~nnual Repor~1976/

LfJ.f\d '
/lr;. tlSS'

i) fl3 ,17~

:';JpJ 42 nd Annual Report

of the SEC

for the

fiscal year

ended

June30J

1976

~
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D C 20549

COMMISSIONERS*

RODERICK M HillS, Chetrmsn

PHILIP A LOOMIS, JR

JOHN R EVANS

IRVING M POllACK

GEORGE A FITZSIMMONS, Secretary

Cornrmssroner A A Sommer resigned from the Commission, sttecnve Apnl 2, 1976, leaVing one vacancy

For sale by the Supenntendent of Cocuments, U S Govemment Pnntlllg Office

Washington, D C 20402 Pnce $2 25 (paper cover)

Stock Number 046-OOO-<1011D-9

Class Number SE 1 1 976

-
LETIER OF TRANSMITI AL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

Sirs On behalf of the Secunues and Exchange Commission,

I have the honor to transmit to you the Forty-Second Annual Report of

the Commission covenng the fiscal year July 1, 1975 to June 30, 1976,

In accordance With the provrsrons of Section 23(b) of the Secuntles

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 arnenomq the Bretton

Woods Agreement Act, Section 11(b) of the Inter-Amencan

Development Bank Act; and Section 11(b) of the ASian Development

Bank Act

Respectfully,

RODERICK M HILLS

Chairman

THE PRESIDENT OF THE SENATE

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, DC

III
SECURITIES AND EXCHANGE COMMISS

THE COMMISSION 

COYUI$,IO*II 

<OU,I,IO*~S 
COMMISSIONERS AND

PRINCIPAL STAFF OFFICERS

(As of November 15, 1976)

COMMISSIONERS

RODERICK M. HILLS of Cahf , Chairman

PHILIP A. LOOMIS, JR., of Cahf

JOHN R. EVANS of Utah

IRVING M. POLLACK of New York

Secretary: GEORGE A. FITZSIMMONS

Executive Assistant to the Chairman: RALPH C. FERRARA

Term expires

June 5

1977

1979

1978

1980

PRINCIPAL STAFF OFFICERS

PETER H. SHIPMAN, Executive Director

RICHARD H. ROWE, Director, Drvisron of Corporation Finance

NEAL S.McCOY, ASSOCiate Director

WILLIAM C. WOOD, ASSOCIate Director

MARY E. T. BEACH, ASSOCiate Director

STANLEY SPORKIN, Director, DIVISion of Enforcement

IRWIN M. BOROWSKI, ASSOCIate Director

WALLACE L TIMMENY, ASSOCIate Director

THEODORE SONDE, ASSOCiate Director

LEE A. PICKARD, Director, DIVISion of Market Regulation

SHELDON RAPPAPORT, ASSOCiate Director

FRANCIS R. SNODGRASS, ASSOCiate Director

DANIEL J. PILIERO, II, ASSOCiate Director

ANDREW M. KLEIN, ASSOCiate Director

ANTHONY C. J. NULAND, ASSOCIate Director

ANNE P. JONES, Director, DIVIsion of Investment Management

SYDNEY H. MENDELSOHN, ASSOCiate Director

JEAN W. GLEASON, ASSOCIate Director

AARON LEVY, Director, DIVISion of Corporate Regulallon

GRANT GUTHRIE, ASSOCiate Director

HARVEY PITT, General Counsel

PAUL GONSON, ASSOCiate General Counsel

DAVID FERBER, Solrotor to the Commission

ANDREW L. ROTHMAN, Director, Office of Pubhc Affairs

CHILES T. A. LARSON, Deputy Director

A. CLARENCE SAMPSON, Acting Chief Accountant

V
VI

J. RICHARD ZECHER, Director of Economic and Policy Research

ROGER W. SPENCER, Deputy Director

BERNARD WEXLER, Director, Office of Opinions and Review

WILLIAM S. STERN, Associate Director

HERBERT V. EFRON, Associate Director

WARREN E. BLAIR, Chief Administrative Law JUdge

FRANK J. DONATY, Comptroller

RICHARD J. KANYAN, Service Officer

ALBERT FONTES, Director, Office of Personnel

JAMES C. FOSTER, Director, Office of Reports and Information Services

FRANKLIN E. STULTZ, Associate Director

RALPH L. BELL, Director, Office of Data Processing
REGIONAL AND BRANCH OFFICES

REGIONAL OFFICES AND ADMINISTRATORS

Region 1 New York, New Jersey -William D Moran, 26 Federal Plaza,

New York, New York 10007

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

Hampshire, Maine -Floyd H Gilbert, 150 Causeway St, Boston,

Massachusetts 02114

Region 3 Tennessee, Virgin Islands, Puerto RICO, North Carolina, South

Carolina, Georgia, Alabama, MISSISSIPPi, Flonda, part of Loursiana->

Jule B Greene, SUite 788, 1375 Peachtree St, N.E., Atlanta, Georgia

30309

Region 4 lthnors, Indiana, Iowa, Kansas City (Kansas), Kentucky, MiChigan, Minnesota, Mlssoun, Ohro, WisconSin -William D Goldsberry,

Room 1708, Everett McKinley Dirksen Bldg., 219 S Dearborn St,

Chicago, llhnors 60604.

Region 5 Oklahoma, Arkansas, Texas, part of Louisrana, Kansas (except

Kansas City) -Richard M Hewitt, 503 U S Court House, 10th & Lamar

Sts., Fort Worth, Texas 76102

Region 6 North Dakota, South Dakota, Wyoming, Nebraska, Colorado,

New MeXICO, Utah -Robert H Davenport, Two Park Central, Room

640, 1515 Arapahoe Street, Denver, Colorado 80202.

Region 7 California, Nevada, Anzona, Hawau, Guam -Gerald E Boltz,

Room 1710, 10960 Wilshire Boulevard, Los Angeles, California 90024

RegIOn 8 Washington, Oregon, Idaho, Montana, Alaska -Jack H

Bookey, 3040 Federal BUilding, 915 Second Ave, Seattle, Washington

98174

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

Drstnct of Columbia -Paul F Leonard, Room 300, Ballston Center

Tower No 3, 4015 Wilson Boulevard, Arlington, Virginia 22203

BRANCH OFFICES

Cleveland, Ohro 44199 -Room 899, Federal Office Bldg, 1240 E 9th at

Lakeside.

Datroit, Michigan 48226.-1044 Federal Bldg.

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

Rusk Ave

Miami, Flonda 33131 -Suite 701, DuPont Plaza Center, 300 Biscayne

Boulevard Way

VII
Ptutadelprua, Pennsylvania 19106.-Federal Bldg., Room 2204, 600 Arch

St

St. LOUIS,MIssouri 63101.-Room 1452,210 North Twelfth St.

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

120 South State St

San FranCISCO,California 94102 -450 Golden Gate Ave., Box 36042

VIII
COMMISSIONERS

RODERICK M. HILLS, Chairman

Chairman Hills was born on March 9, 1931, In Seattle, Washington. In

1952 he received his BA degree from Stanford University and he received

his LL.B. In 1955 also from Stanford In law school he was named to the

Order of the COif. Dunng the period 1955--1957, Mr Hills served as law

clerk to Mr Justice Stanley F. Reed, Supreme Court of the US., and

dunnq 1969-1970 he was a vIsiting Professor at the Harvard Law School

Mr Hills was a founding partner of the law firm of Munger, Tolles, Hills and

Rlckershauser, Los Angeles, California Between 1971 and 1975 he was

on leave from the firm to serve as Chairman of the Board of Republic

Corporation From April 1, 1975, until being named Chairman, Mr Hills

served as Counsel to the President of the United States. Mr Hills was Cochairman of the Domestic Council Task Force on Regulatory Reform for

the President Mr. Hills was swom In as Chairman of the Securities and

Exchange Commission on October 28, 1975, for a term expiring on June

5, 1977.

PHILIP A. LOOMIS, JR.

Commissioner Loomis was bom 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, Cautorrna,

except for the period from 1942 to 1944, when he served as an attorney

With the Office of Price Adrmrustranon, and the penod from 1944 to 1946,

when he was ASSOCIate Counsel to Northrop Aircraft, Inc Commissioner

Loorrus JOined the Commission's staff as a consultant In 1954, and the

follOWing year he was appointed ASSOCiate Director and then Director of

the DIVISion of Trading and Exchanges. In 1963, Commissioner Loomis

was appointed General Counsel to the Commission and served In that

capacity until rns appomtrnsnt as a member of the Commission. Commissioner Loorrus IS a member of the American Bar ASSOCIation, the American

Law Institute, the Federal Bar ASSOCiation, the State Bar of Calrtorrua, and

the Los Angeles Bar ASSOCiation He received the Career Service Award

of the National CIVil Service League In 1964, the Secunnes and Exchange

Commission Drsnnquished Service Award In 1966, and the Justice Tom C.

Il
Clark Award of the Federal Bar Association In 1971 He took office as a

member of the Securities and Exchange Cornrrussron August 13, 1971,

and IS now serving for the term of office expmnq June 5, 1979

JOHN R. EVANS

Cornrrussroner Evans was born In Bisbee, Arizona, on June 1, 1932 He

received his B S degree In Economics In 1957, and his M S degree In

EconomiCS In 1959 from the University of Utah He was a Research

Assistant and later a Research Analyst at the Bureau of Economics and

Business Research at the University of Utah, where he was also an

Instructor of Economics dUring 1962 and 1963 He came to Washington In

February 1963, as Economics Assistant to Senator Wallace F Bennett of

Utah From July 1964 through June 1971 Commissioner Evans was

minority staff director of the U S Senate Committee on Banking, Housing

and Urban Affairs and served as a member of the professional staff from

June 1971 to March 1973 He took office as a member of the Securities

and Exchange Commission on March 3, 1973, and IS now serving for the

term expiring June 5, 1978

IRVING M. POLLACK

Commissioner Pollack was born In Brooklyn, New York, on April 8,

1918 He received a B A degree, cum laude, from Brooklyn College In

1938 and an LL B degree, magna cum laude, from Brooklyn Law School

In 1942 Prior to JOIning the Commission's staff he engaged In the practice

of law In New York City after serving nearly four years In the United States

Army, where he gained the rank of Captain Mr Pollack JOined the staff of

the Commission's General Counsel In October 1946 He was promoted

, from time to time to progressively more responsible positrons In that office

and In 1956 became an ASSistant General Counsel A career employee,

Mr Pollack became Director of the DIVIsion of Enforcement In August

1972 when the SEC's divrsrons were reorganized He had been Director of

the DIVIsion of Trading and Markets since August 1965, and previously

served as ASSOCiate Director since October 1961 In 1967 Mr Pollack was

awarded the SEC Distinguished Service Award for Outstanding Career

Service, and In 1968 he was a co-recipient of the Rockefeller Public

Service Award In the field of law, legislation and regulation Mr Pollack

took the oath of office on February 13, 1974 as a member of the Secuntres

and Exchange Commission, and IS now serving for the term expiring June

5,1980

x
TABLE OF CONTENTS

Organizational chart.., , ___ __ _________ IV

Oomrrussron and pnnopal staff officers V

Regional and branch offices VII

Biographies of Commissioners IX

PART 1

IMPORTANT DEVELOPMENTS 3

Market Regulation 3

Introduction __ _________ 3

Development of the National Market System 4

Off-board trading rules 4

Composite limit order book____________________________ 5

Composite quotation system 6

Consolidated transaction reporting system 7

Equal regulation 8

Short sale regulation 8

Anti-manipulative rules 9

Automated routing systems 9

Access to exchanges 10

Trading by exchange members________________________ 11

Allocation of regulatory responsibihty among self-regulatory organlzatJons__________________________________ 11

Enforcement obligations of self-regulatory organizations __ 12

FOCUS reporting system 12

Uniform net capital rule 14

Regulation of rnurucipal secunnes protessronals 14

Regulation of the options markets 17

Registration and regulation of clearing agencies 18

Registration and regulation of transfer agents 19

Street name study 20

Lost and stolen secunnes 21

Fingerprinting of securities professlonals________________ 21

Registration and regulation of secunties information processors____________________________________________ 22

Commission rates..., ________ 23

Use of commission payments by flducianes 24

Arab boycott 25

Section 31(b) revrew 25
IMPORTANT DEVELOPMENTS-Contlnued

Disclosure related matters 26

Illegal and questionable corporate payments____________ 26

AdvIsory committee on corporate disclosure 27

Projections --- - -- - -- - - - - - -- - - 27

Beneflclalownershlp 28

Communications WIth beneficial owners (Proposed Rule

14b-1)____________________________________________ 28

Tender offers - - - ----- ---- -- - --- - -- - 29

Proposals to amend registration forms ---------------- 29

Proposals to amend and amendments to certain periodic reports 30

Stockholder Proposals --- 31

Stock appreciation nghts______________________________ 31

Disclosure of environmental matters 31

Disclosure of 011 and gas reserves -------------------- 32

Accounting matters 32

Railroad Act amendments 34

Monthly pubhcanon of sigmflcant interpretive letters______ 34

Investment compames ----- ---- --- - -- - - -- 34

Bank Study 35

Vanable hfe Insurance________________________________ 35

Status of broker-dealers as Investment advisers -------- 36

Colhns v SEC, Murtaugh v S.E.C 36

Significant cases involVing secunnes acts ------------------ 36

Commission IltlgalIon 42

PART 2

THE DISCLOSURE SYSTEM 57

Pubhc offering. the 1933 Securities Act 57

lntormatron provided 57

RevieWIng process 58

Time for reglstratlon__________________________________ 58

Fmanoal analysis and examination 58

Office of 011 and gas__________________________________ 58

Real Estate and other tax shelters 59

Small Issue exemption 59

Regulation A 59

Regulation B 60

Regulation E 60

Regulation F 60

Contrnumq disclosure: the Securities Exchange AcL_________ 61

Regulallon on exchanges 61

Over-the-counter registration 61

Exemptions __ __ _ ___ ___ 61

Periodic reoorts., , 61

Proxy soacitanona.. 62

Takeover bids, large acquisrnons 63

insider reporting 63

Accounting and auditing standards 64

RelatIOnsWiththe accounting protession 64

Accounting and auditing standards 65

Other oeveloprnenta.. ___________ ___________ 66

Exemptions for International banks 68

Trust Indenture Act of 1939 70

XII

_
THE DISCLOSURE SYSTEM-Contlnued

Information for public inspection; Freedom of Information Act

Freedom of Information Act litigation 70

PART 3

REGULATION OF SECURITIES MARKETS____________________ 77

Regulation of exchanges 77

Registration __ 77

Dehstmq _ _ __ 78

Unlisted trading priVileges 78

Exchange disciplinary actions 79

Exchange rules______ ___ __ 79

Exchange Inspecbons____________________________________ 80

NYSE specraust surveillance Inspection 80

American Stock Exchange arbitration mspscnon 80

Boston Stock Exchange inspection ~________ 81

NYSE Department of Enforcement inspection 81

American Stock Exchange options program Inspection __ 81

Philadelphia Stock Exchange options program inspection 82

ChIcago Board Options Exchange Inspectlon____________ 82

SuperviSion of the NASD 82

NASD rules 83

NASD Inspections 85

NASD disciplinary actions 86

Review of NASD diSCIplinary acnons 86

Review of NASD membership actions__________________ 87

Supervision of MUnicipal Secunnes Rulemaklng Board 88

Revenues. expenses and operations of self-regUlatory orqaru- zabons 88

Fmaneral results of the NASD 89

NASD bUdget 89

American Stock Exchange, MIdwest Stock Exchange, National Assocranon of Secunnes Dealers. and New York

Stock Exchange 89

Boston Stock Exchange. Chicago Board Options Exchange. Pacmc Stock Exchange and Philadelphia Stock

Exchange 90

Cmcmnan Stock Exchange. Detroit Stock Exchange, Intermountain Stock Exchange. and Spokane Stock Exchange 91

Expenses and operations of the MUnicipal Securities Rulemaking Board 91

Broker-Dealer Regulation 91

RegistratIOn _ _____ 91

Recordkeeplng and preservation requirements 92

Financial responSibility requirements 92

Broker-dealer examinations 92

Early warning and surveillance 94

Training program 94

Regulatory burdens on brokers and dealers 96

Clearance and settlement 96

Progress toward a nabonal system of clearance and

settlement of sscunnas transactrons, _________________ 96

Rule changes of registered c1eanng agencies 97

XIII
REGULATION OF SECURITIES MARKET5-Contlnued

Expenses and operations of registered clearing aqencies 98

Exemptions ____ 98

Securmes Investor Protection Corporation 98

Proposed legislatIOn to amend the Secuntres Investor

Protection Act of 1970______________________________ 98

Litigation related to SIPC 99

Proposed amendments to SIPC by-Iaws________________ 99

Regulation of SECO broker-dealers 99

Short seiling Into underwritten offerings 100

Exemplions ________ __ _______ 100

PART 4

ENFORCEMENT 107

Detection 107

Cornplamts. 107

Market surveillance 107

Investigations ____ ____ 108

Enforcement proceedings 108

Administrative proceedmqs.; ____ __ __ 109

Trading suspensions 111

Delinquent reports program 112

OVII proceedings 113

Cnrrunal proceedings 120

Organized crime program 125

Cooperation With other enforcement agencies 126

SWISStreaty _______________ ___ ___ ___________ 126

Foreign restncted list 127

PART 5

INVESTMENT COMPANIES AND ADVISERS__________________ 133

Number of registrants 133

Proposed leglslatlon_ __ __ __ _ _ 134

Investment Advisers Act Amendments of 1976 134

The NASD maximum sales load rule 134

Contractual plan reserve requirements lowered______________ 134

Proposed rules 135

Rule 15a-2 135

"Open-seasons" rule 135

Temporary Rule 6c-2(T) and proposed Rule 6c-2 135

Rule 206(4)--4 136

Rule 204-2(J) 136

Rules concerning applications for orders filed under Investment Advisers AcL_____________________________ 136

Rule 202-1 -_______________________________________ 136

Apphcations 137

Other developments 138

"Money market" funds________________________________ 138

Reglstralion of foreign Investment companies 138

Secuntres depository system 139

"Index" funds -----------___________________________ 139

Reallocation of management cornoensanon -___________ 140

XIV

_____ _ ____

_ __ ___

___ __ __ ___

- -- ------ ---- - ____________

--- - - - --- - _- ______

- - - - - _ ___ __ _____ _
PART 6

PUBLIC UTILITY HOLDING COMPANIES 145

Composition 145

Financing ___ _____ 145

Volume 145

Proceedings 145

Holding company debL__________________________________ 147

Financing of fuel and gas supplies 147

Amendment of Form U5S and Rule 48(b) under the AcL_____ 147

PART 7

CORPORATE REORGANIZATIONS 151

Proposed bankruptcy legislation 151

Summary of acnvmes 152

Administrative matters______________________________ 152

Trustee's Investigation and statements 153

Plans of reorganization 154

Activities with regard to allowances 158

Intervention In Chapter XI 159

PART 8

SEC MANAGEMENT OPERATIONS 167

Organizational changes 167

Information handling 167

Office of Consumer Affairs 168

Office of Public Information 168

Acnvity under the Freedom of Information Act 169

Personnel management 169

Recruitment 169

Personnel management evaluation 170

Training and development 170

Office space 170

Financial management 171

PART 9

STATISTICS __ __________ ___ _ __ 175

The secunties Industry 175

Income, expenses, and selected balance sheet items 175

Table 1 Financial Information for broker-dealers 176

Historical information-income, expense, and balance

sheet mtorrnanon of broker-dealers with securities related revenue of $500,000 or more 176

Table 2 Historical revenue and expenses for brokerdealers with total revenue of $500,000 or more________ 177

Table 3 Historical consolidated balance sheet for brokerdealers with total revenues of $500,000 or more 178

Secuntres Industry dollar______________________________ 178

Chart Secunties Industry dollar' 1975__________________ 179

Broker-dealers. branch offices, employees______________ 180

Chart Broker-dealers and branch offices 180

xv

_

-
STATISTIC~ontinued

Table 4. Brokers and dealers registered under the Securities Exchange Act of 1934-effectlve registrations as of

June 30, 1976 classified by type of orqarnzation and by

location of principal offlces__________________________ 181

Table 5 Applicanons and registrations of brokers and

dealers-Fiscal year 1976 182

Table 6. Consolidated revenues and expenses of selfregulatory orqaruzations 183

Table 7 Histoncal nnanoat Information for self-regulatory

orqarnzanons , _____________ _________ 186

Financial msntunona., , ______ __________ ____________ 187

Stock transactions of selected financial msntunons 187

Table 8 Common stock transacnons and activity rates of

selected financial institutions 187

Stock holdings of institutional Investors and others 188

Table 9 Market value of stocknoldmqs of institutional

Investors and others 188

Number and assets of registered Investment cornparuea., 188

Table 10 Compames registered under the Investment

Company Act of 1940 as of June 30,1976 189

Table 11 Compames registered under the Investment

Company Act of 1940 189

Table 12 New Investment company reglstratlons________ 190

Table 13 Investment company registrations terminated __ 190

Private norunsured pension funds assets 190

Table 14A Assets of pnvate nomnsured pension funds

book value, end of year 191

Table 14B. Assets of pnvate norunsured pension funds.

market value, end of year 191

Pnvate norunsured pension funds receipts and disbursements -_ ___________ _______________ _ _____ 191

Table 15 Receipts and disbursements of pnvate norunsured pension funds -_____________________________ 192

Securities on exchanges__________________________________ 192

Exchange volume______ 192

Table 16 Exchange volume. 1975 192

Chart Market value of secunnss traded on all U.S stock

exchanges________________________________________ 193

NASDAQ volume __ 194

Table 17 Share volume and dollar volume by exchanges 194

Special block cistnbunons 195

Table 18 Special block distnbutrons reported by exchanges 195

Value and number of secunnes listed on exchanges 196

Table 19 Securities listed on exchanges 196

Table 20 Value of stocks listed on exchanges 197

Securities on exchanges______________________________ 198

Table 21 Secuntres traded on exchanges 198

Table 22. Undupllcated count of secuntres on exchanges 198

1933 Act registrations 198

Effective registration statements filed 198

Purpose of registration ___ ____________ _____________ 198

Table 23 Effective registrations 199

Chart Securities effectively registered WIth S E.C 200

XVI

- ______________________________________
STATISTICS-Continued

Table 24' Effective reqrstratrons by purpose and type of

secunty: fiscal 1976________________________________ 201

Chart: Effective registrations cash sale for account of

Issuers 202

Regulation A offenngs________________________________ 203

Table 25' Offenngs under Regulabon A 203

Enforcement 203

Types of proceedings . 203

Table 26' Types of proceedings 204

Table 27 lnvesnqanons of possible Violations of the Acts

administered by the Commission 206

Table 28 Administrative proceedings instituted dunng fiScal year ending June 30, 1976 206

Injunctive actions 1975-1976 206

Table 29' Injunctive actions 206

Crtrnmal proceedings 206

Table 30 Cnmmal cases 207

List of all foreign corporations on the foreign restricted list 207

Public utility holding companles____________________________ 208

Assets______________________________________________ 208

Table 31, Public-utility holding company systemL_______ 209

Table 32 FinanCing of holding company systems________ 210

Corporate reorganizations 210

Oornrrussron parncipanon ____________________________ 210

Table 33. Reorganization proceedings under Chapter X of

the Bankruptcy Act In which the Cornrrussron parnopated 211

SEC operatlons________________________________________ __ 213

Net cost 213

Chart: Appropriated funds vs fees collected 214

Table 34: BUdget estimates and appropriation 215

XVII
Part 1

Important

Developments

MARKET REGULATION

Introduction

Shortly before the 1976 fiscal year began,

Congress enacted the most far-reaching

amendments to the Federal secunnes laws

Since 1940, the Securities Acts Amendments

of 1975.1 These amendments substantially

revise the regulation of securities exchanges

and securities assocranons, and create a

regulatory scheme for rnurucipal securities

professionals, transfer agents, clearing agencies and securities information processors In

addition, the Commission ISdirected to facilitate the establishment of a national market

system for securities and a national system

for the prompt and accurate clearance and

settlement of securities transactions. The

new provrsrons substantially strengthen the

Commission's regulatory and oversight responatnhnes With respect to those markets

and constitute a major tumlng POintIn securities regulation.

At the same time, the securities Industry,

with the assistance and oversight of the Commission, made SIgnificant strides toward the

realization of a national market system Such

essential components of a central market as

consolidated and nationwide limit order protecnon mechanisms, quotation systems, and

transaction reporting systems steadily continue to evolve. The National AdVISOryBoard,

appointed by the Commission pursuant to the

1975 Amendments, provided substantial

guidance on key policy questions relating to

the establishment of a national market system.

During the fiscal year, the Commission

Part 1

Important

Developments

adopted and Implemented uniform nnanoat

responsibility requirements, applicable for the

first time to substantially all brokers and dealers. And a uniform financial and operational

reporting form was adopted for all registered

brokers and dealers, ending duplicative reporting schemes and dramatically reduonq

the compliance burdens confronting securities professionals especially smaller brokers

and dealers.

DUringthe last fiscal year, the Commission

began to discharge the broad powers conferred upon It by the 1975 Amendments. By

working toward reducing restrictions on the

ability of exchange members to trade listed

secunnes In the marketplace of their choice,

the Commission took a long step toward

strengthening competition In the sscunnes

markets and removing artifiCialhindrances to

the flow of transaction volume. The Commission's inquiry Into exchange membership and

access rules began the process of opening

the securmes markets to greater participation

by financial mtermedianes In other sectors of

the national and International economy. The

Commission also began dUring the last fiscal

year the registration and regulation of securities Information processors

In addition, the Oomrnissron, In conjunction

With the newly formed MUniCipalSecurities

Rulemaklng Board, commenced development

of an integrated pattern of regulation for municipal securities protessronals.And the Commission continued working With the options

markets in developing an appropnate scheme

of regulation for this speeahzed marketplace.

In response to the directive of the 1975

Amendments, the Commission undertook to

3
register and to regulate transfer agents and

clearing agencies The Commission inaugurated ItS program for development of the

legislatively contemplated system for the

clearance and settlement of securities transactions. which program came to Include initial

consideration of the proposed merger of two

major clearing entities

It may be fairly stated that the Commission

and the securities Industry together have

passed through a year of critical Importance

to the growth and the continued vitality of the

Nation's secuntres markets The events of the

past year have done much to promote truly

competitive and efficrent capital markets, capable of serving the Nation's demand for new

Investment capital while operating In the public Interest and for the protection of Investors

Development of the National

Market System

Advisory Committee on the lmpternentetion

of a Central Market System -As previously

reported," the Advisory Committee on the

Implementation of a Central Market System

Issued a Summary Report of Its final recommendations on July 15, 1975 3 The Committee completed Its work on September 12,

1975, with the delivery to the Commission of

a Supplementary Report" outlining the dellberanons leading to the Committee's more

significant recommendations, noting unresolved Issues and setting forth those views

which differed significantly from the recommendations of the rnajonty

National Market AdVisory Board -The

1975 Amendments directed the Commission

to establish a National Market Advisory Board

(the "Board") comprised of fifteen members

(a majority of whom must be associated with

brokers or dealers) sitting for terms of from

two to five years 5 The Board's irutral membership was announced by the Commission

In August 1975,6 and the Board has conducted monthly pubuc meetings since September 1975 The Board IS supposed to give

the Commission ItS views on significant regulatory proposals made by the Commission or

any self-regulatory organization concerning

the establishment, operation and regulation

of the secunnes markets The Board IS also

to recommend to the Commission the steps It

finds appropriate to facilitate the establishment of a nanonal market system and study

4

the possible need for mOdifying the Act's

scheme of self-regulation so as to adapt It to

a national market system, including the need

for the establishment of a new self-regulatory

organization (a "National Market Regulatory

Board") to administer the national market

system The Board was directed to report the

results of Its study to Congress by December

31, 1976, with whatever recommendations

the Board deems appropriate

As discussed below, the Commission

adopted a rule under the Exchange Act (Rule

19c-1) 7 governing off-board trading by members of national securities exchanges At that

time, the Commission requested the Board to

study three specific problems (I) In-house

agency cross transacnons (the Cornrnissron

requested the Board to advise the Commission of ItS views on thrs Issue no later than

October 1, 1976), (II) off-board pnnopal tradIng restrictions, and (III) the development of a

composite limit order book. The Board was

engaged In these studies as the fiscal year

ended

Off-Board Trading Rules

Seeton 11A(c)(4)(A) of the Exchange ActS

directs the Commission to review "any and

all" rules of national securities exchanges

which limit or condition the ability of their

members to buy or sell secunnes any place

but on such exchanges. Ttus section also

directs the Commission to report to Congress

the results of ItS review, and to commence a

proceeding under Section 19(c) of the Act to

amend any such rule Imposing a burden on

cornpennon which did not appear to the Comrrussron to be necessary or appropriate In

furtherance of the purposes of the Act

On September 2, 1975, the Comrrussron

reported to Congress the results of ItS review,

Including a descnptlon of the effects on competition of eXisting off-board trading restrictions 9 The Commission's report found that

certain exchange off-board trading rules did

Impose burdens on cornpetmon which the

Comrrussron was not then prepared to con.

clude were necessary or appropriate In furtherance of the purposes of the Securities

Exchange Act On the same date, the Com.

rrussron Issued a release publishing ItS report

to Congress and announcing the commencement of a proceeding, pursuant to Section

19(c) of the Act, to determine.
a. the extent to which such rules engendered significant antrcornpetmve effects;

b. whether, If such rules were anncornpetmve, there were countervailing

considerations which appropriately

outweighed the need to abrogate or

amend such rules at that time; and

c. whether such rules could be appropriately modified so as to further the

purposes of the Securities Exchange

Act 10

After eight days of hearings, dunnq which

testimony from 63 individuals representing 19

institutions and organizations was received,

the Commission adopted Exchange Act Rule

19c-1, on December 19, 1975 (effective

March 31, 1976), which reflected ItSdetermination that certain aspects of the then existIng off-board trading rules Imposed burdens

on competition which could not be JustifiedIn

terms of the regulatory objectives of the Exchange Act 11

Rule 19c-1(a) provides that on and after

March 31, 1976, the rules of each national

securities exchange may not limit or condition

the ability of any member to effect agency

transactions on any other exchange or In the

over-the-counter market In any equity secunty listed or traded on that exchange. When It

adopted the rule, the Commission also announced ItSIntention

a. to consider further whether In-house

agency cross transactions In listed

secunnes should continue to be restnoted.P

b to consider (after It received the recommendations of the National Market

Advisory Board and saw the progress

made by that date toward establishment of a national market system)

fixing a firm date for the elimination of

restrictions on off-board pnncrpat

transactions; 13 and

c to sohcit comments on the characterIStiCSof a proposed central limit order

repository and the specifications of

any plan for the Implementation of

such a repository 14

Seven national sscurmes exchanges filed

revised off-board trading rules, and the Commission found (with one exception) that those

rules were In conformity WIthRule 19c-1 and

consistent with the requirements of the Exchange Act 15 The Commission commenced

a proceeding to determine whether to disapprove one of the proposed rules, the Public

Limit Order Protection Rule ("PLOPR") filed

by the New York Stock Exchange ("NYSE")

The PLOPR would have limited the ability of

NYSE members to effect agency transactions

on any other exchange without first c1eanng

public limit orders on the NYSE 16 As potential grounds for disapproval, the Commission

noted that the PLOPR appeared to be inconsistent with, among other things, certain sections of the Securities Exchange Act and

Rule 19c-1 Shortly after the close of the

fiscal year, the NYSE advised the Commission that It Wishedto Withdrawthe PLOPR,17

and, on July 28, 1976, the Commission consented to the NYSE request and terminated

ItS proceeding With respect to the PLOPR 18

Composite Limit Order Book

When the Commission adopted Rule 19c-1

governing off-board trading by exchange

members, It Indicated that It was Initiating

steps to provide comprehensive limit order

protection consistent With the public interest 19 The Commission expressed ItS belief

that pubhc limit orders and the methods by

which they are kept play Important roles In

the securities markets Under certain circumstances, displacement of protessional orders

by public limit orders IS appropnate In the

public Interest and for the protection of investors, to ensure the fairness of the markets

and to provide an opportunity for public orders to meet Without the participation of a

dealer The Commission, however, found that

by their very nature eXisting exchange mechanisms for the storage of limited pnce orders

are unable to provide full protection for those

orders, and that regUlatory devices employed

to ensure execution of such orders create

certain adverse effects which outweigh their

laudable objectives The Commission indicated that the solution to these problems

appeared to lie In the utilization of exrsnnq

advanced technology to construct a computerized central limit order repository (a "composite book") desrqned to provide comprehensive limit order protection to Investors.

The Commission announced ItS intention to

consult With the National Market AdVISOry

Board and to soucu public comment concern5
Ing the characteristics and specincatrons of a

composite book and the appropriate manner

of achieving ItS Implementation 20

After ItS staft had consulted With the National Market Advrsory Board to Identify substantive and procedural Issues associated

With the development of a composite book,

the Commission solicited public comment on

these Issues, including the policy and technical questions associated With ten specified

characteristics of any composite book 21 Extensive written comments have been received from numerous Individuals, institutions

and self-regulatory organizations DUring the

coming year, the Commission Will formulate

and propose an appropriate course of action

With respect to the development of a composue book

Composite Quotation System

Section 11A(c)(1)(B) of the Exchange Act

directs the Commission to assure the prompt,

reliable and fair collection, processing, distribution and publication of Information With

respect to quotations for and transactions In

secunties and the fairness and usefulness of

the form and content of such information

Previously, the Commission had indicated ItS

support for a nationwide system making quotations from all market makers universally

available (a "composite quotations system")

In both ItS 1972 Market Structure Statemenf22 and 1973 Polley Statement23

As previously reported, 24 the Commission

In 1972 initiated the development of a composite quotation system by proposing Exchange Act Rule 17a-14 The rule, as Originally proposed,25 would have required all

national securities exchanges to make quotations of their specialists available to vendors

of market Information Similarly, the NASD

would have been required to make available

to such vendors quotations of over-thecounter market makers In securities listed or

traded on exchanges Finally, the rule would

have required all such quotations to be made

available to vendors on a current and continuing baSIS

In 1974, the Commission reproposed Rule

17a-14 In substantially revised form 26 The

major change was the mclusion of a requirement that quotations be "reported" by selfregulatory organizations (and certain brokerdealers) pursuant to a plan (similar to that

6

required by Exchange Act Rule 17a-15), filed

With and declared effective by the Cornrrussion, provrdrnq for the availability of such

quotations to vendors of market Information

on a realtime, current and continuing baSIS

Followrnq reconsideration of proposed Rule

17a-14, the Commission determined to adopt

initially a different approach desiqned to enhance the availability of quotation Information

Without potentially burdensome Federal regulanon On March 11, 1975, the Commission

announced that It had sent letters to all

national secuntres exchanges formally requesting them to eliminate, on or before May

1, 1975, any of their rules or practices which

restricted access to or use of such quotation

information as they then disseminated, or In

the future might disseminate, to quotation

vendors At the same time, the Commission

announced that It was defemng further consideranon of proposed Rule 17a-14 until It

had an opporturuty to observe the effects of

elimination of exchange restrictions on quotation dissemination On May 7, 1975, the

Commission announced that It had received

responses to ItS March 11, 1975 request from

all national securities exchanges and that all

exchanges either had taken the action requested by the Commission or had Informed

the Commission that they had no rules or

practices restricting access to or use of such

Information In making ItS announcement, the

Comrrussion added that, In ItS View, the actions taken by the various exchanges would

tacrhtate the establishment of a central market system, as contemplated by the CornrrussIOn's 1972 Market Structure Statement and

ItS 1973 Polley Statement, by making pOSSIble the composite display of quotation information for multiply traded securities

Since May 1975, several vendors have

made major efforts to develop and market a

composite quotation service The Commission has found, however, that despite these

efforts, the quality of quotation Information

disseminated to brokers, dealers and Investors can be Improved substantially, and that

numerous problems relating to the dissemination of useful and reliable quotation Information have yet to be resolved Exchange

markets stili do not report "firm" quotations,

and no market disseminates Information as to

quotation size In many cases, quotation information supplied to vendors IS not updated
promptly to reflect changes In actual quotations In the various markets. As the fiscal

year progressed, It became apparent that the

lack of reliable quotations from the various

markets was hampering private and self-regulatory efforts to establish a viable composite

quotation system, the absence of which In

turn was Impeding development of a national

market system.

On JUly 29, 1976, the Commission proposed for public comment Exchange Act Rule

11Ac1-1 27 Rule 11Ac1-1 would require, on

and alter November 1, 1976, national securities exchanges to collect from their specialIStS, and the NASD to collect from third

market makers, quotations In eligible securities for disserrunauon by those self-regulatory

organizations to quotation vendors. In addition, those organizations also would be obligated to provide such vendors With their

specialists' and market makers' quotation

sizes If those specialists and market makers

elect to make such sizes available for dissemination.

Although the proposed rule neither speernes the manner In which, or the frequency

With Which the quotations are to be collected,

processed, and made available, It would require specialists and third market makers to

communicate their quotations promptly In accordance With procedures established by the

relevant exchanges or assocranon for the

timely drssernmatron to quotation vendors

And the proposed Rule would require quotations covered be "firm," subject to certain

exceptions In particular, any specrahst or

third market maker who IS presented With an

order for the purchase or sale of any eligible

security (other than an odd-lot order) must

stand ready to execute a transaction In that

security In any amount up to (but In no case

exceeding) his published quotation size (or,

In the event no quotation size IS disseminated, a normal Unit of trading) at a price at

least as favorable to the buyer or seller as hrs

most recently published bid or asked price

The foregOing requirement would not apply If,

alter dissemmanon of hrs published quotation

but before the specralrst or third market

maker received an order (I) a transaction In

that security IS effected either on the floor of

the particular exchange or by the third market

maker, or IS reported In the consolidated

system, or (ii) the speciahst or third market

maker has communicated a superseding

quotation. However, If he did not communicate rus superseding quotation Within three

minutes alter a transaction or a report of a

transaction, he would be obligated to buy or

sell that security In accordance With the general rule as to firmness.

Consolidated Transaction

Reporting System

In addition to ItS work on developing a

composite quotation system, the Cornrrussron

has assisted In Implementing a consolidated

transaction reporting system (the "consolidated system") As previously reported,28 the

consolidated system developed as a result of

the Comrmssron's adoption In 1972 of Exchange Act Rule 17a-15. The consolidated

system has progressed from a pilot state to

an operational reporting system, drsserrunatIng last sale reports of transactions executed

In all reporting markets for secunties listed on

the New York Stock Exchange ("Network A")

and on the American Stock Exchange, plus

selected regional listings ("Network B") Tlus

follows the JOint Industry Plan declared effective by the Cornmrssron In accordance With

Rule 17a-15 Moreover, last sale reports In

both Network A and Network B secunnes are

now available by means of a high speed data

transrrussron line (the "high speed line"),

which for the first time enables Investors and

market professionals to have such information available on a real-time baSIS regardless

of any delays In the low speed ticker network

dunnq penods of heavy trading

DUring the period since the enactment of

the 1975 Amendments, the Commission's

staff has met on a regular baSIS With certain

secunnes Information processors, who drsseminate consolidated last sale reports, and

With the Consolidated Tape ASSOCiation (the

"CTA"), an assocanon of self-regulatory organizations which bears the responsibiuty of

overseeing the JOint Industry Plan for the

operation of the consolidated system, and

which IS registered as an exclusive secunties

rntorrnatron processor. Other relevant developments include:

a The commencement on April 3D, 1976,

of Phase II of the JOint Industry Plan, making

available both the high speed line and last

sale reports In both Network A and Network B

7
securities, which activated certain revised

short sale provisions of Exchange Act Rule

10a-1 and vendor obligations under Rule

17a-1529

b. The Commission's granting of conditional exemptions to certain domestic secunties information processors from the display

requirements of Exchange Act Rule 17a-15,

which became applicable upon the commencement of Phase II.30 The staff of the

Commission IS presently studymq the requests of certain foreign vendors for conditional exemptions from these display requirements

c. The Commission's scsonancn of publiC

comment on whether those provisions of the

JOintIndustry Plan which prohibit a securities

information processor from retransmitting

consolidated last sale reports on a continuous baSISshould be modified or abolished In

light of the standards now contained In Sections 11A(b)(5), 11A(c)(1)(C) and

11A(c)(1)(D) of the Exchange Act One securities information processor had asserted that

the reasons for Initially Imposing such prohibitions no longer provide a sound baSISfor their

maintenance.31

d. After receipt of several letters from securities information processors, as well as from

registered brokers and dealers, questioning

the level of fees charged by the CTA for

consolidated last sale reports, the Oornrmssion's staff has undertaken extensive research Into the Act's requirements that securities information processors be able to obtain

information from an exctusrve processor

(such as the CTA) on "fair and reasonable"

terms, and on terms that are not "unreasonably discriminatory

e The comrmssion has analyzed certain

proposed rule changes of the National Assocratron of Securities Dealers, Inc (the

"NASD") that would reqUire the reporting of

transactions to the CTA at the price at which

the transaction was effected Inclusive of any

cornrmssion or cornmtsston equrvalent (a reporting mode commonly referred to as "net

printing" of pnnopal transactions) These rule

changes were Originallyfiled by the NASD on

June 4, 1975, the date the 1975 Amendments became law Such changes were published for public comment and were declared

summarily effective by the Cornrrussion In

order to permit the scheduled commence8

ment of Network A of the consolidated system,32 subject to the Oommlssion's prerogative under Section 19(b)(2) of the Exchange

Act either to approve the proposed rule

changes or to commence proceedings to

determine whether such rule changes should

be disapproved. On December 24, 1975, the

Oomrmssron publlshed33 an NASD amendment of ItS proposed rule changes which

modified the proposal to permit the reporting

of transactions at the price recorded on the

trade ticket, WithoutrecogniZing any commission or comrnrssion equivalent (commonly

referred to as "gross printing" of pnncipal

transactions). The proposed modifications

eliminated the eXisting disparity between the

reporbng of pnnopat transactions effected by

NASD members and the reporting of Identical

transactions effected by members of national

secunnes exchanges. On May 12, 1976, the

Oomrrnseron approved the NASD transaction

reporting rules as modlfied.34 While finding

these reporting rules to be consistent with the

requirements of the EXchangeAct, the Comrmssron also noted that It Intends to continue

studying quesnons related to the reporting of

transactions In eligible secunnes, partrcularfy

the method of reporbng pnnopal transactions

confirmed by a dealer plus or minus a comrrusston, commission equrvalsnt or differential.

Equal RegUlation

In testimony before Congress preceding

the passage of the 1975 Amendments, Industry representatives urged that the Integration

of eXisting market centers Into a national

market system be accompanied by equal

regulation of all market components. The new

Section 11A(a) of the Exchange Act directs

the Commissron to assure fair competition

among brokers and dealers, among exchange markets, and between exchange

markets and markets other than exchange

markets. Since the enactment of the 1975

Amendments, the Commission has taken

steps to assure such equal regulation in two

specmc areas: regUlation of short sales and

anti-manipulative rules.

Short Sale RegUlation

On June 12, 1975, the Commission

adopted35 amendments to ItS short sale

"
rules, Exchange Act Rules 10a-1 and 10a-2,

to provide for comprehensive regulation of

short sales of listed secunnes In all markets

(including the over-the-counter market) In

conjuncbon with the full Implementation of the

consolidated transaction reporting system.36

In conjunction With the adoption of those

amendments, the Commission proposed two

further amendments to RUle 10a-1 to alleviate the Impact of the short sale rules on the

market-making ability of regional exchange

mernbers.P? After revlewmg the comments

receved on these further proposals (including

the views of certain self-regulatory orqaruzanons presented at a public meeting held on

Apnl 26, 1976), the Comrmssion determined

to withdraw the proposed amendments. 38

The Commission IS connnumq to consider

whether any form of short sale regulation IS

necessary or appropnate In view of the Improvements In the reporting of transactions

by the consolidated system and the development of more sophisticated techniques for

market surveillance by the comrrusson and

the various self-regulatory organlzabons.

Anti-Manipulative RUles

By September 1975, each of the self-regulatory organizations parnopannq In the pilot

phase of the consolidated transaction reportIng system had adopted a uniform anti-manipulative rule in substantially the form recommended by the Commission's AdvIsory

Committee on a Central Market System. In

August 1975, through idenncal letters to all

nabonal securibes exchanges participating in

the consolidated system, the Commission's

staff requested venficabon that all of the annmanipulative rules recommended by the

Commission in September 1974 had been

adopted.39 All these exchanges replied affirmatively. On June 4, 1975, the NASD

amended and refiled WIth the Commission

proposed anti-manipulative rules relating to

over-the-counter trading In eligible seeunnes,

which rules were approved by the Commission on May 12, 197640

Automated Routing Systems

Section 11A(c)(1)(E) of the Exchange Act,

added by the 1975 Amendments, directs the

Commission to assure that all exchange

members, brokers and dealers transmit and

direct orders for the purchase and sale of

qualified secunties In a manner consistent

WIth the establishment and operation of a

nabonal market system. Two related provisions, Sections 11A(a)(1)(C)(I) and (II), requtre the Oornrmssionto assure economically

effiCient executions of securities transactions

and fair competition among brokers and dealers, among exchange markets, and between

exchange and other markets. In furtherance

of thiS obligation, the Commission has reViewed proposals (1) by several exchanges

relating to automatic order routing systems

(2) by three large broker-dealers WIshing to

commence programs for the In-house execubon of certain types of customer odd-lot differentials, and (3) by two exchanges wishing

to prohibt their members from Imposing differential charges on certain types of odd-lot

orders.

On November 11, 1975, the Paone Stock

Exchange, Inc. (the "PSE"), filed a proposed

rule change with the Commission which

would expand the capability of the PSE's

automatic order execution system

("COMEX") from 199-share orders to orders

not exceeding 300 shares." Additionally, the

PSE proposed to broaden the prohibition of

the imposrnon of floor brokerage on COMEX

orders which are executed on a formula baSIS,to cover all market and limit orders. The

Commission approved the PSE's proposal on

December 23,1975.42

On January 9, 1976, the Midwest Stock

Exchange, Inc. (the "MSE"), filed WIth the

Comrmssrona proposed rule change to convert Its automatic execution program (available for orders from 100 to 199 shares in

certain Issues listed on the MSE) ("MAX")

from a pilot program to a permanent program.43 MAX orders are executed on a formula basis In a manner Similar to that of

COM EX. The Commission approved the

MSE's proposal on May 14, 197644

On February 12,1976, the New York Stock

Exchange, Inc (the "NYSE"), submitted a

proposed rule change setting forth procedures for routing and executing 1Oo-share

market orders processed through the NYSE's

Desiqnated Order Turnaround System

("DOr').45 DOT orders are executed on the

baSISof the bid/asked pnces quoted on the

floor of the NYSE at the time the orders are

received on the floor. The Commission ap9
proved the NYSE's DOT proposal on May 19,

197646

In addition, the Cornrmssron analyzed the

regulatory and competitive Implications of

programs by three large broker-dealers to

Internalize executions of certarn types of customer odd-lot orders In listed sscunues without the Imposition of an odd-lot differential

This question was presented m connection

with requests by these broker-dealers for

exemptions from Exchange Act Rules 10a-1

and 10b-6, where applicable, In order to

faCIlitate the operation of these odd-lot programs 47

Finally, the Commission approved rule proposals submitted by the American Stock Exchange and the Midwest Stock Exchange

which would effectively prohibit members of

those exchanges (inclUding specialists) actIng In the capacity of odd-lot dealers from

Imposing a differential In connection With the

execution of certain types of odd-lot orders 48

Access to Exchanges

General InqUiry-Section 31(b) of the 1975

Amendments authonzes the Cornrrussion to

review the rules of any national secunties

exchange or national securities associanon to

see If any of therr rules do not comply With

the Exchange Act, as amended The section

provides that at any time Within one year of

the effectIve date of any amendments to the

Act, the Commission may give written notice

to an exchange or assocranon specifying the

extent to which ItS rules fall to comply With the

provisrons of the Secuntres Exchange Act.

After SIX months have elapsed followmg receipt of the notice, the Cornrmssron may by

order suspend the registration of such exchange or associatron or Impose limitations

on the acnvrnes. functions and operations of

the exchange or assooatron If the Commission nnds, after notice and opponumty for

hearing, that the orqaruzation or rules of such

exchange or association do not comply With

the Exchange Act, as amended

Pursuant to Section 31 (b). the Commission

announced on March 2, 1976,49 that It was

undertakmg a general inqurry of the exchanges, rules relating to membership and

assocranon With members m light of certain of

the 1975 Amendments, particularly those to

Section 6 of the Exchange Act Among other

10

thmqs, Seclion 6(b) now permits any registered broker or dealer to join a national

secunnes exchange and any person to become associated With a member orqamzanon, subject of course to statutory dlsquallflcanons and to appropriate fmancial, operational and competency standards Section

6(b) also embodies a prolubmon against exchange rules Imposmg unnecessary or mappropnate burdens on competition The purpose of the comrrussion's general mquny IS

to assure that exchange regulation of access

to membership and associanon WIth member

organizations IS limited to fulfilling the purposes of the Act At the end of the fiscal year,

the ten nanonal seeunnes exchanges had

responded With a variety of presentatrons

along With proposed amendments to rules as

to which notice had been given pursuant to

Section 31(b) m connection With the proceeding

New York Stock Exchange Rule Proposals -On March 11, 1976, the Commission

gave notice of the filing of, and the issuance

of an order instrtutrnq proceedmgs to deterrrnne whether to disapprove, Rules 309 and

310 as proposed by the NYSE 50 Proposed

NYSE Rule 309 would prohibit an NYSE

member orqaruzation from havmq as a parent

a natural person not a Citizen of, or a company not orgamzed under the laws of, the

Umted States, unless the NYSE determined

that brokers and dealers dormcrled rn the

Uruted States (or thsrr subsrdranes) could

obtain Similar access to secunnes exchanges

under the laws and pohcres of the parent's

dorrucile or principal place of busrness or

both Proposed NYSE Rule 310 would proVide that no member orqaruzatton may funcbon as, control, be controlled by, or be under

common control With a person conductmg

commercral banking operations withm the

United States

Under Section 19(b) of the Exchange Act,

the Cornrrussron generally must approve, or

Institute a proceedmg to determme whether

to disapprove, a rule change proposed by a

selt-requlatory orqaruzanon wrthm 35 days

after a publication of notice of filing Before

the Cornrmssion commenced such proceedIngs, the NYSE had declined the Commission's mvitanon to Withdraw Its proposed

rules pendmg the completion or progress of

the forthcommg general mqUiry By the end of
the fiscal year, the Commission had received

subrnrssrons from several Interested persons

In connection with the pending proceedings

Trading by Exchange Members

Section 11(a) -As amended by the 1975

Amendments, Section 11(a)(1) of the Securities Exchange Act prohibits, with certain

specified exceptions (such as market making

activities), any member of a national secunlies exchange from effecting any transaction

on such exchange for ItS own account, the

account of an assoaated person, or an account with respect to which It or any of ItS

associated persons exercises Investment discretion. Under Section 11(a), the Commission

has broad authonty to fashion either more

flexible or more restrictive standards In light

of changing conditions. Section 11(a)(3) provides that the prohibitions In Section 11(a)(1)

do not apply before May 1, 1978, to transactions effected on an exchange by those who

were members of that exchange on May 1,

1975

On January 27, 1976,51 the Commission

began a rulernakmq proceeding to Implement

Section 11(a) and requested public comment

on a series of related questions In anticipation of May 1, 1978 (and Inasmuch as Section 11(a)(1) Immediately affected members

who JOined exchanges after May 1, 1975), the

Commission took action to Implement certain

specific exemptions envisroned by the Congress. First, the Commission adopted Exchange Act Temporary Rule 11a-1(T) to Implement the exemption In Section 11(a)(1)(G)

for the proprietary transactions of certain

types of members where the transactions

yield pnonty, parity, and precedence In execution to public orders. At the same time, the

Commission proposed Exchange Act Rule

11al-2, which would allow members to effect

transactions for the accounts of their associated persons, and also transactions for accounts earned by associated persons, only

on the same basis that such transactions

could be effected for accounts held by the

member Itself The Commission also proposed an amendment to ItS recordkeepmq

rule. Exchange Act Rule 17a-3, which would

enable every member, broker or dealer to

demonstrate ItS compliance with Section

11 (a)

Rectsston of Rule 19b-2 -Exchange Act

Rule 19b-2, adopted by the Commission In

1973, required each national sscuntres exchange to adopt rules specifymq that every

member of the exchange must have as the

principal purpose of ItS exchange membership the conduct of a public secunties bustness, In accordance with that rule Rule 19b2 had been the subject of extensive litigation 52 Since Section 11(a), as amended by

the 1975 Amendments, was Intended to displace Rule 19b-2, the rule was rescinded by

the Commission 53 Following the rescssion

of Rule 19b-2, the Commission has approved

deletions by national secunnes exchanges of

rules adopted thereunder and has Indicated

further that such rules are no longer consistent with the Act 54

Allocation of Regulatory

Responsibility Among SelfRegulatory Organizations

The 1975 Amendments transferred the responstbihty from the Securities Investor Protection Corporation to the Cornrrussron of

designating one self-regulatory organization

to Inspect members of two or more such

organizations ("dual members") for compliance with the applicable tmancral responsibrlIty rules 55Section 17(d) of the Exchange Act

empowers the Cornrrussron to relieve any

self-regulator of compliance, enforcement, or

other regulatory functions with respect to dual

members, and to allocate among the selfregulators rulernakmq authority concerning

matters as to which such orqaruzanons share

such authority Such action IS to promote

competition and coordination among the selfregulators and the development of a national

market system and a national system for the

clearance and settlement of sscuntres transactions

On April 20, 1976, the Comrmssron

adopted Exchange Act Rule 17d-1,56 which

essenlially provides that the Commission

shall designate one of the self-regulators to

which a dual member belongs as responsible

for examining the dual member for compliance with applicable nnancral responsiburty

rules Under Rule 17d-1, written designation

of one such self-regulatory organization relieves all other Interested self-regulators of

trus responsrbihty to the extent specified In

the designation

At the same time, the Cornrrnssron pro11
posed Rule 17<1-2,which IS Intended to establish the procedural foundation for a comprehensive allocation of regulatory responsibility among the self-regulators, and to promote cooperation among such organizations

In assessing their regulatory capabilities The

proposed rule would permit two or more selfregulatory orqaruzanons to submit to the

Commission a JOintproposed plan for allocation of specified regulatory functions as to

members or participants which they have In

common Once such a plan had been declared effective by the Commission, those

self-regulators parncipatmq In the plan and

not deSignatedthereby to assume regulatory

responsibility would be relieved of such responsibility to the extent provided by the plan.

In the event that proposed plans Illed under

proposed Rule 17<1-2did not provide lor all

members or particrpants 01 parties to the

plan, or did not allocate all their sell-regulatory responsibility, the Commission would be

empowered, on ItS own motion alter due

consrderation01 the statutory cntena, to desIgnate one or more self-regulators to assume

speehed regulatory responsibilities With respect to such members or participants. As

the fiscal year closed, the Commission was

consrdennq public comments upon the allocation program, and responses to the Commission's specrncrequest that the self-regulators submit outlines of allocation plans which

they might file In accordance With proposed

Rule 17d-2

Enforcement Obligations of SelfRegulatory Organizations

Section 19(9), which was added to the

Exchange Act by the 1975 Amendments,

requnes every sell-regulatory orqanizatron to

comply Withthe Act, the rules and regulations

thereunder and Its own rules and, absent

reasonable iustmcanonor excuse, to enforce

compliance therewith by ItS members and

persons associated With ItS members Section 19(9)(2) authonzes the Commission to

adopt rules relieVingany self-regulatory organization 01 ItS enlorcement responsibilities

With respect to specifred provisrons 01 the

Secunties Exchange Act or the rules and

regulations thereunder

On May 26, 1976, the Commission published lor comment proposed Exchange Act

Rule 1992-1 57 The proposed rule IS de12

Signed to provide a format lor developing

gUidelines as to the extent to which sellregulatory organizations should be obligated

to enlorce the Exchange Act and the rules

thereunder. II adopted In the form proposed,

Rule 1992-1 would relieve nanonal seeunnes

exchanges and assooatrons from certain enlorcement responsibilities pnmanly With respect to those persons associated With members who neither control members nor engage In secuntres acnvmes,

FOCUS Reporting System

In response to indications from the secunties Industry that the separate ftnanoal reporting and surveillance systems 01 the Comrrnssron and the vanous sell-regulatory organizations were Imposing an unnecessary burden on brokers and dealers, (especially the

smaller Ilrms), the Commission Initiated a

comprehensive program to review, consolidate and simplify the existmq reporting and

regulatory requirements applicable to the secunnes Industry The program began Withthe

creation 01 an AdVISOryCommittee on BrokerDealer Reports and Registration Hequrrements,58 which was SUbsequently replaced

by the Report Coordinating Group, a Federal

advisory committee lormed In May 1974 59

In ItS First Annual Report to the Commission on June 16, 1975, the Report CoordrnatIng Group recommended the adoption 01 a

Financial and Operational Combined Urulorrn

Single ("FOCUS") Report After considermq

the recommendations 01 the Report Coordinating Group and the comments received

thereon, and making some changes, the

Commission released the FOCUS Report for

puonc comment on October 16, 1975 60 Alter

making additional changes, the Commission

adopted the FOCUS Report and accompanyIng amendments to Exchange Act RUles 17a4, 17a-5, 17a-10, 17a-11 and 17a-20 on

December 17, 1975 (all of which became

effective on January 1, 1976) 61 The report

has also been adopted by over 40 state

secuntres aqencies

The FOCUS reporting system Simplifiesthe

reporting obligations of all brokers and dealers by superseding the eXisting and often

uncoordinated reportmg systems 01 the Comrmssion and the self-regulators With an mtegrated reporting system based upon gtmeral

purpose financial statements. The program
consolidates broker-dealer reporlJng requirements for purposes of surveillance, annual

audits, customer statements, and econorruc

data collection. The FOCUS system replaces

all Similar exisnnq reporlJng programs of the

self-regulatory orqarnzanons. such as the

JOint Regulatory Report and the NASD's

Forms "M" and "0" The consohdatron of

these diverse reporting forms Into a single

reporting system substantially reduces the

mulnplrcrty of forms and the frequency of

required filings resulting In a considerable

reduction In paperwork for the broker-dealer

In addition, the FOCUS forms are desiqned

to enable a firm to present ItS financial condition dearly and effiCiently, through the periodic disclosure of key indicators of financial

condition, such as a monthly computation of

net capital, and detailed ftnanoal and operational statements and schedules prepared on

a quarterly baSIS

The structure of the FOCUS Report IS

desiqned on a "layering" concept, that IS, the

complexity of the broker's or dealer's bUSIness determines the amount of required information and the frequency of ItS filing. Part I of

Form X-17 A-5 consists of twenty-six key

indicators of finanaal condition and must be

filed monthly by those brokers and dealers

which clear or carry customers' accounts.

Part II of Form X-17A-5 comprises comprehensive statements and schedules of nnanaal and operanonal information, which must

be filed on a calendar quarter baSIS by such

brokers and dealers. Part IIA of Form X-17 A5, another quarterly filing, IS an abbreviated

version of Part II available to those brokers

and dealers which Introduce their customers'

business to another broker or dealer on a

fUlly disclosed baSIS

Concurrent With the adoption of the FOCUS Report, the Commission approved and

declared effecllve plans filed by eight selfregulatory organizations pursuant to Exchange Act Rule 17a-5(a)(4), which plans

dispense With the requirement to file a separate copy of the FOCUS Report With the

Commission Under these plans, the American Stock Exchange, Inc, the Boston Stock

Exchange, lnc., the Chicago Board Options

Exchange, Inc, the Midwest Stock Exchange, Inc., the National Assocration of Secunnas Dealers, Inc, the New York Stock

Exchange, Inc, the Pacrnc Stock Exchange,

Inc, and the Philadelphia Stock Exchange,

Inc. have agreed to receive FOCUS Reports

directly from those members for which each

organization IS the desiqnated examining authonty Thrs information IS reviewed and analyzed by the self-regulators and submitted to

the Commission In the form of edited computer tapes, thus providrnq the necessary

data to the Cornrrussron Without Imposing an

additronal direct filing requirement on members of these self-regulatory organizations

For the first time, Rule 17a-5(a)(2) integrates a broker-dealer's annual audit With the

quarterly surveillance reports, thus providmq

a Single coordinated framework of regulallon

Tlus provision requires that a broker or dealer

file a report on Part II or Part IIA of Form X17A-5 as of the date of the annual audit, If

such date does not corncide With a regular

calendar quarter filing of a report on Part II or

Part IIA Tlus requtrernent provides the Comrrussron With comparable data In audited and

unaudited formats from which the accuracy of

the broker's or dealer's quarterly reports may

be verified.

The detailed audit requirements embodied

In previous financial questionnaires have

been eliminated to permit the development of

flexible audit procedures SUited to the nature

and complexity of an mdivrdual broker's or

dealer's business Rule 17a-5(g) prescribes

general audit objectives to be followed In the

preparation of annual financial statements

and thereafter permits the accountant to exerase lus protessional Judgment With respect

to the nature, extent and timing of audit

procedures. In rendering hrs opiruon, the audrtor IS required to reconcile hrs cornputanons

of the firm's net capital (pursuant to Exchange Act Rule 15c3-1) and reserve requirements (pursuant to EXhibit A to Rule

15c3-3) With the corresponding computations

In the broker's or dealer's most recent filing of

the unaudited Part II or Part IIA of Form X17A-5 The auditor IS also required by Rule

17a-5(h)(2) to Inform the Commission If, durIng the course of the audit or interim work, he

determines the existence of material inadequacies which the broker or dealer has not

reported promptly or accurately to the Comrrussron

In addition to the revrsron of Form X-17 A5, the FOCUS reporting system also effects

Significant changes In the Commission's

13
Forms X-17A-10 and X-17A-20. The Information required by Form X-17A-1O, the annual report of revenue and expenses, is substantially reduced and modified to coordinate

WIthcorresponding data on the FOCUS Report. Much of the rntormanon required by

Form X-17A-20, a report utilized by the

Commission to morutorthe Impact of competItive commission rates, has been eliminated,

as Similar Information IS developed by the

FOCUS Report.

The Simplification and uruncancn of the

reporting requirements and the fleXibility of

the revised audit procedures engendered by

the FOCUS concept strengthen the regulatory structures of the Commission and the

self-regulatory organizations while reduemq

the time and effort required of brokers and

dealers In order to demonstrate compliance.

The relative benefits of nus new system accrue particularly to smaller brokers and dealers, and have resulted In substantial time and

cost savings for such firms The Oornrnission

Intends periodically to review and modify the

FOCUS Report to Insure that continued existence of a ftnancral reportrng system that

keeps pace Withan evolvrng securities Industry.

Uniform Net Capital Rule

For years pnor to 1975, brokers and dealers had operated under as many as eight

different rules prescribing hnancral responsibility standards In the form of minimum net

caprtal requirements. Seven national securities exchanges had capital rules which governed their members, and the Commission

applied EXchange Act Rule 15c3-1 to other

brokers and dealers. lJttle Initial uniformity

existed among these rules, and thiS Situation

worsened Withthe passage of time as years

of divergent amendatory and Interpretive development created further drssrmuantres.

Section 15(c)(3) of the Exchange Act, as

amended by the 1975 Amendments, required

the Comrrussion to establish no later than

September 1, 1975, minimum financial responsibility requirements for all brokers and

dealers. On June 26, 1975, the Cornrrussron

fulfilled thiS congressional directive by adoptIng a Uniform net capital rule Which, among

other things, superseded the capital requirements of all national securities exchanges.62

As amended, Rule 15c3-1 perpetuates the

14

Commission's traditional "aggregate indebtedness" standard of Capital sufncrency, and

Introduces a new concept In fmanoat responSibility regulation, the "alternative net capital

requirement." The aggregate Indebtedness

concept, which denves from the provisions of

former capital rules, measures a broker's or

dealer's liqUidity and nnancrat condition m

terms of a rano between substantally all of tus

liabilities and those of ms assets which are

readily convertible Into cash The alternative

net capital requirement, which IS available at

the election of qualified brokers and dealers,

prescribes net capital requirements graduatIng in direct proportion to the magnitude of a

firm's customer-related obligations, as computed In accordance With the Formula for

Determination of Reserve ReqUirements of

Brokers and Dealers, constituting EXhibitA to

Exchange Act Rule 15c3-3

RegUlation of Municipal Securities

Professionals

The 1975 Amendments sought to subject

rnuruopal secunnes professionals to essentially the same scheme of regulallOn applicable to other securities activities 63Thus, municipal secunnes were excised from the exchange Act's definition of "exempted securities" for purposes of several provisions of the

Act, Includrng Section 15(a), which sets forth

registration requirements for brokers and

dealers.64 At the same time, the 1975

Amendments added Section 15B(a) to the

Act Trus new provrsron requires rnurucipal

secunnes dealers utiliZing the [unsdicnonal

means and not otherwise registered under

Section 15 to register WIththe Commission.65

Other provrsions of Section 15B establish and

set rulemakrng standards for the Municipal

Seeunnes Rulemaklng Board, a self-regulatory organization for the rnumcipal secunties

Industry. Since the enactment of the 1975

Amendments, approximately 310 bank murucipal seeunnes dealers, 10 other muruopal

secunnes dealers conducting an exclusively

Intrastate busmess (but utiliZing the junsdrcnonal means),66and 232 brokers and dealers

required to register under Section 15 solely

by Virtueof their murucipal securities acnvmes

have registered With the Oornrnissron. The

past fiscal year saw numerous rulemakrng

rrunanvesby the Oomrrussionand the MUniCIpal Securities Rulemaklng Board Intended to
provide for the regulation of these rnurucipal

securities protessionals

Establishment of the MUnicipal Securities

Rulemakmg Board -Section 15B(b)(1) requrred the Commission to appoint the Initial

15 members of the MUnicipal Securities Rulemaking Board (the "MSRB"). On June 12,

1975, the Commission sohcrted recommendations of candidates for appointment to the

MSRB.67 After reviewing over 500 letters

recommending approximately 150 mdivrduals, the Commission announced ItS selection

of the Initial membership of the MSRB.68

DUring the fiscal year, the MSRB made nine

proposed rule filings. One of these IS drscussed below; others are discussed In Part III

of tlus Report

Definition of the Term "Separately Identifiable Department or DIVISion" of a Bank.-

Section 15B(b)(2)(H) requires the MSRB to

define, by rule, the term "separately Identifiable department or drvrsion [of a bank]" for

purposes of the definition of "municipal secunnes dealer," Such a rule would determine In

what circumstances a bank murucipal secunties dealer could comply With the registration

requirements of Section 15B( a) by registering

Its "separately Identifiable" component, rather

than by reglstenng the entire bank On October 10, 1975, the MSRB filed four rules,

Including a rule defining the term "separately

Identifiable department or drvisron'' of a bank,

and, on October 15, 1976, the Commission

ordered thiS rule (and certain related definitional proposals) to be put Into effect summanly In order to permit the timely and orderly registration of the separately Identifiable

departments or dtvisrons of banks.69

Adoption of Rules Relatmg to RegIstratIon

of MUniCipal Securities Dealers -Under

Section 15B(a), all muructpal secunties dealers must register With the Commission On

August 11, 1975, the Commission (I) announced that non-bank rnuruopal secuntres

protessronats would be required to register on

the exrsnnq Form BD, (II) proposed Exchange

Act Rules 15Ba2-1 and 15Ba2-2 concerning

reglstrabon of bank muruopal secunties dealers and non-bank rnuruopal securities dealers whose business IS exdusively Intrastate,

and (IIi) proposed Form MSD for bank registrants.70

On October 15, 1975, the Commission

adopted Exchange Act Rules 158a2-1,

15Ba2-2, two temporary rules (15Ba2-3(T)

and 15a-1(T»), and Form MSD, With amendments permitting ItS use by separately identifiable departments or drvisrons of banks, 71

The temporary rules provided a six-month

grace period for new registrants from the

requirement that all murucrpal securities

protessronats be effectively registered by December 1, 1975, provided that such persons

filed their applications for registration With the

Commission not later than November 30,

1975, and complied With applicable provisions of the Act, the rules and regulations of

the Commission thereunder, and the rules of

the MSRB. The Commission also adopted

Rule 15b2B-1, which establishes a definition

of, and registration procedures for, separately

Idenbfiable departments or divrsrons of persons referred to In Section 15(b)(2)(B) of the

Act. 72

Shortly after the close of the fiscal year, the

Commission adopted Rules 15Ba2-4,

15Ba2-5, 15Ba2-6 and 15Bc3-1 (and related

Form MSDW), which relate to the reglstrahon

of successors to a registered municipal secunnes dealer, the registration of a fidUCiary

appointed to continue the business of a registered rnurucipal secuntres dealer, and the

Withdrawal of the registration of a muruopal

secunnes dealer. 73

Capital Requuements for Brokers and

Dealers Effectmg Trensections m MUniCIpal

Securities -The Cornrnrssron, aware that its

net capital requirements should provide appropnate recoqrutron of the pronounced differences between the rnurucrpal securities

markets and their corporate securities counterparts, sohcrted public comment on three

occasions dUring the summer of 1975 concerning the appropriate net capital requirements for brokers and dealers effecting

transactrons In rnurucrpal securities 74 The

public's response indicated that these brokers and dealers would need an extended

transitional penod to conform their operanons

to the net capital standards of Rule 15c3-1.

Accordingly, on November 20, 1975, the

Commission announced 75 a financial responsibrhty and reporting program pertaining

to transactions In rnuructpal securities, the

salient feature of which was a series of

temporary amendments to Rule 15c3-1, explnng In most cases on June 1, 1976, deSigned to modify the Impact of certain provl15
srons of the rule upon brokers and dealers

effectmg transactions rn rnurucipal secuntles.76 At the same time, the Commission

again mvited public comment concerning the

appropriate net capital requirements for these

brokers and dealers On May 26, 1976, the

Commission announced?" a second phase of

the financial responsibility and reporting program WhiCh,among other thmgs, permitted

smaller brokers and dealers effecting transactions solely m rnurucipalsecuntresto utilize

on a tnal basts the principal Innovation of the

uniform net capital rule, the alternative net

capital requirement.78Thrs second phase of

the Commission's program also extended until October 1, 1976, certam of the previously

adopted temporary amendments to Rule

15c3-1 Tlus acnon, coupled With the Commission's expkcrtsoncitanonof Impact studies

and other appropnate stanstrcalcomputations

from Interested members of the public, was

mtended to enable the Cornrrussronto develop solutions to technically mtncate questions

Review and Amendment of EXlstmg Antifraud Rules Appltcable to Transaction tn Municipal Secunttes -DUring the past fiscal

year, the Commission engaged In a detailed

review of ItSexistmq antifraud rules (adopted

under Sections 10(b), 15(c)(1), and 15(c)(2)

of the Exchange Act), and exisnnq SEC079

rules (adopted under provrsions renumbered

by the 1975 Amendments as Sections

15(b)(7), 15(b)(8), and 15(b)(9) of the Exchange Act) to determine the extent to which

such rules should be applicable to transacnons In municipal secunnss effected by brokers and dealers, as well as to such transactions by dealer banks or their separately

Idenbfiabledepartments or drvrsions.

In November 1975, the Cornrrussronsenertad public comment on proposals to extend

the application of eleven of the anllfraud rules

adopted under Section 10(b), 15(c)(1) and

15(c)(2) to bank rnurucipalsecuntias dealers,

to suspend the application of Exchange Act

Rule 15c2-11 to quotations for rnurucipal

secunnes, and to suspend the application of

SECO exarrunatron rules and rules of fair

practice to municipal secunties dealers effectIng transacnons solely In such secuntles.80

In order to afford appropnate time for public

comment on these proposed rule changes,

and In order to relieve murucipal secuntias

16

brokers and dealers from pOSSiblymappropnate regulatory requirements that would omerwise have applied to them on December 1,

1975, the Commissron, on November 26,

1975, adopted Exchange Act Temporary

Rule 23a-l(T). Trus rule preserved, With one

exception, the status quo until July 5, 1976,

the requlation of muruopal securities professionals and transactions In rnuruopal securities 81

On May 20, 1976, the Commission

adopted Without major revisron ItS proposed

amendments to the SECO rules. At the same

time, the Commission made those rules

adopted under Section 15(c)(1) of the Act, as

well as Exchange Act Rule 15c2-4, applicable to bank rnurucipal secunnes dealers. FInally, the Oomrmssion exempted transactions

m murncipal sscunnes from Rules 15c2-5,

15c2-7, and 15c2-11.82

Recordkeepmg and Preservation Requrements for MUniCipal Secunues Brokers and

Dealers.-Sectlon 17(a) of the Exchange Act

reqcres certain enumerated classes of persons, mcludmg registered brokers and dealers, to make and keep such records for such

periods of time as the Commission may by

rule prescnbe. The 1975 Amendments added

several classes of persons, mcluding registered murucipal secunnes dealers, to the list

of entities subject to the Oornrrussion's rulemaking authonty With respect to recordkeepmg and preservation requirernents. At the

same time, the 1975 Amendments added to

the Act Section 15B(b)(2)(G), which requires

the MSRB to presence recordkeeping and

preservation requirements for municipal secunnes brokers and rnurucrpalsecunnes dealers. Taken together, Sections 17(a) and

15B(b)(2)(G) vest the Commission and the

MSRB With concurrent authonty to adopt recordkeepmg and preservallon standards for

all registered brokers and dealers effecting

transactions In muruopal securities, as well

as for those banks (or their separately Idennflable departments of diVISions)registered as

rnurncipalsecurities dealers.

The Commission's recordkeepmg and

preservation requirements, Exchange Act

Rules 17a-3 and 17a-4, apply by thelf terms

to all registered brokers and dealers. Thus,

newly registering brokers and dealers effectIng transactions solely m murncipal securibes

would come Wlthmthe ambit of these rules. It
appeared to the Commission that these brokers and dealers might be unfamiliar with the

requirements of these rules and, to the extent

their operational systems would require modification, might experience difficulty In Implementing Rules 17a-3 and 17a-4. On November 20, 1975, In order to afford these brokers

and dealers an appropriate transitional penod, and to permit the Commission and the

MSRB to develop appropriate recordkeepmq

and preservation requirements for all murucipal secunties brokers and municipal securities dealers, the Commission adopted83 and

thereafter maintained certain Interpretations

of Securities Exchange Act Rules 17a-3 and

17a-4 as applied to brokers and dealers

effecting transactions solely In municipal secunnes, These interpretations required such

brokers and dealers to make, keep current

and preserve In an easily accessible place

books and records sutticrent to demonstrate

their financial condition, to reflect the receipt

and delivery of all funds and securities, and

to reflect all customer activity

On February 3, 1976, the MSRB made

available to Interested members of the public

an exposure draft of rules establishing recordkeepinq and preservation requirements

for all rnurncipal secunnes brokers and rnurucpal secuntres dealers Thereafter, In accordance With Section 19(b) of the Act, the

MSRB filed and the Commission pubhsheds"

these proposed rules These rules were under staff review as the fiscal year closed

RegUlation of the Options Markets

As the fiscal year began, three national

secunties exchanges listed and traded "call"

options contracts under programs approved

by the Oornrrussion In prior fiscal years. 85

The Chicago Board Options Exchange

("CBOE") had initiated listed options trading

In April 1973, the Amencan Stock Exchange

("Amex") and the Philadelphia Stock Exchange ("PH LX") began trading exchange

listed options In January and June 1975,

respectively. DUring the fiscal year, all three

exchanges expanded their options programs

amidst dramatically enlarged trading volume,

indicative of the Increasing Interest In thrs

Investment vehicle. Dunng thrs fiscal year,

the Pacrnc Stock Exchange ("PSE") also

began an options market.

At the close of the fiscal year, CBOE had

1,319 members trading listed options on 85

underlying stocks. CBOE's average daily

trading volume reached approximately

89,000 contracts (compared to 53,000 In the

previous fiscal year), 86 representing

8,900,000 shares of the underlying secunnes.

All 650 Amex members had options trading

pnvueqes admitting them to a market of listed

options on 57 underlying stocks 87 Average

dally volume on the Amex climbed from

17,016 to approximately 35,000 contracts.

Approximately 230 Phlx members were qualified to effect transactions In listed options for

27 undertymq stocks; nus exchange attained

an average trading volume of 2,600 contracts

dUring ItS first year of operation.

tmtieuon of Listed Options Tradmg on the

PSE -On March 30, 1976, the Commission

approved88 proposals by the PSE to Implement a program for the listing and trading of

option contracts on the PSE. Trading on the

PSE's options floor commenced on April 9,

1976

In common With other exchanges trading

listed options, PSE lists options on underlying

sscunues characterized by Wide distribution

and active trading and ISSUed by companies

With consistent earnings records. PSE's options contracts, like those traded on other

exchanges, are made fungible through standardization of such contract variables as expiration date and striking pnce. PSE has JOined

other exchanges which trade options as a

participant In the Options Cleanng Corporation (OCC). The OCC Issues, guarantees and

registers all exchange traded options In compliance With the federal secunties laws, and

clears and settles all transactions In such

options PSE reports transactions occurnng

on ItS option floor to the Options Price Reporting Authonty, which serves as a consolidated reporting system for all transactions In

exchange listed options.

Unlike all other options exchanges except

Phlx,89 PSE lists both a particular underlying

security and the corresponding call option

contract. Several features of PSE's options

program are desiqned to reduce the possibnIty of trading option contracts on the baSIS of

market information concerning acnvrty in the

underlying stock not yet publicly disseminated, or vice versa For example, PSE separates ItS options floor from ItS equmes trading

floor, In order to prevent direct oral or Visual

17
communication between members on the two

floors PSE also prohibits members from effecting transactions of their own accounts

when they have learned of large unreported

transactions In an option or Its underlying

security, the effecting transactions for their

own accounts Involving either the stock or the

option until the transaction IS disclosed on the

ticker or otherwise, and, In the case of orders

Involving the option, for two minutes thereafter 90

As the fiscal year drew to a close, other

self-regulatory organizations were publicly

exploring the possrbihty of JOIning PSE as

new entrants Into the options marketplace

Both the Midwest Stock Exchange and the

NASD conducted drscussrons With the Commission's staff poinunq toward the possible

submission to the Commission of proposed

options programs dunnq the coming fiscal

year

l..Jsted Put Option Contracts -A call option

contract essentially provides ItS holder With

the right to purchase for a specrfred price a

specified number of shares of a given secunty from the seller (or "writer") of the call

Conversely, the purchaser of a "put" option

acqurres the right to sell a given quantity of

the underlying security to the writer of the put,

at a price specified In the put option contract

Presently, only call options are listed on the

four national securities exchanges trading

listed options DUring the fiscal year, the

Commission published for public comment

rule proposals from all four exchanges proViding for the commencement of trading In

listed put opnon contracts on each such exchange 91 Shortly after the fiscal year ended,

the Cornrrnssron addressed a letter to each of

the exchanges conveying ItS intention to defer any deoision respecting the initiation of

puts trading until after January 1, 1977 92 The

Commission noted that there had not been

sutncrent opporturuty to conduct an overall

review of the pilot options trading programs In

the context of the ongoing and future development of the securities market systems The

Commission also observed that a substantial

number of regulatory, surveillance and economic questions related to options trading

remained to be resolved However, the Commission expressed ItS recoqrunon of the "economic logiC" for extending exchange options

acnvity to Include listed put contracts

18

Fmanc/al ResponSibility Reqtnrements s-«

The nnaneral structure of the options marketplace revolves around a relatively small number of firms whrch, as "clearing members" of

the Options Clearing Corporation, guarantee,

carry and clear the accounts of the substantially more numerous opnons specialists In

thrs capacity, each clearing member assumes

a complex of credit and market risks the

magnitude of which depends upon the acnvrties of the options specialists whose trading

obligations the clearing member IS reqUlred93

to guarantee In early 1976, the Cornrnrssron

determined that It would be appropriate to

amend the provrsions of ItS net capital rule

relating to the capital treatment of such guaranteed accounts, In order to augment the

nnancial and regulatory incentives upon

clearing members to monitor closely the acnvmes of the options specialists In such accounts On February 26, 1976, the Commission proposed amendments to Aule 15c3-1

Intended to achieve this purpose.e' The proposed amendments would require clearing

members to consider each specialist's market

maker account as a separate entity for purposes of capital computations, no clearing

member would be permitted to "cross-net" a

hquidatmq dencrt In one such account against

equity In another such account The Commission also proposed specmc capital treatment

for certain dual-posrtron trading strategies

known as "spreads" and "hedges," Instead of

applying separate capital charges to each

component of a bona fide hedge or spread

Finally, the proposed amendments to Aule

15c3-1 would establish a system of day-today control and early warning, whereby clearIng members would be required to monitor

closely each specialist's market making acnvmes The Commission's staff was studying

public comments as the fiscal year ended

Registration and Regulation of

Clearing Agencies

The 1975 Amendments provide for Federal

regulation of the securities handling process,

including the registration and regulation of

clearing agencies and transfer agents, In order to facihtate the establishment of a national system for the prompt and accurate

clearance and settlement of securities transactions Under Section 17A of the Exchange
Act, the authority and responsibility for the

reglstralton and regulalton of clearing agences and transfer agents IS shared among the

Commission and the Federal bank regulatory

agencies (r.e , the Comptroller of the Currency, the Board of Governors of the Federal

Reserve System, and the Federal Deposit

Insurance Corporatron.) 95

section 17A(b) of the Act, which became

effective on December 1, 1975, requires a

c1eanng agency96 to be registered with the

Commission If It performs any clearing

agency functions for any secunty other than

an exempted secunty The Cornrruasron must

publish notice of the filing so that Interested

persons may comment on It. Within certain

specrned periods, the Commrssron must

either grant the registration by order, or institute proceedings to determine whether registratron should be demed

In November 1975, the Commission

adopted Exchange Act Rule 17Ab2-1 , 97

which requires each cleanng agency to apply

for registration or exemption from registration

by filing Form CA-1 with the Cornrrussion.

On November 26, 1975, the Cornrrussron

published notice that thirteen cleanng agencies had applied for registration. 98 The reqrstranons were declared effective as of December 1, 1975, after the Commission determined that the cleanng aqenoes' operations

and rules were adequate to safeguard secunties and funds In their custody or control, and

that their rules did not fix pnces which parncrpants In the cleanng agencies must charge to

other persons.

When the thirteen cleanng agencies were

registered on December 1, 1975, the Comrrussion, In accordance with Exchange Act

Rule 17Ab2-1, did not make all the determinations called for by subparagraphs (A)

through (I) of Section 17A(b)(3) of the Act.

