44th Annual Report

of the SEC

for the fiscal year

ended September 30,1978
'. I

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

HAROLD M. WILLIAMS, CHAIRMAN

PHILIP A. LOOMIS, JR

JOHN R EVANS

IRVING M. POLLACK

ROBERTA S. KARMEL

GEORGE A FITZSIMMONS, SECRETARY

For sale by the Superintendent of Documents. U S GovernmentPrinting Ofhce

Washington. D C 20402

Stock Number 046-000-00120-6

'" ..' •
CHAIRMAN'S LETTER OF TRANSMITTAL

The Honorable Walter F. Mondale

President, U. S. Senate

Washington, D.C 20510

The Honorable Thomas P. O'Neill, Jr

Speaker, U.S. House of Representatives

Washington, D.C 20515

Gentlemen:

I am pleased to transmit herewith the Annual Report of the Untted

States Securities and Exchange CommISSIOn for the period October 1,

1977 to September 30, 1978. Reflecting the Comrrussron's continuing

efforts to review and improve ItS internal procedures, this year's Annual

Report has a new, streamlined format, which we hope Will Increase its

utility to the Congress and to others interested In the Commission's

work.

The activmes and accomplishments set forth in the Annual Report

once again reflect the Commission's long tradition of hard work and

high achievement. As I did last year, I would like to take thrs

opportunity to offer my views of the Commission's progress In

addressing the major Issues facmg the Commission. One theme runs

throughout my review of the Comrrnssron's progress. Each Issue we

address reflects the Cornrrussion's effort to balance judrcrously ItS use

of direct regulatory authority against its reliance on private sector selfregulatory initiatives wherever consistent With investor protection.

Through this process, the Commission has cultivated one of the sources

of ItS fundamental strength and vitality-the ability to maximize the

Implementation of the Congressional goals embodied In the federal

securities laws With a minimum of federal intervention.

Development of a Netionel Market System

The Secuntres Acts Amendments of 1975 require the Cornrmssion to

tacrlitate the Implementation of a national market system for the

trading of securrtres. The Commission believes that such a system

III
should Ideally be an Industry undertaking, and that the Commission's

role should be to Identify objectives. stimulate Initiatives, assess

progress, and fill whatever vords may occur from time to time In the

process. It was In this SPirit that the Commission In January 1978

released a comprehensive policy statement setting forth SIX Interrelated

initiatives which It believed should be taken to facilitate development

of the system

DUring the past year, substantial progress was made In Implementing

three of the January rrutratrves-i-a consolidated quotation system, a

nationwide network of order-routing facilities, and refinement of the

exrstrng consolidated transaction reporting system Following the end of

the fiscal year, additional progress was made In facilitating the

development of a national market system. In March 1979, the

Commission Issued a status report assessing the progress made dunng

the past year and indicating the Commission's views as to those steps

which next should be taken to continue progress toward a national

market system. The status report discussed developments towards

achrevmg the other three January initiatives and indicated that the

Commission's first Priority IS the achievement of nation-Wide price

protection for public limit orders against execution at inferior prices In

additron, the status report stated that the Cornrrussron would Initiate

rulernakmg proceedings, which It has done, to consider redefinition of

the trading environment for secuntres now traded over-the-counter

when those secuntres become listed on an exchange for the first time

Finally, the Cornrrussion IS actively considering rulernakrng with respect

to qualified secuntres,

Industry and Comrrussron actions related to these areas have a high

pnority, and I remain confident that the baSIC elements of a national

market system Will all be In place before the end of my term as

Chairman In 1982 While much remains to be done In order to attain

that goal, the Cornrrussion IS fully committed to insuring that Congress'

mandate IS Implemented In a fashion which strengthens and Improves

our capital markets. Those markets are the finest in the world, and

nothing In the evolving new system threatens that pre-eminence.

The Problems of Small BUSiness

Small busmess has long been recognized as a Vital part of the

American economy. The 13 rrulhon or so small firms account for 55

percent of all private employment, 48 percent of the nation's bus.ness

output and 43 percent of ItS GNP. Even these rather rrnpressive figures

fall to convey the full Importance of small businesses to the drversrty

and Vitality of our society. lndrvidual efforts to respond to the demands

of a free market provrde our economy With ItS Immense diversrty,

achieved to a great extent through the efforts of small businessmen.

But, In recent years, small busmesses have not tlounshed. The

opportunity cost of capital IS high-c-as IS rnflatron-c-and adverse

attitudes towards risk-taking have worked to exclude small companies

from our capital markets and Impaired their ability to grow. The

inability of small business to accumulate capital and generate the

IV
savings required for innovation has slowed growth, diminished

productivity and contributed to the increasing difficulty In maintaining

the standard of living we have come to expect In the United States

Many of the problems facing small businesses are beyond the scope

of the Commission to address. However, a fundamental objective of the

federal securities laws IS to promote public confidence In the securities

markets, so that Investors will be willing to participate In the process by

which capital IS marshalled from the public and channelled Into

economic growth. This Important interrelationship between Investor

confidence and capital formation requires that the Commission be

sensitive to the effects of ItS activities on the capital formation process

Thus, the Commission has tried to remain cognizant of the effects of ItS

actions on small businesses

While we must carefully balance our efforts to facilitate venture

capital formation against our primary responsibility to protect Investors,

we have been able to ease the regulatory burden on small business In a

number of areas Although the federal secunties laws are not generally

considered to be a primary contributor to the capital formation

problems of small business, they do have an Impact We therefore

monitor our regulatory actions to ensure that they do not Inadvertently

affect thrs sector of the economy In a negative way Further, we are

taking affirmative steps to rmrurruze the tension which often

accompanies the interaction between small business and the

government.

The Commission has recently amended Rules 144 and 146, and

Regulation A, to liberalize sales of restricted securities and to make

small offerings more viable In addition, we have adopted a new

registration statement, Form S-18, to assist small business capital

formation This Form will allow a small, unseasoned Issuer to sell up to

$5 million In equrty secuntres without Incurring the full range of

disclosure and reporting burdens Imposed upon other Issuers

Finally, the Commission has created a new Office of Small Business

Policy In the DIVISion of Corporation Finance, to serve as the focal POint

for small business matters Within the Commission As these initiatives

are Implemented, there should be a substantial lessening of the

frustration that has historically accompanied much of the dealings by

small businesses With the Commission

Corporate Accountsbtttty

One of the oldest and most traditional of all our self-regulatory

frameworks is embodied In the relationship between shareholders,

management and the board of directors of a corporation The

effectiveness of thrs framework has been criticized, and some of the

Criticism IS no doubt valid. But, thrs structure IS fundamental to our

society, and I believe It retains a great vitality

The Cornrrussron has been engaged In a continuing review of

mechanisms of corporate accountability since September 1977 Thrs

review has so far produced amendments to our proxy rules including

disclosure of the background and relationships of nominees for

v
membership on the board of directors and disclosure of board and

cornrruttee structure and composition, new rules regarding disclosure of

management remuneration, and a heightened sensitivity In the

corporate community to the need to reexamine the traditional roles

played by boards of directors, management and shareholders In the

accountability process. Currently, a staff report IS being prepared

consolidating the knowledge we gained from our hearings on corporate

accountability, examining the areas appropriate for future exploration,

and analyzing the roles which the publrc and pnvate sectors should play

in the accountability process. In addition, as a result of the Increased

disclosure requirements for 1979 proxy statements, the Commission

will be able to quantify data regarding composition and structure of

boards of directors and their committees and develop a baseline for

tracking future developments. This should provide all concerned with

corporate accountability a better understanding of developments and

programs In this vital area.

The Commission IS consrdenng proposing for comment amendments

to the proxy rules which would Improve the effectiveness of the proxy

Solicitation process as a vehicle for communication between

shareholders and their companies. If adopted, such amendments would

be effective for the 1980 proxy season. One proposal under

consrderatron would require that proxy cards permit shareholders to

vote with respect to mdrvrdual nominees for election to boards of

directors. A second proposal would clarify the time by which

shareholder proposals must be submitted In order to be Included in

corporate proxy materials. And a third proposal would expand the

limited exemption which now exists for the furrushrng of unsolrcited

proxy voting advice.

The Commission's efforts to enhance corporate accountability are not

Intended as adversary, but rather as furthenng the tradrtionat and Vital

mechanisms of corporate governance and self-regulation. Our

contrnumg initiatives will hopefully provide disclosures which will

enable and encourage Investors and others to assess how well the

corporate cornrnuruty governs Itself, and may thus help avoid the need

for federal legrslative intervention.

Enforcement

A vigorous and ettective enforcement program IS entreat to the

Comrnissron's ability to carry out ItS responsibility to protect investors.

Our willingness and ability to take prompt enforcement action to

redress violations of the statutes and regulations which we administer

helps to Insure the credibility of the Commission's activtties and

voluntary compliance With the federal securlties laws. The

Cornrnisston's enforcement cases discussed in this year's annual report

reflect the complexity and breadth of the Commission's responsibilities.

The Commission attempts to tailor the relief obtained In ItS

enforcement cases In order to protect the investing public, remedy the

results of past Violative conduct, and assure that circumstances which

may have facilitated violations of the federal securities laws do not

VI
recur Such an approach requires that the Commission have and

exercise a degree of flexibility-not only to respond to traditional areas

of concern to the Congress and the Commission but to assure that the

Commission IS capable of meeting new challenges. A good example of

this approach IS the Commission's ability to obtain other equitable

relief In appropriate injunctive cases. Such additional relief, including

the appointment of special review persons to conduct further

mvestigatrons Into factual allegations made by the Commission and to

make a comprehensive report of their findings, helps to place the cost

and responsibility of remedying the harm caused to the investing publrc

by Violations of the federal secuntres laws upon those who are

responsible for the Violations. In this manner, the Commission's

enforcement staff may devote its energies to other problem areas In the

knowledge that the public will be protected, and that the full facts

surrounding vrolatrons will be made known This approach has enabled

the Commission to rnaxrrruze the effective use of Its limited staff

resources

Nevertheless, our resources are Inadequate to police all secunties law

Violations which may take place. As a result, our enforcement actrvrtres

are designed not only to address specifrc wrongdoings, but also to alert

the private sector as to the kinds of actrvitres which we believe Violate

the secuntres laws.

Private actions, brought by aggrieved mdrvrduals to protect their own

rights, supplement the Commission's own enforcement program, and

Significantly Increase the likelihood that securities law Violations will be

challenged and corrected Increasingly, however, the ability of private

parties to enforce provrsions of the federal secunt.es laws has been

challenged In the courts. * To the extent courts determine that the

federal secunties laws do not Imply private rights of action, the ability

of aggrieved mdivrduals to seek redress for personal wrongs will thereby

be curtailed. The resulting burden on the Cornrrussron would seriously

Impair ItS ability to enforce the federal secuntres laws

Disclosure Developments

Assuring the disclosure of corporate information necessary to enable

Investors to make an intelligent Investment decision IS one of the

Commission's primary responsibilities The Securttres Act of 1933

generally requires that before securrtres may be offered to the public a

registration statement must be filed With the Commission, and a

prospectus containing the most Significant intorrnatron In the

registration statement must be furnished to Investors. In addition, the

Securities Exchange Act of 1934 contains disclosure provisrons

designed to provide current information on a periodic basis about

companies In whose securrtres there IS a substantial public Interest.

The Commission ISendeavoring to Integrate the various types of

* See, e.g., Touche Ross & Co v. Redington, __ U S __ (June 18,

1979); Transamenca Mortgage Advtsors, Inc v. LeWIS, __ F.2d __ (9th

Crr ), cert. granted __ U.S. __ (1978)

VII
disclosures under both acts to reduce compartmentalized, duplicative

or Inadequate disclosures and to rrururruze the Cornrnrssron's regulatory

role. To this end, the short registration Form S-16, which Incorporates

by reference all current 1934 Act reports on file that already contain

basic frrrn-ortented information, has been expanded In a number of

respects. Primary underwritten offerings are now permitted on this

Form by certain high-quality Issuers and their substdranes, as well as

rights offerings and offenngs of secuntres pursuant to dividend and

Interest reinvestment plans As we gain further experience with this

new concept, we Will be exploring ways to broaden the categones of

Issuers and transactions covered by the Form. In addition, the

Commission ISencouraging companies to use information filed with the

Commission as the pnmary means of communication with shareholders

rather than creating alternative documents such as annual reports

which may be less useful to Investors. To this end, we have published a

gurdehne which encourages companies to combine their annual report

on Form 10-K with their annual report to shareholders and we also are

explonng revismg our forms, as discussed below.

The Commission's AdVISOry Committee on Corporate Disclosure,

which reported ItS recommendations to the Commission In 1977,

favored the integration of the 1933 and 1934 Acts Into a continuous

disclosure system. The Commission presently IS Implementing many of

the AdVISOry Committee's other recommendations, including a revrsion

of the Commission's Form 10-K to make It a more flexrble document,

and the encouragement of corporate disclosure of forward-looking

information, such as projections of earnings. Because of the increasing

importance attached to such "soft" mtorrnatron-c-as opposed to

objectively vennabte rustoncal facts, or "hard" data-the Commission

has encouraged companies voluntarily to disclose management

projections and has published staff gurdes for such disclosures In

addition, we have adopted a "safe harbor" rule designed to afford

protection from liability for reasonably-based projections disclosed In

good faith that subsequently are not met

Our Interest In encouraging the disclosure of other "soft" and "firmspecrfrc" information IS continuing. We are also encouraging the use of

a "management report on operations," as a part of the annual report to

shareholders, to aid users of financial information In interpreting a

company's accounting and financial reports

Oversight of the Accounting Profession

One of the major areas of current Commission concern IS ItS oversight

of the accounting profession. Where feasible, we Intend to emphasize

self-regulatory initiatives from within the profession.

Our first report to Congress regarding the accounting professton, In

July 1978, reflects ttus approach We did not attempt to tell the

profession how It should go about meeting the objectives of selfregulation. Rather, we set forth with particularity the major objectives

that we believed the profession should meet In order to be effectively

self-regulating And, while the record IS far from complete concerning

VII I
the effectiveness of the profession's voluntary efforts, we told the

Congress that the profession was making adequate progress In developing

initiatives of its own to achieve self-regulatory objectives Consequently,

we recommended that these private Initiatives be allowed to continue to

evolve.

The Commission, through ItS Chief Accountant's Office, has given

close attention to the protession's self-regulatory efforts over the past

year. In July 1979, the Commission Issued ItS second annual Report to

Congress on the Accounting Profession and the Commission's Oversight

Role, assessing progress made toward the articulated objectives.

The corning years should also see major developments In several

substantive accounting and auditing areas. The Commission, aided by

an AdVISOry Committee on Oil and Gas Accounting, IS In the process of

Implementing ItS September 1978 decrsion to consider a new

accounting prrncipte-s-reserve recognition accounting-for 011 and gas

producers, a task which Will take several years to complete

In addition, the Cornrrussion IS closely tollowmg the work being done

by the Financial Accounting Standards Board In the development of a

conceptual framework for the accounting profession. The result of the

FASB's project should be a set of pnnciples which can serve as a guide

for the profession to work toward as It develops and refines accounting

and disclosure pnnciples and methodologies. It IS a safe prediction

that, dunng the coming decades, the economic, political and

technological changes in thrs country and the world-and their Impact

on the nature and methods of American business-i-wr!l be enormous.

Accountants and frnancial managers Will need such a conceptual

framework, one that IS suffrcrently tlexible and broad to accommodate

these new developments.

Appropriate accounting for the effects of changing prices IS a

fundamental problem which demands Imaginative and progressive

solutions. In 1976, the Cornrrussron provided an Important Impetus to

this effort m ASR No. 190, which Introduced a limited requirement for

disclosure of the replacement costs for certain assets The Cornrrussron

remains fully committed to insuring that users of nnancral statements

receive adequate information about the Impact of changing prices on

corporate earnings and assets. The FASB has proposed that certain

large publicly-held enterprises provide disclosures regarding certain

effects of price changes on earnings, assets, liabilities, and owner's

equity in periods of nsing prices These disclosures would supplement,

but not replace, historical cost frnancral statements. While the

Commission Will consider amendrng or rescrndrng ItS replacement cost

rule If an acceptable final standard ISadopted by the FASB, the

Cornrrussron would not view positively a delay rn the adoption of that

standard.

Investment Management

For the past 40 years, the Cornrrussion has regulated Virtually every

aspect of the investment company Industry. There has been little, If

IX
any, self-regulation The Commission's presence has been formal and

pervasive.

This IS now beginning to change. The Commission IS rethinking the

fundamental assumptions on which our regulatory program In this area

has historically been based, and I expect, over time, dramatic changes

Will be visible In the way we interact With the private sector In

regulating Investment companies.

The Drvrsion of Investment Management IS currently engaged In a

thorough review of the Investment Company Act and all the rules and

administrative practices thereunder. As a result of this re-evaluation, a

Significant regulatory shifting has already begun. First, we are moving

towards Simpler rules that are easier to understand, less costly to

comply With, and state objectives and policy rather than describe

method. Second, we are encouraging Investment company directorsespecially those who are dismterested -to assume their responstbihtres

to the companies that they serve. As this shift to private sector

responsrbrlrty occurs, we will enhance the Cornrnissron's oversight

capabilities to assure compliance With the new regulatory scheme, and

thereby ensure that there is no dirnurutron In Investor protection

The Drvision has also begun a thorough re-evaluatron of the

Investment Advisers Act and our regulatory program under It to

determine whether they are adequate In light of the Significant growth

of and change In the advisory protession in recent years. As a first step

In this re-evaluation, the Commission has recently acted to Improve the

quality of information regarding Investment advisers which ISavailable

to the public. To the extent our experience leads us to adopt new rules

affecting Investment advisers, I expect our approach to be Similar to

that taken In the Investment company area. Indeed, the staff has

already begun to consider the possibtlrty of self-regulation for

Investment advisers

I firmly believe that these initiatives, which Will be continued in the

years to come, will return to the private sector the responsrbihty for

managing the Investment company Industry, and Will Improve

Investment advisory regulation as well.

Options

On February 15, 1979, The Commission's Options Study released ItS

report on the efficacy of exrstrng self-regulatory and Commission

oversight of the burgeoning options markets. This Study, which

commenced In 1977 With the announcement of a moratorium on the

expansion of trading In exchange-listed options, extended to all aspects

of standardized options trading and the regulation of such trading.

Followmg the release of the report, the Commission approved a plan

which Will lead to lifting the moratorium The plan calls for close

cooperation among the self-regulatory organizations and the

Cornrrussron In the Implementation of some 75 specrnc actions

designed to correct the defrcrenctes found by the Options Study in

current surveillance and sales practices.

The Study Identified specrtic problems, and established specrfrc

x
regulatory objectives. But, we hope to rely on the Industry Itself to take

the trutiatives which will lead to a lifting of the moratorium, rather than

ourselves prescribing specifrc corrective action. The response of the

industry to the results of the Study has In general been encouraging,

and I expect the Commission's goals to be met without undue delay.

Market Surveillance

In order to insure that self-regulation IS consistent with our mandate

to protect Investors, It IS Important that we have effective oversight of

what the self-regulatory orgaruzatrons-i-whether In options or equities--

are dorng and how well they are doing It. To this end, the Drvrsion of

Market Regulation has recently strengthened ItS ability to oversee the

performance of the self-regulatory organizations. The Drvrsion has

established a new inspection Unit to oversee the activrtres of these

entitles In carrying out their own surveillance, inspection and

enforcement functions. This unit Will advise the Commission, on a

regular basis, as to the current performance of the self-regulatory

organizations. Further, a consultant has been engaged to advise the

Commission regarding Improvements In ItS surveillance system. Our

goal is not to duplicate the surveillance capabilities of the selfregulatory organizations, but rather to insure that the aggregate

surveillance capacity IS adequate, that there are no gaps and that there

has been an appropriate allocation of surveillance functions among the

self-regulators and the Commission

Implementation of the Foreign Corrupt Precuces Act

One of the most challenging projects facing the Cornrnrssron IS the

Implementation of the Foreign Corrupt Practices Act. This Act, Signed

Into law December 19, 1977, requires every public Issuer of securitres

to make and keep accurate books and records and to establish and

maintain a system of Internal accounting control which provides

reasonable assurance that specrfred objectives of reliability are met.

The primary impetus for the enactment of the Act were disclosures In

the mid-1970's of widespread corporate bribery. The Commission has

already brought several cases alleging Violations of the Act, and

recently adopted rules designed to Implement prcvisrons of the Act

These rules, codified as new Regulation 13B-2, expressly prohibit the

falsification of corporate books, records, or accounts and prohibit the

offtcers and directors of an Issuer from making false, misleading or

Incomplete statements to any accountant In connection With any audit

or examination of the Issuer's financial statements or the preparation of

required reports. In addition, the Commission has proposed to require a

management statement on Internal accounting controls In the coming

years, the Act Will play an increasingly Significant role In our regulatory

and enforcement programs.

Management Developments and Resource Attocetion

FIscal year 1978 was marked by the launching of several Important

management initiatives Intended to make more effrcrent use of limited

XI
Cornrrussron resources and strengthen the Commission's ability to

deliver services to both Investors and regulated entities Major strides

were taken In the area of Information handling, including the

replacement of the agency's computer, the development of important

program tracking systems and the pilot Implementation of a

computerized micrographics system In the area of personnel

management, the Commission offered ItS first formal upward mobility

program, creating new professional and administrative opportunities for

seasoned clerical staff A unrque arrangement with the CIvil Service

Commission has provided the Commission with an unusual opportunity

to begin to develop a performance appraisal system that will aid In

manpower plannrng, career counseling and management development.

The Offtce of Data Processing and the Office of the Comptroller

commenced design of the agency's first comprehensive financial

management reporting and budgetmg system, while the Office of the

Executive Director initiated a major study of all fees collected by the

Commission. In addition, under the guidance of the Office of Consumer

Affairs, a unrform small claims processing procedure was Implemented

by all of the major self-regulatory agencies.

The Commission IS proud It has achieved the reputation of being one

of the most effective federal regulatory agencies with one of the

smallest staffs In government. However, over the past few years, the

Cornrrussron has been given broad new statutory responsibilities--

particularly by the Securities Acts Amendments of 1975 and the

Foreign Corrupt Practices Act. Its workload under pre-existing statues

has also Increased dramatically, and major demands on ItS resources

have been made to meet new obligations under statutes such as the

Freedom of Information, Sunshine and Privacy Acts. In addition, the

Cornrnrssron has undertaken a number of special studies and hearings

to Improve ItS regulatory efforts

Yet at the same time as the Commission's workload IS burgeoning,

ItS resources are shrinking. Indeed, under current budgetary proposals,

the Cornrnrssron will have 44 fewer authorized positions In fiscal 1980

than It had In fiscal 1975, before much of the workload explosion took

place As a result, we must constantly reassess our resource capability

In light of current needs, and shift personnel as best we can to try

to staff adequately our Priority programs.

The Comrrussion supports the President's efforts to control inflation

and to contain the federal budget We are therefore prepared to work

within necessary budgetary constraints, and to be even more selective

In allocating scarce resources and In setting priorities than we have

been In the past However, even under current staffing levels, we are

concerned that some of our responsibilities may not be discharged as

fully or as well as has come to be expected from the Cornrnrssron, and

any further restraints could have a Significant detrimental effect on

both our enforcement and regulatory programs.

* * *

These are Important times for the Commission We are developing

and Implementing new concepts In secunties regulation and

XII
enforcement, and we have been pleased and gratified at the

cooperation and support which we have received from the Congress In

our efforts. I look forward to a continued excellent relationship In the

future. Should the Commission be able to assist the Congress In ItS

legislative programs, we stand ready to do so at your request

Sincerely,

Harold M Williams

Chairman

XIII

Term expires

June 5

1982

1984

1983

1980

1981

COMMISSIONERS AND PRINCIPAL STAFF OFFICERS

(Asof Apnl 1, 1979)

COMMISSIONERS

HAROLD M. WILLIAMS of Calif, Chairman

PHILIP A. LOOMIS, JR., of Calif.

JOHN R. EVANS of Utah

IRVING M. POLLACK of New York

ROBERTA S. KARMEL of New York

Secretary: GEORGE A FITZSIMMONS

ExecutiveAssistant to the Chairman: DAN IEL L. GOELZER

PRINCIPALSTAFFOFFICERS

BENJAMIN MILK, Executive Director

EDWARD F. GREENE, Director, Drvrsion of Corporation Finance 1

LEE B SPENCER, Deputy Director"

WILLIAM C. WOOD, Associate Director

MARY E. T. BEACH, Associate Director

MICHAEL J. CONNELL, Associate Director?

STANLEY SPORKIN, Director, Drvisron of Enforcement

WALLACE L. TIMMENY, Deputy Director

IRWIN M. BOROWSKI, Associate Director

THEODORE SONDE, Associate Director

DAVID P. DOHERTY, Associate Director

THEODORE A. LEVINE, Associate Director

ANDREW M. KLEIN, Director, DIVIsion of Market Regulation

SHELDON RAPPAPORT, Deputy Director

LLOYD H. FELLER, Associate Director

DOUGLAS SCARFF, Associate Drrector

SYDNEY H. MENDELSOHN, Director, DIVIsion of Investment

Management

MARTIN C. LYBECKER, Associate Director

JOEL GOLDBERG, Associate Director

AARON LEVY, Director, DIVIsion of Corporate Regulation

GRANT GUTHRIE, Associate Director

RALPH C. FERRARA, General Counsel

PAUL GONSON, Associate General Counsel

DAVID FERBER, Schetter to the Commission

xv

'
ANDREW L ROTHMAN, Director, Office of Public Affairs

CHILES T A LARSON, Deputy Director

A. CLARENCE SAMPSON, Chief Accountant

STEVEN J. GOLUB, Deputy Chief Accountant?

(VACANT), Director of Economic and Policy Research

ROGER W. SPENCER, Deputy Director

WILLIAM STERN, Acting Director, Office of Opinions and Review

HERBERT V EFRON, Associate Director

R. MOSHE SIMON, Assistant Director

WARREN E BLAIR, Chief Administrative Law Judge

LAWRENCE H HAYNES, Comptroller

RICHARD J. KANYAN, Service Officer

JAMES C. FOSTER, Director, Office of Personnel

JOSEPH F OLIVO, JR , Director, Office of Reports and Information Services

JOHN D ADKINS, Director, Office of Data Processing

JUSTIN P KLEIN, Director, Office of Consumer Affairs

MATTHEW R SCHNEIDER, Director of Legislative Affairs"

I Former Director Richard H Rowe. left the Commissionon March 15, 1979 2 Ttus posrtron was added subsequent to the close of the fiscal year

3 Former Associate Director, Kathryn B McGrath, left the Commission on December 31, 1979

XVI
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, Malne.-Willis H. RICCIO, 150 Causeway St.,

Boston, Massachusetts 02114.

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

South Carolina, Georgia, Alabama, MISSISSiPPi, Flonda, part

of Loursiana.c-Jule B. Greene, SUite 788, 1375 Peachtree

St , N. E , Atlanta, Georgia 30309

Region 4. llhnors, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Minnesota, MISSOUri,Ohro, Wlsconsln.-WIIham D. Goldsberry, Room 1204, Everett McKinley Dirksen

Bldg., 219 S. Dearborn St , Chicago, llhnors 60604.

Region 5. Oklahoma, Arkansas, Texas, part of l.oursrana, Kansas

(except Kansas City) -Michael J. Stewart, 8th Floor, 411 West

Seventh St., Fort Worth, Texas 76102.

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

Colorado, New Mexrco, Utah.-Robert H. Davenport, Two Park

Central, Room 640, 1515 Arapahoe Street, Denver, Colorado

80202.

Region 7 California, Nevada, Arizona. Hawau, Guam -Leonard

H. Rossen, SUite 1710, 10960 Wilshire Bou1evard, 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, Ohio 44113 -1020 Standard Bldg, 1370 Ontano

St.

XVII
Detroit, Michigan 48226.-1044 Federal Bldg.

Houston, Texas 77002.-Room 5615, Federal Office & Courts

Bldg., 515 Rusk Ave.

Miami, Florida 33 13 l.-SUlte 1114 DuPont Plaza Center, 300

Biscayne Boulevard Way.

Philadelphia, Pennsylvania 19106 -Federal Bldg., Room 2204,

600 Arch St.

St. Louis, MIssouri 631Ol.-Room 1452, 210 North Twelfth St.

Salt Lake City, Utah 84111 -Suite 810, Boston Bldg., One

Exchange Place.

San Francisco, California 94102.-450 Golden Gate Ave, Box

36042.

XVIII
COMMISSIONERS

HAROLD M. WILLIAMS, Cnetrmen

Chairman Williams was born on January 5, 1928, In Philadelphia, Pennsylvania. He received his B.A. from UCLA In 1946,

graduating Phi Beta Kappa at the age of 18. Three years later he

was awarded his J.D. degree from Harvard University Law School

He joined a Los Angeles law firm In 1949 where he specialized

In tax and corporation law and remained until 1955 except for

an Interruption to serve as a U.S. Army legal officer during the

Korean emergency. He JOined Hunt Foods and Industries, Inc.,

in 1955 as Associate Tax Counsel. He subsequently became Tax

Counsel, Vice President-Finance and Executive Vice President

In 1964, he became President of Hunt-Wesson Foods, Inc. In

1968, he was elected President of Hunt Foods and Industries,

Inc., and with the formation of Norton Simon, Inc., later that

year-resulting from consolidation of Canada Dry Corporation,

Hunt Foods and Industries, Inc., and McCall Corporation-he

was named Chairman of the new company's Finance Committee.

In 1969, he assumed the additional post of Chairman of the

Board of Norton Simon, Inc. In July of 1970, Mr. Williams became Dean and Professor of Management of the UCLA Graduate

School of Management. DUring his adrrurustratron, the School

achieved national ranking, including recognition as the leading

graduate business school In a public university. During the 1973

energy CriSIS, Mr. Williams took leave to serve as full-time Energy

Coordinator for the City of Los Angeles. While at UCLA, Mr. Williams also served as Director of Norton Simon, Inc, Phillips Petroleum Company, ARA Services, Inc., CNA Financial Corporation,

Signal Companies, Inc., and Montgomery Street Income Securities, and as a Trustee of the Aerospace Corporation. In his service to the community, Mr Williams acted as Co-Chairman for the

Public Commission on Los Angeles County Government, a subcommittee chairman of the Mayor's ad hoc Committee on Los

Angeles City Revenues, a member of the State of California ComXIX
mrssion for Economic Development and of the California Citizens

Commission on Tort Reform, and a member of the SEC Advisory

Committee on Corporate Disclosure

PHILIP A. LOOMIS, JR.

Commissioner Loomis was born In Colorado Spnngs Colorado,

on June 11, 1915. He received an A. B. degree, with highest

honors, from Pnnceton University In 1938 and an LL B. degree,

cum laude, from Yale Law School In 1941, where he was a Law

Journal editor Pnor to JOining the staff of the Secuntres and

Exchange Commission, Commissioner Loomis practiced law with

the firm of O'Melveny and Myers In Los Angeles, California. Comrrussroner Loomis JOined the Commission's staff as a consultant

In 1954, and the following year he was appointed Associate DIrector and then Director of the DIVISion of Trading and Exchanges.

In 1963, Commissioner Loomis was appointed General Counsel

to the Cornrnissron and served In that capacity until his appointment as a member of the Commission. Commissioner Loomis IS

a member of the Amencan Bar Association and the Amencan

Law Institute. He received the Career Service Award of the National Civil Service League In 1964, the Securitres and Exchange

Commission Distinguished Service Award In 1966, and the Justice Tom C. Clark Award of the Federal Bar Association In 1971

He took office as a member of the Securrtres and Exchange CommiSSIOn August 13, 1971, and IS now serving for the term of

office exprrmg June 5, 1984

JOHN R. EVANS

Cornrrusstoner Evans was born In Bisbee, Anzona, on June 1,

1932 He received rus B S degree In Economics In 1957, and

hrs 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

dunng 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 rrunonty staff director of the U S Senate Committee on

Banking, HOUSing and Urban Affairs and served as a member of

the professronal staff from June 1971 to March 1973. He took

office as a member of the Secunties and Exchange Commission

on March 3, 1973, and IS now serving for the term exprnng June

5, 1983.

IRVING M. POLLACK

Commissioner Pollack was born In Brooklyn, New York, on Apnl

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 Pnor to JOining the Commission's

xx
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 positions 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'sdlvlslons

were reorganized. He had been Director of the DIVISion of Tradmg

and Markets since August 1965, and previously served as Associate Director since October 1961. In 1967 Mr Pollack was

awarded the SEC Drstmguished Service Award for Outstanding

Career Service, and In 1968 he was a co-reciprent 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 Securities and Exchange Commission,

and IS now serving for the term expiring June 5, 1980.

ROBERTA S. KARMEl

Commissioner Karmel was born May 4, 1937, In Chicago,

tllmors. She received a B.A from Radcliffe College In 1959 and

an LL.B. from New York University School of Law In 1962. From

1962 to 1969, Mrs. Karmel worked In the New York Regional

Office of the Securities and Exchange Commission as an attorney,

then attorney branch chief, then assistant regional administrator.

From 1969 to 1972 she was an associate With Wlilkle, Farr &

Gallagher In New York Mrs Karmel was a partner In Rogers &

Wells from 1972 through September 1977, and an adjunct professor at Brooklyn Law School from 1973 through 1977 She has

been a member of the American Bar Association Federal Regulation of Securities Committee since 1973 She has also served

on the Association of the Bar of the City of New York Committee

on Securities Regulation, Committee on Administrative Law, and

Committee on Professional Responsibility. She IS the author of

numerous articles In legal journals. Mrs. Karmel took the oath

of office as a member of the Securities and Exchange Commission

on September 30, 1977, for a term expiring on June 5, 1981

XXI

TABLE OF CONTENTS

Chairman's Transmittal Letter III

Commissron and Pnncrpal Staff Officers xv

Regional and Branch Offices XVII

BIOgraphies of Commrssroners XIX

REGULATION OF THE SECURITIES MARKETS

Secunnes Markets and Facilities

The Natronal Market System

National system for clearance and settlement of secunties transactions 4

Charges for Market Information 5

Trading by exchange members 5

Options trading 6

Effects of the Absence of Fixed Commission Rates 7

RegulatIOn of Brokers, Dealers and Munrclpal Secuntres Dealers 7

Regulatory burdens on small brokers and dealers 7

Lost and stolen secunties 8

Secunnes confrrmauons 8

Broker-dealer practices 8

Unrform dispute resolution procedures for Investors 9

Munrclpal secunties dealers 9

Transfer agent rules 9

Oversight of Self-Regulatory Orgamzatmns 9

Secunties exchanges 9

Natrona! Assocration of Secunnes Dealers, Inc 10

Munrclpal Secunties Rulemaklng Board 11

Clearrng agencies 11

Inspections of self-regulatory organizations 11

Revenues and expenses of self-regulatory orgarnzattons 14

THE DISCLOSURE SYSTEM 15

Corporate Governance, Management Background and Remuneratron 15

Small Business Hearings 16

New Developments In Policy 17

XXIII
AdvIsory Committee on Corporate Disclosure 17

Projections of Future Economic Performance 18

lntegration of Documents and Other Disclosure RevISions 18

Tender Offers, Large AcqUIsitIOns and Corporate Repurchases 19

Foreign Corrupt Practices Act 20

Oversight of the Accounting Profession 21

Report on the Accounting Protessron and the Commission's Oversight Role 21

Accounting Standards for 011 and Gas Producers 22

INVESTMENT COMPANIES AND ADVISERS 23

Comprehensive Review of Regulatory System 23

lnsututronal Disclosure 24

Integrated Regrstratton and Reporting System 24

ENFORCEMENT PROGRAM 27

Settlement of Cemrmssron Actions 27

Questionable Payments 27

Tender Offers and Corporate Takeovers 31

Management Perqursrtes 33

MUnicipal Securities 34

Other Significant Enforcement Cases 35

OTHER IMPORTANT LITIGATION 45

PUBLIC UTILITY HOLDING COMPANIES 49

Ccmpositmn 49

Financing 49

Volume 49

Fuel Programs 49

Service Company Operations 50

CORPORATE REORGANIZATIONS 51

ADMINISTRATION AND MANAGEMENT 53

Informalion Systems Management 53

Market Surveillance System 54

Financial Management 55

Personnel Management . 56

Equal Employment Opportunity 57

ACtiVity under the Freedom of lnformatron Act 57

Office Space ActiVities 58

APPENDIX 63

The Securities Industry 65

Income. Expenses and Selected Balance Sheet Items 65

Table I-Financial tntormatron for Broker-Dealers-1975-1977 66

XXIV
APPENDIX Continued

Historical Financial Information of Broker-Dealers with Securities

Related Revenue of $500,000 or more 66

Table 2-Hlstorlcal Consolidated Revenue and Expenses of Broker-Dealers with Securities Related Revenue of $500,000 or

more 67

Table 3-Hlstorlcal Balance Sheet for Broker-Dealers with Secuntres Related Revenue of $500.000 or more 68

Secunties Industry Dollar 68

Chart-Securities Industry Dollar 1977 69

Broker-Dealers. Branch Offices. Employees 70

Chart-Broker-Dealers and Branch Offices 71

Table 4-Brokers and Dealers Registered under the Secuntres

Act of 1934 72

Table S-Prlnclpal Business of SECO Broker-Dealers 73

Table 6-Applicatlons and Regrstratrcns of Brokers and Dealers-Fiscal Year 1978 74

Table 7-AppllcatlOns and Regrstrations of Municipal Securities

Dealers and Transfer Agents-Fiscal Year 1978 75

Self-Regulatory Drgantzatmns-c-Revenues and Expenses 76

Table S-Revenues and Expenses 01 Self-Regulatory Orgaruzanons 1973-1978 79

Table 9-Detalled Revenues and Expenses for each Sell-Regulatory Orgamzation 80

Table 10--Sources of Self-Regulatory Organization Revenue

1973-1977 82

Table ll-Self-Regulatory Orgamzanons-c-Cleanng Agencies

Revenue and Expenses-Fiscal Year 1977 84

Table 12-Revenue and Expenses of Municipal Secuntres Rulema king Board 85

Exemptrons 85

Section 12(h) Exemptions 85

Exemptions for Foreign Private Issuers 85

Financial lnstrtutions 86

Stock Iransactions of Selected Financial lnstitutrons 86

Table 13-Common Stock Iransacnons and ACtiVity Rates of

Selected Financial lnstrtutrens 87

Stockholdmgs of lnsntutronal Investors and Others 88

Table 14-Market Value of Stockholdmgs of lnstttuttnnal lnvestors and Others 88

Table IS-Companies Registered Under the Investment Company Act of 1940 as of September 30. 1978 89

Table 16-Companles Registered Under the Investment Company Act of 1940 89

Table 17-New Investment Company Regrstrahons 90

Table IS-Investment Company Regrstrations Terminated 90

Private NOnlnsured Penson Funds Assets 90

Table 19A-Assets of Private NOnlnsured Pension Funds (Book

Value) 91

xxv

-
XXVI

Table 19B-Assets of Pnvate Norunsured Pension Funds (Market

Value) 91

Secunties on Exchanges 91

Exchange Volume 91

Table 20-Market Value and Volume of Sales on Registered and

Exempted Secuntres Exchanges 92

Chart-Market Value of Securrties Traded on All U S Stock

Exchanges 93

NASDAQ Volume 94

Table 2lA-Share Volume by Exchanges 94

Table 2lB-Dollar Volume by Exchanges 94

Special Block DlstnbutlOns 95

Table 22-Speclal Block DlstnbutlOns Reported by Exchanges 95

Value and Number of Secuntres Listed on Exchanges 96

Table 23-Secuntles Listed on Exchanges 96

Table 24-Value of Stocks Listed on Exchanges 97

Secunties on Exchanges 97

Table 25-Secuntles Traded on Exchanges 98

Table 26-Unduplicated Count of Secunties on Exchanges 98

1933 Act Registrations 98

Effective Registratron Statements Filed 98

Table 27-Effectlve Regrstratrons 99

Chart-s-Securrtres Effectively Registered with SEC 100

Purpose of Registranon 101

Table 28-Effectlve Registrations by Purpose and Type of Secunty Fiscal 1978 101

Chart-Effeclive Registrations Cash Sale for Account of Issuers 102

Regulation A Offenngs 103

Table 29-0ffenngs Under Regulation A 103

Enforcement 103

Types of Proceedings 103

Table 3D-Types of Proceedings 104

Table 31-lnvesligatlOns of Possible Violations of the Acts Administered by the Cornmrssron 107

Table 32-Admlnlstratlve Proceedings Instituted Dunng Fiscal

Year Ending September 30. 1978 107

Injunctive Actions 108

Table 33-lnJunclive Actions 108

Cnmmal Proceedings 108

Table 34-Cnmlnal Cases 108

Iradmg Suspensions 109

Foreign Restricted List 109

Public Utility Holdmg Companies III

Assets III

Table 35-Public Utility Holdmg Company Systems III

Table 36-Key Fmancral Statistics of Registered Public Utility

Holding Company Systems 112

Table 37-Fmancmg of Holding Company Systems 113
Fuel Programs 113

Table 38-Fuel Expenditures of Holdmg Company Systems 114

Corporate ReorganizatIOns 114

Comrmssmn Particrpatron 114

Table 39-ReorganizatlOn Proceedmgs Under Chapter X of the

Bankruptcy Act 115

SEC Operatrons 117

Net Cost 117

Chart-Appropriated Funds vs Fees Collected 118

Table 40-Budget Estimates and Appropriation 119

xxvii

Regulation of the Securities Markets

DUring the fiscal year, the Commission worked to fulfill ItS continuing responsibility to strengthen the nation's

securities markets and to protect Investors who trade In those markets

The Commission took significant steps

to enhance competition In the secunties

industry; to Improve the availability of

transaction and quotation information,

to Increase efficiency In the execution

and clearance of securities transactions; and to make It practical for brokers to execute Investors' orders In the

best market available. Many of those

steps brought closer the realizatron of

a national market system and a national

system for the prompt and accurate

clearance and settlement of transactions In securrties. both of which the

Congress directed the Commission to

help establish. 1

Securities Markets and Facilities

The National Market System-The

past year was most significant In the

development of a national market system.

