1 9 7 1

For the Fiscal Year

Ended June 30th
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

WILLIAM J. CASEY, Chairman

HUGH F. OWENS

JAMES J. NEEDHAM

A. SYDNEY HERLoNG, JR.

PHILIP A. LoOMIS, JR.

RONALD F. HUNT, Secreliolry

For sale by the Superintendent of Documents. U.S. Government Printing OfBce

Washington. D.C. 20402 Price $1 (paper cover)

Stock Number 4600-0083

-
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

Sirs: On behalf of the Securities and Exchange Commission, I

have the honor to transmit to you the Thirty-Seventh Annual

Report of the Commission covering the fiscal year July 1, 1970 to

June 30, 1971,in accordance with the provisions of Section 23(b)

of the Securities Exchange Act of 1934, as amended; Section 23 of

the Public Utility Holding Company Act of 1935; Section 46(a)

of the Investment Company Act of 1940; Section 216 of the Investment Advisers Act of 1940; Section 3 of the Act of June 29,

1949,amending the Bretton Woods Agreement Act; Section 11(b)

of the Inter-American Development Bank Act; and Section 11(b)

of the Asian Development Bank Act.

Respectfully,

WILLIAM J. CASEY,

Chairman

THE PRESIDENT OF THE SENATE

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.C.

m

COMMISSIONERS AND PRINCIPAL STAFF OFFICERS

(As of December 1, 1971)

Commissioners

Term

expires

June 5

1974

1975

1973

1976

1972

WILLIAM J. CASEY of New York, Chairman

HUGH F. OWENS of Oklahoma

JAMES J. NEEDHAM of New York

A. SYDNEY HERLONG,JR. of Florida

PHILIP A. LOOMIS, JR. of California

Secretary: RONALD F. HUNT

Executive Assistant to the Chairman: CHARLES S. WHITMAN, III

Principal Staff Officers

A. JONES YORKE, Executive Director

ALAN B. LEVENSON, Director, Division of Corporation Finance

THOMAS N. HOLLOWAY,Associate Director

RALPH C. HOCKER, Associate Director

SOLOMONFREEDMAN, Director, Division of Corporate Regulation

AARON LEVY, Associate Director

ALLAN S. MOSToFF, Associate Director

IRVING M. POLLACK,Director, Division of Trading and Markets

SHELDON RAPPAPORT,Associate Director

STANLEY SPORKIN, Associate Director

G. BRADFORDCOOK, JR., General Counsel

DAVID FERBER, Solicitor

WALTER P. NORTH, Associate General Counsel

ANDREW BARR, Chief Accountant

A. CLARENCE SAMPSON, JR., Associate Chief Accountant

GENE L. FINN, Chief Economist, Office of Policy Research

LEONARDHELFENSTEIN, Director, Office of Opinions and Review

W. VICTOR RODIN, Associate Director

ALFRED LETZLER, Associate Director

WARREN E. BLAIR, Chief Hearing Examiner

WILLIAM E. BECKER, Chief Management Analyst

FRANK J. DONATY, Comptroller

ERNEST L. DESSECKER, Records and Service Officer

HARRY POLLACK, Director of Personnel

RALPH L. BELL, EDP Manager

v
REGIONALAND BRANCHOFFICES

Regional Officesand Regional Administrators

Region 1. New York, New Jersey.-Kevin Thomas Duffy, 26 Federal

Plaza, New York, New York 10007.

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

Hampshire, Maine.-Floyd H. Gilbert, Suite 2203, John F. Kennedy

Federal Bldg., Government Center, Boston, Mass. 02203.

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

Carolina, Georgia, Alabama, Mississippi, Florida, that part of Louisiana lying east of the Atchafalaya River.-Jule B. Greene, Suite 138,

1371Peachtree Street, N. E., Atlanta, Georgia 30809.

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

Michigan, Minnesota, Missouri, Ohio, Wisconsin.-John I. Mayer,

Room 1708, Everett McKinley Dirksen Bldg., 219 South Dearborn

Street, Chicago,Illinois 60604.

Region 5. Oklahoma,Arkansas, Texas, that part of Louisiana lying west

of the Atchafalaya River, and Kansas (except Kansas City).-Gerald

E. Boltz, 503 U.S. Court House, 10th & Lamar Streets, Fort Worth,

Texas 76102.

Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota,

South Dakota, Utah.-Donald J. Stocking, 7224 Federal Bldg., 1961

Stout Street, Denver, Colorado80202.

Region 7. California, Nevada, Arizona, Hawaii, Guam.-Arthur E.

Pennekamp, 450 Golden Gate Avenue, Box 36042, San Franeiseo,

California 94102.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.--James E.

Newton, 900Hoge Bldg., Seattle, Washington 98104.

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

District of Columbia.-Alexander J. Brown, Jr., Room 300, Ballston

Center Tower #3, 4015 Wilson Boulevard, Arlington, Va. 22208.

Branch Offices

Cleveland, Ohio 44199.-Room 899, Federal OfficeBldg., 1240 E. 9th at

Lakeside.

Detroit, Michigan 48226.-1044 Federal Bldg.

Houston, Texas 77022.-Room 2606 Federal Office& Courts Bldg., 515

Rusk Ave.

Los Angeles, California 90012.-Room 1043, U.S. Courthouse, 312 North

Spring Street.

Miami, Florida 38130.-Room 1504, Federal OfficeBldg., 51 S.W., First

Ave.

St. Louis, Missouri 63101.-Room 1452, 210 North Twelfth Street.

Salt Lake City, Utah 84111.-Room 6004, Federal Reserve Bank Bldg.,

120 South State Street.

VI
COMMISSIONERS

William J. Casey, Chairman

Chairman Casey was born in Elmhurst, New York, on March

13, 1913. He received a B.A. degree from Fordham University in

1934and an LL.B. degree from St. John's University in 1937. At

the time of his appointment to the Commission, he was a partner

in the New York law finn of Hall, Casey, Dickler & Howley and

the Washington law firm of Scribner, Hall, Casey, Thornburg &

Thompson. Mr. Casey has authored and edited a broad spectrum

of publications on legal, tax, financial and economic subjects, and

has served as Chairman of the Board of Editors of the Research

Institute of America and Chairman of the Board of Editors of the

Institute for Business Planning, a subsidiary of Prentice-Hall.

During World War II, he served as Chief of the Secretariat at the

European headquarters of the Officeof Strategic Services and,

subsequently, Chief of O.S.S. intelligence operations in the European Theatre. In 1948,he served on the legal staff of the European

headquarters of the Marshall Plan. Subsequently, he served as

special tax counsel for the Senate Small Business Committee. He

has served as a member of the General Advisory Committee on

Arms Control and as a member of the Presidential Task Force

on International Development. He has also been President of the

International Rescue Committee and of the Long Island Association. He has served as Trustee of Fordham University, of Good

Counsel College and of Catholic Charities in the Long Island

Diocese. Mr. Casey was sworn in as Chairman of the Securities

and Exchange Commissionon April 14, 1971.

Hugh F. Owens

Commissioner Owens was born in Muskogee, Oklahoma, on

October 15, 1909, and moved to Oklahoma City in 1918. He

graduated from Georgetown Preparatory School, Washington,

D.C., in 1927,and received his A.B. degree from the University of

Illinois in 1931. In 1934, he received his LL.B. degree from the

University of Oklahoma College of Law, and became associated

with a Chicago law firm specializing in securities law. He returned to Oklahoma City in January 1936, to become associated

VII
with the firm of Rainey, Flynn, Green and Anderson. From 1940

to 1941, he was vice president of the United States Junior Chamber of Commerce. During World War II he attained the rank of

Lieutenant Commander, U.S.N.R., and served as Executive Officer

of a Pacific Fleet destroyer. In 1948, he became a partner in the

firm of Hervey, May and Owens. From 1951 to 1953, he served

as counsel for the Superior Oil Company in Midland, Texas, and

thereafter returned to Oklahoma City, where he engaged in the

general practice of law under his own name. He also served as a

part-time faculty member of the School of Law of Oklahoma City

University. In October 1959, he was appointed Administrator of

the then newly enacted Oklahoma Securities Act and was active

in the work of the North American Securities Administrators,

serving as vice president and a member of the executive committee of that Association. He took office as a member of the

Securities and Exchange Commission on March 23, 1964, for the

term expiring June 5, 1965, and was reappointed for the terms

expiring June 5, 1970 and 1975. Since June 1964, he has served

on the executive committee of the National Association of Regulatory Utility Commissioners.

James J. Needham

Commissioner Needham was born in Woodhaven, New York, on

August 18, 1926. He received a B.B.A. in 1951 from St. John's

University. During 1944-46, he was in the Naval V-5 Program at

Cornell University. At the time of his appointment to the Commission, Commissioner Needham, a Certified Public Accountant,

was associated with A. M. Pullen & Company, based in Greensboro, North Carolina, serving as partner in charge of its New

York office, and as a member of the firm's Executive Committee.

Previously, he was associated with Raymond T. Hyer & Company

and with Price, Waterhouse & Co. Commissioner Needham has

been active in professional and business organizations, including

the American Institute of Certified Public Accountants (as a member of Council) ; the New York State Society of Certified Public

Accountants (including service as Treasurer and as a member of

its Board of Directors and Executive Committee) ; the New York

Chamber of Commerce; and the Accountants Club of America,

Inc. He also has participated actively in many community organizations. Prior to assuming office on July 10, 1969, for the term

expiring June 5, 1973, he resided in Plainview, New York.

VIII
A. Sydney Herlong, Jr.

Commissioner Herlong was born in Manistee, Alabama, on

February 14, 1909, and in 1912 moved to Sumter County, Florida,

and later to Lake County, Florida, where he attended public

schools. He received an LL.B. degree from the University of

Florida, Gainesville, Florida, in 1930, and commenced practicing

law in his home town of Leesburg, Florida. Commissioner Herlong

continued practicing law until 1937 when he was elected County

Judge of Lake County, Florida. He continued serving as County

Judge until 1948 when he was elected to the U.S. House of

Representatives, in which body he served until January 1969,

when he voluntarily retired. While serving in Congress, Mr.

Herlong was a member of the Post Office and Civil Service Committee, the Agriculture Committee, and, for the last seven terms,

the Ways and Means Committee. Upon retirement from Congress,

he became a consultant to the Association of Southeastern Railroads. He is a past president of the Florida County Judges Association, the University of Florida Alumni Association and the

Florida State Baseball League. Mr. Herlong received the Good

Government Award from the Florida Junior Chamber of Commerce and the Distinguished Alumni Award from the University

of Florida. He took office as a member of the Securities and Exchange Commission on October 29, 1969, for the term of office

expiring June 5, 1971, and was reappointed for the term expiring

June 5, 1976.

Philip A. Loomis, Jr.

Commissioner Loomis was born in Colorado Springs, Colorado,

on June 11,1915. 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 joining the staff of the Securities and

Exchange Commission, Commissioner Loomis practiced law with

the :firm of O'Melveny and Myers in Los Angeles, California, except for the period from 1942 to 1944, when he served as an

attorney with the Office of Price Administration, and the period

from 1944 to 1946, when he was Associate Counsel to Northrop

Aircraft, Inc. 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

IX
appointed General Counselto 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, the American Law Institute, the Federal Bar Association, the State Bar of California, and the Los Angeles Bar

Association. He received the Career Service Award of the National Civil Service League in 1964,the Securities and Exchange

CommissionDistinguished 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,for the term of officeexpiring June

5,1972.

x
TABLE OF CONTENTS

Page

Commissionersand principal staff officers V

Regional and branch offices VI

Biographies of Commissioners VII

PART I

IMPORTANT RECENT DEVELOPMENTS 1

Investor protection; market structure 1

Structure and level of commission rates 5

Public ownership of broker-dealers 6

Securities quotations without specified information 8

NASD automated over-the-counter quotations system (NASDAQ) 8

Institutional investor study 10

Reform of the Investment Company Act 13

Investment advisory fees 14

Sales charges 15

The front-end load on contractual plans 15

Fund holding companies 16

Performance fee advisory contracts 17

Expanded Commission enforcement authority 17

Banks and insurance companies 18

Oil and gas funds 19

Implementation of Investment Company Act amendments 19

Explanatory releases 19

Adoption of rules under amended Section 27 20

Revision of annual report form 20

Study of the potential economic impact of the repeal of

Section 22(d) of the Investment Company Act 20

Proposed rules regarding resales of restricted securities 21

Disclosure by defense contractors 23

Offering of securities as substitute or supplement for savings

account deposits and certificates of deposit 24

Proposed fee schedule 24

Enforcement action charging misuse of pension funds 25

PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS OF SECURITIES 27

Disclosure in connection with public offerings 27

Type of information included in registration statement --- 28

XI
Page

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS OF SECURITIES-Continued

Disclosure in connection with public offerings-Continued

New registration guides 28

Adoption of new or revised registration forms 29

Improving the readability of prospectuses 31

Disposition of abandoned registration statements 31

New rules relating to publication of information and delivery of prospectus by broker-dealers prior to or after

the filing of a registration statement 32

Staff examination of registration statements 32

Time required to complete registration 33

Statistics regarding registration statements filed 34

Statistics regarding securities registered 35

Reports of sales and use of proceeds 39

Examinations and investigations 40

Stop order proceedings 40

Exemption from registration of small issues 42

Exempt offerings under Regulation A 43

Reports of sales 44

Suspension of exemption 44

Exempt offerings under Regulation B 45

Reports of sales 45

Exempt offerings under Regulation F 45

Continuing disclosure requirements 46

Registration of securities on exchanges 46

Registration of over-the-counter securities 47

New rule regarding registration by successor issuers __ 47

Exemptions from registration 48

Periodic reports 48

New rules relating to companies reporting pursuant to

Section 15(d) ------------------_____________________ 49

Proposed amendments of reporting forms 50

Timely disclosure of material corporate developments 50

Proceedings to obtain compliance with Exchange Act registration or reporting requirements 50

Administrative actions ---__________________________ 50

Civil actions ----------____________________________ 52

Proxy solicitations ----- -_______________________________ 52

Scope and nature of proxy regulation 52

Statistics relating to proxy and information statements 5'3

Stockholders' proposals ------------------__________ 53

Proxy contests --__________________________________ 54

Litigation relating to proxy rules 54

Disclosure in connection with takeover bids and other large acquisitions 55

Insiders' security holdings and transactions 56

Ownership reports --_______________________________ 57

Recovery of short-swing trading profits 57

Investigations with respect to reporting and proxy provisions ------_______________________________________ 57

XII
FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS OF SECURITIES-Continued

Accounting and auditing matters--Continued

Summary suspension of trading

Accounting and auditing matters

Relations with the accounting profession and the public

The work of the Accounting Principles Board and com- mittees of the AICPA

Other current developments

Exemptions for securities of international banks

International Bank for Reconstruction and Development __

Inter-American Development Bank

Asian Development Bank

Trust Indenture Act of 1939

Page

58

59

61

62

64

66

66

68

69

70

PART III

REGULATION OF SECURITIES MARKETS 73

Regulation of exchanges 73

Registration and exemption of exchanges 73

Review of exchange rules and procedures 74

Litigation relating to review of exchange rules 75

Inspections of exchanges 76

Delisting of securities from exchanges 77

Litigation relating to delisting 78

Statistics relating to securities traded on exchanges 79

Number of issuers and securities 79

Market value of securities available for trading 79

Volume of securities traded 80

Foreign stocks on exchanges 81

Comparative exchange statistics 82

Block distributions reported by exchanges 84

Unlisted trading privileges on exchanges 85

Supervision of activities of National Association of Securities

Dealer~ Inc. 86

Review of NASD rules and policies 87

NASD rule abrogation proceeding 89

Inspections of the NASD 90

Over-the-counter trading in common stocks listed on the New

'rork Stock Exchange 90

Regulation of broker-dealers and investment advisers 91

Registration ~_______________________ 91

Financial reports of broker-dealers 92

Broker-dealer income and expense reports 92

Regulation of broker-dealers who are not members of a

registered securities association 93

Statistical studies 95

Issues registered under the Securities Act of 1933 95

New securities offerings 95

Private noninsured pension funds 96

Stock transactions of financial institutions 96

XIII

_

_

_

_

_

_

_

_

_

_
REGULATION OF SECURITIES MARKETS-Continued

Statistical Studies-Continued

Financial position of corporations

Plant and equipment expenditures

Directory of registered companies

Stock market data

PART IV

Page

96

97

97

97

CONTROL OF IMPROPER PRACTICES 99

Detection of improper practices 99

Public complaints and inquiries 99

Inspections 100

Market surveillance 101

Investigations 102

Enforcement of investigative subpoenas 103

Enforcement and remedial action 104

Administrative proceedings 104

Judicial review of administrative decisions 115

Civil proceedings 117

Participation as amicus curiae 123

Criminal proceedings 125

Organized crime program 128

Proposed Swiss treaty 128

Disciplinary action by self-regulatory organizations ---------- 129

Exchanges 129

NASD 129

Commission review of NASD disciplinary action ----- 130

Commission review of NASD action on membership -_ 13.2

Cooperation with other enforcement agencies 133

Section of Securities Violations 134

Enforcement problems with respect to foreign securities 135

Disqualification from practice before Commission 138

PART V

REGULATION OF INVESTMENT COMPANIES 141

Companies registered under the Act 142

Investment company assets 145

Investment company filings, other than applications 145

Developments with respect to particular types of investment

companies 145

Investment company sponsored by a public accounting firm 145

Minority enterprise small business investment companies __ 146

Mutual fund for labor union members and pension funds __ 147

Shareholders' proposals in investment company proxy ma- terial 147

Selection of a new investment adviser by an investment

company 148

XIV

_

_

_

_

_
Page

REGULATION OF INVESTMENT COMPANIES-Continued

Revisions of rules and forms; policy statements 148

Adoption of Rule 18f-l and Form N-18F-l 149

Amendment of Rule 22d-l 149

Revision of annual report Form N-IR 150

Valuation of securities 151

Position with respect to dilution of net asset value and

inappropriate extensions of credit on sales, redemptions

and repurchases of fund shares 152

Applications for Commission action 152

Control of improper practices 156

Inspection and investigation program 156

Civil and administrative proceedings 157

PART VI

REGULATION OF PUBLIC.UTILITY HOLDING COMPANIES 167

Composition of registered holding-company systems 167

Section 11 matters in registered holding-company systems 168

Proceedings with respect to acquisitions, sales, and other

matters 168

Financing of active registered public-utility holding companies

and their subsidiaries 173

PART VII

PARTICIPATION IN CORPORATE REORGANIZATIONS 177

Summary of activities 178

Jurisdictional, procedural, and administrative matters 179

Trustee's investigation 183

Reports on plans of reorganization 183

Activities with regard to allowances 191

Intervention in Chapter XI proceedings 195

PART VIII

SUPPORTING ACTIVITIES 205

Public information services 205

Dissemination of information .__ 205

Publications 206

AvailabilitY of information for public inspection 207

Litigation involving public information provisions of the

Administrative Procedure Act 209

Electronic Data Processing 211

Extension of application of automation techniques 211

Assistance to state and federal agencies 212

Sharing of EDP facilities 212

EDP training 212

Personnel and financial management 212

Personnel program 212

Personnel strength; financial management 214

xv
Page

PART IX

APPENDIX-STATISTICAL TABLES

Table 1. Securities registrations effective under the Securities Act

of 1933-fiscal years 1935-1971 217

Table 2. Registrations effective under the Securities Act of 1933,

fiscal year ended June 30, 1971 218

Part 1. Distribution by months 218

Part 2. Purpose of registration and type of security 218

Table 3. Brokers and dealers registered under the Securities Exchange Act of 1934-effective registrations as of June

30, 1971, classified by type of organization and by location of principal office 219

Table 4. Number of security issues and issuers on exchanges -____ 220

Part 1. Unduplicated count as of June 30, 1971 of the number

of stock and bond issues admitted to trading on

exchanges, and the number of issuers involved '220

Part 2. Number of stock and bond issues on each exchange as

of June 30, 1971, classified by trading status, and

number of issuers involved 220

Table 5. Value of stocks on exchanges 221

Table 6. Dollar volume and share volume of sales effected on securities exchanges in the calendar year 1970 and the

6-month period ended June 30, 1971 --________________ 222

Part 1. 12 months ended December 31, 1970 222

Part 2. 6 months ended June 30, 1971 222

Table 7. Comparative share sales and dollar volumes on exchanges; 223

Table 8. Block distributions of stocks reported by exchanges 224

Table 9. Unlisted stocks on exchanges 224

Part 1. Number of stocks on the exchanges as of June 30, 1971_ 224

Part 2. Unlisted share volume on the exchanges-calendar year

1970 225

Table 10. Summary of cases instituted in the courts by the Commission under the Securities Act of 1933, the Securities

Exchange Act of 1934, the Public Utility Holding

Company Act of 1935, the Investment Company Act of

1940, and the Investment Advisers Act of 1940 225

Table 11. A 38-year summary of all injunction cases instituted by

the Commission-1934 to June 30, 1971, by calendar

year 226

Table 12. Summary of cases instituted against the Commission,

cases involving petitions for review of Commission orders, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases on

appeal under Ch. X in which the Commission partici- pated 227

Table 13. A 38-year summary of criminal cases developed by the

Commission-1934 through 1971, by fiscal year 228

XVI
Page

Table 14. A 38-year summary classifying all defendants in criminal

cases developed by the Commission-1934 to June 30, 1971 230

Table 15. Summary of criminal cases developed by the Commission

which were pending at June 30, 1971 230

Table 16. Reorganization proceedings under Chapter X of the

Bankruptcy Act in which the Commission participated

during fiscal year 1971 231

450-484 0 - 72 - 2 XVII

PART I

IMPORTANT RECENT DEVELOPMENTS

INVESTOR PROTECTION; MARKET STRUCTURE

Major efforts were launched in 1971 to provide additional investor protection and to review on a comprehensive basis the

structure and functioning of our securities markets. Among other

things, the Commissionadopted or proposed new rules designed

to strengthen the financial and operational responsibility of

brokerage firms, and it commencedbroad-based public hearings

to examine the structure and functioning of the markets. The

re-examination which is in progress was occasionedin large part

by the substantial operational and financial problems that the

securities industry experienced during the period from 1968

through 1970.

Large, unanticipated increases in trading volume occurred in

the exchange and over-the-counter markets during the middle

1960's. Existing systems for processing securities transactions

proved inadequate at individual brokerage firms and at the industry-wide level. Many firms were unable to maintain recordkeeping control and lost physical control over stock certificates.

In the resulting confusion, a significant number of securities were

either lost or stolen. Errors and delays in executing and settling

trades were widespread, and customers frequently found it difficult to obtain delivery of securities they had paid for.

Although a decrease in trading volume in 1969 eased the operational problems somewhat, it brought with it lower income

for the industry. A financial squeeze ensued, and the industry's

overall capital base shrank under the impact of operating losses

and a significant drop in market value of trading and investment

accounts.

As a result, a number of firms, including some of the industry's

largest, were forced into liquidation, and many others were

merged out of existence. Hundreds of thousands of customers

were saved from major loss by having their accounts transferred

to stronger firms or through the injection of stock exchange trust

1
2 SECURITIES AND EXCHANGE COMMISSION

fund monies. In all, the industry expended about $130 million in

its rescue efforts.

In order to restore public confidence in the safety of the markets, Congress passed the Securities Investor Protection Act of

1970.1 This legislation, the most important in the securities field

in 30 years, established the Securities Investor Protection Corporation to provide insurance for customer accounts. Customers are

now insured up to $50,000 per account (of which no more than

$20,000 can be in cash). To minimize the exposure of the SIPC

fund, which is backed by a billion dollars in taxpayers' monies,

Congress ordered the Commission to study and report on the

unsafe and unsound practices of brokerage firms, and on the need

for additional legislation to correct such practices.

Some of the operational problem areas scheduled to be examined

in the Commission's study of brokerage practices were: physical

facilities for effecting and processing securities transactions;

automation and record-keeping systems; order entry and execution systems; trade comparisons and settlements; transfer and

custody of securities; relationships of banks to brokers; internal

controls maintained at brokerage firms; customer accounts; and

needed expansion programs. In the financial area the major

problem areas to be covered are: permanence and adequacy of

the industry's capitalization; reliance upon customers' funds and

securities; lack of internal controls over financial condition;

faulty handling of customer accounts ; and stock record differences.

The experiences of recent years, the various Congressional

hearings of 1970 and 1971, and the SIPC Study all point up the

need for additional investor protection measures. Of those already

implemented or under consideration, the most significant are

those dealing with the establishment of reserves against customer

free credit balances and the segregation of customers' securities.

Authority to pass rules in these areas was explicitly granted to

the Commission by the Securities Investor Protection Act.

Following consideration of various proposals, the Commission

on November 8, 1971 issued proposed new Rules 15c3-3 and

15c3--4 and proposed amended Rules 8c-1 and 15c2-1 under the

Securities Exchange Act of 1934.2 Proposed Rule 15c3-3 requires

the complete separation of customer funds from firm funds and

provides for reserves designed to protect customer funds held by

1See 36th Annual Report, pp. 3-5, for a discussion of the history and

major provisions of this legislation.

2 Securities Exchange Act Release No. 9388.
THIRTY-SEVENTH ANNUAL REPORT 3

broker-dealers. Proposed Rule 15c3-4, concerned with customer

protection in the area of custody and use of customers' securities,

requires that the broker-dealer promptly obtain physical possession or control of customer securities and contains provisions

for reserves against securities of customers which should be but

are not in the physical possession or control of a broker-dealer.

Supplementing proposed Rule 15c3-4 are proposed amendments to

Rules 8c-l and 15c2-1 (the hypothecation rules) which would,

as regards securities carried for the accounts of customers which

are loaned or borrowed by a broker-dealer, provide the same

protections as are currently provided for by rules of the selfregulatory organizations with regard to the lending of securities

as well as by the hypothecation rules with regard to rehypothecated securities.

In addition to acting to protect customers' funds and securities

on deposit with brokers, the Commission has taken steps to improve procedures for detecting and monitoring financial and operational problems at firms. On September 15, 1971, Rule 17a-ll

under the Securities Exchange Act went into effect." It requires

the giving of immediate notice by a broker-dealer who is in

violation of a net capital rule or whose books and records are not

being maintained in a current manner. Where a firm's financial

condition is deteriorating, although it is not in violation of a net

capital rule, it must tile detailed financial and operational information on a monthly basis. Reports under the rule are to be sent

both to the Commission and to all self-regulatory organizations

of which the troubled firm is a member, so as to permit early

consideration of problems and assistance to the firm on a coordinated basis.

Another rule recently promulgated by the Commission under

the Securities Exchange Act, Rule 17a-13,4 requires firms to count

their "box" at least once each calendar quarter. During the

1968-1970 period when some firms lost control of their back

offices, sizeable differences sprang up between records reflecting

stock ownership and the inventory of securities actually on hand

(or at identifiable outside locations, such as transfer agents).

Some firms had substantial amounts of securities on hand whose

ownership they could not identify and were missing large amounts

of other securities which their records reflected as being owned by

customers. Because these differences were in many cases not

discovered, researched and resolved promptly, customers whose

3 Securities Exchange Act Release No. 9268 (July 30, 1971).

4 Securities Exchange Act Release No. 9376 (November 8, 1971).
4 SECURITIES AND EXCHANGE COMMISSION

securities were in "street name" were at considerable risk. The

"box count rule" will focus the attention of firms and their

auditors on this problem area as a routine practice, thereby

lessening the chance that operational errors wilI cause serious

financial exposure to the firms and their customers.

Rule 15c3-1 under the Exchange Act, commonlyknown as the

Commission's "net capital rule", imposes minimum net capital

requirements on brokers and dealers and limits the amount of

indebtedness which may be incurred by a broker-dealer by providing that a broker-dealer's "aggregate indebtedness" (as defined

in the rule) may not exceed 20 times the amount of its "net

capital" (as computed under the rule). As such, the rule provides

safeguards for the protection of customers of broker-dealers by

requiring that at all times broker-dealers have sufficient liquid

assets available to meet their current obligations.

The Commissionrecently took action to raise the standards for

entry into the broker-dealer business, through proposed amendments to Rule 15c3-1.5 Under these, a firm would be required to

have net capital of at least $25,000,instead of $5,000as at present,

and during the first year of its existence, a firm would be required to maintain an aggregate indebtedness to net capital ratio

not exceeding8:1, rather than the 20:1 ratio otherwise acceptable

for firms subject to the Commission'snet capital rule.

During the past 2 years the Commission has conducted inspections of the administration and interpretation of the New

York Stock Exchange's net capital rule, the primary test of

financial responsibility for member firms, and a series of conferences has been held between the two organizations. As a result

the Exchange moved in August 1971 to strengthen the rule. It

dropped the maximum permissible ratio of aggregate indebtedness to net capital from 20:1 to 15:1, and it made mandatory a

charge against capital for short stock record differences 45 days

after their discovery. Among the other amendments was one

requiring the contraction or liquidation of a firm when its net

capital ratio exceeds 12:1. Various parts of the revision are

already in effect, and by August 1972,the new capital rule will be

largely in force.

At the same time that the Commissionwas proposing and implementing measures for investor protection, it was engaged in

studying the basic structure and functioning of the markets. Public hearings began on October 12, 1971 to help determine what

changes are needed in the rules under which stock exchanges and

I) Securities Exchange Act Release No. 9288 (August 13, 1971).
THIRTY-SEVENTH ANNUAL REPORT 5

other market institutions operate. In a statement accompanying

the announcement of the hearings, Chairman Casey noted that

there had been a tendency for some of the most critical questions

to be resolved, not as a duly deliberated matter of broad public

policy, but as an expedient to effect short-run savings or to settle

or avoid private law suits. Mr. Casey said the Commission would

determine what the public interest requires in the way of rules

governing the operations of various markets, the relationship

between these markets, and the disclosure of quotations, prices

and trading volume in these markets.

In a related area, the Commission held a conference with industry spokesmen in June 1971 on the subject of the stock

certificate. Discussion centered on methods of improving the

efficiency of securities handling systems. Presentations were made

by proponents of different programs for evolving a satisfactory

standardized, nationwide method of handling securities, including

a presentation favoring the elimination of stock certificates altogether. Chairman Casey pointed out the need to develop a sound

industry-wide operational system satisfying the need for the

prompt consummation of securities transactions and resolving the

diverse settlement practices of the various securities markets.

Participants were requested to submit additional ideas for consideration by the Commission in its role of coordinating and

furthering industry attempts to implement operational systems

able to handle existing and foreseeable levels of trading.

STRUCTURE AND LEVEL OF COMMISSIONRATES

As discussed in last year's report," the New York Stock Exchange submitted a new commission rate schedule to the Commission on June 30, 1970. Following extended public hearings,

the Commission announced on October 22, 1970 that with certain

modifications the new schedule would not be objected to. On

February 11, 1971, the Commission announced that it would

not object to the Exchange's commencing competitive rates on

portions of orders above a level not higher than $500,000.7 These

competitive rates became effective on most exchanges on April 5,

1971. Intra-member rates for floor brokerage and clearance on

portions of orders above $500,000 also became subject to negotiation at the same time."

6 See 36th Annual Report, pp. 5-8. See also 35th Annual Report, pp. ~7,

and 34th Annual Report, pp. 1-2.

7 Securities Exchange Act Releases Nos. 9079 (February 11, 1971) and

9105 (March 11, 1971).

S Securities Exchange Act Release No. 9069 (March 4, 1971).
6 SECURITIES AND EXCHANGE COMMISSION

The Commission also requested the Exchange to present on or

before June 30, 1971, a new rate structure based on a percentage

scale of the money involved in an order, a proposed revision of

the intra-member charges for floor brokerage and clearance, and

a proposal for reasonable non-member access.

On June 28, 1971, the Exchange presented a new commission

rate structure, a proposed revision of intra-member rates for floor

brokerage and clearance, and a proposal for a 30 percent discount

from the public commission rate for certain broker-dealers who

are not Exchange members. In accordance with the Commission's

announcement on August 31, 1970, a temporary commission rate

surcharge was continued until such time as circumstances warranted its termination."

On September 24, 1971, the Commission informed the New

York Stock Exchange that it would not object to implementation

of the Exchange's proposed new minimum commission rate schedule subject to a number of conditions, including compliance with

the President's restrictions on price Increases."? Other conditions

included; the elimination of the commission surcharge; an increase to 40 percent in the discount for broker-dealers who are

not Exchange members; a requirement of continued unrestricted

service to small investors in the case of firms which traditionally

have served such investors; the development of uniform reporting

by member firms of income and expenses; the adoption of rules

permitting member firms to enter into cooperative executing and

clearing arrangements; re-examination by the Exchange of the

necessity for fixed intra-member commission rates; and an adjustment of the rate schedule to eliminate a pricing anomaly that

would have required investors to pay more for execution of odd-lot

purchases than for the next higher round-lot purchase.

PUBLIC OWNERSHIP OF BROKER-DEALERS

In March 1970, the New York Stock Exchange amended its

rules to permit the public ownership of member firms provided

9 Securities Exchange Act Release No. 8969 (August 31, 1970).

10 Securities Exchange Act Release No. 9351.

11 See 36th Annual Report, p. 67. In commenting upon this rule change,

the Commission reserved its comment on the "primary purpose" limitation.

In a September 24, 1971 letter to the Exchange dealing with the commission

rate schedule, the Commission stated that it was reserving its determination

regarding the "primary purpose" limitation until after the market structure

hearings scheduled to begin October 12, 1971. See Securities Exchange Act

Release No. 9351.
THIRTY-SEVENTH ANNUAL REPORT 7

the member and any parent are primarily engaged in business

as brokers or dealers in securities.'! Since then, the National

Association of Securities Dealers, Inc., after reviewing the recommendations of a specially formed subcommittee on self-underwritings, abandoned its position that members could not participate

in distributions of their own securities and published proposed

regulations and procedures to govern such distributions. Pending

the adoption of these regulations, the Association determined to

review, on a case by case basis, proposals by its members to

participate in distributions of their own or an affiliate's securities.12 These actions by the Exchange and the NASD cleared the

way for Merrill Lynch, Pierce, Fenner & Smith to register

with the Commission and distribute primarily to its customers a

$112,000,000 offering of its securities. Subsequently, several other

NYSE members filed registration statements with the Commission, which became effective, covering public offerings of their

equity securities.

Generally, under the NASD proposals, which were submitted

to the Commission in September 1971, an Association member

would be permitted to "go public" if: (1) specified financial

statements were submitted with the registration statement; (2)

no more than 25 percent of the equity interest of the owners

of the member was offered as a part of the issue; (3) the amount

of the offering did not exceed three times the member's net worth;

and (4) the member's aggregate indebtedness to net capital ratio,

as computed under Rule 15c3-1, would not exceed 10:1 at the

termination of the offering. Additionally, a member would be

prohibited from making a subsequent public offering for at least

one year and would be required to send to each of its shareholders

a quarterly statement of its operations and an annual independently audited and certified financial statement. FinaIIy, in addition

to the above requirements, if the member participated in the

distribution of its own securities or those of an affiliate, it would

have to obtain two independent underwriters with at least 5 years

experience in the underwriting business, three of which were

profitable, to certify to the fairness of the offering price. These

seasoning and profitability requirements would apply to the

member-issuer as well. If the member recommended the securities

to a customer it would have to have reasonable grounds to believe

that the recommendation was suitable and would also have to

maintain a record in its files showing the basis upon which it

12 For the previous two years such participation had generally been prohibited by the NASD.
8 SECURITIES AND EXCHANGE COMMISSION

reached its suitability determination. As of the end of October,

the Commission had these proposals under consideration.

SECURITIES QUOTATIONS WITHOUT SPECIFIED INFORMATION

The Commission has always been concerned with the problem

of brokers and dealers publishing quotations for a security when

there is no current information available to them or to the public

concerning the issuer of the security. IS The publication of quotations for such securities subjects the investing public to a

situation having a great potential for fraud and manipulation.

In order to protect public investors, the Commission adopted Rule

15c2-11 under the Exchange Act.14

With certain exceptions, the rule prohibits brokers or dealers

from submitting or publishing quotations respecting a security in

the absence of publicly available information concerning the issuer

and the security. In general, the rule prohibits a broker or dealer

from submitting any quotation for a security to a quotation medium unless (1) there had been a recent public offering pursuant

to a registration statement or a notification under the Regulation

A exemption from registration, or (2) the issuer is subject to

certain reporting requirements of the securities laws and the

broker or dealer has no reason to believe that such reporting

requirements are not being complied with, or (3) the broker or

dealer has specified information concerning the issuer reasonably

believed to be correct and reliable, which must be made available

to any person interested in a transaction in the security with the

broker or dealer. The rule does not prohibit quotations for a

security which had been the subject of quotations at least twelve

days within the previous thirty calendar days, or for a security

which is listed on an exchange and has been traded on the same

day or on the day before the submission of the quotation.

NASD AUTOMATED OVER-THE-eOUNTER QUOTATIONS SYSTEM

(NASDAQ)

On February 8, 1971, the National Association of Securities

Dealers, Inc. (NASD) formally commenced public operations of

the NASDAQ automated quotations system with approximately

2300 over-the-counter securities. The system, which is operated

by Bunker-Ramo Corporation for the NASD, has three levels of

operating service. Level I service provides a current representative

IS See Securities Exchange Act Release No. 8909 (June 24, 1970).

14 Securities Exchange Act Release No. 9310 (September 13, 1971). See

the discussion of the rule as proposed in 36th Annual Report, pp..86-87.
THIRTY-SEVENTH ANNUAL REPORT 9

inter-dealer bid and ask quotation for any security registered in

the system for the information of registered representatives and

customers of retail firms. Level II is designed to supply upon

request of trading rooms a list of market makers and their

respective current bid and ask quotations for any such security.

Finally, Level III service is similar to Level II but also has input

facilities allowing authorized NASDAQ market makers to enter,

change or update their bid and ask quotations.

By the end of the fiscal year the number of securities quoted

on the system had reached approximately 2700 with a total

market value of over $110 billion, and there were about 475

registered NASDAQmarket makers. The NASD began developing

a "stock watch" surveillance program for the new system and

has been cooperating with the Commission'ssurveillance staff in

looking into unusual market activity in NASDAQ securities.

During the fiscal year the Association also began a special test

plan with respect to quoting securities which are traded both

over the counter and on one or more national exchanges. The

plan, which began on April 5, 1971, included 32 securities of

which 29 were listed on the New York Stock Exchange, 2 on the

American Stock Exchange and 1 on the Midwest Stock Exchange.

On September 21, 1971, the NASD announced its intention to

continue the test plan for an additional 3 months and to expand

it to include all listed securities which meet the qualification

standards for quotation on the system. During the year the

NASD also began to compileprice indicesfor NASDAQsecurities

and to release them to the news media for public information. To

assist the Association in compiling these indices the Commission

adopted Rules 13a-17 and 15d-17 under the Securities Exchange

Act and a new reporting Form 10-C to require the submission

of certain information to the Commission and to the NASD by

issuers of securities quoted on NASDAQ with respect to any

aggregate net change of 5 percent or greater in a class of securities quoted on the system.15

During the fiscal year the Commission reviewed and made

effective a NASDAQ rule change which provides access to Level

II quotations to nonmembers of the Association. Under this

change nonmembers, for an additional charge, would be able to

obtain on a real-time basis quotations of over-the-counter market

makers for securities quoted on the system. Shortly after the end

of the fiscal year, the Association announced its plans to expand

the system so as to allow subscribing brokerage firms to report

15 Securities Exchange Act Release No. 9255 (August 2, 1971)
10 SECURITIES AND EXCHANGE COMMISSION

the details of each securities trade to the NASDAQ central computer. The proposed trade reporting system, which will probably

take about two years to put into effect, would make it possible

for traders to verify each trade within seconds of its execution

and to detect immediately any errors. It is expected that such a

reporting system will provide more information to investors and

will speed up the clearing and settling of over-the-counter transactions.

INSTITUTIONAL INVESTOR STlJiDY

On March 10, 1971, the Commission transmitted to the Congress

the Institutional Investor Study Report.!" together with its initial

conclusions and recommendations. The Report consists of 15 chapters organized into four major parts. Part One, in addition to

introductory material, contains a summary of the Background

Report on Institutional Investors and Corporate Stock prepared

for the Study by the National Bureau of Economic Research, a

pioneer in the development of flow of funds statistics and the

system of national accounts. The substantive analyses in Part

One were designed to place in historical perspective detailed

studies in Part Two of the recent behavior of financial institutions

as equity investors. Part Three was designed to assess the impact

of institutional investing upon the stability of prices in the secondary equity markets, upon the structure of those markets and

upon the securities industry that services the markets. Part Four

analyzes certain aspects of the impact of institutional investors

on portfolio companies: institutional participation in primary

equity financing and institutional economic power and influence

over companies whose equity securities are held by institutions

or held for the benefit of persons whose investments are managed

by institutions.

Among the Commission's initial conclusions and recommendations were the following:

1. Although institutions have increased their share of outstanding equity securities (relative to non-institutional holders),

the increase has been relatively slow-paced over time. Institutions

have tended to concentrate their purchases and holdings in the

more stable securities of larger corporations while individual investors have sought and obtained higher returns on more risky

securities. Thus, the status of institutions as net purchasers of

16 H. Doc. No. 92-64 (92<1Cong., 1st Sess.). The Study was authorized by

Public Law 90-438. See 35th Annual Report, pp, 9-12; 36th Annual Report,

pp.8-9.
THIRTY-SEVENTH ANNUAL REPORT 11

corporate stock from individuals over most of the post-World

War II period has not resulted in a perceptible increase in their

share of the value of all equity securities during the last decade.

Since the past and likely future growth of institutional investors

in the equity markets makes essential the collection and analysis

of timely information about institutional holdings and activity

in securities, the Commission recommended amendment of the

Securities Exchange Act of 1.934to provide the Commission with

general authority to require reports and disclosures of institutional securities holdings and transactions. Such authorization

would permit the Commission to obtain continuing data for

public disclosure and for the production of statistical data or

aggregates. In order to utilize fully the data so collected, theCommission recommended that its economic research capability

be expanded through additional budgetary and personnel resources and that appropriate steps be taken to make such data

available to persons outside the Commission for analytical purposes.

2. Competitive pressures on institutional portfolio managers for

improved investment performance have led to the rapid growth

of relatively exotic, aggressively managed investment vehiclessuch as certain types of registered investment companies, hedge

funds and offshore funds-and to increased willingness on the

part of many institutions to adopt more aggressive investment

strategies and trading practices. Since these pressures have encouraged investment managers to assume higher levels of investment risk, the Commission concluded that improved disclosure

of investment returns, portfolio volatility and short-term trading

is needed from the managers of most types of professionally

managed portfolios. In addition, the Commission suggested that

where incentive or performance fees are utilized, penalties should

be structured for sub-standard investment performance, as is

currently the case for registered investment companies.

The Commission made specific recommendations for dealing

with hedge funds and offshore funds that would subject those

institutions to needed regulation while preserving their tax advantages.

3. Noting the accelerating trend during the last half of the

1960's toward the integration or diversification of institutions

into multi-purpose financial service organizations, the Commission

discussed several possible solutions to problems of conflicts of

interest, competition and economic power that are generated by

such structures: unbundling of certain services currently pro-
12 SECURITIES AND EXCHANGE COMMISSION

vided in combination with others at fixed rates; lower cost distribution systems for the mutual fund industry; and institutional

membership on stock exchanges. Although no definitive conclusions were reached as to these matters, the Commission emphasized the importance of its prior determination that fixed

commission rates on portions of orders in excess of $500,000

executed on securities exchanges could not be justified.

4. The Study's data indicated that institutional trading was

associated with relatively few of the large price changes that

occur in the securities markets. Thus, the Study did not discover

any basis in terms of price stability for imposing generalized

limitations on the volume of institutional trading or on the size

of institutional transactions. At the same time, rapid and significant changes in the securities markets SUggestthe need for

restructuring those markets. Although the Commission stated

that it was neither feasible nor desirable for any government

agency to predetermine and require a particular market structure,

certain goals and principles were set forth. Its objective, the

Commission stated, was "to see a strong central market created

to which all investors have access, in which all qualified brokerdealers and existing market institutions may participate in accordance with their respective capabilities, and which is controlled

not only by appropriate regulation but also by forces of competition. We propose, in consultation with all interested persons,

to seek the furtherance of these general objectives as we perform our reviewing function over proposed changes in market

structure."

5. Institutional purchases of equity securities from issuers,

including restricted securities required to be registered under

the Securities Act of 1933 upon subsequent resale, provide companies with additional capital and are thus of particular economic

significance. In order to alleviate some of the problems that are

associated with restricted securities, the Commission stated its

view that the principles for valuing such securities at their

current fair value, as set forth in releases under the Investment

Company Act of 1940,should be observed by all types of institutions and persons managing securities portfolios. The Commission

also noted that proposed rules relating to the resale of restricted

securities 17 might, if adopted, result in a reduction in the cost

to issuers of obtaining financing through the sale of restricted

securities since the price of such securities when privately placed

17 See pp. 21-23, infra.
THIRTY-SEVENTH ANNUAL REPORT 13

is usually substantially lower than the market price of similar

securities that are freely tradeable.

6. Although it appears that limited numbers of institutions,

particularly banks, have the potential economic power, were they

to act together, to exercise control or influence over a number of

portfolio companies, the Study found that except in the case of

transfers of corporate control (that is, takeover situations),

where the expectation of benefits to institutions or their managers

is relatively clear, institutions generally report that they do not

participate in corporate decision-making. However, institutional

influence, when exercised-as in the case of transfers of controlcan be of decisive importance. The Commission concluded that

additional disclosures should be required from all types of institutions, both as to the size and types of securities they hold

and manage and as to matters bearing on their involvement in

corporate affairs: voting authority, policies towards corporate

management, participation in transfers of corporate control and

policies regarding business relationships, personnel relationships

and informal consultation with management. In the takeover area,

the Commission recognized the need to consider additional rules

to deal with the misuse of undisclosed information concerning

transfers of control.

* * * * * The Commission has been considering various means of implementing its initial recommendations and of developing further

conclusions that may lead to additional proposals for legislative

or administrative action.

REFORM OF THE INVESTMENT COMPANY ACT

Efforts to obtain much-needed reform of the Investment Company Act of 1940 were finally brought to a successful conclusion

on December 14, 1970 when the Investment Company Amendments Act of 197018 (1970 Act) became law. As described in

previous annual reports," antecedents of this legislation, representing proposals of the Commission, were first introduced in May

1967. The principal Commission proposals involved the reduction

of sales loads imposed on the acquisition of mutual fund shares,

the elimination of the so-called "front-end load," and establishment of a means to test the fairness of management fees. The

proposals also dealt with a number of other areas which in the

18 Public Law 91-547.

19 See 36th Annual Report, pp. 13-19; 35th Annual Report, pp. 12-18;

34th Annual Report, pp. 4-6; and 33rd Annual Report, pp. 1-6.
14 SECURITIES AND EXCHANGE COMMISSION

Commission's opinion required legislative action.

In proposing mutual fund legislation in 1967, the Commission

recognized that most of the specific abuses aimed at in the Investment Company Act had been substantially eliminated. However,

the dramatic growth of the industry and accompanying changes

created new situations which were not anticipated in 1940. While

the industry accepted or even welcomed many of the changes

proposed by the Commission, it took exception to the principal

recommendations of the Commission, and as a result these were

modified in the legislation passed by Congress. The most significant aspects of that legislation, which also included certain

amendments of the Investment Advisers Act of 1940, are described below.

INVESTMENT ADVISORY FEES

The 1970 Act amends the Investment Company Act by adding

a new Section 36(b) (effective June 14, 1972) which specifies

that the investment adviser of a registered investment company'

has a fiduciary duty with respect to the receipt of compensation

for services or payments of a material nature paid by such

company or its shareholders to the adviser or an affiliate of the

adviser. An action for breach of this duty may be brought in a

Federal court by the Commission or by a shareholder on behalf

of the company. It may be brought only against the recipient of

the compensation or payments, and damages are limited to the

actual damages resulting from the breach of fiduciary duty and

may not exceed the amount of compensation or payments received. Section 36 (b) further provides that the court is to give

such consideration as it deems appropriate to approval of the

compensation or payments in question by the board of directors

and to approval or ratification by the shareholders.

An earlier House bill would have imposed on the plaintiff in a

Section 36 (b) action the burden of proving a breach of fiduciary

duty by "clear and convincing evidence." The House and Senate

conferees rejected this standard of proof, which the Commission

urged was inappropriate in a civil action, in favor of the approach

taken by the Senate and finally adopted, which specifies merely

that the plaintiff has the burden of proving such breach. The

Report of the Senate Committee on Banking and Currency indicates that the normal standard of proof, under which a plaintiff

must establish his case by a preponderance of the evidence, is to

apply.

While the Commission had originally recommended adoption
THIRTY-SEVENTH ANNUAL REPORT 15

of a standard of "reasonable" management compensation, it considered the fiduciary standard finally agreed upon and adopted

as equivalent in substance. Clearly, the new provision represents

a significant improvement over the prior standards of "corporate

waste" and "gross abuse of trust" applicable under state and

federal law, respectively.

SALES CHARGES

In the area of sales charges imposed on investors in mutual

fund shares, the 1970 Act amended Section 22 (b) of the Investment Company Act to provide that the National Association of

Securities Dealers, Inc. (NASD) may by rule prohibit its members from offering such shares at a price which includes an

"excessive sales load but shall allow for reasonable compensation

for sales personnel, broker-dealers, and underwriters, and for

reasonable sales loads to investors." Previously, the NASD was

authorized only to prohibit an "unconscionable or grossly excessive sales load." The 1970 Act also provides that at any time

after 18 months from the date of its enactment, or after the

NASD has adopted rules under amended Section 22 (b), the Commission may alter or supplement the rules of the NASD. The

NASD is presently engaged in a study of sales loads to provide

a basis for the adoption of appropriate rules.

THE FRONT-END LOAD ON CONTRACTUAL PLANS

Other significant amendments of the 1940 Act relate to the

so-called "front-end load" on periodic payment plan certificates

(i.e., certificates issued in connection with contractual plans for

the accumulation of fund shares on an installment basis). Formerly, there was no right to a refund for an investor who did not

want or was unable to continue payments to the end of the plan

under which as much as 50 percent of the payments made during

the first year could be deducted for sales charges. Thus, planholders who did not complete their payments were disadvantaged

in terms of the portion of their payments actually invested in

shares.

The 1970 Act, through amendment of Section 27 of the 1940

Act, provides a desirable improvement in investor protection in

this area. Under the new provisions, sales charges on contractual

plans may be imposed under either of two alternative methods.

Under the so-called "spread load" alternative (which must be

elected by written notice to the Commission), the sales load is

restricted to not more than 20 percent of any payment and not

more than an average of 16 percent over the first 4 years of the

450-484 0 - 72 - 3
16 SECURITIES AND EXCHANGE COMMISSION

plan. Under the other alternative, periodic payment plan certificates may still be sold with a 50 percent front-end load, but

plan sponsors must refund, to any investor surrendering his

certificate within the first 18 months of the plan, that portion

of the sales charges which exceeds 15 percent of the gross payments made, as well as paying him the value of his account. The

1970 Act further provides that, regardless of the alternative

followed, an investor is entitled to a full refund of the value of

his account plus all sales charges if he cancels his plan within

45 days from the mailing by the custodian bank of notice of the

charges to be deducted and of his cancellation right. Such a

notice must be mailed within 60 days after issuance of his certificate. The Commission is authorized to make rules requiring

contractual plan sponsors to maintain specified reserves to meet

refund obligations and specifying the notice to be given to investors regarding their refund rights."?

FUND HOLDING COMPANIES

Provisions of the Investment Company Act relating to fund

holding companies (i.e., investment companies whose portfolios

consist either entirely or largely of the securities of other investment companies) were also amended, so as to limit the creation of

new fund holding companies and the further enlargement of

existing companies. Concern with such companies has centered on

the fact that they result in "layering" of sales charges and administrative and other expenses to investors and may have a

disruptive effect on the funds whose securities are held in their

portfolios. Section 12 (d) (1) of the 1940 Act formerly prohibited

a registered investment company, subject to certain exceptions,

from purchasing more than 3 percent of the outstanding voting

stock of another investment company unless it already owned at

least 25 percent. This limitation was inadequate, since it applied

only to purchases by registered investment companies. Hence, a

foreign-based fund holding company not subject to registration

under the Act could make unlimited investments in registered

investment companies.

Under the 1970 amendments, no investment company may have

more than 10 percent of the value of its assets invested in securities of other investment companies. However, that limitation is

made inapplicable to a registered investment company if certain

conditions are met, principally that: (1) not more than 3 percent

20 Rules adopted by the Commission to implement these provisions are

discussed at p. 20, infra.
THIRTY-SEVENTH ANNUAL REPORT 17

of the outstanding stock of anyone investment company is owned

by the holding company, and (2) the sales load of the holding

company cannot exceed 11hpercent. In addition, the portfolio fund

is not obligated to redeem its securities held by the holding company in an amount exceeding one percent of its outstanding

securities in any period of less than 30 days.

PERFORMANCE FEE ADVISORY CONTRACTS

The 1970 Act, in accordance with the Commission's recommendation, amended the Investment Advisers Act by deleting the

exemption from the coverage of its provisions formerly provided

for an investment adviser whose only clients are registered investment companies. The Advisers Act was further amended so

as to prohibit an investment adviser from performing or entering

into an advisory contract with a registered investment company

providing for certain types of "performance fees," i.e., compensation based on the realized or unrealized appreciation of the investment company's portfolio.

The Commission had originally recommended a flat prohibition

of performance fee arrangements between investment advisers

and registered investment companies. It considered that such

arrangements give advisers incentives to take undue' risks and

noted that many fee arrangements were unfair or so complex

that it was virtually impossible to understand them. However,

after discussion with industry representatives, the Commission

agreed to an exception for certain limited types of performance

fees. The amendments as adopted exempt from the prohibition

against performance fee compensation an arrangement based on

a percentage of a registered investment company's net asset value

averaged over a specified period, which provides for proportionate

increases and decreases in compensation on the basis of investment performance of the company as measured against an appropriate index of securities prices or such other measure of

investment performance as the Commission may specify.

EXPANDED COMMISSION ENFORCEMENT AUTHORITY

The 1970 Act added a new subsection (b) to Section 9 of the

Investment Company Act to provide additional grounds for disqualification of persons from affiliation with an investment company. Formerly only persons subject to certain convictions or

injunctions were so disqualified. The new provision parallels

comparable provisions in the Securities Exchange and Investment

Advisers Acts providing for remedial action through administrative proceedings. It empowers the Commission, after notice and
18 SECURITIES AND EXCHANGE COMMISSION

opportunity for hearing, to prohibit any person, either permanently or for such time as may be appropriate, from serving a

registered investment company in the capacities of employee,

officer, director, member of an advisory board, investment adviser,

depositor or principal underwriter or as an affiliated person of

its investment adviser, depositor, or principal underwriter. The

Commission may take such action if it finds (1) that such person

has willfully violated, or willfully aided and abetted violations by

another, of any provision of the Securities Act, Securities Exchange Act, Investment Company Act, or Investment Advisers

Act, or any rule or regulation thereunder, or has willfully made

or caused to be made a materially false or misleading statement

in any registration statement, application or report filed under

the Investment Company Act, and (2) that such action is in the

public interest.

BANKS AND INSURANCE COMPANIES

While the amendments of the 1940 Act were under consideration by the Congress, the question of whether banking laws permitted banks to operate so-called commingled managing agency

accounts was pending before the Supreme Court, in Investment

Company Institute v. Camp. A Senate bill would have expressly

permitted banks and savings and loan associations to operate

such accounts (which are investment companies), subject to

specified restrictions, and would have made it clear that no other

provision of law shall be deemed to prohibit such activities. A

House bill would have provided that if no other provision of state

or federal law prohibited operation by a bank or savings and loan

association of an investment company, such investment company

could be operated, subject to substantially the same restrictions

specified in the Senate bill.

The 1970 Act, as finally adopted, does not contain either of

these provisions. Subsequent to its enactment, the Supreme Court

issued its decision in the Camp case," holding that the national

banking laws do not permit banks to operate commingled managing agency accounts.s"

In another area the 1970 Act clarifies the status of certain

bank collective funds and insurance company separate accounts

under the Investment Company Act and the other federal securities laws. These amendments codify certain administrative in21401 U.S. 617 (1971).

22 See p, 156, infra; 36th Annual Report, p. 149; 35th Annual Report,

p. 136; and 32nd Annual Report, pp. 104-105, for a description of this case

and its companion case, N.A.S.D. v, S.E.C., 401 U.S. 617 (1971).
THIRTY-SEVENTH ANNUAL REPORT 19

terpretations by the Commission with respect to bank collective

trust funds which are used as funding media for pension and

profit sharing plans qualified for favorable treatment under the

Internal Revenue Code. The amendments also provide treatment

more equal to that of bank trusts for separate accounts maintained by insurance companies as funding vehicles for such plans.

OIL AND GAS FUNDS

In the area of oil and gas funds, the Senate bill would have

deleted the existing exclusion from the Investment Company Act

of such funds if they issued redeemable securities or periodic

payment plan certificates, but would have left the exclusion intact

for those oil and gas funds in which investors make only a single

investment. The House version would not have altered the existing

exclusion of oil and gas funds.

The Commission recommended adoption of the House approach.

In the course of the hearings on the mutual fund legislation, the

oil and gas industry had argued that regulation under the Investment Company Act would involve difficulty in accommodating the

structure contemplated by the Act with the structure adopted by

the industry in order to secure favorable tax treatment for oil

and gas investors. The Commission took the position that a satisfactory solution could be achieved by enactment of a regulatory

statute which would provide safeguards parallelling those provided by the Investment Company Act, but which would be

specifically tailored to the practices, problems and operating

methods of the oil and gas funds.

The House and Senate conferees determined to retain the

exclusion, with the same understanding. They directed the Commission to submit a legislative proposal in this area, hopefully to

be worked out in cooperation with the oil and gas industry, within

eighteen months of enactment of the 1970 Act.

IMPLEMENTATION OF INVESTMENT COMPANY

ACT AMENDMENTS

Following passage of the 1970 Act, the Commission took steps

to adopt rules implementing the new provisions, rescind existing

rules which had become obsolete because of the legislation, and

issue explanatory releases.

EXPLANATORY RELEASES

Beginning in February 1971, the Commission published a series

of explanatory and interpretive releases dealing with the changes

effected in the Investment Company and Investment Advisers
20 SECURITIES AND EXCHANGE COMMISSION

Acts by the 1970 AcU3 The releases explained the effects of

various of these changes, called the attention of registered investment companies and their counsel to actions which needed to be

taken in order to comply with the new provisions, and rescinded

certain rules and a form superseded by the amendments.

ADOPTION OF RULES UNDER AMENDED SECTION 27

As described above, the 1970 Act added to Section 27 of the

Investment CompanyAct certain rights of withdrawal and refund

in connection with the sale of periodic payment plan certificates.

Shortly after these amendments became effective on June 14,

1971,the Commissionadopted a series of rules and related forms

to implement them.> Among other things, the rules require principal underwriters and depositors to establish and maintain funds

in a segregated trust account in order to assure their ability to

meet refund obligations and specify the method, form and contents of the notices required to inform certificate holders of their

refund rights.