Under that rule, the Commission has nine

months from the date the registration becomes effective either to make all the reqinred determinations or to institute proceedIngs (In accordance with Section 19(a)(1)(B)

of the Act) to determine whether registration

should be denied. Thrs approach was intended to permit cleanng agencies In operation pnor to December 1, 1975 to be registered In compliance with the Act upon a

finding that their operations afforded adequate safeguards to funds and securmes In

their custody or control, while provrdinq the

Oornrrussron sufficient time to consider fully

the Issues Involved before making the required determinations, particularly those pertinent to the establishment of a national clearance and settlement system

Since December 1, 1975, three additional

entmes have applied to the Commission for

reglstrallon.99 One of these IS the proposed

National Secuntres Clearing Corporatron

("NSCC"), a company combining the cleanng

operations currently conducted by the three

major New York registered cleanng agencies,

the Stock Cleanng Corporation ("'SCC"), the

Amencan Stock Exchange Clearing Corporation ("ASECC") and the National Cleanng

Corporation ("NCC") The Cornrrussron has

also received fifteen applications for exemption from reglstrallon.1OO

On May 28, 1976, the Commission announced the Institution of proceedings, including public heanngs, to determine whether

to grant or deny the application of NSCC for

registration as a cleanng agency. 101 Public

hearings were held on June 16-18, 1976,

dunng which representatives of certain national secunnes exchanges, the NASD, brokers and dealers, cleanng agencies, and

other Interested persons presented their

views and responded to the questions of the

Cornmrssion and ItS staff In addition, numerous letters of comment and other matenals

were received In connection With these hearmqs. At the end of the fiscal year, the Comrrussron was evaluating this mformanon to

determine whether NSCC's application for

registration as a cleanng agency should be

granted or denied.

Registration and RegUlation of

Transfer Agents

Section 17A(c) of the Exchange Act, which

became effective on December 1, 1975, requires a transfer agent to become registered

With ItS appropnate regulatory agencyl02 If It

acts as a transfer agent for any security

registered under Section 12 of the Act or for

any secunty which would be registrable but

for the exemptions from registration for secunties of registered Investment companies

(Section 12(g)(2)(B)), or for secunnes ISSUed

by Insurance companies (Sectron

12(g)(2)(G)). A transfer agent becomes reqis19
tered thirty days after Its apphcaaon for registration IS received by the appropriate regulatory agency, unless the agency accelerates,

denies or postpones registration In accordance with Section 17A(c) of the Act.

In October 1975, acting In cooperation with

the Federal bank regulatory aqenctes, the

Commission adopted Exchange Act Rule

17Ac2-1 and Form TA-1 on which transfer

agents are to register with the CornrrusSlon.103 The three bank regulatory agencies

SImultaneouslyadopted a Similarrule and the

identical registration form for transfer agents

required to register with those agencies.

Thereafter, approximately 2,400 transfer

agents registered with the Commission and

the Federal bank regulatory aqencres. In order to provide the Commission and the bank

regulators with a central repository of readily

accessible information concerning registered

transfer agents, the Commission has irunated

a program to maintain In rts automated data

retneval systems the Information contained In

those registration forms.

As the fiscal year progressed, the Commission's staff Visited several bank, non-bank

and Issuer transfer agents located In various

parts of the country to review their capabilities and performance standards. On the baSIS

of Information obtained through the reglstrabon process and the staff's contacts With

transfer agents, and after consulting Withthe

bank regulators,I04 the Oommrssion on May

12, 1976, published for comment proposed

rules under Section 17A(d) of the Exchange

Act pertaining to certificate tumaround time,

reporting requirements related thereto, response time for confirmation requests, and

record-keeping requirements for registered

transfer agents.105 At the end of the fiscal

year, the Commission was evaluating the

comments of Interested members of the public concerning these proposals.

Street Name StUdy

Section 12(m) of the Exchange Act, added

by the 1975 Amendments, directs the Commission to conduct a study of the practice of

recording the ownership of securities In other

than the name of the benencralowner of such

secunnes (the "Street Name Study"), and to

determine whether this practice ISconsistent

WIth the purposes of the Act, and whether

20

steps can be taken to facilitate communications between Issuers and the beneficial owners of their secunnes while retaining the benefits of the practice.

DUringthe fall of 1975, the staff conducted

extensive research Into both the historical

background of street name registration and

the scope of ItSuse today. Comments regardIng the effect of this practice on appropnate

disclosure of the benenoat ownership of corporate secunnes and on Issuer-shareholder

communications were solicited from the Industry and Interested members of the public

through field Interviews and by Commission

release.106 The Oornrrussion's findings were

Incorporated Into a Preliminary Reportw?

which was submitted to Congress on December 4, 1975. The preliminary report sets forth

the the Commission's findings on the tnstory

and prevalence of street name regIstration

and seven proposals about Improving Issuershareholder communications.

DUring the second phase of the Street

Name Study, the Ocmrmssron set out to

gather statistical data enabling It to construct

an empirical model of the current system of

transmitting Issuer-shareholder commurucanons through interrnedranes, and to evaluate

the efficiency, shortcomings, cost, and cost

drstnbunon of this system. To that end, the

Commission decided to conduct a survey

which would monitor the activities of Issuers,

financial intermediaries, and shareowners

during the months of March, April, May, and

June, the period commonly referred to as the

"proxy season," dunnq wruch most publicly

held companies conduct their shareholders'

meetings

The Commission considered conducting a

survey which would focus upon one or more

past proxy seasons, but numerous interviews

led the Cornmrssronto conclude that much of

the needed information would not be available on an historical baSIS.Because the survey questionnaires could not be returned and

evaluated prior to the date speofied In Section 12(m) for the subrrussronof the Commission's final report to Congress, the Commission had to request a six-month extension of

the Study's June 4, 1976 subrmssron deadline.

In furtherance of the survey, the Commission sent approximately 100,000 quesnonnaires to shareowners. Then, after clearance
by the General Accounting Office pursuant to

the Federal Reports Act, Interrelated questionnaires were sent to 140 brokers, 180

banks, and 195 Issuers. As the fiscal year

closed, the responses to the Commission's

questionnaires were being processed and

evaluated for the formulation of Its final conclusions and recommendations.

In addition to Its empirical study of the

Issuer-shareholder communications process,

the Commission's staff has continued to research and analyze other aspects of street

name registration. Upon completion, the

Oomrmssron will formulate its final conclusions and recommendations and present ItS

report to Congress.

Lost and Stolen Securities

The 1975 Amendments evidence a

congressional determination to create a centralized scheme for dealing Withthe disruptive

effects of the loss, theft or counterfeiting of

secunnss, Section 17(1)(1)of the Exchange

Act, added in 1975, directs the Commission

to formulate a program for the reporting of

missing, lost, counterfeit and stolen secunties, and to establish rules for making inquiry

With respect to securities coming into the

possession or control of certain nnaneal institutions to determine whether such secunnes

have been reported as missing, lost, counterfeit or stolen. Congress directed the Commission to balance the benefits of mandating

inquiry In any specinc Situation against the

resultant costs and Impact on efficient business practices, and to avoid affecting the

status of bona fide purchasers In a manner

unjustifiably disruptive of normal commercial

transactions.lOB

In January 1976,109the Commission published for pubhc comment proposed Secunties EXchange Act Rule 17f-1 and a proposed Lost and Stolen Secuntles Program If

adopted, Rule 17f-1 would require enumerated persons, Including national secunnes

eXchanges and their members, other brokers

and dealers, members of the Federal Reserve System and FDIC Insured banks, to

report all incidents of missing, lost, counterfeit

or stolen sscunues to an "appropnate instrumentality." The "appropnate instrumentality"

is defined by proposed Rule 17f-1(a)(2) as

any Federal Reserve Bank or Branch thereof

With respect to Government or agency ISsues, and the Commission With respect to all

other secunnes. Furthermore, proposed Rule

17f-1(c) would require institutions subject to

the rule to make Inquiry With respect to all

securities coming Into their possession or

keeping, unless the secunty was received

from the Issuer, from another institution subject to the rule, or from a regular customer

where the securities are registered to such

customer and the size and nature of the

transaction are not inconsistent With past

transactions Withthe same customer.

Dunng the public comment penod, at the

staff's request, members of the secunnes and

banking Industries conducted Impact studies

to determine the number of reports and InqUlnes which would be generated by proposed

Rule 17f-1 The Commission IS In the process of evaluating the findings of these Impact

studies and the numerous comments received, and expects to complete action on

the Lost and Stolen Secunnes Program, including the adoption of Rule 17f-1 and the

design and establishment of a system to

process reports and inquiries under the rule,

dunng the new fiscal year

Fingerprinting of Securities

Professionals

Congressional mqumes and Oornrnissron

analyses Indicated that one of the factors

contributing to the increase in securities

thefts was the Inability to Identify secunty nsk

employees

Section 17(1)(2)of the Exchange Act, enacted In 1975, provides that every partner,

director, officer, and employee of every member of a national securities exchange, as well

as broker-dealer, registered transfer agent

and registered cleanng agency shall be fingerpnnted and shall submit, or cause to be

submitted, such flngerpnnts to the Attorney

General of the United States for Identification

and appropnate processing The Commission

ISgiven authonty to exempt certain classes of

persons from these requirements In a manner

consistent With the public Interest and the

protection of Investors

In November 1975,110the Commission ISsued proposed Exchange Act Rule 17f-2 for

public comment. The rule was Intended to

Implement the congressional desire to fingerprint all persons engaged in the sale of

securities, haVing access to securities or

21
monies or onqmal books and records relating

thereto, or supervising persons engaged In

such activities and to exempt those who do

not The rule was adopted In final form on

March 16, 1976,111 to become effective JUly

1, 1976, as to persons entenng the secunnes

Industry after that date, and for persons already employed by or associated with entities

subject to the rule until January 1, 1977

The rule IS Intended to require the fingerpnnnnq of only those persons engaged In the

sale of secuntres, having access to secunlies

or monies or onqmal books and records relatIng thereto, or supervising persons engaged

In such acnvmes For Instance, In the case of

a registered transfer agent, the rule requires

the fmqerpnntmq of only those persons engaged In or having access to "transfer agent

acnvrties

The rule requires organizations subject to

the Act to file a statement descnbmq those

classes of persons meeting the conditions for

exemption In addition, flngerpnnt record retenbon requirements are found In Rule 17f2(d), as well as In companion amendments to

Rules 17a-3 and 17a-4, the Commission's

recordkeepinq and preservation requirements

In order to avoid unnecessary requlatory

duplication, Rule 17f-2(b) provides that persons whose flngerpnnts are submitted to the

Attomey General for Identification and appropnate processing pursuant to other federal,

state or agency law, rule, or regulation may

satisfy the fingerprinting requirements by

compliance with such other requirement Thrs

provisron encompasses employees of banks

which submit fingerprints for Identification and

procsssmq to the FBI, the desiqnated agent

of the Attorney General for flngerpnnt idennfrcalion, and persons submitting fingerprints to

the FBI pursuant to state regulations In Arizona, Arkansas, Colorado, the Drstrrct of Columbia, Idaho, New Jersey, and New York

To Iacihtate the transmittal of fingerprint

records, the rule provides an exemption for

persons whose fingerprints are submitted to

the Attorney General through a self-regulatory organization pursuant to a plan filed by

the self-regulatory organization and approved

by the Comrrnssron By the close of the fiscal

year, the Commission had approved plans

submitted by SIX national securities exchanges and the NASD

22

Registration and RegUlation of

Securities Information Processors

The leglslalive history of the 1975 Amendments evidences conqressronal concern over

the mechanisms whereby Information concerning transactions In securities IS disseminated throughout the secunnes markets

Congress observed that connnumq debate

over the Cornmrssron's authority to foster the

development of composite last sale and quotation systems could only delay Implementation of the communications systems necessary for the natronal market system, and

consequently determined to make clear the

Cornrrusston's authonty over such systems

and the ennnes responsible for their maintenance 112

Trus determination was embodied In a new

Section 11A(b) to the Exchange Act Trus

provisron effectively requires "secunnes mtormatron processors" to register With the Comrrussron. and directs the Cornrrnssron to permit the registration of only those processors

found capable of assuring the prompt, accurate and reliable performance of the functions

of a secunties Information processor

SUbject to the Cornrmssron's authonty to

adopt a contrary rule, Section 11A(b) requires

only "exclusive" securities Information processors to register The term "exclusive processor" IS defined by Section 3(a)(22)(B) of

the Act to Include any securities information

processor or self-regulatory organization

wrnch, on behalf of a registered national

securities exchange or associanon (or on ItS

own behalf, If the processor IS a self-regulator), engages on an exclusive baSIS In the

processing of Information With respect to

transactions or quotations on an effected

registered national secunnes exchange, or

distributed through any electroruc system operated or conducted by the NASD

In September 1975, the Cornrrussron

adopted 113a registration procedure for exclusive processors consisnnq of Rule 11Ab2-1

and related Form SIP Completion of Form

SIP requires the subrmssron of detailed intormatron regarding the organizational structure,

operational capability and functions performed by the applicant After thrs Information

has been filed WIth the Cornrrussron, a notice

of the filing IS published and Interested persons are given an opporturuty to comment

-.".

"
Finally, within ninety days of the date of

publication of such notice (or within a longer

penod to which the applicant consents), the

Commission must by order grant registration

or institute proceedings to determine whether

registration should be denied In granting

registration, the Commission must find, pursuant to Section 11A(b)(3), that the processor

has the orqaruzanon and capacity to perform

ItS functions In a prompt, accurate and reliable manner, to comply with the provrsions of

Section 11A(b) and any rules promulgated

thereunder, to function In a manner consistent with the purposes of Section 11A(b) and,

Insofar as the applicant acts as an exclusive

processor, to operate fairly and effrcrently

As of the close of the fiscal year, the

Commission had received four applications

for registration as secuntres information processors, and had granted registration to the

Consolidated Tape ASsociation ("CTA"), the

Options Pnce Reporting Authonty ("OPRA"),

and the Secunties Industry Automation Corporation ("SIAC"), each of these entities

being exclusive secuntres Information processors 114The Commission also had temporarIly exempted, pursuant to ItS authonty under

Section 11A(b)( 1) of the Act, NASDAQ, Inc

from reglstratlon,115 pending a review of ItS

application for registration which IS expected

to be completed early In the new fiscal year

In addition, the Commission received applications for exemption from registration from

Bunker Ramo Corporation ("Bunker Ramo"),

PC Service Corporation ("PCSC"), and

Quotron Systems, Inc ("Quotron") These

applications were granted,116 subject to certain conditions Imposed pursuant to Section

11A(b)(1) of the Act As to Quotron and

PCSC, their exemptive orders were conditroned on compliance with Section

11A(b)(5)(A) of the Act (and any rules thereunder) regarding prohibitions or limitations

of access to their information services Further, Quotron and PCSC were obliged to

conform to Sections 17(a)(1) and 17(b) of the

Act (and any rules thereunder), relating to the

dissemination of panodic reports and the

maintenance of appropnate records for examination by the Commission and other regulatory bodies Finally, as to Bunker Ramo,

which previously acted as an exclusive processor on behalf of the National Association

of Secunnes Dealers, Inc ("NASD") In operannq the NASDAQ system, the Commission

conditioned exemption on Bunker Ramo's

compliance with Section 17(b) of the Act (and

any rules thereunder), Insofar as Bunker

maintained records relating to ItS performance as an exclusive processor for the

NASD

The Commission has also published for

public comment proposed Exchange Act

Rules 11Ab2-2, 11Ab2-3, and 11Ab5-1.117

Proposed Rule 11Ab2-2 would require an

annual subrmssron of current information by

registered secuntras mforrnanon processors

In order to update Information previously furnished on Form SIP Proposed Rule 11Ab2-3

would establish a procedure for mamtammq

continuity of registration, for a limited penod,

where an entity succeeds to or continues the

business of a registered processor Without

having first completed the registration procedure required by Rule 11Ab2-1. Finally, proposed Rule 11Ab5-1 would require that a

registered secuntres Information processor

give notice to the Commission (and any aggneved party) of any prohibition or hrrutanon

of access to the services offered by the

registrant Trus rule would Implement the notice procedure set forth In Section

11A(b)(5)(A) of the Act The Commission IS

currently considennq certain modifications In

the proposed rules which have been suggested by certain Interested members of the

publiC

Commission Rates

Section 6(e)(3) of the 1975 Amendments

obligates the Commission to keep Itself and

Congress abreast of significant events dunng

the transition to negotiated commission

charges The first rnorutonnq report was presented to Congress on December 1, 1975,

and covered the penod beginning May 1,

1975 (the advent of negotiated cornnussron

rates) and ending August 31, 1975118 The

report presented an analysis of the Impact of

unfixed rates on comrmssion charges by customer type Additional analyses Included capsule financial Information for various types of

New York Stock Exchange member firms and

financial summanes for all self-regulatory orgamzatlons Also Included were analyses relaling to the "quality of the market"

The first report was subsequently followed

23
by two addmonaland more refined reports to

Congress, dated March 29, 1976,119 and

August 10, 1976,120which covered the Impact of naqotrated cornmrssron charges

through March 31, 1976. In addition to the

analysis In the Commission's first report,

these reports Included a more In-depth analySISof the factors affecting secuntres oomrrussions, a detailed analysis of the financial

results for different types of broker-dealers

and for the first time, an analysis of the

financial results of Regional and Over-TheCounter Broker-Dealers

From the inception of negotiated cornmrssion charges to the end of March 31, 1976,

New York Stock Exchange (NYSE) member

firms received an estimated $335 7 million

less than they would have received under the

fixed comrrnssron rate schedule applicable

Immediately pnor to May 1, 1975 (assuming

equivalent market activity) Thrs revenue foregone amounted to roughly 11.7 percent of

cornrrnssronrevenues and 5.8 percent of total

revenues received by NYSE member firms

dUringthe May 1975-through-March 1976 penod

Commission discounts neqotrated by public

customers from the pre-May fixed commission rate schedule moved from 7.0 percent In

the second quarter of 1975 to 13.0 percent In

the fourth quarter The average discount declined to 12 3 percent dunng the first quarter

of 1976 This downward dnft was attnbuted to

Increased retarl customer activity rather than

a change In competitive pressures Commission discounts received by Institutional customers were greater than those received by

Individual customers. Measured as a percent

of order value, institutional commrsslons In

March 1976 were approximately 35 percent

below the pre-May 1 comrrussion level, whrle

the same companson for mdivrdual customers revealed a two percent decline from

the pre-May level. When measured In terms

of cornrrussronsper share, commissions for

msntunons and individuals were 30 percent

and 6 percent lower In March 1976 than April

1975, respectively While mdivrdualsreceived

reduced comrmssions on medium to large

size orders, they paid slightly higher commissions on their small orders (less than 200

shares). On the other hand, institutions received substantially reduced commissions on

all SIzesof orders

24

Not unexpectedly, the discounts granted to

institutional customers had their greatest Impact on the fmancral results of NYSE member

firms speciahzmq In mstnunonetbusiness As

a consequence, institutional firms, as a

group, received less than 70 percent of securities comrrussronsthey would have received

under the rate schedule In effect prior to May

1, 1975 Other groups also regIstered declines In secunties commrssrons over the

eleven months follOWingMay 1, 1975, but not

to the degree experienced by institutional

firms. The introduction of competitive comrnrssronsdoes not appear to have seriously

Impaired the operating results of RegIonal

and Over-The-Counter Broker-Dealers. Negotiated cornmrssron charges do not appear

to have negatively Influenced the operating

results, nor have they Significantly affected

the hquidrtyor volatility of securities markets.

Use of Commission Payments by

Fiduciaries

Section 28(e) of the Exchange Act was

added In 1975 to assure fiducrarres that,

under a system of competitive commission

rates, they might use reasonable busrness

Judgment In selecting brokers and causing

accounts under management to pay commissions Section 28(e) provides generally that a

money manager does not breach nducrary

duties under State or Federal law solely by

reason of hrs causing accounts under management to pay brokerage comrrussrons In

excess of the amount another broker-dealer

would have charged If the manager determines In good faith that the comrmssron IS

reasonable In relation to the value of brokerage and research services received.

In March 1976, the Commission called attention to practices that appeared to be developing In the payment of brokerage comrrnssions by frducrary money managers The

Cornrrussron noted In particular that some

frducranesappeared to be usrnq their beneficranes' commissions to obtain products and

services which are readily and customarily

available and offered to the general public on

a commercial baSIS In addition, the Commission noted, fiducranes appeared In some instances to be asking that brokers pay all their

operating expenses In return for comrmssrons

directed to those brokers It also appeared
that tlducrenes were In some cases asking

the broker, retained to effect a transaction for

the account of a beneficiary, to "give up" part

of the commission negotiated by the broker

and the fiduciary to another broker designated by the fiduciary for whom the executing

or dearing broker IS not a normal and legitimate correspondent.

The Commission stated that It did not beheve Section 28(e) would apply to those

types of arrangements. At the same time, the

Commission noted, while Section 28(e)

might, under appropnate Circumstances, be

applicable to situations where a broker provides a money manager With research produced by third parnes, the money manager

should be prepared to demonstrate the required good faith In connection Withthe transaction. The Commission cautioned, moreover, that some of the practices and arrangements that had been brought to ItS attention

might constitute fraudulent acts and practices

by fiducranes and that brokers should recognize that their compliance With any direcnon

or suggestion by a fiduciary which would

appear to Involve a Violation of the flducrary's

duty to ItS oenenoanes could Implicate them

In a course of conduct Violating the antifraud

provisions of the Federal secuntres laws. 121

Arab Boycott

Early In 1975, there were widespread reports of the Arab boycott against persons

dOing business With, or sympatheuc to, the

state of Israel. The Cornrnissrontook a number of actions to determine the extent of

Involvement In the boycott by persons subject

to ItS regulation and to uncover any possible

Violations of the Federal secunties laws.

From the outset, the Commission expressed

ItSVIewthat the Issues presented by the Arab

boycott are serious matters, and that It

strongly condemns participation In such boycotts by American citizens and enterprises

On November 20, 1975, the Ocmrrussron

published a release stating that drscnrnmatory practices engaged In by persons subject

to ItSregulation would not be tolerated. 122

The possibrhty of Violations of the Federal

securities laws was raised most prominently

In connection With reports early In 1975 of

Arab requests that American brokers and

dealers exclude boycotted brokerage firms

from underwntlng syndicates formed for the

distribution of secunnes Since such reports

surfaced, It has been the Cornrmssron's view

that the best way to safeguard against such

dlscnrmnatory practices IS for the National

ASSOCiation of Securities Dealers, Inc.

("NASD"), of which most American Investment banking firms are members, to take

Initial responstbihty for precautionary measures Under the law, the NASD has responsibility for Insunng that ItSmembers' conduct IS

consistent With Just and equitable pnnciples

of trade 123

The Commission requested the NASD to

rnorutor closely the composition of ItS members' underwriting syndicates for indications

of possible drscnrrunatory practices and, In

December 1975, the NASD submitted to the

Cornrmssion a report of ItS rnorntonnq program and subsequent investigation On the

baSISof the NASD's report and the Commission's own Informal Inquiries, It appears that

there have been no successful attempts to

exclude on a discnrrnnatory baSISany person

from an underwriting of securmes registered

With the Comrrussion. The NASD did, however, present evidence of two successful attempts by Arab Interests to obtain the exclusion of boycotted Investment banking firms

from parncipanon In offerings of securities

which took place outside the United States

and which were not required to be registered

Withthe Commission As a result of ItSinvestigation, the NASD In July 1976 took drseptnary action aqamst two of ItS member firms

on the baSISof their cooperation With Arabrelated firms In precluding boycotted firms

from offshore underwntmqs In addition, the

NASD Issued a notice cautioning all ItSmembers against Involvement In such discnrnmatory practices

section 31(b) Review

Section 31(b) of the 1975 Amendments

authorizes the Cornrrussron, at any time

Within one year of the effective date of any

amendment made by the 1975 Amendments

to the Exchange Act, to notify any national

secunnes exchange or national securities assooauon of the respects In which ItSorganization or rules are not In comphance Withthe

Act as amended. The Commission ISauthorized, at any time after 180 days follOWing

receipt of such notification, to suspend the

registration of any such exchange or assoo a25
non or to Impose limitations on Its activities,

functions or operations If the Comrrussron

finds, after notice and opportunity for heanng

that ItS rules or organization stili fall to conform to the Act Any such suspensron or

limitation continues In effect until the Comrrussron, by order, declares that such exchange or assocanon IS In compliance with

the Act's requirements.

Dunng the fiscal year, the Cornrmssron's

staff conducted an intensive review of the

constitutions and rules of the several selfregulatory organizations Particular attention

was devoted to self-regulatory requirements

In those areas most affected by the 1975

Amendments, such as membership and access restncnons, trnancral responsibility reqinrernents, and rules limiting or condmorunq

the ability of brokers and dealers to ulihze the

services of registered clearing agencies or

registered secuntres mtorrnatron processors

Early In the new fiscal year, the Comrmssion

expects to be In a POSition to transmit appropriate notification to each of the self-regulators In accordance With Section 31 (b) of the

Act.

DISCLOSURE RELATED

MATTERS

Ulegal and Questionable

Corporate Payments

On May 12, 1976, the Cornrrussron submitted to the Senate Banking, HOUSing and

Urban Affairs Committee the "Report of the

Secuntres and Exchange Commission on

Questionable and Illegal Corporate Payments

and Practices" The report provides a detailed analysis of information about Illegal or

questionable foreign payments contained In

public documents filed With the Cornrrussion

The report Indicates that common among

almost all of the cases reviewed by the

Cornrrussron was the apparent failure of the

system of corporate accountability to assure

a proper accounting of the use of corporate

funds, and to assure that documents filed

With the Commission and Circulated to shareholders do not omit or misrepresent matenal

facts Millions of dollars of funds were Inaccurately recorded In corporate books and

records to tacihtate the making of questionable payments Falsrncanon of records, although known to corporate employees and

26

often to top management, was often concealed from outside auditors and counsel and

from outside directors.

The report states that the pnmary thrust of

the Commission's actions has been to restore

the ettrcrency of the system of corporate

accountability and to encourage the boards of

directors to exercise their authonty. To !hIS

end the Commission has sought Independent

review of past disclosure In ItS enforcement

acaons and In ItS voluntary disclosure program

In broad terms, the Cornrrussron's voluntary

disclosure program, Which IS administered by

the DIVISion of Corporation Finance, requires

a company which believes that It may have a

disclosure problem With respect to questionable or Illegal acnvmes promptly to take the

follOWing steps:

1 Authonze a careful In-depth mvesnqanon

of the facts by persons not Involved In the

acnvmes In question,

2 Have the board of directors Issue an

appropriate policy statement about transactions mvolvrnq Illegal or questionable acnvities, or reiterate any relevant, preexistmq

policy statement;

3 Consider whether interim public drsdosure of the results should be made pnor to

completion of the investigation; and

4 At the conclusion of the Investigation, file

a final report of matenal facts With the Comrmssron, generally on Form 8-1<. Companies

In the voluntary disclosure program can make

disclosures Without pnor consultation With the

Cornrmssron's staff and Without Jeopardizing

their parnopanon In the program They can,

however, seek the Informal views of the Commission Itself concerning the appropnate diSclosure of certain matters

In order to restore the integrity of the

disclosure system and to make corporate

ottrcials more fully accountable to their

boards of directors and shareholders, the

Commission's baSIC approach has been. (1)

To Insure that Investors and shareholders

receive rnatenal facts necessary to make

Informed Investment decrsions and to assess

the quality of management; and (2) To establish a climate In which corporate management and the protessionals that advise them

become fUlly aware of these problems and

deal With them In an effective and responsible

manner
Advisory Committee on Corporate

Disclosure

On February 2, 1976, Chairman Hills announced the appomtment of an Advisory

Committee on Corporate Disclosure to be

chaired by then Commissioner, A. A Sommer, Jr. 124The function of the sixteen-member panel IS to define the purposes and

objectives of a corporate disclosure system,

to assess the present system m light of those

objectives, to assess the costs of the present

system and to weigh those costs against the

benefits It produces, and to recommend to

the Commission any changes It may consider

necessary or appropnate to bnng the operation of the disclosure system administered by

the Commission closer to those objecbves

The Committee's work mcludes Identlfymg

the users of the Information available rn the

corporate disclosure system, the users'

sources of Information, the parbcular Items of

Information which are of crucial Importance to

users, and the cost to companies of providing

this information. To answer these and related

questions, the Advisory Committee ISsurveyIng approximately 30 publicly-owned companies, 120 nnanoat analysts, 60 portfolio managers and 8,000 mdtvrdual investors The

Advisory Committee anticipates that when

the data from the survey IS analyzed the

Committee Will have the first clear and complete picture of the operation of the disclosure

system and that this new understandmg WIll

serve as a baSISfor the Committee's recommendations to the Commission

The Committee IS also sohcrtmq position

papers from over one hundred trade assooanons and the public at large on a vanety of

disclosure Issues 125The followmg specific

tOPiCSare among those on which positron

papers are being sought idennfrcanonof the

objecbves of a corporate disclosure system;

the feasibility of defining more precisely the

"matenality" standard under the federal secunues laws, Identification of any need for Increased disclosure of forward-looking and

soft mtormanon, Identification of any need for

mcreased disclosure of environmental and

SOCIally-Significantmatters and the cntena to

be applied In making such a determination,

statement of the role of the differential disdosure concept In the SEC's mandated disclosure system; and recommendations for irnprovement of the shareholder suffrage process.

A tmal report Incorporating recommendations to the Oornrrussion IS expected on or

before July 1, 1977

Projections

On Apnl 23, 1976, the Commission published for comment proposed GUides 62 and

4, "Disclosure of Projacnons of Future Economic Performance," of the GUides for the

Preparation and Filing of Registration Statements under the Secunnes Act of 1933 and

of the GUidesfor the Preparation and Filing of

Reports and Proxy and Registration Statements under the Secunties Exchange Act of

1934, respectively 126The Commission also

announced the adopnon of an amendment to

Exchange Act Rule 14a-9, and the Withdrawal of the other rule and form proposals

relatmg to projections of future economic performance and to changes In control of a

registrant which were published for comment

on Apn128, 1975,127to Implement the "Statement by the Commission on the Disclosure of

Projections of Future Economic Performance "128

The proposed GUidesset forth the views of

the Commission's DIVISionof Corporation FInance on the disclosure of projections m

Comrrussron fllmgs In particular, the GUides

address three Important considerations related to the preparation and disclosure of

projections (1) that management have a reasonable baSISfor ItS projections, (2) that the

projections be presented In an appropriate

format, and (3) that the accompanymg drsclosures tacihtate Investor understanding of the

baSISfor, and Iimltallons of projections The

proposed GUides are not rules of the Commrssion nor are they published as beanng the

Commission's offtcral approval. They represent polices and practices followed by the

DIVISionof Corporation Finance In administerIng the disclosure requirements of the federal

secunnes laws

The staff presently ISconsidennq the comments received on the proposed gUides.

In announcing these actions, the Commission expressed ItSgeneral views on the Inclusion of projections In Cornrrussron filings

Among other things, the Cornrmssron noted

that, at least until February of 1973, ItS long

27
standing policy generally not to permit projections In Commission filings may have served

as an Impediment to the disclosure of projections to Investors The Commission also

noted that Investors appear to want management's assessment of a company's future

performance and that some managements

may WIsh to furnish their projections through

Cornrrussron filings Accordingly, the Commission announced that It Will not object to

disclosure In filings with the Commission of

projections which are made In good faith and

have a reasonable basts, provided that they

are presented In an appropriate format and

accompanied by mtormatron adequate to enable Investors to make their own judgments

The Commission also expressed the view

that reasonably based and adequately presented projections should not subject Issuers

to liability under the Federal secunnes laws,

even If the projections prove to be In error.

In light of thrs change of policy, the Commission amended Exchange Act Rule 14a9129 to delete the reference to predictions of

earnings as being possibly misleading In certain Situations

Finally, the Commission indicated that It IS

not encouraging the making or filing of projecnons because of the diversity of views on

their Importance and reliability and noted that

trus Issue, together With the question of

whether a "safe-harbor" rule for projections IS

needed, may be among those appropnately

considered by ItS AdVISOry Committee on

Corporate Disclosure

Beneficial Ownership

On August 25, 1975, the Commission announced various proposals relating to the

disclosure of beneficial owners and holders of

record of voting secuntres 130 These proposals were partly the result of public heanngs

conducted by the Commission In the fall of

1974 concerning beneficial ownersrnp, takeovers, acquis.nons and other related matters 131

The August proposals Included proposed

rules and amendments under Sections 13

and 14 of the Exchange Act which would,

among other things, (1) provrde standards for

determination of beneficial ownership for purposes of those sectrons, (2) require additional

disclosure In Schedule 13D acquisitron statements about beneficial owners and the nature

28

and extent of their ownership, (3) provide a

short form acquismon notice to be used by

certain persons acquiring secunties In the

ordinary course of their business and not for

purposes of control; and (4) provide an exemption from the filing requirements of Section 13( d)( 1) for certain underwriters who

acqinre securities In the ordinary course of a

firm commitment underwriting

In addrtron, the proposals would amend

various registration and reporting forms requmnq disclosure of pnnopal security holders, as well as Schedule 14A, Information

Required In Proxy Statement, to require diSclosure In such forms, to the extent known by

the filing company, of (1) bsneucrat owners of

more than five percent of any class of voting

securities and the nature of their ownership;

(2) the aggregate amount and nature of benefiCial ownership by officers and directors, of

each class of voting secunties of the Issuer or

any of ItS parents or subsidranes, and (3) the

30 largest holders of record of each class of

voting securities (With an exception for persons holding less than 1/10 of 1% of the

outstanding secuntres of the class) and their

vonnq authority and underlying voting authorrty, If known

The onqinal comment penod on the proposals was to expire on November 3D, 1975,

however, upon request. the Oornrrussron extended the penod to January 2, 1976. Dunng

that time, the Commission received more

than 225 letters of comment from Interested

persons, including, members of Congress

and representatives of the securities Industry,

the legal protession, publicly-held companies,

and Institutional and mdivrdual Investors. DurIng May 1976, the staff of the DIVISion of

Corporation Finance completed an extensive

review and analysis of the letters of comment

and submitted ItS recommendations on the

proposals to the Commission At the close of

the fiscal year the Commission was considerIng the DIVISion's recommendations

Communications with Beneficial

Owners

(Proposed Rule 14b-1)

On August 25, 1975, the Commission sohcited comments on a proposed new Rule 14b1 under the Exchange Act dealing With the

obligations of registered brokers to forward

certain cornrnurucatrons to benefrcral owners
of secuntles.132 If adopted, proposed Rule

14b-1 would require a registered broker (1)

to respond promptly, by means of a search

card or otherwise, to mqumes by Issuers

about how many of the broker's customers

are beneficial owners of the Issuer's secunties held of record by the broker or Its nominees, and (2) upon receipt of a sufficient

number of proxy statements and annual reports to secunty holders and assurances that

Its reasonable expenses would be paid by the

Issuer, to forward such matenals In a timely

manner to such customers As an alternative

to complying WIththe foregOingobligations, a

registered broker would be permitted to furnish an Issuer with a list of the customers

provided that the broker also furnish authonzatron to vote such secunnes In accordance

WIthInstructions of the customer.

The comment penod on the proposed rules

expired November 30, 1975. The comrrnssion's Divrsron of Market Regulation IS considennq the comments received on the proposals In connection with the Commission's

"Street Name Study" mandated by the Secunnes Act Amendments of 1975.133

Tender Offers

As a further result of the Commission's

public hearings on takeovers and acqursitlons,l34 the Cornmrssronpublished for comment proposed rules and schedules under

the Exchange Act, which, If adopted, would

provide specific disclosure and drsserrunanon

requirements, additional substantive regulatory protections and other regulations with

respect to certain cash tender offers and

stock-for-stock exchange offers

The rules and schedules represent the

Commission's first comprehensive rulemakIng proposals under the Williams Act with

respect to tender offers. Among other things,

all tender offers would be required to be open

for at least fifteen busmsss days after their

commencement and for at least ten business

days from the announcement of any Increase

In the offered consrderanon or the dealer's

soliCitingfee.

A proposed Tender Offer Statement,

Schedule 14D-1, would require a bidder to

disdose, among other things, edcmonel mtorrnanon regarding its source of funds and ItS

plans and proposals (regardless of whether It

IS seeking control) and, for the first time,

would speciftcally require disclosure of ItS

past relationships and negotiations With the

subject company whose secuntrss are being

sought and disclosure of nnancralstatements

and other data when matenal A proposed

Recommendation Statement Schedule 140-

4, would require a subject company or any

other person recommending for or against a

tender offer to descnbe, among other things,

any actual or potential conflict of Interest

A proposed dissemination rule would permit a bidder to communicate ItS cash tender

offer by means of long form publication

which IS currently used In connection With

most cash tender offers, summary publication

provided that such an advertisement contains

a minimum amount of Information and Indicates how complete information might be

readily obtained, or mailings to all stockholders listed on the stockholders' list, which

would be available under the Commission's

rules If certain conditions are met

The Commission's proposals would extend

the present seven-day Withdrawal nghts to

ten business days, would provide additional,

limited Withdrawal rights In the event of a

competing tender offer, and would permit a

bidder to accept any shares deposited on a

pro-rata baSISthroughout the life of a tender

offer

Finally, the proposals would Integrate all

purchases of the subject company's secunties by the bidder Within forty business days

after a tender offer With the offer, would

require a bidder to Issue a status report

whenever It extends the tender offer, and

would require a bidder to pay the offered

consrderanon or return the secunnes deposited WIthinten busrness days after the termination of a tender offer

The penod for written views and comments

on the proposals expires September 30,

1976

Proposals to Amend Registration

Forms

Proposed Amendments to Forms S-7 and

S-16 and Proposal to Resctna Form S-9-

On July 26, 1976, the Commission proposed

amendments to Forms S-7 and 5-16 and

announced a proposal to rescind Form 5-9

under the Securities Act 135 The proposals

would substantially relax the conditions for

usmq Forms 5-7 and 8-16,'36 thus making

29
these short registration forms available to a

larger number of Issuers which are subject to

the reporting requirements of the Exchange

Act 137 Form 8-7 also would be made available for the registration of securrnes to be

offered In exchange for other securmes, as

well as for cash In addition, certain of the

disclosure Items of Forms S-7 and S-16

would be amended to require additional disclosure If there has been a change of the

registrant

Issuers usmq Forms S-7 and S-16 are

permitted to omit from the S-7 prospectus, or

to Incorporate by reference In the S-16 prospectus, certain Information already provided

to security holders or available to Investors In

reports filed under the Exchange Act Thus,

the proposed amendments reflect recent Improvements In the nature and extent of Information required to be Included In reports and

proxy and Information statements under that

Act, and the Increased availability of such

information to the investing public

The Cornrrussron also proposed to rescind

Form S-9, a form presently available for

Secunnes Act registration of non-convertible

fixed-interest debt secuntres by certain ISsuers, since the proposed amendments to

Form S-7 would make that form available to

the relatively small number of Issuers presently usmq Form S-9

The comment penod on these proposals

expires on September 27, 1976

Form 8-8 and Rule 457 -In July 1976, the

Commission published for comment certain

proposed amendments to Form S-8138 and

simultaneously withdrew an earlier proposal

to amend that form 139 The proposed amendments would expand the availability of the

form for secunties offered and sold pursuant

to certain employee-benefit plans and would

rescind ItS use for reolfers or resales by

persons who may be deemed underwnters

In a related matter, the Commission adopted

an amendment to Rule 457(g) concerning the

computation of the filing fee required for

registration statements relating to stock bonus and Similar plans

Proposals to Amend and

Amendments to Certain Periodic

Reports

Proposed Amendments to Forms 8-K, 1DO and 10-K -On July 12, 1976, the Com30

rrussion proposed amendments to Forms 8-

K, 1o-a and 10-K, which are used for current, quarterly and annual reports filed pursuant to Section 13 or 15(d) of the Exchange

Act and to the disclosure schedule for proxies

and information statements. 140 The proposed

amendments would, If adopted, provrde for

more timely filing of reports on Form 8-K, by

requmnq such reports to be filed within ten

days after the occurrence of the event reported, although registrants would be permitted an additional 60 days time within which to

file the audited financial statements required

In reports of an acquisrtron of assets. In

addition, the proposals would decrease the

number of Items of Information required to be

Included In reports on Form 8-K by transfernng certain Items to Form 10-0 141

Present Item 9 (Options to Purchase Secuntres) would be deleted from Form 8-K, since

Similar information IS recurred to be Included

In annual reports on Form 10-K and In proxy

and information statements filed pursuant to

Section 14 of the Exchange Act

The Items remaining on Form 8-K would

be renumbered and revised to require additional information concerning changes In control of registrant and non-payment of pnncpal

or Interest on seruor secuntres A new Item,

requmnq disclosure of the appointment of a

receiver or trustee for registrant or ItS parent

In bankruptcy or receivership proceedings,

would be added to Form 8-K

In addition, the Commission proposed to

separate the disclosure relating to matenal

Income changes of an unusual or Infrequent

nature presently reqtnred In reports on Form

8-K The proposed amendments would requrre notmcanon of such changes In reports

on Form 8-K, but the details of such events

would be disclosed In reports on Form 10-0

or Form 10-K, for fourth quarter events,

where they could be more meaningfully assessed against the financial data In such

quarterly or annual reports

In order to make It easier for users of both

Forms 10-0 and 10-K, those forms would be

revised to require that reference be made to

Items previously mentioned In 8-K reports

filed dunnq the quarter covered by the report

These proposals are Intended to provide

for more comprehensive quarterly and annual

reports, more timely reporting of events of

current Importance to Investors, reduction of
those reports filed on Form 8-K, and substantial savings to registrants and the Commission

The comment period on the proposals expires on September 15. 1976

On June 2, 1976, the Commission proposed amendments to Forms 10-K and 10-

0.142 to provide for a space on the cover

page of each form In which a registrant, at ItS

option, could use to Indicate ItS Intention to

file a registration statement on Form 8-7, S9 or S-16. on or before the date of ItS next

filing on either Form 10-K or Form 10-0

Receipt of such notice of Intent to file would

enable the Commission's staff to review

promptly the annual, quarterly and current

reports filed by registrant under the Exchange

Act and, In most cases, to expedite ItS review

of the Secunnes Act registration statement,

when filed

Aaopuon of Amendments to Forms 10-0,

10-K and 12-K to Reqtnre a Statement of

Outstanding Common Stock -On June 8,

,1976, the Commission adopted amendments

to Forms 10-K, 12-K and 10-0 under the

Exchange Act requiring corporate Issuers to

state on the tacmq sheets to reports on those

forms the number of shares outstanding of

each class of their common stock 143 The

amendments were adopted to aid persons In

complying With the volume limitations of Rule

144 by providmq them With information upon

which those limitations frequently are based

Stockholder Proposals

Rule 14a-8 of the proxy rules sets forth the

requirements applicable to proposals submitted by secunty holders for inclusion In the

proxy sohcitmq materials of Issuers On July

7, 1976, the Comrmssion proposed to amend

that rule substantially Among other things,

the proposed amendments would eliminate

certain shareholder abuses that have occurred In the past, broaden the tOPiCS that

could be covered by shareholder proposals.

and formalize certain grounds for omitting

proposals that have been Implied, but not

stated, In the existmq rule 144 In a related

matter, the Comrrussron Issued a release

descnbmq and discussmq the Informal procedures employed by ItS staff With respect to

shareholder proposals which managements

have Indicated they Intend to omit from their

proxy materials 145

Stock Appreciation Rights

In connection With the reporting of msider

secuntres transactions under Section 16 of

the Exchange Act, the Cornrrussron proposed

certain amendments to Rules 16b-3 and

16a-6(c) under the Act to Include certain

transactions In stock apprecration nghts

Within the transactions which may be exempted by those rules 146The exemption for

transactions In stock appreciation nghts

would be available provided certain conditions are met, rncludrnq requirements relative

to the Issuer, the options and rights, and the

administration of the plan In addition, the

proposals would Impose new conditions for

the availability of the exemption provided by

Rule 16b-3 for option, bonus, appreciation or

Similar plans

Disclosure of Environmental

Matters

On May 6, 1976, In Securities Act Release

No 5704,147 the Cornrmssron announced final action In Its rulemakinq proceeding concerning disclosure of environmental and other

soaally Significant matters That proceeding

had been Originally trutrated on February 11,

1975,148 pursuant to the order and opinion of

Judge Charles R Richey In Natural Resources Defense Council, Inc v Secunties

and Exchange Commtsston, 389 F Supp 689

(D DC, 1974) 149Judge Richey had directed

the Cornrrussron, among other things, to determine whether the Cornrmssron's exrstmq

corporate disclosure rules satisfied any applicable requirements of the National Environmental Policy Act of 1969 ("NEPA"), and had

recommended that the Commission compile

a "legislative-type" record In connection With

this undertaking After the culrnmatron of

lengthy public proceeding, the Cornrmssron,

on October 14, 1975, proposed specitrc new

rules regarding environmental disclosure 150

In Secuntres Act Release No 5704 the

Commission announced that It had determined to adopt so much of the rule proposals

as related to the disclosure of capital expenditures for environmental compliance purposes The Cornrnrssron, however, concluded

that another aspect of the proposals, requirIng corporate registrants to list and make

available to shareholders environmental compliance reports filed With other agencies,

31
would not provide additional meaningful Information to Investors Interested In the environmentally significant aspects of the behavior of

registrants Moreover, the Comrrussronconcluded that there was no disclosure alternative which would have provided meaningful

additional information without Imposing costs

and burdens grossly disproportionate to any

resulting benefits to Investors and the envrronment

The Natural Resources Defense Council

and the other plaintiffs In the htlgatlon which

gave nse to thrs proceeding then asserted

that the Comrrussion's rules still failed to

satisfy the requirernents of NEPA, and requested that Judge Richey order the Comrrussionto correct these alleged defrciencres

The court IS expected to rule on plaintiffs'

contentions dunng the next several months

Disclosure of Oil and Gas

Reserves

On May 12, 1976, the Commission

adopted amendments to Forms S-1 and S-7

under the Secunties Act and to Forms 10 and

10-K under the Exchange Act to require the

disclosure of all and gas reserves and to

provide definitions and classrhcatronsof the

term "reserves" 151 These amendments

make exphcrtthe disclosures With respect to

all and gas reserves already required under

Forms S-1, S-7 and 10 and, for the first time,

require such disclosures to be made on an

annual basis In a report on Form 10-K In

connection with the amendment to Form 10-

K, GUide 2 under the Exchange Act, which

relates to disclosure of natural gas reserves,

has also been amended to make It applicable

to reserves disclosed In reports on Form 10-

K

The amendments adopted by the Commission are almost Identical to those which were

proposed for comment on May 30, 1975.152

They Include a requirement to dl~close reserve estimates filed With other federal or

foreign aqenoes and to explain any differences between such estimates and those

Included In flhngs With the Commission. In

response to comments received on the proposals, a requirement to disclose reserve

estimates filed With state agencies has been

deleted from the amendments, and several

32

de muumts hmltatlons have been placed on

the disclosure requirements The Commission beheves that these requirements would

have placed an unwarranted burden on registrants WIthout any corresponding benefit to

Investors Additionally, definitions or gUidance

With respect to the meaning of certain terms

(net productron, gross and net wells and

acres and undeveloped acreage) have been

Inserted for clanncauon.

Accounting Matters

Staff Accountmg Bulletins -In November

1975, the Commission authonzed the DIVIsion of Corporation Finance and the Office of

the Chief Accountant to pubhsh a senes of

Staff Accounting Bulletms 153 to achieve a

Wider dissemination of the administrative Interpretations and practices utilized by the

Commission's staff In reviewing financial

statements The statements In the Bulletins

are not rules or interpretations of the Commissron nor do they bear the Commission's

oftrcral approval; they represent Interpretations and practices followed by the Divrsion

and the Chief Accountant In administering the

disclosure requirements of the federal seounties laws

The process of financial reporting IS dynarruc and evolutionary. Consequently, new

or revised administrative Interpretations and

practices must be Implemented In response

to changes In the reporting process. While

large accounting firms who practice before

the Commission have many opportunities to

exchange information and views With the

staff, the Commission has been concerned

about comments that small accounting firms

have fewer such opportunities and may be at

an unfair competitive disadvantage because

there has been no formal dissemination of

staff POSitions

The purpose of the Bulletms is to mitigate

these problems by making available to the

pubhc a compilation of certain existmq staff

interpretations and practices and by prOViding

a means by which new or revised Interpretations and practices can be quickly and easily

communicated to registrants and their adVISers Thus, the Bulletins should not only reduce the staff's workload by ellmlnabng repetrtrous comments and inquiries, but should
save registrants both time and money In the

registration and reporting process.

The first Bulletin (SAB No 1)154was ISsued concurrently with the announcement of

the senes and included a number of Interpretanons and practices broken down under ten

broad tOPiCheadings Eight additional SAB's

dealing with accounting matters of current

concern were ISSUedthrough June 3D, 1976.

Some of the accounting matters dealt with In

SAB's 2 through 9 were statements of pohcy

and interpretations as to disclosure and reporting practices for Real Estate Investment

Trusts, expenencmq dlfflcullJeswith loan portfollOS,155accounting for transactions In which

Real Estate Investment Trusts transfer assets

(usually loans on real estate projects) to bank

holding cornparues In cancellation for debt

owed to them, 156amendments to Form 10-0

and Regulation S-X regarding mtenrn financial reporting,157and amendments to Regulalion S-X requmnq disclosure of Replacement

Cost data 158

Financial Reoturements for Compames In the

Development Stage-In November 1975, the

Commission amended Article 5A of Regulation S-X 159which speciftes the requuernents

for the form and content of financial statements for commercial, mdustnal and mining

companies In the promotional, exploratory or

developmental stage The amendments conformed the Commission's accounting and reporting requirernents WIth Statement No 7,

"Accounting and Reporting by Development

Stage Enterpnses," Issued by the Fmancial

Accounting Standards Board In June 1975.

The Commrssron considered that It should

revise ItSrequirements for the presentation of

hnancral statements by development stage

companressince It had previously announced

that the pronouncements of the FASB Will be

conSideredto constitute substantial authontanvs support for accounting and reporting procedures and practices used In preparrng financial statements filed WIththe Cornnussion

The proposed reVISIOnsto Regulation S-X

were Issued for public comment In July

1975 160Comments received indicated general agreement WIththe proposals.

Article 5A pnor to revision contained specIaliZed requirements for the nnancial statements of development stage cornparues,particularly for balance sheets, and stockholders'

equity Income statements were not required

of development stage companres. When

these specianzed requirernents were adopted

by the Cornrmssron, there were no authontatrve statements of the accounting protession

regarding the approprrate accounting and financial reporting directly applicable to such

companies.

The revisronsto Regulation S-X eliminated

the speoahzed financral statement requirements for companres to which Article 5A had

been applicable and for fiscal perrods beginning on or after December 26, 1975, required

that fmancral statements Issued by development stage enterprrses shall conform to generally accepted accounting pnnciples applicable to established operallng enterprrses, and

that certain additional mtormanon shall be

disclosed In the fmancial statements

Statistical Disclosure by Bank Holding Compames-on October 1: 1975, the Commission authorrzed the publication for public

comment of proposed GUides61 and 3, "Statistical Disclosure by Bank Holding Companies," of the GUides for the Preparation and

Filing of Registration Statements under the

secunties Act and of the GUides for the

Preparation and FIling of Reports and Proxy

and ReglstralJon Statements under the Exchange Act, respectively 161These GUides

are Intended to provide registrants With a

convenient reference to the statistical drsdosures sought by the staff of the DIVISionof

Corporation Finance In registration statements and other disclosure documents filed

by bank holding companres.

Durrng the comment penod, which expired

on November 3D, 1975, the Commission received comments from approximately 115

Interested parties, and the Comrrussron'sstaff

also conferred extensively With representatives of the federal bank regulatory agencies

As the fiscal year closed the staff was In the

process of making recommendations to the

Commission With respect to certain modifications In the proposed GUides, based on the

suggestions made by vanous commentators

and Intended to publish the GUides In final

form In the near future.

As the operations of bank holding companies have diversrtred,It has become increasIngly difficult for Investors to Identify the

sources of Income of such companies. And,

since various sources of Income can have a

Wide range of nsk charactenstics, Investors

33
may have difficulty assessing the future earnmqs potential of a bank holding company

wIthout detailed Information concerning the

company's sources of Income and exposure

to nsks

In prepanng the GUides, the staff has been

mindful of the Investor's need to assess uncertainties, especially through more meamngful disclosure about loan portfolios and related Items In filings by bank holding comparues In addition. many of the disclosures

suggested by the proposed GUides are intended to provide information to tacintate

analysis and comparison of sources of Income and exposure to nsks. Thus. for example, registrants are asked to provide a breakdown of loan portfolios by type of loan Thrs

information will assist Investors to evaluate

the potential Impact of future economic

events upon a registrant's business and earnIngs The same reasoning underlies the suggestions for disclosure of sources of funds

and sensmvtties to Interest-rate fluctuations.

Among other things. thrs information should

help Investors to evaluate the ability of a bank

holding company to move in or out of situations with favorable or unfavorable risk/return

charactensncs

Railroad Act Amendments

Pursuant to section 13(b) of the Exchange

Act, the Commission IS granted authonty to.

among other things, prescribe the appropriate

accounting methods to be used by registrants

filing reports WIth the Commission Section

308(b) of the Railroad Revitalization and

RegUlatory Reform Act.162 as enacted on

February 5. 1976, slgmficantly amended and

expanded thrs authonty As amended. Section 13(b) no longer specincany requires that

the Commission allow ICC regulated earners

to file reports submitted to the ICC In lieu of

the mtormauon specrned by other Commission forms In addition. Section 13(b) now

provides that Commission rules applicable to

registrants whose methods of accounting are

prescnbed by other laws or regulalions may

be inconsistent With the disclosure requirements of the other agencies to the extent that

the Commission determines that the public

Interest or the protection of Investors so requrres.

At the close of the fiscal year the Oornrnrssion was consrdermq certain proposals which

34

are Intended to Implement these amendments. The Oornrrusstcn's final views and

proposals were to be announced In early

September, 1976.

Monthly Publication of Significant

Interpretive Letters

On March 17, 1976. the Commission announced163 that It had authonzed monthly

pubhcanon in the SEC News Digest of a list

of slgmflcant no-action and interpretative letters Issued by the DIVISion of Corporation

Finance. The leiters listed are those wtuch

express certain views of the DIVISion With

respect to novel or Important questions ansIng under the Secunues Act, the Exchange

Act, and the Trust Indenture Act. The list

Indicates the name of the subject company,

the date of the leiter and the pertinent section

of the act, rule or form diSCUSSed.

INVESTMENT COMPANIES

In June 1976. the Cornrrussion approved

the re-narmnq of the Dlvision of Investment

Management Regulation to the DIVISion of

Investment Management, and approved the

transfer of certain functions and personnel to

the DIVISion from the DIVISion of Corporalton

Finance. Both actions are designed to reflect

the Comrrussron's determination that Federal

statutes and regulatIOns affecting moneymanagement acnvrty should be adrrurustered

on a coordinated and, to the extent teasible,

urutorrn baSIS. The DIVISion of Investment

Management Will continue to be responsible

for the adrmrustratron of the regulatory provrsions of the Investment Company and the

Investment Advisers Acts of 1940, and Will

now perform certam functions relaltng to diSclosure requirements applicable to Investment companies and certain Similar types of

Issuers

These changes have also been made to

place the DIVISion of Investment Management

In a better positron to examine the laws

applicable to various types of money-management acnvrties. For possibly the first time

since the enactment of the Investment Company Act, the DIVISion IS undertaking a comprenensive review of each of the provisrons

of thrs statute and of related legislation The

study Will seek to Idenlify Instances of overregulation, remedy legislative gaps and ex-
amine certain entities now excluded from

coverage to determine the appropriateness of

comparable regulation.

In addition, the Drvrsron continued ItSstudy

of an Integrated Investment company registration and reporting system. It IS Intended

that this system will (1) revise and Improve

information contained in prospectuses and

(2) reduce paperwork by eliminating duplication of information currently required In the

forms and reports filed by Investment companies with the Commission

Bank Study

The 1975 Amendments In adding Section

11A(e) to the Exchange Act, authorized the

Commission to study the extent' to which

banks maintain accounts on behalf of public

customers for bUying and seiling secunnes

registered under Section 12 of that Act. The

Commission was authorized to determine

whether the exclusion of banks from the

definitions of "broker" and "dealer" In the

Exchange Act are consistent Withthe protection of Investors and other purposes of that

Act The Commission was directed to report

to the Congress the results of ItS study by

December 31, 1976

The study's major objectives are to (I)

document the extent of bank Involvement In

activities comparable to those performed by

broker-dealers; (II) consider whether exrstmg

regulation adequately protects Investors usIng bank-sponsored securities services; (III)

analyze the economic conditions under which

banks compete with secunties firms and the

Impact, If any, of existmq differences In regulation; (IV) explore the present and potential

Impact of bank-sponsored securities services

on the nation's capital markets; and (v) evaluate the Circumstances, If any, under which

banks offering sscunues services should be

subject to regulations comparable to those

estabhshed for securities firms.

Three major categones of bank secunnes

services were considered as part of the

study: (I) brokerage services, such as diVIdend reinvestment plans, automatic investment services and the forwarding of orders to

brokers as agents for mdivrdual customers;

(II) rnvestrnent management and advisory

services, and (III) corporate nnanonq ("merchant banking") services, such as formal advice and assistance to corporate Issuers In

private placements, mergers, acqursrtrons

and divestitures Since very httle information

concerning those services IS pubhcly available. the study entails the collection of primary

data through questionnaires and interviews

With offrcrals In both the banking and securities industries

Variable Life Insurance

In December 1975, the Cornmrssron announced a proposal to adopt Rule 6e-2 under the Investment Company Act which

would exempt separate accounts formed by

life Insurance companies to fund certain variable life Insurance contracts from the registration requirements of the Act on the condition that such separate accounts comply with

all but certain designated provisrons of the

Act 164 The due date for comments was extended until March 31, 1976.165

A variable hfe Insurance contract differs

from a traditional whole hfe Insurance pohcy

pnnopatly because the death benefit under

the contract mayor may not Increase based

upon the performance of a separate account

of securities In which a portion of the fixed

premiums has been Invested. Moreover, the

Insured accepts the Investment risk that the

cash surrender value of rus policy Will be

higher or lower than It would otherwise be

under a traditional hfe Insurance pohcy, since

thrs value also reflects the performance of the

separate account

The proposal of Rule 6e-2 followed the

granting of an apphcanonIn October 1975 for

an order of exemption from certain provrsrons

of the Act filed by Equitable Variable life

Insurance Company ("EVLlCO"), the Equitable Life Assurance Society of the United

States, and EVLlCO's separate account

which ISregistered under the Act as an openend management Investment company. 166

Currently, the DIVIsion's Office of Insurance

Product Bequlanon IS considennq the comments on the proposed Rule and ISrevieWing

developments relating to the sale of variable

hfe Insurance contracts by EVLlCO, the only

Insurance company In the United States seilIng vanable life Insurance contracts to the

general pubhc

35

225-010
Status of Broker-Dealers as

Investment Advisers

As a result of the ehrnmation of fixed commission rates on exchange transactions on

May 1, 1975, some broker-dealers may elect

to charge separately for Investment advrsory

services which they had previously provided

incidentally to their busmess and without special cornpensanon Since charging separately

for Investment advice would cause such broker-dealers to become "Investment advisers"

Within the meaning of the Investment Advisers Act, the Commission adopted temporary

Rule 206A-1(T), which exempted certain broker-dealers registered under the Exchange

Act (except broker-dealers already registered

as Investment advisers on May 1, 1975) from

the provisrons of the Advisers Act and the

rules and regulations thereunder from May 1,

1975 until August 31, 1975,' 67 to provide

time for a thorough consideration of questions related to the apphcabrlrty of the Advrsers Act to brokers and dealers

This exemption, which was Intended to

enable broker-dealers to adjust to unfixed

cornrrussron rates without the need to comply

With the provisions of the Advisers Act, was

subsequently extended 168 until Apnl 30,

1976, to provide additional time for the Commission to determine whether and In what

form broker-dealers are receiving special

compensation for advisory services and the

potential Impact on such broker-dealers If

they were to become subject to the regulatory

provrsions of the Advisers Act At the same

nme, the scope of the exemption was narrowed to exclude from ItS coverage any broker-dealer who performs Investment supervisory services or Investment management

services for spacral compensation or In a

manner which IS not solely incidental to rus

business as a broker-dealer In order to obtain a more meaningful pool of data on which

to base a permanent resolution of this question, the Cornrrussron, In April 1976, extended

this exemplion until April 30, 1977 '69

A result of charging separately for Investment advice was that such broker-dealers

would be subject to Section 206(3) of the

Advisers Act, which makes It unlawful for an

Investment adviser, If he IS acting as such In

relauon to a particular transaction, to effect

the transaction With or for hrs chent under

Circumstances where the adviser acts either

36

as principal, or as broker for a person other

than hrs chent, unless the adviser furnishes

tus chent With pnor written disclosure of the

capacity In which the adviser IS acting and

obtains the chant's consent to the transaction

On March 31, 1975, the Commission proposed the adoption of new Rule 206(3)-1

under the Advisers Act170 to exempt investment advisers who are also registered With

the Commission as broker-dealers from the

disclosure and consent requirements of Section 206(3) of the Advisers Act With respect to

certain Investment advisory services If such

advisers comply With the conditions set forth

In the proposed rule This rule was adopted

substantially unchanged on August 20,

1975 '7'

Collins v, S.E.C., Murtaugh v.

S.E.C.172

On June 23, 1976, the Court of Appeals for

the Eighth Circuit, one Judge dissenting, set

asrde a Commission order which granted a

JOint apphcatron by E I Du Pont de Nemours

and Company and Chnstiana socuntres

Company for an exemption from the Investment Company Act which would permit the

proposed merger of the two companies Appucanon for a rehearing en banc was denied

on February 27, 1976 The Supreme Court

has granted the Commission's petition for

cernoran. '73

SIGNIFICANT CASES INVOLVING

SECURITIES ACTS

Ernst & Ernst V Hochfelder 174_The complaint alleged that the defendant accounting

firm had aided and abetted the president of a

brokerage firm who, In a Side arrangement,

had perpetrated a fraud on the firm's customers In Violation of Section 10(b) of the

Exchange Act and Rule 10b-5 thereunder In

essence, the theory of the complaint was that

the accounting firm had not exercised appropnate audinnq procedures in ItS annual audits

of the brokerage firm and that trus orrnssron

resulted In the accounting firm's failure to

discover certain practices, the discovery of

which would have led to the discovery of the

brokerage firm president's fraudulent activrties Discovery of such practices. It was further alleged, would have had to have been

reflected In certain reports filed by the broker-
age firm with the Commission and such disclosure would have led to an Investigation by

vanous regulatory authonnes The plaintiffs

contended that such an Investigation, in turn,

would have led to discovery of the president's

fraudulent activities. Thus, a baste Issue

throughout the litigation was whether the accounbng firm was liable for having failed to

discover the fraud of the brokerage firm's

president.

The Commission had not participated In

this Iitigallon In the lower courts nor had It

taken any action against the accounbng firm

When the Supreme Court granted the accounting firm's pennon to review the decrsion

of the court of appeals, it requested the

Commission to give ItS view. The Commission filed an amicus cunee bnef and parncrpated In oral argument.

The Commission argued that Section 10(b)

and Rule 10b-5 were not limited to the prohibmon of mtentional misconduct, but that the

secnon and Rule proscnbed negligent as well

as mtennonal misconduct Inasmuch as VICtims of manipulative and deceptive secunues

practices may be equally Injured by both

types of conduct.

In ItS deosron, the Supreme Court (6 to 2)

rejected the Commission's argument that

there should be some circumstances under

which cIvil damage liability may be Imposed

under Rule 10b-5 for negligent conduct

which Injures Investors The Supreme Court

held, Instead, that a "pnvate cause of action

for damages will [not] lie under 9 10(b) and

Rule 10b-5 In the absence of an allegation of

'scienter'<mtent to deceive, manipulate defraud." It should be noted, however, that the

Court, recognizing that "In certain areas of

the law recklessness IS considered to be a

form of intentional conduct for Imposing habilIty for some act," chose not to address the

Issue "whether, In some circumstances, reckless behavior IS sufficient for crvrl liability

under 9 10(b) and Rule 10b-5" (Ibid, n. 12)

In addition, the Court also determined not to

consider the question "whether scienter IS a

necessary element In an action for injunctive

relief under 9 10(b) and Rule 1Ob-S:' 175

In TSC tndustnes v. Northway, 176 a TSC

rrunonty shareholder had sued TSC and Nanonal Industnes, claiming that a proxy statement ISSUed by the two companies recommending shareholder approval of the proposed merger of TSC With National had been

Incomplete and matenally misleading, In VIOlation of Section 14(a) of the SecunlJes Exchange Act and Rules 14a-3 and 14a-9. The

Supreme Court agreed With the drstnct court

In denying summary Judgment for the plaintiff

shareholder

The Commission, participating as amicus

cunee, suggested that the Supreme Court, In

formulating a standard of matenality under

Rule 14a-9, be mindful that any such standard should balance the need for adequate

disclosure With the adverse consequences of

setting too low a threshold for CIvil liability.

The Court agreed With these considerauons

and stated

an omitted fact IS matenal If there is a

substantial likelihood that a reasonable

shareholder would consider It Important In

deciding how to vote Thrs standard IS fully

consistent With Mills general descnptron of

materiality as a requirement that 'the defect

have a Significant propensity to affect the

voting process' It does not require proof of

a substantial likelihood that disclosure of

the omitted fact would have caused the

reasonable Investor to change hrs vote

What the standard does contemplate IS a

showrnq of a substantial likelihood that,

under all the Circumstances, the omitted

fact would have assumed actual significance In the dshberanons of the reasonable shareholder Put another way, there

must be a substanlJal likelihood that the

disclosure of the omitted fact would have

been Viewed by the reasonable Investor as

havrnq Significantly altered the 'total mix' of

information made available" 177

The proxy statement In question, while

prominently displaying the fact that National

owned 34% of TSC and that five of TSC's

directors were National apporntees, had omitted to state fUlly the degree of control already

exercised by National over TSC Specifically,

there had been no drsclosure that the National officers headed the TSC board and ItS

executive committee and that reports had

been filed With the Commission indicating

that National could be deemed the parent of

TSC The proxy statement, while includmg

the opinion of an Investment banking firm

favorable to the proposed merger, had not

Included a letter from the same firm which the

37
court of appeals believed contained rnforrnanon unfavorable to the proposal Also the

proxy statement did not pomt out purchases

made of National common stock by National

and a mutual fund whose president was

employed by National, even though the pnce

of the National stock was relevant to the

fairness of the merger

The Court, noting that the Issue of matenalIty was a mixed questron of law and fact, held

that a summary Judgment, finding orrussrons

to be matenal as a matter of law, could only

be granted after a finding that the omissions

were" 'so obviously Important to an Investor,

that reasonable minds cannot differ on the

question of matenallty ,

In Radzanower v Touche Ross & Co, et

ai, 178the Supreme Court held that venue In

a SUit against a national banking association

charged with violating the Federal securmes

laws was governed by S 94 of the National

Bank Act,179 which provides that an action

against a national banking association may

be had only In the Federal drstnct court within

the district In which the bank has ItS pnncipal

office The Commission flied a bnef, amicus

curtee, m the Supreme Court, takrnq the

position that the venue provrsrons of the

Secunties Exchange Act, 180as the later-enacted statute, should control when a national

bank IS alleged to have committed a violation

of that Act The Court concluded, however,

that It presented no Insurmountable burden

for Investors bnngmg an action aqainst a

bank to sue where the bank has ItS pnncipal

office, and ruled that the Federal secuntres

laws neither expressly nor Impliedly repealed

the narrow venue provisrons of the National

Bank Act

In Securtties and Exchange Commission v

Research AutomatIOn Corporetion, et ai, 18'

the Court of Appeals for the Second Circuit

reversed, In part, a default injunction obtained

by the Cornmrssron pursuant to Rule 37(d) of

the Federal Rules of CIVil Procedure, which

provides for sanctions In the event a party

falls to appear for a deposition The court

held that such sanctions are unavailable

against a party who IS physicauy present at

ItS deposition but who, "In a Willful effort to

disrupt and to Impede discovery, refuses to

be sworn or to testify" The court stated that

Rule 37(d) must be limited to the case where

a defendant literally falls to show up for a

38

deposition It also stated that a party seeking

sanctions under these circumstances must

first obtain a court order pursuant to Rule

37(a) directing the party to testify, and a

Violation of such order might result m sanctions.

Samuel H Sloan, et al v Secunues and

Exchange Commission, et al 182- The Court

of Appeals affirmed the drstnct court's dismissal of a pro se complaint whrch, among

other thmqs, purported to challenge "the legality of the entire structure of securities

regulation In the United States "'83 In the

course of ItS oprmon. the court held that

certam sections of the Exchange Act and

rules promulgated thereunder, which were

specifically alleged to be unconstitutional,

were In fact "valid and reasonable exercises

of congressional power under the commerce

clause and the SEC's delegated regulatory

power, which Infringe no constitutional rights

of plaintiff "'84 These provrsions Included

Section 27 of the Act (vesting exclusive JUriSdiction of actions brought under the Act In the

Federal courts), Section 12(g) (registration of

secuntres With the Cornrrussron), Sections

15(c)(5) and 19(a)(4) (summary trading suspension power),185 Rule 15c2-11 (antrmarnpulatrvs rule respecting publication of quotanons), Rule 15c3-1 (broker-dealer net capital

rule), and Rule 17a-5 (annual report of broker-dealer financial condition) '86

In Securities and Exchange Commission v

Csapo, 187 the court addressed Rule 7(c) of

the Commission's Rules Relatmg to Investigations, 188a rule which generally prohibits an

attorney from appearing With a witness In an

Investigation when that attorney has prevrously appeared With another witness In the

same mvesnqanon, unless the rule IS waived

by a hearing officer Because the Commission had reason to believe that certain pnnopal targets In an investigation were seeking to

present a Unified front by havmq their attorneys With many of the witnesses In the investigation, the Commission refused to waive

Rule 7(c) when these attorneys sought likewise to appear With Mr Csapo After Mr

Csapo refused to appear Without these attorneys, the Commission Instituted a subpoena

enforcement action In the United States DIStrict Court for the Drstnct of Columbia The

drstnct court refused to enforce the subpoena

unless the Commission allowed the attomeys

"
to accompany Csapo The Comrmssron appealed from this order and the Court of

Appeals for the District of Columbia Circint

affirmed. It said (533 F 2d at 11)

"We do not rrururruze the dangers inherent In counsel representing multiple

chents In a Single proceeding. It IS at

least plausible that as matters develop

the best Interests of Csapo may prove to

be antagonistic to those of [other

persons represented by the same counseL] That decisron, however, belongs to

neither the district court nor the Commission The SEC properly fulfilled ItS duty

by informing those who came before It

whether their lawyers had appeared on

behalf of others and, If so, the possible

confhcts which might arise The choice

must then be made by the witness after

a full and frank disclosure by hrs attorney

of the attendant risks See ABA Code of

Professronal Hesponsrburty, Drsciplmary

Rule 5-105(c)"

Unless the Oornrmssion can present "concrete evrdence" that the presence of the

attorneys would obstruct and Impede investigation, the court stated, the witness' right to

counsel of hrs own choosmq must prevail

In SEC v Geon tnoustries, Inc, 189 the

court of appeals upheld a permanent InJuncnon, Issued upon a finding of a Violation of

Section 10(b) of the Exchange Act and Rule

10b-5 by Geon's president In crsclosmq material nonpubhc information about a proposed

merger between Geon and Burmah 011 Co ,

Ltd., of Great Britain, which disclosure resulted In vanous transactions In Geon shares

The court ruled that the information disclosed

about the probability and progress of the

merger was material, noting that facts relating

to a proposed merger could become material

at an early stage because of the Importance

of the event to the company

The court reversed the district court's dismissal of the Commission's complaint against

Geon's secretary-treasurer who had responded In the negative to an inquiry from an

Exchange offrcral as to whether problems

With the proposed merger accounted for an

Imbalance In the amount of sell orders for

Geon stock, when, In fact, he was In possession of information which Indicated otherwise

In holding that, under the Circumstances, the

secretary-treasurer had Violated Rule 10b-5,

the court emphasized that, while the unverified Information might have been misleading

If made pubhc, failure to disclose such Information upon mqurry of the Exchange prohibited the Exchange from reaching an Informed

decrsron on whether to suspend trading In

Geon shares

The court affirmed the dismissal of the

complaint against a broker-dealer on the

ground that the Cornrrussron had failed to

show the trading on msrde information by one

of Its registered representatives resulted from

a lack of reasonable supervision on the part

of the firm

Abrahamson v Fleschner 190_At the request of the Court of Appeals for the Second

Circurt, the Cornrmssron filed a brief, emtcus

cunee, In ttus private htlgatlon addressinq

certain Issues raised under the Investment

Advisers Act The Cornrrussion stated ItS view

that a private CIVil action should be permitted

for Violations of the antifraud provisrons of the

Advisers Act 191Under the rationale of recent

Supreme Court cases,192 the Cornrrussron

argued that a private right of action should be

rrnphad because chents of Investment adVISers are members of the class for whose

esoecral benefit the Investment Advisers Act

was enacted, because a private right of action IS consistent With the underlying purposes of the legislative scheme of the Act

and IS Implied by ItS clear purpose, and

because the remedy provided by the antifraud provisrons IS not equivalent to any exrstIng right of action for fraud under common

law

The Commrssron noted In ItS brief that In

December 1975, It had pubhcly announced

that It had submitted leqrslatrve proposals to

the Congress which would amend the Investment Advisers Act In several ways One of

these proposals was that Congress "clarify

the existence of a pnvate nght of action

based on a Violation" of the Act 193 As the

Cornrrussion noted in ItS brief, the fact that It

IS seeking clarification of the private right of

action In order to put an end to the confusron

which exrsts With respect to thrs Issue 194

should In no way be construed as indicating

that a private right of action cannot be rrnphed

from the present statutory scheme

In ItS brief, the Cornrrussron also took the

positron that a partnership havmq as ItS pnn39
opal purpose to Invest and trade In secunties, and the partnership's general partners,

who had the sole power to make Investment

deosrons for the partnership, were "investment advisers" as defined In the Investment

Advisers Act 195The statutory definition, the

Comrmssronasserted, was meant to Include

persons who, like certain of the defendants In

this action, manage the funds of others for

compensation and In the process exercise

discretion over the Investments made with

those funds

In addition, the Oomrnrssronexpressed In

ItS brief ItSviews as to the proper method of

cornpunnq any damages which the plaintiffs

could demonstrate they suffered as a result

of defendants' alleged vrolanonsof the lnvesment Adviser Act. The Court of Appeals has

not yet ruled In the matter

In the Matter of Cavanagh Communities

Corporation 196_The District Court for the

Southern District of New York, on appeal

from an order of a bankruptcy judge, held, In

accordance with the views expressed by the

CornrrussronIn an amicus cunee brief, that

the Cornrrnssionhas pnmary junsdictron In a

question dealing with a stock exchange's

decision to dellst a security,

Cavanagh Communrlles Corporation IS a

publicly-held corporation With common stock

and debentures listed on the New York Stock

Exchange (NYSE), On February 18, 1975,

Cavanagh filed a petition for an arrangement

under Chapter XI of the Bankruptcy Act. On

the same date, the NYSE suspended trading

In Cavanagh's secuntres and announced an

intention to apply to the Comrrussronfor delIstlng Cavanagh thereafter petitioned the

bankruptcy JUdge for an Injunction against

initiation of dell sting procedures by the

NYSE

The bankruptcy Judge concluded that the

hsling was "property" Within the summary

junsdrcnon of the court. Moreover, since tradIng In the secunnes was already suspended,

the bankruptcy judge reasoned that there

would be no Injury to the public If the dshsnnq

application was temporarily eruoined AccordIngly, he entered the injunction and the NYSE

appealed

The Cornrrussronfiled an amicus brief urgIng the district court to reverse the bankruptcy

judge on the ground that the dellsting of

securities IS a matter exclustvely Within the

40

junsdicnon of the Cornrmssron The Commission pointed out that Secbon 12(d) of the

Exchange Act specifically provides that the

proper tribunal to judge the appropnateness

and necessity of dellstlng ISthe Comrrussron,

and further that judrcial review was available

on a petition for review of any Comrrussron

order In the court of appeals. Thus, It was not

proper for the bankruptcy judge to Interfere

With the dellsting procedures by decrdmq

whether there would be Injury to the public In

the absence of delistlng.

In an opinion which closely parallels the

reasoning of the Cornrtussron's brief, Judge

Duffy reversed the bankruptcy judge and vacated the preliminary injunction. The court

noted that "the statutory authonty of the SEC

over listing and delisting of secunnes on an

exchange IS pervasive and comprehensive,'

and that the "existence of thrs regulatory

structure indicates congressional concern

that the skill and expenence of the SEC be

applied to delistlng procedures." In response

to Cavanagh's argument that dehstmq would

be Imprudent and unnecessary at the present

time, the court noted that the proper course

for Cavanagh was to present ItSviews to the

OomrrussronIn response to NYSE's dehstlng

applicabon.

Holdsworth v, Strong 197_ln thrs action,

the distnct court found that the defendant

Violated Section 10(b) of the Exchange Act

and Rule 10b-5 thereunder, by knowrnqly

making false statements regarding a corporabon's ability to pay drvidends to Induce the

plaintiffs to sell their stock In the corporation

to him and that plaintiffs had reasonably

relied upon these false statements.tw The

drstnct court further found that the defendant

concealed the true frnaneral condruon of the

corporanon from the plamnffs.

On appeal, the majority of the panel of the

United States Court of Appeals for the Tenth

CirCUitfound that the plaintiffs had failed to

exercise due diligence In connecuon Withthe

transaction and that their lack of due diligence precluded their recovery.

The Comrrussronfiled a bnef, amicus curtee, when the court agreed to rehear the

case, en banco ArgUing that the court should

hold intentional fraudulent conduct actionable

under Rule 10b-5 even If the Victim was

negligent In falling to discover the fraud, the

Commission expressed ItS concern that a
contrary ruling would encourage persons to

chance secunnes fraud since they may be

able to retain their Ill-gollen gains simply by

showing that the victim was negligent.

Given the broad purposes underlying Section 10(b) and Rule 10b-5, and the Supreme

Court's recoqnmon In Ernst & Ernst v. Hochfelder 199 of a pnvate nght of action for intentionally fraudulent conduct, the Commission

argued that under the above standards the

due diligence defense should be rejected.

The court of appeals, sittmq en banc, reversed the onqmal panel.

Tannenbaum v Zeller200 presented the

question of whether fully Informed and truly

Independent directors of a mutual fund are

precluded, under the Investment Company

Act, from exercrsmq any discretion and good

faith business Judgment In determining

whether to use a portion of the cornrrussrons

paid by the fund on brokerage transactions to

reward broker-dealers which sold fund shares

or provided research services Instead of racaptunng such excess commissions for the

fund's direct cash benefit

The Issue arose because of the minimum

fixed-brokerage commission rate structure

that prevailed on the exchanges until May 1,

1975, when It was prohibited by the Commission. Under that system, persons were compelled to pay brokerage cornrrussionsaccordIng to a fixed rate which did not reflect

economies of scale As a result, the brokerage comrmssrons paid by mutual funds far

exceeded the actual cost to the broker. The

mutual funds had essentially two ways to use

these excessive commissions-they could

channel the excess to brokers which provided

the fund With sales or research services or

they could, through a vanety of devices,

recapture the excess In the form of a direct

cash benefit for the funds

The fund In Tannenbaum had chosen to

use the excess to reward brokers providing

sales and research services The plaintiff

sued on the ground that the defendant investment adviser had caused the fund to take trus

course In Violation of ItS nduciary duty As a

defense, the adviser argued that the decisron

to forego recapture of the excess commissions had been made by the dismterested

members of the board of directors In the

exercise of a good faith business Judgment,

and that the adviser could not be held liable

for carrying out the mstrucnons of the board

The drstnct court agreed Withdefendant, and

plaintiff appealed to the Court of Appeals for

the Second Crrcurt

In an amicus cunae bnef, the Comrrussion

argued that the recapture decisron was one

that could be commilled to the discretion of

the dismterested members of the board of

directors. Crucial to thrs POSitionwas the fact

that this case arose In the context of rapidly

changing market conditions which created

substannal equities In favor of the defendants

In this case. In addition, the structure of the

Investment Company Act and two pnor decsrons by courts of appeals indicated that the

recapture question was one area where independent and drsmteresteddirectors could exercise busmess Judgment In the context of

this case, contrary to the general expenence

of the Commrssron, the drstnct court had

found that the directors were truly independent of the Investment adviser The court had

also found that the directors were fully informed of available alternatives for usinq the

excess cornrrussrons. Under those circumstances and In view of the unique market

condrnons prevailing at the time the events

occurred, the Cornrrussroncould not conclude

that the directors' Judgmentto forego recapture was not reasonable

The case IScurrently awaiting decisron by

the court of appeals

Pargas, Inc v. Empue Gas 201_ The action

was brought by the target company (Pargas,

Inc) to eruoma tender offer. At the request of

the court, the Cornrrussionfiled a letter With

the court expressing ItSviews on the applicability to tender offers of Regulation T, adopted

by the Board of Govemors of the Federal

Reserve System pursuant to Section 7 of the

Exchange Act The Comrrussron noted ItS

practice of refernng requests for interpretations of the Regulation to the Board In view

of ItSresponsibilities for enforcmq the Regulation, however, after consultation Withthe staff

of the Board, the Oomrmssron advised the

court that It was In agreement With the

Board's staff that the Regulation applied to

tender offers and that the arrangement of

credit Involved In the action appeared not to

be Withinany exemption provided In the Regulation.

In Ayres v. Memll Lynch, Pierce, Fenner &

Smith, Inc, 202 the Court of Appeals for the

41
Third Circutt reversed a drstnct court Judgment confirming a decisron rendered by arbitrators of the New York Stock Exchange. The

action arose when plaintiff Ayres retired from

his position as a registered representative

with Merrill Lynch, and Merrill Lynch then

exercised ItS nght to repurchase 8,000 shares

of ItS stock which Ayres, as an employee, had

been permitted to buy, At the time It repurchased the stock from Ayres, Merrill Lynch

did not disclose that It planned to make a

public offenng of ItS common stock Platntlff

brought SUIt under Section 10(b) of the Exchange Act clarmmq Merrill Lynch had WIthheld matenal non-public Information wruch, If

he had known, would have caused him to

delay his voluntary retirement and thus not

tngger the repurchase of his stock

The distnct court granted Merrill Lynch's

motion for a stay of procesdmqs pending

arbitration based on ItS contention that the

controversy was one arrsmq out of Ayres'

employment, subject to compulsory arbitration pursuant to agreement between Ayres

and Merrill Lynch. The arbitrators subsequently rendered a decision adverse to Ayres

on all claims, and the distnct court confirmed

the decision

The court of appeals concluded, In agreement With the views set forth by the Cornrmssron, amicus cunee, that the applicable

NYSE rule was "not Intended to cover a

controversy that has a causal connection to

the fact of employment as remote as that

mvolved'' or "the assertion of legal nghts

having a source wholly Independent of the

employment relatronsrup." To conclude otherWIse would be to place on the arbitrators the

responsibnrty for applying legal pnncples that

are far removed from the NYSE's Interests In

self-governance and "the specialized knowledge of Industry needs and practices that

makes arbitration appropnate when the terms

and conditions of the employment relationship are at Issue"

Moreover, even If the NYSE rule were

Intended to govern the situation, the court

held that agreements to arbitrate future federal secunnes controversies would be unenforceable because of the anti-waiver provision of Section 29(a) of the Exchange Act

and Wilko v. Swan, 346 U S 427 (1953),

which held that the anti-waiver provrsron of

the Secunties Act rendered VOid a prospec42

tlve agreement between a brokerage firm anc

a customer which would have required arb

tranon of the customer's claim under Secbon

12(2) of the Secunnes Act. The prospective

waiver of a nght to a judicral tnal of a cause

arising under the secunues laws IS "inconsistent WIth Congress' ovarndmq concern for the

protection of Investors," Slip op. 8

Finally, the court dismissed Merrill Lynch's

remaining claims, (1) that no cause of action

was stated because Ayres' sale was totally

Involuntary, and (2) that Section 28(b), which

preserves the validity of action taken by a

self-regulatory organization "to settle disputes between members or parnopants," exempts the NYSE rule from the invalidating

effect of the anti-waiver provrsion The case

was remanded to the drstnct court

One jUdge dissented on the grounds that

Since Merrill Lynch had an "unfettered" right

to repurchase Ayres' stock, he had no Investment choice to make In the matter HIs deersion was not whether to sell secunnes, but

whether to retire. Therefore, no information

was matenal to Ayres' Investment decision

and his complaint failed to state a cause of

action under Rule 10b-5.

