June

30, 1980, were $22 billion, a $4.1 billion

increase over the previous year. In the

14 systems, there are 60 electric and/or

gas utility subsidiaries, 68 nonutility

subsidiaries and 22 interactive companies, or a total of 168 system

companies, including the top parent

and subholding companies. Table 37 in

the Appendix lists the systems and Table 38 lists their aggregate assets and

operating revenues.

Financing

During fiscal year 1980, approximately $3.5 billion of senior securities

and common stock financing of the 14

registered systems was approved by the

Commission. Of this amount, approximately $2.6 billion was long-term debt

financing, and over $900 million was

for equity financing. These amounts

represent a 56 percent increase in longterm financmg over fiscal year 1979,

and a 10 percent decreasein the sale of

common and preferred stock. In addition, the Commission approved over

$4.9 billion of short-term debt financing

and $291 million of pollution control

fmancmq for the 14 registered holding

company systems. Table 39 in the Appendix presents the amount and types

of securities issued under the Holding

Company Act by these holding company systems.

Fuel Programs

During fiscal year 1980, the Commission authorized $597.9 million of fuel

exploration and development capital expenditures for the holding company

systems. These expenditures cover annual fuel programs subject to regulation

under the Holding Company Act defined on geographical and functional

terms. Table 40 in the Appendix lists

the authorization by holding company

system for each fuel program.

Largely as a result of radical changes

in the cost and availability of fuel, utility

companies, including registered systems, have embarked on major programs to acquire control of part of their

fuel supply. Generally, the arrangements involve formation of subsidiaries

or entry into joint ventures for

producing, transporting and financing

fuel supplies or the supply of capital for

the exploration of and development

drilling for mineral reserveswith a right

to share in the product. Since 1971, the

Commission has authorized expenditures of over $3.2 billion for fuel programs of holding companies.

73
Service Company Operations

At the end of calendar year 1979,

there were 11 subsidiary service companies provrdinq managerial, accountmq , adrrurustr auve and engineering

services to 11 of the 14 holding

companies registered under the Hold109 Company Act The billings for servIces rendered to the holding company

systems amount to $497.8 million or

2.26 percent of the total revenues generated by the electric and gas operatmq

utilities, with several systems mcluding

a return on capital invested by the parent holdmg company Because the subsidiary service companies are service

oriented, they are heavily labor intensive

havmq 11,762 employees and assets of

over $306 millro n. DUring February

1980, the Commission approved a proposed amendment to the Annual Report

Form U-13-60 for Subsidiary Service

Companies Subject to the Holding

Company Act. The revised report will

conform to the amended Uniform System of Accounts for Service Companies

adopted by the Cornrnissron In February 1979,

The revised Annual Report will: (1)

Simplify the preparatron of service company fmancial data, (2) more clearly disclose frnancial, accounting, and operational information needed by Federal

and state authorities which regulate the

affiliated public utihty companies served

by the service companies; and (3) facihtate the conduct of audit and account

inspection programs. The amended Annual Report form IS effective not later

than January 1, 1981, for the 11 subsidiary service companies.

General Public Utilities

Corporation/Three Mile Island

Durmg fiscal year 1980, the Commission continued to monitor the financial

and operational Impact to the General

74

Public Utilities (GPU) System of the

March 28, 1979, nuclear accident at

Three Mile Island Unit No. 2 (TMI-2).

Prior to fiscal year 1980, the Commission approved for GPU $500 million of

short-term debt bank financing for the

GPU system to assist payment of replacement power cost incurred as a result of the accrdent. The GPU system

has estimated the cost to decontaminate and restore TMI-2 at $855 million

over the next five years. As of June 30,

1979, approximately $148 million of

this amount had been expended. The

GPU system has $300 million of property insurance coverage for TMI-2.

Acquisition of Columbus &

Southern Ohio Electric Company

By American Electric Power

Company

On July 21, 1978, the Commission

approved the acquisrtion, by tender offer, of the common stock of the Columbus and Southern OhIO Electric Company (CSOE). On February 13, 1980,

the Commission approved an Arnerican

Electric Power Company (AEP) offering

of 1.3 shares of its common stock for

each share of CSOE. An exchange offer

was subsequently made and 88.45 percent of CSOE stock was acquired on

May 9, 1980, the closing date of the

tender offer

CSOE's consolidated assets were

$1.3 billion at December 31, 1979, With

operating revenues of $417 million. The

Commission stated in ItS February

1980 order that the existence of a minonty interest IS contrary to the standards of Section 11(b)(2) of the Holding

Company Act. AEP has filed a plan,

jointly with CSOE, to retire any such minority interest pursuant to a plan under

Section 11(e) of the Holding Company

Act This IS still pending before the

Commission.
Corporate Reorganizations

Reorganization proceedings in the

United States District and Bankruptcy

Courts are not initiated by the Commission, but are commenced by a debtor,

voluntarily, or by Its creditors. Federal

bankruptcy law allows a debtor In reorganization to continue to operate under

the court's protection while it attempts

to rehabilitate its business and work out

a plan to pay its debts. Where a debtor

corporation has outstanding publicly issued securities, the reorganization

process raises many issues that materially affect the right of its public Investors. In addition, the issuance of new securities to creditors and shareholders

pursuant to a plan are exempt from registration under Section 5 of the Securities Act of 1933. Therefore, the Commission enters its appearance and

participates in corporate reorganization

proceedings to protect the interests of

public investors holding the debtor's securities and to render independent, expert assistance to the courts and parties

in a complex area of law and finance.

The Bankruptcy Reform Act of 1978,

which became effective at the beginning of the fiscal year, represents a

comprehensive revision of Federal

bankruptcy law and, In particular, of the

business reorganization provisions of

the prior Bankruptcy Act. The reorganization provisions of the new Bankruptcy

Code, set forth in Chapter 11 thereof,

will apply only to cases commenced on

or after October 1, 1979. Cases commenced prior to October 1, 1979, will

continue under the appropriate provrsions of the prior Bankruptcy Act.

Chapter 11 of the Bankruptcy Code

authorizes the Commission to enter Its

appearance in any reorganization case

and to raise, or present its views on, any

Issue In a Chapter 11 case. Although

Chapter 11 applies to all types of business reorqaruzatrons, the Cornrrussron

will not consider It necessary or appropriate to participate In every case Many

cases Will involve only small enterprises

with uncornphcated capital structures or

minimal public Investor Interest In Its

forty years of partictpation In cases under Chapter X of the prior Bankruptcy

Act, the Commission generally limited

Its particrpation to proceedings In which

a substantial pubhc Investor Interest

was Involved.

DUring the past fiscal year. 64 debtors With publicly Issued secunties outstanding entered Chapter 11 reorgamzanon proceedings. The Cornrnissron

entered ItS appearance In 18 of these

cases. which Involved an aggregate of

$1.46 billion In assets and 97,000 public Investors (A list of these proceedings IS set forth In Table 42 In the Appendix to this Report). In these cases

the Commission presented ItS Views, In

court and informally In consultation

With other partrcrpants, on a variety of

Issues including: (1) conflicts of interests of members of creditors' and equity security holders' committees, (2)

Issues concerning the debtor's operations and sales of assets; (3) the need

for appointment of a trustee or examiner to conduct an investigation Into the

debtor's affairs, questions concerning

the vahdity and effect of the terms of

the securities held by public investors,

the classification of their claims, and

proposed treatment In reorgamzation

plans; (4) the adequacy of disclosure in

the disclosure statement required to be

transmitted to public Investors when

75
their votes on a plan are being solicited;

(5) the reasonableness of fees sought

by counsel and other professionals; and

(6) interpretive questions concerning

the Bankruptcy Code's exemption from

the securities laws.

The Commission continues to playa

similar role in pending cases under

Chapter X, the reorganization of the

prior Bankruptcy Act. In addition, in

Chapter X cases where the scheduled

indebtedness of a debtor corporation

exceeds $3 million, the court is required, before approving any plan of reorganization, to submit it to the Commission for an examination and report

on the fairness and feasibility thereof. If

the indebtedness does not exceed $3

million, the court may, if it deems it advisable to do so, submit the plan to the

Commission before deciding whether to

76

approve it. When the Commission files

a report, copies or summaries must be

sent to all security holders and creditors

when they are asked to vote on the

plan. The Commission has no authority

to veto a plan of reorganization or to require its adoption. During the fiscal

year, the Commission prepared and

filed such reports in five large reorganization cases.

At the beginning of the 1980 fiscal

year, there were 87 cases pending under Chapter X of the prior Bankruptcy

Act in which the Commission was

participating. During the fiscal year, 20

proceedmgs were dosed, leaving 67

Chapter X cases in which the Commission was a party at fiscal year end. (A

list of these cases is set forth in Table

41 in the Appendix to this Report).
Administration and Management

General Management and Program

Developments

During the 1980 fiscal year, a restructuring of the Division of Corporation Finance was carried out in accordance

with recommendations made by the Office of the Executive Director and a

Corporation Finance Task Force. In

conjunction with faculty from the

Harvard Business School, the Division

undertook implementation of workload

distribution by industry specialization.

The developing expertise in specific industnes will facilitate more Informed

and efficient review of filings by Commission staff and should produce

operational economies.

Management reviews were also conducted and recommendations provided

for a number of offices and divisions

during fiscal 1980. These reviews are

part of a continumg effort to evaluate

the Commission's management practices and to help upgrade them whenever appropriate.

Also during fiscal 1980, a number of

enhancements were made to information systems, the personnel program,

and in other areas. The objective,

throughout, has been more efficient use

of the Commission's limited resources.

Information Systems Management

The Commission made substantial

progress in 1980 in furthering the objectives of its automatic data processing

(ADP) enhancement program. Results

of the many initiatives undertaken in the

last two years in the areas of facilities

improvement, processing techniques,

computer system development technologies, and external services are beginning to manifest themselves through

qualitative and quantitative improvements In the Commission's information

processing capabilities. These Initiatives

will insure that at the beginning of the

next fiscal year the Commission will

haveat its disposal an ADPcapability as

close to being "state-of-the-art" as any

similar sized computer installation in

the Federal government.

Fectlities Improvement -In the area

of facihties improvement, the Commission replaced its obsolete IBM 360/65

computer system with an IBM 370/

158-a machine of much greater computing speed, power, and storage capacity that should provide sufficient

processing capabilities for all of the

Commission's ADP requirements over

the next five years, In addition, the

Commission's nationwide telecommunications network was completed

this year, providing all regional and

branch offices access to computer files

maintained at the headquarters location. Further enhancements to the telecommunications net will Include the acquisition of replacement computer

terminals at the headquarters locations

and the installation of more efficient

transmission techniques for the regional and branch offices.

In order to maximize use of the new

computer system and telecommunicanons network, the Commission recently

introduced several "state-of-the-art"

techniques in its program development

and implementation processes. The

first of these utilizes "structured analysis, design, and programming," a relatively new analytical technique which

leads to more clearly defined and formalized system requirements and information relationships, and which can

significantly reduce the number of

77
changes to a system that might otherwise be necessary subsequent to its irnplernentatron A second new efficiency

technique Implemented this year referred to as Interactive programming allows the programming staff to

enter programs, make changes to data

and existing programs, and issue command statements for the processmg of

Jobs directly into the computer via terminals. A related capability given much

more emphasis this past year involves

the expanded use of an on-line data

base analysis, query, and retrieval factlity which will allow the Commission staff

to obtain data and mformation directly

from the computer on an ad hoc basis,

without the need for submitting service

requests to the ADP staff. This facility

wrll make management mformation

available where It IS needed on a much

more timely basis.

As a complement to the ADP services

and information systems provided by

the in-house facility, the Commission

has acquired several proprietary software services for use by its staff. One

such service is an on-line information

retrieval system which provides access

to abstracts of newspaper and periodical articles. Publications included in the

system are major general-circulation

newspapers, major international affairs,

and scientific publications, as well as

other business and related news servIces. The proprietary legal research system being used by the Commission has

been enhanced, giving the staff on-line

access to company profiles and extracts

of various financial reports for

companies required to file with the

Commission. In addition, the Commission IS currently investigating the utility

of a corporate financial statement analysis package which could be of significant research value.

Information Systems In addition to

the foregoing facilities and services enhancements, a number of major new in78

formation systems were Implemented

during 1980. Among these are several

systems for which developmental work

was initiated in prior years: the Case Activity Tracking System (CATS), an online system which is used to monitor

the current status of events relating to

all active investigation and litigation activities and which also provides extensive information for use in resource

allocation decisions; and the N-1R System, which facilitates detailed analysis

of data from Investment Company Act

Form N-1R to aid in the evaluation and

regulatory surveillance of all registered

investment companies required to file

these annual reports. Also implemented

during this past year were the on-line

Position and Employee Reporting and

Tracking System (PERTS), used to

monitor temporary and permanent authorized positions and to forecast personnel related budgetary impacts; and

the Document Control Register (DCR),

used to record and monitor incoming

invoices and travel vouchers and their

payment

In addition to these Implementation

activities, several major system developmental efforts were initiated in fiscal

1980, including the requirements definition and systems analysis phases of

an enhanced Delinquent Filings Reportmg System; the development of an integrated filings workload and registrant

data base, which IS part of an on-line

system that provides the staff the capabihty to directly enter and receive information relating to the receipt and distribution of re quire d filings; and the

creation of an Integrated employee data

base which will efficiently maintain all

required Commission personnel information. In addition to the initiation of

major new systems, several critical existmq systems were enhanced this year,

mcluding the Name and Relationship

Search teleprocessing system, the

Broker-Dealer/Investment Adviser Di-

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rectory System, the Cornrnissron's payroll system, the Rules of Conduct system, and the Complaint Processmg

System. The Cornrmsslon was also

heavily involved in coordmation of the

development by a private ADP contractor of the SEC Docket Index Systeman on-line system for retneving information relating to releases published in

the Commission's SEC Docket.

Other ADP ActIVities Other significant measures were also taken In fiscal

1980 to enhance the Commission's inhouse ADP facility An exhaustive assessment of the vulnerables of the

Commission ADP facihty was completed in December 1979. Based on individual loss potentials and existing

ADP secunty control measures, the risk

assessment report recommended a

series of safeguards designed to mitigate Identified weaknesses. A task team

of computer hardware, systems software, and appllcations software specialists reviewed the findings and recommendations of the risk assessment and

prepared a prioritized list of recommendations for implementation. In addition,

in order to fully support the specialized

needs of the Directorate of Economic

and Policy Analysis (DEPA), arrangements are currently being made to Install a remote job entry and time sharing capability which will substantially

enhance DEPA's capabilities in the

areas of interactive programming and

statistical analysis and problem solving.

Financial Management

In fiscal year 1980 .. the Commission

collected a record $48 milhon in fees

for the reqistration of securities, securities transactions on national securities

exchanges and miscellaneous filings,

reports, and applications, The fees collected represented approximately 66

percent of the total funds appropriated

by Congress for Commission operations. In fiscal year 1979, the Commission had collected $33 million which

represented 47 percent of the funds appropriated by Congress for Commission

operations. Nearly $14 million of the increase in collections was attnbuted to

Securities Act reqistratron fees resulting

from money market fund registrations,

Higher stock exchange volumes accounted for $1 rnillion of the increase,

In fIscal 1980, the Office of the

Comptroller continued the rmplernentation of an automated Integrated fmancral management system. Dunnq the

fiscal year, a new system was Implemented to track mvorce payments. This

system resulted In faster responses to

questions and payments and insured

that payments can be made when due,

as required by revised cash management directives

FIscal year 1980 also saw partial Implementation of an organizational cost

accounting system. Reports generated

by this system present selected costs

for management review and control.

This effort should result in greater

orqaruzetronal umt financial management responsibility

The positron tracking system developed in fiscal year 1979 and implemented In the first quarter of fiscal year

1980 was enhanced and evolved into a

posrtion/employee reporting and tracking system (PERTS). In fiscal year 1981,

this system Will provide management

with current posrtron and employee

data, staff year utilization, and comprehensive cost projection throughout the

fiscal year. This system was tested in

fiscal year 1980 and Implemented on

the first day of fiscal year 1981.

Initiatives intended to Improve or

conserve resources completed in fiscal

year 1980 included the issuance of a

comprehensive budget handbook, simphfication of budget call procedures, issuance of a detailed time and attendance handbook, the completion of

phase one of the Comptroller's microfiche project Involving two million cur79

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rent documents, and establIshment of

uniform policies on the use of overtime

and the employment of temporaries. In

addition, major automation efforts continue in payroll, fee collection, budget

call procedures, and the integrated financial management system, which will

be carried on in fiscal year 1981.

Internal Audit

The Office of Internal Audit is a new

organization within the Office of the

Chairman. Formed in the middle of fIscal year 1980, the Office of Internal Audit has the responsibility to perform

operational and financial audits of

Commission functions and to report its

findings and recommendations directly

to the Chairman. The staff will function

as an independent feedback mechanism to the Chairman on the progress

of operations in achieving the Commission's long-term management goals. In

previous years, required financial internal audits were performed by the Office

of the Chief Accountant.

Initially, the Office was composed of

a director and a program analyst. Since

the close of the fiscal year, an additional

program analyst and a secretary have

been added.

In fiscal year 1980, the Office of Internal Audit issued two audit reports: "Review of Gasoline Credit Card Practice"

and "Review of the Assistant Regional

Administrator (Regulation) Position."

Currently, the Office is conducting reviews of the security of the data processmq center and telecommunications

systems and their usage.

Personnel Management

At the close of the fiscal year, the

Commission's total strength was approximately 1,940 persons. This was

somewhat lower than in previous years,

largely because of the extended hiring

freeze imposed by the President in

March 1980. About two-thirds of these

80

individuals were employed in Washington, D.C., while the remainder were employed in regional and branch offices

located in fifteen major financial centers

throughout the United States.

Significant resources were devoted to

developing programs to implement the

Civil Service Reform Act. Recognizing

the importance of personnel management as an integral part of overall management effectiveness, the Commission

developed innovative managementoriented programs designed to improve

productivity and enhance the agency's

effectiveness in fulfilling its obligations

to the investing public. While the full

benefit of these initiatives may not be

realized for some time, significant progress was made on several fronts during

the past year:

Senior Executive Service The Executive Resources Board, comprised of

six top executives, became fully operational during the fiscal year. Functioning in an advisory capacity to the

Chairman, the board has provided direction and oversight in the development and administration of a personnel

management system for senior executives.

The Performance Review Board also

became operational. Its charter is to review performance appraisals for all senior executives and to recommend pay

levels, bonuses, and ranks.

An internal SES candidate development program is being planned. High

potential managers at the GS-14 and

GS- 15 levels will be competitively selected for an intensive developmental

program consisting of an assessment

center to identify executive strengths

and weaknesses, formal classroom

training, residential training, executive

seminars, and inter- and intra-agency

developmental assignments. Upon successful completion of the program,

these individuals will be placed in the

Executive Resources Pool and will be

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eligible for non-competitive appointment to future SES vacancies.