In December 1977, the Cornrntsston

adopted amendments to Rule 19c-1

under the Securities Exchange Act removing certain remaining restrictions

on the ability of exchange members to

effect transactions In listed secunties

otherwise than on exchanges. This action assured that a member of an exchange would be permitted to effect

over-the-counter agency transactions In

listed securities With any person not also

represented as agent by that member

(r.e , precluding only "In-house agency

cross" transactions), thereby permitting

brokers greater tlexrbrlrty In seeking the

best market In which to effect agency

transactions 2

On January 26, 1978, the Commission Issued a statement on the development of a national market system

(January Statement) In that Statement,

the Commission set forth ItS views as to

those steps which It believed should be

taken In 1978 to facrl itate development

of a natrona I market system as envistoned by the Congress In the Securities

Acts Amendments of 1975 (the 1975

Amendments).

The program described In the January

Statement consisted of SIX Interrelated

initiatives the development and Implementation of three new national market

system facilities, a consolidated quotation system (CaS), a nationwrde network of order routing facilities and a

central publrc agency limited order file,

the refinement of an exrstrng natronal

market system facility, the consolidated

transaction reporting system (Consolidated System); the commencement of

rulernakmg proceedings to consider

desrgnatton of certain categories of securities as qualified for trading In the

national market system; and the continued consrderatron of off-board trading
rules In light of the progress made toward a national market system 3

DUring the remainder of the fiscal

year the Commission and the Industry

made significant progress toward

achievement of some of the objectives

of a national market system and, more

particularly, certain of the initiatives

described In the January Statement In

addition, through comments and industry proposals submitted In response to

the January Statement, the self-regulatory organizations and the securities

Industry have Increased their collective

commitment to enhance and perfect

market linkage and information systems

and to address unresolved policy and

technological concerns.

COincident with the Issuance of the

January Statement, the Commission announced the adoption of Rule llAcl1 under the Exchange Act, which requrred each self-regulatory organization, as of August 1, 1978, to collect

and disseminate to securities information vendors quotations and quotation

sizes for all equity securities as to which

last sale information IS included In the

Consolidated System. Quotations and

quotation sizes are required by the rule

to be firm at the prices and In the

amounts displayed by vendors, subject

only to exceptions for revised quotations

or quotation sizes and for unusual market conditions.

Although Rule 11 Acl-l , unlike Rule

17a-15, does not require reporting selfregulatory organizations to file plans for

the dissemination of quotation mtormatron, the Commission, In the release

announcing the adoption of Rule llAcl1, encouraged the exchanges and the

National Association of Securities Dealers (NASD) to consider joint Implementation of Rule llAcl-l on a

voluntary basis. 4

In response to this statement, In April

1978, representatives of the American

Stock Exchange (Arnex), Boston Stock

2

Exchange (SSE>, Cmcmnati Stock Exchange (CSE), Midwest Stock Exchange

(MSE), NASD, New York Stock Exchange (NYSE), Pacific Stock Exchange

(PSE) and Philadelphia Stock Exchange

(Phlx) met to diSCUSSthe possibility of

developing a JOint plan for the Implementation of the Rule. On July 25,

1978, the Amex and NYSE JOintly filed

With the Cornrnissron a "Plan for the

Purpose of Implementing Rule llAcl1 under the Securities Exchange Act of

1934" (CQ Plan) and, on July 28,

1978, the Commission temporarily declared that plan effective pursuant to

Section lIA(a)(3)(B) of the Exchange

Act for a period of 180 days. 5

The CQ Plan (1) establishes JOint procedures to govern the collection, processing and dissemination of quotation

information by participating market

centers; (2) provides for the selection

and evaluation of an exclusive processor

to collect quotation Information from

partrcrpating market centers and make

that information available to quotations

vendors; and (3) establishes fees relatmg to the receipt of quotation information. Pursuant to the CQ Plan, on

August 1, 1978, the BSE, MSE, NYSE,

PSE and Phlx commenced drsserrunatmg quotations to vendors In a Single

data stream processed by the Securities

Industry Automation Corporation (SIAC)

and, at this time, all exchanges reportrng quotations" other than the CSE are

partrclpating.? The Implementation of

the CQ Plan and the resultant availability to brokers, dealers and Investors of

firm quotations from all reporting market centers ISan Important step In meetmg the statutory goals of a national

market system. 8

Significant steps also have been taken

toward Implementation of comprehensive market linkage systems. In the January Statement, the Commission called

for prompt development of market linkage systems to permit orders In qualr-
fled securities to be promptly and

efficiently transmitted from one qualified market center to another.

On March 9, 1978, the Amex, BSE,

NYSE, PSE and Phlx JOintly filed with

the Cornrrussron a "Plan for the Purpose

of Creating and Operating an InterMarket Cornrnurucatrons Linkage" (ITS

Plan). The ITS Plan provides the basis

for the Implementation of an Intermarket Trading System linking the various

participants and providing facilities and

procedures for (l) routing of orders and

administrative messages between and

among participants and (2) partrcrpatron, under certain conditions, by members of all participating markets In

opening transactions In those markets

On April 14, 1978, the Cornrrussron,

noting that the ITS Plan represented a

positive response to the January Statement, issued a temporary order pursuant to Section 11A(a)(3)(B) of the

Exchange Act approving the Implementation of the ITS 9 and In August 1978,

the Commission extended that approval

for an additional year 10 As of the end

of the fiscal year, all reporting self-regulatory organizations other than the CSE

and NASD were partrcipating In the ITS

and over 100 securitres were being

traded in the system.

The other linkage system, the Cincinnati Stock Exchange multiple-dealer facility (CSE system), represents an

expert rnent in the use of a fu lIy automated electronic trading system. The

Cornrnissron, on April 18, 1979, approved the CSE Pilot on a nine month

experimental basis." The CSE System,

through an electronic communications

network maintained by the CSE, enables

CSE members, without the necessity of

maintaining a presence on the floor of

the CSE or any other exchange, to participate In a market conducted In accordance with certain auction-type

trading principles by entenng bids and

offers for securities for their own account and as agents for their customers'

accounts. In addition, CSE rules permit

a specialist on any national secuntres

exchange, without becoming a member

of the CSE, to enter bids and offers In

the system as principal or as agent In

any security In which that specialist IS

registered on another exchange. Orders

entered into the CSE System are stored

In the CSE's computer facilities and

queued for execution as follows: pnonty

ISgoverned first by pnce (J.e., the highest bid and lowest offer) and second, as

between orders at the same prrce, by

time of entry. However, public agency

orders as defined In the CSE's rules, regardless of time of entry, are granted

pnonty over other orders at the same

price.

The Cornrmssion believes that these

systems evidence considerable progress

in the application of automation and

computer and communications technology to overcome some of the problems associated with market

fragmentation. In the Commission's view,

the ITS and the CSE System both offer

valuable opportunities to the Commission and the brokerage community to

assess the ability of differing types of

market IInkage systems to integrate

trading In physically separate locations

and to observe the effects of these linkage systems on the operation of the

markets

In response to its universal message

switch initiative, announced In the January Statement, the Cornrnissron received two different types of proposals.

The NYSE submitted a letter generally

expressing support for enhancing order

switching mechanisms but noting that

a variety of such facihties, including ItS

own common message SWitch, were currently available. The NYSE further noted

that those SWitches commercially available from brokerage services firms currently permit brokers to route orders

directly to the market of their choice.

3
Notwithstanding Its belief that a universal message switch IS now functionally available, the NYSE expressed ItS

willingness, later concurred In by the

Amex, to provide other exchanges access to its swrtch.

In contrast to this proposal, the NASD

described a national order routing system (NORS) as a part of the overall national market system configuration.

NORS would be designed to link all exchanges and third market makers With

any broker or dealer establish mg access

to the system and would permit the routmg of designated orders to a specific

market center or undesignated orders

on the baSIS of the best machine drsplayed quotation

Because of the difference In scope of

these proposals, the Commission, In

June, requested further comment from

the various self-regulatory organizations

and other potential users of the routing

system on the baSIC policy question of

whether order-by-order routing of retail

orders to the best market In size should

be a characteristic of the national market system." At the end of the fiscal

year the Commission was evaluating the

responses to ItS June 1978 request.

An addrtronal area of significant progress dunng fiscal year 1978 was the

proposal, In October 1978, of two rules

dealing extensively With the operation

of the Consolidated System and the

manner In which vendors of market information display transaction and quotation information to their subscribers. 13

The Commission hopes to take further

regulatory action With respect to these

proposals In the near future.

Although there has been considerably

less tangible progress toward achievement of the other three initiatives deSCribed In the January Statement (I.e,

rmplernentation of a central agency limit

order file, consideration of off-board

trading rules, and initiation of rulemak4

mg With respect to qualified secuntres),

the dialogue between the Commission

and the securities Industry with respect

to these matters has refined both the

Commission's views on these subjects

and those of the Industry. At the end of

the fiscal year, the Commission was

continuing to evaluate the comments

which had been received With respect

to these initiatives.

National system for clearance and

settlement of secunttes trensections-:

During the fiscal year, substantial progress was made In the Commission's effort to foster development of a national

clearance and settlement system.

The United States Court of Appeals

for the District of Columbia Circurt affirmed the Commission's order of January 13, 1977 which granted the

application of National Securities Clearrng Corporation (NSCC) for registration

as a clearing agency 14 The Commission

views the registration of NSCC as a key

step In achieving the national clearance

and settlement system envrsioned by

the Congress. Although the court did not

disturb NSCC's registration, It did remand to the Commission for further consideration the matters of competitive

bidding for NSCC's facilrtres management contract and geograph ICprice mutualization.

The Commission took several Important steps toward achieving a competitive national clearance and settlement

system. The Commission has reviewed

the transaction completion rules of the

securities exchanges and of the National Assocratron of Securities Dealers,

Inc. (NASD). Some of those rules unnecessarily restricted competition among

clearing agencies Others failed to comply With the Exchange Act for other reasons. 15 As a result of this review, over

100 exchange and NASD rules were

amended or deleted. This step removed

many Impediments to development of
a national clearance and settlement system.

The Commission also held hearings

in March and April 1978 on this subject. The Commission received data,

views and arguments concerning the

extent to which NSCC had satisfied the

conditions imposed upon It by the Commission In ItS order granting NSCC regrstration as a clearing agency." In

addition, the Commission received other

information which has proven useful In

formulating further steps toward ach levmg a national clearance and settlement

system.

Progress toward a national system

also was evident In other areas. The expansion of Interfaces among clearing

agencies has permitted most brokers

and dealers to clear through a Single

clearing agency (one account processing) all transactions regardless of the

market of execution. Expanded interfaces among depositones have further

Immobilized securities certificates and

allowed most partrcrpants to move securities throughout the country, to effect pledges and to make deliveries by

book entry. These developments have

reduced costs and accelerated the settlement process.

During the year, the Commission took

two Important steps In rrnrnobrlrzmg certificates. First, Rule 17f-4 under the

Investment Company Act was adopted.

The rule establishes the conditions under which registered Investment companies, or custodians for registered

Investment companies, may deposit investment company secuntres In a secunties depository 17

The Commission also worked toward

increasing Insurance company particrpation in secuntres depositones. Insurance companies are large holders of

secuntres but, principally because of

certain requirements of state laws, have

been inhibited from widespread partrcipatron In securities deposrtones The

National ASSOCiation of Insurance Commissioners recently formed a task force

on the use of book entry and depository

systems by Insurance companies Members of the Cornrrussron staff met With

the task force and were appointed by the

task force to serve on an advisory committee which Will seek solutions to both

the legal and practical problems restricting Insurance company particrpation.

Charges for Market Information-In

May 1978, the Cornrnrssron began a review of a dispute between the Options

Price Reporting Authority (OPRA) and

two commercial vendors of transaction

and quotation information. The dispute

concerns fees charged by OPRA to vendors for access to options last sale Information. 18

OPRA IS the exclusive processor of

market information for the options exchanges, and the dispute arose when

OPRA decided to charge an "access

fee" to those persons having direct access to the high speed communications

line for last sale reports of options transactions The Cornrnissron held a hearing

to provide Interested persons an opportunity to present both oral and written

views on the Issues raised, including the

question of whether the Exchange Act

authonzes an exclusrve processor, such

as OPRA, to charge a fee to vendors as

a condition of access to market information, such as options last sale reports.

Tradmg by exchange members-Section l1(a)( 1) of the Exchange Act, as

amended In 1975, prohibits, With specified exceptions, any member of a national secuntres exchange from effecting

any transaction on that exchange for ItS

own account, the account of an assocrated person, or an account With respect to which it or any of Its associated

persons exercises Investment discretion. Under Section l Ita), the Commission has broad authonty to fashion either

5
more flexible or more restnctive standards. Section 11 (a) became effective,

as applied to most exchanges members,

on February 1, 1978.

Durrng the fiscal year, the Commission made significant progress In completing ItS regulatory program under

Section 11(a)(l). Based on proposals

publrshed In the preceding two years

and on an exhaustive public drscussion

relating to those proposals and the Secnon generally, the Cornrrussron announced In March and Aprrl 1978 several

Important actions. First, the Commission adopted a rule under which member transactions for accounts covered by

the general prohibition of Section

11 (a)( 1) may be effected as long as

those transactions are referred to independent members for execution and

meet certain conditions. The exemption

was designed to put members and nonmembers In the money management

business on the same footing, to the

extent practicable, In light of the purposes of this provisron.

Second, the Cornrrussron adopted

separate exemptions for (l) member

transactions effected for affiliates which

a member Itself would be permitted to

effect under Section 11(a)(l) and rules

thereunder and (2) members' bond

transactions These exemptions were

designed to remove unintended burdens

Imposed by Section 11(a)(l) In the exchange markets and, at the same time,

to avoid permitting members and their

affiliates any special trading advantages

over public customers and other nonmembers. Finally, the Commission resolved several major interpretive Issues

under Section 11(a)(l) and rules thereunder, including the meaning of the

phrase "Investment discretion"

The Commission also approved programs designed by the NYSE and Amex

to supplement the market making capacity of specrahsts by creating new

classes of market makers who would be

6

exempt from the prohibitions of the Section These programs were established

for a temporary perrod In order to permit

the Cornrrussron to review them to determine whether the predicted market

benefits are being realized.

Options Trading-In July 1977, the

Commission requested those national

secunties exchanges on which options

are traded to refrain from expanding

their options trading programs. 19 The

Cornrmssron's request, which was honored, was based upon concerns that

the rapid growth In options trading since

1973 had been accompanied by trading

abuses.

In October 1977, the Commission

announced commencement of a comprehensive mvestrgatron and study of

the nation's standardized options markets and a proposed rule to halt temporarrly any expansion of trading In

standardized options pending completion of the study and resolution of the

Comrmssron's concerns as to the adequacy of existrng regulation. 21

On June 22, 1978, the Cornrrussron

requested the NASD and each national

securttres exchange wh rch traded, or

had proposed to trade, standardized options to continue to honor the Cornrrnssion's request for a voluntary moratorrum

on further expansion until the Cornrrussion had evaluated the findings of the

Options Study. 22 The Commission made

that request because It hoped to resolve

ItS concerns with respect to the standardized options markets In a cooperative

effort with the self-regulatory organizations, rather than tormalrzmg the rnoratorrum by rulernakmg. 23

On August 3, 1978, the Cornrrussron

announced that the NASD, the NYSE

and the five options exchanges had

agreed to ItS request 24 Accordingly, the

Cornrrussion postponed final action on

ItS proposal to halt any trading expansion by rule. The Cornrrussron also said

It would consider whether to continue

"
or terminate the moratorium on expansion of options trading promptly after

reviewing the report of the Options

Study. (Subsequent to the close of the

fiscal year the Commission received the

Report of the Options Study and, In February 1979, Issued a release setting

forth the circumstances under which

expansion of options trading could take

place.)

Effects of the Absence of Fixed Commission Rate~ln 1975, the Commission prohibited the national securitres

exchanges from prescribing fixed minimum commission rates and from requiring their members to charge no less

than those rates. The Commission has

submitted to the Congress five reports

covering the first twenty months of commission price competition through December 31, 1976, describing what effect

the absence of any schedule of fixed

rates of cornrrussion IS having on the

maintenance of fair and orderly markets

and on the development of a national

market system for securities.

Analysis of cornrrussion rates IS now

Integrated Into the Commission's ongoing monitoring of the financial condition of the industry. In that connection,

the Commission released to the public

on May 22, 1978, a "Staff Report on

the Securities Industry In 1977," which

detailed among other findings, the results of ItS cornrrussron rate survey.

From May 1, 1975, to the end of September 1978, individual investors' effective cornrrnssron rates when measured

as a percent of principal value declined

13.9 percent. Instrtutronal customers,

due to their larger average order size and

greater bargaining power, have negotiated discounts averaging 48.8 percent

from the exchange prescnbed minimum

rates. When the rates are measured as

cents per share, the declines were 6

percent for individuals and 48.5 percent for mstitutions. lndrvrduals paid an

average of 28.2 cents per share on their

September 1978 orders, which averaged 394 shares In size. Institutional

orders averaged 1,859 shares In size

and cornrrnssions averaged 13.4 cents

per share for these customers.

Broker-dealers were affected by the

elimination of fixed minimum commission rates largely depending upon the

extent they serve institutional Investors.

Some firms which did a large portion of

their total business wrth institutions

merged with more diversified frrrns. A

group of new discount broker-dealers

have entered the Industry to offer investors a reduced level of services at reduced cornrrussron rates. Broker-dealers'

gross revenue for the first nine months

of 1978 was one-third higher than the

comparable 1977 period, due to recordsetting VOlume In the second and third

quarters of 1978. This Jump In revenue

more than doubled pre-tax profits

The Commission's economic staff has

continued to rnorutor the Impact of negotiated cornrrussron rates. Competitively determined cornrrussion rates do

not appear to have adversely affected

the development of a national market

system or the maintenance of fair and

orderly markets

RegUlation of Brokers, Dealers,

Municipal Securities Dealers and

Transfer Agents

Regulatory burdens on small brokers

and deeters-stne Commission IS aware

of the need to evaluate the costs and

cornpetrtive Impact of ItS regulations on

brokers and dealers Accordingly, In

adopting regulatory requrrernents, the

Commission weighs the benefits to

Investor protection and other statutory

goals against possible compliance and

competitive burdens. In addition, the

Commission has endeavored to tailor

regulatory requirements to particular

busmess practices or ways of doing

business so as to avoid Imposing regulatory burdens. This effort can partrcu7
larly benefit smaller, more specialized

brokerage firms.

In 1975, the Commission's financial and operational reporting system

and ItS financial responsibility rules

were substantially restructured to reflect this approach Based on three

years' experience with their operation,

the Commission has undertaken a comprehensive review of these rules with a

view toward eliminating any unnecessary requirement Although this review

IS generally directed toward Improving

the efficiency and effectiveness of the

regulatory system as a whole, the possible benefits to brokers and dealers

domg a limited secunties business are

receiving particular attention

Through such efforts, the Commission has attempted to rrururntze the effects of ItS rules on smaller brokerdealers and to help assure their continued participation In the securities markets without sacrificing the Commission's

primary statutory objective of protecting

Investors

Lost and stolen secunties-: The Comrrussron's program for the reporting of

missing, counterfeit or stolen securities

became fully operational dunng fiscal

1978 The Commission arranged with

the Unted States Attorney General to

enter flies of the National Crime Information Center on securitres thefts Into

the data base maintained by the Securities Information Center, Inc. (SIC), the

organization designated by the Commission to receive reports and respond

to mqurnes regarding corporate and

municipal secuntres. The Federal Reserve Banks perform the same functions

with respect to government securities.

The Commission made arrangements

with the National Crime Information

Center for the exchange of information

on lost or stolen securities As of Septernber 1, 1978, approximately 190,-

000 reports of rnrssrng, lost, stolen or

counterfeit secuntres, with an aggregate

8

market value of nearly $1 billion, had

been received by the SIC

Secunttes conttrmsttons-: The Comrmssion adopted, effective December

18, 1978, a new rule prescribing delivery and disclosure requrrernents for confnrnatrons of securrtres transactions sent

by brokers and dealers to customers 25

The confirmation IS an Important disclosure document that provides an

Investor with information pertinent to

each securities transaction. The Comrnrssron's adoption of new confirmation

disclosure and delivery requirements

represents an effort to review old regulatory requirements so as to enhance

Investor protection while eliminating

regulatory burdens for which the compliance costs appear to exceed the public benefit The Commission IScontinuing

to evaluate whether additional disclosure on customer confrrrnatrons for

transactions In particularly debt securities would be appropriate

Broker-dealer practices-On September 28, 1978 the Commission published a release26 givmg notice to brokerdealers that certain practices regarding

customer accounts are inconsistent with

Just and equitable principles of trade

and may In some Instances violate the

antifraud provisions of the Federal secunties laws These practices are as follows

(a) Issuance to customers of checks

drawn on distant banks, a practice referred to as "remote checking",

(b) retention of Interest and divrdend

payments rather than disbursing such

payments to customers promptly upon

receipt, without afford Ing customers adequate prior notice and a reasonable

opportunity to elect either Immediate or

deferred payment;

(c) Imposition of Increased commission rates without adequate prior notice;

(d) rrnposrtron of custodial fees on

"inactive" customer accounts without

adequate prior notice; and
(e) failure to promptly transfer customer accounts.

Uniform dispute resolution procedures for Jnvestors-A program to Implement uniform, fair and efficient

dispute resolution procedures for investors was undertaken by the Commission

In May 1976, In connection with ItS establishment of an Office of Consumer

Affairs. The purpose of this program IS

to Improve the ability of Investors to resolve disputes with broker-dealers In a

satisfactory manner, and at less cost

then litigation. In April 1977, the Comrrussion agreed to consider proposals

from the Securities Industry Conference

on Arbitration (SICA), a voluntary group

of secuntres Industry and public representatives which would contemplate

utilization of exrstrng arbitration facilities of the self-regulatory orgarnzatlons.27

On November 15, 1977 SICA submitted to the Comrnrssron a proposal for

a Uniform small claims procedure for

Investor-broker disputes SICA proposed that the securities Industry selfregulatory organizations adopt a unrform

set of rules for the simplified arbitration

of customer claims against broker-dealers mvolvmg less than $2500. Any such

dispute could be resolved by a Single

arbitrator on the basis of pleadings and

documentary evidence Without a hearmg, although a hearing could be requested by the customer claimant or an

arbitrator. On May 4, 1978 the Commission approved, pursuant to Section

19(b) of the Exchange Act and Rule

19~ thereunder, the adoption of a set

of rules similar to the SICA proposal, by

the NYSE and the Amex. 28 The uniform

small claims rules were approved subsequently for adoption by other orgaruzanons."

The Cornrrusston expects to receive

further proposals from SICA regarding

uniform investor dispute resolution procedures, including a unrform arbitration

code for adoption by self-regulatory organizations.

The Cornrrussion will review the operation of these arbitration facilities as

part of ItS general oversight responsibilities With respect to self-regulatory

organizations.

MUnicipal secunties dealers-On July

17, 1978, the Cornrrussron published

for comment proposed amendments to

Form MSD, which IS used for rnurucrpal

secuntres dealers, registration by banks

and separately Identifiable departments

or divrsrons of banks 30 The proposed

amendments were designed to simplify

or to clarify, In several respects, the

scope of information solrcited by the

Form

Transfer agent rules- The Commission's first substantive rules governing

the performance of transfer agents became effective durrng the fiscal year. 31

These rules (l) prescn be for registered

transfer agents performance time standards for the transfer of secuntres from

one record owner to another for the completion of the registrar function and for

responding to mqumes concerning the

status of Items previously presented for

transfer; (2) provide for early warning to

the regulatory agencies of Inadequate

transfer agent performance; (3) apply

limitations on the expansion of transfer

agent actrvitres when transfer agents are

repeatedly unable to meet the time

standards for performance of the transfer or registrar functions; (4) require the

making and keeping of certain records,

and (5) provide exemptions from the

performance time standards and recordkeeping sections for certain registered

transfer agents

Oversight of Self-Regulatory

Organizations

Secunties exchanges-As of September 30, 1978, ten exchanges were regrstered With the Cornrrussion as national

secuntres exchanges: American Stock

9
Exchange, Inc. (Arnex), Boston Stock

Exchange, Incorporated (BSE); Chicago

Board Options Exchange, Incorporated

(CBOE); Cincinnati Stock Exchange

(CSE); Intermountain Stock Exchange

(ISE); Midwest Stock Exchange, Inc.

(MSE); New York Stock Exchange, Inc.

(NYSE); Pacific Stock Exchange Incorporated (PSE); Philadelphia Stock Exchange, Inc. (Phlx): Spokane Stock

Exchange (SSE). The Commission ISsued on November 8, 1978 an order

terminating the exemption from registration as a national secunties exchange

of the Honolulu Stock Exchange, which

had ceased operation earlier In the fiscal

year.

In connection With the Commission's

oversight of the delistmg of secuntres

traded on exchanges, the Commission

during the fiscal year granted applications by exchanges to strike 116 equity

issues and 25 debt Issues from listing

and registration. The Commission also

granted applications, submitted by ISsuers, requesting Withdrawal from listmg and registration for 35 equity Issues

and 5 debt Issues.

In November 1977, the Cornrrussron

initiated a review of ItS past practices

In granting applications for unlisted

trading privileges. Since the Initiation

of that review, the Cornrrussron has not

granted any applications for unlisted

trading privileges. The Cornrrussron's

review of ItS policies IS designed to develop standards which the Commission

will apply In considenng whether the

extension of unlisted trading privileges

IS consistent With the maintenance of

fair and orderly markets.

DUring the fiscal year, the national

securities exchanges reported to the

Commission approximately 250 diSCIplmary actions, Imposing a variety of

sanctions upon member firms and their

employees

National ASSOCIatIon of Securities

Dealers, Inc.-The National ASSOCiation

10

of Secuntres, Inc. (the "NASD") IS the

only secunties association registered

with the Cornrrusston At the close of the

fiscal year, 2,798 brokers and dealers

were NASD members.

DUring the past fiscal year, the NASD

reported to the Commission final drspositron of 230 disciplinary complaints

In which 105 member firms and 230

indivrduals were named as respondents.

At the beginning of fiscal 1978, 15

proceedings for review of NASD diSCIplmary decrsions were pending before

the Commission, and during the year 16

additional cases were brought up for review. The Commission revrewed 17 of

these cases, and reduced the sanctions

to be Imposed In some of those cases.

The Cornrrussron also reviewed 35

NASD applications to admit a broker or

dealer to membership or to permit a person to become associated with a member where the broker or dealer or person

ISsubject to a statutory disqualification.

The Comrrussron denied the registration

of one indrvrdual and instituted proceedings to deny the registration of two

others. It has taken no adverse action

With respect to the other 32 notices.

The Cornrrussion began during the

year to review an NASD proposed rule

to prohibit its members from giving drscounts to customers In distributions of

sscuntres offered at a fixed price. The

proposal was written In response to a

1976 judicial decrsion (Paprlsky v.

Berndt32) which held that such drscounts were lawful In some circumstances, absent a contrary Commission or

NASD ruling. The matter Involves complex Issues which. depending upon their

resolution, could have far reaching impact on underwriting practices.

DUring the fiscal year the Commission

worked With self-regulatory organizations to Simplify and eliminate duplication In the self-regulatory system for

brokers and dealers. In September 1978,

the Cornrrusston temporarily approved
four plans proposed by self-regulatory

organizations for allocating their responsibilities to perform various regulatory functions for brokers and dealers

which belong to more than one self-regulatory organization. The plans represent agreements reached between the

NASD and four exchanges: the Boston

Stock Exchange, Inc., the Clncmnat:

Stock Exchange, Inc., the Midwest Stock

Exchange, Inc., and the Pacrfrc Stock

Exchange, Inc.

The plans reflect progress toward reducing unnecessary regulatory duplication by assigning to the NASD much

of the responsibility for conducting onsite examination of dual members and

for processing various applications. At

the close of the fiscal year, the Comrrussion was constdering plans proposed

with respect to other self-regulatory organizations.

MuniCipal Securtttes Rulemakmg

Board-As In the case of national secunties exchanges and the NASD, the

Commission reviews proposed rule

changes of the Murucipal Securities

Rulemakmg Board (the MSRB) During

the fiscal year, the MSRB filed seventeen rule proposals. The Commission

considered several of those proposals

and others which were pending from the

previous fiscal year.

The Commission approved a series of

rule proposals designed to establish

baSIC standards of fair and ethical conduct for rnumcrpal securities professlonals.33 The rules establish

requirements In particular areas such

as: (1) SUitability of recommendations

and transactions; (2) professional advertising; (3) administration of discretrenary and other accounts; (4)

supervrsion of employees; (5) determination of prices and cornrmssrons: (6)

disclosures in connection with new ISsue municipal securities; and (7) advertisements of such secunties. The

rules provided the first regulation of thrs

type for most rnurucrpal securrtres

professionals, since the rules of fair

practice of the NASD do not apply to

transactions In municipal secuntres and

exemptions are available for many persons subject to comparable rules applicable to brokers and dealers who are not

members of the NASD

The Cornrrussron also approved a rule

establishing terms and conditions for

the sale of new Issue murucipal securities dunng the underwriting penod. 34

The rule requires rnurucipal secuntres

underwntrng syndicates to establish

procedures for allocating securrtres

among competing orders; to disclose

those procedures to syndicate members

and, upon request, to others; and to reveal information concerning certain

customers to syndicate members.

In addrnon, the Cornrnissron approved two new examinations for rnunrcrpal securities professionals. 35 The

first examination ISrequired In order for

a person associated With a murucipal

secuntres broker or rnurucrpal secuntres

dealer to become qualified as a tmancrat

and operations principal. The second

examination IS required In order for a

person to become qualified as a rnurucrpal securities representative.

Clearing AgenCies-The Commission

has granted temporary registration to 12

clearing agencies pending the development of permanent standards for registratron.

On June 1, 1977, the Comrrussron

proposed for publrc comment standards

which clearing agencies would have to

meet In order to be granted permanent

registration 36 The Commission received

numerous comment letters on the proposed standards and on March 6, 1978,

proposed revised standards for publrc

comment. 37 The Commission again received many comment letters on the reVised proposed standards and IS

considering them.

inspections of self-regulatory orgent11
zatlOns---During the fiscal year, the

Commission's staff conducted inspections of NASD district offices located In

Los Angeles, New York and San FranCISCO.These Inspections Involved a review and evaluation of the organization

and staffing of those offices, the procedures and quality of their broker-dealer

exarrunatron. disciplinary and customer

complaint processes, the adequacy of

their survlliance for compliance With

Comrrussron and NASD rules, and the

composition and effectiveness of the

District Committees. In the Los Angeles

and New York district offices, the Comrrussron's staff noted areas In which the

NASD's compliance programs could be

enhanced The staff was generally satisfted With the NASD's compliance program at ItS San Francrsco district office

In ItS inspection of the Los Angeles

district office, the staff noted shortcommgs In that office's ability (1) to conduct

adequate ftnancral, operational and sales

practices exarrunatrons. (2) to meet

planned examination cycles; (3) to respond fully and promptly to customer

mqumes and complaints, (4) to process

appropriately requests for extensions

of time for delivery of payment for secuntres pursuant to Regulation T of the

Board of Governors of the Federal Reserve System; and (5) to follow up on

examinations In order to institute drsciphnary actions In a timely fashion It

appeared that these deticrencres were

attributable, In large part, to a lack of

adequate and experienced staff durmg

1976 and 1977. These matters were

reviewed With otfrcials from the NASD's

headquarters office and its Los Angeles

district office upon completion of the

mspectron, and were also discussed

With these offrcrals In follow-up meetings later In the fiscal year. The DIStrict's manpower quota was Increased

from 16 to 20, to authonze an additional full time attorney, a supervisor

and two examiners, and the NASD pro12

vrded assurances that the district's operations were current.

The inspection of the New York district office revealed several dencienc res , Including (1) the relative

inexperience of, and a high rate of turnover among, the examiner staff; (2) a

lack of adequate supervisron of the examination process; (3) the narrow scope

of the examinations conducted by the

NASD's staff, particularly With respect

to sales practices; (4) the failure of the

examiners to follow specmed examination procedures; (5) the failure of the

staff to take adequate follow-up steps

to assure that noted defrcrencres were

corrected; and (6) problems regarding

the processing of requests for extensions of time for payment of securities

pursuant to Regulation T Revised procedures have been Implemented or are

under consideration as a result of this

Inspection.

On November 15, 1977, the Comrrussron's staff Inspected the Amex to

determine the adequacy of ItS surveillance programs for monitoring compliance With Amex rules regarding position

limits. In addition, the staff reviewed

the Amex's procedures for rnorutonng

the use of market maker accounts With

clearing firms by specralrsts and Regrstered Option Traders to determine

whether the Amex's procedures would

detect Violations of Regulation T.

The staff found deficrencies In the

regulatory and surveillance programs

designed to monitor or provide for regulation of options POSitions. The staff

also raised a number of as yet unresolved questions based on conflicting

Interpretations by the FRS and the

Amex regarding the availability of "exempt credit" for Registered Options

Traders.

The Comrrussron's staff inspected the

Amex and NYSE on November 7, 1977,

and on January 25 and 26, 1978, respectively The purpose of these In-
spections was to review and evaluate the

enforcement by the Amex and NYSE of

their delrstmg policies to determine

whether those exchanges are fulfilling

their regulatory responsibilities.