Commission Litigation

SEC v. National Student Marketmg

Corp 203_As previously reported, Anthony

M Natelll, then an auditing partner of Peat,

Marwlck, Mitchell & Co., and Joseph Scansaroll, a former audit supervisor with that firm,

were convicted In the Southern Distrrct of

New York for their part In prepanng mtenrn

unaudited fmancial statements for National

Student Marketing Corp. which appeared In a

proxy statement delivered to the shareholders and filed WIth the Cornmrssron In 1969.

An appeal was taken to the United States

Court of Appeals for the Second CirCUIt.

In affirming Nateill's convrcnon, the Court

enuncrated Important standards of responsrbility for an accountant faced With the opportunity to correct falsehoods In previous nnancials of which he should be aware In subsequent mterrrn, unaudited, financral statements.204 The court concluded that "[t]he

accountant owes a duty to the public not to

assert a priVilege of Silence untIl the next

annual statement comes around In due time"

Nateill's petition for cernoran was denied The

court reversed Scansaroli's convicnon as to
one specification of the count of the Indictment under which he was tned for lack of

sufficient evrdence, and ordered a new tnal

with respect to the other count to correct a

faulty jury charge. That trial is scheduled to

begin In October.

Dunng the previous fiscal year, the Drstnct

Court granted the Commission's motion to

stnke a certain affirmative defense asserted

by a number of the defendants The defendants alleged that the Commission's Injunctive

acnonshould be dismissed because the staff,

dunng the course of the Investigation, failed

to Inform prospective defendants of their status as targets of an Investigation and to solicit

their views as to why they should not be

sued. Defendants alleged that this was reqinred by the rules and requlations of the

Commission The Distnct Court, finding that

no such rule existed, struck the defense as

legally Insufficient. The rUlingwas certified for

Interlocutory appeal under 28 U.S.C.

1292(b). The United States Court of Appeals for the Distnct of Columbia Crrcuit upheld the Commission's POSitionand affirmed

the District Court's ruling. A motion for reconsrderatronISpending.

Over the Commission's objections, thrs action was consolidated by the Judicial Panel

on Multldlstnct litigation Withseveral pending

pnvate SUitS concerning National Student

Marketing. The resulting litigation caused a

substantial delay In the progress of the Commission's action. As a result of thrs type of

expenence, a request was directed to Congress for legislation to Insure the Commission's nght to avoid such Involuntary consolidation In the future. Congress responded In

1975 by adding Section 21(g) to the Exchange Act, which requires the Commission's

consent for future consolidations under 28

U S.C. 1407(a).

Thrs action has been the subject of one of

the most comprehensive pretnal discovery

programs In the Cornrrussron's expenence.

The testimony of more than one hundred

thirty witnesses has consumed forty thousand

pages of transcnpt, Five thousand documents

have been marked for Identification, and

many times that number have been produced

for inspection. With thrs lengthy process

nearly complete, the Commission's action Will

proceed to a separate tnal late In 1976 or

early In 1977.

SEC v. Unned Brands Company, et alThe Commission obtained on consent a permanent mjunctron and other relief against

Untted Brands Company The Commission

alleged Violations of the reporting and antifraud provrsrons of the Exchange Act In connection WithUntted Brands' failure to disclose

substantial payments to officials of foreign

governments In order to secure favorable

treatment In connection WithItSbusiness operations In those countnes 205

In addition to the entry of an order of

permanent injunction, certain ancillary relief

was ordered by the court and undertaken by

United Brands inclUding, among other things,

the follOWing:

A. An order requmnqthe Board of Directors

of United Brands to create and maintain a

Special Committee to investigate and report

to the Commission, the Court and Untted

Brands' Board of Directors on the matters

contained In the Commission's complaint, on

all other payments from 1970 to date made to

otncrals and employees of foreign governments which were unlawful under the laws of

the foreign countries Involved, and any unlawful political contnbunons made In any foreign country The procedures and methods

utilized by the Special Committee and the

Final Report shall be fully reviewed by MIchael Sovern, Dean of the Faculty of Law of

Columbia University.

B. United Brands undertook that With respect to any matenal unlawful expenditure of

corporate funds to an ofncral or employee of

any foreign government, It WIllobtain the pnor

approval of the United Brands Board of Directors as to any such transaction and pnor to

entenng such transaction, publicly disclose

the full details of the transaction, whether or

not such details are otherwise matenal

SEC v Emersons. Ltd, et aI-The Commission filed a complaint seeking injunctive

relief against Emersons Ltd. ("Emersons"), a

corporation With pnncrpal offices In Maryland

which operates approximately 42 restaurants,

and two former officers, John P. Radnay

("Radnay") and Ell LeVI ("LeVI"). Radnay,

Emersons' largest shareholder, was the

chairman of the board and president of Emersons. LeVI was the treasurer and executive

vice president of Emersons

The Commission's complaint alleged that

Emersons received substantial payments of

43

~

~
rnorues from a brewer of beer, a beer wholesaler and producer of liquor, and a producer

of wines and drstnbutor of liquor which were

made In order to Induce Emersons to purchase their products for resale In Its restaurants According to the complaint, Emersons'

books and records were falsified with respect

to the payments

The complaint further alleged that Radnay,

In order to conceal the use of a part of the

payments from one beer supplier for hrs own

purposes at the end of 1974 talsifted certain

of Emersons' records and made false statements verbally and In correspondence sent to

agents of the Bureau of Alcohol, Tobacco

and Firearms and gave false testimony with

respect to the payments to the Commission

The complaint further alleged that Emersons failed to disclose In vanous filings with

the Commission the use of substantial

amounts of Emersons' funds by Radnay and

approximately $9,000 by LeVI for home Improvements and other uses accruing to their

personal benefit In connection with the alleged Improper use of these funds, Radnay

and LeVI caused false entnes to be made In

Emersons' accounting records

The Cornrrussron also alleged that Emersons' fmancial statements for the 1974 and

1975 fiscal years, the mtenrn periods In the

1975 fiscal year and the Income statement for

the first quarter of Emersons' 1976 frscal year

were false and misleading In that advertismq

and computer software costs were Improperly

capitalized The 1975 fiscal year reported

earnings were contrived In order to meet

projections of Income, year-end meat mventones were overstated, an Insurance claim

was Improperly Included In the 1975 accounts

receivable balance without disclosure, the

1975 accounling method used for Inventory

valuation was changed from that used In

1974 without disclosure, and vanous Items In

the 1975 year-end Inventory were arbrtranly

Increased

Emersons was required to appoint and

maintain on Its Board of Directors three additional Independent directors, satisfactory to

the Commission and approved by the court,

and appoint as replacements for any present

board members who cease to serve as directors, such additional Independent directors In

order that such directors constitute a majority

44

of Emersons' Board of Directors Emersons IS

also to maintain an ExeculJve Committee of

the Board, a majonty of whose members are

to be Independent directors. The Board of

Directors IS to appoint a new chief executive

officer and chief financial officer for Emersons

A majonty of the Independent directors are

to appoint a Special Counsel The Special

Counsel IS to Investigate the matters alleged

In the complaint and other matters he deems

appropnate, make an accounting, file a report

of rus findings With the court, and, With the

approval of certain of the directors, take appropnate action Including the msntutron and

prosecution of SUitSon behalf of Emersons

The judgment entered against Radnay restncts the POSitions he can hold With Emersons for a penod of time, and restricts rus

access to cash or other assets of Emersons

and orders him to make an accounting and

pay over to Emersons such morues and other

assets of Emersons used for tus benefit

Radnay, the principal sharholder of Emersons, IS further ordered to place all Emersons' secuntres owned or controlled by him In

a voting trust to be controlled by an independent trustee, selected by him and approved by the Commission, for a penod of

five years but he IS not prohibited from selling

or pledging rus secunuss In addition, Radnay, who IS a lawyer, resigned from practice

before the Commission and agreed not to

practice before the Cornrrnssron Without pnor

Oornrrussron approval

The Judgment against LeVI enjoins him

from serving for a penod of two years as chief

financial or executive officer of Emersons or

any other pubhc company In which hrs duties

encompass preparation or filing of reports

With the Commission Although LeVI may continue to serve as a director of Emersons, the

JUdgment restricts rus actions and may requrre hts resignation depending upon the

findings of the Special Counsel and subsequent deosron of the Board of Directors. LeVI

IS, In addition, ordered to make an accounting

and pay over to Emersons such rnomes and

other assets of Emersons used for hrs benefit In addition, LeVI, who IS an accountant,

has agreed not to practice before the Commission, provided that after two years, he

may apply to the Commission to practice
SEC v Amercten Institute Counselors

Inc -On November 25, 1975, the Cornrrussion obtamed InjunclIons agamst Amencan

Institute Counselors, Inc. ("AIC"), Amencan

Institute for Economic Research CAlER"),

certam related SWISS and liechtenstem corporattons including SWISS Credit Bank and

SWISSLife Insurance and Pension Company,

and certam individuals seekmg a Judgment of

Permanent Injunction and certain other rehef

The Commission alleged a fraudulent

scheme and course of business whereby the

defendants, directly and mdtrectly, offered to

sell and sold to U S Investors vanous goldrelated secunnes, In near total disregard for

and m violation of virtually the entire panoply

of Federal secuntres laws, mcludmq the securities registration, antifraud, record-keepmg

and broker-dealer, mvestment company and

Investment adviser reglstralJon provisrons

The Distnct Court also ordered certam anCillary rehef, mdudmg, among other things,

the appointment of a Special Counsel and a

Special Auditor, the appointment of new independent trustees for the entities and an Invesnqanon into the matters alleged. The judgment also provided that no distnbutton of

funds should be made, WIthout the court's

prior approval, to any Investor SUbsequently,

three of the SIX named Individuals consented

to permanent injunctions enjOining violations

of the Federal secunnes laws,

The court also restrained certain of the

defendants Including the SWISSand liechtenstein entities, from, among other things, effecting any transactions or exercismq any

powers with respect to certain Investment

arrangements offered and sold by the defendants to U S. Investors SWISSCredit Bank

was ordered to transfer to ItS New York

branch office all assets underlymq such Investment arrangements by the bank on behalf of the defendants. 206

SEC V The General Tire & Rubber Company -The Commission obtained on consents permanent injunctions and ancillary rehef against The General Tire & Rubber Company and Michael Gerald O'Neil, a director

and president of General Tire. The Commission alleged various Violations of the secunlIes laws In connection With the making of

substantial Improper and Illegal payments totalhng In excess of several rrnlhon dollars of

General Tire corporate funds, the makmg of

domestic political contnbutrons and Improper

payments to officrals and employees of varIOUSgovernments. the talsficatron of corporate books and records, the utrhzatron of

unrecorded and unaccounted funds, Violations of foreign currency laws. and the flhng

of matenally false and misleading annual and

penodic reports With the Commission

In addition to permanent injunctions, certain ancillary rehef was ordered. including the

estabhshment of a Special Heview Committee, consisting of General Tire's Independent

directors, and the retention of a Special

Counsel to conduct an Investigation Into.

among other things, the use of corporate

funds for unlawful pohtrcal contributions and

Improper payments to foreign or domestic

government officrals and employees, the use

of secret or unrecorded funds. the use of

agents and consultants for unlawful or Improper purposes, and such other matters as

may be revealed dunnq the course of the

investigation.

SEC V Medic-Home Enterpnses, Inc, et

al -In December 1975, In the United States

Distnct Court for the Southern Drstnct of New

York,207 the Commission Instituted an injunctive action agamst Medic-Home Enterpnses,

Inc, a corporation engaged In the business of

developing and owrunq nursing homes and

related health-care facilities, Bernard Bergman, former chairman of the board of MediCHome. Samuel A Klurman. president of

Medic-Home, MOrriS Shrrudrnan, former president and presently a director of Medic-Home,

and Stanley Bergman, Amram Kass and

Moses Braunstein, all former directors of

Medic-Home The complaint charged the defendants With vrolatrons of the antifraud, reporting, proxy, sohcrtatron and tender offer

provrsions of the Federal secunnes laws

The Commission alleged that, beginning on

or about January 1, 1970. and continuing to

the present, the defendants caused MedicHome to enter Into various transactions

among themselves WIth the result that corporate assets were used for the beneftt of such

defendants The Commission further alleged

that the defendants concealed matenal aspects of these transactions In materials filed

With the Commission and disseminated to the

pubhc

45
Medic-Home, Klurman, Shrrudrnan and

Braunstein each consented to permanent InJunctions pursuant to which Medic-Home will

be required to appoint three Independent

directors satisfactory to the Commission and

approved by the court The Independent directors, who will remain on Medlc-Home's

board for two years, shall conduct an mvesngatlon Into certain Medic-Home transactions,

file with the court and furrush the Commission

with copies of their findings and recommendations, and cause Medic-Home to correct

filings previously made with the Commission

SEC v Geo Dvnemics 0,1 and Gas,

Inc 208_ln June 1976, the Commission filed

a complaint seeking Injunctive and other relief

In the U S Drstnct Court for the Drstnct of

Columbia, naming as defendants Geo Dynamics all and Gas, Inc, and Milton A.

Dauber, of Jenkintown, Pa , Comprehensive

Resources Corporallon, Geo Resources Corporation, CRC Corporation, Geo Resources

Management Corporation, William J Soter,

and Marlin J Fnbush, all of New York, New

York, B L Floyd, of Corpus Chnstr, Texas

(all of the above referred to In the complaint

as the "Geo Defendants"), Jack P Janetatos

and Walter A Slowinski, of Washington,

DC, and Fortune Enterpnses, Inc, Richard

Katcher, and Willian J Kraus, of Cleveland,

Ohio

The Commission's complaint charged the

Geo defendants With Violations of the antifraud provrsions of the Federal secuntres

laws, In connection With the offer and sale,

between 1970 and 1973, of over $80 million

In registered and unregistered limited partnership Interests In "leveraged" 011 and gas

dniling ventures, offered and managed by the

Geo defendants A pnme appeal of the offermg was the claim that Investors would be

entitled to claim on their tax returns, m the

year of their Investment, Intangible dniling

costs ("IDC's") equal to two or three times

the amount of their cash invested ("leveraged

deductions")

The complaint alleged that the offenng documents used to offer and sell the partnership's Interests-prospectuses, ccnudennal

memoranda (unregistered offenng Circulars),

and tax opiruon letters-eontamed matenally

false and misleading disclosure of the substance of the transactions on which the lever46

aged deductions were to be used and of the

matenal nsks of adverse tax treatment by the

Internal Revenue Service and the courts, and

further alleged that millions of dollars In frontend management fees were taken from

Investors by the Geo defendants on a fraudulent baSIS

In addition to the allegations of Violations of

the antifraud provrsrons, the complaint

charged Geo Resources Management Corporation, Geo Dynamics all and Gas, Inc,

Comprehensive Resources Corporation,

CRC Corporation, William J Soter, and Milton A Dauber With vrolatrons of the reglstralion and reporting provrsrons of the secunnes

laws, and Fortune Enterprises, Inc, William

J Kraus and Richard Katcher With Violations

of the broker-dealer provrsions

In addition, the complaint alleged that defendants Janetatos and SlOWinski, of Washmqton, 0 C , on behalf of their law firm, aided

and abetted the Geo defendants' antifraud

Violations In Issuing tax opinion letters on the

taking of the leveraged deductrons, which

opinion letters were drstnbuted by the Geo

defendants to prospective Investors or their

advisors. and In reviewing prospectuses contamed In the reglstrallon statements for certain of the dnllmq funds The complaint alleged that defendants Janetatos and SlOWInski knew or should have known facts concerning the substance of the method of operations of the Geo defendants' dnlhnq ventures, such that they should have known that

their opinion letters and the prospectuses did

not fully and fairly descnbe the proposed

method of operations of the 011 and gas

dniling ventures In all respects matenal to the

tax consequences, and did not fUlly and fairly

describe all matenal nsks of adverse tax

treatment

The complaint noted that the Internal Revenue Service, after conducting an audit of the

1971 and 1972 dnlling programs, has decided to disallow the deductions based on the

non-recourse "loan" transactions, on the

grounds, among others, that such transactions are shams for tax purposes, and that

over 2,000 limited partners Will face disallowance of over $80,000,000 In deductions

based on the non-recourse "loan" transactions

Defendants Janetatos and Slowmski consented to a final order prohibiting them from
rendering any tax opinion or advice. In connscnon WIth any tax-oriented secunnes offerIng, without taking reasonable care, including

reasonable and appropriate mquiry and Investigation, to assure themselves that the

proposed method of operations of any entity

formed as a result of the offering IS fully and

fairly descnbed In all respects material to the

tax treatment on their tax opinion letter or any

other offering document, and that all material

risks of adverse tax treatment are fully and

fairly described In their opinion letters or In

any other offering document As part of their

settlement With the Commission, these defendants agreed to obtain review by sxpenanced and knowledgeable secunnes counsel

of the adequacy of disclosures In opinion

letters and offering documents, before rendering any opinions or advice

Defendant Katcher consented to a Judgment prohibiting him, In connection With the

offer and sale of tax-onented secuntres, from

rendering any tax or other advice or recornrnendatron, or'offennq and seiling such securities, to any chent or other persons, Without

informing such person, where applicable, that

he or any entity With which he IS associated

Will receive any comrrussron or other compensation; and from acting as an unregistered

broker-dealer.

The complaint seeks permanent injunctive

rehef against future Violations of the relevant

provisions of t!'le Federal secuntres laws by

the remaining defendants, as well as the

dlsgorgement by the Geo defendants to the

hrrutsd partners of those portions of management fees based on the sham non-recourse

"loan" transactions, and the Issuance of an

order maintaining and preserving the assets

of defendant CRC Corporation and subsroaries pending a final deterrrunanon of the

allowablhty of tax deductions claimed by the

hmlted partners.

SEC V Braniff AIrways, Incorporated 209_

On March 24, 1976, the Cornmrssron obtained by consent permanent rnjunctrons

agamst Braniff Airways, Incorporated, ItS parent corporation, Braniff International Corporation, Harding L. Lawrence, C. Edward Acker

and Charles S. South

The Oornrrussron alleged that dunnq the

penod from 1969 to the date of the complaint

defendant Braniff Airways, and at certain

times the other defendants, maintained a

secret fund of corporate monies and unaccounted-for arrhne tickets With a potential

value of over $900,000, that defendants

Braniff Airways, Lawrence, Acker and South

caused $40,000 In rnorues from trns fund to

be used In connection With a Single Illegal

political contribution made In 1972, and that

defendants Braniff Airways, Acker and South

caused the remaining rnorues and tickets

from the fund to be distributed as extra consideranon to travel agents, tour groups and

promoters In order to promote the company's

rnternatronal and foreign travel business In

Violation of the Federal AViation Act, foreign

law and lnternanonal Air Transport ASSOCIation ("lATA") resolutions

As part of their consent to trns order, the

corporate defendants have undertaken to

continue their ongoing investigation With respect to such payments and With respect to

all other relevant matters as may be revealed

In the course of such Investigation The corporate defendants have further undertaken to

file a report of that investigation With the

Comrmssron and the Court.

SEC v Parklane HOSiery Co, Inc 210_ln

May 1976, the Cornrrussron Instituted an Injunctive action against Park lane HOSiery Co.,

Inc and Parklane's president, chairman of

the board and majority stockholder, charging

them With violations of the antifraud, proxy

and reporting provisrons of the Federal securities laws

The complaint alleges that the defendants

Violated the Federal securities laws In connection With the purchase and sale of Parklane securities relating to the merger of Parklane WIth a private company which resulted In

Parklane's conversion from a pubhcly-held

company to a privately-owned company In

connection With Parklane's conversion to the

status of a privately owned company, the

complaint alleges that the defendants engaged In a scheme whereby they made false

and misleading statements and omitted other

material facts regarding various facets of the

company's scheme to become a private corporanon Among other things, Parklane's failure of disclosure concerned the fact that

Parklane's corporate status was changed so

as to enable Parklane's president to appropriate Parklane's assets for hts own personal

47
benefit (specifically to reduce his own personal Indebtedness), the true status of negotiations regardmg cancellation of certain of

Parklane's leasehold nghts, and the fact that

the defendants had not provided their appraisers, hired to determine the true value of

Parklane stock, with adequate mtorrnauon to

make a proper evaluation.

The complaint seeks a permanent InJuncnon against further violations by the defendants and various anellary relief, Including the

appointment of a Special Counsel, with broad

powers, to conduct an investigation of Parklane, so as to protect and preserve Parklane's assets and the rights of Park lane's

former public shareholders

In June 1976, an injunctive hearing was

held and completed and the Court reserved

decisron on the Commission's motions for a

preliminary injunction and ItS motion to consolidate the prelimmary hearing with a permanent Injunctive trial

SEC v. Joseph Ayoub 211_ The Commission sought to enjorn two brokers and an

employee of a financial printing firm from

further violations of the antifraud provisrons of

the Federal securities laws m connection with

the possession, dissemination and misuse of

material non-public information concerning an

impendmq tender offer The complaint

charged that Charles Boehm, an employee of

a financial printer, provided the brokers with a

printer's proof of the tender offer prior to the

public announcement of the offer It was

further alleged that the two brokers then

purchased and recommended the purchase

of a total of 16,500 shares of the target

company's stock, which was trading on the

American Stock Exchange. The three defendants all consented to iruunonons and the

disqorqement of profits obtained by virtue of

their conduct

NOTES TO PART 1

1 Act of June 4, 1975, Pub L No 94-29,

89 Stat 97 [hereinafter Cited by section as

1975 Amendments]

241 st Annual Report, p. 8, 40th Annual

Report, p 4.

3 41st Annual Report, pp 9-11

48

4 SEC AdVISOry Committee on the Implementation of a Central Market System, Supplementary Report (September 12, 1975).

5 Section 11A(d) of the Exchange Act

which was Section 7 of the 1975 Amendments

6 Securities Exchange Act Release No.

11623 (August 28, 1975), 7 SEC Docket 757.

7 Securities Exchange Act Release No.

11942 (December 9, 1975), 8 SEC Docket

756.

8 Section 7 of the 1975 Amendments.

9 SEC, Report of the Securities and Exchange Commission on Rules of National

Securities Exchanges Which Umit or Condition the Ability of Members to Effect Transactions Otherwise than on Such Exchanges

(Seotember 2, 1975).

1b Securities Exchange Act Release No.

11628 (September 2, 1975), 7 SEC Docket

762.

11Securities Exchange Act Release No

11942 (December 19, 1975), 8 SEC Docket

756

121d. 8 SEC Docket 769-771.

131d 8 SEC Docket 757

141d 8 SEC Docket 773-776 The composrte limit order book IS discussed at pgs. 5-6,

mfra

15Securities Exchange Act Relase No.

12281 (March 29, 1976),9 SEC Docket 316;

Securities Exchange Act Release Nos.

12242-12248 (March 23, 1976), 9 SEC

Docket 249-54

16Securities Exchange Act Release No.

12249 (March 23, 1976),9 SEC Docket 255

17Letter from James E Buck, Secretary,

New York Stock Exchange to Bart Friedman,

ASSistant Director, DIVIsion of Market Regulalion, July 2, 1976.

18Securities Exchange Act Release No.

12664 (July 28, 1976), 10 SEC Docket 106.

19Securities Exchange Act Release No

11942 (December 19, 1975), 8 SEC Docket

756.

20ld.

21Securities Exchange Act Release No.

12159 (March 2, 1976),9 SEC Docket 76.

22SEC, Statement on the Future Structure

of the Secunues Markets (February 2, 1972),

37 Fed Reg. 5286 (1972)

23SEC, Poltcy Statement on the Structure

of a Central Market System (March 29,

1973)

2441st Annual Report, pp. 13-14.

25Securities Exchange Act Release No

9529 (March 8, 1972)

26Securities Exchange Act Release No

10969 (August 14, 1974),5 SEC Docket 735;

see 41st Annual Report, pp. 13-14

27Securities Exchange Act Release No.

12670 (July 29, 1976), 10 SEC Docket 108

2B 41st Annual Report, p. 11; 40th Annual

Report, p 7; 39th Annual Report, p 9.

29Securities Exchange Act Release No.

12138 (February 25,1976),9 SEC Docket 8

30Securities Exchange Act Release No.

12175 (March 8, 1976),9 SEC Docket 128.
31 Secuntres Exchange Act Release No

12162 (March 3, 1976),9 SEC Docket 85

32 Secunties Exchange Act Release No.

11461 (June 11,1975),7 SEC Docket 145.

33 Secuntres Exchange Act Release No

11951 (December 24,1975),8 SEC Docket

894

34 Sacuntras Exchange Act Release No.

12432 (May 12, 1976),9 SEC Docket 623

35 Secunties Exchange Act Release No

11468 (June 12, 1975), 7 SEC Docket 150,

see 41 st Annual Report, p 15

36 Certain of these amendments were activated only upon commencement of the high

speed data transmission line contemplated

by Phase II of the JOint Industry Plan for

Implementation of a consolidated transaction

reporting system See Secunnes Exchange

Act Release No 12138 (February 25, 1976),

9 SEC Docket 8 This occurred on April 30,

1976 See text accornpanymq notes, 28-34,

supra

37 Securmes Exchange Act Release No

11468 (June 12,1975),7 SEC Docket 150

38 Secunties Exchange Act Release No

12384 (April 28, 1976), 9 SEC Docket 495

39 Letters from Bart Friedman, Divrsion of

Market Regulation to American Stock Exchange, Inc, Boston Stock Exchange, Inc,

Cincinnati Stock Exchange, Inc., Detroit

Stock Exchange, Inc, Midwest Stock Exchange, Inc., Pacifrc Stock Exchange, Inc,

and PBW Stock Exchange, Inc (August 1

and 2, 1975).

40 Securilies Exchange Act Release No

12432 (May 12, 1976),9 SEC Docket 623

41 Securitres Exchange Act Release No

11828 (November 14, 1975), 8 SEC Docket

444

42 Secunties Exchange Act Release No

11948 (December 23, 1975),8 SEC Docket

791.

43 Secuntres Exchange Act Release No

12015 (January 14, 1976), 8 SEC Docket

1026

44 Secunties Exchange Act Release No

12451 (May 14,1976),9 SEC Docket 675

45 Secuntres Exchange Act Release No

12114 (February 18, 1976), 8 SEC Docket

1300

46 Secuntias Exchange Act Release No

12461 (May 19, 1976), 9 SEC Docket 678

47 Letter from Merrill Lynch, Pierce, Fenner

& Smith, Inc ("Merrill Lynch") to Lee A

Pickard, Director, Drvisron of Market Regulation (September 4, 1975), Letter from Lee A.

Pickard to Merrill Lynch (September 30,

1975), Letters from Dean Witter & Co ("Dean

Witter") to Lee A Pickard (October 10 and

30, 1975); Letter from Andrew M Klein, AsSOCIate Director, DIVISion of Market Regulation to Dean Witter (November 26, 1975),

letter from Mitchell, Hutchms Inc. ("Mitchell,

Hutchins") to R J Mornsey, III, DIVISion of

Market Regulation (May 5, 1976).

48 Securities Exchange Act Release No

12380 (April 27, 1976), 9 SEC Docket 494,

Secuntles Exchange Act Release No 12381

(April 27, 1976), 9 SEC Docket 494

49 Securities Exchange Act Release No

12157 (March 2, 1976), 9 SEC Docket 45

50 Secunties Exchange Act Release No

12181 (March 11, 1976), 9 SEC Docket 131

51 secunnes Exchange Act Release No

12055 (January 27, 1976), 8 SEC Docket

1155.

52 See Secunties Exchange Act Release

No 12055, at n 3 (January 27, 1976),8 SEC

Docket 1155.

53/d at 1-3

54 E g, Sscunnes Exchange Act Release

No 12056 (January 27, 1976),8 SEC Docket

1163 (NYSE rules)

55 S Rep. No 75, 94th Cong, 1st Sess

121 (1974). In thrs context, the term "selfregUlatory organization" denotes national secunties exchanges and the NASD, the sole

national secunnes organization.

56 Secunuss Exchange Act Release No

12352 (April 20, 1976), 9 SEC Docket 450

57 Secuntres Exchange Act Release No

12483 (May 26, 1976),9 SEC Docket 731

58 See 41st Annual Report, p 17.

59/d. at 18

60 Secuntres Exchange Act Release No

11748 (October 16,1975),8 SEC Docket 99

61 Secuntres Exchange Act Release No

11935 (December 17, 1975). 8 SEC Docket

808

62 Secuntrss Exchange Act Release No

11497 (June 26, 1975), 7 SEC Docket 241

63 See S. Rep No 75, 94th Cong, 1st

Sess 43 (1974).

64 Section 15(a) generally requires brokers

and dealers utiliZing the malls or any means

or Instrumentality of Interstate commerce to

effect transactions In (or to Induce or attempt

to Induce the purchase or sale of) secunues,

other than exempted secuntrss and certain

money market Instruments, to become registered With the Commission

65 The term "municipal secunnes dealer" IS

defined by Section 3(a)(30) of the Act to

Include banks (or their separately Identifiable

departments or divrsions) acting as dealers

With respect to municipal securities On the

other hand, the terms "broker" and "dealer"

employed In Section 15(a) of the Act are

defined by Sections 3(a)(4), (5) of the Act to

exclude banks

66 Unlike Section 15(a), Section 15B(a) of

the Act contains no exemption from registration for municipal securities dealers unhzmq

the JUrisdictional means to conduct an excluSively Intrastate business.

67 Securities Exchange Act Release No

11469 (June 12,1975),7 SEC Docket 157.

68 Secunties Exchange Act Release No

11635 (September 5, 1975), 7 SEC Docket

831.

69 Secunties Exchange Act Release No.

11741 (October 15,1975),8 SEC Docket 80.

70 Secunties Exchange Act Release No

11585 (August 11, 1975), 7 SEC Docket 553

71 Secunties Exchange Act Release No

11742 (October 15, 1975),8 SEC Docket 82

49
72 Secuntres Exchange Act Release No

11881 (November 28, 1975),8 SEC Docket

636

73 Secunnes Exchange Act Release No

12602 (July 7, 1976),9 SEC Docket 1045

74 Sacurttres Exchange Act Release No

11656 (September 16, 1975), 7 SEC Docket

872, Securities Exchange Act Release No

11561 (July 30, 1975), 7 SEC Docket 471,

Securities Exchange Act Release No 11497

(June 26, 1975),7 SEC Docket 241

75 Secuntres Exchange Act Release No

11854 (November 20, 1975),8 SEC Docket

459.

76 The provisrons effected by these temporary amendments Included, among others,

Rule 15c3-1 (c)(1 )(1) (exclusion of certain adequately coltatanalrzed Indebtedness from

aggregate Indebtedness), Rule 15c3-

1(c)(2)(lv)(C) (exclusion from net worth of

certain receivables), Rule 15c3-1(c)(2)(vl)(M)

(haircuts against unduly concentrated securities positions), Rule 15c3-1 (c)(2)(lx) (treatment of aged falls to deliver), Rule 15c3-

1(f)(1)(alternatlve net capital requirement as

applied to certain rnurucipal secunties brokers

effecting transactions only with other rnurucrpal securities professionals

77 Securities Exchange Act Release No

12482 (May 26, 1976),9 SEC Docket 722

78 As temporarily amended, Rule 15c3-

1(f)( 1)(a) permits brokers and dealers effectIng transactions solely In murucipal secuntres

to operate thereunder while maintaining net

capital at least equal to the greater of

$25,000 or 4% of aggregate debit Items computed under the Reserve Formula, 17 CFR

!l240 15c3-3a (1976) Ttus temporary

amendment, which lowered the minimum net

capital dollar requirement under Rule 15c3-

1(f)(1)(a) from $100,000 to $25,000, made

the alternative net capital requirement available to smaller municipal secunnes firms which

would experience difficulty In maintaining the

$100,000 of net capital normally required by

Rule 15c3-1 (f)(1 )(a)

79 "SeCUrities and Exchange Commission

Only" The term refers-and SECO rules

apply-to those brokers and dealers who are

not members of the National Associanon of

Securities Dealers, Inc

80 Secunnes Exchange Act Release No

11876 (November 26, 1975). 8 SEC Docket

541

81 Rule 23a-1(T) also provided municipal

secuntres brokers a temporary exemption

from the requirement In Securities Exchange

Act Rule 15c1-4 that a bro'ker disclose either

the name of the person from whom the

security was purchased or to whom It was

sold, or the fact that such Information Will be

furnished upon request Trus requirernent

previously had applied to municipal secunnes

brokers See Securities Exchange Act Release No 11876 (November 26, 1975), 8

SEC Docket 541

82 Sacuntres Exchange Act Release No

12468 (May 20, 1976). 9 SEC Docket 681

50

83 Securitres Exchange Act Release No.

11854 (November 20, 1975), 8 SEC Docket

459

84 Securrtres Exchange Act Release No

12362 (April 23, 1976),9 SEC Docket 482.

85 See 41st Annual Report, pp 15-17,40th

Annual Report, pp 8-9; 39th Annual Report,

pp. 10-11.

86 See 41 st Annual Report, p. 15

87 Proposals pending before the Commission at year's end would establish 200 additional Amex memberships for "opnons pnncipal members" who generally would be restncted to effecting options transactions for

their own accounts

88 Securrtres Exchange Act Release No.

12283 (March 30, 1976),9 SEC Docket 317.

89 See 41st Annual Report, P 16.

90 Pacmc Stock Exch R I, S 12(k).

91 Seeuntres Exchange Act Release No.

11972 (January 2, 1976), 8 SEC Docket 973

(CBOE), Securities Exchange Act Release

No. 12231 (March 18, 1976),9 SEC Docket

216 (Amex), Securities Exchange Act Release No. 12333 (April 12, 1976), 9 SEC

Docket 407 (PHLX); Secunties Exchange Act

Release No 12508 (June 3, 1976), 9 SEC

Docket 788 (PSE)

92 See Secuntres Exchange Act Release

No 12601 (July 7, 1976), 9 SEC Docket

104493 See, e.g, Chicago Bd. Options Exch. R

8 5(a), which prohibits CBOE "market makers" (speciahsts) from effecbng floor transaclions Without a Letter of Guarantee from a

dearing member

94 Secunues Exchange Act Release No

12148 (February 26, 1976), 9 SEC Docket

11

95 See 41 st Annual Report, pp. 4-5 for a

descnption of the allocation of authonty and

responsibility under Section 17A.

96 Secbon 3(a)(23) of the Act defines the

term "clearing agency" to Include clearing

corporations and deposrtones. Generally,

clearing corporations clear and settle transactions between participating broker-dealers

Deposttones usually hold securities certificates and effect delivery between participants

by book entry

97 Secunties Exchange Act Release No.

11787 (November 3, 1975), 8 SEC Docket

328 .

98 Secuntres Exchange Act Release No

11875 (November 26, 1975), 8 SEC Docket

540

99 See Secuntres Exchange Act Release

Nos 12274 & 12428 (March 29 & May 11,

1976), 9 SEC Docket 305, 622.

100 See secunnes Exchange Act Release

Nos 11904 & 12109 (December 5, 1975 &

February 18, 1976), 8 SEC Docket 694,

1298 One entity subsequently Withdrew ItS

application for exemption and filed an application for registration

101 Securities Exchange Act Release No

12489 (May 28, 1976), 9 SEC Docket 764

The Commlssion published notice of the filing

• '
of NSCC's application for registration as a

clearing agency In Secunbes Exchange Act

Release No, 12274 (March 29, 1976),9 SEC

Docket 305.

102 Depending upon the entity seeking regrstranon, Its appropnate regulatory agency

may be the Commission or one of the three

Federal bank regulatory agencies (I e, the

Board of Governors of the Federal Reserve

System, the Comptroller of the Currency, or

the Federal Deposit Insurance Corporation)

See Sscunnes Exchange Act 93(a)(34)(B).

103 Secuntres Exchange Act Release No

11759 (October 22, 1975), 8 SEC Docket

203 The rule and form were proposed in

Securities Exchange Act Release No. 11622

(August 28,1975),7 SEC Docket 719

104 Section 17A(d)(3)(A)(I) of the Act provides that the Commission and the Federal

bank regulatory aqenoes shall consult with

each other at least fifteen days before proPOSingor adopting any rule concerning transfer agents for which the Commission IS not

the appropnate regulatory authority

105 Secuntles Exchange Act Release No

12440 (May 12, 1976),9 SEC Docket 627

106 Securities Exchange Act Release No

11708 (October 3,1975),8 SEC Docket 4

107 SEC, Prellmmary Report on the Practice of Recordmg the Ownership of Secunties In the Records of the Issuer tn Other than

the Name of the Beneficial Owner of Such

Secunties (December 4, 1975)

108 H Conf. Rep. No. 229, 94th Cong., tst

Sess 104 (1975)

109 Secunnes Exchange Act Release No.

12030 (February 3, 1976), 8 SEC Docket

1092.

110 Secunbes EXchange Act Release No

11872 (November 26, 1975),8 SEC Docket

535 At the same time, the Commission

adopted Secuntres Exchange Act Temporary

Rule 17f-2(T), a blanket exemption from fingerprinting requirements intended to afford

the industry sufficient time to prepare to Implement a frnqerprmnnq program

111 Secunnes Exchange Act Release No

12214 (March 30, 1976), 9 SEC Docket 203

112 S. Rep No 75, 94th Cong., 1st Sess , 9

(1975).

113 Secunties Exchange Act Release No

11673 (September 23, 1975), 7 SEC Docket

918

114 Secuntres Exchange Act Release No

12035 (January 22, 1976), 8 SEC Docket

1099

115 See Secuntres Exchange Act Release

No 12079 (January 6, 1976), 8 SEC Docket

1236, Securities Exchange Release No

12190 (March 10, 1976), 9 SEC Docket 141,

Secunbes Exchange Act Release No 12688

(August 4, 1976), 10 SEC Docket 174.

116 Secuntles Exchange Act Release No

12036 (January 22, 1976), 8 SEC Docket

1100

117 Securities Exchange Act Relase No

11763 (September 23, 1975), 7 SEC Docket

918

118 Report to Congress on "The Effect of

The Absence of Fixed Rates of Comtmssions," December 1, 1975.

119 Second Report to Congress on "The

Effect of The Absence of Fixed Rates of

Commissions," March 29, 1976.

120 Third Report to Congress on "The Effect of The Absence of Fixed Rates of Commissions," August 10, 1976

121 Secunties Exchange Act Release No.

12251 (March 24, 1976),9 SEC Docket 259

122 Secunties Exchange Act Release No

11860 (November 20, 1975), 8 SEC Docket

473

123 See Securities Exchange Act Section

15A(b)(6)

124 Securities Act Release No 5673 (February 2, 1976), 8 SEC Docket 1192

125 Secunues Act Release No 5707 (May

18, 1976),9 SEC Docket 671

126 Secunties Act Release No 5699 (April

23, 1976), 9 SEC Docket 472

127 Secunties Act Release No. 5581 (Apnl

28, 1975).6 SEC Docket 746.

128 Securities Act Release No 5362 (February 2, 1973), 1 SEC Docket 4 12917 CFR 240 14a-9

130 Securities Act Release No. 5609 (August 25, 1975),7 SEC Docket 696.

131 Investigation In the Matter of Beneficial

Ownership, Takeovers and Acquismons of

Securities by Foreign and Domestic Persons,

Secuntres Act Release No 5526 (September

9, 1974),5 SEC Docket 115; Secunties Act

Release No 5538 (November 5, 1975), 5

SEC Docket 406.

132 Secunties Exchange Act Release No

11617 (August 25,1975),7 SEC Docket 712

133 Secuntres Exchange Act of 1934, Section 12(m)

134 Secunbes Act Release No 5526 (September 9, 1974), 5 SEC Docket 115; Secunties Act Release No 5538 (November 5,

1975),5 SEC Docket 406

135 Secunnes Act Release No 5728 (July

26, 1976), 10 SEC Docket 92

136 The proposed amendments would

amend the Rule as to Use of Forms 5-7 and

S-16 to (1) allow their use If the Issuer has

any class of secuntres registered on a national securrnes exchange, (2) require compliance With Sections 13 and 14 of the Exchange Act for three calendar years and

timely filing thereunder for twelve calendar

months, (3) reduce the no-default requirement to three years; (4) reduce the net Income requirement to $250,000 for three of

the last four fiscal years, Including the latest

fiscal year, and (5) eliminate the contmuuy of

management and earned divrdends requirements

137 The proposed amendments to Forms

S-7 and S-16 published for comment in

Secunties Act Release No 5613 (September

11, 1975), 7 SEC Docket 827, were incorporated in the present proposals and repub51
Iished for comment

138Securrties Act Release No 5723 (July

2, 1976), 9 SEC Docket 1014

139Secunties Act Release No. 5530 (October 3,1974),5 SEC Docket 208

140SecUrities Exchange Act Release No

12619 (July 12, 1976), 10 SEC Docket 15

141The Items to be transferred to Form 10-

Q Include Item 3 (Legal Proceedings); Item 4

(Changes In Secunties), Item 5 (Changes In

Security for Registered Secunttes), Item 7

(Increase In Amount of secunnes Outstandrnq), Item 8 (Decrease In Amount of Securities Outstanding); and Item 11 (Submission

of Matters to a Vote of Security Holders)

142Secuntres Exchange Act Release No

12506 (June 2, 1976), 9 SEC Docket 760

143Secuntres Act Release No 5717 (June

8,1976),9 SEC Docket 818

144Secuntres Exchange Act Release No

12598 (July 7, 1976), 9 SEC Docket 1030

145Secuntres Exchange Act Release No

12599 (July 7, 1976), 9 SEC Docket 1040

146Secuntres Exchange Act Release No

12374 (April 23, 1976),9 SEC Docket 487

1479 SEC Docket 540

148Securities Act Release No 5569, 6

SEC Docket 257

149The background of thrs proceeding and

JUdge Richey's opinion are descnbed In

greater detail In the Comrrussron's 41 st Annual Report at page 25

150Secunnes Act Release No 5627 (October 14, 1975),8 SEC Docket 41

151Secuntres Act Release No 5706 (May

12, 1976), 9 SEC Docket 612

152Secunties Act Release No 5588 (May

30, 1975), 7 SEC Docket 62

153Accounting Series Release No 180

(November 4, 1975), 8 SEC Docket 324

154Staff Accounting Bulletin No 1 (November 4, 1975),8 SEC Docket 364

155Staff Accounting Bulletin No 4 (January

29, 1976),8 SEC Docket 1181

156Staff Accounting Bulletin No 5 (February 13, 1976),8 SEC Docket 1330

157Staff Accounting Bulletrn No 6 (March

1,1976),9 SEC Docket 115

158Staff Accounting Bulletin No 7 (March

23, 1976), 9 SEC Docket 295, Staff AccountIng Bulletin No 9 (June 17, 1976), 9 SEC

Docket 916

159Accounting Series Release No 181

(November 10, 1975),8 SEC Docket 402

160Securities Act Release No 5601 (July

31, 1975), 7 SEC Docket 457

161Securities Act Release No 5622 (October 1, 1975), 7 SEC Docket 969

16245 USC 801 (February 5, 1976)

163Securities Act Release No 5691 (March

17,1976),9 SEC Docket 180

164Investment Company Act Release No

9104 (December 30, 1975), 8 SEC Docket

932

165Investment Company Act Release No

9161 (February 17, 1976), 8 SEC Docket

1321

166Investment Company Act Release No

52

8888 (August 13, 1975), 7 SEC Docket 588,

Investment Company Act Release No 8992

(October 16,1975),8 SEC Docket 195

167Investment Advisers Act Release No

455 (April 23, 1975),6 SEC Docket 726

168Investment Advisers Act Release No.

471 (August 20,1975),7 SEC Docket 662

169Investment Advisers Act Release No

506 (April 1, 1976), 9 SEC Docket 359.

170Investment Advisers Act Release No

448 (March 31, 1975), 6 SEC Docket 549

171 Investment Advrsers Act Release No

470 (August 20,1975),7 SEC Docket 686.

172 532 F 2d 584 (C A 8, 1976)

173Sup Ct No 75-1870, 75-1872

174 US , 96 S Ct 1375 (March

30,1976).

175Similarly, In an earlier footnote the

Court remarked that It "need not consider

wnether CIVil liability for aiding and abetting IS

appropriate undeq Secnon 10(b)] and [Rule

10b-5], not the elements necessary to establish such a cause of action" (96 S Ct at

1380)

176 96 S Ct 2126 (1976).

mid at 2133, quoting, Mills v Electnc

Auto-Lste Co, 396 US 375,384 (1970)

178-- U S - , No 75-268 (March 30,

1976)

17912USC 94

180Section 27 of the Securities Exchange

Act, 15 USC 78aa

181521 F 2d 585 (C A 2, 1975) 182535 F 2d 676 (C A 2, 1976) 183535 F.2d at 678

1841d

185The complaint was filed prior to enactment of the Securities Acts Amendments of

1975 which, among other things, consolidated the Commission's summary trading

suspension power In the new Section 12(k) of

the Act

186535 F 2d at 678

187533 F 2d 7 (C A DC, 1976) 18817 CFR 9240 7(c) 189531 F 2d 39 (C A 2, 1976) For a

orscussion of the district court proceedings In

thrs case, see 41st Annual Report, p 104.

190C A 2, No 75-7203

191Section 206 of the Investment Advisers

Act of 1940,15 USC 80tH>

192See Cort v Ash, 422 U S 66, 78

(1975), Securities Investor Protection Corp

v Barbour, 421 US 412,418-420 (1975).

193 See Investment Advisers Act Release

No 491 (December 15, 1975),8 SEC Docket

744

194 Cf, e g , Bolger v Laventhol, Krekstetn,

Horwath & Horwath, 381 F Supp 360

(S D NY, 1974) with Gammage v Roberts,

Scott & Co, CCH Fed Sec L Rep 1194,761

(S D Cal, 1974)

__ --
195 Section 202(a)(lI) of the Investment Advisers Act, 15 U S.C. 80b-2(a)(lI)

196 F. Supp. (S D.N.Y , 1976).

197 No. 75-1144'(C A. io, 1976)

198 No. G-19Q--73 (D. Utah, Dec. 23,1974)

199 96 Sup. Ct. 1375 (1976).

200 C A. 2, Docket No 75-7503.

201 D. Md , Civil Action No 76-676.

202 C.A. 3, No. 75-2007 (decided June 28,

1976), CCH Fed, Sec L Rep.1f95,643

20J See 41 st Annual Report, p 39

204 Unned States v Netelh, 527 F.2d 311

(C.A 2, 1975).

205 See litigation Release No 7251.

206 See Litigation Release No 7183

207 See litigation Release Nos 7207 and

7424

208 See litigation Release No 7423

209 See litigatIOn Release No 7327

210 See Litigation Release No 7383

211 See Litigation Release No 7416

53

_ -
Part 2

The Disclosure

System

A basic purpose of the Federal securities

laws IS to provide disclosure of material,

financial and other mtorrnauon on companies

seeking .to raise capital through the public

offenng of their secunues, as well as companies whose securities are already publicly

held. This alms at enabling Investors to evaluate the securities of these companies on an

Informed and reahsnc basis

The Securities Act of 1933 generally reqinres that before secunnes may be offered

to the public a registration statement must be

filed With the Commission disclOSing preSCribed. categories of Information Before the

sale of secunues can begin, the registration

statement must become "effective" In the

sales, Investors must be furnished a prospectus containing the most Significant Information

In the registration statement

The Secuntres Exchange Act of 1934 deals

In large part With securities already outstandIng and requires the registration of securities

listed on a national securities exchange, as

well as over-the-counter secunnes In which

there IS a substantial public Interest Issuers

of registered secunuss must trle annual and

other penodic reports designed to provide a

public file of current material information The

Exchange Act also requires disclosure of

matenal information to holders of registered

secunnes In sohcrtatrons of proxies for the

election of directors or approval of corporate

action at a stockholders' meeting, or In attempts to acquire control of a company

through a tender offer or other planned stock

acqutsrtron It provides that insiders of companies whose equity secunties are registered

Part 2

The Disclosure

System

must report their holdings and transactions In

all eqmty secuntres of their companies

PUBLIC OFFERING: THE 1933

SECURITIES ACT

The baste concept underlying the Securities Act's reqrstratron requirements IS full disclosure The Commission has no authonty to

pass on the merits of the secunnes to be

offered or on 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

secuntres

Information Provided

While the Secuntres Act spectres the mlormatron to be Included In registration statements. the Commission has the authority to

presence appropriate forms and to vary the

particular Items of information required to be

orsctosed To tacihtate the registration of secuntres by different types of Issuers, the

Commission has adopted specral registration

forms which vary In their disclosure requirements so as to provide maximum drsdosure

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 Forms S-7 and

S-16, which do not require disclosure of

matters already covered In reports and proxy

57
matenal filed or distributed under provisions

of the Secunties Exchange Act. Another short

form for registration under the Sscunnes Act

IS Form S-8 for the registration of securities

to be offered to employees of the Issuer and

ItSsubsidiaries Recent Commission proposals for the amendment of the three forms

referred to above are discussed in Part One

of the Annual Report

Reviewing Process

RegistratIon statements filed WIththe Comrmssion are examined by ItS DIVISionof Corporation Finance for compliance With the

standards of adequate and accurate disclosure Various degrees of review procedures

are employed by the Divrsion." WhIle most

dencrenoes are corrected through an informal letter of comment procedure, where the

Commission finds that matenal representations In a regIstration statement are rrusleadIng, Inaccurate, or Incomplete, It may, after

notice and opportunity for heanng, Issue a

"stop-order" suspending the effectIveness of

the statement

Time for Registration

The Commission's staff tnes to complete

exammanon of registration statements as

qUickly as possible The Secunues Act provrdes that a regIstration statement shall become effective on the 20th day after It ISfiled

(or on the 20th day after the filing of any

amendment). Most registration statements require one or more amendments and do not

become effective until some urns after the

statutory 2D-day penod The period between

the filing and effective date ISIntended to give

investors an opportunrty to become familiar

With the proposed offering through the dissemination of the preliminary form of prospectus The Comrmssion can accelerate the

effective date to shorten the 20-day waIting

period-taking Into account, among other

things, the adequacy of the intormauon on

the Issuer already available to the public and

the ease With which facts about the offering

can be understood

DUringthe 1976 fiscal year, 2,801 reglstralJon statements became effective. Of these,

289 were amendments filed by Investment

58

companies pursuant to Section 24(e) of the

Investment Company Act of 1940, wruch provides for the registration of additional securities through amendment to an effective registration statement rather than the filing of a

new registration statement For the rernarrunq

2,512 statements, the median number of calendar days between the date of the original

filing and the effective date was 29.

Financial Analysis and

Examination

DUring the fiscal year, the Office of the

Chief Frnancral Analyst of the Divisron of

Corporation Finance began a quarterly pubjcanon for the staff about the current status of

the nanon's economy and siqruftcant trends

affecting specific industries. It provides the

staff With Interpretation of leading econorruc

Indicators, With rdennficanon and descnpnon

of new vehicles of financmq and With projections on type and volume of prospective

financmg It also comments on novel fmancmg patterns devised to obscure the true nature of reported transactrons, uncovered

through a quarterly review of investigatory

files of the DIVISionof Enforcement.

By the end of the fiscal year, the Office of

the Chief Financial Analyst mmated an mtensrve review of the real estate industry, now In

progress.

Office of Oil and Gas

The D,VISion'SOffice of all and Gas has

processing responsibility for all 011 and gas

dnlllng program fIlings, as well as filings covenng fractional undivided Interests in 011 and

gas nghts Fifty registratIon statements were

filed dUring fiscal 1976 for 011 and gas drilling

programs, totaling $530,338,420 And fifteen

reglstraIJonstatements covering fractional undiVided Interests In 011 and gas rights were

fIled aggregating $4,988,775.

In addition to the direct processing of those

fIlings, the Office of Orl and Gas ISresponsible for reviewing the disclosure relalJngto the

oil and gas busmess and propernes, including

data on producnon and reserves of 011 and

gas, contained In other fllmgs directly processed by the several branches of the DIVISion

of Corporation Finance In frscal year 1976,

such other filings consisted of 208 reglstra-
non statements under the Secunnes Act and

8 offenng circulars pursuant to the Regulation

A exemption thereunder, as well as 74 registration statements and proxy statements under the Exchange Act

Additional information regarding offenngs

of fracbonal undivided Interests IScontained

under Regulation B In thrs part.

Real Estate and Other Tax

Shelters

On March 17, 1976,2 the Commission

adopted a gUideto the "Preparation of Registration Statements Relating to Interests In

Real Estate Limited Partnerships" Onqmally

proposed for public comment on March 1,

1974,3 the gUide contains the comments and

suggestions developed by the DIVIsion of

Corporation Finance In processing registration statements relating to real estate limited

partnerships. The gUide generally emphasizes drsclosure relating to the nsk and the

conflict of Interest Inherent In many such

offenngs, the compensation paid to the program sponsors, the performance record of

the sponsors In pnor offenngs, and the tax

ramification of these types of offenngs.

As a result of the gUide's adoption and the

recent decline In reqrstranonstatements relatIng to real estate limited partnerships, the

Divisron ISno longer processing these filings

In one specialized branch However, registration statements relating to other non-oil and

gas types of tax shelters, such as cattle

feeding and breeding, aqnbusmess and leasIng, as well as condominium offenngs, Will

continue to be processed In a separate

branch

SMALL ISSUE EXEMPTION

The Commission ISauthonzed under Section 3(b) of the Securities Act to exempt

sscunnes from registration If It finds that

reglstrabon for these secunnes ISnot necessary to the public Interest because of the

small offenng amount or limited character of

the public offenng. The law mposes a maximum limitation of $500,000 upon the size of

the Issues which may be exempted by the

Commission.

The Oomrmssronhas adopted the follOWing

exemptive rules and regulabons'

Regulabon A General exemption for

U.S and Canadian Issues

up to $500,000.

Regulation B Exemption for fractional

undrvided Interests In 011 or

gas nghts up to $250,000

Regulation E' Exemption for secunties of

a small business investment company up to

$500,000.

Regulation F' Exemption for assessments on assessable stock

and for assessable stock

offered or sold to realize

the amount of assessment

up to $300,000

Rules 234-237; Exemptions of first lien

240' notes, secunnes of cooperative housmq corporations, shares offered In

connection With certain

transactions, certain secuntres owned for five years

and certain limited offers

and sales of small dollar

amounts of secuntres by

closely-held Issuers.

Regulation A

Regulation A permits a company to obtain

needed capital not In excess of $500,000

(Including underwnbng commissions) In any

one year from a public offenng of ItS secunties Without registration, provided specified

conditions are met Among other things, a

notification and offering circular supplying

baSICinformation about the company and the

secunnes offered must be filed WIththe Comrrnssron, and the offenng circular must be

used In the offenng In addition, Regulation A

permits seiling shareholders not In a control

relationship With the Issuer to offer In the

aggregate up to $300,000 of secunnes which

would not be Included In computing the ISsuer's $500,000 ceiling

Dunng the 1976 fiscal year, 240 notifications were filed under Regulation A, covenng

proposed offenngs of $83,528,448 compared

WIth 265 nonncanons covenng proposed offenngs of $91,287,296 In the pnor year. A

total of 478 reports of sales were filed reportIng aggregate sales of $41,116,935 Such

reports must be filed every SIXmonths While

an offenng ISIn progress and upon Its terrru59
nation Sales reported dunng 1975 had totaled $49 million Vanous features of Regulation A offenngs over the past three years are

presented In the statistical section of the

report

In fiscal 1976, the Commission temporanly

suspended 10 exemptions where It had reason to believe there had been noncompliance

With the condmons of the regulation or With

disclosure standards, or where the exemption

was not available for the secunnes Added to

8 cases pending at the beginning of the fiscal

year, this resulted In a total of 18 cases for

drsposmon Of these, the temporary suspension order became permanent In 12 cases In

3 by lapse of time, In 2 after heanngs, and In

7 by acceptance of an offer of settlement SIX

cases were pending at the end of the fiscal

year

Regulation B

Regulalion 8 provides an exemption from

registration under the Secuntres Act for public

offenngs of fractional undrvided interests In 011

and gas nghts where the initial amount to be

raised does not exceed $250,000, provided

certain conditrons are met An offenng sheet

disclosing certain baSIC and matenal Information of such offenng must be furnished to

prospective purchasers at least 48 hours In

advance of sale of these sacunues

Form 8-10 IS available for the registration

of fractronal undrvrded Interests In 011 and gas

nghts where the Initial amount to be raised

exceeds $250,000 or where the exemption IS

unavailable for any other reason

Dunng the 1976 fiscal year, 365 offenng

sheets and 462 amendments thereto were

filed pursuant to Regulation 8 and were examined by the Office of all and Gas of the

Drvisron of Corporation Finance Sales dunng

1976 under these offenngs aggregated $22 5

million Dunng the 1975 fiscal year, 625 offerIng sheets and 672 amendments were filed

covenng aggregate sales of $35 4 million For

the fiscal year 1974, 625 offenng sheets were

filed With 751 amendments thereto, covenng

aggregate sales of $29 1 million

In fiscal 1976, the Cornrrussron temporanly

suspended the Regulation 8 exemption for

27 offerors where It had evidence that the

offerors had failed to comply With certain

requirements

60

On December 30, 1975, the Cornnussion

amended Rule 310 under Regulation 8 under

the Secunnes Act4 and adopted a statement

regarding seiling practices under that regulation The amendment requires the furnishing

of satisfactory assurance to the Cornrrussion

that the relevant State secuntres administrators have been notified of a proposed offenng

pursuant to Regulation 8

The Cornrrussron took the opportunity In

thrs release to caution offerors regarding their

responsibility under the Federal secuntres

laws, In view of recent allegations that certain

offerors under Regulation 8 have been engaged In high pressure sales campaigns

On December 23, 1975, the Cornrrussion

proposed an amendment to Rule 306 under

Regulation 85 to requrre Interests exempt

under that regulalion to be offered or sold

only by registered brokers or dealers. Under

the amendment, the Issuer would not have to

be a registered broker or dealer If all offers

and sales of Interests created by the Issuer

for purposes of an offenng pursuant to Regulation 8 were made exclusively by a registered broker or dealer .

Regulation E

Under Section 3(c) of the sscunnes Act,

the Commission IS authonzed to adopt rules

and regulations exempting secunnes Issued

by a small busmess Investment company

under the Small Business Investment Act

Pursuant to that sscnon, the Cornrmssron has

adopted Regulation E, which conditionally

exempts such seeunnes Issued by companies registered under the Investment Company Act of 1940 up to a maximum offenng

pnce of $500,000. The regulalion IS substantially similar to Regulation A, descrrbed

above No notifications were filed under Regulation E for the two preceding fiscal years

Regulation F

Regulation F provides exemptions from

reqrstratron for two types of transactions concerning assessable stock First, an assessment levied upon an exrstmq secunty holder

may be exempted under the regulation, provrded the assessable stock IS Issued by a

corporation Incorporated under the laws of

and haVing ItS prmcipal business operations
In any State. Terntory or the District of Columbia Regulation F provides an exemption

also when assessable stock of any such

corporation IS sold publicly to realize the

amount of an assessment levied thereon, or

when such stock IS publicly reoffered by an

underwnter or dealer The exemplion IS available for amounts not exceeding $300,000 per

year The Regulation requires the filing of a

notification and other materials descnbmq the

offering

Dunng the 1976 fiscal year, 15 notifications

were filed under Regulation F, covenng assessments of stock of $356,318, compared

with 15 notifications covering assessments of

$380,318 In 1975

CONTINUING DISCLOSURE: THE

SECURITIES EXCHANGE ACT

The Securities Exchange Act of 1934 contains srqruficant disclosure provrsrons designed to provide a fund of current matenal

information on companies In whose secunnes

there IS a substantial public Interest The Act

also seeks to assure that secunty holders

who are solicited to exercise their voting

rights, or to sell their securities In response to

a tender offer, are furnished pertinent mtormatron

Registration on Exchanges

Generally speaking, a secunty cannot be

traded on a national secunties exchange untrl

It IS registered under Section 12(b) of the

Exchange Act If It meets the listing requirements of the particular exchange, an Issuer

may register a class of securities on the

exchange by filing With the Commission and

the exchange an application which discloses

pertinent Information concernrng the Issuer

and Its affairs Dunng fiscal year 1976, a total

of 90 Issuers listed and registered secunties

on a national secunties exchange for the first

time and a total of 331 registration applications were filed The registrations of all secuntres of 117 Issuers were terminated Detailed statistics regarding sscunnes traded on

exchanges may be found In the statistical

section

Over-the-Counter Registration

Section 12(g) of the Exchange Act requires

a company With total assets exceeding $1

million and a class of equity secunues held of

record by 500 or more persons to register

those secunnes 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) Upon

registration, the reporting and other disclosure requirements and the rnsrder trading

provisrons of the Act apply to these companies to the same extent as to those With

securities registered on exchanges

DUring the fiscal year, 241 registration

statements were filed under Section 12(g) Of

these, 93 were filed by Issuers already subject to the reporting requirements. either because they had another security registered

on an exchange or they had registered securities under the Securities Act. Included are

companres which succeeded to the bUSInesses of reporting companies, and thereby

became subject to the reporting requirements

Exemptions

Section 12(h) of the Act authorizes the

Commission to grant a complete or partial

exemption from the reglstralion provisions of

Section 12(g) or from other disclosure and

msrder trading provisrons of the Act where It

IS not contrary to the public Interest or the

protection of Investors

At the beginning of the year, 17 exemption

applications were pending, and 38 applications were filed dUring the year Of these 55

applications, 3 were Withdrawn. 18 were

granted. and 7 denied The remaining 27

applications were pending at the end of the

fiscal year

Periodic Reports

Section 13 of the Securities Exchange Act

requires Issuers of secunnes registered pursuant to Sections 12(b) and 12(g) to file

penodic reports, keeping current the information contained In the registration application

or statement Similar reports are required

pursuant to Section 15(d) of certain Issuers

which have filed registration statements under the Securities Act which have become

effective

In 1975, 54,640 reports-annual, quarterly

and current-were filed

61
In 1976, 53,056 reports-annual, quarterly

and current-were filed

Proxy Solicitations

Where proxies are solicrted from holders of

secuntres registered under Section 12 or from

security holders of registered public-utility

holding companies, Subsidiaries of holding

companies, or registered Investment companies, the Commission's proxy regulation requires that disclosure be made of all material

facts concerning the matters on which the

secunty holders were asked to vote and that

they be afforded an opportunity to vote "yes"

or "no" on any matter other than the election

of directors Where management IS soliciting

proxies, a security holder desirmq to communicate with the other security holders may

require management to furnish him with a list

of all secunty holders or to mall his communication for him A security hider may also,

subject to certain limitations, require the management to Include In proxy material an appropnate proposal which he wants to submit

to a vote of security holders, or he may make

an Independent proxy sohcrtauon

Copies of proposed proxy material must be

filed With the Commission In preliminary form

pnor to the date of the proposed solicitation

Where preliminary matenal falls to meet the

prescribed disclosure standards, the management or other group responsibre for ItS

preparation IS notified Informally and given an

opporturuty to correct the denciencres In the

preparation of the definitive proxy matenal to

be furnished to security holders

Issuers of securmes registered under Secnon 12 must transmit an Information statement comparable to proxy material to security

holders from whom proxies are not solicited

With respect to a stockholders' meeting

Dunng the 1976 fiscal year, 6,898 proxy

statements In denrunve form were filed, 6,807

by management and 9 by nonmanagement

groups or rndrvidual stockholders In addition,

82 Information statements were filed The

proxy and information statements related to

6,639 companies, and pertained to 6,616

meetings for the election of directors, 234

spscral meetings not Involving the election of

directors, and 39 assents and authonzauons

ASide from the election of directors, the

votes of secunty holders were solicited With

respect to a variety of matters, including

62

mergers, consolidations, acquisrtrons, sales

of assets and drssolunon of companies (190),

authonzanons of new or additional secunnes,

rnoomcanons of exisnnq secuntres, and recapitalization plans (467), employee pension

and retirement plans (58), bonus or profrtsharing plans and deferred compensation arrangements (251), stock option plans (529),

approval of selection by management of Independent auditors (3,431) and miscellaneous

amendments to charters and by-laws, and

other matters (1,761)

DUring the 1976 fiscal year, 477 proposals

submitted by 121 stockholders for action at

stockholders' meetings were Included In the

proxy statements of 242 companies TYPical

of such proposals submitted to a vote of

security holders were resolutions on 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 and the

sending of a post-meeting report to all stockholders

A total of 268 proposals submitted by 91

stockholders were omitted from the proxy

statements of 133 companies In accordance

With the provrsions of the rule governing such

proposals The most common grounds for

orrussron were that proposals were not submitted on time, were not proper subjects for

stockholders' action under the applicable

State law, or were not Significantly related to

the Issuer's business

Dunng the year, representatives of the

Amencan Jewish Congress subrrutted essentially the same shareholder proposal to 55

companies The proposal requested the

Board of Directors of each company to proVide the sharholders With a wntten report

descnbmq various aspects of the company's

policy towards compliance With the demands

of the Arab boycott In 7 Instances, the staff

refused to agree With the management of the

company that the proposal might be omitted

from the company's proxy material In accordance With the provrsrons of the rule governing

such proposals The proponent Withdrew the

proposal In 8 Instances, and the staff Issued

no-action letters agreeing With the management of the company that the proposal might

be omitted In 40 cases The grounds for

orrussion were as follows the proposal was
not timely submitted (22), the proposal was

not substantrally related to the Issuer's business (16) and the proponent was not a secunty holder eligible to vote at the company's

meebng (2),

In fiscal 1976, 18 companies were Involved

In proxy contests for the election of directors

which bring speoal requirements Into play In

these contests, 51

°persons, including both

management and nonmanagement, filed detailed statements required of participants under the applicable rule Control of the board

of directors was Involved In 15 Instances In 4

of these, management retained control Of

the remainder, four were settled by negotiation, two were won by non management persons, and five were pending at year end In

the other three cases, representation on the

board of directors was Involved Management

retained all places on the board In one contest, opposition candidates won places on the

board In two cases

Takeover Bids, Large Acqusitions

Sections 13(d) and (e), and 14(d), (e) and

(f) of the Securities Exchange Act, enacted In

1968 and amended In 1970, provide for full

disclosure In cash tender offers and other

stock acqursrnons mvolvinq changes In ownership or control These provisions were designed to close gaps In the full disclosure

provisions of the securities laws and to safeguard the Interest of persons who tender their

secunnes In response to a tender offer

DUring the 1976 fiscal year, 1,077 Schedule 13D reports were filed by persons or

groups which had made acqursrtrons resulting

In their ownership of more than five percent

of a class of securities One hundred seven

Schedule 13D reports were filed by persons

or groups making tender offers (including 14

tender offers filed With the Comrrussion by

foreign nationals), whrch, If successful, would

result In more than five percent ownership In

addition, 64 Schedule 14D reports were filed

on sohcrtatrons or recommendations In a

tender offer by a person other than the maker

of the offer Eight statements were filed for

the replacement of a majority of the board of

directors otherwise than by stockholder vote

Three statements were filed under a rule on

corporate reacquisrnons of securities while an

Issuer IS the target of a cash tender offer

Rule 14d-2 under the Exchange Act exempts certain communications Involved In a

tender offer from the provisrons of Regulation

14D Among such communications are those

from an Issuer to ItS security holders which do

no more than Identify the tender offer, state

that management IS studying the proposal

and request the security holders to defer

making a decrsron on the tender offer until

they receive management's recommendation

Such recommendations must be made no

later than 10 days before expiration of the

tender offer, unless the Commission authorrzes a shorter period

Insider Reporting

Section 16 of the Securities Exchange Act

and corresponding provrsions In the Public

Utility Holding Company Act of 1935 and the

Investment Company Act of 1940 are designed to provide other stockholders and

Investors generally With information on msrder

secunties transactions and holdings, and to

prevent unfair use of confidential information

by msrders to profit from short-term trading In

a company's secunues.

Section 16(a) of the Exchange Act requires

every person who benefrcrally owns, directly

or Indirectly, more than 10 percent of any

class of equity security -wruch 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 equty secunnes of the

Issuer of which he IS the benencral owner and

changes In such ownership Copies of such

statements must be filed With exchanges on

which the securities are listed Similar provrsions applicable to msiders of registered public-utility holding companies and registered

closed-end Investment companies are contained In the Holding Company and Investment Company Acts

In fiscal 1976, 91,894 ownership reports

were filed These Included 10,898 initial

statements of ownership on Form 3, 76,154

statements of changes In ownership on Form

4, and 4,842 amendments to previously filed

reports

All ownership reports are made available

for public inspection when filed at the Comrmssion'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 pub63
Iished rn the monthly "Official Summary of

Secunty Transactions and Holdmgs," which

IS distributed by the Government Printing

Office to about 11,600 subscribers

ACCOUNTING AND AUDITING

STANDARDS

The secuntres acts reflect a recognition by

Congress that dependable financial statements of a company are mdispensable to

Informed Investment decisions regarding ItS

secunues A malor objective of the Comrrussion has been to Improve accounting, reportIng, and audiunq standards applicable to the

financial statements and to assure that high

standards of professional conduct are rnamtamed by the public accountants who examme the statements The primary responsibility

for tms program rests with the Chief Accountant of the Commission

Under the Commission's broad rulemakmg

power, It has adopted a oasrc accountmg

regulatIOn (RegUlation S-X) WhiCh, together

with interpretanons and gUidelmes on accountmg and reportmg procedures published

as "Accounting Series Releases," governs

the form and content of fmancial statements

filed In compliance with the secunnes laws

The Cornrrussron has also formulated rules

on accounting for and auditing of brokerdealers and prescribed Uniform systems of

accounts for mutual and subsidiary service

companies related to holdmg companies subject to the Public Utility Holding Company Act

of 1935 The accounting rules and opinions of

the Cornrrussron, and ItS decrsrons 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 accountmg and financial reporting rules and regulatlons--except for the

Uniform systems of accounts which are regulatory reports-s-orescnbe accounting pnnciples to be followed only In certain limited

areas In the large area of fmancial reporting

not covered by ItS rules, the Comrrussion's

principal means of protecting Investors from

Inadequate or Improper tmancial reporting IS

by requiring a report of an mdependent public

accoutant, based on an audit performed In

accordance with generally accepted auditing

64

standards, which expresses an opiruon

whether the financial statements are presented fairly In conformity with accounting

pnnciptss and practices that are recognized

as sound and have attained general acceptance The requirement that the opinion be

rendered by an Independent accountant,

which was Initially established under the Secuntres Act, IS designed to secure for the

benefrt of public Investors the detached objectivny and the skill of a knowledgeable,

protessronal person not connected With man.

agement

The accounting staff reviews the nnancral

statements filed With the Oomrmsston to insure that the requtred standards are observed and that the accounting and auditing

procedures do not remain static In the face of

changes and new developments In fmancral

and economic conditions, New methods of

domg busmess. new types of business, the

combmmq of old businesses, the use of more

sophisticated secunnes, and other mnovatlons create accounting problems which require a constant reappraisal of the procedures

Relations With the Accounting

Profession

In order to keep abreast of changing conditions, and In recognition of the need for a

continuous exchange of views and Information between the Cornrrussron's accountmg

staff and outside accountants regarding appropriate accounting and auditing polrcies,

procedures and practices, the staff maintains

continuing contact With mdivrdual accountants

and various protessronat organizations The

latter Include the American lnstitute of Certified Public Accountants (AICPA) and the FInancial Accounting Standards Board (FASB),

the pnncipat protessronal organizations concerned With the development and Improvement of accounting and audltmg standards

and practices The Chief Accountant also

meets regularly With his counterparts In other

regulatory agencies to Improve coordination

on pohcies and actions among the agencies

Because of ItS many foreign registrants and

the vast and Increasing foreign operations of

American companies, the Cornrmssron has

an Interest In the Improvement of accounting

and auditing pnnoples and procedures on an

mternational baSIS To promote such irn-
provement, the Chief Accountant corresponds WIth foreign accountants, Interviews

many who VISit this country and, on occasion,

participates In foreign and mternanonal accounting conferences.

Professional efforts are being made to Improve and harmonize accounting standards

among countries through various international accounting conferences and committees One committee, compnsed of representatives from thirty-five countnes, was established to promulgate International accounting

standards ThiS committee has adopted three

standards, has proposed a number of other

standards and IS developing additional proposals. The Commission will continue to cooperate closely With these committees and

groups which have as their long-term objecnve the development of a coordinated worldwide accounting protession With uniform

standards

Accounting and AUditing

Standards

The FASB supplanted the Accounting Pnnoples Board of the AICPA In 1973 as the

professional organization which establishes

standards of financial accounting and presentation for the gUidance of Issuers of financial

statements and pubhc accountants who examine such statements The organization

was established on the baSIS of recommendations by a committee appointed by the

AICPA to explore ways of Improving this

function. The FASB IS compnsed of seven

full-time salaried members who are appointed

by a financial accounting foundation that IS

sponsored by the AICPA and consists of

representatives of leading professional orgaruzanons The foundation also appoints the

members of an advrsory counol to the Board

who serve on a voluntary baSIS The Commrssron endorsed" the FASB, which It believes Will provide operational effrcrenoes and

Insure an Impartial viewpomt In the development of accounllng standards on a timely

baSIS, and stated that the FASB's statements

and interpretations would be considered as

being substantrat authontative support for an

accounting practice or procedure

As of June 3D, 1976, the FASB had Issued

twelve Statements of Financial Accounting

Standards and nine Interpretations relating to

accounting opinions or standards In addition,

It had under active consrderatron a heavy

agenda of technical projects which Included

nnanoal repornnq for segments of a busrness

enterpnse, accounting for leases, cntena for

determining matenallty, conceptual framework for accounting and reporting, financial

reporting In Units of general purcnasrnq

power, busmess combmations and purchased intangibles, accounting for Interest

costs, accountmp and reporting for employee

benefit ~ns, accounting for the cost of pension plans, fmancral accounting and reporting

In the extractive industries, mtenrn fmancia!

reporting, classmcanon of preferred stock,

and accounting by debtors and creditors

when debt IS restructured It had held public

hearings on SIX of the projects and had

Issued exposure drafts of three proposed

statements of standards

The FASB has appointed a permanent

screening committee to assist It In IdentIfying

emerging practice problems, evaluating their

magnitude and urgency, and assessing pnonties for their resolunon The Chief Accountant

and the FASB maintain liaison procedures for

consultation on projects of either the Board or

the SEC which are of mutual Interest. Specral

liaison procedures have been established regarding the financial accounting and reporting

In the extractive mdustnes, because the Energy Policy and Conservation Act of 1975

authonzss the Commission to assure the

development and observation of accounting

practices by companies engaged In the production of crude 011 or natural gas by December 1977 In carrying out these responsibilities, the Cornrnrssron IS required to consult

With the Federal Energy Adrrurustranon, the

General Accounting Office, and the Federal

Power Cornrrussron. and It IS authorized to

rely on accountrnq practices developed by

the FASB, If the Cornrrusston IS assured that

such practices Will be observed to the same

extent as If the Commission had prescnbed

such practices by rule

When the FASB Issues Improved standards of accounting and financial reporting, the

Cornrrussron revises ItS rules and regulations

to conform to the Improved standards For

example, amendments to ItS regulations were

adopted? to effect conformity With the standards established In FASB Statement Nos 2

and 7. "Accounting for Research and Devel65
opment Costs" and "Accounling and ReportIng by Development Stage Enterprises."

The AICPA appointed another committee

to study and refine the objectives of fmancral

statements. It considered the baste questions

of who needs nnancral statements, what information should be provided, how It should

be communicated, and how much of It can be

provided through the accounting process

The committee's report on the objectives of

finanoal statements IS being utihzed by the

FASB as the baSIS of ItS study of t~ conceptual framework for accounting and reporting

More recently, the AICPA established an

Independent "Commission on Auditor's Responsitnlrtres" which IS studymg the role of

Independent auditors to Identify auditors' responsrbrhtres In relation to the needs and

reasonable expectations of users of fmanoal

statements and to recommend acnons that

the protession should take to assure that

Independent auditors discharge those responsibumes adequately

This Cornrrussion has published a statement of the Issues bemg considered In this

study which are summarized In four categOries below.

General IssuesThe role of the mdependent auditor

Gap between performance and expecta-

!Ions

The auditor's present responsibthnes->

Forming an opinion on fmancral presentabons

Clarlfymg the responsroihty for detection

of frauds

Reporting uncertairunes

Detectmg and disclosing adverse management behavior

Improvmg cornrnurucatron In the auditor's

standard report

Improvmg audrtmq methods and techniques

Extensron of the auditor's roleNew forms of reporllng

Evaluatmg the retanonstup of nonauditIng services to the audit function

The mstrtuuonal framework of the audit funcnon-eOrqarnzatronal structure for regulating

the profession

Pohcies and procedures for rnarntairnnq

the quality of audit practice

66

Process of establlshmg audillng standards

Developmg mdlvlduals as mdependent

auditors

Relationships between the auditor and

parties mterested In the audit func!lon

The legal environment of Independent

auditors.

The Chief Accountant also mamtams liaison With other seruor committees of the

AICPA on projects of mutual Interest, pnncrpally proposed audit gUides and standards of

the Audiling Standards Executive Committee

and the proposed statements of POSition of

the Accountmg Standards Executive Committee Regular meetings are held With the Com.

mJl!ee on SEC Regulations to provide mformanon and gUidance to the protession concerning the Interpretation of and compliance

With the Comrrnssron's accounting and auditIng requirements applicable to registrants and

their Independent accountants.

Other Developments

The Commission announceds the msntubon of a new pubhcation series entitled "Staff

Accountmg Bullellns" In November 1975 to

provide mtorrnanon to the public regarding

Informal and admrrustratrve practices and

gUidelines developed by the accountmg staff

With respect to spscrnc accounting and audit109 problems consrdered In the review of

financral data filed Dunng the fiscal year mne

Bulletms 9 were Issued.

The Commission Issued 17 Accounting Senes Releases dunng the year to provide

Interpretations or gUidelmes on matters of

accountmg pnnoples and auditing standards,

to require Improved disclosure of nnanoat

Information by amendment of registration and

penodrc report forms or Regulation S-X, or to

announce decisrons 10 drscipunary proceed.

Ings under Rule 2(e) of the Cornrmssron's

Rules of Practice concerning accountants appeanng before It.