Performance Appraisals As reported in last year's annual report, the

Commission has devoted substantial

resources to the development of a new

performance appraisal system. To ensure that the system would be valid and

objective, the Commission utilized the

services of a major consulting firm, as

well as those of the Office of Personnel

Management. These consultants assisted the agency staff in gathering and

evaluating information and in developing criteria to evaluate employee performance. The evaluative studies have

been completed and, based on the findings, a new performance evaluation system has been developed to cover all

employees through OS-IS. This system which, at the close of fiscal 1980,

was awaiting approval at OPM, incorporates a goal-setting and review process

for higher grade positions; at the lower

grades, a more traditional performance

standard approach is used. The system

was implemented in November 1980

for OS-IS positions, with lower grades

to be phased in over a period of several

months. All employees will be under the

new system by July 1981.

Merit Pay The Commission developed and submitted for OPM approval a

merit pay program to cover supervisors

and management officials in grades

as-13 through OS-IS. This program

links within-grade pay increases to level

of performance as evaluated by the performance appraisal system. It is designed to provide financial incentives

for superior performance, and at the

same time to encourage improvement

by less effective employees. The merit

pay program will be implemented by

the Commission in October 1981.

A key feature of this plan enables

managers to exercise discretion in the

awarding of merit pay increases to their

subordinates. Most merit pay plans in

the Federal government use "direct

linkage'" models, i.e., an employee's

performance ratmg is translated directly

into a merit pay adjustment by application of a fixed mathematical formula. By

contrast, the Commission's plan uses a

"variable linkage:' While the plan is

closely linked to the performance rating, the variable linkage gives managers

the option to adjust the size of an employee's increase either upward or

downward if there is a valid reason for

such an adjustment. This feature IS

consistent with the philosophy underlying the Civil Service Reform Act: that

decisionmaking authority for personnel

matters should be deregulated and delegated to the lowest practicable management level.

Another feature of the Commission's

merit pay program seeks to encourage

group performance and teamwork by

basing merit pay adjustments, in part,

on organizational accomplishments.

This, too, was authorized by the Civil

Service Reform Act.

While the foregoing initiatives to implement the Civil Service Reform Act

had high visibility, other, more traditional efforts carried on the Commission's

commitment to improve human resource management. Among these

were:

Delegation of Authority The Commission negotiated agreeements with

the Office of Personnel Management

which authorize this agency to examine

and recruit applicants for certain occupations. This authority covers hiring of

accountants and, in selected regional

offices, Securities Compliance Examiners. Past experience indicates that this

type of authority enables the Commission to obtain higher quality applicants,

largely because recruitment efforts can

be focused on factors that are specific

to the needs of the agency.

Merit Promotion A comprehensive

evaluation was made of the agency's

81

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rnerit promotion program. Employee

attitudes toward the program were

sought through the use of an extensive

employee survey. The results of this

survey, along with an analysis of management needs, were used to Identify

weaknessesand deficiencies m the current system. As a result of this analysis,

the merit promotion program will be revised to streamlme procedures, ensure

their validity, and relate them more

closely to employee performance.

Incentive Awards A comprehensive study IS being made of the incentive awards program. As a result of recent fmdings, qurdelines for granting

awards will be substantially revised to

better ensure that awards are based

upon employee performance or other

valid critena, and that monetary awards

are made m proportion to the value of

the contributions made by receipients

Equal Employment Opportunity

The Commission developed an equal

employment opportunity recrurtmq program Designed to be Integrated with

the Uniform Employee Selection

GUidelines and the affirmative action

program, this effort is intended to identify under-representation by rrunonty

group and sex in all occupations and

grade levels, and to target recruitment

sources for rrunontles and females for

the various Job categories. The Commission's Second Annual Job Fair was

very successful in attracting minority

law students to the Commission, and a

third such recruiting program was

sponsored in November 1980, after the

close of the fiscal year.

Part-time employment The Commission has also developed procedures

for trnplernentinq the Part-time Employment Act. These procedures, when fully

operational, will seek to tap sources m

the labor market that are not available

for full-time work by encouraging the

employment of such individuals on a

part-time basts, "Job shannq", whereby

82

the duties of a single position are

shared by more than one individual,

each on a part-time basis, will also be

tried on an experimental basis. Agency

managers are developmg goals for the

implementation of this program.

Upward Mobility -In view of previous highly successful experience with

the upward mobility program (INTERSECT) durmg the past two years, the

Cornrnission has determined to continue the effort. Accordingly, five staff

spaces were allocated for the "INTERSECT III" program. This will allow lower

grade clerical and technical personnel

to compete for entry into administrative/professronal positions With career

ladder promotion potential to the GS-9

or 11 levels. It is noteworthy that most

of the persons selected for the original

INTERSECT Program In 1978 have

completed their formal development

assignments and have "graduated"

from the program. These lndrviduals

have now taken their place in the

work-force as successful administrative

and professional employees.

The Commission has maintained its

Initiatives in other areas of personnel

management as well. An exemplary employment program for handicapped

individuals has been continued and further refined. Attorney recruitment continues to be of major Significanceas the

agency seeks to attract and retain premium quality legal talent in the face of

austere resources. A forward-looking

employee counselling effort seeks to

provide positive counselling services to

employees on career-related matters,

especially in the development of realistic career objectives and helpmg employees prepare to attain those objectives.

Space Management

Numerous problems continue to exist

due to inadequate and scattered office

space. The Commission's headquarters

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personnel remain dispersed among

three locations, requiring costly, time

consuming, and Inefficient movement

of personnel, equipment, furniture, and

files. In fiscal year 1980, a Joint effort

was made by Congress, GSA, and the

Commission to obtain a consolidated

headquarters building by fiscal year

1981, or early fiscal year 1982.

The Commission has made Important progress in making existing facilities accessible to the handicapped.

Building alterations and special facilities

have been completed, thus Improving

the working environment both for the

Commission'S handicapped population

and for VIsitors.

Consumer and Public Affairs

In November 1979, in response to the

President's Executive Order No. 12160

entitled "Providinq for Enhancement

and Coordination of Federal Consumer

Programs", the Cornrnissron published

a statement to explain its consumer affairs activities, and to solicit public comment concernmg the effectiveness of Its

consumer affairs efforts. After reviewing

and analyzing the comments received,

on May 23, 1980 the Commission ISsued its final statement concerning ItS

consumer affairs activities (Securities

Exchange Act Release No. 16840, May

23, 1980; 20 SEC Docket 128).

In connection with "National Consumer Education Week," Interested

members of the public received briefings and printed material at the Commission's headquarters office The

Denver Regional Office and Philadelphia Branch Office also provided Similar materials and information for VISitors. In addition, representatives of the

Office of Consumer Affairs, the Office

of Public Affairs, and the Houston

Branch Office participated in the annual

convention of the National Association

of Investment Clubs.

Investor Complaints During the

1980 fiscal year the Office of Consumer

Affairs received, analyzed, and answered approximately 3,000 complaints

and Inquiries concerning brokerdealers Most of the complaints involved

operational problems, such as failure to

deliver securrties or funds, or the alleged mishandling of accounts. In addition, there were approximately 5,000

complaints and mqurnes regarding ISsuers, transfer agents, banks, mutual

funds and Investment advisers

The Office also reviews the operation

of the arbitration facilities and complarnt-handhnq systems of the SROs,

and reviews the complaint-handling

systems of broker-dealers Dunnq fiscal

year 1980 the Office inspected the arbitration facilities of three SROs and the

complamt-handllng system of one

broker-dealer

In addition, the Office of Consumer

Affairs conducted a survey of registered

broker-dealers dunnq fiscal 1980 to

gather data concerning abandoned customer accounts. The purpose of the

survey was to determme when a firm

considers a customer's account to be

abandoned, and what, if anythmg, the

firm does with the securitres and/or

funds In the account The Office IS

presently reviewinq and analyzmg the

responses received and will report its

fmdmgs to the Commission durmg the

1981 fiscal year.

Consumer Educeuon and Public

Information Dunnq the fiscal year,

the Office of Consumer Affairs and the

Office of Public Affairs began distnbutmq to newspapers a senes of weekly

columns entitled "Information for Investors." The columns are desiqned to

provide information about tOPiCSthat

are frequently of concern to investors

They may also include discussions of

proposals likely to affect mdrvidual mvestors, about which the Cornrnissron IS

soliciting public comment.

83

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The Commission continued, during

1980, to make informational and educational material directly available to investors and other interested members

of the public, both through its own facilities and through the national Consumer Information Center in Pueblo, Colorado. A new brochure entitled, Q &A:

Small Business and the SEC, was developed and published during the year

and 50,000 copies were distributed to

the public. Work began during the year

on a comprehensive handbook for novice investors, which is expected to be

84

published during fiscal 1981. Altogether, 163,000 copies of Commission brochures were distributed during fiscal

1980 to persons who requested them

from the Consumer Information Center.

Also during the fiscal year, the Office

of Public Affairs completed production

of a multi-media, audiovisual presentation on the Commission, the securities

laws, and the securities markets generally. The 22-minute program, entitled

Eagle on the Street, may be purchased

or rented in 16mm film version through

the National Audiovisual Center.
ISecurities Exchange Act Release No.

16888 (June 11, 1980), 20 SEC Docket

334.

2Secunties Exchange Act Release No.

16889 (June 11, 1980), 20 SEC Docket

353.

3Securities Exchange Act Release No.

13662 (June 23, 1977), 12 SEC Docket

947; withdrawn in Securities Exchange

Act Release No. 16889 (June II, 1980), 20

SEC Docket 353.

4Securities Exchange Act Release No.

16410 (December 5, 1980), 18 SEC Docket 1306.

5Securities Exchange Act Release No.

16589 (February 19, 1980), 19 SEC Docket 659.

6Securities Exchange Act Release No.

16590 (February 19, 1980), 19 SEC Docket 659.

"Secuntles Exchange Act Release No.

16924 (June 24, 1980), 20 SEC Docket

497.

8Securities Exchange Act Release No.

15770 (Apnl 26, 1979), 17 SEC Docket

369.

9590 F.2d 1085 (D.C. Cu. 1978).

lOSecunties Exchange Act Release No.

15640 (March 14, 1979), 16 SEC Docket

1318.

11File Nos. SR-PDTC-79-3, approved in

Secunties Exchange Act Release No.

16352 (November 19, 1979), 18 SEC

Docket 905; and SR-DTC-79-5, approved

in Securities Exchange Act Release No.

16354 (November 20, 1979), 18 SEC

Docket 996.

12File No. SR-BSECC-80-1, approved in

Securities Exchange Act Release No.

17045 (August 4, 1980), 20 SEC Docket

886.

1344th Annual Report at 6.

14House Comm. on Interstate and Foreign Commerce, 96th Cong., 1st Sess., Report of the Special Study of the Options

Markets to the Securities and Exchange

Commission (Comm. Print 1978).

Footnotes

15Securitles Exchange Act Release No.

15575 (February 22, 1979), 16 SEC Docket 1163.

16Secuntles Exchange Act Release No.

16701 (March 26, 1980), 19 SEC Docket

998.

17Securities Exchange Act Release No.

16696 (March 26, 1980), 19 SEC Docket

994. In addition, on May 15, 1980, the

Commission approved the NASD's rule

proposal In response to the Options Study

recommendations. Securities Exchange

Act Release No 16807 (May 15, 1980), 20

SEC Docket 13.

18Secuntles Exchange Act Release No.

16701 (March 26, 1980), 19 SEC Docket

998.

191d.

20Securities Exchange Act Release No.

16788 (May 6, 1980), 19 SEC Docket

1381

21Secuntles Exchange Act Release No.

16793 (May 8, 1980), 19 SEC Docket

1385; Securities Exchange Act Release No.

16848 (May 28, 1980), 20 SEC Docket

141; Secunties Exchange Act Release No.

16851 (May 28, 1980),20 SEC Docket

142; Securities Exchange Release No.

16861 (May 30, 1980), 20 SEC Docket

234; Securities Exchange Act Release No.

16996 (July 23, 1980),20 SEC Docket 767.

22Securities Exchange Act Release No.

16863 (May 30, 1980), 20 SEC Docket

237.

23Securities Exchange Act Release No.

16892 (June 13, 1980), 20 SEC Docket

398.

24Secunoes Exchange Act Release No.

16979 (July 15, 1980), 20 SEC Docket

718.

25Securities Exchange Act Release No.

16801 (May 12, 1980),20 SEC Docket 6.

26Securitles Act Release No. 6248 (October 17,1980),21 SEC Docket 212.

27Securities Exchange Act Release No.

17138 (September 9, 1980), 20 SEC Docket 1377.

85
28Secuntles Exchange Act Release No.

16977 (July 10, 1980), 20 SEC Docket

640

29Secuntles Exchange Act Release No.

16495 (January 15, 1980), 19 SEC Docket

332

30Securities Exchange Act Release No

17100 (September 5, 1980), 20 SEC Docket 1266.

31Securities Exchange Act Release No

17111 (September 2, 1980), 20 SEC Docket 1277.

3215 USC ~78aaa-78]]], as amended

by the Securities Investor Protection Act

Amendments of 1978, Pub. L. No. 95-283,

92 Stat 249

33SecUrItles Exchange Act Release No

16422 (December 12, 1979), 18 SEC

Docket 1323

34SecUrIties Exchange Act Release No

17085 (August 22, 1980), 20 SEC Docket

1033

'36SecurIties Exchange Act Release No

16390 (November 31, 1979), 18 SEC

Docket 1197; MSE, Securities Exchange

Act Release No. 16503 (January 16, 1980),

19 SEC Docket 327; Amex, Securities Exchange Act Release No. 16502 (January

16, 1980), 19 SEC Docket 326; CSE, Securities Exchange Act Release No. 16472

(January 8,1980),19 SEC Docket 148,

MSRB, Securities Exchange Act Release

No. 16570 (February 13, 1980), 19 SEC

Docket 573; CBOE, Securities Exchange

Act Release No 16606 (February 25,

1980), 19 SEC Docket 759, BSE, Securities

Exchange Act Release No. 16671 (March

17, 1980), 19 SEC Docket 922; PSE, Securities Exchange Act Release No 16767

(April 28, 1980), 19 SEC Docket 1297;

NASD, Securities Exchange Act Release

No. 16860 (May 30, 1980), 20 SEC Docket

233; and Phlx, Securities Exchange Act Release No. 16906 (June 19, 1980),20 SEC

Docket 437

36Secunties Exchange Act Release No

17132 (September 8,1980),20 SEC Docket 1372

37Securitles Exchange Act Release No.

16650 (March 13, 1980), 19 SEC Docket

881.

38Securitles Exchange Act Release No

16970 (July 9, 1980), 20 SEC Docket 636

39Secunties Exchange Act Release No

16722 (April 3, 1980),19 SEC Docket 1106

86

40SecurIties Exchange Act Release No

17038 (August I, 1980), 20 SEC Docket

876

41Securities Exchange Act Release No

16781 (May 5, 1980), 19 SEC Docket

1372

42[1976- 77] Fed. Sec L Rep. (CCH)

.. 95,627 (S.D N Y. 1976)

43Securitles Exchange Act Release No.

16959 (July 3, 1980), 20 SEC Docket 608.

44SecUrIties Exchange Act Release No

17129 (September 8, 1980), 20 SEC Docket 1371

46Securitles Exchange Act Release No.

16936 (June 26, 1980), 20 SEC Docket

513.

46SecUrIties Exchange Act Release No.

16960 (July 7, 1980), 20 SEC Docket 615.

47Secunties Exchange Act Release No.

16967 (July 8, 1980), 20 SEC Docket 627.

48Secuntles Exchange Act Release No

16858 (May 30, 1980), 20 SEC Docket

225.

49Securities Exchange Act Release No

16630 (March 6, 1980), 19 SEC Docket

816.

60Securities Exchange Act Release No.

16707 (March 28, 1980), 19 SEC Docket

1092, Securities Exchange Act Release No.

16844 (May 27, 1980), 20 SEC Docket

137.

51Secunties Exchange Act Release No

17150 (September 12, 1980),20 SEC

Docket 1518.

52Secuntles Exchange Act Release No

17030 (July 31, 1980), 20 SEC Docket

851,875.

53Securities Exchange Act Release No.

16735 (Apnl 10, 1980), 19 SEC Docket

1164

54Securities Exchange Act Release No.

16900 (June 17, 1980), 20 SEC Docket

415

55Securities Exchange Act Release No

16443 (December 20, 1979), 19 SEC

Docket 8

66SEC, Final Report of the Securities

and Exchange Comrrussron on the Practice of Recordinq the Ownership of Securities in the Records of the Issuer in Other

than the Name of the Beneficial Owner of

Such Securities (December 3, 1976).

57Securities Exchange Act Release No

15838 (May 18, 1979), 17 SEC Docket

678.
58Securitres Exchange Act Release No

17258 (October 30,1980),21 SEC Docket

347

59Securities Act Release No. 6231 (September 2, 1980), 20 SEC Docket 1059.

6°SecuritIes Act Release No. 6230 (August 27,1980),20 SEC Docket 1014.

81Secunties Act Release No. 6234 (September 2, 1980), 20 SEC Docket 1156.

62Secuntles Act Release No. 6233 (September 2, 1980),20 SEC Docket 1115.

63Secuntles Act Release No. 6232 (September 2, 1980), 20 SEC Docket 1092

64Securities Act Release No 6235 (September 2, 1980), 20 SEC Docket 1175

65Secuntles Act Release No. 6236 (September 2, 1980),20 SEC Docket 1226.

68SecuritIes Act Release No 6151 (November 19, 1979), 18 SEC Docket 984

67Securities Act Release No 6190 (F ebruary 22, 1980), 19 SEC Docket 747.

68Secunties Act Release No 6202 (April

2, 1980), 19 SEC Docket 1056.

69Securitles Exchange Act Release No

16371 (November 29, 1979), 18 SEC

Docket 1118; Securities Exchange Act Release No. 16372 (November 29, 1979), 18

SEC Docket 1128; Secunties Act Release

No. 6156 (November 29, 1979), 18 SEC

Docket 1050; and Securities Act Release

No. 6157 (November 29, 1979), 18 SEC

Docket 1052.

70Secunties Act Release No 6203 (April

2, 1980), 19 SEC Docket 1072.

71Securities Exchange Act Release No.

16806 (May 14, 1980), 20 SEC Docket 11.

72Securities Exchange Act Release No

17080 (August 21, 1980), 20 SEC Docket

976.

73Securities Act Release No. 6188 (February I, 1980), 19 SEC Docket 465.

74Securities Exchange Act Release No.

16833 (May 23, 1980), 20 SEC Docket

124.

75Secuntles Act Release No. 6240 (September 10, 1980),20 SEC Docket 1358

76Securities Exchange Act Release No.

13482 (April 28, 1977), 12 SEC Docket

239.

77Secunties Act Release No 6166 (December 12, 1979), 18 SEC Docket 1279,

Securities Act Release No 6027 (February

22, 1979), 16 SEC Docket 1138.

78Secunties Act Release No. 6210 (May

6, 1980), 19 SEC Docket 1352.

79Secuntles Act Release No. 6261 (November 14,1980),21 SEC Docket 590

80Secuntles Act Release No. 6163 (December 5, 1979), 18 SEC Docket 1188.