REVISION OF ANNUAL REPORT FORM

In May 1971, the Commission published notice of a proposal

to revise Form N-1R, the annual report form for most management investment companies." and in October 1971 it adopted the

proposal, with certain modifications.:" The revision effected

changes in the items of the form consistent with the 1970 amendments. In addition, since annual reports for the fiscal year which

includes December 14, 1971,will involve the reporting, in certain

items, of information relating to requirements of the Investment

Company Act both before and after the effective date of amendments, the form was also revised to provide a means of reporting

information for the fiscal year within which the amendments

becomeeffective.

STUDY OF THE POTENTIAL ECONOMIC IMPACT OF THE REPEAL OF

SECTION 22(d) OF THE INVESTMF;NT COMPANY ACT

The Committee on Banking and Currency of the United States

Senate requested in its Report Accompanying the Investment

Company Amendments Act of 196927 that the Commissionreview

23 Investment Company Act Releases Nos. 6336 (February 2, 1971); 6392

(March 19, 1971); 6430 (April 2, 1971); 6440 (April 6, 1971); 6506 (May 5,

1971); and 6568 (June 11, 1971).

24 Investment Company Act Release No. 6600 (July 2, 1971).

25 Investment Company Act Release No. 6522 (May 14,1971).

26 Investment Company Act Release No. 6748 (October 7, 1971).

27 S. Rep. No. 91-184, p, 8 (May 21, 1969).
THIRTY-SEVENTH ANNUAL REPORT 21

the potential consequences to the investing public and to the

mutual fund sales organizations of a repeal of the "retail price

maintenance" provision of Section 22 (d) of the Investment Company Act and report its findings to the Committee. Section 22(d)

precludes the sale to public investors of redeemable investment

company securities which are being currently offered to the public

by or through an underwriter except at a current public offering

price described in the prospectus.

In the spring of 1971, approximately 600 selected brokerdealers, investment companies and their principal underwriters

were surveyed through questionnaires developed to elicit the information necessary to analyze the potential impact of the repeal

of Section 22 (d). The completed analysis will cover the potential

impact on the funds themselves, principal underwriters, retail

sales organizations and their salesmen, the investing public and

the stock market.

PROPOSED RULES REGARDING RESALES OF RESTRICTED

SECURITIES

The Commission has taken further steps in its efforts to bring

greater clarity and certainty into one of the most difficult areas of

securities law: the application of the registration provisions of

the Securities Act of 1933 to the resale of securities acquired

from issuers in transactions not involving public offerings (Hre_

stricted securities") and securities held by persons in a control

relationship with an issuer.

As discussed in the last annual report," the Commission published a proposed Rule 144 dealing with those matters in September 1970. A large number of comments was received in response

to this proposal and a still earlier one. In light of the comments

and a further re-examination by the Commission of its interpreta.-

tions in this area, the Commission, in September 1971, published

a revised draft of proposed Rule 144 for comment as part of a

package of proposed rules.29

The proposed rule is designed to implement the disclosure objective of the Securities Act and would also operate to inhibit

the creation of public markets in securities of issuers concerning

which adequate current information is not available to the public.

In essence, the rule would permit holders of restricted securities

and persons in a control relationship with the issuer to sell,

after a two-year holding period designed to assure that the seller

2836th Annual Report, pp. 9-10.

29 Securities Act Release No. 5186 (September 10, 1971).
22 SECURITIES AND EXCHANGE COMMISSION

has held the securities at risk, limited amounts of securities

through brokers without registration, provided adequate public

information about the issuer is available. Sellers of the securities

will benefit from the greater certainty of clear-cut objective

standards-a 2-year holding period and the availability of public

information-which will replace the subjective "state of mind"

and "change in circumstances" tests presently in effect. The

adequate information condition is deemed to be met if the issuer

is subject to the reporting requirements of Section 13 or 15(d)

of the Securities Exchange Act of 1934 and has filed all reports

due within the past 90 days. Under a companion proposal to

amend the annual and quarterly report forms.t? issuers filing

such reports would be required to state whether all required filings

within the preceding 90 days had been made, so that sellers will

know whether Rule 144 is available for their use. If an issuer is

not subject to these reporting requirements, there must be publicly available specified information concerning the issuer.

In order to prevent substantial blocks from coming into the

market at one time which may result in wide swings in the market

price, the revised rule would permit the sale of a maximum of 1

percent of the outstanding stock of an issuer in any six-month

period. The securities must be sold in "brokers' transactions"

within the meaning of Section 4(4) of the Securities Act. There

can be no solicitation of buy orders by the broker or the seller

of the securities, and the broker can receive only the usual and

customary broker's commission.

When the securities to be sold will exceed 500 shares. or other

units or the aggregate sale price will exceed $10,000, a notice of

the proposed sale must be filed with the Commission at least 10

days prior to the sale. If the securities are not sold within 90

days after the notice is filed, an amended notice must be filed

before any further sales are made.

In a related action, the Commission invited comment on a

proposed new Rule 237 providing certain exemptions from registration under the Securities Act.31 The proposal reflects the

Commission's recognition that noncontroIling persons owning

restricted securities of issuers which do not satisfy all of the

conditions of proposed Rule 144 might have difficulty in seIling

those securities due to circumstances beyond their control. Rule

237 is designed to avoid unduly restricting the liquidity of such

investments.

30 Securities Exchange Act Release No. 9331 (September 10, 1971).

31 Securities Act Release No. 5187 (September 10,1971).
THIRTY-SEVENTH ANNUAL REPORT 23

Under the proposed rule any person satisfying the conditions

of the rule would be permitted to offer securities up to one percent

of the amount of the class outstanding or $50,000, whichever is

less, during any twelve-month period, reduced by the amount of

any other sales pursuant to an exemption under Section 3 (b) of

the Act or Rule 144 during the period. The conditions would

include the following: The seller has owned and fully paid for

the securities for at least five years; the issuer is a domestic

organization which has been actively engaged in business as a

going concern for at least 5 years; the securities are sold in

negotiated transactions otherwise than through a broker or

dealer; and the seller must file a notice of intention to sell securities under the rule.

Another related proposal is to amend Regulation A so as to

allow noncontrolling shareholders to sell limited amounts under

that Regulation without having such offerings counted against

the $500,000 maximum available to the issuer.v

DISCLOSURE BY 'DEFENSE CONTRACTORS

In May 1970, the Commission received from its staff a report

of an extensive private investigation authorized to determine if

Lockheed Aircraft Corp. and certain of its officers and directors

had made inadequate disclosures and engaged in illegal insider

trading in connection with the cost history of Lockheed's C-5A

contract. Based on this report and other evidence which the staff

presented to the Commission, it was decided that enforcement

action would not be taken against Lockheed. The Commission

instead determined that a broader inquiry should be made into

the entire area of defense contracting so that specific industrywide financial disclosure standards might be established. Accordingly, on June 4, 1970, the Commission ordered a public

inquiry, pursuant to Section 21 (a) of the Securities Exchange

Act of 1934, into the disclosure practices of defense contractors.

As a part of this public investigation of disclosure practices,

50 of the nation's largest defense contractors received a written

questionnaire directed to their current accounting and financial

reporting practices. The staff also took on the record testimony

from representatives of certain companies and their independent

auditors.

It is anticipated that the facts adduced in this inquiry will

provide a basis for improving disclosure by defense contractors,

through the issuance of specific guidelines to registration under

32 Securities Act Release No. 5188 (September 10, 1971).
24 SECURITIES AND EXCHANGE COMMISSION

the Securities Act or a requirement of new items or additional

instructions to existing items to be reported pursuant to the

regular reporting requirements of the Securities Exchange Act.

OFFERING OF SECURITIES AS SUBSTITUTE OR SUPPLEMENT FOR

SAVINGS ACCOUNT DEPOSITS AND CERTIFICATES OF DEPOSIT

During the fiscal year the Commission issued a release announcing its concern regarding recent proposals for public offerings of a novel type of security with characteristics which appear

to invite unwarranted comparisons with bank savings accounts,

savings and loan association accounts, and bank time deposit

certificates." Such securities may be presented to the public as a

satisfactory investment medium to serve as a supplement, or even

a preferable alternative, to such savings accounts and certificates

of deposit.

The security in question is customarily an unsecured debt

security bearing interest at a rate lower than those prevailing

for long term corporate debt, but somewhat higher than the prevailing rates for savings accounts and certificates of deposit.

When the security does not have a relatively short maturity, it

usually has a so-called redemption, presentment, tender or repurchase feature respecting principal and accrued interest which

may lead the investor to believe that his security would have

liquidity comparable with that of conventional savings accounts

and bank certificates of deposit.

The Commission's release noted that investors in such securities

would not have the safeguards resulting from state and federal

supervision of financial institutions or the benefits of federally

created insurance protections. It also pointed out that the so-called

redemption or similar feature of these securities may be illusory

because the issuers of the securities are in general not subject to

any regulation or law with respect to the maintenance of reserves.

Accordingly, the Commission cautioned members of the public

to examine carefully the risk factors associated with securities

they are invited to purchase and reminded persons engaged in

the offering and sale of the securities described in the release

of their obligations under antifraud provisions of the federal securities laws to consider and disclose the risk and other pertinent

factors.

PROPOSED FEE SCHEDULE

Over the past few years, Congress has expressed concern that

33 Securities Exchange Act Release No. 9143 (April 12, 1971).
THIRTY-SEVENTH ANNUAL REPORT 25

the Federal Government is not receiving sufficient returns for

the services it renders, and it has been suggested that agencies

review their schedules of fees and charges with a view to making

increases or adjustments to offset the- increasing needs for direct

appropriations for agency operating costs.

Consistent with this suggestion, the Commission, in September

1971, published for comment a proposed fee schedule covering

fees for certain filings and services under the Securities Act of

1933, the Securities Exchange Act of 1934, the Public Utility

Holding Company Act of 1935, the Investment Advisers Act of

1940 and the Investment Company Act of 1940.34

Under the proposed schedule, fees would be charged for certain

filings and services under these acts where no charges have

previously been made and there would be no refund of any fees

paid. Consistent with that approach, the Commission also proposed to amend Rule 457 under the Securities Act, which now

provides for partial refunds of Securities Act registration fees

under certain circumstances, so as to provide that no refund will

be made once a registration statement has been filed.

The authorization to establish fees is found in Title V of the

Independent OfficeAppropriations Act of 1952 which is applicable

to all Federal independent agencies.

ENFORCEMENT ACTION CHARGING MISUSE OF PENSION FUNDS

In S.E.C. v, Victor Posner, et al.,35 the Commission for the first

time brought enforcement proceedings involving the alleged misuse of corporate pension funds in connection with the purchase

or sale of securities. In May 1971, an injunctive action was

instituted against six defendants, who after a takeover of Sharon

Steel Corporation allegedly engaged in a fraudulent scheme to use

the assets of Sharon's two pension funds to assist in takeovers

and consolidation efforts. According to the complaint, the defendants accomplished the scheme by, among other things, causing

the pension funds to liquidate a portion of their security holdings

and to reinvest the proceeds in securities issued by certain of the

defendant companies and other companies, all of them controlled

by Posner.

34 Securities Act Release No. 5190 (September 13, 1971).

35 S.D.N.Y., 71 Civ. Action No. 2256.

PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE

ISSUERS OF SECURITIES

A basic purpose of the Federal securities laws administered by

the Commission, in particular the Securities Act of 1933 and the

Securities Exchange Act of 1934, is to provide disclosure of

material financial and other information about companies seeking

to raise capital through the public offering of their securities and

those companies whose securities are already publicly held, so as

to enable investors to evaluate the securities of these companies

on an informed and realistic basis.

To this end, the Securities Act, generally speaking, requires

that before securities may be offered to the public by an issuing

company or a person in a control relationship to such company,

a registration statement must be filed with the Commission disclosing prescribed categories of financial and other information,

and that in connection with the sale of the securities investors be

furnished a prospectus containing the most significant of that

information.

The Securities Exchange Act, which deals in large part with

securities already outstanding, requires the registration of securities listed on a national securities exchange and over-the-counter

securities in which there is a substantial public interest. Issuers

of registered securities must file annual and other periodic reports

which are designed to provide a public file of current material

information. The Exchange Act also requires disclosure of material information to holders of registered securities in connection

with the solicitation of proxies for the election of directors or

the' approval of corporate action at a stockholders' meeting, and

in connection with attempts to acquire control of a company

through a tender offer or other planned stock acquisition, and

it provides that "insiders" of companies whose equity securities

are registered must report their holdings of and transactions in

all equity securities of the company with which they are affiliated.

DISCLOSURE IN CONNECTION WITH PUBLIC OFFERINGS

The basic concept underlying the Securities Act's registration

requirements is full disclosure. The Commission has no authority

27
28 SECURITIES AND EXCHANGE COMMISSION

to pass on the merits of the securities to be offered or the fairness

of the terms of distribution. If adequate and accurate disclosure

is made, it cannot deny registration. The Act makes it unlawful

to represent to investors that the Commission has approved or

otherwise passed on the merits of registered securities.

TYPE OF INFORMATION INCLUDED IN REGISTRATION STATEMENT

While the Securities Act enumerates the categories of information to be included in a registration statement, the Commission

has the authority to prescribe appropriate forms, and to increase,

or in certain instances vary or diminish, the particular items of

information required to be disclosed.To facilitate the registration

of securities by different types of issuers, the Commission has

adopted special registration forms which vary in their disclosure

requirements so as to provide maximum disclosure of the essential

facts pertinent in a given type of offering while at the same time

minimizing the burden and expense of compliance with the law.

In recent years it has adopted certain short forms, notably Form

8-7, which do not require disclosure of matters covered in reports

and proxy material filed or distributed under provisions of the

Securities Exchange Act.

In general, the registration statement of an issuer other than

a foreign government must disclose such matters as the names of

persons who participate in the management or control of the

issuer's business; the security holdings and remuneration of such

persons; the general character of the business, its capital structure, past history and earnings; underwriters' commissions; payments to promoters made within 2 years or intended to be made;

the interest of directors, officers and llrindpal stockbolders in

material transactions witb tb.e issuer; llfCndinglegal proceedings ;

and the purposes to which the proceeds of the offering are to be

applied, and it must include financial statements certified by an

independent public accountant. The registration statement of a

foreign government must contain information concerning the

purposes for which the proceeds of the offering are to be used,

the natural and industrial resources of the issuer, its revenues,

obligations and expenses, the underwriting and distribution of the

securities being registered, and other material matters, but need

not contain certified financial statements.

NEW REGISTRATION GUIDES

From time to time in recent years, the Commission has authorized the publication of guides reflecting policies of the Di-
THIRTY-SEVENTH ANNUAL REPORT 29

VISIOnof Corporation Finance regarding disclosure and other

matters relating to the registration of securities.

During the fiscal year the Commission authorized the publication of a guide relating to disclosure of the interests of counsel

named in a prospectus as having passed on the legality of the

securities being registered or on other legal matters in connection

with the registration or offering of the securities.' The guide calls

for disclosure of any interest in the issuer presently held or to be

acquired by named counsel in connection with the registration or

offering of the securities. The theory underlying the requirement

is that potential investors should be told of any interests which

such counsel may have in the issuer or the offering to enable them

to judge for themselves counsel's independence and objectivity.

Another guide which was published requires disclosure in the

prospectus of the registrant's business address and telephone

number.s Complaints had been received from time to time that

investors and state regulatory agencies had been unable to communicate conveniently with registrants because that information

had not been given.

In August 1970, a proposed guide to the preparation of registration statements relating to so-called "equity funding" programs

was published for comrnent." The accompanying release pointed

out that in recent months numerous registration statements had

been filed for such programs which involve the offering of securities, usually mutual fund shares, and the use of such shares as

collateral for a loan the proceeds of which are then used to pay a

premium on a life insurance policy sold to the customer at or

about the same time. The Commission has taken the position that

such a program involves an investment contract which is a

security under the Securities Act. Among other things, the proposed guide indicates the manner in which the risk factors involved in an equity funding program should be disclosed.

ADOPTION OF NEW OR REVISED REGISTRATION FORMS

During the year the Commission adopted Form 8-16, a new

short form for registration statements, for use in connection with

certain types of offermgs.' The form may be used by any issuer

which at the time of filing the registration statement would be

entitled to use Form S-7, i.e., a company which has an established

1Securities Act Release No. 5094 (October 21, 1970).

2 Securities Act Release No. 5102 (November 12, 1970).

3 Securities Act Release No. 5075 (August 3, 1970).

4 Securities Act Release No. 5117 (December 23, 1970).
30 SECURITIES AND EXCHANGE COMMISSION

record of earnings and stability of management and business and

has complied with reporting and proxy requirements of the Securities Exchange Act for at least 3 years." Form 8-16 may be

used for registering securities to be sold in the following types

of offerings: Securities offered by persons other than the registrant in the regular way on a national securities exchange if

securities of the same class are registered on the same or another

such exchange; securities to be offered by an issuer to holders

of convertible securities of an affiliate of the issuer which are

convertible into securities of the issuer, where no commission or

other remuneration is paid or payable by anyone for soliciting

such conversion; and securities to be issued upon the exercise of

outstanding publicly-held warrants where no commission or other

remuneration is paid for soliciting the exercise of the warrants.

The Form S-16 prospectus consists in large part of the latest

annual and other report and proxy or information statement filed

by the issuer which are incorporated in the prospectus by reference. The prospectus must disclose where the documents incorporated by reference may be inspected or copies obtained. Any

material adverse changes in the registrant's affairs subsequent

to the date of the latest certified financial statements must also

be disclosed. Like Forms S-7, S-8 and S-9 which also take into

consideration information otherwise filed with the Commission,

Form 8-16 is in the nature of an experiment. The Commission

intends to observe its operation in conjunction with the recently

revised registration and reporting requirements under the 1934

Act 6 to determine whether the omission of information from the

prospectus is consistent with the objectives of the 1933 Act.

The Commission also adopted certain amendments to Forms

8-1, S-9 and 8-11.7 Form 8-1, the general form for registration

of securities, was amended to require a source and application of

funds statement for each fiscal year or other period for which

a profit and loss statement is required. This amendment conforms

the requirements of Form S-1 to those of revised Forms 10 and

10-K under the Securities Exchange Act.

The amendments to Form 8-9, an optional form for registration

of non-convertible, fixed interest, debt securities, and Form 8-11,

which is used for registration of securities of certain real estate

5 Amendments to Form S-7 adopted during the fiscal year which broadened

its availability were discussed in the 36th Annual Report, at pp, 12-18.

6 See 36th Annual Report, pp. 10-12.

7 Securities Act Release No. 5135 (February 26, 1971).
THIRTY-SEVENTH ANNUAL REPORT 31

companies, also relate to the nature of the financial information

to be furnished.

IMPROVING THE READABILITY OF PROSPECTUSES

Over the years the Commission has taken various measures to

make prospectuses and other documents filed with it and furnished

to the investing public more understandable to the average investor. Nevertheless, many prospectuses are still lengthy and complex. While they may be accurate and complete and useful for

financial analysts and sophisticated investors, they may be unintelligible to the average investor and thus fail to achieve their

statutory purpose of providing full and fair disclosure to investors. Accordingly, the Commission during the fiscal year invited

comments and suggestions from interested persons with respect

to reasonable measures which might be taken to improve the

readability and informativeness of prospectuses and other documents the purpose of which is to inform investors or security

holders." Many helpful responses were received, and shortly after

the end of the fiscal year the Commission invited comments on

certain specific proposals designed as the first in a series of steps

to be taken toward this objective," Among the proposed measures

is the required use in prospectuses of "pie-charts" to show the

intended use of the proceeds of the offering and the dilution of

the investor's equity in the enterprise.

In a related action, the Commission amended certain rules

under the Securities Act and the Securities Exchange Act so as

to require that notes to financial statements and other tabular

data in prospectuses, proxy statements and other documents filed

with the Commission or sent to security holders be set forth in a

larger size type than was previously required."? These notes often

contain information of material importance to investors not found

elsewhere in the documents.

DISPOSITION OF ABANDONED REGISTRATION STATEMENTS

During the fiscal year the Commission adopted a new Rule 479

which provides a procedure whereby the Commission may determine whether a registration statement or post-effective amendment to such a statement, which has not become effective, has

been abandoned and remove such statement or amendment from

consideration as a pending matter." The rule provides that when

8 Securities Act Release No. 5119 (December 16, 1970).

!J Securities Act Release No. 5164 (July 16, 1971).

10 Securities Act Release No. 5145 (April 30, 1971).

11 Securities Act Release No. 5148 (May 14, 1971).

450.484 0 - 72 • 4
32 SECURITIES AND EXCHANGE COMMISSION

a statement or amendment has becomeout of date by the passage

of 9 months from the filing date, or the filing of the latest

substantive amendment, and the registrant has not furnished a

satisfactory explanation as to why it has not amended or withdrawn the registration statement, the Commission may, in its

discretion, give notice to the registrant and if the registration

statement or amendment is not thereafter amended or withdrawn

declare the statement or amendment abandoned. The rule also

provides that the abandoned statement or amendment shall be

suitably marked and remain in the files of the Commission.

NEW RULES RELATING TO PUBLICATION OF INFORMATION AND

DELIVERY OF PROSPECTUS BY BROKER-DEALERS PRIOR TO OR

AFTER THE FILING OF A REGISTRATION STATEMENT

During the year the Commission adopted rules designed to

establish standards for determining circumstances under which

broker-dealers may publish certain information about an issuer

which proposesto or has registered securities under the Securities

Act and to clarify a dealer's obligation to deliver prospectuses

under Section 4(3) of that Act and the anti-fraud provisions of

the Securities Exchange Act.I2 Information, opinions or recommendations by a broker-dealer about securities of an issuer proposing to register securities under the Securities Act for a public

offering or having securities so registered may constitute an offer

to sellsuch securities within the meaning of that Act, particularly

when the broker-dealer is participating in the distribution as an

underwriter or selling group member. Publishing such information may result in a violation of Section 5 of the Act. The purpose

of the rules is to provide guidance to broker-dealers and to alleviate such requirements where it appears that the purposes and

policies of the Act will not be prejudiced, while assuring that

persons engaged in a distribution of a registered offering and

their customers will be supplied with the disclosure afforded by

the statutory prospectus.

STAFF EXAMINATION OF REGISTRATION STATEMENTS

Registration statements filed with the Commission are examined by its staff for compliancewith the standards of adequate

and accurate disclosure. This examination is primarily the responsibility of the Division of Corporation F'inance.P Generally

12 Securities Act Release No. 5101 (November 19, 1970).

IS Statements :filed by investment companies registered under the Investment Company Act of 1940 are examined by the Division of Corporate

Regulation. See Part V for further discussion of the processing of investment

company registration statements.
THIRTY-SEVENTH ANNUAL REPORT 33

speaking, if it appears that a statement fails to conform, in

material respects, with the applicable requirements, the issuing

company is notified by a letter of comment and is afforded an

opportunity to file correcting or clarifying amendments.> The

Commission also has the power, after notice and opportunity for

hearing, to issue a "stop-order" suspending the effectiveness of

a registration statement if it finds that material representations

are misleading, inaccurate or incomplete. In certain instances,

such as where the deficiencies in a registration statement appear

to stem from careless disregard of applicable requirements or

from a deliberate attempt to conceal or mislead, a letter of comment is not sent and the Commission either conducts an investigation to determine whether "stop-order" proceedings should be

instituted or immediately institutes such proceedings. The exercise

of the "stop-order" power during fiscal year 1971 is discussed on

pages 40-42.

TIME REQUIRED TO COMPLETE REGISTRATION

The Commission's staff endeavors to complete its examination

of registration statements in as short a time as possible. The

Act provides that a registration statement shall become effective

on the 20th day after it is filed (or on the 20th day after the

filing of any amendment thereto). Since most registration statements require one or more amendments, they usually do not

become effective until some time after the original 20-day period.

The period between filing and effective date is intended to afford

investors an opportunity to become familiar with the proposed

offering through the dissemination of the preliminary form of

prospectus. The Commission can accelerate the effective date so

as to shorten the 20-day waiting period, taking into account,

among other things, the adequacy of the information respecting

the issuer theretofore available to the public and the facility with

which the facts about the offering can be understood.

During the fiscal year, 2,985 'registration statements became

effective. Of these, 226 were amendments filed by investment

companies pursuant to Section 24(e) of the Investment Company

Act of 1940, which provides for the registration of additional

securities through amendment to an effective registration statement rather than the filing of a new registration statement. With

respect to the remaining 2,759 statements, the median number of

14 Expedited review procedures first adopted in November 1968 to cope

with the volume of registration statements filed were described on pages

11-12 of the 34th Annual Report.
34 SECURITIES AND EXCHANGE COMMISSION

calendar days which elapsed from the date of the original filing

to the effective date was 52, representing a substantial reduction

over the comparable figures for the two preceding years." As a

matter of fact, during the last few months of the fiscal year

the processing time was substantially below the figure for the

year as a whole.

The following table shows by months during the 1971 fiscal

year the number of registration statements which became effective, and the number of calendar days elapsed during the registration process for the median registration statement.

Time in Registration Under the Securities Act of 1988 by Months During the

Fiscal Year Ended June 80,1971

NUMBER OF CALENDAR DAYS

Number of Number of

registra- Totalnum- registra- TotalnumMonths tion state- ber of days Months tion state- berofdays ments in registra- ments in registra- effective « tion effective' tion

1970 1971

July 226 59 anuary ________ 158 52

August-========: 178 60 \i~bruary ------ 160 51 September _____ 215 54 arch _________ 217 39 October ________ 230 54

i'a~l

296 33

November 195 54 281 38 December ______ 251 44 .Tune ___________ 352 46

Fiscal 1971

median

effectIve

statement ____ 2,759 52

ThIS figure excludes 226 amendments filed by investment companies pursuant to Section 24(e) of the Investment Company Act of 1940.

STATISTICS REGAR'DING REGISTRATION STATEMENTS FILED

During the 1971 fiscal year, 3,404 registration statements were

filed for offerings of securities aggregating $70.0 billion, as compared with 4,314 registration statements filed during the 1970

fiscal year for offerings amounting to $66.9 billion. This represents a decrease of 21.0 percent in the number of statements filed

and an increase of 4.6 percent in the dollar amount involved.

Of the 3,404 registration statements filed in the 1971 fiscal

year, 997, or 29 percent, were filed by companies that had not

previously filed registration statements under the Securities Act.

Comparable figures for the 1970 and 1969 fiscal years were 2,.071,

or 48 percent, and 2,350, or 50 percent, respectively.

Particulars regarding the disposition of all registration statements filed from the effective date of the Act to June 30, 1971, are

summarized in the following table:

15 Those figures were 70 days for 3,121 registration statements in fiscal

year 1970 and 65 days for 3,316 registration statements in fiscal year 1969.

===========

•
THIRTY-SEVENTH ANNUAL REPORT 35 

Number and Dispositia of Registration Statements Filed 

July 1, 1970 

Prior to to June 30, Total 

July 1, 1970 1911 June 30. 1971 

Re tration statements: 

d ............................ 40,881 (a) 3,404 44285 


Disposition:

Effective (net) ................. 34,480 (b) 2.929 (c) 31,341


Under stop or refusal order .... 235 2 237 


Withdrawn ..................... 4,120 869 4,889


Pending at June 30, 1070 ....... 2,046 ..... ..... 
 Pending at June S. 1971 ............ ..... 1.712 


Tot ........................ 40.881 ..... 44.285 


Aggregate +Uar amount: 

As filed (m billions) .. $552.8 $70.0 $622.8 

As effective (in billions) ------- 531.2 69.5 600.7 

(a) Ineludes 219 registration statements covering proposed offerings totalling $7288 182817 filed by investment companxes undgr Sectlon 24(e) (1) of the Investment 

com6any' Act of 1940 which permits registratron by amendment to a previously effective registratlon statement. 

(b) Excludes 56 registration statements that became effective during the year but were subsequently withdrawn; these 56 statements are included in the 869 statements 

withdrawn during the year. (c) Excludes 62 registration statements effective prior to July 1, 1910, which were withdrawn during the year: these 62 statements are effected under w~thdrawn. 

The reasons assigned by registrants for requesting withdrawal 

of the 869 registration statements withdrawn during the 1971 ' 

fiscal year are shown in the following table: 

Percent 

Reaspn for registrant's withdrawal request statements of total 

.--

1. Withdrawal requested after receipt of the 

staff's comments ................... L... 
 ..........
 2. Change in financing plan? ......................... 
 3. Change in market condlhons ...................... 
 4. Registrant was unable to negotiate acceptable agreement with underwriter ........ 
 5. Will file on proper form ........................... 
 6. Will file new registration statement ............... 
 7. Exemptions available .............................. 
 8. After investigation under Sec. ate) and 20(a) .... 

Total .......................................... 869 100.0 


STATISTICS REGARDING SECURITIES REGISTERED 

During the fiscal year ended June 30, 1971, a total of 2,989 

registrations of securities in the amount of $69.6 billion became 

effective under the Securities Act l6 Although the number of statements declined, the dollar amount effectively registered increased 

18 percent from fiscal year 1970, reflecting a sharp rise in the 

volume of large security issues registered. The chart on page 36 

shows the number and dollar amounts of effective registrations 

for the period 1935 to 1971. 

18 For a reconciliation of the figures as to effective registration statements 

referred to above and on pp. 33 and 35, see Appendix Table 2. 

...... 
Dollars Billions

90

36 SECURITIES AND EXCHANGE COMMISSION

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

1935.1971

75

1935 40 45 50 55 60 65 70

(Fiscal Yeors)

The figures for 1971 cover all effective registrations including

secondary distributions and securities registered for other than

cash sale, such as issues exchanged for other securities and securi-
THIRTY-SEVENTH ANNUAL REPORT 37

ties reserved for conversion. Of the dollar amount of securities

registered in 1971, 84 percent was for the account of the issuer

for cash sale, 10 percent for the account of the issuer for other

than cash sale, and 6 percent for the account of others, as shown

in the table below.

Account For Which Securities Were Registered Under the Securities Act of

1933: Fiscal Years 1969-1971

(Milhons of dollars)

1971 1970 1969

Account of issuer, cash sale _________ 58,452 48,198 52.039

Account of issuer. other than cash sale __________________________ 7,043 7,355 29,577 Account of other than issuer ________ 4,066 3,563 4,481

Total- ------------------------ 69.561 59.116 86,456

e These figures exclude lease obligations relating to industrial bonds of $400 thousand

in 1971; $21 rrullron in 1970; and $354 million m 1969.

The amount of securities offered for cash sale for the account

of issuer in 1971 amounted to a record $58.5 billion, an increase

of $10.3 billion over the preceding fiscal year and $6.4 billion

more than the previous record established in fiscal year 1969. This

increase was primarily due to the large volume of debt securities

issued; $27.6 billion of bonds, debentures and notes were registered for the account of the issuer for cash sale as compared to

$18.4 billion and $11.7 billion in fiscal years 1970 and 1969, respectively. Securities registered for the account of the issuer for

other than cash sale declined slightly in 1971, with the volume of

securities registered for purposes of exchange amounting to $1.5

billion compared to $2.0 billion during fiscal year 1970. Registrations of secondary offerings (for account of other than issuer)

aggregated $4.1 billion, $500 million more than in the preceding

fiscal year. Appendix Table 1 shows the number of statements

which became effective and total dollar amounts registered for

each of the fiscal years 1935-1971. Issues, classified by security

type, offered for cash sale for the account of issuer are also included for those years. More detailed information for 1971 may be

found in Table 2.

As shown in the table below, corporate issues effectively registered for immediate cash sale totaled a record $38.2 billion in

1971, an increase of $12.2 billion or 47 percent over the preceding

year. New corporate bonds, notes and debentures were up sharply,

aggregating $27.1 billion compared to the previous high of $17.8

billion registered in fiscal year 1970. New common stock flotations

totaled $7.7 billion and showed a moderate increase from 1970

levels. New issues of preferred stock amounted to $3.3 bilIion, a
38 SECURITIES AND EXCHANGE COMMISSION

record high for this type of securities financing. Almost one-half

of these senior equities were offered to securities holders through

subscription rights whereas virtually all of the preferred stock

registered in 1970 and 1969 was issued to the general public.

Securities Registered for the Account of the Issuer for Cash Sale Under the

Securities Act of 1933: Fiscal Years 1969-1971

(Milhons of dollars)

1971 1970 1969

Issues offered for immediate sale:

Bonds, notes and debentures ______ 27,139 17,825 10,818

Preferred stock 3,340 768 515

Common stock _::::::::::::::::::::::::::::::::::::::::7,722 7,382 5,949

Total --------------------------- 38,201 25,975 17,282

Foreign government ----------------- 1,493 495 711

Total for immediate sale ______ 39,694 26,470 17,993

Issues offered over an extended

period ----------------------------- 18,758 21,728 34,046

Total for cash sale for account of issuer ____________ 58.452 48,198 52.039

The following chart shows the amounts of debt issues, common

and preferred stock offered for immediate cash sale in each of

the past ten fiscal years. It points up the precipitous growth in

the demand for capital funds during that period. Thus, the security financing total in 1971 represented a six-fold increase from

the $6.3 billion registered in 1962.

NEW CORPORATE SECURITIES EFFECTIVELY REGISTERED

GROSS PROCEEDS WITH SEC FOR IMMEDIATE CASH SALE (1962 1971) DOLL. ... RS BILLiONS

40

63 64 65 66 67 68 69 70 1971

:::::: COMMON

:::::: STOCK

PREFERREO

STOCK

1962

o

10

20

30

DS-49liU5

The following table shows the volume of issues registered to

be offered continuously over an extended period. Most of these

-
THIRTY-SEVENTH ANNUAL REPORT 39

issues were common stock offerings, including investment company issues, employee stock purchase plans and stock reserved

for warrants and options. Registrations of extended offerings

amounted to $18.7 billion in fiscal year 1971, a decline of $3.0

billion from 1970 and down sharply from the $34.0 billion registered in 1969.

Securities Registered to be Offered Over an Extended Period Under the

Securities Act of 1933: Fiscal Years 1969-1971

1971

(Mtlltons of dollars)

1970 1969

Investment company issues: Management open-end

Management closed-end

Unit investment trust Face-amount certificates

Total investment companies __ Employee saving plan certificates __ SecuntIes for employee stock option plans

Other, including stock for warrants and options

Total

8,281

258

1,721

647

10,907

1,400

3,300

3,151

18,758

11,090

131

2,274

116

13,611

1,677

3,103

3,337

21,728

I 16,129

594

2,279

126

19,128

1,850

5,610

7.458

34,046

The chart below shows dollar amounts of registrations of issues

offered over an extended period for the fiscal years 1962-1971.

It also reflects the close parallel that has existed between the

total volume of such registrations and investment company issues.

DOLLARS

BILLIONS

40

30

20

10

o

SECURITIES EFFECTIVELY REGISTERED TO BE OFFERED FOR SALE

OVER AN EXTENDED PERIOD OF TIME (1962 1911)

.......... .. ..

.........._ "..... ....•...........

•••••••••• _........ ltlVESTMENT COMPANIES

05-4997

REPORTS OF SALES AND USE OF PROCEEDS

The Commission adopted a new rule and form requiring issuers

_

_

_

_

_

_

_

-
40 SECURITIES AND EXCHANGE COMMISSION

registering securities under the Securities Act for the first time

to file reports of sales of such securities and the application of

the proceeds from such sales.F The first report must be filed 3

months after the effective date of the registration statement and

subsequent reports at 6-month intervals during the period of the

offering and until the proceeds have been applied by the registrant. A final report is required upon completion of the offering

and application of the proceeds. Information as to the progress

of an offering of registered securities will enable the Commission

to know whether the registrant is required to file and use an updated prospectus and whether dealers effecting transactions in the

securities must furnish a copy of the prospectus to purchasers.

Information concerning the actual use of the proceeds will indicate whether the statements in the prospectus with respect to such

use are borne out by the registrant's subsequent actions.

EXAMINATIONS AND INVESTIGATIONS

The Commission is authorized by Section 8 (e) of the Securities

Act to make an examination in order to determine whether a stop

order proceeding should be instituted under Section 8 (d) and in

connection therewith is empowered to examine witnesses and require the production of pertinent documents. Failure of the issuer

or underwriter to cooperate in or obstruction of an examination

constitutes grounds for issuance of a stop order. In addition,

investigations into the adequacy and accuracy of registration

statements may be conducted pursuant to Section 20 (a) of the

Act which authorizes the Commission to conduct an investigation

to determine whether any provision of the Act or any rule or

regulation prescribed thereunder has been or is about to be

violated. The following tabulation shows the number of examinations and investigations relating to registration statements which

were in progress during the year:

Pending at beginning of fiscal year 51

Initiated during fiscal year 15

66

Closed during fiscal year 37

Pending at close of fiscal year 29

STOP ORDER PROCEEDINGS

Section 8(d) of the Securities Act gives the Commission the

power, after notice and opportunity for hearing, to issue a stop

order "suspending" the effectiveness of a registration statement

17 Securities Act Release No. 5141 (April 19, 1971).
THIRTY-SEVENTH ANNUAL REPORT 41

which includes an untrue statement of a material fact or omits to

state any material fact required to be stated therein or necessary

to make the statements therein not misleading. The effect of a

stop order, which may be issued even after the sale of securities

has begun, is to bar distribution of the securities so long as the

order remains in effect. Although the order does not have the

effect of restoring losses which may already have been suffered

by investors, the Commission's decision and the evidence on which

it is based may serve to put them on notice of their rights and aid

in their private recovery suits. As provided by the Act, a stop

order is lifted when the registration statement has been amended

to correct the deficiencies.

At the beginning of the fiscal year two stop order proceedings

were pending and during the year two additional proceedings

were instituted. Two of the proceedings were terminated through

the issuance of stop orders, and the others were pending as of the

end of the year. One of these was terminated through issuance

of a stop order shortly after the end of the fiscal year.

In Blimpie Corporation of America,18 the Commission had authorized an examination and investigation to determine whether

a registration statement filed by Blimpie contained false or misleading statements concerning the identity of persons in control

of the company, the background of its board of directors and

transactions by and between its officers and directors. However,

the persons listed in the registration statement as officers, directors and stockholders refused to testify when subpoenaed by the

staff. The Commission held that such refusal constituted a failure

by Blimpie to cooperate in the examination, which, pursuant to

Section 8 (e), constituted a ground for issuance of a stop order.

In Auoion-Umipolar Corporation.I" decided shortly after the

close of the fiscal year, the Commission found that the registration

statement filed by the issuer, a newly organized research and

development corporation, was materially deficient in describing

the intended use of the proceeds of the offering and certain

inventions on which the issuer's business was dependent and in

failing to disclose the possibility of adverse claims to those

inventions and that the issuer's licensee did not have the financial

capacity to honor potential multi-million dollar contractual commitments described in the registration statement. The Commission

also found that the issuer had failed to cooperate in an examina18 Securities Act Release No. 5146 (May 6, 1971).

19 Securities Act Release No. 5161 (July 5, 1971), app. pending, C.A. 2,

No. 71-1677.
42 SECURITIES AND EXCHANGE COMMISSION

tion conducted by its staff pursuant to Section 8(e) of the Securities Act, in that the issuer's president, claiming his privilege

against self-incrimination, had refused to answer a staff member's

question, and the issuer had failed to respond to a subponea

duces tecum calling for the production of corporate books and

records. The Commission rejected contentions that no examination could be conducted pursuant to Section 8 (e) prior to the

formal institution of stop-order proceedings under Section 8 (d),

and that the president's claim of the privilege excused the issuer's

failure to cooperate.

In view of the material deficiencies in the registration statement and the issuer's failure to cooperate, the Commission determined that a stop order suspending the effectiveness of the

registration statement should issue. It rejected the argument that

Section 8 (c) of the Securities Act required it to declare the

issuer's post-effective amendments effective and to dismiss the

proceedings. The Commission noted that its consideration of such

amendments after the institution of stop-order proceedings was

discretionary. It pointed out that even if the post-effective amendments were fully curative of the deficiencies which it had found

in the registration statement, the information which the issuer

and its officers had refused to furnish during the staff's examination might have disclosed further material deficiencies, and that

consideration of the post-effective amendments would therefore

be inconsistent with the public interest and the protection of

investors.

EXEMPTION FROM REGISTRATION OF SMALL ISSUES

The Commission is authorized under Section 3 (b) of the Securities Act to exempt, by its rules and regulations and subject to

such terms and conditions as it may prescribe therein, any class

of securities from registration under the Act, if it finds that the

enforcement of the registration provisions of the Act with respect

to such securities is not necessary in the public interest and for

the protection of investors by reason of the small amount involved

or the limited character of the public offering. The statute imposes

a maximum limitation of $500,000 upon the size of the issues

which may be exempted by the Commission in the exercise of

this power.20

20 Public Law 91-565, effective December 19, 1970,raised the ceiling from

$300,000 to $500,000.
THIRTY-SEVENTH ANNUAL REPORT 43

Acting under this authority, the Commission has adopted the

following exemptive rules and regulations:

Regulation A: General exemption for U.S. and Canadian issues up to

$500,000.21

Regulation B: Exemption for fractional undivided interests in oil or

gas rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for

assessable stock offered or sold to realize the amount

of assessment thereon up to $300,000.

Rules 234-236: Exemptions, up to limited amounts, of first lien notes,

securities of cooperative housing corporations, and

shares offered in connection with certain transactions.

Under Section 3 (c) of the Securities Act, the Commission is

authorized to exempt securities issued by a small business investment company subject to the Small Business Investment Act.

Acting pursuant to this authority the Commission has adopted

Regulation E, which exempts such securities up to a maximum

offering price of $500,000.22

Exemption from registration under Section 3(b) or 3 (c) of

the Act does not carry any exemption from the provisions of the

Act prohibiting fraudulent conduct in the offer or sale of securities and imposing civil liability or criminal responsibility for

such conduct.

EXEMPT OFFERINGS UNDER REGULATIONA

Regulation A permits a company to obtain needed capital not in

excess of $500,000 (including underwriting commissions) in any

one year from a public offering of its securities without registration, provided specified conditions are met. These include the

filing of a notification supplying basic information about the

company with the appropriate Regional Officeof the Commission,

and the filing, and use in the offering, of an offering circular.

However, an offering circular need not be filed or used in connection with an offering not in excess of $50,000 by a company

with earnings in one of the last 2 years.

During the 1971 fiscal year, 836 notifications were filed under

Regulation A, covering proposed offerings of $254,220,725,compared with 1104 notifications covering proposed offerings of

$293,666,784in the 1970 fiscal year. The table below sets forth

21 Implementing the statutory change, the Commission, effective January

7, 1971, increased the maximum amount of the offering permitted under

Regulation A from $300,000to $500,000.Securities Act Release No. 5125.

22 The ceiling was raised during the fiscal year from the previous maximum

of $300,000.Securities Act Release No. 5134 (March 26, 1971).
44 SECURITIES AND EXCHANGE COMMISSION

various features of the Regulation A offerings during the past 3

fiscalyears:

Offerings Under Regulation A

SIZE: $100,000 or less

$100,000-$200,000

$2OO,ooG-$300,ooo

$300,000-$400,000

$4OO,~,OOO

Total

UNDERWRITERS: Used

Not Used

OFFERORS: Issuing companies Stockholders

Issuers and stockholders jointly __

1971

54

116

429

114

123

836

370

466

822

11

3

Fiscal year

1970

90

92

922

1,104

510

594

1,101

2

1

1969

90

114

839

1,043

458

585

1,021

15

7

Reports of Sales.-Regulation A requires the filing of periodic

sales reports during the pendency of the offering and a final

report upon its completion or termination. During the fiscal year

1971, 1036 reports of sales were filed reporting aggregate sales

of $67,629,044.

Suspension of Exemption.- The Commission may suspend an

exemption under Regulation A where, in general, the exemption

is sought for securities for which the regulation provides no

exemption or where the offering is not made in accordance with

the terms and conditions of the regulation or in compliance with

the prescribed disclosure standards. Following the issuance of a

temporary suspension order by the Commission,the respondents

may request a hearing to determine whether the temporary

suspension should be vacated or made permanent. If no hearing

is requested within 30 days after the entry of the temporary

suspension order and none is ordered by the Commission on its

own motion, the temporary suspension order becomes permanent.

During the 1971 fiscal year, temporary suspension orders were

issued in 23 cases. Added to the 19 cases pending at the beginning

of the fiscal year, this resulted in a total of 42 cases for disposition. Of these, the temporary suspension order was vacated

in 1 case and became permanent in 28 cases: in 14 by lapse of

time, in 8 by withdrawal of the request for hearing, and in 6

by final determination by the Commission (including 5 based on

offers of settlement). Thirteen cases were pending at the end of

the fiscalyear.

_

_

_

_ --- _

_

_

_

_

_
THIRTY-SEVENTH ANNUAL REPORT 45

EXEMPT OFFERINGS UNDER REGULATION B

During the fiscal year ended June 30, 1971, 941 offering sheets

and 917 amendments thereto were filed pursuant to Regulation B

and were examined by the Oil and Gas Section of the Commission's Division of Corporation Finance. During the 1970 and 1969

fiscal years, 749 and 613 offering sheets, respectively, were filed.

The following table indicates the nature and number of Commission orders issued in connection with such filings during the

fiscal years 1969-71. The balance of the offering sheets filed became effectivewithout order.

Action Taken on Offering Sheets Filed Under Regulation B

Fiscal years

1971 1970 1969

Temporary suspension orders (under Rule 340(a» _____ 0 4 3

Orders terminating proceeding after amendment _______ 0 1 3

Orders terrrunattng effectiveness of offering sheet ______ 2 0 0

Orders fixing effective date of amendment (no proceedmg pending) ______________________________657 470 376

Orders consentmg to withdrawal of offering sheet (no proceeding pending) ______________________________29 10 7

Total number of orders ___________________________688 485 389

Reports of Sales.-The following table shows the number of

sales reports filed under Regulation B during the past 3 fiscal

years and the aggregate dollar amount of sales during each such

year.

Reports of Sales Under Regulation B

1971 1970 1969

Number of sales reports filed _______ 11,773 8,136 9,012

Aggregate dollar amount of sales

$11,221,563.80 reported ___________________________$15,712,891.51 $11,757,060.32

EXEMPT OFFERINGS UNDER REGULATION F

Regulation F provides an exemption for assessments levied

upon assessable stock and for' delinquent assessment sales in

amounts not exceeding $300,000 in anyone year. It requires the

filing of a simple notification giving brief information with respect to the issuer, its management, principal security holders,

recent and proposed assessments and other security issues. The

regulation requires a company to send to its stockholders, or

otherwise publish, a statement of the purposes for which the

proceeds of the assessment are proposed to be used. Copiesof any

other sales literature used in connectionwith the assessment must

be filed.Like Regulation A, Regulation F provides for the suspension of an exemption thereunder where the regulation provides
46 SECURITIES AND EXCHANGE COMMISSION

no exemption or where the offering is not made in accordance

with the terms and conditions of the regulation or in accordance

with the prescribed disclosure standards.

During the 1971 fiscal year, 19 notifications were filed under

Regulation F, covering assessments of $407,719, compared with

19 notifications covering assessments of $498,220 in the prior

year.

CONTINUING !DISCLOSURE REQUIREMENTS

The Securities Exchange Act of 1934, as amended, contains a

number of significant disclosure provisions with respect to securities traded in the securities markets. These provisions, applicable

in general to issuers of securities listed on exchanges and issuers

of securities traded over the counter which meet minimum asset

and number of stockholder tests, include requirements for the

registration of securities with the Commission and for periodic

reports, as well as for appropriate disclosure in connection with

the exercise of stockholders' voting rights, takeover bids and insiders' securities transactions.

REGISTRATION OF SECURITIES ON EXCHANGES

Unless a security is registered on a national securities exchange

under Section 12(b) of the Exchange Act or is exempt from

registration, it is unlawful for a member of such exchange or any

broker or dealer to effect any transaction in the security on the

exchange. In general, the Act exempts from registration obligations issued or guaranteed by a State or the Federal Government

or by certain subdivisions or agencies thereof and authorizes the

Commissionto adopt rules and regulations exempting such other

securities as the Commissionmay find necessary or appropriate

to exempt in the public interest or for the protection of investors.

Under this authority the Commission has exempted securities of

certain banks, certain securities secured by property or leasehold

interests, certain warrants and, on a temporary basis, certain securities issued in substitution for or in addition to listed securities.

Pursuant to Section 12(b) of the Exchange Act, an issuer may,

if it meets the requirements of the exchange, register a class of

securities on an exchange by filing with the Commission and

the exchange an application which discloses pertinent information concerning the issuer and its affairs. Information must be

furnished regarding the issuer's business, its capital structure,

the terms of its securities, the persons who manage or control

its affairs, the remuneration paid to its officersand directors, and

the allotment of options, bonuses and profit-sharing plans. Finan-
THIRTY-SEVENTH ANNUAL REPORT 47

cial statements certified by an independent accountant must be

filed as part of the application.

Form 10 is the form used for registration by most commercial

and industrial companies." There are specialized forms for

certain types of securities, such as voting trust certificates, certificates of deposit and securities of foreign governments.

Statistics regarding securities traded on exchanges may be

found in Part III of this Report and in Appendix Tables 4-9.

REGISTRATION OF OVER-THE-COUNTER SECURITIES

Section 12(g) of the Exchange Act requires a company with

total assets exceeding $1 million and a class of equity securities

held of record by 500 or more persons to register those securities

with the Commission, unless one of the exemptions set forth in

that section is available, or the Commission issues an exemptive

order under Section 12 (h). The same Form 10 referred to above

is the general form for registration pursuant to Section 12 (g).

During the fiscal year, 714 registration statements were filed

under Section 12 (g). This makes a total, from the enactment of

Section 12 (g) in 1964, through June 30, 1971, of 5,690 registration statements filed. Eleven of these statements were withdrawn

before they had become effective upon determination that they

were not required to be filed under the Act.

Of the 714 registration statements filed under Section 12(g) in

fiscal year 1971, 420 were filed by issuers already subject to the

reporting requirements of Section 13 or 15 (d) of the Act. The

latter figure includes 19 registration statements filed by issuers

with another security registered on a national securities exchange,

and 401 filed by issuers subject to the reporting requirements of

Section 15 (d) because they had registered securities under the

Securities Act. These latter companies, however, had not been

subject to the proxy solicitation and other disclosure and insider

trading provisions of Sections 14 and 16 of the Exchange Act.

The remaining 294 issuers which filed registration statements had

not been subject to any of the disclosure or insider trading provisions and became subject to them through registration.

New Rule Regarding Registration by Successor Issuers.-It has

been the Commission's position that an issuer which succeeds by

merger, consolidation, exchange of securities or acquisition of assets, to another issuer which had securities registered pursuant

to Section 12(g), or securities which would have been required to

23 Last year's report discussed revisions of Form 10 adopted in October

1970. See 36th Annual Report, pp, 10-11.

450-484 0 - 72 - 5
48 SECURITIES AND EXCHANGE COMMISSION

be registered but for the succession, assumes the duty to provide

for such security holders a continuation of the benefits provided,

or which would have been provided, by registration of the predecessor, unless upon consummation of the succession the securities are exempt from registration or all securities of the class are

held of record by less than 300 persons. A new Rule 12g-3 adopted

by the Commission, designed to avoid a hiatus in registration and

reporting, provides that where an issuer which has no securities

registered pursuant to Section 12 of the Act has issued equity

securities to holders of equity securities of a predecessor which

were rezistered under Section 12 (g) and there are at least 300

holders of the class so issued, such class shall be deemed registered

pursuant to that section." It further provides that where the

predecessor was required to register securities pursuant to that

section but had not yet done so, the successor shall file a registration statement within the period of time the predecessor would

have been required to file one, or within such extended period as

the Commission may authorize.

Exemptions From Registration.-Section 12(h) of the Act authorizes the Commission, either by rules and regulations or by

order upon application of an interested person, to grant a complete or partial exemption from the provisions of Sections 12 (g),

13, 14, 15 (d), or 16 if the Commission finds that because of the

number of public investors, the amount of trading interest in the

securities, the nature and extent of the activities of the issuer, the

income or assets of the issuer, or otherwise, the exemption is not

inconsistent with the public interest or the protection of investors.

At the beginning of the fiscal year 9 applications for exemption

orders were pending and 6 applications were filed during the year.

Of these 15 applications, 3 were withdrawn and 3 were granted,

and the remaining 9 applications were pending at the end of the

fiscal year.

PERIODIC REPORTS

Section 13 of the Exchange Act requires issuers of securities

registered pursuant to Section 12 (b) or 12 (g) to file periodic

reports keeping current the information contained in the registration statement. During the fiscal year the content and nature

of the reports to be filed were substantially revised. Thus, Form

10-K, the principal annual report form, was revised so as to

provide on an annual basis information which, together with

that contained in the proxy or information statement sent to

24 Securities Exchange Act Release No. 9072 (February 10, 1971).
THIRTY-SEVENTH ANNUAL REPORT 49

Number of reports

securityholders, will give a reasonably complete and up-to-date

statement of the registrant's business and operations." The semiannual report on Form 9-K was replaced by a new quarterly

report on Form 10-Q calling for summarized financial information.26 As heretofore, current reports on Form 8-K were required

to be filed for each month in which any of certain specified events

of immediate interest to investors occurred. A report on this form

deals with matters such as changes in control of the registrant,

important acquisitions or dispositions of assets, the institution or

termination of important legal proceedings and important changes

in the issuer's securities. Certain real estate companies are required to file quarterly reports on Form 7-Q, which replaced Form

7_K.27 Section 15 (d) of the Exchange Act, generally speaking,

requires issuers which have registered securities under the Securities Act of 1933 and which have no securities registered under

Section 12 to file the reports described above.

The following table shows the number of reports filed during

the fiscal year pursuant to Sections 13 and 15 (d) of the Exchange

Act. As of June 30, 1971, 3,130 issuers had securities listed on

a national securities exchange and registered under Section 12 (b)

of the Act, 4,797 issuers had securities registered under Section

12 (g), and 2,482 additional issuers were subject to the reporting

requirements of Section 15(d) of the Act.

Number of Annual and Other Periodic Reports Filed by Issuers Under the

Securities Exchange Act of 1934 During the Fiscal Year Ended June 90,1971

Type of reports

Annual reports 8,319

~~;;r~~~J;~~~--=========================================== Quarterly reports 1~:~~ 6,790

Total reports filed j~ __ 32_,_90_8

NEW RULES RELATING TO COMPANIES REPORTING PURSUANT TO

SECTION 15(d)

. A new Rule 15d-5 provides that where an issuer which is not

required to file reports pursuant to Section 15 (d) of the Act

succeeds to an issuer which is required to file such reports, the

successor is deemed to have assumed the duty to file such reports,

and shall file the reports required by that section and the rules

25 Securities Exchange Act Release No. 9000 (October 21, 1970). For

further details, see 36th Annual Report, p. 11.

26 Securities Exchange Act Release No. 9004 (October 28, 1970). For

further details, see 36th Annual Report, pp, 11-12.

27 Securities Exchange Act Itelease No. 9005 (November 2, 1970).

_
50 SECURITIES AND EXCHANGE COMMISSION

and regulations thereunder, unless it is exempt therefrom or the

duty to file reports is suspended under the provisions of that

section.w

Under Section 15 (d), if the number of record holders of securities of each class registered is reduced to less than 300 persons

at the beginning of any fiscal year, the duty to file reports is

suspended for that year. To enable the Commission to know

whether an issuer's failure to file reports is due to delinquency

or to a suspension of the duty to file, the Commission adopted a

new Rule 15d-6 which requires notice to the Commission whenever the duty to file has been suspended."

PROPOSED AMENDMENTS OF REPORTING FORMS

The Commission gave notice of a proposal to amend Forms

10-K and 10-Q to require information regarding recent transactions by the issuer in all unregistered securities." This information will be of material assistance in the administration of the

so-called private offering exemption contained in Section 4 (2) of

the Securities Act and in the administration of the securities laws

by the staff and the Commission.

Certain amendments to Form 8-K relating to accounting matters are discussed in the accounting section below.

TIMELY DISCLOSURE OF MATERIAL CORPORATE DEVELOPMENTS

In a release issued during the year, the Commission reiterated

the need for publicly held companies to make prompt and accurate

disclosure of material developments, both favorable and unfavorable, to security holders and the investing public, so that investor

confidence can be maintained in an orderly and effective securities

market." Itreminded companies subject to the reporting requirements of the Exchange Act of their obligation to file reports on

time. The Commission further pointed out that even though a

company complies with the reporting requirements, it still has an

obligation to make full and prompt announcements of material

facts regarding its financial condition.

PROCEEDINGS TO OBTAIN COMPLIANCE WITH EXCHANGE ACT

REGISTRATION OR REPORTING REQUIREMENTS

Administrative Actions.-Section 15(c) (4) of the Exchange

Act empowers the Commission to find, after notice and oppor28 Securities Exchange Act Release No. 9072 (February 10, 1971).

29 Securities Exchange Act Release No. 9100 (March 15, 1971).

30 Securities Exchange Act Release No. 9126 (April 15,1971).

31 Securities Act Release No. 5092 (October 15, 1970).
THIRTY-SEVENTH ANNUAL REPORT 51

tunity for hearing, that any person subject to the provisions of

Section 12, 13 or 15(d) of the Act or the rules thereunder has

failed in any material respect to comply with any of those provisions. It thus provides an administrative procedure for apprising investors of materially misleading filings and for the

resolution of accounting and other complex and technical questions involving the disclosure provisions of the Act. Under Section

15(c) (4) the Commission can publish its findings and issue an

order requiring compliance and, when the circumstances of a

particular case so warrant, apply to a U.S. district court for

enforcement of its order.

At the beginning of the fiscal year, one proceeding pursuant to

Section 15(c) (4) was pending, and during the year three additional proceedings were instituted. The Commission issued decisions in two of the proceedings during the year,32 and the other

two were pending at the end of the year.

Major Realty Corporation 33 involved the adequacy of disclosures contained in annual reports filed by Major for its 1968

and 1969 fiscal years in connection with an agreement for the

sale of a parcel of land. Major entered into a contract to sell the

parcel of land which provided, among other terms, that Major

had the right to rescind the contract, subsequent to closing, under

certain conditions, and no interest or principal payments were

to be made until after the right to rescind was no longer extant.

Major received a down payment of $25,000 representing less than

1 percent of the purchase price and a non-recourse note for the

remainder of $3,475,000 from a subsidiary of the buyer which

had assumed the buyer's obligation and only had nominal assets.

Major reflected $3,152,170 as income derived from this transaction and the note of $3,475,000 as an asset in its 1968 annual

report on Form 10-K.

The Commission found that Major improperly treated the land

transaction as a reportable sale and thereby overstated its net

income and understated its deficit in retained earnings on its

1968 Form 10-K and continued the understatement of its deficit

in retained earnings on its 1969 Form 10-K. The Commission

concluded that the proper accounting treatment, following the

substance rather than the form of the transaction, should have

recognized that Major obtained nothing more than a small de32 One of these decisions (The Susquehanna Corporation, Securities Exchange Act Release No. 8933), issued near the beginning of the year, was

described in the 36th Annual Report, at p. 44.

33 Securities Exchange Act Release No. 9137 (April 8, 1971).
52 SECURITIES AND EXCHANGE COMMISSION

posit in exchange for an option to purchase. Pursant to Major's

offer of settlement in which it consented to findings that the

annual reports were deficient, the Commission ordered Major to

file correcting amendments and to send copies of the Commission's

Findings, Opinion and Order to all of its stockholders.

Civil Actions.-The Exchange Act empowers the Commission

to bring civil actions in Federal district courts to enjoin violations

of the provisions of Sections 12, 13 or 15(d) of that Act or to

compel affirmative compliance with those provisions. During the

fiscal year 12 actions to compel such compliance were instituted.

In one case a default judgment was entered against the issuer,34

and the others were pending as of the end of the year.