Eight releases effected amendments to

registratIon and periodic report forms or Regulation S-X to establish or Improve requirements pertarrunq to the form, content or dISclosure In nnanoel statements In the follow109 areas'

(1) Separate nnancial statements of finan-
oral subsrdranes Included In consolidated

statements; 10

(2) Intenm financial reporting, 11

(3) Accounting for research and development costs; 12

(4) Financial reporting by companies In the

development state; 13

(5) Form and content of financial statements of Insurance companies other than life

and title Insurance companies; 14

(6) Disclosures regarding leases, compensating balances, and Income tax expense; 15

(7) Fmancral statements of bank holding

companies and banks;16

(8) Disclosure of certain replacement cost

data 17

The amendment of Regulation S-X relating

to replacement cost data requires the disclosure In a note to financial statements of the

current cost at the end of a reporting penod

of replacing mventones and productive capacity and the amounts of cost of sales,

depreoanon, depletion and amortization expense computed on the baSIS of replacement

cost dunng the reporting penod, Concurrently

with the release adopting that amendment,

the Commission published 18 a proposed

"safe harbor" rule to Insulate persons from

legal liabilities that some commentators expressed concern about In regard to disclosure of such data based on subjective Judgments and esbmates. The Commission also

announced ItS Intention to appoint a committee to advise the Chief Accountant on va no us

difficult, complex and technical questions

concerning Implementation of the new replacement cost rule Thrs advisory committee, which IS compnsed of 29 persons from

Industry and the accounting profession,

meets regularly with the Chief Accountant

and staff to resolve the questions that have

been solicited from registrants, accountants

and others Interested In the problem. The

Chief Accountant has also conferred with

accounting authonnes and government officials In the United Kingdom and The Netherlands regarding their expenences In trus area

of financial accounting and reporting

The amendments adopted relating to Intenm finanoal reporting require condensed

fmancral statements and a narrative analysis

of the results of operations to be mcluded In

quarterly reports filed and summary data regarding the quarterly results In a fiscal year to

be included In a note to the financial statements filed for a fiscal year These requirements were adopted only after alternative

proposals ts and were considered at public

heanngs 20 In fact, the Commission Issued

for public comment proposed standards and

procedures to be applicable to the review of

the mtsnrn financial data by Independent

accountants In the absence of adequate

standards and procedures promulgated by

the accounting profession. 21 SUbsequently,

thiS proposal was Withdrawn 22 when State.

ment on Auditing Standards No 10, "trrrntsd

ReView of Intenm Financial Information," was

Issued by the AICPA

Other proposed rulemakmq releases ISsued for public comment dunng the latter part

of the fiscal year Included (1) amendments

which would require life Insurance companies

and holding companies haVing only life Insurance subsrdranes to file quarterly financial

data In notes to annual unancral statements,23 (2) technical amendments of varIOUScaptions In Regulation S-X requirements

for nnanoal statements of Insurance companles,24 and (3) an amendment to RegUlation

S-X which would modify requirements for

reporting certain disagreements With former

accountants regarding accounting and nnanoral disclosure matters 25 Thrs latter amendment was adopted,26 substantially as proposed, shortly after the end of the fiscal year

An Interpretive release27 was ISSUed which

provrded interpretations and guidelines regarding drsdosure by registrants of holdings

of secunnes of New York City and accounting

for secunties subject to exchange offer and

moratorium Concurrently, a proposed

amendment to RegUlation S-X was pubIIshed28 for comment which would require

footnote disclosure by all registrants of certain concentrations In secunnes holdings, as

a part of a more generalized effort to deal

With the fact that Significant concentrations of

holdings In any secunty may warrant disclosure This proposal remains under considerabon

The Commission ISSUed opinions In eight

proceedings against accountants or accountIng firms pursuant to Rule 2(e) of the Rules of

Practice dunng the fiscal year. Under that

rule, the Commission may disqualify an attorney or an accountant from pracncmq before

It, either temporanly or permanently, or It may

67
censure him on grounds specified m the rule,

One proceedmg 29 was msntuted on the basis

of the Commission's CIVil mjuncnvs complaints agamst a firm's exarnmatrons of financial statements of four companies and questions raised In an Investigation regarding the

firm's audit of the nnancral statements of

another company Under the oprruon, the firm

was required to have an mvssnqanon made

of ItS audit practices with respect to the

financial statements of client-registrants of

the Commission and to promptly adopt and

Implement any recommended corrective actions, the firm was required to conduct a

study of the percentage of completion

method of accountmg and establish gUldehnes to be applied In the conduct of future

audits, the firm for a penod of SIXmonths was

not permitted to accept engagements from

new clients (With certain exceptions) to examme nnanoal statements to be filed With the

Commission, and the firm IS required to have

reviews conducted In 1976 and 1977 m con.

tormrty With the Amencan Institute of Certified

Public Accountants' program for the review of

quality control procedures of multi-office firms

to determine whether the firm has adopted

and Implemented procedures agreed upon In

the proceedmgs and any corrective actions

recommended In the pnor required Investigation

Three proceedmgs were Instituted on the

baSIS of Investigations In which the Commission found that accounting firms did not perform the audits of trnancral statements of

registrants filed WIth the Commission In accordance With generally accepted auditing

standards In one proceedmg, the accountmg

firm was censured by the Commission 30 In

the second proceedmg, the accountmg firm

was ordered to employ consultants to review

and evaluate ItS audrnnq procedures and

professional practice In connection With the

audits of publicly-held companies and report

ItS conclusions to the Commission, and the

firm was ordered not to accept engagements

to examine new clients' financial statements

to be filed With the Commission until one

month after the subrrussron of the consultants' report to the Commission 3' In the third

proceedmg, the accounting firm was censured and required to partrcipats In a local

firm quality peer-review program conducted

by the AICPA; and a former partner, who had

68

been the partner In charge of the audit, was

suspended from practice before the Commission as an accountant for 60 days and was

required to undertake a program of connnuIng professional education consistent the

gUidelines recommended by the AICPA 32

Four proceedmgs were instrtutsd against

accountants on the baSIS of Injunctive actions

wherein the accountants were permanently

enjoined from vrolatmq certain sections of the

sscunnes laws, In one proceeding, the Comrnrssron ordered that the accountant be suspended from appeanng or practicing before It,

that he may apply for reinstatement after two

years and that hrs application shall be

granted, If (a) there IS a showmg that he has

attended 100 or more hours of protessional

seminars or courses dealing With registration

and disclosure reqinrements of the Federal

secunnes laws and generally accepted accountmg pnnoples and auditing standards,

and (b) nothing has occurred dunng the suspension penod that would be a baSIS for

adverse action against him under Rule 2(e) of

the Cornrrussron's Rules of Practice 33

In another proceeding, the accountant was

permanently suspended from appeanng or

practicing before the Cornrrussion 34 In a third

proceedmg, the Cornrmssron ordered that the

accountant be prohibited from appeanng or

practicing before It as an accountant other

than as an employee of an accountant or as

a consultant under the supervision of an

accountant, and that after 22 months the

accountant may apply for reinstatement, provided that satisfactory evidence IS subrrutted

of his protessronal competence as an accountant rn hrs employment dunng the 22-

month penod and of hrs attendance In at least

40 hours of courses or serrunars relatmg to

public accountmg or audltlOg In the 12

months Immediately precedmg hts application for readrrussron 35 In a fourth proceedmg,

the accountant's resignation from appeanng

or pracncrnq before the Cornrrussron was

accepted 36

EXEMPTIONS FOR

INTERNATIONAL BANKS

Section 15 of the Bretton Woods Agreement Act, as amended, exempts from registration securmes ISSUed, or guaranteed as to

both pnncipal and Interest, by the Intema-
nonal Bank for Reconstruction and Development. The Bank IS required to file With the

Commission such annual and other reports

on securities as the Commission determines

to be appropnate The Commission has

adopted rules requiring the Bank to file quarterly reports and copies of annual reports of

the Bank to ItS Board of Governors The Bank

IS also required to file advance reports of any

drstnbutron In the Uruted States of ItS primary

obligations The Commission, acting In consultation With the National AdVISOry Council

on International Monetary and Financial

Problems, IS authonzed to suspend the exernpnon for secunnes Issued or guaranteed

by the Bank The following summary of the

Bank's activities reflects Information obtained

from the Bank Except where otherwise indicated, all amounts are expressed In U S

dollar equivalents as of June 30, 1976

Net Income for the year was $220 million,

compared With $275 million the previous

year Of the $220 million net Income earned

In the fiscal year ended June 30, 1976, the

Executive Directors of the Bank In July 1976

approved the allocation of $120 million to the

General Reserve and recommended to the

Board of Governors of the Bank that the

balance of $100 million be transferred by way

of grant to the International Development

Association

Repayments of principal on loans received

by the Bank dUring the year amounted to

$609 million, and a further $68 million was

repaid to purchasers of portions of loans

Total pnncipal repayments by borrowers

through June 30, 1976, aggregated $72 billion, Including $4.9 billion repaid to the Bank

and $2 3 billion repaid to purchasers of borrowers' obligations sold by the Bank.

Outstanding borrowings of the Bank were

$14 6 billion at June' 30, 1976 DUring the

year, the Bank borrowed $700 million through

the Issuance of 2-year U.S. dollar bonds to

central banks and other governmental agencies In some 80 countries, $1,275 million In

the United States; OM 1,700 million (U S

$665.6 million) In the Federal Republic of

~ermany, 56.7 billion yen (U S $188.6 million) In Japan; SwF 750 million (U S $288 4

million) In SWitzerland; SwF 300 million (U S

$115.1 million) and OM 100 million (U S

$38.4 million) In Saudi Arabia, SwF 100 million (U.S $38 1 million) In the libyan Arab

RepUblic, OM 400 million (U S $1153 million) In Kuwait, f 450 million (U S $1672

million) In the Netherlands, $50 million In

Yugoslavia; and $1295 million from the Interest SUbSidy Fund, which IS adrnrrustered by

the Bank The Fund, which obtained ItS resources from voluntary contributions from

member governments, was established to

subsidize the Interest payments to the Bank

on loans made to poorer developing countries

These borrowings, In part, refunded maturIng Issues amounting to the equivalent of

$905 million After retirement of $63 million

equivalent of obligations through Sinking fund

and purchase fund operations, the Bank's

outstanding borrowings showed a net increase of $2,360 million from the previous

year after deducting $284 million representIng adjustment of borrowings as a result of

currency depreciations and appreciations In

terms of U S dollars of the value of the nondollar currencies In which the debt was denominated

The Inter-Amencan Development Bank

Act, which authonzes the Uruted States to

participate In the Inter-American Development Bank, provides an exemption for certain

secunnes which may be Issued or guaranteed by the Bank Similar to that provided for

secunnes of the International Bank for Reconstruction and Development Acting pursuant to this authonty, the Comrmssron

adopted Regulalion lA, which requires the

Bank to file With the Commission substantially

the same type of Information, documents and

reports as are required from the lnternauonal

Bank for Reconstruction and Development

The follOWing data reflect rntorrnatron submitted by the Bank to the Cornrrussron

On June 30, 1976, the outstanding funded

debt of the Ordinary Capital resources of the

Bank was the equivalent of $1.816 billion,

reflecting a net Increase In the past year of

the equivalent of $210 million DUring the

year, the funded debt Increased through a

public offering In the United States of $150

million, two public offerings and a private

placement In SWitzerland totalling the equivalent of $95.9 million, as well as private placements In Italy for $325 million and In Germany for the equivalent of $196 million In

addition, there were drawings totalling $36 9

million under arrangements With Finland, Ja69
pan and the United Kingdom Additionally,

$33 7 million of two-year and five-year bonds

were sold to Latin American and Caribbean

Central Banks or Governmental Agencies

and Israel, essentially representing a partial

roll-over of a maturing borrowmq of $38 million The funded debt decreased by approxrmately $39 9 million due to downward aojustment of the U S dollar equivalent of borrowIngs denominated In non-regional currencies

The funded debt also decreased through the

retirement of approximately $80 7 rmlhon

from Sinking fund purchases and scheduled

debt retirement

The ASian Development Bank Act, adopted

In March 1966, authorized United States parnopatron In the ASian Development Bank and

provides an exemption for certain secunnes

which may be Issued or guaranteed by the

Bank, similar to the exemptions accorded the

International Bank for Reconstruction and

Development and the Inter-American Development Bank Acting pursuant to trus authoruy, the Commission has adopted Regulation

AD which requires the Bank to file With the

Commission, documents and reports as are

required from those banks The Bank has 42

members With subscriptions totaling $3 44

billion

Through June 30, 1976, the Bank's net

borrowmqs totaled the equivalent of $931

million In 1976 the Bank Issued obligations

of the equivalent of $115 million In Germany,

$82 3 million In the Netherlands, $49 8 million

In Japan, $30.5 million In Saudt Arabia, $26 7

million In SWitzerland and $50 million to varIOUSCentral Banks In 1976, borrowinq In the

United States was $100 million at 85 percent Before seiling secunnes In a country,

the Bank must obtain that country's approval

As of June 30, 1976, 13 countnes have

contributed or pledged a total of $590 million

to the original source mobilization of the

Bank's concessionary loans fund A total of

$57 4 million from Ordinary Capital resources

have been set aside by the Board of Governors for concessionary loan purposes Congress appropriated a $25 million contribution

dunng fiscal 1976, bringing U S contnbutions

to $125 million As of the same date, pledges

from donor countries for replenishment of the

Bank's concessronal loan funds amounled to

an addinonat $477 million The total to be

contnbuted could amount to $760 million

70

TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures,

notes and Similar debt secuntres offered for

pubnc 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 provisrons of the Act are closely Integrated With the requirements of the Secuntres

Act Registration pursuant to the Securities

Act of secunnes to be Issued under a Irust

Indenture subject to the Trust Indenture Act IS

not permitted to become effective unless the

Indenture conforms 10 the requirements of the

latter Act, desiqned 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 securrty holders and

absolved so-called trustees from minimum

obligations In the discharge of the trusts. It

requires, among other things, that the Indenture trustee be a corporation With a minimum

combined capital and surplus and be free of

conflicting Interests which might Interfere With

the fBithful exercise of ItS duties on behalf of

Ihe purchasers of the secunnes, and It Imposes high standards of conduct and responsrbrhty on the trustee DUring fiscal year 1976,

397 trust Indentures relating to sscunnes In

the aggregate amount of 25 75 billion were

filed

INFORMATION FOR PUBLIC

INSPECTION; FREEDOM OF

INFORMATION ACT

On November 21, 1974, Congress passed

over President Ford's veto amendments to

the Freedom of Information Act 37 which Significantly changed the procedures governmg

the handling oJ requests made pursuant to

the Freedom of lntorrnatron Act (5 USC.

552) as well as the scope of certain of the

exemptions from the Act's provisrons These

amendments became effective February 19,

1975 The Cornrnrssron amended ItS rules

under the Freedom of Information Act (17

CFR 200 80) 38 to reflect the amended provi-
sions of the Freedom of Information Act,

these rules specify the categones of available

materials and those categones of records

that are generally considered non public

These rules establish the procedure to be

followed In requesling records or copies and

provides for a method of administrative appeal from the denial of access to any record.

They also provide for the irnposmon of duplicating fees and search fees when more than

one-half man-hour of work IS performed by

the Commission's staff to locate and make

records available In addition to the records

descnbed, the Commission makes available

for inspection and copying all requests for noaction and Interpretative letters received after

December 31, 1970, and responses thereto

(17 CFR 20080). Also made available since

November 1, 1972 are matenals filed under

Proxy Rule 14a-8(d), which deals with proposals offered by shareholders for mclusron

In management proxy-soliciting matenats,

and related matenals prepared by the staff

(17 CFR 20082)

FollOWing the effective date of the amendments to the Freedom of Information Act, the

Commission instituted the practice of ISSUing

a public release, In a senes desiqnated Freedom of Information Act Releases, In most

administrative appeals decided under the Act

The Commission hopes that thrs senes of

releases Will serve to Inform the public as to

ItS disclosure pohcies under the Freedom of

Information Act and of the manner In which It

has Interpreted and applied the Act to the

many types of records maintained by the

Commission

Most of the administrative appeals decided

by the Commission from the effective date of

the amendments to the close of the fiscal

year were concerned With Investigatory records The seventh exempli on of the Act, as

amended, provides that the Freedom of Information Act "does not apply" to such records

to the extent that their production would "interfere With enforcement proceedings," "depnve a person of a nght to a fair tnal or an

irnparnal aojudicanon." "constitute an unwarranted mvasron of personal privacy," or

cause other types of harm spscmcauy enumerated In the exemption The Commission,

In the administrative appeals It has decided,

has determined that investigatory records Will

generally be Withheld on the ground that

production Will "Interfere With enforcement

proceedings" only If judicral or administrative

proceedings brought by the Commission or

other law enforcement authonnes are In progress or there IS a concrete prospect that law

enforcement proceedings Will be Instituted. 39

EVidentiary matenals contained In investigatory files closed after the completion of public

law enforcement proceedings Will generally

be available to any person requesting access

to them 40 In those cases where Investigations are closed by the Commission Without

the institution of public enforcement action,

the Commission has recognized that considerations of personal pnvacy often require that

such records not be disclosed to members of

the public,41 except where a demonstration of

particulanzed need for access to the records

sufftcient to outweigh consideranons of personal pnvacy has been made 42

Registration statements, apphcanons, declarations, and annual and pen odic reports

filed With the Commission each year, as well

as many other public documents, are available for public inspection and copying at the

Commission's public reference room In ItS

pnnopal offices In Washington, DC and, In

part, at ItS regional and branch offices

The Commission has special public reference tacrhnes In the New York, Chicago and

Los Angeles RegIOnal Offices and some tacitrues for public use In other raqronal and

branch offices Each regional office has available for public examination copies of prospectuses used In recent offenngs of secunties registered under the Secunues Act, registration statements and recent annual reports

filed under the Secuntres Exchange Act by

companies havmq their pnncipal office In the

region, recent annual reports and quarterly

reports filed under the Investment Company

Act by management Investment companies

havinq their principal office In the region,

broker-dealer and Investment adviser applications onqmannq In the reqron, letters of

notification under Hequlation A filed In the

region, and indices of Commission decisrons

Dunng the 1976 fiscal year, 19,218 persons examined matenal on file In Washington; several thousand others examined files

In New York, Chicago, Los Angeles, and

other regional offices More than 47,994

searches were made for information requested by rndrvrduals, and approxrrnately

71
12,201 letters were received for Information

and/or documents

The public may make arrangements

through the Public Reference Seclion of the

Commission In Washington, D C 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 10 cents per page for pages

not exceedmg 81/2" x 14" m Size, With a

$3 50 minimum charge Under the same con-

-tract, the company also makes microfiche

and microfilm copies of Commission public

documents available on a subscnptron or

IndiVidual order baSIS to persons or firms who

have or can obtain viewing taciutres In microfiche services, up to 60 Images of document pages are contained on 4" x fl' pieces

of film, referred to as "fiche"

Annual microfiche subscnpnons are offered

In a variety of packages covering all pubnc

reports filed on Forms 1Q-K, 1Q-0, 8-K, N10 and N-1 R 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 listed

on the New York Stock Exchange, the American Stock Exchange, regIOnal stock exchanges, or traded over-the-counter Reports

are also available by standard industry classrficanons Arrangements also may be made to

subscribe to reports of comparues of one's

own selection Over one hundred million

pages (rmcrormaqery frames) are bemq drstnbuted annually The subscnption services

may be extended to further groups of filings

m the future If demand warrants The copying

company Will also supply copies In microfiche

or microfilm form of other public records of

the Commission desired by a member of the

pubhc

Microfiche readers and reader-printers

have been Installed In the public reference

areas In Washington, D C and the New York,

Chicago, and Los Angeles regional offices,

and sets of microfiche are available for Inspection there VISitors to the public reference room In Washington, D C may also

make Immediate reproduction of matenal on

72

photostatic-type copying rnachmes. The cost

to the public of copies made by use of all

customer-operated equtpment IS 10 cents per

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 services and

copies may be obtained from the Public Reference Section of the Commission

FREEDOM OF INFORMATION

ACT LITIGATION

In The Bureau of National AffairS, Inc, et

al v SEC,43 the Commission was named In a

SUit seeking access to the evidennary materials contained In certam Commission mvesngatory files which had been closed on the

baSIS of an mformal agreement or undertakIng With the subjects of the investigation

Plarnnfts also sought access to portions of

the rnternal memoranda which formed the

baSIS of the Commission's decisron to close

the mvesnqatrons In denying access to the

evrdennary materials In these files, the Comrrnssron claimed that they were exempt from

disclosure because disclosure would be an

unwarranted invasron of the personal privacy

of the mdrviduals named m the flles.44 The

requested portions of the Internal memoranda

were Withheld on the ground that they expressed the opinions and recommendations

of the author, and were therefore exempt

from compelled disclosure 45

In April 1976, the Uruted States Supreme

Court ISSUed ItS opinion In Department of the

Air Force v Rose, 46 interpreting the scope of

the FOIA exemptions for mvasrons of personal privacy The Court In Rose mdicated

that blanket exernptrons were not permitted

by the Act, rather, an agency's efforts to

protect against mvasions of personal privacy

should be limited to deleting names and

Identifying details, even where there was

some risk that disclosure of the material In

that form would disclose the Identities of the

persons concerned

As a result of the Supreme Court's oecrsion

In Rose, the Commission re-examined ItS

posnon In the pending litigation and deterrrnned to disclose to plaintiffs the evidentiary

materials contamed In the particular group of

files In Issue, subject to the deletion of names

and IdentifYing details of persons against
whom no Informal action was taken Plaintiffs

thereupon amended their complaint to drop

their claim to the material deleted from the

mternal memoranda In question. On July 26,

1976, the district court ordered "that the case

be marked settled on the merits," and further

ordered that counsel fees and costs of

$5,013 be awarded to the plamntts

In Anton, et al v. Secunttes and Exchange

Comtmsston.v plaintiffs, who were respondents In a public administrative proceeding

Instituted by the Oommrssion sought the

disclosure of all the materials contained In or

relating to the Cornrmssion's proceeding

Certain of the requested material was made

available, but other records were Withheld on

the basis of Exemptions 5 and 7 of the

FOIA 49 After a hearing on August 26, 1975,

the United States District Court entered an

order, rUling that all of the records In Issue

were properly Withheld pursuant to the

FOIA's exemptive provrsions. Plaintiffs took

an appeal from the district court's decisron, 50

but dropped their appeal after the Issues had

been briefed.

In Merrill Lynch, Pierce, Fenner & Smith,

Inc v, S E.C ,51 plaintiff, also a respondent In

a Commission administrative proceeding,

sued to compel release of various records

under the FOIA Plalnbff also sought a prelimmary Injunction against continuation of the

administrative proceeding pending resolution

of ItS FOIA claims. On May 27, 1976, Judge

Gasch of the District Court for the District of

Columbia declined to Issue the preliminary

injunction The court has not yet ruled on the

Issue of plaintiff's entitlement to the records In

quesnon.

The plaintiff In Bast v SEC 52 was seekIng access to various portions of Internal

memoranda WIthheld by the Comrrussron on

the ground that they reflected the opinions

and recommendations of members of the

staff FollOWIng an In camera Inspection of

the records In question. the court ruled on

May 27, 1976, that all of the Withheld records

were properly Withheld In accordance With

Exemption 5 of the FOIA.53

In Todd & Co v Mason,54 plaintiffs are

seeking various materials from the files of the

National ASSOCiation of Securitres Dealers,

Inc. (NASD) concerning orsciphnary proceedIngs Instituted by the NASD against them.

Proceeding on the theory that the NASD IS an

"agency" of the Federal govemment as that

term IS defined In the FO/A,55 Todd & Co

requested, from the Cornrnrssron, materials

relating to certain specmed NASD posrnons

and pohcres Which, It IS claimed, the NASD

would be required to maintain and either

publish or make publicly available If the

NASD were a Federal agency Todd & Co

claimed that the Cornrrussron IS either required to maintain the requested records for

the NASD or to take steps to require the

NASD to do so After the Comrrussron denied

their administrative appeal of the Initial staff

determination made WIth respect to their request, 56 Todd & Co amended the complaint

In their pending SUit against the NASD to

Include the Cornmrssron as a defendant The

Cornrrussron has filed a motion to disrruss the

action or, In the alternative, for summary

Judgment, which the court had not ruled upon

at the close of the fiscal year

NOTES FOR PART 2

1 Securities Act Release No 5231 (February 3, 1972)

2 GUide 60 of the GUides for Preparing and

Filing Registration Statements under the Secuntres Act Securities Act Release No 5962

(March 17, 1976),9 SEC Docket 180

3 Securmes Act Release No 5465 (March

1, 1974), 3 SEC Docket 606

4 Securities Act Release No 5662 (December 30, 1975),8 SEC Docket 807

5 Secuntres Act Release No 5660 (December 23, 1975),8 SEC Docket 751

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

7 Accounting Series Release No 178 (October 9, 1975), 8 SEC Docket 39, and Accounting Series Release No 181 (November

10, 1975),8 SEC Docket 402

8 Accounting Series Release No 180 (November 4, 1975),8 SEC Docket 324

9 Staff Accounting Bulletin No. 1 (November 4, 1975), 8 SEC Docket 364, Staff Accounting Bulletin No 2 (January 9, 1976), 8

SEC Docket 1006; Staff Accounting Bulletin

No 3 (January 16, 1976), 8 SEC Docket

1138, Staff Accounting Bulletin No 4 (January 29, 1976), 8 SEC Docket 1181, Staff

Accounting Bulletin No. 5 (February 13,

1976), 8 SEC Docket 1330, Staff Accounting

Bulletin No 6 (March 1, 1976), 9 SEC Docket

115, Staff Accounting Bulletin No. 7 (March

23, 1976),9 SEC Docket 295, Staff AccountIng Bulletin No 8 (June 4, 1976), 9 SEC

Docket 868; Staff Accounting Bulletin No 9

(June 17,1976),9 SEC Docket 916.

10Accounting Series Release No 175 (July

10, 1975), 7 SEC Docket 339

73

I I , I

"
11Accounting Senes Release No 117

(September 10,1975),7 SEC Docket 816.

1~Accounting Senes Release No 178 (October 9,1975),8 SEC Docket 39.

13Accounting Senes ReleaSe No 181 (November 10, 1975),8 SEC Docket 402.

14Accounting Senes Release No 183 (November 14, 1975). 8 SEC Docket 434.

15Accounting Senes Release No. 184 (November 26, 1975), 8 SEC Docket 526

16Accounting Senes Release No. 185 (December 11, 1975), 8 SEC Docket 692.

17Accounting Senes Release No. 180

(March 23, 1976),9 SEC Docket 240.

18secunnes Act Release No. 5696 (March

23, 1976),9 SEC Docket 245.

19Secuntres Act Release No 5579 (Apnl

17, 1975),6 SEC Docket 670

20Secunnes Exchange Act Release No.

11354 (Apn117, 1975), 6 SEC Docket 682.

21 sscunnss Act Release No. 5612 (September 10,1975),7 SEC Docket 825.

22Accounting Senes Release No 189

(February 9, 1976), 8 SEC Docket 1294

23Securities Act Release No. 5689 (March

15, 1976), 9 SEC Docket 178

24Secunuss Act Release No 5716 (June

3, 1976),9 SEC Docket 761

25Securities Act Release No. 5701 (Apnl

29, 1976), 9 SEC Docket 477.

26Accounting Senes Release No 194 (July

28, 1976), 10 SEC Docket 100

27 Accounting Senes Release No. 188

(January 7,1976),8 SEC Docket 961.

28Secuntles Act Release No. 5668 (January 7, 1976),8 SEC Docket 963.

29Accounting Senes Release No. 173 (July

2, 1975),7 SEC Docket 30L

30Accounting Senes Release No 174 (July

2, 1975), 7 SEC Docket 293

31Accounting Senes Release No 176 (July

22, 1975), 7 SEC Docket 432

32 Accounting Senes Release No. 191

(March 30, 1976). 9 SEC Docket 363.

33Accounting Senes Release No 179A

(November 24, 1975),8 SEC Docket 522.

74

34 Accounting Senes Release No 182 (November 12, 1975), 8 SEC Docket 402

35Accounting Series Release No 186 (December 5. 1975).8 SEC Docket 1006.

36Accounting Senes Release No 187 (December 15, 1975),8 SEC Docket 1006

37Pub. L. No 93-502

38Secuntres Act Release No 5571 (February 21,1975),6 SEC Docket 286.

39See, e g , in the Matter of Request of I

Walton Bader, FOrA Release No. 1 (Apnl 3,

1975), 6 SEC Docket 541; In the Matter of

Request of Jeffrey B. Albert, FOIA Release

No 10 (June 11, 1975), 7 SEC Docket 138.

40Secuntles Act Release No. 5571 (February 21, 1975), 6 SEC Docket 288. In the

Matter of Request of John A Jenkins, FOIA

Release No 11 (June 11, 1975), 7 SEC

Docket 139.

41 In the Matter of Request of John A

Jenkms, FOIA Release No 11 (June 11,

1975),7 SEC Docket 139.

42 In the Matter of Request of Jung Ja

Malandfls, FOIA Release No. 8 (May 29,

1975), 7 SEC Docket 58.

43 D.D C , No 76-0443.

44 See 5 U S.C. 552(b)(7)(C).

45See 5 U.S C. 552(b)(5).

46 U.S. -, 44 U.S.L W 4503 (Apnl

21, 1976).

47 D. Colo, No 75-M~11

48 In the Matter of Fmanclal Programs,

Inc, Admin. Proc No. 3-4610

495 USC. 552(b)(5), (7) See FOIA Release No. 20 (July 22, 1975), 7 SEC Docket

429

50CA 10, No 75-1868.

51D D.C , No. 76-0762

52 E D. Va , No. 76-47-A.

535 U.S.C. 552(b)(5).

54 0 DC. No 75-1438

55See 5 U.S.C 552(e).

56See FOrA Release No. 41 (January 20,

1976),8 SEC Docket 1085

_
Part 3

Regulation of

Securities Markets

In addition to the disclosure provisrons discussed In the preceding chapter, the Secunties Exchange Act assigns to the Commission

broad regulatory responsibilities over the secunnes markets and persons conducting a

business In secuntres Thrs Act, among other

things, requires secuntres exchanges to register with the Commission, provides for Comrrussion supervision of the self-regulatory responsibilities of registered exchanges, and

permits registration of self-regulatory associations of brokers or dealers The Act requires

registration of brokers and dealers In secunties, and also contains prcvrsions designed to

prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and

In the over-the-counter markets

The secunnes Acts Amendments of 1975

(the "1975 Amendments")' established a

new self-regulatory organization, the MuniCIpal Secuntres Rulemaklng Board, to formulate rules for the municipal secunnes Industry

subject to the oversight of the Commission

The amendments also contemplate a national

market system and a national system for the

clearance and settlement of secunnes transactions and require municipal secunties

protessronals, certain secunties information

processors, c1eanng agencies and transfer

agents to register With the Commission Important recent developments concerning regulation of the secunties markets are discussed In Part 1 of trus Annual Report

Part 3

Regulation of

Secuntles Markets

REGULATION OF EXCHANGES

Registration

The Secunnes Exchange Act generally requires a secunties exchange to register With

the Commission as a national secunlies exchange unless the Commission, acting pursuant to Section 5 of the Act, exempts It from

registration because of the limited volume of

ItS transacnons 2 As of June 30, 1976, the

follOWing eleven secunnes exchanges were

registered With the Commission

Amencan Stock Exchange, Inc

Boston Stock Exchange

Chicago Board Options Exchange, Inc

cmcmnan Stock Exchange

Detroit Stock Exchange

Intermountain Stock Exchange

Midwest Stock Exchange, Inc

New York Stock Exchange, Inc

Pacmc Stock Exchange, Inc.

Philadelphia Stock Exchange, Inc J

Spokane Stock Exchange

On October 16, 1975, the Commission,

pursuant to Section 19(a)(3) of the Act, ISsued orders withdrawmq the registrations of

the National Stock Exchange and the Board

of Trade of the City of Chicago as national

securmes exchanges The National Stock Exchange had ceased operations on January

31, 1975, while the Executive Committee of

the Board' of Trade of the City of Chicago

77

;1

, ,I

i
adopted a resolution In March 1975 to close

Its securities market 4 On June 30, 1976, the

Detroit Stock Exchange ceased operations

That exchange IS currently In the process of

taking the necessary steps to withdraw Its

registration as a national securities exchange

Delisting

Pursuant to Section 12(d) of the Securmes

Exchange Act, a security may be stricken

from listing and registration with a national

secunnes exchange upon the exchange's application to the Commission, or may be withdrawn from listing and registration upon the

application of ItS Issuer, In accordance with

the rules of the exchange and upon such

terms as the Commission may Impose for the

protection of Investors Hrstoncally, It has

been the Commission's view that in evaluatIng deli sting applications, It IS not generally

the Commission's function to substitute ItS

judgment for that of an exchange, and that

where there has been full compliance with

the rules of an exchange with respect to

dehstmq, the Commission IS required to grant

a deli sting application The authonty of the

Commission In such cases IS limited to the

Imposition of terms deemed necessary for the

protection of Investors 5

The standards for deli sting vary among the

exchanges, but generally deli sting actions are

based on one or more of the Iollowmq factors (1) the number of pubhcly-held shares or

shareholders IS tnsuffrcient (often as a result

of an acqursmon or merger) to support a

broad-based trading market, (2) the market

value of the outstanding shares or the trading

volume IS Inadequate, (3) the company no

longer satisfies the exchange's listing criteria

with respect to earnings or financial condition;

or (4) required reports have not been filed

WIth the exchange

DUring the fiscal year, the Commission

granted exchange applications for the delistIng of 181 stock Issues and twenty-two bond

Issues In the wake of ItS decrsion to withdraw

ItS registration as a national secunues exchange, the National Stock Exchange applied

to strike eighty-five stock and three bond

Issues from "sting and registration Applications granted other exchanges totaled Amencan, twenty-seven stocks and two bonds,

New York, twenty-three stocks and fifteen

78

bonds, Pacific, twenty-one stocks and two

bonds, Boston, ten stocks, Philadelphia, Midwest and Detroit, five stocks each 6

The Commission also granted the application of two Issuers to withdraw their securities

from listing and registration on the Boston

Stock Exchange

Unlisted Trading Privileges

Prior to the 1975 Amendments, Section

12(f) of the Secunties Exchange Act provided

that a nanonal securities exchange might,

upon application to and approval by the Comrrussron, extend unlisted trading privileges to

any security listed and registered on another

national securities exchange The 1975

Amendments broadened the section to encompass secuntres not listed on any exchange, other textual changes were Intended

to express congressional concern over the

Impact of unlisted trading on the development

of a national system, and to clanfy that such

applications may not be granted If the effect

would be to restnct competition 7 At the time

the 1975 Amendments were enacted, the

Boston Stock Exchange ("BSE") had pending

an application for unlisted trading privileges In

the common stock of Ludlow Corporation,

which was already listed on the New York

Stock Exchange ("NYSE") 8 FollOWing notice

of BSE's application, Ludlow Corporation filed

an objection to the granting of BSE's application and requested a public heanng on the

matter On June 25, 1975, the Commission,

pursuant to Section 12(f)(2) of the Act, ordered that a public heanng be held concernIng BSE's application 9

The Ludlow matter represents the first application for unlisted trading privileges to be

contested since the adoption of the 1975

Amendments and also the first such application which has become the SUbject of an

administrative proceeding In approximately

30 years Ludlow asserted that (I) the Act

requires BSE to show that It would establish

a trading market In Ludlow stock, (II) such a

market would not divert trading volume from

the "pnmary market" (NYSE) In a manner

disruptive to the fair and orderly market currently maintained on the NYSE, and (III)

transactions In Ludlow stock occurring on the

BSE WIthout clearing the NYSE specialist's

book would not be inconsistent with the protection of Investors BSE and the Cornmts-
sion's staff both asserted that (I) the secnon

12(f)(2) standard requires only that the applicant demonstrate that an appropnate medium

for trading the subject secunty exrsts on Its

exchange (without necessanly demonstrating

that active trading or a particular type of

market will automatically develop), (II) the

emphasis on competition evident In the 1975

Amendments outweighs possible concerns of

diversion of trading volume from exrstmq pnmary markets. and (III) the 1975 Amendments

and subsequent Implementation thereof by

the Commission have established that the

development of a national market system IS

the proper means for protection of Investors'

limit orders on specialists' books

On May 6, 1976, a Commission Administrative Law Judge Issued an Initial Decision

granting SSE's application. 10 The lrnnal DeCIsion held that Section 12(f) and Rule 121-1

thereunder require only a minimal showinq by

the applicant exchange, namely, that there

exrsts a degree of local Interest In the subject

secunty, that the applicant exchange rnamtams rules and practices which assure a fair

and orderly market In the stock should a

market develop on that exchange, and that

the subject secunty currently trades In a fair

and orderly fashion The Administrative Law

Judge noted that the 1975 Amendments create a presumption In favor of compsnnon and

thereby rrururruze the extent to which potential

diversion of trading volume should be considered, and refused to find that tradmg of

LUdlow stock on the SSE, In Circumvention of

public limit orders on the NYSE, would be

mconsrstent with the protection of Investors

The Comrrussron subsequently granted

Ludlow's Petition for Hevrew of the lrutral

Decisron and the matter IS currently pending

before the Cornrmssron

Exchange Disciplinary Actions

Section 19(d) of the Secunnes Exchange

Act, added by the 1975 Amendments, requires exchanges to report to the Commission for ItS review any final disciplinary sanction Imposed by an exchange that (I) dentes

membership or parnopanon to any applicant,

(II) prohibits or limits access to services offered by an exchange or member thereof, or

(III) Imposes final drsctplmary sanctions on

any person associated with a member or bars

any person from becoming associated with a

member

Dunng the fiscal year, five exchanges reported to the Cornrrussron a total of 198

separate disciplinary actions, Including the

irnposrtron In 117 cases of fines ranging from

$100 to $20,000, the admomshment of SIXteen mdrvrduals, the suspension from membership (for periods ranging from one week to

five years) of three member orqaruzanons

and twenty-rune Individuals, the censure of

eight member firms and twenty-seven mdividuals, the bamng of twenty-eight mdrviduals

and the expulsion of two Individuals and one

member firm

Exchange Rules

As previously reported." the 1975 Amendments added to the Secunties Exchange Act

the requirement that self-regulatory orqaruzations file With the Cornrrussron any proposed rule or change In an exrstrnq rule

accompamed by a concise statement of the

baSIS and purpose of the proposed rule

change 12 Thrs requirement applies to the

rules of exchanges as well as rules of the

NASD, cleanng agencies and the Municipal

Securities Rulemaklng Soard 13 In general,

the Cornrrussron IS required to publish nonce

of the proposed rule change and to give

Interested parties an opportunity to submit

their views concerning the proposal Proposed rule changes may not take effect unless approved by the Commission (with the

exception of certain types of rule changes,

such as interpretations of exrstrnq rules,

which are permitted to take effect Without

Cornrrussron review, subject to the Commission's powers under Section 19(c) of the

Sacuntres Exchange Act to abrogate such

rule changes)

On August 19, 1975, the Cornrrussron

adopted 14 Rule 19b-4 and related Forms

19b-4A and 19b-4S, which provide procedures for self-regulatory orqaruzanons to file

proposed rule changes for the Cornrrussron's

approval or to give notice of those rule

changes which may take effect Without Comrrussion approval The rule also provides the

self-regulatory orqarnzations With cntena by

which they may determine which of their

pohcres, practices and Interpretations are

deemed to be rules for the purpose of the

79

I'

!
filing requuernent. Furthermore, it specifies

the procedures to be followed by the Comrrussron In passing upon proposed rule

changes.

DUring the fiscal year, the Commission

received 196 submissions from exchanges

Involving a variety of rules and stated policies The Iollowmp were among the more

signifIcant rule changes approved by the

Commission.

1 The NYSE adopted two rule changes

affecting previously fixed listing and dell sting

standards. The first provided for semi-annual

downward adjustment In the listing and dehstIng cntena for publicly-held shares based on

fluctuations In the NYSE Composite Index

The second rule change provided alternative

numerical standards for listing the securities

of companies which are not organized under

the laws of the United States, these standards are significantly higher than those required of domestic Issuers

2 Three exchanges submitted rule proposals to implement or expand automated order

routing and execution systems The Midwest

Stock Exchange ("MSE") adopted rule

changes to convert ItS "MAX" program for

automatic execution of certain market orders

from a pilot to a permanent program The

NYSE adopted rule changes to Implement ItS

Desiqnated Order Turnaround ("DOT") System to expedite automated routing of 100-

share market orders to NYSE specialists, and

the Pacmc Stock Exchange ("PSE") expanded ItS automated order routing and execution system ("COMEX") to handle orders

up to 300 shares

3. The NYSE amended various rules to

permit NYSE specialists to become odd-lot

dealers In their respective assigned Issues

4 Pursuant to the requirements of Section

6(e) of the Securities Exchange Act, as

amended, all of the national securities exchanges amended their rules to abolish fixed

odd-lot differentials as well as those provrsions requiring the Imposition of a differential

on all odd-lot orders In addition, these exchanges have amended their rules to provide

for competitive commission rates on Intramember transactions

5 The Chicago Board Options Exchange

("CBOE"), the Philadelphia Stock Exchange

("Phlx") and the Cincinnati Stock Exchange

("CSE") amended their organizational rules

80

to provide for the participation of at least one

public director (or governor) on their respec

nve boards.

6 The PSE amended ItS rules to institute a

pilot program for competitive market making

In one Issue which IS dually listed and traded

on the PSE and two other national securities

exchanges

7. All national securities exchanges

amended their trading rules to conform to

Securities Exchange Act Rule 19c-1, which

decrees the phased elimination of exchange

restncuons on off-board transactions In exchange secunnes 15

8. The Commission did not object to Initiation of trading In the same class 16 of options

by more than one exchange (dual trading). 17

Presently, options which are the subject of

dual trading must have the same expiration

dates and exercise pnces on one exchange

as those of the same class which are traded

on another exchange. Thus, members of the

public are able to "shop markets" to place

orders for Identical option contracts In the

market where they receive best execution 18

EXCHANGE INSPECTIONS

NYSE Specialist Surveillance

Inspection

From JUly 30 through August 1, 1975,

members of the Commission staff conducted

an inspection of the NYSE's Market Surveillance DIVISion The purpose of the inspection

was to determine the extent, If any, to which

NYSE specialists were engaged In the practices of "print splitting" and "narrowing

spreads "'9 As the fiscal year closed, the

staff was currently reviewing documents and

data compiled dUring the course of the inspection to determine the effectiveness of the

NYSE's rules and surveillance program In

thrs area

American Stock Exchange

Arbitration Inspection

On January 26-28, 1976, members of the

Commission staff conducted an inspection of

the Amencan Stock Exchange ("Amex") Department of Arbitration The purpose of the

Inspection was to review and evaluate the

Amex arbitration program to determine

whether It provrdes a fair procedure through

•
which the Interests of the public and Investors

are protected. The inspection Included review

of the administration of such matters by the

Amex staff, the selection and composition of

arbitration panels, types of cases and Issues

Involved, and the appropriateness of awards.

Subsequently, the staff made the follOWing

recommendations to the Director of the Department of Arbitration:

1 That the Amex delete that portion of ItS

Rule 602 wrnch, In cases where the amount

In controversy exceeds $1,000, permits the

Director to appoint a five person arbitration

panel, four of whom would be connected With

the secunnes Industry. In addition, the staff

suggested that public claimants be entitled to

a panel composed entirely of persons haVing

no affiliation WIth the secunnes Industry.

2 That the Amex resume ItS past practice

of making a record of arbitration proceedings,

to assist any party Wishing to appeal the

decision to the courts and to aid the Commission In the performance of ItS oversight responsibilities.

3 That the Amex resume ItS past practice

of requiring ItS Conduct Divrsion to review

arbitration proceedings to determine whether

disophnary action against the member may

be warranted, parncularty where the decisron

IS rendered against the member firm.

4 That the exchange's advertismq and

pubhc relations programs be expanded to

Inform the public more adequately of the

availability of ItS arbitration facilities.

Boston Stock Exchange

Inspection

On February 17-19,1976, members of the

Cornmrssron staff conducted an Inspection of

the Boston Stock Exchange ("BSE"), focusIng on the BSE's market surveillance program, floor procedures and performance of

the BSE's specialists In securities traded on

the BSE pursuant to unlisted trading pnvrleges In addinon, the staff examined BSE's

Internal operating and disciplinary procedures

and reviewed disciplinary and arbitration proceedings conducted by the BSE In recent

years. Issues raised by the Inspection were

under analysis at the end of the fiscal year

NYSE Department of Enforcement

Inspection

On October 17, 1975, the Commission's

staff Informed the NYSE of findings after ItS

Inspection of the NYSE Department of Enforcement The Inspection was Intended to

evaluate the Department's effectiveness In

Investigating and prosecuting rule Violations

by members, member firms and registered

employees.

In ItS letter, the staff requested the Department's views as to what factors (Including

working conditions and salaries) may account

for the turnover20 of enforcement attorneys

and what steps the Department believes can

be taken to Improve the srtuation The staff

recommended that consideratron be given to

filling an enforcement attorney vacancy and a

vacant special counsel POSition In order to

enable the Department to maintain the resources required to Investigate and prosecute

a relatively large number of cases. It was

further suggested that the Department develop procedures for utihzinq the examining

staff of the Member Surveillance DIVISion to

gather evidence pertinent to a case under

mvesnqanon and to determine whether rule

Violations are Widespread Within a firm

The staff also recommended the maintenance of flow charts or other appropriate

records tracking the progress of Investigations through their final drsposmon, In order to

assure that investigations are handled expeditiously and formal charges, where necessary, are filed timely In order to assist the

Cornrrussion In the exercise of ItS oversiqht

responsibrsnes, the staff recommended that

the Department make more detailed closmq

records of cases In which no drsciphnary

aclJon IS taken. The staff suggested further

that after the Department had become reasonably current In the handling of ItS present

"major cornplamt'V" caseload, the gUidelines

applicable to NYSE Rule 351, which requires

the prompt reporting by member firms of rule

VIolations, lawsurts and vanous other matters

mvolvmq member firms and their registered

employees, be amended downward to increase the number of Significant claims reported. Finally, It was recommended that the

Department resume ItS review of arbitration

cases, Inasmuch as such proceedings are a

valuable source of possible rule Violations

American Stock Exchange

Options Program Inspection

On September 16 and 17, 1975, members

81
of the Commission's staff Inspected certain

aspects of the Amex's options pilot program,

with special attention given to activities of

option traders and to Amex's surveillance of

such acnvmes The staff sought to determine,

among other things, the extent to which option traders were discharging the affirmative

obligations Imposed by Amex rules to maintain fair and orderly markets. 22

The Inspection revealed that Amex needed

a procedure for ascertaining whether one or

more opnon traders were present In a trading

crowd and thereby subject to affirmative tradIng obligations. In consuitanon with the Commission staff, Amex adopted a rule and related surveillance procedures requmnq that at

least one option trader be present In the

crowd when a customer's order IS executed

by a floor broker 23 The rule gives Amex a

more effective means of determining whether

unsatisfactory market conditions exist and

whether such conditions are attnbutable to

the failure of option traders to discharge their

affirmative responsronrtres.

Philadelphia Stock Exchange

Options Program InSPeCtion

On August 27, 1975, members of the Commission's staff conducted an inspection of the

Philadelphia Stock Exchange ("Phlx") to determine whether the Exchange's faCilities and

surveillance programs were adequate to accommodate the expansion of ItS recently establlshed24 option trading program 25 Speciat

attention was given to an examination of

Phlx's floor taouues and the ability of floor

personnel to keep quotations current, report

trades, and conduct orderly options trading.

The staff team concluded that the operational aspects of the Phlx option pilot program

were satisfactory and that the organizational

framework of the Exchange's regulatory and

surveillance programs appeared adequate to

accommodate expansion It was noted, however, that more comprehensive assessment

of the Phlx's regulatory and surveillance systems could not be made until ItS options pilot

program achieved higher trading volume and

a larger number of opnon classes.

Chicago Board Options Exchange

lnspectten

On December 2-4, 1975, the Oornrrussion

82

staff conducted an inspection of the Chicago

Board Options Exchange ("CBOE") which

focused pnmanly on CBOE's regUlatory and

surveillance programs. Special attention was

devoted to CBOE's evaluation of the performance of ItS market makers and board brokers and allocation of option classes to those

members. The staff found that CBOE's performance In the area of floor member evaluation had Improved considerably since the

time of the Oornrrussron staff's last mspectlon.26

The Inspection also revealed Significant

new developments In CBOE's market surveillance program. At the time of the mspscnon,

CBOE was In the process of restructuring this

program to Include methods employed by the

NYSE to monitor stock trading In periods of

unusual market activity. The staff suggested

that CBOE's current procedures not be discarded until the new procedures have been

fUlly evaluated.

The inspection of CBOE's Investigation

Section 27 led to staff recommendations that

CBOE adopt a system enabling It to maintain

records more fully descnbmq Instances In

which market makers are given psrmlssron to

trade at variance With their obligations to

maintain fair and orderly markets.28 Members

of the CBOE staff stated that they would

Institute a procedure for keeping such records.

The staff also sought to determine the

extent to which CBOE members engaged In

"front-running" of blocks,29 "up-ticking" (or

"down-ticking") at the close of buslness30

and prearranged spread transacnons. 31 At

the time of the inspection, CBOE appeared to

have made progress In establishing surveillance programs for the detection of these

practices.

The Oornrmssron staff paid particular attennon to CBOE's surveillance program for detecting members' holding POSitions In excess

of the maximum limits set forth In CBOE's

rules.32 The Commission's staff suggested

that CBOE faCIlitate Its review procedures by

arranging to have POSition reports sent on a

regular baSIS to its Trading Procedure Department as well as to ItS Compliance Department.

SUPERVISION OF NASD

The Secunnes Exchange Act provrdes that
an assooanon of brokers and dealers may be

registered with the Commission as a national

secunnes association If It meets the standards and requirements for the registration

and operation of such associations contained

In Section 15A of the Act. The Act contemplates that such assooranons will serve as a

medium for self-regulation by over-thecounter brokers and dealers. In order to be

eligible for registration, an assooation's rules

must be desiqned to protect Investors and the

public Interest, to promote Just and equitable

pnnaples of trade and to meet other statutory

requirements Registered securities associations operate under the Cornrrussron's general supervisory autnonty, which Includes the

power to review disciplinary actions taken by

an assocratron, to approve or disapprove

changes In the association's rules and to

abrogate, alter or supplement such rules The

National ASSOCiation of Secunties Dealers,

Inc. ("NASD"), IS the only such associanon

registered With the Commission under the

Act

In adopting legislation to permit the formation and registration of national sscunnes

assooanons, Congress provided an incentive

to membership by permitting such associations to adopt rules precluding any member

from dealing With a nonmember broker or

dealer except on the same terms and conditions and at the same pnces as the member

deals With the general public The NASD has

adopted such rules As a practical matter,

therefore, membership IS necessary for profitable pamcpanon In many underwnnnqs since

members properly may grant only to other

members pnce concessions, discounts and

Similar allowances not granted to the general

public.

By the close of the fiscal year, 2,928 brokers and dealers were NASD members, a

decrease of Sixty-three members dunng the

year. This loss reflects the net result of 303

adrrussrons to and 366 terminations of membership. The 1975 Amendments provide, for

the first time, for the registration With the

Cornrrussron of muruopal secunnes protsssronats, consequently, approximately 250

rnurucipal secunnes brokers and dealers became members of the NASD. The number of

members' branch offices decreased by fortyfour to 5,968 as a result of the opening of 916

new offices and the closinq of 960. Dunng the

fiscal year, the number of registered representatives and prmcipats (which categones

Include all partners, officers, traders, salesmen and other persons employed by or affiliated With member firms In capacmes which

require registration) decreased by 2,984 to

194,718 as of June 30, 1976. This decrease

reflects the net result of 14, 793 Initial registrations, 16,633 re-reqrstranons and 34,410

terminations of registrations dunnq the year.

DUring the fiscal year, the NASD adrrurustered 40,762 qualification exarmnanons, of

which 14,295 were for NASD qualification,

2,025 for the Cornrrussron's SECO program33

and the balance for other agenaes, including

major exchanges and vanous state secunnes

requlators

NASD Rules

Prior to the 1975 Amendments, the Securities Exchange Act required the NASD to file

for Cornmrssron review copies of proposed

rules or rule amendments 30 days pnor to

their proposed effectiveness. The Commission could disapprove them If It found them

mconsistent With the requirements of the Act

Otherwise, the Cornrmssron would Issue a

statement to the effect that It had reViewed

such proposed rules or rule amendments and

had "not disapproved" them Moreover, the

Comrrussron would generally review, In advance of pubncanon, general policy statements, directives and interpretations Issued

by the NASD Board of Governors pursuant to

ItS powers to administer and Interpret NASD

rules

Section 19(b) of the Act, as amended by

the 1975 Amendments, gave the Comrmssron

more exphcrt oversrqht authonty over the

NASD's rule making processes (as well as

those of other self-regulators) and provided

further statutory cntena for such Cornrmssron

oversrqht 34 Proposed NASD rule changes

are now filed With the Cornrrussron. after

which the Cornrrussron generally has thirtyfive days from the time the notice of the

proposal has been published In which to

approve the proposal, or to institute proceedIngs to determine whether the proposal

should be disapproved. If the Cornrrussion

finds good cause for Immediate approval

upon filing, and publishes ItS reasons for so

finding, the Commission may approve the

83

..

: I 1:1

, II
proposed rule change or amendment prior to

the thirtieth day after publication.

DUring the fiscal year, numerous proposed

changes to NASD rules were submitted to the

Commission for ItS consrderanon, Among the

major filings which the Commission approved

were.

(1) Adoption of a new interpretation and

explanation by the Board of Governors of

Artrde III, Sections 1, 27 and 28 of the NASD

Rules of Fair Practice concerning personal or

private secunnes transactions by persons associated with a member firm and such member's responsibility to supervise such transactions. The new Interpretation and explanation

IS desiqned (1) to give an NASD member

notice of the private secunnes activlues of ItS

associated persons (2) to give notice to persons associated with a member that their

Involvement In private securities transactions

outside the scope of their assocration with the

member may require their reqrstranon as brokers, dealers or Investment advisers under

Federal or state securities laws, and (3) to

acvise members of their obligations to supervise the private secunnes transactions of their

associated persons In thrs regard, an associated person contemplating such transactions

IS required to notify the member In writing of

rus Intention, which notice provides a mechanism to assist members In satisfying their

supervisory responsibilities The new Interpretanon appeared necessary In view of past

Instances of private securities transactions

mvofvmq associated persons In which customers mistakenly believed that the transacnon was sponsored by the member

(2) Adoption of new Article XVIII of the

NASD's By-Laws and Schedule G thereunder

concerning, among other things, the reporting

of transactions In eligible seeurrtres In the

consolidated transaction reporting system

(the "consolidated system") contemplated by

Secuntrss EXchange Act Rule 17a-15,35 and

ann-marupulanon rules relating to over-thecounter trading In such securities The new

requirements provide that pnnopal transactions effected by NASD members must be

reported In the consolidated system at the

price recorded on the trade ticket Without

taking Into account any cornrrussron, commission equrvalent, or differential Imposed In

connection With the transactron, The new

procedures effectively eliminate the previous

84

disparity between the reporting of pnnopat

transactions effected by NASD members and

the reporting of Identical transacnons effected

on national secunnes exchanges

(3) Amendments to Schedule D under Article XVI of the NASD By-Laws to eliminate

capital requirements for market makers authonzed to enter quotations In the NASDAQ

(Natrona! ASSOCiation of Securities Dealers

Automated Quotation) System, to modify

block reporting requirements, to revise fees

for Level I NASDAQ usage, to reduce the

NASDAQ market maker requirements to requrre only one market maker (Instead of two)

for any security traded on NASDAQ, to outline procedures on limitation of access to the

NASDAQ System, and to permit the mdusion

In the NASDAQ System of securities Issued

by certain open-end Investment companies

registered under the Investment Company

Act The NASD eliminated the NASDAQ capital requirements because the recent amendments to Securities Exchange Act Rule 15c3-

1 established an industry-wide uniform net

capital rule 36 Moreover, In order to Improve

the NASD's market surveillance program and

to provide better Information to the public, the

NASD amended ItS block reporting regulalions to require dally reporting of the total

number of block transactions executed for all

Issues In which a firm IS a registered market

maker. With regard to the mclusion of certain

open-end Investment companies In NASDAQ, It appeared that since shares of these

companies were not continuously offered and

were already traded In the over-the-counter

market, It was In the Interest of the investing

public to provide broader dissemination of

quotations In such shares. Other admendments to Schedule D specify the reasons for

which the NASD may summarily limit or prohibit access to NASDAQ by Issuers and market makers, and outline the procedures for

NASD review of gnevances arising from such

action. Section 15A(h)(3) of the 1975 Amendments gives the NASD authority to take such

summary action under certain circumstances

(4) Amendments to Schedule D of the

NASD By-Laws to perrrut the mdusion In the

NASDAQ System of stabiliZing bids accompanied by penalty snpulanons. The penalty

stipulation IS Imposed by the underwriter of a

new Issue upon a participant In a selling

group when the participant sells back to the
underwnter shares which the former had

agreed to distribute In furtherance of the

offenng In this situation, the penalty stipulation generally provides that the participant

forfeits ItS seiling concession on those shares

sold back to the underwriter

The NASD theretofore had considered a

stabiliZing bid qualified by a penalty stipulabon as not representing a "firm" quotation

(I e , the bid IS so conditioned that It does not

represent an opporturuty for certain members

to sell to the managing underwnter at the

quoted pnce) 37 However, the amendment to

Schedule D now permits inclusion In NASDAQ of a stabilizing bid accompanied by a

penalty stipulation, provided the stipulation

only depnves a member of the syndicate of

ItS seiling concession for any shares returned

to the managing underwriter via the stabihzIng bid

NASD Inspections

Dunng the fiscal year, the Commission's

staff Inspected the NASD's distnct offices in

Atlanta, Boston and Cleveland.38 the NASDAQ and Market Surveillance Departments

of the NASD's Washington headquarters, and

the NASD's Arbitration Department. located

In New York City. These inspections were

conducted as a part of the Commission's

contmuinq oversight of the NASD's performance of ItS self-regulatory functions The

Inspection program also IS desrqned to Improve coordination between NASD and Commission programs for regulation and enforcement activrnes In the over-the-counter markets.

The NASD distnct office inspections by the

Commission Involved a review of (1) the

composition and effectiveness of the Distnct

Cernrrnttees, the District BUSiness Conduct

Cornrruttees ("DBCC's"), examination subcommittees, nominating committees and quotations committees, (2) the administrative

management and functioning of the distnct

staffs, especially their working relationships

with the vanous committees comprised of

representatives of NASD member firms, (3)

the district staffs' cooperation with the Comrrussron's regional offices, the exchanges and

other Interested regulatory bodies Including

the state sscunnes regulators, (4) the effectiveness of NASD disciplinary procedures,

and (5) the need, If any. for adoption of new

rules or amendments to existmq NASD or

Commission rules, or NASD policies and Interpretations Problems encountered dunnq

these Inspections Included (1) questions concerning the adequacy of enforcement of the

NASO's Mark-Up Polley by certain DSCC's.

(2) a need to generate greater consistency

with respect to the timely Initiation of drsciphnary proceedings and the seventy of sanctions Imposed, (3) Instances of msumcient

specncity In wntten decsrons rnernonahztnq

DBCC drsciplmary action, (4) the possible

need for greater representation of non-exchange member firms on the vanous

DBCC's, and (5) occasionally msutnerent administration and enforcement of the NASD's

in-firm supervision standards, All these problems were reviewed with representatives of

the NASD's National Office dUring the course

of the fiscal year, and appropriate correclive

action had been Initiated by year's end.

The objectives of the NASD Arbitration

Department Inspection were to review and

evaluate (1) the NASD's arbitration procedures to determine the quality and fairness of

ItS program, (2) the administrative procedures

used by the NASD arbitration staff, (3) the

selectron and composrtron of arbitration

panels to ensure the fairness of ItS proceedIngs and lack of orscnrnmanon, and to survey

(4) the types of cases and Issues Involved,

and (5) the awards made by the arbitration

panels The inspection revealed delays In the

processing of disputes submitted to the

NASD for arbitration The staff noted that as

of the inspection date, approximately flftythree cases remained "open" or unresolved

Of trus number, thirty-three cases had remained open for periods ranging from SIX

months to a year after the date of their

subrrussron for arbitration At least one case

had been open for nearly two years. A meetIng With the NASD on this matter Will be

scheduled early In the coming fiscal year.

The inspection of NASD's NASDAQ operalJons39 revealed a need to Improve enforcement of the NASD's minimum requirements

of two market makersw and 500 shareholders of record for mclusion of a secunties

Issue on NASDAQ. and of the NASD's policy

With respect to "crossed markets" The inspection also uncovered a delay In Implementing a NASDAQ "Bid Analysis Program"

which was deSigned In 1974 by the NASD

85

I

I

:1
and the Commission to detect market manipulation. Finally, the undesirable consequences of the high tumover rate of personnel In NASDAQ's Market Surveillance Secnon was noted by the Commission's staff.

In subsequent drscussrons with the NASD's

representatives concerning Implementation of

the NASDAQ Bid-Analysts Program, the

NASD stated that It planned to start a pilot

program along these lines by September of

1976 The NASD also agreed to meet with

the Commission's market surveillance staff to

discuss the NASD's plans for the program

With respect to the personnel problems In

NASDAQ's Market Surveillance Section, the

NASD pointed out that thrs sscnon-c-pamcularly ItS antifraud department-Is now fully

staffed with experienced personnel, and IS

expected to be more effective In the future.

The inspection of the NASD's Arbitration

Department revealed delays In the processIng of disputes submitted to the NASD for

arbitration. The staff noted that as of the

inspection date, approximately fifty-three

cases remained "open" or unresolved Of thrs

number, thirty-three cases had remained

open for periods ranging from SIXmonths to a

year after the date of their submrssion for

arbitration At least one case had been open

for nearly two years. The NASD's Arbrtrauon

Department staff said that the main reasons

why these fifty-three cases remained open

were difficulties In scheduling mutually convenient hearing dates and delaying tactics by

certain parties to these proceedings A meetIng with the NASD on thrs matter Will be

scheduled early In the coming fiscal year

NASD Disciplinary Actions

The Commission receives from the NASD

copies of ItS dacisrons In all cases where

drsctphnery acnon IS taken against members

or persons associated With members Generally, such actions are based on alleqanons

that the respondents have violated specined

provrsronsof the NASD's Rules of Fair Practice Where violanons by a member firm are

found, the NASD may Impose such sanctions

as expulsion, suspension, limitation of acnvrties or operations, fine, censure or other

fitting sanction If the violator ISan Individual,

rus registration with the NASD may be suspended, he may be barred from assooanon

86

with any member, or he may be fined, censured, or otherwise SUitablysanctioned.

DUring the past fiscal year, the NASD reported to the Commission final disposinon of

348 disciphnary complaints In which 209

members and 523 mdividuals were named as

respondents Complaints against nine members and thirty-two mdrviduals were dismissed for failure to establish the alleged

violations. Thirty-five members were expelled

from membership and twenty-one members

were suspended for periods ranging from one

day to two years. Fines also were Imposed In

many of these cases. In 126 cases, members

were fined amounts ranging from $25 to

$20,000, and In eighteen cases members

were censured. Additionally, 157 persons associated With member firms were barred or

had their registrations revoked, and elghtyone had their reglstraliOns suspended for

penods ranging from one day to five years

Finally, 206 other mdividuals were censured

or fined amounts ranging from $100 to

$20,000.

Review of NASD Disciplinary

Actions

DISCiplinaryactions taken by the NASD are

SUbjectto review by the Commission on ItS

own motion or on the nrnely application of

any aggrieved person. Prior to the 1975

Amendments, the effectiveness of any penalty imposed by the NASD In those cases

accepted for review by the Commission was

stayed pending such review. However, Section 19(d) of the Securities Exchange Act, as

amended, provides In part that the effectiveness of any sanction Imposed by the NASD

(or any self-regulatory organization) IS not

stayed pending appeal to the Commission

unless the Commission so orders. If the

Commission finds, on appeal or on review by

ItS own motion, that the drsciphned party

committed the acts found by the NASD and

that such acts Violatedthe spectned rules, the

Commission must sustain the NASD's action

unless It finds that the penalties imposed are

excessive or oppressive, In which case It may

reduce or set aside such penallJes The Comrrussron,however, may not Increase the penalties Imposed by the NASD

At the beginning of fiscal 1976, thirty proceedings for review of NASD drsophnary de-
crsions were pending before the Commission,

and dunnq the year fourteen additional cases

were brought up for review The Commission

disposed of twenty-nine of these appeals In

seventeen cases, the Commission affirmed

the NASD's action The Commission dismissed the appeal In one case because of

respondent's failure to file a brief, modified

the NASD's findings or penalties In eight

cases, remanded two cases to the NASD,

and permitted withdrawal of one appeal At

the close of the fiscal year, fifteen appeals

were pending

Three Significant opinions emerged dUring

the fiscal year In Unified Underwriters,

Inc ,41 the Commission affirmed the NASD's

findings that the respondent violated the

NASD's Rules of Fair Practice by falling to

comply with ItS Interpretations respecting free

riding and withholding Here, dunnq the

course of a distribution, respondent purchased for ItS own account shares In several

public offerings at the public offering price

When these shares advanced to an Immediate premium In the aftermarket, and after

respondent had held these shares for periods

ranging from seven to ninety days, respondent sold these shares In the openmarket for a

profit The respondent argued that Its actions

did not violate the NASD Interpretation since

It was not a participant In the distribution and

since ItS purchases were not made with a

view to distribution but solely for Investment

purposes The Commission found, however,

that respondent's trading was for the purposes of realizing short-term capital gains

and that, since the shares were Immediately

resold, respondent did not Intend to hold the

shares for Investment Accordingly, the respondent was held to have engaged In a

distribution and violated ItS obligation to make

a bona fide public offering at the public offering pnce

In Todd and Company, Inc 42 the Commission affirmed the NASD's findings that respondents arbitrarily set the market price In

the trading of the common stock of Automated Medical Laboratones, Inc, Just after

Todd had completed seiling Automated's first

pubhc offering of 250,000 shares, In order to

Induce customers to purchase and sell that

stock In large quantities The Cornrrussron

held that the respondents' prices were not

determined as "passive responses to market

forces" but were "arnfrcral devices Invented

for the purpose of generating demand" Further, the Commission found that the respondents engaged In a "crass manipulation that

could not possibly be deemed pnvrleqed under any conceivable legal theory" 43

In reviewing the penalties, the Commission

noted that respondent Langbein, the firm's

president, appeared to have been Influenced

by erroneous legal advice and, accordingly,

reduced the duration of hrs suspension and

that of rus firm from twelve months to SIX

months However, the Commission affirmed a

$50,000 fine Imposed against respondents 44

In Frank De Felice Ph 0 & ASSOCiates,

Inc ,45 the Commission 1f' -med the findings

of the NA8D that the respondents violated

Just and eqintable principles of trade by obtaining loans under two subordination agreements without disclosmq to the lenders the

firm's tmancral Situation, affording them a

clear descrrption of the terms of the subordination agreement, or Informing them that the

protections afforded customers by the Securities Investors Protection Act of 1970 were not

available to them Although some of ttus

information was a part of the agreement, the

Commission noted that the "Ieqalrstrc boserplate" In the form agreement was no substitute for the clear statement In ordinary language which respondents were obligated to

give the lenders However, due to a lack of

evidence indicating dehberate deception, the

NASD's sanction was reduced to ninety-day

suspension for each respondent

Review of NASD Membership

Action

Under Section 15A(g)(2) of the Exchange

Act, the NA8D must notify the Commission of

ItS Intention to admit a registered brokerdealer subject to a statutory drsquahficatron to

membership, or to permit a statutorily OISquahfred person to become associated with a

member, not less than thirty days prior to

admission of the member or assocrauon of

the person At the time of the flhng of such

notice, the NASD may apply for an order

stating that the Commission Will not proceed

under those provrsrons of the Act empowerIng the Commission to exclude the firm or

associated person, notwithstanding the disquahhcatron The Commission, In ItS discre87
non and subject to such terms and conditions

as It deems necessary, may Issue an order

permitting such membership or association If

It finds such acnon appropriate In the public

Interest and for the protection of Investors At

the beginning of the fiscal year, four applications of thrs nature were pending before the

Commission DUring the year, eight applications were filed, five were approved and three

were Withdrawn, leaving four applications

pending at the end of the year

SUPERVISION OF THE

MUNICIPAL SECURITIES

RULEMAKING BOARD

Under Section 19(b) of the Exchange Act

and Rule 19b-4 thereunder, the Municipal

Securities Rulemaklng Board ("MSRB") IS

required to frle With the Commission any

proposed rule change, accompanied by a

concise general statement of the basis and

purpose of such proposed rule change In

general, the Commission must then publish

notice of the proposed rule change together

With the terms of such change or descnptron

of the subjects and Issues Involved, and must

gIve parties an opportunity to submit their

views Most proposed rule changes may not

take effect unless approved by the Cornrrussion, however, certain rule changes, including

those establishing or changing a fee, dues or

other charges Imposed by the MSRB or rules

concerned solely With the administration of

the MSRB, need not be approved by the

Commission before taking effect

Prior to June 30, 1976, the MSRB had

made nine filings of proposed rules Five of

the filings embodied proposals which became

summarily effective Without Commission approval 46 Those rules concerned detmrtrons,

MSRB fees and administration, and the definition of a "separately Identifiable department

or drvrsron" of a bank 47 In addrtion, the

Comrnissron approved a proposal establishIng a $100 initial assessment to be paid by all

murucrpal secunties brokers and municipal

seeunnes dealers 48 At the close of the fiscal

year the three remaining fIlings, wrucn concern protessronal standards and recordkeepIng requrrements, were under review by the

Commission 49

88

REVENUE, EXPENSES AND

OPERATIONS OF SELFREGULATORY

ORGANIZATIONS 50

Self-regulatory organizations receive approximately 70 percent of their revenue from

five sources transaction charges, listing fees.

communication fees, cleanng f~es, and depository fees The nature of these revenue

sources make the Viability of self-regulatory

orqarnzatrons highly dependent upon pnce

fluctuations and the trading volume

Total share volume of secunnes traded on

all national secunnes exchanges and overthe-counter Increased by 26 7 percent between calendar years 1974 and 1975, bnnqIng 1975 share volume to 7 6 billion. 51 As a

result of thrs Increased trading acnvny, com.

bmed self-regulatory organization revenues

Increased to $206 million, up $33 million from

the 1974 total. 52

Changes In major revenue compo rents between 1974 and 1975 were as follows

Revenues from transaction fees increased to $33 million from $24 million.

Revenues from listing fees Increased to $32 million from $26 million,

Revenues from comrnurucauon fees

Increased to $26 million from $21 million.

Revenues from clearing fees increased to $35 million from $30 million.

Revenues from tabulating services

Increased to $14 million from $11 million,

Revenues from all "other" sources

declined to $38 million from $39 million

The expenses of the selt-requlatory bodies

are concentrated In two areas, employee

costs and oomrnurucanon and data process'

Ing costs These costs accounted for 75

percent of the $192 million 'In selt-requlatory

expenditures for 1975

Net Income of self-regulatory organizations

Increased In 1975 1975 pre-tax Income

amounted to $14 million, a considerable rrnprovement over the $1 million loss recorded

In 1974 Dunng the first SIX months of 1975,

self-regulatory orqaruzatrons saw their pre-tax

income climb even higher, reaching $15 mil.

lion 53
Financial Results of the NASD

Each year the Cornrrussron reviews the

NASO's proposed fee and assessment

schedule, Its supporllng financial statements

for the current and past fiscal years, and

proposed budget for the following fiscal year

The fee and assessment schedule must comply with Section 15A(b)(5) of the Secunties

Exchange Act, which requires the NASO to

allocate dues equitably among Its members

The NASO's statement of financial results

for Its fiscal year ended September 3D, 1975

revealedthat the NASO's equity Increased to

$92 million from $7.8 million In the pnor year

This Increase In the NASO's equity resulted

from higher net operating earnings and from

profitable operations of the National Cleanng

Corporation,the NASO's wholly-owned clearIng subsidiary.

Operating revenues of the NASO were

$13 0 million, an Increase of $0.8 million or 7

percent, and resulted from $1.8 million more

Income received from NASOAQ Issuer fees.

Other sources of Income generally declined.

For the second consecutive year, fees

charged for adrrnrustennq qualifications examinations declined by 25 percent to $2.4

million In fiscal year 1975, versus $3 1 million

In fiscal year 1974. Member assessments

and branch office fees also declined to $5 9

million In fiscal year 1975 from $6.4 million In

1974,an 8 percent decrease.

Ounng the 1975 fiscal year, operating expenses of the NASO declined to $12.0 million

from $12.1 million In fiscal 1974 The decline

ISattnbutable to a continuation of the NASO's

cost cutting programs which have been msntuted In recent years. Thus, Increases In

operating revenues, taken together With decreased operallng expenses, resulted In net

operating Income of $0.9 million as opposed

to $0.1 million In the prior year, a marked

Increase. Additionally, in fiscal year 1975, the

National Clearing Corporation had net income of $0.5 million wtuch, when added to

the NASO's net Income, Increased the Association's equity by $1.4 million, compared

Witha net loss of $0.6 million In ItS1974fiscal

year

NASD BUdget

A review of the NASO budget ISconducted

as a part of the Cornrmssron's regulatory

oversight responsibilities. Dunnq recent

years, the Commission has been specifically

concerned With the NASO's budqetmq regarding ItSprogram for examination of member broker-dealers, In order to assure that the

NASO has a sutncrent examiner staff to carry

out ItSenforcement and surveillance responsrbiunes. The NASO bUdget for fiscal year

1976 provrdes for expenditures of $135 million, against actual expenditures of $120

million In fiscal year 1975,an Increase of $1.5

million. The Increase ISlargely attributable to

the Increase In staff required to fulfill additional regulatory responsibilities Imposed by

the 1975 Amendments, which require the

NASO to oversee the rnurucipal secunties

acnvmes54 of ItS members and to enforce

rules promulgated by the MSRB

The NASO projects the addition of 250 new

member firms which deal exclusively In murucipalsecunnes and consequently has budgeted for an additional 46 examiners at a cost

of approximately $0 6 million The budget

provides for 556 full-time employees, a net

Increase of 62 positions over the NASO staff

as of June 3D, 1975, and an Increase of 32

POSitionsover the pnor staff budget of 524

The NASO has projected ItS Income for

fiscal year 1976 at $13.5 million, based upon

ItS current schedule of fees and assessments The NASO fee structure remains unchanged for fiscal year 1976, but the annual

assessment base has been modified to reflect the proration of assessments for partyear membership In the NASO, and has been

expanded so that the amount to be reported

by members as gross Income now Will include Income from transactions In rnurncrpal

securities

American Stock Exchange,

Midwest Stock Exchange,

National Association of Securities

Dealers, and New Vork Stock

Exchange

In calendar year 1975, the markets govemed by the four largest (In terms of total

revenue) self-regulatory organizations-the

American Stock Exchange ("Amex"), Midwest Stock Exchange ("MSE"), NASO, and

the New York Stock Exchange ("NYSE")-

experienced rising share volume On the

NYSE, volume rose from 38 billion In 1974 to

5 1 billion In 1975, an Increase of 32 percent

89
Over the same penod of time, MSE share

volume Increased 20 percent, share volume

from over-the-counter transactions by members of the NASD Increased 17 percent, and

Amex share volume Increased 14 percent.

Ttus rise In share volume resulted In increased revenues for these four self-regulatory organizations. 55

Although the Amex expenenced the smallest percentage Increase In share volume of

the four largest self-regulatory organizations,

It experienced the largest percentage increase In revenues, In part due to ItS Initiation

of trading In listed options. 56 The 1975 total

revenue of the Amex was 24 percent above

that for 1974. Transaction fees, which doubled between 1974 and 1975, accounted for

much of the Increase. Thrs rapid rise In

revenues, coupled with only a 16 percent nse

In expenses, gave Amex Its first profitable

year Since 1972

The MSE posted a 15 percent increase in

revenue between 1974 and 1975, a percentage gain exceeded only by Amex. ThIS gain

In revenue was not attributable to anyone

source but was generated by an Increase in

most revenue components, the exception

being communication fees whIch dIpped

slightly. Although the MSE's expenses increased dUring 1975, ItS revenues Increased

at a higher rate, resulting In 1975 net income

surpassing that of 1974 by over $910,000

The NYSE ranked third among the four

largest self-regulatory organizations In percentage gain In total revenue between 1974

and 1975. The rise In NYSE's share volume

caused transaction fees to increase by $2 5

million. LJstlng fees climbed from $20 million

In 1974 to $23 rrulhon In 1975. SImilarly,

Increases occurred In revenues ariSing from

cornrnumcanon fees, c1eanng fees and deposrtory fees, contributing to an $11 million

increase in total revenue. Much of the revenue Improvement was carried through to pretax Income, which In 1975 was $9 million

higher than In the prevrous year.

NASD revenues are not as sensitive to

changes in volume as are those of the national exchanges. As a result, the NASD

experienced the smallest percentage increase In total revenue of the four largest

self-regulatory organizations between 1974

and 1975, approximately SIX percent. ThIS

nse In revenue, however, was sunicient to

90

move the NASD from an operating loss of

$0.8 mIllion In 1974 to pre-tax earnings of

$1.3 million for 1975

Boston Stock Exchange, Chicago

Board Options Exchange, Pacitic

Stock Exchange and Philadelphia

Stock Exchange

LJke the four largest self-regulatory organizations, the next four self-regulatory organizations (In terms of gross revenue) also expenenced nsmq revenues, expenses and volume 57 The Boston Stock Exchange ("BSE")

generated a 24 percent Increase In share

volume; the Chicago Board Options Exchange ("CBOE") experienced a 154 percent

increase in contract volume; the Pactnc Stock

Exchange ("PSE") gained 26 percent in Volume, and the Philadelphia Stock Exchange

("Phlx") gained nme percent In share volume

during 1975.

The CBOE's large Increase In volume generated a 130 percent Increase in its transacnon fees and a rise of nearly 800 percent m

ItS commurucanon fees. Expenses for the

CBOE, however, rose by only 76 percent

dunng 1975 As a result, the CBOE erased ItS

1974 loss of $445,000 by earning $1.3 million

In 1975.

The BSE's rise In revenues came from

Significantly Increased transaction fees and

c1eanng fees, both of which are highly correlated to exchange share volume. Share volume on the BSE Increased by 27 percent

from 43 million shares in 1974 to 54 million

shares in 1975. Expenses also rose between

January and December 1975. Tlus resulted In

net income climbing to $356,000 in 1975, a

substantial improvement over the $11,000

recorded in 1974.

The PSE also expenenced Increases m

revenue due to greater volume However, the

PSE experienced large increases In communrcatron, data processing, collection, and

other expenses primarily associated with the

exchange's preparation for opnon trading and

with enhancement of data processing capabilities at the exchange's service bureau

Consequently, pre-tax Income slipped from

$517,000 in 1974 to a loss of $75,000 In

1975.

The Phlx also regIstered gains in total

revenue. Between 1974 and 1975 Phlx

gained 16 percent In total revenue pnmanly
due to a 42 percent nse In transaction fees.

Unlike PSE, however, Phlx's pre-tax Income

mcreased to $84,000 In 1975 compared to a

pre-tax loss of $341,000 In 1974.

Cincinnati Stock Exchange,

Detroit Stock Exchange,

Intermountain Stock Exchange,

and Spokane Stock Exchange

Three of the four smallest sell-regulatory

organizations-Cincinnati Stock Exchange

("CSE"), Detroit Stock Exchange rOSE"),

Intermountain Stock Exchange ("ISE") and

Spokane Stock Exchange ("SSE")--<levlated

to some extent from the trend expenenced by

the eight larger self-regulatory organizations

discussed above,58 the exception being the

CSE In 1975, CSE quadrupled Its 1974

share volume of 2 million shares. This generated a 13 percent Increase In revenues, a

relatively small increase In expenses, and a

near tnpling of net Income

The ISE did not fare as well. ISE volume

declined dunng 1975 by 38 percent. However, because the ISE's pnmary sources of

revenue are not dependent upon volume, the

dedme In total revenues was only 10 percent

ISE managed to reduce its expenses dunng

1975 and, as a result, Its pre-tax Income rose

by 33 percent over 1974 levels

The DSE also expenenced a decline In

revenues dunng 1975, and ceased operanons on June 30, 197659 pnmanly because of

declines In both volume and membership

Between January and December 1975, share

volume for DSE declined by 75 percent from

1 2 million shares In January to 0 3 million

shares In December Share volume showed

an additional decline of 74,000 shares between the fourth quarter of 1975 and the first

quarter of 1976. The number of Individual

members of DSE fell from 55 to 44 dunng the

penod 1974 to 1975, a decline of 20 percent

The SSE, which receives Income pnmanly

from membership dues and listing fees, expenenced small Increases rn revenues and expenses with no Significant change In net

income. SSE also sustained a 50 percent

decline In trading volume between 1974 and

1975 but, because SSE's sources of revenue

are unrelated to volume, the fmanoal condition of SSE was not senously affected.

Expenses and Operations of the

Municipal Securities Rulemaking

Board ("MSRB")

Section 23(b) of the secunues Exchange

Act, as amended by the 1975 Amendments,

requires that the Comrmssron submit "a

statement and analysis of the expenses and

operanons of each self-regulatory orqaruzalion in connecnon With the performance of Its

responsibilities under this title" The only responsibility of the MSRB under the Secunnes

Exchange Act IS rulemakmg for the municipal

sscunnes Industry. The MSRB Income of

$793,468 was denved from two fees established by rules adopted pursuant to Section

15B(b)(2)(J) of the Sscunnes Exchange Act

Fees mdude a one hundred dollar imnal fee

paid by all rnurucipal secunnes brokers and

rnurucipal secunnes dealers and an underwrlling assessment equal to 005% of the

face amount of all rnurucipal secunnes which

are purchased from an Issuer as part of a

new Issue by a municipal secunties broker or

a rnurucipal secunbes dealer which have a

fmal stated maturity of not less than two

years from the date of the secunties Over

70% of the MSRB's expenses were for salarres and other employee compensation, travel

and meetings. In ItS first nine months of

operatron the MSRB had net Income of

$282,000

BROKER-DEALER REGULATION

Registration

Brokers and dealers who use the malls or a

means or Instrumentality of Interstate commerce In the conduct of an Interstate secunties busmess are required to register With the

Commission 60

As of June 30, 1976, there were 5,308

broker-dealers registered, compared With

3,546 a year earlier This represents an increase of 1,762, or 50 percent since June 30,

1975. The large Increase In effecbve registranons IS due pnmanly to the fact that brokers

and dealers who confine their busmess to

transactions on a national securities exchange ("floor members"), and rnurucipal secunnes protessronals were required to register With the Commrssion for the first time as

of December 1, 1975, pursuant to Secnon

91
15(a) of the Securities Exchange Act as

amended by the 1975 Amendments Of the

total of 5,308 effective registrations, approxrmately 1,800 registrants were floor members

and 260 were murucrpal securities professionals

DUring fiscal 1976, 503 registrations were

terminated, of which 442, or 87 9 percent,

were withdrawn by the broker or dealer and

sixty-one, or 121 percent, were revoked or

cancelled by the Commission. DUring the

year, 2,293 new applications became effective, while 250 new applications were either

withdrawn, returned or denied

Recordkeeping and Preservation

Requirements

Secunues Exchange Act Rules 17a-3 and

17a-4 require registered brokers and dealers,

tnter alta, to make, keep current, and preserve for prescribed Intervals specified books

and records relating to their business Dunng

the past fiscal year, the Cornrmssron twice

amended these record keeping and preservation requirements. On August 25, 1975, the

Commission adopted 61 amendments to Rule

17a-3(a)(12)(I)(h), which then required brokers and dealers to obtain, for each assooated person, a record of any arrests, indictments or convictions for any felony or misdemeanor, other than minor traffiC offenses As

amended, the provrsron requires the maintenance of such records only With respect to

arrests, indictments or crimes which may

directly reflect on an rndrvidual's trustworthiness In dealing With customers' funds and

secuntles In March 1976, the Commission

adopted62 amendments to Rules 17a-3 and

17a-4 to require the maintenance and preservation of records ansmq out of Securities

Exchange Act Rule 17f-2, which Implements

the provisrons of Section 17(f)(2) of the Secuntres Exchange Act requiring the creation of

industry-Wide programs for the fingerprinting

of Industry personnel and the suormssron of

such fingerprints to the Attorney General of

the United States for rdentrncanon and appropriate processing

Financial Responsibility

Requirements

The Implementation and refinement of the

Commission's uniform net capital rule, dis92

cussed In Part 1 of thiS report,63 consntuted

the most Significant development of the past

fiscal year In the area of financial responsibuIty requirements for brokers and dealers DurIng the year, the Commission's staff evolved

new procedures to expedite the processing of

public mqumss and interpretive requests addressed to the Uniform net capital rule and

related financial responsibutty and reporting

requirements. The staff got over sixty phone

mqumas a week and answered more than

800 letters requesting interpretations of these

regulations durrnq the fiscal year

The Cornrrussron's financial responsibility

and reporting program for newly registering

brokers and dealers In municipal secunties'"

Involved two provisrons of Securities Exchange Act Rule 15c3-3, the customer protection rule On November 20, 1975,65 In

order to afford these brokers and dealers an

appropriate period of adjustment to pcssibly

unfamiliar regulatory requirements, the Comrrussron suspended untJI January 31, 1976,

Rule 15c3-3(d), which obliges brokers and

dealers to verify and obtain possession and

control of their customers' fully pard and

excess margin secunnes. At the same time, 66

In recognition of the difficulty frequently experienced In promptly acquiring a particular muruopal security, the Commission reaffirmed

the mdefrrute suspension of the "buy-in" requirements of Rule 15c3---3(m) as applied to

murucipal securities

Broker-Dealer Examinations

The Sscunnes Acts Amendments of 1975

augmented the Commission's broker-dealer

examination responsrbrlitres. As amended,

Section 15(b)(2)(C) of the Act requires the

Commission (or a self-regulatory organization

acllng at the Commission's direcnon) to examine each newly registered broker or dealer

Within SIX months of the granting of ItS registration. Dunng the past fiscal year, the Commission Implemented a Post Effective Conference Program wherein each new SEC067

registrant receives such an examination from

the Commission The seff-requiatory organizations have Similar responsrbihty In the case

of newly registered brokers or dealers for

Which such an organization IS the designated

exarmrnnq authonty 68

In addition to the Post Effective Conference

Program the Commrssron has continued ItS
regular exammauon program for both SECO

brokers and dealers and members of selfregulatory organrzatlons.

The Commission's exarrunauon program

for SECO brokers and dealers consists of two

types of examinations. The first type IS a

routine examination conducted once a year to

determine the nnanoal and operational condition of the SECO firm The second type of

examination, the so-called "cause" examination, is conducted whenever a fmancial or

operational problem has been noted In a firm.

Cause examinations generally emphasize the

particular problem encountered rather than

the overall condition of the firm. Dunng the

previous fiscal year, the Commission conducted 193 routine examinations and 92

cause examinations of SECD firms; approxrmately the same number of SECO examinations conducted the previous fiscal year.