The staff concluded that the NYSE's

regulatory responsibilities, In relation to

Its dehstrng policies and procedures,

were being earned out satrsfactonly.

With respect to the Amex, the staff

found that It had no program of centralized management and control for

dehsting securities. The Amex subsequently has taken steps to correct the

deficiencies found

On Apnl 20-21, 1978, the Commission's staff conducted an inspection of

the NYSE's processing of Regulation T

extension requests. The inspection disclosed that the NYSE procedures for review of Regulation T extension requests

do not assure compliance With that Regulation's requirement that extensions be

granted only in exceptional circumstances. In addition, inadequacies were

found in member firm's supervisory procedures, and NYSE surveillance thereof,

for compliance With Regulation T requirements. By letter dated September

19, 1978, the Drvrsion of Market Regulation Informed the NYSE of ItS findrngs and suggested possible alternative

solutions to the problem The Commission's staff ISdrscussing With the NYSE

the Implementation of new procedures

for the processing of extension requests

and IS also reviewmg whether the procedures of other exchanges and the

NASD are adequate to assure compliance With the requirements of Regulation T.

On October 3-5, 1977, the Commission's staff conducted an rnspectron of

the CBOE which focused pnmarily upon

the CBOE's examination program and

its procedures for enforcing member

compliance With its rules concerning

option selling practices. The Commission's Inspection team noted a number

of areas In which It felt that the CBOE's

surveillance systems, like those of other

options exchanges, should be strengthened. The staffs of the Commission and

the Options Exchanges were working on

solutions to a number of problems as

the fiscal year ended

On May 18-19, 1978, the Commission's staff reviewed the CBOE's closmg

rotations procedures. The Commission's

staff was concerned about the need for

uniform procedures among the options

exchanges and the unfairness to publrc

customers of dally closing rotation procedures because of limitations that are

imposed on publrc customers but not on

protessronals on exchange floors. Based

In part on the results of this rnspectron,

the Commission approved a four month

experirnent by the options exchanges to

extend trading unt,14.10 New York time

and to suspend dally closmg rotations

On July 27 and 28, 1978, the Commission's staff Inspected the Phlx With

respect to (1) operation and surveillance

of the trading floor for stocks, (2) regulation of specralrsts and alternate dealers, (3) functioning of the BUSiness

Conduct, Floor Procedures, and Stock

Life Committees; and (4) processing of

Regulation T extension requests submitted by member firms At the end of

the fiscal year, the Commission's staff

was continuing to analyze data gathered

In the course of this inspection After

completion of this work, a report drscussing the staff's findings Will be transmitted to the Phlx.

On September 27 and 28, 1978,

members of the Commission staff conducted an inspection of the NYSE Arbitration Department. The purpose of

the inspection was to determine whether

the NYSE's procedures result In the fair

and etncient resolution of disputes between broker-dealers and their customers. As of the end of the fiscal year,

the Cornrnissron staff was In the process

of reviewing the data gathered dunng

13
the course of the inspection and, after

evaluation, will make any necessary recommendations to the NYSE and to the

Commission. The inspection Included

Interviews with the staff of the Arbitration Department, review of the system

of documentation for matters submitted

for arbitration, and reivew of a sample

of case files. The subjects of inquiry included the time necessary to conclude

arbitration proceedings, the manner In

which arbitrators are selected, the number of locations In which hearings may

be held, the types of cases and issues

involved, the appropnateness of awards,

the extent of particrpatron by the NYSE

staff In the resolution of disputes, and

the referral of matters which may be of

concern to the appropriate disciplinary

authorities of the NYSE and/or other organizations.

Revenues and expenses of self-regulatory organizations- The regulatory

14

functions of the various exchanges and

the NASD With regard to their brokerdealer members are financed through

various fees and dues, such as listing

fees and transaction charges. The nature of some of these revenue sources

makes the financial condition of selfregulatory organizations dependent upon

price fluctuations and trading volume.

Furthermore, the various self-regulatory organizations are quite different in

the extent of their dependence on particular sources of revenue. Some sources

of revenue, such as transaction, clearing and depository fees, change directly

with changes in share volume. Others

are relatively fixed, such as listing fees

and membership dues. Additional analysis and statistical detail on share volume and revenues and expenses of each

self-regulatory organization IS presented

in the Appendix of this report.
The Disclosure System

Corporate Governance; Management

Background and Remuneration

During the fiscal year, the Cornrrussion took sigruftcant steps toward providing new disclosures to investors

regarding the structure and function of

corporate boards of directors, and toward Implementing required disclosures

of new material inforrnatron regarding

the background and remuneration of

directors.

As a result of many recent events, including numerous corporate disclosures

revealing questionable and Illegal payments, the Commission became concerned about the adequacy of corporate

accountability and conducted a broad

re-examination of ItS rules relating to

shareholder communications, shareholder participation in the corporate

electoral process and corporate governance generally. 38 The Cornrrussionheld

public hearings which commenced in

Washington on September 29, 1977,

and continued for five and a half weeks,

with sessions In Los Angeles, New York

and Chicago. On July 18, 1978, the

Commission proposed rule, form, and

schedule amendments designed to increase the information available to

Investors regard109 (l) the structure,

cornposrtron, and functioning of Issuers'

boards of directors; (2) resignations of

directors; (3) attendance at board and

committee meetings; (4) voting policies

and procedures of certain institutions

subject to the proxy rules that exercise

voting rights With respect to equity securitres held for their own accounts or

for the accounts of others; and (5) the

terms of settlement of proxy contests.

The Commission also requested com.

ments on a rule proposal that would enable shareholder-proponents to review

management statements opposing

shareholder proposals pnor to the mailing of Issuers' proxy matenals.39

Final rules adopting many of the proposals were Issued after the close of the

fiscal year. Generally, those amendments require disclosures In the areas

descnbed above Including disclosure of

certain economic and other relationships of directors and nominees. However, the proposals on institutional

Investors' voting polrcres were Withdrawn.

The staff is also engaged In the preparation of a comprehensive report which

would address some of the more complex questions raised dunng the course

of the corporate governance proceedrngs, The report is expected to address

such issues as exrstmg checks on corporate conduct, available shareholder

remedies, the functions of the board of

directors and ItS various committees,

and the respective roles of the pnvate

sector, shareholders, the Commission,

the self-regulatory organizations, and

Congress In corporate accountability.

After review and perhaps publication of .

15
the staff report, the Commission will

consider what further action, if any, IS

appropriate and will determine whether

to publish additional rulernakmg proposals or to recommend or support new

legislation affecting corporate accountability.

The Commission also published proposed amendments to various forms,

reports, and schedules Intended to

standardize and Improve ItS disclosure

requirements relating to management

renurneratron 40 In view of the development of complex and varied management remuneration packages and the

necessity for accurate and complete remuneratron disclosure, the amendments were Intended to provide clearer

and more concise reporting of all types

and formats of remuneration, including

security-based and other non-cash arrangements. In addrtron, these proposed amendments were Intended to

provide a clearer method for reporting

of personal benefits or "perqursites"

provided to management, In recognition

of the considerable concern engendered

In the corporate and legal cornrnurutres

by the Commission's Interpretive releases regarding how such benefits

should be disclosed. (After the close of

the fiscal year, the Commission adopted

amendments to the remuneration disclosure requrrernents.)

In connection with ItS efforts to consolidate, for easier reference, substantially all disclosure requirements Into

one uniform schedule, the Commission

also adopted standardized Items, which

set forth In one regulation the current

disclosure requirements concerning directors and executive officers, management remuneration, legal proceedings

and security ownership of certain benefrcral owners and management 41 The

Commission's action at the time also

Involved amendments to the disclosure

requirements regarding the Identity and

background of corporate offtcials and

16

events which are material to Investors'

evaluation of the ability and integrity of

management. 42 These amendments, for

example, will require disclosure With respect to the previous five year period of

any injunctions or consent decrees relating to business practices or Violations

of Federal or State secunties laws and

certain CIVil actions involvmg Violations

of such laws to which directors and officers are subject, as well as disclosure

of other directorships held by each director or nominee.

Small Business Hearings

On December 14, 1977, the Commission announced that It would hold

pubhc hearings concerning the effects

of ItS rules and regulations on the ability

of small businesses to raise capital and

the Impact on small businesses of the

disclosure requirements under the Secunties Acts.43 The Commission, on

March 6, 1978, published a release listmg the Issues to be considered at the

hearings. 44 The general areas of inquiry

for which the Commission requested

oral presentations and written subrnrsstorrs Included the following.

(a) The Definition of a Small Business

Issuer;

(b) POSSible Revision of Disclosure

Obligations Imposed on Small Bustnesses:

(c) Role of Underwriters, Accountants

and Attorneys In a Small Business Secuntres Offering;

(d) Intrastate Offerings and Rule 147;

(e) Regulation A;

(f) Rule 240; and

(g) Private Placements and Rule 146.

In a companion release dated March

6, 1978, the Commission proposed

Form S-18 and related actions concerning Simplified registration and reporting requirements for small Issuers 45

The Form was proposed to be available

for offerings of up to $3 million by domestic or Canadian corporate Issuers
which are not subject to the Commission's continuous reporting requirements The Form calls for narrative

disclosure somewhat less extensive that

that presently required by Form $-1 and

audited financial statements substantially srrnilar to those required by Regulation A. In addition, the proposal

relaxed certain financial statement requirements by allowing such Issuers to

Include In their initial annual report

filed with the Commission audited financial statements substantially similar

to those required by Regulation A

Between Aprr112, 1978 and May 18,

1978, the Commission conducted a senes of hearrngs In Washington, DC;

Los Angeles, California; Denver, Colorado, Atlanta, Georgia, Chicago, Illinois; and Boston, Massachusetts. The

commentators discussed a number of

deletions, additions, and modifications

of registration and reporting requirements in an effort to aid small bustnesses and new ventures. Commentators

also emphasized that there are a number of factors other than the Federal securities laws that have a substantial

Impact on access to the public marketplace.

Based on the hearrngs and other

available information and suggestions,

the Commission adopted revrsrons to

Rule 144, Rule 146, and Regulation A

The Commission relaxed Rule 144's

quantitative resale restnctrons, 46 and

proposed an amendment to Rule 144

which would permit certain persons who

have held securities covered by the Rule

for a five year perrod to sell such securities Without any volume limitations

(This proposal was adopted after the end

of the fiscal year With a holding period

of three years for exchange listed securrties and four years for secuntres not

listed but Issued by a reporting company).47 An amendment was adopted to

Rule 146 to allow the use of Regulation

A type financial information for Rule

146 offerings up to $1.5 million 48Pursuant to requisrte Congressional authorrzation, the Commission raised the

ceiling on the amounts of securities

which may be sold under Regulation A

Within a twelve month perrod from

$500,000 to $1,500,000 49

In conjunction With the Commission's

ongoing review of problems facing small

businesses, additional proposals-e-rncludmg Form $-l8-were stili In various stages of staff formulation and

review at the end of the fiscal year

(Subsequent to the close of the fiscal

year, the Commission adopted, on March

29, 1979, Form S-18 as revised to reflect certain recommendations of commentators. The form IS available for

offerrngs of up to $5 million dollars, of

which up to $1.5 million may be sales

by existmg securrty holders.)

New Developments in Disclosure

Policy

Advisory Committee On Corporate

DIsclosure-In November, 1977, the

Report of The AdVISOry Committee on

Corporate DIsclosure was presented to

the Commission and the public 50 The

Report represented the culmination of

a 21-month investigation by a 17 -rnernber Committee which was assisted by

the staff of the Commission and a number of other protessional and self-regulatory organizations

The transmittal letter accompanying

the Report Indicated that although not

all members agreed unreservedly, the

conclusions reached were that the disclosure system established by the Comrnrssron IS sound and does not need

radical reform or renovation. However,

the letter also urged that the Commission be mindful of the POSSIbilities extant for such reform, and the Report

goes on to recommend that the Comrrussion review ItS practices In 13 major

areas: (1) the Commission's disclosure

objectives; (2) the Commission's rule17
making and monitoring practices; (3)

the development of Industry gurdelines:

(4) soft information; (5) segment reporting; (6) social and environmental

information; (7) proxy statement disclosure; (8) further integration of the Secuntres Act and the Exchange Act; (9)

reporting requirements under the Exchange Act; (10) financial statement

disclosures, (11) disclosure problems

of small companies; (12) dissemination

of company filings; and (13) reorganization of the Commission's file-keeping

system.

In a release Issued In February,

1978,51 the Commission summarized

the major aspects of the Report and announced ItS preliminary response to the

recommendations.

In the area of Industry guidelmes, the

Commission has Issued two releases 52

announcing Its Intent to develop guides

for railroads and for gas and electric

utilities, and the staff IS reviewing the

letters received on these projects With

a view to making further recommendations to the Commission.

Projections of Future Economic Performance.-In connection With projections of financial information, the

Commission reviewed the administrative record on several prior rule-making

porposals and hearings, completed ItS

review of the Advisory Committee's recommendation that the Commission ISsue a publrc statement encouraging the

disclosure of earnings forecasts and

other forward-looking information by

registrants, and approved, after the end

of the fiscal year, proposed gurdelmes

for disclosure of such information. The

guidelmes Included, in accord With the

Advisory Committee's recommendation,

a proposed rule that would provide a

"safe-harbor" from the liability provisions of the Federal securities laws for

reasonably based and adequately presented projections or forecasts that are

made In good faith, but ultimately prove

to be erroneous

18

In a release Issued In December,

1977, the Commission adopted amendments to ItS disclosure forms Implementing the Advisory Committee's

recommendations concerning the disclosure of Industry segment and geographrc information, and integrating

such disclosure With the registrant's description of business Information. To

provide the public With further guidance

concerning the Issues presented by segment disclosure, the Diviston of Corporatron Finance later Issued an

interpretative release responding to some

of the more frequently-asked questlons.54

lntegreiton of Documents and Other

DIsclosure Revtstons-« The Advisory

Committee also recommended that the

Commission continue ItS efforts to integrate the disclosure aspects of the

Securities Act and the Exchange Act and

pursuant to thrs goal, the Commission

has taken several actions. On April 11,

1978, the Cornrnissron adopted admendments to Form S-16, the Simplest

and shortest registration form; the

amendments, for the first time, made

the form available for registration of securities to be offered directly to the public in primary offerings. 55Issuers eligible

to use form S-16 are required to file

periodic reports under the Exchange Act

containing information about their bUSIness management and financial operations. Since these reports are generally

available, the form requires only limited

further disclosure concerning the offering, and basic disclosure regarding the

Issuer ISincluded through incorporating

these reports by reference. Further

amendments to Form S-16 were proposed on September 7, 197856 making

the short form available for primary offerings by larger, well established subsidiary Issuers. (These proposals were

adopted after the close of the fiscal

year.)

Another Significant action relating to

the format of disclosure involves the

"
Cornrrussron action of August 16, 1978

inviting comment on a proposed new

version of Form 100K, the annual reporting form under the Exchange Act 57

The Advisory Committee recommended

that Form 100K be amended to eliminate what are, In the Committee's View,

unnecessary requirements, to add new

requirements and to allow the information required to be presented In a

more effective and flexible format.

A number of comments were received

on this concept and the Commission's

staff is reviewing them with a view to

making specrfic recommendations to

the Commission. It IS expected that a

number of the revrsions to Form 10-K

which might be proposed would allow

that document to be prepared In a "freewriting" style similar to the annual report to security holders, rather than In

the rigid format now required under

Form lO-K. One result of thrs approach

might be that registrants would be encouraged to combine the two documents--the annual report to security

holders and the annual report on Form

10-K-thereby Improving the comprehensrveness of mtorrnatron disseminated by registrants While easing the

burdens of preparing and filing the required documents.

The Commission has also taken steps

to further the Advisory Committee's recommendation that disclosure requirements under the Securities Act and

Exchange Act relating to the same categories of information be uniform among

forms and reports. In December, 1977,58

the Commission adopted the first two

Items of Regulation S-K, which provide

uniform requirements for registrants to

provide disclosure In various reports and

forms of their busrness and properties

by focusmg on their Industry segments

and geographic areas. In July 1978,59

the Commission adopted additional uniform Items regarding disclosure of management background and remuneration,

material legal proceedings, and benencrat ownership of management and

certain substantial security holders. The

approach of Regulation S-K ISIntended

to make compliance With disclosure requrrernents Simpler by providrng one

convenient reference source and assurmg that information required to be disclosed on a particular subject does not

vary from one form to another.

Elsewhere In this Report, a descrrptron IS provided of actions taken concerning the Advisory Committee's

recommendations on corporate governance and small busmess frnancmgs

and disclosure

Tender Offers, Large Acquisitions

and Corporate Repurchases

Sections 13(d) and (e), and 14(d),

(e) and (f) of the Exchange Act, enacted

In 1968 and amended In 1970, provide

for full disclosure In cash tender offers,

other stock acqursrtrons mvolving

changes In ownership or control, and

corporate repurchases of stock These

provisions were desrgned to close gaps

In the full disclosure provrsions of the

securities laws and to safeguard the interest of persons who tender their securitres In response to a tender offer or

have their securities repurchased by the

Issuer

On April 21, 1978, the Commission

adopted amendments to Regulation 130

as well as a new Schedule 13G relating

to disclosure by certain beneftcial owners of equity secunties pursuant to Section 13(d) of the Exchange Act 60 Among

other th rngs, the new provrsrons (l) proVide a definition of the term "benefrcral

ownership" for the purpose of Section

13(d) of the Exchange Act; (2) make the

disclosure In Schedule 130 acqursitron

statements more meaningful to investors and the reporting of that inforrnatron less burdensome to beneftctal

owners; and (3) provide a short form

acquisrtron statement to be used by certain institutional Investors and certain

employee benefit plans acquiring se19
cunties In the ordinary course of their

business and not for purposes of control.

Concurrently with the adoption of the

amendments to Regulation 130, the

Commission proposed for comment

amendments to Regulation 130 which

would Implement Section 13(g) of the

Exchange Act. 61The principal effect of

the proposed amendments IS to require

persons who own more than five percent

of a class of equity securities specified

In Rule 13d-Hc) and who are not presently required to file under Section

13(d) of the Exchange Act, to file annually the applicable information required by Schedule 13G. (The gaps In

reporting under Section 13(d) were

closed with the adoption of these

amendments, essentially as proposed,

on November 22, 1978,62 subsequent

to the end of the fiscal year.)

Various technical and interpretive ISsues raised by the amendments to Regulation 130 were also addressed In a

staff interpretive release.P and further

amendments to Regulation 13D were

adopted relating to the availability of

Schedule 13G to a parent holding company and to the beneficial ownership of

pledged secuntres, including secuntres

pledged to a broker-dealer In connection

with margin account transactions. 64

To satisfy the obligation under Section 13(g) to tabulate and make promptly

available the Information contained In

Schedules 130, 13G, and 14D-1, the

Commission, after the close of the fiscal

year, proposed and adopted amendments to the cover pages of those forms 65

These proposals require persons filing

the schedules to abstract certain data

from within the schedule In order to facrhtate the entry of such data Into a proposed computer system.

On November 17, 1977, the Comrrussron also proposed for comment a

new rule and related schedule with respect to gomg private transactions by

20

public companies or their affiliates. 66

The effect of these transactions IS the

elimination or substantial reduction of

the public equity Interests, thereby resulting In the corporation or ItS successor becoming a privately held firm. If

adopted, the proposals would provide

defrrutrons, specific disclosure and dissemination requirements, substantive

protections and particular antifraud provisions with respect to gomg private

transactions.

The Foreign Corrupt Practices Act

In December 1977, the President

signed the Foreign Corrupt Practices Act

of 1977 (FCPA), which amended certain sections of the Federal securitres

laws. The Act prohibits Issuers from,

among other things, corruptly making

payments to officials of foreign governments In order to Induce such officials

to use their authority or Influence to obtain business In the country for the ISsuer.

The Act also requires issuers to comply with certain related provrsrons including the maintenance of a system of

Internal accounting controls which provides reasonable assurance that certain

objectives are met. The Act will sigrnticantly assist the Commission In its continuing program against fraud by

management of publicly held companies.

Subsequent to the end of the fiscal

year, the Cornrnissron adopted rules that

prohibit the falsification of an Issuer's

books and records and the making of

false, misleading or Incomplete statements to an accountant In connection

With any audit or examination of the financial statements of the Issuer or the

preparation of reports or documents

filed with the Cornrrussron. These rules

are intended to assure that an issuer's

books and records accurately and fairly

reflect Its transactions and dispositions

of assets; to protect the integrity of the
Independent audit of Issuer financial

statements required under the Exchange Act; to promote the reliability

and completeness of financial information that issuers are required to file

with the Commission, or disseminate to

Investors under the Exchange Act; to

promote compliance with the new Sections 13(b)(2)(A) (FCPA provisions); and

to prevent the concealment of questionable or Illegal corporate payments and

practices. The Commission believes that

these rules, while Intended to deal with

a much broader range of practices than

the problem of questionable or Illegal

corporate payments and practices, will

serve to discourage repetition of the seriOUSabuses which the Commission has

uncovered in this area.

It bears emphasis that the Internal

accounting control provrsions of the

FCPA are not exclusively concerned with

the preparation of financial statements.

An equally Important objective of the

new law, as well as pre-existing provisions of the Federal securities laws, IS

the goal of corporate accountability. In.

this context the Act embodies certain

requirements of integrity In corporate

record keeping and includes assurances

that there IS proper control over and accountability for the use of corporate assets and that corporate transactions are

executed In accordance with management's general or specific authorization.

Accordingly, the Act establishes requirements concerning the Internal activities of reporting companies that are

supportive of the disclosure system

mandated by the Exchange Act, but

should not be analyzed solely from that

point of view. The new requirements

may provide an independent baSIS for

enforcement action by the Commission,

whether or not violation of the provisions

may lead, in a particular case, to the

dissemination of materially false or misleading Information to Investors.

Certain cases brought by the Comrrussron under the Act are discussed In

this report In the "Enforcement Program" section.

Oversight of the Accounting

Profession

Report on the Accounting Profession

and the Commission's Oversight RoleIn July 1978, the Commission submitted to Congress ItS frrst Report on the

Accounting Profession and the Commission's Oversight Role This was In accordance With the Commission's

undertaking dunng the hearings held on

the accounting profession by the Subcommittee on Reports, Accounting and

Management of the Senate Committee

on Governmental Affatrs one year earlier

to report periodically on the accounting

profession's response to the challenges

which Congress and others have placed

before It and on related Commission inrtiatives.

The questions raised concerning the

accounting profession and ItS future

have centered principally on the profession's capability, absent direct government regulation, to regulate and

discipline its members and to assure

their Independence; and to set auditing

and accounting standards. The Report

contained the views of the Commission

and the staff on on the major issues confronting the accounting profession. and

analyzed In detail the recent progress

made by the Commission and, under ItS

active oversight, the protession, in dealIng With them.

During the fiscal year, the profession's major self-regulatory initiatives

were focused on the new Drvision of

Firms of the American Institute of Certified Public Accountants. The SEC

Practice Section of that Divisron, monitored by a Public Oversight Board composed of distingurshed individuals from

outside the accounting profession, IS to

provide leadership In addressing Issues

21
of importance to the profession and ItS

Independence, such as the range of

services appropriate for accountants to

offer clients, and IS responsible for the

development and conduct of a continuing program of peer reviews of member

firms.

Based on ItS review of events during

the preceding year, the Commission indicated that It was too early to assess

the long-run effectiveness of the profession's efforts at self-regulation, but that

It regarded the section's creation as a

major accomplishment and a potentially

viable foundation for a meaningful program of self-regulation. The Comrnrssron Indicated, therefore, that the

profession's initiatives showed sufficient promise to be permitted to continue to evolve, and that It would not at

that time recommend legislation, such

as that Introduced In Congress dunng

the year, which would institute formalized procedures for self-regulation of

the profession.

The Cornrrussron has worked with the

accounting profession to define the objectives of the self-regulatory program,

and to assure that the profession's proposed Implementation ISconsistent with

those objectives. As described In the

staff report, the Cornrrussron has monrtored the profession's efforts m this

area closely In addition, the Commission was active dunng the year m overseeing the profession's Initiatives

concernrng the Independence of auditors and the accountrng and audrtmg

standard-setti ng processes.

Accounting Standards for Oil and Gas

Producers-During the fiscal year the

Cornrrnsston conducted an extensive

public proceeding on accounting standards for 011 and gas producers. The Commission's proceeding was conducted

pursuant to both the Federal securrtres

laws and the Energy Policy and Conservatron Act of 1975 (EPCA), which re22

quires that the Cornrnrssron assure the

development and observance of accounting practices for the oil and gas

Industry. The Impact of the requirements of EPCA, among other things,

contributed to the uniqueness of the

Cornrrussron's proceeding In this matter.

In August 1978, the Cornrnission announced that It had determrned, among

other things, to require disclosure In financial statements of supplemental financial and operating data, Including

inforrnatron on future net revenues from

production of proved 011 and gas reserves. It also specrfred a form of successful efforts accounting to be followed,

and proposed an alternative full-cost

method

Based on ItS conclusions that development of new tmancral accounting

measurement standards will be necessary to achieve meaningful reporting of

earnings and fmancral position for 011

and gas producing companies, the Comrnrssron announced that it had determined to work toward the development

of a method of accounting that recognizes valuations of proved 011 and gas

reserves In the balance sheets and mcome statements of 011 and gas producers, a method which the Cornrrussion

designated "reserve recognition accountmg." Because of the inherent imprecrsion of reserve valuation, the

Cornrnrssron also indicated that It Will

closely study the feasibility of th ISmethod

and ItS usefulness before determining

the ultimate method of reporting

Although the Cornrrussron's conclusions In this matter differed from those

of the FASB, the Comrrussron. In announcing ItS determinations, emphaSized that ItS policy toward the FASB

remained unchanged, and reiterated Its

strong general support of the FASB's

role rn addressing frnanctal accounting

Issues.
Investment Companies and Advisers

Comprehensive Review of Regulatory

System

The Divrsron of Investment Management undertook during the fiscal year

comprehensive reviews of the Investment Company Act and the Investment

Advisers Act. These reviews were Implemented with a view to ensuring that the

Acts and the Commission's administration of them are consistent with both the

protection of investors and the needs of

regulated Investment managers In light

of current and anticipated trends In

business

The DIVision established a special

study group to review the Investment

Company Act and the rules, regulations,

and administrative practices under it,

with the purpose of simplifying and reducrng the burden of regulation, to the

extent possible, consistent with the protection of Investors. One objective of the

study ISto replace administrative review

of proposed Investment company activities with rules codifying general condrtions under which such activities are

permissible. Such rules could obviate

certain routinely granted applications

for exemptive relief and requests for interpretive advice. More significantly the

study is explonng ways of reducing the

extent to which the staff becomes involved in decisrons of investment companies and their managements which

involve the exercise of both business

judgment and legal and frducrary responstbilrty. A major focus of this effort

will be on strengthening and structuring

the role of drsrnterested directors of Investment companies In making and

overseeing such decisrons,

The result should be a regulatory system which relies primarily on investment companies and their managers,

and particularly the disinterested directors, to discharge their duties properly

and to make full and fair disclosure, but

which preserves a strong oversight function for the Cornrmssion through ItS inspectron and enforcement programs

(Subsequent to the close of the fiscal

year, the Cornrnrssron proposed rules

regarding the pricing of redeemable investment company securities; the receipt of brokerage commissions by

affiliated brokers In connection With

stock exchange transactions; transactions With portfolio affiliates; reorganization of portfolio companies; and certain

jornt purchases of Insurance coverage

It also proposed and adopted three rules

regarding unit Investment trusts. Moreover, It proposed to rescind an obsolete

rule regarding the receipt of brokerage

cornrnissions by affiliated brokers In

connection With over-the-counter transactrons.)

The Investment Advisers Act review

ISconcentrating on whether the exrstrng

regulatory structure ISadequate In light

of the dramatic growth of the advisory

industry in recent years Subjects to be

23
examined by the review Include. whether

or not there should be professional and

financial qualifications for Investment

advisers, whether there should be speerne antifraud rules dealing with abuses

to which the advisory Industry may be

particularly vulnerable, whether there

should be different regulations for different types of advisers, and to what

extent the Advisers Act should apply to

entitles such as banks, Insurance companies, rruru-accounts. and certain kinds

of publications (Subsequent to the end

of the fiscal year, on January 24, 1979,

the Commission adopted major amendments to the Investment adviser registration form and adopted a new rule

requiring advisers to make certain drsclosures to their clients. These actions

should greatly Increase the amount of

material information about Investment

advisers which ISavailable to the Comrnrssion and the public)

Institutional Disclosure

The Commission adopted dunng the

fiscal year Rule 13f-1 and related Form

13F Implementing the institutional drsclosure program mandated by Section

13(f) of the Exchange Act which was

added by the Securities Acts Amendments of 1975 67 Section 13(f) empowers the Cornrnissron to adopt rules

creating a reporting and disclosure system to collect specifrc mtorrnatron as to

the equity secuntres held In accounts

over which certain institutional investment managers exercise Investment drscrenon. The reporting system required

by Section 13(f) IS Intended to create

In the Commission a central repository

of historical and current data about the

Investment activrtres of institutional investment managers.

Under Rule 13f-1, an institutional

Investment manager exercismg investment discretion with respect to accounts having $100 million or more In

exchange-traded or other specrfred eq24

urty secunties, on the last trading day

of any of the twelve months of a calendar

year, must file Form 13F With the Comrrussron, Within forty-five days after the

last day of such calendar year. The new

rule took effect beginning With calendar

year 1978. Banks must also file Form

13F With the appropriate banking agency.

The release announcing adoption of

Rule 13f-1 sought comments concernmg the usefulness and costs associated

With quarterly, as opposed to annual reporting. As of the end of the fiscal year,

the DIVISion of Investment Management

was reviewing the numerous comments

It had received concerning that matter

(Subsequently to the close of the fiscal

year the Cornrnrssron, on January 5,

1979, Issued final rules requiring quarterly reportrng.)

Integrated Registration and

Reporting System

The Comrrussron adopted dunng tiscal 1978 a rule and forms creating an

Integrated regrstration and reporting

system designed to reduce both the

number of forms and the duplicative information filed by management investment companies. 68 The need to Integrate

the various registration and reporting

requirements under the Securities Act

and the Investment Company Act has

been recognized since 1941, and the

Cornrrussion's action achieved thrs Important goal.

The Integrated registration and reporting system provides for a unified

registration statement form (Form N-1

for open-end companies and Form N-2

for closed-end companies) which may

be used both to register securities under

the Securities Act and to meet the requrrernents for filing a registratron statement under the Investment Company

Act. The unified registratron statement

Includes most of the information previously contained In registration state-
ment Form N-8B-l under the

Investment Company Act, and Forms S4 and S-5 under the Securities Act. The

Commission also adopted a revised notification of registration, Form N-8A,

under the Investment Company Act The

new form permits Investment companies filing a notification of registration

Simultaneously with a registration statement to file a special short-form nonficatron of registration.

As part of the Integrated registration

and reporting system, the Commission

adopted Rule 8b--16 requiring the annual updating of registration statements

filed under the Investment Company

Act. This IS a new requirement for

closed-end management Investment

companies. The effect of Rule 8b-16

will be to ensure that the staff of the

Commission and the public have access

to complete and current Information

about all registered management investment companies

The Commission revised Form N-l R,

the annual report form under the Investment Company Act for management

Investment companies The annual

amendment of registration statements

filed under the Investment Company Act

required by Rule 8b-16 permits elimination of separate narrative annual reports previously required to be filed as

part of Form N-l R

25

Enforcement Program

DUring the past fiscal year, the Comrrussron has continued to maintain a vigorousand effective enforcement program

asa means of accomplishing ItSInvestor

protection goals. The significant cases

brought and disposed of reflect the variety of fraudulent conduct detected and

prosecuted by the Commission. They

also show the channelling of the enforcement effort Into specific problem

areas.

The Commission's enforcement activities, which are designed to combat securities fraud and other Illegal conduct,

encompass civil and criminal court actions, as well as administrative proceedings. Where Violations of the

securities laws are established, the

sanctions which may result range from

censure by the Commission to prison

sentences Imposed by a court.

The enforcement program ISdesigned

to achieve as broad a regulatory Impact

as possible within the framework of resources available to the Commission. In

view of the capability of self-regulatory

and state and local agencies to deal effectively With certain secunties violations, the Commission seeks to promote

effective coordination and cooperation

between its own enforcement activities

and those of other agencies.

Settlement of Commission Actions

A high percentage of the Commission's judicial and administrative enforcement actions are settled before any

trial of the action ISheld. Theseactions

are primarily remedial In nature and are

aimed at preventing future Violativeconduct and at remedying the results of

past Violations. The Commission has

been successfu I In obta Inmg settlements which meet both of these goals

Without the necessity for prolonged litigation which could Impose a serious

burden upon limited personnel resources

Typically, defendants consent to such

settlements Without admitting or denymg the factual allegations contained In

the Commission's complaint (In the

case of injunctive actions) or order for

proceedings (In the case of administrative proceedings) Accordingly, In the

following discussion of significant enforcement actions, it should be assumed that the defendant consented to

any indicated settlement Without admitting or denying the factual allegations.

Questionable Payments

The Commission continued ItS enforcement Interest in the area of questionable and Illegal corporate payments

in fiscal 1978, and expects that ItS interest in this area Will continue in fiscal

1979. While more than 400 corporations have made disclosures of such

payments, the Commission IS continuing to investigate evidence of violative

27
conduct In this area both by companies

which have disclosed such activities

and by other corporations as well

Prevrous Commission enforcement

activities disclosed a widespread pattern of rllegal and unethical corporate

activity and contributed to the enactment by the Congress of the Foreign

Corrupt Practices Act of 1977 (Sections

13(b)(2), 30A and 31 (c) of the Exchange Act) which was signed Into law

rn December 1977. The Act prohibits

Issuers from, among other things, corruptly makrng payments to officials of

foreign governments rn order to rnduce

such offtcials to use their authority or

rnfluence to obtarn busrness for the ISsuer rn the country.

The Act also requires Issuers to comply with certarn related provisrons, rncludrng the maintenance of a system of

Internal accountrng controls which provrdes reasonable assurance that certarn

objectives are met. The Act Will sigruficantly assist the Commission In ItScontinuing program against fraud by

management of public companies

The relief obtarned rn these cases IS

designed to be both remedial and prospective For example, rn the Seagrams

case discussed below, the Frnal Order

prohibits the defendants (1) from filing

Inaccurate annual and other reports

with the Comriussion pursuant to Section 13(a) of the ExchangeAct, regardIng, among other things, (a) any

accountrng practices employed to disguise Illegal activities, (b) the Illegal

contribution of funds for the benefit of

political candidates, (c) the Illegal drsPOSitionof wrnes and SPirits for gratuities, promotion, or entertarnment, and

(d) the establishment or maintenance

of any fund of corporate monies or other

assets which are not accurately and

fairly accounted for, In reasonable detail, on the books and records of the

defendants; (2) from makrng or ardrng

and abettrng the making of false and

28

ncntrous entries rn books and records

under their control; and (3) orders the

defendants to file With the Cornmission

reports on Form 8--K drsclosmg all material matters relevant to the complarnt.

The following cases Illustrate the

Comrrussron's efforts rn thrs area

SEC v. Bestrtce Foods Co. 69_0n August 17, 1978, the Cornrrussron filed a

complaint against Beatrice Foods Co.

(Beatrice) and contemporaneously, a

Judgment of Permanent Injunction was

entered against Beatrice upon ItS consent.

The complarnt charged violations of

the reportrng and proxy sohcrtatron proVisions of the Exchange Act rn connection WithBeatrice's paymentof discounts

or rebates to ItSdairy customers In posSible Violation of state mrnimum pricmg

or milk marketing laws. The complaint

alleged that durmg the period from

1971 through 1976, payments totaling

rn excess of $11. 7 mil/Ion were accounted for falsely and Improperly on

Beatrice's books and records or passed

through unrecorded bank accounts.

The complaint also alleged that at varIOUStimes the existence of certarn of

these unrecorded accounts came to the

attention of Beatrice's Internal audit

staff but references to these accounts

were omitted from Internal audit reports In addition, the complaint alleged

that on the one occasion when the exrstence of an unrecorded bank account

was discovered by Beatrice's pubhc accountrng firm, the discovery was not

disclosed rn the audit report.

SEC v. The Seagram Company Ltd. 70_

On September 8, 1978, the Commission filed a complaint agarnst The Seagram Company Ltd. (Seagram) and ItS

pnncrpal subsidiary, Joseph E. Seagram

& Sons, Inc. (JES). The complaint alleged the failure by Seagram and JES

to disclose In their annual and periodrc

reports filed With the Comrnissron certain illegal and questionable political
contributions and certain illegal and

questionable trade practices.

The complaint alleged that Seagram

and JES failed to disclose that Seagram

maintained a special account In Canada, from which various payments were

made, including questionable and Illegal payments and political contributions

made through JES. The complaint further alleged that JES made additional

payments In cash and merchandise to

retailers of wine and spirits In possible

violatron of Federal and state liquor

laws and regulations. These payments

were not reflected or were Inaccurately

reflected on the respective books and

records of Seagram and JES. Finally,

the complaint alleged that JES paid an

advertising agency $435,000 In order

to reimburse that agency for the advertising expense incurred on behalf of a

primary cadidate for a state election In

1970. It was alleged that this expenditure was falsely reflected on the books

of JES.

Simultaneously with the filing of the

complaint, Seagram and JES consented

to the entry of a Final Order.