PROXY SOLICITATIONS

Scope and Nature of Proxy Regulation.-Regulation 14A under

the Exchange Act, implementing Section 14(a) of that Act,

governs the manner in which proxies or other authorizations may

be solicited from the holders of securities registered under Section

12 of that Act, whether for the election of directors, approval of

other corporate action, or some other purpose." It requires that

in any such solicitation, whether by the management or minority

groups, disclosure must be made of all material facts concerning

the matters on which security holders are asked to vote, and they

must be afforded an opportunity to vote "yes" or "no" on each

matter other than elections. The regulation also provides, among

other things, that where the management is soliciting proxies, a

security holder desiring to communicate with other security

holders may require the management to furnish him with a list

of all security holders or to mail his communication to security

holders for him. A security holder may also, subject to certain

limitations, require the management to include in its proxy material any appropriate proposal which he wants to submit to a

vote of security holders. Any security holder or group of security

holders may at any time make an independent proxy solicitation

upon compliance with the proxy rules, whether or not the management is making a solicitation. Certain additional provisions of

the regulation apply where a contest for control of the management of an issuer or representation on the board is involved.

Copies of proposed proxy material must be filed with the Com34 SEC v. Continental Travel, Inc., D.C.D.C.,Civil Action No. 468-71.

35 This regulation also applies to security holders of registered publicutility holding companies, their subsidiaries and registered investment companies.
THIRTY-SEVENTH ANNUAL REPORT 53

mISSIOnin preliminary form prior to the date of the proposed

solicitation. Where preliminary material fails to meet the prescribed disclosure standards, the management or other group

responsible for its preparation is notified informally and given

an opportunity to correct the deficiencies in the preparation of

the definitive proxy material to be furnished to security holders.

Under Section 14(c) of the Act, issuers of securities registered

under Section 12 must, in accordance with rules and regulations

prescribed by the Commission, transmit information comparable

to proxy material to security holders from whom proxies are not

solicited with respect to a stockholders' meeting. Regulation 14C

implements this provision by setting forth the requirements for

"information statements."

Statistics Relating to Proxy and Information Statements.-

During the 1971 fiscal year, 6,152 proxy statements in definitive

form were filed, 6,132 by management and 20 by nonmanagement

groups or individual stockholders. In addition, 126 information

statements were filed. The proxy and information statements

related to 5,942 companies, some 316 of which had a second

solicitation during the year, generally for a special meeting not

involving the election of directors.

There were 5,864 solicitations of proxies for the election of

directors, 383 for special meetings not involving the election of

directors, and 25 for assents and authorizations.

The votes of security holders were solicited with respect to the

following types of matters, other than the election of directors:

Mergers, consolidations, acquisitions of businesses, purchases and

sales of property, and dissolution of companies 530

Authorizations of new or additional securities, modifications of

existing securities, and recapitalization plans (other than mergers, consolidations, etc.) 1,698

Employee pension and retirement plans (including amendments to

existing plans) 58

Bonus or profit-sharing and deferred compensations arrangements

(including amendments to existing plans and arrangements) __ 153

Stock option plans (including amendments to existing plans) -___ 882

Stockholder approval of the selection by management of independent auditors 2,439

Miscellaneous amendments to charters and by-laws, and miscellaneous other matters (excluding those listed above) 2,419

Stockholders' Proposals.-During the 1971 fiscal year, 489

proposals submitted by 46 stockholders were included in the proxy

statements of 204 companies under Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of
54 SECURITIES AND EXCHANGE COMMISSION

security holders were resolutions relating to amendments to

charters or by-laws to provide for cumulative voting for the

election of directors, preemptive rights, limitations on the grant

of stock options to and their exercise by key employees and management groups, the sending of a post-meeting report to all stockholders, and limitations on charitable contributions.

A total of 113 additional proposals submitted by 28 stockholders

was omitted from the proxy statements of 48 companies in

accordance with Rule 14a-8. The principal reasons for such omissions and the number of times each such reason was involved

(counting only one reason for omission for each proposal even

though it may have been omitted under more than one provision

of Rule 14a-8) were as follows:

Reason for Omission of Proposals

Number

Concerned a personal grievance against the company 29

VVithdra~ by proponent 26

Not a proper subject matter under State law 6

Related to the ordinary conduct of the company's business 25

Outside scope of rules 8

Not timely submitted 10

Insufficient vote at prior meetings 9

Proxy Contests.-During the 1971 fiscal year, 31 companies

were involved in proxy contests for the election of' directora. A

total of 720 persons, both management and non-management, filed

detailed statements as participants under the requirements of

Rule 14a-11. Proxy statements in 22 cases involved contests for

control of the board of directors and those in 9 cases involved

contests for representation on the board.

Management retained control in 13 of the 22 contests for control of the board of directors, five were settled by negotiation,

non-management persons won two, and two were pending as of

June 30, 1971. Of the nine cases where representation on the

board of directors was involved, management retained all places

on the board in four contests, opposition won places on the board

in three cases, one was settled by negotiation and one was pending

as of June 30, 1971.

Litigation Relating to Proxy Rules.-In Medical Committee for

Human Rights v. S.E.C.,36 as previously reported.s? the Commission petitioned the Supreme Court for a writ of certiorari to

review a decision of the Court of Appeals for the District of

36432 F. 2d 659 (C.A. D.C., 1970), petition for certiorari granted, 401

U.S. 973 (1971).

37 36th Annual Report, pp. 49-50.
THIRTY-SEVENTH ANNUAL REPORT 55

Columbia Circuit which had held that a refusal of the Commission

to advise a company that the Commission was of the view that

a stockholder proposal should be included in the company's proxy

soliciting material was reviewable. The Dow Chemical Company

had refused to include in its proxy statement for the company's

annual meeting a proposal submitted to it by one of its shareholders,

the Medical Committee for Human Rights. The Commission, in

indicating that it would not institute an enforcement action

against Dow, had not expressed any view with respect to the

reasons given by Dow for its refusal to include the proposal.

The petition was granted on March 22, 1971,38In its brief on

the merits in the Supreme Court the Commission urged that its

determination not to take enforcement action against Dow was

not an "order" within the meaning of the relevant jurisdictional

statute, Section 25 (a) of the Securities Exchange Act, and that

its "no-action" determination was without legal effect or impact.

DISCLOSURE IN CONNECTION WITH TAKEOVER BIDS AND OTHER

LARGE ACQUISITIONS

Sections 13(d) and (e) and 14(d), (e) and (f) oftheSecurities Exchange Act, which were enacted in July 1968, as implemented by rules and regulations adopted by the Commission,

provide among other things for appropriate disclosure in connection with cash tender offers and other large stock acquisitions.

These provisions were designed to close gaps in the full disclosure

provisions of the securities laws and to safeguard the interests of

persons who tender their securities in response to a tender offer.

In December 1970 the statutory provisions were amended, so as

to improve their effectiveness in light of the Commission's experience gained in administering them." The most significant of

the amendments requires the filing of information with respect

to acquisitions of securities by persons who own more than 5

percent of the class, or the making of tender offers or requests for

tenders of equity securities if after consummation thereof the

persons making the tender offer or solicitation would be the

beneficial owner of more than 5 percent of the class. Previously

the percentages were 10 percent in both cases. The amendments

also extended the coverage of Sections 13(d) and 14(d) to insurance companies and made the provisions of Section 14 (d)

applicable to tender offers made by means of a registration statement under the Securities Act. To implement the amendments,

38 401 U.S. 973 (1971).

39 Public Law 91-567.
56 SECURITIES AND EXCHANGE COMMISSION

the Commissionadopted a new rule under the Securities Act and

amended its rules and regulations under Sections 13(d) and

14(d).40

Rule 13d-1 under the Act now requires the filing with the

Commissionof a Schedule 13Dreport by a person or group which

acquires any of a class of equity securities registered pursuant to

Section 12 of the Act, or issued by an insurance company which

would have been required to be so registered except for the exemptions contained in Section 12(g) of the Act, or issued by

a closed-endinvestment company registered under the Investment

CompanyAct of 1940,if such acquisition results in the ownership

by such person or group of more than five percent of such class

of securities, and the acquisitions by such person or group in the

past twelve months exceed 2 percent of such class. During the

1971 fiscal year 514 Schedule 13D acquisition reports were filed.

Rule 14d-l requires the filing of a Schedule 13D report by a person or group making a tender offer, including an exchange offer

pursuant to a registration statement under the Securities Act,

which, if successful, would result in such person or group owning

more than 5 percent of any class of equity securities subject to

Section 14(d). Forty-three Schedule 13D tender offer notices

were filed during the fiscalyear.

In addition, 21 Schedule 14D reports were filed pursuant to

Rule 14d-4 involving solicitations or recommendations in connection with a tender offer by a person other than the maker of

the offer, and 15 statements were filed pursuant to Rule 14f-l.

The latter relate to the replacement of a majority of the board

of directors (otherwise than by stockholder vote) pursuant to an

arrangement or understanding with the person or persons acquiring securities in a transaction subject to Section 13(d) or 14(d)

of the Act. One statement was filed pursuant to Rule 13e-l relating to corporate reacquisitions of securities while the issuer is the

target of a cash tender offer.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Section 16 of the Securities Exchange Act and corresponding

provisions in the Public Utility Holding Company Act of 1935

and the Investment CompanyAct of 1940 are designed to provide

other stockholders and investors generally with information as to

insiders' securities transactions and holdings, and to prevent the

unfair use of confidential information by insiders to profit from

short-term trading in a company'ssecurities.

40 Securities Act Release No. 5126 (January 18,1971).
THIRTY-SEVENTH ANNUAL REPORT 57

Ownership Reports.-Section 16(a) of the Exchange Act requires every person who beneficially owns, directly or indirectly,

more than 10 percent of any class of equity security which is

registered under Section 12, or who is a director or an officer of

the issuer of any such security, to file statements with the Commission disclosing the amount of all equity securities of the issuer

of which he is the beneficial owner and changes in such ownership.

Copies of such statements must be filed with exchanges on which

securities are listed. Similar provisions applicable to insiders of

registered public-utility holding companies and registered closedend investment companies are contained in the Holding Company

Act and Investment Company Act.

During the fiscal year, 94,961 ownership reports (20,666 initial

statements of ownership on Form 3 and 74,295 statements of

changes in ownership on Form 4) were filed with the Commission.

By comparison, during fiscal year 1970, 95,952 such reports were

filed (21,337 initial statements and 74,615 statements of changes).

All ownership reports are made available for public inspection

as soon as they are filed at the Commission's office in Washington

and at the exchanges where copies are filed. In addition, the

information contained in reports filed with the Commission is

summarized and published in the monthly "Official Summary of

Security Transactions and Holdings", which is distributed by the

Government Printing Office to about 10,000 subscribers.

Recovery of Short-Swing Trading Profits.-In order to prevent

insiders from making unfair use of information which they may

have obtained by reason of their relationship with a company,

Section 16(b) of the Exchange Act and corresponding provisions

in the Holding Company Act and Investment Company Act provide for the recovery by or on behalf of the issuer of any profit

realized by insiders (in the categories listed above) from certain

purchases and sales, or sales and purchases, of securities of the

company within any period of less than 6 months. The Commission at times participates as amicus curiae in actions to recover

such profits when it deems it important to present its views regarding the interpretation of the statutory provisions or of the

exemptive rules adopted by the Commission thereunder.

INVESTIGATIONS WITH RESPECT TO REPORTING AND PROXY

PROVISIONS

Section 21 (a) of the Exchange Act authorizes the Commission

to make such investigations as it deems necessary to determine

whether any person has violated or is about to violate any pro-
58 SECURITIES AND EXCHANGE COMMISSION

vision of the Act or any rule or regulation thereunder. The

following investigations were undertaken pursuant to Section

21 (a) in connection with the enforcement of the provisions of

Sections 12, 13, 14 and 15 (d) of the Act and the rules thereunder,

particularly those provisions relating to the filing of annual and

other periodic reports and proxy material:

Pending at beginning of fiscal year 44

Initiated during fiscal year 17

61

Closed during fiscal year 28

Pending at close of fiscal year 33

SUMMARY SUSPENSION OF TRADING

Section 19(a) (4) of the Exchange Act authorizes the Commission summarily to suspend trading in a security listed on a

national securities exchange for up to 10 days if in its opinion the

public interest so requires. Under Section 15 (c) (5) of that Act

the Commission may summarily suspend over-the-counter trading

in any non-exempt security for up to 10 days if it believes that

such action is required in the public interest and for the protection

of investors.

During the 1971 fiscal year, the Commission temporarily

suspended trading in 26 securities, compared to 55 in fiscal 1970

and 33 in fiscal 1969. In four instances exchange-traded securities

were involved and the Commission acted under both Section

19(a)(4) and Section 15(c) (5).41 In each of these cases, the

exchange on which the securities were listed had previously halted

or suspended trading.

In most instances the Commission ordered suspension of trading because adequate information concerning the company was

not available or the Commission learned of information not generally known to the securities community and investors which

indicated the existence of substantial questions concerning the

financial condition or business operations of the company or the

purchase or sale of its securities.

The suspensions involved a wide variety of factual circumstances, as illustrated by the cases described below. In the case

of Rolls-Royce, Ltd.,42 trading in the company's common stock

41 Securities Exchange Act Releases Nos. 9104 (March 10, 1971), 9111

(March 17,1971), 9188 (May 26, 1971) and 9193 (May 27, 1971).

42 Securities Exchange Act Release No. 9104 (March 10, 1971).
THIRTY-SEVENTH ANNUAL REPORT 59

and American Depositary Receipts (ADRs) had been halted by

the American Stock Exchange about a month previously, pending

the release of additional information relating to the company's

financial condition and plans, and the company had announced

that it was going into receivership. Thereafter an active over-thecounter market had developed in Rolls-Royce ADRs. The suspension was ordered after it appeared that the English transfer

registrar and the American depositary for ADRs would close

their books. Once the books were closed, American citizens would

be unable to transfer ADR certificates and to convert ADRs into

common stock or common stock into ADRs.

In the case of Canadian Javelin Limited," the suspension was

ordered because of the unavailability of adequate and accurate

information concerning the extent, quality and commercial feasibility of possible mineral deposits within a mining concession in

Panama owned by a company in which Canadian Javelin owned

an interest and had options to acquire the remaining interest.

Widespread rumors had circulated concerning the concession, and

the prices of Canadian Javelin's securities had increased on a

comparatively high trading volume.

The temporary suspension of trading in the securities of Ecological Science Corporation was ordered because facts coming to

the attention of the Commission indicated that information then

public concerning the company and its financial condition may

have been inaccurate.v' Thereafter, as a result of an action

brought by the Commission, the company, pursuant to court order,

filed a restated annual report for 1969 which indicated substantially lower earnings than previously reported."

Commission releases announcing the terminations of trading

suspensions frequently carry a warning to investors to exercise

care in transactions involving the securities in question, and

remind brokers and dealers of their responsibility under the Federal securities laws for full disclosure of material facts in connection with the solicitation of purchases.

ACCOUNTING AND AUDITING MATTERS

The several Acts administered by the Commission reflect a

recognition by Congress that dependable financial statements of

a company are indispensable to an informed investment decision

regarding its securities. The value of such statements is directly

43 Securities Exchange Act Release No. 9111 (March 17, 1971).

44 Securities Exchange Act Release No. 9188 (May 26, 1971).

45 SEe Securities Exchange Act Release No. 9274 (August 3, 1971).
60 SECURITIES AND EXCHANGE COMMISSION

dependent on the soundness of the judgment exercised in applying

accounting principles and practices in their preparation, and on

the adequacy and reliability of the work done by public accountants who certify the statements. A major objective of the Commission has been to improve accounting and auditing standards

and to assist in the establishment and maintenance of high stanards of professional conduct by certifying accountants. The

primary responsibility for this program rests with the Chief

Accountant of the Commission.

Pursuant to the Commission's broad rulemaking power regarding the preparation and presentation of financial information, it

has adopted a basic accounting regulation (Regulation S-X)

which, together with opinions on accounting principles published

as "Accounting Series Releases," governs the form and content

of financial statements filed under the statutes administered by

the Commission. The Commission has also formulated rules with

respect to accounting for and auditing of brokers and dealers and

has prescribed uniform systems of accounts for companies subject

to the Public Utility Holding Company Act of 1935. The accounting rules and opinions of the Commission and its decisions in

particular cases have contributed to clarification and wider acceptance of the accounting principles and practices and auditing

standards developed by the profession and generally followed in

the preparation of financial statements.

However, the accounting rules and regulations-except for the

uniform systems of accounts which are regulatory reportsprescribe accounting principles to be followed only in certain

limited areas. In the large area of financial reporting not covered

by its rules, the Commission's principal means of protecting investors from inadequate or improper financial reporting is by

requiring a certificate of an independent public accountant, based

on an audit performed in accordance with generally accepted

auditing standards, which expresses an opinion whether the

financial statements are presented fairly in conformity with accounting principles and practices that are recognized as sound

and have attained general acceptance. The requirement that the

opinion be rendered by an independent accountant is designed to

secure for the benefit of public investors the detached objectivity

of a knowledgeable professional person not connected with the

management.

The accounting staff examines the financial statements filed

with the Commission to insure that the required standards are

observed and that the accounting and auditing procedures do not
THIRTY-SEVENTH ANNUAL REPORT 61

remain static in the face of changes and new developments in

financial and economic conditions. New methods of doing business,

the formation of new types of business, the large number of

combinations of old businesses, the use of more sophisticated

securities, and other innovations, create accounting problems

which require a constant reappraisal of the procedures.

RELATIONS WITH THE ACCOUNTING PROFESSION AND THE

PUBLIC

In order to keep abreast of changing conditions and in recognition of the need for a continuous exchange of views and information between the Commission's staff and outside accountants

regarding appropriate accounting and auditing policies, procedures and practices for the protection of investors, the staff

maintains continuing contact with individual accountants, other

government agencies, and various professional organizations.

These include the American Accounting Association, the American Institute of Certified Public Accountants (AICP A) , the

American Petroleum Institute, the Financial Analysts Federation,

the Financial Executives Institute, the National Association of

Accountants, and the National Association of Railroad and Utilities Commissioners. Since the AICP A is one of the principal

professional organizations involved in the development and improvement of accounting and auditing standards and practices,

regular liaison is maintained with it through its Committee on

Relations with Securities and Exchange Commission and Stock

Exchanges. Conferences are held with this committee from time

to time at which problems of mutual interest are discussed and

the staff is briefed on the work being done by the Institute's

Committees on Ethics and Auditing Procedures and by its Accounting Principles Board. The Commission's accounting staff

also meets with the Committee on Corporate Reporting of the

Financial Executives Institute to discuss possible improvements

of accounting standards and practices.

As part of the Commission's effort to maintain a continuing

exchange of views with the accounting profession, members of

the Commission and accounting staff members from time to time

address, or participate in panel discussions at, professional society

meetings. In this way the Commission can indicate problem areas

in accounting where it believes the profession can aid in developing solutions. The Chief Accountant also accepts engagements to

discuss the work of the Commission as it relates to accounting at

colleges and universities throughout the country.

Because of its many foreign registrants and the vast and in-
62 SECURITIES AND EXCHANGE COMMISSION

creasing foreign operations of American companies, the Commission has an interest in the improvement of accounting and

auditing principles and procedures on an international basis. To

promote such improvement the Chief Accountant corresponds

with foreign accountants, meets with many who visit this country,

and, on occasion, participates in foreign accounting conferences

or writes for foreign professional journals. For example, in

September 1970 he presented a paper at the First Annual Conference of the British Accounting and Finance Association in

Edinburgh, Scotland.

THE WORK OF THE ACCOUNTING PRINCIPLES BOARD AND

COMMITTEES OF THE AICPA

The Accounting Principles Board sponsors research studies of

problem areas in accounting and formulates formal opinions and

advisory statements for the improvement of accounting standards

and practices. The Board submits drafts of these studies, opinions

and statements to the Chief Accountant for review and comment

prior to their publication, and representatives of the Board confer

with him on projects in progress or under consideration. Standing

committees of the AICP A develop statements on auditing standards and procedures for the guidance of the profession in much

the same manner that Board opinions are developed.

In connection with the development of opinions in major problem areas in accounting, the Board conducts symposiums or formal

hearings in order to obtain the views of representatives of professional groups and governmental organizations, including the

SEC, and other persons concerned with the particular accounting

problems. The Board also maintains liaison with other important

professional associations for coordination of their efforts with

respect to its projects.

Early in the fiscal year the Board published opinions on "Business Combinations" and "Intangible Assets" which deal with

difficult and long-standing problems relating to the accounting

for business combinations and for the intangible assets that are

created in many acquisitions. The Chairman and the Chief Accountant had urged the profession to restudy the principles

applicable to these areas of accounting in order to develop criteria

which would curb abuses that had arisen because of inadequate

restrictions on the choice between the alternatives of purchase or

pooling-of-interests accounting to be accorded business combinations and assure an adequate program of amortization of the

intangible assets or "goodwill" resulting from some of these

transactions.
THIRTY-SEVENTH ANNUAL REPORT 63

The Board issued two other opinions during the fiscal year and

two additional opinions under consideration during the year were

issued in August 1971. One opinion extends the application of the

equity method of accounting for investments in common stocks

to situations in which the investor's interest in the investee may

in general be as low as 20 percent instead of the prior minimum

of 50 percent. Another opinion provides detailed rules for accounting for changes in accounting principles, accounting estimates

and reporting entities, and specifies that an entity should demonstrate that changes which are made in accounting principles will

provide more useful financial information than the prior method

of accounting.

The third opinion, on "Interest on Receivables and Payables,"

provides needed guides for the determination of the effective rates

of interest and the amounts of discount or premium involved when

notes of certain types which are received or issued do not bear

interest or bear an interest rate differing materially from the

prevailing interest rates for comparable notes.

The fourth opinion establishes a requirement for the presentation, as a basic financial statement to be covered in the independent auditor's opinion, of a statement summarizing changes in

financial position when balance sheets and statements of income

and retained earnings are presented, and provides guides for

preparation of the statement. Comparable requirements were also

adopted by the Commission during the year by an amendment to

Regulation S-X, to include a section which specifies the content of

a statement of source and application of funds.v' and by amendments to registration and annual report forms under the securities

acts to require the inclusion of such statements."

The Board has plans to develop and issue ten more opinions by

June 30, 1972 on the following subjects: marketable equity securities, leases, tax allocation on unremitted earnings of subsidiaries,

stock compensation plans, repurchase of debt instruments at large

discounts, noncash transactions, diversified companies, extraordinary items, components of a business enterprise, and accounting policies. Other topics on which the Board or its subcommittees

are working with a view to issuing opinions are the following:

interim financial statements, common stock equivalents, account46 Accounting Series Release No. 117 (October 14,1970).

47 Securities Act Release Nos. 5100 (November 12, 1970) and 5135 (February 26, 1971); Securities Exchange Act Release Nos. 8996 (October 14,

1970) and 9000 (October 21, 1970).

450-484 0 - 72 - 6
64 SECURITIES AND EXCHANGE COMMISSION

ing for land development companies, public utilities, and extractive industries;"

Accounting research studies are in progress on the subjects of

intercorporate investments, research and development, foreign

operations, stockholders' equity, concept of materiality, inventory

pricing, depreciation methods, working capital, asset and liability

valuation, and worldwide financial reporting.

A Statement of the Board on "Basic Concepts and Accounting

Principles Underlying Financial Statements of Business Enterprises," published in October 1970, is intended to provide a basis

for enhanced understanding of the broad fundamentals of financial accounting and for guiding its future development.

The AICP A Committee on Auditing Procedure issued during

the fiscal year Statements on Auditing Procedure on "Confirmation of Receivables and Observation of Inventories" (a revision

of an earlier statement) and "Reports Following a Pooling of

Interests," and in July 1971 issued Statements on "Piecemeal

Opinions" and "Using the Work and Reports of Other Auditors."

This committee is also developing Statements relating to the

short-form report, internal control, comfort letters, and subsequent event procedures, and reporting on Article 5A companies,

i.e., commercial, industrial and mining companies in the promotional, exploratory or development stage that present financial

statements included in filings with the SEC in conformity with

Article 5A of Regulation S-X. The committee is also considering

Statements on the subjects of negative assurance, degrees of

qualification, reporting on price-level financial information, transactions with affiliates, reporting on forecasts, and reliance upon

experts.

Committees of the AICP A are also developing or revising Audit

Guides for the following types of organizations whose financial

statements may be filed with the SEC: stock brokers and dealers,

finance companies, life insurance companies and savings and loan

associations.

OTHER CURRENT DEVELOPMENTS

During the fiscal year the Commission issued three Accounting

Series Releases. One of these, as noted above, added a new section

to Regulation S-X governing the content of statements of source

and application of funds. Funds statements are now required to

48 An Accounting Research Study, "Financial Reporting in the Extractive

Industries," was published in November 1969.
THIRTY-SEVENTH ANNUAL REPORT 65

be included in registration and reporting forms under the Securities Act and Securities Exchange Act.

Another release provided an interpretation regarding the computation of the ratio of earnings to fixed charges which is required

to be shown in certain registration forms under the Securities

Act and is permitted to be shown in certain registration and

report forms under the Securities Exchange Act.49 An additional

interpretation on the subject was issued in August 1971.50

The third release dealt with the accounting for investment

securities by registered investment companies. 51 This and another

release issued shortly after the end of the fiscal year which

amended annual report Form N-1R for management investment

companies 52 are discussed in greater detail in Part V of this

report.P

In May 1971 the Commission invited public comment on a

proposal to amend certain registration and reporting forms and

Regulation S-X to remove the exemption from certification of

financial statements of banks filed under the Securities Act and

the Securities Exchange Act and statements of life insurance

companies filed under the Securities Exchange Act.54 After consideration of the comments received, the Commission, shortly

after the end of the year, adopted amendments which removed

the exemption from certification of financial statements of banks

for fiscal periods ending after November 30, 1971.55 However, the

Commission determined to retain at this time the exemption with

respect to life insurance companies. This will permit the accounting profession in collaboration with the life insurance industry

to complete work now underway to develop and promulgate accounting guidelines for life insurance companies which will enable

the financial statements of such companies to be certified in accordance with generally accepted accounting principles.

In May 1971 the Commission also issued for comment a proposal

to amend certain reporting forms to require registrants to furnish

additional information regarding any unusual material charges or

credits to income; to report a change in the certifying accountants

and the reasons for the change and to request the replaced accountant to furnish a letter to the Commission discussing the

49 Accounting Series Release No. 119 (June 15, 1971).

50 Accounting Series Release No. 122 (August 10, 1971).

51 Accounting Series Release No. 118 (December 23, 1970).

52 Accounting Series Release No. 120 (July 15, 1971).

53 See pp. 150-151, infra.

54 Securities Act Release No. 5149 (May 17,1971).

55 Securities Act Release No. 5172 (July 19, 1971).
66 SECURITIES AND EXCHANGE COMMISSION

reasons; and to report changes in accounting principles and

practices materially affecting the financial statements together

with a letter from the independent accountants regarding the

changes.P" With some modifications, the proposed amendments

were adopted by the Commission in September 1971.57

In August 1971 the Commission issued for public comment a

proposal to revise Articles 1, 2, 3, 4, 5, 9 and 11 and Rules 12-01

to 16 (exclusive of 12-06A), and to omit Rules 12-17 and 12-32,

of Regulation S-X.58 These proposed general revisions, the first

since 1950, represent changes, additions and deletions that have

become necessary as a result of changing conditions over the

years. Committees of the AICP A and Financial Executives Institute submitted many helpful suggestions for the proposed

revisions. The Commission's Disclosure Study Group had also

recommended certain revisions, particularly with respect to the

schedules required under Rule 12. In connection with Article 9.

which pertains to bank holding companies and banks, representatives of the Federal bank regulatory agencies also submitted

suggestions for revisions.

EXEMPTIONS FOR SECURITIES OF INTERNATIONAL BANKS

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Section 15 of the Bretton Woods Agreement Act, as amended,

exempts from registration under both the Securities Act and the

Securities Exchange Act securities issued, or guaranteed as to

both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such

securities as the Commission determines to be appropriate in

view of the special character of the Bank and its operations, and

necessary in the public interest or for the protection of investors.

Pursuant to this authority, the Commission has adopted rules

requiring the Bank to file quarterly reports and also to file copies

of each annual report of the Bank to its Board of Governors. The

Bank is also required to file reports with the Commission in

advance of any distribution in the United States of its primary

obligations. The Commission, acting in consultation with the

National Advisory Board on International Monetary and Finan56 Securities Exchange Act Release No. 9169 (May 6, 1971).

57 Securities Exchange Act Release No. 9344 (September 27, 1971).

58 Securities Act Release No. 5177 (August 20,1971).
THIRTY-SEVENTH ANNUAL REPORT 67

cial Problems, is authorized to suspend the exemption at any

time as to any or all securities issued or guaranteed by the Bank

during the period of such suspension. The following summary

of the Bank's activities reflects information obtained from the

Bank.

During the year the Bank made 78 loans totaling $1,896 million

in 41 countries, compared with a total of $1,680 million the

previous year.

Net income for the year was $212 million, virtually unchanged

from the previous year. The Bank's Executive Directors recommended to the Board of Governors and the Board has subsequently

approved that $110 million be transferred as a grant to its affiliate, the International Development Association. The remaining

portion of the year's net earnings, amounting to approximately

$102 million, will be transferred to the Bank's Supplemental

Reserve, increasing it to $1,254 million. Total reserves of the

Bank, including the Special Reserve, will amount to $1,546 million.

Gross income for fiscal 1971 aggregated $578 million including

$187 million income from investments, $384 million income from

loans and $7 million income from other sources. Income from

investments was $38 million higher than in the prior year as a

result of both a higher level of investments and a continuing high

level of yields. Income from loans was $39 million higher primarily due to expansion of the Bank's loan portfolio. The interest

charged on new loans increased during the fiscal year from 7

percent to 71,4percent.

Expenses in fiscal 1971 totaled $366 million compared with

$291 million the previous year. Interest on the Bank's own bonds

and other financial costs amounted to $309 million, an increase of

$63 million over fiscal 1970 reflecting both increased borrowings

and higher interest rates. Administrative expenses were $11 million higher at a total of $56 million, after deduction of $20.1

million in management fees charged to the International Development Association, and of $1.7 million of "Service and Support

Fees" charged to the affiliated International Finance Corporation.

The Bank increased its investments in liquid securities during

the year by $483 million to an aggregate of $2,203 million at

June 30, 1971. Other liquid investments held in the Bank's Special

Reserve, on the same date, amounted to $292 million, bringing its

liquid securities to a total of $2,495 million. This compares with

a total of $2,012 million in similar holdings at June 30, 1970.

Repayments of principal on loans received by the Bank during

the year amounted to $319 million, and a further $146 million
68 SECURITIES AND EXCHANGE COMMISSION

was repaid to purchasers of parts of loans. Total principal repayments to the Bank through June 30, 1971, aggregated $4,227

million, including $2,445 million repaid to the Bank and $1,782

million repaid to purchasers of borrowers' obligations sold by

the Bank.

Outstanding funded debt of the Bank was $5,424 million on

June 30, 1971. During the year the Bank borrowed $400 million

in the United States market; $375 million through the issuance

of 2-year U.S. dollar bonds to Central Banks and other governmental agencies in some 70 countries; DM 1,078 million (U.S.

$294.5 million) in Germany; 79 billion yen (U.S. $291 million)

from the Bank of Japan; f120 million (U.S. $33.2 million) in the

Netherlands; L10 million (U.S. $28 million) in Libya, the Bank's

first borrowing in that country; and SwF 75 million (U.S. $17.5

million) in Switzerland. The Bank also issued $43.5 million of

bonds that had been sold in a previous year under delayed delivery

contracts.

These borrowings, in part, refunded maturing issues amounting

to the equivalent of $490 million. After retirement of U.S. $58

million equivalent of obligations retired through sinking fund

and purchase fund operations, the Bank's outstanding funded

debt showed an increase of $856 million from the previous year.

During the fiscal year the Bank's authorized capital was increased by $3,000 million to $27,000 million to enable the Bank

to accept special increases in capital stock totaling up to $2,222

million by 75 member countries. To June 30, 1971, nine members

had taken up their special increases in subscriptions and a further

13 were taking the necessary steps to do so. On June 30, 1971,

aggregate subscribed capital of the Bank was $23,871 million of

which $2,387.1 million had been paid in to the Bank and the

remaining $21,483.9 million was subject to call only to meet the

obligations of the Bank.

INTER.AMERICAN DEVELOPMENT BANK

The Inter-American Development Bank Act, which authorizes

the United States to participate in the Inter-American Development Bank, provides an exemption for certain securities which

may be issued or guaranteed by the Bank similar to that provided

for securities of the International Bank for Reconstruction and

Development. Acting pursuant to this authority, the Commission

adopted Regulation lA, which requires the Bank to file with the

Commission substantially the same information, documents and

reports as are required from the International Bank for Reconstruction and Development. The following summary of the Bank's
THIRTY-SEVENTH ANNUAL REPORT 69

activities reflects information submitted by the Bank to the Commission.

During the year ended June 30, 1971, the Bank made 19 loans

totaling the equivalent of $230,510,000 from its Ordinary Capital

resources, bringing the net total of loan commitments outstanding,

after cancellations, to 212, aggregating $1,566,546,787. During

the year, the Bank sold or agreed to sell $2,280,875 in participations in the aforesaid loans, all such participations being without

the guarantee of the Bank. The loans from the Bank's Ordinary

Capital resources were made in Argentina, Brazil, Colombia,

Ecuador, Jamaica, Mexico, Peru, Uruguay and Venezuela.

During the year the Bank also made 37 loans totaling the

equivalent of $415,830,000 from its Fund for Special Operations,

bringing the gross total of loan commitments outstanding to 292,

aggregating $2,206,758,846. The Bank made no loans during the

year from the Social Progress Trust Fund, which it administers

under an agreement with the United States, leaving the gross

total of loan commitments outstanding from that Fund at 116,

aggregating $494,191,039.

On June 30, 1971, the outstanding funded debt of the Ordinary

Capital resources of the Bank was the equivalent of $948,641,000,

reflecting a net increase in the past year of the equivalent of

$174,079,000. During the year the funded debt was increased

through public bond issues in Austria, France, Germany, Netherlands, Switzerland and the United States totaling the equivalent

of $175,053,000 as well as private placements in Japan, Latin

America, Norway, Sweden and the United Kingdom totaling the

equivalent of $69,263,000. The revaluation of the Swiss franc and

Austrian schilling in May 1971 resulted in an increase in the

funded debt in the equivalent of $3,323,000. The funded debt was

decreased through the retirement of $43,350,000 of short-term

dollar bonds, SF 50,000,000 ($11,434,000) representing a shortterm loan in Switzerland and $1'8,776,000 through sinking fund

purchases and scheduled debt retirement.

The subscribed ordinary capital of the Bank on June 30, 1971

was the equivalent of $2,763,020,000 of which $2,374,540,000

represented callable capital.

ASIAN DEVELOPMENT BANK

The Asian Development Bank Act, adopted in March 1966,

authorized United States participation in the Asian Development

Bank and provides an exemption for certain securities which may

be issued or guaranteed by the Bank similar to the exemptions
70 SECURITIES AND EXCHANGE COMMISSION

accorded the International Bank for Reconstruction and Development and the Inter-American Development Bank. Acting pursuant

to this authority the Commission has adopted Regulation AD

which requires the Bank to file with the Commission substantially

the same information, documents and reports as are required

from these banks. The Bank has 36 members, including 22 countries in the region and 14 nonregional developed countries with

subscriptions totaling $1,005 million. Of the $502.7 million of

paid-up shares subscribed, $490.3 million had matured by June

30, 1971.

As of June 30, 1971, Australia, Belgium, Canada, Denmark,

Germany, Italy, Japan, the Netherlands, and the United Kingdom

had contributed or pledged a total of $174,645,944 to the Bank's

Special Funds. In addition to the $14.575 million set aside from

Ordinary Capital in 1969 by the Board of Governors for Special

Funds purposes, another $9.935 million were set aside in April

1971, making a total of $24.510 million set aside. In addition, the

United States Congress is considering a proposal for a $100 million U.S. contribution to the Bank's Special Funds and there have

been indications from other countries of additional contributions

in 1971 and thereafter.

In November 1970, the Bank sold in Japan 6 billion yen

($16,667 million) 7.4 percent bonds. In April 1971, the Bank sold

$20 million U.S. bonds to regional central banks at 5.5 percent,

sold in Switzerland 40 million francs ($9.147 million U.S.) 7

percent bonds, and sold $25 million notes in the United States at

61;2 percent and $25 million bonds in the United States at 7%

percent.

As of June 30,1971, the Bank had made 45 loans from Ordinary

Capital resources totaling $341.035 million, and had approved 21

loans totaling $71.208 million from its Special Funds resources.

As of June 30, 1971, a number of technical assistance grants,

totaling $7,422,546, had been made or pledged to the Bank, by

Australia, Belgium, Canada, Ceylon, China, Denmark, Finland,

Germany, India, Japan, Korea, Netherlands, New Zealand, Pakistan, Switzerland, United Kingdom and the United States, including $1 million for the Southeast Asia Regional Transport Survey.

Norway has also indicated its intent to contribute. The Bank has

provided technical assistance to 15 countries through 53 projects

amounting to over $7 million, as well as contributing to important

regional projects.

TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures, notes, and similar
THIRTY-SEVENTH ANNUAL REPORT 71

debt securities offered for public sale, except as specifically exempted, be issued under an indenture which meets the requirements of the Act and has been duly qualified with the Commission.

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the

Securities Act of securities to be issued under a trust indenture

subject to the Trust Indenture Act is not permitted to become

effective unless the indenture conforms to the requirements of

the latter Act designed to safeguard the rights and interests of

the purchasers. Moreover, specified information about the trustee

and the indenture must be included in the registration statement.

The Act was passed after studies by the Commission had

revealed the frequency with which trust indentures failed to

provide minimum protections for security holders and absolved

so-called trustees from minimum obligations in the discharge of

their trusts. It requires that the indenture trustee be free of

conflicting interests which might interfere with the faithful exercise of its duties in behalf of the purchasers of the securities.

It requires also that the trustee be a corporation with a minimum

combined capital and surplus; imposes high standards of conduct

and responsibility on the trustee; precludes preferential collection

of certain claims owing to the trustee by the issuer in the event

of default; provides for the issuer's supplying evidence to the

trustee of compliance with indenture terms and conditions such

as those relating to the release or substitution of mortgaged

property, issuance of new securities or satisfaction of the indenture; and provides for reports and notices by the trustee to

security holders. Other provisions of the Act prohibit impairment

of the security holders' right to sue individually for principal

and interest except under certain circumstances, and require the

maintenance of a list of security holders which may be used by

them to communicate with each other regarding their rights.

Number of Indentures Filed Under the Trust Indenture Act of 1939

Indentures pending June 30, 1970

Indentures filed durrng the fiscal year

Total for disposal

Disposition durmg fiscal year: Indentures qualified

Indentures pending June 30, 1971

Total - --- -- -- -----

Number

filed

135

601

736

574

162

736

Aggregate

amount

$ 3,341,042,617

27,187,350,860

30,528,393,477

27,239,456,300

3,288,937,177

30,528,393,477

_

_

_

_

_

PART III

REGULATION OF SECURITIES MARKETS

In addition to the disclosure provisions discussed in Part II of

this report, the Securities Exchange Act of 1934 gives the Commission significant responsibilities with respect to the securities

markets and persons engaged in the securities business. Among

other things, it requires securities exchanges to register with the

Commission and provides for Commission supervision of the selfregulatory responsibilities conferred on registered exchanges. The

Act also provides for the registration and regulation of brokers

and dealers doing business in the over-the-counter markets, and

grants to registered associations of brokers or dealers self-regulatory functions under the Commission's supervision. In addition,

it contains provisions designed to prevent fraudulent, deceptive,

and manipulative acts and practices on the exchanges and in the

over-the-counter markets.

This and the next part of the report deal with developments

and actions taken in these areas during the 1971 fiscal year.

Statistical information concerning the securities markets is presented in this part. Certain recent developments of particular

significance are discussed in Part I.

REGULATION OF EXCHANGES

REGISTRATION AND EXEMPTION OF EXCHANGES

The Securities Exchange Act requires an exchange to be registered with the Commission as a national securities exchange

unless the Commission exempts it from registration because of

the limited volume of transactions effected. As of June 30, 1971,

the following 12 stock exchanges were registered:

American Stock Exchange

Boston Stock Exchange

Chicago Board of Trade1

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

New York Stock Exchange

Pacific Coast Stock Exchange

Philadelphia-Baltimore-Washington

Stock Exchange

Salt Lake Stock Exchange

Spokane Stock Exchange

1The Executive Committee of the Board of Trade of the City of Chicago

adopted a resolution on March 29, 1971 to close the Board's securities market.

73
74 SECURITIES AND EXCHANGE COMMISSION

The Honolulu Stock Exchange and the Richmond Stock Exchange were exempt from registration during the fiscal year.

REVIEW OF EXCHANGE RULES AND PROCEDURES

A major aspect of the Commission's supervisory function with

respect to national securities exchanges is the continuous review

by its Division of Trading and Markets of the existing rules,

regulations, procedures, forms, and practices of all exchanges.

Such review is necessary in order to: (1) ascertain the effectiveness of the application and enforcement by the exchanges of their

rules; (2) determine the adequacy of exchange rules and of

related statutory provisions and rules administered by the Commission in light of changing market conditions; and (3) anticipate and define problem areas so that members of the

Commission's staff can meet with exchange representatives in an

effort to work out salutary procedures within the framework of

cooperative regulation. In addition, Rule 17a-8 under the Exchange Act provides that each national securities exchange must

file with the Commission a report of any proposed amendment or

repeal of, or addition to, its rules and practices not less than 3

weeks (or such shorter period as the Commission may authorize)

before taking any action to effectuate the change. These proposals

are submitted for review and comment to the Branch of Regulation and Inspections of the Division of Trading and Markets.

During the 1971 fiscal year, 163 changes in exchange rules and

practices were submitted to the Commission pursuant to Rule

17a-8. Among the more significant were:

1. A significant revision by the New York Stock Exchange

(NYSE) of its net capital rule. The new provisions are to be

implemented in phases over a period of a year. The revision

represents a strengthening of the financial responsibility required

of the Exchange's members.

2. An amendment to the Pacific Coast Stock Exchange's net

capital rule to reduce the allowable ratio of aggregate indebtedness to net capital from 20:1 to 15 :1.

3. An amendment to the constitution of the Boston Stock Exchange to increase the number of Governors of the Exchange

from sixteen to seventeen and provide that one Governor be an

officer or director of a company which has a class of stock listed

on the Exchange.

4. Revocation by the American Stock Exchange of its Special

Trust Fund. The Trustees of the Fund authorized payment of the
THIRTY-SEVENTH ANNUAL REPORT 75

approximately $3,000,000 in the Fund to the Securities Investor

Protection Corporation for its initial flnancing.s

5. Amendments to the rules of the Detroit and PhiladelphiaBaltimore-Washington Stock Exchanges to facilitate the membership of broker-dealer firms which are market-makers in the "third

market."

The New York Stock Exchange incorporated in February 1971.

The Commission subsequently indicated to the Exchange that to

the extent that the chief purpose of incorporation was to end

the unlimited liability each member of the Exchange had for

acts and omissions of the Exchange, there is now a greater

burden on the Exchange to provide adequate resources for satisfying its responsibilities under the Exchange Act.

Litigation Relating to Review of Exchange Rules.-In Thill v.

The New York Stock Exchange,3 the Court of Appeals for the

Seventh Circuit held that New York Stock Exchange rules are

not immune from challenge under the federal antitrust laws by

reason of the Commission's power to review such rules pursuant

to Section 19 (b) of the Securities Exchange Act. The court ruled

that the Exchange must demonstrate that any rule having anticompetitive effects is necessary to the operation and effectiveness

of the Act. The case was remanded to the district court where it

is now pending. The Commission has intervened in the case,

pursuant to an order of the district court entered November 16,

1971.

In Independent Broker-Dealers' Trade Association v. S.E.C ..

a trade association of broker-dealers, none of which are members

of the New York Stock Exchang-e, filed suit against the Commission seeking declaratory and injunctive relief against what they

characterized as a Commission "direction or order" to the Exchange which resulted in the elimination of customer-directed

give-ups, a practice of splitting brokerage commissions that in

some cases benefited members of the Association. In May 1968,

as part of its review of various aspects of the commission rate

structures of national securities exchanges, the Commission made

a request, pursuant to Section 19 (b) of the Securities Exchange

Act, that the Exchange adopt an interim rate structure incorporating a volume discount or, in the alternative, that it eliminate

fixed rates of commission for certain large transactions.' The

Exchange in reply to this request made a counter-proposal which

2 See Part I of this report for a discussion of SIPC.

:1433 F.2d 264 (C.A. 7, 1970), certiorari denied, 401 U.S. 994 (1971).

4 See 35th Annual Report, pp. 6-8.
76 SECURITIES AND EXCHANGE COMMISSION

included the abolition of customer-directed give-ups. The Commission regarded this counter-proposal as acceptable, and the

proposals were adopted by the Exchange effective December 5,

1968.

The Association challenged the Commission's authority allegedly to have ordered the Exchange to abolish give-ups. The

district court dismissed the complaint for lack of jurisdiction,

holding that the Commission had entered no "order," but the

Court of Appeals for the District of Columbia Circuit reversed

in part," stating that the Commission had exerted "pressure"

on the Exchange to prohibit give-ups and that such pressure

constituted reviewable "agency action." On the merits, however,

the court rejected the Association's contention that the Commission had acted improperly and remanded the case to the district court with directions to enter summary judgment in favor

of the Commission.

INSPECTIONS OF EXCHANGES

Another aspect of the Commission's supervision of exchange

self-regulation is the program of regular inspections of various

phases of exchange activity conducted by the Branch of Regulation and Inspections in the Division of Trading and Markets.

These inspections enable the Commission to recommend, where

appropriate, improvements designed to increase the effectiveness

of self-regulation. In cases where it appears that revisions in

internal policies are desirable, the Commission's staff communicates its views to the particular exchange and discusses the

matters with exchange personnel in an effort to arrive at appropriate solutions.

In the 36th Annual Report, mention was made of an inspection

of the New York Stock Exchange relating to the enforcement and

interpretation of its net capital rule, and of inspections of the

New York and American Stock Exchanges relating to the activities of specialists including performance, capital and financing

arrangements. Follow-up conferences and correspondence continued into fiscal 1971. In the specialist area, the staff sent

recommendations for improvement to the NYSE. The inspection

of the American Stock Exchange resulted in general commendation although some recommendations for improvement were made

by the staff.

As a result of two major inspections relating to the enforcement

5442 F.2d 132 (C.A.D.C., 1971), certiorari denied, 4{) U.S.L.W. 3162 (Oct.

12,1971).
THIRTY-SEVENTH ANNUAL REPORT 77

and interpretation of the NYSE net capital rule, numerous meetings and a lengthy exchange of correspondence between the staff

of the Commission and the staff of the NYSE, the Exchange, as

noted above, adopted a more stringent net capital rule, which is

expected to enhance the financial strength of its members.

In fiscal 1971, the Branch of Regulation and Inspections conducted nine formal inspections. These included general inspections

of the Boston, Midwest, Cincinnati, Detroit and Pacific Coast

Exchanges, and inspections of the New York and American Stock

Exchanges limited to exchang-e activities in specific areas.

Recent inspections of the New York Stock Exchange centered

upon a comprehensive review of its surveillance and enforcement

programs. The staff inspected two divisions of the NYSE which

exercise disciplinary control over members and member firms,

the Conduct Division and the Advertising Department. The Conduct Division conducts investigations into alleged rule violations,

but does not exercise any surveillance over member firms. It investigates and develops disciplinary cases only when information

is disclosed or discovered by other sources. The Advertising Department reviews all member firm advertising prior to publication

for compliance with Exchange standards. Several of the recommendations based on the inspections, relating- primarily to enforcement activities, were adopted by the Exchange.

An inspection was also made of the disciplinary programs of

the American Stock Exchange, which are focused on the approximately forty members who are not also members of the NYSE

Generally speaking, the inspection team found an effective disciplinary program. Staff recommendations for certain improvements have been accepted.

DELISTING OF SECURITIES FROM EXCHANGES

Under Section 12 (d) of the Securities Exchang-e Act and the

Commission's Rule 12d2-2 thereunder, securities may be stricken

from listing and registration upon application by an exchang-e, or

withdrawn from listing and registration upon application by an

issuer, in accordance with the rules of the exchange and upon

such terms as the Commission may impose for the protection of

investors.

During the fiscal year ended June 30, 1971, the Commission

granted applications by exchanges for the removal of 62 stock

issues, representing- 56 issuers, and 58 bond issues from listing

and registration. The distribution of these removals among exchanges was as follows:
78 SECURITIES AND EXCHANGE COMMISSION

Stocks Bonds

American Stock Exchange 20 5

Boston Stock Exchange 1

Cincinnati Stock Exchange 1

Detroit Stock Exchange 4

Midwest Stock Exchange 4

National Stock Exchange 6

New York Stock Exchange 13 53

Pacific Coast Stock Exchange 7

Philadelphia-Baltimore-Washington Stock Exchange; 1

Richmond Stock Exchange 2

Salt Lake Stock Exchange 3

Total 62 58

Delisting applications by exchanges are generally based on the

ground that continued listing is no longer appropriate because of

a reduced number of shares of the issue in public hands or an

insufficient number of shareholders (sometimes resulting from

acquisitions or mergers) ; the low market value of outstanding

shares; insufficient trading volume on the exchange; failure to

meet the exchange's requirements as to earnings or financial condition ; failure to file required reports with the exchange; cessation

of operations by the issuer; or a combination of these factors.

Seven applications by issuers to withdraw securities from listing and registration were granted during the year, resulting in

the removal of two securities each from the National and Philadelphia-Baltimore- Washington Stock Exchanges, and three securities from the Salt Lake Stock Exchange.

Litigation Relating to Delisting.-In Winkleman v. New York

Stock Exchange, suit was brought by Scientific Resources Corporation and one of its shareholders to enjoin the New York

Stock Exchange from continuing to suspend trading of the company's stock and from initiating steps to delist the stock. The

district court denied plaintiffs' motion for preliminary injunction

and dismissed the complaint, concluding that the Commission had

exclusive jurisdiction over delisting procedures. On appeal to the

Court of Appeals for the Third Circuit plaintiffs argued that

the Exchange's delisting rules were applied arbitrarily and without opportunity for fair hearing, constituting a violation of the

federal antitrust laws. In a brief amicus curiae in support of the

lower court's action, the Commission urged that its procedures

on an application by an exchange for delisting are sufficient to

guarantee the company and its shareholders due process and a

forum for the consideration of any allegations of unfairness or

arbitrariness.
THIRTY-SEVENTH ANNUAL REPORT 79

The court of appeals affirmed the denial of preliminary relief,

but remanded the case to the district court in order to afford

plaintiffs an adequate opportunity to be heard on the Exchange's

motion to dismiss."

STATISTICS RELATING TO SECURITIES TRADED ON EXCHANGES

NUMBER OF ISSUERS AND SECURITIES

As of June 30, 1971, 5781 stock and bond issues, representing

3220 issuers, were admitted to trading on securities exchanges in

the United States. Of these, 5650 securities issues (3623 stock

issues and 2027 bond issues), representing 3130 issuers, were

listed and registered on national securities exchanges, the balance

consisting primarily of securities admitted to unlisted trading

privileges and securities listed on exempted exchanges. The listed

and registered issues included 1915 stock issues (52.8 percent of

the total) and 1827 bond issues (90 percent), representing 1652

issuers (52.8 percent), which were listed and registered on the

New York Stock Exchange. Table 4 in the Appendix to this report

contains comprehensive statistics as to the number of securities

issues admitted to exchange trading and the number of issuers

involved.

During the 1971 fiscal year, 284 issuers listed and registered

securities on a national securities exchange for the first time,

while the registrations of all securities of 132 issuers were terminated. A total of 742 applications for registration of securities

on exchanges was filed.

MARKET VALUE OF SECURITIES AVAILABLE FOR TRADING

As of December 31, 1970, the market value of stocks and bonds

admitted to trading on U.S. stock exchanges was approximately

$796 billion. The tables below show various components of this

figure.

With reference to the tables, it should be noted that issues

traded on either the New York or American Stock Exchange are

not traded on the other of those two exchanges. Many of these

issues are, however, also traded on the so-called regional exchanges. The figures below for "other exchanges" show only the

number of issues traded solely on the regional exchanges. The

figures in the tables exclude issues suspended from trading and

a few inactively traded issues for which quotations were not

available.

6 445 F .2d 786 (C.A. 3, 1971).

450-484 0 - 72 - 7
80 SECURITIES AND EXCHANGE COMMISSION

Number

of issUes

Market value Dec. 31. 1970

(millions)

Stocks: New York Stock Exchange

Amencan Stock Exchange

Exclusively on other exchanges

Total stocks

Bonds' New York Stock Exchange

Amencan Stock Exchange

ExclUsively on other exchanges

Total bonds

Total stocks and bonds

1.840

1,222

471

3.533

1.729

169

24

1.922

5.455

$636.380

39.536

4.754

680.670

112.622

2,045

287

114.954

795.624

The number and market value as of December 31, 1970 of preferred and common stocks separately were as follows:

Preferred stocks Common stocks

Market Market

value value

Number (millions) Number (millions)

New York Stock Exchange ______ 510 $25.455 1.330 $610.925 American Stock Exchange _______ 71 1.094 1.151 38.442

Exclusively on other

exchanges ---------------------- 121 244 350 4.510

Total --- -------------------- 702 26.793 2,831 653.877

The 3,533 common and preferred stock issues represented over

19.6 billion shares.

The New York Stock Exchange has reported aggregate market

value of all stocks listed thereon monthly since December 31, 1924,

when the figure was $27.1 billion. The American Stock Exchange

has reported totals as of December 31 annually since 1936.Aggregates for stocks exclusively on the remaining exchanges have been

compiled as of December 31 annually since 1948. The available

data since 1936appear in Table 5 in the Appendix of this Annual

Report. Itshould be noted that changes in aggregate market value

over the years reflect not only changes in prices of stocks but also

such factors as new listings, mergers into listed companies, removals from listing and issuance of additional shares of a listed

security.

VOLUME OF SECURITIES TRADED

The number of shares traded on all exchanges in calendar 1970

(including stocks, rights and warrants) was over 4.8 billion, com.

pared to 5.1 billion shares traded in 1969. Dollar value of shares

traded was $132 billion in 1970,or 25 percent less than trading in

1969. Bonds with a principal amount of $6.3 billion were traded

in 1970.

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THIRTY-SEVENTH ANNUAL REPORT 81

During the first half of calendar 1971 trading accelerated

markedly-total dollar value of all exchange trading was over

$105 billion, considerably higher than during the same 1970

trading period.

The figures below show the volume and market value of securities traded on all registered and exempt stock exchanges during

calendar 1970 as well as the first six months of 1971. Refer to

Tables 6 and 7 of the Appendix for more comprehensive trading

statistics classifiedby exchanges.

Volume and Value of Trading on All Exchanges

(Amounts in Thousands)

calendar Flrst 6 months

year 1970 1971

Volume: Stocks (shares)

Rights and Warrants (units)

Bonds (principal amount in dollars) s

Market Value (dollars): Stocks

Rights and Warrants

Bonds 4

Total 4

4 Does not include U.S. Government Bonds.

4,540.222

294,207

6,299,546

131,134.394

575.609

4.763,242

136,473,445

3,272,260

147,991

5,157,368

100,261,761

697.540

4,374.887

105,334,188

FOREIGN STOCKS ON EXCHANGES

The estimated market value on December 31, 1970 of all shares

and certificates representing foreign stocks on U.S. stock exchanges was $20.5 billion, of which $16.3 billion represented

Canadian and $4.2 billion represented other foreign stocks.

Foreign Stocks on Exchanges

December 31, canadian Other foreign Total

1970 Issues Value Issues Value Issues Value

Exchange: New York ___ 19 $ 8.830.867.000 14 $3.476,547,000 33 $12,307,414,000 American ____ 48 7.345,741,718 19 762.767.930 67 8.108,509.648 Others Only __ 3 73.495.027 2 6,405,294 5 79,900,321

Total ------ 70 $16,250,103.745 35 $4,245.720,224 105 $20,495,823,969

The total of 105 stock issues represents a decline of one issue

over the number a year earlier. There has been a steady decline

since 1960 when 173 foreign issues were being traded.

Trading in foreign stocks on the American Stock Exchange fell

from 10.70percent of aggregate share volumeon that exchange in

1969 to 9.11 percent in 1970. Similarly, on the New York Stock

Exchange trading in foreign stocks in relation to aggregate share

volume declined from 3.4 percent in 1969to 2.9 percent in 1970.

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82 SECURITIES AND EXCHANGE COMMISSION

COMPARATIVE EXCHANGE STATISTICS

The number of stocks listed on exchanges increased by four

percent during fiscal 1971 to total 3,740 issues. The number of

stocks on both the New York and American Stock Exchanges

increased, but stocks listed exclusively on other exchanges decreased. Refer to Appendix Table 4 for more detail on exchange

listings.

Net Number 0/ Stocks on E:r;changes

New York American Exclusively Total stocks June 30 Stock Stock on other on exchanges

Exchange Exchange exchanges

1940_________________ 1,242 1.079 1.289 3,610 1945_________________ 1,293 895 951 3.139 1950 _________________ 1.484 779 775 3,038 1955 _________________ 1,543 815 686 3,044 1960 _________________ 1,532 931 555 3,018 1961 _________________ 1,546 977 519 3,042 1962 _________________ 1,565 1,033 493 3,091 1963 _________________ 1,579 1,025 476 3,080 1964 _________________ 1,613 1,023 463 3,099 1965 _________________ 1,627 1,044 440 3,111 1966 _________________ 1.656 1,054 429 3,139 1967 _________________ 1,693 1,072 415 3,180 1968 _________________ 1,764 1,097 405 3,266 1969 _________________ 1,781 1,168 435 3,384 1970_________________ 1,819 1,194 566 3,579 1971 _________________ 1,925 1,292 523 3,740

The aggregate market value of shares listed on exchanges was

$680.7 billion at the end of calendar 1970. Of this amount, over

93 percent was the value of shares listed on the New York Stock

Exchange. While the value of NYSE listed stock as a proportion

of total listed stock increased in 1970, the percentages attributed

to AMEX listings and to stocks traded exclusively on other exchanges decreased. Appendix Table 5 carries historical data on

value of stocks on exchanges.

Value 0/ Shares Listed on E:r;changes, in Percentages

New York American Exclusively

December 31 Stock Stock on other

Exchange Exchange exchanges

1950________________________ 84.50 12.52 2.98 1955________________________ 86.98 11.35 1.67 1960 ________________________ 91.56 7.22 1.22 196L _______________________ 91.02 7.74 1.24 1962 _______________________ 92.41 6.52 1.07 1963_______________________ 93.12 5.91 0.97 1964 ________________________ 93.59 5.56 0.85 1965 ________________________ 93.77 5.41 0.82 1966 ________________________ 93.81 5.41 0.77 1967_______________________ 92.82 6.58 0.60 1968 ________________________ 91.15 8.06 0.79 1969 _______________________ 92.22 6.99 0.79 1970 ________________________ 93.49 5.80 0.71

The total volume of all exchange transactions in stocks, rights

and warrants is broken down by exchanges in the following tables.