81Secunties Act Release No 6115 (August 30, 1979), 18 SEC Docket 220

82Secuntles Act Release No 6221 (July

8. 1980), 20 SEC Docket 600

83Securitles Act Release No 6049 (Apnl

3, 1979). 17 SEC Docket 153

84Secuntles Act Release No 6180 (January 17, 1980), 19 SEC Docket 295

85Securities Act Release No 6214 (June

19. 1980), 20 SEC Docket 390

86Securitles Exchange Act Release No

16866 (June 2. 1980). 20 SEC Docket 241.

87Securities Act Release No. 6158 (November 29. 1979), 18 SEC Docket 1053.

88Secuntles Act Release No. 6159 (November 29.1980).18 SEC Docket 1092.

89Secunties Act Release No 6230 (September 4,1980),20 SEC Docket 1241.

9045th Annual Report at 26

91Report of the Subcommittee on Reports, Accountmg and Management of the

Committee on Governmental Affairs,

United States Senate. "Irnprovmq the Accountability of Publicly Owned Corporations and Their Auditors" (November 1977)

at 17

9245th Annual Report at 28.

9345th Annual Report at 30

94Secuntles Act Release No 6229 (August 25, 1980), 20 SEC Docket 1005.

95SecurItieS Act Release No. 6243 (September 30. 1980), 21 SEC Docket I

961nvestment Company Act Release No.

10891 (October 4, 1979). 18 SEC Docket

637

971nvestment Company Act Release No.

10890 (October 4, 1979), 18 SEC Docket

635.

981nvestment Company Act Release No

11053 (February 19. 1980). 19 SEC Docket 733.

99lnvestment Company Act Release No.

11005 (January 2, 1980), 19 SEC Docket

132.

I00lnvestment Company Act Release No.

11086 (March 14. 1980). 19 SEC Docket

953.

1011nvestment Company Act Release No.

10937 (November 13, 1979). 18 SEC

Docket 948.

1021nvestment Company Act Release No.

87
10943 (November 16, 1979), 18 SEC

Docket 1024.

l031nvestment Company Act Release No.

10944 (November 16, 1979), 18 SEC

Docket 1027.

l041nvestment Company Act Release No.

10938 (November 13, 1979), 18 SEC

Docket 957.

lO'lnvestment Company Act Release No.

11136 (April 21, 1980), 19 SEC Docket

1268.

l061nvestment Company Act Release No.

11193 (June 2, 1980),20 SEC Docket 274.

l071nvestment Company Act Release No.

11414 (October 28, 1980),21 SEC Docket

324.

l081nvestment Company Act Release No.

11421 (October 31, 1980),21 SEC Docket

488.

1091nvestment Company Act Release No.

11391 (October 10, 1980),21 SEC Docket

183.

l1°lnvestment Company Act Release No.

8959 (September 26,1975),7 SEC Docket

1002.

ll1SEC v, Alexander Kasser, Civ. Act. No.

74-90 (D.C.N.J. 1974). litigation Release

No. 9167 (August 28,1980),20 SEC Docket 1352.

112SEC v. Ian T. Allison, et al., Civ. Act.

No. 80-899 PHX-EHC (Ariz. September 29,

1980),21 SEC Docket 61.

113Id.

114SEC v. Jack M. Catain, Jr., et al., Civ,

Act. No. 80-02947 (C.D. Cal. January 3,

1979).

l1'ld.

116SEC v, Contmental Advisers, et al.,

Civ. Act. No. 78-0066 (D.D.C. January 16,

1978), litigation Release No. 9204 (October 16, 1980), 21 SEC Docket 208.

l1745th Annual Report at 44, 46.

116SEC v. Lerner, David, Littenberg &

Samuel, et aI., Civ. Act. No. 80-0845

(D.D.C.), Litigation Release No. 9094 (April

2, 1980), 19 SEC Docket 1153.

119Lltlgation Release No. 9049 (April 2,

1980), 19 SEC Docket 1153.

12°SEC v. National Kmney Corp., Civ.

Act. No. 80-3683 (S.D.N.Y.), litigation Release No. 9118 (June 30, 1980), 20 SEC

Docket 595.

l21SEC v, David H. Hall, Civ. Act. No.

80-0504, (D.D.C.), LItIgation Release No.

88

9013 (February 22, 1980), 19 SEC Docket

788.

122SEC v. Samuel E. Wyly, Raymond E.

Shea and Eldon Vaughan, Civ. Act. No.

79-3275 (D.D.C.), litigation Release No.

8943 (December 6, 1979), 18 SEC Docket

1272.

l2344th Annual Report at 32; 45th Annual

Report at 45.

l....Wellman v. Dielcesson [current] CCH

Fed Sec. LRep. '97,604 (S.D.N.Y.1980).

l2'SEC v, Eurrell V. Potts, et aI., Civ. Act.

No. 80-0900 (D.D.C.), litigation Release

No. 9057 (April 9, 1980), 19 SEC Docket

1200.

126Securities Exchange Act Release No.

16728 (April 9, 1980), 19 SEC Docket

1162.

127Securities Exchange Act Release No.

16950 (July 2,1980),20 SEC Docket 567.

l28Securities Exchange Act Release No.

16938 (June 27, 1980), 20 SEC Docket

559.

l29SEC v, Textron, Civ. Act. No. 80-0326

(D.D.C. January 31, 1980), Litigation Release No. 8993 (January 31,1980),19 SEC

Docket 463.

l30Civ. Act. No. 79-1760 (D.D.C. July 9,

1979), litigation Release No. 8815 (July 9

1979), 17 SEC Docket 1302.

131SEC 1979 Annual Report at 41.

l3245th Annual Report at 43-44.

l33SEC v. G. Weeks Securities, Inc., Civ.

Act. No. 79-2711 (W.D. Tenn.), litigation

Release No. 9000 (February 12, 1980), 19

SEC Docket 611.

l3'SEC v, Harwell, Civ, Act. No.

H-78-1916 (S.D. Tex. October 5,1978), litigation Release No. 8559 (October 5,

1978), 15 SEC Docket 1341.

l3'45th Annual Report at 42.

136Securities Exchange Act Release No.

16554 (February I, 1980), 19 SEC Docket

501.

l37SEC v. Jack M. Catain, Jr. and Rusco

Industries, lnc., Civ. Act. No. 80-02947

(C.D. Cal.), Litigation Release No. 9129

(July 8, 1980), 20 SEC Docket 683.

lUSEC v, General Resources Corporation, et al., Civ. Act. No. 79-2026A (U.S.

Assit. Ct., N.D. Ga., filed October 31, 1979),

Litigation Release No. 8934 (November 27,

1979), 18 SEC Docket 1183.

u.SEC v. Investment Information, lnc., et
aI., Civ. Act. No. 80-0701 (D.C. filed March

19, 1980), Litigation Release No. 9039

(March 19, 1980), 19 SEC Docket 972.

140SEC v. Irving Cohen, et aI., c.A. No.

80-0853 (D.D.C. April 2, 1980), Lrtiqatron

Release No. 9050 (April 2, 1980), 19 SEC

Docket 1154.

141SEC v. Edward G. Heller, et al., Civ.

Act. No. 80-2608 (D.D.C. October 14,

1980).

142SEC v. Gerald L. Rogers, et aI., Civ.

Act. No. 80-04841 (C.D. Cal. October 29,

1980), Litigation Release No. 9224 (October 30, 1980), 21 SEC Docket 411.

143SEC v. Stewart Energy Systems of

Idaho, Inc., A Lamont Nibarger, et al., C1v.

Act. No. 79-372 (E D. Wa. October 23,

1979), Litigation Release No. 8900 (October 23, 1979), 18 SEC Docket 796.

144SEC v. Stewart Energy Systems of

Idaho, lnc., et al., Civ. Act. No. C79-372

(E.D. Wash. June 3, 1980), Lltiqanon Release No. 9119 (July I, 1980),20 SEC

Docket 596.

145SEC v, Cal-AM Corp., et al., Civ. Act.

No. 77-4586-AAH (C.D. CaL), Litigation Release No. 9158 (August 11, 1980), 20 SEC

Docket 963. See also Utigation Release

Nos. 8521, 8602, 8216.

146SeeLitigation Release No. 8602.

147SEC v. The International Minmg Exchange, Inc., et al., Civ. Act. No. 80-1198

(D.C. Col.), Litigation Release No. 9181

(September 17, 1980), 20 SEC Docket

1546.

1uSEC v. Murphy, Civ. Act. No. 76-2299

and 78-3300 (9th Cir., 1980) Fed. Sec. L.

Rep. (CCH) '97,588 (Current).

149SECv, Alexander Kasser, C1v.Act. No.

74-90, (D.C.N.J.), Litigation Release No.

9167 (August 28, 1980), 20 SEC Docket

1352.

150SEC v. Philip R. Cohn and David E.

Lyon, C1v.Act. No. 80-0052F (D.C. Mass.),

LItigation Release Nos. 9042 (March 20,

1980), 19 SEC Docket 975, 9066 (April 22,

1980), 19 SEC Docket 1287.

151SEC v. The Fundpack, Inc., et al., C1v.

Act. No. 79-0859 (D.D.C) Lrnqatlon Release No. 8698 (March 22, 1979), 17 SEC

Docket 72.

152Litlgation Release No. 8838 (August

13,1979),18 SEC Docket 147.

153Litlgation Release No. 8880 (October

I, 1979), 18 SEC Docket 602.

154Litlgation Release No. 8949 (December 13, 1979),18 SEC Docket 1366.

155litigation Release No. 9026 (March 5,

1980),19 SEC Docket 847.

156LltlgatJon Release No 9155 (August

6, 1980),20 SEC Docket 912.

157SEC v. First Independent Stock

Transfer Agent, Inc. and Terry E. KIrchner,

C1v. Act. No. 80-177-1026 (U.S.D.C. Colo

August 4, 1980), Litlqatron Release No.

9157 (August II, 1980), 20 SEC Docket

963.

156Securities Exchange Act Release No.

16343 (November 15, 1979), 18 SEC

Docket 927.

a'Securities Exchange Act Release No.

16668 (March 17, 1980), 19 SEC Docket

921.

160Securities Exchange Act Release No.

17183 (October I, 1980), 21 SEC Docket

22.

161SEC v, Ian T. Allison, et al., Civ. Act.

No. 80-2465 (D.D.C.), Litigation Release

No. 9188 (September 29, 1980), 21 SEC

Docket 61.

89

Appendix

THESECORrnESINDOSTRY

Income. Expenses and Selected

Balance SheetItems

Registered broker-dealers reported

total revenues of $14.6 billion in 1979,

30 percent above the level of 1978. Securities commission income increased

8 percent in 1979 and represented 33

percent of total revenues. Trading profits rose 60 percent in 1979 and comprised 22 percent of aggregate reveAppendix

nues. Underwriting revenues remained

virtually unchanged from the level of

the previous year, while accounting for

6 percent of total revenues in 1979.

Pre-tax income increased by $1.1 billion or 168 percent in 1979 due to the

more rapid growth of revenues relative

to expenses. Ownership equity at the

end of 1979 was $6,359 million, reflecting an increase of $570 million or 10

percent during the year.

93
Table 1

FINANCIAL INFORMATION FOR BROKER-DEALERS

1975-1979

(Millions 01 Dollsrs)

1975 1976 1977 1978" 1979'

A Revenues

1 secunues Commrsstons $ 3,378 $ 3,657 $ 3,334 $ 4,480 $ 4,825

2 Gain (Loss) In Tradmq 1,202 1,828 1,691 1,993 3,183

3 Gam (Loss) rn Investments 132 269 353 391 742

4 Profit (Loss) From Underwnllng and

Selling Groups .. 930 1,035 991 949 943

5 Revenue from Sale of Investment

Company Secuntres 140 165 161 162 197

6 All Other Revenues 1,591 1,961 2,401 3,222 4,662

7 Total Revenues $ 7,373 $ 8,915 $ 8,931 $ 11,197 $ 14,552

B Expenses

8 All Employee Compensation and

Benefits (Except Registered

Representatives' Compensation) ••

9 Commissions and Clearance Paid to

Other Brokers. • • • • •••• •

10 Interest Expe nses ••••• •

11 Regulatory Fees and Expenses ••

12 Compensation to Partners and Voting

Stockholder Officers

13 All Other Expenses (Including

Registered Representatives'

Compensation

14 Total Expenses

15 Pre-Tax Income •••••

C Assets, liabilities and Cap~al

16 Total Assets

17 trabumes

a Total liabilities (excluding

subordmated debt) ••••••••

b Subordmated debt) .•

c Total liabilities (17a + 17b)

18 Ownership Equity. ••

19 Total Liabilities and Ownership Equity

Number of Firms

R Hevrsed

P Prehrmnary

Sources FORM X-HA-l0 and FOCUS Reports

Directorate of Econorrnc and Policy Analysis

securmes and Exchange Cornrrussron

Historical Financial Information Of

Broker-Dealers With Securities

Related Revenues of $500,000 Or

More

Aggregate revenues of broker-dealers

havmq secunties-related revenues of

$500,000 or more Increased 20 percent

in 1979 on a 15 percent rise In share

volume. While trading profits increased,

commission revenues and underwriting

revenues declined slightly from 1978.

Investment profits, commodity revenue

94

$ 1,413 $ 1,664 $ 1,769 $ 2,143 $ 2,493

524 535 585 793 868

668 900 1,246 1,964 3,060

76 81 69 72 76

488 572 553 608 679

3.084 3,658 4,118 4,980 5,668

$ 6,253 $ 7,410 $ 8,340 $ 10,580 $ 12,844

$ 1,120 $ 1,505 $ 591 $ 637 $ 1,707

$31,851 $48,983 $54,670 $66,470 $87,544

26,352 42,842 48,794 59,500 79,914

636 858 948 1,181 1,271

$27,188 $43,700 $49,743 $60,681 $81,185

$ 4,663 $ 5,263 $ 4,927 $ 5,789 $ 6,359

$31.851 $48.983 $54,670 $68,470 $87,544

4.079 4,315 4,484 4,998 4,876

and revenue from all other sources

each rose relative to the previous year,

Pre-tax income increased 56 percent.

Firms that reported securities-related

revenue of $500,000 or more comprised 21 percent of all firms, held approximately 86 percent of the industry's

assets and reported 83 percent of all

revenue in 1979. Balance sheet data for

the most recent three years are not

comparable with earlier years because

of changes made in the broker-dealer

reporting system.

•

•

~

=
Table 2

HISTORICAL CONSOLIDATED REVENUE AND EXPENSES OF BROKER-DEALERS

WITH SECURITIES RELATED REVENUE OF $500,000 OR MORE

(Millions of Dollars)

1970 1971 1972 1973 1974 1975 1976 1977 1978" 1979'

Revenues

1 Securities Cornrrussrons $2,267 $3,287 $3,404 $2816 $2,438 $3 220 $3 516 $2984 $3 964 $3,852

2 Gam (Loss) on Firm Secunties

Trading and Investment

Accounts

a Gam (loss) In trading 824 1,056 994 590 722 1,143 1,757 1,512 1,773 2,728

b Gam (loss) In Investments 75 243 209 -3 55 131 253 326 356 693

c Total gam (loss) 898 1,299 1,203 587 777 1,274 2,010 1,838 2,129 3,421

3 Profit (loss) from Underwntmg

and Seiling Groups 601 957 914 494 496 914 1,021 929 838 800

4 Revenue from Sale of Investment Company Securmes 184 196 151 149 79 120 146 138 138 159

5 Fees for Account SUpervision,

Investment AdviSOry and

Administrative Services 64 82 99 83 85 156 207 176 232 246

6 Commodity Revenue 88 98 125 178 168 187 236 268 346 366

7 All Other Revenues 645 664 833 943 1,022 1,142 1,441 1,901 2,476 3,271

8 Total Revenues $4,747 $6,583 $6 729 $5,250 $5,065 $7,013 $8,577 $8 232 $10,123 $12,115

Expenses

9 All Employee Compensation

and Benefits (Except RegiStered Representatives'

Compensation) $1,086 $1,300 $1,392 $1,184 $1,097 $1,376 $1,668 $1,593 $1,925 $2,014

10 Commissions Paid to Other

Brokers' 128 182 186 188 151 209 168 530 707 620

11 Interest Expense 540 520 634 796 750 582 839 1,149 1,787 2,675

12 All Other Expenses

(Includmg Reglslered

Representatives

Compensation 2,259 2,960 3,153 2,703 2,657 3,796 4,487 4,274 4,762 5,332

13 Total Expenses $4,013 $4,962 $5,365 $4,871 $4,655 $5,963 $7,162 $7,546 $9,181 $10,641

Pre- Tax Income

14 Pre-Tax Income $ 734 $1,621 $1,365 $ 378 $ 410 $1,050 $1,415 $ 686 $ 942 $1,474

Number of Firms 655 768 817 652 609 764 930 857 962 1,018

, Includes clearance paid to others beginning In 1977

R Hevrsed

P Prellmmary

Sources Form X-17A-lO and FOCUS Reports

Directorate of Econormc and Pohcy AnalySIS

Secunues and Exchange Commission

95

=

=
Table 3

HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITH

SECURITIES RELATED REVENUE OF $500,000 OR MORE

(M.lllons 01 Dollars)

1970 1971 1972 1973 1974 1975 1976 1977' 1978" 1979 p

$ 8,994 $11,286 $14,398 $ 9,878 $10,421 $ 9,488 $11,802 $26,503 $27,565 $33,945

3,740 3,749 4,370 2,936 2,919 3,568 4,785 5,460 5,481 6,843

4,242 4,736 5,228 4,978 3,986 4,696 6,174 5,158 7,691 8,250

707 907 1,525 1,158 1,038 1,165 2,555 4,834 7,097 14,310

641 728 774 642 594 767 799 840 973 1,007

2,343 2,859 2,505 2,550 2,099 7,203 17,178 4,837 5,849 6.005

20,667 24,264 28,802 22,142 21,056 26,887 43,293 47,632 54,656 70360

2,818 3,661 3,948 3,047 2,731 3,939 4,782 4,115 4,659 5,191

$23,484 $27,925 $32,750 $25,189 $23,787 $30,826 $48,075 $51,747 $59,315 $75,551

655 788 817 652 609 770 932 857 962 1,018

$ 1,162 $ 1,221 $ 1,281 $ 1,139 $ 940 $ 925 $ 1,135 $ 979 $ 1,108 $ 1,569

3,382 3,547 4,314 3,270 3,014 3,883 5,399 5,364 6,131 7,757

7,077 9,644 13,373 9,056 7,450 8,464 12,804 13,728 15,431 14,394

10,261 11,667 11,870 9,722 10,789 12,901 21,392 28,521 33,038 47,451

210 200 20B 123 101 118 142 117 121 163 1,392 1,646 1,704 1,879 1,493 4,535 7,203 3,038 3,488 4,217

$23,484 $27,925 $32,750 $25,189 $23,787 $30,826 $48,075 $51,747 $59,315 $75,551

Number 01 Firms

R ReVIsed

P PrelimInary

1Tlle balance sheet for 1977 IS not comparable wrth previous years' data because of changes In the reporting form

Sources Fomn X-17A'10 and FOCUS Reports

DtreclOfate of EconomIC and Policy AnalysJs

Secuntles and Exchange CommIssIon

A Assets

1 Cash, cleanng lunds and

Other deposrts

2 Recetvab!es Irom olher

broker-dealers and noncustomers

3 R9C8Ivab!es Irom customars

4 Market value or I8Jr value 01

long posmcns m securmes

and commodflles

5 Exchange memberships at

market value

6 Other assets

7 Total assets

B Liahl/lDes

8 Money borrowed

9 Payables to other brokerdealers and

non-eustomars

10 Payab!es to customers

11 Short posilJons In seeunnes

and commodflles

12 Subordinated borroWIngs

13 Other lIabrlrtles

14 Tolal lIabrlrtles

C OwnershIp EqUIty

15 Ownership equrty

16 Total lIabrlrtles and caprtal

Securities Industry Dollar: 1979

Securities commissons accounted for

31.8 cents of each dollar produced by the

securities industry. Trading gains and underwriting profits contributed 22.5 cents

and 6.6 cents, respectively. These three

sources combined accounted for 60.9

cents of each revenue dollar, a decline of

6 percent from the 1978 figure of 65.0

cents. Allother revenues-a new category

comprised of margin interest, other revenue related to the securities business and

revenue from all other sources-represented 27.0 cents of the total revenue dollar, an increase of 10 percent over the

1978 figure of 24.5 cents.