As part of the Commission's responsibility

to oversee the operations of self-regulatory

orqaruzanons,and In keeping Withthe pattern

of selt-requlatron in the secunnes Industry,

the Commission conducts an ongoing review

of the regulatory programs of the vanous selfregulatory orqaruzanons. One phase of thrs

review consists of an on-site examination of

the self-regulatory organization's examination

and compliance programs and faCilities The

second phase-the "overstqht" exarrunanon-s-rs deSigned to evaluate Doth the financial and operational condition of the subject

broker or dealer, and the quality of the most

recent examination of that firm performed by

Its self-regulator. Commenced promptly after

the complsnon of an exammanon made by

the self-regulator, an oversight examination

Includes a physical inspection of the brokerdealer's books and records and supporting

'matenals and a review of the firm's selling

practices. The program contemplates a SImultaneous comparative review of the workIng papers and reports of the examination

conducted by the self-regulatory organization

dunng the corresponding penod.

The Oommrssron'sheadquarters office staff

has pnmary responsibility for on-site mspsctrons of the self-regulatory organization's

headquarters office, while the comrmssion's

regional offices have pnmary responsibility

regarding the overSightexamination program

Representatives from the headquarters and

regional offices hold quarterly meetings to

diSCUSSthe results of both on-site inspections

of the self-regulators and oversrqht examinations. SUbsequent to such meetings, conferences or other communications take place

With the self-regulatory organizations, dunng

which the staff conveys Its analysis of and

any recommendations concerning the selfrequtator's programs Moreover, the specinc

results of a particular oversiqht examination

generally are discussed With the self-regulator Immediatelyafter the examination

The second type of examination of a member firm of a self-regulatory organization ISa

cause exammauon, nearly Identical In purpose and scope to the Comrrussron'scause

examinations of SECO brokers and dealers

Dunng the previous fiscal year, the Comrrussron conducted 390 oversiqht sxarrunanons and 384 cause examination of such

member firms, a slight Increase over the total

number performed In fiscal year 1975, and In

keeping Withthe goal set by the Commission

for such examinations

The Comrrnssron continues to update ItS

Broker-Dealer Exammatlon Manual and

Checklists In order to reflect the current rules

and regulations applicable to brokers and

dealers In addmon, the Comrrussron prepares and distnbutes to all regional offices

educational matenals on new regulatory developments or examination techniques to

supplement the Broker-Dealer Examination

Manual and tarmuanzethe secunues compliance examiners WIthsuch matters.

The self-regulatory organizations srrrnlartly

have developed and updated their examination manuals and checklists dunng the past

fiscal year. In addition, these organizations

prepare educational rnatenal on regulatory

developments for their examiners. Such rnatenals are often the subject of examiner trainIng sessions

To further coordmate the Commission's

regulatory efforts between Its headquarters

and regional offices, the Oornrrussron staff

prepares and transmits to the regional offices

a monthly status report regarding new rule

proposals and regulatory developments, the

Commission's examination program and the

surveillance and examination efforts of the

self-regulators

93

II

II

I"

"
Early Warning and Surveillance

The Cornrrussron IS responsible for the financial and operational soundness of all registered brokers and dealers. In trus connection, pursuant to Section S(al of the Secunties Investor Protection Act IJf 1970, the CommiSSIOn requires each self-regulatory organization to provide the Commission with early

warning lists Identifying member firms which

may be In or approaching tmancal difficulty

or which may require c1oser-than-normal surveillance for other reasons Trns Information

IS collected by the staff on at least a biweekly basis and IS transmitted to the appropnate Commission regional office, which venfles the condition of those firms on the early

warning list Each firm on the list IS subjected

to intensified rnorutonnq by the regional office, acting In conjunction with the firm's selfregulatory examining authority

Other early warning techniques employed

by the Commission Include Secuntres Exchange Act Rule 17a-11, which requires a

broker or dealer to notify the Cornrrussron and

the appropnate self-regulator If the firm falls

below certain standards of finanaal and operational soundness, measured In terms of caprtal sutncrency and adequacy of books and

records If a firm drops below a level speerned In the Rule, It must take Immediate

remedial action and begin an accelerated

financial and operational reporting cycle to

provide the Commission with current information about how well the firm IS complying with

the rules

The Commission penodically reviews the

early warning and surveillance tools of the

self-regulatory organizations to Insure that

they constitute sound, effective programs

which Will enable each organization to detect

and monitor member firms that are In or

approaching financial difficulty at the earliest

possible time

The Cornrmssron's program for reviewing

the early warning and surveillance programs

of the self-regulatory organizations has two

phases In the first phase, on-SIte inspections

of the self-regulatory organizations, the Commission's staff reviews and attempts to

strengthen where necessary, a self-regulator's early warning and surveillance programs, while at the same time evaluating and

defining the goals, procedures, budget and

94

staffmg of those programs Dunng the past

fiscal year, the Commission's staff conducted

on-site inspections of the early warning. surveillance and examination programs of the

Chicago Board Options Exchange. Boston

Stock Exchange, Midwest Stock Exchange,

American Stock Exchange. and the Pacmc

Stock Exchange. The staff also completed an

on-site mspecnon of the Philadelphia Stock

Exchange rrutratad In the previous fiscal

year 69 In addition, the Cornrrussron staff conducted on-site inspections of the examination, early warning and surveillance programs

of the NASD distnct offices In New Orleans,

Kansas City, Boston, and Los Angeles With

regard to all self-regulators, In particular

those not receiving on-site inspections dunnq

the past fiscal year. the Cornrrussron maintains on-qomq communications with the organizations to determine the status of their

regulatory programs, especially In such areas

as meeting examination goals, surveillance of

member firms on the early warning list, and

new regulatory developments

The second phase of trus review, generally

earned out by the Regional Offices, Involves

an on-site review of member firms of selfregulators to determine their understanding of

and compliance with the vanous early warnIng standards and procedures applicable to

them. As a rule, the Regional Offices combine their evaluation of a member organization's understandmg of and compliance with

applicable early warning standards with a

review of that firm's nnanoat and operational

soundness and of the self-regulator's most

recent examination of that firm

The efforts of the Comrnrssron, In coruuncnon with those of the self-regulators, to develop comprehensive and effective early

warrnnq and surveillance programs constitute

one explanation for the steady decline In the

number of securities firms who have been

subject to liqurdatron In the past several

years.70 Indeed, hqurdation proceedings under the Secunnes Investor Protection Act of

1970 have been commenced only once durIng the first seven months of 1976.

Training Program

The Comrrussron firmly believes In the

need for comprehensive penodrc trarrunq programs for secunties compliance examiners,
both those on the Commission's staff and

those employed by the vanous self-regulatory

organizations Such training efforts broaden

the knowledge and the skills of the exammers, and acquaint them With the latest modifications to examination procedures AccordIngly, In the past fiscal year the Commission

has carned out a senes of training courses,

some directed only toward Commission examiners and others toward regulatory organizations' examiners Some of these programs

are developed and conducted by SEC personnel, others utilize the expertise of moivrouals and orqaruzations not connected With the

Commission The Commission encourages

ItS own compliance examiners to Improve

their skills through correspondence courses,

seminars, and lecture courses provided by

colleges and umversrtres: and In appropnate

cases, the Commission pays tumon fees on

behalf of ItS examiners

The Commission's Internally developed

training efforts essentially consrst of four drstinct programs

1 Pen odic two-day training seminars conducted at each regional office and dealing

With the Commission's oversight examinations Such seminars review the results of

oversight exarrunanons, diSCUSSany new and

Important developments or techniques

emerging from these examinations, and proVide an opportunity for the regional offices to

diSCUSSWith staff members of the self-regulatory organizations, who are mvited to the

seminars, means whereby exammanon programs and techniques may be refined and

more closely coordinated

2 Two-day seminars held twice each year

In each regional office for the more expenenced securities compliance examiners on

the subject of examination techniques Such

seminars diSCUSS Significant new developments In the Industry and particular examination techniques that may be utilized to deal

With such developments.

3. One four-day training seminar held at

the Commission's headquarters Thrs seminar increasingly employs audiovisual instruction and provides examiners from the Comrrnssron, the self-regulatory organizations and

State secunlles comrrussrons With Information

on baSIC examination techniques, as well as

the vanous regulatory programs of the Comrrussron pertaining to broker-dealer nnancrat

and operational compliance The seminars

generally Include lecture and workshop sessrons, With representatives from the Commission and the self-regulatory organizations

parnopannq as lecturers, commentators and

workshop session leaders

4 BI-weekly, one-hour training sessions In

the regional offices for the Comrnrssron's examiners These sessions focus on new developments, requlatory problems, rules and examination techniques

The mdrvrduals charged With pnmary responsibrhty for each regional office's examination program meet every three months With

members of the Comrrussron's staff to discuss new training and examination techniques, areas where additional training IS

requued, and the strengths and weaknesses

of the Commission's regulatory current program Such meetings ensure Uniformity of

regulalion throughout the Commission's regional offices and contnbute to the contmumq

refinement of the Cornrrussron's training and

exarrunatron programs

The Cornrrussron's tnree volume BrokerDealer Examination Manual contains, among

other things, a compendium of Comrnrssron

rules, releases, and other relevant documentation Taken together With exarrunation

checklists and other supplementary material.

It IS Intended to provide the Cornrrussron's

examiners With a centralized reference

source of the rules, interpretations, examination procedures and techniques With which

they must be familiar In conjunction With the

Manual, the Cornrrussron utilizes professionally produced training films and case problems which Illustrate the proper procedures

for conducting a thorough examination of a

broker or dealer

In addrtron to Inviting examiners employed

by the self-regulatory organizations to certain

of the Cornrrussion's training programs, the

Commission also works With the self-regulators to Improve their own training programs

The Commission periodically reviews the

training efforts of the self-regulators and has

encouraged each self-regulator to hold Informal, br-rnonthly training programs and more

formal annual training sessions for their own

examination staffs In many Instances, the

Comrmssron's examiners have been mvrted

to attend or partiopate In such sessions

95
Regulatory Burdens on Brokers

and Dealers

The Commission has been sensitive to the

Impact of ItS regulations and reporting requrernents, In addrtron to those of the selfregulatory orqaruzatrons, upon all brokers

and dealers and especially upon smaller

firms. As a consequence, dunng recent years

It has undertaken a number of programs

aimed at streamlining and Simplifying such

requirements for the entire secunlles industry.

The Commission has reviewed and continues to review ItS financial and operational

reporting rules and related reporting requirements and those of the self-regulatory bodies

In an effort to anevrate the burden of compliance faced by brokers and dealers, and especially smaller broker-dealers, and to assure

that such rules 'and requlatrons reflect the role

of the small broker-dealer In the Nation's

sscunnes markets. To the extent that It IS

found that the benefit to the pubuc Interest

contemplated by the Commission's rules and

requlanons IS not commensurate With the

burden Imposed on brokers and dealers, and

In particular on smaller firms, the Commission

has modified rules and regulations through

the use of provisions creating appropriate

partial or complete exemptions from certain

regulatory obligations

Other efforts by the Commission In thrs

area Include the formation In May 1974 of a

Federal advisory committee, the Report Coordmannq Group, to advrse the Commission

on Simplifying and standardizing vanous reporting forms used by the Commission and

the self-regulatory orqarszanons." Trus project has produced concrete results In the form

of the FOCUS reporting concept which, as

discussed In Part 1 of trus Annual Report, 72

dramatically lessens the burdens placed

upon brokers and dealers to demonstrate

compliance WIth the Commission's financial

and operallonal regulabons.

Another equally Important product of the

Report Coordinating Group's efforts has been

the development of uniform forms for the

registration 01 brokers and dealers (Form

BD), and their agents and associated persons (Form u-4) As previously reported.P

these forms have achieved mcreasmqly Wide

acceptance among the Commission, sell-reg96

ulatory orqanrzanons, and State secuntrss

regulators. Dunng the fiscal year, four addinonal States adopted Form BD and one

adopted Form U-4. Thus, to date, forty-nine

States, the Commission, and the NASD accept Form BD, these regulators, as well as all

national secunnes exchanges, accept Form

U-4

In January 1976, the Report Coordinating

Group recommended adoption of unrform interpretations of certain terms In Item 10 of

Form BD In order to permit consistent responses by all registrants On February 6,

1976, the Commission formally adopted

these Interpretations 74 Other junsdrcnons

and organizations which have adopted Form

BO have Informally indicated their concurrence With the recommendations of the

Group

Two other Federal advisory cornrmttees

established by the Commission In recent

years have had as one of their purposes the

prOViding of assistance to the small brokerdealer cornmuruty. The Cenfral Market System AdVISOry Committee was created to ensure the maintenance of an appropriately

competitive environment for the brokerage

communrty, especially for the smaller firms 75

The other committee, the Broker-Dealer

Model Compliance Program AdVISOry Committee, was responsible for compiling a gUIde

to common regulatory obllgallons of brokerdealers, particularly small broker-dealers, and

for suggesllng ways to comply with such

obligations 76

CLEARANCE AND SETTLEMENT

Progress Toward a National

System of Clearance and

Settlement of Securities

Transactions

Dunng the past fiscal year, With the Comrrussron's active encouragement, enbties involved In secunnes processing Improved their

ability to complete secuntres transactions

promptly and accurately For example, deposrtones Instituted transfer agent custodian

("T AC") programs which are deSigned to

reduce both the number of certificates mamtamed In deposrtories and certificate movement between deposrtones and transfer

agents 77
Dunng the fiscal year, the continued development of Interfaces among c1eanng corporations and deposrtones, which Immobilize secunnes cernncates by allowing pamctpants to

move secunnes throughout the country by

book entry, tended to reduce costs and accelerate the settlement process

As a result of such Improvements, as well

as the Increased participation In depositones

by brokers and dealers, banks and other

institutions, the Commission believes that

progress IS being made toward the development of an efficient national system for the

clearance and settlement of secunnes transactions This progress made can be measured by the fact that secunties processing

mechanisms efficIently handled record tradIng volume dunng the early months of calendar year 1976. The Commission expects that

the continued development and refinement of

c1eanng and depository services WIll attract

more persons to become participants In these

systems In order to realize the substantial

benefits wruoh accrue from such participation.

Increased particpatron WIll In turn further reduce the dependency of the clearance and

settlement mechanisms upon the physical

movement of certmcates

Rule Changes of Registered

Clearing Agencies 78

DUring trscal year 1976, numerous

changes In, or additions to, the rules, practices and operations of the thirteen registered

cleanng agencies 79 were submitted to the

Commission for ItS approval under the provisions of Section 19 of the Securities Exchange Act 80 The tollowmq are among the

more SIgnificant Items on which the Oornrmssron acted favorably'

1 The Midwest Secunnes Trust Company

("MSTC") established several programs deSigned to taohtate the handling of seeunnes

MSTC's Transfer Agent Custodian ("TAC")

Program81 permits the depository to retain a

working supply of cernncates while deposmnq

the remaining certificates With a transfer

agent bank to be held In custody In the form

of a balance certificate registered In the name

of MSTC's nominee ThIS aids secuntres

processing by reducing certificate movement

between the deposrtory and the transfer

agent The Depository Input Satellite System82 allows MSTC parnopants to deposit

secunnes With banks acting as agents for

MSTC and to receive credit for the deposrts

at MSTC pnor to the actual physical delivery

of secunnes from the banks to MSTC MSTC

also expanded ItS depository Interface WIth

PaCifiC secunnes DepOSItory Trust Company

("PSDTC") to permit book entry movements

of secunnes from PSDTC to MSTC 83

2 MSTC amended ItS rules to provide for

Increased representation on MSTC's Board

of Directors for five Chicago cleanng house

banks which participate In MSTC by auowinq

the banks to nominate five of the eleven

Board members 84

3 PaCifIC Cleanng Corporation ("PCC")

established satellite tacrhtres In Seattle,

Washlngton,85 Portland, Oregon86 and Denver, Colorado 87 The purpose of these tacihnes IS to provide access to the cleanng and

depository operations of PCC and PSDTC for

broker-dealers, banks and other qualified

users In the Seattle, Portland and Denver

areas.

4 The Paofic Stock Exchange, Inc. rrntrated Interfaces between PSDTC and the

Deposrtory Trust Company ("DTC") and

MSTC 88

5. Stock Cleanng Corporation ("SCC") developed a mechanism for the processing of

odd-lot transactions on the New York Stock

Exchange, Inc. ("NYSE") through SCC's continuous net settlement ("CNS") system 89

6 The NYSE adopted and the Comrmssron

approvedw amendments to DTC's rules to

enable the NYSE to sell part of the capital

stock of DTC to ItS participants The amendments perrrut direct ownerstup of DTC shares

by mstrtutional partrcipants. Broker-dealer

participants are not permitted to own DTC

shares directly. Instead, the NYSE, the Amerroan Stock Exchange, Inc, and the NASD act

as representatives of their members

7 DTC also amended ItS fee schedulev' to

enable DTC's fees to bear a closer relationship to ItS costs

8 Stock Clearing Corporation of Philadelphia ("SCCP") adopted new procedures atlowmq SCCP members to pledge securmes

held In SCCP's depository to the Options

Cleanng Corporation In order to guarantee

opuon contracts written by SCCP members 92

9 Boston Stock Exchange Clearing Corporation ("BSECC") adopted procedures to irn97
plement a market-to-market requirement applicable to transactions on the Boston Stock

Exchange having a contract price not exceeding $250,000.93 This action was designed to protect clearing members of

BSECC from losses resulting from the failure

of other clearing members to sellie such

trades.

In approving these proposals, the Commission acted With a view toward facilltabng the

development of a national system for the

prompt and accurate clearance and settlement of securities transactions, and the ehrnrnation of seounnes certificate movement In

connecbon WIth the settlement of securibes

transacbons.

Expenses and Operations of

Registered Clearing Agencies

Secnon 23(b) of the Secunnss Exchange

Act, as amended by the 1975 Amendments,

requires that the Comrrussron submit "a

statement and analysis of the expenses and

operations of each self-regulatory orqarnzabon In connecbon WIththe performance of ItS

responsibihnesunder this tItle, for which purpose data pertaining to such expenses and

operations shall be made available by such

organization to the Comrrussron at ItS request." The 1975 Amendments also require

c1eanngagenCIesto regIster as separate selfregulatory organizations as of December 1,

1975 The revenue and expense figures for

all registered clearing aqencres other than

TAD Deposnory Corporation, Bradford Securities Processing Services, Inc. and Options

Cleanng Corporation (which were not wholly

owned subsidianes of a national securities

exchange or the NASD when the 1975

Amendments were signed Into law) are included In the revenue and expense analyses

of their respective parent self-regulatory orgarnzanons.94 Thrs precludes companson between those clearing agencies and the remaining registered cleanng aqenoes; It has

not, therefore, proven possible to set forth

separate and uniform nnanoal data for regiStered clearing aqenoes. Separate statements

and analyses of the operating results of each

regIstered clearing agency WIll be available

for mclusron In the Commiss.on's Annual Report for fiscal year 1977.

98

Exemptions

During fiscal year 1976, the Oommissron

received SIXapplications from transfer agents

for exemption from reglstralton under Section

17A(c) of the Act. All SIX applicants were

Informed that the Commission's staff would

not recommend that the Commission grant

an exemption, and that the staff would conSider the applicanons as Withdrawn unless

the applicant indicated otherwise. Only one

applicant Indicated a desire for further consideranon: thiS appucauon was pending at the

close of the nscal year

Fifteen applications for exemption from

registration as a cleanng agency under Secnon 17A(b) of the Act were fIled. One entity

Withdrew ItS exemption request and the remaining apphcattons-e-whrch are discussed In

Part 1 of thrs Report95-are being considered.

SECURITIES INVESTOR

PROTECTION CORPORATION

The Secunnes Investor ProteclJonAct96 of

1970 (the "SIPC Act") established the Secunnes Investor Protection Corporabon ("SIPC")

to provide certain protections to customers of

member brokers and dealers who are unable

to meet their ftnancral obligations to such

customers. SIPC IS a non-profit membership

corporation, the members of which are most

of the registered brokers and dealers 97 While

SIPC IS funded primarily through assessments on ItS members, under certain condrnons It may borrow up to $1 million from the

United States Treasury.98

Proposed Legislation to Amend

the securities Investor Protection

Act of 1970

In October 1975, the Cornmissron testified

before the Subcommittee on Consumer Protection and Finance of the House Committee

on Interstate and Foreign Commerce on a btll

to amend the SIPC Act 99 This bill grew out of

a June 1974 report1OO to the SIPC Board of

Directors by a Special Task Force appointed

by SIPC to consrder possibte changes In the

1970 Act. Among other things, the bill would:

(1) permit SIPC to make direct payments to

customers In certain relatively small cases by

amending eXisting procedures requiring
oourt-appointed trustees In all SIPC hquidalions; (2) permit customer accounts to be

transferred In bulk to other SIPC members In

appropnate cases rather than to be hquidated

on an individual baSIS;and (3) raise the dollar

limitations upon the protections available to

Individual customers. The Commission expressed Its support for the bill and offered

certain comments. At the end of the fiscal

year, this proposed leglslatlon-as well as a

companion Senate bl1l101-was sllll pending

Litigation Related to SIPC

In SEC v. Morgan, Kennedy & Co , Inc, 102

the trustees of a profit sharing plan trust that

held an account with the debtor broker-dealer

asserted that the 108 bsnencranss of the

trust were separate customers of the debtor,

each entitled to protection under the SIPC

Act or, alternatively, that the several trustees

were separate customers. The United States

Drstnct Court for the Southern District of New

York held that each of the beneficiaries was a

separate customer. In January 1976 the

United States Court of Appeals for the Second Circuit reversed the district court, holding

that only the trust Itself was a customer for

purposes of the SIPC Act. 103On June 14,

1976, the Supreme Court dedi ned to review

that decrsion.104

In SEC v. Executive Secunties Corporauon.v» certain broker-dealers and educational mstrtutronswhich had loaned securities

to the debtor asserted that they were customers of the debtor With respect to such

loans and therefore entitled to protection under the SIPC Act. A Federal court of bankruptcy held that secured stock lenders which

had no other sacunues accounts or dealings

Withthe debtor were not customers Withinthe

meaning of the SIPC Act, and, therefore,

were not entitled to the protection of the SIPC

Fund.

Proposed Amendment to SIPC

By-Laws

In June 1975, SIPC submitted to the Commission a proposed amendment of ItS bylaws which would have required SIPC members to display the SIPC symbol In their

offices and to Include a reference to SIPC In

their advernsmq. On August 28, 1975, the

Commission determined to disapprove the

proposed amendment on the grounds that

the SIPC Act does not vest SIPC With the

authonty to require such display by ItS members 106

REGULATION OF SECO

BROKER-DEALERS

Under Section 15(b) of the Securities Exchange Act, the Commission IS responsible

for prescnbinq rules establishing qualifications standards for all brokers and dealers,

mcludmq those who are not members of the

NASD ("nonmember" or "SECO" brokers or

dealers) Thrs section also empowers the

Commission to adopt rules governing the

business conduct of SECO brokers and dealers, In order to provide regulation of such

brokers and dealers comparable to that provided by the NASD for ItSmembers

At the close of the fiscal year, the number

of SECO brokers and dealers registered With

the Commission and not entitled to an exarnptron from the Commission's SECO

rules 107 totaled 309,108 and the number of

associated persons of such firms (I e , partners, officers, directors, sole proprietors and

employees not engaged In merely clerical or

ministerial funcnons) totaled 23,236.

Secuntres Exchange Act Rule 15b9-2 Imposes an annual assessment to be paid by

SECO brokers and dealers to defray the cost

of their regulation by the Commission. DUring

the fiscal year, the Commission proposed to

amend Rule 15b9-2 and the annual assessment schedule for SECO brokers and dealers

for fiscal year 1976 (Form SECQ-4-76). The

proposals would'

(1) reduce the current annual personnel

assessment from $15 to $5,

(2) Introduce a 0 375 percent assessment on annual gross Income from

over-the-counter transactions,

(3) reduce the Initial fee for mdrviduals

filing Form U-4 from $50 to $35,

(4) change the due date for SECO annual assessments from June 1 to September 1; and

(5) change the SECO fiscal year from

July 1 to October 1 cycles, to conform

the SECO fiscal year to the new Federal fiscal year

The modifications to the SECO fee and

assessment schedule were desrqned to rnm99 I

IIII

I L !
gate mequnes In the assessment structure

pnmanly resulting from the Inclusion In SECO

of a number of rnunrcipal secuntles brokers

and dealers who were required to register

with the Commission by the 1975 Amendments and elected not to JOinthe NASD The

proposed amendments to both rule and

schedule were adopted by the Commission

shortly after the close of the fiscal year 109

SHORT SELLING INTO

UNDERWRITTEN OFFERINGS

As previously reported, 110 the Commission,

on Apnl 2, 1975, published for public comment, among other things, a revised version

of proposed Secunnes Exchange Act Rule

10b-21 , which was first proposed In 1974 111

Proposed Rule 10b-21 would Impose certain

limitations on purchases to cover short sales

where such short sales were effected before

the commencement of an offenng mvoivrnq

securities of the same class or senes

These proposals were intended to regulate

certain trading practices which continue to be

of substantial concern to the underwriting

community Short selling by hedge funds and

other persons reportedly continue to take

place In antrcipanon of underwritten offerings,

particularly of securities traded over-thecounter Such short selling may be Intended

to create downward pressure on the trading

market, forcing the Issuer or underwnter to

lower the offenng pnce, thereby perrrutnnq

short sellers to cover their short sales at

lower prices With secunnes purchased In the

offering or In the lower aftermarket Thrs

practice has reportedly caused Issuers and

underwriters to abandon prospective offermqs The Commission IS continuing to study

these and other associated trading practices

In order to mmate appropriate regulatory acbon

EXEMPTIONS

Of three requests received for exemptions

from the broker-dealer registration requirements, one was granted pursuant to Section

15(a)(2) as necessary and appropnate In the

public Interest and for the proteclion of investors

Securities Exchange Act Rule 10b-6

places certain protuoinons upon trading In

secuntles by persons Interested In a distnbu100

lion of such secuntres Dunng the fiscal year,

approximately 360 exemption requests under

paragraph (f) of Rule 10b-6 were granted on

facts indicatmq that the transactions did not

appear to constitute manipulative or deceptive devices or contrivances Within the meanIng of the rule

DUring tbrs year the Director of the DIVISion

of Market Regulation, pursuant to delegated

authonty, exempted two life Insurance companies registered as broker-dealers from the

provrsrons of the Uniform net capital rule,

Securities Exchange Act Rule 15c3-1. Due to

the specral nature of their business, their

fmancral posinon, and the safeguards established by those firms for the protection of

customers' funds and secunnes, the Commission was satisfied that It was not necessary

or appropriate In the public Interest or for the

protection of Investors to subject such brokerdealers to the provrsrons of Rule 15c3-1.

The Cornrrussron monitors the Impact of

competitive cornrrussron rates by obtaining

pertinent data on a quarterly basis from certain brokers and dealers through Securities

Exchange Act Rule 17a-20 and related Form

X-17 A-20. Some brokers and dealers subject to the rule's filing requirements cannot,

because of special circumstances or an unusual business rrux, provide the Comrrnssron

With rnearnnqtul information regarding competitive comnussron rates Consequently, durIng FIscal Year 1976, the Commission

granted exemptions from the Form X-17A-20

filing requirement to twenty-one brokers and

dealers.

Other applications for exemption from the

provisions of the Secuntres Exchange Act are

discussed elsewhere In thiS Annual Report, In

connectron With the mdrvrdual provrsions

thereof germane to these applications.

NOTES FOR PART 3

1 Act of June 4, 1975, Pub L No 94-29,

89 Stat. 97 (hereinafter Cited by section as

1975 Amendments)

2 The Honolulu Stock Exchange IS the only

securities exchange presently exempted from

registration

3 On May 10, 1976, the PBW Stock Exchange, Inc changed ItS name to the Philadelphia Stock Exchange, Inc

4 See 41 st Annual Report, pp. 65-66

5 See Ecological SCience Corp., Securities

Exchange Act Release No 10217 (June 13,

1973), 1 SEC Docket No 20 at 5, and cases
cited therein. DUring fiscal year 1976, the

Commission followed this approach In cases

involving the removal of two securities listed

on the American Stock Exchange, Inc. See

Clary Corp , Securities Exchange Act Release No 11751 (October 20,1975),8 SEC

Docket 196, BBI, Inc., Securities Exchange

Act Release No. 11686 (September 26,

1975), 7 SEC Docket 978.

6 In addmon, applications by two exchanges to stnke the stock of State Savings

and Loan Association were granted by the

Federal Home Loan Bank Board, pursuant to

authonty given to the Board by Section 12(1)

of the Securities Exchange Act of 1934

7 See S Rep No 75, 94th Cong, 1st

Sess. 106 (1975), H Conf. Rep No 229,

94th Cong., tst Sess. 95 (1975)

8 Application for Unlisted Trading Pnvileqes

In Common Stock of Ludlow Corp by the

Boston Stock Exchange, File No. 7-4596

(filed April 23, 1974)

9 Secuntres Exchange Act Release No

11492 (June 25,1975),7 SEC Docket 738

10 Boston Stock Exchange, Administrative

Proceeding File No. 3-4646 (May 6, 1976)

11 41st Annual Report, p 67.

12 Section 19(b) of the Securities Exchange

Act, as amended by Section 16 of the 1975

Amendments.

13 For a descnpnon of the MUniCipal Securities Rulemaklng Board, see 41 st Annual Report,p 7

14 Secuntres Exchange Act Release No

11604 (August 19,1975),7 SEC Docket 652

15 Sscunnes Exchange Act Rule 19c-l IS

discussed at pages 4-5, supra

16 As used here, the term "class of options"

means all option contracts of the same type,

e , put or call, covering the same underlying

stock.

17 Cf Rule 19b-4, FIling No PBWSE-76-2

(filed January 19, 1976) The Cornrrussron

neither required nor discouraged dual trading

of options However, the Oornrrussron's preVIOUSInsistence that Initiation of option tradIng programs on more than one national

secunnes exchange should be conditioned,

among other things, on the achievement of a

national options clearing system, establishment of a common system for reporting and

disseminating last sale information for options

transactions and agreement as to standardizatron of terms of listed options helped insure that there would not be obstacles to

such trading See Securities Exchange Act

Release No. 10981 (August 22,1974),5 SEC

Docket 224.

18 At the end of the fiscal year, the Comrmssion had under consrderanon a proposal

by the PSE to permit dual trading WIth different expiration dates

19 "Print splltllng" IS the reporting of a single sale of several round lots as several

smaller sales-for example, printing a 1,000

share transaction as five 200 share transactions. "Narrowmq quotations" IS a related

practice Which Involves re-quounq the stock

between split trade reports by raising the bid

or lowering the offer after a transacnon has

occurred but before the card used to report

the transaction on the consolidated tape has

been placed In the reader

20 As of December 31, 1974, five of the

nine enforcement attorneys have been With

the NYSE for less than one year, three had

from one to two years of NYSE experience

and one had been With the NYSE for SIX

years

21 New York Stock Exch Educ Cir No

353 (January 10, 1972) defines major complaint as "any written complaint which Involves (1) claim of actual damages In excess

of $10,000, or (2) claim for damages which IS

settled for an amount exceeding $2,500

22 When they enter the trading crowd, options traders assume certain responsibilities

to assist specialrsts In their options market

making capacity These responsibilities are

set forth In American Stock Exch. Rule 958

See also 41 st Annual Report, p 69.

23 Commentary 07 to American Stock

Exch Rule 958.

24 See 41 st Annual Report, p 16.

25 Phlx had proposed to expand ItS option

trading program by the listing of call options

on five additional underlying stocks which

would bring the total number of underlying

stocks listed on the Exchange up to fifteen

See Rule 19b-4, Filing No SR-PBWSE-75-

2 (filed September 15, 1975)

26 See 41st Annual Report, pp 67-68

27 The lnvestrqanon Section deals With all

problems brought up In complaints of members and customers relating to floor operations It also supervises trading on the floor

and investigates apparent trading Violations

28 See g~nerally Chicago Bd. Options

Exch Rule 8 7.

29 This practice Involves trading options

With the knowledge that a block transaction IS

about to occur In the underlying stock, or that

e. block transaction has occurred but has not

yet affected the option price

30 Thrs practice Involves executing a small

trade at the close of business for the purpose

of moving the optron price up or down, pOSSIbly In order to affect the market maker's

margin requirements favorably

31 Tlus practice Involves the execution of

"wash sales" In option spread transactions

and may be done for tax reasons

32 See Chicago Bd Oplions Exch Rule

411

33 Those registered broker-dealers which

are not NASD members are referred to as

SECO broker-dealers See p 99, mtre

34 See pp 79-80, supra

35 See pp 7-8, supra

36 See p 14, supra

37 However, Schedule D did permit (and

continues to permit) mcusion of stabrhzmq

bids that were unqualified by legend or penalty snpulanons

38 The staff also discussed With the NASD

concerns raised by a staff inspection of the

101

"

, t
NASD's Chicago District Office dUring fiscal

year 1975, See 41st Annual Report, p 72

39 On February 9, 1976, the NASD completed Its purchase of the NASDAQ facrlrtres

from Bunker Ramo Corp and organized this

operation as a wholly-owned subsidiary,

NASDAQ, Inc, which WIll be registered With

the Commission as a securities Information

processor pursuant to Section 11A of the

Securities Exchange Act See pp 22-23,

supra,

40 Subsequently, the Cornrrnssion approved certain amendments to Schedule D of

the NASD's By-Laws, including an amendment to reduce the NASDAQ market maker

requirement to one See text accornpanymq

note pp 84-85, supra

41 Securrties Exchange Act Release No

11729 (October 14, 1975),8 SEC Docket 69

42 Securities Exchange Act Release No

12279 (March 29, 1976), 9 SEC Docket 311

431d at n 17

44 On April 15, 1976, the Commission ISsued an order granllng Todd and Company,

Inc, and Thomas K Langbein a stay, pending

drsposinon of their appeal to the Third Circurt

45 Securities Exchange Act Release No

12564 (June 22, 1976),9 SEC Docket 947

46 Securities Exchange Act Release No

11741 (October 15, 1975), 8 SEC Docket 80,

Secunnes Exchange Act Release No 11838

(November 17, 1975), 8 SEC Docket 448,

Securities Exchange Act Release No 12004

(January 12, 1976), 8 SEC Docket 1019,

Securities Exchange Act Release No 12052

(January 27, 1976), 8 SEC Docket 1154,

Securities Exchange Act Release No 12168

(March 5, 1976),9 SEC Docket 125

47 See p 15, supra

48 Secuntres Exchange Act Release No

11916 (December 11, 1975), 8 SEC Docket

702

49 See Secunties Exchange Act Release

No 12177 (March 8, 1976), 9 SEC Docket

130, Securities Exchange Act Release No

12362 (April 23, 1976), 9 SEC Docket 482,

Securities Exchange Act Release No 12469

(May 20, 1976),9 SEC Docket 690.

50 Section 23(b) of the Securities Exchange

Act, as amended by the 1975 Amendments,

requires that the Commission submit "a

statement and analysts of the expenses and

operations of each self-regulatory organization In connection With the performance of ItS

responsibilities under trns title, for which purpose data pertaining to such expenses and

operations shall be made available by such

organization to the Commission at ItS request" The tollowmq drscussion IS responsive to that requirement

51 A breakdown of 1975 exchange share

volume, together With compilations of exchange share volume and dollar volume In

recent years, may be found In pt. 9 mire,

Table 17

52 See pt. 9 Infra, Table 6

53 See generally pt 9 mfra, Table 6

54 See pp 14-17, supra

102

55 See generally pt 9 tntre, Table 6,

56 See p 17, supra

57 See generally pt 9 mfra, Table 6.

58 See pt 9 mfra, Table 6

59 See p. 78, supra

60 Section 15(a) of the Securities Exchange

Act, as amended by the 1975 Amendments,

now requires the registration of brokers and

dealers who were previously exempt from

registration because they confined their securities business to an exchange. Brokers and

dealers who confine their acnvmes to exempted secuntres, as defined In Section

3(a)(12) of the Securities Exchange Act, continue to be exempt from the registration requirernent Effective December 1, 1975, murucipal securities are no longer defined as

exempted securities for purposes of the regrstratron requirement applicable to brokers

and dealers

61 secunnes Exchange Act Release No.

11615 (August 25, 1975), 7 SEC Docket 710

62 Securities Exchange Act Release No

12214 (March 16, 1976), 9 SEC Docket 203

63 See p 14, supra

64 See pp 14-17, supra

65 secunnes Exchange Act Release No

11854 (November 20, 1975),8 SEC Docket

459

661d

67 "Secunnes and Exchange Cornrmssion

Only" In this context, the term refers to

brokers and dealers who are neither members of the National ASSOCiation of Secunnes

Dealers, Inc, nor designated to another selfregulatory organization for examination purposes.

68 See Securities Exchange Act Release

No 12352 (April 20, 1976), 9 SEC Docket

',5069 See 41st Annual Report, p 80

70 See 5 Securities Investor Protection

Corp. Ann Rep (1975)

71 SeE' 41st Annuall1eport, pp 17-19,84.

72 See pp 12-14, supra

73 See 41 st Annual Report, p 19.

74 Securities Exchange Act Release No.

12078 (February 6, 1976), 8 SEC Docket

1234

75 See 41 st Annual Report, pp 8--11, 40th

Annual Report, p 4

76 See 41 st Annual Report, p 19, 40th

Annual Report, p 5.

77 Generally, In a TAC program the deposrtory maintains a working supply of certificates

of a particular Issue, while depositrnq the

remaining certificates With the transfer agent

to be held In ItS custody In the form of a

balance certificate registered In the name of

the deposrtory As the need for certificates In

the depository changes, the depository adjusts ItS In-house Inventory by increasing or

decreasrnq the number of shares held inhouse In nominee name, correspondingly decreasing or increasing the number of s'rares

held by the transfer agenl. Appropriate shipments of securmes between the depository
and transfer agent are made to effect these

adjustments

78 The 1975 Amendments required clearing

agencies to register separately with the Comrmssion as self-regulatory organizations no

later than December 1, 1975. Prior to that

date, the rule changes of registered clearing

agencies which were wholly-owned subsidraries of exchanges or the NASD were filed by

the parent organization

79 As of June 30, 1976~ the tollowrnq thirteen c1eanng agenaes were registered With

the Commission' American Stock Exchange

Clearing Corporation, Boston Stock Exchange Clearing Corporation, Bradford Securities Processing Services, Inc, The DepOSItory Trust Company, Midwest Clearing Corporation, Midwest Secuntres Company; Options Clearing Corporation, National Clearing

Corporatron, Stock Clearing Corporation,

Stock Clearing Corporation of Philadelphia,

Paone Clearing Corporation, Pacrnc Securities Depository Trust Company, and TAD

Depository Corporation

80 The 1975 Amendments amended Section 19(b) of the Act to provide a detailed

procedure by which the Commission reviews

each proposed rule change by a self-regulatory organization, including a registered clearIng agency

81 See Securities Exchange Act Release

No 12579 (July 6, 1976), 9 SEC Docket

1027

82 See Securities Exchange Act Release

No 12077 (February 6, 1976) 8 SEC Docket

1233

83 See Securities Exchange Act Release

No 12394 (Apnl 29, 1976), 9 SEC Docket

510

84 Securities Exchange Act Release No

12107 (February 13, 1976), 8 SEC Docket

1296

85 Securities Exchange Act Release No

11857 (November 20, 1975), 8 SEC Docket

471.

86 Securities Exchange Act Release No

12324 (April 7, 1976),9 SEC Docket 379

87 Securities Exchange Act Release No

12571 (June 23,1976),9 SEC Docket 955

88 Securities Exchange Act Release No.

11856 (November 20, 1975), 8 SEC Docket

471.

89 See Securities Exchange Act Release

No. 12486 (May 27, 1976), 9 SEC Docket

738, Securities Exchange Act Release No

12006 (January 12, 1976), 8 SEC Docket

1020.

90 Securities Exchange Act Release No

11723 (October 9, 1975), 8 SEC Docket 65

91 Securities Exchange Act Release No.

12103 (February 12, 1976), 8 SEC Docket

1256.

92 Securities Exchange Act Release No

12305 (April 2, 1976),9 SEC Docket 371

93 Securities Exchange Act Release No

12198 (March 12, 1976),9 SEC Docket 193

94 See pt. 9, Table 6

95 See pp. 19-20, supra

9615 USC 99 78aaa-78111 (1970)

97 Exempted from membership are brokers

and dealers whose busmess consists exclusively of (1) the distribution of shares of

mutual funds, (2) the sale of variable annuities, (3) the business of Insurance, or (4) the

busmess of rendering Investment advisory

services to certain Investment companies or

Insurance company separate accounts Id

978aaa(a).

981d 979ddd

99 H R 8064, 94th Cong ,1st Sess (1975).

100 See 41st Annual Report, p 86, 40th

Annual Report,p 64

101 S 1231, 94th Cong, 1st Sess (1975)

'02 [1975-1976 Transfer Binder) CCH Fed

Sec L Rep para 95,228 (S D N Y 1975),

rev'o sub nom SIPC v Morgan, Kennedy &

Co, 553 F 2d 1314 (2d Clr), cert dented, 96

S Ct 2650 (1976)

103 SIPC v Morgan, Kennedy & Co, 553

F 2d 1314 (2d Crr 1976), rev'g SEC v

Morgan, Kennedy & Co , [1975-1976 Transfer Binder] CCH Fed Sec L Rep para

95,228 (S D.N Y 1975)

104 96 S Ct 2650 (1975)

105 CIVil No 75-733 (S D NY, Feb 23,

1976)

'06 The pending legislation to amend the

SIPC Act would expressly confer such authonty upon SIPC

107 In March 1976, the Commission announced, In Securities Exchange Act Release

No. 12160 (March 3, 1976), 9 SEC Docket

80, the amendment of Secunues Exchange

Act Rules 15b8-1, 15b9-1, 15b9-2, and

15b10-1 through 15b1Q-6 to provide an exemption from such rules for brokers and

dealers whose activities are generally confined to a national secunnes exchange Specmcally, a broker or dealer ISexempt from the

SECO provisrons If (1) It IS a member of a

national secuntres exchange, (2) It carnes no

accounts of customers, and (3) ItS annual

gross Income derived from the purchases

and sales of securities otherwise than on the

exchange of which It IS a member IS no

greater than $1,000, provided, however, that

gross Income derived from transactions otherwise than on such national secunnes exchange which are effected for ItS own account With or through another registered broker or dealer IS not subject to that dollar

limitation

loa Thrs represents an Increase of seven

such brokers and dealers from the prior fiscal

year, and constitutes the third consecutive

Increase In the number of effective SECO

registrations The past year's Increase may

be attnbuted to the SECO reqistranon of

several brokers and dealers effecting transactions In rnurucipal secunues required to

register by the 1975 Amendments

109 Securities Exchange Act Release No

12700 (August 10, 1976), 10 SEC Docket

217. The change In the SECO fiscal year had

103

, ,
the effect of postpontng the flhng deadhne for

Form U-4 from June 1 to September 1 For

trus reason, It has not proven possible to

Include In this year's Annual Report a table

denved from the Form U-4 filings indicating

the pnnopal activities of SECO brokers and

dealers. See 41st Annual Report, p. 182 110 41st Annual Report, pp. 89-90

111 Secunnes Exchange Act Release No.

10636 (February 11, 1974), 3 SEC Docket

540. At the same time, the Cornnussronproposed Secunnes Ext:hange Act Rule 10b-20,

WhiChwould prorubrt underwriters and deal- ers particIpating in a dIstribution from requrr104

Ing a purchaser, in order to receive an alloca- non of the secunty, to pay consideranon In

addItion to the amount Indicated In the prospectus or to perform any other act such as

purchasing an additional security In an unre- lated offenng (so-called "tie-in" arrangements) The commissron also proposed

amendments to ItS recordkeepmq requirements for brokers and dealers, Securities

Exchange Act Rule 17a-3, intended to assist

brokers and dealers in complying with provrsions of the secunnes laws relating to short

sales
Part 4

Enforcement

The Commission's enforcement activities,

which are designed to combat secuntres

fraud and other Illegal activities, continued at

a high level dunnq the past year. These

activities encompass CIvil and criminal court

actions, as well as administrative proceedIngs conducted Intemally. Where vrolanons of

the secunnes laws are established, the sanenons which may result range from censure by

the Cornrrussion to prison sentences Imposed

by a court.

The enforcement program IS designed to

achieve as broad a regulatory Impact as

posstble within the framework of resources

available to the Commission. In light of the

capability of self-regulatory and state and

local aqencies to deal effectively with certain

secuntrss violations, the Commission seeks

to promote effective coordination and cooperation between ItS own enforcement acnvmes

and those of other agencies

DETECTION

Complaints

The Commission receives a large volume

of cornrnurucanons from the public. These

consist mainly of requests for Information and

complaints against broker-dealers and other

members of the seounnes community as well

as complaints concerning the market price of

particular secunnes DUring the past year,

approximately 5,300 complaints against broker-dealers were received, analyzed and answered. Most of these complaints dealt With

operational problems, such as the failure to

deliver secunnes or funds promptly, or the

alleged mishandling of accounts In addition,

Part 4

Enforcement

there were about 11,000 complaints received

concerning Investment advisers. Issuers,

banks, transfer agents, mutual funds or Similar matters.

The Oommrssron seeks to assist persons In

resolvmq complaints and to furnish requested

information Thousands of Investor complaints are resolved through staff inquiries of

the firms Involved While the Comrrusston

does not maintain an arbitration program to

resolve disputes between brokerage firms

and Investors, a complaint may lead to the

instrtunon of an mvesnqanon or an enforcement proceeding, or It may be referred to a

self-regulatory or local enforcement agency

Market Surveillance

The Commission's staff has devised procedures to Identify possible Violative acnvmes In

the secunnes markets through surveillance of

listed secunnes This program IS coordinated

With the market surveillance operations of the

New York, American and regional stock exchanges, as well as the various options exchanges

In nus regard, the Comrrussron's market

surveillance staff maintains a continuous

watch of transactions on the stock and options exchanges and reviews reports of large

block transactions to detect any unusual price

and volume variations It also rnorntors nnanCial news bckers, ftnanoal publications and

statistical services In addition, the staff has

supplemented ItS regular reviews by receiving

dally and penodic market surveillance reports

from the exchanges and the NASD which

provide In-depth analysis of Information de107
veloped by them To augment ItSsurveillance

capabilities, the staff IS uSing various data

processing services so that Irregular trading

activity WIll be promptly detected and effectively investigated

For those securities traded by means of the

NASDAQ system, the Commission also has

developed a surveillance program, which IS

coordinated with the NASD's market surveillance program, through a review of weekly

and special stock watch reports

For those over-the-counter securities not

traded through NASDAQ, the Commission

uses automated equipment to provide an

efficrent and comprehensive surveillance of

stock quotations distributed by the National

Quotation Bureau. Thts 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 secunty IS so

Identified, the equipment prints out current

and historic market Information. Other programs supplement thrs data with information

concerning sales of sscunnes pursuant to

Rule 144 under the Securities Act, ownership

reports, and penoorc company filings such as

quarterly and annual reports These data,

combined with other available information,

are analyzed for possible further Inquiry and

enforcement action

In addition, recognizing that the computer

provides the most expeditious method of reviewing and analyzing the volummous trading

data generated by the sacuntres markets, the

Commission has developed a program which

provrdes an analysts of the bid listings for

each security by summarizing specrnedtypes

of acnvny by each broker-dealer firm subrmtling price quotations for that particular security.

The staff oversees tender offers, exchange

offers, proxy contests and other acnvmes

involving efforts to change control of pubhc

corporations Such oversight mdudes review

not only of trading markets In the securities

Involved, but also filings WIththe Commission

of required schedules, prospectuses, proxy

material and other information

INVESTIGATIONS

Each of the acts administered by the Comrrnssronauthorizes investigations by It to determine If violations have occurred Most of

108

these are conducted by the Commission's

regional offices Investigations are carned out

on a confidential baSIS,consistent with effective law enforcement and the need to protect

persons against whom unfounded charges

might be made Thus, the existence or results

of a nonpubllc Investigation are generally not

divulged unless they are made a matter of

public record In proceedings brought before

the Commission or In the courts DUring the

fiscal year 1976, a total of 413 investigations

were opened, as against 490 In the preceding

year

ENFORCEMENT PROCEEDINGS

The Cornrrussion has available a Wide

range of possibte enforcement remedies It

may, In appropriate cases, refer ItSfiles to the

Department of Justice with a recommendalion for cnrmnal prosecution The penalties

upon conviction are specified In the vanous

statutes and Include Imprisonment for substantial terms as well as fines

The securities laws also authorize the

Commission to file Injunctive actions In the

Federal drsmct courts to enjoin continued or

threatened Violations of those laws and applicable comrntsson rules In Injunctive actions,

the Commission frequently has sought to

obtain anCillaryrelief under the general equrty

powers of the Federal district courts The

power of the Federal courts to grant such

relief has been JudiCially recognized The

Oornrrussronoften has requested the court to

appoint a receiver for a busmess where

Investors were likely to be harmed by continuance of the exrstmq management It also

has requested court orders WhiCh, among

other things, restnct future activities of the

defendants, require that rescissron be offered

to securities purchasers, or require disgorgement of the defendants' III-gottengains

The Commission's pnmary function IS to

protect the public from fraudulent and other

unlawful practices and not to obtain damages

for Injured mdrviduals Thus, a request that

dlsgorgement be required IS predicated on

the need to deprive defendants of profits

denved from their unlawful conduct and to

protect the public by deternng such conduct

by others.

If the terms of any Injunctive decree are

Violated, Criminal contempt proceedmgs may
be filed as a result of which the violator may

be fined or Imprisoned

The Federal secunnes acts also authorize

the Commission to Impose remedial administrative sanctions Administrative enforcement

proceedings Involve alleged violations of the

securities acts or regulations by firms or

persons engaged In the secunnes busrness

Generally speaking, If the Commission finds

that a respondent WIllfUlly Violated a provrsion

of or rule under the securities acts, failed

reasonably to supervise another person who

committed a Violation, or has been convicted

of or eruomed from certain types of misconduct, and that a sanction IS In the public

Interest, It may revoke or suspend the registration of a broker-dealer or Investment advrser, bar or suspend an mdrvidual from the

securities business or from assocranon With

an Investment company, or censure a firm or

mdivrdual. Proceedings may also cover adequacy of disclosure In a registration statement or In reports filed With the COmmission

Such a case may lead to an order suspendIng the effectiveness of a registration statement or directing compliance With reporting

requirements The Commission also has the

power to suspend trading summarily In a

security when the public Interest requires

ADMINISTRATIVE PROCEEDINGS

Summarized below are some of the many

administrative proceedings pending or finally

disposed of In fiscal 1976

Mitchum, Jones & Templeton, Inc 1-ln an

Initial decision which became the final deCIsion of the Comrrussron. Mitchum, Jones &

Templeton ("registrant"), a Los Angeles broker-dealer, was found to have aided and

abetted Violations of antifraud and other proVISions of the secunties laws In connection

With ItS partrcipanon In a registered 1972

stock offenng of SaCom The administrative

law Judge concluded that the pubhc Interest

did not warrant rrnposrtron of a sanction

Registrant was a member of the underwntIng syndicate for the SaCom offenng However, ItS syndicate department manager had

an undisclosed understanding With the managing underwriter that registrant would not be

subject to the normal underwnter's risk of

havinq to take unsold stock Into ItS Investment account None of the shares for which

registrant was committed were sold, pursuant

to the understanding, the managing underwriter purchased those shares for ItS own account upon termination of the syndicate The

failure to disclose the understanding was held

to render the representations concerning registrant In the reqrstratron statement and otherwise materially misleading

In holding that It was not necessary or

appropriate to sanction registrant, the adrrnnistranve law Judge noted, among other things,

that the misconduct represented an Isolated

occurrance, that It has not been proven that

registrant had failed reasonably to supervrse.

and that the responsible employee had not

been associated With registrant since 1973

Chartered New England Corp 2_ The

Comrrusston instituted administrative proceedings against Chartered New England

Corp ("Chartered"), a New York brokerdealer, ItS president, two vice presidents and

a registered representative The order alleged, among other things, that the respondents Violated the antifraud and registration

provisrons of the Federal secunties laws In

connection With Chartered's acnvmes as an

underwriter and a market-maker In the securities of Audio Media Corp

On accepting offers of settlement from the

respondents, the Cornrmssron suspended two

of the respondents for specrtred periods of

time from assocration With a broker or dealer

The Cornrrussron also requrred that Chartered

and the remaining respondents, With certain

exceptions. not engage In the activmes of a

broker or dealer for a penod of three months

and not engage In offers of securities for a

penod of rune months The order further

required, With respect to Chartered, procedures for compliance With the secunnes laws

and specified addmonal sanctions against an

mdivrdual vice president which Included,

among other things, a prohibition against

sharing In the profits of Chartered for a runemonth penod

Michael Batterman, et al J_ The Commission accepted offers of settlement from MIchael Batterman, who had been a registered

representative With a broker-dealer now no

longer In busrness, from Ragnar Option Corporation, an options dealer, and from Ragnar's pnncrpal executive officer, Victor Sperandeo These respondents were found to

have manipulated the market for the common

stock of Vetco Offshore Industnes, Inc,

109
which was then listed on the Amencan Stock

Exchange ("AMEX").

In essence, respondents developed a system of bUying and seiling options for Vetco

stock In such a way as to Insure that when

the stock to cover those options was purchased or sold on the AMEX, those orders

would arrive simultaneously and be matched

against each other These transactions created a false and misleading appearance of

active trading In Vetco stock In addition,

Batterman, who was wntmq most of the options Involved, entered Simultaneous orders

to purchase and sell short Vetco stock (Involving over 180,000 shares) for accounts

over which he had discretionary authonty

These "wash" sales also created a false and

misleading appearance of active trading Batterman's use of hrs discretionary accounts for

thrs purpose also constituted a fraud against

rus customers, who were required to pay a

brokerage fee on these "wash" sales and

who realized substantial losses because of

margin requirements

In addition to consenting to a censure,

Ragnar and Sperandeo agreed to restrict

their dealings In options In specmed terms so

as to prevent recurrance of the type of trading

which produced their part In the manipulation

Batterman, also on consent, was barred from

the securrtres Industry, With the proviso that

after two years he could apply for perrrussron

to become associated In a non-supervisory

POSition upon a showmq that he Will be adequately supervised

Paul L RIce 4_ The Commission suspended Rice from association With any broker-dealer for 30 days Rice was a salesman

for a former broker-dealer firm The sanction

was based on the Cornrrussron's findings that

Rice had arranged for two of his customers to

sell 698,000 shares of unregistered common

stock of United Australian 011, Inc In Violation

of the Secuntres Act's registration provrsions

The Cornrrussron stated "Rice's argument

that the responsibility for complying With the

Secuntles Act's registration and prospectusdelivery requirements rested wholly on rus

supenors goes much too far Salesmen also

have some measure of responsibihty In these

matters Thrs IS not to say that they must be

finished scholars In the metaphysics of the

Securmes Act But tarmhanty With the rudiments IS essential

110

IDS, Ltd and Arthur LIpper, 11/5_ The

Cornrmssron barred lOS, Ltd (S A.) of Geneva, SWitzerland, and Arthur Lipper, III,

president of Arthur Lipper Corporation, a broker-dealer firm, from association With any

broker-dealer, and revoked the broker-dealer

registration of Lipper Corp It discontinued the

proceedings against Investors Planning Corporation of Amenca (IPC), now known as

CIP, lnc., a broker-dealer which was pnncrpally owned by lOS In determining to discontinue that aspect of the proceedings, the

Comrrussion noted that IPC "was never an

Independent actor" and that "ItS present owners are wholly unaffiliated With lOS"

The remedial action was based on findings

that, dunng 1967 and 1968, lOS, which managed unregistered off-shore Investment companies, arranged to have Lipper Corp execute those companies' over-the-counter porttone transactions and payor "give up" a

portion of the cornrrussrons on such busmess

to IPC The Cornrrussron concluded that lOS

and IPC, aided and abetted by Lipper Corp

and Lipper, Violated the antifraud provrsrons

In reaching this conclusron, the Cornmrssron

found that. "Since neither of the lOS respondents (lOS and IPC) performed any brokerage function In connection With the overthe-counter transactions handled by Lipper

Corp, It IS apparent that they did nothing In

return for the Income that they denved from

those transactions They Simply caused the

funds to divert $1,450,000 to them Lipper

Corp. was a mere condurt for the diversron

No extended discussron IS required to demonstrate that trus was a gross breach of

noucrary duty by the lOS respondents.

Since the Lipper respondents (Lipper Corp

and lJpper) knew about lOS's relationship to

the foreign funds, and since their active assistance was an essential element of the

scheme, they were clearly parncipants In the

lOS respondents' breach of trust"

The Comrrussron also concluded that lOS

and IPC engaged In a Similar rebanve comrmssron scheme With other brokers (not the

Lipper respondents) In connection With the

New York Stock Exchange portfolio transacnons of Fund of America, Inc, a registered

Investment company for which IPC was the

pnnopal underwriter and investment adviser

" In addition, the lOS respondents were found
to have violated specified provrsions of the

Investment Company Act

Arthur LIpper, III, and LIpper Corp. have

appealed the Commission's decisron to the

United States Court of Appeals for the Second Circutt, which appeal IS stili pending 6

Collms Secunties Corporatlon7-The Commission revoked the broker-dealer and investment adviser registrations of Collins Secunties and barred ItS president, Timothy

Collins, from association With any broker or

dealer After two years, he may apply to the

Commission for permission to become so

associated In a position which IS not connected With the making of markets In securities

The Commission found that respondents

had manipulated the market for the common

stock of Big Horn National Life Insurance

Company, and sold the stock to customers

Without drsclosmq that they had artrncally

Inflated ItS price They were also found to

have Violated the anti manipulative provrsions

of Rule 10b--6 under the Exchange Act and

failed to comply With credit extension, recordkeeping and reporting requirements.

In rejecnnq Collins' argument that, as chief

executive officer of a large broker-dealer firm,

he could not be held responsible for every

mfracnon of credit extension, recordkeepinq

and reporting requirements, the Commission

stated: "[T]he president of a broker-dealer

has the responsibility for compliance WIth all

applicable requirements, He retains that responsibility unless and until he reasonably

delegates a particular function to another

person In the firm, and neither knows nor has

reason to know that the person In question IS

not properly pertorrnmq his duties

Respondents have appealed the Commission's decrsron to the United States Court of

Appeals for the District of Columbia Circuit,

and that court has granted a stay of the

sancnons pending disposmon of the appeal B

Spangler and Nassar Firms 9_The Comrrussion revoked the broker-dealer registrations of Richard C Spangler, Inc. and Nassar

and Co. Inc, and barred Richard C Spangler, Jr and George M Nassar, the respective presidents of Spangler, Inc and Nassar,

Inc, from association With any broker-dealer

It also granted the request of the firm of

Albert Teller and Co Inc, for the Withdrawal

of ItS broker-dealer registration, and censured

ItS president, Albert Teller.

The Commission found that Spangler, Nassar and Teller, Inc fraudulently sold the stock

of lnterarnencan Industries, Ltd , a company

which had a "commercially untried" oral contraceptive pili and "whose prospects turned

entirely on an alleged SCientific breakthrough" Spangler, Nassar and Teller, Inc

were found to have made misrepresentations

concerning the testing, efficacy and sales of

lnterarnencan's pili, and prospective nses In

the market price of ItS stock

In excluding the Spangler and Nassar respondents from the securities business, the

Commission said; "In Nassar's case, as In

Spangler's, we deal With a high-pressure

sales effort that lasted for a long time, was

unsupported by any semblance of an adequate foundation, and was characterized by

grossly reckless price predictrons." As to

Teller, Inc and Teller, the Comrrussion found

that the case against them stood on a "different footing" It observed "The Teller otncrals

who sold lnterarnencan stock fraudulently are

no longer With the firm And Teller, who

owned Virtually all of the firm's stock, made

no fraudulent representations himself HIs

derehctron stems solely from a failure to supervise."

In ordering Withdrawal and censure, It took

Into account "the purely vrcanous nature of

Teller, Inc's liability and the fact that Teller's

misconduct was limited In extent and brief In

duration."

Nassar has appealed the Cornrrnsston's

decisron as to him and his firm to the United

States Court of Appeals for the District of

Columbia Ctrcurt, 10

TRADING SUSPENSIONS

The Secunties Exchange Act authonzes

the Commission summarily to suspend tradIng In a secunty traded either on a national

secunties exchange or In the over-thecounter market for a period of up to ten days

If, In the Comrrussron's opmron, such action IS

In the public Interest Dunng fiscal 1976, the

Cornrrussron Initiated a new procedure permitting a person adversely affected by a

trading suspension to petition the Commission In wnnnq to terminate the suspension If

he has reason to believe that It IS not neces111

'
sary In the public Interest or for the protection

of Investors." As a result of the Secuntres

Acts Amendments of 1975, authonty to suspend trading In secunues of banks was transferred from the Commission to the Federal

bank regulatory agencies. The Commission

has sought to provide technical assistance

and coordination to these bank regulatory

aqencres If It should appear that a suspension of trading In bank securities may be

necessary

Dunng fiscal 1976, the Commission suspended trading In the secunties of 126 companies, an Increase of 11 percent over the

113 securities suspended In fiscal 1975 and a

54 percent decrease from the 279 secunnes

suspended In fiscal 1974 Of the 126 companies whose seeuntres were the subject of

trading suspensions In fiscal 1976, 70 were

suspended because of delinquency In filing

required reports with the Commission In

most other instances, the trading suspension

was ordered either because of substannal

questions as to the adequacy, accuracy or

availability of public information concerning

the company's nnanoat condition or business

operations, or because of transactions In the

company's securities suggesting possible

mampulauonsor other violations.

For Instance, on March 25, 1976, the Commission suspended trading In the secunnes of

Presley Companies, pending ctanncanon of

rumors relating to the company's entry Into

the field of energy technology 12 The Commission's action occurred shortly after a rapid

Increase In the pnce of Presley's stock amid

conflicting reports of an arrangement

whereby the company acquired the hcenstnq

nghts to a oevice which purportedly produced

hydrogen gas from tap water. Subsequently,

on May 20, 1976, the Commission Initiated

proceedings to determine whether the company had failed to comply with certain provisions of the Exchange Act by filing reports

wluch, among other things, omitted matenal

information required to be stated therein, or

necessary to make statements therein not

misleading

DELINQUENT REPORTS

PROGRAM

Fundamental to the success of the disclosure scheme of the Federal securities laws IS

the timely filing In proper form and content of

112

annual and other periodic and current reports

required to be filed by Issuers and Individuals

The Delinquent Reports Program was started

by the staff two years ago to Identify required

reports which have not been nrnely filed and,

when appropriate, to recommend remedial

enforcement action. Such enforcement action

entails alerting the public to the lack of current and accurate mtorrnanon and, where

necessary, seeking a court order requmnp

the filing of delinquent reports coupled With

an InJuncllonagainst further violations of the

Exchange Act's reportmg provisrons,

The staff of the Commission contmuously

rnorutorscompliance with the periodic reportIn9 requirements of Sections 13 and 15(d) of

the Exchange Act. When Cornrrussron records Indicate a delinquency, the staff Will,

among other things, mall the registrant a

notice of detected delinquency and request

that a wntten explanation be filed under cover

of Form B-K On July 14, 197513, the Comrmssron announced Its intention to indude

thereafter In a registrant's public file certam

correspondence to and from a registrant concerning ItS delinquency notwithstanding the

registrant's continued filing responsibilities

ThiSprocedure makes available to the public

a delinquent registrant's reasons for failing to

meet ItSstatutory disclosure obligations.

The Commission suspended trading In the

secunties of approximately seventy reqrstrants dunng the 1976 fiscal year pnmanly

based on their failure to file at least one

required annual report These suspensions

were temporary-they ran for one ten-day

penod for each delinquent registrant Approximatety twenty, or about 29 percent, of the

seventy suspensions Involved registrants

whose securities were listed for trading on a

national secunnes exchange

Dunng nus fiscal year, the Comrrussion

Initiated five CIVilactions against delinquent

registrants seekmg court orders compelling

the Immediate filing of delinquent reports and

permanently enjoining future analagous Exchange Act violations. Three of those acnons

were resolved by consents to the entry of,

inter alia, fmal judgments of permanent injunction; 14 one case, SEC v. Western Ortxs

Company, was resolved by the grant of a

summary judgment In favor of the Commission which mduded a final Judgment of permanent InjUnctlon,15and one action ISpend-
Ing. 16 Another crvrl action under this Program,

SEC v Umted Communities Corp and Alexander L Guterma, Initiated on May 27, 1975

and resolved by consent on July 28, 1975, IS

noteworthy because the Commission sought

and obtained Injunctive relief against both the

delinquent registrant and ItS chief executive

officer. 17

In this fiscal year, the Commission also

initiated two ctvil contempt proceedings

based on delinquencies In spite of court ordered injunctions against such violations

Both proceedings are pending but one deserves particular mention. SEC v VTR, Inc

was a civu injunctive action settled by a

consent upon which a Final Judgment of

Permanent Injunction was entered on April

19, 1973 by the United States District Court

for the District of Columbia. Havmq detected

subsequent violations of trus mjuncnon, the

Cornrrussron rrunated a crvtl contempt proceeding on August 26, 1975 against both

VTR, Inc and ItS chief executive officer,

David E Jordan 18 There have been several

hearings on nus matter and the Court has

found both VTR, Inc. and Jordan In civil

contempt of Its Final Judgment of Permanent

Injunction 19 However, some of the violations

contmue, and the Court has granted the

CommisSion's requested remedial relief includinq the appointment of a limited receiver

(I) to oversee the preparation and filing of

delinquent VTR Exchange Act reports, and

(II) to submit recommendations for a program

to assure future VTR compliance with ItS

Exchange Act and Court ordered filing obliganons 20 Moreover, the Court decreed that

VTR be fined $25 per day and Jordan be

fined $75 per day for each day of continued

civil contempt The Commission has moved

for the entry of Judgments of fine against VTR

and Jordan on three separate occasions and

the Court has granted such JUdgments resultIng In aggregate fines against VTR, Inc. of

$4,975 and aggregate fines against Jordan of

$14,925. To date $6,000 of such fines have

been paid Into the registry of the Court. Trus

matter IS stili pendlng.21

CIVIL PROCEEDINGS

DUring fiscal 1975, the Comrrussron Instituted a total of 158 Injunctive actions Some

of the more noteworthy injunctive proceedIngs and siqrufrcant developments In actions

msntuted In earlier years are reported below

Several of these enforcement actions were

achieved through coordination between self.

regulatory bodies and the Oornrrussion's en.

forcement staff

In SEC v Eastern Frelghtways Inc, 22-the

Comrrussron filed a complaint seeking InJunc.

trve and ancillary relief on November 19,

1975 against Eastern Frelghtways, Inc

("Eastem"), ASSOCiated Transport Inc ("As.

socrated"), Myron P Shevell, Henry Epstein,

and Paul W t.evrne The Cornrrussron alleged, among other things, the misappropriation of $1 3 million from the Employee Retirement Pension Fund of ASSOCiated, the misappropriation of Eastern's funds to acquire common stock of Associated In Violation of an

Interstate Commerce Commission order, and

the tatsmcetron of books and records to avoid

disclosure of these transactions Based on

consents hied by both Eastern and ASSOCIated, the court Issued on the same day a

permanent mjunction granting the rehef

sought On March 16, 1976, the court Issued

a permanent Injunction against Shevell, Epstein, and LeVine based on consents filed by

these indiVidual defendants

The relief obtained In these actions In- I

eludes, among other things, the appointment Ii

of additronal Independent members of the

Boards of Directors of Eastern and ASSOCIated, the maintenance of an execulive committee consisting of the new additional directors, and the appointment of a new chief

executive officer, as well as the appointment

of addrtronal trustees to the Eastern and

ASSOCiated Employees Retirement Pension

Funds The court further ordered that Eastern

and ASSOCiated appornt separate special

counsels to conduct a full Investlgalion Into

the allegations In the Comrmssron's complaint, as well as any other matters deemed

appropriate

On April 22, 1976 both Eastern and ASSOCIated filed petitions for reorganization pursuant to Chapter XI of the Bankruptcy Act

Later, on April 28, 1976 Eastern and Assooated filed "Consents to Adjudication" and

were ultimately declared bankrupt Due to the

filing of the bankruptcy proceedings by Eastern and ASSOCiated, the investigation being

conducted by the respective speoal counsels

was terminated In June 1976, Eastern resumed opsranons, on a scaled-down baSIS,

113
pursuant to Chapter XI of the Bankruptcy Act.

It is anticipated that the Investigation of the

special counsel for Eastern will resume upon

approval by the Bankruptcy Court.

SEC v. PRF Corp. Involved alleged violations by PRF of the proxy provrsions of the

Federal secuntres laws.23 The complaint

charged that, by use of a false and misleadIng proxy statement, the shareholders were

soiiorted to vote on a conversion of Class A

stock, owned by the controlling shareholder

and rus family and assooates, Into common

stock In such a way that the only practical

effect of such conversion was to Increase by

2,000 percent the dividend nghts of the former Class A stockholders at the expense of

the common stockholders The complaint

also charged that the shareholders were not

Informed that there was a substantial question as to the legality of such a conversion.

The complaint further charged that the proxy

statement did not disclose other matenal

facts, Including the purpose and effect of a

plan to buy 1,000,000 shares of common

stock from the estate of the controlling shareholder at hrs death for $1,500,000 In addition, the complaint alleged that PRF's proxy

statement failed to Include the information

required by the Oornmlssron's proxy rules

and regulations and that It did not provrde the

shareholders of PRF the opportumty to vote

against proposals as required by the Commissron's proxy rules

PRF consented to an order permanently

enjOIningIt from Violatingthe proxy provrsions

of the Federal secunnes laws Certain anollary relief was ordered by the court, including.

1. An order voidmq the amendment to

PRF's certificate of incorporation converting

the Class A stock into common stock at a

twenty-far-one ratio

2. An order VOidingthe approval by PRF's

shareholders of a plan for PRF to purchase

1,000,000 shares of common stock from the

estate of PRF's controlling shareholder at a

price of $1,500,000.

3. An order requmnq PRF to appoint a

speoal agent satisfactory to the Cornrmssron

to Investigate and evaluate any subrrussronto

PRF's shareholders of a proposal to convert

Class A stock Into common stock or a proposal to buy stock owned by the controlling

shareholder and requinng PRF to Include the

114

speost agent's evaluation In any proxy statement containing any such matter.

4. An order enjOIningPRF from converting

Class A stock into common stock or from

entering Into any agreement to buy stock

owned by the controlling shareholder, unless

the matter is submitted to the PRF shareholders and approved by a majonty of the votes

cast by the common stock shareholders of

PRF who own no Class A stock.

The case of SEC v Ftrestone Ttre & Rubber Co, et et , involves use of corporate

funds for unlawful political contnbuuons, both

domestic and foreign, over a penod of 8

years The Commission obtained injunctive

and ancillary relief against Firestone, Robert

P. Beasley, formerly Its executive vice president and Vice-chairmanof the Board of Directors, and Raymond C Firestone, chairman of

Firestone's Board of Directors and formerly

chief executive offlcer.24 In ItScomplaint, the

Oornrrussron alleged, among other things,

that penodic and annual reports and proxy

rnatenals filed by Firestone Withthe Commission dunng the penod from 1968 through

June 15, 1976 were false and misleading In

Violation of the antifraud, proxy and reporting

provisions of the Federal secunnes laws.

In addition to the injunction, the court's

order prornorted the use of corporate funds

for unlawful political contnbunons or Similar

unlawful purposes; prohibtted Firestone from

making any matenally false or fletmous entries in its books and records and from maintaining any unrecorded fund of corporate

rnorues: and required Firestone to continue

an investigation conducted by ItS audit committee Into the use of corporate funds to

make payments to foreign government officials or for unlawful political contnbutions.

In SEC v. Foremost-McKesson Inc, the

Commission obtained a permanent injunction

and ancitlary relief against Foremost-McKesson based on allegations that It had VIOlated the antifraud, repornnq and proxy soliotation provisions of the Federal securities

laws 25 Foremost-McKesson consented to

the entry of the court's judgment Without

admitting or denYing the allegations in the

Oommlssron complaint.

The complaint alleged that dunng the penod from 1971 to 1976 Foremost-McKesson,

the largest wholesale drstnbutor of wine and

spurts in the United States and an importer of
alcoholic beverages, made undisctosed payments of approximately $6 million, In the form

of cash payments and free merchandise, to

retailers and wholesalers, to Induce the purchase of wine and spmts products It drstnbuted, In possible violation of the Federal and

state liquor laws. The complaint further alleged that Foremost-McKesson made undisclosed cash payments of approximately

$231,000 to various offiCials of foreign governments to Influence foreign governmental

action, and talsmed ItS books and records

With respect to these cash and merchandise

payments.

In addition, the court restrained and enJOined Foremost-McKesson from making matenally false or ncunous entnes In ItS books

and records, and required It to maintain adequate and accurate documentation With respect to the matters referred to In the complaint. It also agreed to:

A. Complete an investigation, commenced

as a result of the Commission's Investigation

by ItS Audit Committee, outside counsel and

Independent auditors, Into vanous matters

referred to In the complaint.

B. Submit a wrrtten report, Within 210 days,

by the Audit Committee, to Its Board of Directors; and to have a person satisfactory to the

Commission review the procedures and

methods used by the Audit Committee.

C. Prohibit (1) any cash payment or renderIng of merchandise In Violation of Federal,

state or local liquor laws or regulations, and

(2) the payment of anything of value Which IS

matenal In nature directly or IndIrectly to any

foreign governmental offiCial or entity controlled or owned by any foreign government.

SEC v AudiO Media Corp -0n October

30, 1975, the Commission obtained permanent Injunctions against Audro Media Corp.

(formerly known as Eastern Sound Co. lnc.),

two of ItS officers, and Johnson & Rles, a

pubhc relations firm formerly engaged by Audro Medla.26 The inJunctIons, to which defendants consented, were based on comrmssion allegations that Audio Media distnbuted

false and misleading offenng Circulars In connection With a Regulation A offenng of ItS

stock and warrants and a further offer to

exchange the onqmal warrants for new warrants exercisable at a lower pnce, that the

defendants Issued false and misleading press

releases, annual reports, and letters to shareholders; that AudIO Media offered for sale and

sold 6,000 shares of ItS common stock when

no registration had ever been flied With the

Comrmssron and the transactions did not

comply WIth Rule 144

SEC v. Chicago Milwaukee Corp, et a/-

On June 29, 1976, the Oommission obtained

permanent injunctions against Chicago Milwaukee Corp. ("CMC"), Chicago, Milwaukee,

St. Paul and Pacinc Railroad Company ("Milwaukee Road") and four officers and directors of the two defendant comparnss.r' Each

of the defendants consented to the InJuncnons Without admitting or denying the allegations In the Oornrmssron's complaint

The complaint alleged that CMC and the

Milwaukee Road had made false and misleading statements and had omitted to state

matenal facts In registration statements and

annual reports between 1968 and 1974 concerning, among other things, Significant alteration In the operations of a Milwaukee Road

subsrdiary. The subsroiary was directed by

Milwaukee Road offiCIals to commence and

continue substantial sales of ItS timberland for

the purpose of maintaining the solvency of

the Milwaukee Road Further, It was alleged

that the defendants had failed to disclose that

corporate accounting books and records and

official corporate documents had been talsrfred to cover up a rescission by the Milwaukee Road of a $4 million divrdend from a

subsidrary In 1972 In order to avoid the

rarlroad's obligation to pay Interest to certain

of ItS bondholders.

The Commission's complaint also alleged

that the defendants had failed to drsclose that

millions of dollars of deferred roadway maintenance had been Incurred by the MIlwaukee

Road; that certain of Milwaukee Road's

books and fmancial statements had been

Ialsihed to conceal a matenal contingent liability In connection With a sale of land; and

that the books and records had been falsified

to conceal the operation of a corporate political contnbunons fund

The court's order compels CMC and the

Milwaukee Road to correct their exrstmq filIngs With the Oornrmssion. Further, CMC was

ordered to continue to maintain a special

committee of ItS Board of Directors to conduct

an mvestrqanon Into the matters alleged and

to prepare a report of ItS mvesnqanon, which

Will be submitted to the Comrmssion and to

115
I

CMC and Milwaukee Road shareholders. The

full Board of Directors of CMC and of the

Milwaukee Road are to take such action as

they deem appropriate with regard to the

findings and recommendaltons contained In

the Report

SEC v. Kalvex, Inc, et al 28_ This action

was instituted In December 1974 to enjoin

Kalvex Inc, Emanuel L Wolf, Kalvex's president and chairman of the board, and Robert

L lnqrs, a Kalvex director and former vrcepresident, from further violations of Sections

13(a) and 14(a) of the Exchange Act and

Rules 13a-1, 13a-13, 14a-3, and 14a-9 thereunder The complaint alleged that Kalvex's

Forms lo-K and 10-0 for 1972 and 1973,

and ItSproxy statements Issued In connection

with ItS stockholders annual meetings for

those years, failed to disclose (1) a scheme

to kick-back $8,500 to Ingis from a Kalvex

supplier, (2) the receipt by Ingls of approximately $6,000 of corporate funds, as a result

of Ingls' submission of "expense" vouchers to

Kalvex for expenses unrelated to any corporate purpose, and (3) Wolf's subrrussron of

expense vouchers to both Kalvex and to

Allied Artists Pictures Corporation, a publlclyheld corporation controlled by Kalvex, in order to receive reimbursement for the same

expenses from both companies

Kalvex consented to an Injunction In which

It agreed to (1) establish a financial controls

and audit committee to adopt procedures to

prevent a recurrence of acts similar to those

charged In the complaint, and (2) retam a

specral auditor to ascertain whether any officers, directors, and employees of Kalvex received expense reimbursements that were

not for a valid busmess purpose Wolf's consent Included the return of approximately

$80,000 to Kalvex. lnqrs chose to litigate the

action, and the court Issued a decrsion grantIng the Commission's monon for summary

judgment against him 29 The court found that

the orrussron of the above facts In Kalvex's

proxy statements, and In ItS annual and

quarterly reports, was matenal to a reasonable stockholder, even though there was neither a fight for corporate control nor a proxy

contest In progress Ingls, who IS also a

certified public accountant, subsequently consented to an order of the Commission prohibIting him from appeanng or practicing as an

accountant before the Commission for a

116

twenty-two month period The Court's application of the proxy and reportmg provisions of

the Federal securities laws In this action may

well be Significant In connection With other

enforcement actions rnvolvrnq management

fraud, kickbacks, and overseas payments

SEC v The Rovac Corporation, Inc, et

ai-On May 13, 1976, the Commission obtamed permanent Injunctions agamst The Rovac Corporation ("Rovac"), Bond, Richman &

Co , Inc ("Bond Richman"), Stanley A. Morgenstern ("Morgenstern"), Thomas C Edwards ("Edwards"), Denrns Catenne ("Caterme"), and John A. Wert ("Wert"), based on

allegations that the defendants variously VIOlated Seeton 10(b) of the Exchange Act and

Rules 10b-5, 10b-6 and 10b-9 thereunder

and Sections 5(a), 5(b) and 5(c) of the Securities Act In connection With transactions In

the securities of The Rovac Corporation 30

The complaint al/eged that, the defendants,

m connection With the "all-or-none" offering

of Rovac secunues In October 1974, defrauded investors by representing that the

secuntres were offered on an "all-or-none"

baSISwhile engaging In certain non bona tuie

sales of Rovac secunties which were company financed or guaranteed against loss by

the underwriter The complaint also al/eged

that by virtue of the above described "parkmg" transactions, the offering did not close

on the purported closinq date, but rather

continued until the parked secunties had

been sold to the public.

In a separate administrative proceedmg

pursuant to Section 15(b) of the Exchange

Act, Bond Richman was suspended from

engaging directly or indirectly In any underwrltmg acnvmes whatsoever for 180 days,

and Morgenstern, ItS chairman of the board,

was suspended from assocration With any

broker-dealer, Investment company or investment adviser for a period of 90 days and

thereafter suspended from engaging directly

or indirectly In any underwntrnq acnvines

whatsoever for an addmonal 90 days

In SEC v. Waste Management, Inc, et et ,

the defendants consented to permanent Injunctions prohibiting further Violations of the

reporting and proxy provisrons of the Exchange Act. 31 Among other things, the complaint alleged the maintenance of an off-thebooks "slush fund" used for political purposes In adortron to the company, Harry
Wayne HUizenga, vice-chairman of the board

of directors, and Earl Edward Eberlin, a regional manager, were named as defendants

SEC v. Standard Prudentfal Corporetion,

et al 32- The Commission filed a crvrl Injunctive action against Standard Prudential Corporanon and ItS chief executive officer, Theodore H. Silbert Standard was charged With

Issuing a false and misleading press release

descnomq the purported sale of an option to

acquire 1 6 million shares of Talcott National

Corporation stock The complaint alleged that

the release omitted to disclose, In Violation of

Section 10(b) of the Exchange Act and Rule

10b-5 thereunder, that Standard had not

abandoned ItS previously devised plans to

acquire Talcott shares or to merge With Talcott, which acquismon or merger would have

required approval by the Federal Reserve

Board, and that Standard was seeking to sell

the option to a purchaser who would agree

that Standard retain absolute control over the

final disposmon of the shares, Including the

nght of Standard to acquire the shares from

the purchaser Standard was also charged

With Violating Section 13(d) of the Exchange

Act and Rule 13d-1 thereunder In connection

With a filing of a Schedule 130 With the

Cornrmssron relabng to the Talcott block. The

defendants consented to a permanent mjuncnon enjoining future Violations of Sections

10(b) and 13(d) of the Exchange Act and

Rules 10b-5 and 13d-1 thereunder The

court order also provided, among other

things. for the torrnanon of a committee to

prepare a plan satisfactory to the Commission for the disposrnon of the Talcott shares

The plan was submitted to the Comrrusston

by Standard's Independent committee In August 1975 and found to be provrsionally satisfactory, provided that Standard enter Into an

agreement With an acceptable purchaser to

sell the block of Talcott shares.