In 1970, share volume on the New York Stock Exchange amounted
THIRTY-SEVENTH ANNUAL REPORT 83

to 3.4 billion shares, up moderately from the 3.2 billion of the

previous year. In terms of dollar value, 1970 New York Stock

Exchange transactions amounted to $103.3 billion, or 20 percent

less than 1969 dollar value. During the first six months of 1971,

however, both share and dollar value on the NYSE were up considerably over the first half of 1970.

On the American Stock Exchange 1970 share volume was 920

million shares or 35 percent below the previous year; AMEX

dollar volume was $14.6 billion, less than half that of the previous

year. In the first half of 1971, American Stock Exchange volume

-both dollar and share volume--advanced from the first half

statistics of 1970. However, the increase was not as strong as

that on the NYSE.

Share and Dollar Volume on E~chang68

Calendar year

New York

Stock

Exchange

American

Stock

Exchange

All other

exchanges Total

Share volume (thousands)

1940

1945

1950

1955

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971 (First 6 months)

285,059

506,564

681,806

909,785

986,878

1,392,573

1,220,854

1,371,808

1,542,373

1,867,223

2,297,884

2,992,805

3,352,169

3,243,333

3,446,448

2,424,266

49,882

163,860

120,908

253,531

320,906

548,161

344,347

354,305

411,450

601,844

756,942

1,320,462

1,608,325

1,417,764

920,125

659,187

42,957

98,595

90,606

158,084

133,263

201,790

146,744

154,686

172,551

201,944

257,558

333,258

448,244

473,898

467,856

336,798

377,898

769,019

893,320

1,321,401

1,441,048

2,142,523

1,711,945

1,880,798

2,126,374

2,671,012

3,312,383

4,646,525

5,408,737

5,134,995

4,834,430

3,420,251

Dollar volume (thousands)

1940

1945

1950

1955

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971 (First 6 months)

7,170,572

13,474,271

18,734,723

32,830,838

37,972,433

52,820,306

47,353,334

54,897,096

60,501,229

73,234,393

98,653,005

125,362,700

144,992,721

129,622,648

103,320,622

79,930,235

646,146

1,759,899

1,493,706

2,657,016

4,235,686

6,863,110

3,736,619

4,844,912

6,127,236

8,874,875

14,647,166

23,491,312

35,479,186

31,036,896

14,636,528

10,234,796

603,065

1,020,382

1,579,855

2,551,253

3,098,484

4,388,207

3,765,941

4,696,065

5,833,285

7,439,825

10,366,272

13,335,199

16,646,050

15,730,215

13,753,053

10,794,270

8,419,783

16,254,552

21,808,284

38,039,107

45,306,603

64,071,623

54,855,894

64,488,073

72,461,750

89,549,093

123,666,443

162,189,211

197,117,957

176,389,759

131,710,203

100,959,301

The NYSE's percent of total exchange volume jumped appreciably in 1970 to 71 percent of share volume and 78 percent of

dollar volume. The gain was at the expense of AMEX volume

which dropped from 28 percent of all exchange share volume in

1969 to 19 percent in 1970 and from 18 to 11 percent of dollar

volume. Other exchange volume increased both as a percent of

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84 SECURITIES AND EXCHANGE COMMISSION 

share and dollar volume. Percentage data for the first six months 

of 1971 are basically similar to the relationships tabulated for 

calendar year 1970.See Appendix Table 7 for further detail. 

Annual Sales of Stock on Ezlchnnges, in Percentages 

Percent of share volme Percent of dollar volume 

Calendar year New York Amerlean All other New York American All other 

1940................. 75.44 13.20 85.17 7.68 7.15 


1945................. 65.87 21.31 11.82 82.75 10.81 6.44 


1950. 76.32 13.54 10.14 85.91 6.85 724 


1955................. 68.85 19.19 11s 86.31 6.98 6.71 


IsBO................. 68.48 ~27 925 W.81 9.35 6.84 


I ................. 64.99 2558 9.43 82.44 10.71 6.85 


1962................. 71.32 20.12 858 86.32 6.81 8.81 


1963................. 72.94 18.64 822 85.19 7.52 729 


1964................. 72.54 19.35 8.11 83.49 8.46 8.05 


1965 ................ 69.91 22.53 81.78 991 8.31 


1966................. 69.37 22.85 7.7856 79.78 11.84 8.38


1867................. 64.41 28.42 7.17 TT.30 14.48 822 


1968................. 61.98 29.74 828 73.56 18.00 8.44 


1969................. 53.16 27.81 73.49 8.91 


1970................. 71.29 19.03 9.68 78.45 lTS0 11.11
 10.44 

1971 (First 6 months) 70.88 19.27 9.85 79.17 10.14 10.89 

I I I I I I 

BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES 

Special distribution methods are utilized when blocks are considered too large for the regular auction market on the floor of 

the exchanges. 

The most important of these methods is the secondary distribution which typically is utilized for larger blocks than other 

block distribution methods. A secondary distribution takes place 

off the floor of the exchange, usually after trading hours. The 

block is offered by an exchange firm or a selling group of firms 

formed for the distribution and at a price usually below the last 

transaction. In 1970, there were 72 secondary distributions involving stock valued at $505 million, representing a considerable 

reduction from 1969 levels. As the table below shows, the number 

and value of secondary distributions rose dramatically in the first 

half of 1971,totalling more than double the dollar value of such 

distributions for the entire year 1970. This large jump in secondary distributions came at the same time as the introduction 

of negotiated commission rates on large transactions. 

Under another method, the exchange distribution, a group of 

member firms solicits buy orders sufficient to cross with the 

block sell order. The transaction is then made on the floor and 

announced on the tape. There were 35 exchange distributions in 

1970, as against 32 in the previous year. The dollar value of 

shares sold under exchange distributions was $48 million, compared to $52 million in 1969. 

A third method of block distribution, special offerings, has not 
THIRTY-SEVENTH ANNUAL REPORT 85

been used in several years. In a special offering, a large block is

sold at a fixed price via an announcement on the tape seeking bids.

Block Distributions 0/ Stocks Reported by Exchanges

Number Value

(dollars)

12 months ended December 31, 1970

Special offerings

Exchange distnbutions

Secondary distributions

o

35

72

6 months ended June 30, 1971

o

48,218,319

504.561,641

Special offerings

Exchange distributions

Secondary distributions

o

15

108

o 1,653,937

41,784,200

o

50,450,331

1,148,540,513

NOTE- Details of these distributions appear in the Commission's Statistical Bulletin

Data for prior years are shown in Appendix Table 8 of this Annual Report.

UNLISTED TRADING PRIVILEGES ON EXCHANGES

The number of stocks with unlisted trading privileges which

are not listed and registered on other exchanges further declined

during the fiscal year from 62 to 61. During the calendar year

1970, the reported volume of trading on the exchanges in stocks

with only unlisted trading privileges decreased to about 20,649,003

shares, or about 0.46 percent of the total share volume on all

exchanges, from about 47,958,150 shares, or about 0.97 percent

of the share volume during calendar year 1969. About 98 percent

of the 1970 volume was on the American Stock Exchange, while

two other exchanges contributed the remaining 2 percent. The

share volume in these stocks on the American Stock Exchange

represented 2.3 percent of total share volume on that exchange.

Unlisted trading privileges on exchanges in stocks listed and

registered on other exchanges numbered 2,397 as of June 30,

1971. The volume of trading in these stocks for the calendar year

1970 was reported at about 190,057,913 shares. About 98.5 percent of this volume was on regional exchanges in stocks listed on

the New York or American Stock Exchanges. The remaining

1.5 percent represented unlisted trading on the American Stock

Exchange in issues listed on regional exchanges. While the

190,057,913 shares amounted to only 4.2 percent of the total share

volume on all exchanges, it represented a substantial portion of

the share volume of most regional exchanges, as reflected in the

following approximate percentages: Cincinnati 87.8 percent; Boston 73.7 percent; Detroit 48.5 percent; Philadelphia-Baltimore-

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86 SECURITIES AND EXCHANGE COMMISSION

Washington 88.1 percent; Midwest 36.7 percent; and Pacific

Coast 27.0 percent,"

Applications by exchanges for unlisted trading privileges in

stocks listed on other exchanges, filed pursuant to Rule 12f-1 under Section 12(f) (1) (B) of the Securities Exchange Act, were

granted by the Commissionduring the fiscal year ended June 30,

1971,as follows:

Boston

Cincinnati

Detroit

Mid~est

Pacific Coast

Philadelphia-Baltimore-Washington

TOTAL

Number

of stocks

55

51

116

71

'1

91

891

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Exchange Act provides for registration with

the Commissionof national securities associations and establishes

standards and requirements for such associations. The National

Association of Securities Dealers, Inc. (NASD) is the only association registered under the Act. The Act contemplates that

such associations will serve as a medium for self-regulation by

over-the-counter brokers and dealers. Their rules must be designed to protect investors and the public interest, to promote

just and equitable principles of trade, and to meet other statutory

requirements. They are to operate under the general supervision

of the Commission, which is authorized to review disciplinary

actions taken by them," to disapprove changes in their rules, and

to alter or supplement their rules relating to specified matters.

Review of NASD rules is carried out for similar purposes as the

review of exchange rules described at page 74.

In adopting legislation permitting the formation and registration of national securities associations, Congress provided an

incentive to membership by permitting such associations to adopt

rules which preclude a member from dealing with a nonmember

broker or dealer except on the same terms and conditions as the

member affords the general public. The NASD has adopted such

rules. As a result, membership is necessary to profitable par7 The distribution of unlisted stocks among the exchanges and share volume

therein are shown in Appendix Table 9.

8 This aspect of the Commission's supervisory authority is discussed at

pp, 180-182, infra.

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THIRTY-SEVENTH ANNUAL REPORT 87

ticipation in underwritings since members may properly grant

price concessions, discounts and similar allowances only to other

members.

At the close of the fiscal year the NASD had 4,390 members,

reflecting a net loss of 92 members during the year. This loss

was the net result of 439 admissions to and 531 terminations of

membership. At the end of the year NASD member firms had

7,028 branch offices, reflecting a net loss of 347 offices during the

year. This loss was the net result of the opening of 1,468 new

offices and the closing of 1,815 offices. During the year the number

of registered representatives and principals, which categories include all partners, officers, traders, salesmen and other persons

employed by or affiliated with member firms in capacities which

require registration, increased by 6,547 to stand at 199,917 as of

June 30, 1971. This increase was the net result of 26,100 initial

registrations, 33,087 re-registrations and 52,640 terminations of

registrations during the year.

During this period the NASD administered 59,025 qualification

examinations of which approximately 37,028 were for NASD

qualification and the balance for other agencies, including major

exchanges, the Commission and various States.

REVIEW OF NASD RULES AND POLICIES

Under Section 15A(j) of the Exchange Act, the NASD must

file for Commission review, 30 days in advance of their effectiveness, copies of any proposed rules or rule amendments. These may

be disapproved by the Commission if not consistent with the requirements of the Act. In practice, the Commission also normally

reviews in advance of publication general policy statements, directives, and interpretations proposed to be issued by the Association's Board of Governors pursuant to its powers to administer

and interpret NASD rules.

During the fiscal year, numerous changes in or additions to

NASD rules, policies and interpretations were submitted to the

Commission pursuant to these procedures. Among the significant

matters covered in such submissions were:

1. Amendments to Schedule "D" of the NASD by-laws

revising: (1) the minimum price criteria for securities included in the Association's NASDAQ quotation system; and

(2) the system's eligibility standards for foreign securities,

ADR's, rights and warrants."

9 See Part I of the report for a discussion of the NASDAQ system.
88 SECURITIES AND EXCHANGE COMMISSION

2. A revised interpretation of the Board of Governors

concerning "Free-Riding and Withholding" which is designed

to eliminate unfair and manipulative practices in underwritings of securities that sell in the "aftermarket" at a premium

over the initial public offering price.

3. Amendments of the Association's Uniform Practice

Code relating to: (1) the delivery of mutilated securities;

(2) the reclamation of securities which have been the subject

of an over-delivery, or other similar errors in delivery; and

(3) the closing out of open contracts with an Association

member where the member can not meet its obligations as

they becomedue.

4. An amendment to the Association's Code of Procedure

for Handling Trade Practice Complaints to provide specified

procedures for settlement of Association disciplinary actions.

5. Amendment to Schedule "C" of the NASD by-laws to

provide for the establishment of a new qualification examination for principals of NASD member firms.

In Harwell v. Growth Programs, Inc., reported previously.t"

the United States District Court for the Western District of

Texas, agreeing with positions urged by the Commission in its

amicus curiae brief filed with that court, upheld an "interpretation" promulgated by the Board of Governors of the NASD in

1966that the speculative use of the withdrawal-and-reinstatement

privilege contained in certain contractual plans for the accumulation of mutual fund shares was contrary to the public interest

and inconsistent with Article III, Section 1, of the NASD's Rules

of Fair Practice.t! That rule requires NASD members to conduct

their business in accordance with "high standards of commercial

honor and just and equitable principles of trade."

Plaintiffs, who were purchasers of single payment contractual

plans containing this "in-and-out" privilege, sued the mutual

fund's sponsor and its underwriter, as well as the NASD, seeking,

among other things, actual and exemplary damages (including

treble damages from all of the defendants for an alleged conspiracy in violation of the antitrust laws) and resumption of the

right to unlimited exercise of the in-and-out privilege.

Under the terms of the investment programs in question, the

investor had the right to liquidate into cash at any time, and as

often as he wished, up to 90 percent of his shares in the mutual

10 35th Annual Report, p. 105.

11315 F. Supp. 1184 (1970).
THIRTY-SEVENTH ANNUAL REPORT 89

fund. He could later repurchase these shares with the proceeds of

his prior withdrawal, at the then market value, without the payment of any additional brokerage commission. Both the NASD and

the Commission decided that this speculative activity was detrimental to the interest of nonspeculating shareholders in the underlying funds, since it diluted their shares, and to the funds

themselves, since it imposed liquidity problems arising out of the

necessity to maintain relatively large cash positions to meet requests for redemptions. The district court granted the defendants'

motions for summary judgment, and the plaintiffs appealed to

the Court of Appeals for the Fifth Cireult.P The Commission filed

a brief with the court of appeals, amicus curiae, in which it urged

that the district court properly determined that the NASD interpretation was clearly within the power granted the NASD

under the Exchange Act; that the promulgation of such interpretation did not violate due process of law; and that, since

the interpretation was promulgated under close supervision of

the Commission, it did not constitute a violation of the antitrust

laws. The appeal was pending at the close of the fiscal year.

NASD RULE ABROGATION PROCEEDING

In April 1970 the Commission instituted a proceeding, pursuant

to Section 15A (k) of the Exchange Act, to determine whether, as

alleged by the Commission staff, the NASD had in specific situations improperly construed or applied the authority granted to

it under Section 15A (i) of the Exchange Act and Article III,

Section 25 of its Rules of Fair Practice. Section 15A (i) authorizes

the NASD to provide in its rules that no member may deal with

a nonmember broker-dealer except at the same prices and on the

same terms as it accords to the general public. Section 25 of the

NASD rules provides in pertinent part that NASD members may

not (1) grant to nonmember broker-dealers any selling concession, discount or other allowance not accorded to the general

public, or (2) join with any nonmember broker-dealer in the

distribution of an issue of securities to the public.

The principal issue in the proceeding relates to whether the

latter provision and the statute permit the Association to prohibit

its members from joining in a distribution of securities with a

nonmember broker-dealer where the concession or other special

price discount flows from the nonmember to the member. A

petition filed by Aetna Life and Casualty Company and its subsidiaries, Aetna Financial Services, Inc. and Participating An12 C.A. 5, No. 80501.
90 SECURITIES AND EXCHANGE COMMISSION

nuity Life Insurance Company, had raised similar issues with

respect to the NASD's authority to restrict its members' dealings

with nonmember broker-dealers, and the Aetna companies were

admitted as parties to the proceeding.

During fiscal year 1971 an evidentiary hearing was held before

a hearing examiner. The examiner rendered an initial decision

in May 1971. Thereafter the Commission granted petitions for

review of the initial decision filed by the NASD, the Commission

staff and the Aetna companies, and at the end of the fiscal year

the matter was pending before the Commission.

INSPECTIONS OF THE NASD

Under the regulatory scheme of the Exchange Act the Commission, as noted, is charged with general oversight of national

securities associations in the performance of their self-regulatory

activities. With a view to insuring that the NASD is meeting its

responsibilities, the Commission's staff conducts periodic inspections of various phases of NASD activity. During the past fiscal

year, the staff inspected the overall operations of the Association's

district office in Boston, and reviewed the New York district

office's programs and procedures with respect to the monitoring

of the financial and operating conditions of NASD member firms.

OVER-THE-COUNTER TRADING IN COMMON STOCKS LISTED ON

THE NEW YORK STOCK EXCHANGE

During the calendar year 1970, total over-the-counter sales of

common stocks listed on the New York Stock Exchange (the soOver-the-Counter Volume in Common Stocks Li8ted on the New York

Stock Exchange

- ------

Ratio of

over-the-counter

sales to New York

Over-the-counter New York Stock Stock Exchange

sales of common Exchange volume

stocks volume (percent)

Share volume (thousands)

965________________________ 48.361 1,809,351 2.7 966_________________,______ 58.198 2,204,761 2,6 967________________________ 85,081 2.885,748 2.9 968________________________ 119.730 3,298,665 3.6 969________________________ 155,437 3,173,564 4.9 970________________________ 210.067 3,213,069 6.5

971 (First 6 months) ---- 153,858 2,345,973 6.6

Dollar volume (thousands)

1965________________________ 2,500.416 73,199,997 3.4 1966________________________ 2,872.660 98,565,294 2.9 967________________________ 4,151,917 125,329,106 3.3 968________________________ 5,983,041 144,978,416 4.2 969________________________ 7,127,834 129,603,420 5.5 970________________________ 8,020,839 103,063,237 7.8

971 (FIrst 6 months) ---- 6,464,273 79.792,140 8.1

1

1

1

1

1

1

1

1

1

1

1

1
THIRTY-SEVENTH ANNUAL REPORT 91

called "third market") continued to increase both in share and

dollar volume as they have in every year since 1965, when reports

to the Commission regarding such transactions were first required. Third market sales in 1970 amounted to 210 million

shares, valued at $8,021 million. The increase in dollar volume

of third market sales contrasts with a decrease in dollar volume

on the NYSE in 1970. As a result, the value of trading over the

counter in NYSE comon stocks in relation to the value of an stock

trading on the Exchange reached a new high ratio of 7.8 percent.

In the first half of 1971, third market volume and NYSE volume

both increased sharply. Third market volume, in terms of dollars,

grew at a faster rate, however, reaching the equivalent of 8.1

percent of NYSE dollar volume.

REGULATION OF BROKER-DEALERS AND INVESTMENT ADVISERS

REGISTRATION

The Securities Exchange Act requires brokers and dealers who

use the mails or the means of interstate commerce in the conduct

of an over-the-counter securities business to register with the

Commission. Investment advisers must register under the Investment Advisers Act of 1940, which establishes a pattern 'of regulation comparable to that established by the Exchange Act with

respect to brokers and dealers. Applicants for registration which

are subject to a statutory disqualification may be denied registration, and misconduct following registration may result in suspension or revocation of the registration.P

As of June 30, 1971, 4,940 broker-dealers and 3,485 investment

advisers were registered. The number of broker-dealers represented a decrease of 284 from the total a year earlier, attributable

principally to the withdrawal of a large number of registrations.

However, the number of investment advisers increased by 425

over that at the end of fiscal year 1970.

The following tabulation reflects various data with respect to

registrations of brokers and dealers and investment advisers during the 1971 fiscal year:

Broker-Dealers

Effective registrations at close of preceding year 5,224

Registration suspended, pending final determination of proceedings, at close of preceding year 1

IS For a discussion of the various types of disqualifications and of enforcement and remedial actions taken by the Commission and the self-regulatory

agencies with respect to broker-dealers and investment advisers, see Part IV

of this report.
92 SECURITIES AND EXCHANGE COMMISSION

Applications pending at close of preceding year 65

Applications filed during year 603

Total 5,893

Applications denied 3

Applications withdrawn 14

Registrations withdrawn 828

Registrations canceled 22

Registrations revoked 39

Registrations effective at end of year 4,940

Applications pending at end of year 47

Total 5,893

Investment Advisers

Effective registrations at close of preceding year 3,060

Applications pending at close of preceding year 79

Applications filed during year 763

Total _____ __ __ 3,902

Registrations canceled or withdrawn 313

Registrations revoked 3

Applications withdrawn 16

Registrations effective at end of year 3,485

Applications pending at end of year 85

Total 3,902

FINANCIAL REPORTS OF BROKER.DEALERS

Rule 17a-5 under the Exchange Act requires registered brokerdealers to file annual reports of financial condition with the Commission. These reports must be certified by a certified public accountant or public accountant who is in fact independent, with

certain limited exemptions applicable to situations where certification does not appear necessary for customer protection. During the fiscal year 4,481 reports were filed with the Commission.

These reports enable the Commission and the public to determine the financial position of broker-dealers. They provide one

means by which the staff of the Commission can determine

whether a broker-dealer is in compliance with the net capital

rule. Failure to file required reports may result in the institution

of administrative proceedings to determine whether the public

interest requires remedial action against the registrant, as well

as possible injunctive or criminal action.

BROKER.DEALER INCOME AND EXPENSE REPORTS

In order to obtain improved financial information concerning

the securities industry, the Commission, in June 1968, adopted
THIRTY-SEVENTH ANNUAL REPORT 93

Rule 17a-10 under the Securities Exchange Act, effective January

I, 1969.H This rule requires registered broker-dealers and exchange members to file income and expense reports for each

calendar year with the Commission or with a registered selfregulatory organization [an exchange or the National Association

of Securities Dealers, Inc. (NASD)] which has qualified a plan

pursuant to the rule. The self-regulatory organization is to transmit copies of such reports to the Commission. All reports are

submitted to the Commission on a confidential basis.

The Commission has approved the plans of the NASD, and

the American, Midwest, and Philadelphia-Baltimore-Washington

Stock Exchanges." In summary, these plans provide that the

self-regulatory organization will (1) adopt and implement appropriate internal procedures for review of the reports submitted

by members, (2) review all reports filed for reasonableness and

accuracy, (3) transmit edited reports to the Commission (excluding the names and addresses of the respective firms), and

(4) undertake certain other obligations.

The reports covering calendar year 1970 of SECO brokerdealers 16 and non-NASD members of those exchanges which have

not qualified a plan have been received and reviewed by the

Commission. The 1970 reports of all NASD members and of

non-NASD members of those exchanges which have qualified a

plan have been received by the Commission from the respective

self-regulatory organizations. The Commission will analyze the

reports, and it anticipates that it will publish aggregate information based on them for the calendar years 1969 and 1970.

REGULATION OF BROKERJDEALERS WHO ARE NOT MEMBERS OF

A REGISTERED SECURITIES ASSOCIATION

Under the Exchange Act, as amended in 1964, the Commission

has the responsibility for establishing and administering rules

relating to qualification standards and business conduct of broker14 Securities Exchange Act Release No. 8347 (June 28, 1968); also see 34th

Annual Report, pp. 14-15.

15 Securities Exchange Act Releases Nos. 8876 (April 30, 1970); 8896 (May

28, 1970); 8946 (July 28, 1970); and 8954 (August 11, 1970). The NASD

plan was amended on March 30, 1971 to make it clear that all NASD members will continue indefinitely to file annual income and expense reports with

the NASD and to delete a provision as to the deadline date for filing which

was only applicable to the 1969 reports. See Securities Exchange Act Release

No. 9130.

16 Those registered broker-dealers which are not members of the NASD are

referred to as SECO broker-dealers.
94 SECURITIES AND EXCHANGE COMMISSION

dealers who are not members of the NASD 17 and persons associated with them, so as to provide regulation for these SECO

broker-dealers comparable to that provided by the NASD for

its members.P

During the fiscal year, the number of nonmember broker-dealers

decreased from 336 to 301 and the number of associated persons

of such firms (which includes principally partners, officers, directors, and employees not engaged in merely clerical or ministerial

functions) decreased from 19,504 to 16,060.19

Number of Nonmember Broker-Dealers by Principal Type of Business as of

June 90, 1971

Principal type of business

Exchange member primanly engaged m floor actIvities

Exchange member primarrly engaged m exchange commission business __ Broker or dealer In general securrtres busmess

Mutual fund underwriter and drstrrbutor

Broker or dealer selling variable annuitres

SOlicitor of savings and loan accounts

Real estate syndicator or mortgage broker or banker

Broker or dealer selhng oil and gas interests

Put and call broker or dealer or option writer

Broker or dealer selling securities of only one issuer or associated issuers Broker or dealer sellmg church securities

Government bond dealer

Broker or dealer mother securrties business «

Inactive in securities business

Total

Number

437

16 79

27

22

15

16

4

23

15

21

4

19

3

301

4 Includes 16 New York Stock Exchange members and 14 American Stock Exchange

members

Includes 3 New York Stock Exchange members and 1 American Stock Exchange member . c Includes, among others, finders m mergers and acqutsrtrons, sellers of theatrical

partrcrpations, a private banker and appraisers of estates.

Various rules have been adopted by the Commission since 1964

in the development of its regulatory program for nonmember

broker-dealers.w One of the requirements imposed by these rules

is that each associated person engaged in specified securities

activities successfully complete the Commission's General Securities Examination or an examination deemed by the Commission

to be a satisfactory alternative. Alternative examinations include

those given by the NASD, by certain of the national securities

exchanges and by many states. During the fiscal year the examina17 The Act does not specifically refer to the NASD, but to broker-dealers

who are not members of a registered "national securities association." However, the NASD is the only such association.

IS See pp. 86-88 for the discussion of NASD regulation.

19 Nonmember broker-dealers must file a prescribed form (Form SECO-2)

with the Commission for each associated person.

20 See 31st Annual Report, pp. 11-13; 32nd Annual Report, pp, 16-18;

33rd Annual Report, pp. 15-18; 34th Annual Report, pp. 83-85; 35th Annual

Report, pp. 86-88.

_

•

_

_

_

_

_

_

_

_

_

_

_

_

•
THIRTY-SEVENTH ANNUAL REPORT 95

tion requirements of the various states were surveyed by the

Commission. The results of this survey are being studied to determine whether the list of acceptable alternative examining

jurisdictions and examinations should be further revised.

Rule 15b9-2 under the Act provides for an annual assessment

to be paid by nonmember broker-dealers to defray the cost of

regulation. It includes a base fee, a charge for each office, and

a charge for each associated person. The rule also provides that

the maximum amount payable by anyone SECO member is set

each year on the assessment form which must be filed by each

firm. The maximum for fiscal year 1971 was raised from $25,000

to $50,000.21

Pursuant to the inspection program for nonmember brokerdealers, 66 inspections were conducted during the fiscal year.22

These inspections were designed to determine compliance with

applicable Commission rules and to obtain information which will

prove helpful in the further development of the SECO program.

STATISTICAL STUDIES

The regular statistical activities of the Commission and its

participation in the overall Government statistical program under

the direction of the Office of Statistical Standards, Office of Management and Budget, were continued during fiscal 1971 in the

Commission's Office of Policy Research. The statistical series described below are published in the Commission's monthly Statistical Bulletin. In addition, current figures and analyses of data

are published quarterly on new securities offerings, stock transactions of financial institutions, the financial position of corporations, and plant and equipment expenditures.

ISSUES REGISTERED UNDER THE SECURITIES ACT OF 1933

Monthly statistics are compiled on the number and volume of

registered securities. Summary statistics for the years 1935-1971

are given in Appendix Table 1 and detailed statistics for the fiscal

year 1971 appear in Appendix Table 2.

NEW SECURITIES OFFERINGS

Monthly and quarterly data are compiled covering all new

corporate and noncorporate issues offered for cash sale in the

United States. The series includes not only issues publicly offered

21 Securities Exchange Act Release No. 9160 (April 30, 1971).

22 For further discussion of Commission inspections of broker-dealers,

see pp. 10D-101, infra.

450-484 0 - 72 - 8
96 SECURITIES AND EXCHANGE COMMISSION

but also issues privately placed, as well as other issues exempt

from registration under the Securities Act, such as intrastate

offerings and offerings of railroad securities. The offerings series

include only securities actually offered for cash sale, and only

issues offered for the account of issuers.

Estimates of the net cash flow through securities transactions

are prepared quarterly and are derived by deducting, from the

amount 01. e'2>t\.mated. grO'2>'2>-proceed.'2> received. b-y cor-poration'2>

through the sale of securities, the amount of estimated gross

payments by corporations to investors for securities retired. Data

on gross issues, retirements and net change in securities outstanding are presented for all corporations and for the principal

industry groups.

PRIVATE NONINSURED PENSION FUNDS

An annual survey is published of private pension funds other

than those administered by insurance companies, showing the

flow of money into these funds, the types of assets in which the

funds are invested and the principal items of income and expenditures. Quarterly data on assets of these funds are published

in the Statistical Bulletin.

STOCK TRANSACTIONS OF FINANCIAL INSTITUTIONS

A statistical series containing data on stock trading of four

principal types of financial institutions is published quarterly.

Information on purchases and sales of common stock by private

noninsured pension funds and nonlife insurance companies has

been collected on a quarterly basis by the Commission since 1964.

These data are combined with similar statistics prepared for

mutual funds by the Investment Company Institute and for life

insurance companies by the Institute of Life Insurance.

FINANCIAL POSITION OF CORPORATIONS

The series on the working capital position of all U.S. corporations, excluding banks, insurance companies, investment companies and savings and loan associations, shows the principal

components of current assets and liabilities, and also contains an

abbreviated analysis of the sources and uses of corporate funds.

During fiscal year 1971 the responsibility for compiling the

quarterly financial report of all U.S. manufacturing corporations,

previously shared by the Commission and the Federal Trade

Commission, was assigned to the latter agency. This report gives

complete balance sheet data and an abbreviated income account,

data being classified by industry and size of company. The Com-
THIRTY-SEVENTH ANNUAL REPORT 97

mission's staff has been working with the FTC staff to assure an

orderly transfer of this data collection responsibility, which is to

be completed by the end of calendar year 1971.

PLANT AND EQUIPMENT EXPENDITURES

The Commission, together with the Department of Commerce,

conducts quarterly and annual surveys of actual and anticipated

plant and equipment expenditures of all U.S. business, exclusive

of agriculture. After the close of each quarter, data are released

on actual capital expenditures of that quarter and anticipated

expenditures for the next two quarters. In addition, a survey is

made at the beginning of each year of the plans for business

expansion during that year.

DIRECTORY OF REGISTERED COMPANIES

The Commission annually publishes a list of companies required

to file annual reports under the Securities Exchange Act of 1934.

In addition to an alphabetical listing, there is a listing of companies by industry group classified according to The Standard

Industrial Classification Manual.

STOCK MARKET DATA

The Commission regularly compiles statistics on the market

value and volume of sales on registered and exempted securities

exchanges, round-lot stock transactions on the New York and

American Stock Exchanges for account of members and nonmembers, odd-lot transactions in 100 selected stocks on the New

York Stock Exchange and block distributions of exchange stocks.

Since January 1965, the Commission has been compiling statistics

on volume of over-the-counter trading in common stocks listed on

national securities exchanges (the so-called "third market")

based on reports filed under the Securities Exchange Act.

Data on round-lot and odd-lot trading on the New York and

American Stock Exchanges are released weekly. The other stock

market data mentioned above, as well as these weekly series, are

published regularly in the Commission's Statistical Bulletin.

PART IV

CONTROL OF IMPROPER PRACTICES

One of the major areas of the Commission's work is its enforcement activities, which encompass the detection and investigation

of possible violations of the Federal securities laws and the taking

of appropriate action to curtail fraudulent and other unlawful

activities. The Commission's enforcement program is designed to

achieve a broad regulatory impact within the framework of its

limited resources. In addition to direct action by the Commission,

the various self-regulatory organizations have a responsibility

(subject to Commission oversight) to uncover and take appropriate action with respect to improper practices by their respective

members. Moreover, there is a significant degree of coordination

between the enforcement activities of the Commission, the selfregulatory agencies, the various states, and certain foreign securities agencies.

This part of the report deals with some of the more significant

aspects of these enforcement activities conducted during the fiscal

year 1 and with developments in litigation arising out of prior

enforcement actions. It also summarizes certain noteworthy cases

involving private litigation under the Federal securities laws in

which the Commission participated as amicus curiae.

DETECTION OF IMPROPER PRACTICES

PUBLIC COMPLAINTS AND INQUIRIES

The Commission receives many communications from the public, consisting predominantly of complaints against members of

the securities industry and requests for information about issuers.

These complaints and inquiries are given careful attention in

connection with the Commission's responsibility to enforce the

Federal securities laws. Within the scope of its authority, the

Commission endeavors to assist investors in obtaining the desired

information or resolving their complaints. Where violations of

1For enforcement matters related to disclosure requirements under the

Securities Act or Securities Exchange Act, see Part II, at pp. 40-42 and

50-52, supra. Enforcement activities related to investment companies are

discussedin Part V, at pp. 156-165,infra.

99
100 SECURITIES AND EXCHANGE COMMISSION

the Federal securities laws are indicated, the matters are referred

to the enforcement officials of the Commission for appropriate

action. The Commission may also refer matters to the stock

exchanges or the National Association of Securities Dealers, Inc.

(NASD). Analysis of complaints and inquiries helps the Commission to recognize problems being experienced by a particular

firm or by the industry in general.

Indicated below are the approximate number of written and

telephoned complaints and inquiries relating specifically to brokerdealers which the Commission received from the public during

the last 4 fiscal years.

Fiscal year 1968 4,000

" "1969 12,500

" "1970 15,000

" "1971 17,000

Approximately 80 percent of the complaints against brokerdealers involve back-office problems, such as the failure of firms

to deliver securities or funds promptly and the alleged improper

handling of accounts.

As a result of the inquiries the Commission makes of brokerage

firms upon receipt of complaints, thousands of investor complaints

have been resolved. The Commission's authority, however, does

not extend to arbitrating private disputes or controversies between brokerage firms and investors or to assisting investors in

the assertion of their private rights. The Commission generally

does not reveal the existence, progress, or results of any investigation it may undertake as a result of a particular complaint unless

and until these are made a matter of public record in proceedings

brought before the Commission or in the courts.

Other sources of information regarding possible securities law

violations include stock exchanges, the NASD, brokerage firms,

State and Canadian securities authorities, better business bureaus, and various law enforcement agencies.

INSPECTIONS

The program of surprise inspections of broker-dealers and investment advisers by the Commission's staff is another important

device for the detection of unlawful practices. During fiscal 1971,

the staff conducted 772 broker-dealer inspections (as compared

with 707 the previous year) and 121 inspections of investment

advisers (as compared to 96 during the previous year).

The table below shows the types of infractions indicated by the

inspections conducted during the fiscal year:

-

-

-

-
THIRTY-SEVENTH ANNUAL REPORT 101

Broker-Dealers

Number of

Broker-Dealers

Net Capital Deficiencies 180

Unlawful hypothecation -___________________________ 6

Unreasonable prices in securities transactions 10

Noncompliancewith Regulation T 39

Noncompliancewith confirmation or bookkeepingrules.,., 180

Other --------_____________________________________ 227

Total indicated violations 642

Investment Advisers

5

13

Total indicated violations 84

Number of

Investment Advisers

Books and records deficient 24

Registration application inaccurate 25

False, misleading, or otherwise prohibited advertising__ 11

Improper "hedge clause". 6

Failure to provide for nonassignability in investment

advisory contract

Other

."Hedge clauses" used in literature distributed by investment advisers

generally state in substance that the information furnished is obtained from

sources believed to be reliable, but that no assurance can be given as to its

accuracy. A clause of this nature may be improper where the recipient may

be led to believe that he has waived any right of action against the investment adviser.

MARKETSURVEILLANCE

In order to enable the Commission to meet its responsibilities

for the surveillance of the securities markets, the market surveillance staff has devised a number of procedures to identify

possible manipulative activities. These include a program of staff

surveillance over listed securities, which is coordinated with the

stock watching operations of the New York, American and regional stock exchanges. The staff reviews the daily and periodic

stock watch reports prepared by these exchanges and, on the

basis of its analysis of the information developedby the exchanges

and other sources, determines matters of interest, possible violations of applicable law, and the appropriate action to be taken.

In addition, the market surveillance staff maintains a continuous ticker tape watch of transactions on the New York and

American Stock Exchanges, and monitors the sales and quotation

sheets of regional exchanges in order to detect any unusual or

unexplained price variations or market activity. The financial

_

_

_
102 SECURITIES AND EXCHANGE COMMISSION

news ticker, leading newspapers and various financial publications and statistical services are also closely followed.

If any of these sources reveals possible violations, the market

surveillance staff conducts a preliminary inquiry into the matter.

These inquiries, some of which are conducted with the cooperation

of the exchange concerned, generally begin with the identification

of the brokerage firms which were active in the security. The

staff may communicate with principals or registered representatives of these firms, with customers, or with officials of the issuer

involved to determine the reasons for the activity or price change

in the securities in question and whether violations may have

occurred.

The Commission has also developed an over-the-counter surveillance program involving the use of automated equipment to

provide more efficient and comprehensive surveillance of stock

quotations distributed by the National Quotation Bureau and the

NASD's automated NASDAQ service. That equipment is programmed to identify, among other things, unlisted securities

whose price movement or dealer interest varies beyond specified

limits in a pre-established time period. When a security is so

identified, the automated system prints out current and historic

market information concerning it. This data, combined with other

available information, is collated and analyzed to select those

securities whose activity indicates the need for further inquiry

or referral to the Commission's enforcement staff.

INVESTIGATIONS

Each of the Acts administered by the Commission specifically

authorizes it to conduct investigations to determine whether violations of the Federal securities laws have occurred.

The nine regional offices of the Commission are chiefly responsible for the conduct of investigations. In addition, the Office of

Enforcement of the Division of Trading and Markets at the

Commission's headquarters office conducts investigations dealingwith matters of particular interest or urgency, either independently or with the assistance of the regional offices. The Office of

Enforcement exercises general supervision over and coordinates

the investigative activities of the regional offices and recommends

appropriate action to the Commission. Investigations are also

conducted by the Divisions of Corporation Finance and Corporate

Regulation in the areas under their respective jurisdictions.

It is the Commission's general policy to conduct its investigations on a confidential basis. Such a policy is necessary to effective
THIRTY-SEVENTH ANNUAL REPORT 103

131

15

9

155

law enforcement and to protect persons against whom unfounded

or unconfirmed charges might be made. The Commission investigates many complaints where no violation is ultimately found to

have occurred. To conduct such investigations publicly would

ordinarily result in hardship or embarrassment to many interested persons and might affect the market for the securities involved, resulting in injury to investors with no countervailing

public benefits. Moreover, members of the public would tend to

be reluctant to furnish information concerning violations if they

thought their personal affairs would be made public. Accordingly,

the Commission does not generally divulge the existence or findings of a nonpublic investigation unless they are made a matter

of public record in proceedings brought before the Commission or

in the courts.

When it appears from a preliminary investigation that a serious

violation of the Federal securities laws has occurred or is occurring, a full investigation is conducted. Under certain circumstances the Commission may issue a formal order of investigation

which designates members of its staff as officers authorized to

issue subpoenas, take testimony under oath, and require the

production of documents.

The following tables reflect in summarized form the Commission's investigative activities during fiscal year 1971:

Investigations of Possible Violations of the Acts Administered by the

Commission

Pending June 30, 1970 862

Nevv Cases 410

Total 1,272

Closed 447

Pending June 30, 1971 825

Formal Orders of Investigation Issued by the Commission upon

Recommendation of the Staff Divisions Indicated

Division of Trading and Markets

Division of Corporation Finance

Division of Corporate Regulation

Total

ENFORCEMENT OF INVESTIGATIVE SUBPOENAS

In Vesco and International Controls Corp. v. S.E.C.,2 plaintiffs

sought to enjoin the Commission from requiring compliance with

investigative subpoenas. The Commission counterclaimed for enforcement of the subpoenas. The United States District Court for

2 D.N.J., Civ. No. 585-71.

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104 SECURITIES AND EXCHANGE COMMISSION

the District of New Jersey granted the relief requested by the

Commission and dismissed plaintiffs' claims. The court rejected

the asserted bases for noncompliance-that disclosure of certain

information pursuant to the Commission's investigative order

would subject plaintiffs to criminal sanctions under Swiss laws

relating to secrecy in banking and commercial affairs, that the

Commissionhad accessto the information sought in its investigation from sources other than plaintiffs, and that the Commission's

principal investigating officerwas "non-objective." The Court of

Appeals for the Third Circuit 3 and the Supreme Court (by Mr.

Justice Marshall) denied plaintiffs' request for a stay of the

district court order pending appeal.

ENFORCEMENT AND REMEDIAL ACTION

When the Commission determines, based upon staff investigation, that enforcement action appears appropriate, it may authorize the staff to institute civil court proceedings for injunctive

relief, or, in particularly serious cases, it may refer the matter

to the Justice Department with a recommendation for criminal

prosecution. The Commission may also, on the basis of staff

allegations, initiate administrative proceedings which can result

in a Commissionorder imposing remedial sanctions on the persons

involved.In appropriate cases, the Commissionmay refer matters

to state or local enforcement agencies or to industry self-regulatory organizations.

A'DMINISTRATIVE PROCEEDINGS 4

Under the Securities Exchange Act, as amended in 1964, the

Commission has available to it a wide range of administrative

sanctions which it may impose against brokers, dealers and other

persons. The Commissionmay deny a broker-dealer's application

for registration. With respect to a broker-dealer already registered, it may impose sanctions ranging from censure to suspension or revocation of registration and may suspend or terminate

a broker-dealer's membership in a stock exchange or the NASD.

In addition, it may suspend or bar any person from association

with a broker-dealer, or censure him. Comparable sanctions may

be imposed under the Investment Advisers Act, as amended in

1970.

3 C.A. 3, Nos. 71-1711 and 71-1712.

4 For administrative enforcement proceedings under the Securities Act and

Securities Exchange Act disclosure provisions and under the Investment

Company Act, see Parts II and V, respectively.
THIRTY-SEVENTH ANNUAL REPORT 105

97

167

264

106

158

Generally speaking, the Commission may impose a sanction

only if, after notice and opportunity for hearing, it finds (1) that

the respondent willfully violated, or aided and abetted violations

of any provision of the securities acts or the rules thereunder;

failed reasonably to supervise another person who committed

such violations; or is subject to certain disqualifications, such as

a conviction or injunction relating to specified types of law

violations; and (2) that a particular sanction is in the public

interest.

Broker-dealer and investment adviser proceedings are frequently disposed of without hearings where respondents waive

their right to a hearing and submit offers of settlement consenting

to the imposition of certain sanctions, which the Commission

accepts as an appropriate disposition of the proceedings. In those

instances where hearings are held, the hearing officer who presides renders an initial decision, including an appropriate order,

unless such decision is waived by the parties. If Commission

review is not sought, and if the case is not called up for review

on the Commission's own initiative, the initial decision becomes

the final decision of the Commission, and the examiner's order

becomes effective.

In those instances where it prepares its own decision upon

review or waiver of an initial decision, the Commission is generally assisted by the Office of Opinions and Review. This Office

is directly responsible to the Commission and is completely independent of the operating divisions of the Commission, consistent with the principle of separation of functions embodied

in the Administrative Procedure Act. Where the parties to a

proceeding waive their right to such separation, the operating

division which participated in the proceeding may assist in the

drafting of the Commission's decision. The Commission's opinions

are publicly released and are distributed to the press and to persons on the Commission's mailing list.

Set forth below are statistics regarding administrative proceedings with respect to brokers and dealers and investment advisers

pending during fiscal 1971.

Brokers and Dealers

Proceedings pending at beginning of fiscal year --------------------

Proceedings instituted during fiscal year

Sub-total

Proceedings closed during fiscal year

Proceedings pending at end of fiscal year ------------------------- --

_

_

_
106 SECURITIES AND EXCHANGE COMMISSION

Actions taken during fiscal year with respect to broker-dealers and

individuals:

Registrations revoked

Registrations revoked and firms expelled from NASD

Registration revoked and firm expelled from stock exchange

Registration revoked and firm expelled from NASD and stock exchange

Registrations suspended for periods of time

Registrants censured

Withdrawal of registration permitted and proceedings discontinued __

Nonregistered broker-dealer suspended

Registra tion cancelled

Registrations denied

Individuals barred

Individuals suspended

Individuals censured

Total

Investment Advisers

Proceedings pending at beginning of fiscal year

Proceedings instituted during fiscal year

Sub-total

Proceedings closed during fiscal year

Proceedings pending at end of fiscal year

Actions taken during fiscal year with respect to investment advisers:

Registrations revoked

Registrations suspended

Proceedings discontinued due to death of respondent

SO

5

1

1

40

4

15

1

1

3

78

100

21

300

5

22

27

9

18

3

5

1

Total 9

Certain of the more noteworthy administrative proceedings

pending during the fiscal year and significant decisions rendered

by the Commission during the year or shortly thereafter are

described below:

In a decision of particular significance, Investors Management

Co., Inc," (the so-called Douglas Aircraft-Merrill Lynch case),

the Commission addressed itself to the responsibility of "tippees",

i.e., persons other than corporate insiders who receive non-public

corporate information, under the antifraud provisions of the

Federal securities laws. Following the issuance of the hearing

examiner's initial decision, from which no appeal was taken to the

Commission by any of the parties, the Commission, sua sponte,

decided to review the legal issues and express its views on them

because of their significant implications for the securities industry

and the investing public.

5 Securities Exchange Act Release No. 9267 (July 29, 1971).

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_
THIRTY-SEVENTH ANNUAL REPORT 107

The essential facts as found by the hearing examiner were that

from June 21 through June 23, 1966, institutional salesmen for

Merrill Lynch, Pierce, Fenner & Smith, Inc. conveyed to the

respondents (investment companies, investment advisers and

hedge funds) material non-public information, which Merrill

Lynch had received from Douglas Aircraft Co., in its capacity

as managing underwriter of a proposed offering of Douglas

securities, concerning substantially reduced earnings for the first

six months of 1966 and lowered earnings projections for 1966

and 1967. The respondents thereupon sold virtually their entire

holdings in Douglas stock (133,400 shares) and sold short 21,100

shares prior to the public release of the information on June 24,

for an aggregate price of more than $13.3 million. The examiner

held that 12 of the respondents had willfully violated the antifraud provisions of the Federal securities laws and should be

censured."

In its decision the Commission held that the antifraud proscriptions against the use of inside information apply not only to those

persons who occupy a special relationship to an issuer but also to

others who receive inside information," The recipient of material

non-public corporate information violates the antifraud provisions

when such information is a factor in his decision to effect a

securities transaction and he knows or has reason to know that

such information is non-public and "had been obtained improperly

by selective revelation or otherwise." The Commission noted that

its formulation would clearly attach responsibility in a situation

where the recipient knew or had reason to know the information

was obtained by industrial espionage, commercial bribery or the

like, and observed that there could be potential responsibility

where persons who innocently corne into possession of information

which they have reason to know is intended to be confidential use

that information.

In holding that the Douglas Aircraft adverse earnings information was material, the Commission indicated that it considered

6 The examiner dismissed the proceedings against one respondent who had

made no use of the information obtained from Merrill Lynch, and he discontinued the proceedings against two respondents who merely were in

control relationships to some of the violators, holding that no sanction was

warranted as to them.

7 With respect to the disposition of the proceedings against Merrill Lynch

and certain of its employees, see Securities Exchang-e Act Release No. 8459

(November 25, 1968), discussed in the 34th Annual Report, pp. 8-9. See also

City Associates, Securities Exchange Act Release No. 8509 (January 31,

1969).
108 SECURITIES AND EXCHANGE COMMISSION

the following factors: the degree of specificity of the information;

the extent to which it differed from publicly available information; and its reliability in view of its nature, source and the

circumstances under which it was received. The Commission

further indicated that this information was of such an extraordinary nature that its significance was immediately clear, and

that it was not merely one link in a chain of analytical information. In determining that the earnings information was non-public,

the Commission, relying upon the test set forth in the Second

Circuit's decision in S.E.C. v. Texas Gul] Sulphur CO.,8held that

"information is non-public when it has not been disseminated

in a manner making it available to investors generally". Here

the earnings information did not become available to the investing

public until after the issuance of a press release by Douglas on

June 24.

In discussing the tippees' awareness of the fact that the information they obtained from Merrill Lynch was non-public, the

Commission noted that respondents knew that Merrill Lynch

was the prospective underwriter of an imminent Douglas Aircraft

debenture offering, and also knew that underwriters customarily

receive non-public information from issuers during the course of

the preparation of public offerings.

The Commission stated that it appreciated concerns which

had been expressed for the free flow of corporate information

throughout the financial community and the need to provide

public investors and their financial advisers with the most accurate and complete factual basis upon which to make investment

decisions. "In some cases, however, there may be valid corporate

reasons for the nondisclosure of material information." The Commission indicated that where such reasons exist, it would not

ordinarily consider it to be an antifraud violation for an issuer

to refrain from making public disclosure, but that it was necessary to ensure that there be no improper use of such undisclosed

information for non-corporate purposes.

In determining whether the information received was a factor

in respondents' investment decisions, the Commission stated that

where a securities transaction of the kind consistent with the

nature of the information (e.z., the sales and short sales by the

respondents after receiving the adverse information concerning

Douglas Aircraft's earnings) is effected by the recipient of inside

information prior to its public dissemination, an inference arises

8401 F.2d 833 (C.A. 2, 1968), eert. denied 394 U.S. 796 (1969).
THIRTY-SEVENTH ANNUAL REPORT 109

that the information was a factor, and that in this case respondents did not overcome that inference by countervailing evidence.

The Commission rejected respondents' argument that they had

a fiduciary duty to their clients to sell their Douglas stock upon

learning of the poor Douglas earnings, holding that the obligations

of a fiduciary do not include performing an illegal act.

The Commission affirmed the examiner's decision that each of

the respondents should be censured.

In a concurring opinion, former Commissioner Smith placed

emphasis upon the respondents' awareness of Merrill Lynch's

special relationship with Douglas Aircraft, and stated that he

would hold that tippees are liable when they know or have reason

to know that the inside information became available to them in

breach of a duty owed to the corporation not to disclose or use

the information for non-corporate purposes. Commissioner Smith

would have also required proof that the information substantially

contributed to the recipient's decision to buy or sell.

In another significant decision, the Commissionaddressed itself

to the responsibilities of banks in connection with the distribution

of unregistered securities. In Southern California First National

Bank of San Diego,9 the Commission for the first time instituted

administrative proceedings against a bank. The bank, without

admitting or denying the charges, consented to findings of violations of the Securities Act registration provisions as alleged in

the order for proceedings, and to an order censuring it.

The Commission found that the bank had participated in an

unlawful distribution of unregistered securities in 1968,by selling

20,000 shares of common stock of Mastercraft Electronics Corp.

through an account which it maintained with a brokerage firm.

The shares were sold purportedly for an employeeof Mastercraft,

although he was apparently used as a nominee by persons engaged

in a large-scale distribution of unregistered Mastercraft stock.

Two sell orders for the employee's account, each covering 10,000

shares, were placed with the bank by a customer of the bank by

telephone from New York. Although the customer gave no information concerning the employeeto the bank officialhandling the

transaction, who did not know the employee,the officialfailed to

inquire whether the employeewas connected with Mastercraft or

into the circumstances of the transaction. The customer directed

the bank to make its checks for the proceeds of sales payable to

the employee, but to send them in part to an individual with the

same last name as the customer and in part to c/o an individual

9 Securities Exchange Act Release No. 9289 (August 16, 1971).
110 SECURITIES AND EXCHANGE COMMISSION

who was an officer and director of Mastercraft and its house

counsel.

The Commission noted that it appeared that the use of bank

brokerage accounts for transactions by bank customers or other

persons was widespread and that often the banks did not disclose

the seller's name to executing brokers, and it pointed out that

such practice may provide essentially unregulated channels of

distribution for securities. Itstated that if banks wish to maintain

brokerage accounts for the convenience of their customers or

others, it is incumbent upon them to take precautions to avoid

the use of such accounts in connection with unlawful distributions

of unregistered securities. The Commission held that while the

nature of the inquiry to be undertaken by a bank varies with the

circumstances of particular cases,

"Generally speaking, it would seem that the bank would be expected

to follow procedures substantially equivalent to those which we have

required broker-dealers to establish and maintain ... We would consider

that, alternatively, a bank could meet its responsibilities by requesting

the broker-dealer with which it maintains its account to conduct the

necessary investigation of the circumstances surrounding a proposed

securities transaction, of course with the full cooperation of the bank."

The Commissionnoted that in this case not even the most elementary safeguards were observed, despite the presence of many

"red flags."

In Haight & Co., Inc.,1° the Commissionrevoked the respondent

firm's broker-dealer registration and barred nine of the ten individual respondents from being associated with any broker or

dealer for violations of the antifraud and other provisions of the

Federal securities laws.

The Commissionfound, among other things, that the respondents had engaged in a scheme to defraud customers by holding

themselves out as financial planners who would exercise their

talents to make the best choicesfor their clients from all available

securities, when in fact the firm had no research staff and the

respondents' efforts were directed at liquidating clients' portfolios and utilizing the proceeds and their clients' other assets to

purchase securities which would yield respondents the greatest

profits, in some instances in complete disregard of the clients'

stated investment objectives. This scheme was implemented by,

10 Securities Exchange Act Release No. 9082 (February 19, 1971), af!'d

without opinion (C.A.D.C., June 30, 1971), rehearing denied. Petitions for

certiorari filed November 9 and 10, 1971.
THIRTY-SEVENTH ANNUAL REPORT 111

among other things, the firm's advertising and its training program for salesmen.

The firm created sales quotas and other inducements designed

to spur its salesmen to generate a greater volume of transactions

that would earn a high return for the firm. The sales staff was

taught by principals of the firm to utilize a variety of high pressure and fraudulent tactics to obtain financial planning clients

and then induce them to convert their assets into securities yielding respondents high profits. For example, salesmen were told to

appeal to the prospect's fears and greed, to give clients only such

facts as were necessary to support a sales presentation, and to

dominate the interview, dramatize the facts, appeal to the client's

sense of prestige and create a sense of urgency. The salesmen

were told that, in selling, emotion was more important than logic,

and that "an ounce of enthusiasm at the proper time is worth a

pound of knowledge."

In Quinn & Co., Inc.F" the Commission held that a brokerage

firm cannot avail itself of certain exemptions for brokers and

dealers from the securities registration provisions of the Securities Act of 1933 where it is aware of circumstances indicating

that a selling customer is engaged in a distribution of unregistered securities.

Based on stipulated facts, the Commission found that in 1968

the firm effected sales of 25,000 shares of unregistered stock of

Mountain States Development Co. for the account of a customer

who had received the stock in exchange for properties sold by

him to the issuer. The Commission stated that it was clear that

the customer intended to resell the shares on the open market as

soon as possible in order to obtain cash for the properties he had

sold. Thus, his acceptance of the stock and immediate resale for

cash did not differ in essence from an arrangement whereby the

issuer sold the stock to the public for cash and used the cash so

raised to buy the properties, an arrangement which clearly would

have required registration. Under the circumstances, the customer

was an "underwriter," regardless of whether, as claimed, he was

deceived by the issuer as to the saleability of the stock without

registration, and no exemption was available to the respondent

broker-dealer which was aware of the pertinent facts.

The Commission stated that respondent was not entitled to rely

on the absence of any restrictive or cautionary legends on the

Mountain certificates. While such a legend or instructions to trans11 Securities Exchange Act Release No. 9062 (January 25, 1971), app.

pending, C.A. 10, No. 71-1090.

450-484 0 - 72 - 9
112 SECURITIES AND EXCHANGE COMMISSION

fer officesmay serve as useful devices by issuers to alert buyers

to the restricted character of unregistered securities and to prevent violations of the registration requirements, the failure of an

issuer to take such measures cannot relieve a broker-dealer from

his duty as a professional in the securities business to make a

reasonable inquiry into facts known to him indicating that he

is participating in an illegal sale of unregistered securities.

In view of certain mitigating factors, the Commission suspended the firm from NASD membership for 15 days and suspended a principal of the firm who had handled the transactions

from association with any broker or dealer for 20 days.

In a case involving "interpositioning," the Commission barred

Edward Sinclair, who was an order clerk in the over-the-counter

department of Filor, Bullard and Smyth, from association with

any broker-dealer.v' It also barred two individuals who held

similar positions with another firm.IS

According to the Commission's decision, Sinclair, in order to

increase business for Filor on which he would receive commissions, entered into a reciprocal arrangement with Holt, Rose &

Co., then a registered broker-dealer, under which Hoit directed

listed business to Filor, and Sinclair directed over-the-counter

businessto Hoit, When he directed a transaction to Hoit, Sinclair

first would obtain quotations from at least three market-makers

in the stock, and, contrary to Filor's instructions, offer to deal

with Hoit at the best quotation obtained even though Hoit did not

make a market in the stock. The Commissionfound that in 1965

Hoit was interposed between Filor's customers and the best available market in 189 transactions, at a profit to itself which generally ranged from lis to 1h and reached a high of 51h, for a total

profit of about $8,500.The Commissionfurther found that in 90

percent of these transactions, Hoit executed the trade simultaneously or within 10 minutes with a market-maker, in many

instances one from whom Sinclair had obtained a quotation.

Stressing that it "cannot sanction any erosion of the broker's

obligation to secure the best execution for his customers," the

Commissionheld that "the short amount of time needed by Hoit

to better the so-called'best price' obtained by Sinclair would seem

12 Securities Exchange Act Release No. 9115 (March 24, 1971), af!'d 444

F.2d 399 (C.A. 2, 1971). The court's decision on appeal is discussed at p.

116, infra.

13 For disposition of the proceedings against the brokerage firm respondents, see Securities Exchange Act Releases Nos. 8489 (January 8, 1969) and

8563 (April 7, 1969).
THIRTY-SEVENTH ANNUAL REPORT 113

to indicate that the quotations recorded on the order tickets by

Sinclair were false, or that he did not negotiate with the dealers

from whomhe obtained quotations, or that he did not negotiate in

good faith to ascertain the best price obtainable."

According to the decision, Sinclair, in order to conceal the

interpositioning from his supervisor, falsely listed on the order

ticket as the executing dealer a market-maker (usually one he

called for a quotation), while entering Hoit's name on the copy

of the ticket from which accounting entries were made and confirmations sent.

The two other respondents were found to have interposed Hoit

in 1,456 transactions between October 1963 and February 1966

pursuant to a secret arrangement under which Hoit paid them

25 percent of its gross profits on such business, or about $12,000

to each of them, and to have violated the Commission's recordkeeping requirements.

In a number of cases pending during the fiscal year, the alleged

misconduct included serious manipulations and other improper

activities inconsistent with the maintenance of fair and honest

securities markets. Among these cases were the following proceedings, all of which were disposed of during or shortly after

the fiscal year on the basis of settlement offers and consents.

In proceedings with respect to Nadel & Co., four other brokerdealer firms and 24 individuals, the Commission's order included

staff allegations charging the respondents variously with violations of the registration and/or antifraud provisions of the securities laws in the distribution of and manipulation of the market

for securities of Computer Counseling,Inc.

Computer Counseling made a purported public offering of

100,000shares of its common stock in reliance on the Regulation

A exemption from the registration provisions of the Securities

Act. In its offering circular, it represented that these shares

would be offered to the public without the use of an underwriter.

However, according to the Commission's decisions.t- certain of

the respondents underwrote at least 55,000 of the shares, and a

substantial portion of those shares was withheld and purchased

at the offering price by them or persons affiliated with them.