Total expenses amounted to 87.8 cents

of each revenue dollar, a decrease of 3

percent from 1978, as the industry's pretax profit margin increased 31 percent

from 9.3 cents per revenue dollar to 12.2

cents. All employee compensation and

benefits (except registered representatives' compensation) accounted for 16.6

cents of each revenue dollar; interest expense amounted to 22.1 cents; and all

other expenses, a new classification,

consumed 44.0 cents. The all other expenses category includes registered representatives' compensation and expenses

for communications, data processing, occupancy, advertising and miscellaneous

items. Registered representatives' compensation could not be reported separately for the securities industry as a whole

because firms fiUngPart IIAof the FOCUS

Report are required to include registered

representatives' compensation in the "all

other expenses" category.

96

=

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~
Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers decreased from 4,816 in 1978 to 4,697 in

1979. Dunng the same period, the number of branch offices Increased from

5,893 to 6,519

At the end of 1979, 47,157 full-time

registered representatives were associated

98

with members of the New York Stock Exchange ("NYSE') and 67,683 full-time

registered representatives were employed

in the securities industry. The total of fulltime personnel employed in the securities

business in 1979 was 165,948, an increase of 3 percent from 161,216 in

1978. NYSE member firms accounted for

78 percent of the industry's full-time employees.
Broker-Dealers and Branch Offices

o 3000 6000 9000

1972

1973

1974

1975

1976

1977

1978

1979

. I ,

i~t~~t~t~:t\:::i~~~~~~~fr;iiJ~~~~~~~IfJ~~~~~~f~rii~~~~~~~~~~~~I~~f~~ 4255

)7334

I

4088 I

J 7223

I

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\6301

I

4113 I

16267

I

4315 I

16290

I I :11fI~t1:~i1tr::tt{ltr:tllrtt11~f)1~1tttlr:)1~~ 4484

16498

I

4861R I

J 5893R

I

4697P I

I6519P

I

___ I Branch Offices

P.Preliminary R~Revised

SOURCE: FORM X-17A-1O AND FOCUS REPORTS

99

~~:~::::~:tj~~~~~j~~~~~~::~~:}~~j~~~~~~~~~~~~~~

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~~~:;I~I~I~~II~IIII~~~:II~m~IIIIIIII~~~~I~~I~I~~~:~~~I~III~Ir~I~~~~I~I~I~~~~~~III~@
Table 4

BROKERS AND DEALERS REGISTERED UNDER THE SECURmES ACT OF 1934-

EFFECTIVE REGISTRANTS AS OF SEPTEMBER 30, 1980 CLASSIFIED BY TYPE OF

ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE

Number of Registrants Number of Propnetors

Partners, Officers, Etc' 2

Total Sole Partner- Corpora- Total Sole Partner- CorporaPropne- shiPS nons Propne- ships bons

torstups torshlPS

Alabama 25 2 0 23 131 2 0 129

Alaska 0 0 0 0 0 0 0 0

Anzona 26 3 2 21 91 3 7 81

Arkansas 22 2 0 20 87 2 0 85

Cal~omla 591 173 61 357 2,603 173 274 2,156

Colorado 80 2 4 74 412 2 60 350

Connecbcut 76 9 10 57 386 9 63 324

Delaware 12 3 0 9 37 3 0 34 Dlstncl of Columllla 33 1 5 27 274 1 25 248

FIonda 175 12 12 151 572 12 33 527

Georgia 58 3 3 52 334 3 7 324

HawaII 17 1 1 15 80 1 2 rr Idaho 9 2 0 7 27 2 0 25 IIIllOs 2,039 1,445 In 417 3,788 1,446 833 1,509

Indiana 47 5 1 41 255 5 2 248

Iowa 33 3 1 29 170 3 2 165

Kansas 28 1 2 25 150 1 9 140

Kentucky 10 1 0 9 63 1 0 62 LOUiSiana 25 5 4 16 180 5 16 159

MjIlne 10 0 3 7 45 0 19 26 Maryland 46 5 3 38 270 4 70 196

Massachusetts 166 28 15 123 1,034 28 96 910

MIChigan 66 8 4 54 392 8 105 279

Minnesota 79 1 0 78 617 1 0 616 MISSISSIppi 19 0 3 16 80 0 7 73

M,ssoun 64 2 4 58 679 2 107 570

Montana 3 0 0 3 22 0 0 22

Nebraska 14 0 0 14 121 0 0 121

Nevada 3 1 1 1 6 1 2 3 New Hampshire 7 1 0 6 19 1 0 18

New Jersey 203 33 22 148 738 33 60 645 New MeXICO 6 1 0 5 24 1 0 23

New YOtk (excludong NY Clly) 288 82 25 181 1,092 82 195 815

North Carolina 31 4 0 27 137 4 0 133

North Dakota 4 0 0 4 16 0 0 16

OhIO 84 4 11 69 556 4 178 374

Oklahoma 34 4 0 30 163 4 0 149

Oregon 29 1 0 28 118 1 0 117

Pennsylvania 232 25 51 156 1,140 25 201 914

Rhode Island 18 5 3 10 45 5 10 30

South Carolina 8 2 1 5 19 2 2 15

South Dakota 2 0 0 2 14 0 0 14

Temessee 46 a 2 42 313 2 29 282

Texas In 16 7 154 1,094 16 31 1,047

Utah 31 3 2 26 133 3 7 123

Vermont 4 1 1 2 21 1 2 18

Vlrgtma 30 4 4 22 288 4 15 269 Washington 64 5 1 58 325 5 6 314

West Virginia 7 2 0 5 21 2 0 19

WISCOnSin 47 8 0 39 404 8 0 396

Wyoming 6 1 0 5 22 1 0 21

Total (excludong NY Clly) 5,134 1,922 446 2,766 19,596 1,922 2,465 15,211

New YOtk Clly 1,596 610 285 721 8,408 610 1,958 5,840

Subtolal 6,730 2,532 711 3,487 28,006 2,532 4,423 21.051

FOl8Ign 21 0 2 19 141 0 9 132

Grand Tolal 6,751 2,532 713 3,506 28,147 2,532 4.432 21183

, Includes dlrectors. officers, trustees and all other persons OCCUpying similar status or perfonlllng sllndar Iuncbons

2AJlocabons made on the basis 01 Iocabon of pnllClplll o1Iices of r&gISlranls, not actual Iocabons 01 persons

'Includes all lorms of orgamZ8bons O1her than sole propnetorshtps and partnershops

Aegtstrants whose pnnClpal olfices are located In fOl8lgn countnes or other junsdlclJons not .Sled

100

•
Table 5

PRINCIPAL BUSINESS OF SECO BROKER-DEALERS

Exchange member pnmanly engaged In exchange cornrmssron busmess

Exchange member pnmanly engagEJd In lIoor actlVltles

Broker or dealer In general secunbes buSIness

Mutual fund undelwnlar

Mutual fund d.stnbutor

Broker or dealer selling vanable amully contracts

SoI1crtor of saVings and loan accounts

Real estate Syndicator and mortgage broker and banker

Real estate condomlrllum Intarests

L1mrted partnershtp Intarests

Broker or dealer seiling 011and gas Interests .

Put and call broker or dealer or oplJon wnter (non-exchange opnons)

Broker or dealer selling secunttes of only one Issuer or associated Issuers (other than mutual

funds)

Broker or dealer selling church secunhes

Government bond dealer (other than murnopal)

Broker or dealer In munICIpal bonds

Broker or dealer In other secunhes buSIness

No securmes busmess

Totals

Based on data provided by 326 of the 346 broker-dealers

•• Based on data p roVlded by 305 ot the 387 broker-dealers

••• Based on data provided by 353 of the 400 broker-dealers

Fiscal yea,-end

1978 1979 1980

25 6 1

18 8 5

65 33 41

11 7 8

4 2 2

12 8 9

6 5 4

35 32 32

5 1 3

25 71 89

20 19 27

5 4 8

23 33 27

11 9 10

3 0 1

5 4 6

28 38 42

25 25 28

326. 305 •• 353•••

101

•
Table 6

APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERS

AND INVESTMENT ADVISERS

Fiscal Year 1980

BROKER-DEALER APPLICATIONS

Applications pending at close of preceding year

Applications received dUring fiscal 1980

Total applications for diSPOSition

DispoSitiOn of Applications

Accepted for filing

Returned

Withdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1980

BROKER. DEALER REGISTRATIONS

EffeclJve registrations at close of preceding year

Registrations effective dUring fiscal 1980

Total registrations

Registrations terminated dUring fiscal 1980

Withdrawn

Revoked

Cancelled

Total registrations terminated

Total registration at end of fiscal year 1980

INVESTMENT ADVISER APPICATIONS

Applications pending at close of preceding year

Applications received dunng fiscal 1980

Total applications for disposition

Disposition of applications

Accepted for filing

Returned

Withdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1980

INVESTMENT ADVISER REGISTRATIONS

EffeclJve registrations at close of preceding year

Registrations effective dUring fiscal 1980

Total registrations

Registrations terminated dUring fiscal 1980

Withdrawn

Revoked

Cancelled

Total registrations terminated

Total registrations at end of fiscal 1980

102

891

1,522

2,413

1,120

380

0

0

1,480

933

6,246

1,118

7,364

555

0

58

613

6,751

1,049

938

1,987

654

252

0

0

906

1,081

5,664

641

6,305

610

2

13

625

5,680
Table 7

APPLICATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES DEALERS

AND TRANSFER AGENTS

Fiscal Year 1980

MUNICIPAL SECURITIES DEALERS APPLICATIONS

Applications pending at close of preceding year

Applications received dunng fiscal 1980

Total applications for msposmon

DISPOSition of Applications

Accepted for filing

Returned

Wrthdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1980

MUNICIPAL SECURITIES DEALERS REGISTRATIONS

Effective registrations at close of preceding year

Registrations effective dunng fiscal 1980

Total reglstrallons

ReglslralJons tsrmmated dunng fiscal 1980

Wrthdrawn

Cancelled

Suspended

Total registrations terminated

Total registrations at end of fiscal 1980

TRANSFER AGENTS APPLICATIONS

Applications pending at close of preceding year

Applications received dunnq fiscal 1980

Total applications for dlSPOSrtlon

DISposition of applications

Accepted for filing

Returned

Wrthdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1980

TRANSFER AGENTS REGISTRATIONS

21

6

27

4

0

0

0

4

23

346

4

350

0

0

0

0

350

18

58

74

44

7

0

0

51

23

Effective registrations at close of preceding year

Registrations effective dunng fiscal 1980

Total registrations

Registrations termmated dunng fiscal 1980

Wrthdrawn

Cancelled

Suspended

Total registrations terminated

Total registrations at end of "scal 1980

o

o

o

891

44

935

o

935

103
Self-Regulatory Organizations:

Revenues. Expenses and Balance

Sheet Structure

In 1979, revenues of self-regulatory

organizatIons ("SROs") amounted to

$247.2 million-an increase of 12 percent from the level obtained in 1978.

Total expenses increased by 17 percent, from $192.6 million to $225.6

million. Thus, pre-tax income declined

from $27.4 million in 1978 to $21.6

million in 1979.

Total share volume traded on the nation's stock exchanges continued to rise

in 1979, although the rate of increase

was less than that of 1978. Revenues

generated from volume related activities are an important component of

SRO revenues. Commission fees and

transaction revenues, for example, increased from $52.1 million in 1978 to

$57.7 million in 1979 while communication fees rose by 15 percent and totaled $32.6 million in 1979. SRO aggregate revenues from listing fees

Increased by nine percent to $47.1 million in 1979 from $43.1 million in 1978.

The largest increase in revenues

occurred in the "other" revenue category which increased by 25 percent and

aggregated $47.5 million in 1979. This

primarily consists of income from interest and/or investments.

The individual organizations are quite

different in their dependence on particular sources of revenues. The distribution of revenues among SROs is set

forth in the accompanying tables.

Employee costs continued to represent the largest component of expenses

for SROs in 1979. These costs, which

increased by 18 percent to $102.4 million during the year, accounted for almost 50 percent of the SROs' total expenses. Communication, data

processing and collection costs totaled

$56.1 million in 1979, an increase of 16

percent. The largest increase in expenses was professional and legal serv104

ices which rose by 31 percent and totaled $11.2 million in 1979.

During the period 1975-1979, financial decisions of major self-regulatory

organizations were influenced by at

least two developments: (1) the evolution of the National Market System; and

(2) increases in costs associated with

capital expenditures. In an effort to

combat escalating overhead expenses,

some SROs stepped up investments in

automated transaction systems and

others reduced costs through joint ownership of clearing facilities. In situations

where capital reserves for new investment were limited, innovative money

management techniques were introduced to improve or maintain desired

asset levels.

The NYSE, with assets in excess of

$125 million (or, one-third of aggregate

SRO assets), has the largest SRO asset

base. The NYSE is followed by the MSE

($74.6 million), and the NASD ($44.4

million). Although two line items

(property/equipment and short-term investments) each accounted for more

than 35 percent of NYSE assets, a

single line item (investment securities)

accounted for 59 percent of NASD

asssets. The difference in asset distribution between the NYSE and the NASD

is principally attributable to the type of

market served. For example, in the case

of the NYSE, an "auction" market,

members of the exchange meet in a geographically centralized location (the

Exchange) to effect transactions. Relatively large fixed overhead costs (e.g.,

property/equipment) are generally associated with this type of market. In

contrast, the nature of the "dealer"

market, as serviced by NASDAQ, is

such that large, fixed cost outlays for

business-related property are unnecessary. The chief component of the liabilities portion of the major self-regulatory

organizations' balance sheets is accounts payable.

At year-end 1979. net worth (or,

-
member's equity) for all SROs totalled

$190.7 million. The NYSE. with $87

million, accounted for approximately 46

percent of this figure. Although individual SROs experienced large percentage

increases in net worth over the five year

period, the net worth of all SROs as a

group increased by 48 percent

The MSRB income of $744,712 during fiscal 1980 was derived primarily

from three fees established by rules

adopted under authority granted in the

Exchange Act. Municipal securities brokers and municipal securities dealers

are assessed (1) an initial fee of $100,

(2) an underwriting assessment fee

equal to .001% of the face value of all

municipal securities they purchase from

an issuer as part of a new issue which

has a final stated maturity date of not

less than two years from the date of the

securities and which has an aggregate

par value of $1.000.000 or rnore.! and

(3) an annual fee of $100 which, as of

October I, 1979, is due by February 15

of the fiscal year for which the fee is

paid." The underwriting assessment

fees accounted for 65% of the MSRB income during fiscal 1980. The balance

of MSRB income was from other fees

and interest income.

! From November 1, 1977, to December

31, 1979, this fee was equal to .001% of all

sales regardless of aggregate par value.

Since December31, 1979, the assessment

changed to .001 % of all sales with an aggregate par value of $1,000,000 or more.

Effective October 1, 1980, the rate was

changedto .003%.

21nprior years, the annual fee could be

offset by payment within the calendaryear

of underwriting assessmentfees. Effective

November 29, 1979, the annual fee could

no longer be offset. The result was a substantial increase in revenue from annual

fees.

During fiscal 1980. the MSRB had total expenses of $1,096.186. The major

expense items were staff salaries and

employee benefits, including contribution to an employee retirement plan (38

percent); meetings and travel (31 percent); and mailing list, rule manual.

postage and other printing (16 percent).

Expenses exceeded income by

$351,474. As of September 30, 1980,

the MSRB had a surplus of $281,349.

1979 clearing agency revenues from

clearing services decreased by $10.1

million while revenues from depository

services increased by $8.6 million and

revenues from interest and other

sources increased by $6 million. Thus,

aggregate clearing agency revenues increased by $4.5 million in 1979 to approximately $123 million. This increase

is net of refunds by some clearing

agencies of fee revenues which exceeded their current needs. National

Securities Clearing Corporation's

("NSCC's") 1979 refund of $17 million,

however, was exceptional and accounts

for the 1979 decrease in aggregate

c1earmg revenues. NSCC's refund in

1978 was $2 million when its fee revenues were the largest of all registered

clearing agencies. Its substantial 1979

refund was due principally to cost reductions of $9.5 million and to a $2

million reduction in its rate of pre-tax

earnings retention.

Aggregate clearing agency expenses

increased by $6 million in 1979 to approximately $118 million. NSCC cost

reductions of $9.5 million discussed

supra resulted principally from a $8.9

million reduction in operating costs

through a consolidation of its facilities

management arrangements.

1979 was a relatively stable year with

changes in aggregate clearing agency

revenues and expenses approximately

offsetting each year.