SEC v. The Goodyear Tire & Rubber

Company71-0n December 21, 1977,

the Commission obtained a Judgment

of Permanent Injunction and other injunctive relief against The Goodyear TIre

& Rubber Company (Goodyear) upon

Goodyear's consent. The Commission's

complaint had alleged various violations

of the secunties laws In connection

with the maintenance of unrecorded

cash funds totaling over $1 5 million

and the rnakrng of both Illegal domestic

political contributions and various questionable foreign payments. The Commissron charged that questionable

payments were made In at least twenty

foreign countries In order, among other

things, to secure price Increases, settle

tax problems, acquire licenses to do

business, secure government purchase

of Goodyear products, expedite customs

clearance and other regulatory matters,

Influence the outcome of CIvil litigation

and settle labor difficulties.

It was further charged that one payment represented Goodyear's share of

an industry-wide payment to secure an

Increase In the government-controlled

price of tires In a Latin American country. In order to maintain these unrecorded funds and make the questionable

payments, the Commission charged that

there had been falsifications of corporate books and records, and filings of

materially false and misleading annual

and periodic reports and proxy statements with the Cornrrussron.

SEC v. )05. Schutz Brewing Co. 72_

The Cornrrussron, on April 7, 1977,

filed a complaint against the Jos. Schlitz

Brewmg Co. (Sch lrtz) alleging that Sch lrtz

had made undisclosed payments to varIOUS persons and entities, In violation of

Federal and state liquor laws, to Induce

these persons to purchase from Schiltz.

The complaint also alleged the undisclosed receipt of payments by certain of

Schlitz's Spanish affiliates In violation

of Spanish tax and currency exchange

laws. The complaint sought an mjuncnon against violations of the antifraud,

proxy and reporting provrsions of the

Federal securities laws as well as additional equitable relief. including the appointrnent of a Special Counsel to

investigate Schiltz's practices and report on hrs findings

Based upon ItS view that the alleged

payments might be material facts to

Investors, the court denied a motion by

Schiltz to drsrruss the Commission's

complaint.

The Court's determination of materiality was premised on the alleged payments' reflection on the integrity of

management and on the potentially adverse consequences to Schiltz's licenses as a result of ItS Illegal conduct. The

court also cited with approval the Commission's May 12, 1976 report to the

29
Senate Banking Housing and Urban Affairs Committee in finding that the

amount of business dependent on the

questionable payments was relevant to

a determination of materiality

On July 7, 1978 the same Court entered a Final Judgment of Permanent

Injunction by Consent against Schlitz.

enjommg It from violations of the proVISions of the Federal securitres laws

alleged In the Commission's complaint. 73

SEC v. The Boeing Company74-0n

July 28, 1978, the Commission filed a

civil injunctive action against Boeing

Company (Boeing) alleging violations of

the antifraud, reporting and proxy provisions of the Exchange Act and the

rules thereunder. Simultaneously with

the filing of the complaint, Boeing consented to the entry of a Judgment of

Permanent Injunction

The complaint alleged that since about

1971, Boeing engaged In an undisclosed course of business whereby (l)

It made payments of approximately $27

million to officials of foreign governments or instrumentalities thereof and

approximately $6 million to indrviduals

or entities controlled by them, who were

officers or controll rng shareholders of

foreign airlines, in connection With sales

of Boeing airplanes; (2) Boeing entered

Into contractual arrangements With varIOUSconsultants and cornrrussion agents

pursuant to which Boeing disbursed at

least $19 million Without adequate records and controls sutncrent to Insure

that such disbursements were actually

made for the purpose indicated or that

services were received by Boeing commensurate With the amounts of such

disbursement; (3) Boeing executed

multiple consulting contracts With foreign consultants which facilrtated the

payments of large sums of money Into

accounts maintained by those consultants outside their home country; (4) In

two Instances Boeing represented to a

30

foreign government or an instrumentalrty of a foreign government that It would

not pay cornrnissrcns to any person

when, In fact, It did pay substantial

cornrrussions.

As part of the equitable relief obtained in the case Boeing was required

to establish a Special Review Committee consisting of three outside members

of ItS Board of Directors. The Special

Review Committee IS to review the adequacy and accuracy of disclosures made

by Boeing in ItS Form 8-K report, and

to review Boeing's own Investigation in

connection With the matters alleged In

the complaint and Similar matters concerning commissions, fees, and other

payments made by Boeing since January

1, 1971, to determine whether such investigation was reasonably complete.

SECv. PageAtrways, Inc. 75--On April

12, 1978, the Commission filed a CIVil

injunction action charging Page Airways, Inc. (Page) and SIXof its officers

and/or directors With Violations of the

antifraud, penodrc reporting and proxy

provisions of the Exchange Act. The

complaint also charged Page With violations of Section 13(b)(2) of the Exchange Act, which was added to that act

by the Foreign Corrupt Practices Act.

The complaint alleged that the defendants, In connection With overseas

sales of aircraft, paid or caused to be

paid funds to officrals of foreign governments, to entities controlled by such

ottrcrals or to purported cornrmssion

agents without adequate controls to insure that such disbursements were actually made for the purposes Indicated

In Page's records and Without adequate

controls to document whether the services provided, If any, were commensurate With the amounts paid.

The action filed by the Comrnission

IS currently being litigated.

SECv. Katy lndustrtes, Inc. 76_ln the

first case brought under Section 30A of

the Exchange Act, which was added to
that act by the Foreign Corrupt Practices

Act and which prohibits certain foreign

payments by Issuers of securities and

certain persons acting on their behalf,

the Commission, on August 30, 1978,

filed a civil injunctive action against

Katy Industries, Inc. (Katy), its chairman of the board of directors; and another Katy director On the same day,

the DIstrict Court entered judgments

permanently enjoining the defendants

from Violating certain of the periodic reporting, proxy sohcrtation, antifraud and

foreign corrupt practices provisrons of

the Federal secunties laws With respect

to payments made In connection with

obtaining a foreign oil concession. The

defendants consented to the entry of the

Injunctions.

SEC v. E-Systems Inc.77-On March

13, 1978, the Commission filed a CIVil

injunctive action which alleged that ESystems Inc. (E-Systems) and three of

ItS employees violated the reporting and

proxy solicitatron provisions of the Federal securities laws In connection with

E-Systems' Indirect payments of approximately $1.4 rnillron to an official

of the Republic of Korea. The complaint

alleged that the payments were made to

bank accounts located In the United

States controlled by relatives of the Korean official The complaint further alleged that those relatives in turn

transferred the monies to the Korean

officral, or his designees.

The defendants consented to the entry of a Judgment of Permanent Injunction and Other Relief.

SEC v. Aminex Resources Coro.t"-:«

On March 9, 1978, the Commission

filed a Civil injunctive action against

Aminex Resources Corp. (Arnmex), certain of ItS officers and directors, and

other corporations alleging violations by

various of the defendants of Sections

10(b), 13(a) and 13(b)(2) of the Exchange Act and rules thereunder. The

Commission's complaint alleged that

certain of the defendants had engaged

in schemes, undisclosed to Arrunex's

shareholders or to the public, to misappropriate and divert at least $1.24

million of Arrunex's assets. The defendants disguised these misappropriations

by means of false and Improper accounting rn the books and records of

Aminex. In furtherance of these schemes,

Amrnex allegedly filed false and misleading annual and quarterly reports

With the Cornrnissron.

The Commission sought and obtained

a temporary restraining order agamst

the defendants restrarrung them from

further VIolations of the above-mentioned provrsions of the Federal securities laws and also appointing a temporary

receiver to manage the assets of Aminex

and ItS subsidiaries. The temporary receiver served In this capacity until bankruptcy receivers were appointed for

Ammex, and for the subsrdianes.

On May 24, 1978, the District Court

entered a Judgment of Permanent Injunction and Ancillary Relief against the

remaining defendants upon their consent. In addition to being enjorned, the

defendants were ordered to disgorge

$1.24 million to Aminex. Other provrsions of the Judgment mclude restrictions upon the mdrvrdual defendants

assuming positions as officers or directors of any publtc company In the future.

Tender Offers and Corporate

Takeovers

Due to a variety of corporate economic

considerations, there has recently been

a significant Increase In tender offers

and other corporate takeover activity.

The Commission's enforcement and rulemaking responsibilities under the Williams Act are designed to ensure that

parties involved in such transactions are

provided the benefit of full and fair disclosure; to ensure that all affected

shareholders and Investors are treated

fairly; and to avoid tippmg the balance

31

"
of regulation In favor either of the bidder

or the target company's management

Because of the swiftly changing circumstances often associated with tender

offers, the Commission has taken measures to insure ItS capability to monitor

changes In corporate ownership; to coordinate ItS efforts to detect promptly

any possible violations of the applicable

laws; and to take appropnate investigatory and enforcement action.

Among the recent Important enforcement actions In the tender offer area are

the following:

SEC v. Sun Company, Inc. BO_On

March 9, 1978, the Commission filed

a civil injunctive action against Sun

Company, Inc. (Sun), LHIW, Inc. (LHIW),

and certain other corporate and individual defendants.

Among other things, the complaint

alleged that certain defendants violated

Sections ion», 13(d), 14(d) and 14(e)

of the Exchange Act and rules thereunder In connection with an offer by Sun

and LH IW for the common stock of Becton Dickinson and Company (BectonDickinson) by which they acquired approximately 34 percent of the outstandmg common stock of Becton-Dickrnson.

Equitable relief sought In the case includes injunctions and an order compelling Sun and LHIW to make an offer

of rescrssron to those persons from

whom Sun and LH IW purchased Becton-Dickinson stock and with respect to

any Becton-Dickrnson stock for which

the offer of rescrssion IS not accepted,

ordering Sun and LHIW to dispose of

such shares In a manner pursuant to a

plan approved by the Court

SEC v. Bank of Credit and Commerce

internettonst, S.A. BI_On March 20,

1978, the Commission flied a crvil injunctive action against Bank of Credit

and Commerce lnternatronal, S.A.

(BCCn, and other corporate and individual defendants.

The Commission alleged, among other

32

things, that certain foreign persons and

entities and certain United States persons had acted as a group In seeking to

acquire control of Financial General

Bankshares, Inc. (Financial General)

and had acquired approximately 25 percent of its common stock without making the necessary disclosure filings with

the Commission.

In addition to permanent mjunctions

and other relief, as part of the equitable

relief obtained In this case upon the

defendants' consent, certain of the foreign persons and/or entitles were either

to make a cash tender offer for all the

common stock of Fmancral General at

a price of $15 per share, which was the

highest pnce they paid for the stock, or

In the event such an offer was not made

within a certain time penod, to sell their

stock. In addition, such persons represented that If any person made a cash

tender offer at a price In excess of $15

per share they would tender their stock

to the person making the offer. The defendants also were ordered to create a

$1 million fund against which claims

could be made by persons who sold

stock to the defendants at a pnce less

than $15 per share.

SEC v. Secunty lnternsttonel CorporationB2-On November 22, 1978, the

Cornrrussron filed a complaint against

Security International Corporation (SIC),

the chief executive officer of SIC, a consultant to SIC, and other corporations

and individuals. The complaint alleged

violations of the provrsrons of the Federal securities laws relating to tender

offers, proxy matenals, annual reports

and required reports concerning stock

ownership and acquisrtions.

The complaint alleged, among other

things, that SIC and ItS chief executive

officer caused annual reports and preliminary proxy matenals to be flied with

the Cornrnrssron which contained false

and misleading statements about annual remuneration paid to the chief ex-
ecutive officer. The complaint further

alleged that the chief executive officer

caused to be filed With the Commission

and distributed to shareholders tender

offer materials containing misleading

statements about the remuneration paid

him. It was also alleged that the material

failed to disclose adequately the terms

of a competing tender offer and that

certain of the defendants (1) acted as

a statutory "group" under the Williams

Act and failed to file the necessary reports With the Commission disclosing

the group's existence and actions and

(2) sought to acquire stock outside of

the tender offer.

The court, on July 17, 1978, entered

a Final Order of Permanent lnjunctron

against certain consenting defendants,

except the consultant. In addition, the

order, in substance, required the consenting defendants to correct certa In

misleading statements In their previous

filings With the Commission.

After a hearing, the court entered an

Order of Preliminary Injunction against

the consultant enjoining him from VIOlating certain of the antifraud, reportmg, proxy solicitation and secunties

acquisition provisions of the Federal securities laws. The Commission's action

seeking a permanent injunction against

him is still pending. 84

SEC v. Texas International Company85-On March 7, 1978, the Commission filed a complaint against Texas

International Company (TI) to enjoin It

from further alleged Violations of Sections 10{b), 14{d) and 14(e) of the Exchange Act and rules thereunder In

connection with a December 1977 tender

offer for certain claims which were exchangeable for stock of Phoenix Resources Company, formerly King

Resources Company. The complaint alleged that TI's tender offer materials

should have been filed With the Commission. In addition, the cornplamt alleged Violations of the antifraud

provrsions concerning, among other

things, (1) the comparability between

the amount of cash paid per share of

stock In the December 1977 tender offer and a prior tender offer to different

parties; (2) the value per share of each

class of stock to be Issued under Phoenix's plan of reorganization; (3) the

present and future financial condition

of Phoerux and the value of Its assets;

and (4) the comparability between the

amount of cash paid per share of stock

to the senior creditors and trade creditors and that offered to the security

holders of King Resources

The matter IS presently before the

court on cross motions for summary

judgment.

Management Perquisites

The staff's continuing Investigations

involvrng management perquisites have

focused on the payment of nonbusiness

expenses and subsidres to corporate officers and directors. Examples Include

rental of expensive livrng quarters at far

less than the amount paid by the companies for their maintenance, and the

use of corporate airplanes, as well as

other undisclosed expenses and benefits.

An Important action brought In this

area IS the following case.

SEC v. Charles Jacquin et Cie, Inc.86

This case alleged Violations of the antifraud, reporting and proxy solrcrtatron

provrsrons of the Federal secunties laws

by the corporate defendant and two of

ItS officers.

Among other things, the complaint

alleged substantial salary payments to

certain members of the officers' family

who, In fact, rendered no Significant

services to the company. The complaint

further alleged that the company paid

a variety of strictly personal expenses of

the family including such Items as

apartment rentals, maintenance, tax,

and utility expenses for personal rest33

"

_
dents and college tuitron payments for

certain children of Jacquin's officers

and directors.

In addition to the injunctive relief

which was granted In the case upon the

defendants' consent, Jacquin was ordered to expand Its board of directors

to Include two additional Independent

directors; establish an Audit Committee

of the board; and, appoint a Special

Counsel to prepare an accounting of

montes Improperly directed by or to any

officer, director or employee of Jacquin.

In this connection, the officer defendants were required to provide an accounting of and to repay montes which

they received for their personal benefit.

Municipal Securities

The trading of government and murucipat secunties has Significantly increased In recent years. At one time,

these secuntres were purchased primarily by financial institutions for their

Investment yield and low risk. More recently, however, highly sophisticated

and extremely speculative trading practices In these securities have developed,

mvolvrng brokers and dealers who, by

the use of manipulative and deceptive

practices, have preyed upon unsoptustreated Investors. These developments

have generated an active enforcement

Interest on the part of the Commission.

The followmg enforcement actions reflect the Commission's activity In this

area.

SEC v. Winters Government Secunties CorporatlOnB7-ThlS case, filed on

August 15, 1977, was one of the first

injunctive actions by the Commission in

connection With transactions In United

States government securrtres. Winters

Government Securities Corporation

(WGSC), an unregistered broker-dealer,

and others, were alleged to have Violated

certain of the antifraud provisions of the

Federal securines laws, In connection

WIth transactions In secunties consist34

ing primarily of Government National

Mortgage Association (GNMA) securities for delayed or forward delivery and

payment.

The Cornrrussron's complaint alleged

that the defendants used high pressure

sales techniques, charged excessive

markups and cornrrussrons and used

sham accounts. The complaint further

alleged that fraudulent misrepresentanons and omissions were made In

that the defendants represented that

quick and substantial profits could be

made Without risks.

In addition to permanent injunctive

relief consented to In the case, the Commission obtained a representation from

one defendant and instituted pubhc admirustrative proceedings against another which limited, for periods of tirne,

their ability to be associated with broker-dealers. The Commission also cancelled the broker-dealer registration of

one defendant. 88

The Cornrnissron has also been concerned with the growing number of

abuses in the offer and sale of industrial

development bonds. In some instances

these bond offerings have resulted In

ftnancral loss for investors. One case In

the area IS U.S. v. George Mariscal. 89

Tlus case Involves Criminal charges

against a Phoenix, Arizona attorney who

In another matter had been enjoined

from offering and/or selling the securities of any issuer in Violation of the registration requirements of the Securities

Act and, subsequently, had been permanently suspended from appearing or

practicmg before the Commission under

an order Issued pursuant to Rule

2(e)(3)(II) of the Cornrnission's Rules of

Practice. 90

The Ind ictment 91 charged George

Mariscal, the attorney and promoter of

Toltec Agri-Nomics, Inc., an Arizona

corporation. with ten counts of interstate transportation of securities obtained by fraud and thirteen counts of
mail fraud. (The defendant was convicted on 22 counts in May 1979 )

Other Significant Enforcement

Cases

SEC and Comptroller of the Currency

v. The National Bank of Georgla92 The

Commission and the Comptroller of the

Currency JOintly filed a CIvil injunctive

action against The National Bank of

Georgia (NBG), The Calhoun First National Bank (Calhoun), and T. Bertram

Lance (Lance) alleging violations of certain ofthe antifraud, reporting and proxy

soucrtation provrsrons of the Federal securitres laws. Simultaneously the defendants consented to the entry of Final

Judgments of Permanent Injunction and

Other Equitable Relief.

The complaint alleged that NBG, Calhoun and Lance engaged in certain unsafe and unsound banking practices

including a pattern of related-party

transactions by Lance and certain of his

relatives, substantial and prolonged overdraftmg in checking accounts at Calhoun, numerous questionable loans to

officers and directors of Calhoun and

misleading entries on its books and records, Incomplete and Inadequate evaluations of NBG's loan porttoho, and

loans by N BG to relatives and associates

of Lance without adequate regard for the

creditworthiness of the borrowers and

on preferential terms.

The complaint alleged that the senior

management of Calhoun and the management of N BG engaged In, were aware

of, or permitted certain of the unsafe

practices, and that the board of directors In a number of Significant respects

performed no meaningful monitoring

role of management. The management

of Calhoun engaged In such acnvrties

despite persistent criticisms and recommendations by the Comptroller of the

Currency and despite having knowledge

of many of the unsafe practices.

As part of the settlement of the case,

NBG and Calhoun made certain undertakings which are construed to be Written agreements entered Into with the

Comptroller of the Currency within the

meaning of the Financial Institutions

Supervisory Act of 1966 (12 U.S C

Section 1818) After five years from the

date of the Judgment, unless terminated

by the Comptroller, NBG and Calhoun

will no longer be subject to the Court's

order to comply with such undertakings,

but such undertakings shall continue as

a final cease and desist order of the

Comptroller.

The NBG and Calhoun undertakings

relate to certain of the lending practices

of the banks with respect to insiders;

the relationships of the banks to their

correspondent banks; certain reporting

requirements of insiders of both banks;

and the adequacy of the loan loss reserves of both banks.

As a further part of the equitable relief

granted, the Court ordered both banks

to maintain audit committees, with

specrfied duties and functions, consisting In part of Independent directors.

In addition, Lance made certain undertakings which addressed certain of

the conduct described In the complaint

and with which he was ordered to comply.

SEC v. Netionet Student Marketing

coroorettonv-us» August 31, 1978,

District Judge Barrington D. Parker of

the United States District Court for the

District of Columbia issued a Memorandum Opinion and Judgment tollowing

the trial of the remaining defendants In

the Commission's litigation ansmg from

the National Student Marketing Corporation (NSMC) stock fraud.

The Commission proceeded to trial

against. the president of an Insurance

holding company acquired by NSMC

th rough a merger In 1969; a d Irector of

the Insurance holding company who was

a partner In ItS law firm; another partner

In the law firm; and the law firm Thtr35

-
teen other defendants In the case settled the civil case before trral; three

defendants were granted summary Judgment. 95

The Commission had alleged that the

remaining defendants had violated and

aided and abetted violations of Section

lO(b) of the Exchange Act, Rule 1O~

5 thereunder and Section 17(a) of the

Securities Act by participating In the

merger of NSMC and the Insurance

holding company, a merger which was

approved by that company's public

shareholders based on allegedly materially false and misleading financial information concerning NSMC, and by

engaging in the sale of NSMC stock Immediately after the merger, all without

disclosrng materral Information contained In a comfort letter delivered at

the closmg by NSMC's outside auditors.

The NSMC tmancial statements which

were contained In the proxy statement

sent to the public shareholders of the

Insurance holding company showed a

profit of approximately $700,000 while

the auditors stated irrthe comfort letter

that retroactive adjustments were necessary such that they would show a loss.

The court found that" ... [the attorneys] should have refused to proceed

with the merger absent disclosure to and

resolrcrtatron of the shareholders."

Concerning the alleged aiding and

abetting Violations by the attorneys In

failing to take any action at the closmg,

the court held that" ... the attorneys'

responsibilities to their corporate client

required them to take steps to ensure

that the information [contained In the

comfort letter] would be disclosed to the

shareholders.

The court concluded that the attorneys were required at the very least to

"speak out at the closmg concerning the

... concomitant requirements that the

merger not be closed until the adjustments were disclosed and approval of

the merger was again obtained from the

36

Interstate shareholders". Although It

determined that the defendants had VIolated the securrties laws, the court concluded that an Injunction was not

warranted.

SEC v. IU tntemetionet Corp.96-On

Aprrl 17, 1978, the Cornrnission rnstrtuted an injunctive action against IU International Corporation (IU) In which

the Cornrnissron alleged that IU filed

annual reports and proxy statements

which failed to disclose adequately and

accurately materral facts The alleged

failure concerned IU's payment of approximately $445,000 In legal fees incurred In the defense of IU's chairman

and chief executive officer, John M.

Seabrook, and two others In the AlscoHarvard Fraud LitigatIOn, (Consolidated

Cases) D.D.C., Civil Action No. 71-

659, and IU's payment of approximately $533,000 to settle claims against

Seabrook arrsing out of such litigation.

The complaint further alleged that IU

was not named as a defendant In such

litigatron and was not Involved In any

way In the acnvitres which formed the

baSIS of such litigation.

The Cornrrussron's action was settled

by the entry of a decree enjom rng IU

from Violation of the reporting provisions

of the Federal securitres laws and requrrrng IU to comply With the terms of

ItS Consent and Undertaking (Consent)

filed With the decree. Seabrook agreed

to comply With the terms of the Consent.

Among other th mgs, the Consent provrded for the appointment of a Special

Counsel to investigate and Issue a report

with respect to the matters set forth in

the complaint and the transcrrpt of Seabrook's testimony taken- durrng the

Commission's investigation which preceded the filing of the complaint.

SEC v. Moms A. Shenker97-The

Cornrnissron flied this action on October

13, 1977 against Continental Connector Corporation (Connector), whose pnncipat asset is the Dunes Hotel and

"
Casino In Las Vegas, Nevada; Connector's controlling shareholders-Morris

A. Shenker; seven of Connector's former

or present directors; and companies

wholly owned or controlled by Shenker.

The complaint also named as defendants the Pipefitters Local Union No.

560 Pension Fund, and Pipefitters Welfare Educational Fund, trust funds (collectively, the "Prpefitters Funds"); and

four trustees of the Prpefitters Funds.

The complaint charged Shenker, Connector, and other defendants with VIOlations of the antifraud provisions of the

Securities Act and the antifraud and reporting provrsions of the Exchange Act

through their participation In a scheme

to defraud which caused Connector to

enter into a transaction with a company

owned by Shenker. The transaction was

allegedly designed to benefit Shenker

and his company to the detnment of

Connector and Its public shareholders.

As a result of this transaction, the complaint alleged, Shenker's company received $5 million of Connector's montes.

The complaint further alleged that Connector made false and misleading public disclosures concerning this

transaction.

In order to restore to Connector assets

lost through the transactions alleged In

the complaint, the judgments also provided that Shenker guarantee Connector

against loss In the amount of $5 million

plus interest in connection with the

transaction described above between

Connector and the company owned by

Shenker.

Finally, the Prpefrtters Funds were

ordered to appoint a special counsel to

investigate and report on the transactions alleged in the complaint. In addition, the Piepfitters Funds were ordered

to adopt written Investment policies and

procedures and to appoint an independent investment advisor to review and

approve all proposed investment deersions pnor to their being effected.

The action IS pending against one remaining defendant.

Further, the complaint charged

Shenker, the Prpefrtters Funds, and

other defendants with engaging In a

course of busmess whereby the assets

of the Pipetitters Funds were used for

the benefit of Shenker and hrs controlled companies and not for the benefit of the beneficianes of the Prpefitters

Funds.

Simultaneous With the filing of the

lawsuit, Connector, Shenker, the Pipefitters Funds, and certain other defendants consented to the entry of orders of

permanent injunction. In addition, Connector was ordered to appoint three independent directors, satisfactory to the

Commission, to ItS board of directors

and to have these Independent directors, through an audit committee and an

Independent public accountant, investigate and report on certain past transactions between Connector and its

officers, directors and certain other persons. In addition, the audit committee

will review certain proposed transactions and will approve or disapprove any

such transaction.

SEC v. Sheldon L. Hert, et al.98; Report of Investigation in the Matter of

National Telephone Co., lnc., Relating

to Acttvittes of the Outside Director of

Nettonel Telephone, Inc.99-On January 16, 1978, the Cornrnissron filed a

Civil injunctive action naming as defendants certain former officers, directors and employees of National

Telephone Co., Inc. (National) and Pnce

Waterhouse & Co (PW), National's former Independent auditors. The complaint alleged Violations of Section 17(a)

of the Sec unties Act and Sections 10(b)

and 13(a) of the Exchange Act and rules

thereunder, and the Commission's Regulation S-X.

The complaint alleged that certain financial statements Issued by National

and reported upon by PW were rnaten37
ally false and rrusleadrng, rn that they

materially overstated assets and revenues and understated liabilities and expenses. The complaint also alleged that

PW failed to conduct Its audit of National rn accordance with generally accepted auditing standards and,

accordingly, that PW lacked sufficient

basis to conclude that National's frnancial statements were presented rn accordance with generally accepted

accountrng pnnciples. In addition, the

indivrdual defendants were named for

their roles in the preparation and ISSUance of allegedly materrally false and

misleading public cornrnurucatrons concerning National's declrnrng frnanctal

condition durrng the perrod prror to National's enterrng bankruptcy proceedrngs.

PW agreed to a settlement rn which

It consented to the entry of a Frnal Judgment and Other Relief enjcrrung PW

from Violations of the antifraud and reportrng provisions of the Federal secuntres laws rn connection With the

securitres of National or ItS subsrdrarres.

The judgment entered against PW also'

(1) ordered PW to review rnternally a

number of specified audit areas descrrbed rn the complarnt and to adopt

such procedures, if any, as are needed

to assure the adequacy of ItS audit practices; (2) ordered PW to submit to a

"peer review" of the manner In which

PW conducts ItS audit practice With respect to clients whose financial statements are filed With the Commission or

whose securitres are listed on a stock

exchange or traded in the over-thecounter market; and (3) ordered PW to

return to Natronal's Chapter X Trustee

$90,000 rn fees paid rn connection With

the National engagement for Natronal's

1973 and 1974 fiscal years

Pursuant to Section 21(a) of the Exchange Act, the Commission also Issued

its Report of Investigation (Report) based

on rntorrnatron received in the Cornrrus38

sion's non-public mvesngatron-i-ro the

Matter of National Telephone Co., Inc.-

With respect to the actrvities of certarn

directors of National. These directors

consented to the issuance of the Report

Without adrrutting or denyrng the Report's findrngs.

The Report found that these directors

were aware, durrng the fall of 1974 and

the wrnter and sprrng of 1975, of significant facts concernrng National's

troublesome financial condition. Moreover, they were also aware of the optimistic nature of the company's publrc

disclosures, disclosures which were in

direct contrast With the true state of the

company's affairs. Under these circumstances, the Report contrnued, "ITlhe

company's outside directors had an affirmative duty to see to It that proper

disclosures were made." The Report

concluded that "In general, outside directors should be expected to rnamtain

a general tarnilranty with their company's communications with the public.

Inthisway, theycancomparesuch comrnurucatrons With what they know to be

the facts, and If the facts as they know

them are rnconsrstent With those communications, they can see to It, as stewards for the company, that approprrate

revistons or add It Ions be made."

SEC v. George M. OssermanlOO-On

September 7, 1978, the Cornrrussron

filed a complarnt seekrng Injunctions

agarnst a number of Individual corporations and limited partnerships, and a

law firm. The complarnt alleged that

each of the defendants Violated the regrstration provrsrons of the Securities Act

m connection With the offer and sale of

approximately $112 million of unregistered securitres rn the form of limited

partnersh Ip interests.

The complarnt further alleged that

certain of the defendants Violated the

general antifraud provisrons of the Secunties Act and the Exchange Act rn
connection with the sale of the limited

partnership interests.

On September 14, 1978, certain defendants (including the law firm) consented to the issuance of permanent

Injunctions without admitting or denyrng the allegations of the complaint. The

court ordered one of these defendants

to make an accounting of the disposition

of funds received by him in connection

with the activities alleged In the complaint. The law firm further stipulated

that It would adopt, Implement and

maintain Internal supervisory procedures set forth in a letter of undertaking

to the Commission.

The Commission is conducting drscovery as to the remaining defendants

and expects a hearing on the merits In

the coming fiscal year.

In the Matter of Bateman, EIchler,

Hill Richards Inc.101--On March 20,

1978, the Commission issued an

Order Instituting Proceedings against

Bateman Eichler, Hili Richards, Inc.

(Bateman Eichler) and four of its senior

officers for violation of the anti-manipulative and antifraud provisrons of the

Exchange Act In connection With trading

in the securities of Frigitromcs, Inc.,

Vernitron Corporation and Logicon Inc.

The Order also alleged that Bateman

Eichler violated the beneficial ownership reporting requirements and recordkeeping provisions of the Exchange Act,

that the four officers aided and abetted

such Violations and that all of the respondents violated the margin provisions of the Exchange Act. The Order

alleged that a senior vice-president of

Bateman Eichler purchased the securities of these three Issuers for customers

accounts without their authonzation.

Approximately $9.6 million of these securities were purchased on such unauthorized basis. The fact that customers

were unaware of the unauthorized purchases for their accounts or in some instances, refused to accept the

unauthonzed purchases for their accounts, enabled this officer to offer to

sell securities to other customers at a

price below their then current market

price. These transactions resulted in an

artificial inflation of the prices of the

securities.

Bateman Eichler and its officers consented to findings of violations as alleged In the order and the Imposition of

certain remedial sanctions.

As part of the remedial sanctions ordered by the Commission, Bateman EIchler's registration With the Commission

as a broker-dealer was suspended for

one year but the suspension was held

In abeyance providing that Bateman EIchler met certain conditions. The conditions Included a protubrtron (with

certain exceptions) from engaging in

any block posrtiorung on certain national securities exchanges for a period

of six months, the setting aside of $1

million for claims and the establishment

of a Special Review Committee to review

and monitor the compliance activities

of the firm. Three officers were suspended from assocratron With any broker-dealer for one year each but that

sanctron was held In abeyance provided

that each officer not serve in any capacity with any broker or dealer for three

months, nor receive compensation from

the firm for an additional three months

and not be found to have committed

additional violations of the Exchange

Act for a period of one year from the date

of the order. The fourth officer was

barred from association With a broker or

dealer With the proviso that he could

reapply to be associated with a broker

or dealer after three years from the date

of the order.

In the Matter of Memll Lynch, PIerce,

Fenner & Smith, Inc 102_ln November

1977, the Commission issued an Opinion and Order wherein it found that Merrill Lynch, Pierce, Fenner & Smith Inc.

(Merrill Lynch), a research analyst em39
ployed by Merrill Lynch, and twentyeight of Merrill Lynch's salesmen had

violated the antifraud provisions of the

Securities Act and the Exchange Act In

connection with recommendations to

purchase shares of Scientific Control

Corporation (Scientific). After the institution of public administrative proceedmgs, hearings were held before an

administrative law judge In various major crties throughout the United States.

At the conclusion of the proceeding, the

respondents made offers of settlement,

which were accepted by the Commission. The Cornrnrssron Issued an OprnIon and Order, which contained findings

and Imposed remedial sanctions upon

the respondents.

The find ings of violations by the Merrill Lynch salesmen primarily rest upon

the false and misleading representations made to public customers dunng

oral presentations designed to encourage the purchase of SCientific shares.

Most common among these misrepresentations were statements related to

the future Increase In the market price

of SCientific shares, and statements

comparing SCientific, In terms of future

potential, to much larger and more seasoned companies The Commission

found these statements to have been

-made without a reasonable basis In fact

and, hence, In violation of the antifraud

provrsions. Merrill Lynch was also found

to have failed to reasonably supervise

the twenty-eight salesmen with a view

toward preventing these violations.

The Commission censured Merrill

Lynch and ordered the payment of the

sum of $1.6 million to compensate ItS

customers who suffered losses In connection with transactions In Sctentrfrc.'?'

In addition, the Commission directed

Merrill Lynch to review and strengthen,

where necessary, ItS sales and research

guidehnes and its training program for

salesmen.

Seven individual salesmen received

40

suspension from association with the

secuntres Industry for various periods;

twenty-one salesmen were censured. In

the Commission's Opinion and Order,

the proceedings were dismissed against

eighteen salesmen and a supervisory

analyst.

In the Matter of Bache Halsey Stuart

Shields Incorporated and Shearson

Hayden Stone Inc.-In two administrative proceedings, the Commission

found that Bache Halsey Stuart Shields,

Inc. (Bache) and four of ItS employees 104

violated the Federal securities laws In

connection with listed option activity In

the accounts of certain customers. 105

The respondents were charged with

churning their customers' accounts over

which they had discretionary authority

and effecting option trades for such accounts which were not suited to the investment objectives, Investment

sophistication and financial situations

of the customers.

The Commission found that Bache

and two of ItS salesmen violated certain

of the antifraud provrsions of the Federal

secunnes laws and that Bache and one

of its salesmen violated the margin requirementsofthe Federal Reserve Board.

Two branch managers were found to

have failed reasonably to supervise persons subject to their supervision.

As part of Bache's offer to settle the

proceedings, Bache agreed to pay approximately $74,000 to customers who

suffered losses, and to cancel debit balances In customers' accounts totalling

approximately $264,000.

The Commission ordered all option

trading suspended for forty-five days In

two of Bache's branch offices where the

respondent employees had worked. Three

of the employees were barred from association with any broker or dealer and

one was suspended for 15 days. The

barred respondents may reapply to become associated with a broker or dealer
after specified periods of time have

elapsed.

In the other administrative proceeding, the Commission alleged that Shearson Hayden Stone (Shearson) and two

of its employees violated the general

antifraud provisions of the S 303

Act and the Exchange Act and that two

employees failed reasonably to supervise a person subject to their supervision.

As part of the settlement, Shearson

agreed to pay approximately $146,000

to customers who suffered losses. The

Comrnissron ordered that one branch

office of Shearson suspend option trading for 30 days and another branch office suspend option trading for 60 days

One employee was censured, another

suspended from association with a broker or dealer for 90 days and another

was barred from association With any

broker or dealer.

The findings were made pursuant to

offers of settlement submitted by the

respondents.

SEC v. The IES Management Group,

Inc.106-ln a series of judrcial and administrative actions mvolvrng the IES

Management Group, Inc (lES), a registered broker-dealer, and related indrviduals, the Cornrrussicn obtained

permanent orders of mjunctron, by consent, against nine indivrduals enjoining

them from Violations of registration,

antifraud, customer protection, and financial responsibility provrsrons of the

Federal secuntres laws. Additionally, a

Securities Investor Protection Corporation trustee was appointed to liquidate

IES.

The Commission's complaint In thrs

matter alleged that IES fraudulently

sold Interests in tax shelter limited partnerships. Pursuant to offers of settlement, the Commission revoked the

broker-dealer and Investment adviser

registrations of IES, barred three individuals and suspended one person for

a one-year period from being associated

with any broker, dealer, Investment

company, or Investment adviser The

Cornrnissron also accepted resignations

from practice before the Commission

from three attorneys.

In the Matter of Steven S Mltchell107

The Cornmissron ordered public adrrunistrative proceedings against two registered broker-dealers and nine individual

options market makers In connection

with certain options trades on the floor

of the Pacrfrc Stock Exchange (PSE) In

San Francisco. The proceedings are

based upon allegations of the Commission's staff that the respondents VIOlated certain of the anti-manipulation

and antifraud provrsrons of the Federal

securities laws by engaging In trade reversals In call option contracts respectmg the underlying stock of Houston Oil

and Minerals Corp. (Houston 0,1). Listmg and trading In Houston 011 options

began Simultaneously on the PSE and

the Chicago Board Options Exchange on

November 22, 1976 The trades In ISsue occurred on that first day of competitive trading between the two

exchanges. A pubhc evrdentrary hearing

In San Francisco has been completed

and the Administrative Law Judge has

entered find ings that the respondents

Violated certain provrsions of the securities laws alleged In the order mstrtuting proceedings and has Imposed

sanctions including a suspension The

matter IS now an appeal to the Commission.

In the Matter of The Boston Company

tnstttuttonel Investors, Inc.-In an initial decision which became the final

Cornrrussron decision as to all respondents except Raymond L. Dirks (Dirks) of

New York, New York (petition for review

pending), SIXregistered Investment advisers were found to have Violated the

general antifraud provisrons of the Federal securities laws In March 1973, by

offering for sale and seiling on their

41

-
clients' behalf the securities of Equity

Funding Corporation of America (Equity

Funding) after receiving information from

Dirks that one or more former Equity

Funding employees had alleged that a

substantial amount of the corporation's

reported Insurance business had been

fabricated by company offrcrals.

Four of the respondents were censured. The administrative law judge,

finding that another respondent had dISclosed to ItS immediate purchaser, a

large NewYork block trading firm, much

but not all of the information about Equity Funding It possessed, determined

that the public Interest required no

sanction against the respondent.