Thereafter, most of the withheld shares were sold at far higher

prices without disclosure of the profits realized. Certain respondents manipulated the market in Computer stock and made misrepresentations in connection with transactions in such stock.

14 The respondents consented to the Commission'sfindings, for the most

part without admitting or denying the charges against them.
114 SECURITIES AND EXCHANGE COMMISSION

The sanctions imposed by the Commission ranged from partial

suspension of operations for 5 days to revocation of registration

for the broker-dealer respondents and from censure to bar from

broker-dealer association for the individual respondenta.P

In Brand, Grumet & Seigel, Inc., the firm, two of its officers and

a registered representative were charged, among other things,

with manipulation of the market for the securities of L'Aiglon

Apparel, Inc. which were listed and traded on the American

Stock Exchange. The order charged that as part of the manipulative scheme, respondents effected transactions in L'Aiglon stock

which involved no change in beneficial ownership and which

raised the price of the stock and entered purchase and sale orders

for such stock with the knowledge that orders of substantially

the same size, at substantially the same time and price, for the

sale and purchase of that stock had been or would be entered.

It was alleged that respondents effected these and other transactions for the purpose of creating a false and misleading appearance of active trading in L'Aiglon stock and for the purpose of

inducing others to purchase such stock. Pursuant to respondents'

offer of settlement, in which they consented to findings of violations as charged without admitting or denying the allegations,

the Commission revoked the firm's registration, suspended the

individual respondents for periods of from 2 to 12 months and

imposed additional restrictions on those respondents."

The proceedings respecting J. H. Rapp Co. and its two principals involved among other things violations of registration and

antifraud provisions of the Federal securities laws arising out

of transactions in common stock of LesStuds Corporation (now

Trans-Southern Holding Corp.) . According to the Commission's

decision.!" shortly after LesStuds' incorporation in June 1969, one

of the respondents discussed with its president a method of making LesStuds a publicly-held corporation by having its shares

transferred to a publicly-held company which would then "spinoff" those shares to its stockholders. Thereafter, 75,000 LesStuds

shares were exchanged for shares of a wholly-owned subsidiary

15 See Securities Exchange Act Releases Nos. 8922 (July 2, 1970); 8963

(August 19, 1970) ; 8964 (August 19, 1970) ; 9018 (November 6, 1970); 9067

(January 27, 1971); 9106 (March 15, 1971); 9120 (March 30, 1971); and

9296 (August 19, 1971).

16 Securities Exchange Act Release No. 9106 (March 15, 1971).

17 Securities Exchange Act Releases Nos. 9209 (June 15, 1971) and 9343

(September 24,1971). Respondents consented to the findings and to sanctions

without admitting or denying the allegations in the order for proceedings.
THIRTY-SEVENTH ANNUAL REPORT 115

of Atomic Fuel Extraction Corp., to which the respondent had

referred the president of LesStuds. The subsidiary was formed

for the sole purpose of effecting this exchange. The LesStuds

shares were then distributed to the Atomic stockholders, and

active trading in the shares began with no information on LesStuds being available to the investing public. As part of its trading in such shares, the Rapp firm purchased from officers of

Atomic over 16,000 LesStuds shares received by them in the

"spin-off", and resold such shares to customers and other brokerdealers.

Beginning in July 1969, the Rapp firm entered quotations for

LesStuds stock in the pink sheets published by the National Quotation Bureau, Inc. at arbitrary prices which bore no reasonable

relationship to the actual value of the stock. Respondents purchased LesStuds stock from persons engaged in its illegal distribution at prices far below those which respondents artificially

maintained in the sheets, sold such stock and other shares of

such stock to customers of the firm and others at such inflated

levels, and used fictitious and nominee accounts to conceal the

identity of buyers and sellers. In addition, respondents made

materially false and misleading statements.

The Commission revoked the registration of the firm and barred

its principals from association with any broker or dealer.

Judicial Review of Administrative Decisions.-In Jaffee & Co.

and Wilton L. Jaffee, Jr. v. S.E.C.,18 the Court of Appeals for the

Second Circuit affirmed that part of the Commission's order 19

which imposed sanctions on Mr. Jaffee for violations of Rule

10b-6 under the Securities Exchange Act. The court rejected

Jaffee's contention that his purchases of Solitron Devices, Inc.

stock in the course of a registered secondary offering of such

stock held by him and other stockholders were not proscribed

because he had no present intent to sell his registered shares immediately and so had not engaged in a "distribution" within the

meaning of Rule 10b-6. The court held that Jaffee's "registration

of shares owned by him implied an intention to sell or distribute .... " The court also rejected his argument that no violation

of the rule had been established because manipulative intent or

fraudulent conduct had not been shown. It stated (446 F.2d at

391) :

"The Commission need not have shown that Jaffee actually intended to

defraud the marketplace through his purchases. The rule proscribes and

18446 F.2d 387 (C.A. 2, 1971).

19 See 36th Annual Report, pp, 101-102.
116 SECURITIES AND EXCHANGE COMMISSION

clearly defines a practice. . . . Where the rule applies, its prohibition is

absolute."

Reversing that part of the Commission's order which imposed

sanctions on Jaffee & Co., a registered broker-dealer in which

Jaffee's interest exceeded 90 percent but which had not been in

existence at the time of his violations, the court held that the

order instituting the Commission's proceedings had not afforded

Jaffee & Co. adequate notice that a sanction might be imposed

against the firm solely on the basis of Jaffee's conduct.

In Sinclair v. S.E.C.,2° the Court of Appeals for the Second

Circuit affirmed an order of the Commission 21 barring Edward

Sinclair, who was an order clerk in the over-the-counter trading

department of a registered broker-dealer, from further association

with any broker or dealer. The court held that substantial evidence in the record supported the Commission's findings that

Sinclair had violated the antifraud provisions of the federal

securities laws when he interposed another broker-dealer between

his firm's customers and the executing dealers, or market-makers,

in certain over-the-counter securities, thereby causing customers

to pay higher prices for securities purchased or to receive lower

prices for securities sold than had he dealt directly with those

dealers. The court also agreed with the Commission's holding

that Sinclair's falsification of the names of executing dealers on

order tickets was a violation of the recordkeeping requirements

of the Securities Exchange Act. The court found no merit in

Sinclair's contention that a commissioner had prejudged Sinclair's case by participating in an earlier Commission decision

to accept an offer of settlement submitted by another respondent

in the same administrative proceeding. The court noted that the

settlement was based upon facts "stipulated by the parties solely

for the particular settlement, just as is the practice in the negotiation of consent decrees" and that the Commission's decision

accepting the offer of settlement stated that it was not binding

on the other respondents.

In Levine v. S.E.C.,22 the Court of Appeals for the Second

Circuit affirmed the Commission's holding that a broker-dealer

firm, two of its officers and a salesman had violated antifraud

provisions of the securities laws as a result of the sale of certain

securities by material false representations including many contained in a brochure prepared by the issuer and distributed by

the broker-dealer to its customers. The court rejected petitioners'

20 444 F .2d 399 (C.A. 2, 1971).

21 See pp. 112-113, supra.

22436 F. 2d 88 (C.A. 2, 1971).
THIRTY-SEVENTH ANNUAL REPORT 117

argument that they had a right to rely on statements made by

the management of the company concerning its business affairs,

noting that one of the principals of the broker-dealer had personal

knowledge of the company's financial affairs and indicating that

certain of the matters discussed in the brochure could have been

checked with others. The court also held that the hearing examiner had properly refused to allow petitioners to introduce the

testimony of numerous investors that certain misrepresentations

had not been made to them, stating that their testimony would

not have negated the testimony of other investors who had testified that misrepresentations had been made to them. The court

rejected a claim that the petitioners had been deprived of due

process because their books and records had been subpoenaed by

the New York State Attorney General and had been made available to the Commission's staff but not to the petitioners. It noted

that the records were never in the possession of or under the

control of the Commission and that the petitioners failed to show

that they could not have examined the records at the Attorney

General's Office.

In Stead v. S.E.C.,23 the Court of Appeals for the Tenth Circuit

affirmed an order of the Commission imposing sanctions upon

Stead, a securities salesman. The court sustained the Commission's finding that Stead had violated the registration provisions

of the Securities Act by selling unregistered securities for an

account controlled by the issuer. The fact that Stead called the

transfer agent and was advised that the securities were freely

tradeable was held to be "obviously not a sufficient inquiry." The

court also sustained the Commission's finding that Stead willfully

aided and abetted his firm's violations of the recordkeeping provisions of the Securities Exchange Act in connection with errors

in Stead's trading account with the firm, of which he was aware.

CIVIL PROCEEDINGS

Each of the several statutes administered by the Commission

authorizes the Commission to seek injunctions in the Federal

district courts against continuing or threatened violations of those

statutes or the Commission's rules thereunder. During the past

fiscal year the Commission instituted a total of 140 injunctive

actions." A substantial number of these actions were designed to

23444 F.2d 713 (C.A. 10, 1971), petition for certiorari pending.

24 In addition, the Commission instituted eight subpoena enforcement actions and two civil contempt proceedings in the U. S. district courts. More

detailed statistics regarding the Commission's civil litigation activities are

contained in Appendix tables 10-12.
118 SECURITIES AND EXCHANGE COMMISSION

restrain further violations of the registration or antifraud provisions of the Securities Act and Securities Exchange Act; others

sought injunctions against operation of broker-dealers in violation

of net capital or other investor protection requirements. In appropriate cases the Commission also sought ancillary relief, including the appointment of a receiver, or court orders requiring

that rescission be offered to securities purchasers or that profits

unlawfully obtained be disgorged.

The nature of some of the more noteworthy of these actions,

developments in actions instituted in prior years, and certain

appellate decisions in injunctive proceedings, are summarized below.

In S.E.C. v. Parvin Dohrmann Company,25 earlier aspects of

which were discussed in the last annual report.s" the United States

District Court for the Southern District of New York entered a

final judgment in December 1970 against eight of the defendants,

upon their consent, providing essentially all of the broad relief

sought in the Commission's complaint. That complaint had alleged, among other things, that those defendants who were part

of a group with Delbert W. Coleman 27 that controlled Parvin

Dohrmann." were to receive a cash premium for their shares of

the company's stock while the uninformed shareholders of the

company were to receive shares of Denny's Restaurants, Inc.

stock, worth substantially less.

The judgment required these defendants to disgorge virtually

all of the company's shares they had purchased through Coleman,

(and, as to defendant Edward Torres, who had not acquired his

shares through Coleman, to disgorge approximately 1;3 of his

shares-roughly corresponding to the premium he was to have

received for the sale of his shares), such shares to be turned over

to a court-appointed trustee for ultimate distribution to those

beneficial shareholders of the company as of July 10, 1969 (the

date of the alleged unlawful preference) who had no connection

with Coleman, the other defendants, or any of the unlawful

schemes alleged in the Commission's complaint. These defendants

were permitted to keep an installment of the sale price they had

received from defendant Butler that was roughly equivalent to

25 S.D.N.Y., 69 Civ. 4543 (ELP).

2636th Annual Report, pp. 109-110.

27In October 1969, the court entered a final judgment of permanent injunction against Coleman, upon his consent, providing all the relief demanded

by the Commission against him in its complaint.

28 In 1970, the company's name was changed to Recrion Corporation.
THIRTY-SEVENTH ANNUAL REPORT 119

the cost to them of their shares plus interest. The court's order

further required these defendants to divest themselves, within 1

year, of their remaining holdings of the company's shares; to

refrain from any future purchase or acquisition of the stock of

the company, its assigns, successors or subsidiaries; to refrain

from holding any position or office in the company, its assigns,

subsidiaries and successors; and to relinquish any and all claims

of any nature that they had against the company. The decree also

enjoined the defendants from any future violations of those

provisions of the federal securities laws which they had allegedly

violated, with respect to any securities.

Consent judgments of permanent injunction were also entered

against four other defendants, providing essentially all the relief

demanded in the complaint as to them. Nathan Voloshen, one of

the non-consenting defendants, has died, and the case remains

open as to only one defendant, Albert Parvin.

In S.E.C. v. Texas Gulf Sulphur CompanY,29 the Court of Appeals for the Second Circuit affirmed (except as to one defendant)

the decision of the United States District Court for the Southern

District of New York,so which had found Texas Gulf to have

violated Section 10(b) of the Securities Exchange Act and Rule

10b-5 thereunder in the release of a false and misleading press

release on April 12, 1964. The court also affirmed the district

court's order that certain officers and employees of the company

who had violated the antifraud provisions be required to disgorge

the profits they made from the purchase of Texas Gulf stock and

calls on such stock on the basis of material, non-public information about the company. The court of appeals emphasized:

"It would severely defeat the purposes of the Act if a violator of Rule

10b-5 were allowed to retain the profits from his violation."

A defendant who had given tips to others as well as purchasing

stock for himself was required to disgorge both his own profits

and those of his tippees. The court stated that,

"without such a remedy, insiders could easily evade their duty to refrain

from trading on the basis of inside information. Either the transactions

so traded could be concluded by a relative or an acquaintance of the

insider, or implied understandings could arise under which reciprocal tips

between insiders in different corporations could be given."

With respect to a defendant who had accepted a stock option

29446 F.2d 1301 (C.A. 2,1971), certiorari denied, 40 U.S.L.W. 3288 (Dec.

14,1971).

so See 36th Annual Report, pp. 116-117.
120 SECURITIES AND EXCHANGE COMMISSION

while in the possession of inside information, the court of appeals,

confessing error as to its previous determination that the option

should be cancelled, remanded the matter to the district court for

a hearing on the question of appropriate remedy.

After a trustee had been appointed, as previously reported,

in S.E.C. v. Golconda Mining CO.,31he attempted to locate all

persons who had traded with the defendants during the period

of the alleged antifraud violations in order to pay such persons a

share of the fund provided by defendants and consisting of profits

which the Commission alleged resulted from the use of inside

information in violation of Rule 10b-5 under the Securities Exchange Act. On May 27, 1971, the district court ruled that to

the extent persons entitled to share in the fund could not be found,

any remaining moneys should be deposited in the registry of the

court and ultimately paid over to the Treasury of the United

States to be held pursuant to 28 U.S.C. 2041 and 2042 for the

benefit of those persons. The court refused to permit the return

of any part of the fund to defendants, on the ground that this

would impair the deterrent impact of the court's judgment, even

though the judgment had been entered upon defendants' consent.

In S.E.C. v. Harwyn Industries, Inc.,32 the Commission alleged

that, in violation of the registration provisions of the Securities

Act, Harwyn had spun-off shares of stock of four subsidiary companies to its shareholders in consummation of arrangements

pursuant to which certain persons received controlling blocks of

stock in the spun-off companies in exchange for assets given to

these companies. Although the district court denied the Commission's motion for preliminary relief, it held that these transactions

violated Section 5 of the Securities Act since the unregistered

spin-off's were "sales" within the meaning of the Act. The court

found that the effect of each spin-off was to convert a Harwyn

subsidiary into a publicly-held company whose shares were then

actively traded in the over-the-counter market. The transactions

were sales or dispositions of a security for value, the defendants

realizing benefits in the form of a contribution of assets to each

subsidiary and the creation of a public market in the subsidiary's

shares. Harwyn, as the controlling company of each subsidiary,

was held to be an "underwriter" within the meaning of the Act

81327 F. Supp. 257 (S.D.N.Y., 1971). See 36th Annual Report, p, 113;

85th Annual Report, pp, 59-60; 32nd Annual Report, p. 123; 31st Annual

Report, p, 123.

32326 F. Supp.943 (S.D.N.Y., 1971).

~~
THIRTY-SEVENTH ANNUAL REPORT 121

and the other defendants were found to have participated in the

violations.

In S.E.C. v. Liberty Equities Corporation,83 the Commission

filed a complaint against 12 defendants to enjoin further violations of the antifraud, proxy, reporting and registration provisions of the federal securities laws. The defendants included

four officers and directors of Liberty Equities; Peat, Marwick,

Mitchell & Co., a national accounting firm; National Savings &

Trust Co., a national bank; and four broker-dealers. The Commission alleged, inter alia, that certain of the company's financial

statements certified by Peat, Marwick showed as current assets

non-negotiable, non-interest bearing certificates of deposit which

were purchased from National Savings with the proceeds of a

14-month 6 percent loan in the amount of the certificates, obtained

on the same day. The certificates of deposit in fact were pledged

as collateral for the loan, but the pledge was not disclosed in the

certified statements. The complaint alleged that the entire transaction was a sham, entered into only to lend the appearance of

bolstering the company's financial position. All of the defendants

except one-against whom the case is still pending-have consented to the entry of final judgments of permanent injunction

against further violations of the provisions involved. In addition,

Peat, Marwick withdrew its certification of the company's financial statements challenged by the Commission.

In S.E.C. v. Bangor Punta Corp.,84the United States District

Court for the Southern District of New York on August 25, 1971

entered judgment after trial ordering Bangor Punta to make an

offer of rescission to shareholders of the Piper Aircraft Co. who

had exchanged their shares for a package of Bangor Punta securities pursuant to a registered exchange offer in July 1969. The

court found that Bangor Punta's registration statement and

prospectus covering the exchange offer were materially false and

misleading, in that the $18.4million carrying value which Bangor

Punta had assigned in its financial statements, included in the

prospectus, to its investment in the Bangor and Aroostook Railroad (based on an appraisal of 1965 fair market value) had

become "obsolete to the point of being misleading." The circumstances surrounding Bangor Punta's negotiations in May and

June 1969 for disposition of the railroad had indicated that the

83 D.D.C.,No. 2351-70. See Litigation Releases Nos. 4709 (August 6, 1970),

4810 (November 16, 1970), 4811 (November 16, 1970) and 4999 (May 6,

1971).

84331 F. Supp.l154 (S.D.N.Y.. 1971).
122 SECURITIES AND EXCHANGE COMMISSION

only willing buyer would pay no more than $5 million. Concluding, however, that this deficiency was not purposeful, the court

denied the Commission's request for injunctive relief.

In S.E.C. v. Home-Stake 1970 Proqram. Operating Corporation,35 the Commission sought, and by consent obtained, injunctions against violations of the registration requirements of the

Securities Act and antifraud provisions of the Securities Exchange Act in the offer and sale of units of participation in a

program of oil and gas drilling projects. The defendants admitted

that, in violation of Section 5 of the Securities Act, promotional

sales literature was disseminated and sales of units of participation were made before a registration statement had become effective. No violation of the antifraud provisions was admitted. The

defendants did admit, however, that estimates of future recoverable oil reserves contained in the promotional sales literature,

other than reserves actually proven, were extremely uncertain

and speculative.

In accordance with the final judgment, the defendant corporation offered rescission to all persons who had purchased a participation in its "1970 Program," providing each purchaser a

prospectus that purported fully and accurately to describe the

oil and gas recovery projects that were to be included in the

Program. Thereafter, an order was entered directing that the

participants who elected to rescind be repaid an aggregate of

$5,609,000, including interest.

In S.E.C. v. Barraco & CO.,36 the Court of Appeals for the Tenth

Circuit reversed the judgment of the district court which had

dismissed the Commission's complaint for an injunction against

officers of a registered broker-dealer for aiding and abetting the

latter's violations of the Securities Exchange Act. The court

sustained the Commission's authority, pursuant to Section 21 (e)

of the Act, to obtain injunctions against those who participate in

or aid and abet violations of the securities laws. The case was

remanded to the district court for trial on the merits.

In S.E.C. v. Jam-Dol Oil & Gas, Inc.,37 a corporation and its

president had consented to the entry of a decree permanently

enjoining them from selling or offering to sell fractional undivided interests in oil, gas, and other mineral rights in violation

of the registration provisions of the Securities Act of 1933. About

8 months later, the defendants brought an action to dissolve the

35 D.D.C., No. 71-348, April 23, 1971.

36438 F. 2d 97 (C.A. 10, 1971).

37433 F. 2d 304 (C.A. 10, 1970).
THIRTY-SEVENTH ANNUAL REPORT 123

consent decree, stating that they had complied with the securities

law and that the injunction was a continuing embarrassment to

them and might adversely affect the proposed sale of oil and gas

interests pursuant to a registration statement that they contemplated filing with the Commission. The district court set aside the

injunction. On appeal by the Commission, the Court of Appeals

for the Tenth Circuit remanded the case to the district court with

directions to vacate its order and to reinstate the injunction to

full force and effect. Reaffirming well-established judicial guidelines, the court pointed out that where modification or dissolution

of an injunctive decree is sought a strong showing is required that

there are no longer any substantial dangers and that the moving

party is exposed to severe hardships of extreme and unexpected

nature. The court stated that short-term compliance with the law

and a continuing embarrassment in present business relationships

because of an earlier dereliction were not enough.

Participation as Amicus Curiae.-The Commission frequently

participates as amicus curiae in litigation between private parties

under the securities laws where it considers it important to present its views regarding the interpretation of the provisions involved. For the most part, such participation is in the appellate

courts. During fiscal 1971, the Commission filed amicus curiae

briefs in six cases.

In Chasins v. Smith, Ba1'ney & Co., Inc.,38 the Court of Appeals

for the Second Circuit held that the failure of a broker-dealer to

disclose its market-making activity in securities it recommended

in writing to a customer upon his request constituted a violation

of Section lO(b) of the Securities Exchange Act and Rule lOb-5

thereunder. On defendant's petition for rehearing, the Commission, as amicus curiae, noted its agreement with the result reached

by the court under the facts of the case, which established an

investment advisory relationship where the customer was relying

upon the broker's recommendations and hence should have been

advised of the broker's economic interest in the sale of securities

in which it was making a market. At the same time, the Commission expressed concern that the court's holding might be

construed broadly to hold a broker-dealer liable for its customers'

losses due to market declines solely because the broker had failed

to disclose that it was making a market in particular securities

the customers had purchased. The court of appeals denied the

petition for rehearing, but modified its initial opinion so as to

limit its holding to the facts in the case.

38438 F. 2d 1167 (C.A. 2, 1971).
124 SECURITIES AND EXCHANGE COMMISSION

In Superintendent of Insurance v. Bankers Life & Casualty

CO.,il9 the complaint had alleged that the named defendants had

engaged in a scheme whereby Manhattan Casualty Company, a

New York insurance company, was induced to sell nearly $5

million worth of its portfolio Treasury Bonds upon the misrepresentation that the proceeds of the sale would be invested for the

company in certificates of deposit. Instead, the complaint alleged,

the defendants intended to and in fact did misappropriate the

proceeds from the sale of these government bonds without disclosing this fact to Manhattan. The court of appeals, relying upon

its prior decision in Birnbaum v. Newport Steel Corp.,40held that

"Rule 10b-5 was not intended to provide a remedy for schemes

amounting to no more than 'fraudulent mismanagement of corporate affairs.''' 41 The court of appeals further held that, although the creditors of Manhattan might have been defrauded by

the alleged scheme, the creditors would have to look to state law,

rather than Federal law, to ascertain whether any remedy was

available to them as a result of the alleged fraud. In its brief

amicus curiae in the Supreme Court, the Commission took the

position that the antifraud provisions of the Federal securities

laws were intended to cover all manipulative and deceptive devices

of whatever type if they were in connection with the purchase

or sale of securities and that the Superintendent of Insurance,

successor to all the rights of Manhattan, could maintain a suit

under the Federal securities laws on behalf of the company's

creditors.

In Levine v. Seilon,42 a former preferred shareholder of Seilon,

Inc. alleged that the company had violated Sections lOeb) and

14(e) of the Securities Exchange Act and Rule 10b-5 thereunder

by fraudulently inducing preferred shareholders to refrain from

selling their stock. Although allegedly leading such shareholders

to believe that Seilon would not redeem the preferred shares but

would instead make an offer to exchange the shares for common

stock, the company redeemed the preferred shares without making any exchange offer. On appeal from dismissal of the complaint,

the Commission as amicus curiae expressed the view that plaintiff had stated a claim of fraud "in connection with" the sale of

securities under Section 10(b) and Rule 10b-5 because Seilon's

39430 F. 2d 355 (C.A. 2, 1970), affirming 300 F. Supp. 1033 (S.D.N.Y.,

1969), petition for certiorari granted, 401 U.S. 973 (1971).

40193 F. 2d 461 (C.A. 2), certiorari denied, 343 U.S. 956 (1952).

41430 F. 2d at 360.

42439 F. 2d 328 (C.A. 2, 1971).
THIRTY-SEVENTH ANNUAL REPORT 125

redemption resulted in a "forced sale" by the preferred shareholders and it had been alleged that the company's misrepresentations had affected plaintiff's investment judgment whether to sell

or hold the company's securities. The Commission also took the

position that a claim had been stated under Section 14(e), governing tender offers, on the ground that this provision was not limited

in application to consummated tender offers but also included

fraudulent announcements of intent to make a tender offer, such

as the alleged representation in this case that Seilon would exchange its preferred shares for common stock.

The court of appeals, finding it unnecessary to consider either

of the Commission's positions, affirmed the dismissal of the complaint. It held that dismissal was proper because the complaint

did not assert any causal relation between the alleged fraud and

the raising of funds needed for redemption and because the complaint failed to allege recoverable damages in that it did not state

that the preferred shares had any investment value in excess of

their redemption price.

CRIMINAL PROCEEDINGS

The statutes administered by the Commission provide that the

Commission may transmit evidence of violations of any provisions

of these statutes to the Attorney General, who in turn may institute criminal proceedings. Where an investigation by the Commission's staff indicates that criminal prosecution is warranted,

a detailed report is prepared. After careful review by the Office of

Criminal Reference and Special Proceedings and the General

Counsel's Office, the report and the General Counsel's recommendations are considered by the Commission. If the Commission

believes criminal proceedings are warranted, the case is referred

to the Attorney General, who in turn refers the case to the appropriate U.S. Attorney. Commission employees familiar with

the case generally assist the U.S. Attorney in the presentation of

the facts to the grand jury, the preparation of legal memoranda

for use in the trial, the conduct of the trial, and the preparation

of briefs on appeal.

During the past fiscal year 22 cases were referred to the

Department of Justice for prosecution." As a result of these and

prior referrals, 16 indictments were returned against 83 defendants during the year. Convictions were obtained against 89 defendants in 32 cases. Convictions were affirmed in 5 cases, and

appeals were still pending in 9 other criminal cases at the close

of the year.

43 In addition, five criminal contempt actions were referred.
126 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year, the Court of Appeals for the Seventh

Circuit, in U.S. v. Amick." affirmed among others the convictions

of Van C. Vollmer, former editor of an Indiana financial newspaper, and the Indiana Investor and Business News, Inc., its

publisher, for violating Section 17 (b) of the Securities Act by

publishing an article describing stock of Air and Space Underwriters, Inc. for consideration received from the issuer without

disclosing the receipt and amount of such consideration. The

court rejected the defendants' argument that Section 17 (b)

abridged the freedom of the press, contrary to the First Amendment, stating that, "The substantial interest of the investing

public in knowing whether an apparently objective statement

in the press concerning a security is motivated by promise of

payment is obvious. We see no significant abridgement of freedom

of the press in requiring disclosure of a promise of payment if

there has been one."

In another appellate decision;" the Court of Appeals for the

Eighth Circuit affirmed the convictions of and sentences of 35

and 25 years, respectively, imposed on Donald P. Smallwood and

Roy E. Lay. The defendants had been found guility of violations

of the antifraud and registration provisions of the Securities Act

of 1933 and the Mail Fraud Statute, in connection with the sale

of promissory notes of Diversified Brokers Company. In affirming

the sentences, the court stated :

"We recognize that the sentences ... are severe. But we are also mindful, as was the district court, that the hardship and suffering endured

by thousands of unsuspecting individuals, including many elderly persons,

as the result of the nefarious operations of Smallwood and Lay, was

also severe."

As reported in last year's annual report, Harry A. Lowther, Jr.

and three others were indicted for alleged violations of the Securities Act and the Securities Exchange Act in connection with the

offer and sale of common stock of Elkton Company, a corporate

shell which Lowther revived by causing it to acquire assets of

questionable value. During the fiscal year, Lowther, Wendell

Everett Lowry and Lowry Investments, Inc., a Colorado corporation, were convicted.v' These three convictions are presently on

appeal.

In a prosecution arising out of transactions in the securities of

Mooney Corporation, Hal Frances Rachal, an attorney, and Ed44 439 F.2d 351 (C.A. 7, 1971).

45 U.S. v. Smallwood, 443 F.2d 535 (C.A. 8, 1971).

46 D. Colorado.
THIRTY-SEVENTH ANNUAL REPORT 127

ward B. Hunnicutt, an accountant, were convicted on each of 13

counts of an indictment charging violations and conspiracy to

violate the antifraud and registration provisions of the Securities

Act and the Mail Fraud Statute." Rachal sold stock of Mooney

Corporation by making false statements to the effect that the

issuer, a shell corporation, manufactured airplanes and was to be

listed on a stock exchange. Under the direction of Rachal and

Hunnicutt a false and misleading Form 10 and unaudited financial

statements were filed with the Commission. Rachal was sentenced

to five years in prison and fined $10,000, Hunnicut to three years

imprisonment and fined $5,000. Each was also assessed costs of

approximately $10,000.

Lengthy prison sentences were also meted out in a criminal case

involving the offer and sale of certificates of beneficial interest

in two Indiana real estate investment trusts, American National

Trust and Republic National Trust. Four defendants were convicted of violation of the Securities Act and the Mail Fraud

Statute. Calvin R. Mummert, who pled guilty to certain counts

during the course of the trial, received a ten-year suspended

sentence. Defendants Jack Aldridge, Samuel P. Good and James

J. Perrault were convicted by a jury and received prison sentences

of 40, 65 and 65 years, respectively." Kenneth A. Erickson and

Gordon William Schuetz were indicted during the fiscal year for

violations of the registration and antifraud provisions of the

Securities Act and the antifraud provisions of the Securities

Exchange Act in connection with the offer and sale of unregistered undivided fractional interests in oil and gas leases held

by Arch Creek Development Company.t" The indictment charges

that the sales promotion of these interests engaged in by Erickson, a gospel singer, and Schuetz, a traveling evangelist, was

surrounded by an aura of religion and was accomplished by means

of fraudulent misrepresentations. The Department of Justice is

presently seeking the extradition of Erickson who is a resident

of Canada.

The Commission has continued its efforts designed to assure

that injunctions which have been obtained by it are obeyed and

to have those who violate such injunctions held in contempt.

During the fiscal year, 11 persons were convicted of criminal

contempt for violating injunctions. Contempt proceedings with

respect to 12 others were pending at the end of the year. In one

47 D. Texas.

48 D. Indiana.

49 N.D. Ohio.

450-484 0 - 72 - 10
128 SECURITIES AND EXCHANGE COMMISSION

case, a criminal contempt proceeding was filed during the :fiscal

year against Albert Silver, Vernon Brown and Turf Enterprises,

alleging violations of provisions of a permanent injunction entered in August 1969.50 It was alleged that subsequent to the

injunction, Silver and Brown continued to sell stock in Turf

Enterprises, using the proceeds to place wagers on horses at

various tracks in the United States and Canada. The court accepted a nolo contendere plea from Silver; the proceedings as to

Brown were pending as the year ended.

Organized Crime Program.-The Commissiongives priority to

the investigation of cases where there is an indication that organized crime may be involved. Pursuant to Executive Order

11534,51 the Chairman of the Commissionwas designated in June

1970to be a member of the National Councilon Organized Crime.

In that capacity, the Chairman and his designees have met with

other government officialsto formulate a national strategy for

the elimination of organized crime. In this connection, members

of the staff have assisted in the development of plans regarding

better accounting and auditing procedures for gambling operations in the State of Nevada.

In fiscal 1970the Commission'sefforts with respect to organized

crime were intensified by the establishment of an organized crime

unit in its headquarters office to focus on the involvement of

organized crime in the securities markets. This unit acts as a

"back-up" unit to the various Justice Department "strike forces"

against organized crime and as an enforcement unit investigating

securities violations in which persons with organized crime associations are believedto be involved.

The Commission maintains close liaison with the organized

crime and racketeering section of the Department of Justice and

submits quarterly reports relating to organized crime investigations. During the 1971 fiscal year, the Commission had four enforcement staff members assigned to the New York Strike Force

against organized crime and one enforcement staff member assigned to Strike Force Number 18. Commission staff members,

including those assigned to the strike forces, played significant

roles in many cases involving persons reported to be associated

with organized crime.

Proposed Swiss Treaty.-Since approximately January 1969, a

representative of the Commissionhas participated with the State

50 D. Michigan.

5135 F.R. 8865, June 9, 1970.
THIRTY-SEVENTH ANNUAL REPORT 129

Department and other agencies of the United States Government

in discussions looking toward a possible Treaty of Mutual Assistance in Criminal Matters between the United States and

Switzerland. It is believed that such a Treaty would be of assistance to the Commission in dealing with problems presented

by the use of Swiss financial institutions in connection with

securities transactions taking place in the United States.

The Commission's representative participated in a series of

informal discussions between U.S. and Swiss officials in Washington, D.C. and in Bern, Switzerland, which resulted in an informal

agreement by the working groups on an English text of it draft

treaty. Substantial further progress was made during the 1971

fiscal year. An additional round of informal discussions, looking

toward resolution of the remaining problems between the two

working groups, was scheduled for the fall of 1971.

DISCIPLINARY ACTION BY SELF.REGULATORY ORGANIZATIONS

EXCHANGES

Although the Exchange Act does not provide for Commission

review of disciplinary action by exchanges, each national securities exchange reports to the Commission actions taken against

members and member firms and their associated persons for

violations of any rule of the exchange or of the Exchange Act or

of any rule or regulation under that Act.

During the fiscal year, seven exchanges reported 135 separate

actions, including impositions of fines in 90 cases ranging from

$10 to $50,000, with total fines aggregating $502,465; the revocation of 1 member firm and expulsion of 3 individuals; the suspension from membership of 7 member firms and 49 individuals; and

censure of 26 member firms. These exchanges also reported the

imposition of various other sanctions against 95 registered representatives and other employees of member firms.

NASD

The Commission receives from the NASD copies of its decisions

in all disciplinary actions against members and registered representatives. In general, such actions are based on allegations that

the respondents violated specified provisions of the NASD's Rules

of Fair Practice. Where violations are found, the NASD may

impose one or more sanctions upon a member, including expulsion, suspension, fine, or censure. If the violator is an individual, his registration as a representative may be suspended or

revoked, he may be suspended or barred from being associated

with any member, and he may be fined and/or censured. Under
130 SECURITIES AND EXCHANGE COMMISSION

Section 15A(b) (4) of the Exchange Act and the NASD's by-laws,

no broker-dealer may be admitted to or continued in NASD membership without Commission approval if he has been suspended

or expelled from membership in the NASD or a national securities

exchange; he is barred or suspended from association with a

broker or dealer, members of the NASD, or an exchange; his

registration as a broker-dealer has been denied, suspended, or

revoked; he has been found to be a cause of certain sanctions

imposed upon a broker-dealer by the Commission, the NASD, or

an exchange; or he has associated with him any person subject to

one of the above disqualifications.

During the past fiscal year the NASD reported to the Commission its final disposition of disciplinary complaints against 291

member firms and 206 individuals associated with member firms.

With respect to 24 members and 22 associated persons, complaints

were dismissed where the NASD determined that the alleged

violations had not been established. In the remaining cases, violations were found and penalties were imposed on 267 members and

184 registered representatives or other individuals. The maximum

penalty of expulsion from membership was imposed against 16

members, and 26 members were suspended from membership for

periods ranging from 1 day to 5 years. In many of these cases,

substantial fines were also imposed. In another 209 cases, members were fined amounts ranging from $100 to $35,000. In 16

cases, the only sanction imposed was censure, although censure

was usually a secondary penalty where a more severe penalty was

also imposed.

A variety of penalties were also imposed on associated individuals found to have violated NASD rules. Seventeen individuals

were barred from association with any NASD member. The registrations of 27 registered representatives were revoked, and 48

representatives had their registrations suspended for periods

ranging from 5 days to 2 years. Fines in various amounts were

also imposed against many revoked or suspended representatives.

In addition, 92 other representatives were censured and/or fined

amounts ranging from $100 to $10,000.

The number of final disciplinary actions reported to the Commission during the past fiscal year increased by approximately

37 percent over fiscal 1970. This increase is attributable in part

to the severe operational and financial conditions prevailing in

the securities industry during the past 2 years.

Commission Review of NASD Disciplinary Action.-Section

15A (g) of the Exchange Act provides that disciplinary actions by
THIRTY-SEVENTH ANNUAL REPORT 131

the NASD are subject to review by the Commission on its own

motion or on the timely application of any aggrieved person. This

section also provides that upon application for or institution of

review by the Commission the effectiveness of any penalty imposed by the NASD is automatically stayed pending Commission

review, unless the Commission otherwise orders after notice and

opportunity for hearing. Section 15A (h) of the Act defines the

scope of the Commission's review. If the Commission finds that

the disciplined person committed the acts found by the NASD and

thereby violated the rules specified in the determination and that

such conduct was inconsistent with just and equitable principles

of trade, the Commission must sustain the NASD's action unless

it finds that the penalties imposed are excessive or oppressive, in

which case it must cancel or reduce them.

At the start of the fiscal year eight proceedings to review

NASD disciplinary decisions were pending before the Commission. During the year seven additional cases were brought up for

review. Seven cases were disposed of by the Commission. In one

of these cases the Commission sustained in full the disciplinary

action taken by the NASD.52 It dismissed the review proceedings

in two cases as having been abandoned, and permitted the withdrawal of three applications for review. With respect to the

remaining case, the Commission sustained most of the NASD's

findings of violations but reduced the penalty as to one of the

applicants. 53Eight cases were pending at the end of the year.

One of the review cases, May & Co., Inc.,54 involved the NASD's

interpretation respecting the fairness of underwriting compensation. The NASD found that May & Co. had violated the Association's rules of fair practice by entering into underwriting

arrangements with respect to an offering of common stock of

Fibers, Inc. which were unfair and unreasonable, and failing

promptly to file with the Association required documents in connection with such offering.

According to the Commission's decision, May & Co. acted as

managing underwriter in an offering of 147,500 shares of Fibers

common stock at $2 per share pursuant to Regulation A under

the Securities Act. Two months before the offering, Fibers had

sold 40,000 unregistered shares at $0.50 per share to an officer

of May & Co., and issued 5,000 shares for no cash consideration

;;2 Securities Exchange Act Release No. 8975 (September 8, 1970).

;;3 Securities Exchange Act Release No. 9149 (April 16, 1971).

54, Securities Exchange Act Release No. 8975 (September 8, 1970).
132 SECURITIES AND EXCHANGE COMMISSION

to another person who was a director and promoter of Fibers and

had served as a consultant to May & Co.

In its opinion, the Commission observed:

"The NASD very properly has been concerned with the arrangements

between issuers and underwriters in connection with the public offering

of securities of unseasoned companies. Its interpretation that it is a

violation of ... its Rules of Fair Practice for a member to act as an

underwriter in a public offering in which the underwriting arrangements are unfair or unreasonable is consistent with the Rule and beneficial in the exercise of its function of self-regulation in the securities

business. Thus it is important in the application of this Interpretation

that there be a strict standard which avoids even the appearance of

overreaching."

The NASD treated the stock issued to the two individuals as

stock issued to related parties of May & Co. in connection with

the offering for the purpose of computing the overall underwriting compensation. The Commission sustained the NASD's finding

that the stock issued to the officer was a part of the underwriting

compensation, particularly since the officer had signed the underwriting agreement and acquired his shares when it was known

that a public offering was contemplated in which his firm would

be managing underwriter. The Commission did not agree with

the NASD, however, that the evidence was sufficient to show that

the stock acquired by the promoter-consultant was issued in connection with the offering, but concluded that even with the exclusion of these shares the total underwriting compensation,

including the direct underwriting commission and the anticipated

profit on the officer's shares, equalled 28.8 percent of the aggregate offering price and was unfair and unreasonable. The Commission also sustained the NASD's finding of a violation based

on the late filing, and it affirmed the sanctions imposed, consisting

of a 2-day suspension from membership and a $2,000 fine.

Commission Review of NASD Action on Membership.-As previously noted, Section 15A(b) (4) of the Act and the bylaws of

the NASD provide that, except where the Commission finds it

appropriate in the public interest to approve or direct to the contrary, no broker or dealer may be admitted to or continued in

membership if he, or any person associated with him, is under any

of the several disabilities specified in the statute or the NASD

by-laws. A Commission order approving or directing admission to

or continuance in Association membership, notwithstanding a disqualification under Section 15A(b) (4) of the Act or under an

effective Association rule adopted under that Section or Section
THIRTY-SEVENTH ANNUAL REPORT 133

15A(b) (3), is generally entered only after the matter has been

submitted initially to the Association by the member or applicant

for membership. The Association in its discretion may then file

an application with the Commission on behalf of the petitioner.

If the Association refuses to sponsor such an application, the

broker or dealer may apply directly to the Commission for an

order directing the Association to admit or continue him in membership. At the beginning of the fiscal year, 5 applications for

approval of admission to or continuance in membership were

pending. During the year, 12 additional applications were filed,

and 8 were approved, leaving 9 applications pending at the year's

end.

COOPERATION WITH OTHER ENFORCEMENT AGENCIES

In recent years the Commission has given increased emphasis

to the coordination of its enforcement activities with those of

the various state and local authorities, the self-regulatory

agencies, and foreign securities agencies. This program encompasses the referral to state or local authorities for investigation

and prosecution or other action of those cases where it appears

that the activities were confined largely to one state or local area

and that the matter will be dealt with promptly and effectively.

The Commission frequently provides manpower assistance to

these authorities in the development of such cases. In addition,

the Commission's regional offices have taken steps to improve the

coordination of inspections and other activities with state securities administrators and with the NASD in those areas where their

respective jurisdictions overlap. Staff members of the Commission

and of certain state authorities have conducted joint inspections

which have made the entire inspection program more effective.

In a case referred during the fiscal year to local enforcement

authorities, Phyllis C. Dempster was indicted by a citizens grand

jury in Detroit, Michigan for violation of the Michigan Uniform

Securities Law in connection with the offer and sale of high

interest promissory notes of Dempster Investment Co. Evidence

compiled by the Commission's staff during its investigation of

this matter was turned over to local authorities because almost all

of the allegedly defrauded investors were residents of Michigan.

During the fiscal year, the Commission continued its program

of cooperative regional enforcement conferences at each of its

regional offices. These conferences, during which Commission

personnel meet with personnel from state securities agencies, post

office inspectors, Federal, state, and local prosecutors and local
134 SECURITIES AND EXCHANGE COMMISSION

representatives of self-regulatory agencies such as the NASD, are

designed to promote the exchange of information concerning

regional enforcement problems, the development of methods of

increasing cooperation and communication, and the elimination

of needless effort and waste of manpower and other resources in

the regulation of the securities markets. Although the Commission

served as the primary agency in establishing these cooperative

enforcement conferences, they have progressed to the point where

state securities agencies frequently serve as hosts of the programs.

During the previous 4 years the Commission each year held

enforcement training sessions at its headquarters office in Washington, D.C., to which it invited staff members of state and

foreign securities agencies and other law enforcement agencies

working in the securities area in addition to its own personnel. A

shortage of funds in 1971 and an accompanying reduction in new

employees resulted in a determination not to conduct a training

program in the past year.

SECTION OF SECURITIES VIOLATIONS

The Commission's Section of Securities Violations provides one

of the means for cooperation on a continuing basis with other

agencies having enforcement responsibilities. This Section acts as

a clearing house for information regarding enforcement actions

in securities matters taken by state and Canadian authorities, by

other governmental and self-regulatory agencies, and by the Commission. In addition to handling requests for specific information,

the Section publishes a periodic Bulletin which is sent to contributing agencies and to other enforcement and regulatory organizations. The Bulletin contains current information which is

a matter of public record regarding the institution and disposition

of remedial and enforcement proceedings.

Among other things, the data in the SV files (which are

maintained in a computer) constitute a valuable tool for screening

applicants for registration as securities or commodities brokers

or dealers as well as applicants for loans from such agencies as

the Small Business Administration and the Economic Development Administration of the Department of Commerce.

During the fiscal year, the Section received 4,704 letters either

providing or requesting information and sent out 3,051 communications to cooperating agencies. State and Canadian securities administrators reported 142 criminal actions, 11 injunctive

actions, 255 actions in the nature of cease and desist orders, and

169 other administrative orders, such as denials, suspensions, and

revocations of issuers, broker-dealer, and salesmen.
THIRTY-SEVENTH ANNUAL REPORT 135

ENFORCEMENT PROBLEMS WITH RESPECT TO FOREIGN

SECURITIES

The past :fiscal year was again marked by extensive efforts by

various promoters and others to distribute foreign securities in

the United States without complying with the registration and

disclosure provisions of the Securities Act of 1933, and generally

in violation of the antifraud provisions of the federal securities

laws. In some instances companies which were represented as

having issued the securities were in fact non-existent. Known

securities laws violators, as well as individuals associated with

organized crime, appear to be connected with some of the more

flagrantly fraudulent offerings of foreign securities.

To alert brokers and dealers, :financial institutions, investors,

and others to possible unlawful distributions of foreign securities,

the Commission maintains and publicizes a Foreign Restricted

List. That list is comprised of the names of foreign companies

whose securities the Commission has reason to believe recently

have been, or currently are being, offered for public sale in the

United States in violation of the registration requirements of the

Securities Act. The number of companies on the list increased

from 46 on June 30, 1970 to 54 at the end of the 1971 :fiscalyear.

Most brokers and dealers refuse to effect transactions in securities

issued by companies on the list; however, this does not necessarily

prevent promoters from illegally offering such securities directly

to investors in the United States, either in person or by mail.

The following companies were added to the list during the year:

1. Allied Fund for Capital Appreciation, S.A., also known as

AFCA, S.A., purportedly a Panamanian company." AFCA

claimed to have $37 million in assets in the custody of its depository, Midwest National Banking Corporation, in Panama City,

Panama. As a result of investigations by Panamanian and

Canadian authorities, it was reported that no such assets could

be located at the premises of Midwest, which consisted of one

office with no regular employees. Despite the apparent absence

of assets, loans have been made in the United States on the basis

of shares of AFCA used as collateral. Attempts to redeem the

shares upon default in payment of the loans were reported to

have been unsuccessful.

2. J. P. Morgan & Company, Ltd. of London, England (not to

be confused with J. P. Morgan & Co., Incorporated, New York) ;

Swiss Caribbean Development & Finance Corporation, Zurich,

;;5 Securities Act Release No. 5078 (August 12, 19'10).
136 SECURITIES AND EXCHANGE COMMISSION

Switzerland; and Trust Company of Jamaica, Ltd.56 Spurious

"bank money orders" bearing the J. P. Morgan name and exceeding $375,000 in amount were mailed to 31 savings and loan associations in California, as well as a bank in Minnesota, ostensibly

for the purpose of opening new accounts against which cash

withdrawals were attempted. In addition, instruments labeled

"Negotiable Certificate of Deposit" of "J. P. Morgan & Company,

Ltd." of London were distributed in the United States. With respect to the other two companies, advertisements were placed in

U. S. newspapers offering joint venture interests and certificates

of deposit, respectively. The same individual is believed to have

been behind all 3 offerings.

3. Unitrust Limited, of Dublin, Ireland." Through newspaper

advertisements in the United States, Unitrust offered securities

representing interests in Irish real estate properties.

4. Northern Survey of Montreal, Canada." This company,

through mail solicitation and advertisements in a magazine widely

distributed in the United States, offered three-year mineral leases

on designated locations in Canada for amounts ranging from

$100 for 10 acres to $650 for 160 acres. Upon expiration of a

lease, the purchaser would be entitled to renew it for another

three years by payment of the same amount. These offers were

accompanied by representations that the purchaser would profit

in the event that a rich strike of minerals were made near his

lease by another company, because in that event other large corporations would seek to acquire his lease at a substantial profit

to him. In addition, Northern Survey held itself out as willing

to advise and assist the investor in negotiating a profitable sale

of his lease. The cover page of the brochure used to solicit persons

to purchase these leases contained the following representations:

"DO NO MINING--YOU DO NO WORK

PAY NO TAXES-IMPROVE NO LAND

YOU MAY REALIZE A PROFIT ON

YOUR LEASE

WITHOUT EVER LEAVING HOME"

The Commission's staff determined that what was being offered

was an investment contract and as such a "security" as defined in

the Securities Act. Moreover, Canadian authorities had received

numerous complaints from investors in the United States that

they had transmitted funds to purchase leases offered and in

fiB Securities Act Release No. 5086 (September 17,1970).

~. Securities Act Release No. 5109 (November 18, 1970).

~.,Securities Act Release No. 5123 (December 28, 1970).
THIRTY-SEVENTH ANNUAL REPORT 137

return each had received a document which Canadian officials

charged with the duty of recording transfers of land titles had

refused to accept and record because it was so poorly drawn that

the land described could not be located and because it was not

notarized.

5. Hebilla Mining Corporation and Cia. Rio Banano, S. A.69

Unregistered shares of these companies were offered to investors

in the United States by mail from Costa Rica. Information available to the Commission indicated that a Robert Colucci was an

officer of both companies. One Robert Colucci had been indicted

in 1969 by a federal grand jury in Peoria, Illinois in a 61-count

indictment charging him and five others with conspiring to violate

and violating the Federal securities laws and the Mail Fraud

Statute by fraudulently selling unregistered securities. The individual defendants have been fugitives from justice since that

time.

On June 30, 1971, the following companies were on the Foreign

Restricted List:

BAHAMIAN

American International Mining

Compressed Air Corporation Limited

Durman Ltd., formerly known as

Bankers International

Investment Corporation

First Liberty Fund Ltd.

San Salvador Savings and Loan Co.,

Ltd.

United Mining and Milling

Corporation

BRITISH HONDURAN

Caribbean Empire Company, Ltd.

CANADIAN

Allegheny Mining and Exploration

Company, Ltd.

Amalgamated Rare Earth Mines,

Ltd.

American Mobile Telephone and

Tape ce., Ltd.

Antoine Silver Mines, Ltd.

Briar Court Mines, Ltd.

Claw Lake Molybdenum Mines, Ltd.

Ethel Copper Mines, Ltd.

Golden Age Mines, Ltd.

Ironco Mining and Smelting

Company, Ltd.

Jupiter Explorations, Ltd.

Kenilworth Mines Ltd.

Klondike Yukon Mining Company

59 Ibid.

Kokanee Moly Mines, Ltd.

Lynbar Mining Corporation, Ltd.

Norart Minerals, Ltd.

Northern Survey

Northland Minerals, Ltd.

ObscoCorporation, Ltd.

Pacific Northwest Developments,

Ltd.

Paulpic Gold Mines, Ltd.

Pyrotex Mining and Exploration

Company, Ltd.

Radio Hill Mines Company, Ltd.

RichwoodIndustries, Ltd.

Trihope Resources, Ltd.

Wee Gee Uranium Mines, Ltd.

Yukon Wolverine Mining Company
138 SECURITIES AND EXCHANGE COMMISSION

COSTA RICAN

Cia. Rio Banano, S.A.

Hebilla Mining Corporation

EUROPEAN

Central and Southern Industries

Corp.

Unitrust Limited

Swiss Caribbean Development and

Finance Corporation

IRISH

PANAMANIAN

Allied Fund for Capital

Appreciation, S.A., also known as

AFCA, S.A.

British Overseas Mutual Fund

Corporation

Cerro Azul Coffee Plantation

Continental and Southern

Industries, S.A.

Crossroads Corporation, S.A.

Darien Exploration Company, S.A.

DeVeers Consolidated Mining

Corporation, S.A.

Euroforeign Banking Corporation

Global Explorations, Inc.

Panamerican Bank and Trust

Company

Security Capital Fiscal and

Guaranty Corporation, S.A.

Victoria Oriente, Inc.

UNITED KINGDOM

Bank of Sark, of the Isle of Guernsey

J. P. Morgan & Company, Ltd.

WEST INDIAN

California and Caracas

Trust Company of Jamaica

DISQUALIFICATION FROM PRACTICE BEFORE COMMISSION

In Murray A. Kivitz,b° the Commission suspended an attorney

from practice before it for a period of two years, pursuant to

Rule 2(e) of the Commission's Rules of Practice. The Commission

found that Kivitz had allowed a layman, Harold G. Quase, to

control and exploit Kivitz's privilege to practice before the Commission. Kivitz permitted Quase to represent to a prospective

corporate issuer that Quase had an "organization" which could,

through the use of political influence, obtain Commission clearance of a registration statement to be filed pursuant to the Securities Act; that part of the fee paid by the issuer would be used to

purchase such influence; and that accountants who would "stretch

a point" could be found to prepare the financial information re60 Securities Act Release No. 5163 (June 29, 1971), app, pending, C.A.D.C.,

No. 71-1602.
THIRTY-SEVENTH ANNUAL REPORT 139

quired for the prospectus. The Commission held that it had jurisdiction to discipline Kivitz under Rule 2 (e) for his participation

as an attorney in such a scheme, even though the prospective

client did not accept Kivitz's proposed retainer agreement and

Kivitz never made any filings in its behalf.

Recognizing the need for expeditious disqualification procedures

in appropriate cases, the Commission further amended Rule 2 (e)

of its Rules of Practice 61 to provide for the suspension from

appearing or practicing before it of any attorney, accountant or

other expert who by name (1) has been permanently enjoined by

any court of competent jurisdiction by reason of his misconduct

in an action brought by the Commission from violating or aiding

and abetting the violation of any provision of the federal securities laws, or (2) has been found by any court in an action brought

by the Commission to which he is a party, or by the Commission

in any administrative proceeding to which such person is a party,

to have violated or to have aided and abetted the violation of any

provision of the federal securities laws, unless the violation was

expressly found not to have been willful.w Under the amendment,

such a person may be temporarily suspended by the Commission,

the suspension becoming permanent after thirty days unless a

petition for hearing is filed within that time. Upon petition, the

Commission may lift the suspension or, after prompt opportunity

for hearing, may censure or discipline the practitioner. In any

hearing, after the Commission's staff has demonstrated that an

injunction has been entered or that findings of violation have been

made, the burden will be upon the practitioner to show why he

should not be disciplined, and he will not be permitted to litigate

factual questions that he litigated or, but for any consent to

injunction or findings, might have litigated in the earlier proceeding upon which the disqualification proceeding is based.

61 See 86th Annual Report, pp. 131-182, for amendments of Rule 2(e)

dealing with persons disbarred by other authorities or convicted of criminal

violations.

62 Securities Act Release No. 5147 (May 10, 1971).

PART V

REGULATION OF INVESTMENT COMPANIES

In broad terms, an investment company is any arrangement by

which a group of persons invests funds in an entity that is itself

engaged in investing in securities. Investment companies are important vehicles for public participation in the securities markets.

They enable small as well as large investors to participate in a

professionally managed and diversified portfolio of securities.

The Investment Company Act of 1940 imposes various obligations and restrictions on investment companies and persons

affiliated with them and sets forth the Commission's responsibilities in protecting investors in such companies.' It provides a

comprehensive framework of regulation which, among other

things, prohibits changes in the nature of an investment company's business or in its investment policies without shareholder

approval, contains prohibitions against theft or conversion of

assets or breaches of fiduciary duty, and provides specific controls

to eliminate or mitigate inequitable capital structures. The Act

also requires that an investment company disclose its financial

condition and investment policies; requires that management contracts be submitted to shareholders for approval; prohibits underwriters, investment bankers, or brokers from constituting more

than a minority of an investment company's board of directors;

regulates the custody of investment company assets; and provides

specific controls designed to protect against unfair transactions

between investment companies and their affiliates.

In addition to complying with the requirements of the Investment Company Act, an investment company must comply with the

Securities Act of 1933 when offering its securities, and it is subject to certain provisions of the Securities Exchange Act of 1934,

including those relating to proxy and tender offer solicitations and

insider trading and reporting.

1For a discussion of the Investment CompanyAmendments Act of 1970,

enacted during the fiscal year, which amended the 1940 Act in various

significant respects, see Part I of this report.

141
142 SECURITIES AND EXCHANGE COMMISSION

COMPANIES REGISTERED UNDER THE ACT

As of June 30, 1971, there were 1,351 investment companies

registered under the Act, with assets having an aggregate market

value of approximately $78 billion. Compared with corresponding

totals at June 30, 1970, these figures represent an increase of 23,

or only 1.7 percent, in the number of registered companies, but

an increase of approximately $22 billion, or about 39 percent, in

the market value of assets. The $78 billion represents the highest

market value of assets of active companies as of the end of any

fiscal year since the Act was passed.

The following table shows the numbers and categories of registered companies and the approximate market value of the assets

in each category as of June 30, 1971.

Companies Registered Under the Investment Company Act of 19,40as of

June 30, 1971

Number of registered companies

Management open-end ("Mutual Funds")

Funds having no load or load not exceeding 3 percent of net asset value

Vanable annuity-separate accounts

Capital leverage compames AIl other load funds

Management closed-end

Small business investment

compames

Caprtal leverage companies

AIl other closed-end companies.

Umt investment trusts

Vanable annuity-separate accounts

All other unit investment trusts

Face-amount certificate

compames

Total

Active

825

230

47

1

547

187

52

8

127

228

31

197

6

1246

Inactive.

41

39

22

3

105

Total

866

226

250

9

1357

Approxi- mate

market

value

of assets of active

companies

(millions)

$59,814

6,049

490

40

53,235

7,775

255

369

7,151

9,478

34

9,444

1.042

78,109

"InactIve" refers to registered companies whIch as of June 30, 1971, were in the

process of berng Irquidated or merged, or have filed an apphcation pursuant to Section 8(f) of the Act for deregrstration, or which have otherwise gone out of

existence and remain registered only untn such time as the Comrrussion Issues orders

under Section 8(f) termmating therr regrstrations.

The approximately $9.5 billion of assets of the registered unit

investment trusts includes approximately $8.1 billion of assets

of unit investment trusts which invest in securities of other

_

•

_

_

_

_

_

_

_

_

_

_

_

_
THIRTY-SEVENTH ANNUAL REPORT 143

registered investment companies, substantially all of them mutual

funds.

The graph below shows the number of registered investment

companies, broken down into the various categories, over a 5-year

period.

NUMaER

1400

1200

1000

800

600

400

200

o

REGISTERED INVESTMENT COMPANIES

Face Amount

Certificate

Companies

Unit

Investment

Trusts

Management

Open-End dMutual Funds"

( Fiscal year ended June 30) os 5006

The following table on page 144 shows the number of investment companies which became registered during the fiscal year

and the number of registrations terminated.

As the table shows, 12, or approximately 10 percent, of the

newly registered companies were variable annuity separate accounts of insurance companies.> Including these companies, there

were 78 active variable annuity separate accounts registered at

June 30, 1971, consisting of 31 unit investment trusts and 47

management open-end investment companies. A significant part of

2 Typically, a variable annuity contract provides payments for life commencing on a selected date with the amounts of the payments varying with

the investment performance of equity securities which are set apart by the

insurance company in a separate account which is registered with the Commission as an investment company. The separate accounts now registered

are either open-end management companies or unit investment trusts.