105
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~~~~~
Table 9

REVENUES AND EXPENSES OF SELF-REGULATORY ORGANIZATIONS

1975-1979

(Thousands of Dollars)

1975" 1976" 1977" 1978R 1979

REVENUES

Commrssron FeeslTransachon Revenues 32,844 38,602 37,230 52,086 57,699

lIsting Fees 31,709 40,756 42,275 43,109 47,136

Cornmurucanon Fees 21,794 25,193 30,214 28,265 32,560

Cleanng Fees 35,451 41,185 8,886 10,332 11,707

Deposrtory Fees 27,792 36,227 6,737 8,678 10,201

Tabulation ServIceS 13,553 16,537 16,029 5,429 3,724

MembershIp Dues 11,267 13,054 14,437 15,554 16,572

RegIstration Fees 5,130 4,222 4,361 6,246 7,649

Floor Usage Revenues 6,966 9,022 10,653 11,074 11,229

Corporate Finance Fees 1,111 1,047 922 1,127 1,236

All Other Revenues 13,999 23,416 34,256 38,087 47,498

Total Revenues 201,618 249,262 205,998 219,986 247,212

EXPENSES

Employee Costs 84,276 99,782 84,016 86,491 102,428

Occupancy Costs 12,885 14,887 11,097 11,568 13,294

EqUipment Costs 3,504 4,423 8,250 7,956 8,213

ProfeSSIonal and legal ServIces 8,001 8,676 8,150 8,539 11,194

Deprecranon and Amortization 4,824 8,425 8,526 8,441 8,240

AdvertiSing, Pnnllng and Postage 3,338 3,445 3,252 3,861 5,496

Commurucatton, Data Processing and

coueenon 54,694 64,742 52,372 48,407 56,071

All Other Expenses 15,861 27,982 16,761 17,304 20,685

Total Expenses 187,383 232,163 192,422 192,569 225,621

PRE-TAX INCOME 14,235 17,099 13,576 27,417 21,591

R ReVised

Note ExtensIve revrsions have been made In 1975-1978 data to comply WIth annual auoted financial statements

Source Survey of Se~-Regulatory Orqanrzations and suosioianes

Directorate of Econormc and Policy AnalYSIS

Seeurmas and Exchange Comrmssron

107

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Teble 13

REVENUE AND EXPENSES OF MUNICIPAL SECURmES RULEMAKING BOARD

Years Ended September 30

1980 1979 Revenues

Assessment fees $484,391 $413,841 Annual fees 190,202 95,554 Inmal fees 15,900 17,600 Interest Income 36,833 62,328 Other 17,386 1,637

744,712 590,960

Expenses'

Salanes and employee benefits 412,636 355,721

Meetings and travel 340,882 232,738

Mailing IIS1,Board manual and other pnntlng and postage 171,687 129,667

Rent, telephone and other occupancy costs 70,875 65,939

ProfeSSlOllai and other 98lVIC8S 61,209 42,436

Payroll taxes 20.072 17.620 Oepreclabon and amomzat,on 11,366 13.669

Other 7,459 8,533

1,096,186 866,323

Excess of axpenses over revenues (351,474) (275,363)

Fund balance, beginntng of year 632,823 908,186

Fund balance, end of year $281,349 $632,823

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 provlsions 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 I,

1979, 52 applications were pending, and

an additional 42 applications were filed

during the year. Of these 94 applications,

59 were granted, 19 were withdrawn and

one was denied. Fifteen applications were

pending at the close of the year.

Rule 10b-6 Exemptions

Exchange Act Rule 10b-6 imposes certain prohibitions upon trading in securities

by persons interested in a distribution of

such securities. During the fiscal year, the

Commission granted approximately 400

exemptions pursuant to paragraph (f) of

Rule lOb-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.

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 certam foreign issuers which submit on a current basis

material specified in the rule. Such material includes that information about which

investors ought reasonably to be informed and which the issuer: (l) has

made public pursuant to the law of the

country of domicile or in which it is incorporated 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 August 31,

113
1980, and contains a total of 227 foreign

issuers.'

ANANC~INS~OTIONS

Stock Transactions of Selected

AnanclaI Institutions

During 1979, private noninsured pension funds, open-end investment com1Secuntres Exchange Act Release No.

17169 (September 29, 1980),21 SEC Docket

8.

114

parties, life insurance companies, and

property-liability insurance companies

purchased $57.9 billion of common stock

and sold $47.1 billion, resulting in net

purchases of $10.8 billion. In 1978 purchases were $47.7 billion, sales $42.7 bilnon, and net purchases $5.0 billion. Their

1979 common stock activity rate was

27.2 percent as compared to 26.1 percent one year earlier.
C>

.....

C>

115
Stockholdings of Institutional

Investors and Others

At year-end 1979, the ten institutional

groups listed below held $415.8 billion of

total corporate stock outstanding (both

common and preferred). In comparison,

they accounted for $359.9 billion of the

stock held a year earlier. This resulted in a

15.5 percent increase in the value of the

stockholdings of these institutions compared to a 20.0 percent upswing in the

116

aggregate market value of all stock outstanding. Thus, the share of total stock

outstanding that was held by these institutions was 35.0 percent at year-end 1979.

During 1979, the shares held by other domestic investors, which consist of individuals, broker-dealers and institutions not

listed, rose to 583 percent from 56.8 percent a year earlier. Foreign investors'

share of stockholdings decreased to 6.7

percent
o II)OH\I (0

ci C\I (f) OHn -::;<D~~

117

~~
Table 16

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

AS OF SEPTEMBER 30, 1981

Number of RegIstered Companies Approximate

Market Value

of Assets of

Acttve Inaettve' Total Acbve

Comparnes

(Millions)

Management open-end (Mutual FUnds") 907 46 953 $130,453

Vanable annuity-separate accounts 59 1 60 1,674

All other loed funds 848 45 893 128,779

Management closed-end 163 56 219 7,920

Small busmess Investment compames 36 6 42 304

All other closed-end cornoarses 127 50 177 7,616

Unrt Investment trust 386 24 410 17,556'

Venable annuity-separate accounts B3 0 B3 1,644

All other unrt Investment trusts 303 24 327 15,912

Face-amount cerblicate companies 5 4 9 52

Total 1,461 130 1,591 $155,981

'Inaettve refers to regIstered cornparses whICh as of September 30, 1980, were In the process of being liquIdated or merged, or

have filed an appllcabon pursuant to Secbon 8(1) of the Act for dereglstratlon, or which have otherwise gone out of existence and

remam only untIl such bme as the Oornrmssion Issues order under Secbon 8(1) terminating the" regIstration

'Includes about 4 4 btillon of assets of trusts wlltch IIwest In seeurmes of other mvestment companies, substannally all of them

mutual funds

118
Table 17

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

Approximate

market value

Fiscal year ended Registered Registered Registration Registered of assets

September 30 at beglllnlllg dunng termmated at end of of active

of year year dunng year year companies

(millions)

1941 0 450 14 436 $ 2,500

1942 436 17 46 407 2,400

1943 407 14 31 390 2,300

1944 390 18 27 371 2,200

1945 371 t4 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 16 366 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 34 367 12,000

1956 387 46 34 399 14,000

1957 399 49 16 432 15,000

1956 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 n5 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 1,3n 62,287

1975 1,3n 88 66 1,399 74,192

1976 1,399 63 86 1,376 80,564

19n 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

Began Fiscal Year Endlll9 September 30, 19n

119

•
Table 18

NEW INVESTMENT COMPANY REGISTRATIONS

Management open-end

Vanable AnnultJ8s

All others

Sub-total

Management closed-end

S8IC's

All others

Sub-total

Unrt Investment trust

Vanable amultJ8s

All others

Sub-total

Face amount cerlJficates

Total RegIstered

Table 19

INVESTMENT COMPANY REGISTRATIONS TERMINATED

Management open-end

Vanable amultJ8s

All others

Sub-total

Management closed-end

SBIC's

All others

Sub-tolal

Unrt Investment trust

Vanable amultJ8s All others

Sub-total

Face amount cerlJfieates

Totaltennonated

120

1980

o _7_

7

14

_8_

22

o

136

1980

1

39

40

o

9

9

1

2

3

o

52
Private Noninsured Pension Funds:

Assets

The assets of private noninsured pension funds totaled $223.5 billion at book

value and $225.2 billion at market value

on December 31, 1979. A year earlier

their comparable asset totals were $202.2

billion and $201.5 billion. The book value

of common stock holdings increased to

$110.9 billion at year-end 1979 from

$100,4 billion the previous year. Valued at

market, those holdings also increased to

$122,7 billion, or 54.5 percent of total assets, at the end of 1979 from $106.7 billion, or 53.0 percent of total assets, one

year earlier.

Table 20

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

(Millions of Dollars)

1972 1973 1974 1975 1976 1978 1979

Book Value, End of Year

Cash and OeposIls 1,857 2,336 4,286 2,962 2,199 3,721 8,100 8,609

U S Government SecuntJes 3,689 4,404 5,533 10,764 14,713 20,138 19,695 22,459

Corporate and Other Bonds 28,207 30,334 35,029 37,809 39,070 45,580 53,824 59,537

Preferred Stock 1,481 1,258 1,129 1,188 1,250 1,168 1,274 1,350

Common Stock 74,585 80,593 79,319 83,654 93,359 96,984 100,424 110,934

Own Company 3,868 4,098 4,588 5,075 NA NA NA NA

Other Companies 70,717 76,495 74,731 78,579 NA. NA NA NA

Mortgages 2,728 2,3n 2,372 2,383 2,369 2,497 2,789 3,091

Other Assets 4,983 5,229 6,063 6,406 7,454 11,421 16,121 17,476

Talai Assets 117,530 126,531 133,731 145,166 160,414 181,509 202,237 223,465

Market Value, End of Year

Cash and Deposrts 1,857 2,336 4,286 2,962 2,199 3,721 8,100 8,609

U.S Government SecuntJes 3,700 4,474 5,582 11,097 14,918 20,017 18,767 21,516

Corporate and Other Bonds 26,232 27,664 30,825 34,519 37,858 42,754 48,633 51,261

Preferred Stock 1,869 985 703 892 1,212 1,009 1,162 1,099

Common Stock 113,369 89,538 62,582 87,669 108,483 100,863 106,732 122,703

Own Company 8,750 6,947 5,230 6,958 NA. NA NA NA

Other CompallltlS 104,619 82,591 57,352 80,711 NA. NA NA. NA.

Mortgages 2,427 2,108 2,063 2,139 2,160 2,362 2,554 2,664

Other Assets 4,908 5,140 5,681 6,341 7,073 10,838 15,585 17,336

Total Assets 54,383 132,247 111,724 145,622 173,906 181,564 201,545 225,188

N A Not Available

NOTE Includes deferred profit shanng funds and pension funds of corporations, Unions, rnul\Jernployer groups, and nonprofrt

orgaJ1lza\Jons

121
SECURITIES ON EXCHANGES

Exchange Volume

Dollar volume of all equity securities

transactions on registered exchanges

totaled $323.9 billion in 1979. Of this

total, $300 billion or $92.6 percent represented stock trading, $22.7 billion or 7.0

percent, option trading, and the balance,

trading In rights and warrents. The value

of New York Stock Exchange transactions

was $251.6 billion in 1979. NYSE share

volume Increased 14.8 percent from the

1978 total. On the American Stock Exchange, value of shares traded increased

43.9 percent to $27.3 billion. The AMEX

volume of 1.2 billion was up 17 percent

from the 1978 figure.

122

The Chicago Board Options Exchange

contract volume for 1979 was 35.2 million, up 4.5 percent from 33.7 million in

1978. The market value of option contracts traded in 1979 was $13.8 billion, an

increase of less than one percent from

the 1978 total. The American Stock Exchange option volume was 17.5 million

contracts in 1979, a slight decrease from

the level obtained in 1978. The value of

AMEX options trading in 1979 was $6.0

billion. Philadelphia Stock Exchange option volume was 4.3 million in 1979, up

34.4 percent from the 1978 figure of 3.2

million. Pacific Stock Exchange contract

volume In 1979 was 4.1 million with a

value of $899 million. The Midwest Stock

Exchange contract volume was 2.6 million contracts with a value of $758 million

In 1979.
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NASDAQ (Volume)

NASDAQ share volume and price information for over-the-counter trading has

been reported on a daily basis since November 1, 1971. At the end of 1979, there

were 2,670 issues in the NASDAQ system, an increase of 3.4 percent from

2,582 in 1978. Volume for 1979 was 3.65

billion shares, up 30.4 percent from 2.8

billion in 1978. This trading volume reflects the number of shares bought and

sold by market-makers plus their net inventory changes.

Share and Dollar Volume by

Exchange

Share volume of all stocks, rights and

warrents traded on exchanges totaled $11

124

billion, a 15 percent increase from $9.6

billion in 1978. New York Stock Exchange

accounted for 79.8 percent of all share

volume; American Stock Exchange, 10.8

percent; and Midwest and Pacific Stock

Exchanges, 3.3 and 3.4 percent, respectively.

Dollar volume of all stocks, rights and

warrents was $300.7 billion, a 20.5 percent increase from $249.6 billion in 1978.

New York Stock Exchange represented

83.7 percent of the dollar volume total.

American and Midwest Stock Exchanges

had 6.9 and 3.8 percent of the total.
Market Value Of Securities Traded On

All 0.5. Stock Exchanges Dollars BIllions

350

BStOCkS. Rights

& Warrants , ,

Options

300

250

200

o

19.0 22.7

1969 70 71 72 73 74 75 76 77 78 1979

125

~
Table 22

SHARE VOLUME BY EXCHANGESl

In Percentage

Total Share Volume

Year (thousands) NYSE AMEX MIDW PSE PHLE BOSE CNSE Other'

1935 681,971 7313 1242 191 269 110 096 003 776

1940 377,897 7544 1320 211 278 133 119 008 387

1945 769,018 6587 2131 177 298 108 066 005 630

1950 893,320 7632 1354 216 311 097 065 009 316

1955 1,321,401 6885 1919 209 308 085 048 005 541

1960 1,441,120 6847 2227 220 311 088 038 004 265

1961 2,142,523 6499 2558 222 341 079 030 004 267

1962 1,711,945 7131 20 11 234 295 087 031 004 207

1963 1,680,793 7293 1883 232 282 083 029 004 194

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 2264 256 268 086 040 005 123

1967 4,646,553 64.40 2841 235 246 087 043 002 106

1966 5,407,923 6198 2974 263 264 089 078 001 133

1969 5,134,856 6316 2761 264 347 122 051 000 119

1970 4,834,887 7128 1903 316 368 163 051 002 069

1971 6,172,668 7134 1842 352 372 191 043 003 063

1972 6,518,132 7047 1822 371 413 221 059 003 064

1973 5,899,678 7492 1375 409 368 219 071 004 062

1974 4,950,833 7847 1027 439 348 182 086 004 067

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 356 314 149 060 015 021

1979 10,977,775 7978 1082 329 338 164 054 027 028

1 Share Volume for exchanges 'ncludes Stocks, Rights, and Warrants

'Others Include all exchanges not listed above

Table 23

DOLLAR VOLUME BY EXCHANGES 1

In PercenIlIge

Total Dollar Volume

Year (thousands) NYSE AMEX MIDW PSE PHLE BOSE CNSE Other'

1935 15,396,139 6664 783 132 139 088 134 004 056 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 6591 685 235 219 103 112 011 044 1955 38,039,107 8631 698 244 190 103 078 009 047 1960 45,309,825 8380 935 272 194 103 060 007 049 1961 64,071,623 8243 1071 275 199 103 049 007 053 1962 54,855,293 8632 681 275 200 105 046 007 054 1963 64,437,900 6519 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 314 284 110 056 007 068 1967 162,189,211 7729 1448 308 279 113 068 003 054 1958 197,116,367 7355 1799 312 265 113 104 001 051 1969 176,389,759 7348 1759 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 429 394 256 075 005 027 1973 178,863,622 8207 606 454 355 245 100 006 027 1974 118,828,272 8382 439 489 350 202 123 006 029 1975 157,555,489 6504 368 482 325 172 118 017 016 1976 195,224,815 8435 387 475 382 168 093 053 007 1977 187,393,082 6396 460 479 353 162 073 074 003 1978 249,603,319 8435 617 419 284 163 061 017 004 1979 300,728,389 8365 693 382 285 180 056 035 004

1 Dollar Volume for exchanges Includes Stocks, Rlgh1s, and Warrants

'Others Include all eXchanges not listed above

126
Special Block Distribution

In 1979, there were 45 special block

distributions WIth a value of $278.3 million. Secondary distributions accounted

for 82.2 percent of the total number of

special block distributions In 1979 and 68

percent of the total value of these distributions.

The special offering method was employed five times, accounting for 11.1

percent of the total number of special

block distributions in 1979, but With an

aggregate value of $2.9 million, these offerings accounted for only 1.0 percent of

the value of all special block distributions,

The exchange distribution method was

employed three times In 1979. The value

of exchange distributions was $86.1 million, representinq 30.9 percent of the

value of all special block distnbutrons.

Table 24

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary orstnbunons Exchange d,stnbubons Special offenngs

YEAR

Number Shares Value Number Shares Value Number Shares Value

sold sold sold

1942 116 2,397,454 62,840 0 0 0 79 612,390 22,694

1943 61 4,270,560 127,462 0 0 0 60 1,097,338 31,054

1944 94 4,097,298 135,760 0 0 0 87 1,053,667 32,454

1945 115 9,457,356 191,961 0 0 0 79 947,231 29,878

1946 100 6,481,291 232,398 0 0 0 23 308,134 11,002

1947 73 3,981,572 124,671 0 0 0 24 314,270 9,133

1948 95 7,302,420 175,991 0 0 0 21 238,879 5,466

1949 86 3,737,249 104,062 0 0 0 32 500,211 10,956 1950 rr 4,280,681 68,743 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 17 380,680 10,488

1954 84 5,738,359 218,490 57 705,781 24,664 14 189,n2 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 9,324,509 339,062 33 390,832 15,855 5 63,408 1,845

1958 122 9,508,505 361,886 36 619,876 29,454 5 88,152 3,286

1959 148 17,330,941 822,336 28 545,038 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 48,200 568

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 2,334,2n 86,479 0 0 0

1966 126 29,045,038 1,523,373 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 2,669,938 93,528 1 3,352 63

1969 142 38,224,799 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

1971 204 72,801,343 2,007,517 30 2,595,104 65.765 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,886 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 7,512,200 133,838 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 20,566,432 517,546 16 752,600 13,919 22 1,475,842 18,459

19n 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 10,726,560 189,253 3 1,647,600 86,065 5 203,900 2,939

r revised

127

=
Value and Number of Securities

listed on Exchanges

The market value of stocks and bonds

listed on U.S. Stock Exchanges at yearend 1979 was $1,487 billion, an increase

of 11.4 percent from the previous yearend figure of $1,335 billion. The total was

composed of $1,022 billion in stocks and

$465 billion in bonds. The value of listed

stocks increased 18.2 percent in 1979

and the value of listed bonds decreased

1.1 percent Stocks with primary listing on

the New York Stock Exchange were

valued at $960.6 billion and represented

94 percent of the common and preferred

stock listed on all U.S. exchanges. The

value of NYSE listed stocks increased

from their 1978 year-end total by $137.6

billion or 16.7 percent Stocks with primary listing on the AMEX accounted for

5.6 percent of the total and were valued at

$57.8 billion. The value of AMEX stocks

increased $18.6 billion or 47 percent in

1979. Stocks with primary listing on all

other exchanges were valued at $3.9 billion, an increase of 34.4 percent from the

1978 total.

The net number of stocks and bonds

listed on exchanges increased 18 issues

or 0.3 percent in 1979. The New York, Pacific, Intermountain and Philadelphia

Stock Exchanges listed 42, 17, 9 and 2

additional securities, respectively.

Spokane showed no change while all

other exchanges showed a drop in the

number of listings.