SEC V Untted Americas Bank, Konos

ASSOCiates and Abbey J Butler-The Comrrussion brought an Injunctive action against

United Amencas Bank for alleged excessive

extensrons of secuntres credit In Violation of

Secllon 7(d) of the Exchange Act and Regulatron U promulgated thereunder by the

Board of Governors of the Federal Reserve

Board 33

The two other defendants, Konos ASSOCIates and Abbey J. Butler, were charged With

unlawfully obtaining excessive secuntres

credit from the Bank In Violation of Section

7(f) of the Exchange Act and the Federal

Reserve Board's Regulation X In addmon,

these two defendants were charged With havIng engaged In manipulative short sales of

secunnes In order to dnve down the pnce of a

block of secunnes they knew was about to be

offered, Illegally effecting short sales on minus ticks or zero minus ticks, making deceitful representations to the broker-dealers regarding ownership of stocks and trading In

certain securities while In possession of matenal non-public Information

Konos ASSOCiates and Abbey J Butler consented to the entry of permanent Injunctions

The litigation against the Bank continues

SEC v Petrofunds, Inc. et al -On May

26, 1976, the Cornrrussron filed a complaint

against Petrofunds, Inc 34 ("Petrofunds"),

McRae 011 Corporatron ("McRae 011"),

McRae Consolidated 011 and Gas, Inc ("Consohdated"), James A McRae ("J A McRae"),

David Kelly ("Kelly"), J Frank Benson ("Benson"), Osias Biller ("Biller") (hereinafter collectively referred to as "the Petrofund defendants"), LOUISiana Gas Purchasmq Corporation ("LGP"), LOUISiana Gas Intrastate, Inc of

Shreveport ("LGI"), Sunny South 011 and

Gas, Inc ("SSOG"), Houston National Bank

("HNB"), Bromley DeMentt, Jr ("DeMentt"),

Henry Becton ("Becton"), Sidney Raphael

("Raphael"), Edmund D'Eha ("D'Ella"), the

law firm of Raphael, Searles, visctu, Scher,

Gover and D'Elia ("RSV"), Thomas Leger &

Co ("Leger & Co "), Thomas Leger

("Leger"), Edward Coulson ("Coulson"), Bennett J Roberts, Jr ("Roberts") and Edward

C Dorroh ("Dorroh")

The complaint charged (1) each of the

defendants With Violations of the antifraud

provisrons of the Secunnes and Securitres

Exchange Acts, (2) the Petrofunds defendants and defendant DeMentt With Violations of

the registration provisrons of the Secuntles

Act, (3) defendants Petrofunds, Consolidated,

Leger & Co, Leger, J A McRae, Kelley,

Benson, Biller and Roberts With Violations of

the nnancrat reporting provrsions of the Exchange Act, and (4) defendant Biller With

Violations of the broker-dealer registration

provisrons of the Exchange Act

The complaint alleged that Interests In 011

and gas dniling programs were offered and

117
sold by use of false and misleading statements which tailed to disclose or falsely or

Inadequately described, among other things,

(1) the extensive misuse, diversion and misappropriation by the Petrofunds defendants,

Dorroh, DeMeritt, Becton, Coulson, Roberts

and others of montes Invested by, and assets

belonging to, the public Investors, (2) the

failure by the Petrofunds defendants and defendant HNB to properly maintain public

Investors' momes In custodian accounts at

HNB, (3) the misuse of gas reserves, In

which the Petrofunds drilling programs own

majority working Interests, for the benefit of

the Petrofunds defendants and defendants

LGP, LGI and others, (4) the nature and

effect of certain transactions between the

drilling programs and compames affiliated

with or controlled by defendant J A. McRae;

(5) the manner and timing of all and gas

leasehold aquismons, (6) the skimming-off of

Interests In various 011and gas leaseholds by

certain of the defendants; (7) the amounts

paid as oornrrussrons to defendants Biller,

Raphael, and others for the sale of drilling

program Interests to the publiC, and (8) the

potential tax ramifications and/or risks associated with the aforesaid acts and practices.

The Commission sought, among other

things, (1) a tempoary restraining order and

preliminary injunction against the Petrofunds

defendants and defendants LGP, LGI, SSOG

and Dorroh; (2) permanent mjuncnons

against each of the defendants, and (3) an

order appointing a temporary receiver for

defendants Petrofunds, Consolidated, McRae

011, LGP, LGI and SSOG

After granting temporary restrarrnnq orders

against defendants Petrofunds, McRae 011,

Consolidated, LGP, LGJand SSOG, the court

heard oral argument on the Commission's

request for a preliminary injunction and other

relief against the Petrofunds defendants and

defendants LGP, LGI, SSOG and Dorroh. In

denying the Commission's request the court

stated "It may well be that upon a trial,

where the disputed fact Issues are fUlly explored and the court afforded an opportumty

to appraise the demeanor of witnesses and to

evaluate their credibility In making ItS fact

determination, plaintiff may fUlly and abundantly establish ItS various claims so as to

entitle It to the full relief It seeks"

SEC v. Howard R Hughes 3S-Followlng

118

the death of Howard Hughes In April 1976,

the court, on the Commission's motion,

agreed to substitute his estate as defendant

(the case now being re-captioned SEC v

iummts et al In the action, filed In March

1975 by the Commission, which alleged a

sequence of actions by Hughes, his wholly

owned company Summa, his attorney and

Summa director, Chester C. Davis, and his

assistant, Robert Maheu, arising from the bid

by Hughes In 1968 to purchase the assets of

Atr West, a regional West Coast airline. The

Commission's complaint alleged, among

other things, that Hughes (a) hired public

relations man James "Jimmy the Greek"

Snyder to disseminate false and misleading

reports to shareholders, (b) made contributions to certain political figures who had spoken on Snyder's request In support of the

Hughes offer, (c) caused the Issuance In both

1968 and again In 1970 of materially false

and misleading proxy statements, and (d)

engaged In a scheme of stock manipulation

and lawsuits against Atr West directors opposed to hrs offer to force those directors to

change their votes to tus support. The Comrmssron alleged that Air West shareholders

had been led to believe that they would

receive $22 for their shares and supporter,

the Hughes offer for that reason, when Ultimately, through valuations of assets and

forced write downs alleged not to be In accordance With the Purchase Agreement, the

shareholders received only $8 75

Since the Institution of the acnon, the Comrrussron has withstood a monon to disrmss,

and has had most of the defendants' affirmative defenses stricken from the record. Judgment by default has been obtained against

James Snyder. Howard Hughes on two occasions failed to appear for deposmons, and

both he and hrs companies (of which the

Court declared 111mto be the Managing

Agent) have been defaulted. The Commission has been conducting extensive diSCOVery since November 1975, and expects thiS

to continue through this fiscal year with a trial

on the merits against the remaining parties

shortly thereafter.

In S.E C v Thermal Power Co., et ai, 36the

comrrnssron filed an injunctive action against

the Natomas Company, Thermal Power

Company and their respective presidents,

Dorman Commons and Damel MacMillan,
alleging that the defendants violated the

tender offer and antifraud provisrons of the

Exchange Act In connection with the Natomas Company's attempt to take control of

Thermal Power Company The Natomas

Company eventually acqurred approximately

97 percent of Thermal Power Company stock

In spite of competing tender offers by Union

011 Company and Aquitame Company The

Comrrussion alleged that the defendants had

failed to disclose that (a) the main purpose

for an agreement to sell a 42 percent block of

Thermal Power Company stock to the Natomas Company was to defeat the competing

tender offers by Union 011 Company and

Aqurtaine Company, (b) Dorman Commons

and Daniel MacMillan had secretly agreed to

cancel the sale of this block of Thermal stock

If the Natomas Company failed to gain control

of Thermal Power Company, (c) The proceeds from the sale of the block of stock

would be loaned back to Natomas Company,

(d) Natomas Company offered Daniel MacMillan an employment contract, and (e) Thermal Power Company's board of directors

owned a substantral amount of the company's stock at a relatively low tax basts

when they Initially recommended Natomas

Company's tax-free exchange of stock and

agreed to support Natomas Company's bid

for control This represents one of the few

times that the Cornrrussron has attempted to

use the tender offer provisrons of the secunties laws to protect shareholders from actions

by Incumbent management This case IS currently In litigation

In SEC v Cosmopolitan Investors Fundmg

Co, et ai, the Cornrrussron sought to enjoin

Cosmopolitan Investors Funding Co, Robert

J DIStefano, Robert R Nelson, Ramon N

D'Onotno, Alfred P Herbert, Herbert &

D'Onofno A G , formerly known as D'Onofno

& Feeney A G, Ernst Ballmer and Bank

Hofmann A G from further violations of Section 10(b) of the Exchange Act and Rule 10b5 thereunder and Cosmopolitan Investors

Funding Co , Robert R. Nelson and Robert J

DIStefano from further vrolations of Sections

13(a) and 14(a) of the Exchange Act.37

The complaint alleged that dunng 1970 and

1971, the defendants engaged In a scheme

to defraud the purchasers and sellers of the

common stock of Cosmopolitan The complaint alleged that Nelson and DIStefano with

$210,000 of the corporate funds of Cosmopolitan purchased shares of two off-shore

mutual funds which were of little or no value

and that these "Investments" were made with

the understanding that $85,000 of these

funds would be deposited In secret SWISS

bank accounts for the personal benefit of

DIStefano and Nelson, the president and

vice-president of Cosmopolitan, respectively

The complaint further alleged that defendants Cosmopolitan, Nelson and DIStefano

filed or caused to be filed with the Commission pen odrc reports and proxy statements

dunng this penod which were false and misleading In that they failed to disclose the

corporate monies kicked back to Nelson and

DIStefano and reflected a net value of

$147,500 for these "Investments", which

were, In fact, of little or no value

Subsequently, on Apnl 16, 1976, permanent injunction and ancillary relief against

Nelson was granted Nelson consented to the

entry of the Judgment without admitting or

denying the allegations of the Comrrussron's

complaint Nelson was ordered to pay to the

court the sum of $10,000 and prohibited from

assuming a position as either an offrcer or

director of any public company except upon a

showrnq satistactory to the court that measures have been taken to prevent the conduct

alleged In the Cornrrussron's complaint or

conduct of similar object or purport PrevIously, permanent Injunctions had been entered against Cosmopolitan, D'Onofno and

Herbert & D'Onofno

In SEC v Amencen Beef Packers, Inc, et

ai, American Beef Packers, Inc, a large

Omaha meat packing corporation, which had

petrtioned In January 1975 for relief under

Chapter XI of the bankruptcy law, and ItS

former chief officer and director and two other

directors were named as defendants In an

injunctive action filed by the Comrrussron on

February 25, 1976 38 The complaint, In part,

alleges the defendants violated the proxy and

antifraud provisrons of the Federal secunties

laws In that, among other things, the defendants failed to disclose the tollowmq matters

(1) the source and Intended use of $94,000

cash found In ofllces of the company and the

use made of similar unaccounted cash, If

any, that had been In the company offices,

(2) the use of funds by the company which

should have been turned over to General

119
Electric Credit Corporation In accordance

with a financing agreement, (3) the reasons

for and duration of the practice of the company and Its subsidiary In paying rebates to

foreign customers, and (4) an Illegal agreement of management to manrpulate upwards

the pnce of common s~ockof the company In

addition to Injunctive relief prohibiting future

violations, the Commission seeks the appomtment of a special master and an order

enjoining each Individual defendant from actIng as an officer or director of any public

company except upon a showmg to the court

that procedures have been instituted to prevent recurrence of the same or similar violative conduct alleged In the complaint The

trial of this case IS scheduled for October

1976

SEC v Scott-Gorman MUnicipals, Inc 39_

In September 1975, the Commission mstrtuted an Injunctive proceeding against ScottGorman Munrclpals, Inc ("Scott-Gorman"), a

municipal bond dealer and Scott Gorman's

four officers alleging violations of the antifraud provrsrons of the Federal secunnes

laws

The Commission charged that the defendants engaged In a fraudulent course of conduct whereby they failed to deliver fully pardfor notes, bonds and other secunnes to their

customers, failed to disclose the true financial

condition of Scott-Gorman; and failed to drsclose that fully-pald-for customers' notes,

bonds and other seeunnes were being Illegally hypothecated, on Scott-Gorman's behalf, at various lending institutions

Prior to the Commission's action, ScottGorman had filed a petition In Bankruptcy

Court pursuant to Chapter XI reorganrzatlon

The Commission Intervened In the Bankruptcy Court against Scott-Gorman In order to

name Scott-Gorman as a defendant In ItS

own SUItand to request the appomtrnent of a

receiver for Scott-Gorman

The Bankruptcy Court granted the Commission's application to Intervene and followIng a hearing on the Commission's motion, a

receiver was appointed on the recommendation of the Bankruptcy Court Thereafter, a

Trustee In Bankruptcy was appointed for

Scott-Gorman In order to liquidate the firm

Following a hearing on the Commission's

mollon for a preliminary mjuncnon against the

defendants, the court preliminarily enjoined

120

the four mdrvrdua! defendants from Violating

the antifraud provrsronsof the Federal securities laws and ordered the imposrtion of a

temporary freeze on the mdivrdual defendants' personal assets pending a deterrrunalion of customers' losses

The court has yet to set a trial date With

respect to a hearing for permanent InJunellon

CRIMINAL PROCEEDINGS

In August 1975, after investigations by both

the Oornrmssionand the U S Attorney for the

Southern District of New York, a grand JUry

indicted James E Carr, III and seven other

persons associated With broker-dealers, for

Violations of the antifraud provisions of the

Federal securrnes laws 40 The defendants

were charged WIthrnampulatmqthe over-thecounter market In the secunnes of Jerome

Mackey's Judo, Inc dUring 1972 and 1973 by

purchasing stock and not paymq for the

shares upon delivery, by uSing swap transactions, and by parking shares to keep them

from being sold In the market Pnor to trial,

three of the defendants pleaded gUilty to

consprnnq to Violate the antifraud provisions

of the Federal secunnes laws Another defendant pleaded gUilty to fraud In connection

WIth the purchase and sale of securities

These defendants were sentenced to prison

terms of from three to SIX months Another

defendant also pleaded gUilty to sscuntres

fraud and was given a suspended sentence,

and placed on probation for two years After

trial, defendants Carr and Roger Drayer were

found gUilty and sentenced to prison terms of

2- 1/2 years and four months, respectively;

appeals by these two defendants were argued before the Court of Appeals for the

Second Crreurt In July 1976 The jury was

unable to reach a verdict as to Barry Drayer,

the remaining defendant

As a result of the Commission's referral of

ItS mvesnqanve files to the Department of

Justice In the Stirling Homex Corporatron

matter, an eleven count mdrctrnent was returned against four of the former prtncipal

officers of Stirling Homex Corporation, David

Stirling, Jr, William G Stirling, Harold M

Yanowrtch, and Edwrn J Schultz, and an

attomey--employee for the company, Rubel L

Phrlhps, charging them WIthfraud In connection With the 1970 and 1971 public drstriou-
non and sale of Stirling Homex common and

preferred stock for nearly $40 mllllon.41

The indictment charges that the defendants

used fraudulent devices to Inflate Stirling

Homex's earnings In SEC registration statements, and annual and mtenrn reports and

related documents The indictment further

charges that In 1969 and 1971, the defendants boosted reported sales and profits by

Indudlng substantial sales of land to shell

corporations which lacked any real ability to

pay, and by making the sales at pnces which

were artmcally Inflated. The indictment also

charges that, In 1971, a fraudulent sale of

modules to a shell corporation was Included

In sales and profits on the baSIS of a forged

$15 million dollar government fmancmq commitment

The indictment also alleged that even

though the company's prmcipal busmess was

manufactunng modular homes, the bogus

land sales amounted to 18 percent of Stirling

Homex's earnings for 1969 and nearly half of

ItS six-month earnings for 1971 The Indictment also specmed that a forged commitment

letter was used to double earnings In the SIX

and nine-month reports for fiscal 1971

The indictment further charges that seven

officers and employees of the United Brotherhood of Carpenters and JOiners of Amenca

received payoffs In the form of $240,000

worth of Stirling Homex stock purchased at

$76,800 less than the fair market value.

Later, when the fair market value declined,

their stock was repurchased from them at

$136,000 above that pnce.

The above indictment resulted from a referral of the Commission's Investigative files

after the Commission had completed a CIVil

injunctive action against Stirling Homex Corporation, SIX of ItS officers and directors and

Mernll Lynch, Pierce, Fenner & Smith Inc

The Commission also had Issued a Report of

Investigation In the Matter of Stirling Homex

Corporation Relating to the Acnvmss of the

Board of Directors of Stirling Homex Corporation, and, pursuant to Rule 2(e) of the Commission's Rules of Practice, had ISSUed oprnIons Imposing certain remedial sanctions

against SlIrIlng Homex's two Independent

auditors, Hams Kerr Forester & Co and Peat

Marwick Mitchell & Co 42

The tnal of the cnrrunal prosecutions involved In the EqUity Fundlng43 case finally

came to a conclusron In July 1975 With the

sentencing of the three Independent accountants who had been convicted follOWing a four

months' tnal In the Federal Distnct Court In

Los Angeles Each of them was sentenced to

terms of irnpnsonment followed by four years'

probation and a requirement that each contribute 2,000 hours to community service.

Twenty-two mdivrduals have been Indicted as

a result of the EqUity Funding scandal and of

those only the three accountants had a full

JUry tnal Sentences of the other 19 defendants who plead gUilty to various charges

ranged from eight years' irnpnsonrnent and a

$20,000 fine for the pnnopal architect of the

scheme, Stanley Goldblum, to two years'

probation for the two most minor figures In

the scandal The convicnons of the three

accountants are presently on appeal before

the United States Court of Appeals for the

Ninth Cucuit.

U S v Leslte Zacharias, et a/ 44_A flftynine count indictment was returned against

Leslie Zacharias, LOUIS MartinO, Norman

Brodsky, Albert Rubenstein, Arthur Souretis

and Fritz Johnson charging the defendants

With Violations of the registration and antifraud provisions of the Federal seeunnes laws

and mall fraud and conspiracy In connection

With a scheme to drstnbute large quantines of

unregistered shares of Pollution Dynamics

Corporation It was alleged that, In order to

carry out the scheme, Norman Brodsky, an

attorney, wrote bogus opinion letters to the

transfer agent for the company for the purpose of removing restncnons on stock owned

by MartinO, president of Pollution Dynarracs

The case, which was prosecuted by the New

England Organized Cnme Stnke Force, resulted In the conviction of Brodsky, Martino

and Fntz Johnson, a secunnes salesman, on

their entry of gUilty pleas to Violations of the

antifraud provisrons of the Exchange Act.

Brodsky and Martino each received two-year

sentences of which three months were to be

served In Jail and Johnson received a twoyear sentence and a $2,000 fine The other

defendants are awaiting tnal

US V Nete/kos, et al 45-Chnsllan-Palne

& Co , Inc., ("CP"), a broker-dealer firm registered With the Cornrmssron, and ItS former

president, Joseph Rega, Jr consented to

permanent InjunctIOns In Apnl 1974 for Violations of the anntraud, net capital, hypotheca121
non, and bookkeeping provrsrons of the Exchange Act CP IS currently being hquidated

pursuant to the Securities Investor Protection

Act of 1970.

Rega, Chnstos Netelkos, an undisclosed

pnnopal of CP, George Santorlello, a cashier

for CP, Charles Gamarekian, an officer of the

firm, Georgett Ysrael, bookkeeper, Ross Pascal, and LUCIlleDitta, a trader for CP were

mdtcted by a grand JUryfor Illegally hypothecating customers' secunnes, falSifying books

and records of CP, and submitting false reports and fmancral statements to the Commission.

After an eIght week tnal, Netelkos, Rega,

Garnarekran, Santonello, and Ysrael were

convicted of conspiracy, unlawful hypothecanon and sale of customers' secuntres, making

and keeping false books and records, and

submitting false statements to Federal offIcers.

Netelkos was sentenced to eleven years In

pnson and fined $50,000; Rega was sentenced to five years and fined $20,000. Gamarekian was sentenced to five years and

fined $20,000; and Ysrael and Santonello

were both sentenced to eighteen months In

prison. The indictment against Pascal was

dismissed and Ditta ISpresently awaiting trial.

US v Fred C. Tallant, Sr , et al.46-0n

November 21,1975, Fred C. Tallant, Sr., and

William M. Womack, Jr. of Atlanta, were

sentenced on their pleas of nolo contendere

to a twelve-count Indictment charging them

WithViolationsof Section 17(a) of the Securities Act, the Mall Fraud statute (18 U.S.C.

1341) and the Conspiracy statute (18 U.S.C.

371) and further charging Womack With VIOlating the Obstruction of Justice statute (18

U.S.C. 1505).

Tallant was sentenced to three years Imprisonment on each of the eleven counts, the

terms to run concurrently and all but three

months of the sentence to be suspended. He

was also fined the maximum amount on each

of the eleven counts for a total of $40,000, to

be paid WIthinninety days after the penod of

hrs confinement. Tallant was also sentenced

to a five-year penod of probanon. Womack

was sentenced to three years imprisonment

on each of twelve counts, the terms to run

concurrently and all but two months of the

sentence to be suspended. He was also fined

a total of $15,000 to be paid WIthin150 days

122

after the period of hISconfinement. Womack

was also sentenced to a five-year penod of

probation.

The fraudulent scheme charged In the indictment Involved, among other things, the

acqursmon by the defendants of shares of

common stock of Preferred Land Corporation

and the sale of those shares In the course of

the distribution of later higher priced Issued

as Original Issue stock of the corporauon

Funds received by Preferred Land from such

sales were diverted to the use and benefit of

defendants The charge of obstruction of JUstice Involved the falSIfication of books and

records of Preferred Land presented dUring

the Oornrrussron'sinvestigation.

Because of a continuing problem of "shell

corporation" promotions originating from the

Salt Lake City area, a special unit of the

secunnes fraud section of the Department of

Justice was assiqned to work closely With

Commission attorneys and investigators In

Denver and Salt Lake CIty. A number of

investigations were completed, and indictments were obtained In four cases With seventeen persons and three corporations

named as defendants.

US V. RIO de Oro Mmmg Company, et

a/47-Thls case Involved charges of securities fraud against a New MeXICOcorporation

and three Salt Lake City promoters on which

all of the defendants were convicted after a

two-week trial. DUring the period before trial,

attorneys of the Comrrussronand the Department of Jusnce worked closely WIthattorneys

of the Vancouver, Bnnsn Columbia, Regional

Office of the Canadian Department of Justice,

Since one defendant, FranCISC. Lund, a Salt

Lake CIty lawyer, was a fugItive In Vancouver. Extradition proceedings were commenced to return Lund to the United States

for tnal-the first such proceeding on secunties fraud charges In recent years. Lund

agreed to voluntarily return to the United

States two days before the hearing was to

commence.

The Indictment charged RIOde Oro MIning

Company, FranCISC. Lund, Virgil Redmond,

and Carl Powers WIth participating In a

scheme to defraud purchasers of RIOde Oro

Mining stock by causing false and misleading

statements to be made concerning mining

activities at the Red Creek Mine In Duchesne

County, Utah. They falsely represented the
corporation's Interest In the mining property,

the nature and extent of the mining aonvrty

and the value of the coal deposit. They

falsely represented the corporation's Intent to

conduct the open-pit method of mining on the

property. Other charges related to false

statements made concerning contracts to sell

coal, the ownership and operanons on uranium and gold mining properties, and the

arrangements for the financing and construction of an electric power plant at the Red

Creek Mine.

The defendants were convicted on 8

counts of secuntles fraud and each was sentenced to 24 years In Federal Pnson. These

sentences were later reduced to a total of 18

years In pnson and fines of $40,000 for Lund

and Powers and a fine of $24,000 for Redmond. Two of the three defendants are In

prison while the case IS on appeal to the

Court of Appeals for the Tenth CircuIt.

U S v. Richard T. Cardal/, et a/.48- This

tnal related to charges of false and misleadIng statements made In the sale of the stock

of International Chemical Development Corporation totalling over one million dollars.

Two mdivrdual defendants, Richard T. Cardall

and Frank Uoyd Parks, were tned together

With the corporation and were convicted on

nine counts and sentenced onglnally to 45

years each In pnson. The sentences were

later reduced to 18 years In pnson and a

$50,000 fine. The corporation pled nolo contendere and was fined $10,000. Another defendant, William L. Allen, of Ogden, Utah,

pled guilty to one count of the sale of unregistered stock and was sentenced to five years

In pnson.

The Violations charged Involved the reactivation of a "corporate shell," and the promotion and sale of its stock by means of false

and misleading statements, InclUding statements relallng to purported acnvmes of the

corporation In extraction of valuable minerals

from the waters of the Great Salt Lake In

Utah. The case ISpresently on appeal to the

Court of Appeals for the Tenth Ctrcurt

US. v, John J. Badger, et al 49-John J.

Badger, Jay Victor Miller, Evelyn Mitchener

and John E. Worthen were tried on a 14-

count indictment charging a scheme to defraud shareholders of Flying Diamond Corporation, a Utah corporation engaged In minerai

and oil exploration. The indictment charged

that the defendants caused the stock transfer

agency of FlYing Diamond to Issue stock In

the names of nominees of the defendants

and that stock was then sold through brokerage accounts by the defendants. Miller and

Worthen also were charged Withtransporting

the forged and altered stock cernncates In

Interstate commerce. At the trial, Badger was

convicted on three counts of secunnes fraud

and one count of sale of unregistered securities Sentences were Imposed as follows.

Badger was sentenced to five years in pnson

and five years probation. Miller, who pled

guilty to one count of sale of unregistered

secuntles and one count of securities fraud,

was sentenced Originally to five years In

prison. He was later sentenced to one year In

prison and five years probation

In a later tnal, Miller was also convicted of

three counts of Criminalcontempt of a District

Court Injunction prohibiting certain activities

by the stock transfer agent of FlYingDiamond

and was sentenced to five years In pnson.

Mitchener pled gUilty to an information chargIng secunnes fraud and was sentenced to two

years' probation. The charges against Worthen, who was then serving a 10-year prison

sentence on another convrcnon, were drsmissed

U.S v. E. M. "Mike" Rlebold, et also-In

another cnrmnal securmes case, E.M "Mike"

Rlebeld, the prmopal officer of a New MeXICO

natural resources company, and Donald Morgan, a former senior officer of the First National Bank of Albuquerque, New MeXICO,

after a nine week tnal, were convicted by a

Jury of misapplication of bank funds, wire

fraud, mall fraud, secuntles fraud, interstate

transportation of stolen property and false

statements In a registration statement Prior

to tnal, defendant Harold Morgan, an attorney, had pled gUilty to one count of secunnes

fraud; and Hillard Crown, an accountant, had

pled gUilty to one count of submitting a false

statement to a bank In connection With the

loan. The remaining defendant, E.J Hammon, also pled gUilty prior to trial to one count

of secunnes fraud This case Involved the

obtaining of over $5 million In loans by Rlebold and tus affiliated companies through

fraudulent means from several banks and

Investors throughout the country. The successful prosecution of thrs case resulted from

a JOIntinvestigation by the SEC and the FBI

123
In connection with the U S Attorney's Office

for the District of New MexIco Defendants

Harold Morgan and Rlebold are appeahng

their convictions. Btebotd was sentenced to

five years In prison followed by five years'

probation. Donald Morgan was sentenced to

two years In prison followed by five years'

probation Defendants Harold Morgan, Crown

and Hammon were sentenced to SIX months

In prison followed by five years' probation

U S v Goss, et et 51-Cadmus L. G

Goss, Richard F. Vande Vegte, Arthur John

Kirsch, Rosland Stewart Moore, Donald Wilham Sparks and Elary Rlnehard were indicted

In a 51 count indictment charging them with

mall fraud, sale of unregistered securities and

securmes fraud In connection with the offer

and sale of promissory notes of New Life

Trust, Inc., of PhoeniX, Arizona The indictment charged that New ufe Trust operated a

land development busmess near Dateland,

Arizona, known as EI Camino de Sol As a

part of thrs business, New ufe Trust Issued

corporate notes, purportedly secured by first

realty mortgage on lots or portions of lots of

the EI Camino de Sol subdivrsron. The Indictment charged that the land had been previously mortgaged, sold or was otherwise encumbered. The defendants allegedly sold

these corporate mortgage notes to Investors

In Iowa, Nebraska, Minnesota, IIhnols and

elsewhere Then, allegedly, through Nl T, the

defendants disbursed monthly interest payments from the proceeds of the offenng to the

Investors for a nrne In accordance WIth the

terms of the corporate mortgage notes to lull

the Investors Into a false sense of security

and to Induce the Investors to buy more

notes The case IS presently awaiting trial

U S v Harold Gokistetn, et al -Harold

Goldstein, Daniel Goldstein, alkial Nell Daniels, Paul Levine, a/k/a Henry Harper, Roger

C Anderson and Donald McCoy were

charged In a thirty count indictment WIth Violations of the Federal secunties laws, mall

fraud and conspiracy to defraud 52

Thrs Indictment followed a Commission Investigation Into the acnvmes of the defendants In connection With the offer and sale of

Investment contracts In gold concentrate, a

form of gold ore. The defendants' sales,

which began In January 1975, exceeded $1

rrulhon Among other things, the defendants

represented to customers that they would

124

refine, ship and store the gold concentrate on

behalf of those customers. The defendants

failed to disclose that the purported source of

the gold concentrate was not In operation and

that they had no current supply of concentrate available to satisfy customer orders

Most of these same defendants were already subject to permanent injunctions for

Violations of the registration and antifraud

provisions of the Federal secunnes laws

The Criminal Indictment of these defendants IS the first InvolVing the sale of gold to

United States Citizens since the prornomon on

the ownership of gold was hfted on December

31,1974

An Important part of the Commission's

cnrmnal enforcement program IS ItS Criminal

contempt proceedings. In U S v. William

Robert Cook, 53 Wilham Robert Cook was

convicted of three counts of Criminal contempt after a six-day trial The contempt

arose from rus disobeying the provrsions of a

permanent Injunction entered against him In

1970 The defendant had engaged In a

course of conduct In willful disobedience of

the Injunction in the offer and sale of fractional undlvrdad working interests In oil and

gas leases He distributed fraudulent Schedule B sheets, made false statements to investors, usmq high pressure "boiler room" telephone salesmen, and Improperly used investors' morues. Trus case IS particularly Significant In that the defendant received a threeyear prison term. The convicnon was affirmed

by the U.S. Court of Appeals for the Fifth

CIfCUlt

In another Criminal contempt proceeding,

which arose In connnecnon With the CIVil

Injunctive action entitled SEC v. TransJersey

Bancorp, the Commission charged that the

defendants had engaged In a scheme to

manipulate the price of TransJersey securities from $13 per share In September 1975 to

$27 per share In October 1975.54 Ralph

Iannelli, who had been previously snjomed

from engaging m rnanipulative conduct, was

found gUilty of Criminal contempt after an

eight-day JUry trial. ThIS cnrnmal proceeding

was insntuted and tned by the Commission's

staff rather than through a referral of the case

to the Department of Justice. Iannelli was

given a two-year suspended sentence and

place on probanon for two years

US v, Tom R. Rodgers 55-0n an appeal

from hrs cnrrunal contempt convionon, which
sought to set aside the prior consent decree

on which the contempt charge was based,

Tom R Rodgers argued that he did not have

effective counsel at the time he consented to

the Injunction The Court of Appeals for the

Fifth CircUit held that the Sixth Amendment

nght to effective counsel does not apply to

civrl proceedings The court also stated:

"Consent Decrees would not be worth very

much If every violation of them had to be

prosecuted de novo as a violation of the

securities acts. We think It ISsafe to conclude

that Congress did not Intend for enforcement

of the securities acts to be confined In this

way.

Organized Crime Program

The prosecution of securities cases ISoften

based primarily on circumstantial evidence

requmnq extensive investigation by highly

trained personnel. The difficulties In such

investigations and prosecutions are compounded when elements of organized crime

are Involved. Witnesses are usually reluctant

to cooperate because of threats or fear of

physical harm. Books, records. and other

documentary evidence essential to the Investigation and to a successful prosecution may

be destroyed or nonexistent. The organized

cnme element ISadept at diSgUISingItSpartieipation In transactions. through the use of

aliases and nominee accounts, by operating

across international boundaries, and by takIng advantage of foretgn bank secrecy laws.

It frequently operates through "fronts" and

Infiltrates legitimate business concerns. Organized crime also has an extensive network

of affiliates throughout this country In all

walks of life, and m.rnany foreign nations. As

a result of these problems. CIViland criminal

litigation Involving organized crime can result

In unusually lengthy proceedings. Despite

these difficulties, the Commission. working In

cooperation Withother enforcement aqenoes,

has been able to make major contributions to

the fight against organized crime.

DUring the fiscal year 1976. the organized

crime program focused pnncipally on two

goals. (1) increasing the Commission's effectiveness In obtaining current reliable Information relating to organized Criminal activity In

the securities Industry; and (2) aggressively

pursuing to completion investigations of situations brought to the Commission's attention

as potentially mvolvmq the the Infiltration of

elements of organized crime Into the Industry

In order to Increase the flow of reliable

data. an Intelligence unit was established In

1974 In the Divrsion of Enforcement Its pnnctpal function ISto maintain channels of communication Withstate, local and other Federal

agencies, as well as comparable agencies of

foreign governments. which might have Information on organized cnrnmal activrty In the

secunnes Industry, Information received by

this Unit IS correlated With other available

information and evaluated In light of the Comrrussron's responsibilities under the Federal

secunnes laws, Information Indicating pOSSIble securities law Violations by organized

cnrrunal elements IS relayed by the Intelligence Unit to those other members of the

staff whose pnncipal duties are to Investigate

activrty by organized crime ThiSprogram has

already generated a Significant number of

new cases, as well as contributing new

sources of Information to ongoing Investigations

In furtherance of the intelligence function.

members of the statt have continued to participate In seminars and lectures sponsored

by state and local governments and their

representatives have been Included In the

Commission's training programs Thrs has

alerted local authonnes to the role of the

Comrrussion In curtailing organized cnrnmal

activity In the securities Industry, Members of

the Commission staff are also assiqnsd on a

full time baSISto certain of the Justice Department's Organized Crime Strike Forces, Both

the Strike Forces and the Oornrmssronstaff

have benefited thereby In learning more

about organized Criminalacnvny In the securities Industry.

As a result of the organized crime unit's

enforcement efforts dunnq the past fiscal

year, the Commission filed injunctive actions

naming 23 persons and contributed to the

return of Indictments naming 17 mdivrduals

and the convicnons of 35 of them Two persons considered to be Important members of

organized cnme were eruomeo, three such

members were indicted and three convicted

on indictments returned In pnor years The

Comrmssron presently has 58 matters under

mvestiqatronmvolvmq organized cnme

After an extensive Cornrmssron Investigation and the efforts of the Organized Cnme

125

"
Strike Force In Manhattan, on June 29, 1976,

a Federal grand JUryIn the Southern District

of New York indicted seven individuals, Including GUidoBenrgno, and two former stock

brokers charging them with seeunnes fraud

and conspiracy In connection with the offer

and sale of counterfeit American Home Products Corporation stock certificates. The Indictment alleges that as part of the scheme, the

defendants caused Seed Capital Corporation,

a former New York stock brokerage firm, to

deliver 13,000 fraudUlently Issued shares to

purchasers In exchange for approximately

$1,400,000 Thereafter, the defendants

caused Seed Capital to Issue checks for

$1,300,000 which the defendants then

cashed

In another significant case the Commission

hied a CIVilaction In the U.S District Court for

the Southern District of New York, on April

26, 1976, seeking a permanent mjunction

against John C Doyle and eight others, to

prevent further violations of the anti-fraud and

antlmarnpulatron provisrons of the Securities

Exchange Act of 1934 In connection with

transactions In the securities of Canadian

Javelin Limited The complaint alleges that

Doyle, the prrncipal shareholder of Canadian

Javelin, and the other defendants participated

In a scheme to manipulate the market price of

Canadian Javelin stock on the American

Stock Exchange.

Cooperation with Other

Enforcement Agencies

In recent years the Comrnlssion has given

increased ernphasrsto cooperation and coordination with other enforcement agencies,

including the self-regulatory organizations,

enforcement agencies at the state and local

level, and certain foreign agencies. Its programs In thrs area cover a broad range For

example, the Cornrnlssron believes that certain cases are more appropnately enforced at

the local rather than the Federal level where

the activities, while perhaps Violatingthe Federal securities laws, are essentially of a local

nature In these Instances, the Commission

authonzes the referral of the case to the

appropriate state or local agency, and members of the staff familiar With It are made

available for direct assistance to that agency

In its enforcement action. A member of the

staff has been specifically designated as a

126

liaison With state enforcement and requlatory

authonnes

The Commission also has fostered programs desrqned to provide a cornprehensrve

exchange of Information concerning mutual

enforcement problems and possible secunnes Violations DUring the fiscal year, It continued ItSprogram of annual regional enforcement conferences These conferences are

attended by personnel from state secunnes

agencies, the U S Postal Service, Federal,

and state and local offices of selt-requlatory

assocratrons, such as the NASD. They provide a forum for the exchange of Information

on current enforcement problems and new

methods of enforcement cooperation One

result of these conferences has been the

establishment of programs for JOintmvesnqanons Although the conferences were Initially

hosted by the Commission's regional offices,

many state and local agencies are now servIng as sponsors or co-sponsors

SWISS TREATY

The ratification process continued on the

Treaty between the United States and SWitzerland on Mutual ASSistanceIn Cnmmal Matters.56 Negotiations on this Treaty began In

1969 and culminated In ItSsigning In Bern In

May of 1973. The SWISSratification procedure, which Included Implementing legislation

believed necessary, was completed in the

middle of January 1976. The Treaty was

transmitted to the President in early February

and to the Senate In the middle of February

The Senate Foreign RelalJons Committee

held heanngs on the Treaty In the middle of

June, and It was approved by the Senate

approximately a week later The exchange of

Instruments of ratification should follow

shortly The Treaty takes effect 180 days

after that date.

In general, the Treaty provides for broad

cooperation between the two countries In

criminal matters. Provision ISmade for assistance In locating Witnesses, obtaining Witnesses' statements and testimony, the production and authentication of business records, and the service of Judicial and administrative documents. The Treaty also provides

for special assistance in cases involvmq organized crime

The Treaty should be of assistance to the

Cornrrnssron In major cases where SWISS
financial institutions are utilized to engage In

securities transactions In the United States,

or where funds resulting from Illegal activities

are secreted In such situations

FOREIGN RESTRICTED LIST

The Cornrrussion maintains and publishes

a Foreign Restricted List which ISdesiqned to

put broker-dealers, financial institutions,

Investors and others on notice of unlawful

distributions of foreign secuntres In the United

States The list consists of names of foreign

compames whose securities the Commission

has reason to believe have been, or are

being offered for public sale In the Umted

States In violation of the registration requirement of Section 5 of the Securities Act of

1933 The offer and sale of unregistered

seeuntres deprives Investors of all the protections afforded by the Securities Act of 1933,

including the right to receive a prospectus

contarnmqthe information required by the Act

for the purpose of enabling the Investor to

determine whether the Investment ISSUitable

for him While most broker-dealers refuse to

effect transactions In secuntres Issued by

companies on the Foreign Restricted trst,

this does not necessarily prevent promoters

from Illegally offering such secunties directly

to Investors In the Umted States by mall, by

telephone, and sometimes by personal sohcrtanon. DUringthe past fiscal year, 15 corporations were added to the Foreign Restricted

trst, bringing the total number of corporations

on the list to 99 The tollowrnq companies

were added during the year

Hemisphere Land Corporation, LimIted57-lnformatlon came to the attention of

the Commission that this corporanon was

offering by mall from Nassau In the Bahamas

In the United States Interests In Canadian

land These Investment contracts are securities.

The solicitations mailed to prospective

Investors Included a subscnption agreement

entitled "Purchase Reservation" to reserve

from one to four "uruts" at $2,000 per unit of

unspecified, and undeveloped, land In Varrenes, Quebec, Canada, represented to be at

the price of 40 rt per square foot After an

Investor completed payments, which may be

made on a monthly baSISfor the units, the

company would decide which parcels of land

would go to the Investor The arrangement

contemplated that at that time the Investor

would receive a deed to one or more specinc

lots selected by Hemisphere This deed

would be subject to the restriction of an

option obligating the Investorto sell the same

land back, at any time upon request, to

Hemisphere at $1 20 per square foot, or at

such higher price as the market value, Independently appraised, might establish at the

time of re-purchase. There would be no obligation upon Hemisphere to repurchase parcels of land being distributed by means of

these Investment contracts

No Securities Act registration statement

covering these Investment contracts had

been filed with the Comrrussron

American Industrial Research, SA 58_

Thrs Mexrcan corporation, also known by the

name of lnvesnqacron Industrial Americana,

S.A , has been making a public offering In the

United States by mall sent from San Jose,

Costa Rica and by telephone calls from MexICOCity Investors are sohcrtedto buy "uruts''

consisting of 2000 of ItS"shares of beneficial

Interest" at $3 20 per unit With warrants to

purchase another 1,000 of these shares at

the same price.

No tmancral information was available

about this corporation, and there was little

information available as to the Identity of ItS

promoters or the Intended diSPOSitionof any

funds that were being obtained from Investors

In the uruted States. Since trus corporation

has not filed a Securities Act registration

statement covering any of ItSunits, shares or

warrants, the public offering of these securities constituted a Violationof Section 5 of the

Act

Duncannon SPirits, Ltd 59_ThiS Bahamian

corporation has been offering shares of ItS

stock to Investors In the UrutedStates stating

that It was engaging In contract sales of

Scotch whiskey. The information that normally would be available to Investors from the

filing of a registration statement and supplyIng each Investor With a prospectus containIng the information required by the Securities

Act was not available Since no registration

statement had been filed With the Commission covering shares of stock of Duncannon

SPirits, Ltd , all sales of thiS security that had

taken place In the Umted States were In

Violationof Section 5 of the Act

127
Royal Greyhound and Turf Holdmgs limIted60 This South African corporation was

offering Its shares of stock and secured convertible redeemable debentures to investors

In the Umted States A prospectus that stated

it was filed In Pretoria, South Africa, on

September 25, 1975, contained the following

mtorrnanon The purpose of the corporation IS

to develop dog and horse racing In the Kingdom of Swaziland In Africa The corporation

has an option to acquire 90 percent of the

stock of Gorman Investment (Proprietary)

Limited, a private company Incorporated under the laws of the Kingdom of Swaziland,

from which It has obtained an exclusive license to develop dog racing and horse raeIng The latter company also owns the land In

Swaziland necessary to burld a stadium and

a dog racmg track.

Royal Greyhound and Turf Holdings was

offering 10 million shares at 17 rt per share

To the extent that an Insufficient number of

shares were sold to raise the necessary

capital, the corporation was offering secured,

convertible, redeemable debentures bearing

an Interest rate of 14 percent per annum to

make up the difference In raising the necessary capital The above described prospectus

further stated that the debentures were to be

secured by a first mortgage on the property

owned by Forman Investment, and that the

proceeds from the sale of shares and debentures might be loaned to thrs company to

construct a modern stadium Including a dog

racmg track and totalisators In the Cities of

Mbabane and Manzlnl.

No Securities Act registration statement,

covering either these shares of stock or debentures, had been filed with the Commission

by Royal Greyhound and Turf Holdings, thus,

the public offer or sale of those secunnes In

the United States was in Violation of Section

5 of this Act.

Aguacate Gonsoltdated Mmes, tncorporated61 This Costa Rican corporation was

offering ItS shares of stock by mall and by

telephone to Investors In the United States

Its written soncnatrons stated that It had obtamed rnmeral rights to 2,347 acres In Costa

Rica that Included old gold mines that had not

been worked for a number of years It further

stated that the consideranon for these minerai rights was 250,000 shares of ItS stock

and a "deferred note" for $75,000, given to

128

the company's vrce-president, and another

250,000 shares and "deferred note" for

$75,000 to Atlanta Foreign Investments,

whose president was also the president of

Aguacate Consolidated Mmes. The list of

shareholders in the Uruted States to whom

shares of Aguacate Consolidated Mmes had

been offered and sold showed that there

were about 450 shareholders reSiding In 43

states ,ApprOXimatelytwo and a half million

shares had been Issued and were outstandIng. By February 5, 1976, thiS corporation

was offering to sell 125,000 additional shares

to ItSshareholders at $2.25 per share.

The records of the Oomrmssron disclosed

that no Secuntles Act registratIon statement

had been filed Withthe Comrrussroncovering

the shares of stock of Aguacate that had

been publicty offered and sold to Investors In

the United States. Therefore, the shares of

Aguacate being publicly offered and sold In

the Umted States were offered and sold In

Violation of the provisions of secuon 5 of the

Act.

Fmancleras-Informatlon came to the attention of the Comrrussron that Investors In

the United States were bemg solicited by

broker-dealers, Investment advisers and others, to purchase, and were purchasing, securities In the form of promissory notes and

fmancial certificates of Credtto Mmero v. Mercenut A A , Fmanciera de Fomento Industrial,

SA, Fmenctere Comermex, SA, and Fmancters Metropolttana, S A 62 No registration

statement had been filed pursuant to the

provrsrons of the Securities Act with respect

to these securities. Accordingly, the Commission placed Credito Minero v. Mercantll, S.A.,

Fmancrera de Fomento Industrial, S.A., Financiera Comermex, S.A. and Financlera Metropoutana SA on the Foreign Restricted

list

The ccrnnussion also alerted investors,

broker-dealers Investment advisers and the

public that other Mexrcan nnancreras (MeXIcan fmancral institutions), which had not been

Identified to the Comrrassron,may be seiling

unregistered notes, financral certificates or

other securities to Investors In the Umted

States The ComrrussionWill place additional

financreras on the Foreign Restricted list

when mtormanon comes to the comrmssion

that such nnancieras are offering to sell or

-

-
are seiling unregistered securities to United

States Investors

ASCA Enterprtses Limited 63_ The Comrrussron received information that ASCA Enterprises, urmted, of Hong Kong, was engaged In publicly offering Its secunnes by

mail In the United States, and offering shares

In two pooled Investment accounts created

and managed by ASCA Enterprises, Limited

One pooled fund was to be used to make

Investments In common stocks and the other

to make Investments In commodities No registranon statement under the Secunties Act of

1933 has ever been filed with the Commission covering any of the shares being offered

by ASCA Enterprises Limited.

Whisky Investment Contracts-The Comrrussron received Information that certain apparently affiliated corporations of London,

England were engaged In the offering and

sale to Investors In the United States of

Investment contracts for Investment In Scotch

whisky In storage In Scotland.

No registration statement under the Securities Act of 1933 had been filed with the

Commission covering any of these investment contracts that were being offered

The Investment procedure being used

closely follows the procedure In other whisky

Investment cases In which Federal courts, In

Commission enforcement actions, had deCided that similar sales of whisky In storage In

Scotland constitute sales of Investment contracts that are securities as the term "security" IS defined In Section 2(1) of the secunlies Act of 1933. These cases are SEC v.

M A Lundy ASSOCiates, 362 F. Supp. 266

(R.!. July 2, 1973), and SEC v. HaffendenRune: tntemeuonei, tnc., 362 F. Supp 323

(E.D. Va. August 8, 1973) Accordingly, the

Commission placed on the Foreign Restricted

List the follOWing corporallons Atholl Brose

Ltd.; Atholl Brose (Exports) Ltd; Strathross

Blending Company Lirruted: Derkglen, Ltd.,

and Henry Ost & Son, Ltd 64

NOTES TO PART 4

1 Securities Exchange Act Release No

12680 (August 2, 1976), 10 SEC Docket 167

2 Securities Exchange Act Release Nos

12105 (February 13, 1976), 8 SEC Docket

1296; 12376 (Apnl 26, 1976), 9 SEC Docket

492; 12497 (June 1, 1976), 9 SEC Docket

781.

3 Securities Exchange Act Release No.

12278 (March 29, 1976),9 SEC Docket 307

4 Securities Exchange Act Release No.

11667 (September 22, 1975), 7 SEC Docket

915

5 Securities Exchange Act Release Nos

11773 (October 24, 1975), 8 SEC Docket

273,11980 (January 6, 1976),8 SEC Docket

976

6 Arther Lipper Corp v SEC, C A 2 (No

76-4067)

7 Securities Exchange Act Release Nos

11767 (October 24, 1975), 8 SEC Docket

250, 11946 (December 22, 1975), 8 SEC

Docket 789.

B Col/ms Secunties Corp v SEC, C A.D.C

(No 75-2200)

9 Securities Exchange Act Release No.

12104 (February 12, 1976), 8 SEC Docket

1257

10 Nassar & Co, Inc, et al. v SEC,

C.A.D C (No. 76-1278)

11secunnes Exchange Act Release No

12361 (April 22, 1976), 9 SEC Docket 482.

12Securities Exchange Act Release No

12262 (March 25, 1976),9 SEC Docket 266.

13Securities Exchange Act Release No

11534 (July 14, 1975),7 SEC Docket 405

14 SEC v TMC Mortgage Investors, Litigation Release Nos. 7059 (August 26, 1975), 7

SEC Docket 753, and 7232 (January 14,

1976),8 SEC Docket 1046, SEC v Hal/craft

Homes, Inc, litigation Release Nos 7133

(October 24, 1975),8 SEC Docket 315, and

7396 (May 18, 1976), 9 SEC Docket 707,

SEC v Servotrorucs Inc and Munro Games

Inc, Litigation Release Nos. 7440 (June 11,

1975),9 SEC Docket 919, and 7506 (July 30,

1976), 10 SEC Docket 193

15LJtlgatlon Release Nos. 7247 (January

21, 1976), 8 SEC Docket 1138, and 7384

(May 5, 1976), 9 SEC Docket 573

16SEC v. Stelber Industries, Inc., Litigation

Release No 7268 (February 10, 1976), 8

SEC Docket 1290

17 LJtlgatlon Release Nos 6909 (May 30,

1975), 7 SEC Docket 94, and 7039 (August

12, 1975), 7 SEC Docket 603

1BLitigation Release No 7063 (August 29,

1975),7 SEC Docket 810.

19Litigation Release No. 7170 (November

18, 1975),8 SEC Docket 516

20 Litigation Release No 7385 (May 6,

1976),9 SEC Docket 574, and 7431 (June 3,

1976),9 SEC Docket 815.

21Lltlgallon Release Nos 7307 (March 10, , i

1976), 9 SEC Docket 175, 7385 (May 6,

1976), 9 SEC Docket 574, and 7505 (July 29,

1976), 10 SEC Docket 139

22LJtlgatlon Release No 7171 (November

19, 1975),8 SEC Docket 517

23 unqanon Release No 7408 (May 24,

1976), 9 SEC Docket 753.

24l!tlgatlon Release No. 7443 (June 15,

1976), 9 SEC Docket 920

25 Litigation Release No 7479 (July 7, 1976),

9 SEC Docket 1074.

26LJtlgatlon Release No 7142 (October 30,

1975),8 SEC Docket 318.

27Litigation Release No. 7472 (June 29,

129
1976}, 9 SEC Docket 1009. 28 ltllgatlon Release No. 6654 (December

27,1974),6 SEC Docket 40. 29 unaatron Release No. 6977 (July 10,

1975), i SEC Docket 367. 30 LitIgation Release No. 7393 (May 13,

1976), 9 SEC Docket 668. 31 lItlgallOn Release No. 7333 (March 29,

1976), 9 SEC Docket 362 32 L,tlgallon Release No 6830 (Apnl 14,

1975), 6 SEC Docket 708 33 Litigation Release No. 7478 (July 2,

1976), 9 SEC Docket 20. 34 Lltlgallon Release No. 7412 (May 26,

1976), 9 SEC Docket 754 35 Litlgallon Release No. 7464 (June 24,

1976),9 SEC Docket 982 36 Litigation Release No 7048 (August 19,

1975), 7 SEC Docket 691. 37 litigation Release No. 7366 (April 23,

1976),9 SEC Docket 533 38 litigation Release No. 7300 (March 4,

1976), 9 SEC Docket 115 39 LitigatIOnRelease No 7095 (September

23, 1975), 7 SEC Docket 19. 40 LItigatIOn Release No 7349 (Apnl 12,

1976),9 SEC Docket 443. 41 Litigation Release No. 6960 (July 2,

1975), 7 SEC Docket 370 42 Secunnes Exchange Act Release Nos.

11514 (July 2, 1975), 7 SEC Docket 293,

11516 (July 2,1975),7 SEC Docket 298, and

11517 (July 2, 1975), 7 SEC Docket 301. 43 LltigalJon Release No 7196 (December

5, 1975), 8 SEC Docket 724. 44 Lltlgallon Release Nos. 6615 (December

17, 1974), 5 SEC Docket 656 and 7148

(November 18, 1975), 8 SEC Docket 361

45 LitIgation Release No. 7246 (January 12,

1976),8 SEC Docket 16.

130

46 L1bgallonRelease No. 7192 (December

3, 1975), 8 SEC Docket 33. 47 L1tlgallon Release No. 7151 (November

4, 1975), 8 SEC Docket 363. 48 Litigabon Release No. 7150 (November

4, 1975), 8 SEC Docket 362 49 Litigation Release No. 7293 (February

26, 1976),9 SEC Docket 35. 50 LIlJgatlon Release No. 7164 (November

12, 1975),8 SEC Docket 514. 51 Litigation Release No 7194 (December

3, 1975),8 SEC Docket 685 52 Litigation Release No. 7466 (June 25,

1976), 9 SEC Docket 1008. 53 Litigation Release No. 6812 (April 2,

1975), 6 SEC Docket 594. 54 LItigation Release No. 7394 (May 14,

1976),9 SEC Docket 707. 55 U.S. v. Tom R. Rodgers, C.A. 5, 1976,

Summary Cal Nos. 75-3010 and 75-3098. 56 See 41st Annual Report, p. 122. 57 Secunties Act Release No 5633 (October 23, 1975), 8 SEC Docket 236. 58 Secunues Act Release No. 5635 (October 24, 1975),8 SEC Docket 237. 59 Secunties Act Release No 5646 (November 21,1975),8 SEC Docket 524. 60 Sscunnes Act Release No. 5649 (December 1, 1975),8 SEC Docket 634 61 SecunlJesAct Release No 5697 (March

26,1976),9 SEC Docket 304. 62 Secunties Act Release No 5698 (Apnl 5,

1976), 9 SEC Docket 367. 63 SecurilJes Act Release No 5713 (May

27, 1976),9 SEC Docket 715 64 Secunnes Act Release No 5712 (May

27, 1976),9 SEC Docket 715
Part 5

Investment Companies

and Advisers

PartS

Investment Companies

and Advisers

Under the Investment Company Act of

1940 and the Investment Advisers Act of

1940, the Commission IS charged with extensive regulatory and supervisory responsibilities over Investment companies and investment advisers The responsrbrnty for discharging these duties lies with the Divrsron of

Investment Management

Unlike other Federal secunnes laws, which

emphasize disclosure, the Investment Company Act provides a regulatory framework

within which Investment companies must operate. Among other things, the Act (1) prohibits changes In the nature of an Investment

company's business or ItS Investment policies

Without shareholder approval, (2) protects

against management self-dealing, embezzlement or abuse of trust, (3) provides specifrc

controls to eliminate or mitigate mequitable

capital structures, (4) requires that an investment company disclose ItS financial condition

and Investment policies, (5) provides that

management contracts be submitted to

shareholders for approval and that provisron

be made for the safekeeping of assets, and

(6) sets controls to protect against unfair

transactions between an Investment company and ItS affiliates

Persons advismq others on their secuntres

transactions for compensation must register

With the Commission under the Investment

Advrsers Act Thrs requirement was extended

by the Investment Company Amendments

Act of 1970 to Include advisers to registered

Investment companies The Advisers Act,

among other things, prohibits performance

fee contracts which do not meet certain requirements, fraudulent, deceptive or rnampulanve practices, and advernsrnq which does

not comply With certain restrictions.

Investment companies and assets under

the management of Investment advisers constitute Important resources for Investment In

the nation's capital markets In order to continue their role of channeling indiVidual savIngs Into capital needed for Industrial development, Investment companies and Investment advisers must have the confidence of

Investors, and the safeguards provided by the

Investment Company and Investment AdVISers Acts contribute to sustaining such confidence

NUMBER OF REGISTRANTS

As of June 30, 1976, there were 1,286

active Investment companies registered under the Investment Company Act, With assets

havmq an aggregate market value of over

$806 billion Those figures represent a decrease of 17 In the number of registered

companies and an Increase of nearly $6 4

billion In the market value of assets since

June 30, 1975 Further data IS presented In

the statistical section of this Report At June

30, 1976, 3,857 Investment advisers were

registered With the Commission, representing

an Increase of 437 from a year before

DUring the fiscal year, the DIVISion's staff

conducted examinations of 260 Investment

companies and 425 Investment advisers, 17

and 21 respectively, more than dunnq fiscal

1975. It IS the Commission's ultimate objective to examine all Investment company registrants Within the first year after registration,

and to examine each registered Investment

133
company and registered Investment adviser

every other year This should provide effective regulatory oversrqht As a result of the

Commission's examination and Investigation

program In 1976, numerous Violations of the

Investment Company Act and of the Investment AdVisers Act were uncovered, and approximately $1,582,928 were returned to investment companies and their shareholders

Ten Investment company and forty Investment adviser matters were referred to the

DIVISion of Enforcement for possible action

PROPOSED LEGISLATION

Investment Advisers Act

Amendments of 1976

On December 11, 1975, the Cornrmssron

transmitted to Congress proposed amendments to the Investment Acvisers Act of 1940

to provide substantial additional protections

to Investment advrsory clients

These proposals, desiqned to upgrade the

standards and quality of regulation of investment advtsers, would provide the Cornrmssion With the authonty to prescnbe minimum

qualification standards and financial responsrbility requirements for registered advisers In

addition, the legislation would (1) make certain technical and conforming changes, (2)

eliminate the "Intrastate" exemption provided

In the Act, (3) c1arrfy the existence of a prrvate

rrght of action based on a Violation of the Act,

(4) amend the definition of "person associated With an Investment adviser," and (5)

authonze and direct the Cornrmssron to

study

(I) the extent to which persons not Included In the definition of Investment

adviser or specifically excluded therefrom engage In actrvrtres Similar to

those engaged In by Investment adVISers and whether such exclustons are

consistent With the Act's underlying

purposes; and

(II) the extent to which the establishment

of one or more self-regulatory organizations would tacihtate the Act's purposes

On February 3 and 4, 1976, the Subcommittee on Secunnes of the Senate Committee

on Banking, HOUSing and Urban Affairs, held

hearrngs on S 2849, a bill SUbstantially Similar

to the Cornrrnssron's proposals FollOWing the

134

Subcommittee's consideration of the measure, the full Committee on Banking, HOUSing

and Urban Affairs favorably reported S 2849

on May 20, 1976, With certain changes A

companion bill, H R 13737, was the subject

of hearrngs on May 20 before the Subcommittee on Consumer Protection and Finance

of the House Committee on Interstate and

Foreign Commerce, and the full Committee,

which adopted the changes made by the

Senate Committee

THE NASD MAXIMUM SALES

LOAD RULE

On October 10, 1975, the Comrrussron

approved the National ASSOCiation of Securrties Dealers' maximum sales load rule relatIng to mutual fund shares and certain other

redeemable sscunnss 1 Seclion 22(b) of the

Investment Company Act gives the NASD

authorrty, With Cornrrussron oversrqht, to promulgate and enforce rules to prevent sales

charges which are "excessive" The statute

provides that such rules must allow for "reasonable" compensation for sales personnel,

broker-dealers, and underwriters. and for

"reasonable" sales loads to Investors

For mutual funds and Single-payment contractual plans the rule essentially provides a

ceiling of 8 50% on sales charges (declining

to 6 25% for larger purchases), but conditions

the right to charge the maximum on the

fund's offerrng (1) diVidend reinvestment at

net asset value, (2) rrghts of accumulation,

and (3) volume discounts, as defined In the

rule A specmc deduction from the maximum

allowable sales charge IS Imposed for failure

to provide each of the services

The rule change also provides maximum

sales loads ranging from 8 50% down to

6 50% on Single-payment varrable annumes,

and a maximum of 8 50% of total payments

as of a date not later than the twelfth year

after purchase for multiple-payment variable

annurty contracts

CONTRACTUAL PLAN RESERVE

REQUIREMENTS LOWERED

On October 22, 1975, the Cornrrusston

amended Rule 27d-1 under the Investment

Company Act 2 Tnrs revision, which became

effective December 15, 1975, modified the

reserve requirernents for front-end load con-
tractual plans ("penodlc payment plans")

The reserve requirements were established

by the Commission In 19713 and are designed to ensure that sponsors of front-end

load penodic payment plans will be able to

carry out their obligations to refund sales

charges pursuant to Sections 27(d) and 27(f)

of the Investment Company Act The revrsion

of these requirements was based upon data

filed with the Commission on the sales, persistency and refund expenence of more than

32,000 front-end load plans dunng the two

years following the adoption of the reserve

requirement The revrsron was designed to

prevent unnecessary burdens upon plan

sponsors, while contmumq to ensure proper

protection for Investors

PROPOSED RULES

Rule 15a-2

On March 25, 1976,4 the Commission proposed the adoption of new Rule 15a-2 under

the Investment Company ActS to provide a

procedure which funds may follow In order to

be certain that annual continuances of their

advisory and pnncipal undsrwntmq contracts

meet the requirement of Sections 15( a)(2)

and 15(b)(1) of the Act that such continuances be "specifically approved at least annually"

One purpose of the statutory requirement

IS to prevent the life of an advisory or distnbubon contract from continuing for an unreasonable penod of time Without re-evaluation by

directors or shareholders Another purpose IS

to assure that the decisron to continue a

contract IS based on sutncrsnt Information as

to the performance of the Investment advrser

or pnncipal underwnter to be meaningful

Under the proposed rule the management

of a fund could be certain of fulfilling these

purposes by haVing the directors or shareholders vote on the continuance of a contract

dunng a specified penod pnor to the date a

contract would terminate, If ItS continuance

were not so approved The rule would not

preclude consrderanon of a contract at more

frequent Intervals and would not prescnbe the

exclusive method of complying With Section

15 of the Act

The DIVISion IS analyzrnq the comments

received and IS prepanng appropnate recommendations to the Commission

"Open-seasons" Rule

In August 1975, the Commission published

for comment proposed Rule 22~6 and a

proposed amendment to Rule 134 under the

Secunties Act of 1933 which together would

further Implement the recommendations of

the DIVISion's August 1974 "Mutual Fund

Drstnbution Report" These proposals would

permit mutual funds, their pnnctpal underwnters, and dealers to offer fund shares at

reduced or no load to qualifying repeat investors At year end, the comments were being

analyzed by the staff

Temporary Rule 6c-2(T) and

Proposed Rule 6c-2

In February 1974, the Commission adopted

Temporary Rule 6c-2(T) and proposed for

public comment a permanent measure, Rule

6c-27 to provide corporations organized pursuant to the Alaska Native Claims Settlement

Act of 19718 ("ANCSA corporations" and

"Settlement Act" respectively) blanket exemptive relief from a substantial number of

provrsions of the Investment Company Act

The corporations, over 200 In number,

were created to receive, hold, and administer

the land, minerai nghts and cash awarded by

the United States Government to Alaska's

Native Indian, Aleut and Eskimo populations

In settlement of their abonqmal claims to the

land In the State of Alaska Dunng the first

few years of the exrstence of the ANCSA

corporations, only the cash portion of the

award was actually drstnbuted to the companies, and many of the Settlement Act companies Invested the cash In secuntres Hence, a

substantial number of these entities became

Investment companies Within the meaning of

the Act, and registered pursuant to Section

8(a) of the Act

On January 2, 1976, the Settlement Act

was amended to exempt ANCSA corporations from all provisions of the Act, as well as

all provrsions of the Secunnes Act of 1933

and the Secuntres Exchange Act of 1934 9

As a practical matter this amendment makes

registration under the Act by an ANCSA

corporation both unnecessary and inappropnate. The Commission proposed.!" therefore, pursuant to Section 8(f) of the Act, to

declare by order upon ItS own motion that

such ANCSA corporations as had registered

135
have ceased to be Investment companies as

defined rn the Act and rescinded Rule 6c2(T)

Rule 206(4~4

On March 5, 1975, the Commission proposed the adoption of new Rule 206(4)-4 and

new paragraph (14) of Rule 204-2(a) under

the Investment Advisers Act 11 The proposed

rules are rntended to assure that extsnnq and

prospective clients of an Investment adviser

obtain written disclosure of material information which would enable such persons to

evaluate, among other things, the adviser's

quautrcanons, methods, services and fees

They generally would require that Investment

advisers furnish a written disclosure statement to every client and prospective client

(other than a registered Investment company)

upon entering Into. extending or renewing an

advisory contract with such client and that

copies of each such disclosure statement be

maintained by Investment advrsers as part of

their recordkeepmq obligations under the Advisers Act. The proposed written statement

would include, among other things. a desenplion of the types of services offered, length of

time the Investment adviser has been In such

business. Investment techniques, sources of

information used. general standards of education and business background required of

advisory personnel and the baSIS of fee

charges There are additional disclosure requirernents for advrsers provrdmg Investment

supervisory services or managing Investment

advisory accounts. DUringthiSfiscal year. the

staff has analyzed the comments received on

thrs proposal and ISnow consrdennq an alternative approach to accomplishing the proposal's objectives

Rule 204-2(j)

In order to strengthen the protections afforded by the Investment Advisers Act to

Investment advisory clients, one amendment

to the recordkeepmq rule was made Rule

204-2 requires Investment advisers to maintain such books and records as the Commission may prescribe as necessary or appropriate In the puohc Interest or for the protection

of Investors The recordkeepinq requirernents

of Rule 204-2 serve as an Important safe136

guard against fraudulent secunnes trading

practices.

Rule 204-2(c) requires that books and records be maintained and preserved "In an

easily accessible place" and that partnership

articles and corporate books and records be

maintained at the Investment adviser's pnncrpal office In this regard, there has been

some uncertainty as to whether places outSide the tern tory of the United States are

"easuy accessible" To resolve thrs question.

the Cornrrussion adopted new paragraph (J)

under Rule 204-212 which requires a nonresident Investment adviser either (1) to

maintain and preserve copies of the books

and records at a location WIthin the United

States and file Withthe Commission a notice

specifying the address of such place, or (2) to

file with the Commission an undertakmg to

furnish copies of such books and records

upon demand by the Commission. The rule IS

substantially Similar to Rule 17a-7 under the

Securibes Exchange Act.

Rules Concerning Applications

for Orders Filed Under Investment

Advisers Act

On May 13, 1976, the Commission proposed the adoption of Rules 0-4, 0--5.and 0--

613 under the Advisers Act. which would

establish rules governing the filing and processing of applications for orders under the

Advisers Act The proposed rules, which are

Similar to the rules under the Investment

Company Act concerning applications, are

Intended to provide the Commission With the

kind of formal and complete record normally

required as the baSISfor Commission action

on applications for orders The DIVISionIS

presently considennq the comments received

on the proposed rules.

Rule 202-1

The DIVISionbecame concerned that cer.

tam provisrons of the Employee Retirement

Income Security Act of 1974 ("ERISA") en.

couraged persons who were otherwise ex.

empt from registration to register under the

Investment Advisers Act In order to Insulate

trustees of their employer-sponsored employee benefit plans from liability for a breach

of fidUCiary duty by In-house rnanaqe.s In

order to extend ERISA's substantial protsc-
nons to beneftcianes of such plans, the Commission proposed on September 29, 1975,14

and adopted on March 12, 1976,15 Rule 202-

1, which excludes from the definition of an

Investment adviser a person who offers Investment advice to an employee benefit plan,

as defined In ERISA, sponsored by his employer, If such person does not otherwise

engage In the Investment advisory business

or hold himself out generally to the public as

an Investment adviser

APPLICATIONS

One of the Commission's pnncipal activities In the regulation of Investment comparues and Investment advisers IS the consideration of applications for exemptions from varIOUS provrsrons of the Investment Company

and Investment Advisers Acts or for certain

other relief under these Acts, Applicants may

'also seek determinations of the status of

persons or comparues. DUring the fiscal year,

224 applications were filed under the Investment Company Act, and final action was

taken on 265 applications There were no

applications filed under the Advisers Act, and

final action was taken on two As of the end

of the year, 115 applications were pending

under both Acts

Under Section 6(c) of the Investment Company Act, the Commission, by order upon

application, may exempt any person, secunty

or transaction from any provisron of the Act, If

and to the extent such exemption IS necessary or appropriate In the pubhc Interest and

consistent With the protection of Investors and

the purposes fairly Intended by the policy and

provisrons of the Act Under Section 206A of

the Advisers Act, the Commission has Identical authority With regard to provrsions of that

Act Under Section 17 of the Investment

Company Act, affiliates of a registered investment company cannot participate In a JOint

arrangement With the registered company

and cannot sell to or purchase from the

registered company unless they first obtain

an order from the Commission Many of the

applications filed With the Commission relate

to these actions

Among the applications disposed of dunnq

the fiscal year, the follOWing were of particular

Interest

The Commission Issued an oprruon and

order under the Investment Company Act

denying the application of International Funeral Services of Califorma, Inc ("Internanonat") for exemption from all provrsrons of

the Act 16 International's application sought

exemplion from the Act to permit It to finance

ItS funeral service operations by selling ItS

4 '/2 percent 20-year debentures on the installment basis to the purchasers of International's pre-need funeral service contracts

Internalional anticipated that the debentures

would be used to pay for funeral services

supplied by International to the pre-need purchaser at death By usrnq the debentures,

lnternatronal would be able to obtain the

Immediate use of the cash proceeds from the

sale of the debentures and avoid a Califorma

law which requires that the cash proceeds

from the sale of pre-need funeral service

contracts be placed In trust until the funeral

services are performed

The Commission's decisron was based

upon a deterrrunatron that, If International

Issued and sold ItS debentures on the Installment basis, It would be a face-amount certificate company and thus an Investment company Within the denrunon of Section 3(a)(2) of

the Act and that International did not propose

to meet the statutory requirements of the Act

for face-amount certificate cornparues With

respect to cash surrender nghts and values

and the maintenance of reserves to meet

surrender values and matunty amounts The

Commission's opiruon noted that "purchasers

of applicant's debentures would thus assume

all of the nsks Inherent In the traditional faceamount certificate But they would have none

of the protections envisaged by Congress"

The fact that the debentures would be tied to

the performance of funeral services by International was not Viewed as a basis for distmction International has filed an appeal of

the Commission decrsion wrucn, as of the

end of the fiscal year, IS pending before the

Umted States Court of Appeals for the Eighth

Circurt 17

Dunng the fiscal year, the Continental Illinos National Bank and Trust Co of Chicago

requested assurance that the Divrsron would

not recommend that the Commission take

action to require It to register under the

Investment Company Act a collective trust

fund (CIRT) used as an Investment medium

for trusts which meet the requirements of

Section 401 of the Internal Revenue Code

137
(the "Code") and trusts which meet the requirernents of Section 408(e) of the Code

(individual retirement accounts)

The Division denied Continental s request

on the basis that the proposed collective fund

would not be a "collective trust fund maintained by a bank consisting solely of assets

of such [Code Section 401] trusts" (ernphasis

added) wittun the meaning of Section 3(c)(11)

of the Act

Contmental thereafter sought reconsideration of the DIVISion'spositron. and asked that

the matter be submitted to the Commission

The Commission agreed with the decisron to

deny the request for a "no action" position,

and further asked that the DIVISionmform

Contmental that the Commission had taken

no position on the legal conclusions set forth

In the DIVIsion's earlier no-action response,

but had based ItS determination on ItS view

that the proposal raised Significant legal and

policy Issues which could not properly be

considered In the context of a no-action letter.

At the end of the fiscal year, the staff was

engaged in considennq an application for

exemption filed by Continental pursuant to

Section 5(c) of the Act

Dunng the fiscal year, several mutual funds

organized as limited partnerships applied for

exemptive orders under vanous provrsrons of

the Investment Company Act Until recently, It

had not been teasrble for a mutual fund

registered under the Act to operate In limited

partnership form because State partnership

laws did not authonze voting powers for holders of limited partnership shares As a result,

such a fund could not satisfy the requirements of the Act which mandate shareholder

voting on specmed matters. Ho. sver, recent

amendments of the laws of so.ve States

permit limited partners to be grantee' certain

voting powers without the exercise of such

powers being deemed to be "control" 01 the

business Previously, such control would

have SUbjectedlimited partners to unlimited

habiltty as general partners

The Commission has granted exemptions

to several limited partnerships dunng the fiscal year 18 These exemptions have been

sought by rnurncipal bond funds and "exchange" funds, both of which depend upon

their limited partnership form for the tax treatment they seek to achieve. For example, the

tax exempt character of Income from muruci138

pal secunnes IS "passed through" to holders

of limited partnership Interests, but such income would lose Its tax exempt character If It

were dlstnbuted as diVidends to shareholders

of a mutual fund organized as a corporation

In addition, the limited partnership device.

unlike the corporation, presently permits

mvestors to exchange appreciated secuntres

for mterests 10 limited partnerships without

the recognition of capital gains at that time

However, legislation currently pendmg 10

Congress might elimmate trus "tax-free" exchange priVilege for limited partnerships, and

such funds are awaltmg a resolution of the

tax status of exchanges before comrnencmq

operation

OTHER DEVELOPMENTS

"Money Market" Funds

Throughout the fiscal year, "money market" funds continued to be a dynamic segment of the mutual fund Industry Generally,

these are funds which Invest In short-term

debt seeunnes such as treasury bills, commercial paper and certificates of deposrt.

Money market funds raise unique regulatory

questions because of their short-term nature

and the characteristics of the secunnes 10

which they Invest.

The Initial two questions addressed by the

DIVISionwere the methods by which money

market funds value portfolio securities and

calculate rates of return or "Yield" With respect to these matters, the Commission published for comment proposed gUidelines 19

deSigned to standardize valuation of shortterm debt securities by these funds and to

establish Uniform calculanons to be used 10

reportmg money market fund yields and rates

of return.20 In addition to analyzinq the comments that were received on these proposals,

the DIVISiondeveloped computer Simulations

of money market fund portfolios and, In February 1976, held a public meeting to soncrt

adotnonat views from Interested persons. The

DIVISion expects to complete ItSstudy of trus

matter In the near future.

Registration of Foreign

Investment Companies

Foreign mvestment companies, which generally are prohibited by Section 7(d) of the
Investment Company Act from selling their

secunnes In this country, offer an opporturnty

for Investing In diversified pools of secunnes

ISSUed by companies In foreign countnes On

December 2, 1974, the Commission Issued a

release requesting public comments on

whether foreign Investment companies

should be permitted to register under the

Investment Company Act and allowed to sell

their shares In this country and, If so, under

what conditions The Issues raised In thrs

release were consistent With a recommendation of the Organization for Economic Cooperation and Development that member

countries review their regulation of investment comparues, and when deciding whether

to permit a foreign Investment company to

operate In their country, give substantial

weight to whether such company IS domiciled

In a country which compiles with the DECO's

rules on operation of Investment companies

The Commission also sought comments on

related Issues, Including whether such companies could be allowed to register and sell

shares In thrs country Without sacnncrnq the

high level of Investor protection embodied In

the Act.

In response to the release, the DIVISion of

Investment Management received approxrmately fifty comments, including comments

from domestic and foreign Investment comparues, representatives of the Uruted States

and of foreign government agencies and

Umted States Investors After consideratron

of these comments, the DIVIsion recommended to the Commission that certain factual and legal questions which are crucial to

the determinations which must be made pursuant to the Act can best be resolved on a

case-by-case baSIS and In the context of

formal applications filed by mdivrdual comparues for exemptions from specrnc provisions

of the Act and for orders permitting such

companies to register under the Act and to

sell their shares In the Umted States The

DIVIsion also recommended that rule-making

would be premature at thiS time

The Cornrrussron adopted thrs recommendation and published a statement of policy

and gUidelines for the filing of applications for

orders permitting reglstratlon.22 The release

stated that the Commission would entertain

applications filed by foreign Investment comparues pursuant to Section 7(d) of the Act

which may Incorporate requests for exemplion from other sections of the Act With which

a foreign applicant IS unable to comply The

release also set forth certain mrmrnurn prerequisites to filing, such as a rrururnum Size,

and descnbed information which should be

Included In any such application No foreign

Investment company has yet sought to avarl

Itself of this procedure, although overtures

have been made by several

Securities Depository System

Dunng the past fiscal year, the DIVISion

continued to study the problems that may be

presented when an Investment company

uses a secunnes depository either directly or

through a custodianship of ItS assets

Section 17(f) of the Investment Company

Act provides that subject to Commission regulation, a registered management Investment

company, or any permitted custodian for such

company, With the consent of the company,

may deposit all or any part of the secunnes

owned by the company In a system for the

central handling of secunnes established by a

national secunties exchange or national secunnes assocratron registered With the Comrrussron, or such other person as may be

permitted by the Commission, pursuant to

which system all secunnes of any particular

class or senes of any Issues deposited Within

the system are treated as fungible and may

be transferred or pledged by bookkeeping

entry Without physical delivery of such secunties

A letter Issued by the DIVISion Indicated

that no action would be recommended to the

Commission against a fund which authonzes

ItS bank custodian to use the Federal Book

Entry Deposit System In connection With

treasury secunnes owned by the fund If the

fund's Board of Directors approve the arrangement, at least once a year, after making

certain determinations In good faith

The DIVISion IS continuing to consider what

rules, If any, are necessary or appropriate for

the protection of Investors In connection With

the participanon In a depository by an Investment company.

"Index" Funds

A recent Innovation In the Investment company Industry IS the so-called "Index fund,"

139

II

I

i!

I'

"

"
an Investment company whose principal investment objective IS to seek to match the

performance of an established common stock

Index Shortly following the end of the past

fiscal year, the first registration statement for

a fund seeking to match the performance of

Standard and Poor's Corporation Composite

Stock Price Index was filed The development

of the Index fund concept was accelerated

with the recent enactment of federal pension

reform legislation which Imposes certain obligations on persons acting In a fiduciary capacity with respect to retirement fund Investments Index funds are seen by some as a

means by which fiduciaries may discharge

these obligations In a prudent manner while

achieving the Investment performance of a

diversified pool of common stocks

Reallocation of Management

Compensation

Mutual liquid Assets (the "Fund") wants to

start a no-load mutual fund which Will Invest

In money market securities The Fund's manager and distributor of ItS shares Will be

Athena Management Incorporated ("Athena")

Instead of providing for the payment of

sales and distnbunon expenses either out of

a sales load charged the Investor or as an

out-of-pocket expense of the manager-adviser/distributor, as other Investment companies do, Athena Intends to reallocate one-half

of the management compensation to be paid

under the management agreement with the

Fund to the secuntres dealers who have sold

the Fund's shares It IS contemplated that

under the agreement the manager will receive monthly compensation at the annual

rate of 112 of 1 percent of the average net

asset value of the Fund

The Fund requested assurance that the

Drvrsion would not recommend that the Comrrussion take any action concerning these

arrangements The Drvrsion granted the

Fund's request. But It advised the Fund that

the staff IS presently analyzing a number of

Issues related to tne distribution of investment company shares, Including the question

of whether any portion of the assets of an

open-end fund may be properly used, directly

or indirectly, to pay distribution expenses In

addition, It stated that, If It SUbsequently were

to decide that the procedure descnbed above

140

does not comply with the Act, steps must be

taken Immediately to modify the procedure

accordingly The Divisron further stated that

ItS position assumed that the Fund's directors

would be fUlly Informed of the uncertain legal

status of the proposed arrangement and

would consrder the appropriateness of the

Fund's entering the arrangement In light of

such information

NOTES FOR PART 5

1 Securities Exchange Act Release No

11725, Investment Company Act Release

No 8980 (October 10, 1975),8 SEC Docket

66 The maximum sales load rule was approved as an amendment to Article III, Sections 26 and 29, of the NASD Rules of Fair

Practice

2 Investment Company Act Release No

8999 (October 22, 1975), 8 SEC Docket 227

3 Investment Company Act Release No

660 (July 2, 1971)

4 Investment Company Act Release No

9219 (March 25,1976),9 SEC Docket 288

5An earlier form of the proposed rule was

published on October 18, 1968 (Investment

Company Act Release No 5517) and Withdrawn March 25,1976 (Investment Company

Act Release No 9218, 9 SEC Docket 287

6 Investment Company Act Release No

8894 (August 19, 1975), 7 SEC Docket 639

7 Investment Company Act Release No.

8251 (February 1974),3 SEC Docket 140

843USC 1601,etseq

9 PL 94-204, 89 Stat 1145

10Investment Company Act Release No

9150 (February 6, 1976), 8 SEC Docket

1282

11 Investment Advisers Act Release No

442 (March 5,1975),6 SEC Docket 414

12Investment Advisers Act Release No

477 (September 26, 1975), 7 SEC Docket

103

13Investment Advisers Act Release No

516 (May 13, 1976),9 SEC Docket 661

14Investment Advisers Act Release No

478 (September 29, 1975), 7 SEC Docket

1014

15Investment Advisers Act Release No

503 (March 12, 1976),9 SEC Docket 234.

16Investment Company Act Release No

9112 (January 5, 1976), 8 SEC Docket 997

17 International Funeral Services of Centerme, Inc v SEC (CA 8, No 76-1174)

18See e g , In the Matter of Vance, Sanders Exchange Fund, Investment Company

Act Release No 9111 (January 5, 1976), 8

SEC Docket 996, and In the Matter of Kemper Mumclpal Bond Fund, Ltd, Investment

Company Act Release No. 9251 (April 19,

1976), 9 SEC Docket 463.

19Investment Company Act Release No

8757 (Apn115, 1975),6 SEC Docket 703

20Investment Company Act Release No

8816 (June 12, 1975),7 SEC Docket 141
21 Investment Company Act Release No

8596 (December 2, 1974), 5 SEC Docket

640

22 Investment Company Act Release No

8959 (September 26, 1975), 7 SEC Docket

1002

141

Part 6

Public Utility

Holding Companies

Part 6

Public Utility

Holding Companies

Under the Public Utility Holding Company

Act of 1935, the Commission regulated interstate public utility holding company systems

engaged In the electric utility business and/or

retail distribution of gas The Commission's

JUrisdiction also covers natural gas pipeline

companies and other non utility companies

which are subsrdrary companies of registered

holding companies. There are three principal

areas of regulation under the Act (1) the

physrcal 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; (2) the nnancmq

operations of registered holding companies

and their subsidiary companies, the acquisrnon and drsposmon of secunnes and properties and certain accounling practices, servicIng arrangements, and Intercompany transactions, (3) exemptive provisrons 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 another such

company through acquisrnon of seeunnes

COMPOSITION

At the end of calendar 1975, there were 20

holding companres registered under the Act

There were 18 registered holding companres

WIthin the 15 "active" registered holding-company systems 1 The remairunq two registered

holding companies, which are relatively

small, are not Included among the "active"

systems.s In the 15 active systems, there

were 68 electnc and/or gas utility subsrdiaries, 63 nonumty subsrdianes, and 16 macnve companies, or a total of 165 system

companies, including the top parent and subholding companres Table 31 In Part 9 lists

the active systems and their aggregate assets

FINANCING

Volume

DUring fiscal 1976, a total of 12 active

registered holding company systems Issued

and sold 62 Issues of long-term debt and

capital stock aggregating $3 4 billion pursuant to authonzation by the Commission

under Sections 6 and 7 of the Act Table 32

In Part 9 presents the amount and types of

secunnes Issued and sold by these holding

company systems.

The dollar volume of these fmancmqs represents a 21 percent Increase over the preVIOUSfiscal year Bonds and debentures ISsued and sold Increased 36 percent, and

preferred stock Increased 53 percent However, the amount of common stock Issued

and sold decreased 13 percent

PROCEEDINGS

Amencan Electnc Power CompanyAmerican Electnc Power Company (AEP), a

registered holding company, has filed an application to acquire the common stock of

Columbus and Southern Oruo ElectriC Company, a nonassociate electnc utility company.

The DIVISion of Corporate RegUlation and the

Department of Justice oppose the acqutsmon,

arguing that AEP had not sustained ItS burden of showmq substantial economies which

would result from the acquisrtron and that the

145
acquismon would have anti competitive effects

warranting disapproval under the Act. The

Administrative Law Judge denied the application. ADP appealed to the full Commission.

The Commission heard oral argument on

October 8, 1974. Dissatisfied WIth the state of

the record, the Comrnrssron subsequently ordered AEP and certain other parties to answer In supplemental bnefs certain questions

presented by the Commission relannq to the

alleged econorrues. After subrrussron of bnefs

by AEP and others, the matter IS now before

the Commission for decisron.

Central and South West Corporation

("CSW')-Several Oklahoma rnurucipaunes

have complained to the commrssion that

CSW's electnc utility subsrdianes are not operated as an Integrated electnc system as

required by Section 11(b)(l), and have requested a heanng on that Issue. CSW has

one Oklahoma and two Texas SubSidiaries. It

also has a fourth subsidiary serving portions

of LOUISiana, Arkansas and Texas. CSW's

Texas companies have been Interconnected

with several other large Texas utilities In a

completely Intrastate system Exchange of

power within the CSW system across the

Oklahoma- Texas border IS not permitted under an agreement between CSW and the

other companies.