450-484 0 - 72 - 11
144 SECURITIES AND EXCHANGE COMMISSION

New Repisiratione, and Terminations 01Registration, During the Fiscal Year

Ended June 80, 1971

Registered Registration during the terminated

fiscal year during the

fiscal year

Management open-end ("Mutual Funds")

Funds having no load or load not exceeding 3 percent of net asset value ______________________ 18 3 Vanable annuity-separate accounts _________________ 4 2 All other load funds ________________________________ 41 41

SUb-total ---------------------------------------- 63 46

Management closed-end

Small business investment companies ______________ 5 3

All other closed-end funds __________________________ 18 38

SUb-total ---------------------------------------- 23 41

Unit Investment trusts Variable annuity-separate accounts ---------------- 8 0

All other unit investment trusts ------------------- 27 10

SUb-total --------------------------------------- 35 10

Face-amount certificate companies ------------------ 0 1

Total -------------------------------- ----- ------ 121 98

the Commission's regulatory effort with respect to variable annuities has involved the application of the requirements of the

Number of companies Estimated

aggregate

market

Registration value

Registered Registered terminated Registered of assets at Fiscal year at beginning during during at end of end of year

ended June 30 otyear year year year (m millions).

1941_____________ 0 450 14 436 $2.500 1942_____________ 436 17 46 407 2,400 1943_____________ 407 14 31 390 2.300 1944 _____________ 390 8 27 371 2,200 1945_____________ 371 14 19 366 3,250 1946_____________ 366 13 18 361 3.750 1947_____________ 361 12 21 352 3.600 1948_____________ 352 18 11 359 3.825 1949_____________ 359 12 13 358 3,700 1950_____________ 358 26 18 366 4.700 195L ____________ 366 12 10 368 5,600 1952_____________ 368 13 14 367 6.800 1963_____________ 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 1958_____________ 432 42 21 453 17,000 1959_____________ 453 70 11 512 20.000 1960_____________ 512 67 9 570 23.500 196L ____________ 570 118 25 663 29,000 1962_____________ 663 97 33 727 27.300 1963_____________ 727 48 48 727 38.000 1964 _____________ 727 52 48 731 41,600 1965_____________ 731 50 54 727 44.600 1966 _____________ 727 78 30 775 49,800 1967_____________ 775 108 41 842 58.197 1966 _____________ 842 167 42 967 69,732 1969 _____________ 967 222 22 1.167 72.465 1970_____________ 1,167 187 26 1.328 56,337 197L ____________ 1,328 121 98 1,351 78.109

The agfregate assets reflect the sale of new securities as well as capital ap- preciation. •
THIRTY-SEVENTH ANNUAL REPORT 145

Investment Company Act to the patterns and procedures which

have grown up in the insurance industry.

INVESTMENT COMPANY ASSETS

The table on the preceding page sets forth the number of investment companies registered under the Investment Company Act

and their estimated aggregate assets, in round amounts, at the end

of each fiscalyear, 1941through 1971.

INVESTMENT COMPANY FILINGS, OTHER THAN APPLICATIONS

As previously noted, investment companies offering their shares

for sale to the public must register them under the Securities Act

of 1933. Registration statements filed by such companies are reviewed for compliance with that Act as well as with the Investment Company Act. Proxy soliciting material filed by investment

companies is reviewed for compliance with the Commission's

proxy rules. The number of registration statements and proxy

soliciting materials filed or processed during the fiscal year was

as follows:

Pending Pending

Type of material June 30, Filed Processed June 30, 1970 1971

Registration statements and post-effective amendments under the Securities Act of 1933 308 1,326 1,358 267

Reglstratllin-statemeniS-undei-ihe--iilvest:- ment Company Act of 1940 _______________ 167 154 127 194 Proxy soliciting material ___________________ 115 871 928 58

Investment companies also filed 902 annual reports, 3,051

quarterly reports, 2,249 periodic reports to shareholders containing financial statements and 1,939 copies of sales literature.

DEVELOPMENTS WITH RESPECT TO PARTICULAR TYPES OF

INVESTMENT COMPANIES

During the fiscal year, a variety of novel investment companies

began operations and certain developments of particular interest

occurred with respect to operating investment companies.

INVESTMENT COMPANY SPONSORED BY A PUBLIC ACCOUNTING

FIRM

Arthur Andersen & Co., a large international accounting firm,

established and registered the Fund A Partnership as a nondiversified, open-end, no-loadinvestment company. The Fund, participation in which is limited to partners and persons holding

equivalent positions, is designed to provide a vehicle for investment by such persons in a manner consistent with the firm's
146 SECURITIES AND EXCHANGE COMMISSION

interests. Thus, the Fund cannot invest in clients of the finn or

make investments of a type which the finn's partners are not

permitted to make as a matter of finn policy or which the Fund's

management committee or the finn determines to be adverse to

the independence, reputation or business of the firm. The committee, consisting of partners, may employ others to supply investment advisory or management services.

The Fund's structure is unique in several respects. To permit

operation of the Fund in a manner consistent with its intended

objectives, the Commissiongranted certain requested exemptions

from various provisions of the Investment CompanyAct, designed

principally to permit the firm to maintain control over the Fund

to insure that it will operate without conflicting with the independence and reputation of the firm."

MINORITY ENTERPRISE SMALL BUSINESS INVESTMENT

COMPANIES

On February 26, 1971, Southern California Minority Capital

Corporation, a closed-end,non-diversifiedmanagement investment

company, offered its shares to the public. The company proposes

to provide equity funds, long-term loans and management assistance to small business concerns owned by socially and economically disadvantaged persons. As a minority enterprise small

business investment company (MESBIC), the company has applied for a license to operate under the Small Business Investment

Act of 1958.

The company proposed to raise an initial $500,000through the

sale of 5,000 shares to be purchased for investment and not with

a view to distribution. If the shares were not sold and the license

granted by July 31, 1971, the offering would terminate and all

funds paid for shares would be returned without interest. As of

July 20, 1971, the $500,000had not been obtained, and the company was making tentative plans to extend the offering until

December 31, 1971.

Minority Investments, Inc., a registered closed-end,non-diversified investment company, which has applied for a license to operate as a MESBIC, filed an application for exemption from

Sections 16(a) and 18(i) so that two classes of voting securities

could be issued and holders of less than one-half of the outstanding stock could elect more than one-half of the directors. Class A

stock, offered primarily to members of the minority community,

is entitled to elect 60 percent of the company's board of directors.

3 Investment Company Act Release No. 6393 (March 19, 1971).
THIRTY-SEVENTH ANNUAL REPORT 147

Class B stock, entitled to elect 40 percent of Minority's board of

directors, will be offered only to business corporations with gross

assets of at least $750,000, trade associations, banks, trust companies, insurance companies, and tax-exempt organizations. The

requested exemptions were granted upon condition that if a

majority of Class A shares are no longer held by members of

minority groups, the differing voting rights will be eliminated and

the shares made identical. 4

MUTUAL FUND FOR LABOR UNION MEMBERS AND PENSION FUNDS

American Union Investment Fund, Inc., a no-load, diversified,

open-end investment company, began selling its shares in December 1970. Shares of the Fund are being offered only to members

of labor unions, jointly administered pension and welfare funds,

and other funds held for the benefit of labor union members.

Each member of the board of directors must be a current or

former labor union officer or a person who has served as trustee or

in some other capacity with respect to pension or welfare funds

of labor unions or for the benefit of labor union members. In

addition the Fund, as a fundamental policy, will not invest in the

security of any company which is involved in a major labor dispute. The Fund claims that it was established in response to the

generally limited investment opportunities for rank and file labor

union members resulting from unfamiliarity with existing funds

and other investment matters.

SHAREHOLDERS' PROPOSALS IN INVESTMENT COMPANY PROXY

MATERIAL

Relying on the provisions of Rule 14a-8 under the Securities

Exchange Act concerning the inclusion of shareholder proposals

in proxy material, two shareholders of Fidelity Trend Fund, Inc.

submitted to the management of the Fund two proposals which

were included in the Fund's proxy material for the 1971 annual

meeting of shareholders.

The first proposal recommended that management consider

adoption of an investment policy requiring management to consider as part of its security analysis the activities of potential and

existing portfolio companies in regard to pollution, minority hiring, and the conduct of business in certain foreign nations. If

analysis of these activities revealed certain specified information

regarding the potential or present portfolio companies, such as

existence of a lawsuit brought by any governmental body for

4 Investment Company Act Release No. 6407 (April 19, 1971).
148 SECURITIES AND EXCHANGE COMMISSION

noncompliance with anti-pollution standards, the recommended

investment policy required the Fund either not to invest or retain

its investment in such companies, or, if an investment were made

or retained in such companies, to seek to change those activities

by taking certain actions as a shareholder. Such actions could

include exercise of its voting rights, making shareholder proposals

designed to improve deficientperformance in the areas of concern,

or consulting with management of the portfolio companies with

respect to adoption of policies designed to improve such performance. The proposal also specified that the Fund's annual report

should include descriptions of all instances in which the Fund

had acted to further the "corporate responsibility" of portfolio

companies and that the proposed policy, if adopted, be disclosed

in the Fund's prospectus.

The second proposal recommended that the board of directors

justify the merits of the management fee payable to the Fund's

investment adviser in its next annual report, and include comparisons of the adviser's net income, Fund-related expenses, the

Fund's total net assets and the net asset value of shares held by

Fund shareholders.

Management included in the proxy statement its statement

in opposition to the proposals, in accordance with Rule 14a-8.

Shareholders of the Fund voted at their annual meeting not to

adopt either of the proposals.

SELECTION OF A NEW INVESTMENT ADVISER BY AN INVESTMENT

COMPANY

During the last year, the three funds managed by a subsidiary

of Hayden, Stone, Inc.-American DualVest, Tudor Hedge Fund

and Tudor Capital Fund-terminated their advisory contracts

with their investment adviser and invited other investment advisers to indicate upon what terms they would be willing to enter

into an advisory agreement. Among the offers received, and the

one accepted, was that of Weiss, Peck & Greer, a member firm of

the NYSE, which offered approximately $1,000,000directly to the

three funds if it were selectedas investment adviser. Weiss' decision

to negotiate directly with the three funds resulted in the funds

dividing the payment according to their respective net asset values.

REVISIONS OF RULES AND FORMS; POLICY STATEMENTS

In the course of fiscal year 1971, the Commission adopted or

revised various rules and forms under the Investment Company

Act and issued policy statements as to certain matters. II

5 Actions of this nature taken by way of implementing the 1970 amendments of the Act are discussedin Part I of the report.
THIRTY-SEVENTH ANNUAL REPORT

ADOPTIONOF RULE 18f-l AND FORM N-18F-l

149

During the fiscal year the Commission adopted Rule 18f-1

which permits any registered open-end investment company to

waive partially the right to redeem in kind." The definition of

"redeemable security" in the Investment Company Act 7 has traditionally been interpreted as giving the issuer the option of

redeeming its securities in cash or in kind. The securities administrators of several states and some foreign countries now

require or are considering requiring, as a condition to doing

business in their respective jurisdictions, that open-end companies

which have the right to redeem in kind file an undertaking that

redemptions by residents of such jurisdictions will be effected in

cash only or that redemptions in kind will not be effected unless

specific approval is first obtained from the securities administrator. Such requirements involve priorities as to distribution of

assets and thus create senior securities within the meaning of

Section 18 of the Act, which are prohibited by that section.

Although redemptions in kind are extremely rare, the Commission believes that it is desirable for open-end companies to

retain the flexibility afforded by the opportunity to make such

redemptions, and it determined to adopt the rule in order to avoid

needless conflicts with state and foreign regulatory authorities.

Under the rule, any registered open-end investment company

which has the right to redeem in kind may file with the Commission, on new Form N-18F-l, a notification of election committing

itself to pay in cash all redemptions by any shareholder of record,

limited in amount during any 9o-day period to the lesser of

$250,000 or 1 percent of the net asset value of the fund at the

beginning of the 90-day period. Should redemptions by one shareholder during any 9o-day period exceed this limit, the fund would

have the option of redeeming the excess in cash or in kind.

AMENDMENTOF RULE 22d-l

During the fiscal year, the Commission amended paragraph

(h) of Rule 22d-l under the Act to restrict the categories of

6 Investment Company Act Release No. 6561 (June 14,1971).

7 Section 2(a) (32) (as renumbered by Public Law 91-547, December 14,

1970) defines the term as "any security, other than short-term paper, under

the terms of which the holder, upon its presentation to the issuer or to a

person designated by the issuer, is entitled (whether absolutely or only out

of surplus) to receive approximately his proportionate share of the issuer's

current net assets, or the cash equivalent thereof."
150 SECURITIES AND EXCHANGE COMMISSION

persons to whom mutual fund shares may be sold with a lower

sales load than that charged to the general public."

Section 22(d) of the Act prohibits a registered investment

company, its principal underwriter or a dealer in its redeemable

securities from selling such securities to "any person" except "at

a current public offering price described in the prospectus." Many

exemptions from these price maintenance provisions were granted

by the Commission to meet special circumstances and in 1958

the Commission codified its administrative interpretations by

adopting Rule 22d-1.

Paragraph (h) of that rule, in essence, permitted sales of

shares at a reduced sales load or none at all to directors, officers

or partners of the investment company, its investment adviser or

principal underwriter, and to full-time employees or sales representatives of any of the foregoing who had acted as such for not

less than 90 days.

Under the terms of that provision, many individuals who provided no services to the investment company could be favored.

For example, a life insurance company having possibly thousands

of employees, which was investment adviser or principal underwriter for an investment company, could offer shares of that

company to employees at a reduced sales load even though their

activities were completely unrelated to the advisory or underwriting functions. The Commission therefore determined that the

paragraph should be revised to limit the exemption to persons

associated directly with the investment company, and to those

associated with the adviser or underwriter only if more than half

their working time involved rendering investment advisory

services to the investment company, selling its shares, or supervising persons engaged in such activities.

REVISION OF ANNUAL REPORT FORM N-IR

Shortly after the end of the fiscal year, the Commission adopted

certain revisions of the Annual Report Form for Registered

Management Investment Companies (Form N-IR) to focus more

attention on the "back office" problems of investment companies,

and to place greater reliance upon the review and opinion of the

independent accountants in detecting and reporting such probIems." The revisions of Form N-IR require more explicit information with respect to the registration of investment company

shares; the processing of orders for sales, redemptions and re8 Investment Company Act Release No. 6347 (February 8, 1971).

9 Investment Company Act Release No. 6620 (July 15, 1971).
THIRTY-SEVENTH ANNUAL REPORT 151

purchases of such shares; and investment company portfolio

transactions generally and in "restricted securities." Information

relating to the status of shareholder accounts and processing of

shareholder inquiries is also required. The opinion of the independent public accountant filed with the annual report on Form

N-1R is required to include comments upon any material inadequacies in the accounting system and the system of internal

accounting control of the investment company and any corrective

action taken or proposed.

VALUATION OF SECURITIES

The Commission published its views on some of the more important questions concerning the accounting for investment securities by registered investment companies. to The Commission

set forth some of the general factors which the directors should

consider in determining a valuation method for an individual

issue of securities if a market quotation is not readily available.

These include the fundamental analytical data relating to the

investment, the nature and duration of restrictions on disposition

of the securities and the forces which influence the market in

which the securities are purchased and sold.

As reported in the 36th Annual Report,!' during fiscal 1970 the

Commission issued a policy statement and a supplemental release

dealing with problems arising from the acquisition and holding

of "restricted" securities by registered investment companies.

During the last fiscal year, the Commission issued another release

dealing with valuation of such securities.'> It called attention to an

interpretive position taken by its staff concerning a possible

"shelf" registration by the issuer of the securities. It was the

staff's view that maintenance of an effective Securities Act registration statement for a specified period of time (a "shelf"

registration) was a factor which could properly be taken into

consideration by an investment company's board of directors in

valuing restricted securities, but that automatic valuation at the

market price on the basis of the shelf registration alone, without

considering all of the business and financial changes which might

occur with respect to the issuer after the filing of the registration

statement, would be improper.

10 Investment Company Act Release No. 6295 (December 23, 1970).

11 Page 138.

12 Investment Company Act Release No. 6121 (July 20, 1970).
152 SECURITIES AND EXCHANGE COMMISSION

POSITION WITH RESPECT TO DILUTION OF NET ASSET VALUE

AND INAPPROPRIATE EXTENSIONS OF CREDIT ON SALES,

REDEMPTIONS AND REPURCHASES OF FUND SHARES

On March 5, 1971, the Commission published a release 13 in

which it observed that a number of open-end investment companies were not making prompt and diligent efforts to protect

their shareholders against the dilution of net asset value which

usually results when orders for the sale, repurchase or redemption

of fund shares are not honored by investors and the investment

companies merely cancel or reverse the transactions on their

records. The Commission noted that when, under these circumstances, investment companies fail to require prompt settlement

of the transactions in fund shares they are, in effect, extending

non-interest bearing loans at their own risk.

As to purchases of fund shares, the Commissionstated its view

that where a principal underwriter is involved it should be responsible for completing the transaction with the fund whether

or not the offsetting transactions with the customers are honored.

Where a fund distributes directly to investors rather than through

a principal underwriter and dealers, the fund should consider

refusing to accept orders for fund shares unless accompanied by

payment, except when a responsible person has indemnified the

fund against losses resulting from failure of investors to make

payment.

APPLICATIONS FOR COMMISSION ACTION

Under Section 6(c) of the Act, the Commission,by rules and

regulations upon its own motion or by order upon application,

may exempt any person, security, or transaction from any provision of the Act if and to the extent such exemption is necessary

or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy

and provisions of the Act. Other sections, such as 6(d), 9(b) ,

10(f), 17(b), 17(d), and 23(c), contain specific provisions and

standards pursuant to which the Commissionmay grant exemptions from particular sections of the Act or may approve certain

types of transactions. Also, under certain provisions of Sections

2, 3, and 8, the Commissionmay determine the status of persons

and companies under the Act. One of the principal activities of

the Commissionin its regulation of investment companies is the

consideration of applications for orders under these sections.

During the fiscal year, 275 applications were filed under these

13 Investment Company Act Release No. 6866.
THIRTY-SEVENTH ANNUAL REPORT 153

and other sections of the Act, and final action was taken on 361

applications. As of the end of the year, 221 applications were

pending. The table below contains a more detailed presentation

of these statistics.

Applications Filed With Or Acted Upon By Commission Under The

Investment Company Act During The Fiscal Year Ended June SO, 1971

PendSections

Pend- mg

Subject ing FlIed Closed .Tune

.TulyI, 30.

1970 1971

2, 3, 6 ________ Status and exemption ______________ 84 32 60 56

5 ------------- SUbclassification of investment com- parries, 1 0 1 0

7 ------------- Registration of investment com- panies. 2 2 1 3

8(f) Termination of registration _________ 61 77 100 38

9, 10,-16-====== Regulation of affiliation of directors,

officers, employees, investment advisers, underwriters and others. 15 11 17 9

11, 25 -------- Regulation of securities exchange offers and reorganization matters. 3 6 5 4

12, 14(a), 15 __ Regulation of functions and activities of investment companies. 15 17 18 14

17 ------------ Regulation of transactions with affiliated persons. 47 57 59 45

18. 22, 23 _____ Requirements as to capital structure. loans, distributions and redemptions and related matters. 71 55 81 45

20 ------------ Proxies, voting trusts, circular

ownership. 0 0 0 0

21 ------------ Periodic payment plans _____________ 3 8 8 3

28 ------------ Regulation of face amount certificate

companies. 3 2 4 1 30, 45 _________ Other periodic reports _____________ 2 8 7 3

Total ___ 307 275 361 221

Among the applications disposed of during the fiscal year, the

following were of particular interest:

The National Association of Small Business Investment Companies, an association of small business investment companies

(SBICs) licensed by the Small Business Administration (SBA)

pursuant to the Small Business Investment Act of 1958 (SBI

Act), had applied during fiscal 1969 for exemption of all SBICs

subject to registration under the Investment Company Act from

certain provisions of that Act.14

In May 1971,the Commission,with two Commissionersdissenting, granted limited exemptions from the statutory prohibitions

with respect to the issuance of stock options and, with two other

Commissioners dissenting, denied exemptions from provisions of

the Act requiring Commissionapproval of transactions between

investment companies and affiliated persons and prohibiting the

issuance of convertible securities."

The SBI Act's prime purpose is to establish a program to stim14 See 35th Annual Report, p. 135.

15 Investment Company Act Release No. 6523 (May 14, 1971).
154 SECURITIES AND EXCHANGE COMMISSION

ulate and supplement the flow of private equity capital and long

term loan funds to small business concerns. For this purpose, the

SBA is authorized to license and lend money to SBICs which in

turn can provide the loans and equity type fundings to small

business concerns.

The Commissionpointed out that it is not an inadvertent result

that SBICs may be subject to regulation under both the Investment Company Act and the SBI Act. Congress was aware of this

situation at the time of the passage of the SBI Act in 1958 when

it concludedthat SBICs with a public investor interest should not

be exempted from the basic provisions of the Investment Company

Act, and as recently as 1967 it again recognized that SBICs were

subject to regulation both by the SBA and the Commission.

With particular reference to the requested exemption from Section 17 of the Investment Company Act, sometimes referred to

as the "self-dealing" section, the Commissionstated that that section is intended, in general, to prevent abuses and unfair transactions by insiders of investment companies and, as such, is a

keystone in the statutory scheme enacted to protect investors.

SBA regulations against conflicts of interest have a coverage

narrower than that under the Investment Company Act. While

compliance with that Act entails some increased costs and inconvenience, such consequence, the Commission observed, is a

necessary incident to regulatory oversight and is not itself a

justification for a blanket exemption from any section of the Act

for an entire industry. The Commissionfurther pointed out that it

had by rule granted to SBICs specific exemptions from Section 17

in recognition of particular problems incident to SBIC activities.

With reference to stock options, the Commission concludedthat

the issuance of "qualified" stock options under the Internal Revenue Code,subject to the adoption of SBA regulations satisfactory

to the Commission imposing appropriate limitations on employee

stock option plans, would not offend the policies and purposes of

the Act. The Commission noted that the adverse factors which

have been stated as resulting from the issuance of options are

not persuasive in the case of SBICs, and that restrictions placed

on "qualified" options under the Internal Revenue Code contain

a number of safeguards.

The hearing examiner's conclusion that no showing had been

made that it was necessary or appropriate in the public interest

that an exemption be granted from the restrictions on the issuance

of convertible securities was upheld by the Commission.
THIRTY-SEVENTH ANNUAL REPORT 155

In Ivy Fund, Inc.,t6 the Commission denied the application of

the Fund and its investment adviser for an order exempting from

the prohibition of Section 17 (a) of the Act the proposed grant by

the Fund to the adviser of a license to use the word "Ivy" in a

proposed new name for the adviser and in the names of other

investment companies advised by it, in consideration of a payment

of $2,000 by the adviser to the Fund. The denial was based on the

Commission's finding that the applicants had failed to prove that

the consideration proposed to be paid was reasonable and fair.

The Commission noted that while the Fund's board of directors

had discussed various relevant factors, it acted without the benefit

of independent expert assistance and had not made any effort to

place dollar values on any of such factors. The Commission stated

that although there was no specific precedent available to the

board which could serve as a basis for comparison, it seemed

likely that guidance could have been obtained from a consideration of analogous situations. Moreover, the Commission held,

"without such guidance the various uncertainties as to the use

which Adviser would make of the license, particularly the extent

to which it could make use of the Ivy name in connection with

other investment companies, precluded a reasonable determination by the board of directors of an appropriate consideration for

all such uses. Such uncertainties could have been narrowed by

appropriate limitations in the licensing agreement or a formula

provision for additional payments."

In an application filed pursuant to Section 6 (c), Small Business

Investment Company of New York, Inc. (SBICNY), a closed-end,

non-diversified investment company, sought exemption from Section 12(d) (3) to permit it to invest in Daniels & Bell, Inc., a

proposed broker-dealer firm that was to be the first black-controlled member firm of the New York Stock Exchange. Section

12(d) (3) prohibits a registered investment company from investing in a broker-dealer unless the investment company or a group

of registered investment companies will wholly-own the brokerdealer. The exemption requested was granted subject, however,

to conditions designed to reduce SBICNY's risk and to prevent

any conflicts of interest. IT

First American-Australian Investors Limited, an investment

company chartered under the laws of the Commonwealth of

Australia, applied for an order under Section 7 (d) of the Investment Company Act to permit the company to register as an in16 Investment Company Act Release No. 6509 (May 6, 1971).

17 Investment Company Act Release No. 6444 (April 6, 1971).
156 SECURITIES AND EXCHANGE COMMISSION

vestment company under the Act and make a public offering of

its securities in the United States. That section prohibits a foreign

investment company from seIling its securities to the public

through the mails or any means or instrumentalities of interstate

commerce unless the Commission, upon application, issues an

order permitting the company to register and make a public

offering.

The company was organized for the purpose of engaging in

business as a closed-enddiversified management investment company investing principally in the securities of Australian companies. The Commission found that, in light of the company's

charter and by-law provisions and certain undertakings and

agreements contained in its application, it was both legally and

practically feasible to enforce effectively the provisions of the

Act against the company and that it was consistent with the

public interest and protection of investors to issue the requested

order.18

In N.A.S.D. v. S.E.C.,19 the Supreme Court vacated the Commission's order granting First National City Bank of New York

exemptions from certain provisions of the Investment Company

Act with respect to a CommingledInvestment Account which the

Bank established and registered under the Act,20because of the

Court's holding, in a companion case," that the establishment of

an investment company such as that created by First National

City Bank involvesthe bank in the underwriting, issuing, selling

and distributing of securities in violation of the Glass-Steagall

Act. The Commission had taken no position on the applicability

of the Glass-Steagall Act or any other provision of federal banking laws; however, the Court's determination that operation of

the investment company would violate those laws required that

the Commission'sexemptive order be vacated. Although the Court

did not decide whether the Commission's order was properly

granted, the two dissenting members of the Court (Justices

Harlan and Blackmun) stated that the Commission had not

abused its discretion in granting the exemptions.

CONTROL OF IMPROPER PRACTICES

INSPECTION AND INVESTIGATION PROGRAM

During the fiscal year, the Commission's staff conducted 95

til Investment Company Act Release No. 6517 (May 12, 1971). 19401 U.S. 617 (1971).

::0 See 36th Annual Report, p, 149.

21 Investment Company Institute v, Camp, 401 U.S. 617 (1971).
THIRTY-SEVENTH ANNUAL REPORT 157

investment company inspections. Many of these disclosed violations of the Investment Company Act and of other statutes administered by the Commission. Among the violations were failure

to obtain best execution on portfolio securities transactions resulting in unnecessary costs to investment companies, improper use

of investment company portfolio brokerage, inadequate disclosures concerning the activities of a company, participation by

investment companies in joint ventures with affiliated persons,

and various accounting and bookkeeping problems.

A number of situations were noted where investment advisers

of investment companies became insolvent and were unable to

discharge their obligations to the companies, with resultant losses

to them.

In most cases, deficiencies noted during inspections were

pointed out to the companies concerned, and corrective action was

immediately taken. Largely as an outgrowth of information obtained during inspections, a substantial number of private investigations were commenced during the fiscal year to develop

facts concerning what appeared to be serious violations. As a

result of the Commission's inspection and investigation program,

more than $3,600,000 was returned to investors either directly or

indirectly during the year. This brings to more than $11,700,000

the total amount returned to investors since the inception of the

inspection program in 1963.

CIVIL AND ADMINISTRATIVE PROCEEDINGS

During the fiscal year, the Commission instituted a number of

civil and administrative proceedings involving investment companies, and various pending proceedings continued to progress or

were concluded.

The Commission brought an injunctive action in October 1970

in the United States District Court for the Central District of

California against All Ame1-icanFund, Inc., its investment adviser

and its principal underwriter, and the president of the Fund and

the advtser.> The complaint alleged that as of June 30, 1970, the

adviser was insolvent and was therefore unable to reimburse the

Fund for certain of the Fund's excess expenses, as it was obligated

to do by the terms of its investment advisory contract with the

Fund. The complaint further alleged that the adviser had received

unauthorized reimbursements from the Fund to cover the salaries

of certain employees of the adviser and had failed to account to

22 See Litigation Releases Nos. 4774 (October 7, 1970) and 4785 (October

19, 1970).
158 SECURITIES AND EXCHANGE COMMISSION

the Fund for rebates received from a broker who executed portfolio transactions. In addition, the complaint alleged that the

Fund's shares were overvalued to the extent that its net assets

included the amounts due from the insolvent adviser, that its

directors had not made a good faith valuation of such receivables

as required by the Investment Company Act, and that its shares

were being sold by means of a false and misleading prospectus

which failed to disclose the above matters. The defendants, without admitting the allegations of the Commission's complaint,

consented to the entry by the court of a final judgment permanently enjoining them from engaging in such violations of the

Investment Company Act and applicable antifraud provisions of

the securities laws.

In December 1970 the Commission instituted an injunctive

action in the U. S. District Court for the Northern District of

California against Investment/Indicators Fund and its investment

adviser'." The complaint alleged, among other things, that as of

October 20, 1970, the adviser was insolvent and unable to account

to and reimburse the Fund for certain expenses in accordance

with the terms of its advisory agreement with the Fund; that it

had converted to its own use moneys belonging to the Fund by

continuing to accept advisory fees from the Fund while insolvent

and indebted to the Fund; and that the Fund and the adviser

had sold Fund shares without complying with applicable state

securities laws with the result that substantial contingent liabilities had accrued arising from the rights of investors to rescind

their investments. The complaint also alleged that Fund shares

had been overvalued to the extent that its net assets included

amounts due from the insolvent adviser and that its directors

had not made a good faith effort to value such receivables. Finally,

the complaint alleged that Fund shares were being sold through

the use of a materially false and misleading prospectus which did

not disclose any of the above matters.

In July 1971 the U. S. District Court for the Northern District

of California preliminarily enjoined Golden Gate Fund, Inc., the

adviser to the Fund, and John B. Licata, president of the adviser,

from engaging in acts and practices in violation of the antifraud

provisions of the federal securities laws.>' The court also appointed an interim investment adviser for the Fund pending

determination by the Fund's board of directors as to proposals, if

any, to be submitted to shareholders concerning future manage23 See Litigation Release No. 4862 (December 23, 1970).

:!4 See Litigation Release No. 5100 (July 15, 1971).
THIRTY-SEVENTH ANNUAL REPORT 159

ment of the Fund. The court found that the adviser was insolvent

and unable to meet its accruing obligation to reimburse excess

expenses of the Fund, as required by the terms of its advisory

agreement with the Fund, and that Licata had guaranteed the

adviser's indebtedness to the Fund, but was insolvent and unable

to fulfill his guarantee. The court further found that, in view of

the adviser's insolvency, the Fund's net assets had been overvalued by inclusion of the adviser's indebtedness as an asset of

the Fund, so that Fund shares had been redeemed at an inflated

value to the detriment of the Fund's shareholders, and that the

Fund's prospectus was materially false and misleading.

In administrative proceedings respecting Sierega & Co., Inc.,

a registered broker-dealer and investment adviser which had

acted as principal underwriter for Olympus Fund, Inc., its subsidiary which acted as the Fund's investment adviser, and two

principal officers of the corporate respondents, the Commission's

staff alleged that Sierega & Co. engaged in business while it was

insolvent and unable to meet its current obligations, that respondents induced the Fund to engage in transactions which were

excessive in size and frequency for their own benefit and not in

the interest of the Fund, and that the Fund paid expenses which

the adviser was obligated to but did not repay to the Fund.25

Among the issues raised in these proceedings is whether, pursuant

to new Section 9 (b) of the Investment Company Act,26 the respondents should be prohibited from affiliation with an investment

company in any of the various capacities enumerated in that

section.

In December 1970, an action by the Commission against American General Insurance Company and three affiliated investment

companies was settled. In its complaint the Commission had

alleged that the defendants had published a series of nine advertisements in The Wall Street Journal in September and October

1969, offering securities of the investment companies in violation

of the prospectus requirements of Section 5(b) (1) of the Securities Act and the sales literature filing provisions of Section 24 (b)

of the Investment Company Act.

Under the terms of the settlement, American General, without

admitting the violations charged, entered into an undertaking to

comply with the above statutory provisions. The undertaking was

incorporated in a court order, thus making American General

25 See Investment Company Act Release No. 6562 (June 15, 1971).

26 For a discussion of that provision, which was part of the 1970 amendments of the Investment Company Act, see pp, 17-18, swpra.

450-484 0 - 72 - 12
160 SECURITIES AND EXCHANGE COMMISSION

subject to the sanction of contempt in the event of future violations. As part of the settlement, the case was dismissed as to the

remaining defendants.

In August 1969 the Commission had instituted administrative

proceedings against Value Line Securities, Inc., a broker-dealer

which is principal underwriter for three investment companies,

its president, and the controlling shareholder of its parent company which is investment adviser to those companies. The proceedingswere based on staff allegations that, among other things,

respondents offered and sold shares of the investment companies

by means of misleading prospectuses which failed to disclose a

lack of personnel and facilities necessary to service shareholders'

accounts properly. During the past fiscal year, respondents, without admitting the allegations, agreed not to contest certain findings of violations of antifraud and record-keeping provisions of

the Securities Exchange Act and a finding of failure of supervision. They also consented to suspensions ranging from 15 to

40 days and agreed that for nine months Value Line would submit

monthly reports on various aspects of its business.F

In S.E.C. v, Enterprise Fund, Inc.,28 the district court, in February 1970,had entered, upon consent, a final judgment of permanent injunction against Enterprise Fund, Inc. and an order

approving a stipulation and undertaking by Shareholders Management Company (''Management''), the fund's investment adviser and principal underwriter. The injunction and order had

prohibited the offer and sale of Enterprise shares until further

court order and had directed Enterprise and Management to take

steps necessary to make and keep current and accurate the records

of Enterprise in compliancewith the requirements of the Investment Company Act.29 Subsequently, in October 1970, an order

was entered by the court, with the Commission's approval, permitting the resumption of sales of Enterprise shares and also

approving an agreement between Enterprise and Management

which provided for the payment of approximately $1.8 million

to Enterprise by Management and State Street Bank and Trust

Company, Enterprise's transfer agent.30 Enterprise's application

for authorization to resume sales of its shares followed compliance with certain provisions of the court's initial order, pur27 Securities Exchange Act Release No. 9183 (May 25, 1971).

28 C.D. CaI., Civ. Action No. 7o-22o-EC (1970); see 86th Annual Report,

pp, 155-156.

29 See Litigation Release No. 4547 (February 27, 1970).

30 See Litigation Release No. 4779 (October 15, 1970).
THIRTY-SEVENTH ANNUAL REPORT 161

suant to which Management filed with the Commission and the

court a report by an independent certified public accounting firm

retained by Management and an analysis prepared by Management of costs and expenses incurred by Enterprise and Management in connection with the maintenance of Enterprise's records.

That analysis formed the basis for the $1.8 million payment

referred to above. That payment, as well as more than $970,000

which Enterprise and its shareholders had already received from

State Street Bank and Bank of America, the former transfer

agent, are part of a total of over $5 million which Management

and the two banks have expended to bring Enterprise's records

into compliance.

A permanent injunction was entered by the U. S. District Court

for the Southern District of New York against Arnold Bernhard

& Co., Inc., a registered investment adviser, and certain affiliated

firms and individuals.v Bernhard & Co. publishes investment advisory publications under the name "Value Line" and acts as

investment adviser for several investment companies. The Commission's complaint alleged, among other things, that securities

analysts who did research for the publications and investment

companies failed to disclose their activities as finders of mergers,

acquisitions, and financing for companies they were reviewing,

and that certain of the defendants had accepted compensation

for the placement of investment company portfolio transactions.

The defendants consented to the injunction without admitting or

denying the allegations in the Commission's complaint.

Administrative proceedings were instituted under the Exchange

Act and the Investment Advisers Act with respect to Maxwell

Ohlman and several firms controlled by him, based on allegations

of the Commission's staff that respondents induced the investment

advisers and/or principal underwriters of several investment companies to direct allocations of brokerage and "give-ups" by their

affiliated investment companies to the Ohlman firms and certain

other persons, in exchange for undisclosed payments by the respondents to the advisers and/or underwriters of direct and indirect pecuniary benefits and other compensation.P The staff

further alleged that respondents failed to deal fairly with the

investment companies involved in that, having undertaken to act

in connection with the portfolio transactions of those companies,

they engaged in the acts and practices described above without

31 See Litigation Release No. 5017 (May 26,1971).

32 Securities Exchange Act Release No. 9061 (January 18, 1971).
162 SECURITIES AND EXCHANGE COMMISSION

disclosing them to the investment companies or their shareholders;"

On the basis of an offer of settlement submitted by the respondents, the Commission suspended, for 30 and 15 calendar days,

respectively, the broker-dealer and investment adviser registrations of Financial Programs, Inc., principal underwriter for and

adviser to three investment companies, and suspended Thomas J.

Herbert, former president of Programs and of the investment

companies, from association with any broker-dealer, investment

adviser or investment company for 30 business days.34 The Commission found, among other things, that during the years 1961-68

Programs caused the three funds to allocate brokerage and "giveups" to another broker-dealer or his designees, pursuant to an

arrangement whereby companies affiliated with such broker-dealer

in return paid certain expenses of Programs related to its distribution of the shares of the funds. The Commission held that these

and related activities by Programs, including the failure to make

proper disclosures thereof in the funds' prospectuses and in other

filings with the Commission, were violative of antifraud and other

provisions of the federal securities laws, and that Herbert aided

and abetted the violations and failed to exercise reasonable supervision of employees to prevent the violations. The respondents

consented to these findings and the sanctions without admitting

any violations.

The Commission filed a complaint in U. S. District Court for

the Central District of California, in June 1971, seeking to enjoin

Incentive Fund, Inc., its investment adviser, and the president

and director of both the Fund and the adviser. The complaint

alleges that defendants violated antifraud and other provisions

of the federal securities acts by causing the Fund to make excessive purchases and sales of its portfolio securities and by

failing to adhere to the Fund's investment policies as set forth

in its prospectus. On October 13, 1971, the court issued an injunction against the investment adviser and the president-e-director. However, it declined to enjoin the Fund, partly because

of a change of management subsequent to institution of the

proceedings.

33 Subsequent to the end of the fiscal year, the Commission, pursuant to

an offer of settlement in which the respondents consented to findings as

alleged without admitting any violations, and to certain sanctions, imposed

sanctions on them, including a lBO-day suspension on Ohlman from association with any broker, dealer, investment adviser or investment company.

Securities Exchange Act Release No. 9370 (October 12, 1971).

34 Securities Exchange Act Release No. 9030 (November 30, 1970).
THIRTY-SEVENTH ANNUAL REPORT 163

The U. S. District Court for the Eastern District of Kentucky

entered a preliminary injunction on October 20, 1970 enjoining

Albert B. Chandler, Sr., J. Daniel Chandler and others from

violating various sections of the Investment Company Act, and

enjoining J. Daniel Chandler from violating Section lOeb) of

the Securities Exchange Act and Rule lOb-5 thereunder. This

action was taken pursuant to a complaint filed by the Commission

alleging, among other things, that defendants, officers of Commonwealth Security Investors, Inc., a registered investment company, had engaged in prohibited joint transactions with that

company and, acting as agents, had received compensation for

the purchase or sale of property to or for that company, in connection with a plan of reorganization under which the assets of

Commonwealth were exchanged for stock of Daniel Boone Fried

Chicken, Inc.35

Toward the end of the fiscal year, the Commission instituted

administrative proceedings involving Charles W. Steadman and

various companies bearing his name. Among the issues raised

was whether action should be taken against the respondents

pursuant to new Section 9 (b) of the Investment Company Act.

All respondents are alleged to be affiliates of a group of registered

investment companies (Funds) managed and advised by Steadman Security Corporation (SSC), one of the respondents, or its

subsidiaries. The staff alleged, among other things, that Steadman

and SSC and others caused transfers of securities between AmeriFund, an "off-shore" fund controlled by Steadman, and certain

of the registered companies in violation of certain provisions of

the Investment Company Act; that Steadman and SSC engaged in

prohibited joint arrangements with certain of the Funds by using

the assets of the Funds to obtain a loan for SSC; that SSC and

another respondent failed promptly to reimburse certain of the

Funds managed by SSC for excess expenses as they were required

to do by agreement with the Funds and with each other and

thereby effected a prohibited "borrowing" from the Funds; and

that respondents caused reports, proxy soliciting materials and

prospectuses to be filed with the Commission and transmitted to

shareholders which were false and misleading concerning the

above practices and transactions."

In S.E.C. v, Fifth Avenue Coach Lines, Inc.,37 the Court of

35 See Litigation Releases Nos. 4682 (July 13, 1970) and 4720 (August 18,

1970).

36 Investment Company Act Release No. 6595 (June 29, 1971).

37435 F. 2d 510 (C.A. 2, 1970).
164 SECURITIES AND EXCHANGE COMMISSION

Appeals for the Second Circuit affirmed the judgment of the district court, previously reported." which appointed a trusteereceiver for Fifth Avenue Coach Lines, Inc. and enjoined certain

of the individual defendants from violating, with respect to transactions involving Fifth Avenue, Section 10(b) of the Securities

Exchange Act and Rule 10b-5 thereunder, and various provisions

of the Investment Company Act. The court of appeals sustained

the district court's finding that Fifth Avenue was an investment

company required to register as such with the Commission,ruling

that "there is nothing surprising about considering Fifth to be an

investment company," since the "transformation of an industrial

company into an investment company, which occurred with Fifth,

was anticipated by events preceding the enactment of the 1940

Act." In affirming the injunction that had been issued against

future violations of the Investment CompanyAct by the individual

defendants, the court adopted the view that an injunction may

be entered upon evidence of "a propensity to violate the Act in

the future."

The court further held that the lower court was justified in

granting an injunction for violations of Rule 10b-5 in connection

with the sale by Fifth Avenue of its stock in Gateway National

Bank to Gray Line Corp., another of the complex of companies

formerly controlled by the individual defendants. The court agreed

with the Commission's contention that the sale of Gateway stock

constituted a fraud upon Fifth Avenue, in that the defendants, as

"controIIing persons [of Fifth], without full disclosure to the

entire board of directors, caused their corporation to sell valuable

stock owned by it to another corporation known by the controlling

persons to be incapable of paying for the stock." In this connection

the court rejected the argument that the appointment of a receiver for the company precluded the issuance of an injunction

under the securities laws.

During the fiscalyear the Commissionalso prosecuted a related

injunctive action, S.E.C. v. Gray Line Corp.,aDto compelGray Line

to register as an investment company. In July 1970, Gray Line

consented to the entry of a permanent injunction and order which,

among other things, directed the company to file required reports

with the Commission under the Investment Company Act and to

conduct a shareholders meeting for the election of directors and

to vote upon whether Gray Line should be liquidated.

38 See 34th Annual Report, pp. 117-118.

3D S.D.N.Y., No. 70 Civ. 2504.
THIRTY-SEVENTH ANNUAL REPORT 165

Thereafter, the court, upon the Commission's application, entered an order appointing a trustee-receiver for Gray Line.40 In

January 1971, the Court of Appeals for the Second Circuit summarily affirmed the appointment of a receiver for Gray Line."

At fiscal year end the respective receivers of Fifth Avenue and

Gray Line had negotiated in principle a settlement, subject to

court approval, of litigation brought on behalf of Fifth Avenue

against Gray Line to recover an alleged indebtedness to Fifth of

about $3 mtllion.v The proposed settlement provides for the

elimination of the cross-ownership existing between the two investment companies, which had previously enabled the individual

defendants in the Commission's action against Fifth Avenue to

maintain control of both these companies.

40 CCH Fed. Sec. L. Rep. 1[92,887(December 17, 1970).

41 C.A. 2, No. 71-1002 (January 13, 1971).

42 Gillespie v, Gray Line Corp., S.D.N.Y., No. 69 Civ. 4251.

PART VI

REGULATION OF PUBLIC. UTILITY HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935, the

Commission regulates interstate public-utility holding-company

systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility

companies which are subsidiary companies of registered holding

companies. There are three principal areas of regulation under

the Act. The first includes those provisions of the Act which require the physical integration of public-utility companies and

functionally related properties of holding-company systems and

the simplification of intercorporate relationships and financial

structures of such systems. The second covers the financing operations of registered holding companies and their subsidiary companies, the acquisition and disposition of securities and properties,

and certain accounting practices, servicing arrangements, and

intercompany transactions. The third area of regulation includes

the exemptive provisions of the Act, provisions relating to the

status under the Act of persons and companies, and provisions

regulating the right of persons affiliated with a public-utility

company to become affiliated with a second such company through

the acquisition of securities.

COMPOSITIONOF REGISTERED HOLDING.COMPANY SYSTEMS

At the close of the 1971 fiscal year, there were 23 holding companies registered under the Act. Of these, 20 are included in the

17 "active" registered holding-company systems, 3 of the 20 being

subholding utility operating companies in these systems. 1 The remaining 3 registered holding companies, which are relatively

small, are not considered part of "active" systems." In the 17

1The three subholding companies are The Potomac Edison Company and

Monongahela Power Company, public-utility subsidiary companies of Allegheny Power System, Inc., and Southwestern Electric Power Company, a

public-utility subsidiary company of Central and South West Corporation.

2 These holding companies are British American Utilities Corporation;

Kinzua Oil & Gas Corporation and its subholding company, Northwestern

Pennsylvania Gas Corporation; and Standard Gas & Electric Company,

which is in the process of dissolution.

167
168 SECURITIES AND EXCHANGE COMMISSION

active systems, there are 95 electric and/or gas utility subsidiaries, 49 nonutility subsidiaries, and 17 inactive companies, or a

total, including the parent holding companies and the subholding

companies, of 181 system companies. The table on page 169 shows

the number of active holding companies and the number of subsidiaries (classified as utility, nonutility, and inactive) in each of

the active systems as of June 30, 1971, and the aggregate assets

of these systems, less valuation reserves, as of December 31, 1970.

SECTION 11 MATTERS IN REGISTERED HOLDING-COMPANY

SYSTEMS

Washington Gas Light Company, which, pursuant to Section

3 (a) (2), had been granted an exemption from the Act except

Sections 11(b) (2), 11(d), and 11(e), filed a plan under Section

11(e) proposing the elimination of the 0.7 percent publicly-held

minority interest in the commonstock of its gas utility subsidiary

company, Shenandoah Gas Company," After a hearing on the plan,

the Commission approved the plan," and, on application of the

Commission, the United States District Court ordered the plan

enforced.5

As reported previously," the Commission approved an amended

plan filed by Pennzoil United, Inc. for the divestiture of its interest in its gas utility subsidiary company, United Gas Corporation, pursuant to Section Il(e) of the Act. The divestments were

completed during this fiscal year.'

PROCEEDINGS WITH RESPECT TO ACQUISITIONS, SALES, AND

OTHER MATTERS

In American Electric Pourer Company, Inc. (AEP), discussed

previously,"the reopened hearings continued during the fiscal year

with respect to AEP's proposal to acquire, in exchange for its

stock, the common stock of Columbus and Southern Ohio Electric

Company, a nonassociate electric utility company.

S See 36th Annual Report, p, 160.

4 Holding Company Act Release No. 17053 (March 16, 1971).

5 Civil Action No.-289-71A, E.D. Va., April 23, 1971.

6 See 36th Annual Report, pp. 170-171; 35th Annual Report, p. 147; 34th

Annual Report, pp. 134-135; 33rd Annual Report, p. 121; 32nd Annual Report,

pp.77-78.

, Subsequent thereto, the Commission released jurisdiction over the related

fees and expenses (Pennzoil United, Inc., Holding Company Act Release No.

17272, September 14,1971).

8 See 36th Annual Report, p. 160; 35th Annual Report, p. 148; 34th Annual

Report, p. 188.
THIRTY-SEVENTH ANNUAL REPORT 169

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170 SECURITIES AND EXCHANGE COMMISSION

In New England Electric System, reported previously," hearings were concluded during the fiscal year on the proposal for an

affiliation, through the creation of a new holding company to be

known as Eastern Electric Energy System, of New England

Electric System and Eastern Utilities Associates, both registered

holding companies, and Boston Edison Company, a nonaffiliated

electric utility company. The Division of Corporate Regulation

opposes approval on the grounds that (a) the anti-competitive

effects of the acquisition would be contrary to the standards of

Section 10(b) (1) and (b) it was not shown that, as required by

Section 10(c) (2), significant economies would result from the

proposed affiliation. The United States Department of Justice and

39 Massachusetts Municipal electric systems also oppose the proposed affiliation.

American Electric Power Company, Inc., filed an application

seeking authorization for the issue and sale of $100 million principal amount of debentures. A hearing was ordered to determine

whether the proposal meets the standards of Section 7 of the

Act.10

In two separate orders, the Commission authorized Louisiana

Power & Light Company (LP&L), an electric utility subsidiary

company of Middle South Utilities, Inc., a registered holding company, to issue and sell first mortgage bonds and preferred stock

at competitive bidding and short-term notes to banks and to

dealers in commercial paper." The Cities of Lafayette and Plaquemine, Louisiana (Cities) sought to intervene as parties and

requested a hearing unless LP&L consented to the imposition of

conditions requiring cessation of activities alleged to be in violation of Federal antitrust laws. The Commission determined that

the facts alleged by the Cities did not present issues relevant to

Section 7 of the Act and that Section 7 (f) does not authorize the

Commission to impose terms and conditions to resolve collateral

and unrelated controversies in which a declarant may be engaged

with other parties. The Cities filed petitions for review from both

orders, oral argument was heard by the Court of Appeals, and, at

the end of the fiscal year, the matter was under advisement."

9 See 36th Annual Report, p. 160; 35th Annual Report, p, 149; 34th Annual

Report, p. 138.

10 Holding Company Act Release No. 17158 (June 9,1971).

11 Louisiana Power & Light Company, Holding Company Act Releases Nos.

16881 and 16955 (October 27, 1970, and December 29, 1970).

12 Cities of Lafayette and Plaqueminp. T.ouisiana v. B.E.C., C.A.D.C., Nos.

24764 and 24963 (consolidated).
THIRTY-SEVENTH ANNUAL REPORT 171

In Middle South Utilities, Inc., the Commission rejected the

above Cities' intervention and request for reopening the hearing,

filed 15 months after the hearing, with respect to the proposal by

Middle South to acquire, in exchange for its common stock, the

outstanding common and preferred stocks of Arkansas-Missouri

Power Company, an unaffiliated company. The Cities' petition

reasserted the alleged violations of the Federal antitrust laws

charged in the proceedings relating to the proposed financing of

Louisiana Power & Light Company. The Commission concluded

that the rule permitting intervention by interested municipalities

"cannot be deemed to grant, nor does an orderly administration

of proceedings permit, an extension of the privilege for such a

long period of time beyond the time fixed in the public notice of

hearing for interested persons to request participation." 13 Subsequently, the Commission approved the proposed acquisition,

without ordering the hearing requested by the Cities." The Cities

have filed petitions for review with respect to both orders."

In Michigan Consolidated Gas Co. v. S.E.C.,16 the Court of

Appeals for the District of Columbia Circuit affirmed an order

of the Commission 17 denying an application by Michigan Consolidated and its subsidiary company for permission to provide

financing to the subsidiary company which, pursuant to the National Housing Act, proposed to construct in its service area two

housing projects for low and moderate income families. The

court agreed with the Commission's construction of the "other

business" clauses of Section 11(b) (1) which govern the retainability of nonutility businesses.

Under that construction, the court pointed out, "the holding

company or its subsidiary must clear two hurdles. First, the

company must show that its 'other business' is 'reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system.' ... Once a company

has cleared this hurdle, the Commission then looks to see whether

the second sentence of Section 11 (b) (1) is adhered to, i.e.,

whether the retention of the 'other business' is 'necessary or

appropriate in the public interest.''' The court agreed that the

13 Holding Company Act Release No. 17081 (March 30, 1971).

14 Holding Company Act Release No. 17116 (May 5, 1971).

15 Cities of Lafayette and Plaque-mine, Louisiana v, S.E.C., C.A.D.C., No.

71-1337.

Ifi 444 F.2d 913 (C.A.D.C., 1971).

17 Holding Company Act Release No. 16763 (June 22, 1970). See 36th

Annual Report, pp, 161-162.
172 SECURITIES AND EXCHANGE COMMISSION

operation of a low-rent housing project did not meet the functional relationship test and that it was therefore not necessary

for the Commissionto reach the "public interest" questfon.P

Legislation has been introduced in the 92nd Congress (H.R.

6711and S. 1991) to provide an exemption from the Act to permit

registered holding companies to participate in low and moderate

income housing programs. The bills are identical to those introduced in the 91st Congress (See 36th Annual Report, p, 162).

In National Utilities & Industries Corporation,t9 a hearing has

been held on an application by National for an exemption as a

holding company under Section 3 (a) (1) of the Act. National,

which was organized in 1969, acquired all of the outstanding

commonstock of Elizabethtown Gas Company in an exchange of

National stock for stock of Elizabethtown. National also has nonutility subsidiary companies which are engaged in such activities

as data processing and computer services, exploration for gas,

leasing an aircraft, and a travel agency business. The principal

question is whether under the "unless and except" clause of

Section 3 (a) the exemption should be denied in light of the fact

that National has become engaged in activities unrelated to the

retail gas utility business. At the conclusion of the hearing, the

Division announced that it would opposegranting of an exemption

to National. National and the Division waived an initial decision

by the hearing examiner, and, subsequent to the close of the fiscal

year, briefs were filedwith the Commission.

Union Electric Company, an exempt holding company and an

electric and gas utility company,filed an application relating to a

proposal to acquire, through an invitation for tenders, the outstanding shares of common stock of Missouri Utilities Company,

a nonassociate electric and gas utility company." A hearing commenced during the fiscal year to determine whether the proposed

acquisition meets the standards of Section 10 of the Act and

18 The court also affirmed orders of the Commission which had denied

motions for an "interim order" and "limited relief" filed subsequent to the

issuance of its order denying the main application. Holding Company Act

Release No. 16819 (August 26, 1970); Holding Company Act Release No.

16842 (September 22, 1970). These motions sought authorization to complete

construction and financing of the projects during the period required to

implement the divestiture order. The court noted that there had been no

showing that denial of this relief would render any substantial harm to

Michigan Consolidated, its investors, or any of its customers.

19 Holding Company Act Release No. 17062 (March 23,1971).

20 Holding Company Act Release No. 16815 (August 20,1970).
THIRTY~SEVENTH ANNUAL REPORT 173

whether Union Electric should be granted an exemption pursuant

to Section 3 (a) (2) thereof.

In Columbia Gas System, Inc.,21 a hearing was held on an application relating to the acquisition of the common stock of National

Gas & Oil Corporation by Columbia. At the conclusion of the

hearing, Columbia filed a brief in support of the acquisition.

Thereafter, National terminated the agreement with Columbia,

and Columbia's request to withdraw its application was granted.22

FINANCING OF ACTIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During fiscal 1971, 16 active registered holding-company systems issued and sold for cash a total of 72 issues of long-term debt

and capital stock, aggregating $2,496 million." pursuant to authorizations granted by the Commission under Sections 6 and 7

of the Act.24 All of these issues were sold for the purpose of raising new capital. The table on page 174 presents the amounts and

types of securities issued and sold by these holding-company

systems."

The financing highlight of fiscal 1971 was the record volume of

external financing by registered holding companies and their subsidiary eompanies, The total of $2,4735 million of new securities

publicly issued and sold for cash by these companies, as shown

in the preceding table, represents the greatest volume of external

financing by companies subject to the Act for any year since

passage of the Act and is almost 1.5 times the volume of securities

issued and sold the previous year. The amount of preferred stock

issued in 1971 was 2.7 times the amount issued in 1970.

All of the senior securities were sold at competitive bidding

except a $58,000,000 debenture issue of GPU, with an interest

21 See 36th Annual Report, p. 164.

22 Holding Company Act Release No. 17058 (March 19, 1971).

23 Debt securities are computed at their principal amount, preferred stock

at the offering price, and commonstock at the offering or subscription price.

24 The active system which did not sell stock or long-term debt securities

to the public was Philadelphia Electric Power Company.

25 The table does not include securities issued and sold by subsidiaries to

their parent holding companies, short-term notes sold to banks, portfolio

sales by any of the system companies, or securities issued for stock or assets

of nonaffiliated companies. Transactions of this nature also require authorization by the Commission except, as provided by Section 6(b) of the Act, the

issuance of notes having a maturity of 9 months or less where the aggregate

amount does not exceed 5 percent of the principal amount and par value of

the other securities of the issuer then outstanding.
174 SECURITIES AND EXCHANGE COMMISSION

Securities Issued and Sold for Cash to the Public and Financial Institutions

by Active Registered Holding Companies and Their Subsidiaries-FiBcal Year

1971 (In Millions of Dollars)

Holding-company systems

Allegheny Power System, Inc.

Monongahela Power Co.

Potomac EdIson Co.

West Penn Power Co.

American Electric Power Co., Inc.

Appalachian Power Co.

Indiana & Michigan Electric Co. Ohio Power Co.

Amencan Natural Gas Co.

Mlchlgan Wisconsin Pipe Line Co. WIsconsin Gas Company

Central & South West Corporation Central Power & Light Co.

Columbia Gas System Inc., The

Consolidated Natural Gas Co.

Delmarva Power & Light Co.

Eastern Utfhtres Associates

Blackstone Valley Electric Co.

General Public UtIlities Corp.

Jersey Central Power & Light Co.

Pennsylvania Electnc Co

Middle South Utilities, Inc.

Arkansas Power & Light Co.

Louisiana Power & Light Co.

Mississippr Power & LIght Co.

National Fuel Gas Co.

New England Electric System Massachusetts Electnc Co.

Narragansett Electnc Co

New England Power Co.

Northeast Utllitles

Connecticut Light & Power Co.

Ohio Edison Company

Southern Company, The

Alabama Power Company Georgia Power Company Gulf Power Company MississippI Power Company Utah Power & Light Company

Maine Yankee Atomic Power Co.'

Vermont Yankee Nuclear Power Corp.'

Bonds

20

20 a 140

70

30

80

80

36

30

75

51 n 42

55

"45

17.5

20

20

40

105

60

149.5

16

15

35

125

80

Debentllres

15

"125

"125

58

30

21

15

Preferred

stock

5.1

5.0

30.4

a 25.4

132

50.8

"17.3

7.6

10.1

10.1

15.3

20.5

10_0

n 406

13.4

Common

stock

36.2

9.4

78.3

55

36

82.7

Total 1,389.50 389.00 274.80 420.20

"Two issues.

"Three issues c Statutory utrlrty subsidiartes of Northeast Utilities and New England Electric

System.

rate of 10-~ percent, which was sold pursuant to a rights offering

to its common stockholders at principal amount. All of the common stock was issued and sold at competitive bidding except for

597,909 shares issued by Delmarva Power & Light Company,

3,800,000 shares issued by The Southern Company, and 3,000,000

shares issued by GPU. These shares were sold pursuant to rights

offerings to common stockholders with the compensation to

standby underwriters determined by competitive bidding except

for GPU whose rights offering was not underwritten.

This unprecedented volume of :financing was accompanied by

continuing high interest and preferred dividend rates and the

deterioration of ratios of earnings coverages for interest and

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

"

"

"

"

"

"
THIRTY-SEVENTH ANNUAL REPORT 175

preferred dividends. For the calendar year 1970, the 17 registered

electric and gas holding-company systems earned their income

deductions plus preferred dividend requirements an average 2.19

times (after taxes) as compared to 2.93 times in 1966 and 3.07

times in 1955.26

26 The ratios for 1966 and 1970 were computed from annual reports filed

With the Commission. The 1955 computation is for 16 holding-eompany

systems cited in Hearings Before the Subcommittee of the Committee on

Interstate and Foreign Commerce of the Senate, 84th Cong., 2nd Sess., S.

2643, p. 399 (1956).