Table 25

SECURmES LISTED ON EXCHANGES'

December 31, 1979

COMMON PREFERRED BONDS TOTAl SECURITIES

Market VeJue Market VeJue Market VeJue Market VeJue

Number (MIllIon) Number (MIllIon) Number (MillIon) Number (MIllIon)

904 $55,836 102 $1,941 210 $4,190 1,216 $61,967

56 S03 2 + 1 1 59 504

5 26 2 4 5 35 12 65 14 458 6 17 0 0 29 475

1,536 935,997 656 24,609 2.939 459,878 5,131 1.420,484

43 1,599 11 263 35 860 89 2,722

21 182 91 492 22 305 134 979

36 332 0 0 0 g 36 332 24 $12 0 $0 0 $0 24 $12

2,539 $ 994,945 870 $27,326 3,212 $465,269 6,721 $1,487,540

EXCHANGES

RegIstered

Amencen

Boston

Clnc,nnah

Midwest

New York

PlICIfic

PhiladelphIa

Intermountain

SPOl<ane

Total

InclUdes the follOWing

for91gn stocks

Reglstered

NewYor!<

Amencen

Pacdic

Total

36

58

2

96

$32,141 0

24,126 0

$214 0

$56,481 0

$0

o

$0

$0

166

8

o

174

$8,111

327

$0

$8,488

202 $40,252

66 24,453

2 $214

270 $64,919

1Excludes secuntJes whIch were suspended from tradIng at the end of the year, and S9ClIntles which because of lnactlvi!y had

no available quotes

Honolulu Stock Exchange ceased operations on December 31, 19n

+ less than 05 mIllIon, but greater than zero

128

=
Table 26

VALUE OF STOCKS USTED ON EXCHANGES

(Dollars m billions)

New York Amencan ExcluSIVely

Dec 31 Stock Stock On Other Tote!

Exchange Exchange Exchanges

1936 599 148 747

1937 389 102 491

1936 475 108 583

1939 465 101 586

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 . 68.6 132 818

1947 683 121 804

1946 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 474.3 28.2 43 5068

1965 5375 309 47 5731

1966 4825 279 4.0 5144

1967 805.8 430 39 652.7

1968 8923 612 60 5795

1969 8295 477 54 6826

1970 8354 39.5 4.8 8807

1971 7418 491 47 7596

1972 . 8715 556 56 9327

1973 . 7210 387 41 7638

1974 5111 288 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 10223

129
Securities on Exchanges

As of September 30, 1980, a total of

6,850 securitIes, representIng 3,082 issuers, were admitted to trading on securities

exchanges in the United States. This

compares with 6,783 issues, involving

3,129 issuers a year earlier. Over 5,000

issues were listed and registered on the

New York Stock Exchange, accounting

for 61.9 percent of the stock issues and

89.7 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 27

SECURITIES TRADED ON EXCHANGES

Issuers Stocks Bonds'

Temporanly

Registered exempted Unlisted Total

American 994 994 39 1,034 223

Boston 775 106 711 817 14

Chicago Board of Options 1 1 1

Chicago Board of Trade 3 1 2 3

Cmcmnan 336 30 320 350 16

Intermountain 48 47 1 48

Midwest 581 358 1 290 647 33

New York 1,915 2,266 2 2,266 2,902

Pacrnc Coast 791 780 1 163 944 110

PBS 870 257 773 1,030 81

Spokane 35 34 4 38

'Issues exempted under Section 3(a)(12) of the Act, such as obligations of US Government, the states, and cmes, are not included In thrs table

Table 28

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(September 30, 1980)

Issuers

Stocks Bonds Total Involved

Registered and Listed 3,625 3,221 6,846 3,052

Temporanly exempted from registration 2 2 4 2

Admitted to unlisted trading pnvlleges 36 13 49 28

Tolal 3,663 3,236 6,850 3.082

130
1933 ACT REGISTRATIONS

Effective Registration Statements

In fiscal year 1980, securities valued at

a total of $104.9 billion were registered in

3,263 effective registrations. This dollar

value of effective registrations in 1980, a

record amount for a single fiscal year,

represents a rise of 35.6 percent from the

total of $77.4 billion effectively registered

in fiscal year 1979. The number of effective registrations in 1980 rose by 4.9 percent from the 3,112 effective registrations

in fiscal year 1979.

First-time registrants in 1980 accounted for 947 effective registrations, an

increase of 247 registrations (35.3 percent) from the 700 first-time registrants in

fiscal year 1979.

The dollar amount of securities reqistered for cash sale by issuers (primary

cash sales) rose to $75.4 billion in fiscal

year 1980, an increase of 41.4 percent

from the total amount of $53.3 billion

registered In fiscal year 1979. The fiscal

year 1980 total dollar amount of these

reqrstrations is exceeded only by the

$77.6 billion effectively reqistered In fiscal

year 1977.

131
Table 29

EFFECTIVE REGISTRATIONS

(Dollars onM.lhons)

Cash Sale for Account of Issuers

FJSC8lYear Total

Common Bonds, Preferred Total

Number of Stock' Debentures Stock

SlaJements Value end Notes

Fiscal Year ended June 30

1935' 284 $913 $168 $490 $26 $686

1936 689 4,635 531 3,153 252 3,936

1937 840 4,851 602 2,426 406 3,634

1936 412 2,101 474 666 209 1,349

1939 344 2.579 318 1,593 109 2,020

1940 306 1.767 210 1,112 110 1,432

1941 313 2,611 196 1,721 184 2,061

1942 193 2,003 263 1.041 162 1.468

1943 123 659 137 316 32 485

1944 221 1,760 272 732 343 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 2,937 767 4.874

1948 435 6,405 1,676 2,817 537 5,032

1949 429 5,333 1,083 2,795 326 4,204

1950 487 5,307 1,766 2.127 468 4,381

1951 487 6,459 1,904 2,838 427 5,169

1952 635 9,500 3,332 3,348 851 7,529

1953 593 7.507 2,806 3,093 424 6,325

1954 631 9,174 2,610 4,240 531 7,381

1955 n9 10,960 3,664 3,951 462 8,2n

1956 906 13,096 4,544 4,123 539 9.206

1957 676 14,624 5,656 5,689 472 12,019

1956 613 16,490 5,998 6,857 427 13,262

1959 1,070 15,657 6,387 5,265 443 12,095

1960 1,426 14,367 7,260 4,224 253 11,737

1961 1,550 19,070 9,650 6,162 248 16,260

1962 1,844 19,547 11,521 4,512 253 16,286

1963 1,157 14,790 7,227 4,372 270 11,669

1984 1,121 16,860 10.006 4,554 224 14,784

1965 1,266 19,437 10,638 3,710 307 14,655

1966 1.523 30,109 16,216 7.061 444 25,723

1967 1,849 34,216 15,083 12,309 558 27,950

1966 2,417 54,076 22,092 14,036 1,140 37,286

1969 3,845 66,810 39,614 11,674 751 52,039

1970 3,389 59,137 26,939 16,436 823 48,196

1971 2,069 69,562 27,455 27,637 3,360 56,452

1972 3.712 62,487 28,516 20,127 3,237 49,682

1973 3,285 59,310 26,615 14,841 2,576 44,034

1974 2,890 56,924 19,611 20,997 2,274 43,082

1975 2,760 n,457 30.502 37,557 2,201 70,260

1976 2,813 87.733 37,115 29,373 3,013 69,501

TransrtJon Quarter

JIy-Sept 1976 639 15,010 6,767 5.066 413 12,246

FJSC8lYear ended September 30

19n 2,915 92,579 47,116 26,026 2.426 n,56B 1976' 3,037 65,043 25,330 23,251 2.128 50,709

1979 (r) 3,112 n,400 22,714 28.894 1.712 53,320

1980 (p) 3,263 104,900 31.631 40.907 2.841 75.379

CumulatJVe Total 65,762 $1,296,467 $530,162 $436,007 $41,381 $1,007.550

(r) reVIsed

(P) prehmlnary

, Includes warrants, shares of benefiaaJ onterest, ce<tJficates of per1JapatJon and ell other equity onterests not elsewhent ,n- cIuded

'For 10 months ended June 30, 1935

'The adoplIon of Rule 24f-2 (17 eFR 27924f-2) elfecllVe November 3. 19n made rt omposSlble to report the dollar velue of

secuntJes regostered by Investment companies

Nole The Total Cash Sale (jIfers from earlier presentations due to changes onroundlllg procedures.

132

=

=
Securities Effectively Registered With S.E.C.

1935.1980 Dollars Billions

110

90

BILLIONS OF DOLLARS

70

50

30

10

30

20

10

o 1935 40 45 50 55 60 65 70 75 1980

(F.scol Yeors)

H;H~;;i~~:j FISCAL YEAR END CHANGED FROM JUNE TO SEPTEMBER

DA T A FOR TRANSITION QUARTER JUL Y.SEPTEMBER 1976 NOT SHOWN ON CHARTS:

EFFECTIVE REGISTRATIONS 515.0 BILLION. NUMBER OF REGISTRATIONS 639

!! DOES NOT INCLUDE INVESTMENT COMPANIES AS OF Vlna DUE TO RULE CHANGE

133
Purpose and Type of Registrations

Of the $104.9 billion of securities registered In fiscal year 1980, $75.4 billion

(71.9 percent) were registrations of cash

sales for the account of the issuer (pnmary cash offenngs). Non-cash registrations for the account of the issuer

amounted to $27.0 billion (25.8 percent)

and reqrstrations of secondary offerings

accounted for $2.5 billion (2.4 percent) of

all registrations in fiscal year 1980.

Within the primary offering category,

$58.7 brllion of securities were registered

for Immediate sale and $16.7 billion of

secunties were registered for extended offenngs. Of secunties registered for immediate offenng, $56.2 billion (95.7 percent)

represent the securities of corporations

and other private enterprises. The remaining $2.5 billion (4.3 percent) are securities registered by foreign governments. Effective registrations of extended

cash offenngs, the last category of primary cash offerings, amounted to $16.7

biliion In fiscal year 1980. Of this amount,

$12.7 billion (76.5 percent) represented

securities registered for future distribution

to an Issuer's employees through savings,

stock option, stock purchase or Incentive

compensation plans. Securities registered

for exchange offers, mergers and consolidations and securities reserved for the

conversion of other securities ($24.3 billion) account for 89.7 percent of the

$27.0 billion of securities registered by issuers for non-cash transactions.

Registrations for the cash sale of common stock form the largest group of secondary offerings registrations (proceeds

to selling securities holders). In fiscal year

1980, these registrations covered $1.7 billion (67.7 percent) of all registrations for

secondary offerings.

The total dollar value of all but two categories of registrations by purpose (registrations for foreign government securities

and for secondary offerings) rose in fiscal

year 1980 from fiscal year 1979. Registrations for immediate offenngs by private

enterprises to the public for cash increased for all types of securities. Bond

offerings of this kind rose by $14.1 billion

(58.3 percent) to $38.3 billion, preferred

stock offerings rose by $1.2 billion (69.4

percent) to $2.8 billion and common

stock offerings increased by $5.6 billion

(74.3 percent) to $13.3 billion from the

previous fiscal year.

Table 30

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL YEAR 1980

(Dollars In Millions)

Type of secunty

Purpose of registrations Total Bonds, Preferred Common

debentures Stock Stock'

and notes

All registrations (estimated value) $104,900 $46,024 $ 6,301 $52,575 For account of Issuer for cash sale 75,380 40,907 2,841 31,631 Immediate oHenng 58,709 40,907 2,814 14,987 Pnvate Enterpnse 58,220 38,418 2,814 14,987 Offered to

General PubliC 54,316 38,255 2,811 13,250

Secunty Holders 1,904 184 3 1,737

Foreign GovemmenlS 2,469 2,469 0 0 Extended cash sale 16,671 0 27 16,844 For account of Issuer for other than cash sale 27,025 5,116 3,441 18,468

Secondary aHenngs 2,496 1 19 2,476 Cash Sale 1,695 0 4 1,691 Other 801 1 15 785

Includes warrants, shares of benefiCtallnterest, certmcates of parncrpanco and all other equrty Interests not elsewhere Included

Note Preliminary

134
Effective Registrations

Cash Sale For Account Of Issuers

1935-1980 Dollars Billions.

50

40

30

20

I

I

II

/I

II

/I

I

I

n

II

I

I

I

I

I

I

I

I

I

I

55 60 65 70 75* 1980

Common Stock I

~,~:

I'

I

I

1. J

/ '/ I \/

/

45 50

Bonds

... , J Preferred Stock~.! / ••, /

.....,.~~ : o

1935 40

10

( F .. cal Yeors)

*BEGINNING IN 1977, FISCAL YEARS END IN SEPTEMBER RATHER THAN JUNE.

135

DATA FOR TRANSITION QUARTER JUl Y.SEPTEMBER 1976 NOT SHOWN ON CHART:

BONDS SSol BilliON, PREFERRED STOCK S.4 BilliON, COMMON STOCK $6.8 BilliON

~
REGULATION A OFFERINGS

During fiscal year 1980. 398 notifications were filed for proposed offerings under Regulation A Issues between $500-

000- $1.500,000 in size predominated. It

should be noted that the ceiling for Regulation A was raised to $1.5 million on

September 11. 1978.

Table 31

OFFERINGS UNDER REGULATION A

FI8C8I Fiscal FIscal

1980 1979 1978

SIze

$100,000 or Less 17 10 23

$100,000-$200,000 25 33 33

$200,000-$300,000 17 27 36

$300,000-$400,000 23 30 25

$400,000-$500,000 35 44 120

$500,000-$1,500,000 281 203 5

Total 398 347 242

Underwnters

Used 100 98 55

Not Used 298 249 187

Total 398 347 242

Offerors

ISSUIng Compantes 382 331 223

Slockholders 14 3 5

lS8U8rs and StoekhoIders JOIntly 2 13 14

Total .. 398 347 242

ENFORCEMENT

Types of Proceedings

As the table below 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

136

or threatened securities 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 required

in the public interest When an injunction

is entered by a court. violation of the

court's decree is a basis for criminal contempt action against the violator,
Table 32

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

P8I1IOllS SUbject to, Acts Constitutmg.

and Basos for. Enforoement ActIon

BroUr dl .. ." IIlUIIlclII* -.rIIIM .... I~...,.., or ---..-..

Wilful VIOlabon of secunbes acts proviSIon or rule. 8IdIng or

abetbng such V1OI8IJon, failure I'll88OIl8bly to supeM88 others, WIllful misstatement or omlSSlOll In fi~ng WIth the CommlllSlOl1, COlWlCIJon of or 1r1Unc\lon &gains! oert8Jn cnmes or

conduct

-.rIIIM--.Jon

0rganlZ8b0n or rule not conforming to st8IutofY requtrementa.

V'1OI8IIon 01 or InabdIty to comply WIth the 1934 Act, rules

thenlunder. or ns own rules. Ur'4usl1fied f.lura to enIon:e

compliance WIth the Ioregou19 or with rules of the MuniclplII

Seclwlbas RuIemalong Board by a member or person 8SSOCI8t8d WIth a member .

......... of -.rIIIM -'ilion. or ___

..-..

Being subject to ConvnISSlon order pursuant to 1934 Ad..

S 15(b). WIllful VIOl8bon of or e1feclJng trans8ClJon lor other

person WIth reaeon to belteve thai person was V1OI8IJngsecu- rm. acts provISIOIlS, rules thereunder, or rules of MunICIpal

Securm. Rulem8ktng Board

NIIIoMI -.rIIIM

0<gan0z8b0n or rules not conforming to st8Iutory requirements

V'1Ol8bon of or lnabolity to comply WIth 1934 Act, rules thereunder or ,ts own rules, unjusltlfled falture to enforce

compiance WIth the foregoing by a member or person aaso- cI8I8d WIth a member

......... clMrIng..-:Y

V'1Ol8bon 01 or INIbIIty to comply WIth 1934 Act, rules thereunder, or its own rules; f8llura to enIon:e compliance WIth its

own rules by par1JclpanlS

.......... In .....-..s cIMrlng

..-:Y

Being subject to ConvnI8SlOl1 order pursuart to 1934 Act,

S 15(b)(4), wtIfut viol8bon 01 or elleclJng trans8ClJon lor other

person WIth reaon to believa that person was V1OI8bng pr0-

VISions of cleartng egency rules.

lIec:urItI.-l~ ..-

VIoI8bon of or .NIbIIty to comply WIth prov!SIOIlS 01 1934 Ad.

or rules thereunder

Sancbon

Censure or hmrt8tlOn on aetJVrtles. r8Y0C8bon, suspensoon or

de",al of regt8lrlltJon. bar or suspellSlon from 8S8OCI8bon

(1934 Ad., SS 158(c)(2)-(4), 15(b)(4)-(6), Adv1aers Ad.,

SS 203(e)-(I)

Suspensoon 01 or imlt8bon of 8ClJVItleS, funclions. or operatJona (1934 Ad. S 19(h)(1»

SuspellSlon or r8Y0C8bon of l'8ll'Slr8tJon. censure or hmlt8-

non of activities, functions, or operations (1934 Acl.

S 19(h)(1»)

SuspellSlon or expulsion from the 8SlIOCI8tion, bar or sua- pensoon from 8SlIOCI8bon WIth member of 8SSOCI8bon (1934

Ad., SS 19(h)(2)-(3»

Suspensoon 01 reg.-on or imlt8bon 01 _, funcbOIlS, or operatIOIlS (1934 Ad., S 19(h)(1»

SuspellSlon or revocatlOl1 01 1'8QISlr8tJon, censure or Iimitalion of activities, functions, or operations (1934 Act,

S 19(h)(1»

Suspensoon or axpulSlon from exchange. bar or suapereoon

from 8SlIOCIabon WIth member (1934 Act. U19(h)(2)-(3»

Suspensoon or revoc8bon of l'8ll'Slr8tJon, censure or 1im1t8-

non of actIvitIes, functIOns, or operations (1934 Act,

S f9(h)(1»

Suspensoon or expulSIon from cleanng agency (1934 Act,

S 19(h)(2»

Censure or operatJon8I inm8bons, lIUSp8fISIon or revocabon

of regoSlr8bon (1934 Act, S 11A(b)(6»

0Slatutory ralarences .. as IoIows "1933 Ad.", the S4lcuritie8 Ad. 011933, "f934 Ad.", the Securities Exchanga Ad. 01

1934; "11lV8lIlmenI Company 14', The IIlV8lIlmenI Company Ad. 011940, "Adv1aers Ad.", the IIlV8lIlmenI Ad. 01

1940; "HoldIng Company 14', the Public UIiIty HoldIng Company Ad. of f935; ''Trust Indenture Ad.", the Trust Indenture Ad.

011939, and "SIPA", the Secunliea Inveator Protaction Ad. 011970

137

°

~

~

~

~

•

~
Table 32-Continued

TYPES OF PROCEEDiNGS

ADMINISTRATIVE PROCEEDINGS

Persone SiJbject to. Acts Constrtubng,

and Baaosfor. Enforcement Acbon

T......... 9fII

Willful Violation of or lnabllity to comply with 1934 Act, 9917

or 17A, or regulat.ons thereunder

Any..,.on

Wil"ul violabon of sacuntles act prOVISIonor rule, aJd.ng or

abell.ng such Violation, WIllful misstatement rn filing with

Comm.SSlon

0tIIcer or d1_ of MIl.

reguIMoIy ~.