The matter was set down shortly after the

close of the fiscal year for heanng before an

administrative law JUdge

Delmarva Power and Light Company-on

Apnl 5, 1972, the Commission Instituted proceedings under Section 11(b)(1) to determine

whether Delmarva should be required to divest Itself of ItS gas ulihty operations Delmarva and its Maryland and Virginia subsunaries constitute a large Integrated elsctnc

system. Delmarva then filed an application for

exemption under Section 3(a)(2), which exempts from the Act a holding company which

IS predominantly an operating company. The

two proceedings were consolidated for hearIng and the DIVISion of Corporate Regulation

opposed Delmarva's application for exemption.

In tus Initial decision, to which the Divrsron

has taken exception, the administrative law

judge held that Delmarva's gas business was

not retamsble under the Act, but that, In light

of the Commission's recent decisron In Union

Electrtc, 3 which highlighted the problem" ere146

ated by the energy cnSIS, Delmarva would not

be required to divest Its gas business. The

law fUdge further held that Delmarva was

entitled to an exemption under Sectron

3(a)(2) of the Act and that compliance WIth

the Section 11 Integration standards IS not

necessary as a preeonoltron to granting such

an exemption.

Empire State Power Resources, IncConsolidated Edison Company of New York,

Inc, Long Island lighting Company, New

York State ElectriC and Gas Corporation,

Niagara Mohawk Power Corporation and

Rochester Gas and Electnc Corporation, five

of the seven sponsors of Empire State Power

Resources, Inc. ("ESPRI") have JOintly applied to the Oornrmssron under Section 3(a)

of the Act for an order exempting them as

holding companies With respect to ESPRI,

and, In the case of Niagara and Rochester,

for aumonzanon under Section 10 to acquire

ESPRl's stock

ESPRI Will be jOintly owned by Its sponsors. It Will construct and own generating

faCIlities throughout New York State to supply

electnclty to its sponsors. ESPRI IS expected

to construct 13 nuclear and 3 coal-fired baseload units With a rated capacity of 18,600

MW. The sponsors estimate that the construcnon costs dunng the penod 1980-1991

Will exceed $20 billion.

ESPRI represents the most Significant effort on the part of utility companies In any

State or region of the country to coordinate

construction and operation of JOintly owned

faCtlitles.

No hearing has yet been scheduled on the

application, although a consumer group has

requested one. The New York Public Service

Cornrrussron, however, has held extensive

heanngs on the matters relating to the project Within that Cornrmssron's junsdlctlon.

Otuo Power Company-OhIo Power, an

electnc utility subsrdiary of Amencan Electnc

Power Company, filed an application for authonty to Issue short-term notes In an aggregate amount of up to $270 million through

June 30, 1976. Ormet Corporation, OhiO

Power's largest Single customer, opposed the

application and requested a hearing. A hearIng was held on the proposal December 3-5,

1975. After the heanng, the Division of Corporate RegUlation and Ormet argued to the

Oornrrussron that Oruo Power had not demon-

•
strated any need for the full amount of the

borroWingauthority requested. The Commission agreed. In Its Opinion of Apnl 27, 1976,

the Commission authonzed Ohio Power to

Issue only $190 million In short-term debt

through June 30, 1976.4

North Penn Gas Company-The Commission approved a negotiated plan filed pursuant to Section 11(e) of the Act under which

Penn Fuel System, Inc. ("System") proposed

to acquire 100 percent of the common stock

of North Penn Gas Company ("North Penn")

and up to 93 percent of the outstanding

common stock of Penn Fuel Gas, Inc ("Penn

Fuel"). System was also granted an exemption under Section 3(a)(1) of the Act. 5 On

February 2, 1976, the Federal Dismct Court

In Philadelphia ordered that the plan be enforced.

Under the plan, System will acquire about

243,000 shares of North Penn common stock

at $18.50 per share, payable $3.10 In cash

and the balance In 10 percent senal installment notes on which the final payment will be

due on December 31, 1979. System will also

Issue Its common stock to the Ware family In

exchange for the remaining shares of North

Penn common stock and up to 93 percent of

the outstanding common stock of Penn Fuel.

HOLDING COMPANY DEBT

Section 7(c)(1) of the Act Identifies COrTh

mon stock and first mortgage bonds as the

pnmary source of long-term utility system

financing. Congress, however, has authorized the Commission to approve alternate

methods of nnancmq In exceptional circumstances.

In 1969 and 1970, the Commission excepted the sale by General Public Utilities

Company (GPU) of $100 million of holding

company unsecured debentures from Section

7(c)(1) (ReI. 35-16540, November 28, 1969

and ReI. 35-16892, November 4, 1970).

There was little choice MaSSiveInvestment

In plant under construction had outrun the

bonding power of the operating companies

and the short-term borrOWinglimits of the Act.

Practical limits on common stock sales left

the debentures the only feasible source of

finanCing.

Dunng the difficult financial times of the

recent fiscal year, the Oornrnlssron again exercised Its exemptive authonty to allow The

Southern Company to sell $125 million of SIXyear notes" and Northeast Utilities to sell $50

million of ten-year notes. 7

FINANCING OF FUEL AND GAS

SUPPLIES

Fuel curtailments have made It increasingly

necessary for electric and gas utilities, mcludIng those registered under the Act, to Invest

in their own sources of supply and their own

delivery facilities.8 During fiscal 1976, the

Commission allowed 8 registered systems to

Invest over $100 million In these activities. 9

AMENDMENT OF FORM U5S AND

RULE 48(b) UNDER THE ACT

The Oomrrussron amended Form U5S, the

Annual Report lor registered holding companies under the Act, In two ways. First, the

Form was changed to require that a registered company report total annual compensation of employees, other than officers, paid

more than $40,000 by system companies.

The Form previously required a report of total

compensation In excess of $15,000 The

amendment was made to conlorm to the

requirements of Form lQ-K.

The Form has also been amended to allow

reporting companies to substitute a statement

of the total loans to and guarantees for employees for the Itemized list previously required.

The Commission also amended Rule 48(b)

which formerly exempted, automatically, all

loans to or guaranties by system companies

for the account of employees that otherwise

would require Commission authonzanon. As

amended, Rule 48(b) limits the automatic

exemption to a maximum of $10,000 for any

one employee. That limit however Will not

apply to the financing of an employee's residence.lo

NOTES TO PART 6

I Three of the 18 are subholdmq utility

companies In these systems. They are The

Potomac Edison Company and Monongahela

Power Company, public utility subsroranes of

Allegheny Power System, Inc., and Southwestern ElectriC Power Company, a public

utility suosrdrary of Central and South West

Corporation. 2 These holding companies are British

Amencan Utilities Corporation and Kmzua 011

and Gas Corporation.

147
3 See 41st Annual Report. p 142 4 Holding Company Act Release No

19502.9 SEC Docket 515 5 Holding Company Act Release No 19254

(November 20, 1975).8 SEC Docket 482

6 Holding Company Act Release No 19439

(March 23, 1976),9 SEC Docket 272. 7 Holding Company Act Release No 19519

(May 7, 1976), 9 SEC Docket 637. a See, e g, Public Service Company of

Oklahoma, Holding Company Act Release

No 19090 (July 17, 1975). 7 SEC Docket

413. Indiana & Michigan Electnc Company,

Holding Company Act Release No 19064

(June 26, 1975), 7 SEC Docket 346, otuo

Power Company, Holding Company Act Release No 19036 (June 12, 1975), 7 SEC

Docket 163, Appalachian Power Company,

Holding Company Act Release No 18971

(May 7, 1975), 6 SEC Docket 868 and No

18363 (Apnl 3, 1974). 4 SEC Docket 50,

Middle South Utilities, Inc, Holding Company

148

Act Release No 18966 (May 2, 1975), 6 SEC

Docket 806, No. 18785 (January 23, 1975), 6

SEC Docket 172, and No. 18221 (December

17, 1973), 3 SEC Docket 258; Trensok Pipe

Line Company, Holding Company Act Release No 18933 (Apnl 14, 1975), 6 SEC

Docket 691, Columbia Gas System, Inc,

Holding Company Act Release No 18749

(December 31, 1974), 6 SEC Docket 22 9 The need for Commissron approval of

such nonutillty busmesses has been well es- tablished. See, e g, Columbia Gas & Electnc

Cotporetton, 17 SEC 494 (1944), Appalachian Electric Power Company, 27 SEC

1029 (1948); General Public Utihtles Corporetion, 32 SEC 807 (1941); Columbia Hydrocarbon Corporetion, 38 SEC 149 (1957);

Arkansas Power & Light Company, Holding

Company Act Release No 17400 (December

17, 1971)

10 Holding Company Act Release No

19489 (ApnI15, 1976),9 SEC Docket 434
Part 7

Corporate

Reorganizations

The Commission's role 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

Cornrrussron participates In proceedings under Chapter X to provide Independent, expert

assistance to the courts, participants, and

Investors In a highly complex area. 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, Seclion 172 of Chapter X requires the Judge,

before approving any plan of reorganization,

to submit It to the Cornrrussron for ItS examination and report If the Indebtedness does

not exceed $3 million, the Judge may, If he

deems It advrsable to do so, submit the plan

to the Comrrussron before decrdinq whether

to approve It When the Cornrntssron files a

report, copies of summaries must be sent to

all security holders and creditors when they

are asked to vote on the plan The Commission has no authority to veto a plan of reorganization or to require ItS adoption

The Oornrrussion has not considered It necessary or appropriate to partictpate In every

Chapter X case Apart form the excessive

administrative burden, many of the cases

Involve only trade or bank creditors and few

public Investors The Cornrrussron seeks to

participate pnnopally In those proceedings In

Part 7

Corporate

Reorganizations

which a substantial public Investor Interest IS

Involved However, the Commission may also

parncipate 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 provrsrons of

the Act, the facts Indicate that the Commission can perform a useful service. or the

Judge requests the Commission's parncipanon

The Comrrussron In ItS Chapter X acnvines

has divrded the country Into five geographical

areas. The New York, Chicago, Los Angeles

and Seattle regional offices of the Commission each have responsitnhty for one of these

areas Supervision and review of the regional

offices' Chapter X work ISthe responsibility of

the DIVISion of Corporate RegUlation of the

Cornrrussrcn whrch, through ItS Branch of

Reorganization, also serves as a field office

for the southeastern area of the United

States

PROPOSED BANKRUPTCY

LEGISLATION

DUring the ftscal year, the Commission

submitted an extensive report to Congress'

on two pending bills which are Intended to

replace the present Bankruptcy Act. The bills

were prepared by the Cornrrussion on the

Bankruptcy Laws of the United States (S 236

and H 31) and the National Conference of

Bankruptcy JUdges (S 235 and H 32). Commissioner Philip A t.oorrus, Jr , testified with

respect to thrs report before a Senate sub151
committee on November 5, 1975, and before

a House subcommittee on Apnl 5, 1976.

The proposed legislation for the most part

deals With consumer bankruptcy matters

Thus, the Commission's report was limited to

the small portion of the legislatIOn dealing

With rehabilitation of corporations The Comrmssron expressed particular concern In the

report that certain Important Investor safeguards now In Chapter X, Including Cornrmssion partrcpauon as advisor to the courts and

parties and parties to the reorganization,

would be eliminated under the proposed legislanon

SUMMARY OF ACTIVITIES

In fiscal year 1976, the Commission entered 4 new Chapter X proceedings Involving

companies with aggregate stated assets of

approximately $765 million and aggregate

Indebtedness of approximately $684 million

Including the new proceedings, the Commission was a party In a total of 124 reorqaruzalion proceedings dunng the fiscal year. 2 The

stated assets of the companies Involved In

these proceedings totaled approximately $4 5

billion and their Indebtedness about $4.0 billion

Dunng the fiscal year, 9 proceedings were

closed, leaVing 115 In which the Commission

was a party at year end

ADMINISTRATIVE MATTERS

In Chapter X proceedings, the Commission

seeks to protect the procedural and substantive safeguards afforded parties In such proceedings. The Commission also attempts to

secure judicial Uniformity In the construction

of Chapter X and the procedures thereunder.

Cavanaugh Communities Corporation 3_

On appeal by the New York Stock Exchange

("Exchange") , the distnct court vacated an

order of the bankruptcy Judge enjoIning the

Exchange from applying to the Commission

to de list the debtor's secuntres. The court, as

urged by the Commission In an amicus curIae brief, held that the bankruptcy JUdge

lacked the power to Issue the injunction because the Commission has statutory authonty

over the listing and deli sting of securmes on

nanonal excnanqes.s The drstnct court also

indicated that It agreed With the Exchange's

contention that an exchange listing 15 not

152

"property" within the meaning of the Bankruptcy Act

Interstate Stores, Inc 5_The trustees contracted to sell certain real estate for

$650,000. At the heanng on the apphcation to

approve the sale, a second party offered to

pay $675,000, the onglnal offeror agreed to

pay this amount. The second party then increased rus offer to $685,000. The onglnal

party claiming surpnse at trus competitive

bidding, stated he was unprepared at that

time to pay more. The bankruptcy fudge

concluded the heanng and directed the trustees to submit an order authonzinq the sale

for $685,000 FollOWing the heanng, the first

party offered to pay $725,000, but the bankruptcy judge confirmed the sale to the other

party for $685,000.

The onqrnal party asked the bankruptcy

judge to vacate hrs order and to reopen

bidding The Commission supported tus POSItion The bankruptcy jUdge denied hrs request. He appealed to the distnct court, which

vacated the order confirming the sale and

remanded the matter to the bankruptcy judge.

SUbsequently, at a heanng before the bankruptcy judge, the trustees sold the real estate,

after spirited bidding, to the original offeror for

$1,210,000.

In another aspect of thrs proceeding, the

trustees sought expungement of a $38 million

proof of claim. The claimant sought to modify

an order of the bankruptcy court staying SUitS

against the bankrupt so as to permit the

prosecution of Its $38 million claim In a cantorrua state court. The Commission supported

the trustees In their efforts to have this claim

tried In the Chapter X court. The Oommisaron

contended that In light of the size of the claim

and the central Importance of its resolution to

the tormulanon of a plan of reorganization,

the Chapter X court must hear and summarily

determine the trustees' application to expunge under Section 196 of the Bankruptcy

Act. The Commission further argued that If

the claim were determined by a California

state court, public Investors would be depnved of the Oomrmssron's assistance In the

resolution of that claim.

The bankruptcy jUdge In effect determined

that the clarm could proceed to tnal In California. The trustees appealed to the dlstnct

court The distnct court directed the Chapter
x court to retain jursrdrctron to determine the

claim

The claimant appealed to the Second CirCUlI. At the close of the fiscal year, this

appeal was pending.

C I P Corporation 8_ The Commission

supported the trustee In urging the Court of

Appeals for the Sixth Crrcurt In Cincinnati to

affirm the district court's ruling which permitted the sale of certain real estate free and

clear of certain liens with the proceeds to be

placed In escrow subject to further order of

the court

The Commission argued In ItS brief that the

questions of when and under what circumstances property may be sold free of liens In

a reorganization case IS "In the sound discretion of the District Judge "7 Here, the court

did not abuse ItS discretion since the lien of

the appellant would attach to the proceeds,

which exceeded the value of the claim

The Commission also urged that other ISsues raised by appellant concerning the validity, enforceability and priority of ItS mortgages were clearly not ripe for appeal since

the district court had not ruled on these

matters because of the need for further eVIdentiary hearings

Kmg Resources Company 8_ The Court of

Appeals for the Tenth Crrcuit, as urged by the

Commission, affirmed the district court's holdIng that senior debt IS not entitled to postpennon Interest at the expense of subordinate

debentures, where the subordination agreement was to pnnopal and Interest to the date

of payment, but did not specifically provide

for subordmanon to post-petition Interest 9

The district court's order disallowed the

claims of senior creditor banks for post-petition Interest from the funds otherwise distributable to publicly-held debentures which were

subordinated to the senior debt by the terms

of the Indenture pursuant to which those

debentures were Issued Since the district

court had determined that the debtor was

Insolvent, the general rule that Interest stops

on the date of the filing of the pennon applied

EqUity Fundmg Cotporetton of Amenca

Certain claimants filed appeals to the Court of

Appeals to prevent consummation of the

trustee's plan of reorganization for Equity

Funding Corporation of America ("EFCA")

and to overturn the lower court's denial of

their claims 10 The appellants had unsuccessfully sought a stay of the reorganization

proceedings pending the resolution of their

appeals

The claimants had been convicted of numerous counts of fraud In connection With the

Issuance of false tmancrals In conneclton With

the sale of EFCA secuntres, 11 and were

defendants In the litigation described Infra 12

Their claims In the reorganization proceeding

exceeded $1 5 billion

The lower court had rejected their claims

because (1) they were not timely filed, (2)

they lacked suffrcient detail to show any Indebtedness oWing from the debtor, (3) their

claims for Indemnity and contribution were

not allowable since such claims are limited

under the plan to legal and defense expenses

and then only If the action IS terminated

Without a finding of fraud, and (4) that even If

otherwise allowable, the claims are barred

under the doctrine of equrtable subordination

As of the close of the fiscal year, the

appeals were stili pending

TRUSTEE'S INVESTIGATION AND

STATEMENTS

A complete accounting for the stewardship

of corporate affairs by the prior management

IS a requisrte 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 hrs

mvesnqatron

EqUity Fundmg Corp of Amenca 13_The

trustee had filed SUit against the Independent

accountants who reviewed the fraudulent financial statements and rendered their opmIon that the statements fairly represented the

financral condmon of the cornpanres.r- The

accountants are also defendants In litigation

brought by Equity Funding Corp of America's

("EFCA") security holders to recover the

losses allegedly suffered from the purchase

of EFCA's securities

The trustee seeks recovery for the estate

under two general categories of damages

The first Involves $3,750,000 for recovery of

the fees paid to the accountants for work

Incompetently performed and for the fees and

153

-
costs Incurred by the estate In ascertaining

EFCA's true financial condition The -second

part of the trustee's SUit claims recovery for

all of the liabilities Incurred by EFCA and ItS

subsrdianes from the publication of false financial statements. This part of the action

involving hundreds of millions of dollars essentially duplicates the claim by EFCA's secunty holders.

Since It was clear that the defendant's

ability to pay for any jUdgment on any of

these causes of action would be limited, the

trustee and representatives of the security

holders agreed to a drvtsron of a partial

recovery. The agreement. which was Incorporated Into the plan of reorganization, provided

for a maximum recovery for the estate of $2.4

million plus certain costs If the recovery

exceeded about $4 9 million, the estate

would receive about .$2.45 million and the

other plaintiffs the same amount plus all of

the balance.

Beverly Hills Bancorp 15_ The trustee of

this holding company has had no business to

conduct and IS liquldatmq the estate. In an

effort to hold down the mounllng administrative costs, the Commission applied for an

order directing the trustee to complete rus

mvestrqanon,prepare and file hrs Section 167

report, and prepare and file a plan of reorganuauon by a specified time.

The Commission, to assist the trustee in

hrs mvesnqanon, had made the comrmssion's enforcement investigative transcripts

available In a pending CIVilSUIt under the

Secunnes Act. 16 The trustee had appointed a

special counsel to conduct the lnvesngauon,

but it appeared that his activmss were limited

to reading the Commission's rnvestrqatlve

transcripts

The Commission contended In Its application that the thorough investigation contemplated by Congress to be made by the dismterested trustee was the cornerstone of

Chapter X, upon which a plan or report would

be based. 17 The Commission urged that the

trustee's investigatory function required affirmative discovery as opposed to relying on

available work done by others for more speCifIC purposes.t- The court continued the

heanng on the Commission's application

pending resolution of certain collateral matters.

154

PLANS OF REORGANIZATION

Generally, the Commission flies a formal

advrsoty report only In a case which Involves

substantial pubhc Investor interest and presents SignifIcant problems. When no such

formal report IS filed, the Commission may

state ItSviews briefly by letter, or authonze its

counsel to make an oral or written presentation Dunng the fiscal year the Commission

published four advisory reports, two of which

supplemented a prior advisory report, dealing

With four plans of reorganizallon 19 Its views

on five other plans of reorqaruzanon were

presented to the courts either orally or by

written memoranda 20

EqUity Funding Corp. of America 21_The

trustee proposed a plan of reorqaruzanon for

mrs holding company premised upon a series

of cornprormses Interrelated Since the claims

of each class of creditors affected those of

every other class. EqUity's prinopal assets

are two substantial operallng Insurance comparues valued at about $100 million. Consolidated assets of the new enterpnse WIll be

about $400 million With the pnnopa! consolidated liabilities being $235 million of reserves

for policy IIabtlltles.

The plan would create a new holding company which would Issue about $27 million of

Income notes to secured bank creditors and

7,900,000 shares of Its stock, valued at $87

million, to be diVided among other creditors

Certain other secured creditors whose clarms

aggregated about $50 million were paid In

cash from the proceeds of hquidanon of their

collateral.

Even though EqUity was found to be insolvent so that ItScommon stock did not parncrpate as such,' about $21 million In new common stock (20 percent of the estate) was

allocated to settle the class action SUitsasserted principally by stockholders. Their net

losses estimated at about $170 million. About

$20 million of common stock was allocated In

settlement of claims of $64 million to pubhclyheld subordinated debenture holders. In addition, the subordinated debentures Issued by

EFCA's Euro-dollar subsidiary shares $1.5

million in cash from the subsidiary estate In

addition to their stock drstnbuuon as subordinated guaranteed debt of EFCA. The claims

of the original shareholders in one of the

Insurance comaprues who sought to reclaim
In kind the Insurance shares of which they

were defrauded In a 1971 merger were also

settled under the plan by an aliocaton of $12

million of common stock of the reorganized

company. The remaining $34 million of common stock was distnbuted pnrnanly to bank

creditors With claims of $40 4 million and

miscellaneous claims of about $4.3 million.

The Commission filed an advisory report

concluding that the plan was fair and equitable and feasible. 22 The plan was overwhelmIngly accepted by all classes of creditors and

was consummated on March 21, 1976.

KIng Resources Company. 23-At the conelusion of plan heanngs, the court referred

the trustee's internal plan of reorganization to

the Commission for report. The plan provided

for full payment In cash of administrative

costs, pnonty claims and secured claims

Unsecured creditors, including owners of the

publicly held subordinated debentures, face

value $41 million, will receive 25 Class A and

25 Class B shares for each $1,000 of claims.

The two classes have Identical nghts except that the Class A shares have a $20

liqUidation preference If the reorganized company IS hqurdated, To give recognition to the

contractual subordination, the plan provided

that the senior creditors would receive In the

actual drstnbutron only Class A shares, while

the subordinated debentures would receive

after exchanging their Class A shares for

senior creditors Class B shares about 10

Class A shares and 40 Class B shares for

each $1,000 claim.

The public shareholders of the debtor WIll

not participate as shareholders since the

debtor estate was found to be Insolvent

However, the plan proposes to compromise

the class action claims on behalf of the

shareholders and public debenture holders,

which are based on, among other things,

Violation of Federal and State secunnes laws,

by Issuing to thrs class about 15 percent of

the common stock of the new company.

The Oomrrusston's advisory report concluded that the plan could be found to be fair

and equitable and feasible, If amended In

certain respects.24 The Commission concluded that, since hqurdanon of the new company was remote, the liqUidation preference

did not give sutnerent recognition to the subordination provision of the Indentures. To

afford senior creditors their contractual nghts,

the Commission recommended that the Class

A shares be convertible Into one and one-half

shares of Class B shares at the holder's

option dunng the first five years after reorganizanon

The Commission also recommended that

additional evidence be taken WIth respect to

the value of the assets of International Resources Irrruted, a wholly owned subsrdrary

of the debtor. The foreign debentures had an

Independent claim to these assets as well as

equal rank With the domestic debentures on a

guarantee by the debtor The trustee allowed

a $1 million nonsubordmated claim In recognition of this nght, but the record was inadequate to evaluate the fairness of thrs proposal

The trustee amended trus plan to provide

for the conversion feature, as urged by the

Commrssron, but limited thrs pnvileqe to two

years. The first year the conversion rate IS

one and one-half shares of Class B for each

Class A share and the second year the rate IS

one and one-quarter shares of Class B stock

for each Share of Class A.

The senior creditor banks appealed the

drstnct court's order approving the plan of

reorganization, arguing that the court erred

by (I) not consrdennq a plan of uqurdanon for

the debtor, (II) valumq the debtor's nonproducmq Arne properties on a discounted cash

flow method; (III) including all unsecured

creditors In a Single class, and (IV) not providIng adequate compensation under the plan to

senior creditors In recognition of their senior

nghts

The Commission argued, as It concluded In

Its advisory report, that the trustee properly

valued the Arne Interests and that the plan

correctly Included senior creditors In the one

class of unsecured creditors. With regard to a

plan of hqurdannn, the Commission noted that

while Section 216(10) of Chapter X permits

such a plan, nevertheless, "the court should

be 'reorganization minded' and not 'hquidanon minded.' "25 The general pohcy of Chapter X to preserve values, keep businesses

operating and maintain employment far outweighs the banks' desrre for hquidanon.

To afford senior creditors their contractual

nghts under the subordination provrsron, the

Commission urged that the plan be amended

to provide for a longer conversion penod as

orgmally suggested In the advisory report.

155
Since. however, almost a year had elapsed

from the date of approval of the plan, the time

to begm the conversion penod should commence from confirmation of the plan rather

than from Its consummation

tmpenel '400' National, Inc 26-An mternal

plan of reorganization was proposed by the

trustee, creditors committee and a large

stockholder providing for the Issuance by a

reorganized Impenal of (I) notes (two senes),

common stock. plus cash payments In satisfaction of general unsecured creditor claims,

including Interest, (II) common stock In satisfaction of subordinated public debentureholder claims, including Interest, and (III)

common stock to shareholders equivalent to

their Interest In the estate The Commission

filed a third supplemental advisory report statIng that the plan was not "fair and equitable,

and feasible" 27 The plan was unfair because

It afforded preferred treatment to certain large

creditors by offenng them a senes of notes

which were senior to the notes offered small

creditors. Further, It was tnrs essentially unfair aspect of the plan upon which ItS feastbilIty was predicated. In addition, the plan's

teasibihty was premised on the availability of

a tax loss carry-forward, an assumption that

was open to question The Commission suggested proposed amendments to make the

plan fair, equitable and teasrble

Thereafter, the plan was amended substantially In accordance with the Commission's suggestions, Including the Issuance of

Identical notes to all general unsecured creditors The Commission filed a fourth supplemental advisory finding that the plan as

amended was fair, equitable and Ieasrble 28

The plan was approved and confirmed by the

court

First Home Investment Corp of Kansas,

Inc. 29_ The debtor IS a publicly-held face

amount certificate company registered under

the Investment Company Act of 1940. Over

22,000 public Investors purchased more than

$50 million of ItS stock and face-amount certificates

The trustee and the Investors' Protective

Committee A ("Committee") JOintly proposed

a plan of reorganization provrdrnq for the

establishment of a reorganized company authonzed to operate a mortgage banking company and to engage In related busmess activrty The company was solvent with a shore156

holder equity of over $40 million, an Increase

from that recorded as of the filing of the

petition.

The plan provides for full payment In cash

of the costs of administration, tax claims, and

the claim of unsecured creditors (other than

holders of face-amount certificates) Outstanding face-amount certificates Will conlInue to be secured by qualified assets on

deposit with the Union National Bank of

Wichita, Kansas. Holders may redeem their

certificates for their cash surrender value If

not redeemed, the terms and conditions of

these certificates Will be honored except that

the reorganized corporation Will not accept

any funds for further Investment, lend any

money under the face-amount certificates,

nor make any annuity payments under certain of the face-amount certificates

Shareholders Will be permitted to resell to

the corporation up to one-half of their com.

mon stock for cash at 90 percent of asset

value, except those who own fewer than 200

shares may redeem all their shares The

shareholders are also given the alternative to

accept a 7 percent, 7-year note for 100

percent of asset value Instead of cash, or

shareholders can retain a full common stock

posrtron

The Commission In ItS advisory memorandum concluded that the plan was fair and

eourtaole and feasible but recommended certain minor amendments which were substantially adopted by the court The plan was

accepted and confirmed In April 1976

Omega-Alpha, Inc 3°-The trustee filed a

plan of orderly hqurdanon for thrs publicly-held

holding company which wholly owns one operating subsidrary, the Okorute Company

("Okonlte") The pnncpal feature of the plan

IS the sale of the debtor's stock ownership In

Okorute for $44 million plus $1 million In

forgiveness of debt to an Employees Stock

Ownership Trust ("ESOT") which Okorute

created for the benefit of ItS employees. 31

The ESOT IS finanCing the purchase through

a $13 million loan from the New Jersey

Economic Development Authonty With the

remaining funds being borrowed from banks

The sale agreement provroes for a procedure

for resolvmq a claim of $12.2 million under

the tax consolidated agreement between the

debtor and Okorute

The Comrrussion filed an advisory memo.
randum concluding that the plan was fair and

equitable and feasible The plan called for the

payment In full of costs of administration, tax

and governmental claims and claims of $850

or less. Also, secured bank claims of about

$15 million will be paid In full In cash. The

remaining cash Will be distributed to unsecured creditors, including public subordinated

debenture holders, with recoqiruuon of the

subordination provisions of the Indentures.

Since the debtor was found to be Insolvent,

no participation was afforded to shareholders.

The plan was approved and confirmed by

the court whereupon the sale of Okorute to

the ESOT was consummated

Valtu, Inc., holder of about $7.6 million face

amount of the debtor's subordinated debentures as a result of a tender offer conducted

during the proceeding at a price of $30 net

per $100 principal amount, has appealed to

the district court, the confirmation of the plan

contending that the bankruptcy judge erred

by not considerinq ItS alternative "Internal"

plan filed at the time of confirmation and by

permitting certain creditors to vote for the

trustee's plan. At the close of the fiscal year,

the matter was stili pending before the district

court.

Maryvale Commumty Hosptte', Inc. 32-.At

the close of the fiscal year, the district Judge

ordered the trustee to make the final distribution to public bondholders pursuant to a confirmed plan of orderly hqurdanon which terminated a long, but very successful, Chapter X

proceeding In which the Commission played

an active role throughout.

The case grew out of the public Issuance of

high-interest first mortgage bonds by charitable nonprofit corporations In the southwest In

the early 1960's. In 1963, Maryvale bondholders filed a fraud SUit under the Federal

secuntrss laws and a creditors' petition for

reorganization under Chapter X. The petition

was approved but was vigorously contested,

and the Commission Intervened In the public

Interest and supported the petitioning creditors, who were faced at the outset with a

basic junsdiononal Issue.33

The court-appointed trustee managed the

debtor's business operations and eventually

sold the hospital for a sum sutncrent to repay

bondholder pnnopat, Simple Interest, and interest on defaulted Interest at eight percent

according to the terms of the Indenture. While

the trustee's plan to pay the proceeds to the

bondholders was upheld on appeal,34 drstnbunon of a substantial portion was delayed by

extensive litigation over a claim asserted by

the former pathologist for the hospital Ultimately, the trustee prevailed, 35and the bondholders received the final payment amounting

to approxrrnately 158 percent of the face

value of the bonds Pursuant to the plan, the

court fixed a bar date to expire not less than

five years on or before which bondholders

may claim their drvrdends, at the end of

whrch, since the debtor IS a charitable corporation, any unclaimed funds Will be distributed

to designated Arizona nonprofit organizations

Lyntex Corpotetion, et al 36_ The plans of

reorganization contemplating orderly uquidanon of the debtor and ItS subsrdtarres provided for the subordination of all costs and

expenses of administration of the superseded

Chapter XI proceedings to those Incurred In

the Chapter X proceeding. The court, In an

unreported memorandum decision, rejected

>the Commission's posinon that the applicable

"fair and equitable" standard requires equal

treatment for cost and expenses of adrrurustration In both proceedings, but agreed that

all administrative costs and expenses within

each proceeding be treated equally by the

terms of the plans. The plans of orderly

hqutdatron as amended were approved by the

court

Bubble Up Delaware, Inc, et al 38_ The

co-trustees developed a consolidated plan of

reorganization provrdmq for the distribution of

the proceeds from the previous sale of the

debtors' assets as gOing concerns 39 The

plan proposed a settlement of the pending

controversy between the public stockholders

of the Parent company who had claims based

upon the Federal secunties laws and the

general creditors of all three related debtor

estates. Essentially, the co-trustees' plan provided for substantively consolidating the three

debtor estates and allocating by way of compromise the combined assets to the various

creditor groups on a percentage baSIS

In ItS memorandum on the plan filed WIth

the court, the Commission pointed out that

the "formula for distribution . IS the result of

negotiation and compromise among the Interested parties" and that while compromises

form a normal part of corporate reorqaruza157

"
lions, they must be fair and equrtable WIthan

adequate record to support that conclusion.40

It also noted that the plan provisions applied

the leading cases on the Issue of consohdatlon41and that the provision for recognition of

resossron claimants based on Federal secuntres fraud claims was proper 42

ACTIVITIES WITH REGARD TO

ALLOWANCES

Every reorganization case ultimately presents the difficult problem of determining the

compensation to be paid to the vanous 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

service It renders, has sought to assist the

courts In assuring economy of adrnmrstratron

and In allocating compensation equitably on

the basts of the claimants' contributions to the

adrnrrnstrahcnof estates and the formulation

of plans. DUring the fiscal year 525 apphcanons for compensallon totaling about $23.5

million were reviewed

Famngton Manufacturmg Company, et

al.43 The Court of Appeals for the Fourth

Crrcutt held that the lower court's award of

$350,000 for a Chapter X trustee was insufficient and adopted the Commission's recommendation of $575,000 for services rendered

through June 30, 1973 44 With respect to

counsel fees subsequent to that date, as

urged by the Commission, the court of appeals remanded In order that the notice requrred by Chapter X be given to creditors.

The Fourth Ctrcurt noted In accordance

with the position of the Commission that

counsel to a Chapter X trustee

"IS an officer of the court charged with

speono dunes and responsibmnes for the

performance of which It ISentitled to fair

recompense. Thrs, of course, does not

mean that It IS to be paid for unnecessary services or for services meptly

done But, so long as ItS services are

within the proper range of ItSduties and

are performed with reasonable competency, It IS to be compensated, not necessarily by the same yardstick as 'similar

services command In purely private employment' but sutncrent In amount to Induce competent counsel to undertake

158

the labors mordent to a reorganization

proceeding In reliance on the Willingness

of the Court later to deal faIrly WIthIt "45

The court, agreeing WIth the Cornrrussron,

also held that there was no jusnncanon for

the district court to reduce by 50 percent the

pre-Chapter X expenses of an Indenture

trustee (to be paid out of the distribution for

the debenture holders) payable pursuant to

the trust Indenture, and that ItSservices durIng the Chapter X proceeding which were

benencral to the estate should be paid as a

cost of administration, rather than from the

amount available for distribution to the debenture holders, as ordered by the district

court.

The court In commenting that the district

court "apparently disregarded the SEC's

evaluation of counsel's services and recommendation of a proper allowance therefor"

stated that the Comrrussion's fee recommendations In reorganization cases are entitled to

great weight.46

Nettonet Telephone Company, Inc, et

al 47-Shortly after a transfer of the proceedings from Chapter XI to Chapter X upon the

motion of certain creditors, eight law firms

applied for fees totalling more than $300,000

for services rendered dunnq the Chapter XI

proceedings. The Oomrmssronurged that the

applications be denied WIthoutprejudice suggesting that they be resubmitted at the conclusion of the Chapter X proceedings Among

other things, the Comrrussron advised the

court that the misfiling under Chapter XI and

the prolonged eight-month proceeding under

a wrong chapter of the Bankruptcy Act raised

questions concerning the benefits conferred

on the estate, which questions could only be

answered at the conclusion of the Chapter X

proceeding upon an adequate record 48

At the close of the fiscal year, the court had

not rendered a decision With respect to the

applications.

U S tmencmt, Inc 49_The trustee of trus

large pubuoly-owned real estate conglomerate sought "interim compensation based

upon an annual salary of $125,000, payable

monthly .. subject to pencdic review and

exarrnnanon by the court." After a hearing,

the bankruptcy judge allowed interim compensation of $10,000 per month until further

order of the court and directed the trustee to

file quarterly "report of services" which was

_
noticed for penodrc heanngs for "review" by

the court While he submits a report of servIces rendered, the trustee files no application

for allowance of compensation

The Commission objected to thrs procedure for compensating a Chapter X trustee,

asserting that It did not comply with the

established pen odic application, notice, and

heanng procedure onginally suggested by the

Commission and adopted by the courts In

compliance With Secbon 247 of the Bankruptcy Act so When the bankruptcy judge

entered a subsequent order approving the

trustee's report of services and pnor payment

of $30,000 for the first quarter, the Commission filed a notice of appeal to the district

court asserting that the procedure followed by

the bankruptcy judge did not comply With the

application, notice, and heanng provrsrons of

Section 247 of the Bankruptcy Act and Chapter X Rules 10-215 and 10-216 In ItS brief,

the Commission POinted out that Chapter X IS

a public Investor protection statute whrch,

mter alia, contains "detailed machinery govermng all claims for allowances from the

estate,"S1 and that the procedure adopted by

the lower court does not permit the court or

parnes In Interest to evaluate the services

rendered before mtenm fees are paid and

undermines the Important statutory nght to be

heard on all allowances from the estate S2

Although bnefed, the appeal had not been

heard before the close of the fiscal year.

Interstate Stores, Inc S3_ The Independent

trustee applied for a second mtenrn allowance of $40,000 for services rendered over a

one-year penod General counsel for the

trustee sought a first mtenrn allowance of

$575,000 for services rendered over a 17'/2

month penod. In addition, vanous special

counsel for the trustee retained for particular

tasks and who had expended insubstantial

amounts of time requested mtenrn fees

Approximately 22 percent of general counsel's reported total time expended on the

estate dunng the penod (9,670 hours) was

not supported by adequate time records A

portion of the Independent trustee's time was

not substantiated by time records. The Comrrussion recommended to the bankruptcy

judge mtenrn allowances of $450,000 and

$25,000 to general counsel and the independent trustee, respectively. The Commission also recommended that approximately

one-half of general counsel's expenses, for

which reimbursement was sought, was not

properly chargeable to the estate and should

be disallowed. The Commission also recommended that the payment of mtenrn allowances to four special counsel be dented Without prejudice pending completion of their

work

Apart from reducmq the request of the

Independent trustee by $5,000, the bankruptcy Judge granted all the applications In

full, Without setting forth any reasons In law or

fact why he declined to follow the Commission's recommendations Subsequent to the

close of the fiscal year, the Commission

appealed the bankruptcy Judge's decrsron to

the orstnct court. S4

INTERVENTION IN CHAPTER XI

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, Sectton 328 of

Chapter XI and Rule 11-15 of the Rules of

Bankruptcy Procedure authonze the Commission or any other party In Interest to make

application to the court to transfer the Chapter XI proceeding to Chapter X.

Under Rule 11-15, which became effecbve

as of July 1, 1974, the Commission as well as

other parties In Interest, except the debtor,

have 120 days from the first date set for the

first meebng of creditors to file a motion The

time may be extended for good cause. A

motion made by the debtor for transfer, however, may be made at any time. The rule

requires a shOWIng that a Chapter X reorqaruzanon IS feasible Thrs In effect means that a

motion can be granted only If the court finds

both that Chapter XI IS Inadequate and reorganization under Chapter X IS possible The

pnor procedure for filing a Chapter X pennon

after the granting of the motion and a separate hearing on the pennon has been abotished,

Attempts are sometimes made to misuse

Chapter XI so as to depnve Investors of the

protection which the secunnes Act of 1933

and the Seeunties Exchange Act of 1934 are

desiqned to provide In such cases the Comrmssion's staff normally attempts to resolve

the problem by Informal negotiations If thrs

159
proves fnntless, the Commission Intervenes

In the Chapter XI proceeding to develop an

adequate record and to direct the court's

attention to the applicable provisrons of the

Federal securities laws and their bearing

upon the particular case

W T Grant Company 55-Grant's filing of

a Chapter XI petition on October 2, 1975,

tnggered the single largest attempted business rehabilitation instituted under the Bankruptcy Act At that time, Grant operated about

1,070 retail stores throughout the United

States and employed 62,000 persons. The

Chapter XI petition reflected assets and habrlrues of $1,016,776,242 and $1,030,556,198,

respectively, as of September 4, 1975 The

public Investor Interest In Grant consisted of I)

$117,336,000 In pnnopal amount of debentures (3 Issues) held by 3,600 persons; II)

75,000 shares of preferred stock held by 500

persons; and III) 14 million shares of common

stock held by 35,000 persons Grant was

Indebted to a consortium of 27 banks in the

aggregate sum of $641 million The banks

asserted secunty Interests In customer receivables, merchandise inventones and certain

securities of a large Canadian rnajontyowned retail store chain Subsidiary

At the outset, there were Impediments to

the transfer of the case to Chapter X The

debtor-in-possession order, entered on October 2, 1975, contained provisrons authonzinq

the banks to accelerate payment of $90 million they lent back to Grant, In the event of a

transfer monon Another ex parte order authorrzed the banks to terminate their credit

card agreements With Grant In the event of a

transfer monon Grant and others advised

that any motion to transfer would be vigorously contested and the banks made It clear

that they would litigate the usage of collateral

In Chapter X, At the same time, the Commission was assured by Grant and others that

the objective of the Chapter XI filing was

rehabilitation and reorganization

The business of Grant at the time of ItS

Chapter XI filing was In a state of turmoil

Trade credit was unavailable and the flow of

merchandise Into the stores was reduced to a

trickle. Difficulties were even Incurred In getting merchandise for the Christmas selling

season by paYing cash on delivery and cash

before delivery In short, the business posture

of Grant was so ehaonc and a transfer motion

would have Introduced such Inordinate com160

plexmes that the Cornmrssron was precluded

as a practical matter from making such a

motion until there was some stabilization In

the busmess.

Grant embarked on a SWift IiqUidallon program. Between November 1975 and January

1976, 67 percent of the Grant chain was

hqtndated (712 stores). As a result of the

hqurdations, there was a fund of $320 million

to which secured creditors (pnrnanly the consortium of 27 banks) laid claim, and upon the

use of which Grant's Viability depended A

mere 4- 1/2 months after Grant's Chapter XI

filing, the court on February 12, 1976,

granted the liqUidation request of the creditors' committee (SIX banks and five trade

creditor representatives), With Grant's consent, and ordered the remaining 359 stores

hquidated The debtor's testimony that,

among other things, the creditors' committee

resolution to liqUidate was "terminal" and

"lethal" precluded any residual POSSibility that

a Chapter X pennon could be filed In "good

falth."ss On April 13,1976, Grant was adjudicated a bankrupt and a straight hqurdatmq

bankruptcy trustee was thereafter appointed

DUring the Chapter XI proceedings, the

Cornrrussron opposed the payment of bonuses aggregating $2.7 million to a professronal liquidator. The court awarded less than

10 percent of the amount sought The Commission unsuccessfully opposed the payment

of Interim fees to the attomeys for the debtor

Unfortunately, however, Grant was hquidated

prior even to the expiration of the nme under

Bankruptcy Rule 11-15 for the Cornrrussion

to transfer the case to Chapter X.

GAC Corporation, et et 57-The Commission and certain debenture holders moved

under Section 328 and Rule 11-15 of the

Bankruptcy Rules to transfer these proceedrnqs to Chapter X. The debtor IS a holding

company which operates an extensive land

development business through subsrdianes

GAC Properttes, Inc. ("PropertieS"), the primary operating subsidiary, sells subdivrded

lots and home sites to the public on the

Installment sales baSIS pursuant to the Interstate Land Sales Full Disclosure Act 58 GAC

Properties Credit, Inc ("Credit"), a subsrdiary

of Properttes, was created In 1970 to taohtate

the selling of $100 million In debentures to

the public through two $50 million Issues.

Thereafter, ItS sole busmess activity was pur-
chasing receivables generated from Properties' land sales

On a consolidated basts, the companies

listed $436 million In assets and about $384

million In liabilities as of December 31, 1974

The debtor reported losses of about $28

million for the year ended December 31,

1975, with Installment land sales declining 95

percent from ItS peak In 1971 of $128 million

The compames' capitalization now Includes

about $79.2 rrulnon of two Issues of seruor

debentures held by about 6,000 persons and

about $53 5 million of convertible subordinated debentures held by about 3,000 persons The debtor also has publicly-held ISsues of preferred stock, and ItS common

stock IS held by about 25,000 persons

The Commission In ItS transfer motion

urged, among other things, that there was a

need for a thorough investigation by an independent trustee and that rehabilitation of the

company required a substantial adjustment of

widely held public debt. The parent company

consented to the Commission's transfer motion and on May 19, 1976, the court ordered

the company transferred from Chapter XI to

Chapter X and subsequently appointed the

previously appointed receivers of Properties

and Credit as co-trustees of the parent corporation. Subsequent to the close of the frscal

year, the Court granted the Comrmssron's

motion With respect to the two pnmary subsidianes.

Contmental Investment corporeuon 59_

The Commission filed a monon pursuant to

Section 328 of Chapter XI and Rule 11-15 of

the Rules of Bankruptcy Procedure to transfer this proceeding to Chapter X. The debtor

IS a diversified flnancrat services holding company which through vanous operating subsrdianes IS engaged In the business of life

Insurance, Investment company management

and 011 and gas partnership management

The Chapter XI petition reflected assets and

liabilities of $51.2 million and $80.2 million,

respectively The debtor's capitalization includes two outstanding Issues of subordinated debentures In the pnnopal amount of

$38 6 million held by about 1,600 persons In

addmon, there are dose to 13 million shares

of outstanding common stock held by some

4,100 persons.

Pnor to the filing of ItS Chapter XI petition,

the debtor attempted a voluntary restructunng

of, among other things, ItS publiC debt pursuant to proxy sonotanon matenals and a

registration statement filed With the Commission The attempt failed because of a failure

to obtain the required 95 percent debenture

holder acceptances The debtor did obtain,

however, the requisrte number of acceptances from debenture holders for confirmation of a plan of arrangement under Chapter

XI 60 The debtor then filed a petition under

Chapter XI together With a plan of arrangement to affect the public debt In the manner

that was attempted through the aborted voluntary restructunng, and With the pre-filing

acceptance In hand sought SWIft confirmation

The Cornrrussion moved to transfer the

case to Chapter X arqumq (I) Chapter X IS

required where more than a minor adjustment

of the nghts of public debenture holders IS

necessary, (II) public debenture holders are

entitled to "fair and equrtable'' treatment, (III)

the plan of arrangement was not feasible

because, among other things, certain litigation claims against the debtor were not dischargeable In Chapter XI, (IV) a comprehensive reorganization rather than a "Simple

cornposrtron" of unsecured debt was requrred, (v) there was a need for a new

management and an investigation by a dismterested trustee Into the debtor's past acnvrbes, and (VI) the debtor sought to circumvent

the protections afforded public Investors by

Chapter X through the use of preflling acceptances

At the close of the fiscal year, the bankruptcy Judge had not rendered a decrsion on

the Cornrrusston's transfer action.

Continental Mortgage Investors 61_ The

Commission and certain seruor creditors, including banks and institutions, filed motions

to transfer trus Chapter XI case rnvolvmq a

$600 million real estate Investment trust to

Chapter X The debtor has outstanding $46

million of convertible subordinated debentures held by 2,000 public Investor-creditors

and 20 8 million shares of benenoal Interest

held by 28,000 public Investors The Commrssron In ItS motion argued, among other

things, that there was a need for a thorough

mvesnqatron by an Independent trustee, and

that rehabilitation of the debtor required a

substantial adjustment of Widely held public

debt

The Cornrrussron pressed for the rnamte161
nance of the status quo pending a determination of Its transfer motion, In order that gOing

concern values and assets were not diSSIpated before a reorganization attempt under

Chapter X could get underway. The need for

maintenance of the status quo was accentuated by indications that the debtor may be

contemplating hquidanon rather than rehabilitation and by the delays obtained by the

debtor, over strong Commission objections,

of the heanng on the transfer monon, Indeed,

the Commission felt It necessary to appeal

the order of the bankruptcy judge adjourning

for 9O-days the heanng on the transfer motion.

At the close of the fiscal year, a heanng on

the Commission's transfer motion had still not

been held. And, despite the Commission's

insistence on maintenance of the status quo,

the debtor obtained authonty on a number of

occasions to dispose of assets.

Esgro, Inc 62-The Comrmssron's appeal

to the distnct court from the bankruptcy

judge's denial, WIthout prejudice, of a Section

328 transfer motion was dismissed when the

debtor agreed to amend ItS plan of arrangement so as substantrally to Increase the

amount payable to ItS public debenture holders In settlement of their claims 63

The Commission brought to the debtor's

attention that Its proxy matenal soncrnnq consents to the arrangement may have been

matenally rrusleadrnq In viotanon of proxy

provisrons of the Secunnes Exchange Act. 64

When the debtor sought confirmation desptte

the pending appeal, the Comrrussron moved

to stay confirmation and, alternatively, to intervene In the Chapter XI proceeding 65 to

enforce compliance WIth the proxy antifraud

provrsions and to object to confirmation. The

Comrmssron requested that the court VOid the

consents because of the alleged Violation of

the proxy prOVISIOnS66

When the debtor agreed to amend rnatenally ItS proposed arrangement for the benefit

of the general creditors and debenture holders, the Commission withdrew ItS objections

as did the Oftrcral Creditors' Committee,

which also had filed objecnons. The order

confirming the modified arrangement became

final; the Oomrmssron then dismissed ItS appeal.

National Telephone, Inc et al 57-Dunng

the pendency of a motion by certain creditors

162

to transfer the proceedings from Chapter XI

to Chapter X, the majonty shareholder and

former chairman sought to convene a speeral

meeting of stockholders to remove three of

the company's SIX directors. He tailed however to comply With the proxy provlsrons of

the seconnes Exchange Act of 1934 The

Oornrmssron supported an applicatron for an

order barnng the holding of the meeting on

the grounds that, among other things, such a

meeting, absent filing with the Commission

and transmittal to stockholders of an Information statement, would violate the Securities

Exchange Act of 1934. Based on trus ground,

the court enjomed the convening of the speoal meeting of stockholders.

American Beef Packers, Inc and Beef/and

International, Inc 68-The Oomrrussron intervened In this Chapter XI proceedmg and

joined With the States of Iowa and Nebraska

In seeking the appointment of a receiver

pursuant to Section 332 of Chapter XI. American Beef, whIch is publicly held, has assets

of about $110 million and liabilities of over

$92 rrulhon. The application alleged, among

other thmgs, that preferential transfers of

money were made to affiliates of American

Beef before and after the Chapter XI filing;

that certain officers and directors were subjects of mvesnqanons by vanous state and

Federal aqencies: and that Amencan Beef

was mismanaged by ItS officers and directors

in that It diverted funds from ItS pnncipal

creditors, ISSUed checks drawn on accounts

Insufficient to pay the checks, and applied

funds necessary for Its continued operations

for capital Improvements.

The application became moot when a proposed plan of arrangement requiring new

management was confirmed. The majonty of

claimants, whose claims arose from the sale

of livestock and livestock feeds were paid 55

percent of their daims in cash with the remainder to be paid from available cash flow.

Trade creditors were paid 50 percent of their

clairns In full satisfaction thereof.

Scott, Gorman Mumclpals, Inc. 69_ The

Oomrnlssron intervened In ttus Chapter XI

case Involving a municipal bond dealer and

sought the appointment of a receiver pursuant to Section 332 of Chapter XI and

Bankruptcy Rule 11-18(b). In this connecbon,

the Oomrmssron alleged that substantial

sums of secunties, notes and bonds of the
debtor's customers were Illegally pledged and

rmsappropnated, After an evidentiary hearing

a receiver was appointed. The Commission

further sought and was granted a danncanon

of ItS Chapter XI stays of all actions against

the debtor, so as to permit the commencement of a lawsuit against the debtor and its

pnnopals for violations of the Federal secunties laws. Shortly thereafter a complaint was

filed by the Commission for violations of the

antifraud provisions of the Secunties Act of

1933 and of the Securities Exchange Act of

1934.70

Ultimately, the debtor was adjudicated a

bankrupt and a bankruptcy trustee appointed

NOTES TO PART 7

1A substantially identical report was submitted to the Subcommittee on CIVil Rights

and Constitutional Rights of the House Committee on the Judiciary and to the Subcommittee on Improvements In JudiCial Machinery of the Senate Committee on the JudicIary.

2A table listing all reorganization proceedIngs In which the Commission was a party

dunng the year is contained In Part 9.

3S D.N.Y ,No. 7~243. Previously reported In 41st Annual Report p. 161 4 Section 12(f) of the Secuntles Exchange

Act of 1934, 15 lJ S.C. 781(f).

5S.D.N.Y., No. 74-~1~02, inclusive.

Previously reported In 41st Annual Report,

pp. 157-158.

6S.D Oruo, No. B-1-75-1181. 7 In re Dania Corp., 400 F 2d 833, 836 (5th

Clr.1968).

8D. Colo, No. 71-B-2921. Previously reported In 41st Annual Report, p. 150, 40th

Annual Report, p. 127 and 39th Annual Report, pp. 121-122.

9 In re King Resources Company,_F.2L

(10th Ctr, 1976).

10C.D. Cal., No. 73-03467-HP. Previously

reported in 40th Annual Report, pp. 124-126;

39th Annual Report, p. 120.

l..Jchtlg v. Loeffer, C.A. 9 No. 76--1052. 12 United States of Amenca v. Stanley

Goldblum, et a/., Case No. CR-1339o-July

(C.P. col).

13C.D. Cal., No. 73-03467-HP. Previously

reported In 40th Annual Report, pp. 124-126;

39th Annual Report, p. 120. 14 Loeffler v. Wolfson, Wemer, Ratoff &

Topsu), et al. (CiVilAction No 75-301-MDL).

15C.D. Cal., No. 74-4409. 16 SEC v. Beverly Hills Bancorp C.D.,

Cal., No. 74-2348. 17 SEC V U.S. Realty & Improvement Co,

310 U.S. 434 (1939); SEC v. Amencan Trailer

Rental Co, 319 U.S. 594 (1965)

18See the leading case of Committee, et

al. v. Kent, 143 F.2d 684 (4th Cir. 1944).

191nre Impenal '400' Neuonet, Inc., Corporate Reorganization Release Nos. 315 (July

30, 1975), 7 SEC Docket 339 and 318 (f=ebruary 24, 1976), 9 SEC Docket 36; In re King

Resources Company, Corporate Reorganization Release No 316 (August 13, 1975), 7

SEC Docket 604; In re EqUity Funding Corporeuon of Amenca, Corporate Reorganization Release No. 317 (November 25,1975),8

SEC Docket 589. 20 In re Bubble Up Delaware, Inc., C 0

Cal., Nos. 78641-FW, 7956--FW,and 80470-

FW; In re First Home Investment Corp of

Kansas, Inc., D. Kans., No 24075 B-2; In re

Lyntex Corporeuon, S.D NY, No. 73-B-751,

In re Maryvale Commumty Hospital, Inc, D.

Ariz, No B-9352-PHX; In re Omegal-Alpha,

Inc, N.D Texas, No. 8K-3--74-454-<3

21 CD. Cal., No. 73-03467-HP. Previously

reported In 40th Annual Report, pp. 124-126;

39th Annual Report, p. 120 22 In re EqUity Fundmg Corporation of

Amenca, Corporate Beorqanzatlon Release

No 317 (November 25,1975),8 SEC Docket

589.

23D. Colo, No. 71-B-2921. Previously re- ported In 41st Annual Report, p 150; 40th

Annual Report, p. 127; and 39th Annual Report pp 121-122. 24 In re King Resources Company, Corporate Reorganization Release No. 316 (August

13, 1975), 7 SEC Docket 604.

25See A-Cos LeaSing Corporeuon v. Wheless, 422 F.2d 522, 525 (5th Clr. 1970). 260 N J., No. ~56--65 Prevrously re- ported In 40th Annual Report, p. 128; 39th

Annual Report, pp 124-125; 38th Annual

Report, pp. 117, 122, 125; 36th Annual Report, pp 176--1n, 190, 35th Annual Report,

p. 161; 33rd Annual Report, pp. 132, 137;

32nd Annual Report, p. 94 27 In re lmpenet "400" Netionet, Inc. Corporate Reorganization Release No. 315 (July

30, 1975); 7 SEC Docket 339. Earlier advisory reports on other plans In trns case were reported In Corporate Reorganization Release Nos 312 (JUly 12, 1972); 313 (July 29,

1973),2 SEC Docket srr. and 314 (May 15,

1974), 7 SEC Docket 604.

28Corporate Reorganization Release No.

318 (February 24, 1976), 9 SEC Docket 36.

29O. Kans., No. 24075 B-2. Previously

reported In 40th Annual Report, pp. 125-126.

30N D. Texas, No. Bk-3-74-454-G. Previously reported In 41st Annual Report, p. 158.

31The Original offer of $41 million was

Increased $3 million after another proponent

offered a higher price for Okonite at the

approval hearing.

32D. Arizona, No. B-9352-PHX. Previously

reported In 30th Annual Report, p 100, and

35th Annual Report, p 165 33 See In re Maryvale Commumty Hospital,

Inc., 307 F. Supp 304 (D. Anz, 1969), at note

4, p. 306 The case presented a novel question of whether an eleemosynary corporation

could be the subject of an Involuntary petition

for reorganization under Chapter X. Section 4

163

"
of the Bankruptcy Act 11 U.S C 22. But see In re Allen UniversIty, 497 F.2d 346 (C.A. 4,

1974).

34 In re Maryva/e Community Hospttel, Inc,

456 F 2d 410 (9th Clr. 1972) 35 In re Maryva/e Community Hospttel, Inc.,

456 F.2d 414 (9th C,r 1972), cert. denied,

409 U.S 879 (1972); In re Maryvale Community Hospttel, Inc Memorandum (9th Crr ,

November 5, 1975) 36 SON Y., No. 73-B-751. Previously reported In 40th Annual Report p. 131, 41st

Annual Report,p. 156 37 A plan of reorganization under Chapter X

may contemplate an orderly liquidation.

Country ute Apartments, Inc v Buckley, 145

F.2d 935 (2d Ctr. 1944), 6 Cotner on Bankruptcy, p. 206 (14 ed. 1972). 36 C 0 Calif, Nos. 78641-FW, 7956-FW,

and 8047Q-FW. Previously reported In 39th

Annual Report, p 121. 39 See 39th Annual Report, p. 121. 40 Protective Oomtmttee v Anderson, 390

US. 414 (1968).

41 Cnemtcei Bank of New York Trust Company v Khell, 369 F 2d 845 (2d Ctr, 1966); In

re Flora MIx Candy Co, 432 F.2d 1060 (2d

Orr, 1970); Anaconda But/ding Matertals v.

Newland, 336 F 2d 625 (9th C,r 1964). 42 In re Four Seasons Nursing Centers of

Amence, Inc., 472 F.2d 747 (10th Cif 1973). 43 E.D va, No 17-71-A, 256-71-A and

257-71-A. Previously reported In 41st Annual

Report, pp. 151-153, 156-157; 39th Annual

Report, pp 123-124, 38th Annual Report, p

118.

44 In re Famngton Manufacturing Co.,

F.2L (4th Cif 1976), See 41st Annual Report, pp. 156-157 45 In re Famngton Manufacturing Co, supra, n._aL 46 In re Famngton Manufacturing Co, supra, n. _aL, Citing Finn V. Childs Co, 181

F.2d 431, 438 (2d Clr. 1950); In re Solar Mfg

Corp., 215 F.2d 555, 562 (3d Clr 1954) 470 Conn, No. H-75--B65. 48 In re lmpenet "400" National, Inc., 432

F 2d 232 (3rd Cif 1970); In re McGann

Manufacturing Co, Inc, 188 F 2d 110 (3d

Clr. 1951), In re Keystone Holding Co, 117

F 2d 1003 (3d Crr 1941), 6A Cottier on

Bankruptcy, pp. 1009-1011 (14th ed 1972)

and cases Citedtherein 49 S.D. Calrf., No 17007-K. Previously re- ported In 41st Annual Report, p. 158 50 The procedure and rationale are set forth In detail In 6A CollIer, Bankruptcy, 14th ed.,

Par. 13.16, p 1011 51 Brown V. Gerdes, 321 US 178 182

(1944)

52 Cf In re Famngton Manufacturing Co,

164

_F.2L (4th Crr. 1976) In re Cybern Education, Inc., 478 F.2d 1340 (7th Cir. 1973), 53 S.D.N Y, No. 74-S-:S14-802, Inclusive

Previously reported In 41st Annual Report,

pp. 157-158

54 The rule governing the weight to be

accorded Commission fee recommendabons In Chapter X proceedings IS that such recom- mendations "should not be exceeded WIthout

definite findings why this step IS necessary."

Fmn v cnuds, 181 F 2d 431, 438 (2d C,r

1950), Scnbner & MIller v Conway, 238 F.2d

905, 907 (2d Clr. 1956); Secunties Investor

Protection Corp v, Chensme Secunttes

Corp, 506 F.2d 1191, 1196 (2d C,r 1974); In

re Polycast Corp, 289 F. Supp 707, 722 (0,

Conn. 1968) 55 S.D.N.Y 75-B-1735 56 A party seeking to transfer a case under

Bankruptcy Rule 11-15 must show that

Chapter X petition can be filed In "good

faith." This means, among other things, that It

IS not unreasonable to expect a successful

reorganization. Section 146(3), 11 USC 546

(3).

57 S.D Fla., No. 76-131-Bk-NCR-H, Properties, No 76--816-Bk-JE-H; Credit, No 76,

1812-Bk-JE. In addition, 47 other subsrdi- anes of Properties have filed Chapter XI

petitions 5815 U.S C. 1701-20, 1970 590 Mass., No. 76-1158--G.

60 A rnajonty In number and amount of a creditor class IS sufficient and binds all mem- bers of that class Section 362 of the Act, 11

U S.C 762 61 D. Mass, 76-0593 62 CD Calif, No 73-02510 Previously

reported In 41st Annual Report, p. 159 63 A $1,000,000 contingent cash payment

from the sale of certain assets was made a firm commitment. Additionally, the debtor

agreed to pay the creditors an additional

$1,000,000 WIthInterest over four years 64 See note 60, p. 163, 41st Annual Report

regarding the necessity for compliance With

these provisrons 65 Citing SEC v United States Realty &

Improvement Co, 310 U.S. 434 (1940), SEC

V. Amencen Treuer Rental Co., 379 U.S. 594

(1965) While the stay was denied, the court

permitted mtervennon. 66 See In re Ftrst Home Investment Corp

of Kansas, Inc, 368 F. Supp. 597 (D. Kansas

1973), SEC V. Crumpton BUIlders, Inc, 337

F 2d 907 (5th c«. 1964) 67 D.C Conn. No H-75--B65.

68 0 Neb, Nos. Bk-75-Q-17 and 18. 69 S.D N.Y , 75-B-1538 70 S.D.N Y , 75--C-4373

~~

_
Part 8

SEC Management

Operations

A number of Important developments occurred In 1976, contributing to Increased operating efficiency, Improved service to the

public, and effeclJve use of the Commission's

resources The Commission awarded a new

contract for the public drsserrnnatron of filed

Information The contractor plans a number of

user workshops In major cities over the next

two years, and Increased promotion of ItS

new "Search line" telephone service that offers research of filings to subscribers and

non-subscribers Projects for future Improvements In operations depend to a large extent

on our ability to cope with our own paperwork

problems The Commission has been successful In obtaining funding In 1977 to initiate

a program for technological Improvements.

DUring 1977, the Commission plans to embark on a comprehensive micro-Imagery program which Will, over a three year period,

convert all active official public filings and

formal correspondence to microfiche The microfiche program will be combined With a

reliable on-line document Indexing, tracking

and retrieval system It IS anncipated that the

Commission will benefit by extensive use of

telecommumcatrons, including comprehensive data-entry systems, desiqned to eliminate a substantial amount of clerical effort

and Improve the accuracy and timeliness of

essential information

ORGANIZATIONAL CHANGES

The Commission established an Offlce of

Consumer Affairs on May 20, 1976 The

Office IS charged With protecting the Interests

of consumers, I e., smaller mdividual mvesPartS

SEC Management

Operations

tors, In their dealings With the secunnes industry and In providmq special representation

for such Investors In matters before the Comrrussron.

An Office of Small BUSiness Policy was

established In the Commission's Office of

Economic and Policy Research. The function

of this Office IS to direct and coordinate the

Commission's examination of the efficacy

and Impact of secunnes regulation on small

busmesses

To assure coordination between the Commrssion's relations With the press and With

Congress, and to provide Increased emphaSIS In both areas, the Commission combined

the Offices of Public Information and

Congressional Affairs.

Effective Apnl 2, 1976, the Commission

changed the name of the DIVISion of Investment Management Regulation to the DIVISion

of Investment Management Additionally, the

Commission approved the transfer of functions and personnel from the DIVISion of Corporanon Finance relating to disclosure requirements applicable to Investment companies and certain Similar types of Issues to the

DIVISion of Investment Management

INFORMATION HANDLING

Significant progress was made durrnq the

year In furthering the Commission's use of

electronic data processing (EDP) In support

of ItS information handling activities.

Certain EDP systems were developed as a

result of the rrnplementatron of the Securities

Acts Amendments of 1975. These systems

Involved the creation of mtormanon bases on

167
rnuructpal securitres dealers and transfer

agents, and the addition of new data elements to the broker-dealer registrant mtorrnanon base. Assistance was also provided to

the Commission's staff through the techmcal

review of documents filed by secunties information processors to determine the adequacy of required Information.

In a related area, the Office of Data Processing was extensively Involved In the design and development of a computer system

for processing mtormanon contained on the

broker-dealer Financial and Operational

Combined Uniform Single Report (FOCUS

Report) 1

An EDP system was also developed to

faciutate statrstrcal analyses of information

collected by the Commrssron In support of ItS

Street Name Study 2

Currently under development IS a system

for more effectively indexing Information relatIng to SEC registrants that will allow more

effIcient use of many EDP data files and will

serve as the central or master index for

locating and retrieving the filings of companies reporting to the Commission.

Plans for the coming year mctude the Implementation of a limIted telecornrnunrcanons

capability to support the previously menboned central Index and certain other information systems Also planned IS the complebon of a five-year automatic data processing

program to establish long-range mtorrnanon

systems goals and provide for significant expansion and further development of EDP

WIthin the Commission

OFFICE OF CONSUMER AFFAIRS

As noted above, the Commission established an Office of Consumer Affairs In response to the President's four POint regulatory reform program. The Offrce was charged

WIth protecting the Interests of consumers,

I e., smaller individual Investors, In their dealings with the secunnes Industry and In provrdIng special representation for such investors

In matters before the Cornrrussron.

As ItS first assignment, the Office was

Instructed by the Comrrussron to draw up a

proposal for the establishment of a meaningful Investor dispute grievance system which

would utilize, If possible, the securmes industry's self-regulatory organizations. The proce168

dures should be designed to avoid any cumbersome, ineffiCIent, or overly expensive requirernents which would discourage smaller

consumers In the securities Industry from

asserting their gnevances and dalmlng monetary damages In trns regard, they Will perform the same function as eXisting small

clarms courts. On June 9, 1976, the comrmssion mvited public comment on the need for

and possrbte structure of such a system and

scheduled a public forum on thrs matter for

JUly, 1976.

In adcmon to proposing a dispute gnevance procedure, the Oomrmsston asked the

OffIce to explore the possibnrty of Improving

ItS consumer protection program by upgradIng the Cornrrsss.on's complaint processing

effort; prOVIding for greater commes.on overSight of the complaint processing procedures

of the self-regulatory organizations; instituting

a legal aid system for Injured consumers who

meet requisite quahhcanons, reviewing the

cornmlssron's standards for partroipanon as

emtcus cunse in court cases Involving Injury

to consumers; making greater use of public

investigatory proceedings; increasing the

Oomrrussron's consumer education program,

and prOViding for greater consumer Input In

Comrrussion rulemaklng proceedings.

To ard In accomplishing the above the

Comrmssron on June 9, 1976, mvited all

Interested persons to submit In writing their

Ideas for a procedure that Will be available

nanonwide through the self-regulatory organizations to Investors for settling disputes ansIng out of dealings In securities between a

customer and a registered broker-dealer." In

this release the Oornrrussron also mvited the

people who had submitted written comments

to make an oral presentanon at an Informal

public forum held on July 15, 1976.

OFFICE OF PUBLIC

INFORMATION

The Office of Public Information has the

responsibility for disseminating news about

Commrssron actions. This IS done prmopany

through the dally publication of the SEC

News Digest The News Digest summarizes

such matters as: (1) proposed public offerIngs of securities for wmch a Secunnes Act

registration statement is filed; (2) notices of

filings of apphcanons and of all orders, deer-
PERSONNEL MANAGEMENT

The permanent personnel strength of the

Commission totalled 1,922 employees on

June 30, 1976, as shown below

Dunng 1976, the Commission focused ItS

recrurtrnent actrvrties on the strengthening of

ItS Equal Employment Opportunity Program

Under the leadership of a top-level committee

chaired by a Member of the Commission, the

SEC pursued an active attorney recruitrnent

program which Included on-campus VISitS

combined With a thorough screening and review of applications at the Headquarters level

to Insure consideratron of candidates from all

segments of the population The Committee

also developed a cooperative training program to enable graduate students In nonlegal

curncula to participate In the work of the SEC

and to broaden the Comrmssron's recruitment

base Though most of the results of these

efforts Will not be seen until the transitional

quarter and early fiscal 1977 appomtrnents,

the Commission did Increase by 236 percent

the number of female attomeys on the staff,

the public. However, the public was denied

access to certain categones of material, notably investigatory records Pursuant to various

FOIA requests, the Commission has made

available for public Inspection many records

which had traditionally been considered confidential Among these records are portions of

the Broker-Dealer and the entire Investment

Advisers and Investment Company Inspection Manuals, the Summary of Administrative

Interpretations under the Secuntles Act of

1933 and the Commission's pen odic Secunties Violations Bulletin Moreover, the Commission has made available, pursuant to particular FOIA requests, staff letters of comment on registration statements or other filmqs and Wells Committee subrrussions.

From July 1, 1975 through June 30, 1976,

the Commission received 730 requests for

Information pursuant to the FOIA

4

1,217

701

1,918

1,922

Commissioners

Staff

Headquarters Office

Regional Offices

Total Staff

Grand Total

Recruitment

ACTIVITY UNDER FREEDOM OF

INFORMATION ACT

srons, rules and rule proposals Issued by the

Commission, and (3) court actions In litigation

involving the Commission's enforcement program

The News Digest IS made available to the

press Immediately after It IS reproduced each

day. It IS also reprinted and distnbuted, on a

subscription basts, by the Government PrintIng Office Currently there are 3,055 subscribers In addition, the Office of Public Information assembles copies of Important releases,

orders, decisrons, rules and rule proposals for

dally distribution to the media and all selfregulatory organizations.

The Office IS also called upon to respond to

approximately 75-100 dally telephone mqurnes from the press and the general public

The Office also receives approximately 2~0

letters per week from the general public seekIng assistance on a wide range of secunnes

related matters

Dunng the past year, the Office of Public

Information Initiated a consumer education

program through the use of written and audio-visual aides Several small brochures, designed as gUides and warnings to Investors,

were printed and distributed. "Eagle on the

Street", a narrated slide program on the

history and current role of the SEC, was

produced It has been seen by a variety of

groups, Including graduate business and law

school students and CIVIC and professional

organizations Copies of the program have

been placed with the National Audio Visual

Center for sale to the general public

DUring the year, the Commission determined to centralize and coordinate staff acnvIty on FOIA matters and assigned rssponsrbrlmes to the Office of Reports and Information

Services The first FOIA Officer for the Comrrussron was appointed and a Branch of FOIA

and Privacy Act created In the Office of

Reports and Information Services

The Commission's Freedom of Information

rules, revised on February 19, 1975, provide

that the public can Inspect or obtain copies of

all records maintained by the SEC with the

exception of certain specified categories of

Information Most financial and other information filed by registered companies has always

been available for Inspection or copying by

169
the number rose from 55 at the end of fiscal

year 1975 to 68 at the end of 1976, and

represents a gaIn of 183 percent In the last

three fiscal years.

The Office of Personnel developed and

obtained CIvil Service Comrrussron approval

for an Upward MobIlity Training Agreement,

whIch wIll facihtate the advancement of the

Oomrrussron's current clencal and secretarial

employees Into the professional and technical

staff of the Oommlssron

Personnel Management

Evaluation

In July 1975, the CIvIl Service Commrssron

Issued ItS report on personnel management

svaluatron of the SEC A number of specinc

dehciencies were noted and several recomrnendanons were made to Improve personnel

management pracnces, A substantial amount

of nrne and resources were devoted to the

correction and Improvement of these areas,

and most were resolved to the mutual sanstaction of the SEC and CSC One of the more

slgnrflcant areas addressed by CSC dealt

wIth the grade structure and posinon management of the Secuntles Compliance Exammers These are key non-attorney Jobs WIthin

the agency, and It IS of utmost Importance

that examiners be given assignments that are

professionally challenging and offer mearunqful opportunity for advancement. The Comrrussron has begun an effort to develop more

clearly defined Job cntena for the journeyman

and seruor level examiners posmons, so that

orsnncnons between grade levels wIll be both

meanrngful and equitable This WIll be an ongomg program whIch wIll require monrtonng

over the next several years

The Commissron mmated ItS own management review and evaluation program dunng

fiscal year 1976 wIth a team of management

and personnel specialists, who began with a

revIew of the operations and personnel management acnvity of the newly organrzed DIVIsron of Investment Management SImilar reviews are scheduled throughout the Oornrrussion dunng the transrnonal quarter and Into

fiscal year 1977

Training and Development

The training and development efforts durIng fiscal year 1976 Included the major cate170

gones of Executive Development, AffirmatIve

Action and Protessronal Skills:

ExecutIve Development: DeSIgned to enhance the performance and potential of our

rruddle management, thIS opportunity enabled

seven G5-14/15's to attend advanced management development training. In addition,

the SEC sent three of Its top management

executives to the Federal Executive Institute

and to the executive Seminar Center

Program Development The SEC worked

closely WIth the Nanonai Audro V,sual Center

to develop a film on tnal proceedings; thIS fIlm

IS being utilized by many of our protessronat

staff throughout the agency. The Amencan

InslJtute of CertIfied Public Accountants provrded under contract a senes of seminars on

advanced and "refresher" accounting pnnopies designed to keep our accounting and

finanaal staff up to date WIth the dynarmcs of

the accounting dISCIpline.

An Internal MobIlity Program was developed. When Implemented ,n early fall, thIS

program WIll encourage senior professionals

to seek temporary posnlons outside of their

orqarnzanon (but within the SEC) that will

provide them WIth broadenrng work expenences that could be useful to them when they

return to their permanent assignments.

AffirmatIve Action: Our TUItIon Support

Program was utilized by over 100 employees

as a means of assistance In the pursuit of

undergraduate education. Plans for next year

call for an mcorporanon of thiS program into a

larger Upward Mobility Program.

Protesstons! SkIlls Development. EmphaSISwas once again placed on Inhouse "techmeal" training both In the RegIons and In

Washington. Enforcement, regulatIons and

Investment training conferences were conducted for both new and "seasoned" professtonats. A senior tnal attorney seminar is now

being planned for the winter months. Trns

program WIll address the needs of regIonal

enforcement attorneys who must litigate Slgnrficant cases on an Infrequent baSIS.

OFFICE SPACE

Dunng the first quarter of the fiscal year,

the Office of Management and BUdget upheld

the comrmssion's appeal against the General

Services Adnurustranon's deosron to assign a

new but unsatisfactory headquarters bUIlding

to thIS agency. FollOWIng thrs outcome, the
Commission explored other alternatlves that

would enable It to centralize all of ItS WashIngton metropolitan area offices In one buildIng or In a few bUildings In close proximity to

each other at a site that would be easily

accessible to VIsitors and members of the

secunnes Industry and allow for staff expansion over the next several years. Although an

adequate location at an acceptable price was

not found, a new headquarters remains a

high priority for the Commission.

The General Services Administration, With

the approval of the Congress, signed a new

nve year lease for Capitol Mall North, the

present primary office location of the Commission. As the fiscal year ended, it appeared

that the Oomrmssron's Washington staff

would continue to be located at their three

separate area locations for the Immediately

forseeable future

FINANCIAL MANAGEMENT

Total fees collected by the Commission In

fiscal 1976 represented 52 percent of funds

appropriated by the Congress for Commission operations. The Oornmissron IS requred

by law to collect fees for (1) registration of

seeuntres Issued, (2) qualifications of trust

Indentures; (3) registratlon of exchanges, (4)

registration of brokers and dealers who are

registered with the Oomrnlssion but are not

members of the NASD; and (5) certification of

documents flied With the Commission. In addition, by fee schedule the Commission Imposes fees for certain filings and services,

such as the filing of annual reports and proxy

material

The Securities Acts Amendments of 1975

increased the transaction fees to be paid by

all national security exchanges to one threehundredth of 1 per centum of the aggregate

dollar amount of the sales of securities transacted during each preceding calendar year.

The 1975 Amendments have also mduded

under this fee requirement certain transacnons by every registered broker and dealer

wruch are not transacted on a nanonal secunues exchange, provided, however, that no

payment Will be required for any calendar

year In which the fee would be less than

$100

With reference to the fee schedule, the

Investment adviser assessment fee refunds

Originally announced In Commission release

IA-4B6 have been almost completed. To

date, approximately 2,750 refund checks

have been mailed totaling slightly more than

$607,000.

NOTES TO PART 8

1 See p 12, supra, and 41st Annual Report, p. 1B.

2 See page 20, supra.

3 Sscunnas Exchange Act Release No.

1252B (June 9, 1976), 9 SEC Docket B33.

171

Part 9

Statistics

THE SECURITIES INDUSTRY

Income, Expenses, and Selected

Balance Sheet Items

On December 17, 1975, the Cornrrussron

announced the adoption of the Financial and

Operational Combined Uniform Single (FOCUS) Report and the amendment of other

rules governing broker-dealer reporting of flnanaal and operational information Among

the changes were amendments to Rule 17a10 and its associated Form X-17A-l0, the

Cornrrussron's source for Industry financial

mtorrnatron.

The amendment to Form X-17 A-1 0 reduced considerably the reporting burden to

broker-dealers and made available for the

nrst time financial data for approximately

2,000 addmonal registered broker-dealers

Part 9

Statistics

which previously filed only the Introduction of

the anginal Form X-17 A-l 0 As a consequence, sscunnes Industry financial mtorrnalion IS more comprehensive than that previously collected

Registered broker-dealers reported total

revenue of $7.3 billion for the year. The

largest Single source of revenue was secunties cornrmssrons, which accounted for approximately 46 percent of total revenue. TradIng and underwnnnq revenues were the second and third most Important revenue contnbutors, accounting for 16.4 percent and 12 7

percent, respectively

Pre-tax Income came to approximately

$1 1 billion, bnnglng the Industry profit margin

to 15 2 percent for 1975. Industry assets

stood at $31.1 billion at the end of the year

Withownershlp equity closmq the year at $4.5

billion

175
Table 1

FINANCIAL INFORMATION FOR BROKER.DEALERS 1975

(Millions of Dollars)

1975"

A RI~nul Ind ElpInlll

1 Sscurmes Commtssons 2 Gain (Loss) In Trading

3 Gain (Loss) In Investments

4 Profit (Loss) From Underwrrtlng and Sellrng Groups

5 Interest Income

6 Other Revenue Related to securmes BUSiness

7 Revenue From All Other Sources

B Total Revenue

9 Total Expenses'

10 Pre-tax Income

B. AsIIII. L1lbll"'lllnd Cap"I'

11 Total Assets

12 uabnmes

a Total lratnlmes (excluding subordinated debt)

b Subordinated debt

c Total uabrhues (ua + 11b)

13 Ownership EQUity

14 TotalLJabllrtles and Ownership EQUIty

Number of Frrms

preliminary

Expenses Include Partners Compensation

Source Form X-17A-10

Historical Information-Income,

Expense, and Balance Sheet

Information of Broker-Dealers

With Securities Related Revenue

of $500,000 or More

Hrstoncally, broker-dealers receive a major

portion of their revenue from four primary

sources securmes comrrnssrons, trading actrvrtres, underwntmq, and Interest Income

earned on loans to customers 1 Reflecling

Increased market actrvity, three of these revenue sources showed marked Improvement

1 Because of aforementioned changes In reporting requirements, the most detailed Income, expense, and balance

sheet mtormauon IS available for only registered brokerdealers Wtth secunbes related revenue of $500,000 or more

In order to provide as comparable mtormauon as possible,

new financral mtormatron was developed for pnor years For

1975, broker-dealers With seeunnes related revenue of

$500,000 or more held approxrmatety 99 percent of Industry

assets and reported roughly 95 percent of mdustry revenue

176

$ 3,374 1 1,201 1

131 7

9303

6017

6975

3943

7,330 7 6,2159

$ 1,1148

$31,181 1

25,824 4 8347

26.659 1

4,522 0

$31,181 1

4,015

dunnq 1975 With only Interest Income failing

below the prevrous year's level Coupled WIth

Increases from all other revenue components, 1975 total revenue was 38 percent

above the depressed 1974 fIgure and 4 percent above the 1972 revenue level, the last

previous peak

The surge In revenue In 1975 was reflected

In the pre-tax Income figure of $1041.7 rrullion, more than 250 percent above that recorded for 1974. Due to the Influence of

posmve economic conditions. total assets of

broker-dealers (With $500,000 or more of

secunnes related revenue) at the close of

1975 stood at $307 billion, up from the 1974

level of $23.8 billion SImilarly, ownersrup

equity surpassed the year-end 1974 figure by

$1 2 billion, an Increase of 44 percent. The

year-end 1975 ownership figure of $3.9 billion

almost equaled that recorded for 1972 even

though 53 fewer firms were Included In the

1975 figure.