450-484 0 - 72 - 13

PART VII

PARTICIPATION IN CORPORATE REORGANIZATIONS

The Commission'srole under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the

United States district courts, differs from that under the various

other statutes which it administers. The Commission does not

initiate Chapter X proceedings or hold its own hearings, and it

has no authority to determine any of the issues in such proceedings. The Commission participates in proceedings under Chapter

X in order to provide independent, expert assistance to the courts,

the participants, and investors in a highly complexarea of corporate law and finance. It pays special attention to the interests of

public security holders who may not otherwise be represented

effectively.

Where the scheduled indebtedness of a debtor corporation exceeds $3 million, Section 172 of Chapter X requires the judge,

before approving any plan of reorganization, to submit it to the

Commission for its examination and report. If the indebtedness

does not exceed$3 million,the judge may, if he deemsit advisable

to do so, submit the plan to the Commission before deciding

whether to approve it. When the Commissionfiles a report, copies

or a summary must be sent to all security holders and creditors

when they are asked to vote on the plan. The Commissionhas no

authority to veto a plan of reorganization or to require its

adoption.

The Commissionhas not considered it necessary or appropriate

to participate in every Chapter X case. Apart from the excessive

administrative burden, many of the cases involve only trade or

bank creditors and few public investors. The Commission seeks

to participate principally in those proceedings in which a substantial public investor interest is involved. However, the Commission may also participate because an unfair plan has been or

is about to be proposed, public security holders are not represented

adequately, the reorganization proceedings are being conducted in

violation of important provisions of the Act, the facts indicate

that the Commission can perform a useful service, or the judge

requests the Commission'sparticipation.

For purposes of carrying out its functions under Chapter X,

177
178 SECURITIES AND EXCHANGE COMMISSION

the Commission has divided the country into five geographic areas.

The New York, Chicago, San Francisco and Seattle regional

offices of the Commission each have responsibility for one of these

areas. Supervision and review of the regional offices' Chapter X

work is the responsibility of the Division of Corporate Regulation

of the Commission, which, through its Branch of Reorganization,

also serves as a field officefor the fifth area.

SUMMARY OF ACTIVITIES

In the fiscal year 1971, the Commission entered its appearance

in 19 new proceedings involving companies with aggregate stated

assets of approximately $373.4 million and aggregate indebtedness of approximately $267.4 million. The corporations involved

in these proceedings were engaged in a variety of businesses,

including, among others, those manufacturing such diverse items

as ice cream, furniture, education devices, soft drinks, data

processing equipment and shoes, as well as such businesses as

producing oil and gas, renting uniforms, refining beet sugar,

providing computer services, leasing trucks, operating an insurance holding company, a school, nursing homes, automobile race

tracks and helicopter and commercial airlines, and engaging in

commercial finance and real estate development.

Including the new proceedings, the Commission was a party

in a total of 114 reorganization proceedings during the year.' The

stated assets of the companies involved in these proceedings

totaled approximately $1.4 billion and their indebtedness totaled

approximately $1.1 billion. The proceedings were scattered among

district courts in 36 states and the District of Columbia as follows: 12 in California; 11 in New York; 9 in Arizona; 7 in

Pennsylvania; 6 in Texas; 5 each in Florida, Illinois, Indiana, and

New Jersey; 4 each in Louisiana and North Carolina; 3 in

Oklahoma; 2 each in Arkansas, Colorado, Hawaii, Kansas, Michigan, Nevada, Ohio, South Dakota, and Utah; 1 each in Connecticut, District of Columbia, Georgia, Iowa, Kentucky, Maine,

Maryland, Massachusetts, Minnesota, Montana, Missouri, North

Dakota, Tennessee, Virginia, West Virginia and Wisconsin.

During the year, 13 proceedings were closed. As of the end of

the fiscal year the Commission was a party in 101 reorganization

proceedings.

1Appendix Table 16 lists reorganization proceedings in which the Commission participated during the year.
THIRTY-SEVENTH ANNUAL REPORT 179

JURISDICTIONAL, PROCEDURAL, AND ADMINISTRATIVE MATTERS

In Chapter X proceedings in which it participates, the Commission seeks to have the courts apply the procedural and substantive

safeguards to which all parties are entitled. The Commission also

attempts to secure judicial uniformity in the construction of

Chapter X and the procedures thereunder.

In Bermec Corporation.' the district court approved the debtor's

petition over the opposition of several major creditors holding

claims secured by liens on the debtor's motor vehicles. These

creditors contended that the petition had not been filed in good

faith, principally on the ground that it was unreasonable to expect that a plan of reorganization could be effected. The court of

appeals, in accordance with the view urged by the Commission,

affirmed, stating: "In sum, we cannot find the prospect so hopeless as to require setting aside the order below . . . the expressed

intention of certain secured creditors to reject any plan that does

not provide full payment ... is not enough to defeat the petition.

Creditors have been known to change their minds when a plan

is actually put on the table." 3

In Maine Sugar Industries, Inc.i: an involuntary Chapter X

petition was filed against the debtor and one of its wholly-owned

subsidiaries by three unsecured creditors. As a result of a settlement with them, these creditors filed a motion to dismiss the

petition. The court granted the motion over the Commission's

objection that the motion papers failed to disclose adequately the

terms of the settlement.

In Federal Shopping Way, Inc.,5 previously reported," the court

of appeals affirmed the decision of the district court that debenture

holders were not disqualified from joining in a creditor's petition

for reorganization merely because they also held common stock

of the debtor." The court also agreed that the appointment of a

receiver pendente lite in an injunctive action filed by the Commission constituted the appointment of a receiver "in a pending

equity proceeding," within the meaning of Section 131 (2) of

Chapter X, and that one of the alternative requirements for an

involuntary petition had therefore been met.

2 S.D. N.Y., No. 71-B-291.

3445 F. 2d 367, 369 (C.A. 2, 1971).

4 D. Maine, No. Bk-70-435-ND.

5 W.D. Wash., No. 61609.

6 See 36th Annual Report, p. 177; 35th Annual Report, p. 161; and 34th

Annual Report, p. 145.

7433 F. 2d 144 (C.A. 9, 1970).
180 SECURITIES AND EXCHANGE COMMISSION

In Kelly Development Company,8 a case in which the Commission was not participating, a lawyer who was an officer and

stockholder of creditors of the debtor was appointed as general

counsel to the Chapter X trustee. The Commission advised the

attorney that he was not disinterested as required by Sections 157

and 158,and he resigned.

Four Seasons Nursing Centers of America, Inc., et al.,o includes

a group of associated companiesjointly engaged in the construction and operation of nursing centers. At the time they entered

Chapter X, 45 centers were in operation and an equal number

were in various stages of construction. Ownership of the centers

was divided among a bewildering maze of partnerships and corporations, although their management was centralized in the

principal debtor.

The reorganization trustee for the parent corporation caused

a voluntary Chapter X petition to be filed in the same court for

Four Seasons Overseas, N. V., a wholly-owned subsidiary, which

had been organized abroad with $3 million of capital provided

by its parent. The subsidiary had issued and sold to European

investors $15 million of debentures guaranteed by its parent, lent

the $15 million proceeds to its parent and had $1,700,000 on

deposit in American banks. Over objections raised by Finimtrust,

S. A., a Luxembourg corporation (the indenture trustee under

the trust indenture pursuant to which the debentures were sold),

the reorganization court, as urged by the Commission,retained

jurisdiction over the proceeding for the subsidiary, approved its

petition for reorganization as filed in good faith and appointed

the Chapter X trustee for the parent as trustee for the subsidiary.

Finimtrust appealed from these rulings," and the Commission

filed a brief urging affirmance. After the close of the fiscal year

the matter was settled and the appeals dismissed.

In the same proceeding a bank attempted to set off funds

deposited by a subsidiary company in reorganization against the

unpaid balance on a loan owed to the bank by the parent corporation. The district court, on petition of the reorganization trustee, ruled against the bank, which appealed.'! The Commission

urged that the district court was correct in refusing to disregard

the separate corporate entities of the parent and the subsidiary

and in determining that it had summary jurisdiction to order the

8 S.D. W. Va., No. 70-422.

oW.D. Okla., BK 70-1008, 1008 A-D, 1129, 1129A.

10 C.A. 10, Nos. 602-70, 71-1259 and 71-1331.

11C.A. 10, No. 603-70.
THIRTY-SEVENTH ANNUAL REPORT 181

bank to turn over to the trustee the amount the bank sought to

offset. The matter was settled by the parties prior to decision by

the court of appeals, and the appeal was dismissed by stipulation.

In this proceeding a number of disputes have arisen as to the

status of property titled in a partnership in which a debtor was a

general partner and operator but had outside partners. The court

ruled that a partnership interest is property of the debtor within

the meaning of Chapter X.12 In all cases but one, satisfactory

settlements have been made with the other partners.

Serious charges of fraud have been made against debtors in

various transactions and numerous class actions on behalf of

shareholders are pending against debtors and their officers, accountants and underwriters. Several claims under the Securities

Act, including one for $100 million, have been filed on behalf of

the shareholders, but have not been resolved.

In Landmark Inns of Durham, Inc.,13 previously reported.> the

Commissionopposed the petition of landlords asking the Chapter

X court to declare a forfeiture of a lease of real property on which

the debtor had constructed a motel, its principal asset. The Commission, citing In re Fleetwood Motel Corp.,15 had argued that it

would be inequitable to permit the landlords to obtain the debtor's

principal asset as a result of breaches of the lease which had been

remedied by the Chapter X trustee.

The referee in bankruptcy denied the landlords' petition. The

landlords filed a petition for review with the district judge who

upheld the referee's decision. The landlords have appealed.!" and

the Commissionfiled a brief supporting the district court's order.

The matter is pending on appeal.

In Los Angeles Land and Investments, Ltd.,n previously reported," after the close of the fiscal year the court of appeals,

as urged by the Commission,affirmed the decision of the district

court that, when an officerof the debtor filed proofs of interest

and claims, the reorganization court had summary jurisdiction to

allow a counterclaim filedby the reorganization trustee for breach

of fiduciary obligation and for violation of a permanent injunction

12 This is in accord with In the matter of Imperial '400' National, Inc., 429

F. 2d 671 (C.A. 3, 1970), discussed in the 36th Annual Report, pp. 176-177.

13 M.D.N.C., No. B-198-69.

14 36th Annual Report, p, 179.

15355 F. 2d 857 (C.A. 3, 1964).

16 C.A. 4, No. 71-1577.

17 D. Hawaii, No. Bk-67-352.

18 See 35th Annual Report, pp. 162-163; 34th Annual Report, p. 148.
182 SECURITIES AND EXCHANGE COMMISSION

entered on consent in a prior action by the Commission.P It held

that summary jurisdiction exists even where the counterclaim did

not arise in a strict sense from the same transaction, although it

found that the officer's claims were sufficiently related to the

trustee's counterclaim. The court of appeals stated that it was

unable to distinguish the present case from Alexander v. Hillman,

296 U.S. 222 (1935), an equity receivership proceeding.

In Manufacturers' Credit Corporation.P" previously reported.sthe debtors, consisting of the parent and 25 affiliated and subsidiary companies, were engaged primarily in the business of

operating bus lines in New Jersey and vicinity. Certain secured

creditors made a motion for an order to allow them to reclaim the

buses securing their claims. At the hearing before the referee

these creditors argued that the debtor could not be reorganized

within a reasonable time and that their security was being impaired in the meantime. The Commission urged that such drastic

action was premature and that the trustee should be granted more

time to explore various alternatives which might lead to some

form of reorganization.

The referee recommended in his report that (1) the secured

creditors be restrained from reclaiming their buses for at least

four months from the date of the court's order on the referee's

report, during which time they should be paid the sums set forth

in a previous order of the court; and (2) if a plan of reorganization could not be proposed within this time, the trustee be directed

to undertake thereafter the liquidation of the assets of the various

debtor corporations. The district court has scheduled a hearing on

the referee's report.

In Canandaigua Enterprises Corporation,22 previously reported,23 the Commission objected to the trustee becoming president of the reorganized company on the ground that under Section

158 a trustee must be disinterested not only at the outset but also

during the proceeding and that to allow the trustee to assume the

presidency of the reorganized company gives him an interest in

the outcome of the reorganization not consistent with the policy

of Section 158. The district court overruled the Commission's

objections.

19447 F. 2d 1366 (C.A. 9, 1971).

20 D. N.J., No. B-1084-67.

21 36th Annual Report, pp. 177-178; 34th Annual Report, p. 160.

22 W.D. N.Y., No. BK-63-1954.

23 See 36th Annual Report, pp, 185-186; 35th Annual Report, pp, 166-167:

34th Annual Report, pp. 154-155.
THIRTY-SEVENTH ANNUAL REPORT 183

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs

by the prior management is a requisite under Chapter X. One of

the primary duties of the trustee is to make a thorough study of

the debtor to assure the discovery and collection of all assets of

the estate, including claims against officers, directors, or controlling persons who may have mismanaged the debtor's affairs. The staff of the Commission often aids the trustee in his

investigation.

In R. Hoe & Co., Ine.,24 the trustee, after conducting an extensive investigation into the affairs of the debtor, instituted suits

against former principals of the debtor and the debtor's former

independent public auditor alleging, among other things, mismanagement on the part of the principals, and negligent execution

of professional duties on the part of the accountants, leading to

the debtor's financial collapse. The trustee is seeking at least $40

million in damages from each of the defendants. The trustee also

instituted suit to set aside security interests granted a factor,

two banks, and two insurance companies, and to recover approximately $10 million transferred to them and a major supplier,

alleging that such conveyances were fraudulent and constituted

voidable preferences.

In Webb & Knapp, Ine.,25 previously reported." the court of

appeals en bane held that, because no property of the debtor or

"res" was involved, a Chapter X trustee does not have standing to

assert a class claim on behalf of public debenture holders of the

debtor against the indenture trustee for alleged misconduct or

gross negligence, either in the reorganization proceeding or in a

plenary actlon." The Chapter X trustee filed a petition for a writ

of certiorari;" which the Commission is supporting."

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only

in a case which involves a substantial public investor interest

and presents significant problems. When no such formal report is

24 S.D.N.Y., No. 69-B-461.

25 S.D.N.Y., No. 65-B-365.

26 34th Annual Report, p. 150.

27 Caplin v, The Marine Midland Grace Trust Company of New York, 439

F.2d 118 (C.A. 2, 1971).

28 October Term, 1971, No. 70-220.

29 For settlements of investor claims in other proceedings incorporated in

plans of reorganization, see p. 186,infra.
184 SECURITIES AND EXCHANGE COMMISSION

filed the Commission may state its views briefly by letter, or

authorize its counsel to make an oral or written presentation.

During the fiscal year the Commission published no formal

advisory reports. However, its views on twelve plans of reorganization were transmitted to the court either orally or by written

memorandum.s?

In Sunset International Petroleum Corporation." the debtor

had interests in some 5,000 producing oil and gas wells recorded

on its books at a net of $40 million but valued for purposes of

reorganization at about $18 million. Liabilities exceeded $59

million, including over $25 million of debt due its parent, Commonwealth United Corporation, consisting of about $14.8 million

on an open account and about $10.8million in debentures.

The Commission supported the trustee's plan of sale, under

which the open account was disallowed for lack of proof. The

Commission also supported the subordination of the Commonwealth debenture claimsto the claims of other creditors, including

debenture holders. Commonwealthhad acquired control of Sunset

when it was insolvent and, as the Commission noted, did very

little during the three years after acquisition to relieve Sunset

from its excessive indebtedness. The Sunset acquisition was used

by Commonwealth for its own promotional ends, while keeping

Sunset just "two jumps ahead of the wolf".32

The Commission stated that the subordination of Commonwealth should not extend to notes of Sunset held by several banks.

These banks originally held unsecured notes of Sunset. To obtain

an extension of time, Commonwealthcaused Sunset to convert the

banks to a secured position. Subsequently the banks made substantial loans to Commonwealth,which, in turn, used part of the

proceeds of the loans to acquire the Sunset notes from the banks.

These notes, along with other assets, were then pledged to the

30 In re Arlington Discount Co., S.D. Ohio, No. 48421; In re Canandaigua

Enterprises Corp., W.D. N.Y., No. Bk-63-1964; In re Continental Vending

Machine Corp., E.D. N.Y., No. 63-B-663; In re Los Angeles Land & Investments, Ltd., D. Hawaii No. Bk-67-352; In re Peoples Loan & Investment Co.,

W.D. Ark., No. FS 68-B-15; In re John Rich Enterprises, Ine., D. Utah,

No. B-42-70; In re Riker Delaware Corp. (3 plans), D. N.J., No. B-597-67;

In re Standard Airways, Tnc., W.D. Wash., No. 65475; In re Sunset International Petroleum Corp., N.D. Texas, No. Bk-3-1640.

In Ozarke Paradise Village, Inc., W.D. Mo.,No. 4339-6, a non-participating

case, the staff of the Commission, at the request of the court, assisted in

the formulation of the plan.

31 N.D. Tex., No. Bk-3-1640.

32 The quoted phrase is from Taylor v. Standard Gas & Electric Co., 306

U.S. 307, 310 (1939).
THIRTY-SEVENTH ANNUAL REPORT 185

banks as security for the Commonwealth loans. The banks thus

became exclusively creditors of Commonwealth. As pledgees the

banks asserted claims against Sunset on the notes. In the Commission's opinion, the banks, in seeking to realize on the pledge

in the Sunset proceeding, were not entitled to the additional

benefit they would receive by subordinating Commonwealth's

other claims against Sunset to its claims as pledgor of the notes.

The banks' share of the estate should be determined without

regard to the Commonwealthsubordination.

The plan was amended in this and other respects in accordance

with the views of the Commission.As so amended, the plan was

approved and confirmedby the court.

In Riker Delaware Corporation,33 previously reported.s- the

Commission reported on three plans of reorganization, filed respectively by the trustees, the debtors, and stockholders. The

Commissionfound the trustees' plan neither fair and equitable nor

feasible. It urged that the other two plans would meet the statutory standards if amended in certain respects, and both plans were

amended accordingly. The Commission advised the court that

Sections 174and 175 of Chapter X do allow the approval of more

than one plan, and permit security holders to decide by a vote

which plan they favor. The court approved and confirmedonly the

debtors' plan, as amended.

Under this plan, unsecured creditors would receive $250,000in

cash and 5 percent convertible debentures in the principal amount

of $2.25 million, representing the value of their interest in the

assets of the debtors. A secured creditor, the plan proponent,

would supply $500,000 in cash for 1,440,000 shares of capital

stock of the reorganized company. Preferred and common stockholders would receive 360,000shares of new common stock, or 20

percent of the total to be outstanding, although creditors were

not receiving full compensation for their claims.

The Commission stated that such stockholder participation in

an insolvent debtor was fair and equitable. The proponent was

entitled to all the common stock equity for the contribution of

fresh capital, and the allotment, presumably for tax reasons, of

20 percent of the common stock to the old stockholders was a

"gratuity" the proponent was free to grant since it was not at the

expense of the creditors.

In Arlington Discount CompanY,3Gthe debtor owned a large

33 D. N.J., No. B-597-67.

3435th Annual Report, pp. 160-161.

35 S.D. Ohio, No. 48421.
186 SECURITIES AND EXCHANGE COMMISSION

quantity of heavily mortgaged marginal real estate. Cash flow

was about equal to the mortgage payments, plus a small amount

for overhead. It appeared that an appreciable equity above the

mortgage liabilities would be left if the properties were liquidated

over a period of time. The plan of reorganization, as originally

proposed, was based on an orderly liquidation by a reorganized

company, a waiver of past mortgage defaults, and issuance of

income debentures and common stock for the publicly held unsecured notes. The Commission objected to the plan because the

terms of the debentures were so contingent as to make them

illusory and deceptive. The plan was amended to provide for

issuance of common stock only, and as amended it was confirmed

and consummated.

In Bankers Trust, et al.,36previously reported;" a plan of reorganization which has been consummated provided for consolidating eight affiliated debtors and many subsidiaries into a new

reorganized company, the payment of all debts except certain

mortgage obligations assumed by the new company, and distribution of shares of the new company and surplus cash to the public

certificate holders. The plan set aside assets sufficient to pay some

$2 million in disputed secured claims, and discharged the asserted

liens of the claimants on other assets considered surplus collateral.

One creditor appealed, contending that he had an absolute right

to retain all collateral until his claim was adjudicated. On the

eve of oral argument, this creditor's claim was settled and paid,

and the appeal became moot.

In Peoples Loan and Investment Company,38 a plan of reorganization, supported by the Commission, was approved and confirmed by the court. The plan incorporated a settlement of several

causes of action on terms favorable to the estate. These included

a elafm -against a bonding company based on dishonesty and mismanagement by former officers and directors which was settled

for $90,000, and a claim for legal malpractice against a former

attorney for the debtor which was settled for $75,000. The Chapter X proceeding resulted in a recovery of 57 percent to 60 percent

for the 3,000 depositors whose claims constituted substantially all

of the debtor's liabilities. According to the trustee's testimony, in

a bankruptcy liquidation the depositors would have realized only

about 5 percent of their claims.

36 S.D. Ind., No. IP-6&-B-2375.

37 35th Annual Report, p. 165.

38 W.D. Ark., No. FS 68-B-15.
THIRTY-SEVENTH ANNUAL REPORT 187

In Maryvale Community Hospital,39 the court first approved a

sale of the debtor's property for cash and thereafter approved a

plan under which the bondholders of the debtor, the only remaining creditors, would receive the total net proceeds of the sale

pursuant to the terms of the indenture, including principal, interest, interest on interest and a prepayment premium. The State

of Arizona and the Health Facilities Planning Counsel of Arizona

objected to the plan of distribution insofar as it provided for the

payment of interest on interest and a call premium. The Commission expressed the view that the plan was fair and equitable

except for the allowance of the call premium.:" On appeal the

Commission filed a brief in support of its position below.v The

appeal was pending at the end of the fiscal year.

In Los Angeles Land & Investments, Ltd.,42 previously reported," the trustee's plan offered the public creditors a choice of

selecting specific lots of California land owned by the debtor or

receiving both debt and equity securities of the liquidating company. The old common stock, held by the principal promoter, was

declared worthless.

The Commission urged in its report that since this was a

liquidation, the court should not approve the issuance of any

negotiable securities to the creditors but provide for the issuance

of transferable, non-negotiable liquidating certificates. The trustee

amended the plan to conform with the suggestions of the Commission, and the court approved and confirmed the plan as thus

amended.

John Rich Enterprises, Inc., et al.,H involved debtor companies

organized by their promoter for the purpose of developing and

exploiting two novel devices. One of these was an automobile

bumper that cushions the shock by means of a water release device. The other was a unit consisting of a chair, to which is affixed

a small television set and a coin box. The unit was designed for

installation in airports, railroad stations, bus terminals, etc. The

financing came from the public which had been induced to invest

over $5 million in these ventures.

Prior to the Chapter X proceeding the Commission had brought

an injunctive action seeking to restrain violations of the registration and antifraud provisions of the Federal securities statutes by

39 D. Ariz., No. B-9352-Phx.

40See 35th Annual Report, pp. 165-166.

41C.A. 9, Nos. 25586 and 25587.

42D. Hawaii, No. Bk-67-352.

4334th Annual Report, p. 148; see also pp. 181-182 supra.

44 D. Utah, Nos. B-42-46-70, B-925-70.
188 SECURITIES AND EXCHANGE COMMISSION

the debtors and by their controlling persons and the appointment

of a receiver to conserve the debtors' assets. Without admitting or

denying the allegations against them, the defendants had consented to the entry of injunctive decrees, which provided that

the debtors would file Chapter X petitions.w

Sometime before the Chapter X proceedings the debtors'

managers converted the debtors into investment companies by

transferring substantially all of their assets to two unaffiliated

corporations in exchange for non-controlling stock interests in

those corporations. Concluding that it would be unwise to attempt

to rescind these conveyances, the trustee has endeavored to reorganize the debtors on the basis of their common stock interests

in those companies.

The trustee proposed a plan for the television chair operations.

It called for the merger of the company that was actually operating this business into one of the debtors, and for the issuance of

half of the stock in the reorganized company to the investors who

had entrusted their savings to the debtor. Since the company

would be in dire need of capital, the plan proposed to raise fresh

money by means of an offering of new stock to the old investors.

This offering was to be made without registration under the

Securities Act in reliance on Section 264a (2) of Chapter X, which

exempts "any transaction in any securities issued pursuant to a

plan in exchange for securities of or claims against the debtor or

partly in such exchange and partly for cash and/or property"

from the Securities Act's registration and prospectus-delivery

provisions ( emphasis added).

The Commission found this plan unfeasible. Its memorandum

pointed out that "the reorganized company will not only be engaging in a novel and an untested business, but will do so while it

staggers under a mountain of debt". Noting that the reorganized

company's capital structure was to consist of nine-tenths debt and

one-tenth equity, the Commission concluded that seldom, if ever,

could such a capital structure be squared with Chapter X standards and that "this kind of finance is especially objectionable

where, as here, the business that is to pay the debt has no earnings history at all and confronts a most uncertain future."

On the question of exemption from registration the Commission's memorandum stated:

"We do not suggest that the provisions of the Securities Act and

of the Bankruptcy Act which permit companies in Chapter X to raise

46 See Litigation Releases Nos. 4485 (November 25, 1969) and 4495

(December 9, 1969).
THIRTY.SEVENTH ANNUAL REPORT 189

new money from old stockholders and old creditors pursuant to plans of

reorganization are available only for securities of triple-A quality.

Debtors who resort to Chapter X are usually in poor health: That is

why they are there. It would be unreasonable to read Section 3(a) (10)

of the Securities Act and Section 264a(2) of the Bankruptcy Act as

requiring a showing of top investment quality. But a showing of fairness and some credible evidence of intrinsic investment value is essentiaL"

Indeed, the Commission pointed out, the very exemption from

registration imposed upon the reorganization court a special responsibility to scrutinize the soundness of securities to be issued

under a plan. It was particularly essential to do so in the present

case in which the new stock was to be supported by an almost

nominal book equity in an enterprise with no earnings history.

The Commission also took issue with the fairness of the plan.

Fairness was questionable, the Commission thought, because a

half-interest in the reorganized chair business was to go to a

company that had never paid anything-and that the plan did not

obligate to pay anything-for that interest. This company's right

to that interest was founded on a pre-Chapter X contract between

it and the debtors by which it had undertaken to obtain financing

from others for the television chair venture. Since the trustee had

at first questioned the validity of this contract, the Commission

thought an evidentiary record was required to ascertain the reasons for his decision to abandon his objections to the contract. In

this connection the Commission directed the attention of the

parties and the court to the Supreme Court's holding in Protective

Committee v. Anderson, 390 U.S. 414, 424-425 (1968) that "The

requirements ... of Chapter X ... that plans of reorganization be

both 'fair and equitable' apply to compromises just as to other

aspects of reorganization."

Since the television chair business was still embryonic, the

Commission considered any attempt to reorganize it now as premature, suggesting that another year of operation would permit

a better-informed assessment of the situation. It observed that

the trustee could well use this breathing spell to explore simpler

plans than the rather involved merger scheme on which his present plan rested.

The trustee advised the court that he agreed with the tenor of

the Commission's comments and that he deemed it best to defer a

disposition of the debtors' interest in the television chair.

In Standard Airways, Inc.,46 a non-participating case, the

46 W.D. Wash,. No. 65745.
190 SECURITIES AND EXCHANGE COMMISSION

debtor's scheduled liabilities exceeded $3 million. Hence the plan

of reorganization was referred to the Commission as required by

Section 172 of the Bankruptcy Act. The proponent of the plan, a

substantial creditor, proposed to exchange its claim against the

debtor and additional cash and property for 80 percent of the

reorganized company's stock. The balance of the stock would be

distributed to several hundred trade creditors. The Commission's

sole concern with the plan was the status under the Securities

Act of the proponent's controlling stock interest in the reorganized company.

Itwas obvious that the proponent, a corporation, would control

the reorganized company and that it would therefore be subject to

the inhibitions that the Securities Act imposes on those who

control issuers. The Commission observed that the exemption

from registration in Section 264a(2) applied only to the immediate transaction between the debtor and the proponent, but

not to any transaction thereafter. Hence, if the proponent was

taking the stock directly from the issuer with a view to distribution, it was clearly an underwriter, and thus would be unable to

dispose of any securities of the reorganized company, unless some

exemption from registration were available at the time. If the

proponent were taking for investment and not with a view to

distribution, then the initial distribution should be treated as a

private offering to the proponent, which but for Section 264a (2)

would not be exempt under Section 4 (2) of the Securities Act

because of the simultaneous distribution to the trade creditors.

The Commission concluded that in either event a restrictive

legend on the securities to be issued to the proponent would be

appropriate.

The proponent agreed to the imposition of the restrictive legend.

Thereafter the plan was approved, confirmed and consummated.

In Hudson & Manhattan Railroad Company,47 the Commission

supported, and the court approved, a petition for authority to

make an initial liquidating distribution of about $41 million to

the debtor's Class A and Class B stockholders in accordance with

the plan of reorganization, which had been consummated years

ago.48 A total distribution of approximately $56 million will be

made pursuant to the plan of reorganization, representing the

proceeds of various condemnation awards and the interest

thereon.

Some security holders objected to the distribution, contending

47 S.D.N.Y., No. 90460.

48 See 38 S.E.C. 676 (1958); 39 S.E.C. 813 (1960).
THIRTY-SEVENTH ANNUAL REPORT 191

that the debtor should be given the opportunity to depart from

the reorganization plan for the purpose of exploring possible

mergers. The Commission took the position, with which the court

agreed, that since the plan had been substantially consummated,

the liquidating dividend should be made as contemplated by the

plan.w

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem of determining the compensation to be paid to the various

parties for services rendered and for expenses incurred in the

proceeding. The Commission, which under Section 242 of the

Bankruptcy Act may not receive any allowance for the services

it renders, has sought to assist the courts in assuring economy of

administration and in allocating compensation equitably on the

basis of the claimants' contributions to the administration of

estates and the formulation of plans. During the fiscal year 223

applications for compensation totaling about $7 million were

reviewed.

In TMT Trailer Ferry, [nc.,50 previously reported," the Commission supported appeals by the Protective Committee for Independent Stockholders and its counsel from orders of the district

court (1) awarding Committee counsel $10,000 in interim compensation and $5,000 interim reimbursement of expenses for

services rendered over an H-year period and (2) denying motions

by the Committee and counsel (a) for a protective order against

certain depositions which the Chapter X trustee's general counsel

proposed to take of the individual members of the Committee and

their counsel and (b) for instructions as to the future role of the

Committee and its counsel in the Chapter X proceeding. The court

of appeals reversed the orders of the district court.52

It held, as urged by the Commission, that the amounts allowed

by the district court were "grossly inadequate," and adopted the

49 The Commission's 36th Annual Report (p, 187) erroneously reported

that the Clute Corp. (D. Colo. No. 32895) plan had been approved. The

special master recommended that the plan should not be approved; objections

to his report were filed; and as of the close of this fiscal year the court had

not ruled on these objections.

50 S.D. Fla., No. 3659-M-Bk-WM.

51 See 36th Annual Report, pp. 179-180, 190-191; 35th Annual Report, p,

160; 34th Annual Report, p. 153; 33rd Annual Report, p. 135; 32nd Annual

Report, pp, 92-93; 31st Annual Report, p. 100; 30th Annual Report, p. 105;

and 29th Annual Report, pp. 91-92.

52 Protective Committee v, Kirkland, 434 F. 2d 804 (C.A. 5, 1970).

450-484 0 - 72 - 14
192 SECURITIES AND EXCHANGE COMMISSION

recommendation of the Commission made in the district court

for $60,000 as interim compensation and an interim amount of

$10,000 for expenses. In order to prevent unduly burdensome

conditions which might prevent the Committee from utilizing the

allowance, the court of appeals also adopted the Commission's

suggestion that the amount allowed not be subject to vacation,

setting aside, reduction or modification except upon proof that

Committee counsel were legally disqualifiedto receive any allowance.

The court of appeals also held that the district court should

have issued a protective order in order to prevent "undue harassment" and that "in the future the District Court should, in the

firmest and most emphatic manner possible, state to the trustee

and its counsel the absolute need of cooperation and harmony

with the Protective Committee and its counsel to insure a proper

determination and final wind-up of this reorganization." The

court stated that "the Committee is entitled to participate fully

in these proceedings.... "

After the trustee's petition for writ of certiorari was denied/,3

the district court, upon remand, entered an order authorizing

further discovery proceedings directed against the Committee

and its counsel on grounds substantially identical to those which

trustee's counselhad raised on appeal. After the close of the fiscal

year, the Committee and its counsel petitioned the court of appeals for a writ of mandamus and prohibition directed to the

district judge to require compliancewith the previous decision of

the court of appeals.P The Commissionsupported this petition.

The district court awarded counselfor TMT's trustee compensation at a rate of $60 per hour for service rendered during the first

half of 1970.The court of appeals granted the Protective Committee leave to appeal from that award. While this appeal was

pending, the district court awarded interim compensation to the

trustee's general counsel for services rendered during the last six

months of 1970 and also granted interim compensation to the

trustee's special counsel, each at a rate of $60 an hour. By leave

of court, the Protective Committee appealed, and the two appeals

were consolidated.55

In its briefs the Commissionpointed out that since the appointment of trustee's present general counsel in January of 1969

there had been almost no progress in the reorganization proceed53402 U.S. 907 (1971).

54 C.A. 5, No. 71-2828.

55 C.A. 5, No. 71-1277.
THIRTY-SEVENTH ANNUAL REPORT 193

ing, The Commission noted that despite this lack of progress the

district court had awarded such counsel approximately $150,000

in interim compensation for services rendered during the twoyear period and urged that these awards were overly generous

and tended to encourage procrastination. The Commission recommended that counsel be allowed interim compensation at a rate

not to exceed $35,000 per year and that this amount be allowed

only upon demonstration of substantial progress towards the reorganization of the debtor. The Commission further recommended

that the special counsel receive interim compensation at a rate

not to exceed $40 per hour. The appeals were pending at the

close of the fiscal year.

The district court also entered an order ex parte, establishing a

procedure for valuation of the debtor's estate, and providing that,

in certain circumstances, compensation for services rendered by

creditors and stockholders, or their representatives, would be

precluded regardless of any benefits which such services might

provide to the estate. The Commission urged deletion of this

provision, stating that it was contrary to the purposes of Chapter

X which provides for allowance of compensation to those who

render beneficial services as an incentive to active and useful

participation by all parties in the proceeding.

Another order issued ex parte authorized the trustee to bring

certain admiralty suits, appointed the trustee's general counsel as

special counsel to prosecute these suits, and fixed an hourly rate

of compensation he was to receive as additional compensation

should his efforts prove succesful. The Commission pointed out

that one of the reasons for counsel's appointment as general

counsel was his expertise in admiralty law and that it was his

duty to make that expertise available to the estate under his

general appointment. The Commission also urged that a judicial

commitment in advance to an hourly rate of compensation was

not in accordance with the fee provisions of Chapter X which

contemplate an allowance of compensation after services are

rendered and then only on application and hearing upon proper

notice.

The district court amended both orders as requested by the

Commission.

In Webb & Knapp, Inc.,56 previously reported.s" counsel for the

trustee and the trustee applied for fourth interim allowances of

$200,000 and $25,000, respectively, for services rendered during

56 S.D.N.Y., No. 65-B-365.

57 36th Annual Report, pp, 193-194; 35th Annual Report, p. 170.
194 SECURITIES AND EXCHANGE COMMISSION

a 22-month period. The Commission urged deferral of the requests, pointing to the substantial prior interim awards which had

been allowed and the uncertainty as to the fate of the proceeds

from the estate's virtual liquidation because of a disputed $35

million claim asserted by the Internal Revenue Service. The

Commission also urged that, if the court decided to make any

award to trustee's counsel, it should not exceed $75,000, and that

no further interim award should be made to the trustee who had

not rendered such substantial services as to warrant an interim

award to alleviate economic hardship. The court allowed $20,000

to the trustee and $125,000 to counsel, noting that there was no

reason to believe that any further interim allowances would be

necessary.

In Riker Delaware Corporation, 58 previously reported." the

two trustees and their two attorneys sought second interim

awards aggregating $40,000 and $50,000, respectively, for services

rendered over a 3-year period. The Commission urged that, having received prior interim allowances for the earlier portion of

the 3-year period, the applicants could not receive additional

interim compensation for the same period, and that the pending

applications should be considered as requests for compensation

only for the last 15 months of the period. The Commission recommended that both trustees and one of their attorneys be denied

interim awards since the time spent in the latter period was

insubstantial. It recomended an interim award of $20,000 to the

second attorney who had spent about 40 percent of his time on

the estate. The district court granted interim awards to all

applicants, including a total of $17,500 to the two trustees, and

$2,500 to one attorney. The second attorney, who had sought

$30,000, was allowed $15,000.

In R. Hoe & Co., Inc.,60 the trustee and his counsel sought

"interim" compensation of $146,000 and $706,000, respectively,

for services rendered over a one-year period. The Commission

urged that the requests were excessive, because they reflected

rates charged private clients, and that applicants were really

seeking payment in full for services rendered during this period.

The Commission further urged that the trustee, although an

attorney, was not appointed to render legal services and any

interim allowances to him should reflect services he rendered in

his capacity as chief executive officer of the estate. The Commis5R D. N.J., No. B-597-67.

59 35th Annual Report, p, 170.

60 S.D. N.Y., No. 69-B-461.
THIRTY-SEVENTH ANNUAL REPORT 195

sion recommended interim allowances of $40,000 and $185,000,

respectively.

An application for compensation in the amount of about

$235,000 was also filed by the accounting firm retained by the

trustee. Although rates of compensation for the accountant are

normally fixed in the order of retention, no rates were set in

this case. The Commission opposed the request since it appeared

that the average rate was far above that at which the same firm

was being paid for services in other large Chapter X proceedings

in the jurisdiction of this district court. The Commission recommended about $142,000 as a final allowance, or payment in full,

for the period covered by the application.

The district court awarded the following interim allowances

to the three applicants: $50,000 to the trustee; $350,000 to his

counsel; and $150,000 to the accountants.

In Canandaigua Enterprises Corporation,61 previously reported,62 the trustee requested a final allowance of $750,000, including prior interim awards, for services rendered by himself

and his law firm over a period of almost six years.63 The Commission contended that the request was excessive and urged that

the application be viewed as separate requests for final allowances

by the trustee and his law firm, since the services rendered were

by separate persons and distinguishable. It recommended final

allowances of $180,000 and $60,000 to the trustee and his law firm,

respectively, but the court granted a single award of $310,000,

including $200,000 previously awarded as interim compensation.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by

which debtors can effect arrangements with respect to their unsecured debts under court supervision. Where a proceeding is

brought under that chapter but the facts indicate that it should

have been brought under Chapter X, Section 328 of Chapter XI

authorizes the Commission or any other party in interest to

make application to the court to dismiss the Chapter XI proceeding unless the debtor's petition is amended to comply with

the requirements of Chapter X, or a creditors' petition under

Chapter X is filed.

61 W.D. N.Y., No. Bk-63-1954.

62 36th Annual Report, p. 191.

63 No attorney for the trustee was appointed during these proceedings. In

the interest of economy the court advised the trustee to act as his own

attorney, and, if necessary, to utilize the services of members of his firm.
196 SECURITIES AND EXCHANGE COMMISSION

In Viatron Computer Systems Corporation,64 the debtor was

engaged in the business of developing, manufacturing and selling

data processing and computer systems. It had outstanding nearly

$15 million in principal amount of convertible debentures held by

over 1,200 persons, and over 3.5 million shares of common stock

held by more than 7,500 persons. For its first three years of

operations ended October 31, 1970, the debtor sustained operating

losses of approximately $40 million on gross sales of about $3.2

million. At the time of the filing of the petition, the debtor had

a net asset deficit of about $23 million and no working capital.

After a default in interest payments, creditors filed a bankruptcy petition. The debtor filed a Chapter XI petition, which

stayed the bankruptcy proceeding. The proposed Chapter XI arrangement provided that all the outstanding unsecured debt of

approximately $25 million, including the publicly-held debentures,

would be converted into common stock at a prescribed ratio.

The Commission made a motion pursuant to Section 328, urging

that the financial condition of the debtor called for more than a

simple composition of unsecured debt, and that fairness to public

creditors, and the need for a disinterested investigation to account, among other things, for the dissipation of approximately

$35 million in public funds over a period of 11;2years, required

the broader scope and protections of Chapter X.

The debtor, the trade creditors' committee, and the debenture

holders' protective committee opposed the motion, but it was

granted by the district court. Creditors thereupon filed an involuntary Chapter X petition, which the debtor opposed and the

Commission supported. The court approved the petition and appointed a trustee.

In Federal Coal Company,65 previously reported.t" the debtor's

appeal from the district court's order granting the Commission's

Section 328 motion was withdrawn, and a voluntary Chapter X

petition was filed. After the close of the fiscal year, the debtor's

controlling persons moved for the dismissal of the Chapter X

proceeding on the ground that during the course of the proceeding

they had acquired virtually all of the claims against the company.

The Commission and the trustee opposed that motion, which is

pending.

In Fotochrome, Inc.,67 the debtor had outstanding 3,463,036

64 D. Mass., No. 71-218.

65 S.D. W. Va., No. 69-270.

66 See 36th Annual Report, pp. 194-195.

67 E.D.N.Y., No. 70-209.
THIRTY-SEVENTH ANNUAL REPORT 197

shares of common stock and $2,450,000 of debentures held by

approximately 11,000 and 500 members of the public, respectively.

The debtor proposed a Chapter XI arrangement which provided

for payment in full over a period of 7 years of the approximately

$2.5 million owed to trade creditors. The debenture holders were

offered common stock of the debtor for 50 percent of their claims

at a price of $3.33 per share. The remaining 50 percent would

be paid at the end of a ten-year period without interest, with a

right to convert into additional common stock at specified rates

ranging from $3.33 to $5.00 per share. The Commission moved

for dismissal pursuant to Section 328, urging that Chapter XI

did not permit such a radical adjustment of the rights of public

debenture holders.

The debtor amended the proposed arrangement so as to provide,

among other things, that the debtor would pay debenture holders

past due principal and interest upon confirmation of the arrangement and make all future payments when due. The Commission

thereupon withdrew its motion on condition that the amended

arrangement be confirmed by the court.

In Super Stores, Inc.,68 the Chapter XI debtor operated a chain

of small variety stores along the Gulf Coast from Alabama to

Louisiana. It had about $4 million in liabilities, including some

$1 million of publicly-held 61;2 percent debentures, due in 1981,

which were subordinated to all other unsecured debts. The debtor's

common stock was also publicly-held.

The proposed plan of arrangement provided that the non-public

unsecured creditors would receive 55 percent of their claims

payable in installments over a period of five years from confirmation. The claims of the debenture holders would also be reduced

to 55 percent of principal amount, but such reduced amount would

mature in 1981, with sinking fund obligations to commence five

years after confirmation. Interest on the debentures was to be

waived for five years and then to be payable at 3% percent on

the original principal sum.

Since the debtor proposed to effect a drastic revision in the

rights of its public creditors, the Commission, together with an

individual debenture holder, moved under Section 328 to dismiss

the debtor's Chapter XI petition unless the proceedings were

transferred to Chapter X. The motions were opposed by the

debtor and various creditors. After an evidentiary hearing and

oral argument, the district judge denied the motions and a motion

for rehearing, and the debenture holder appealed.

68 S.D. Ala., No. 30,812.
198 SECURITIES AND EXCHANGE COMMISSION

While the appeal was pending the arrangement was amended to

provide that the claims of debenture holders would only be reduced to 75 percent of the principal amount. In addition, the

debenture holders would receive, immediately upon confirmation,

725 shares of common stock for each $1,000 principal amount of

debentures presently outstanding, thereby giving the debenture

holders a substantial amount of the common stock to be outstanding. Payment to other unsecured creditors was to remain at 55

percent as originally proposed.

The Commission, although somewhat doubtful about the feasibility of the arrangement, decided not to object to confirmation

of the amended arrangement, and the debenture holder withdrew

his appeal. The arrangement, as amended, was confirmed.

In Nationwide Investment Corporation,69 the Chapter XI debtor

had been in the securities business but left it after having been

enjoined from further violations of the Federal securities statutes.

Its principal creditors were the public investors with whom it had

dealt while in the securities business. The debtor's proposed plan

of arrangement called for the liquidation of its estate and for the

distribution of the proceeds to its creditors-except for the sum

of $100,000 which was to be returned to the debtor's managers for

"investment" in whatever fashion they saw fit. The scheme rested

on the hope that these unspecified investments would prove productive enough to permit all creditors to be paid in full, leaving

a residue that would inure to the benefit of the debtor's stockholders. When the bankruptcy court asked for the Commission's

views, the Commission pointed out that nothing in Chapter XI

sanctioned a proposal of this character and that because of its

vagueness the plan did not meet that chapter's feasibility requirements, and it stated that in its view the debtor's public creditors

would be better off if the estate were liquidated in toto in ordinary

bankruptcy. The court refused to confirm the plan and adjudicated

the debtor a bankrupt.

As was noted in last year's annual report,"? attempts are sometimes made to misuse Chapter XI so as to deprive investors of the

protections which the Securities Act and the Securities Exchange

Act are designed to provide. When such cases come to the attention of the Commission's staff, it normally attempts to resolve the

problem by informal negotiations with the debtor's counsel. When

negotiations prove fruitless or there appears to be a deliberate

69 C.D. Calif., No. 76544.

70 36th Annual Report, p. 197.
THIRTY.SEVENTH ANNUAL REPORT 199

effort to evade these statutes, the Commission, in order to discharge its statutory responsibilities for protection of investors,

intervenes in the Chapter XI proceeding to assist in the development of an adequate record and to direct the court's attention to

the applicable provisions of the Federal securities laws and their

bearing on the particular case.11

In Transystems, Inc.,72 a publicly-held company caused one of

its wholly-owned subsidiaries to file a Chapter XI petition. The

proposed plan of arrangement called for the distribution, without

registration under the Securities Act, of the parent's stock to

the debtor-subsidiary's creditors, none of whom were public investors. One of these creditors moved to dismiss the Chapter

XI proceeding under Section 328. That same creditor also objected to the plan of arrangement on various grounds, one of

which was that the unregistered distribution of the parent's stock

called for by the plan violated the Securities Act because the

exemption under Section 393 a (2) of Chapter XI did not apply.

That section exempts from registration, among other things, "any

transaction in any security issued pursuant to an arrangement in

exchange for claims against the debtor." The Commission did not

intervene, but, at the request of the referee, commented as a

friend of the court on some of the issues presented.

Read literally, the exemption seems not to be limited to securities issued by the debtor. The Commission urged, however, that

the provision must be interpreted in the light of the statutory

policy, and that the exemption does not necessarily extend to

securities issued by a corporation other than the debtor, since

Chapter XI was designed primarily for simple compositions under

which securities of the debtor are issued in exchange for claims

against it.

The Commission pointed out that it was not necessary for the

bankruptcy court to resolve definitively all questions raised in a

Chapter XI proceeding regarding the application of the Securities

Act. Itstated :

"When a close question regarding the registration requirements of the

Securities Act is presented in a particular Chapter XI proceeding, it is

sufficientif the Commissionassures the court that on the facts before it

the Commissionwill not seek to upset the contemplated transactions by

invoking the Securities Act."

11The Commission also participated in Chapter XI proceedings involving

former members of the New York Exchange: Robinson & Co., Inc., E.D. Pa.,

No. 70-518; Blair & c«; Inc., S.D.N.Y., No. 70-B-755; First Devonshire

Corporation, S.D.N.Y., No. 70-B-739.

72 S. D. Fla., No. 71-164-Bk-JE.
200 SECURITIES AND EXCHANGE COMMISSION

The Commission said that in this case it would raise no objection regarding the claimed exemption and that

"We believe this advisory determination sufficient to free the court

from any further concernwith the impact of Section 5 of the Securities

Act on the debtor's proposal, which may thus be appraised solely on

its merits in terms of the Chapter XI requirements for confirmation."

The Commissiontook the position that the proposed arrangement was objectionable on three grounds: (1) the materials used

in soliciting the trade creditors' assent were misleading and inadequate; (2) the parent's stock on which the bankruptcy court

was being asked to place its stamp of approval was of a speculative character; and (3) the president of the debtor, who was also

a creditor, was to be accorded different treatment in that he was

to receive commonstock of the debtor rather than of its parent. 73

The referee refused to confirmthe arrangement. He rejected the

debtor's contention that approval was required because its parent's stock was selling on the market for "something", and held

that:

"While the bankruptcy court ordinarily does not directly supervise or

review the soliciting of acceptances in Chapter XI cases, this is true

primarily because the ordinary simple composition of debts involved in

such cases, for cash consideration, requires very little in the way of

additional disclosure beyond that given by the Court in the statutory

notice. However, when corporate stock is being distributed under the

plan, particularly when the stock is not that of the debtor itself, the

question of adequate disclosure of relevant information becomes more

pertinent. . . Accordingly, the bankruptcy court has a duty . . . to

prevent issuance of unsound or deceptive securities as a result of a

judicial proceeding.... 74 One way to facilitate meaningful scrutiny by

the Court is to require adequate disclosure of relevant facts to the

parties in interest-thereby assuring effective adversary hearings when

appropriate....

"While a Chapter XI solicitation letter involving a stock distribution

need not give the extensive detail that an SEC registration would, it

should give basic financial data concerning the corporation whose stock

is being issued under the plan-in order that the creditors may make an

informed judgment as to accepting or rejecting the plan, or objecting to

confirmationthereof." 75

73 The only justification offeredfor this differentiation was that his receipt

of an additional block of the parent's stock pursuant to the arrangement

would impede his ability to dispose of his already substantial holdings of

that security within the limits permitted by the Commission'sRule 154 under

the Securities Act.

74 Citing In re American Department Stores, 16 F. Supp. 977, 979-980

(D. Del., 1936); In re Barlum Corp., 62 F. Supp. 81, 88 (E.D. Mich., 1945).

75 The referee's order gave the debtor 20 days to file a new plan of arrangement. As this was not done, the debtor was adjudicated a bankrupt.
THIRTY-SEVENTH ANNUAL REPORT 201

In Greater Western Home Manufacturers,76 the debtor had during the course of the Chapter XI proceeding acquired a substantial quantity of the stock of another corporation directly from

the issuer in a transaction that was not registered under the

Securities Act of 1933. At the time of the acquisition the debtor

represented that it was taking these shares for investment, and

the issuer and its counsel accordingly viewed the transaction as

one "not involving a public offering" and therefore exempt from

the Securities Act's registration requirements under Section 4 (2)

of that statute. Some months thereafter the debtor obtained an

order from the bankruptcy court authorizing it to sell the securities to the public through a broker. In that order the referee

found that there was no "practical need" for registration since

the security in question was listed on several exchanges and

abundant information with respect to it was available to the

public.

The Commission intervened in the Chapter XI proceeding for

the limited purpose of preventing the violation of the Securities

Act that the referee had purported to authorize. It pointed out

that the debtor was an "underwriter" of the securities that it

proposed to sell, within the meaning of the Securities Act, and

that public sales by it would require registration, and it urged

that there was no legal basis for the referee's "practical need"

rationale. The debtor thereupon arranged for a private sale, and

the referee vacated the order to which the Commission had

objected.

In Gibson Products Company of Lodi, California, Ino.," and

in Cable Car Burgers, Inc.,78 Chapter XI plans of arrangement

were proposed calling for issuance to creditors, without registration under the Securities Act, of large quantities of the stock of a

corporation (the proponent of the plans) that wished to acquire

both debtors. The debtors and the proponent considered that these

transactions would be exempt from the registration requirements

by reason of Section 393a(2).

Because the cases presented questions of moment under both

the registration and the antifraud provisions of the Federal

securities statutes, the Commission intervened in both proceedings. The Commission pointed out that since the stock which the

creditors would receive was to be issued by an entity other than

the debtors, the availability of the claimed exemption was highly

76 C.D. Calif., No. 217067.

77 E.D. Calif., No. BK8-13800.

78 N.D. Calif., No. B-70-3965.
202 SECURITIES AND EXCHANGE COMMISSION

doubtful, and that it might therefore well be that both plans

would run afoul of the Securities Act. However, the Commission

did not choose to press this point. Instead, it stressed the character of the proponent's history and the deceptive nature of the

materials that had been used to solicit creditors' consents.

In Cable Car Burgers the bankruptcy court refused to confirm

the proposed plan and adjudicated the debtor a bankrupt. In

Gibson Products the plan was amended to provide for the issuance

of the debtor's own shares to its creditors. To that amended plan

the Commission raised no objection.

In Sveden House of Texas, Inc.,79the court confirmed a Chapter

XI arrangement, its order reciting that the Sveden stock to be issued thereunder was to be issued pursuant to the Section 393a(2)

exemption. Pursuant to the arrangement, stock was issued to

creditors but one block of stock was sold for cash to a purchaser

who was not a creditor.

Subsequently, the debtor and that purchaser sought to enjoin

the Commission from interfering with any resale by him without

registration. The court agreed with the Commission that the

Commission was not bound by the order confirming the arrangement and declined to take jurisdiction to restrain the Commission

since, notwithstanding the recitals in the order, it appeared that

the exemption did not extend to the issue and sale of securities to

persons who were not creditors.

Meter Maid Industries, Inc.80 and Language Laboratories,

Inc.,81 involved publicly-held debtors that had dissipated almost

all of their assets and had ceased doing business in any real sense.

In each case a plan of arrangement was proposed calling for the

issuance of large quantities of new stock to the creditors in reliance upon the Section 393a (2) exemption.

The Commission suggested that the proposed securities would

be spurious and that their issuance without registration under

the Securities Act was precluded by the standards implicit in

Chapters X and XI of the Bankruptcy Act. Both debtors were

adjudicated bankrupt.

Studio Creative Crafts, Inc.82 and Universal Topics, Inc.,8s involved small, closely-held debtors. In the Studio case, the debtor's

assets consisted of an unsuccessful retail ceramic shop. In the

79 S.D. Texas, No. 69-H-135.

80 S.D. Fla., No. 70-327-BK-CA.

81 D. Md., No. 14004.

82 E.D. Va., No. 208-70-A.

83 D. Md., No. 14243.
THIRTY-SEVENTH ANNUAL REPORT 203

other the debtor had been formed for the purpose of publishing

one book which never saw the light of day.

In both cases the proposed plan of arrangement called for the

issuance of massive quantities of stock in each of several as yet

unformed corporations to the creditors and to the private "investment groups" which had undertaken to supply the modest

amounts of cash needed to payoff the priority creditors." These

private investors were to pay a small fraction of a cent per share

for their stock.

The Commission pointed out that after the consummation of

these plans of arrangement the debtors would be multilevel corporate shells, with public investors at all levels, and little in the

way of assets and business. It suggested that plans of arrangement of this type, motivated primarily by stock market considerations rather than by any serious desires to rehabilitate a business,

lacked the "good faith" required by Section 366 (4) of Chapter

XI. Neither plan was confirmed, and both debtors were adjudicated bankrupt.s"

84 The Commission pointed out that it was doubtful that the exemption

found in Section 393a (2) of Chapter XI applied to such an offering. See the

discussion of Transystems, Inc. at pp. 199-200, supra.

85 In both cases, the plan proponents included several of the same individuals and corporations involved in the Sveden House proceeding discussed

at p. 202, supra. The Commission has instituted proceedings under the

Federal securities laws against many of these individuals and corporations.

See Litigation Release No. 5118 (July 29, 1971).

PART VIII

SUPPORTING ACTIVITIES

PUBLIC INFORMATION SERVICES

DISSEMINATION OF INFORMATION

As the discussion in prior sections of this Report indicates, most

large corporations in which there is a substantial public investor

interest have filed registration statements or registration applications under the Securities Act or the Securities Exchange Act

with the Commission and are required to file annual and other

periodic reports. Widespread public dissemination of the financial

and other data included in these documents is essential if public

investors generally are to benefit by the disclosure requirements

of the securities laws. This is accomplishedin part by distribution

of the prospectus or offering circular in connection with new

offerings. Much of the data reflected therein and in the annual

and other periodic reports is also reprinted and receives general

circulation through the medium of securities manuals and other

financial publications, thus becoming available to broker-dealer

and investment adviser firms, trust departments and other financial institutions and, through them, to public investors generally.

The documents mentioned above are also available for public

inspection both at the officesof the Commission and at the exchanges on which particular securities may be listed.

Various activities of the Commission also facilitate public dissemination of information filed as well as other information.

Among these is the issuance of a daily UNews Digest" which

contains (1) a resume of each proposal for the public offering of

securities for which a Securities Act registration statement is

filed; (2) a list of issuers of securities traded over the counter

which have filed registration statements under the Securities

Exchange Act; (3) a list of companies which have filed periodic

reports disclosing significant corporate developments; (4) a summary of all notices of filings of applications and declarations, and

of all orders, decisions, rules and rule proposals issued by the

Commission; (5) announcements of the Commission's participation in corporate reorganization proceedings under Chapter X

of the Bankruptcy Act and of the filing of advisory reports of the

205
206 SECURITIES AND EXCHANGE COMMISSION

Commission on the fairness and feasibility of reorganization

plans; (6) a brief report regarding actions of courts in litigation

resulting from the Commission's law enforcement program; and

(7) a brief reference to each statistical report issued by the

Commission.

The News Digest is made immediately available to the press,

and it is also reprinted and distributed by the Government Printing Office, on a subscription basis, to some 5,000 investors, securities firms, practicing lawyers and others. In addition, the

Commission maintains mailing lists for the distribution of the

full text of its orders, decisions, rules and rule proposals.

These informational activities are supplemented by public discussions from time to time of legal, accounting and other problems

arising in the administration of the Federal securities laws.

During the year, members of the Commission and various staff

officers made speeches before a number of professional, business

and other groups interested in the Federal securities laws and

their administration and participated in panel discussions of like

nature. Participation in these discussions not only serves to keep

attorneys, accountants, corporate executives and others abreast

of developments in the administration of those laws, but it also

is of considerable value to the Commission in learning about the

problems experienced by those who seek to comply with those

laws. In order to facilitate such compliance, the Commission also

issues, from time to time, general interpretive releases and policy

statements explaining the operation of particular provisions of

the Federal securities laws and outlining policies and practices

of the Commission.

Publications.-In addition to the daily News Digest, and releases concerning Commission action under the Acts administered

by it and litigation involving securities violations, the Commission

issues a number of other publications, including the following:

Weekly:

Weekly trading data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).

Monthly:

Statistical Bulletin .•

Official Summary of Securities Transactions and Holdings of Officers,

Directors and Principal Stockholders .•

Quarterly:

Financial Report, U.S. Manufacturing Corporations (jointly with the

Federal Trade Commission}." (Statistical Series Release summarizing

this report is available from the Publications Supply Unit.)
THIRTY-SEVENTH ANNUAL REPORT 207

Plant and Equipment Expenditures of U.S. Corporations (jointly with

the Department of Commerce).

New Securities Offerings.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

Annually:

Annual Report of the Commission .•

Securities Traded on Exchanges under the Securities Exchange Act of

1934.

List of Companies Registered under the Investment Company Act of

1940.

Classification, Assets and Location of Registered Investment Companies

under the Investment Company Act of 1940.b

Private Noninsured Pension Funds (assets available quarterly in the

Statistical Bulletin).

Directory of Companies Filing Annual Reports with the Commission

under the Securities Exchange Act of 1934.•

Other Publications:

Decisions and Reports of the Commission." (Out of print, available only

for reference purposes in SEC Washington, D. C. and Regional

Offices.)

Securities and Exchange Commission-The Work of the Securities and

Exchange Commission.