Willful v.oIabon of 1934 Act. rules thereunder. or the organization's own rules. Wllfuillbuae of BUlhonty or unjustified fall.

ure to enforce compliance

Prlncl,*of~

Engllglng In OOSlne18as a broker-d8aler ahar appointment

of SIPC lnJstee

1833 Act ~on __

Statement mlllenelty Inaccurate or Incomplete

Investment company has not allarned $100.000 net worth 90

days after statement became effactJve

Peraona aubjlIct to 8ectIone 12, 13

or 15(d) of the 11134 Act.

MatanaI noncompliance with such proVISIons

8ecuritIM 1_

Noncompliance by l18Uer with 1934 Act or rules thereunder

Publ.c .nterest requires trading suspensoon

AegIMeNd I~ c:ompeny

Failure to file Investment Company Act "",,_,on stat&-

ment or requ.red report. filing rnatenally Incomplete or mi.

leading statement of report

Company has not allamed $100,000 net worth 90 days alter

1933 Act regt8lraIoon statement became effecbve

=::t.--. or other 00181 or expert

Lack of requ.SIle qualof1calJonsto repreasnt others. IackJng m

character or Intagnty, unettveal or Improper prof~ c0nduct. WIlful VlolalJon of secunt188 laws or rules, or lIldIng and

abe1lJngsuch V1OIaIJon

AIlomay -..pandad or dlaIIMad by

-.rt, expert's Ian.raVOUd or

suapandacI; -mctIon of a taIony

orm*'-"-lOl' InvolVIng monI

turpItuda.

Permanent rnjunctlon aga"'st or findlng of secuntl8S V101abon

In Convn,.;on-lIll1lrtutad achon. findlng of secuntl8S V1OIlII.on

by Convnlaaoon rn edm'~lVe proceedmQl

.......... of IIunIcIpeI SacwfIlaa

............ IIo.-d

WIIfuf V1OIaIJonof secuntoe. laws. rules thereunder. or rules

of the Board

138

Sancbon

Censure or Iimrtatlon of actJvrtl8s. denial, SUSpellSlon, or revocation of reg.strat.on (1934 Act. 9 17A(c)(3))

Temporary or permanent proh.brtJon from 88""119 In certam capacrtles for registered .nvestment company (Investment

Company Act. 9 9(b))

Removal from office or censure (1934 Act, 9 19(h)(4))

Bar or suspensoon from being or being UlIOCUIted wrth a

broker-d8aler (SIPA, 9 10(b))

Stop order suspendmg effactJvene18 (1933 Act. 9 8(d))

Stop order (Investment Company Act, 9 14(a»)

Order dlrecbng compliance (1934 Act. 9 15(c)(4»)

DenoaJ. suspensoon of effecbve dale. suspensoon or revocabon of regostralJon on national secuntl8S exchange (1934

Act.912@

SiJmrNlry suspensoon of over-tbe-eouoter or exchange trad- Ing (1934 Act, 9 12(k))

Revocation of reglstrat.on (Investment Compsny Act.

98(e))

Revocallon or suspe .... on of r&gI_'on (Investment C0mpany Act. 9 14(a))

Permanent or temporary der>al or prtV11ege to appear or

praetJce before the Convn_on (17 C F R 9201 2(e)(1))

Automatic suspensoon from appearance or pracbce before

the Convn,aaoon (17 C F R 9201 2(e)(2))

Temporary suspensoon from appearance before Comm.aaoon

(17 C F R 9201 2(e)(3))

Censure or removal from offJce 1934 Act. 9158(C)(8))
Table 32-Continued

TYPES OF PROCEEDINGS

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting

and BaSIS for, Encorcement Action

Any~n

Engaging In or about to engage In acts or praclJces violating

secuntles acta, rules or orders thereunder (Including rules of

a r&gISlered se"-regulalory organozalJon)

Noncompliance wrth proVISIons of law, rule, or regulation under 1933, 1934, or Holding Company Acts, order ISSUed by

CommiSSIon rules of a registered ~-regulatory organization, or Undertaking In a r&gIatratlon statement

SecuritIM In_or ProtectIon

CorporatIon

Refusal to commrt funds or ect for the protecbon of customers

tMlIOMI eecuritIM exchMae or

regletered eecurItIM eeeoClMlon

Noncompliance by rts members and persons associated With

rts members wrth the 1934 Act, rules and orders thereunder,

or rules of the exchange or 8SSOCIation

Aegletered clHring egency

Noncompliance by rts parlJClpantS wrth rts own rules

..... 8Ubject to ..-portIng reqUirements

F81lure to file reports reqUired under 9 15(d) of 1934 Act

Regletered I_nt c:ompeny or

.mHate

Name of company or of secunty ISSUed by It oecepnve or

misleading

Olflcer. dlNClor. of edvIeory ax-rd. edvI_. ctepoe/lor.

or u.-wrtWr of I_nt

compeny,

Engage In act or pracbce constitUting breach of fidUCiary

duty inVolving personal misconduct

Any ~n hevtng '=..=r.

rnpectIng .-Ipt of on

from I_nt c:ompeny.

Breach of fiducoary duty

SenclJon

Injunct'on agBlnst acts or practiceS which constitute or would

consututa ViolationS (pius other equrtable relief under court's

general equrty powers) (1933 Act, Sec 2O{b), 1934 Act, Sec

21(d), 1935 Act, Sec 18(f), Investment Company Act,

9 42(e), Advisers Act, 9 209(e), Trust Indenture Act, 9321)

Wnt of mandamus, II1UnclJon, or order dtrecb"l.l compliance

(1933 Act, 9 20(c), 1934 Act, 9 21(e), Holding Company Act

918(9))

Order dJrecbng discharge of obligationS or other appropnate

relief (SIPA, 9 7(b))

Wnt of mandamus, IfljunclJon or order dlrecbng such exchange or association to enforce compliance (1934 Act,

921(e))

Wnt of mandamus, 'IlJUnct,on or order d'recbng cleanng

agency to enforce compliance (1934 Act, 9 21 (e))

Forfeiture of $100 per day (1934 Act, 932(b))

Injunction agBlnst use of name (Investment Company Act,

935(d))

Injunction ag8lnat aCbng In certeln cepacmes for Investment

company, and other appropriate rellBf (Investment Company

Act, 936(a»

InjunclJon (Investment Company Act 9 36(8))

III REFERRAL TO ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIs for Enforcement ACbon

Any~

Wilful Violation of secuntlBS acts or rules thereunder or wdlful

misstatement In any document reqUired to be filed by seeenbas laws and rules or by ~-regulatory organozatlOO In conneenon wrth an apphc:atlon for membetshlp, partJClpatlon or

to become 8SSOCIated wrth a member thereof

SenclJon or AellBf

M8Xlmum penaltJes $10,000 fine and 5 years Impnaonment,

an exchange may be fined up to $500,000, a publoc-ublrty

holding company up to $200,000 (1933 Act, Sees 2O(b),24,

1934 Act Sees 21 (d), 32(a), 1935 Act, Sees 18(1), 29, 1939

Act, Sec 325, Investment Co Act, Sees 42(e), 49, Advisers

Act, Sees 209(e), 217)

139

~
Table 32-Contlnued

TYPES OF PROCEEDINGS

REFERRAl TO ATTORNEY GENERAl FOR CRIMINAL PROSECUTION

Persona Sublecl to Acts Constrtullng,

and Bus for Enforcement AclJon

Any~n

Wilful Vlola!Jon of secuntles aets or rules thereunder or willful

mllll8lement In any document reqUIred to be filed by secuntl8S laws and rules or by self-regulatory org&lllZ8llon In con- necbon wrth an appllca!Jon for memberslup, paI1Japatlon or

to become USOCIaI8d wrth a member thereof

Any '- which vIoIatM SectIon 3OA(.) 01 tha 1934 Act.

Any ofIIcer or dlractor 01 an 1_. or .ny

aIocIdlolcIar acting on bahaII 01 8UCh '-.

who wllfuly vlolalH lIectIon 3OA(.) 01

tha 1934 Act.

Any ampIoYM or agent (eubjact to the

Jwladlctton 01 tha UnIlIId ..... ) 01

an '-found to '- vioIIII8d SectIon 3OA(.)

01 tha 1934 Act, who wlIIuly CMIed ou1

the act or pnctIce COlI8IItutfng 8UCh

vloIatIon.

Any~n

Willful Violation of secuntles acts or rules thereunder or WIllful

m_ement In any document reqUIred to be filed by secunlaws and rules or by self-regul8lory org&nIZ8IlOIl In connecbon wrth an appIK:alIon for membersh&p, paI1JapalJon or

to become USOCIaI8d wrth a member thereof

Any '- whlch vIoIatM SectIon 3OA(a) 01 tha 1934 Act (1oNIgn corrupt pratIcea).

Any ofIIcer or dlractor 01 an or any aIocIdlolcIar acting on bahaII 01 8UCh

who wlIIuIy vIoIIDe SectIon 3OA(.) 01

tha 1934 Act.

Any ampIoYM or -.d (~to tha Jwladlctlon of tha l1nIIIecJ 8tliIaa) 01

an '-found to '- vloIMNI 8ectIon 3OA(.' 01 tha 1934 Act, who wllfuly CMIed ou1

tha eel or pnctIce conatItutIng 8UCh

SancIIon

MaxImum penalbes: $10,000 fine and 5 y-' lIIIpf1aonment,

an exchange may be fined up to $500,000, a pubIio-utJity

holding company up to $200,000 (1933 Ad, 8ecI. 3O(b), 24,

1934 Ad 8ecI. 21 (d), 32(a), HoldIng Company AD.. 8ecI

18(1), 29, 1939 AD.. Sec 325. IllV8IIment Company AD..

8ecI 42(e), 49. AdvJ-.s AD.. 8ecI 209(e),217)

MaxImum penalty: $1,000.000 fine (1934 Ad Sec 32(c)(l))

MaxImum penalty $10,000 fine and 5 Y8lII8 Impneonment

(1934 Ad Sec 32(c)(2))

MaxImum penalty $10,000 fine and 5 Y8lII8 IInpnaonment

(1934 Ad Sec 32(c)(3))

MaxImum peneltJes $10,000 fine and 5 Y8lII8 Impnaonment,

an exchange may be fined up to $500,000 a pubIic-utIity

holding company up to $200,000 (1933 AD.. 8ecI 2O(b),24,

1934 Ad 8ecI. 21(d), 32(a), HoldIng Company Ad, 8ecI

18(1), 29, 1939 AD.. Sec 325; Investment Company AD..

8ecI 42(e), 49. AdvJ-.s AD.. 8ecI. 209(e), 217)

MaxImum penalty: $1,000,000 fine (1934 Ad Sec 32(c)(l))

Malamum penalty $10,000 fine and 5 years unpnaonmenI

(1934 Ad Sec 32(c)(2))

MaxImum penalty: $10,000 fine and 5 Y8lII8 Impnaonment

(1934 Ad Sec 32(c)(3))

Table 33

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE

COMMISSION

Pending September 30, 1979

Opened

ToteI for Dlstnbullon

Closed

Pending September 30, 1980

1,171

322

1,493

405

1,088

During the fiscal year ending September 30. 1980, 186 formal orders were

issued by the Commission upon recorn140

mendation of the Division of Enforcement

_

__ • __ •

~
Table 34

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30,1980

Broker Dealer Proceedings

Investment AdIn.- Proceedings ... .

Stop Order. Reg A $uSpe1llll0ll and Other DIsclosure Cases

35

16

23

Injunctive Actions 1979 1980

During fiscal 1980, 103 suits for injunctions and 25 miscellaneous actions were

instituted in the United States district

courts by the Commission, and 23 district

court proceedings were brought against

the Commission. During that year this office handled 16 appellate cases invoMng

petitions for review of Commission decisions. 3 appeals in teorganization matters

and 23 appeals in injunction and miscellaneous cases. SEC participated and filed

13 amicus curiae briefs in 13 cases.

Table 35

INJUNCTIVE ACTIONS

1971

1972

1973

1974 .

1975 .

1976 .

19n

1978

1979

1980 .

FoacaJ Year Cases Instrtutad

140

119

178

148

174

156

166

135

1118

103

Injuncbons

0rdef8d

114

113

145

289

453

435

336

289

253

216

Defendants

Enjooned

495

511

654

613

749

722

715

607

511

387

Criminal Proceedings

DUring the past fiscal year 74 cases

were referred or access was granted to

the Department of Justice. (This figure includes 1 criminal contempt action.) As a

result of these actions and those prior referrals, 26 indictments were returned

against 49 defendants during the fiscal

year. There were also 57 convictions in 35

cases. Convictions were affirmed in 2

cases that had been appealed. and appeals were still pending in 6 other criminal cases at the close of the fiscal year. Of

10 defendants in 9 criminal contempt

cases handled dUring the fiscal year, 3 defendants were convicted, prosecution was

declined as to 1 defendant, and 6 defendants in 6 cases are still pending.

141

-
Table 36

CRIMINAL CASES

FIscal Year Number of cases Number of Defendants ConV1Clions referre<Vaccess IndIctments IndICted JustIce Dept

1971 22 16 83 89 1972 38 28 67 75

1973 49 40 178 83 1974 67 40 169 81 1975 88 53 199 116 1976 116 23 118 97 19n 100 88 230 135 1978 109 50 144 174 1979 45 42 112 87 1980 74 26 49 58

Trading Suspensions

During fiscal 1980, the Commission

suspended trading in the securitIes of 25

companies, an increase of 9% from the

23 securities suspended in fiscal 1979

and a 71% decrease from the 86 secunties suspended in fiscal 1978. Of the 25

companies whose securities were the

subject of trading suspensions in fiscal

1980, 3 were suspended because of delinquency in filing required reports with

the Commission. In most other instances,

the trading suspension was ordered either

because of substantial questions as to the

adequacy, accuracy or avaliability of public information concerning the company's

financial condition or business operations,

or because transactions in the company's

securities suggested possible manipulation or other violations.

Foreign Restricted Ust

The Commission maintains and publishes a Foreign Restricted Ust which is

designed to put broker-dealers, financial

institutions, investors and others on notice

of unlawful distribution 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 vio142

lation of the registration requirements of

Section 5 of the Securities Act The offer

and sale of unregistered securities deprives investors of all the protections afforded by the Securities Act, 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. During the

past fiscal year, there was one corporation

added to the Foreign Restricted List, The

total number of corporations on the list is

102. The following company was added

during the fiscal year:

International Monetary Exchange,

SA. -Information has come to the attention of the Commission that Intemational

Monetary Exchange, SA, has solicited investors in the United States, through the

mails and the means and instruments of

transportation and communication of interstate commerce, to purchase securities, namely, investments purporting to

consist of leasehold interests in supposed

goldmining properties. Since no registration statement has been filed nor become

effective pursuant to the Securities Act of

1933 with respect to these securities, their
offer and sale may be in violation of Section 5 of the Securities Act of 1933.

The complete list of all foreign corporations and other foreign entities on the

Foreign Restricted Ust on September 30,

1980, is as follows:

Aguacate Consolidated Mines, Incorporated (Costa Rica)

Alan MacTavish, Ltd. (England)

Allegheny Mining and Exploration Company, Ltd. (Canada)

Allied Fund for Capital Appreciation

(AFCA, SA) (panama)

Amalgamated Rare Earth Mines, Ltd.

(Canada)

American Industrial Research SA, also

known as Investigacion Industrial Amer-

.icana, SA (Mexico)

American International Mining (Bahamas)

American Mobile Telephone and Tape

ce, Ltd~ (Canada)

Antellntemational Corporation, Ltd. (Canada)

Antoine Silver Mines, Ltd. (Canada)

ASCA Enterprises Limited (Hong Kong)

Atho'l Brose (Exports) Ltd. (England)

Atholl Brose, Ltd. (England)

Atlantic and Pacific Band and Trust Co.,

Ltd. (Bahamas)

Banco de Guadalajara (Mexico)

Bank of Sark (United Kingdom)

Briar Court Mines, Ltd. (Canada)

British Overseas Mutual Fund Corporation Ltd. (Canada)

California & Caracas Mining Corp., Ltd.

(Canada)

Canterra Development Corporation, Ltd.

(Canada)

Cardwell Oil Corporation, Ltd. (Canada)

Caribbean Empire Company, Ltd. (British

Honduras)

Caye Chapel Club, Ltd. (British Honduras)

Central and Southern Industries Corp.

(Panama)

Cerro Awl Coffee Plantation (Panama)

Cia. Rio Bonano, SA (Costa Rica)

City Bank AS. (Denmark)

Claw Lake Molybdenum Mines Ltd. (Canada)

C1aravellaCorporation (Costa Rica)

Compressed Air Corporation, Limited

(Bahamas)

Continental and Southern Industries, SA

(panama)

Credito Mineroy Mercantil (Mexico)

Crossroads Corporation, SA (panama)

Darien Exploration Company, S.A.

(panama)

Derkglen, Ltd. (England)

De Veers Consolidated Mining Corporanon, SA (Panama)

Doncannon Spirits, Ltd. (Bahamas)

Durman, Ltd, formerly known as Bankers

International Investment Corporation

(Bahamas)

Empresia Minera Cavdalosa de Panama,

SA

Ethel Copper Mines, Ltd. (Canada)

Euroforeign Banking Corporation, Ltd.

(Panama)

Financiera Comermex (Mexico)

Financiera de Eomento lndustrral

(Mexico)

Financiera Metropolitana (Mexico)

Finansbanken a/s (Denmark)

First Uberty Fund, Ltd. (Bahamas)

Global Explorations, Inc. (Panama)

Global Insurance Company, Umited (British West Indies)

Globus Anlage-VermittJungsgesellschaft

MBH (Germany)

Golden Age Mines, Ltd. (Canada)

Hebilla Mining Corporation (Costa Rica)

Hemisphere Land Corporation Limited

(Bahamas)

Henry Ost & Son, Ltd. (England)

International Communications Corporation (British West Indies)

International Monetary Exchange, SA

International Trade Development of Costa

Rica, SA

Ironco Mining & Smelting Company Ltd.

(Canada)

James G. Allan & Sons (Scotland)

J.P. Morgan & Company, Ltd., of London,

England (not to be confused with J.P.

Morgan & Co., Incorporated, New York)

Jupiter Explorations, Ltd. (Canada)

143
Kenilworth Mines, Ltd. (Canada)

Klondike Yukon Mining Company (Canada)

Kokanee Moly Mines, Ltd. (Canada)

Land Sales Corporation (Canada)

Los Dos Hermanos, SA (Spain)

Lynbar Mining Corp., Ltd. (Canada)

Mercantile Bank & Trust Company, Limited

Norart Minerals Umited (Canada)

Normandie Trust Company, S.A.

(Panama)

Northern Survey (Canada)

Northern Trust Company, S.A.

(Switzerland)

Northland Minerals, Ltd. (Canada)

Obsco Corporation, Ltd. (Canada)

Pacific Northwest Developments, Ltd.

(Canada)

Panamerican Bank & Trust Company

(Panama)

Paulpic Gold Mines, Ltd. (Canada)

P<IBUC cmU1Y HOLDING

COMPANIES

System Companies

At fiscal year 1980 there were 14 holding companies registered under the Act of

which 13 are "active". In the 14 registered

144

Pyrotext Mining and Exploration Co., Ltd.