" =

•
Table 2

HISTORICAL REVENUE AND EXPENSES FOR BROKER.DEALERS WITH TOTAL

REVENUE OF $500,000 OR MORE

(Millions of Dollars)

1970 1971 1972 1973 1974 1975'

A. HeWln.e end Expenses 1 Commissions

a Commissions earned on eqUity secunnes transactions executed on a nanonal secunnes exchange $1,904 1 $2,7272 '$2,7473 $2,385 2 $2,081 1 $2,599 3 b Other commission revenue 3624 5601 6563 4306 357 1 6163 c Total commissions 2 266 5 3,287 3 3,403 6 2,8158 2,438 2 3,2156 Gain (Loss) on Firm secunnes Trading and Investment Ac- counts

a Gain \'OSS) In trading 8235 1,0560 9942 5902 7224 1,1366 b Gain loss) In Investments 749 2425 2086 -31 545 131 0 c Total gain (loss) 8984 1,2985 1,2028 5871 7769 1 2676 Profit (Loss) from Underwntlng and Seiling Groups 601 3 9570 9156 4935 4963 9127 Revenue From Sale of Investment Company Secunties a As Underwnter N/A N/A NJA N/A N/A 488 bOther fhan as underwnter (retail transactions) NJA N/A N/A N/A NJA 709 c Total revenue from sale of Investment company secunues 1842 1955 151 0 1488 788 1197 Interest Income 3786 3638 5270 6209 6220 591 3 Fees for Account Supervision, Investment Advrsory and Ad- rnmrstratrve Services 636 823 986 828 846 1545 7 Commodity Revenue 882 983 1246 177 5 1682 1866 8 Other Revenue Related to secunnes susness N/A N/A N/A N/A N/A 381 3 9 Revenue From All Other Sources 2662 3004 3062 3233 3997 1671

10 Total Revenue $4,7470 $6,583 1 $6,7294 $5,2497 $5,064 7 $6 996 4

B Expense

11 Compensation to registered representatives s 7777 $1 1390 $1 1980 s 937 4 s 949 4 s 1,274 5 12 Employee compensation and benefits 1 0857 1 2997 1 3922 1,1842 1,0966 1 3755 13 Commissions paid to other brokers 1280 1820 1857 1880 151 0 2108 14 Interest 5399 5198 6337 7957 7497 580 0

15 Communications 3700 4338 4880 461 0 4626 481 7 16 Occupancy and equipment rental 3487 4128 4596 4334 4397 4630

17 Promotonat 1568 1877 2140 1857 172 1 1568

18 All other operating expenses 6063 7874 7935 6859 6337 1,4130

19 Total expenses' 40131 4,9622 5,364 7 4,871 3 4,654 8 5 955 3

C. Pre.Tlllncome

20 Pre-tax Income 7339 $1,6209 $1,364 7 3784 4099 $1 041 7

Number of Firms 655 788 817 652 609 764

Expenses Include partners compensation

Source From X-171\-10

177

•
Table 3

HISTORICAL CONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS WITH

TOTAL REVENUES OF $500,000 OR MORE

(Millions of Dollars)

1970 1971 1972 1973 1974 1975"

A. Allab1 Cash, cleanng funds. and other dePOSItS $ 1.161 7 s 1,2205 $1,2806 s 1.1394 s 9403 s 9227

2 Receivables from brokers or dealers

a secunnes faIled to deliver 2,3189 2.230 3 2,5679 1,8436 1,2199 1,446 1

b Securmes borrowed 8648 1,0222 1,3639 1,096 0 8890 1,366 2

c Other receivables 1977 2951 3822 3300 9052 1,0697 3 ReceIVablesfrom customers 7,077 0 9,6436 13,37~ 8 9,056 2 7,4501 8,455 1 4 Market value or fa" value of securmes and commodr- ties accounts a Trading accounts NA NA NA NA NA 10,6733 b Other accounts NA NA NA NA NA 2,1924 c Total market value or fa" value of secunties and

commodmes accounts 10,261 4 11,6670 11,8701 9,7216 10,7885 12,865 7

5 Membersh~S In exchanges (market value) 2102 200 T 2079 T230 1005 1177 6 Property, urmture, eaulPment, leasehold Improve- ments and nghts un er lease agreements (net of

~~~~~~t~' 2286 2781 306 7 2799 268 5 2554

1,1638 1,368T 1,3975 1,5990 T,2248 4,276 4

Total assets 23,484 1 27,9250 32,7496 25,1887 23,7868 30,7750

B Llabllttlll

9 Money borrowed a Secured by customer collateral NA NA NA NA NA 2,2125 b Secured by firm collateral NA NA NA NA NA 7,1231

c Unsecured NA NA NA NA NA 1422 d Total money borrowed 8.9941 11,285 7 14,3984 9,8781 10,4210 9,477 8 TO PayablesTo brokers or dealers

a Securmes taIled to receive 2,7057 2,4196 2,7322 1,7243 1,2810 1,3989 b seconnes borrowed 8355 9836 1.2843 8469 5792 1,0631

c Other payables to brokers or dealers T978 3452 3542 3647 1,0585 1,084 3

d Total payables to brokers or dealers 3,7390 3,7484 4,3707 2,9359 2,9187 3,5463

11 Payables to customers

a Freecredit balances 2,1255 2,103 8 2,1498 2,184 4 1,7325 1,7329

b All other pakables to customers 2,1165 2,632 6 3,0783 2,7931 2,2536 2,9585 c ToTalpayab s to customers 4,242 0 4,736 4 5,2281 4,977 5 3,986 1 4,6914

12 Short posmons In securnes and cornmodites ac- counts 7074 906 8 T,5251 1,158 3 1,0382 1,163 8 13 Other babillties 2,3430 2,8587 2,5054 2,5497 2,098 5 7,1958 14 ToTalliabilItIes excluding subordinated borrOWings 20,025 5 235360 28,0277 21,4995 20,4625 26,075 1

15 Subordinated borroWings 6410 7281 7739 6422 5935 7670

16 ToTalliabilitieS 20,6665 24,2641 28,801 6 22,T41 7 21,0560 26,8421

C.o-lIIIlp Equity

17 Ownership equIty 2,8176 3,6609 3,9480 3,0470 2,730 8 3,932 9

18 Total liabilities and caprtal $23,484 1 $27,9250 $32,7496 $25,188 7 $23,7868 $30,7750

Number of Firms 655 788 817 652 609 784

Item 6 not neTof amcrnzanon

Source Form X-17A-l0

Securities Industry Dollar

Of each dollar recerved by broker-dealers

(With secunnes related revenue of $500,000

or more) In the calendar year 1975, a total of

46.0 cents was denved from the secunues

comrrnssron busmess, 16 2 cents from tradIng acnvmes, 13.0 cents from the underwntIng business and the remaining 24.8 cents

from secondary sources of revenue such as

commodities revenue, sale of investment

178

company secunnes and gain or loss from frrm

Investments.

Total expenses amounted to 85.1 cents of

each secunnes Industry dollar. The largest

proportion of broker-dealer expenses were

assooated with personnel costs. Adrrurustranve and employee cost and compsnsanon to

registered representatives amounted to 37.9

cents per Industry dollar. Operating Income

after partners' compensation but before taxes

accounted for 14.9 cents of the average

secunties industry dollar.

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Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers decreased In

1975, contmumq a senes of successive declines beginning In 1970 Following the trend

In the number of broker-dealers, the number

of branch offices operated by broker-dealers

also continued ItS downward movement, endIng the year at 6,267 offices.

The number of full-time broker-dealer employees stood at 242 thousand at the end of

1975 There were approximately 72 thousand

full-time registered representatives employed

In the Industry at the close of the year, 30

percent of Industry total employment

B R 0 K E R - D'EALE RSAN 0 BRA N CH 0 FFie ES

o 3000 6000 91)00

1970

1971

1972

1973

1974

1975

Broker-Dealers _____ J Branch Of f rc es

180

p Prel muruirv

SOURCE X-17A-l0 REPORTS

R Revi s ed

DS-SOS!

_

= =
Table 4

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACT

OF 1934-EFFECTIVE REGISTRATIONS AS OF JUNE 30,1976 CLASSIFIED BY TYPE

OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICES.

Number of Registrants Number of Proprietors, Partners, Officers, etc 2.3

Location of Principal Offices Sole Sole Total propne- Partner- Corpora- Total propr .. Partner- Corporalorshlps ships tlonS4

torsmps ships tlOOS4

ALABAMA 23 2 1 20 125 3 120

ALASKA 0 0 a 0 0 0 0 0 ARIZONA 28 4 1 23 105 4 9 92

ARKANSAS 22 2 a 20 106 2 a 104

CALIFORNIA 480 139 46 295 2595 139 245 2,211

COLORAOO 63 7 4 52 408 7 58 343

CONNECTICUT 62 8 10 44 465 8 117 340

DELAWARE 13 3 1 9 34 3 2 29 DISTRICT OF COLUMBIA 31 2 6 23 289 2 31 256

FLORIDA 112 10 5 97 481 10 10 461

GEORGIA 42 6 1 35 261 6 2 252

HAWAII 18 0 a 18 97 0 0 97

IDAHO 7 1 0 6 24 1 a 23

ILLINOIS 1,363 1,062 91 210 2,650 1,062 451 1,137

INDIANA 52 7 2 43 274 7 5 262

IOWA 37 2 1 34 225 2 6 217

KANSAS 27 2 2 23 282 2 9 271

KENTUCKY 11 2 1 8 71 2 3 66

LOUISIANA 10 4 0 6 35 4 0 31

MAINE 13 1 4 8 53 1 21 31

MARYLAND 37 4 4 29 235 4 72 159

MASSACHUSETTS 180 54 16 110 1 145 54 110 981

MICHIGAN 54 5 5 44 381 5 108 268

MINNESOTA 76 4 1 71 626 4 2 620

MISSISSIPPI 23 2 5 16 86 2 13 71

MISSOURI 67 4 6 57 766 4 144 618

MONTANA 3 1 0 2 20 1 0 19

NEBRASKA 16 0 0 16 112 0 0 112

NEVADA 3 1 0 2 8 1 0 7

NEW HAMPSHIRE 3 1 0 2 11 1 0 10

NEW JERSEY 179 39 26 114 609 39 77 493

NEW MEXICO 6 1 a 5 30 1 a 29

NEW YORK ~XCIUdln9 New York City) 280 108 20 152 647 108 59 480

NORTH CAR L1NA 28 6 1 21 144 6 2 136

NORTH DAKOTA 5 0 0 5 27 0 0 27

OHIO 98 6 16 76 750 6 221 523

OKLAHOMA 22 4 1 17 110 4 2 104

OREGON 25 3 1 21 103 3 3 97

PENNSYLVANIA 192 26 40 126 1,122 26 213 883

RHODE ISLAND 20 5 2 13 48 5 8 35

SOUTH CAROLINA 12 1 2 9 55 1 9 45

SOUTH DAKOTA 2 1 0 1 12 1 a 11

TENNESSEE 49 3 2 44 278 3 29 246

TEXAS 152 26 5 121 899 26 23 850

UTAH 32 3 4 25 126 3 12 111

VERMONT 5 2 1 2 22 2 2 18

VIRGINIA 40 8 3 29 341 8 13 320

WASHINGTON 55 7 1 47 284 7 4 273

WEST VIRGINIA 5 1 0 4 17 1 0 16

WISCONSIN 34 3 0 31 339 3 a 336

WYOMING 7 2 a 5 24 2 a 22

TOTAL (excluding New York City) 4,124 1,595 338 2191 17956 1 595 2,098 14,263

NEW YORK CITY 1 160 398 249 513 4,923 398 2571 1 954

SUBTOTAL 5,284 1 993 587 2704 22879 1,993 4,669 16217

FOREIGN' 24 2 2 20 195 2 9 184

GRAND TOTAL 5,308 1,995 589 2724 23,074 1,995 4,678 16,401

1 R::1/lstrants whose principal offices are located In foreign countries or other junsrncnons not listed 2 Inc udes directors, officers, trustees and all other persons occupying similar status or performing similar functions

3 Allocations made on the baSISof location of principal offices of registrants not actual locations of persons

4 Includes all forms of orgamzallons other than sole proprietorships and partnerships

181

-
Table 5

APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERS

Fiscal Year 1976

BROKER-OEALER APPliCATIONS

Applications pending at close of preceding year 39

Applications received dunng fiscal 1976 2,601

Total applications for disposmon 2,640

Drsposmon of Applications

Accepted for filing 2,293

Returned 224

Withdrawn 22

Dented 4

Total applications disposed of 2,543

Applications pending as of June 30, 1976 97

BROKER. DEAlER REGISTRATIONS

Effective registrations at close of preceding year 3,546

Registrations effective dUring fiscal 1976 2,265

Total registrations 5,811

RegistratIOns termmated dunng fiscal 1976 Withdrawn 442

Revoked 49

Cancelled 12

Total registrations terminated 503

Total registrations at end of fiscal 1976 5,308

INVESTMENT ADVISER APPLICATIONS

ApplicatIOns pending at close of preceding year 63

Applications received dunng fiscal 1976 1,250

--- Total appncatons for drsposmon 1,313

Disposmon of applications

Accepted for fi Iing 711

Returned 495 Withdrawn 3

Demed 1 Total applications disposed of 1,210

Applications pending as of June 30, 1976 103

INVESTMENT ADVISER REGISTRATIONS

Effective registrations at close of preceding year 3,420

Registrations effective dUring fiscal 1976 694

Total registratIOns 4,114

RegistratIOns terminated dUring fiscal 1976

Withdrawn 238

Revoked 9

Cancelled 10 Total registratIOns terminated 257

Total registrations at end of fiscal 1976 3,857

182
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FINANCIAL INSTITUTIONS

Stock Transactions of selected

Financial Institutions

Dunng 1975, private noninsured pension

funds. open-end investment companies. hfe

Insurance companies, and property-habihty

insurance companies purchased $35.2 billion

of common stock and sold $30.6 billion, resulting in net purchases of $4.7 bllhon. In

1974 purchases were $27.2 billion; sales

were $24.4 billion; and net purchases were

$2.8 bilhon. their common stock activity rate

was 23.0 percent as compared to 19.1 percent a year earlier.

Table 8

COMMON STOCK TRANSACTIONS AND ACTIVITY RATES OF SELECTED FINANCIAL

INSTITUTIONS

(Millions of Dollars)

1968 1969 1970 1971 1972 1973 1974 1975

Pnvate Nonmsured Pension Funds'

Purchases 12.286 15.231 13,957 21,684 23,222 20.324 11,758 17,560

Sales 7,815 10,271 9,370 12,800 15,651 14,790 9,346 11,846

Nef purchases (sales) 4,471 4,960 4,587 8,884 7.571 5.534 2.412 5,714

ActIVIty rate 187 213 205 221 197 173 141 183 Open-End Investment Compames2

Purchases 20,102 22,059 17,128 21,556 20,943 15,561 9,085 10,949

Sales 18,496 19,852 15,901 21,175 22.552 17,504 9.372 12,144

Net purchases (sales) 1.606 2,207 1,227 381 (1,609) (1,943) (287) (1,195)

ActIVIty rate 484 510 456 482 448 390 305 358

life Insurance Compames'

Purchases 2,932 3,703 3,768 6,232 6,912 6.492 3,930 4.534

Sales 1,725 2,184 1,975 2,n7 4,427 4,216 2,439 3,373

Net purchases (sales) 1,207 1,519 1,793 3,455 2,485 2,276 1,491 1,161

AdlVlty rate 268 294 278 310 295 258 187 206

Property-liability Insurance Compames Purchases 2,243 3,781 3,613 4,171 5,128 4,519 2,400 2,193

Sales 1,644 2,879 2,722 1,944 2,738 2,856 3,223 3,196 Net purchases (sales) 599 902 891 2,227 2,390 1,663 (823) (1,003)

ActIV1ly rate 160 267 281 232 238 208 213 238

Tolal Seleded Instrtutlons Purchases 37,563 44,774 38,466 53,643 56,205 46,896 27,173 35,236

Sales 29,660 35,186 29,988 38,696 45,368 39,366 24,380 30,559

Net purchases (sales) 7,863 9,588 8,498 14,947 10,837 7,530 2,793 4,6n

ActiVIty rate 294 324 298 308 278 236 191 230

Fore~ Investors'

rchases 13,118 12,428 8,927 11,625 14,360 12,768 7,634 15,066

Sales 10,849 10,941 8,301 10,893 12,173 9,9n 7,094 10,586

Net purchases (sales) 2,269 1,487 626 732 2,187 2,791 540 4,480

t Includes penson funds of corporatons, umons, mu~.-employer groups, and nonprofit orgamzatlOns, also mcludes deferred profit shanng

funds

2 Mutual funds reportmg to the Investment Company Instrtute, a group whose assets conslrtute about mnety percent of the assets of all

open-end Investment cornparnes

, Includes both ~eneral and separate accounts , Transad.ons 0 foreign ndlvlCluals and mslrtutoons In oornestc common and preferred stocks Ac\Iv.ty rates for foreign mvestors are not

calculable

NOTE Ac\IV1ly rate IS defined as the avera~ of gross purchases and sales dJvlded by the average mar1<etvalue of holdmgs

SOURCE Pension funds and property-Ia Illy Insurance compames, SEC, .nvestment compames, Investment Company Institute, life

msurance companoes, Inslrtute of life Insurance, foreign mvestors, Treasury Department

187
STOCKHOLDINGS OF

INSTITUTIONAL INVESTORS AND

OTHERS

At year-end 1975, the institutional groups

listed below held $328 2 billion of the corporate stock, both common and preferred, versus $245 4 billion a year earlier The resultmq

33 7 percent Increase In the value of the

stocknoldmqs of these eleven groups closely

matched the 34 1 percent Increase In the

aggregate market value of all stock outstandIng Thus, the 40.2 percent share of total

stock outstanding that was held by these

institutions at year-end 1975 remained nearly

unchanged from their 40.3 percent share of a

year earlier DUring the same period, however, the share held by other domestic investors, which consists of individuals and mstitunons not nsteo, declined slightly from 55.1

percent to 53 9 percent, while foreign Investors absorbed this slack by Increasing their

share from 4 6 percent to 5.9 percent

Table 9

MARKET VALUE OF STOCKHOlDINGS OF INSTITUTIONAL INVESTORS AND OTHERS

(Billions of Dollars, End of Year)

1968 1969 1970 1971 1972 1973 1974 1975

1 Pnvate Nonlnsured Pension Funds 61 5 614 671 887 1152 905 633 886

2 Open-End Investment Companies 509 450 439 526 580 433 303 387

3 Other Investment Companies 83 63 62 69 74 66 47 60 4 lite Insurance Companies 132 137 154 206 268 259 21 9 283

5 propertY-lIablll\lnSUrance Companies' 146 133 132 166 21 8 197 128 143

6 Common Trust nds 48 46 46 58 74 66 43 57

7 Personal Trust Funds 836 796 786 941 ltD 2 947 677 928

8 Mutual Savings Banks 24 25 28 35 45 42 37 44

9 State and Local Retirement Funds 58 73 101 154 222 206 174 258

10 Foundations 220 200 220 250 285 245 184 227

11 Educational Endowments 85 76 78 90 107 96 67 87

12 Subtotal 2756 261 3 271 6 3382 4t27 346 1 251 3 3360

13 Less lnstnunonat Holdings of Investment Company Shares 34 40 49 58 65 63 58 78

14 totaunstneuonal Investors 2722 2573 266 8 3324 406 2 3398 2454 3282 15 Foreign Investors' 288 269 287 329 41 3 370 282 482 16 Other Domestic Investors' 6803 5821 5639 6384 6947 487 B 3353 4399

17 Total Stock Outstanding' 981 4 8663 85941,00371,1423 8646 6089 8163

1 Excludes holdings of Insurance company stock

, Includes estimate of stock held as direct Investment

'Computed as resdual (hne 16~ 17-14-15) Includes both indiViduals and InstitutIOnal groups not hsted above

, Includes both common and preferred stock Excludes Investment company shares but Includes foreign Issues outstanding In the U S

Number and Assets of Registered

Investment Companies

As of June 30, 1976, there were 1,286

active Investment companies registered under the Investment Company Act, with assets

188

haVing an aggregate market value of over

$80 billion Those figures represent a decrease of 1 In the number of registered

companies and an Increase of $6 4 billion In

the market value of assets smce June 30,

1975
Table 10

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS OF

JUNE 30, 1976

Number of Registered Approximate Mar- Companies ket Value of Assets of Acflve

Active Inactive' Total comr,anles

(Mil Ions)

Man,ement open-end ("Mutual Funds") 786 29 815 56,937 unds having no load 250 11,288 Vanable armuny-separate accounts 57 1,304 Caprtal Leverave Companies 2 32 AU other load unds 470 44,333

Man,ement closed-end 178 36 214 9,319 mall business mvestment companies 39 286 Capital leverage companies 7 335 All other closed-end companies 132 8,698

Unrt Investment trusts 315 22 337 '13218 Vanable annuuy-separate accounts 57 927 All other unrt mvestment trusts 258 12,291

Face-amount certificate companies 10 1,091

Total 1,286 90 1,376 80,564

"lnactiva" refers to registered companies which as of June 30, 1976, were In the process of bemg hquidated or merged, or have filed an

apptcanon pursuant to Section 8(f) of the Act for dereqrstratmn, or which have otherwise gone out of existence and remain registered only until

such time as the Oornrmsson Issues order under Section 8(0 terminating the" registratIOn

b Includes about $5 9 bllhon of assets of trusts whIch Invest 10 secunnes of other Investment companies, substantially all of them mutual funds

Table 11

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

Number of compames Approximate

market value

Rscal year Registered R~,stered Registration Registered of assets of

ended June 30 terrmnated active at beginning unng durmg at end of comr,anles of year year year year (1011Ions)

1941 0 450 14 436 $ 2,500

1942 436 17 46 407 2,400 1943 407 14 31 390 2,300

1944 390 18 27 371 2,200 1945 371 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 16 366 4,700

1951 366 12 10 388 5,600

1952 368 13 14 367 6,800

1953 367 17 15 369 7,000 1954 369 20 5 384 8,700

1955 384 37 34 387 12,000 1956 387 46 34 399 14,000

1957 399 49 16 432 15,000 1958 432 42 21 453 17,000

1959 453 70 11 512 20,000

1960 512 67 9 570 23,500

1961 570 118 25 663 29,000

1962 663 97 33 727 27,300

1963 727 48 48 727 36,000

1964 727 52 48 731 41,600

1965 731 50 54 727 44,600

1966 727 78 30 775 49,800

1967 775 108 41 842 58,197

1968 842 167 42 967 69,732 1969 967 222 22 1,167 72,465

1970 1,167 187 26 1,328 56,337 1971 1,328 121 98 1,351 78,109

1972 1,351 91 108 1,334 80,616

1973 1,334 91 64 1,361 73,149

1974 1,361 106 90 1,377 62,287

1975 1,377 88 66 1,399 74,192

1976 1,399 63 86 1,376 60,564

189

•
Table 12

NEW INVESTMENT COMPANY REGISTRATIONS

1976

Management open-end

No-loads

Vanable annuities All others

Sub-total

Man~~ffi~~t closed-end

All others

Sub-total

Unit Investment trust Vanable anmanes

All others

Sub-total Face amount certificates

Total Registered

Table 13

INVESTMENT COMPANY REGISTRATIONS TERMINATED

Management open-end No-loads

Vanable annumes

All others

Sub-total

Management closed-end S81e s All others

Sub-total

Unit Investment tnust

Vanable annumes

All others

SUb-total Face amount certificates

Total Terminated

15

3

28

46

3

10

13

1

63

1976

23

3

39

65

4

11

15

86

Private Noninsured Pension

Funds: Assets

The assets of private norunsured pension

funds totaled $145.2 billion at book value and

$1456 billion at market value on December

31, 1975 A year earlier their comparable

asset totals were $133 7 billion and $111 7

190

billion The book value of common stockholdIngs Increased from $79 3 billion at the end of

1974 to $83.7 billion last year. At market

value, holdings of common stock rose from

$626 billion, or 560 percent of total assets,

at the end of 1974 to $877 billion, or 602

percent of total assets, at the end of last year
Table 14A

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

Book Value, End of Year

(Millions of Dollars)

1968 1969 1970 1971 1972 1973 1974 1975

Cash and Deposits 1,592 1619 1,804 1.641 1.857 2,336 4,286 2,962 U S Government secunnes 2.756 2,792 3,029 2,732 3,689 4,404 5,533 10,764

~~e'fe~~~e~t'::!:kOtherBonds 27,000 27,613 29,666 29.013 28.207 30,334 35.029 37,809

1,332 1,757 1,736 1,767 1,481 1,258 1,129 1,188 Common Stock 41,740 47,862 51,744 62,780 74 585 80 593 79 319 B3 654

Own Company 2,836 3,062 3,330 3,608 3.868 4098 4588 NA Other Cornparues 38,904 44,800 48,414 59,172 70,717 76,495 74731 NA

Mortgages 4,067 4,216 4,172 3,660 2.728 2377 2,372 2,383

Other Assets 4,585 4,720 4,860 4,826 4,983 5,229 6,063 6,406

Total Assets 83,072 90,579 97,011 106,419 117,530 126531 133,731 145166

N A Not Available NOTE tnctuoes deferred profit shanng funds and pension funds of corporations, uruons. mulnemployer groups, and nonprofit orqaruzauons

Table 148

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

Market Value, End of Year

(Millions of Dollars)

1968 1969 1970 1971 1972 1973 1974 1975

Cash and Deposits 1,592 1,619 1,804 1,641 1,857 2,336 4,286 2,962 U S Govemmenf secunnes 2,615 2,568 2,998 2.772 3,700 4,474 5,582 11,097

~~:~~~~e ~~kOther Bonds 22,437 21,262 24,919 26,111 26,232 27,664 30,825 34,519

1,351 1598 1 631 2,014 1,869 985 703 892 Common Stock 60,105 59,827 65,456 86,636 113,369 B9,538 62,582 87,669

Own J:ompany 5,764 5,775 6,038 7,691 8,750 6,947 5,230 NA

Other Companies 54,341 54,052 59,418 78,945 104,619 82 591 57,352 NA

Mortgages 3,578 3,461 3,504 3,184 2,427 2,108 2,063 2,139

Other Assets 4,332 4295 4,422 4,560 4,908 5,140 5,681 6,341

Total Assets 96,013 94,632 104737 126,921 154,363 132247 111,724 145,622

N A Not Available

NOTE includes deferred profit shanng funds and pension funds of corporations, uruons, rnulu-ernptoyer groups, and nonprofit oruanuauons

PRIVATE NONINSURED PENSION

FUNDS: RECEIPTS AND

DISBURSEMENTS

Informalton on the receipts and disbursements of private nomnsured pensron funds

for 1975 IS not yet available. In 1974, net

receipts were $10.0 billion. Of the $21.1

bilhon In total receipts, $17,0 billion was contnbuted by employers and $1 5 billion by

employees. Investment income (Interest, dIVIdends. and rent) and net loss on sale of

assets were $6.0 billion and $3 5 billion,

respectively Of the $11 0 billion In total drsbursements, $107 billion was paid out to

benencranss

191
Table 15

RECEIPTS AND DISBURSEMENTS OF PRIVATE NONINSURED PENSION FUNDS

(Millions of Dollars)

1968 1969 1970 1971 1972 1973 1974 1975

Total Receipts 13,152 14.151 13,195 17,545 20,070 19,673 21.063 NA Employer contnoutons 7,702 8,487 9,717 11.324 12,745 14,368 16,971 NA Employee contnbunons 893 1,011 1.074 1.120 1.199 1.273 1,460 NA Investment Income 3,193 3,549 3.866 4,102 4.302 4,843 5,982 NA Net Profit (Loss) on Sale at Assets 1.265 991 (1.592) 904 1.723 (924) (3.477) NA

Other Receipts 99 113 130 95 101 113 127 NA

Total Disbursements 4,621 5,428 6,180 7,263 8,493 9,539 11,030 NA

8enefits Paid Out 4,503 5.290 6.030 7.083 8.297 9.313 10.740 NA

Expenses and Other Disbursements 118 138 150 180 196 226 290 NA

Net Receipts 8,531 8,723 7,015 10,282 11.577 10.134 10.033 NA

NOTE Includes deferred profit sharing funds and pension funds of corporations, Unions, and mum-ernployer groups, and nonprofit

organizations

SECURITIES ON EXCHANGES

Exchange Volume

Dollar Volume of all securities transactions

on regIstered exchanges totaled $1669 billion In 1975. up 33 percent from the $125.1

billion volume In 1974 Of nus total. $157.3

billion represented stock trading. $93 billion

bond trading, and the balance trading In

rights and warrants The value of New York

Stock Exchange transactions was $143.1 billion In 1975 This figure represents an Increase of 36 percent from 1974. NYSE share

volume Increased 32 percent from the 1974

total. On the American Stock Exchange.

value of shares traded Increased 13 percent

to $5 7 billion The AMEX volume of 541

million shares was up 14 percent from the

1974 figure. Share volume on regional exchanges Increased 15 percent from the 1974

figure to 623 9 million shares, valued at $17.8

btilion

Chicago Board Opnons Exchange began

listed option trading April 23, 1973 The contract volume for the year ending 1975 was

144 million. up 153 percent from 5.7 million

contracts In 1974. The value was $6.4 billion,

an Increase of 276 percent from $1.7 billion In

1974 The American Stock EXchange com.

menced listed option trading January 13,

1975 The volume was 3.5 million contracts In

1975 On June 27. 1975. Philadelphia Stock

EXchange began listed option trading their

contract volume In 1975 was 279 thousand

WItha value of $27 5 million.

Detroit Stock Exchange ceased operations

June 30, 1976.

Table 16

EXCHANGE VOLUME: 1975

(Data In thousands)

Total Bonds Stocks Rights and warrants

dollar Dollar Pnnc,pal Dollar Share Dollar Number volume volume amounts volume amount volume of unrts

All Registered Exchanges 166,900.444 9.345.608 10,706,861 157.259,952 6.231.323 294.884 150,153

Amencan 5,980,826 204.193 303,672 5.678,028 540,944 98,605 31,180 Boston 1871,126 0 0 1,870.995 54.177 131 65

Chicago Board of Trade 0 0 0 0 0 0 0 cmcmnan 268,393 332 536 268,060 8,351 1 7 Detrort 196,661 0 0 196.660 7.356 1 5 Midwest 7.606.573 1,433 996 7,604.714 257.542 426 1,202 National 109 0 0 109 124 0 0 New Vorl< 143.066,148 9,079,083 10.313,772 133,818,551 5.056,450 168.514 107,745 PaCific Coast 5,182.746 60.132 87,423 5,096.042 198,867 26,572 9.137 Philadelphia 2.722,963 436 462 2,721.893 97.633 634 812 Intermountain 552 0 0 552 3.167 0 0 Spokane 4,457 0 0 4,457 6,836 0 0

Exempted Exchanges-Honolulu 524 0 524 69 0 0

192
MARKET VALUE OF SECURITIES TRADED ON

ALL U.S. STOCK EXCHANGES Dollars Bd lions

~.,,----~--------------1M.-

200

160

120

80

40

o

I""'"...... :::::::: & Warrants

Bonds ....•.... :::::::: : ::':::::: ::::::::::

.lliillii::",;i'li' i!i,:!ili illlllllll'!111111111111\:I"\

.:::::::: :::::::::: :::::::::::::::::::

193
NASDAQ Volume

NASDAQ share volume and pnce Information for over-the-counter trading has been

reported on a daily basis since November 1,

1971. At the end of 1975, there were 2,598

issues In the NASDAQ system, an Increase

of 0.2 percent from the previous year-end

figure. Volume for 1975 was 1.4 billion

shares, up 17 percent from 1974. This trading

volume reflects the number of shares bought

and sold by market makers plus their net

Inventory changes.

Table 17

SHARE VOLUME BY EXCHANGES'

Total Shares In Percentage

Year Volume

(thousands) NYSE AMEX MSE PSE PHLX BSE DSE CSE Other'

1935 681.971 7313 1242 191 269 110 096 085 003 691

1940 377,897 7544 1320 211 278 133 119 082 008 305

1945 769,018 6587 21 31 177 298 106 066 079 005 551

1950 893,320 7632 1354 216 311 097 065 055 009 261 1955 1,321,401 6885 1919 209 308 085 048 039 005 502

1980 1,428,552 6908 2246 222 314 089 039 034 004 141

1961 2,121.050 6565 2584 224 345 080 030 031 004 133 1962 1.699.346 7184 2026 236 297 087 031 03& 004 095

1963 1,874,718 7317 1889 233 283 083 029 047 004 110

1964 2,118,326 72 81 1942 243 265 093 029 054 003 086

1965 2,683,495 7010 2259 263 234 082 026 053 005 064 1968 3,306,386 6954 2289 257 268 086 040 045 005 051

1967 4,641,215 6448 2845 236 246 087 043 033 002 057

1968 5,406,582 6200 2974 263 265 089 078 031 001 095

1969 5,133,498 63 17 2761 284 347 122 051 012 000 100

1970 4,835,222 7127 1902 316 368 163 051 010 002 057

1971 6,172,668 7134 1842 352 372 191 043 015 003 044

1972 6,518,132 7047 1822 371 413 221 059 015 003 045

1973 5,899,678 7492 1375 409 368 219 071 018 004 039 1974 4,950,833 7847 10 27 439 348 182 086 019 004 044

1975 6,371,545 8105 897 406 310 154 085 011 013 o 15

1 Share Volume for Exchanges Includes Stocks, Rights, and Warrants

2 Others Iflclude Intermountain, Spokane, National, and Honolulu Stock Exchanges

Table DOLLAR VOLUME BY EXCHANGES'

Total Dollar In Percentage Year Volume (thousands) NYSE AMEX MSE PSE PHLX BSE DSE CSE Other2

1935 15,396,139 8664 783 132 1 39 088 134 040 004 016 1940 8,419,772 8517 768 207 152 111 191 036 009 009 1945 16,284,552 8275 1081 200 178 096 116 035 006 013 1950 21,808,284 85 91 685 235 219 103 112 039 011 005 1955 36,039,107 86 31 698 244 190 103 078 039 009 008 1960 45,276,616 8386 935 272 1 95 104 060 034 007 003 1961 64,032,924 8248 1071 275 199 103 049 037 007 005 1962 54,823,153 86 37 681 275 200 105 046 041 007 004 1963 64,403,991 8523 752 272 239 106 042 051 006 004

1964 72,415,297 8354 848 315 248 114 042 066 006 004 1965 89,498,711 8182 991 344 243 112 042 070 008 003 1966 123,643,475 7981 1184 314 285 110 056 057 007 002 1967 162,136,387 77 31 1448 308 279 113 067 043 003 003 1968 197,061,776 7357 1800 312 266 113 104 035 001 008 1969 176,343,146 73 50 17 60 339 312 1 43 067 012 001 012 1970 131,707,946 7844 1111 376 381 199 067 011 003 004 1971 186,375,130 7907 998 400 379 229 058 018 005 003 1972 205,956,263 7777 1037 429 394 256 075 017 005 005 1973 178,863,622 8207 606 454 355 245 100 021 006 001 1974 118,828,272 83 62 439 489 350 202 123 022 006 001 1975 157,555,360 8504 366 482 325 172 118 012 017 000

I Dellar Volume for Exchanges Includes Stocks, Rights, and Warrants 2 Others I/lclude Intermountain, Spokane, Natl3nal, and Honolulu Stock Exchanges

194
Special Block Distributions

In 1975, the total number of speoal block

dtstnbuuons declined 3 7 percent. The value

of these distnbunons Increased 808 percent

to $1.4 billion from $157 million In 1974

Secondary orsmbunons accounted for 64.6

percent of the total number of special block

distnbunons In 1975 and 98.6 percent of the

total value of these distnbutrons

The special offering method was employed

14 times accountlng for 17.7 percent of the

total number of special block distnbutrons In

1975, but with an aggregate value of $11.5

million, these offenngs accounted for only 0.8

percent of the value of all special block

distnbunons,

The exchange distnbunon method was employed 14 nrnes In 1975 The value of exchange drstnbuuons was $8 3 million, representlng an Increase of 22 percent from the

1974 figure.

Table 18

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value," thousands)

Secondary dlstnbutlOns Exchange drstnbuuons SpeCIal offenngs

Year Shares Shares Shares Number sold Value Number sold Value Number sold Value

1942 116 2,397,454 82,840 79 812,390 22,694 1943 81 4,270,580 127,462 80 1,097.338 31,054 1944 94 4,097,298 135,760 87 1,053,667 32,454 1945 115 9,457,358 191,961 79 947,231 29,878 1946 100 6,481,291 232,398 23 308,134 11,002 1947 73 3,961,572 124,671 24 314,270 9,133 1948 95 7,302,420 175,991 21 238,879 5,466 1949 86 3,737,249 104,062 32 500,211 10,956 1950 77 4,280,681 88,743 20 150,308 4,940 1951 88 5,193,756 146,459 27 323,013 10,751 1952 76 4,223,258 149,117 22 357,897 9,931 1953 68 6,906,017 108,229 17 380,680 10,486 1954 84 5,738,359 218,490 57 705,781 24,684 14 189,772 6,670

1955 116 6,756,767 344,871 19 258,348 10,211 9 161,850 7,223

1956 146 11,696,174 520,968 17 156,~1 4,645 6 131,755 4,557 1957 99 9,324,599 339,062 33 390,8 2 15,855 5 63,408 1,845 1958 122 9,506,505 361,886 38 619,876 29,454 5 88,152 3,286 1959 148 17,330,941 822,336 28 545,038 26,491 3 33,500 3,730 1960 92 11,439,065 424,688 20 441,644 11,108 3 63,663 5,439 1961 130 19,910,013 926,514 33 1,127,266 58,072 2 35,000 1,504

1962 59 12,143,656 658,780 41 2,345,076 65,459 2 48,200 588 1963 100 18,937,935 814,984 72 2,892,233 107,498 0 0 0 1964 110 19,462,343 909,821 68 2,553,237 97,711 0 0 0 1965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 0 1986 128 29,045,038 1,523,373 52 3,042,599 118,349 0 0 0 1967 143 30,783,604 1,154,479 51 3,452,856 125,404 0 0 0 1988 174 36,110,489 1,571,600 35 2,669,938 93,528 1 3,352 63 1969 142 38,224,799 1,244,186 32 1,706,572 52,198 0 0 0 1970 72 17,830,008 504,562 35 2,068,590 48,218 0 0 0 1971 204 72,801,243 2,007,517 30 2,595,104 65,765 0 0 0 1972 229 82,385,749 3,216,126 26 1,469,686 30,156 0 0 0 1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662,111 79,889 1974 45 7,512,200 133,838 4 82,200 6,836 33 1,921,755 16,805 1975 51 34,149,069 1,409,933 14 483,846 8,300 14 1,252,925 11,521

195
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds

listed on U S Stock Exchanges at year-end

1975 was $1,038 billion, an Increase of 31

percent from the previous year-end figure of

$795 billion The total was comprised of $719

billion In stocks and $319 billion In bonds.

The value of listed stocks Increased by 34

percent In 1975 and the value of listed bonds

Increased 24 percent Stocks with primary

listing on the New York Stock Exchange were

valued at $685 billion and represented 95

percent of the common and preferred stock

listed on all U.S stock exchanges. The value

of NYSE listed stocks Increased from their

1974 year-end total by $174 billion or 34

percent Stocks with primary listing on the

AM EX accounted for 4 percent of the total

and were valued at $29 4 billion The value of

AMEX stocks Increased $6 billion or 26 percent In 1975 Stocks WIth primary listing on all

other exchanges were valued at $4.2 billion

and Increased 45 percent over the 1974 total.

The net number of stocks and bonds listed

on exchanges Increased by 139 Issues or 2

percent In 1975. The largest gain was recorded on the NYSE, where listings increased by 283 Issues.

Table 19

SECURITIES LISTED ON EXCHANGES'

(December 31, 1975

Common Preferred Bonds Total Securmes

Exchange Markel Value Market Value Market Value Market Value Number (Millions) Number (Millions) Number (Millions) Number (Millions)

Reglstereo Amencan 1 181 S 27,937 86 S 1,429 197 2.999 1,464 32.365 Boston 88 268 3 2 1 1 92 271 Cmcmnati 6 15 3 7 64 16 85 Detroit (estimated) 5 17 1 0 0 6 17 Midwest 27 324 8 79 1 1 36 404 New York 1.531 663.127 580 21,983 2.632 315.405 4,743 1.000.515 PaCific 55 1691 9 606 21 396 85 2.693 Philadelphia 24 113 97 704 3 5 124 822 Intermountam 33 19 0 0 0 0 33 19 Spokane 27 2 0 0 0 0 27 2 Exempteo

Honolulu 18 368 3 28 380

Total 2.995 693.881 794 24816 2,865 318,876 6.654 1 037 573

Includes the loffowlflg foreign stocks

New York 32 14 171 10 158 3.384 192 17565 Amencan 70 10670 13 6 NA 77 10.683 PaCific 3 304 507 0 0 4 811 Honolulu 2 21 0 0 0 2 21

Total 107 25 166 530 164 3384 275 29.080

, Excludes secunues which were suspended from IradIOg at the end at the year, and secunties which because of inacnvny had no available QuotesLess than 5 million but greater than zero

196

~

•
Table 20

VALUE OF STOCKS LISTED ON EXCHANGES

(DollarsIn billions)

New Vorl< Amencan Exclusively

Dec 31 Stock Stock on Other Total

Exchange Exchange Exchanges

1936 599 148 747 1937 389 102 491 1938 475 108 583 1939 465 10 1 566

1940 419 86 505 1941 358 74 432 1942 388 78 466 1943 476 99 575 1944 555 11 2 667

1945 738 144 882 1946 686 132 818

1947 683 121 804 1948 670 11 9 30 81 9

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405

1953 117 3 153 28 135 4

1954 169 1 221 36 1948

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 411 3 261 43 4417

1964 4743 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 61 2 60 7595

1969 6295 477 54 6826 1970 6364 395 48 6807

1971 741 8 491 47 7956

1972 871 5 556 56 9327

1973 7210 387 41 7638

1974 511 1 233 29 5373

1975 6851 293 43 7187

197
securities on Exchanges

As of June 30, 1976, a total of 6,764

secunnes, representing 3,377 Issuers, were

admitted to trading on secunnes exchanges

In the Uruted State~ This compares with

6,559 Issues, involving 3,404 Issuers, a year

earlier. Over 4,700 Issues were listed and

registered on the New York Stock Exchange,

accounting for 55.2 percent of the stock ISsues and 90 percent of the bond Issues. Data

below on "Securities Traded on Exchanges"

Involves some duplication since It Includes

both solely and dually listed secunues

Table 21

SECURITIES TRADED ON EXCHANGES

Stocks

Issuers Temporarily Bonds' Registered exempleO Unustad Total

American 1,257 1,269 43 1,313 205

Boston 848 145 760 905 16

Chicago Board Options 1 1 1

Chicago Board of Trade 3 1 2 3

Cincinnati 345 37 320 357 14

Detrort 373 79 315 394

Honolulu 2 35 44

Intermountain 53 51 2 53 Midwest 626 361 347 709 28

New York 1,890 2,158 2161 2574

PaCIfic Coast 855 849 179 1,029 92

PBS 946 308 822 1,130 63

Spokane 37 35 5 40

, Issues exempted under Section 3(a)(12) 01 the Act, such as obligations of U S Government, the states, and Cities, are not Included In thiS

table2 Exempted exchange had 38 listed stocks and 6 admitted to unlisted trading

Table 22

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(June 30, 1976)

Registered exchanges Stocks Bonds Total Issuers

Involved

Registered and ustec 3,840 2,833 6,673 3,324

Temporarily exempted from registration 3 2 5 2 Admrtted to unlisted trading priVileges 39 14 53 30

Exeme,~~~rChangeS 22 27 15 Admrtted to unlisted trading priVileges 6 6 6

Total 3,910 2,854 6,764 3,377

1933 ACT REGISTRATIONS

Effective Registrations

Statements Filed

DUring fiscal year 1976, 2,813 secunties

registration statements valued at $88 billion

became eftecnve While the number of effective registrations rose only one percent from

fiscal 1975, the dollar value Increased 13

percent

Although there were 2,976 reqrstration

statements filed In fiscal 1976 as compared

198

With 2,912 filed In the previous year-a slight

rise of 2 percent-the dollar value rose from

$80 billion to $86 billion Among these statements, there were 540 first-time registrants In

fiscal 1976 as compared With 507 In fiscal

1975

Purpose of Registration

Effective registrations for cash sale for the

account of Issuers amounted to $70 billion,

remaining at the same level as the previous
year In this category there were substantial

differences In distribution as between equity

and debt offerings; Ie. equity offerings increased from $33 billion to $40 billion In fiscal

1976-a 23 percent rise-and debt offerings

declined from $38 billion to $29 blilion-a 22

percent decline

Among the securmes registered for cash

sale, almost all debt Issues were for Immediate offerings, whereas nearly three-fourths of

the equity registrations were for extended

cash sale. Registration of extended offerings

totaled $28 9 billion With investment companies accounting for $18.8 billion and employee plans $9 1 billion Corporate equity

registrations accounted for 29 percent of rrnmediate cash sale registrations, up 39 percent from fiscal 1975

Securities registered for the account of the

Issuer for other than cash sale are primarily

common stock Issues relating to exchange

offers, mergers and consolidations In fiscal

1976 common stock effectively registered for

trus purpose totaled $11 billion, an Increase

of nearly three and one half limes over the

previous year

Registrations for the purpose of secondary

offenngs (proceeds gOing to seiling security

holders) typically concern sales of common

stock In fiscal 1976 these registrations

amounted to $2 1 billion, representing a 64

percent Increase from fiscal 1975

Table 23

EFFECTIVE REGISTRATIONS

(Dollars In millions)

Total Cash sale for account of Issuers

Fiscal year ended June 30 Common Bonds, Preferred Number Value stock debentures, stock Total

ano notes

1935' 2B4 S 913 16B S 490 28 S 686 1936 689 4,835 531 3,153 252 3,936 1937 840 4,851 B02 2426 406 3635 1938 412 2101 474 666 209 1,349 1939 344 2,579 318 1,593 109 2020 1940 306 1 787 210 1,112 110 1,433 1941 313 2,611 196 1,721 164 2,081

1942 193 2003 263 1,041 162 1,465 1943 123 659 137 316 32 486 1944 221 1 760 272 732 343 1,347 1945 340 3,225 456 I,B51 407 2,715 1946 661 7,073 1,331 3,102 991 5,424

1947 493 6,732 1,150 2,937 787 4,874

194B 435 6,405 1 678 2817 537 5032 1949 429 5,333 1 083 2795 320 4,204 1950 487 5 307 1 786 2 127 468 4,381 1951 487 6459 1,904 2,838 427 5 169 1952 635 9500 3,332 3346 851 7,529

1953 593 7,507 2,808 3,093 424 6326

1954 631 9 174 2,610 6,240 531 7381 1955 779 10960 3,864 3951 462 8277

1956 906 13,096 4,544 4,123 539 9206

1957 876 14,624 5,858 5,689 472 12019 1958 813 16490 5,998 6,857 427 13281

1959 1 070 15657 6,387 5265 443 12095 1960 1,426 14,367 7,260 4,224 253 11 738

1961 1,550 19070 9,850 6,162 248 16,260

1962 1.844 19,547 11,521 4,512 253 16286 1963 1 157 14,790 7,227 4,372 270 11,869

1964 1,121 16860 10,006 4,554 224 14,784

1965 1,266 19437 10,638 3710 307 14,656

1966 1 523 30 109 18,218 7061 444 25,723

1967 1,649 34,218 15083 12,309 558 27,950

1968 '2,417 '54 076 22,092 14036 1 140 37,269

1969 '3645 '86,810 39,614 11 674 751 52,039

1970 '3389 '59137 28,939 18,436 823 48198 1971 '2989 '69,562 27 455 27 637 3360 58,452 1972 3712 62,487 26,518 20,127 3237 49 882 1973 3285 59,310 26,615 14,841 2578 44 034

1974 2890 56,924 19,811 20,997 2274 43,082

1975 2760 77 457 30,502 37,557 2,201 70 260

1976 '2813 '87733 37115 29,373 3013 69,502

Cumulative total 52,816 943 535 396624 309,863 31,841 738 335

, For 10 months ended June 30, 1935

a Includes registered lease obligatiOns related to industrial revenue bonds

199
SECURITIES EFFECTIVElY REGISTERED WITH S.LC.

Dollars Br lhen s

90

75

60

45

30

15

30

20

10

o

200

1935 1976

BILLIONS OF DOLLARS I

( Fiscal Years \

65 70 1975

OS 4737 e 7151

-
Table 24

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL 1976

(Dollars In millions)

Purpose of registrations

Type of secuntl

Total Bonds, Preferred Common

d:~~n~~r:i' stock stock

All r,~srt~~~~~l~tl,~;~:~ f~~u~Sh sales

Immediate offenng

Corporate

Offered to General public

Secunty holders Forel\ln governments

Extended cash sale and other Issues

For account of Issuer for other than cash sale Secondary offenngs

Cash sale Other

B7,726

69,502

40,522

36,949

36,284

664

3,573

28,980

16,136

2,089

973

1,116

30,954

29,373

28,969

25,396

25,388

8 3,573

404

151071

30

40

3,573

3,013

3,010

3,010

2,965

45

o

4

547

12

o

12

53,200

37 115 8,543

8,543

7,932

611

o 28,572

14,079

2,006

943

1,063

201
Dollors 811110ns

30

20

10

o

EFFECTIVE REGISTRATIONS

CASH SAlE FOR ACCOUNT OF ISSUERS

,I

I

III,

,I I

I I I

, \

I \

I

,

I , I , , I

,

I Common Stock A I

~\I

I I

Bonds

,.....

Preferred Stac k ! ,,' --........i •...p.............••.•.•..••....•...............•.....•......... :

1935 40 45 50 55 60 65 70 75

202

(Fiscal Years)

~

"
Regulation & Offerings

Dunng nscat year 1976, 240 notmcauons

were filed for proposed offenngs under Regulation A Issues between $400.00 and

$50000 In size predominated

Table 25

OFFERINGS UNDER REGULATION A

Fiscal Year

1976 1975 1974

SIZe

$100.000 or less 24 28 40 $100.000-$200.000 36 42 79 $200.000-$300.000 27 39 66 $300 .000-$400,000 39 24 39 $400,OOD-$500,OOO 114 132 214

Tolal 240 265 438

Underwnters Used 37 44 115 Nol Used 203 221 323

TOlal 240 265 438

OfferorsISSUing companies 222 227 394 Stockholders 12 7 34 Issuers and Stockholders JOlnlly 6 31 10

Total 240 265 438

ENFORCEMENT

Types of Proceedings

As the table below reflects, the securities

laws provide for a WIderange of enforcement

actions by the Commission, The most common types of actions are Injunctive proceedIngs instituted In the Federal distnct courts to

enjoin continued or threatened secunnes law

VIolators,and administrative proceedings pertaining to broker-dealer firms and/or mmviduals associated WIth such hrms which may

lead to various rernedral sanctions as required In the pubhc Interest. When an inJuncnon IS entered by a court, violation of the

court's decree IS a baSISfor Criminal contempt action against the violator

203
Table 26

TYPES OF PROCEEDINGS

I ADMINISTRATIVE PROCEEDINGS

Basts for enforcement action

Blllker-dealer, Invellmenl edYlllr or euocleted ptl10ft

Wllijul vmlanon of securmes acts provision or rule, ald,"g or

abelling of such violation, failure reasonably to supervise others, wlllIul misstatement In fihng wrth cornrrnsscn. conviction of or

InJundlon against certain securrtles, or secuntles-related, violations

Member of regillered IIcurilles enoelellon

Violation of 1934 Act or rule thereunder, willful violation of 1933 act or rule thereunder

Member 01 nallGnel IIcurttles elchlnae

VlOlahon of 1934 act or rule thereunder

An, perlOn

same as first rtem

Violation of 1934 act or rule thereunder, Willful Violation of 1933 ad or rule thereunder

Wilful voiaton of secunnes acts provisron or rule ard,"g or abell,"g of such violaton, Willful misstatement," fll,"g With Comrrnssion

Principii 01 blllur-d .. ler

Appointment of SIPC trustee for broker-dealer

Regllle"d llcunlles eaoclilion

Rules do not conform to statutory requirements

Violation of 1934 act or rule thereunder, failure to enforce comphance wrth own rules, engaging m activity tending to defeat purposes

of provIsIOnof 1934 ad authonzlng natIOnal secuntles assocratlOns

Nilioneillcurilies IIchllIge

Violation of 1934 act or rule thereunder, tailure to enforce comph- ance therewith by member of

Officer or d1"clDr of "glllered IIcuntles eslOClllion

WlllIul failure to enforce associanon rules or wllijul abuse of authonty

Officer 01 nellonellICuntlelllchlnge

ViolatIOn of 1934 act or rule thereunder

1933 Act reglllllltion IIll1men!

Statement matenally inaccurate or mcomptete

Investment company has not attarned $100,000 networth 90 days after statement became effective

1934 Ad reporting requlremenll

Matenal noncomphance

SecunUes laue

Noncomphance by Issuer wrth 1934 act or rules thereunder

Pubhc Interest requires trading suspenson

204

sanction or rehef

Revocation, suspenson, or demal of broker-dealer or investment

adviser registration, or censure of broker-dealer or Investment adviser (1934 act, sec 15(b)(5), Advisers Act, sec 203(d))

Expulsion or suspension from association (1934 act, sec 15A(1)(2))

Expulsion or suspensIOnfrom exchange (1934 act, sec 19(a)(3))

Bar or suspension from assocauon wrth a broker-dealer or mvestment adviser, or censure (1934 act, sec 15(b)(7), AdViser Act, sec

203(1))

Bar or suspenson from association WIth member of registered secunnes associanon (1934 act, sec 15A(I)(2))

ProhibitIOn, permanently or temporanly, from serving In certain capacities for a registered mvestrnent company (Investment Co Act,

sec 9(b))

Bar or suspenson from associaton With a broker-dealer (Secunties Investor Protection Act, sec 10(b))

Suspension of reglstrallOn (1934 act, sec 15A(b))

Revocation or suspension of registratIOn (1934 act, sec 15A(I)(I))

Withdrawal or suspenson of regIStration (1934 act, sec 19(a)(l))

Removal from office (1934 act, sec 15(A)(1 )(3))

Exputston or suspenson from exchange (1934 act, sec 19(a)(3))

Stop order suspending effectiveness (1933 act, sec B(d))

Stop order (Investment Co Act, sec 14(a))

Order dllectlng comphance (1934 act, sec 15(c)(4))

Demal, suspension of effective date, suspension or wrthdrawai of

registration on national sec unties exchange (1934 act, sec 19(a)(2))

Summary suspenson of over-the-counter or exchange trading (1934

act, secs 15(c)(5) and 19(a)(4))
BasIs for enforcement action

Table 25-Contlnued

saneuen or rehef

Reglltlred InVlllmlnl camplny

Failure to file 1940 act regIStration statement or required report, RevocatIOn or suspension of registration (Investment Co Act, SiC

filing matenally Incomplete or misleading statement or report 8(e))

Company has not attal~ed $100,000 net worth 90 days aller 1933 Revocation or suspension at registratIOn (Investment Co Act, SIC act reglstrauon statement became ettecnve 14(a))

Name of company, or of secunty Issued by n, deceptive or ProhlbrtlOn of adoption of such name (Investment Co Act, sec misleading 3S(d))

AftOmey, ICCOUnllnl, or other plIlflllllonll or .. perl

Lack of requisne QuahficatlOns to represent others, lacking In character or Integnrty, unethical or Improper protessonal conduct,

wlDful VIolation of securmes laws or rules, or aiding and abetting of

such VIolation

Attorney suspended or disbarred by court, expert's bcense revoked or suspended convction of felony or rmsderneanor involVIng

moral turpnuoe

Penmanent IllJunctlon or finding of VIolatIOn In CommiSSIOn- instituted action, finding of Violation by Commission In administrative proceeding

Permanent or temporary demal of pnvlleae to aPRear or practice before CommiSSIOn(RUles of Practice, RuTe2(e)(1))

Automatic suspension tram appearance or practce before CommISSIOn(Rules of Practice, Rule 2(e)(2))

Temporary suspenscn from appearance or practee before Commission (Rules of Practice, Rule 2(e)(3))

Table 25-Contlnued

CIVIL PROCEEDINGSIN FEDERAL DISTRICT COURTS

BaSISfor enforcement aenon

Any PllIOII

Person engaging or about to engage In acts or practices VIOlating

securmes acts or rules thereunder

Noncomphance with provisions of law, rule, or regulation under 1935 act, order Issued by comnuesicn, or undertaking In a registration statement

SanctIOn or rehef

Injunction against acts or practices which constitute or would consti- tute ViolatIOns (plus ancillary rehel under court's general equity

powers) (1933 act, sec 20(b), 1934 act, SIC 21(e), 1935 act, SIC

18(1), Investment Co Act, SIC 42(e), AdVIsers Act, see 209(1))

Wrrt of mandamus directing comphance (1933 act, SIC 2O(c), 1934 act, sec 21(1), 1935 act. sec 18(g))

IIIUI1 subject 10 reporllng requirements

failure to file reports reqUired under section 15(d) of 1934 act Forfeiture of $100 per day (1934 act, sec 32(b))

Regillered Inveltmenl campeny or Iffiliitl

Name of company or of secunty ISSUedby rt deceptive or rmslead- lruuncnon against use of name (Investment Co Act, see 3S(d))

Ing

Officer, director, adviser, or underwrner engaging or about to lruuncuon against acong In certain capacities lor Investment com- engage In act or practice constrtutlng breach of fidUCiary duty pany (Investment Co Act, sec 36(a))

involving personal misconduct

Breach of fidUCiary duty respecting receipt of compensation from Award of damages (Investment Co Act, sec 36(b)

Investment company, by any person haVing such duty

III REFERRALTO ATIORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSISfor enforcement action

AnypellOl1

Wilful Violation of secuntes acts Or rules thereunder

sancnen or relief

Malumum penalties $5,000 fine and 5 years' Imprisonment under

1933 and 1939 acts, $10,000 fine and 2 years' Impnsonment under other acts An exchange may be fined up to $500,000, a pUbicutlhty holding company up to $200,000 (1933 act, sees 20(b),24,

1934 act, secs 21(e), 32(a), 1935 act, secs 18(1), 29, 1939 act, sec 325, Investment Co Act, sees 42(e), 49, AdVisers Act, sees 209(e), 217 )

205
Table 27

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS ADMINISTERED BY THE

COMMISSION

Pending June 30, 1975 Opened

Total for OlstnbutlOn

Closed

Pending June 30, 1976

Dunng the fiscal year ending June 30, 1976,

273 formal orders were Issued by the Com1,288

413

1,701

447

1,254

mission upon recommendation of the Divrsron

of Enforcement

Table 28

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR ENDING JUNE

30, 1976

Broker Dealer Proceedings

Investment Adviser Proceedings

Stop Order, Reg A Suspension and Other Drscloseure Cases

Injunctive Actions. 1975-1976

DUring fiscal 1976, 158 SUitS for mjuctions

and 17 miscellaneous actions were Instituted

In the United States district courts by the

Commission, and 14 district court proceedIngs were brought against the Commission

Eighteen appellate cases mvolvmq petitions

for review of Commission decrsrons, 10 ap77

17

35

peals In reorganization matters and 61 appeals In injunction and miscellaneous cases

were filed SEC participated as Intervenor In

1 case and filed 11 amicus curiae briefs In 11

cases

DUring fiscal 1976, the Cornrrussron referred to the Department of Justice 116 Criminal reference reports (This figure Includes 7

criminal contempt actions)

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

Table 29

INJUNCTIVE ACTIONS

Fiscal Year cases mstnuteo

68

93

94

111

140

119

178

148

174

158

Injunctions

ordered

56

98

102

97

114

113

145

289

453

435

Defendants

eruomed

189

384

509

448

495

511

654

613

749

722

Criminal Proceedings

Dunng the past fiscal year 116 cases were

referred to the Department of Justice for

prosecunon (This figure Includes 7 Criminal

contempt acnons.) As a result of these and

prior referrals, 23 indictments were returned

against 118 defendants dunnq the fiscal year

There were also 97 convrcnons In 24 cases

Convictions were affirmed In 17 cases that

206

had been appealed, and appeals were stili

pending In 10 other Criminal cases at the

close of the period Of 24 defendants In 21

Criminal contempt cases handled ounnq the

year, 6 defendants were convicted, prosecubon was declined as to 2 defendants, and 8

defendants In 8 cases are stili pending Eighteen cases are pending In a Suspense Category (This figure Includes 1 Criminal contempt case)
Table 30

CRIMINAL CASES

Fiscal year

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

List of All Foreign Corporations

on the Foreign Restricted List

The complete list of all foreign corporations

and other foreign entities on the Foreign

Restncted List on June 30, 1975, IS as follows.

Aguacate Consolidated Mines, Incorporated (Costa Rica)

Alan MacTaVish, ltd. (England)

Allegheny Mining and Exploration Company, ltd (Canada)

Allied Fund for Capital Appreciation

(AFCA, S. A.) (Panama)

Amalgamated Rare Earth Mines, ltd

(Canada)

Amencan Industnal Research S A., also

known as lnvestiqacron Industnal

Arnencana, SA. (MeXICO)

Amencan International Mining (Bahamas)

Amencan Mobile Telephone and Tape

Co, ltd (Canada)

Antel International Corporation, Ltd

(Canada)

Antoine Silver Mines, ltd (Canada)

ASCA Enterpnsers limited (Hong Kong)

Atholl Brose (Exports) ltd (England)

Atholl Brose. ltd (England)

Atlantic and Pacinc Bank and Trust Co ,

ltd (Bahamas)

Banco de Guadalajara (MeXICO)

Bank of Sark (United Kingdom)

Bnar Court Mines, ltd (Canada)

Bnnsn Overseas Mutual Fund Corporation ltd (Canada)

Cahforrua & Caracas Mining Corp, ltd

(Canada)

Canterra Development Corporation, ltd

(Canada)

Cardwell 011 Corporation, ltd (Canada)

44 53 213 127

40 42 123 84

37 64 213 83 35 36 102 55

22 16 83 89

38 28 67 75

49 40 178 83 67 40 169 81 88 53 199 116 116 23 118 97

Canbbean Empire Company. ltd (Bntish

Honduras)

Caye Chapel Club, ltd (Bnnsh Honduras)

Central and Southern Industnes Corp

(Panama)

Cerro Azul Coffee Plantation (Panama)

Cia RIO Banano, S.A (Costa Rica)

City Bank A S (Denmark)

Claw Lake Holybdenum Mines, Ltd

(Canada)

Claravella Corporation (Costa Rica)

Compressed Air Corporation, Limited

(Bahamas)

Continental and Southern Industnes,

S.A (Panama)

Credito Mlneroy Mercantll (MeXICO)

Crossroads Corporation, S A. (Panama)

Darien Exploration Company, S.A (Panama)

Derkglen, ltd (England)

De Veers Consolidated Mining Corporation. S A (Panama)

Doncannon Spmts, ltd (Bahamas)

Durman, ltd , formerly known as Bankers International Investment Corporation (Bahamas)

Ethel Copper Mines, Ltd (Canada)

Eurotorerqn Banking Corporation. ltd

(Panama)

Fmanciera Comermex (MeXICO)

Fmanciera de Eomento Industnal (MexICO)

Fmanoera Metropohtana (MeXICO)

Fmansbanken a/s (Denmark)

First Liberty Fund, ltd. (Bahamas)

Global Explorations, Inc (Panama)

Global Insurance Company. Limited

(British West Indies)

Globus Anlage- Verrruttlunqsqesellscnatt

MBH (Germany)

207
208

Golden Age Mines, Ltd (Canada)

Hebilla Mining Corporation (Costa Rica)

Hemisphere Land Corporation Limited

(Bahamas)

Henry Ost & Son, Ltd (England)

International Communications Corporation (Bnnsh West Indies)

lronco Mining & Smelting Company, Ltd

(Canada)

James G Allan & Sons (Scotland)

J P Morgan & Company, Ltd., of London, England (not to be confused With

J P Morgan & Co , Incorporated, New

York)

Jupiter Explorations, Ltd (Canada)

Kenilworth Mines, Ltd. (Canada)

Klondike Yukon MIning Company (Canada)

Kokanee Moly Mines, Ltd. (Canada)

Land Sales Corporation (Canada)

Los Dos Hermanos, S A (Spain)

Lynbar MIning Corp., Ltd (Canada)

Norart Minerals limited (Canada)

Norrnandie Trust Company, S.A (Panama)

Northern Survey (Canada)

Northern Trust Company, S.A (Switzerland)

Northland Minerals, Ltd. (Canada)

Obsco Corporation, Ltd (Canada)

Pacifrc Northwest Developments, Ltd

(Canada)

Panamencan Bank & Trust Company

(Panama)

Paulpic Gold Mines, Ltd (Canada)

Pyrotex Mining and Exploration Co , Ltd

(Canada)

Radio HIli Mines Co ,Ltd (Canada)

Rodney Gold Mines Limited (Canada)

Royal Greyhound and Turf Holdings Limited (South Afnca)

S A Valles & Co , Inc (Prulhpmes)

San Salvador Savings & Loan Co , Ltd

(Bahamas)

Santack Mines Limited (Canada)

Secunty Capital Fiscal & Guaranty Corporation, S A. (Panama)

Silver Stack Mines, Ltd. (Canada)

Societe Anonyme de Refmancement

(Switzerland)

Strathmore Distillery Company, Ltd

(Scotland)

Strathross Blending Company Limited

(England)

SWISS Caribbean Development & FInance Corporation (Switzerland)

Tam O'Shanter, Ltd (Switzerland)

Timberland (Canada)

Trans-American Investments, limited

(Canada)

Tnhope Resources, Ltd (Canada)

Trust Company of Jamaica, Ltd. (West

Indies)

United Mining and Milling Corporation

(Bahamas)

Urutrust Limited (Ireland)

Vactronland (Canada)

Valores de inversion, SA (MeXICO)

Vrctona Onente, Inc. (Panama)

Warden Walker WorldWide Investment

Co. (England)

Wee Gee Uranium Mines, Ltd. (Canada)

Western International Explorations, Ltd

(Bahamas)

Yukon Wolvenne Mining Company (Canada)

PUBLIC UTILITY HOLDING

COMPANIES

Assets

At fiscal year end there were 18 active

holding cornaprues registered under the 1935

Public Utility Holding Company Act. The 15

Active holding company systems In which

those companies are Included represent a

total of 165 companies. Aggregate consolidated assets, less valuation reserves, approximated $384 billion at December 31,

1975
Table 31

PUBLIC-UTILITY HOLDING COMPANY SYSTEMS

Solely Registered Aggregate System

Registered Holding Elect"e &/or Non-utility Inactive Total Assets, Less ValuaHolding Operating Gas Ut",ty Subsidiaries Companies Companies non Reserves, at Subsidranes December 31, Companies Companies 1975"

Allegheny Power System, Inc $1,903054,000 Ame"ean Electnc Power Company, Inc 0 9 17 2 29 6,408,281,000

Gentral & Southwest Corporation 1 3 2 1 8 1,982,294,000 Columbia Gas System, Inc, The 0 8 11 0 20 3,202,660,000

Consolidated Natural Gas Company 0 5 5 0 11 1,798,353,000 Delmarva Power & light Company 1 2 1 0 4 934,724,000 Eastem Utilities Associates 0 4 1 2 8 279,776.000 General Public Ullllt,es Corporauon 0 5 3 1 10 3,631.979.000 Middle South Utilities. Inc 0 6 4 3 14 3,634.623.000

NatIOnal Fuel Gas Com~any 0 1 3 0 5 448,000,000 New England Elect"c ystem 0 4 2 0 7 1.640.387.000 Northeast UtilitieS 0 5 8 6 20 2,741,950.000

OhiO Edison Company 1 1 0 0 2 2,048,144,000

Philadelphia Elect"c Power Company 3 58,379,000 Southem Company, The 8 7,237,003,000

Subtotals 12 60 63 16 157 $37.949,607,000 AdJustments (a) to take account of

JOintly-owned companies, (b) to add net assets of eight JOlntlyowned companies not Included above' (ah8 (a)T 8 429,438,000

Total companies and assets

In active systems 12 68 63 16 165 $38,379,045,000

Represents the consolidated assets, less valuation reserves, of each of system as reported to the cornmsson on Form U5S for the year 1975 The figures for National Fuel Gas Company are as at September 30, 1975

•• These eight companies are Beechbottom Power Company, Inc whICh IS an indirect subSidiary of Ame"ean Elect"c Power Company, Inc

and A1le~heny Power System. Inc, OhiO Valley Elect"c Corporation and ItS subsmary, Indiana-Kentucky Elect"c Corporation, which are

owned 3 8 percent by Amencan Electnc Power compa~, Inc, 165 percent by Ofuo Edison Companr' 125 percent by Alleghany Power

System, Inc, and 33 2 percent by other companies, e Ar1dahoma CorporatIOn. which IS owned 2 percent by Central & Southwest

Corporation system, 34 percent by Middle South Utilities. Inc system, and 34 percent by an electnc utility company not associated With a registered system, Yankee Atorntc Electnc Company, Connecticut Yankee AtomiC Power com~any, Vermont Yankee Nuclear Power Corporaten, and Maine Yankee AtomiC Power Company, WhICh are statutory utility subsidrares of ortheast Utilities, New England Electnc

System, Eastern Utilities ASSOCiatesand other electnc utumes not associated wrth a registered system

209

•

•
Table 32

FINANCING OF HOLDING-COMPANY SYSTEMS I

(Fiscal 1976)

In Millions of Dollars'

Bonds Debentures Preferred Common'

Stock Stock

Alleghany Power Systems Inc $ $ $683

Potomac Edison Co 548 150

Amencan Electnc Power Co 196 0 Appalachian Power Co 1198

Indiana & Michigan Power Co 736

Indiana & Michigan Electnc Co 596 300 OhiO Power Co 1040

OhiO Electnc Co 743 Central and South West Corp Public Service of Oklahoma 250 Southwestem Etectnc Power Co 845 Columbia Gas Co 148 0

Eastem Utilities ASSOCiates .~ 123

Brockton Edison Co 200 63 General Public Utilities Corp .~. 151 5

Jersey Central Power & light Co 1285

Metropolrtan Edison Co 935

Pennsylvania ElectriC Co • 1038 • 670

Middle South Utilities 1219 Arkansas Power & light Co 402 756

touisana Power & Light Co 502 MISSISSiPPiPower & light Co 251 National Fuel Gas Co '300 New England Electnc System Massachusetts Electnc Co 400 New England Power Co 263 Northeast Utilities "500 671

Connecticut light & Power Co 498 200 Hartford Electnc Light Co 297 100 OhiO Edison Co 400 565 Pennsylvania Power Co 248 80 177 6

Sout~I~~;~~~~~er TS; 1250 1828 500

~~r~;:e~'Ce~ Co 2463 e.s 150 0

150

MISSISSiPPiPower Co 251 150

Total $1,630 4 $3230 $5832 $8512

, The table does not mclude securnes ISsued and sold by subsioianes 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 authonzston by the cornrmsson. except, as proVided by Sec 6(b) of the Act, the Issuance of notes haVing a matunty of 9 months

or less where the aggregate amount does not exceed 5 percent of the prmcjpal amount and par value of the other secunnes of the Issuer then

outstanding , Debt secunnes are computed at pnce to company, preferred stock at offenng pnce, common stock at offering or subscnpton pnce

, Common stock Includes shares Issued by diVIdend reinvestment plan -I Two or more Issues , Pnvate placement

, At least one Issue negotiated

CORPORATE

REORGANIZATIONS

Commission Participation

During fiscal year 1976, the Commission

entered 4 new Chapter X proceedings mvolvIng companies WIth aggregate stated assets

210

of approximately $765 million and aggregate

Indebtedness of approximately $684 million,

InCludingthe new proceedings, the Commission was a party In a total of 124 reorqaruzanon proceedings dunng the fiscal year DurIng the year, 9 proceedings were closed,

leaVing 115 pending.

•

•

•

'

•

•

•

•

'

" •

•
Table 33

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1976

SEC Notice of

Debtor Drstnct Court Petrtlon Filed Appearance Filed

Air Industnal Research, Inc NO Cal March 14, 1974 May 6, 1974 Aldersgate foundation, Inc M 0 Aa Sept 12. 1974 Oct 3, 1974 Amencan AssoCiated Systems, Inc ED Ky Dec 24. 1970 Feb 26, 1971

:~~~~t~~~°frn;~~~~ SO Ohio Aug 8, 1973 sept 25, 1973

ED Va July 31, 1972 Aug 30, 1972

Amencan Mortgage & Investment Co o S C Dec 13, 1974 Feb 6, 1975

Anmna Lutheran Hcspital o Anz May 11. 1970 May 25, 1970 Arlan's Dept Stores, Inc SONY March 8. 1974 March 8. 1974

Atlanta International Raceway, Inc NO Ga Jan 18. 1971 Feb 3, 1971

Bankers Trusf3 SO Ind Oct 7. 1966 Nov 1.1966

Beck Industnes. Inc SONY May 27, 1971 July 30. 1971 Bermec Corp SONY Apnl 16, 1971 Apnl 19. 1971

Beverly Hills Bancorp CD Cal Apnll1.1974 May 14. 1974

Bubble Up Delaware. Inc CD Cal Aug 31.1970 Oct 19, 1970

BXP construcnon Corp SONY Jan 15,1974 June 10, 1974

CIPCorp SO Oruo May 23. 1975 June 26, 1975

Calvin cnnsnan Retlfement Home, Inc W 0 Mlch Aug 8, 1974 Nov 4, 1974

Carolina Canbbean Corp WON C Feb 28. 1975 Apnl17. 1975

Coast Investors. Inc 3 W 0 Wash Apnll, 1964 June 10, 1964

Coffeyville Loan & Investment' o Kans July 17. 1959 Aug 10.1959

Combined Metals ReductIOn Co o Nev Sept 30. 1970 sept 7, 1972

Commonwealth Corp NO Fla June 28, 1974 July 17. 1974

Commonweakh Financial Corp 3 ED Pa Dec 4, 1967 Dec 13. 1967

Communrty BUSinessServices, Inc ED Cal June 8, 1972 Apnl 30, 1973

Continental Land Development One, Inc 2 SOFia Nov 27. 1974 May 8, 1975

Continental Vending Machine Corp EON Y July 10. 1963

Cosmo Capital Inc 3 NO III July 22. 1963 ~~'Y2~: 1~~

OavenP.OrtHotel. Inc ED Wash Dec 20. 1972 Jan 26. 1973

OlvefSlfied Mountaineer Corp SOW Va Feb 8. 1974 Apnl 24. 1974

Dumont-Airplane & Manne3 SONY Oct 22. 1958 Nov 10. 1958

E T & T Leasing. Inc o Md Dec 20. 1974 June 5. 1975

Eastem Credit Corp 2 ED Va March 4. 1974 Apnl 22, 1974

EducatIonal Computer Systems, Inc o Anz Apnl 26, 1972 Nov 3, 1972

Eichler co~ 3 NO Cal Oct 11.1967 Oct 11,1967

Equrtable ortgage Investment Corp 1 SO Iowa July 10, 1975 July 10. 1975

Equrtable Plan Co 3 SO Cal March 17, 1958 March 24, 1958

Equrty funding Corp of Amenca CD Cal Apnl 5. 1973 Apnl 9, 1973

Farnngton Manufactunng Co ED Va Dec 22. 1970 Jan 14, 1971

Fllst BaptIst Church. Inc of Margate. Fla SOFia sept 10, 1973 Oct 1,1973

First Home Investment Corp of Kansas. Inc o Kan Apnl 24. 1973 Apnl 24, 1973

First Research Corp SOFia March 2, 1970 Apnl14, 1970

MC Corp 1 SOFia June 14. 1976 June 14, 1976

Wm Gluck," Co ltd SONY Feb 22, 1973 March 6, 1973

Gro-Piant tndustnes, Inc 3 NO Fla Aug 30. 1972 sept 13,1972

GUlico Investment Corp W 0 Okla March 22. 1974 March 28, 1974

Gull UnIOn Corp M 0 La Aug 29, 1974 Nov 5. 1974

Harmony Loan, Inc ED Ky Jan 31, 1973 Jan 31. 1973

Hawkeye Land, ltd SO Iowa Dec 19, 1973 Jan 21, 1974

R Hoe & Co , Inc SONY July 7. 1969 July 14, 1969

Horne-Stake Production Co NO Okla Sept 20. 1973 Oct 2. 1973

Houston Educational FoundatIOn. Inc SO Tex Feb 16, 1971 March 2. 1971

Human Relations Research Foundal1(Jn3 SO Cal Jan 31.1964 Feb 14, 1964

Impena~Amencan Resources Fund, Inc OCala Feb 25, 1972 March 6, 1972

Impenal '400' National, Inc o N J Feb 18. 1966 Feb 23. 1966

Indiana BUSiness& Investment Trust SO 1M Oct 10. 1966 Nov 4. 1966

Interstate Stores, Inc SONY June 13. 1974 June 13, 1974

Investors AsSOCiated,Inc 3 W 0 Wash March 3. 1965 March 17. 1965

Investors Funding Corp of New York SONY Oct 21. 1974 Oct 22, 1974

Jade 011& Gas Co 3 CD cal June 28. 1967 Aug 16, 1967

J 0 Jewell, Inc NO Ga Oct 20, 1972 Nov 7, 1972

King Resources Co o Colo Aug 16, 1971 Oct 19, 1971

Kllchofer & Amold 3 EON C Nov 9. 1959 Nov 12, 1959

Lake Winnebago Development Co , Inc W 0 Mo Oct 14. 1970 Oct 26. 1970

little Mlssoun Minerals Assn. Inc o NO July 18. 1966 Jan 29, 1968

Los Angeles Land & Investments, Ltd o HawaII Oct 24. 1967 Nov 28. 1967

Louisrana Loan & Thnlt, Inc ED La Oct 8. 1968 Oct 8, 1968

Lusk Corp o Anz Oct 28, 1965 Nov 15 1965

See footnote at end of table

211

•
Table 33

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1976

SEC Notice of

Debtor Olstnct Court Petition Filed Appearance Filed

Lyntex Corp SONY Apn115, 1974 Jan 28, 1974

Dolly Madison lndustnes, Inc ED Pa June 23, 1970 July 6, 1970

Magnolia Funds, Inc ED La Nov 18, 1968 May 26, 1969

Mammoth Mountain Inn Corp a CD Cal Nov 9, 1969 Feb 6, 1970

Manufacturer's Credit Corp' o N J Aug 1, 1967 July 30, 1968

Maryvale Community Hospital' o Anz Aug 1, 1963 Sept 11, 1963

MaJer Central BUilding' o Anz July 15, 1965 Jan 19, 1966 MI -Cily Baptist Church E 0 La July 30, 1968 Oct 23, 1968

Morehead City ShipbUilding' EON C Nov 9, 1959 Nov 12, 1959

Mount Everest Corp' ED Pa May 29, 1974 June 28, 1974

Nevada Industnal Guaranty Co o Nev Mafi 7, 1963 July 2, 1963

North Amencan Acceptance Corp NO Ga Marc 5, 1974 March 28, 1974

North Westem Mortgage Investors Corp W 0 Wash Dec 12, 1973 Dec 12, 1973

Omeia-Alpha, Inc NO Tex Jan 10, 1975 Jan 10, 1975

Pan rnencan Financial Corp o Hawau Oct 2, 1972 Jan 9, 1973

Parkvlew Gem, Inc W 0 Mo Dec 18,1973 Dec 28, 1973

Pocono Downs, Inc 1 M 0 Pa Aug 20, 1975 Aug 20, 1975

RIC lnternatmnal Industnes, Inc N 0 Tex Sept 16, 1970 Sept 23, 1970

John Rich Enterl!::ses, Inc' o Utah Jan 16, 1970 Feb 6, 1970

Riker Delaware rp a o N J Apnl 21, 1967

Roberts Company' M 0 N C Feb 12, 1970 M~~~ ~~: 1m

Royal Inns of Arnenca. Inc SO Cal Apnl 24, 1975 June 24, 1975

Scranton Corp' M 0 Pa Apnl 3, 1959 Apn115, 1959

Sequoyah Industnes, Inc W 0 Okla Jan 21, 1974 Jan 30, 1974

Edward N Siegler & Co N 0 OhiO May 23, 1966 June 7, 1966

Sierra Trading Corp' OCala July 7, 1970 July 22, 1970

Sound Mortgage Co , Inc' W 0 Wash July 27, 1965 Aug 31, 1965

Southem Land Title Corp ED La Dec 7, 1966 Dec 31, 1966

Stanndco Developers, Inc WONY Feb 5, 1974 March 7, 1974 Stirling Homex Corp WON Y July 11, 1972 July 24, 1972 Sunset International Petroleum Corp' NO Tex May 27, 1970 June 10, 1970

TMT Trailer Ferry, Inc' SO Aa June 27, 1957 Nov 22, 1957

Tele Troncs Co EO Pa July 26, 1962 Sept 12, 1962

Texas Independent Coffer Organization' SO Tex Jan 5, 1965 Jan 13, 1965

Tsco, Inc ~aFfa Feb 7, 1973 Feb 22, 1973

Tower Credit Corp' Apnl 13, 1966 Sept 6, 1966 Traders Compress Co W 0 Okla May 12, 1972 June 6, 1972

Trans-East Air Inc o Me Aug 29, 1972 Feb 22, 1973

Trans-International Computer Investment NO Cal March 22, 1971 July 26, 1971 Trusters Corp 3 CD Cal Sept 13, 1961 Oct 9, 1961

"U Distnct BUilding Corp W 0 Wash Dec 9, 1974 Dec 9, 1974 U S Hnancial, Inc 1 SO Cal Sept 23, 1975 Nov 3, 1975

Oruservces. Inc' SO lnd Dec 4, 1970 Jan 28, 1971

Viatron Computer Systems Corp o Mass Apnl 29, 1971 Apnl 29, 1971

Vinca Corp' E 0 Mlch March 29, 1963 Apnl 9, 1963

Virgin Island Properties, Inc' o V I Oct 22, 1971 Apnll1,1972

Wahham Industnes Corp C 0 Cal July 14, 1971 Aug 19, 1971

Webb & Knapp, Inc' SONY May 7, 1965 May 11,1965

H R Weissberg Corp a NO III March 5, 1968 Apnl 3, 1968

Westec Corp SO Texas Sept 26, 1966 Oct 4, 1966 Westem Growth Capital Corp o Anz Feb 10, 1967 Mafi 16, 1968 Westem NatiOnal Investment Corp' o Utah Jan 4, 1968 Marc 11, 1968

Westgate.(;alifornla Corp SO Cal Feb 26, 1974 March 8, 1974

Wonderbowl, Inc CD Cal March 10, 1967 June 7, 1967

Woodmoor Corp' OCala Feb 25, 1974 March 25, 1974

Yale Express System Inc' SONY May 24, 1965 May 28, 1965

1 CommiSSiOnfiled nonce of appearance In fiscal year 1976

e ReorganizatIOnproceedings closed during fiscal year 1976

, Plan has been substantially consummated but no final decree has been entered because of pending matters

212

'

'

~

'
SEC OPERATIONS

Net Cost

Total fees collected by the Commission In

fiscal 1976 represented 52 percent of funds

appropnated by the Congress for Commission operations. The Commission IS required

by law to collect fees for (1) registration of

secunties Issued; (2) qualification of trust

Indentures; (3) registration of exchanges, (4)

registration of brokers and dealers who are

registered With the Commission but are not

members of the NASD; and (5) certification of

documents filed With the Commission. In addition, by fee schedule the Commission Imposes fees for certain filings and services,

such as the filing of annual reports and proxy

matenal

The Securities Acts Amendments of 1975

Increased the transaction fees to be paid by

all national security exchanges to one threehundredth of 1 per centum of the aggregate

dollar amount of the sales of secunues transacted dunnq each preceding calendar year.

The 1975 Amendments have also Included

under thrs fee requirement certain transactions by every registered broker and dealer

which are not transacted on a national securities exchange, provided, however, that no

payment Will be required for any calendar

year In which the fee would be less than

$100.

With reference to the fee schedule, the

Investment adviser assessment fee refunds

originally announced In Commission release

IA-486 have been almost completed. To

date, approximately 2,750 refund checks

have been mailed totaling slightly more than

$607,000

213
APPROPRIATED FUNDS vs FEES COLLECTED

Dollars Mill,ons

50

40

30

NET COST OF

COMMISSION

OPERATIONS

20 •

10

o

214

1970 71 72 73 74 75 1976
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