Commission Report on Public Policy Implications of Investment Company

Growth .•

Cost of Flotation of Registered Equity Issues, 1963-1965 .•

Report of SEC Special Study of Securities Markets." (Out of print,

available only for reference purposes in SEC Washington, D. C. and

Regional Offices.)

Institutional Investor Study Report of the Securities and Exchange

Commission (1971)-Eight Parts, H. Doc. No. 64 (92nd Cong.)

Part 8 of the Institutional Investor Study Report, containing the text

of the Summary and Conclusions drawn from each of the fifteen

chapters of the report .

Must be ordered from the Superintendent of Documents, Government

Printing Office, Washington, D.C. 20402.

b This document is available in photocopy form. Purchasers are billed by

the printing company which prepares the photocopies.

AVAILABILITY OF INFORMATION FOR PUBLIC INSPECTION

The many thousands of registration statements, applications,

declarations, and annual and periodic reports filed with the Commission each year are available for public inspection and copying

at the Commission's public reference room in its principal offices

in Washington, D.C. Also available at that location are other

documents contained in Commission files and indexes of Commission decisions.

The categories of materials which are available for public inspection and copying are specified in the Commission's rule

450-484 0 - 72 - 15

•
208 SECURITIES AND EXCHANGE COMMISSION

concerning records and information, 17 CFR 200.80, as revised to

implement the provisions of the Public Information Amendment

to Section 3 of the Administrative Procedure Act which became

effective July 4, 1967.1 The rule also establishes a procedure to

be followed in requesting records or copies thereof, provides a

method of administrative appeal from the denial of access to any

record, and provides for the imposition of fees when more than

one-half man-hour of work is performed by members of the Commission's staff to locate and make available records requested.

The Commission has special public reference facilities in the

New York and Chicago Regional Offices and some facilities for

public use in other regional and branch offices. Each regional

office has available for public examination copies of prospectuses

used in recent offerings of securities registered under the Securities Act, registration statements and recent annual reports filed

pursuant to the Securities Exchange Act by companies having

their principal office in the region, recent annual reports and

quarterly reports filed pursuant to the Investment Company Act

by management investment companies having their principal

office in the region, broker-dealer and investment adviser applications originating in the region, letters of notification under Regulation A filed in the region, and indexes of Commission decisions.

Additional material is available in the New York and Chicago

regional offices.

Members of the public may make arrangements through the

Public Reference Section at the Commission's principal offices to

purchase copies of material in the Commission's public files. The

copies are produced by a commercial copying company which

supplies them to the public at prices established under a contract

with the Commission. Current prices begin at 12 cents per page

for pages not exceeding 8112" x 14" in size, with a $2 minimum

charge. Under the same contract, the company also makes microfiche and microfilm copies of Commission public documents available on a subscription or individual order basis to persons or

firms who have or can obtain viewing facilities. In microfiche

services, up to 60 images of document pages are contained on

4" x 6" pieces of film, referred to as "fiche." Annual microfiche

subscriptions are offered in a variety of packages covering all

public reports filed on Forms 10-K, 10-Q, 8-K, N-IQ and N-IR

1As described in the 36th Annual Report, pp. 204-205, during the fiscal

year the Commission adopted a rule (17 CFR 200.81) making requests for noaction and interpretative letters submitted on or after December 31, 1970 and

responses thereto available for public inspection and copying.
THIRTY-SEVENTH ANNUAL REPORT 209

under the Securities Exchange Act or the Investment Company

Act; annual reports to stockholders; proxy statements; new issue

registration statements; and final prospectuses for new issues.

The packages offered include various categories of these reports,

including those of companies whose securities are listed on the

New York Stock Exchange, the American Stock Exchange, or

regional stock exchanges or traded over the counter and standard

industry classifications (S.I.C.). Arrangements also may be made

to subscribe to reports of companies of one's own selection. Over

one hundred million pages (microimagery frames) annually are

being distributed to the user community. The subscription services

system may be extended to further groups of filings in the future

if demand warrants. The company also will supply, at reasonable

prices, copies in microfiche or microfilm form of other public

records of the Commission desired by a member of the public.

Microfiche readers and reader-printers have been installed in

public reference areas in the Commission's headquarters office

and New York Regional Office, and sets of the microfiche are

available for inspection there.

Visitors to the public reference rooms of the Commission's

Washington, D.C., New York and Chicago offices also may make

immediate reproductions of material in those offices on coinoperated copying machines at a cost of 25 cents per 8th" x 14"

page. The charge for an attestation with the Commission seal is

$2. Detailed information concerning copying services available

and prices for the various types of service and copies may be

obtained from the Public Reference Section of the Commission.

Each year, many thousands of requests for copies of and information from the public files of the Commission are received

by the Public Reference Section in Washington, D.C. During the

1971 fiscal year, 12,435 persons examined material on file in

Washington and several thousand others examined files in New

York, Chicago, and other regional offices. More than 28,628

searches were made for information requested by individuals, and

approximately 3,667 letters were written with respect to information requested.

LITIGATION INVOLVING PUBLIC INFORMATION PROVISIONS OF

THE ADMINISTRATIVE PROCEDURE ACT

The public information provisions of the Administrative Procedure Act," among other things, require agencies, including the

Commission, to make records maintained by them available to

2 5 U .S.C. 552.
210 SECURITIES AND EXCHANGE COMMISSION

members of the public. The Act contains various exemptions from

the general disclosure requirements, the meaning of certain of

which was the subject of litigation involving the Commission

during the fiscal year. In M. A. Schapiro & Co., Inc. v. S.E.C.,3

plaintiff asked that the Commission be required to make public

a staff study on Rule 394 of the New York Stock Exchange and

transcripts of testimony and other records obtained in the course

of an investigation of the rule. The Commission has taken the

position that these documents are exempt from disclosure under

various exemptive provisions, including those for "investigatory

files compiled for law enforcement purposes," matters that are

"contained in or related to examination, operating, or condition

reports prepared ... for the use of an agency responsible for the

regulation or supervision of financial institutions," information

"specifically exempted from disclosure by statute" 4 and "commercial or financial information [which is] privileged or confidential." In addition the Commission has urged that the staff

study is an intra-agency memorandum exempt from disclosure

under the Act. As of the end of the fiscal year, the plaintiff's

motion for a preliminary injunction was pending in the district

court.

In Frankel v. S.E.C.,5 plaintiffs seek access to the contents of an

investigatory file which was the basis of a civil enforcement

action resulting in injunctions against future violation of the

securities laws. The Commission has asserted that the documents

requested are exempt from the disclosure requirements of the

Act as investigatory files compiled for law enforcement purposes,

matters that are specifically exempted from disclosure by statute,

and commercial or financial information which is privileged and

confidential. Preliminary motions were pending before the court

at the end of the fiscal year.

In Commercial Envelope Mfg. Co., Inc. v. S.E.C.,6 a petition

was filed in the Court of Appeals for the Second Circuit to review

the Commission's refusal to make public a document obtained

from an informant relating to the completeness and accuracy of

a registration statement filed under the Securities Act. The Commission's motion to dismiss the petition for lack of jurisdiction

was denied without prejudice to renewal at the time of briefing

3 D.D.C., No. 2243-70.

418 U.S.C. 1905 prohibits officers and employees of the United States from

disclosing confidential information received in the course of their employment.

5 S.D.N.Y., 71 Civ. 2369.

6 C.A. 2, No. 71-1171.
THIRTY-SEVENTH ANNUAL REPORT 211

on the merits. The Commission contends that the document is

exempt from disclosure as commercial or financial information

which is privileged and confidential and as part of an investigatory file compiled for law enforcement purposes. It further

contends that the district courts have exclusive jurisdiction over

public information cases.

ELECTRONIC DATA PROCESSING

EXTENSION OF APPLICATION OF AUTOMATION TECHNIQUES

During the 1971 fiscal year the Commission continued the

improvement of existing EDP systems and progressed in the

development of planned systems described in previous annual

reports.

In a further extension of the use of automation for analysis

of data related to the financial structure of business and the

economics and practices of the securities industry, several new

EDP systems have been developed. One of these is a system for

assessing developments in corporate liquidity by analyzing liquid

asset holdings of approximately 850 large non-financial corporations registered with the Commission. Another new system related to a survey of factors influencing 1970 and 1971 business

investment. It provided statistical data on developments in the

years 1969-70 which may have resulted in changes in selected

companies' actual investment in 1970 and expected investment

in 1971.

The Commission also implemented a system involving statistical

data on issues registered under the Securities Act of 1933, private

placements, and issues of Federal, State and local governments

and other securities exempt from registration under the Securities Act. This system produces data for the Commission's Statistical Series releases and for special studies concerning the cost

of flotation of new issues, the yield structure of corporate debt

placed privately, the maturity distribution of debt securities, and

the seIling arrangements for new issues.

In addition, detailed systems design and computer programming

work was begun on an automated system which will provide data

for a study of the potential impact on the mutual fund industry

of the repeal of Section 22 (d) of the Investment Company Act,"

This project is being conducted in conjunction with a related

study being undertaken by the National Association of Securities

Dealers.

-7 See pp. 20-21, supra, for a descrrptron of this study.
212 SECURITIES AND EXCHANGE COMMISSION

EDP applications currently under developmentinclude a system

for processing reports of security holdings and transactions of

corporate insiders and the automated preparation of the "Official

Summary" of insiders' transactions and holdings published by

the Commission.

As time and other resources permit, the use of EDP will be

extended to other areas of Commission activities.

ASSISTANCE TO STATE AND FEDERAL AGENCIES

The Commission continued during the past year to provide

certain information from its computer files to State authorities,

self-regulatory institutions and Federal agencies as described

in previous annual reports."

SHARING OF EDP FACILITIES

During the past fiscalyear the Commissionentered into sharing

arrangements with the General Accounting Officeand the National Weather Service. Under these arrangements the Commission provides a total of approximately 300 hours of computer

time per year at a significant savings to the Government as compared with the prevailing rates of commercial facilities.

EDP TRAINING

During the year the Commission continued its training programs geared to the specificneeds of its computer specialists and

operators. The program is designed to enable the Commission's

EDP staff to utilize more advanced hardware and software in the

development and implementation of new and revised computer

systems.

PERSONNEL AND FINANCIAL MANAGEMENT

PERSONNEL PROGRAM

In fiscal 1971 the Commission experienced a sharp decline in

its turnover rate, as a consequence of which recruiting activity

had to be halted or drastically reduced throughout most of the

year. However, in the face of this general curtailment of job

opportunities, the SEC continued its efforts to implement its

various special hiring programs, notably in the areas of equal

employment opportunity, and in utilizing the special authority

for making "Veterans Readjustment Appointments." The Commission was successful in attracting to its staff a number of

qualified minority individuals and women. In some instances,

these were first-time appointments of such persons for the posi8 See 34th Annual Report, p, 168j 35th Annual Report, p, 179.
THIRTY-SEVENTH ANNUAL REPORT 213

tions involved. Many of the Commission's clerical jobs were filled

by the appointment of veterans recently discharged after military

service in Vietnam.

With the cooperation of the law schools involved, the Officeof

Personnel arranged for the assignment of law students to the

SEC as uncompensated Student Observers, with a view to giving

them an opportunity to study first-hand the Commission's operations and activities. Under this program, the students spend 10 to

15 hours a week at the SEC. Some of them receive academic

credit for this activity as part of their law school education.

During the fiscal year, three of the law students who had served

as Student Observers were hired as permanent members of our

legal staff.

The Office of Personnel conducted an in-depth evaluation of

the Commission's EEO Action Plan which was designed to assess

past results and develop affirmative action for the future. Each

officeand division was asked for short and long-range objectives

in this area, and the Office of Personnel aided the operating

officials in establishing realistic and meaningful goals for equal

employment opportunities for present staff members and for

future recruitment needs and goals. A revised EEO Action Plan

has been prepared incorporating additional means for furthering

the aims of the EEO Program.

As a result of a special election, the Commission granted the

AFGE Local 2497 exclusive bargaining rights for all nonsupervisory general schedule and wage grade employees in the

Headquarters Office. The only other union local with exclusive

recognition in the Commission is located in the New York

Regional Office.

The Commission's Sixteenth Annual Service and Merit Awards

Ceremony was held in November 1970. Distinguished Service

Medals were awarded by the Commission to Nellye Thorsen, Assistant Secretary of the Commission; Alexander J. Brown, Jr.,

Regional Administrator of the Washington Regional Office; and

Aaron Levy, Associate Director of the Division of Corporate

Regulation. Ten employees were given 35-year pins for SEC

service and eight employees received pins for 30-year SEC

service; within-grade salary increases in recognition of high

quality performance were granted to 24 employees; and cash

awards totaling $8,875 were presented to 37 employees for

superior performance, special service or adopted suggestions.

The Commission is singularly proud of the special recognition

accorded Philip A. Loomis, Jr., General Counsel of the Commis-
214 SECURITIES AND EXCHANGE COMMISSION

sion (subsequently appointed Commissioner), by the District of

Columbia Chapter of the Federal Bar Association when it presented him with its Annual Justice Tom C. Clark Award. That

award is presented to one lawyer in Government service in recognition of superior and exceptional professional performance in

the career service. The award, which was signed by Chief Justice

Warren E. Burger, Attorney General John N. Mitchell, and other

members of the selection committee, stated in part:

"Your expert abilities in the highly specialized field of federal securities

law have been an invaluable assistance to the Securities and Exchange

Commission, where you are presently the General Counsel, in its important service to the public. Your distinguished accomplishments have

contributed to the preservation of confidence by the individual investor

in the integrity of the capital markets of the nation and have advanced

the cause of investor protection."

PERSONNEL STRENGTH; FINANCIAL MANAGEMENT

The following comparative table shows the personnel strength

of the Commission as of June 30, 1970 and 1971.

June 30, 1970 June 30, 1971

Comrntsstoners 5 5

Staff:

Headquarters Office ------ ------- ------------- 1,007 961

Regional Offices --------- --------- ------------ 442 463

Total Staff ------------- --------- ------------ 1,449 1,424

Grand Total ------------------------------ -- 1,454 1,429

The table on page 216 shows the status of the Commission's

budget estimate for the fiscal years 1967 to 1972, from the initial

submission to the Congress to final enactment of the annual appropriation.

The following table shows the Commission's appropriation,

total fees collected, percentage of fees collected to total appropriation, and the net cost to the taxpayers of Commission operations

for the fiscal years 1969, 1970 and 1971.

Percentage of

fees collected Net cost Year Appropriation to total of

Fees appropriation CQmmission

collected (percent) operations

1969 __________ $18,624,000 $21,996,362 118 ($3 ,372 ,362)

1970 __________ 21,904,977 15,525,693 71 6,379,284

197L _________ 23,615,000 16,374,178 69 7,240,822

The Commission is required by law to collect fees for (1)

registration of securities issued; (2) qualification of trust indentures; (3) registration of exchanges; (4) brokers and dealers

-------------------- ~---------------
THIRTY-SEVENTH ANNUAL REPORT 215

who are registered with the Commission but who are not members

of a registered national securities association (the National Association of Securities Dealers (NASD) is the only such organization); and (5) certification of documents filed with the

Commission,"

9 Fees collected are derived principally from categories (1), (3) and (4)

above. Rates for these are (1) 1/50 of 1 percent of the maximum aggregate

price of securities proposed to be offered, or 20<!per $1,000, with a minimum

fee of $100; (3) 1/500 of 1 percent of the aggregate dollar amount of the

sales of securities transacted on the exchanges; (4) for fiscal 1969: a basic

registration fee of $100 for non-NASD broker-dealers plus $5 for each

associated person, with a maximum payment of $20,000; $30 for each office

and $25 for each associated person for whom a nonmember broker or dealer

had not previously filed a personnel form; and an initial assessment fee of

$150. The maximum payment for all fees payable on the annual assessment

form was raised in fiscal 1970 to $25,000, and in fiscal 1971 to $5(J,000. The

associated persons fee was raised to $35 effective December 15, 1970.
216 SECURITIES AND EXCHANGE COMMISSION

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PART IX

APPENDIX

STATISTICAL TABLES

TABLE l.-Securities Registrations Effective Under the Securities Act of

19S5-Fiscal Years 19S5-1971

(Amounts in rmllions of dollars)

Cash sale for account of issuers

Number Bonds.

Fiscal year ended of All regis- debentures. Preferred Common

.Tune 30 state- trations Total and notes stock stock ments >

1935 284 $ 913 $ 686 $ 490 $ 28 $ 168 1936_____________ 689 4,835 3,936 3,153 252 531 1937_____________ 840 4,851 3.635 2,426 406 802 1938_____________ 412 2,101 1,349 666 209 474 1939_____________ 344 2,579 2,020 1,593 109 318 1940_____________ 306 1,787 1,433 1,112 110 210 1941-____________ 313 2,611 2,081 1,721 164 196 1942_____________ 193 2,003 1,465 1,041 162 263 1943_____________ 123 659 486 316 I 32 137 1944_____________ 221 1,760 1,347 732 343 272 1945_____________ 340 3,225 2,715 1,851 407 456 1946_____________ 661 7,073 5,424 3.102 991 1,331 1947_____________ 493 6,732 4,874 2,937 787 1,1110 1948_____________ 435 6.405 5,032 2,817 537 1,878 1949_____________ 429 5,333 4,204 2,795 326 1,083 1950_____________ 487 5,307 4,381 2.127 468 1,786 1951-____________ 487 6.459 5,169 2,838 427 1.904 1952_____________ 635 9,500 7,529 3.346 851 3,332 1953_____________ 593 7.507 6,326 3.093 424 2,808 1954_____________ 631 9,174 7,381 4,240 531 2.610 1955_____________ 779 10,960 8,277 3.951 462 3,864 1956_____________ 906 13,096 9,206 4,123 539 4,544 1957_____________ 876 14.624 12.019 5,689 472 5,858 1958_____________ 813 16,490 13,281 6.857 427 5.998 1959_____________ 1.070 15,657 12,095 5,265 443 6.387 1960_____________ 1.426 14.367 11.738 4,224 253 7,260 1961-____________ 1,550 19,070 16,260 6,162 248 9,8lIO 1962_____________ 1,844 19,547 16,286 4,512 253 11,521 1963_____________ 1,157 14,790 11,869 4,372 270 7;1.27 1964_____________ 1,121 16,860 14,784 4,554 224 10,006 1965_____________ 1,266 19,437 14,656 3,710 307 10,638 1966_____________ 1.523 30,109 25,723 7,061

! 444 18,218 1967_____________ 1,649 34,218 27,950 12.309 558 15,083 1966_____________ 32,417 354,076 37,269 14.036 1,140 22,092 1969_____________ '3,645 '86,810 52,039 11.874 751 39,614 1970_____________ 53,389 559,137 48,198 18,438 I 823 28,939 197L ____________ "2,989 "69.562 58,452 27,637 I 3.360 27,455

I Statements registering American Depositary Receipts against outstanding foreign

securities as provided by Form 5-12 are Included,

For 10 montbs ended .Tune 30, 1935.

InclUdes three statements registering lease obligations relating to industrial revenue bonds of $140 million. , Includes eight statements registering lease obligations relating to industrial revenue bonds of $354 million.

Includes four statements registering lease obligations relating to industrial revenue bonds of $21 million.

"InclUdes one statement registering lease obligations relating to industrial revenue bonds of $400 thousand.

217

•____________

•

•

•
218 SECURITIES AND EXCHANGE COMMISSION

TABLE 2.-Registrations Effective Under the Securities Act of 1988, Fiscal

Year Ended June 80, 1971

All registratIons

[Amounts rounded to thousands of dollars and may not add to totals]

PART 1-Dlstnbution by months

Proposed for cash sale for account of issuers

Year and

month

Number Number

of state- of ments issues 1

Amount

Total

Number I of Amount

Issues 1

Corporate"

Number

of Amount

issues 1

I

2,988 3,370 69,561,575 : 2,705

102 $2,159,153

95 12'025'499 120 3,215,409

152 3,448.731

134 3,686,510

135 I 2,828,461

91 2,254,497

102 2,799.494

158 4,974,059

158 3,293.994

134 2,717,089

181 4,797,742

1,562 38,200,638

3,345,862

4,227,128

7,051,538

7,754,707

5,911,994

6,341,255

$3,440,789

3,287,777

4,269,675

4,597,156

4,537,608

3,686,680

58,452,169

160

177

230

310

255

310

219

180

206

232

195

231

3,977,476

4,830,333

7,944,327

9,250,600

7,623,948

9,374,422

$ 3,848,305

3,462,772

4,606,945

5,215,565

5,081,447

4,345,435

196

218

276

390

337

414

263

214

252

274

235

301

174

188

244

348

298

365

244

189

232

244

199

263

1970

July

August

September

October

November

December __

1971

January

February

March

April

May

June

Total.

fiscal

year

19718

PART 2 -Purpose of registration and types of security

Preferred Common

stock stock 6

Purpose of registration Total

Type of security

Bonds,

debentures,

and

notes

All regrstrations (estimated value)

For account of issuer for cash sale __

Immediate offering 2 ---------------- I Corporate

Offered Generalto: I public

Security holders

Other special groups /

Foreign governments

Extended cash sale and other issues

For account of issuer for other than I cash sale \

For account of other than issuer

Og~~h_~~~_~~~~~~~~~~~~~~~~~::~~~~~~~==

$69,561,575

58,452,169

39,693,861

38,200.638

35,424,222

2,754,285

22,128

1,493,225

18,758,306

7,043,431

4,065,975

2,007,167

2,058,809

$28,024,575

27,637,284

27,632,584

27,139,359

26,894,957

232,262

12,140

493,225

4,700

173,006

214,285

1,207

213,078

$3,716,884 $37,820,115

3,359,836 27,455,048

3,339,669 8,721,608

3,339,669 7,721,608

1,786,029 6,743,236

1,553,640 968.383

~==i~~i~~ 11~:~:m

81,783\6,788,642 275,265 3,576,425

100,099 1,905,861

175,166 1,670,585

1Warrants are excluded from the count of the number of issues although inclUded

in dollar amount. 2 Covers only Issues proposed for sale immediately following effective registration. 3 The 2,988 effective regtstration statements covered in this table differ from the

2,929 "net" effective statements shown in the text table "Number and disposition of

registration statements filed" as follows:

Included In effectives but excluded from net effectives:

Five registratrons effective In fiscal 1970 prior to receiving competitive bids. The

amendments disclosing the accepted terms were received in fiscal 1971.

Fifty-six rgtstrations effective In fiscal 1971which were later withdrawn.

Excluded from effectIves but included in next effectives:

One registration effectIve prior to receiving competitive bids. The amendments

disclosing the accepted terms were not received in fiscal 1971.

One registration of lease obligatIons relating to industrial revenue bonds.

Includes face amount certificates.

Includes certificates of partfcrpation, warrants and voting trust certificates.

_

_

_

_

_

_

_

_

_

~

•

_

_

_

_

_

_

•

•
THIRTY.SEVENTH ANNUAL REPORT 219

TABLE a.-Brokers and Dealers Regu;tered Under the Securities Exchange

Act of 1934 I-Effective Regu;trations as of June 30, 1971, Classified by

Type of Organization and by Location of Principal Office

Number of registrants

Corporations

PartnerShIPS

Number of proprietors,

partners, officers, etc 2 3

Sole

proprietorships

Total

Part- Cor- ner- pora- ships trons s

Sole

proprietorships

Total

Location of

principal office

Alabama _o

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

District of Columbia Florida

Georgia

Hawaii

Idaho

Ilhnois

Indiana

Iowa

Kansas

Kentucky

Louisrana

Maine

Maryland

Massachusetts

Michigan

MInnesota

MISsissippi

MIssouri

Montana . Nebraska

Nevada

New Hampshire New Jersey

New Mexico

New York (excludmg New York City)

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia Wisconsin

Wyoming

Total (excluding

New York City)

New York CIty

Total

37

6

30

23

525

86

49

19

59

136

52

31

9

181

58

47

34

12

30

18

45

200

71

78

22

94

12

19

7

15

248

4

426

37

9

112

27

36

239

30

17

3

43

192

55

6

59

91

8

47

11

3,705

1,196

4,901

5

5

5

5

125

18

7

3

7

20

7

7

3

19

13

6

3

1

12

3

10

59

9

4

4

12

4

1

2

5

76

1

153

10

1

11

10

4

34

9

2

1

5

38

6

3

12

18

2

3

2

785

127

912

2

o

2

2

46

4

6

1

8

7

4

2

o

32

1

3

3

3

8

2

6

21

6

3

6

10

o

o

o

o

27

o

35

4

o

25

1

2

43

4

1

o

2

6

4

1

12

2

1

1

2

362

346

708

30

1

23

16

354

64

36

15

43

109

41

22

6

130

44

38

28

8

10

13

29

120

56

71

12

72

8

18

5

10

145

3

238

23

8

76

16

30

162

17

14

2

36

148

45

2

35

71

5

43

7

2,558

723

3,281

150

9

108

102

2,601

476

327

136

432

510

269

112

23 1,207

281

220

195

64

185

59

269

1,110

425

476

78

833

34

134

17

40

713

20

1,038

213

34

774

76

176

1,387

76

101

11

199

1,167

190

22

296

421

27

354

30

18,207

10,758

28,965

5

5

5

5

125

18

7

3

7

20

7

7

3

19

13

6

3

1

12

3

10

59

9

4

4

12

4

1

2

5

76

1

153

10

1

11

10

4

34

9

2

1

5

38

6

3

12

18

2

3

2

785

127

912

5

o

4

4

347

32

59

2

60

19

9

5

o 222

2

11

11

26

78

9

99

116

86

6

16

141

o

o

o

o

70

o

116

19

o 267

2

5

248

25

2

o

19

21

13

4

60

4

5

39

4

2,292

3,640

5,932

140

4

99

93

2,129

426

261

131

365

471

253

100

20

966

266

203

181

37

95

47

160

935

330

466

58

680

30

133

15

35

567

19

769

184

33

496

64

167

1,10542

97

10

175

1,108

171

15

224

399

20

312

24

15,130

6,991

22,121

1Does not Include 39 registrants whose prmcipal offices are located in foreign countnes or other territorial JUrisdictIOns not listed. 2 Includes drrectors, officers, trustees, and all other persons occupying sirmlar status

or performing SImilar functions. 3 Anocaucns made on the baSIS of tocation of prmerpat offices of registrants, not actual location of persons. InformatIon taken from latest reports filed prior to June

30,1971. hi Includes all forms of organizations other than sole propnetorshIps and partners IpS

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220 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Number 0/ Security Issues and Issuers on E:x:ckanges

PARTl.-UNDUPLICATED COUNT AS OF JUNE 30, 1971 OF THE NUMBER OF

STOCK AND BOND ISSUES ADMITTED TO TRADING ON EXCHANGES, AND

THE NUMBER OF ISSUERS INVOLVED

Status under the Act 1 Stocks Bonds

Total

stocks

and bonds

Issuers

involved

Registered pursuant to Sections 12«b), (c) and (d)

Temporarily exempted from registra- tion by Commission rule

Admitted to unlisted trading privileges on registered exchanges pursuant to Section 12(f)

Listed on exempted exchanges under

exemption orders of the Commission __ Admitted to unlisted trading privileges on exempted exchanges under ex- emption orders of the Commission

Total

3,623

13

55

41

8

3,740

2,027

5

4

5

o

2,041

5,650

18

59

46

8

5,781

3,130

9

44

29

8

3,220

1Registered: A security may be registered on a national securities exchange by the

Issuer filing an application with the exchange and with the Commission containing certain types of specified information.

TempO'1'arilyexempted: These are securities such as short term warrants, or securities resulting from mergers, consolidations, etc., which the Commission has by pub- lished rules exempted from regrstration under specified conditions and for stated

periods. Admitted to unlisted trading privileges: This refers to securities which have been

admitted to tradmg on the initiative of exchanges without listing. Since July 1964,the

effective date of the 1964amendments to Section 12(f) of the Exchange Act, additional

securrties may be granted unlisted trading prrvileges on exchanges only if they are listed and registered on another exchange.

Listed on exempted exchanges: Certam exchanges have been exempted from reg- istration under Section 6 of the Act because of the limited volume of transactions

The Comrmssion's exemption orders specify in each case that securitIes which were bsted on the exchange at the date of the order may continue to be listed thereon,

and that no additional securities may be listed except upon compliance with Sections

12(b), (c) and (d).

Unlisted on exempt exchanges: The Commission's exemption orders specify that

securities which were admitted to unlisted trading privileges at the date of the order

may continue such privileges, and that no additional securities may be adm.itted to Unlisted trading privileges except upon compliance with Section 12(f).

PART2.-NUMBER OF STOCK AND BOND ISSUES ON EACH EXCHANGE AS OF JUNE 30,1971, CLASSIFIED BY TRADING STATUS, AND NUMBER OF ISSUERS

INVOLVED

stocks Bonds

Exchanges Issuers R X U XL XU Total R X U XL !'rotal

177 3 4 __ 184

13 __ __ __ 13

1 __ __ 8 9

.: .: -5 ---5 16 __ __ __ 16

7 __ __ __ 7

1,827 4 __ __ 1,831 47 __ __ __ 47

55 __ 2 __ 57

1 1

1,226 4 62 __ __ 1,292

64 __ 589 __ __ 653 2 __ 2 __ __ 4

28 __ 201 __ __ 229 76 __ 322 __ __ 398 ____ __ __ 42 8 50

377 2 279 __ __ 658

146 __ __ __ 146

1,915 10 __ __ 1,925

717 6 201 __ __ 924 236 4 742 __ __ 982

--52 .: --3 .: 31 __ 6 37

1,211

6314

221

386

41

592

138 1,652

756

841

12

55

34

American

Boston

ChIcago Bd. of Trade __ Cincinnati _ Detroit

Honolulu- _ Midwest

National

New York

Pacific Coast _ PhIla.-Ba1t.-Wash _ Richmondsalt Lake

Spokane

Symbols: R-registered; X-temporarily exempted; U-admitted to unlisted trading privileges; XIr-bsted on an exempted exchange; XU-admitted to unlisted trading privileges on an exempted exchange.

Note-Issues exempted under Section 3(a)(12) of the Exchange Act, such as obliga- tions of the U. S. Government, the states, and cities, are not included in this table.

-Exempted exchanges.

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THIRTY-SEVENTH ANNUAL REPORT

TABLE 5.-Value of Stocks on Ezchanges

[Billions of dollars]

221

New York American Exclusively December 31 Stock Stock on other Totall

Exchange Exchange Exchanges

1936______________________________ $59.9 $14.8 $'14.7 1937 38.9 10.2 49.1 1938 47.5 10.8 --- 58.3 1939______________________________ 46.5 10.1 --- 56.8 1940______________________________ 1941____________________________ 41.9 8.6 --- 50.11

35.3 7.4 43.2 1942 38.8 7.8 46.8 1943 47.6 9.9 57.11 1944 55.5 11.2 1I8.7 1945 73.8 14.4 88.2 1946 68.6 13.2 81.8 1947 68.3 12.1 80.4 1948 67.0 11.9 $3.0 81.9 1949______________________________ 76.3 12.2 3.1 91.6 1950______________________________ 93.8 13.9 3.3 111.0 1951______________________________ 109.5 16.5 3.2 129.2 1952______________________________ 120.5 16.9 3.1 140.5 1953______________________________ 117.3 15.3 2.8 135.4 1954______________________________ 189.1 22.1 3.6 194.8 1955______________________________ 207.7 27.1 4.0 238.8 1956______________________________ 219.2 31.0 3.8 254.0 1957______________________________ 195.6 25.5 3.1 224.2 1958______________________________ 276.7 31.7 4.3 312.7 1959______________________________ 307.7 26.4 4.2 338.4 1960______________________________ 307.0 24.2 4.1 335.3 1961______________________________ 387.8 33.0 5.3 426.2 1962______________________________ 3458 24.4 4.0 374.2 1963______________________________ 411.3 26.1 4.3 441.7 1964______________________________ 474.3 28.2 4.3 506.8 1965______________________________ 537.5 30.9 4.7 573.1 1968______________________________ 482.5 27.9 4.0 514.4 1967______________________________ 605.8 43.0 3.9 652.7 1968______________________________ 8923 61.2 6.0 759.5 1969______________________________ 629.5 47.7 5.4 682.6 1970______________________________ 636.4 39.5 4.8 680.7

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

American Stock Exchange only

______________________________ --- ______________________________ ---

______________________________ --- ______________________________ --- _____________________________ --- ______________________________ --- ______________________________ --- ______________________________ --- ______________________________ ---
222 SECURITIES AND EXCHANGE COMMISSION

TABLE G.-Dollar Volume and Share Volume of Sales Effected on Securities

Exchanges in the Calendar Year 1970 and the 6-Month Period Ended June

30,1971

[Amounts in thousandal

PART 1.-12 MONTHS ENDED DEC. 31, 1970

Bonds Stocks Rights and

warrants

Total Prin- NumExchanges dollar Dollar cipal Dollar Share Dollar ber of

volume volume amount volume volume volume units

Registered

exchanges 136,464,594 4,763,242 6,299,546 131,125,543 4,539,456 575,809 294,207

American ______ 15,030,945 394,417 658,483 14,366,041 878,536 270,487 41,590 Boston _________ 892,770 0 0 892,415 24,592 355 318 Chicago Board of Trade _____ 0 0 0 0 0 0 0

Cincinnati 45,732 10 18 45,679 1,000 43 118

Detroit 145,108 0 0 145,052 4,985 56 266

Midwest ------- 4,953.441 1,170 1,597 4,942,990 149,305 9,282 3,504

National 44,621 0 0 44,621 11,926 0 I 0 New York-===== 107,648,957 4,328,335 5,554,921 103,063.237 3,213,069 257,385 ,233,379 Pacific Coast __ 5,057,890 36,378 82.199 4,985,958 164,975 35,553 112,989 PhUa.-Balt

Washington __ 2,634,268 2,933 I 2,328 2,628,687 76,932 2,648 2,044 Salt Lake ___. __ 6,255 0 0 6,255 5,800 0 0

Spokane ------- 4,606 0 : 0 4,606 8,337 0 0

Exempted

exchanges 8,852 0 0 8,852 766 0 0

Honolulu ------ 8,590 0 0 8,590 759 0 0

Richmond 262 0 0 262 7 0 0

PART 2.-6 MONTHS ENDED JUNE 30, 1971

Bonds Stocks Rights and

warrants

Total

dollar Prin- NumExchanges volume Dollar elpal Dollar Share Dollar ber of

volume amoun volume volume volume units

Registered

exchanges 105,330,791 4,374,876 5,157,358 100,258,375 3,271,977 697,540 147,991

American ______ 10,628,186 ::93,390 522,742 9,745,102 608,944 489,693 50,242 Boston _________ 593,307 0 0 592,290 13,938 1,017 41

Chicago Board of Trade _____ 0 0 0 0 0 0 0

Cincinnati ----- 49,459 23 39 49,434 1,045 2 6 Detroit -------- 153,884 0 0 153,854 4,149 30 44

Midwest 3,936,268 281 173 3,928,062 113,429 7,925 1,346

National 29,504 0 0 29,504 7,625 0 0

New York-===== 83,861,634 3,931,399 4,544,642 79,792,140 2,345,973 138,095 78,293

Pacific Coast -- 3,900,047 47,513 84,853 3,798,082 110,898 54,452 14,740

PhiladelphiaBaltimoreWashington __ 2,173,665 2,269 4,908 2,165,070 58,535 6,326 3,279 Salt Lake ______ 3,118 0 0 3,118 3,846 0 0

Spokane ------ 1,720 0 0 1,720 3,596 0 0

Exempted

g!

exchanges 3,397 11 10 3,386 283 0

Honolulu ------ 3,397 11 10 3,386 283 0

Richmond ----- 0 0 0 0 0 0

Note: Data on the value and volume of securities sales on the registered exchanges

are reported m connection with fees paid under Section 31 of the Securities Exchange

Act of 1934. Included are all securities sales, odd-lot as well as round-lot transactions,

effected on exchanges except sales of bonds of the U S. Government which are not

subject to the fee. Comparable data are also supplied by the exempted exchanges

Reports of most exchanges for a grven m.onth cover transactions cleared during the

calendar month Clearances generally occur on the 5th business day after that on

WhICh the trade was effected

____=====

-

"

~----

----~--
THIRTY-SEVENTH ANNUAL REPORT 223 

TABLE?.-Cornpa~ati~le Share Sales and DoEEar Volumes on Ezohangss 

Year I Share sales 

1935......... 


1940......... 377,896,512 


1945......... 789,018,138 


1950......... 893,320,458 


1955 ........ 


1958 ........ 1,182,487,065 


1958... 1.400,578.512 


1959......... 1,699,696,619 


1960......... 1,441,047,564 


1961 ........ 2,142,523,490 


1962......... 1,711,945,297 


19E4 ........ 2,128,373,821 


1965......... 2,671,011,839 


1967 ........ 


1968 ........ 5,408,731,347 


3969..... 5,154,994,769 


1970......... 4,834,429,514


SIX months 

Dollar 


volume (in
 I thousands)


1935......... $ 15.396.139 


1'340......... 8,419,772 


1845......... 16,234,552 


19s......... 21.808.284 


1955.. 38,039,107


1956......... 35.143115 


1957......... 32,214,846 


1958......... 38.419.580 


1959......... 52W1.255 


1 ......... 43:306,603 


1961......... 64,071,613


1962~........ 54,855.894 


1963......... 64.438.073 


1964~........ 72,461,150 


1965......... 89,549,093 


l9%6 ......... 123,668,443 


1967..... 162,189,211 


1968......... 197,111,957 


196% ........ 116.3r9.759 


1970......... 131.710,203


Six months to June 30.1 

1971....... 100,959.301 


Note.-Annual sales. including stocks, warrank and rights, as repprted by all U.S. 

exchanger to the Commission. Figures for merged exchanger are included in those 

of the exchanges into which they were merged. Details for all years prior to 1955 

appear in Table 7 in the Appendix of the 32nd Annual Report.

SmD0Ir.-NYS New York Stock Exchange. AMS American Stock Exchange; MSE. 

Midwest Stock ixehange. PCS Pacific co&t sto>k Exchange. PBS Philadelphia- Baltirnore-Washington Stick ~iehange; BSE, Badon St& ~xihahangk DSE, Detmrt 

Stock Exchange; CIN. Cincinnati Stoek Exchange. 
224 SECURITIES AND EXCHANGE COMMISSION 

T~LE 8.-Block Distributions of Stocks Reported by Exchanges

TABLEB.-Unlisted Stock8 on Exchanges 

PART1.-NUMBER OF STOCKS ON THE EXCHANGES AS OF JUNE 30, 1971 1 

Llsted end Registered on Another 

Exchange 

! Admitted Prior to Admitted Sine; Exchanges Unlisted Only 2 / March 1. 19348 March 1. 1934 

American ................. Boston 

CindnnaU ... Detmit .................... Honolulu ................. Midwest .................. Pacific Coast 

Phila-Balt-Wash .......... %It Lake 

Spokane .................. 


Totals .............. 61 

THIRTY-SEVENTH ANNUAL REPORT 225 

PART2.-UNLISTED SHARE VOLUME ON THE EXCHANG-CALENDAR YEAR 1970 

LIsted and Registered on Another 

Exchange 

Admitted Prior to Admitted Sine: 

Exchanges . Unlisted Only * March 1. 1934 March 1. 1934 

American .................. 20.eZl.OW 1,804,350 953,059 


Bwton .... 0 4.772.492 13,543,025 


Chicago Board of Trade .-. 0 0 0 


Cindnmti ................. 0 0 877 800 


Detroit ..................... 0 164.581 2.255:QQE 


H~n~lulu.................. 44,715 0 0 


Wdwest ................... 0 0 53,409,050 


Paelfie Coast ............... 0 1,501,701 43.372,MQ 
 Phila-Balt-Wash ........... 0 18222,371 49,591,393 


Salt Lake .................. 0 0 0 


Spokane ................... 383288 2.131 4,815 


Totals ............... 20.649.M)3 28,287,808 183,790,507 


,Refer to text under heading "Unlisted Trading Privileges on Exchanger;' in Part 

111 of this Report. Vol"mes are as reported by the exchanges or other repordng agpncies and are exeluslve of those in short-term rights. -Includes issues admitted under Clause 1 of Section 12(f) as m effect prior to the 

1964 amendments to the Exchange Act and two stocks an the American Stock Exchange admitted under fonner Section U(f). Clause 3. a ~heseissues were admitted under farmer Secbon 12(f). Clause 1. 


,These figures include issues admitted under former Section lZ(f), Clauses 2 and 3 


(except the two stacks on the American Stock Exchange referred to m footnote 2). and under new Sectlon 12(f) (1) (B). s ~uplication of issues among exchanges brings the total figures to more than the 

actual number of issues involved. 

TABLE 10.-Summary of Cases Instituted in the Cosrts by the Canlniaswn 

Uder the Securities Act of 198.9, the Securities Eschange Act of 1934, the 

Public Utdity Holding Company Act of 1935, the Investment Company Act 

of 1940, and the Investment Advisers Act of 1940 

Type8 of cases year 

year 


Actions to enjoin
 violations of the 


Actions to enforce 

subpoenas under 

the Securities Act 

and the Securities 

Actions to carry out voluntary lane to comply Wpm sec- tion ll(b) of the 

Holding Company Act 


Miscellaneous 


AEtlons 

Total 2.359 
226 SECURITIES AND EXCHANGE COMMISSION

TABLE ll-A 38-Year Summary of All Injunction Cases Instituted by the

Commission-1934 to June 30, 1971, by Calendar Year

Calendar Year

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

195L

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971 (to .June 30) __

Number of cases instituted Number of cases In which

by the Commission and mjunctions were granted

the number of defendants and the number of deinvolved fendants enjoined 1

Oases Defendants Oases Defendants

7 24 2 4

36 242 17 56

42 116 36 108

96 240 91 211

70 152 73 153

57 154 61 165

40 100 42 99

40 112 36 90

21 73 20 54

19 81 18 72

18 80 14 35

21 74 21 57

21 45 15 34 20 40 20 47

19 44 15 26

25 59 24 55

27 73 26 71

22 67 17 43

27 103 18 50 20 41 23 68

22 59 22 62

23 54 19 43

53 122 42 89

58 192 32 93

71 408 51 158

58 206 71 179

99 270 84 222

84 368 85 272

99 403 82 229

91 358 98 363

76 276 88 352

72 302 68 271

56 236 50 181

89 380 79 291

94 489 97 391

99 584 102 518

128 697 113 544

73 276 53 209

1,993 i 7,600 21,825 5,965

SUMMARY

Cases Defendants

Actions mstltuted 1,993 7,600

Injunctrons obtained 1,797 5,965

Actions pending 60 "542

Other disposrnons s 136 1,093

Total 1,993 7,600

1These columns show dISPOSItion of cases by year of dISpOSItIOn and do not necessarily reflect the disposrtion of the cases shown as having been instituted in the same

years. 2 Includes 28 cases whreh were counted twice in this column because injunctions

agamst differ-ent defendants m the same cases were granted in dIfferent years.

3 Includes 37 defendants m 7 cases in which injunctions have been obtamed as to 40

co-defendants

Includes (a) actions disnussed (as to 957 defendants); (b) actions discontinued,

abated, abandoned, stipulated or settled (as to 76 defendants); (c) actions in which

Judgment was demed (as to 56 defendants); (d) actions in which prosecution was

stayed on stipulation to drscorrtinue misconduct charged (as to 4 defendants).

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THIRTY-SEVENTH ANNUAL REPORT 227

TABLE 12.-Summary of Cases Instituted Against the Commission, Cases

Involving Petitions for Review of Commission Orders, Cases in Which the

CommissionParticipated as Intervenor or Amicus Curiae, and Reorganization Cases on Appeal under Ch. X in which the Commission Participated.

Total Total Cases Cases Cases in- Total Cases cases in- cases pend- pend- statuted cases closed

stituted closed mg ing durrng pend- dunng

up to up to at end at end 1971 mg 1971

Types of cases end end of 1971 of 1970 fiscal dur- fiscal

of 1971 of 1971 fiscal fiscal year mg year fiscal fiscal year year 1971

year year fiscal

year

Actions to enrom enforcement of

Securities Act, Se- cunttes Exchange

Act or Public

Utihty Holdmg Company Act

with the exception of subpoenas

I

issued by the

Comrmssion _______ 92 87 II 2 7 9 4

Actions to enjoin enforcement of or compliance

with subpoenas issued by the

Comrmssion _______ 19 19 0 0 2 2 2 Petitions for review

of Commission's

orders by Courts

of Appeals under

the various Acts

admmistered by

the Commission 3S6 341 IS 11 16 27 12 Miscellaneous actrons against the Commission or officers

of the Commission

and cases in which

the Commission

participated as intervenor or amicus curiae ____ 352 342 10 9 10 19 9

Appellate proceedIngs under Ch. X

in which the

Commission par- ticipated __________ 238 235 3 9 3 12 9

Total -------- 1,057 1,024 33 31 38 69 38
228 SECURITIES AND EXCHANGE COMMISSION

OS :IS .. ~I~i~i oooocooooooooooooooooooooo~~o~~~~~.R;~

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.ce 'S .5'0

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~~~~~~~m~~~ ggm S~ """"""""""""""""""""""""""""""""""""""

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~~~~~~~~~~~~~~ ~
THIRTY-SEVENTH ANNUAL REPORT 229
230 SECURITIES AND EXCHANGE COMMISSION

TABLE 14.-A 98-Year Summary Classifying All Defendants in Criminal

Cases Developed by the Commission-1994 to June 80, 1971

Number Number Number Number Number

Indicted Convicted Acqwtted as to as to whom whom cases were cases dismissed are on motion pending

ofUmted

States

Attorneys

Registered broker-dealers

(Including principals of

such firms) 703 416 55 184 48 Employees of--regi"stered- broker-dealers ___________ 393 189 31 122 51

Persons In general securt- I

ties business but not as I

registered broker-dealers

(includes principals and !

885 438 76 362 9 employees) ______________: All others 2 ________________ , 2,562 1,351 304 731 176

Total ---------------- 4,543 2,394 466 1,399 284

I Includes persons registered at or prior to time of indictment.

"The persons referred to In this column, while not engaged In a general business 111 securitres, were almost without exception prosecuted for vrolations of law Involving securrties transactions

TABLE I5.-Summary of Criminal Cases Developed by the Commission Which

Were Pending at June 30, 1971

Number L:um- of such defendants

Number of such as to whom cases are still

Pending, referred to of de- defend- pending and reasons thereDepartment of Jus- Cases fendants ants asto for

tice In the fiscal in such whom

year: cases cases Not yet Await- Awaithave been appre- ing ing

completed hended trial appeal'

1959__________________ 0 0 0 0 0 0 1960__________________ 1 4 0 1 3 0 196L_________________ 6 38 0 1 37 0 1962__________________ 0 0 0 0 0 0 1963__________________ 1 6 0 0 6 0 1964__________________ 1 22 0 0 22 0 1965__________________ 4 21 4 1 16 0 1966__________________ 6 32 1 0 31 2 1967__________________ 2 8 4 0 4 0 1968__________________ 10 51 12 0 39 1 1969__________________ 13 60 33 6 21 12 1970__________________ 15 69 25 0 44 1 1971__________________ 7 56 4 0 52 0

TotaL __________ 66 367 83 9 275 116

SUMMARY

Total cases pending 2 91

Total defendants 2 438

Total defendants as to whom cases are pending 2 355

'The figures In thrs column represent defendants who have been convicted and

whose appeals are pending, These defendants are also mcluded in the figUres in

column 3 2 As of the close of the fiscal year, md1ctments had not yet been returned as to 71

proposed defendants in 25 cases referred to the Department of Justlce. These are refiected only m the recaprtulatton of totals at the bottom of the table. The figure

for total cases pending includes 24 cases in a Suspense Category.

'

!
THIRTY-SEVENTH ANNUAL REPORT 231

TABLE 16.-RBorganization Proceedings Under Chapter X of the Bankruptcy

Act in which the Commission Participated During Fiscal Year 1971

Debtor District Court

Petition

filed

S.E.C.

notice of

appearance

filed

D. Ariz. Sept 17, 1969

E.D. Ky. Dec 24, 1970

S.D. Ind. Feb 13, 1968

D Anz .Jan 2, 1970

D. Ariz May II, 1964

S D. Ohio .July 3, 1967

N.D. Ga. .Jan 18, 1971

S D. Ind Oct 7, 1966

S D.N.Y Apr 16, 1971

CD. Calif Aug 31, 1970 N.D III Mar. 23, 1970

E.D Pa. .June 1, 1970

D Ariz Oct 26, 1961

W D N Y. . __ ._ Dec 15, 1964

S D.N.Y Feb. 26, 1942

D Colo Nov 5, 1962

W.D Wash. __ Apr. I, 1964 D. Kans .July 17, 1959 ED Pa. Dec 4, 1967

D. S.D. Apr 6, 1965

S D. Iowa Feb 24, 1970

E D.N Y .July 10, 1963 N D. III .July 22. 1963

N.D III __. Sept. 11, 1970

S D N.Y. ._. Oct 22, 1958

N D. CalIf . Oct 11. 1967 ED. Pa . Nov 25, 1958

S D Calif. __._ Mar 17, 1958 ED Va. __. Dec 22, 1970

S D. W Va __ .Jan 29, 1971

W D. Wash. __ Nov. 13. 1967 S D. Ind Oct 7. 1969

S D. Fla. . __ Mar 2 1970

E.D Pa. Sept 23, 1970

D. Md .. __.. .July 28, 1959

.Jan 22, 1970

Feb 26, 1971

Mar 27, 1968

Mar. 26, 1970

May 25, 1964

.Tuly 10, 1967

Feb. 3, 1971

Nov 1. 1966

Apr. 19. 1971

Oct 19, 1970

Apr 1. 1970

Feb. 3 1971 Oct 26. 1961

Dec 15, 1964

Mar 11, 1942

.Jan 29 1963

.Tune 10, 1964

Aug 10, 1959

Dec 13, 1967

May 11. 1965

Mar 11, 1970

Aug 7. 1963

Apr 22 1963

Sept 25, 1970

Nov 10, 1958

Oct 11. 1967

.Tan 16. 1959

Mar 24, 1958

.Tan 14, 1971

.Jan. 29 1971

Nov 29, 1967

Dec 10. 196'1

Apr 14, 1970

Dec 15. 1970

Aug 10, 1959

.July 13, 1970

.July 16. 1'164

Feb. 12. 1964

.Tune 20. 1'169

.July 14, 1969

Mar 2. 1971

Oct 5 1961

Feb. 14. 1964

Mar 18, 1964 Feb 23, 196fl

Nov 4. 1966

Mar 17. 1965

Aug 16, 1967

Nov 12 1959

Feb 7 1968

Dec 10, 1969

Oct 26 1970

Apr 22, 1957

.Tan 2'1. 1968

Nov 28, 1967

Oct 8 1968

Nov 15. 1965

.July 6, 1970

May 26. 1969

Mar 24, 1'171

Feb. 6. 1970

.July 30 1968

Sept 11. 196:1

.Tan 19. 1966

Oct 23 1968 Nov. 12. 195'1 Mar. 26 1969

.July 2 1963

Oct 17 1969

Apr 14. 1970

Apr 10, 1969

Oct 14, 1970

Sept 9, 1955

.July 18, 1966

Oct 24, 1967

Oct 8. 1968

Oct 28 1965

.June 23, 1970

Nov 18. 1968

Dec 10, 1970

Sept. 16. 1969

Aug I, 1967

Aug 1. 1963

.July 15, 1965

.July 30, 1968

Nov 9. 1959

Feb 26, 1969 May 7 1963

Oct 10. 1969

Mar 27, 1970

Feb 18, 1969

D. N D __ .. D Hawaii __ . ED La D Ariz.

F.: D Pa

ED. La... D. Me C.D. Calif D N..J ._ D Ariz

D Ariz

ED. La ED. N C. N D III __. _

D Nev

WD. Okla N D. Okla.

CD. Calif ._._

Alco Industries, Inc.

Amerrcan Assoeiatad Systems, Inc.'

American National Trust

Arizona HelIum Corp' Anzona Lutheran Hospital

Arlington Discount Co.

Atlanta International Raceway, Inc.' _= Bankers Trust

Bermec Corp.'

BUbble Up Delaware, Inc.'

Burton's In The Round, Inc.

Business Finance Corp Cal-West Aviation Inc?

Canandataua Enterpnses Corp. Central States Electric Corp.' Clute Corp

Coast Investors. Inc"

Coffeyville Loan & Investment" .

Commonwealth Financial Corp. _ .. _

Commonwealth Investment Corp?

Computer Services Corp ._._

Contrnental Vending Machine Corp. __. Cosmo Capital Inc."

Cvbern Education. Inc' .

Dumont-AIrplane & Marine" . EIchler Corp . . ._.

EI-Tronics, Inc." . . .

Equitable Plan Co."

Farrington ManUfactUring Co' Federal Coal Co.'

Federal ShOPPIng Way, Inc.

First Holding Corp" ._. First Research Corp.

Flying W AIrways, Inc.' .

Food Town, Inc" _ ._._. _

Four Seasons Nursrng Centers of America, Inc.' ._. W D Okla. __ .June 26, 1970

General Umted Corp., Inc .. D Kans __. May 22, 1964

Goebel Brewing Co' . ED MIch. .Jan 24, 1964

Gulf Aerospace Corp" S.D Tex Apr 23, 1969

R Hoe & Co, Inc. . S D N.Y. .. .July 7. 1969

Houston Educational Foundation, Inc.' __ S D Tex Feb 16, 1971 Hughes Homes, Inc" . D Mont . __._ Sept 8, 1961

Human Relations Res Foundation" S D. Calif ---- .Jan 31 1964 Hydrocarbon Chemicals, Inc' _. __. D N.J. . __ Mar 17, 1964

Imperial '400' National _. . D N.J Feb 18. 1966

Irrdraria Bus. & Investment Trust" _. ___ S.D Ind Oct 10, 1966

Investors ASSOCIated, Inc' _. W D Wash. --- Mar 3 1965 .Jade 011 & Gas Co ._. C.D. Calif .Tune 28, 1967

Krrehofer- & Arnold" .. _. ED N C Nov 9. 1959 Ladco Corp N D. Calif Nov 3 1967

Landmark Inns of Durham, Inc M D N C Sept 3. 1969

Lake Winnebago Development Co, Inc' .. __.. W D Mo.

Liberty Baking Corp? S D N Y. -._

Little Missouri MInerals Association, Inc.

Los Angeles Land & Investments, Ltd LOUIsiana Loan & Thrift Inc. . Lusk Corp.

Dolly Madison Industries, Inc' Magnolia FIInds, Inc. ._

Maine Sugar Industries, Inc" .

Mammoth Mountain Inn Corp _.

Manufacturers Credit Corp.

Maryvale Community Hospital . Mayer Central BuildIng" .

Mid-CIty Baptist Church __ Morehead City ShIpbuilding' Natronal VIdeo Corp.

Nevada Industrial Guaranty' .

Norman Finance & Thnft Corp. _._. Oil Field Drilling Co.'

Paramount General Corp. __. _

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232 SECURITIES AND EXCHANGE COMMISSION

Parkwood, Inc. D. D.C. June 13, 1966

Peoples Loan & Investment Co. W.D. Ark. May 13. 1969

Phoemx Mortgage Co. D. Ariz. Aug. 14. 1967

Polycast Corp.• D. Conn. Sept. 6, 1966

Realsite. Inc.- S.D. Fla. July 5. 1963

RIC International Industries. Inc.' N.D. Tex. Sept. 16. 1970

John Rich Enterprises. Inc. D. Utah Jan. 16. 1970

Riker Delaware Corp. D. N.J. Apr. 21. 1967

Roberts Company M.D. N. C. Feb. 12. 1970

San Francisco & Oakland Helicopter Atrnnes, Inc.' N.D. calif. July 31. 1970

Santa's Forest Corp. E.D. Wise. May 18. 1970

Scranton Corp.• M.D. Pa. Apr. 3, 1959

Edw. N. Siegler & Co. N.D. Ohio May 23. 1966

Sierra Trading Corp.' D. Colo. July 7. 1970

60 Minute Systems. Inc.' M.D. Fla. JUly 17, 1970

Sire Plan, Inc. S.D N.Y. Feb. 16, 1963

Sire Plan Management Corp. S.D.N.Y. Mar. 4. 1963

Sound Mortgage Co., Inc .• W D. Wash. July 27, 1965

Southern Land Title Corp. E.D. La. Dec. 7, 1966

South Jersey Land Corp.- D. N.J. Feb. 23. 1965

Sunset International Petroleum Corp.__ N.D. Tex. May 27, 1970

Swan-Finch Oil Corp. S.D.N.Y. Jan. 2. 1958

Tele-Tronics Co.. E.D. Pa. July 26. 1962

Texas Independent Coffee Organization. Inc. S.D. Tex. Jan. 5, 1965

TMT Trailer Ferry, Inc. S.D. Fla. June 27, 1957

Tower Credit Corp. M.D. Fla. Apr. 13, 1966

Tri-State Building Materials Co.- D. S. D. July 13. 1965

Tri-State Petroleum Inc.- N.D. Nev. June 17, 1963

Trustors' Corp.• C.D. Calif. Sept. 13. 1961

Twentieth Century Foods Corp.• E.D. Ark. Oct. 30, 1961

Union Investments. Inc. D. Hawaii Feb. 2. 1970

Uniservices, Inc' S.D. Ind. Dec. 4. 1970

Viatron Computer Systems Corp.' D. Mass. Apr. 29. 1971 Vinco Corp. E.D. Mich. Mar. 29. 1963

WAC. Inc.- D. Minn. Mar. 13, 1968

Webb & Knapp, Inc. S.D.N.Y. May 7. 1965

H. R. Weissberg Corp. N.D. Ill. Mar. 5, 1968

Westec Corp. S.D. Tex. Sept. 26. 1966

Western Growth capital Corp. D. Ariz. Feb. 10. 1967

Western National Investment Corp. D. Utah Jan. 4. 1968

Whale, Inc. M.D. Tenn. May 20, 1970

Wonderbowl, Inc. C.D. calif. Mar. 10, 1967

Yale Express System Inc. S.D.N.Y. May 24. 1965

June 17, 1966

May 21.1969

Apr. 17, 1968

Sept. 23. 1966

June 1. 1968

Sept. 23, 1970

Feb. 6, 1970

May 23,1967

Mar. 23, 1970

Aug. 11. 1970

June 15. 1970

Apr. 15, 1959

June 7. 1966

July 22. 1970

JUly 29. 1970

Feb. 18. 1963

Apr. 5.1963

Aug. 31, 1965

Dec. 31, 1966

Mar. 11. 1965

June 10. 1970

Jan. 23. 1958

Sept. 12, 1962

Jan. 13. 1965

Nov. 22, 1957

Sept. 6, 1966

Aug. 30, 1965

Aug. ,1965

Oct. 9. 1961

Feb. 5. 1962

Mar. 12, 1970

Jan. 28, 1971

Apr. 29. 1971

Apr. 9, 1963

May 1. 1968

May 11, 1965

Apr. 3. 1968

Oct. 4. 1966

May 16.1968

Mar. 11, 1968

June 5,1970

June 7, 1967

May 28.1965

1Commission filed notice of appearance in fiscal year 1971. a Reorganization proceedings closed during fiscal year 1971.

Plan has been substantially consummated but no final decree has been entered

because of pending matters. , Chapter X petition filed durrng course of fiscal year pursuant to grant of motion

under 1328.

U.S. GOVERNMENTPRINTINGOl"""C£, 1972a-1l~1I4

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