Dirks was found to have violated the

antifraud provisions and aided and abetted the other respondents' Violations by

selectively disseminating allegations

about the Equity Funding fraud to them

and others, all of whom were clients of

potential clients of Dirks' broker-dealer

firm. Dirks was tmtrally suspended from

association Witha broker-dealer for sixty

days; he has petitioned for review of

each adverse finding and legal conclusion. The Divrsion of Enforcement IS

seeking review of that portion of the initial decision wherein Dirks was suspended for only sixty days.

In reaching hrs decision that the other

respondents received and wrongfully

employed material, non-public information about Equity Funding, the administrative law judge sharply

drstrngurshed between vague, unattnbuted rumors Circulating in financial

Circles and concrete allegations from

one or more recent employees In a positron to know about alleged Improprieties. The judge also ruled that material

information under the antifraud provisions could consist of the allegations of

fraud, falsified records, and artrftcrally

Inflated earnings conveyed In this case.

The judge found that the seiling respondents' sudden lrqurdatron of their

42

clients' Equrty Funding holdings and

Dirk's pattern of intensive Investigation

and selective dissemination were all

strong indications that the Equity FundIng allegations were both material and

a substantial factor in the determination

to sell.

U.S. v. Richard P. Curran108-On

September 14, 1976, a Federal grand

jury In Phoenix, Arizona returned a

multi-count indictment against 18 individuals and 5 corporations. The indictment charged the defendants With

various counts of securities fraud, mail

fraud, and interstate transportation of

money obtained by fraud in connection

with the purchase and sale of various

Interests in land contracts offered for

sale and sold by Cochise College Park,

Inc. (Cochise). In addition, certain defendants were charged With operating

enterprises In Violation of the Federal

Racketeer Influenced and Corrupt Organizations (RICO) statute. The indictment resulted from a joint CommissionFBI investigation.

Over $40 million was raised from

members of the publrc, the public loss

from the sales of these Interests exceeded $20 mIIlion. The losswascaused

by an extremely high default rate on the

contracts for the lots sold, together With

large sales commissions and assignment discounts paid by Cochise on the

lot contracts.

On the basis of verdicts of guilt rendered after trial and the entry of pleas

of guilty to Informations, various fines

of up to $10,000 have been imposed

upon certain of the defendants. Sentences range from periods of probation

to ten years Imprisonment. The matter

remains pending or on appeal With respect to certain of the defendants. 109

(Subsequent to the close of the fiscal

year, certain appeals were resolved resulting in attirrnatrons of convictions of

three defendants and reversal of convictions for two others. 110)
U.S. v. Larry L. Stevens alkJa Frank

Goodman111_A thirty-nine count indictrnent was returned against Larry L

Stevens a/kJa Frank Goodman charging

him WIth VIolations of the antifraud proVISIons of the Securities Act, mall fraud

and bankruptcy fraud. The alleged VIOlations occurred In connection With the

sale of promissory notes and Investment

contracts of North Western Mortgage

Investors Corporation (the company) of

Seattle, Washington of which Stevens

was president and In connection With ItS

Chapter X reorganization proceeding.

The company, under the control of the

defendant, raised In excess of $6 million from over 1,700 Investors, the vast

majority of which were elderly and retired, attracted by a promised 8 percent

return. The notes and contracts sold to

the public were secured by Interests In

real property. However, the indictment

charged that the notes and contracts

were sold In amounts far In excess of the

company's equity therein; that the company was offering to pay Interest to

Investors at a time when It was not payrng nor could It pay Interest to existrng

investors; and that the company was

making Interest payments from other

investor montes The defendant pleaded

gurlty and was sentenced to serve three

years In a Federal perutentrary followed

by probation.

U.S. v. Barry S. Marlin-In thrs case

a sentence of ten years Imprisonment

followed by five years probation was Imposed on the defendant following his

plea of guilty to SIXcounts of an indictment charging him With secunties fraud,

mall fraud and rnducmg the filing of

false tax returns 111 Marlin earned out

a complex fraudulent scheme In which

numerous Investors were falsely told

that their funds were profitably Invested

In real estate syndrcations, a Caribbean

bank and a London based export-Import

business. Vrctrrns were gathered primarily from airline and airport employment tretds, and Included many

commercial pilots, cabin attendants and

airport fire fighters who Innocently involved their friends, associates and famrly members Marlin'S scheme resulted

In a public loss believed to be In excess

of $12 million.

U.S. v. Walter Wencke-In thrs case

five defendants were convicted for their

roles In conspiring to defraud publtc

shareholders of Sun Fruit, Ltd. pursuant

to a scheme In which this fmancrallytroubled concern was taken over by false

assurances of renabihtatron followed by

a systernatrc looting of ItS assets by defendant Wencke and his co-conspirators. The looting was concealed from

discovery for a time through false reports disseminated to shareholders and

through the mstrtutron of a fraudulent

receivership proceeding In a Nevada

State court In which Wencke caused

himself to be named as receiver All defendants received prison terms. The

principal defendant, Wencke, a prominent San Diego, California attorney, was

sentenced to serve five years Imprisonment followed by five years probation,

fined $31,000 and ordered to make restitution to the Victims. The investigation

leading to the successful prosecution of

the case resulted from a Significant cooperative effort of the Postal Inspection

Service, the Internal Revenue Service

and the Comrrussron's enforcement

staff. 112

43

Other Important Litigation

The Commission, through ItS Office

of General Counsel, participates as a

party and as an amicus rn a substantial

amount of lrtrgatron rn addition to ItS

enforcement actions The results rn

these suits often affect exrstrng rnterpretations of the Federal secuntres laws

and/or the scope of the Commission's

authority. The followrng IS a summary

of some of these non-enforcement actions which were litigated rn the past

year.

Daniel v. tnternettonet Brotherhood

of Teamsters--The Issue raised In Daniel rnvolved the extent of the coverage

of the Securities Act. The case presented the question of whether the antifraud provisions of the Federal secuntres

laws are applicable to the acqursttron by

employees of rnterests rn certarn types

of pension funds-a question which

turned on whether such an acqursrtron

rnvolved the "sale" to the employee of

a "security." The private plarntrff rn that

case contended that it did. The District

Court dismissed that portion of hrs cause

of action but the U.S Court of Appeals

for the Seventh Circuit reversed that

determination. The Supreme Court

thereafter granted certiorari and the

Commission appeared amicus as It had

rn the Circuit Court

In the Supreme Court, the Commission contended that, under the proper

mterpretatron of the terms "sale" and

"security" rn the securities laws and on

the baSIS of principles long established

and consistently applied rn numerous

Supreme Court decistons considenng

the term "rnvestment contract" (one of

the terms rncluded rn the statutory defrrution of the term "secunty' J-c-the acqursitron of an rnterest rn a pension fund

was a sale of a security and, hence, subject to the antifraud provrsions. The

Cornrrussron's particular concern which

led It to appear amicus was that the defrnrtion of these terms not be constricted

because ItS experience rn administering

the Federal securrtres laws had shown

that unscrupulous persons who sought

to defraud others through promises of

profits had constantly devised new

schemes rnvolvrng novel Investment vehicles to effectuate their goals. Srnce

Congress, rn enactrng the secuntres

laws, could not anticipate every potential rnvestment vehicle which could be

utilized to commit fraud, the Commission contended that the traditionally

broad construction given to the term

"rnvestment contract" was a necessary

protection for rnvestors and an accurate

mterpretatron of the secuntres laws. At

the close of the fiscal year, the case was

awaitrng a decision by the Supreme

Court. (Subsequent to the close of the

fiscal year, the Supreme Court, on January 16, 1979, reversed the Judgment

of the Court of Appeals, holdrng that the

Securities Act of 1933 and the Securities Exchange Act of 1934 do not ap45
ply to a non-contnbutory, compulsory

pension fund.)

Nettonet Resources Defense Council

v. SEC- This case arrses out ofthe Commission's determination not to adopt a

rule proposed by the plaintiffs They had

requested the Commission to require,

among other things, publicly-owned

corporations to disclose detailed information concerning the present and potential environmental effects of the

corporations' activities including the

nature and extent of the pollution caused

by such activities, the teasibthty of

curbing such pollution and the plans

and prospects for Improving relevant

technology. The Commission determined not to adopt the proposed rules

for reasons directly related to Its mandate of Investor protection. It was concerned that rules requiring disclosure of

particular categories of information that

would only be material With respect to

some companies and only of Interest to

some Investors would result In disclosure documents that would be so voluminous as to be of less use to Investors

generally. Also, It was concerned that

disclosure requirements not Impose an

unreasonable administrative burden on

the Commission or excessive costs on

publicly held corporations. The major

Issues raised In the plaintiffs' action

contesting the Cornrnissron's determination were whether the determination

of the Commission not to adopt the proposed rules was subject to judrcral review and whether the Commission had

acted properly In contrnurng to elrcrt

environmental Information through ItS

existing rules rather than through the

methods proposed by the plaintiffs.

The Distnct Court ordered the Comrnissron to undertake further rulemaking

proceedings and the Commission appealed to the U.S. Court of Appeals for

the District of Columbia Crrcuit. On appeal, the Commission contended that

ItS decision not to promu lgate requested

46

rules was proper and moreover, that the

determination IScommitted by law to ItS

discretion and not reviewable under the

Administrative Procedure Act. (Subsequent to the end of the fiscal year, the

Court of Appeals reversed the District

Court holdrng and upheld the Commission's determination not to promulgate

the proposed rules on the grounds that

the Cornrnisston's determinations were

procedurally free from defect and reasonable.)

Bradford National Cleanng Corporation, et al. v. SEC-Bradford raised issues dea ling with the creation of a

national clearing system as required by

the secunties Acts Amendments of

1975. These amendments directed the

Commission to facilitate the establishment of a national system for clearance

and settlement of securities transactions having due regard for the maintenance of fair competition among

brokers and dealers, c1eanng agencies

and transfer agents.

To carry out this broad directive, Congress gave the Commission authority to

register clearing agencies that meet certain specified cntena, including an abiltty to clear and settle securities

transactions promptly and accurately

and an absence of rules that Impose any

burden on competition not necessary or

appropnate In furtherance of the purposes of the Exchange Act. Without

such registration, or a Commission exemption therefrom, it is illegal to operate such an agency.

The plaintiffs in Bradford appealed

from the registration by the Commission

of the National Securities Clearing Corporation as a cleanng agency alleging

that it imperrnissrbly contained certain

monopolistic tendencies, The U.S. Court

of Appeals for the District of Columbia

Circuit, however, affirmed the Commission's action concluding that the Commission had appropriately assessed the

Importance of the relevant statutory
considerations and had properly balanced the results. The Court concluded

that the Commission's vigilance would

forestall any irreparable antrcompetmve

harm from accornpanyrng the registration and that the Commission had acted

properly in establishing a national clearIrg framework that was virtually certain

to be dependable, stable, efftcrent-s-

, and more rapidly achievable than any

other alternative-rather than in establishing an admittedly more competitive

system that for years to come would be

stili developing, precarious, and thus

less certain to provide safe, efficient

and inexpensive services.

47

Public Utility Holding Companies

Composition

Under the Holding Company Act, the

Commission regulates Interstate public

utility holding company systems engaged In the electnc utility business or

In the retail distnbution of gas. The

Commission's jurisdiction also covers

natural gas pipeline companies and

nonutilrty companres which are subsidiary companies of registered holding

companies.

There are presently 15 registered

holding company systems with aggregate assets, as of June 20, 1978, of

over $46 million. In the 15 systems

there are 62 electnc and/or gas utility

subsidiaries, 71 nonutilrty subsldranes,

and 22 inactive cornparues, or a total

of 174 system cornparues, including the

top parent and subholdrng companies.

Table 35 In the Appendix lists the systems and Table 36 lists their aggregate

assets and operating revenues

Financing

Volume--Durlng fiscal year 1978,

approximately $3 billion of seruor securities and common stock financing of

the 15 registered systems was approved

by the Commission. Of thrs amount, approximately $2.1 billion was long-term

debt financing, and over $887 million

was for equity tmancing. These amounts

represent a 34 percent Increase In longterm debt financing over fiscal year

1977 and a 5 percent Increase In the

sale of common and preferred stock. In

addition, the Commission approved over

$4.2 billion of short term debt tmancmg

and $978 million of pollution control

financing for the 15 registered holding

company systems. Table 37 In the Appendix presents the amount and types

of secuntres Issued under the Act by

these holding company systems.

Fuel Programs

Dunng fiscal year 1978, the Commission authorized $184 million of fuel

exploration and development capital expenditures for the holdmg company systems. This autnonzation covers an annual

maximum expenditure for fuel programs

defined on geographical and functional

terms. Table 38 In the Appendix lists

the authonzatron by holding company

system for each fuel program

Largely as a result of the energy crisis.

holdrng companies have embarked on

major and expensive new commitments

to acquire better control over their own

fuel supplies, and these commitments

require substantial additional capital

Generally, the arrangements Involve formation of several new subsidianes for

producing, transporting and financmg

fuel supplies or the Investment of caprtal for the exploration of and development drilling for minerai reserves With

a nght to production accruing to such

Investment. Since 1971, the Cornrrus49
sron has authorized over $2.2 billion for

fuel programs of holding companies.

Service Company Operations

At the end of calendar year 1977,

there were eleven subsidiary service

companies providing managerial, accounting, administrative and engineering services to eleven of the 15 holding

companies registered under the Act.

The billings for services rendered to the

holding company systems amount to

$363 million or 2.10 percent of the total revenues generated by the electric

and gasoperating utilities of the holding

company systems. All services are rendered at cost to the operating utilities,

With several systems Including a return

on capital Invested by the parent holdrng company. Because the subsidrary

service companies are service oriented,

50

they are heavily labor mtensive havmg

10,299 employees and assets of over

$190 million.

DUring the calendar year, the Commission issued a notice of a proposed

amendment to the Uniform System of

Accounts for pubhc utility service companies. The revised system of accounts

will (l) provide for closer coordination

With the Federal Energy Regulatory

Cornrnissron's Uniform System of Accounts for electnc and gas public utilities, (2) facilitate the conduct of audit

and account Inspection programs, and

(3) Improve reports filed by service companies subject to the Act. At the close

of the fiscal year it was expected that

the final rules for the revised system of

accounts would be submitted to the

Commission for approval in January

1979.
Corporate Reorganizations

The Commission's role under Chapter

X of the Bankruptcy Act, which provides

a procedure for reorganizing corporations In the United States distnct courts,

differs from that under the vanous other

statutes which it administers. The Commission does not initiate Chapter X proceedings or hold ItS own hearings. and

It has no authonty to determine any of

the Issues In such proceedings The

Commission 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

Interest of public security holders who

may not otherwise be represented effectively.

Where the scheduled Indebtedness of

a debtor corporation exceeds $3 million, Section 172 of Chapter X requires

the court, before approving any plan of

reorganization, to submit It to the Commission for its examination and report

If the Indebtedness does not exceed

$3 million, the court may, If It deems

It advisable to do so, submit the plan to

the-Cornrnrssion before decrdrng whether

to approve it. When the Commission

flies a report, copies or summanes must

be sent to all secunty holders and credrtors when they are asked to vote on the

plan. The Commission has no authonty

to veto a plan of reorgaruzatron or to requrre ItS adoption

The Commission has not considered

It necessary or appropnate to participate

In every Chapter X case. Apart from the

excessive administrative burden, many

of the cases Involve only trade or bank

creditors and few public Investors. The

Commission seeks to participate pnncrpally In those proceedings in which a

substantial publrc Investor Interest IS

Involved. However, the Commission may

also participate because: 0) an unfair

plan has been or IS about to be proposed; (2) public security holders are

not represented adequately; (3) the reorganization proceedings are being conducted In Violation of Important

provrsrons of the Act; (4) the facts indicate that the Cornrnission can perform

a useful service; or (5) the court requests the Commission's participation

The Cornrnissron In ItS Chapter X activities has divided the country Into four

geographical areas. The New York, Chicago, Los Angeles and Seattle regional

offices of the Commission each have responsibihty for one of these areas Supervision and review of the regional

offices' Chapter X work IS the responsibility of the DIVISion of Corporate Regulatron of the Comm rssion wh ich, through

Its Branch of ReorganizatIOn, also

serves as a field office for the

southeastern area of the United States

Dunng the fiscal year, the Commission entered SIXnew Chapter X proceed51
ings involving companies with aggregate

stated assets of approximately $165

million and aggregate Indebtedness of

approximately $127 million. Including

the new proceedings. the Commission

was a party In a total of 118 reorgaruzatron proceedings during the fiscal year

(a list of these proceedings appears In

52

Table 39 In the Appendix of thrs report).

The stated assets of the companies involved in these proceedings totaled approximately $5.7 billion and their

indebtedness about $5.1 billion.

During the fiscal year 24 proceedings

were closed, leaving 94 In which the

Commission was a party at year end.
Administration and Management

In FY 1978, the Commission Improved both Its planning capabilities

and Internal management systems In

order to increase the effectiveness of Its

programs and to provide better service

to the public. No major organizational

changes were undertaken Rather, the

focus was on managing the current organization In order to make It function

more effectively.

Information Systems Management

The Commission took several important steps toward Improving ItS Information handling processes In 1978.

The Commission received authority from

the General Services Administration to

replace its ten-year old computer with

an IBM 360-65. A three-year lease was

awarded, allowmg the Commission time

to complete a comprehensive study

aimed at Identifying possible new computer applications, delineating the

agency's ADP requirements and speerfymg the characteristics and configuration needed to address present and

contemplated needs. In addition, a prototype-teleprocessing network was established linking the Atlanta and Los

Angeles regional offices with the central

computer facility.

A comprehensive information system

requirements analysis was completed,

as planned, providing a blueprint for information system development activrties to be undertaken over the next

several years. In conjunction with thrs

analysis, work began late In 1978 to formulate functional specifications for the

computer processing capability that

would be required to support all of the

Commission's information systems over

the next 5 to 8 year period This task IS

expected to be completed during the

first quarter of 1979.

Significant progress was made during

1978 toward the development of several

new information systems and the enhancement of certain exrstrng systems.

In the administrative area, the new Staff

Time and Actrvrty Tracking System

(STATS) now provides the Commission

With an expanded and Improved means

to record the work activity of every Commission employee on a continual basis.

Categories of Information have been established to conform With and generate

information useful in preparing ZBB and

congressional budget justifrcatrons The

system also allows for the production of

certain staff time and activity reports

required by various levels of SEC management. These reports serve as a basis

for manpower planning and provide for

Improved utilization of scarce personnel

resources. Other new systems were developed to maintain the Commission's

personnel records and position management data. Apart from Improving the integrity of the data base and reducrng

manual preparation of forms, these systems provide, for the first time, a means

53
of conducting personnel research and

analysis on a prompt, low cost basis.

In the area of financial management,

the Commission initiated several Important processing changes In both

budget and accounting systems. Most

significantly, development of a Case

and Activities Tracking System (CATS)

was also Initiated In 1978. Thrs system

Will provide the Commission With a

means of rnorutonng active Investigations and litigation, as well as rulemakmg and special projects. It Will give the

Chairman, the Commission, the Executive Director, drvisron directors and regional administrators the ability to track

the progress of open cases by means of

Identifiable milestones. In addition, authonzed personnel Will be able to inquire Into current case status, access

case-related documentation, and obtain

related or similar case history and settlement information

In an effort to make more eftrcrent use

of exrstrng information systems through

better utrlrzatron of ItS upgraded computing capabilities, the Commission inmated the expansion of ItS Name and

Relationship Search System This innovation Will provide the staff With a facility for Immediate terminal access to

an Index of name and associated data

Oil companies and mdrviduals having a

direct or indirect relationship with the

Commission. Thrs on-line access replaces a system of manual requests

which often required several days of

processing.

Operational testing of a major comprehensive records management system

was also begun In 1978. Thrs system,

utrhzrng microform and teleprocessing

techniques, Will provide the staff With

the capability for directly entering and

retrieving information relating to the receipt and disposition of various reports

filed with the Cornrnrssron. It Will also

provide for quick access to information

being maintained on microfilm. Even54

tually, this system Will be expanded under a consolidated data base concept

and will include relevant data on all entities required to register with and report

to the Commission. Apart from Improved file integrity, speedy retrieval

and greater availability of data, the new

system marks the beginning of the end

for the millions of pages of paper normally added to the Commission's voluminous officral files each year Full

operation of the first phase was scheduled for early In 1979

Market Surveillance System

DUring the fiscal year, the Commission conducted a feasibrlrty study and

Initiated the design of a comprehensive

market surveillance system In consultation With the firm of Monchlk-Weber

Associates, Inc. The study represents a

concerted effort by the Cornrnission to

examine and modernize the information

resources used In ItS administration of

the Federal secuntres laws through enhanced application of advanced comrnurucations and computer technology.

The feasibility study entailed extensive analysis of the current market surveillance system and techniques With a

view toward establishing a comprehensive market surveillance system which

would monitor all secuntres market activrtres by reference to specified Violations of self-regulatory organization rules

and the Federal securities laws The

study encompassed fact-gathering and

procedural documentation of a representative cross section of orgamzations

Involved In both the conduct of securities trad mg and the regulatory processes

related to all market activities. It examined the option, equity, and bond

exchanges, the over-the-counter market, and the various regulated components and facilities Within those markets.

The activrtres of major classes of market

participants such as retail member firms,

floor members of national secunties ex-
changes, investment advisors, investment companies and related institutions,

clearing agencies and transfer agents

were examined to determine the best

manner In which to Integrate such activities Into the comprehensive surveillance system. Other governmental

regulatory bodies were also contacted to

reduce possible regulatory overlap The

study has, thus far, made several recommendations directed at enhancing

the effectiveness of the Commission's

regulatory, oversight, and enforcement

functions. The study was, at the close

of the fiscal year, In the design phase

of ItS effort which IS scheduled to be

completed by April 30, 1979

The proposed market surveillance

system is not Intended to replace or diminish the existing regulatory responsibtlrtres of the various self-regulatory

organizations Rather It IScontemplated

that the market surveillance system Will

Integrate exrstmg trad mg information

from the various markets at one location, so that the Commission may better

rnorutor trading practices both for oversight and enforcement purposes as

well as for analysis of self-regulatory

organization rule proposals and revrsion

of Commission rules. In this manner,

the Commission's oversight capabilities

Will be greatly enhanced by making possible more effective dally coordination

with all of the nation's secuntres markets. The proposed system also represents the first attempt ever to correlate

current information from all exchanges

and self-regulatory organizations In a

manner designed to detect possible secunties violations The system Will include among ItS Input sources such

Commission filings as. Forms 3,4, 144,

and 146; Schedule 130, 140, and

13G; penodic filings and reports of broker-dealers; dally trading and clearing

information; and corporate news

The system Will facihtate other exrsting Commission functions such as the

inspection and regulation of self-regulatory organizations and the examination of broker-dealers. The proposed

system will be geared also to accommodate developments In the evolvrng

national market system For the system

to be completely successful, It IS contemplated that It Will be necessary for

the self-regulatory organizations to move

toward eventual standardization of certain trading and clearing information

Such changes, however, Will be planned

In conjunction With development of the

national market system.

The system IS expected to be Implemented over a five-year period, dependmg upon Industry developments, the

pace at which trading Information can

be standardized, and the availability of

government funding By building upon

existmg Industry and self-regulatory automated systems, the system cost will

be relatively modest In comparison to

communications and computer systems

created In recent years elsewhere In government or In private Industry The comprehensive market surveillance system,

when Implemented, will represent a significant Improvement In the Industry's

and the Commission's regulatory information systems

Financial Management

The Commission collects fees for the

regrstration of secuntres. secunties

transactions on national secunties exchanges, and miscellaneous filings, reports and applications In fiscal year

1978, the Cornrnrssron collected $26 1

million dollars In fees; this represents

approximately 42 percent of the total

funds appropriated by the Congress for

Cornrrnssron operations

The Office of the Executive Director

IScurrently conducting a major study of

all fees collected by the Cornrrussron

Thrs study Will address such Issues as

the burden upon registrants and Investors, the relationship between existmg

55
fees and Commission costs, the surtabrhty of exrstrng fees, fee collection procedures and the Impact of fees on the

business community The staff will submit ItS recommendations dunng 1979

The development of a comprehensive

financial management reporting and

budgeting system was begun In 1978

by the Offices of the Comptroller and

Data Processing under the coordination

of the Office of the Executive Director

The system ISdesigned to automate and

Integrate accounting and budgeting activities previously administered individually and manually. The long-term goal

IS the linking of the financial management systems Into a larger agency-wide

administrative management system. The

reasons for the Commission's focus on

the financial management system are:

It will facilitate the timely preparation

of complex reports and analyses which

will be tailored to meet the needs and

mandates of controlling agencies and of

the Cornrrussron's Internal management

structure; and It will provide structured

policy planning and review techniques

at a program level.

Personnel Management

On September 30, 1978, the Comrrussron's permanent personnel strength

was 2,009. Approximately two-thirds of

these personnel were assigned to Commission headquarters In Washington,

D C.; the remaining one-third were employed In the seventeen regional and

branch offices located In major national

and regional financial centers throughout the United States.

DUring 1978, personnel management

activities at the Commission stressed

the increasing Importance of managing

personnel resources more efficiently, as

reflected In several new programs designed to enhance the management of

human resources.

One of the Cornrnissron's Important

initiatives has been the launching of a

56

cornprehensive promotion appraisal

program under the sponsorship of the

Civil Service Commission The research

psychologists assigned to this project by

CSC Will Initially collect task data and

behavroral statements for all major attorney functions, with the objective of

developing data needed to Implement

an interim performance evaluation program In 1979. This data Will then be

refined, other major job categories Will

be brought into the program, and the

research team Will be expected to present the Comrrussron with a validated

promotion appraisal system In 1980.

DUring this period, the Cornrrussion may

also seek the assistance of outside consultants, to work with the CIVil Service

team In putting a useful performance

appraisal system Into place at the earliest possible time. Such a system,

when operational, Will provide an informed and validated basis for making

personnel dectsrons, I.e., Initiating

manpower planning, provrdrng career

counselling, establishing executive development requirements and Improving

recru itrnent efforts.

In order to make the best use of inhouse talent, as well as to enhance ItS

affirmative action efforts, the Commission Initiated ItS first formal upward

mobility program. This was designed to

Identify high-potential employees In

lower grade clerical and technical jobs

and develop them for advancement Into

targeted professronal and administrative POSitions. Twelve employees were

selected for particrpatron In the 1978

program, which Will become an annual

feature of the Cornrnrssron's overall personnel effort.

In order to make the upward mobility

program stili more meaningful, the

Cornrrussron established a career counseling program Oriented toward applicants who were not selected for entry

Into the upward mobility program. A series of workshops was conducted both
to help these mdrvrduals develop career

goals and to better enable them to prepare themselves to qualify for future vacancies.

In another important area, the Comrrussion Increased ItS senior executive

and managerial training by 30 percent,

and Increased both ItS tumon assistance

and In-house training programs by 20

percent dunng 1978. Thrs was supported by an Increase in the quality of

all training activrtres Cornrrussron-wrde

The Cornrnrssron has continued to

emphasize the recruitment and full utilization of handicapped persons. Its efforts in this area have been recognized

by the CIVil Service Commission as one

of the more aggressive and effective In

the Federal service, and have served as

a model for use by other agencies In

addition to ItS focus on recrurtrnent, the

Commission has sought to eliminate attrtudinal, environmental and procedural

barriers to the employment of handicapped persons. Important steps include obtaining contracts for the services

of Interpreters for the deaf and readers

for the blind; signing major Commission

events, such as the annual Awards Ceremony, for heanng Impaired employees;

brarllmg location and directional signs;

purchasing telecommunications devices for use by deaf employees and the

deaf community and those With speech

Impairments; and developing a continuing program to train supervisors and

employees in sign language to allow

heanng-rrnparred workers to communicate more effectively With their co-workers and supervisors. The SEC

headquarters building has also been

made accessible to handicapped VISItors and employees.

In an effort to be more responsive to

the concerns and problems of ItS employees, the Commission has also established a more effective employee

counseling program. Towards this end,

the Office of Personnel established a

centralized branch to advrse staff members of rights, benefits and obligations

regarding such matters as health benefits, life Insurance, retirement, career

development, and alcohol and drug

abuse.

Equal Employment Opportunity

Overall, the number of women employees In the Commission Increased by

8 percent during 1978. Women attorneys In the Commission Increased from

105 In September 1977, to 123-approximately a 17 percent Increase Of

the 659 attorneys employed, there was

a nse of 2 2 percent In the number of

women attorneys and a 4.2 percent nse

In the number of rrunorrty attorneys over

the previous year.

The Committee on Equal Employment

Opportunity, consisting of representatives of the secuntres Industry and the

SEC, published a handbook on equal

employment and affirmative action plans

which was distnbuted throughout the

secuntres Industry. The purpose of the

handbook IS to Inform securrtres industry employers about equal employment

laws and to assist them In achrevrng voluntary compliance. The committee also

raised $14,000 for the initiation of a

college scholarship program for black

students. The scholarship program IS

expected to eventually be expanded to

Include women and other rrunontres

Activity under the Freedom of

Information Act

Cornrrussron rules Implementing the

Freedom of Information Act provide that

the public can Inspect or obtain copies

of records maintained by the SEC, With

the exception of certain specified categories of information In 1978, the

Commission received 1,252 requests

for information, up 13 percent from

1977.

While most information flied by registered companies has always been

57
available for inspection by the publrc,

the public was historically denied access to certain categories of material,

notably investigatory records Pursuant

to various FOIA requests dunng 1978,

the Commission has made available for

public inspection many records which

previously had been considered confidential. Among these records are portions of the broker-dealer manual and

the entire Investment advisers and investment company inspection manuals,

the summary of administrative interpretations under the Securities Act of 1933,

and the Commission's periodic Securities Violations Bulletin Moreover, the

Commission has made available, pursuant to particular FOIA requests, staff

letters of comment on registration statements and other filings and Well Committee subrrussions.

Office Space Activities

One of the Commission's most serious

operational shortcomings IS In the area

of space The Commission headquarters

expanded Into two floors of the former

Federal Home Loan Bank Board BUildmg In the Spring of 1978 Acqursrtion

of this additional space has provided

some relief from the overcrowded conditions at the main headquarters buildmg. but It has also resulted In a less

efficient and more costly dispersion of

personnel among three burldrngs The

Commission IS contrnumg ItS efforts to

acquire a single buildmg In Washington

large enough to house ItS entire headquarters operations

FOOTNOTES

1 See Sections 11 A and 17 A of the Exchange Act

2 Secuntres Exchange Act Release No

14325 (December 30,1977),13 SEC Docket

1289

3 Secunties Exchange Act Release No

14416 (January 26,1978),14 SEC Docket

31 (the January statement).

58

4 Secuntres Exchange Act Release No

14415 (January 26, 1978), 14 SEC Docket

14

5 Securrtres Exchange Act Release No

15009 (July 28, 1978), 15 SEC Docket

467.

6 On July 28, 1978, the Commission

granted exemptions from Rule 11Acl-1 to

the Intermountain and Spokane Stock Exchanges relievrng them of the obligations of

that Rule Securities Exchange Act Release

No 15011 and 15012 (July 28, 1978), 15

SEC Docket 478 and 479. At the end of the

fiscal year, the NASD was engaged In discussions with CO Plan participants regarding

ItS partrci pat Ion In the CO Plan

7 Secunties Exchange Act Release No

15009 (July 28, 1978), 15 SEC Docket

467

8 Secuntres Exchange Act Release No

14415 (January 26,1978), 14 SEC Docket

14

9 Secuntres Exchange Act Release No.

14661 (April 14, 1978), 14 SEC Docket

806.

10 Securities Exchange Act Release No

15058 (August 11, 1978), 15 SEC Docket

596

11 Secunties Exchange Act Release No

14674 (April 18, 1978), 14 SEC Docket

817

12 Secunties Exchange Act Release No

14855 (June 23, 1978), 15 SEC Docket

138

13 Secunties Exchange Act Release Nos

15250 and 15251 (October 20, 1978), 15

SEC Docket 1355 and 1370

14 Bradford Netionei Cleanng Corporetion

and Bradford Securities Processing Services,

Inc. v Securities and Exchange ComttusSIOn, DC c« No 77-1199,77-1547

15 The Commission's review was conducted pursuant to Section 31(b) of the

1975 Amendments

16 See Securitres Exchange Act Release

No 13163 (January 13, 1977), 11 SEC

Docket 1448.

17 Investment Company Act Release No

10453 (October 26, 1978), 15 SEC Docket

1427

18 Secunties Exchange Act Release No

14784 (May 19, 1978), 14 SEC Docket

1159

19 Securitres Exchange Act Release No
13760 (June 18, 1977), 12 SEC Docket

1275.

20 Secuntres Exchange Act Release No.

14056 (October 17,1977),13 SEC Docket

366. Following Issuance of the October Release, the Commission, on December I,

1977, announced the appointment of senior

staff members to conduct ItS study and investigation of the options markets The remainder of the Options Study staff was

thereafter assembled and has consisted of

approximately 20 professionals and 7 supporting personnel.

21 See proposed Securities Exchange Act

Rule 19b-HT). In light of the Commission's

concerns regarding the exrstrng pilot options

trading programs and the Commission's inability to find, at that time, that certain pendmg self-regulatory organization rule change

proposals designed to expand existing options trading pilot programs or to initiate new

options pilot programs (the NYSE and the

NASD) were consistent with the requirements of the Exchange Act, and the rules

thereunder, the Commission announced SImultaneously with the publication proposed

Rule 9b-HT), the initiation of disapproval

proceedings for 26 such rule change proposals. See Securities ExchangeAct Release

No. 14057 (October 17, 1977), 13 SEC

Docket 375.

22 Securities Exchange Act Release No.

14878 (June 22, 1978), 15 SECDocket 98.

23 The Commission also requested that the

self-regulatory organizations withdraw those

rule change proposals which were pending

before the Commission which would have

had the effect of expanding existmg pilot

programs, or initiating new pilot programs for

the trading of standardized options. Those

proposals Included the 26 rule change proposals which were the subject of a consolidated disapproval proceeding commenced

by the Commission on October 17, 1977,

and certain other pending rule change proposals which would have had the effect of

expanding or altering pilot programs or initiating new pilot programs for the trading of

standardized options and which were not the

subject of that disapproval proceeding.

24 Securities Exchange Act Release No.

15026 (August 3, 1978), 15 SEC Docket

494. The self-regulatory organizations also

Withdrew those rule change proposals which

would have had the effect of expanding existing pilot programs or initiating new pilot

programs for the trading of standardized options, and the Commission dismissed the

consolidated disapproval proceeding With regard to 26 of those self-regulatory orgaruzatron rule proposals. The details of the

agreement between the self-regulatory organizations IS set forth 'In Securities Exchange Act Release Nos. 14878 (June 22,

1978) and 14991 (July 25, 1978), 15 SEC

Docket 98 and 15 SEC Docket 359, respectively.

25 Exchange Act Rule 1Ob-10

26 Securities Exchange Act Release No.

15194 (September 28, 1978), 15 SEC

Docket 1174.

27 Securities Exchange Act Release No.

13470 (April 26, 1977), 12 SEC Docket

186.

28 Securities Exchange Act Release No.

14737 (May 4, 1978), 14 SECDocket 985.

29 Chicago Board Options Exchange, Inc.,

and Pacrfic Stock Exchange, Inc Securities

ExchangeAct Release No. 14881 (June 22,

1978), 15 SEC Docket 103; Philadelphia

Stock Exchange, Inc., Securities Exchange

Act Release No. 14896 (June 26, 1978),

15 SEC Docket 146; and the National Association of Securities Dealers, Inc, Securities Exchange Act Release No. 14892,

(June 23, 1978), 15 SEC Docket 144.

30 Securities Exchange Act Release No.

14971 (July 17, 1978), 15 SEC Docket

307.

31 Securities Exchange Act Release No

13636 (June 16, 1977), 12 SEC Docket

853

32 [1976-1977 Transfer Binder] Red. Sec

L. Rep. (CCH) 95,627 (S.D.N.Y. 1976).

33 Securities Exchange Act Release Nos.

15247 and 15248 (October 19,1978), 15

SEC Docket 1323 and 1325.

34 Securities Exchange Act Release No.

15090 (August 25, 1978), 15 SEC Docket

853.

35 Securities Exchange Act Release Nos.

14038 (October 7, 1977), 13 SEC Docket

307, and 14965 (July 14, 1978), 15 SEC

Docket 288.

36 Securities Exchange Act Release No.

13584 (June I, 1977), 12 SECDocket 671.

At the same time, the Commission also ISsued an order extending until September I,

59

~
1977, the exrstrng registrations of The Depository Trust Company, Bradford Securities

Processing Services, Inc., Stock Clearing

Corporation of Philadelphia, Boston Stock

Exchange Clearing Corporation, Midwest Securities Trust Company, The Options ClearIng Corporation, Midwest Clearing

Corporation, Pactfrc Securities Depository

Trust Company, Pacrftc Clearing Corporation

and TAD Depository Corporation and announced the extension to September I,

1977 of the time for concluding those registratron proceedings On August 31, 1977,

the Commission extended until March 1,

1978, the interim registrations of the above

clearing agencies and also extended to that

date the time for concluding their regrstratron

proceedings. Securities Exchange Act Release No. 13911 (August 31, 1977), 12

SEC Docket 1640

37 Securities Exchange Act Release No

14531 (March 6, 1978), 14 SEC Docket

356. At the same time, the Commission announced the extension to August 31, 1978,

of the interim registrations of all clearing

agencies already registered and also announced the extension to that same date the

time for concluding the proceedings on

whether to make those registrations permanent.

38 Securities Exchange Act Release No

13482 (April 28, 1977), 12 SEC Docket

239; Securities Exchange Act Release No

13901 (August 29, 1977), 12 SEC Docket

1630.