(Canada)

Radio Hill Mines ce, Ltd. (Canada)

Rodney Gold Mines Umited (Canada)

Royal Greyhound and Turf Holdings Limited (South Africa)

SA Valles & Co., Inc. (Phillipines)

San Salvador Savings & Loan Co., Ltd.

(Bahamas)

Santack Mines Umited (Canada)

Security Capital Fiscal & Guaranty Corporation, SA (panama)

Silver Stack Mines, Ltd. (Canada)

Societe Anonyme de Refinancement

(Switzerland)

Strathmore Distillery Company, Ltd.

(Scotland)

Strathross Blending Company Umited

(England)

Swiss Caribbean Development & Finance

Corporation (Switzerland)

systems, there were 60 electric and/or

gas utility subsidiaries, 68 non-utility subsidiaries, and 22 inactive companies, or a

total of 168 system companies including

the top parent and subholding companies. The following table lists the active

systems.
Table 37

PUBUC UTIUTY HOLDING COMPANY SYSTEMS

Solely RegoIlered EIeclnc

Reglslered HoldIng ardIor

Holding Opera!Jng Gas UtilIty Nonutlllty Inactive Total

Compares Compares Sublldt8l18S Sublldt8l18S Comparles Comparoes Other

Alegheny Power System (APS) 1 3 0 4 0 8 3

Amencan EIeclnc Power Company (AEP) 1 0 12 10 6 29 3

CentnlllIIld South West CorponIIton (CSW) 1 1 3 4 1 10 ,. ColonItll Gas Energy System (eGES) 1 0 2 12 2 17

ColumbIa Gas System(COS) 1 0 8 9 1 19

ConsoIdII8d NaIlJqj Gas Company (CNG) 1 0 5 6 0 12

Eastern UUIibee (EUA) 1 0 3 1 2 7 4 e

GenenII Publoc UUIibee (GPU) 1 0 4 5 0 10

MlddIe South Utllrties (MSU) 1 0 7 2 3 13 1

NabonlII Fuel Gas Company (NFG) 1 0 1 3 0 5

New England EIeclnc System (NEES) , 0 4 2 0 7 4 e

Nor!'- UUIlbee(NEU) . . 1 0 5 7 6 19 4 e

Philadelphia EIeclnc Power Co (PEP) 0 1 1 0 1 3

Southern Company (80) 1 0 5 3 0 9

Total Comparoes 13 5 60 68 22 168 8

• Beech BoItom Power Co Inc. • Artdahoma Corp 'Yan<ee AtomIC EIeclnc Co

-5O%APS -32%CSW 30% NEES. 31 5% N8U. 45% EUA

5O%AEP 34%MSU

34% 0Idah0ma Gas & EIec Connecllcut Yan<ee AtomIC

OhIO Veley EIec. Corp & Subs Power Co 15% NEES, .... % NEU

45% EUA.

IndI-.Kentucky EIec Corp

eIecInc utility Vermont Yan<ee Nuclear Power

-378% AEP Corp 20% NEES, 12% NOll.

12.5%APS 25% EUA.

49 7% olher COITIP8I"S Mellle Yan<ee Atomic Power

Co 20% NEES, 15% NDU.

4% EUA.

StaMory utihty 8UbsIdtanes

Table 38

KEY FINANCIAL STATISTICS OF REGISTERED PUBUC UTIUTY

HOLDING COMPANY SYSTEMS

As 01June 30. 1980 (000 omJlted)

Name of Company

AIeghen~ Power System (APS) . .

AmerICan EJectnc Power Company Inc (AEP)

Cenlr8IlIIld South W" ColponIbon (C&SW)

ColclIMI Gas Energy $yI*n (eGES). . .

CoIumllIa Gas System Inc., The (COS). . ..

ConIoIdeted NlII1nI Gas Company (eNG)

Eastern UtiIIbes (EUA). . .

GeneniI Public UtiIlies ColponIbon (GPU)

ModcIIe South UUitIes Inc (MSU). . .

NtIbonIIf Fuel Gas Compeny (NFO) ..

New England EJectnc $yI*n (NEES) .

NoI1he8II UtlIibee (NEU) . . .

f'hiledeIpIu EIeclric Power Co (PEP)

Sclut'-1 Company. The (SC) ..

Total-'-a

$ 2,870,473

10,506,994

3.596.895

106,558

3,606,947

2.841.683

363.601

5,067.082

8.934.526

873,046

1.938.055

3,291,86T

59.386

10.866,288

$52.525.341

$1.142,932

3.490.000

1,493.195

78,723

3.368.742

2,367.420

219.197

1.643,625

2.002,420

730,871

970.620

1.188,427

7,006

3,283.7 ....

$21.986.922

145

•

~

•

-

-

•

~
Table 39

PUBLIC FINANCING OF HOLDING COMPANY SYSTEMS

Flacall980

In Mllhons 01 Dollars

Long-tenn PoUubon Slock Short

Noles and/or Control Term

Bonds Debentures finaoongB Prelerred Common Debt

$ $ $ $ $ $

Allegheny Power System 152 1750

West Pem Power Co 300 300

Amencan EIectnc Power Co 1027 1650

AppaIec/llan Power Co 400 1000 110 2000

Ceder CoeI Co

Central OhIO CoeI Co 300

Central & Southem OhIo Electnc 800 1000 500 2000

Indlana & Mochtgan EIectnc 550 1000 500 3446

Kentucky Power Co 800 350

KIngsport Power Co 150

Mochl~ Power Co 200

OhIO owerCo 298 7

WhMhng EIectnc Co 190

Central & Southwest Corp 1151 2500

Central Power & l..Jght Co 750 400 1217

Central & South West ServICeS 40

Central & South West Fuels 192 Pubhc Servoce Co 01 Oklahoma 550 900 1800

Southwestern EIectnc Power Co 600 400 783

Colonial Gas Energy Co

I..oweIt Gas Co 125 CoIumboa Gas System 1000 2000 190

Consolidated Natural Gas Co 2250

eNG ProdUCIng Co 38

Eastern lJtJhbes Asaoctstes 75

Blackstone VaHey EIectnc 47

Eastern Edlson 197

Montaup EIectnc 635 General PublIC lJtJlrtles 155

Jersey Central Power & I.Jght 475 1600

Metropolotan Edlson Co 140 1250 Middle South lJtJlllles 420 1 2268 Arkansas-M,aaoun Power 160

Arkansas Power & l..Jght 500 1500

loUISIana Power & l..Jgh1 550 400 1650

Middle South Energy Inc 990

Middle South ServICeS 300 MISSlSlpp' Power & IJghI 450

New Orteens Pubhc Servoce 150 220

System Fuels, Inc 1240 400 NatIonal Fuel Gas Co 300 Seneca Resources Corp 200 New England EIectnc System 20 25

Granole State EIectnc 250

N~ttEIectnc 200 1430

New England Power Co 900 40

New England Power Servoce Co 280 Vermont Yankee Nuclear Power

Northeast lJtJhbes 550 ConneclJcut Power & light 750 1850

Hartford EIectnc l..Jght Co 100 1000 250

Holyoke Water Power Co 80

Northeast lJtJlrtoes Servoce Co

Western Massachusetts EIectnc Co 300 550 Northeast Nuclear 300

Phlladelphoa EIectnc Power Co 40

The Southern Co 182 1000 Alabama Power Co 2500 403 5750

Geofgoa Power Co 1250 4500

Gul Power Co 500 100 500

M... Slpp' Power Co 250 500 Connectocut Yankee AtomIC Power 500 350

Yankee AtomIC EIectnc Co 210

Total $1,3910 $1,204 8 $2913 $2500 $699.8 $4,9242

Total $8,761 1 mllbon

146

=
FUEL PROGRAMS

During fiscal year 1980. the Commission authorized $597.9 million of fuel exploration and development capital expenditures for the holding company

systems. These expenditures cover annuaI fuel programs subject to regulation under the Holding Company Act defined on

geographical and functional terms. The

following table lists the authorization by

holding company system for each fuel

program.

147
148

a

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0 ~t :! ... (J <it ::J.ll CJ ; l!'l: ... 96'8

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i0 U:s I- (I) -:::E W CD l: S ""'a CD a: ~\l K <0 ... It) - <0

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00

W GiCD

8

Q "> <it W U.s S 15~ ... ~i - 0<')0 ... 0 '" ,...~~ lri W It) 0>

a: :lw <it Cl=0

...

-

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~

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~

=~

~

~
Corporate Reorganizations

During the fiscal year the Commission

entered 18 reorganization cases filed under Chapter 11 of the Bankruptcy Act of

1978 involving companies with aggregate

stated assets of $1.46 billion and 97,000

public investors. The Commission also

continued its participation in pending reorganization cases under Chapter X of the

prior Bankruptcy Act During the fiscal

year 20 reorganization cases, all under

Chapter X, were closed, leaving at year

end 85 reorganization cases involving

$5.96 billion in aggregate stated assets in

which the Commission was participating.

149
Table 41

PENDING REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY

ACT IN WHICH THE COMMISSION PARTICIPATED

FIscal Year 1980

SEC Nobce of

Debtor lilstnel Court Petmon FIled Appearance FIled

------ Aldersgate FOUndatIon, Inc 2 MD Fla Sep 12,1974 Oct 3,1974

Amencan AssocIated Systems, Inc 2 ED Ky Dec 24,1970 Feb 26,1971

Amencan Land Corp 1 SD OhIO Aug 8,1973 Sept 25,1973

ArIan's Dept Stores, Inc 2 SD NY March 8,1974 March 8,1974

Bankers Trust 1 SD Ind Oct 7,1966 Nov 1,1966

Bankers Trust Co 2 S D M,ss Dec 16,1976 AprIl 5,1977

Beck Industnes, Inc SD NY May 27,1971 July 30,1971

Bennec Corp 2 SD NY AprIl 16,1971 AprIl 19,1971

Beverly HIlls Bancorp CD Cal AprIl 11,1974 May 14,1974

Brethren s Home, The SD OhIO Nov 23,1977 liec 27,1977

Bubble Up Delaware, Inc CD Cal Aug 31,1970 Oct 19,1970

BXP ConstructIon Corp 1 SD NY Jan 15,1974 June 10,1974

CIP Corp 1 SD OhIO May 23,1975 June 26,1975

CarolIna Canbbean Corp WD NC Feb 28,1975 AprIl 17,1975

CllJZens Mortgage Investment Trust DMass Oct 5,1978 Nov 1,1978

Coast Investors, Inc 2 WDWash AprIl 1,1964 June 10,1964

Combmed Metals ReductIon Co 1 D Nev Sept 30,1970 Sept 7,1972

Commonwealth Corp 2 ND Fla June 28,1974 July 17,1974

Commonwealth FmallClai Corp 1 ED Pa Dec 4,1967 Dec 13,1967

Conunental Investment Corp DMass Oct 31,1978 Oct 31,1978

ContInental Mortgage Investors D Mass Oct 21,1976 Oct 21,1976

ContInental VendIng MachIne Corp ED NY July 10,1963 Aug 7,1963

Davenport Hotel, Inc 2 ED Wash Dec 20,1972 Jan 26,1973

DetrOIt Port DeVelopment Corp 2 ED MICh Sept 14,1976 Nov 17,1976

DlVersofied Equrty Corp SD ~d Jan 24,1977 Feb 17,1977

DlVersofied Mountameer Corp 2 SD W Va Feb 8,1974 AprIl 24,1974

Duplan Corp 3 SD NY Oct 5,1976 OCt 5,1976

E T & T Laung, Inc 2 DMd Dec 20,1974 June 5,1975

Famngton Manu1actunng Co 2 ED Va liec 22,1910 Jan 14,1971

First BaptIst Church, Inc of Margate, Ra 2 SD Fla Sept 10,1973 Oct 1,1973

Rrst Horne Investment Corp of Kansas, ~c 2 D Kan AprIl 24,1973 AprIl 24,1973

Rrst Research Corp 2 SD Fla March 2,1970 AprIl 14,1970

Fort Cobb, Okla Imgabon Fuel Authonty WD OkIa AprIl 20,1979 July 16,1979

GAC Corp 3 SD Fla May 19,1976 June 14,1976

GEBCO Investment Corp WD Pa Feb 8,1977 March 24,1977

Wm Gluckln Co , ltd SD NY Feb 22,1973 March 6,1973

Guaranty Trust Co 3 WD OkIa AprIl 9,1979 AprIl 9,1979

Gunco Investment Corp WD OkIa March 22,1974 March 28,1974

Gun Union Corp 2 MD La Aug 29,1974 Nov 5,1974

Harmony Loan, Inc 2 ED Ky Jan 31,1973 Jan 31,1973

HawaII Corp D HawaII March 17,1977 March 17,1977

Home-Stake Prooucuoo Co N D OkIa Sept 20,1973 Oct 2,1973

Houston EducatIonal FOUndallon, Inc 1 S D Texas Feb 16,1971 March 2,1971

Impenal-Amencan Resources Fund, Inc D Colo Feb 25,1972 March 6,1972

Interstate Stores, Inc 1 SD NY June 13,1974 June 13. 1974

Investors Assocrated, Inc 2 WDWash March 3,1965 March 17,1965

Investors Fundong Corp of New York SD NY Oct 21,1974 Oct 22, 1974

J D Jewell, ~c 2 ND Ga Oct 20, 1972 Nov 7,1972

King Resources Co 2 D Colo Aug 16,1971 Oct 19,1971

Lake Wimebago Development Co , Inc WD Mo Oct 14,1970 Oct 26,1970

lusk Corp DMz Oct 28,1965 Nov 15,1965

Dolly Madlson Industnes, Inc 1 ED Pa June 23,1970 July 6,1970

Mount Everest Corp 2 ED Pa May 29,1974 June 28,1974

Nabonal Telephone Co , ~c 2 D Conn July 10,1975 May 27,1976

Nevada Industnal Guaranty Co 1 D NaY May 7,1963 July 2,1963

North Amencan Acceptance Corp 2 ND Ga March 5,1974 March 28,1974

North Westem Mortgage Investors Corp 1 WDWash Dec 12,1973 Dec 12,1973

Omaga-A4>ha, ~c 2 N D Texas Jan 10,1975 Jan 10,1975

150
Table 41-Continued

PENDING REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY

ACT IN WHICH THE COMMISSION PARTICIPATED

Rscal Year 1980

Pacrlic Homes CD Cal Dec 9,1977 Feb 2,1978

Pan Amencan Financial Corp 2 D HawSlI Oct 2,1972 Jan 9,1973

Parkvlew Gem, Inc 2 WD Mo Dec 18,1973 Dec 28,1973

Pocono Downs, Inc MD Pa Aug 20,1975 Aug 20,1975

John Rich Enterpnses, Inc 2 D Utah Jan 16,1970 Feb 6,1970

Rahance Industnes, Inc D Hawau I';,ay 24,1976 Aug 10,1976

Riker Delaware Corp 1 D NJ Apnl 21,1967 May 23,1967

Royal Inns of Amenca, Inc 2 S D Cal Apnl 24,1975 June 24,1975

Scranton Corp 1 M D Pa Apnl 3,1959 April 15,1959

S,erra Trading Corp 2 D Colo July 7,1970 July 22,1970

Sound Mortgage Co , Inc 2 WD Wash July 27,1965 Au9 31,1965

Southern land Trtle Corp ED la Dec 7,1966 Dec 31,1966

Stanndco Developers, Inc WD NY Feb 5,1974 March 7,1974

SMing Homex Corp 2 WD NY July 11,1972 July 24,1972

Sunset International Petroleum Corp 2 N D Texas May 27,1970 June 10,1970

TMT TrSller Ferry, Inc 2 SD Ra June 27,1957 Nov 22,1957

Thenno-Dyne, Inc 1 WD Okla Feb 24,1978 June 5.. 1978

TIIco, Inc 2 D Kans Feb 7,1973 Feb 22,1973

Tower Credit Corp 2 MD Ra Apnl 13,1966 Sept 6,1966

Traders Compress Co 1 WD Okla May 12,1972 June 6,1972

Tnnrty Bapbst Church of Jacksonville. L<1c1 ND Fla June 24,1977 Oct 3,1977

"lJ' D!stnet Bu,ldtng Corp 1 WDWash Dec 9,1974 Dec 9,1974

US RnanClal, L<1c2 SO Cal Sept 23,1975 Nov 3,1975

University Bapbst Church of JacksonVIlle, Ronda Inc 1 MO Ra May 23,1977 Oct 3,1977

Virgin Island Properttes, Inc 2 o VI Oct 22,1971 Apnl 11,1972

Washington Group, Inc 3 MO NC June 20,1977 July 25,1977

Western Growth C8prtal Corp o Anz Feb 10,1967 May 16,1968

Westgate California Corp 3 SO Cal Feb 26,1974 March 8,1974

Wonderbowl, Inc 2 CD Cal March 10,1967 June 7,1967

1 Reorganization proceedings closed dunng fiacal year 1980

2Plan has been substantially consummated but no final decree has been entered because of pendtng matters

3Raport or memorandum on plan of reorgantzabon filed dunng fiacal year 1980

Table 42

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH COMMISSION ENTERED

APPEARANCE DURING FISCAL YEAR

Auto Tram Corp . .. .. ..

Chnsnan We Cerrter ..

Coleman Amencan Comparues .. .. . .. .. .. .. .. .. .. .. .. .. ..

G Weeks Securrtl9S, Inc ..

General Rasources Corp .. .. . ..

Inforex,Inc ..

L S Good&Co .

Mansfield TIre & Rubber Co •.. .. .. •.. .. . .......

Park Nursong Center, Inc .. ,

Penn-DOGe Industnes, Inc .. .• .. .. .. . . ....,

P1easarrt Grove MedICal Cerrter.. . , , ..

Rasources ExpIorat'on, Inc , ,

SSE, Inc .. .. . .. .. .. .. .

Southland Lutheran Home .. .. . .. .. .

TeooaCorp .

Topps & Trowsers ..

Western Farmers Assoc . . .. ., ., •.

Whrte Motor Corp . ..

'Plan substantoalfy consummated dunng f'scal year

DOC

NO Ca

o Kans

W 0 Tann

ND Ga

o Mass

NO W Va

ND OhiO

ED MlCh

SO NY

NO Texas

NO Otuo

NO Ca

CD Ca

NO Oh,o

NO Ca

o Wash

NO Oruo

151

•

•

'"

• " •

'"
SEC OPERATIONS

The Commission collects fees for the

registratIon of securities, securities transactions on national securities exchanges,

and miscellaneous filings, reports and applications. In fiscal year 1980, the Commission collected a record $48 million

dollars in fees, representing approximately

66 percent of the total funds appropriated

by the Congress for Commission opera152

tions. These figures are up from $33 million, representing 47 percent of funds appropriated in fiscal year 1979. Nearly $14

million of the increase in collections was

attributed to Securities Act registration

fees resulting from money market fund

registrations, while higher stock exchange

volumes accounted for $1 million of the

increase.
Appropriated Funds vs Fees Collected

Dollars Millions

80

.:":::::::::::: . .... . .::::: :::' ::':::: ..................... ..:':::: ::.'::::::::': AP PROPRIA TION .:::::.::::.::: •• :::::::::

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