39 Secuntres Exchange Act Release No

14970 (July 18, 1978), 15 SEC Docket

291.

40 Securities Act Release No. 5950 (July

28, 1978), 15 SEC Docket 449.

41 Securities Act Release No. 5949 (July

28, 1978), 15 SEC Docket 428.

42 ld.

43 Secuntres Act Release No. 5889 (December 14, 1977), 13 SEC Docket 1094.

44 Securities Act ReleaseNo. 5914 (March

15, 1978), 14 SEC Docket 314.

45 Securities Act ReleaseNo. 5915 (March

15, 1978), 14 SEC Docket 331.

46 Securities Act Release No. 5979 (September 20, 1978), 15 SEC Docket 1109.

47 Securities Act Release No. 5980 (September 20, 1978), 15 SEC Docket 1114.

48 Securities Act Release No. 5975 (September 8, 1978), 15 SEC Docket 1052

60

49 Securities Act Release No. 5977 (September 11, 1978), 15 SEC Docket 1054.

50 Report of the AdVISOryCommittee on

Corporate Disclosure to the Secunties and

ExchangeCommission, Committee Print 95-

29, House Committee on Interstate and Foreign Commerce, 95th Cong., 1st sess., November 3, 1977.

51 Secuntres Act Release No. 5906 (February 15, 1978), 14 SEC Docket 140.

52 Securities Act Release Nos. 5824 (April

28, 1977), 12 SEC Docket 78; and 5827

(May 19, 1977), 12 SEC Docket 426.

53 Securities Act Release No. 5893 (December 23,1977),13 SEC Docket 1217.

54 Securities Act ReleaseNo. 5910 (March

3, 1978), 14 SEC Docket 695.

55 Securities Act Release No. 5923 (April

11, 1978), 14 SEC Docket 695.

56 Securities Act Release No. 5974 (September 7, 1978), 15 SEC Docket 1013.

57 Securities Exchange Act Release No.

15068 (August 16, 1978), 15 SEC Docket

606.

58 Securities Act Release No. 5893 (December 23,1977),13 SEC Docket 1217.

59 Securities Act Release No. 5949 (July

28, 1978), 15 SEC Docket 428.

60 Securities Act Release No. 5925 (April

21, 1978), 14 SEC Docket 861.

61 Securities Act Release No. 5926 (April

21, 1978), 14 SEC Docket 888.

62 Securities Exchange Act Release No.

15348 (November22,1978),16 SECDocket

228.

63 Securities Exchange Act Release No.

14830 (June 5, 1978), 14 SEC Docket

1305.

64 Securities Exchange Act Release No.

14910 (June 30, 1978), 15 SEC Docket

183.

65 Securities Exchange Act Release No.

15317 (November 9, 1978), 16SEC Docket

147. .

66 Securities Act Release No. 5884 (November 17, 1977), 13 SEC Docket 839.

67 Securities Exchange Act Release No.

14852 (June 15, 1978), 15 SECDocket 14.

68 Investment Company Act Release No.

10378 (August 28, 1978), 15 SEC Docket

723.

69 litigation Release No. 8510 (August

18, 1978), 15 SEC Docket 717.

70 Litigation Release No. 8526 (September 8, 1978), 14 SEC Docket 1100.
71 Litigation ReleaseNo. 8227 (December

21, 1977), 13 SEC Docket 1206

72 Litigation Release No. 8460 (July 7,

1978), 15 SEC Docket 278.

73 43rd Annual Report at 193.

74 Litigation Release No. 8482 (July 28,

1978), 15 SEC Docket 535.

75 litigation Release No. 8372 (April 13,

1978), 14 SEC Docket 766.

76 litigation Release No. 8519 (August

30, 1978), 15 SEC Docket 891

77 litigation Release No. 8315 (April 13,

1978), 14 SEC Docket 419.

78 Lrtrgatron ReleaseNo. 8316 (March 13,

1978), 14 SEC Docket 496.

79 Securities Exchange Act of 1934, Sections 13(d) and 14(d).

80 litigation Release No 8314 (March 9,

1978), 14 SEC Docket 418

81 litigation ReleaseNo. 8336 (March 20,

1978), 14 SEC Docket 579.

82 Litigation ReleaseNo. 8206 (November

29, 1977), 13 SEC Docket 974.

83 Litigation Release No. 8498 (August 9,

1978), 15 SEC Docket 585.

84 Litigation Release No. 8513 (September 21, 1978), 15 SEC Docket 1149.

85 litigation ReleaseNo. 8330 (March 14,

1978), 14 SEC Docket 503

86 Litigation Release No. 8164 (October

17, 1977), 13 SEC Docket 407.

87 Litigation Release No 8484 (August 2,

1978), 15 SEC Docket 536

88 litigation Release No. 8067 (September 15, 1977), 12 SEC Docket 1560.

89 Litigation ReleaseNo.5 794 (March 19,

1973), 1 SEC Docket 1242.

90 Securities Act Release No 5442 (November 30, 1973),3 SEC Docket 101

91 litigation ReleaseNo. 8332 (March 14,

1978).

92 Litigation Release No. 8395 (April 26,

1978), 14 SEC Docket 1029.

93 (D.D.C. Clv,l Action No 225-72).

94 42nd Annual Report at 42, 43d Annual

Report at 59.

95 Litigation Release No. 8377 (April 20,

1978), 14 SEC Docket 858.

96 litigation Release No. 8155 (October

17, 1977), 13 SEC Docket 359.

97 Litigation Release No. 8256 (January

16, 1978), 13 SEC Docket 1432.

98 Securities Exchange Act Release No.

14380 (January 16, 1978), 13 SEC Docket

1393.

99 Litigation Release No. 8543 (September 21, 1978), 15 SEC Docket 1151.

100 Secuntres Exchange Act Release No.

14579 (March 20, 1978), 14 SEC Docket

520, and Securities Exchange Act Release

No. 15166 (September 19, 1978), 15 SEC

Docket 1117.

101 Securrtres Exchange Act Release No

14149 (November 9, 1977), 13 SEC Docket

646

102 The Commission's Order permits the

payment of up to $1.45 rmllron of trus

amount to be made pursuant to the settlement agreement filed In the class action entitled In Re Sctenttttc Control Corporation

Securities LitlgatlOn-MDL 157.

103 A salesman of Shearson Hayden Stone

who IS also a respondent In the proceedings

IS not affected by the Cornmrssron's findings

against the other respondents.

104 Securities Exchange Act Release Nos.

14723 (May 1, 1978), 14 SECDocket 977,

14846 (June 12, 1978), 15 SECDocket 10,

and 14918 (July 3, 1978), 15 SEC Docket

191.

105 Litigation Release Nos. 8333 (March

15,1978),14 SEC Docket 504, 8468 (July

21, 1978), 15 SEC Docket 419, and 8145

(October 6, 1977), 13 SEC Docket 355,

Securities ExchangeAct ReleaseNos 14560

(March 15, 1978), 14SECDocket428, and

15087 (August 25, 1978), 15 SEC Docket

722.

106 Securities Exchange Act Release No.

14084 (October 21, 1977), 13 SEC Docket

454.

107 Litigation Release No. 7571 (September 20, 1976), 10 SEC Docket 541.

lOB litigation Release No. 7946 (May 31,

1977), 12 SEC Docket 744, Litigation Release 8431 (June 9,1978),15 SEC Docket

86; and litigation Release No. 8480 (July

27, 1978), 15 SEC Docket 425.

109 t.rtrgatron Release No. 8642 (January

11, 1979), 16 SEC Docket 802.

110 t.itrgatron Release No. 8361 (April 15,

1978), 14 SEC Docket 692

III Litigation Release Nos. 8113 (September 13, 1977), 13 SEC Docket 103, and

8374 (April 19, 1978),14SECDocket857.

112 Litigation Release Nos. 8084 (August

25,1977),12 SECDocket 1593, and 8438

(June 20, 1978), 15 SEC Docket 132.

61

Appendix

THE SECURITIES INDUSTRY

Income, Expenses and Selected

Balance Sheet Items

Registered broker-dealers recorded

total revenue of $8.9 billion In 1977,

nearly unchanged from 1976 Securities comrnrssrons are by far the most Important source of revenue; however, the

Industry appears to be diversifying ItS

business activity Since 1973, when

53 6 percent of total revenue was generated from this source, commissions

have accounted for a steadily declining

portion of total revenue They contributed 41 percent of total revenue In

1976 and 37 percent In 1977. Trading

and underwntrng revenues were the second and third most Important revenue

contn butors, together accounting for 32

percent of total revenue In 1976 and 30

percent In 1977

With stable revenue but 12.6 percent

higher expenses In 1977, Industry pretax Income declined to $591 mil/Ion.

Ownership equity at the end of 1977

was $4.115 b: 1/ ron, reflecting an increase of $30 million dunng the year.

65
Table 1

FINANCIAL INFORMATION FOR BROKER-DEALERS

1975-1977

(Millions of Dollars)

1975'

A. Re.. nue

1976' 1977'

Secunties Cornrmssrons

Gam (less) m Tradmg Gam (loss) In Investments

ProfIt (loss) From llnderwntrng and Sellmg Groups Revenue from Sale of Investment Company Securities

Interest Income

Other Revenue Related to Secunties BUSiness

8 Revenue From All Other Sources 9 Total Revenue

Elpenses

10 Registered Representatives Compensation

11 Employee Compensation and Benefits

12 Comrmssrons and Clearance Pard to Other Brokers 13 Interest upense 14 Communications and Data Processmg 15 Occupancy and [qUipment

16 Prometion

17 Regulalory Fees and Expenses

18 Compensation to Partners and Volmg Stockholder OffIcers

19 All Other Operafmg Expenses

20 Total Expenses

21 Pre-Tax Income

Assets. L,ab,lrt,es and Caprtal

22 Tolal Assets 23 lrabrlmes

a Total l"biI,tres (excludmg subordinated debt)

b Subordmated debt

c Total l"b,1I1I05 (23a + 23b) 24 Ownership Equ,ty 25 Total uaburtres and Dwnershrp EqUity Number of Fums

R ReVISed P Prelimmary

Sources Form X-17A-lO and FOCUSReports

OffICeof Secunties Industry And Self-Regulatory Economics

Directorate at Economic and Policy Research

$ 3 378

1202

131

930

140

476

897

218 $ 7 373

$ 1284

1413

524

668

488

472

159

76

488

681

6153

$ 1120

$31851

26352

836

27188

4663 $31851

4079

$ 3 657

1828

269

1 035

165

557

I 168

236 $ 8915

$ 1575

1664

535

900

590

485

203

81

572

805

7410

$ 1505

$48983

42842

858

43700

5283

$48983

4315

$ 3334

1691

353

991

161

782

738

881 $ 8931

$ 1541

1769

507

1246

708

4ll

203

69

553

1333

8340 $ 591

$54663

48787

948

49736

4927

$54663

4484

Historical Financial Information of

Broker-Dealers with Securities

Related Revenue of $500,000 or

More

Brokerage firm revenue declined 3 9

percent In 1977 on share volume which

was Virtually unchanged from 1976

Cornrrussion revenue, trading profits

and underwntrng revenue each declined

somewhat from their 1976 levels. Investment profits, Interest Income, commodity and other revenue each rose

66

from the previous year. Pre-tax Income

declined 54 percent, however, as brokers' expenses rose 16.5 percent dunng

this year of slightly declining revenue.

Balance sheet comparisons for the

two years are not comparable because

of changes made In the brokerage firm

reporting system. Firms With securities

related revenue of $500,000 or more

filing the FOCUS report held approximately 95 percent of the Industry's assets and reported over 93 percent of all

revenue In 1977.

~

~
Table 2

HISTORICAL CONSOLIDATED REVENUE AND EXPENSES OF BRoKER.DEALERS WITH

SECURITIES RELATED REVENUE OF $500,000 OR MORE

(Mliloons of Dollars)

1970 1971 1972 1973 1974 1975' 1976' 1977'

A. Revenue

1 Cernmrssrons $1167 $3187 $3404 $1816 $1438 $3.210 $3516 $1954 1 Gain (Loss) on Firm Securmes Trading and Investment Accounts

a Gain (loss 1 In trading 814 1056 994 590 711 1143 1757 1518 b Gain (loss) In investments 75 143 109 3 55 131 153 317 c Total gain (loss) 898 1299 1103 587 777 1274 1010 1835 Profit (Loss) from UndelWTlting and Selling Groups 601 957 914 494 496 914 1.011 945 Revenue from Sale 01 Investment Company Secuntres 184 196 151 149 79 110 146 136

Margin Interest Income 379 364 517 611 611 466 550 731 Fees for Account Supemsien Investment AdvISOry and Admmrstranve Services 64 82 99 83 85 156 207 190 Commodity Revenue 88 98 125 178 168 187 236 267

Other Revenue Related to Secunttes BUSiness N/A N/A N/A N/A N/A 509 691 766 Revenue from All Other Sources 266 300 306 323 400 167 201 415

10 Total Revenue $4747 $6583 $6729 $5250 $5.065 $7.013 $8.577 $8241

bpenses II Compensalion to RegIStered Representatives $778 $1.139 $1198 $ 937 $ 949 $1278 $1576 $1428

12 Employee Compensation and Benelots 1086 1300 1392 1184 1097 1376 1668 1593

13 commrssens Pard to Other Brokers 128 182 186 188 151 209 168 312

14 Interest 540 520 634 796 750 587 839 1149

15 Cemmumcatrons and Oata ProcesSing 370 434 488 461 463 482 590 649

16 Occupancy and Equipment 349 413 460 433 440 464 486 372

17 Promolion 157 188 214 186 172 157 202 186

18 All Other Operating Expenses 606 787 794 686 634 1416 1633 1903

19 Total Expenses $4013 $4962 $5365 $4 871 $4655 $5963 $7162 $7592

Pre-Tallneome

20 Pre-Tax Income 734 $1621 $1365 378 $ 410 $1050 $1415 649

Numbel 01 Firms 655 788 817 652 609 764 930 857

R ReVISed

P Preliminary

Sources Form X-17A-I0 and FOCUSReports

OffICeof SeCUTItieSIndustry And Sell-Regulatory Econcmics

Olrectorale 01EconomICand Policy Research

67

-

~

~
Table 3

HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITH

SECURITIES RELATED REVENUE OF $500.000 OR MORE

(MoIllons 01 Dollars)

1970 1971 1972 1973 1974 1975 1976 19771

A. AssetsI Cash cleanng fund and other deponts $ 1162 $ 1221 $ 1281 I 1139 $ 940 $ 925 $ 1,135 $ 979

2 Receivables from olher broker-dealers

a Secuntes failed 10 dehver 2319 2.230 2568 1844 1220 1,446 2.215 2.375 b Secuntres borrowed 865 1022 1364 1,096 889 1,366 2.091 2307

c Other receivables 198 295 382 330 905 1071 1.093 682 Receivables from customers 7077 9.644 13373 9.056 7,450 8.464 12.804 13.728 Market value or fair value of long posmons 10 secunties and commodities 10.261 11667 11 870 9722 10789 12901 21.392 28.521 5 Exchange memberships at markel value 210 200 208 123 101 118 142 1J)

6 Other assets 1392 1646 1704 1879 1493 4.535 7203 3038

7 Tofal assets $23484 $27925 132750 $25189 $23,787 $30826 $48075 $51.747

B lJabllrtres 8 Money borrowed $ 8994 Sll 286 114398 I 9878 $10,421 I 9.488 Ill.802 $26.503 9 Payablefo other broker-dealers a Secunties failed to receive 2706 2,420 2732 1724 1281 1.416 2152 2598

b Secunties borrowed 836 984 1284 847 579 1,064 1,614 1770

c Other payables 198 345 354 365 1059 1,088 1,019 1.092 10 Payable 10 customers 4242 4736 5228 4978 3986 4.696 6.174 5.158

11 Short posmons rn secunues and commodifies 707 907 1525 1158 1038 1165 2.555 4834

12 Subordinated borrowrngs 641 728 774 642 594 767 799 840

13 Other hablhlles 2343 2.859 2505 2550 2099 7203 17.178 4.837

14 Total hab,hf"s 20667 24.264 28802 22142 21056 26.887 43.293 47632

C Ownership Equrty

15 Ownership EQu,fy 2.818 3661 3948 3047 2731 3.939 4.782 4.115

16 Tolal hablilles and capllal 123484 127925 $32750 125189 $23787 $30.826 $48.075 $51.747

Number 01 Firms 655 788 817 652 609 770 932 857

1 The balance sheel for 1977 IS nof comparable wllh prevous years' data because 01changes rn Ihe reportmg IorIO

Sources Form X-17A-1O and FOCUSReports

OffICe01Secunnes Induslry And Self-Regulalory Economics

Directorate of Economrc and Policy Research

Securities Industry Dollar: 1977

Securities commissions represented

37.9 cents of each dollar of securities

industry revenue. Another 18.3 cents of

each dollar came from trading activities

and underwriting revenue contributed

11.7 cents Together, these three activities accounted for 67.9 cents of each

revenue dollar.

The largest portron of this revenue

68

dollar-38.5 cents-went to pay registered representatives and support personnel (clerical and adrrumstrattve

employees). Another 13.1 cents was

spent on communications, occupancy

and equipment. General partners and

voting stockholder officers' compensation amounted to 5.9 cents of each dollar, With 8.4 cents remaining for pre-tax

income. Thrs margin was 50 percent

below the 1976 figure.
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69

~

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Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers Increased from 4,315 In 1976 to 4,484

In 1977. Following the upward trend of

70

broker-dealers, the number of branch

offices Increased to 6,498.

There were approximately 39,000

full-time registered representatives associated with members of the New York

Stock Exchange at the end of 1977.
BROKER-DEALERS AND BRANCH OFFICES

o 3000 6000 9000

1972

1973

1974

1975

1976

73H

6301

6267

6290

1977

64981:

__ Broker-Dealers

Pv Prel iminorv R=R e r-z s e d

SOURCE: X-17A-lO AND FOCUS REPORTS

Branch Offices

71
Table 4

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES ACT OF 1934-EFFECTIYE REGISTRATIONS AS OF

SEPTEMBER 3D, 1978 CLASSIFIED BY TYPE OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE

Number of Proprietors

Number of Registrants Partners Officers, etc

location of Pnncrpal Othces Sole Sole

pro- Part- COI- pro- Part- CorTolal pn- ner oora- Total pn- ner- pora- etor- ships trons etor ships trons

ships ships

Alabama 25 3 1 11 125 3 3 119 Alaska 0 0 0 0 0 0 0 0 Anzona 29 4 2 13 102 4 14 84 Arkansas 19 2 0 17 82 2 0 80 Cahtorrna 504 152 56 296 2,460 152 266 2042 Colorado 60 2 3 55 352 2 56 294 Connecticut 62 9 9 44 351 9 43 299

Delaware 10 3 0 7 34 3 0 31 OlStncl of Columbra 33 2 6 25 277 2 27 248 flonda 148 17 6 125 521 17 12 492 Georgra 47 2 2 43 288 2 4 282 Hawau 14 0 I 13 72 0 2 70

Idaho 6 2 0 4 18 2 0 16

llhnors 177l 1344 122 305 3276 1345 600 1331 Indiana 50 9 I 40 257 9 2 246

Iowa 29 2 0 27 135 2 0 133

Kansas 29 2 2 25 144 2 9 133

Kenlucky II I I 9 71 I 3 67 toursrana 23 5 4 14 175 5 16 154 Maine 9 0 3 6 43 0 19 24 Maryland 46 4 4 38 316 4 122 190 Massachusetts 152 26 13 113 937 26 82 829 MIChigan 55 6 4 45 362 6 105 251 Mmnesota 74 I 0 73 445 I 0 444

MISSISSIPPI 19 0 3 16 79 0 7 72

MISSOUri 66 2 4 60 742 2 107 633 Montana 4 2 0 2 21 2 0 19 Nebraska 14 0 0 14 101 0 0 101

Nevada 2 I 0 I 4 I 0 3 New Hampshire 5 1 I 3 18 I 3 14 New Jersey 194 39 26 119 685 39 75 571 New MeXICO 6 1 0 5 31 I 0 30 New York (e"ludIOg NY C,Iy) 266 97 19 150 654 97 55 502

North Carolina 29 6 0 23 141 6 0 135

North Dakota 5 0 0 5 19 0 0 19

OhiO 86 4 13 69 566 4 185 377 Oklahoma 23 4 0 19 110 4 0 106

Olegon 27 3 0 24 III 3 0 108 Pennsylvania 211 28 46 137 1168 28 177 963

Rhode Island 17 5 2 to 42 5 8 29 Soulh Carolina 8 0 1 7 33 0 2 31 South Dakola 2 I 0 I 12 I 0 II

Tennessee 50 3 2 45 344 3 29 312

Texas 164 15 8 141 1116 15 34 1067

UIah 29 2 2 25 128 2 7 119

Vermont 4 I 1 2 21 I 2 18 Virginia 30 4 3 23 302 4 13 285 WashlOg1on 56 6 0 50 284 6 0 278 West Virginia 6 1 0 5 20 I 0 19

WisconSin 40 5 0 35 383 5 0 378 Wyoming 5 1 0 4 20 1 0 19

Tolal Iexcludmg NY CIIy) 4574 1.830 371 237J 17 998 1,831 2,089 14078 New York C,Iy 1451 551 270 630 9609 550 2357 6702

Subtotal 6,025 2381 641 3003 27607 2381 4,446 20780

Foreign 24 0 2 21 158 0 9 149

Grand Total 6049 2381 643 3025 27765 2381 4455 20929

I Registrants whose principal offices are located 10 foreign countries or other junsdictions not listed

2 Includes directors officers trustees and all other persons occupying Similar status pertormmg SImilar functions

3 AllocatIOns made on the baSIS of locatron of pnncrpal office of registrants not actual locations of persons

4 Includes all forms of organizations other than sole proprietorships and partnerships

72
Table 5

PRINCIPAl BUSINESS OF SECO BROIlER-DEAlERS

Exl:hange member pnmanly engaged on exchange commISSion bUSiness

Exl:hange member pnmanly engaged on floor actlvilles

BroUr or dealer on general secunnes busoness

Mutual fund underwmer *

Mutual fund dlstnbulor*

Broker or dealer selhng vanable annUIty conlracts

SoIlcrtor of savongs and loan accounts

Real estale syndIcator and mortgage broker and banker

Real estale condomonlUm onleresls * limIted partnership onlerests * Broker or dealer selhng 011 and gas onlerests

Pul and can broker or dealer or optIon wnter (non-exchange opllOns)

Broker or dealer selhng secumles of only one Issuer or assoclaled ISSUers(olher than mutual funds I

Broker or dealer selhng church secunlles Governmenl bond dealer (other llIan munIcipal)

Broker or dealer on municipal bonds *

Broker or dealer on olher secuntes busoness

No secunlleS busoness

Totals

* Not labulaled ,n pner years, new calegory on lhe Form SECCl-+-76

** Based on data provided by 326 of the 346 SECObroker-dealers

FIScalyear-end

1976 1977

28 25 II 18 61 65

9 II

5 4

10 12 5 6 33 35 3 5 23 25 12 20 3 5 21 23 10 II 2 3 5 5 46 28 22 25

309 326*'

73
Table 6

APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERS

Fiscal Year 1978

BROKER.OEAlfR APPLICATIONS

ApplicatIOns pending at close of preceding year 521 ApplicatIOns received dunng "scal 1978 1,359 Total applications for d,sposrt,on 1,880

O,sposrtlOnof Applications

Accepted for "ling 939

Returned 70

W"rthdrawn 6 Denied 0 Total applicatIOns diSposed of 1.015

Applications pending as of September 3D, 1978 865

BROKER.DEAlER REGISTRATIONS

EffectIVe registrations at close of preceding year 5.756 RegistratIOns effectIVe dunng fIscal 1978 939

Total registrations 6,695

RegistratIOns terminated dunng tlscal1978 W"rthdrawn 601 Revoked 2 Cancelled 85

Total registrations terminated 688

Total regrstranens at end of nscal 1978 6,007

INYESIllENT ADVISER APPLICATIONS

Applications pending at close of preceding year 436

ApplicatIOns received dunng "seal 1978 1,238

Total applications for dispoSItion 1.674 Olsposrtlon of applicatIOns

Accepted for "ling 610

Returned 137 W"rthdrawn 1 Denied 0 Total application dupesed of 748

ApplicatIons pending as of September 30, 1978 926

INVESTMENT ADVISER REGISTRATlDNS

Effective registratIOns at close of preceding year 4,801

RegIstratIOns effective dunng "seal 1978 610

Total regIstratIons 5,411

RegIstratIOns terminated dunng "seal 1978 W"rthdrawn 193

Revoked 5 Cancelled 8 Total registratIons terminated 206

Total registrations at end of hscal 1978 5,205

74
Table 7

APPLICATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES DEALERS AND TRANSFER AGENTS

Fiscal Year 1978

MUNICIPAl SECURITIESDEAlERSAPPliCATlDNS

Appllcatoons pending at close of precedmg year 22 ApplicatlOfls recetved dunng IIscal 1978 15

Total applications for dlSPOSrtlon 37 DISPOSrtlOflof Appllcatoons

Actepted for filing 16 Returned 0 Wrthdrawn 0 Denied 0 Total applications diSposed 0' 16

Appllcaflons pendmg as of September 30, 1978 21

MUNICIPAl SECURITIESDEAlERSDEGISTRATIONS

Effective registratIOns al close of preceding year 332 Reglstraflons effectIVe dunng flsca' 1978 16

Tota' reglstraloons 348 Reglstraflons terminated dunng fiscal 1978 Wrthdrawn 12 Cancelled 0 Suspended 0 Total reglslratlOns termmaled 12

Total registrations at end of fiscal 1978 336

TRAllSfER AGENTSAPPliCATlDNS

ApphcallOns pending at close of precedmg year 15 Apphcatoons recetved dunng fiscal 1978 47

Total applications for d,sposrtlon 62 Dlsposrtoonof applications

Actepted for filing 43 RetUrned 0

Wrthdrawn 0 Denied 0

Total apphcallons diSposed of 43

ApphcatlOfls pendmg as of September 30, 1978 19

TRAIlSfER AGENTSREGISTRATIONS

Effective reglstralions at close of precedmg year 837

Reglstratoons eflectlve dunng fiscal 1978 43

Total reglstrallOns 8BO

Reglstralions termmated dunng fiscal 1978 Wrthdrawn 19

Cancelled 0

Suspended 0

Total regIstratIOns termlnaled 19

Total reglstrallOns at end of fiscal 1978 861

75
Self-Regulatory Organizations--

Revenues and Expenses

The high trading volume dunng the

first three quarters of 1978 provides an

opportunity to examine how changes In

trading volume Improve each self-regulatory organization's financial results.

As a result of the record high trading

volume in the second and third quarters

of 1978, exchange share volume for the

first nine months was 3.2 percent higher

than the figure for all of 1977. The revenue increase was not as dramatic.

Through the first three quarters of 1978,

revenue was, however, running 8 percent higher than for the same period In

1977. Because operating costs are

largely fixed the growth in revenue dramatically improved pre-tax Income.

Forthe first nine months of 1978, the

national securities exchanges and the

NASD enjoyed combined pre-tax income of nearly $26 million, more than

double the $12.7 million generated

during all of 1977.

The NYSE derives 44 percent of its

revenue from its volume related transaction and depository fees. Relatively

fixed sources of revenue such as listing

fees paid by corporations, and communications fees and membership dues

paid by brokers generate 45 percent of

revenue and miscellaneous sources account for 11 percent. Pre-tax Income

through September 1978, at $15.5

million, was already 45 percent higher

than 1977 results.

The Amex generates only 22 percent

of Its revenue from volume-related

transaction fees Its listing and communication fees and membership dues,

however, all generated revenue at a

higher annual rate in 1978 than 1977.

Pre-tax Income for the first nine months

of 1978 was nearly triple the 1977 annual figure.

Trading volume In listed and unlisted

Issues over-the-counter was 52 percent

76

above the 1977 pace through September 1978. NASD revenue, however, is

derived from sources which do not vary

with trading volume. Registration, corporate finance and listing fees together

with membership dues generate 87 percent of revenue. Nine-month 1978 revenue was consequently about threefourths of 1977 annual revenue. Pre-tax

income slipped In 1978. The nine-month

figure wasonly about one-third of 1977's

annual results.

With the registration of the NSCC In

1977, most transactions executed on

the NYSEand Amex and In the over-thecounter market began to be cleared

through this clearing agency. The three

organizations thus no longer have clearing costs and generate only a small

amount of revenue from services performed for the clearing agency. The operating surplus from the clearing agency's

operation is returned to its members in

the form of fee rebates.

The MSE discontinued Its unprofitable broker service bureau in 1978 and

total 1978 revenue was reduced. Nearly

73 percent of revenue IS stili volumerelated, however, and the combined effects of the discontinued lossesand the

growth in trading volume have resulted

In pre-tax Income of $724,000 through

September, 1978. Pre-tax losses were

over $1 million in 1977.

The PSE, Phlx and SSE also depend

heavily on volume-related fees. Sixty-six

percent of PSE and 80 percent of both

Phlx and SSErevenue comes from these

sources. The record trading volume has

raised PSE's pre-tax Income to a ninemonth level nearly ten times as high as

the 1977 annual figure. The comparable nine-month Phlx and SSE pre-tax

Income figure is nearly seven times as

large as the previous year's annual results.

The CSOEISdependent upon volumerelated sources for 65 percent of ItSrevenue. A pre-tax loss of $580,000 In
1977 became pre-tax profit of over$2.2

million in the nine months of 1978.

The CSE, which began an electronic

trading experiment In 1978, now receives less in floor usage revenue and

more in communications fees. Its 1978

revenues were higher than the previous

year but profitability comparisons were

unfavorable for this small exchange.

The ISE In Salt Lake City, and the

SSE appear to be unaffected by the factors which influence the other orgaruzations.

The MSRB Income of $678,476 during fiscal year 1978 (See Table 12) was

derrved prrmarily from three fees established by rules adopted under the Exchange Act. Municipal secunties brokers

and municipal securities dealers are assessed (1) an initial fee of $100, (2) an

underwriting assessment fee equal to

.001 percent of the face value of all

rnunicrpat secuntres they purchase from

an Issuer as part of a new Issue which

has a final stated maturity of not less

than two years from the date of the secunties, and (3) an annual fee of $100

which can be offset by underwntmg fees

paid Within the calendar year. The underwriting assessment fee accounted for

75.7 percent of the MSRB Income during fiscal year 1978. The balance of

MSRB income was from other fees and

interest income.

During fiscal year 1978, the MSRB

had total expenses of $854,703. The

major expense items were staff salaries

and employee benefits, including MSRB

contribution to an employee retirement

plan established In 1978 (44 percent);

meetings and travel (24.8 percent); and

mailing list, rule manual, postage and

other prrnting (15.5 percent). Expenses

exceeded income by $176,227, due, in

part, to a Significant reduction in assessment fees received. As of September 30, 1978, the MSRB had a surplus

of $908,186.

Aggregate cleanng agency revenues

Increased approximately $9 million in

1977 to approximately $103 million.

Aggregate clearing agency operating expenses Increased In excess of $10 million, or 12 percent over 1976.

NSCC had an increase in clearing revenues over Its predecessors' combined

1976 revenues of 17 percent, or $5

million, to approximately $35 million

(including an $800,000 loss resulting

from the Insolvency of one of ItSclearing

members and approximately $3.6 million in regulatory fees to the NYSE,

Amex and the NASD). These regulatory

fees were for services consisting prrncipalty of exarrunatron, rnorutonng and

investigation of financial and operating

conditions of existing and prospective

clearing members and notification of

unusual market conditions which may

affect secunties clearing .

When Boston Stock Exchange Clearrng Corporation and New England Securities Depository Trust Company, both

wholly owned subsidiarres of the BSE,

are combined for purposes of analysis,

their revenue increased $77,000 while

expenses Increased $87,000.

While Bradford Securities Processing

Service, Inc 's clearing and other revenues Increased by $1.6 million and

$1.1 million, respectively, ItS expenses

Increased by $2.6 rrullron.

The Depository Trust Company revenues Increased 8 percent to $33.3 million while Its expenses Increased a like

amount to $33.3 million.

The Midwest Clearrng Corporation experrenced a 7 percent decline In clearmg services revenues while its expenses

Increased 14 percent. The Midwest Securrties Trust Company had a 5 percent

increase in depository servrces revenues

and a 7 percent Increase In expenses.

Pacific Clearing Corporation also experienced a substantial decrease In

clearing services revenues With a 15

percent decline while its total expenses

remained about the same. The Paciftc

77
Secuntres Depository Trust Company

had a 3 percent decline In depository

services revenues while expenses increased by 8 percent.

Stock Clearing Corporation of Philadelphia also experienced a decline in

clearing services revenues with a decrease of 4 percent while expenses decreased by 2 percent.

78

The Options Clearing Corporation's

total revenues increased 1 percent as

did its expenses.

TAD Depository Corporation, which

ceased dorng business early in 1978,

had an increase in revenues from

$307,000 to $495,000 while its expenses increased from $287,000 to

$466,000.
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Table 12

REVENUE AND EXPENSES OF MUNICIPAL SECURITIES RULEMAKING BOARD

YearendedSeptember30

1978 1977

Revenue Assessment fees $ 513708 $1259983 Annual fees 96301 100 Inlt,al fees 16800 50600 Interest Income 51667 27431

678476 1338115

(qIenses Salanes and employte benefits 376839 320.784 Meelings and travel 212467 207132 Mailing ust, Board manual and other pnnflng and postage 132870 115459 Rent, telephone and other occupancy costs 62385 63103 Professional and other services 32886 15114 Payroll taxes 18163 13840 Depreciation 13624 12747 Other 5469 5401

854703 763580

Revenue over (under) expenses (176117) 574535 Fund Balance, beginning of year 1084413 509878

Fund Balance, end of year $ 908186 $1084 413

EXEMPTIONS

Section 12(h) Exemptions

Section 12(h) of the Exchange Act

authorizes the Commission to grant a

complete or partial exemption from the

registration provisions of Section 12(g)

or from other disclosure and msider

trading provisions of the Act where It IS

not contrary to the public Interest or the

protection of Investors.

For the year beginning October 1,

1977, 29 applications were pending,

and 177 applications were filed dunng

the year. Of these 146 applications. 29

were withdrawn, 70 were granted, and

4 denied. Forty-three apphcatlons were

pending at the end of the year.

On January 17, 1978. the Commission amended ItS rules governing the

delegation of authority to the Director

of its Division of Corporatron Finance.

The new amendment authorizes the DIrector to grant exemptive orders pursuant to Section 12(h) of the Exchange

Act With respect to applications for exemption from the registration, reportIng, proxy and insider trading provisions

of the Exchange Act. Such authority,

limited to applications which appear to

the Director to be routine In nature and

not requiring a hearing, Will reduce the

processing time for these aoolicatrons.

Exemption for Foreign Private

Issuers

Rule 12g3-2 provides various exernptrons from the registration provisions of Section 12(g) of the Exchange

Act for the securities of foreign private

Issuers. Perhaps the most Important of

these ISthat contained In subparagraph

(b), which provides an exemption for

certain foreign Issuers which submit, on

a current basis, material specified In the

rule. Such material Includes that information about which Investors ought reasonbly to be Informed and which the

issuer. (1) has made public pursuant to

the law of the country of domicile or In

which It IS Incorporated or organized;

(2) has filed with a foreign stock exchange on which its secuntres are traded

and which was made public by such exchange; and/or (3) has distributed to its

security holders. Periodically, the Commission publishes a list of those foreign

85
issuers which appear to be current under this exemptive provision. The most

current list is as of July 31, 1978 and

contains a total of 152 foreign issuers.

FINANCIAL INSTITUTIONS

Stock Transactions of Selected

Financial Institutions

DUring 1977. private nonInsured

pension funds, open-end Investment

86

companies, life insurance companies,

and property-liability insurance companies purchased $36.9 billion of common stock and sold $34.5 billion,

resulting in net purchases of $2.4 billion. In 1976 purchases were $40.6

billion, sales $33.1 billion, and net purchases $7.4 billion. Their 1977 common stock activity rate was 20.7 percent

as compared to 21.1 percent one year

earlier.
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~
STOCKHOLDINGS OF

INSTITUTIONAL INVESTORS AND

OTHERS

At year-end 1977, the eleven institutional groups listed below held $342.4

billion of total corporate stock outstanding (both common and preferred). In

comparison, they accounted for $375.2

billion of the stock held a year earlier.

The resulting 8.7 percent decrease In

the value of the stockholdrngs of these

institutions was more than the 6.1 percent decline In the aggregate market

value of all stock outstanding. Thus, the

shareof total stock outstanding that was

held by these institutions declined to

34.4 percent at year-end 1977 from

35.4 percent a year earlier. During

1977, the shares held by other domestic Investors, whrch consist of indivrduals, broker-dealers and institutions not

listed, rose to 60.0 percent from 58.6

percent. Foreign Investors,share of

stockholdmgs remained at 6.0 percent

Table 14

MARKET VALUE OF STOCKHOLDIN6S OF INSTITUTIONAL INVESTORS AND OTHERS

(Bllhons of Dollars. End 01 Year)

1970 1971 1972 1973 1974 1975 1976 1977

Pnvate Nonmsured Pension Funds 671 887 1152 905 630 886 1097 1019

Open-End Investment CompanIes 439 526 580 433 303 387 430 362

Other Investment Compa",es 62 69 74 66 47 53 59 31

life Insurance Compames 154 206 268 259 219 281 342 R 338 Property-llabilrty Insurance Companres1 132 166 218 197 128 142 169 R 171

Common Trust Funds 46 58 74 66 43 59 78R 69 Personal Trust Funds 186 941 110 2 947 677 810 957 R 832

Mutual Savmgs Banks 28 35 45 42 37 44 44 48

9 State and local Retirement Funds 101 154 222 202 164 243 301 300

10 Foundations 220 250 285 245 184 227 271 261 11 Educational Endowments 78 90 107 96 67 88 104 98

12 Subtotal 2716 3382 4127 3458 2499 3220 3852R 3529

13 less Inslitulional Holdmgs of Investment Company Shares 49 58 65 67 65 86 100 105

14 Total lnstttunenal Investors 2668 3324 4062 3391 2434 3134 3752 R 3424 15 Foreign Investors 2 187 329 413 370 284 526 R 639 R 601 16 Other Domeslic Investors J 5639 6384 6906R 5253R 3699R 4835 R 6206R 5926

17 Total Stock Outstandmg' 8594 10037 11381 R 9014 R 6417 R 8495 R 10597 R 9951

R ReVISed IExcludesholdmgs of Insurance company stock 2 Includes estimate 01slock held as direct mvestment J Computed as residual (hne 16 17 14 15) Inciudes both mdlvlduals and Instltuhonal groups not lISted above Includes both common and preferred stock Excludesmvestment company shares but Includes foreign ISsuesoutstandmg In the U S

88

=

= - - •
Table 15

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS OF SEPTEMBER 30,1978

Number of Registered Compames ApproXImate

Mar1<etValue

of Assets of

Active Inactive a Total Active

Companies

(Millions)

Mana,emenl open-end ("Mutual Funds") 820 55 875 63.969 unds havtng no load 271 14 285 20,956 Vanable annully-separate accounts 53 3 56 1,475

~~P~\~~r~~a'~n~mpames 2 0 2 28 494 38 532 41.510

Mana~ement closed-end 162 53 215 8,039

mall business Investment companres 37 5 42 303

Caprtal leverage compames 7 0 7 380

All other closed-end compames 118 48 166 7,356

Uqrt tnvestmenl trust 349 24 373 20.733' Va"able annully-separate accounts 66 0 66 1.009

All other unrt tnvestmenl trusts 283 24 307 19,724

Face-amount certificate comDames 1.180

Total 1.336 136 1.472 93,921

"Inact.ve" refers to regIStered companies wlllch as Df september 30. 1978. were m the process of being hquidated Dr merged. Dr have Itled an

appltcatlon pursuant to sect.on 8(1) of the Act tor dereglStrallon, Dr which have otherwISe gone Dul Df eustence and rematn registered only until such time

as Ihe CDmmlSslonISsuesOIlIer under Section 8(1) termmatmg therr regIStration , Includes about 3 8 bllltDn 01assets Dftrusts whIch tnvesl tn securtties of Dlher Investment companies. substanltally all of them mutual funds

Table 16

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

Number Dfcompames ApproXImate

RegIStered market value

Fiscal year ended RegIStered RegIStered ReglStralton at end of Dfassets

september 30 at beglnntng dunng terminated year of active

of year year dunng year compames

(millions)

1941 0 450 14 436 $ 2.500

1942 436 17 46 407 2.400

1943 407 14 31 390 2.300

1944 390 18 27 371 2.200

1945 371 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 3700

1950 358 26 18 366 4,700 1951 366 12 10 368 5.600

1952 368 13 14 367 6,800

1953 367 17 15 369 7.000

1954 369 20 5 384 8,700

1955 384 37 34 387 12.000

1956 387 46 34 399 14,000

1957 399 49 16 432 15.000

1958 432 42 21 453 17.000

1959 453 70 11 512 20.000

1960 512 67 9 570 23.500

1961 570 118 25 663 29.000

1962 663 97 33 727 27.300

1963 727 48 48 727 36.000

1964 727 52 48 731 41.600

1965 731 50 54 727 44.600

1966 727 78 30 775 49,800

1967 755 108 41 842 58.197

1968 842 167 42 967 69,732

1969 967 222 22 1.167/ 72,465

1970 1.167 187 26 1.328 56337

1971 1.328 121 98 1351 78.109

1972 1.351 91 108 1.334 80,816

1973 1.334 91 64 1.361 73.149

1974 1.361 106 90 1377 62287

1915 1.377 88 66 1.399 74.192

1976 1.399 63 86 1.376 80.564

1917" 1.403 91 57 1.437 76.904

1918 1.437 98 63 1472 93.921

Began FIScalYear Endtng seplember 30.1977 1:>°1

89

•

•
Table 17

NEW INVESTMENT COMPANY REGISTRATIONS

1978

Mana~:::~~~~pen-end

Vanable annUlt,es

All others

Sub-total

Managementclosed-end

SBIC's

All others

Sub-total

Un,t mvestment trust Vanable annuities All others

Sub-total

face amount certrhcates Total RegIStered

Mana~~~~~~pen-end

Vanable annuitres All others

Sub-total

Management closed-end SBIC's

All others

Sub-total

Umt Investment trust

Vanable annumes

All others

Sub-total

Face amount certificates

Total termInated

Table 18

INVESTMENT COMPANY REGISTRATIONS TERMINATED

6

o

56

62

I

15

16

3

17

20

o

98

1978

6

3

34

43

o

13

13

o

63

Private Noninsured Pension

Funds: Assets

The assets of private nonInsured pension funds totaled $181.5 billion at

book value and $181.6 billion at market

value on December 31, 1977. A year

earlIer their comparable asset totals

were$160.4 billion and $173.9 billion.

90

The book value of common stock holdrngs increased to $97.0 billion at yearend 1977 from $93.4 billion the previous year. Valued at market, those

holdings decreased to $100.9 billion,

or 55.6 percent of total assets, at the

end of 1977 from $108.5 billion, or

62.4 percent of total assets, one year

earlIer.
Table 19A

ASSm OF PRIYATE NONSUREO PENSION FUNDS

Book Value, End of Year

(Mllltons of Dollars)

1970 1971 1972 1973 1974 1975 1976 1977

Cash and Deposas 1,804 1,641 1,857 2,336 4,286 2,962 2,199 3,721 U S Government Secunties 3,029 2,732 3,689 4404 5,533 10764 14,713 20,138 =ate and Other Bonds 29,666 29,013 28,207 30,334 35,029 37,809 39,070 45,580 Pn! erred Stock 1,736 1,767 l.481 1.258 1.129 1.188 1,250 1.168 Common Stock 51,744 62,780 74,585 80,593 79,319 83,654 93,359 96,984 Own Company 3,330 3,608 3,868 4,098 4,588 5,075 N.A NA Other Compames 48,414 59,172 70,717 76,495 74,731 78579 NA NA Mortgages 4,172 3,660 2,728 2,377 2,372 2,383 2,369 2,497 Other Assets 4,860 4,826 4,983 5,229 6,063 6,406 7,454 11,421

Total Assets 97,011 106,419 117,530 126,531 133,731 145,166 160.414 181.509

NA Not Available

Note Includes deferred prof.t sh.nn, funds and penslOfl funds of corporations, umons, mull.emplOjOr groups, and nonprofit or,an_allons

Table 19B

ASSm OF PRIYATE NONINSURED PENSION FUNDS

Market Yalue, End of Year

(Millions of Dollars)

1970 1971 1972 1973 1974 1975 1976 1977

Cash and Deposas 1,804 1.641 1,857 2,336 4,286 2,962 2,199 3,721

U S Government Secunt.es 2,998 2,772 3,700 4,474 5,582 11,097 14.918 20,017

Corporate and Other Bonds 24,919 26,111 26,232 27,664 30,825 34,519 37,858 42,754

Pn!ferred Stock 1,631 2,014 1.869 985 703 892 1,212 1,009

Common Stock 65,456 86,636 113,369 89,538 62,582 87,669 108,483 100,863

Own Company 6,038 7,691 8,750 6,947 5,230 6,958 NA NA

Other Compames 59,418 78,945 104,619 82,591 57,352 80,711 NA NA

~~ac:.rs 3,504 3,184 2,427 2,108 2,063 2,139 2,160 2,362

4,422 4,560 4,908 5,140 5,681 6,341 7,073 10,838

Total Assets 104,737 126,921 154,363 132,247 111.724 145,622 173,906 181.564

N.A Not Available Note InCludes deferred profa shann, funds and penSion funds of corporations, umons, mulilemployer ,roups, and nonprof.t or,anllallons

SECURITIES ON EXCHANGES

Exchange Volume

Dollar volume of all equity secuntres

transactions on registered exchanges

totaled $198.3 billion in 1977. Of thrs

total, $187.2 billion represented stock

trading, $10.9 billion, option trading,

and the balance, trading in rights and

warrants. The value of New York Stock

Exchange transactions was $157.3 billion in 1977. NYSE share volume decreased 4.6 percentfrom the 1976 total

but still accounted for 80 percent of all

transactions. On the American Stock

Exchange, value of shares traded increased 14.2 percent to $8.5 billion.

The AMEX volume of 651.9 million

shares was up 2.3 percent from the

1976 figure. Share volume on regional

exchanges increased 1.1 percent from

the 1976 figure to 757.9 million shares,

valued at $21.4 billion.

The Chicago Board Options Exchange

contract volume for 1977 was 24.8

million, up 16 percent from 21.5 million In 1976. The value was $8.0 billion, a decreaseof 12 percent from $9.0

billion In 1976. The American Stock

ExchangeOption volume was 10.1 million contracts In 1977, an Increase of

23 percent from the 8.2 million contracts in 1976. The value of AMEX options trading In 1977 was $1.9 billion.

91
Philadelphia Stock Exchangeoption volume was 2.2 million In 1977--almost

double the 1976 volume with a value

of $402 million In 1977. Pacific Stock

Exchange contract volume in 1977 was

1.9 million with a value of $459 million.

The Midwest Stock Exchange contract

volume was 601 thousand contracts

with a value of $101 million In 1977,

the first full year of trading In options.

Table 20

MARKET VAlUE AND VOLUME OF SALES ON REGISTERED AND EXEMPTED SECURITIES EXCHANGES I

(All data are In thousands)

Total Stocks' Options) Warrants RIghts

Market Market Number Market Number Market Number Market Number Value Value of Value ot Value of Value ot (Oollars) (Oollars) Shares (Oollars) Contracts (Dollars) Units (Dollars) Units

All Registered Exchanges for past SIX years

Calendar Year

1973 179,310,223 177,877,567 5,723,164 448,498 1,119 973,076 124,740 11,082 51,515 1974 120,487,320 118,433,546 4,846,343 1,660,222 5,683 389,251 67,174 4,301 37,167 1975 163,978,654 157,259,952 6,231,232 6,423,469 14,428 285,859 97,225 9,024 52,928 1976 206,958,654 194,968,674 7,035,662 11,734,222 31,428 248,124 53,603 7,634 35,843 1977 198,291,919 187,202,557 7,023,101 10,899,135 39,622 184,435 67,841 5,792 43,940 1978 268,508,724 249,257,272 9,602,325 18,9tJ5,405 57,306 343,725 68,064 2,323 13,889

Breakdown of 1978 Data by RegISteredExchange

All RegIStered Exchanges

'Amencan Stock Exchange 18,943,355 15,204,973 922,179 3,525,010 17,619 212,966 35,468 407 568 'Boston Stock Exchange 1,535,923 1,535,839 177,281 0 0 81 43 2 235 'Clnnclnatl Stock Exchange 433,287 433,287 15,127 0 0 0 0 0 0 Midwest Stock Exchange 10,880,316 10,461,239 343,185 419,077 2,288 0 0 0 0 'New York Stock Exchange 210,550,436 210,426,412 7,617,958 0 0 122,589 28,988 1,435 12,796

PacifIC Stock Exchange 7,872,090 7,099,249 297,904 766,462 3,063 5,900 3,018 479 289 'PhIladelphia Stock Exchange 4,560,103 4,085,804 142,687 472,110 2,912 2,189 547 0 0 Intermountain Stock Exchange 815 815 2,281 0 0 0 0 0 0 Spokane Stock Exchange 9,655 9,655 13,723 0 0 0 0 0 0 'ChICago Board Options Exchange 13,722,745 0 0 13,722,745 33,712 0 0 0 0

All Exempted Exchanges for past Sll years

Calendar Year 1973 1,899 1,897 260

1974 1,174 1,174 149

1975 524 524 69 1976 383 383 94 1977 298 298 64

1978 0 0 0

, Reports of those exchanges marked wrth an astensk cover transactions cleared dunng the calendar month, clearances occur for the most part on the

flftp day after that on whIChthe trade actually was effected Reports for other exchanges cover transactions effected or trade dates ot calendar month

Data on the value and volume of secunties sales are reported In connection WIth fees paid under Section 31 of the Secunties Exchange Act of 1934

They Include all seeunnes sales effected on exchanges except sales of bonds of the United States Government whICh are not sublect to the fee The data cover odd.lot as well as round.lot transactions

'Includes voting trust certificates, certmcates of depoSit for stocks, and Amencan DepoSitaryReceipts for stocks, but excludes nghts and warrants ) ExercIsesare not Included In these totals

92
Dollars Bli lions

MARKET VALUE OF SECURITIES TRADED ON

ALL U.S. STOCK EXCHANGES

200

160

120

80

40

o

-I ,-

-ElOptIon.

&..... Wa"onh'.'. - - -- - I-- - - .-- .....-

- - - -

- -

-

- -

. -

G." 1.1 -6•• 117 109

1967 68 69 70 71 72 73 74 75 76 1977

GA '21!H8 I

93

-

~

-

-
NASDAQ Volume system, a decrease of 2.0 percent from

NASDAQ share volume and price in- 2,627 in 1976. Volume for 1977 was

formation for over-the-counter trading 1.9 billion shares, up 11 percent from

has been reported on a dally baSISsince 1.7 billion in 1976. This trading volume

November I, 1971. At the end of 1977, reflects the number of shares bought

there were 2,575 issues in the NASDAQ and sold by market makers plus their

net inventory changes,

Table 21A

SHARE VOLUME BY EXCHANGES I

Total Share In Percentage

Yur Volume Other1 (thousands) NYSE AMEX MIDW PCSE PIllE BOSE CNSE

1935 6g1,911 7313 1242 191 269 110 096 003 776

1940 377,897 7544 1320 211 278 133 119 008 387

1945 769,018 6587 2131 177 298 106 066 005 630 1950 893,320 7632 1354 216 311 097 065 009 316 1955 1,321,401 6885 1919 209 308 085 048 005 541 1960 1,428,552 6908 2246 222 314 089 039 004 141 1961 2,121,050 6565 2584 224 345 080 030 004 133

1962 1.699,346 1184 2026 236 297 087 031 004 095

1963 1,874,718 7317 1889 233 283 083 029 004 110 1964 2,118,326 72 81 1942 243 265 093 029 003 086

1965 2,663,495 7010 2259 263 234 082 026 005 064 1966 3,306,386 6954 2289 257 268 086 040 005 051 1967 4,641.215 6448 2845 236 246 087 043 002 057

1968 5,406,582 6200 2974 263 265 089 078 001 095 1969 5.133.498 6317 2761 284 347 122 051 000 100

1970 4.835,222 1127 1902 316 368 163 051 002 057 1971 6.172.668 1134 1842 352 372 191 043 003 044

1972 6.518.132 7047 1822 311 413 221 059 003 045 1973 5,899,678 7492 1375 409 368 219 011 004 039 1974 4,950,833 7847 1027 439 348 182 086 004 044 1975 6,371,545 8105 897 406 310 154 085 013 015 1976 7,125,201 80 03 935 387 393 141 078 044 017 1977 7,134,882 7954 973 395 311 149 066 064 028

IShare Volume for EJchanges Includes Stocks, Rights, and Warrants

2 Others Include Intermountarn, Spokane, Natronal. Getrolt and Honolulu Stock EJchanges

Table 21B

DOWR VOLUME BY EXCHANGES I

Total OoIla' In Percentage

Yu, Volume Othel1 (thousands) NYSE AMEX MIDW PCSE PIlLE BOSE CNSE

1935 15.396.139 8664 783 132 139 088 134 004 056

1940 8.419,772 8517 768 207 152 III 191 009 045

1945 16,284,552 82 75 1081 200 178 096 116 006 048

1950 21,808,284 8591 685 235 219 103 112 011 044

1955 38,039,107 8631 698 244 190 103 078 009 047

1960 45,276,616 8386 935 272 195 104 060 007 003

1961 64.032,924 82 48 1011 275 199 103 049 007 005

1962 54.823.153 86 37 681 275 200 105 046 007 004

1963 64,4Il3.991 8523 752 272 2.39 106 042 006 004

1964 72.415.297 8354 846 315 2.48 114 042 006 004

1965 89.498.711 8182 991 344 243 112 042 008 003

1966 123,643,475 7981 1184 314 285 110 056 007 002

1967 162.136,387 77 31 1448 308 279 113 067 003 003

1968 197,061,776 7357 1800 312 266 113 104 001 008

1969 176.343.146 7350 1760 339 312 143 067 001 012

1970 131.707.946 7844 1111 376 381 199 067 003 004

1911 186.375.130 7907 998 400 379 219 058 005 003

1972 205,956.263 7777 1037 419 394 256 075 005 005

1973 . 178.863.622 82 07 606 454 355 245 100 006 001

1974 118.828.272 83 62 439 489 350 202 123 006 001

1975 157.555.360 8504 366 482 325 172 118 017 000

1976 195.224.815 84 35 388 476 383 169 094 053 000

1977 187,393.082 8396 460 479 353 162 074 075 001

IOoIla' Volume for EJchanges Includes Stocks. Rights, and Warrants

2 Others Include Intermountarn, Spokane. Nabonal. and Honolulu Stock EJchanges

94
Special Block Distributions

In 1977, the total number of special

block distributions decreased by 33.7

percent. The value of these distributions

decreased 54.2 percent to $280.9 million from $613.6 billion in 1976.

Secondarydistributions accounted for

61.9 percent of the total number of special block distributions in 1977 and

93.0 percent of the total value of these

distributions.

The special offering method was employed 18 times. accounting for 28.6

percent of the total number of special

block distributions In 1977, but, with

an aggregate value of $14.5 million,

these offerings accounted for only 5.2

percent of the value of all special block

distributions.

The exchange distribution method

was employed 6 times in 1977. The

value of exchange distributions was

$5.2 million, representing less than 2

percent of the value of all special block

distributions.

Table 22

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHAJIGES

lY.. IlIl11a1unds)

Secondlry d,stnbutlOlls Exthlnae d.stnbutlOns Special offennas

Yur Sha",s Shires Shires Humber sold Vllue Humber sold Vlloe Humber sold Vlloe

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 24,664 14 189,772 6,670

1955 .. 116 6,756,767 344,871 19 258,348 10,211 9 161,850 7,223

1956 , .... 146 11,696,174 520,966 11 156,481 4,645 8 131,755 4,557

1957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,845

1958 .. 122 9,508,505 361,886 38 619,876 29,454 5 88,152 3,286

1959 .. 148 17,330,941 822,336 28 545,038 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 1966 .. 126 29,045,038 1,523,373 52 3,042,599 118,349 0 0 0

1967 143 30,783,604 1,154,479 51 3,452,856 125,404 0 0 0

1968 114 36,110,489 1,571,600 35 2,669,938 93,528 1 3,352 63

1969 142 38,224.199 1,244,186 32 1,706,572 52,198 0 0 0

1970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 0

1971 ... 204 72,801,243 2,007,517 30 2,595,104 65,765 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,666 30,156 0 0 0

1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662,111 79,889

1974 45 7,512,200 133,838 4 82,200 6,836 33 1,921,755 16,805

1975 51 34,149,069 l.409,933 14 483,846 8,300 14 1,252,925 11,521

1976 57 24,089,636 581,560 16 752,600 13,623 22 1,475,842 18,459

1977 39 9,848,986 261,257 6 295,264 5,242 18 1,074,290 14,519

95

•

•

•

•

•

• _
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds

listed on U.S. Stock Exchangesat yearend 1977 was $1,291 billion, a decrease of less than 1 percent from the

previous year-end figure of $1,301 billion. The total was composed of $818

billion in stocks and $473 billion in

bonds. The value of listed stocks decreased 9.0 percent in 1977 and the

value of listed bonds increased 17.5

percent. Stocks with primary listing on

the New York Stock Exchangewere valued at $777 billion and represented

95.0 percent of the common and preferred stock listed on all U.S. exchanges. The value of NYSE listed

stocks decreased from their 1976 yearend total by $82 billion or 9.6 percent.

Stocks with primary listing on the AMEX

accounted for 4.6 percent of the total

and were valued at $38 billion. The

value of AMEX stocks increased $2 billion or 5.5 percent In 1977. Stocks with

primary listing on all other exchanges

were valued at $3.3 billion, a decrease

of 20.7 percent from the 1976 total.

The net number of stocks and bonds

listed on exchanges decreased by 145

issuesor 2.2 percent in 1977. The Philadelphia Stock Exchange listed 10 additional secunties. Cincinnati and

Honolulu showed no change while the

other exchangesall showeda drop in the

number of listings.

Table 23

SECURITIES LISTED ON EXCHANGES I

December 31, 1977

Common Preferred Bonds Tolal Secunloes

Exchanges Marl<el Marl<et Marl<el Marl<et Number Value Number Value Number Value Number Value (Million) (Million) (Mllhon) (Million)

RegIstered

Amencan 1047 $35,559 99 $2,079 184 N.A 1,330 $37,638

Boslon 72 437 2 I I I 75 439

Cmcmnaf 6 27 3 7 6 47 15 81

Mldwesl 19 259 6 66 I 8 26 333

New Vorl< 1,513 751,273 627 25,420 2,658 472,527 4,79B 1,249,220

PacifIC 41 1,034 9 143 18 392 68 1,569

Philadelphia 3D 196 93 705 12 100 135 1,001

Inlermountam 29 49 0 0 0 0 29 49

Spokane 24 6 0 0 0 0 24 6 uempted

Honolulu' 18 $366 7 $7 $5 27 $378

Tolal 2799 $789,206 846 $28,428 2,882 $473,080 6,527 $1,290,714

Includes the folloWing

foreIgn stocks

RegIStered

New Vorl< 36 $ 19,872 73 179 6.998 216 26.943 Amencan 71 11,433 7 6 NA- 78 11,440

PaCific' 3 80 + 0 0 4 80 Exempted Honolulu' 15 $ 0 0 15

Tolal 112 $ 31400 $ 80 185 6,998 300 38,478

IExcludes seeunnes whICh were suspended from tradmg allhe end of the ",ar, and secunnes whICh because of Inactivity had no available quotes

'(eStlmaled) Honolulu Stock Exchange ceased operallons on December 31, 1977

+ less Ihan 0 5 mllhon, bul greater Ihan zero

96
Table 24

VALUE OF STOCKS LISTED ON EXCHANGES

lOillars In billionsl

Dec31

New York Amencan

Siock Stock

Exchange Exchange

1936 599

1937

148

1938

389 102

1939

475 108

1940

465 101

1941

419 86

1942

358 74

1943

388 78

1944

476 99

1945

555 112

1946

738 144

1947

686 132

1948

683 12 I

1949

670 119

1950

763 122

1951

938 139

1952

1095 165

1953

1205 169

1954

1173 153

1955

1691 22 I

1956

2077 271

1957

2192 310

1958

1956 255

1959

2767 317

1960

3077 254

1961

3070 242

1962

3878 330

1963

3458 244

1964

4113 261

1965

4743 282

1966

5375 309

1967

4825 279

1968

6058 430

1969

6923 612

1970

6295 477

1971

6364 395

1972

7418 491

1973

8715 556

1974

7210 387

1975

511 I 233

1976

685 I 293

1977

8583 360

7767 376

ExclUSIVely

on Other Total

Exchanges

747

491

583

566

505

432

466

575

667

882

818

804 30 819 31 916 33 1110

32 1292 31 1405

28 1354 36 1948 40 2388

38 2540

31 2242 43 3127 42 3373

41 3353 53 426 I

40 3742 43 4417 43 5068 47 5731

40 5144

39 6527

60 7595

54 6826 48 6807

47 7956

56 9327 4 I 7638 29 5373 43 7187

42 8985 42 8185

Securities on Exchanges

As of September 30, 1978, a total of

6,777 securities, representing 3,179

Issuers, were admitted to trading on securities exchanges In the United States.

This compares with 6,798 Issues involving 3,283 Issuers, a year ea:ller.

Over 5,000 Issues were listed and registered on the New York Stock Exchange, accounting for 60 percent of

the stock Issuesand 90.7 percent of the

bond Issues. Data below on "Securities

Traded on Exchanges" Involves some

duplication Since It Includes both solely

and dually listed securities.

97
Table 25

SECURITIES TRADED 011 EXCHAIIGES

Stocks Bonds I

Issuers RegIstered Temporanly Unlisted Total exempted

Amencan 1.088 1,096 39 1.136 203 Boston 819 126 740 866 16 Ch,cago Board of Opllons I 1 1

ChIcago Board of Trade 3 1 2 3

~~~~~~~V 341 29 326 355 15 I 1 Intermountain 47 46 1 47 MIdwest 596 366 303 670 29 New York 1,926 2,227 2,230 2,776 PaCIfIC Coast 816 814 167 982 106 PBS 914 290 792 1.082 71 Spokane 35 34 4 38

IIssues exempted under SectIOn 3(a)(l2) of the Act, such as obllgallons of U S Govemment, the states, and cmes, are not Included In thIS table

2 Exempted exchange had 1 admitted to unlisted trading

Table 26

UIIDUPLICATED COUIIT OF SECURITIES 011 EXCHAIIGES

(September 30,1978)

Stocks Bonds Total Issuers RegIstered exchanges Involved

RegIstered and lIsted 3,676 3,044 6,115 3,148

Temporanly exempted from regIstratIon 4 2 6 2 Admrtted to unlisted tradIng pnvlleges 36 14 50 28 Exempted exchanges

listed 0 Admrtted to unlisted trading pnvlleges I

Total 3,711 3.060 6,777 3,179

1933 ACT REGISTRATIONS

Effective Registration Statements

Filed

During the fiscal year ending September 30, 1978, 3,028 registration statements valued at $65 billion became

effective. The number of effective registratlons in fiscal 1978 rose 3.9 percent from fiscal 1977. The decrease In

the dollar value is due to a change in

reporting the registrations of investment

companies necessitated by a change in

the rules of the Securities Act of 1933.

98

(The number of effective Investment

company registrations continue to be

included while the dollar value of effective investment company registrations

is no longer available.)

Among the registration statements

effective, there were 647 first-time registrants In fiscal 1978 ascompared with

637 in fiscal 1977.

The number of registration statements filed rose 5.8 percent to 3,204

in fiscal 1978 from 3,029 in the previous fiscal year.
Table 27

EFFECTIVE REGISTRATIONS

(Dollars In m1l1lonsl

Total Cash Sale for Account of Issuers

FIscal year ended June 30 Common Bonds Preferred Number Value Stock Debentures, Stock Total

and Notes

19351 284 913 168 490 28 686 1936 689 4.835 531 3,153 252 3,936 1937 840 4.851 802 2,426 406 3,635 1938 412 2.101 474 666 209 1,349 1939 344 2,579 318 1,593 109 2,020 1940 306 1.787 210 1 112 110 1,433 1941 313 2,611 196 1,721 164 2,081 1942 193 2,003 263 1041 162 1,465 1943 123 sss 137 316 32 486 1944 221 1.760 272 732 343 1,347 1945 340 3,225 456 1851 407 2,715 1946 661 7,073 1,331 3102 991 5,424 1947 493 6,732 1150 2,937 787 4,874 1948 435 6,405 1,678 2,817 537 5,032 1949 429 5,333 1,083 2,795 326 4,204 1950 487 5,307 1.786 2.127 468 4,381 1951 487 6,459 1,904 2,838 427 5,169 1952 635 9,500 3332 3,346 851 7,529 1953 593 7,507 2,808 3093 424 6,326 1954 631 9.174 2,610 4240 531 7,381 1955 779 10,960 3,864 3,951 462 8,277 1956 906 13.096 4.544 4.123 539 9,206 1957 876 14,624 5,858 5,689 472 12,019 1958 813 16,490 5998 6,857 427 13,281 1959 1,070 15,657 6387 5,265 443 12,095 1960 1,426 14,367 7,260 4,224 253 11,738

1961 1,550 19,070 9,850 6,162 248 16,260 1962 1,844 19,547 11,521 4,512 253 16,286

1963 1,157 14,790 7,227 4,372 270 11,869

1964 1,121 16,860 10,006 4,554 224 14,784

1965 1,266 19,437 10,638 3.710 307 14,656 1966 1,523 30,109 18,218 7061 444 25,723 1967 1,649 34,218 15,083 12,309 558 27,950

1968 2,417 54,076 22,092 14,036 L,140 37,269

1969 3,645 86.810 39,614 11,674 751 52,039

1970 3,389 59.137 28,939 18,436 823 48,198

1971 2,989 69,562 27,455 27.637 3,360 58,452

1972 3,712 62.487 26518 20,127 3,237 49,882

1973 3,285 59,310 26,615 14,841 2,578 44,034

1974 2,890 56,924 19,811 20,997 2,274 43,082

1975 2,780 77.457 30,502 37,557 2,201 70,260

1976 2,813 87,733 37,115 29,373 3,013 69,502

Transltoon Quarter July-September 1976 639 15,010 6,767 5,066 413 12,246

FiscaL year ended September 30 1977(r) 2,914 92,579 47,125 28017 2,425 77,566

1978 3,028 64,7562 25,3051 23,324 2,095 50,724

Cumulat,ve Total 59,397 1,115,880 475,821 366,270 36,774 878,871

r revised

IFor 10 months ended June 30, 1935 2 The adoptoon of Rule 241--2 (17 CFR 270241-2) effecllve November 3, 1977 made ,t ,mposslble to report the dollar value of secunnes rellstered by

.nvestment companres

99

=
Oollors 811110ns

100

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

1935 1978

80

BILLIONS OF DOLLARS

60

20

Hundreds

40

30 NUMBER OF REGISTRA nONS

20

10

0

1935 40 45 50 55 60 65 70 1975 78

( F s cc l Years)

FISCAL YEAR END CHANGED FROM JUNE TO SEPTEMBER

DATA FOR TRANSITION QUARTER JULY-SEPTEMBER 1976 NOT SHOWN ON CHARTS

EFFECTIVE REGISTRATIONS $IS.0 BILLION. NUMBER OF REGISTRATIONS 639

1..' DOES NOT INCLUDe INVESTMENT COMPANIES AS OF 1/1/78 DUE TO RULE CHANGE

100

-

t
Purpose of Registration

Effective registrations for cash sale

for the account of corporate Issuers

amounted to $29 billion 1 In fiscal 1978

as compared to $33 billion in fiscal

1977. With respect to distribution of

these registratrons between equity and

debt offerings, equity offerings increased from $6.7 billton In frscal 1977

to $7.9 blllion-an 18 percent increase. Debt offerings Increased from

$24.2 billion to $29.2 billron-c-a 207

percent fall.

Among the securities registered for

cash sale in fiscal 1978, nearly all debt

issues were for Immediate offerings,

whereas 36.3 percent of the equity reg1 The adoption of Rule 24f-2 (17 CFR

270.24f-2) effective November 3 1977

made It irnpossrble to report the doliar valu~

of secunties registered by Investment companies.

istrations were for cash sale. Registrations of extended offerings totaled $17.5

brlhon with employee plan offerings acco.un.ting for $9.1 billion. In prior years,

this Included sales of open-end investment companies.

Securities registered for the account

of the Issuer for other than cash sale

totaled $12.9 billion including $9.3

billion of common stock. The bulk of

these registrations were common stock

Issues relating to exchange offers, mergers and consohdatrons, In fiscal 1978

common stock effectively registered for

this purpose totaled $8.8 billion, a decrease of 24.1 percent from fiscal 1977

Registrations for the purpose of secondary offerings (proceeds gorng to seiling security holders) typically concern

sales of common stock. In fiscal 1978

these registrations amounted to $1.1

brluon, or a 16 percent decline from fiScal 1977.

Table 28

EFFECTIVE REGISTRATIONS 8Y PURPOSE AND TYPE OF SECURITY: FISCAL 1978

(Dollars ,n moilions)

r,pe of security

Purpose of registrations Bonds. Preferred 10tal debentures, Common

and notes stock stock

All re~lStratlOns (estimated value) 64.756 24.228 4.909 35619

or account of ISsuer for cash sa 50.724 23324

Immediate offenng

2.095 25305 33.186 23230 2.083 7.873 Corporate 29.087 19.131 2083 7.873 Offered to ~neral public 28.948 19128 2.081 7739 SecUrity holders 139 3 2 134

Foreign governments 4.099 4099 0 0 Extended cash sale and other ISsues 17.538 93 12 17432 For account of ISsuer for other than cash sale 12901 838 2801 9262 Secondary offenngs 1,131 66 13 1052 Cash sale 387 1 Other 386 744 65 13 666

101

~

-
EFFECTIVE REGISTRA TlONS

CASH SALE FOR ACCOUNT OF ISSUERS

Dollan Billions.

50

1935 1978

40

30

20

,

,

,

, Common Stock ,

~,~l

,\

I

I

"

II

,1,1

,I

d

, I

I I

I I

,

55 60 65 70 75 78

i'>. ...... Preferred Stock : • •••

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

1935 40 45 50

o

10

(FIscal Years 1

FISCAL YEAR END CHANGED FROM JUNE TO SEPTEMBER

DATA FOR TRANSITION QUARTER JULY.SEPTEMBER 1976 NOT SHOWN ON CHART

102 BONDS 5S.1 BILLION, PREFERRED STOCK 5.4 BILLION, COMMON STOCK 56 8 BILLION

-

~

~

~
Regulation A Offerings

During fiscal year 1978, 242 notifications were filed for proposed offerings

under Regulation A. Issues between

$400,000 and $500,000 In size predominated. It should be noted, that the

ceiling for Regulation A was raised to

$1.5 million on September 11, 1978,

Just prior to the end of the fiscal year.

Table 29

OFFERINGS UNDER REGULATION A

FIscal FIscal Fiscal 1978 1977 1976

SIze

$100,000 or less 23 17 24 $100,000-$200,00 33 30 36 $200,000-$300,000 36 30 27 $300,000-$400,000 25 24 39 $400,000-$500,000 120 117 114 $5OO,OOll-$1,500,OOO 5 0 0

Tolal 242 218 240

UndefWfIlers

Used 55 52 37

Not Used 187 166 203

Total 242 218 240

Offerars

ISSUing Companoes 223 205 222

Stockholders 5 7 12

Issuers and Stockholders JOlnUy 14 6 6

Total 242 218 240

ENFORCEMENT

Types of Proceedings

As the table below reflects, the secunties laws provide for a wide range of

enforcement actions by the Commission. The Most common types of actions

are injunctive proceedings Instituted In

the Federal district courts to enjoin continued or threatened securities law VIolators, and administrative proceedings

pertaining to broker-dealer firms and/or

mdrviduals associated with such firms

which may lead to various remedial

sanctions as required In the public interest. Whenan injunction IS entered by

a court, violatron of the court's decree

is a basis for Criminal contempt action

against the violator.

103
Table 30

TYPES OF PROCEEDINGS

ADMINISTRATIVEPROCEEDINGS

Persons Subject to, Acts Constituting,

and BaSISfor, Enforcement Action

lroller-dealer, munICipal Sleurllies

dealer, ,.. ostmont anlSl! or

assoclat.d person

WillfUl VIolation OJ secunnes dl,.l) ",rovlslon or rule. aiding or abeNmg such

vIOlation, failure reasonably to supervise others, willful misstatement or

omISsIOnIn filing with the CommISSion, conviction of or InJunct.on against

certain cnmes or conduct

RIIist.red SlcurllleS assoclaten

Organuatlon or rules not conforming to statutory reqUirements

Yoalation of 0' InabIlity to comply With the 1934 Act. rules thereunder or rts own rules, unJustified failure to enforce compliance With the foregOing

or WIth rules of the MUDlclpal Secuntres Rulemaklng Board by a member

or person assocIated wrth a member

lI.mber 01 rellst.red Sleurllies

association, or aSS<lClat.d

person

Being subJeCt to CommISsIOnorder pursuant to 1934 Act, S IS(b), Willful

voolatlOOof or effecting transaction for other person With reason to belreve

that person was Violating seeunties acts provISIOns, rules thereunder, or rules of MUDlclpal Secunues Rulemakrng Board

IlItlonaI SlcurllleS .seha ...

OrganuatlOn or rules not conforming to statutory requirements

VIOlatIOnof or Inability to comply wdh 1934 Act, rules thereunder or ItSown

rules, unJustifIed farlure to enforce compliance WIth the foregOing by a

member or person associated WIth a member

llember 01 national soeurllie

sella .... or a.S<lClated persons

Betng subJeCt to CommISsIOnorder pursuant to 1934 Act, S IS(b), WIllful voolatlOOof or effecting transaction for other person With reason to believe that person was Violating secUntllS acts proVISionsor rules thereunder

RIIist.red elearl ....... ,

VlOlatlOOof or Inabllrty to comply wrth 1934 Act, rules thereunder, or ItS

own rules, failure to enforce compliance WIth ItS own rules by partiCIpants

Participant In fIIIst.red el.an .. .....,

Beln' subject to CommISSionorder pursuant to 1934 Act, S lS(bH4), Willful

vlOlatlOOof or effecting transactIon for other person WIth reason to believe

that person was VIolating provISIons of c1eanng agency rules

SIcarItles Information processor

YroiatlOO of or Inabllrty to comply wrth prOVISIons of 1934 Act or rules

thereunder

Tl'IlISIer IIInt

Willful VIOlatoonof or rnab.lrty to comply wrth 1934 Act, H 17 or 17A, or

relulatlOOs thereunder

Ally pel'S8ll

Willful vlOlatlOO01 secunties act prtlVlslOn or rule, aldrng or abett.ng such

vlOlatlOO,WIllful mISstatement In filing wrth CommISSion

Sanct.on

Censure or limitation on actmties revocatIOn, suspenslOR or deDlal of

regrstranon, bar or suspensien from assoc13t1on(1934 Act. HISB(cH2}-

(4), IS(bH4H61. AdvISersAct. H2D3leHfH

SuspensIOnof regIStration or limItation of actlvltres, functIOns, or operations

(1934 Act, S 19Ih)(1ll

Suspension or revocahon of registration. censure or limitation of actiVIties.

functIons, or operations (1934 Act. S 19(hHI))

Suspension or expulSion from the aSSociatIOn, bar or suspenSIOn from assoc,atlon WIth member of association (1934 Act. SS 191hH2}-13ll

Suspensnn of regIStration or lnmtanen of actiVIties, functIOns, or operations

(1934 Act, S 19(hl(1ll

SuspenSion or revocatien 01 registratIOn, censure or limItation of act,mlls,

functions, or operatens (1934 Act, S 19(hl(1ll

SuspenSion or espulSion from exchange, bar or suspensen from assoc,atlon WIth member (1934 Act, H 19(hH2H3ll

SuspensIOnor revocatIOn of reglstratton, censure or limitatIon of actiVIties,

functions, or operallOns (1934 Act, S 19(h)(1ll

Suspensen or espulSion from cleanng agency (1934 Act, S 19(hH2)J

Censure or operatIOnal Iimltallons, suspenSion or revocatIOn of regIStratIOn

(1934 Act, S llA(bH6))

Censure or IimrtatlOO ot actlvltres, demal, suspenSIOn, or revocatlOO of

regIStration (1934 Act, S 17A(cH3))

Temporary or permanent prohlbrtlOO from seNlng rn certaIn capaCrt,es for

regIStered Investment company (Investment CompanyAct, S 9(b))

Statutory referenets are as follows "1933 Act", the Secunties Act of 1933, "1934 Act", the Secuntlls Exchange Act of 1934, "Investment Company

Act",the Investment Company Act of 1940, "Advisers Act", the Investment Advisers Act ot 1940, "Holdrng Company Act", the PublocIIlllity Holding Company

Act of 1935, "Irust Indenture Act",the Trust Indenture Act of 1939, and "SIPA",the Secunties Investor Protect.on Act of 1970

104

•

•

•

•
Table3D-Contlnued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subteel to, Acts Constrtutln" and BasIs for, Enforcement ActIOll

8IfIctr or dlrtctor 01 sa"-

rtPlatorJ orpnlutlon

Willful VIOIatoon of 1934 Act, rules thereunder, or the or"nllallOll's own rules, willful abuse of authorrty or unjustified flliure 10 enforce compliance

Prilclpl 01 brollir-dnier

En""n"n bus,ness as I brobr-duler after Ipporntmenl of SlPC lruslee

1133 Act rqI$lrIlIOlI ~1 ... 1Il

Removal flllm office or censure 1193Uct, t 19<h)(4))

Stltement mllenilly Inlccurlle or Incomplete Stop order SUlpendln, 1"ec1ovenlSS 11933 Act, t I(d))

Investment company his not attllned $100,000 net worll 90 dlYS after StoP order (Investment Complny Act, t 14(1))

statement became effectove

I'moIIs subject to Slcttoas t Z, 13

... 151d) 01tlIIll34Act

Matenal noncomplllnce wrth such PIllVlSIOllS

S1clrttlls IuUl

Noncompliance by ISSuer wrth 1934 Act or rules thereunder

PublIC Interes' reqUires tred", SUSpellSlon

Order dlrectln, complilnce 11934 Act, t 15Ic)(4)

Den,"I, SUSpeIISIOllof effect,ve dltt, SUSpeIISIOIlor revocatlOll of ""strlllOll on nallOllll secuntoes mhon,e 11934 Act, t 121m

Summlry suspenslOll of over-lhe ..... nler or achan,e tredln, 11934 Act, t (2Ik))

llIisIInd Inmt1nIlIl company

Flllull to file Investment Complny Act re"sIII'1OIl stalemen' or reqUIred RIYOCI'1OIlof 1I"slrlllOll (Investment CompanyAct, tI(t))

1tjlOII, fllin, mltenally ,"complete or mlSlead'"l stile men' of "port

Company hiS not Ittllned $100,000 net worll 90 dlYS Ifter 1933 Act RIYOCI'1OIlor suspenslOl1 of 1I"stlibon (Investment Company Act, t 14(1))

ltl,stlltlOll stltemenl became effectove

AtlInIy, -.tut.or otlIIr

".teuloul .....,.rt !Jet 01 requlsrte qualificatIOnS to IIpresent others, Ilcktn, In chlrlcter or Permlnent or lemporlry denlll of pnvIlep '0 IPpear or prlctlCe before the

Inte,n!y; unethICal or Implllper plllfesSlOl1al conduct, willful VIOIltlOl1of CommlsslOl1 (11 C F R t 201 2lelll))

secunbes laws or rules, or IId,n, and lbet!Jn, such Y1o1ltlOll

AttOl'lllJ IIIslllnded or dlsbarrld by Auloma'lC suspensIOn IllIm appearance or praellce belor, the Comm,,_

court, 1IIIIIt'S bClnll moIltd or (11 C F R t 201 2(e)(211

1IIS1II.d1d, COIlYictIOl of I felony or mlllle ... ,.or inyolYilll morll

turpitude

Permlnent ,",unellOll "',"St or f,ndl.' 01 secunt .. s VIOIatlOll,n Commls- T,mporary suspenslOll lrom Ipparlnee or praellCl belore Comm,","" (11

s,olHnstrtuted lellOll, flndln, of secuntoes VIOIltlOll by CommlsslOll In C F R t 201 2(e)13))

Idmlftlstretove proceed,",

Willful VIoIatlOll of securrtoes laws, rules .htleunder, or rules of the Board Consullor removll flllm offoct (1934 Act, t ISSlc)(I))

CML PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons SubjlCl to, Acts Constrtut,nc. Ind BasIS for Enforcement ActIOll SlnctlOll

En",,", I. or lbout to en"" In acts or practICeS VIoIlbn, secuntltS acts, rules or orders thereunder (,oclud,n, rules of I ItlISttred s,ff-re,-

u"'tory or"nllabon)

Noncompliance wrth pnIYISIOllSof law, rule, or "lulatlOll u.dII1933, 1934,

or HoId,n, Company Acts, order ,ssued by Commlssron rules of are"stered

self-Itlulatory or"nllltlOll, or undertlktn, I ""stllt1Ollstltement

InfunellOll IllInst aels or prlctlCeS wlncb COIlstrtutl or would COIlstrtull

VIoIlllOlls (plus 01"" equrtable refl,f under court's pneral equrty oo-sl (1933 Act, Sec 20(b), 1934 Act, Sec 21(d), 1935 Act, Sec 11(1), Investment

ComPlY Act, t 42(e), Advtsers Act, t 209(,), Trust Indentu" Act, t 321)

Wnt of mlndlmus, ,n,uncllOll, or order dIrect,", c:ompllloce 11933 Act,

t 201c), 1934 Act, t 21(e), Hold,", Company Act, t ISW)

105

'"
Table 3D-Continued

TYPES OF PROCEEDINGS

CIVil PROCEEDINGSIN FEDERALDISTRICTCOURTS

Persons SubJecllo Acls Consiliuling

and BaSISfor. Enlorcemenl Acllon

Securities Investor Protecuon

Cof1ItrJtlon

Sanction

Refusal 10Cllmm,1funds or act for the prolechon of customers

IlItionaI Slcunties elchalle or

fIIlslered SlCUntits association

Nllncomphance by ,ts members and persons associated with lis members

Wllh the 1934 Act. rules and orders thereunder or rules of Ihe exchange

or association

llI!stered citarial IIIncy

NllnCllmphance by lis partICipants WIth Its own rules

issuer sublect 10rep<>rtlng

requirements

Failure to file rep<>rtsrequited under 15(d) of 1934 Acl

:=red Investment compan, or

Name of Cllmpan, or of secunly ISsued by II de<:epl,veor mISleading

OIIIeer. dlrechlr. IIIImhtr.1

advisory IIoard. adYlser, depos"or, II'IIIIdtrwriler 01 investment

CMIlIIftY

Engage In act or practice Cllnsl,tullng breach of fidUCiary duly involVing

personal mISconduct

Order directing dIscharge of obligatIOns or other appropnate relief (SIPA 1(b))

Wnt of mandamus. InJuncllon, or order dlrectmg such exchange or assn- cranen 10enforce comphance (1934 Act. 2I(ell

Writ of mandamus injunction or order directing cleanng agency to enforce

comphance (1934 Act. 2I(e))

Forteolureof $100 per day (1934 Act. 32(b))

InlunctlOn agamst use of name (Inveslment CompanyAct. 35(d))

Injunction against achng In certam caeacmes for Investment company and

other appropnate rehel (lnvestmenl CompanyAcl 36(a))

by IIIrsoa haYlnallduclary duty

respoctJna receipt 01 COJlllllnsation InMn IllYIstmInt compan,

Breach of hduClary duty InJuncllon (lnveslment Company Act 361a))

III REFERRAlTOATTORNEYGENERALFORCRIMiNAl PROSECUTION

BaSISfor Enforcemenl Act.on Sancllon or Rehef

Willful vlOlalion of seeunnes acts or rules Ihereunder or willful mrsstatement

onany documenl reqUired to be Illed by secunlles laws and rules or byselfregulatory organlzallOn on connectIOn wllh an apphcallon for membership.

partlC,palion or to become assoclaled WIth a member Ihereot

Mal,mum penanres $10.000 hne and 5 years Impnsonmenl an .. change

may be hned up to $500.000. a pubhc-utlhty holdong company up 10

$200.000 (1933 Act Sees 20(b) 24 1934 Act. Sees 2Hd) 32(a) 1935 Act Sees 18lfl 29 1939 Act Sec 325 Inveslment Co Act Sees 42/.)

49 AdvISers Act Secs 209Ie).217J

REFERRAlTOATTORNEYGENERAlFORCRIMiNAl PROSECUTION

Persons Sub)OCllo Acts Constltulong.

and BasISfor. Enforcement Acllon

Willful v,olal,on of secunties acts or rules thereunder or Willful mrsstatement

10 any document requ,red 10be filed by seeurmes laws and rules or by selfreguiatory orlanlzal,on 10 connectlOft WIth an apphcallon tor membership.

part'ClpatlOn or to become assoc.ated WIth a member thereof

by luller wblc:h violates Stctton 3lA(al 01

UIt 1134 Act.

.., ofllctr or director 01 an InUlr, or any

s1lIcUoIdtr KtiJII on bthaK 01 SlICh luller,

.1IIlIIully vtoIatts StctJon 3llA(a) 01

UIt 1134 Act.

by..,..".. or aplIt IsHjtct 10 llIt

jIrtMIctiolI oIlbt UI"ed Stales) 01 .. Isner IOUlIIIo llan YloIIttd Section 3lA(a)

tIUIt 1134 Act. .1IlIl!ldIy carrlttl out

UIt let or prIC1lcI ~II sucll

vtoIatJoI

106

Sanct,on

Mallmum penalties $10 000 hne and 5 years impnsonment an .. change

may be flOed up 10 $500.000 a pubhc-utlhty holdlOg Cllmpany up 10 $200.000 (1933 Act, sees 20lb) 24. 1934 Act Sec. 2Hd) 32/01 Holding

Company Act. Sees 18(1) 29. 1939 Act Sec 325.lnvesemenl CompanyAct

Secs 42/e). 49. AdvIsers Act. Secs 209(e) 217)

MlIlmum penalty $1.000.000 hne '1934 Act Sec 32(c)(1))

Mal.mum penalty $10.000 fine and 5 years rmprrsonment (1934 Act. Sec

32lC)(2))

MaXImum penalty $10.000 'lne and 5 years Impnsonmenl1l934 Act Sec

32/C)(3))

~

~

~

~ ~

~

~

~
AIy person

Table 3D-Continued

TYPES OF PROCEEOINGS

REFERRAlTOATTORNEYGENERAlFORCRIMiNAlPROSECUTION

PersonsSublect'tO. Acts Constituting,

and BaSISfor. Enforcement Action Sanctron

Wililul vlolalion of securmes acts or rules thereunder or willful misstatement In any document requlled to be filed by securmes laws and rules or byself- regulatory organIZation In conneclion with an apphcatlon for membership,

partIcipatIOn or to becomeassociated wrfh a member thereof

AIy Isslltr wtIlch VJOIatessection 30A(a) 01

tile 1134 Act Uore .... convpl practIces)

AIy officer or director of an Issuer, or any stockholders acting on behaIJ

of such issuer, wtIo w1l11ullyvIolates Section 30A(a) 01

tile 1134 Act

Any employee or agent (SUbject to the JUriSdICtIon01 the Unrted States)

of

al issuer lound to have vIOlated sectIon 30Ala) of the 1134 Act, wtIo w1l11ullycamed out

tile act or practIce constrtutllli such

vloIatIon

MaXimum penalties $10000 fine and 5 years irnpnsonment an exchange

may be fined up to $500,000, a pubhc-utlhty holding company up to

$200.000 (1933 Act Sees 20lbl 24 1934 Act Sees 2l(dl 321a) Holding

CompanyAct, Sees 18U). 29 1939 Act See 325. Investment CompanyAct Sees 421e' 49 AdvISersAct Secs 2091e' 2111

MaXimumpenalty $1,000 000 fine (1934 Act Sec 32(c){111

MaXimum penalty $10000 fine and 5 years impnsonment (1934 Act See

321C){2))

MaXimum penatty $10 000 fine and 5 years irnpnsonment (1934 Act See

321C){3))

Table 31

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS AOMINISTEREO BY THE COMMISSION

Pending September 30. 1977 Opened

Total for Olstnbutlon

Closed

Pending September 30 1978

DUring the fiscal year ending September 30, 1978, 196 formal orders

were Issued by the Commission upon

recommendation of the DIVISionof Enforcement.

Table 32

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR ENDING SEPTEMBER 3D, 1978

Broker Dealer Proceedings Investment Adviser Proceedings

Stop Order, Reg A SuspenSion and Other OlSclosure Cases

1404

337

1741

385

1356

62

16

44

107
Injunctive Actions 1977-1978

During fiscal 1978, 135 SUitSfor injunctions and 19 miscellaneous actions

were Instituted In the United States distrrct courts by the Commission, and 20

district court proceedings were brought

against the Commission. Durrng the

year this office handled 12 appellate

cases involving petitions for review of

Commission decrsions, 4 appeals In reorganization matters and 31 appeals In

injunction and miscellaneous cases.

SEC participated and filed 11 amicus

currae brrefs In 11 cases.

During frscal 1978, the General

Counsel referred to the Department of

Justice 105 crrminal reference reports.

(This figure Includes 4 criminal contempt actrons.)

Table 33

INJUNCTIVE ACTIONS

FIscal Year Cases Injunctions Defend'nts lnstituted Ordered EnJomed

1969 94 102 509

1970 III 97 448

1971 140 li4 495

1972 li9 113 5li

1973 178 145 654 1974 148 289 613

1975 174 453 749

1976 158 435 722

1977 166 336 715

1978 135 289 607

Criminal Proceedings

During the past fiscal year 109 cases

were referred to the Department of Justice for prosecution. (This figure includes 4 cnrmnal contempt actions.) As

a result of these and prror referrals, 50

Indictments were returned against 144

defendants during the fiscal year. There

were also 174 convictions in 80 cases.

Convictions were affirmed In 5 cases

that had been appealed, and appeals

were still pending In 5 other crrminal

cases at the close of the fiscal year. Of

14 defendants In 12 criminal contempt

cases handled during the frscal year, 1

defendant was convicted, prosecution

was declined as to 2 defendants, and

11 defendants In 10 cases are stili

pending. Four cases are pending In a

Suspense Category.

Table 34

CRIMINAL CASES

FIscal Number of cases Number of Defendants referred to ConVictIOns year Justrce Dept Indictments mdlcted

1969 37 64 213 83

1970 35 36 102 55

1971 22 16 83 89

1972 38 28 67 75

1973 49 40 178 83

1974 67 40 169 81

1975 88 53 199 li6

1976 116 23 118 97

1977 100 68 230 135

1978 109 50 144 174

108
Trading Suspensions

DUring fiscal 1978, the Commission

suspended trading In the secunties of

86 companies, a decrease of 22 percent

from the III secuntres suspended In

fiscal 1977 and a 32 percent decrease

from the 126 securrtres suspended In

fiscal 1976. Of the 86 companies whose

securities were the subject of trading

suspensions In fiscal 1978, 38 were

suspended because of delinquency In

filing required reports with the Commission. In most other Instances, the

trading suspension was ordered either

because of substantial questions as to

the adequacy, accuracy or availability

of public Information concerning the

company's financial condition or bustness operations, or because of transactions in the company's securities

suggesting possible manipulations or

other violations.

Foreign Restricted List

The Commission maintains and publishes a Foreign Restricted List which

ISdesigned to put broker-dealers, financial institutions, Investors and others on

notice of unlawful distribution of foreign

securities In the United States. The list

consists of names of foreign companies

whose securities the Commission has

reason to believe have been, or are

being, offered for public sale In the

United States In violation of the registration requirements of Section 5 of the

Securities Act. The offer and sale of unregistered securities deprives Investors

of all the protections afforded by the

Securities Act, including the right to receive a prospectus containing the information required by the Act for the

purpose of enabling the Investor to determine whether the Investment IS SUItable for him. While most broker-dealers

refuse to effect transactions In securities Issued by companies on the Foreign

Restricted trst, trus does not necessarily prevent promoters from Illegally offering such secuntres directly to Investors

In the United States by mail, by telephone, and sometimes by personal solicrtatron DUring the past fiscal year,

two corporations were added to the Foreign Restricted List, bringing the total

number of corporations on the list to

101. The following company was added

dunng the year:

Empreste Minera Cauda/osa de Panama, S.A.- The Commission received

information that Ernpresia Minera Caudalosa de Panama, S A., a Panamanian

corporation, had been engaged In offermg and seiling In the United States instruments purporting to be options to

buy secuntres, or Instruments appearing

to represent secunties No registration

statement under the Securities Act of

1933 had been filed With the Commission covering any of these Instruments,

so that these offers and sales may be In

violation of Section 5 of the Securities

Act of 1933.

List of All Foreign Corporations on

the Foreign Restricted List

The complete list of all foreign corporations and other foreign entities on

the Foreign Restricted List on September 30, 1977, IS as follows.

Aguacate Consolidated Mines, Incorporated (Costa Rica)

Alan MacTaVish, Ltd. (England)

Allegheny Mining and Exploration Company, Ltd. (Canada)

Allied Fund for Capital Appreciation

(AFCA, SA) (Panama)

Amalgamated Rare Earth Mines, Ltd.

(Canada)

American Industrial Research SA, also

known as lnvestrgacion Industrial

Americana, S.A. (MeXICO)

American International Mining (Bahamas)

American Mobile Telephone and Tape

Co., Ltd. (Canada)

109
Antel International Corporation, Ltd.

(Canada)

Antoine Silver Mines, Ltd. (Canada)

ASCA Enterprises Limited (Hong Kong)

Atholl Brose (Exports) Ltd. (England)

Atholl Brose, Ltd. (England)

Atlantic and Pacrfrc Bank and Trust Co.,

Ltd. (Bahamas)

Banco de Guadalajara (Mexico)

Bank of Sark (United Kingdom)

Briar Court Mines, Ltd. (Canada)

British Overseas Mutual Fund Corporation Ltd. (Canada)

California & Caracas Mining Corp., Ltd

(Canada)

Canterra Development Corporation, Ltd.

(Canada)

Cardwell Oil Corporatron, Ltd. (Canada)

Caribbean Empire Company, Ltd. (British Honduras)

Caye Chapel Club, Ltd. (British Honduras)

Central and Southern Industries Corp.

(Panama)

Cerro Azul Coffee Plantation (Panama)

Cia. RIO Banano, S.A. (Costa Rica)

City Bank A.S (Denmark)

Claw Lake Molybdenum Mines, Ltd.

(Canada)

Claravella Corporation (Costa Rica)

Compressed Air Corporation, limited

(Bahamas)

Continental and Southern Industries,

S.A. (Panama)

Credrto Mlneroy Mercantil (Mexico)

Crossroads Corporation, S.A. (Panama)

Darien Exploration Company, S.A. (Panama)

Derkglen, Ltd. (England)

De Veers Consolidated Mining Corporation, S.A. (Panama)

Doncannon SPirits, Ltd. (Bahamas)

Durman, Ltd., formerly known as Bankers International Investment Corporation (Bahamas)

Ethel Copper Mines, Ltd. (Canada)

Euroforeign Banking Corporation, Ltd.

(Panama)

Financiera Comermex (Mexico)

110

Fmanciera de Eomento Industrial (MexICO)

Fmancrera Metropohtana (Mexico)

Finansbanken a/s (Denmark)

First Liberty Fund, Ltd. (Bahamas)

Global Explorations, Inc. (Panama)

Global Insurance Company, Limited

(British West Indies)

Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

Golden Age Mines, Ltd. (Canada)

Hebula Mining Corporation (Costa Rica)

Hemisphere Land Corporation Limited

(Bahamas)

Henry Ost & Son, Ltd. (England)

International Communications Corporation (British West Indies)

International Trade Development of Costa

Rica, S.A.

Ironco Mining & Smelting Company,

Ltd. (Canada)

James G. Allan & Sons (Scotland)

J. P. Morgan & Company, Ltd., of London, England (not to be confused with

J. P. Morgan & Co., Incorporated,

New York)

Jupiter Explorations, Ltd. (Canada)

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)

Mercantile Bank & Trust Company, limited

Norart Minerals LImited (Canada)

Norrnandre Trust Company, S.A. (Panama)

Northern Survey (Canada)

Northern Trust Company, S.A. (Switzerland)

Northland Minerals, Ltd. (Canada)

Obsco Corporation, Ltd. (Canada)

Pacific Northwest Developments, Ltd.

(Canada)

Panarnerican Bank & Trust Company

(Panama)

Paulpic Gold Mines, Ltd. (Canada)
Pyrotex Mining and Exploration Co.,

Ltd. (Canada)

Radio Hill Mines Co., Ltd. (Canada)

Rodney Gold Mines Limited (Canada)

Royal Greyhound and Turf Holdings

Limited (South Africa)

SA Valles & Co., Inc. (Philhpmes)

San Salvador Savings & Loan Co., Ltd.

(Bahamas)

Santack Mines Limited (Canada)

Security Capital Fiscal & Guaranty Corporation, SA (Panama)

Silver Stack Mines, Ltd. (Canada)

Societe Anonyme de Refrnancement

(Switzerland)

Strathmore Distillery Company, Ltd.

(Scotland)

Strathross Blending Company Limited

(England)

Swiss Caribbean Development & FInance Corporation (Switzerland)

PUBLIC UTILITY HOLDING

COMPANIES

Assets

At fiscal year 1978. there were 15

holding companies registered under the

Act of which 14 are "active." In the 15

registered systems, there were 62 electric and/or gas utility SUbsidiaries, 71

non-utility subsrdianes, and 22 Inactive

companies, or a total of 174 system

companies including the top parent and

subholding companies. The following

table lists the active systems.

Table 35

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Solely RegIStered

Registered Holdmg Elect"c andlor Gas Honullhty Inactive Total Other Holding Operatmg Utdlty Subsldla"es Subsldla"es CompanIes Companies

Compan"s Compa"es

Allegheny Power SF:' lAPS) 3 0 4 0 8 3 Amencan EJectnc r Co (A£P) 0 12 10 5 28 3' Central & South West Corp (CSW) 1 3 3 1 9 I' Cololual Gas Energy System (CGES) 0 2 13 2 18 Columilla GIS System (CGS) 0 8 11 0 20

ConsolIdated Hatural Gas (CNG) 0 5 6 0 12

Eastern Utlldres Assoclltes (EOO 0 4 1 2 8 4'

General Public Utdd"s (GPU) 0 5 5 1 12

Middle Suoth Utddres (MSP) 0 6 3 3 13 I' NatlOllal Fuel Gas Co (HFG) 0 1 2 1 5 How Engl.nd Electnc System (HEES) 0 4 2 0 7 4'

Northeast Utdd"s (HEU) 0 5 8 6 20 4' OhIO EdIson (OE) 1 1 0 0 2 2' Phda Electnc Power Co (PhdEP) 1 1 0 1 3 Southern Comp.ny (SC) 0 5 3 0 9

Total compan"s 13 62 71 22 174

Beech Bottom Power Co . Inc Add.homa Corp 'Vankee AtomIC Elect"c Co 30% HEES. 31 5% HEU.

mactrvt -32%CSW 45% EUA

SO% AI'S. SO% AEP 34%MSU ConnectICut V.nkee AtomIC I'oMr Co 15% HEES. 44%

OhIO V.lley Elee Corp & subs 34% Okl.homa Gas & Elee HEU.4 5% EUA

Indllna-Kentucky Elee Corp Vermont Vankee Huclear I'oMr Corp 20% HEES. 12% electnc utdlty HEU 37 8% AEP Mame Vankee AtomIc Power Co 20% HEES. 15% HEU 165% OE

12S%AI'S statutory utllrty Subsldlanes

33 2% 7 other compan"s

111

•

-

'

-

-

•

-

-

-
Table 36

KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Name of Company

Allegheny Power System, Inc (APS) ,

Amentan Eled"c Power Company, Inc (A[P)

Central and South West Corporation (C&SWl CoIon .. 1 Gas Energy Systems (eCES)

ColumbIa Gas System, Inc, The (CCS)

ConsolIdated Natural Cas Company (CNG)

Eastern Utllrtles AsSOCIates (EUAl

General ~bhc UtJlrtres CorporatIon (GPU)

lItddle South Ut,htles, Inc (MSU)

NatlOllal Fuel Gas Company (NFG)

New England EIect"c System (NEES) Northeast Utllrtles (NEll)

Oluo EdIson Company (OE)

PhIladelphIa Electnc Power Co (PEP)

Southern Company, The (SC)

IAs of 12-31-77

112

As of June 30, 1978 (000 OmItted)

Total

Assets

$ 2,496,961

7,697,000 2m:m,

3,276,619

2,263,405

310,352

4,441,198

5.196,160

563,428

1.801.779

2,961.621

2.907,121

61.152 9.418,639

$46.405.464

Operating

Revenues

$ 845,435

2.199,600 1,2~km,

2,400.247

1.545.452

174,792

1.302,399

1.557.468

543,428

760.589

925,170

826,244

6.645 2776,854

$17,185,092
Tlble 37

FINANCING OF HOLDING COMPANY SYSTEMS

(fiscal 1111)

In Millions 01 Dollars

Bonds

long-Ierm PoIlulion Stock Short Notes and/or Control Debentures Frl1anclngs Preferred Common Term

Debt

Allegheny PaMr System Inc $

Mononlahela PaMr Co 150

$ 100 $ 1000

Potomalc EdISon Power Co 500 500

150 500 West Penn Power Co 450 480

Amencan Electnc Power Co

900 500

Appalachian Power Co 160 1100 1740

Indlana-Mlchlgan Electnc Co 1000

100 0

Indiana-Michigan Power Co 300,0 900 400 1500

IndIana-Kentucky Electnc Co

OhIO Power Co 380

450

Central & South West Corp

U50 400 1500

Central Power & light Co 750 390

1068 1700

Public SelYlce of Oklahoma

920

Southwestern Electnc Power Co

1200 500 915

West Teus Utllitres Co

500 185 765

Colonial Gas Co

415

Columbia Gas System

188

Consolidated Natural Gas Co

5920

Eastern Utllitres AsSOCiates

1000

fall Rrver Electnc & ught Co

Montaup Electnc Co

59

General Pubhc Utllrtles

116

Jersey Central Power & light Co 500 155 500

710

Metropolrtan Edison Co 500 120

1170

Pennsylvanra Electnc Co

850

MIddle South Utllrtres

600 340 870

Arkansas-MlSssoun Power Co 10

1407 1748

Arkansas Power & lIghl Co 1500 591

132

LoulSllna Power & l,ght Co 1350

1150

MISSISSIPPI Power & lIght Co

300 150

New Orleans Pubhc SelYlce Co

100

Natoonal fuel Gas Co

100

New England Electnc Syslec

450

New England Power Co 500

GraM. Stat. Electnc Co

1300

Northeast Utllrtres

07

ConnectICut lIghl & Power Co 400

150

Hartford Electnc lIght Co 400

150 0

Holyoke Water Power Co

350

West.rn Massachusetts Electnc Co

60

OhIO Edison Co 1100 450

400

Pennsylvanra Power Co 250

1181 955

Southern Co, The

106 100 97

Alabama Power Co 4000 540

1881 1000

Georgll Power Co

490 3050

Gull Power Co

1000 300

MISSISSIPPI Power Co

250 15 400

ConnectICut Vankee AtomIC Power Co

190 360

Vankee AtomIC Electnc Co

300

160

Total $1,9360 S1455 $917 8 $164 0 S623 8 S0251

Fuel Programs terns. Trus authonzation covers an annual

During fiscal year 1978, the Com- maximum expenditure for fuel programs

mission authorized $184 million of fuel

defined on geograprucal and functronal

exploration and development capital ex- terms. The following table lists the aupendrtures for the holding company systnonzatron by holding company system

for each fuel program.

113
Table 38

FUEL EXPENDITURES OF HOLDING COMPANY SYSTEMS

(In Millions of Dollars)

Cas Coal Nuclear Coal Fuel andlor Uramum Fuel Storage Holding Company Systems andlor lignite Explora- Procure- Gas"lCa- Oil Transpor- Explora- t,on ment lion Dnlling tatten lion

Central & South West Corp $ 87 $217 $52 s Columbia Gas System, Inc 25 Consolidated Natural Gas Co 10 General PublIC Ut,lrt,es Corp 350 M'ddle South Ut,lilles, Inc 130 136 100 410 50 NatlOl1al Fuel Cas Co 31 New England Electnc System 132

Northeast Ut,lrt,es 110

$380 $703 $152 $520 $35 $50

Total $184 0 million

CORPORATE REORGANIZATIONS

Commission Participation

In fiscal year, the Commission entered six new Chapter X proceedings involving companies with aggregatestated

assets of approximately $165 million

and aggregate Indebtedness of approximately $127 million. Including the

new proceedings, the Commission was

114

a party in a total of 118 reorganization

proceedings during the fiscal year. The

stated assets of the companies involved

in these proceedings totaled approxrmately $5.7 billion and their indebtedness about $5.1 billion.

During the fiscal year 24 proceedings

were closed, leaving 94 In which the

Commission was a party at year end.

=
Table 39

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

(Rscal Vear 1911)

Distnct Petition SECN<ltlceof

Debtor Appearance Court File<! file<!

A1dersgate foundation, Inc M 0 fla Sept 12,1974 Ocl 3,1974 Amencan Associated Systems, Inc EO Ky Dec 24,1970 feb 26,1971 Amencan land Corp SO Ohio Aug 8,1973 Sept 25,1973 Amencan Mortgage & Inv~stment Co o S C Dec 13 1974 feb 6,1975 Amona lutheran Hospital DAm May 11,1970 May 25,1970

r.~~~~~st~tores, Inc SONY March 8,1974 March 8,1974

SO Ind Oct 7,1966 Nov 1,1966 Bankers Trust Co J SO MISs Oec 16 1976 Apnl 5,1977 Beck Industnes, Inc SONY May 27,1971 July 30,1971 Bermec Corp SONY Apnl 16 1971 Apnl 10,1971

&everty Hills Bancorp CO Cal Apnl 11,1974 May 14,1974 Brethren's Home, The I SO OhIO Nov 23,1977 Oec 27,1977

Bubble UP Delaware, Inc CO Cal Aug 31.1970 Oct 19 1970

C~~~~ryctlOnCorp SONY Jan 15,1974 June 10,1974

SO Ohio May 23 1975 June 16,1975

~~~n~~:~o~~~c qorp WO NC feb 28,1975 Apnl 17,1975

WO Wash Apnl 1.1964 June 10,1964

Coffeyville loan & Investmentl n Kans July 17,1959 Aug 10 1959

Combined Metals Re<!uctlon Co n Nev Sept 30.1970 Sept 7,1971

Commonweanh Corp NO fla June 28 1974 July 17 1974

Commonwealth flnancral Corp J EO Pa Oec 4, 1967 Dec 13,1967

Communrty BUSiness Services. Inc l EO Cal June 8. 1971 Aprrl 30 1973

Conllnental Investment Corp 1 o Mass Ocl 31. 1978 Oct 31. 1978

Continental Mortgage Investors o Mass Oct 21 1976 Oct 21. 1976

Continental Vending Machine Corp EO NY July 10, 1963 Aug 7. 1963

Cosmo Capital Inc I NO III July 12 1963 Aprrl 22,1963

Oavenport Hotel, Inc EO Wash Oec 20, 1972 Jan 26, 1973

DetrOIt Port Development Corp! EO Mlch Sept 14. 1976 Nov 17,1976

g=:::~~~~~~a~~r Corp j

SO Ind Jan 24,1977 feb 17,1977

SOW Va feb 8,1974 Aprrl 24 1974

Oumont-Alfplane & ManneJ SONY Oct 12,1958 Nov 10,1958

Duplan Corp SONY Oct 5,1976 Oct 5.1976

ET &T leaSing. Inc! n Md Oec 10 1974 June 5,1975

EducatIOnal ifmputer Systems, Inc l o AnI Apnl 16,1972 Nov 3,1971

E.chler Corp NO Cal Oct II, 1967 Oct II. 1967

EqUitable Mortgag1'nvestment Corp I SO 'owa July 10,1975 July 10 1975

Equrtable Plan Co SO Cal March 17 1958 March 24,1958

Equrty funding Corp of AmerIcal CO Cal Apnl 5,1973 Apnl 9,1973

famnglon Manufactunng Co EO Va Oec 22,1970 Jan 14 1971

forst BaptISt Church, Inc of Margate, fla SOfia Sept 10.1973 Oct I 1973

first Home Investmeyt Corp of Kansas, Inc 3 o Kan Apnl 24. 1973 Apnl 24. 1973

forst Research Corp SOfia March 2.1970 Apnl 14.1970

GAC COIp SOfia May 19,1976 June 14,1976

GEBCO Investment Corp WO Pa feb 8,1977 March 24. 1977

Wm Gluck," Co, ltd SONY feb 22.1973 March 6,1973

Gro-P1ant Industnes. Inc J NO fla Aug 30,1971 Sept 13,1972

Gulfco Investment Corp WO Okla March 22. 1974 March 28,1974

Gulf Unoon Corp M 0 la Aug 29,1974 Nov 5,1974

Harmony loan. Inc EO Ky Jan 31,1973 Jan 13,1973

Hawa" Corp o Haweu March 17,1977 March 17. 1977

HawkeYe land, ltd SO Iowa Oec 19,1973 Jan 21.1974

R Hoe & Co, Inc I SONY July 7,1969 July 14,1969

::'~;taE~u~~~~'~~u~~atlon. Inc j

NO Okla Sept 10,1973 Oct 2,1973

SO Tex feb 16,1971 March U971

Human Relafrons Research foundafron l SO Cal Jan 31. 1964 feb 14.1964

Impenal-Amencan Resources Fund. Inc J e Co'o Feb 25. 1971 March 6 1971

i~:,~1~~~~e~t;~~~~~~ent Trust! e NJ feb 18,1966 Feb 23. 1966 SO Ind Oct 10,1966 Feb 4.1966

::~~e kt:~~t~~ Inc! SONY June 13.1974 June 13,1974

WO Wash March 3.1965 March 17,1965

See footnotes at end of table

115

~~
Table 3S-Contmued

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

(FlsealYe.r 1978)

OlStnct PetitIOn SEC NotICe ot

Debtor Court Filed Appearance

Filed

Investors Fundmg C~rp of New York SONY Oct 21 1974 Oct 22 1974

Ja~ ~~~~IGrn'c ~o CD Cal June 28 1967 Aug 16 1967

NO Ga Oct 20 1972 Nov 7 1972

Kmg Resources Co J o Colo Aug 16 1971 Oct 19 1971

lake WlOnebago Development Co, Inc WO Mo Oct 14 1970 Oct 26,1970

los Angeles land & Investmjnts, ltd 1 o Hawau Oct 24 1967 Nov 28 1967

lOUISIana loan & Ihnft. Inc EO la Oct 8,1968 Oct 8,1968

lusk Corp o Am Oct 28,196S Nov 5 1965

lyntex Corp' SONY Apnl 15 1974 Jan 28,1974

Dolly MadISon Industnes, Inc EO Pa June 23 1970 July 6 1970

Manufacturer's Credit Cjrp , o NJ Aug 1 1967 July 30, 1968

Mid-City Baptrst Ch~rch EO la July 30 1968 Oct 23 1968

Mount Everest Corp EO Pa May 29 1974 June 28 1974

National Telephone Co, Inc o Conn July 10 1975 May 27 1976

Nevada Industnal Guaranty Co o Nev May 7 1963 July 2 1963

North Amencan Acceptance Corp NO Ga March 5 1974 March 28,1974

North Western Mortgage Investors Corp J WO Wash Dec 12,1973 Dec 12,1973

Omega-Alpha, Inc J NO Tex Jan 10 1975 Jan 10 1975

Paclfrc Homes I CO Cal Dec 9 1977 Feb 2 1978

Pan Amencan Fmancial Corp o HawaII Oct 2 1972 Jan 9 1973

Parl!.vlew Gem, Inc WO Mo Dec 18 1973 Dec 28,1973

Pocono Downs, Inc MO Pa Aug 20,1975 Aug 20 1975

John Rich Enterpnses, Inc J o Utah Jan 16 1970 Feb 6,1970

Reliance Industnes, Inc n HawaII May 24 1976 Aug 10,1976

RIker Delaware Corp J o NJ Apnl 21 1967 May 23 1967

Royal Inns of Amenca, Inc SO Cal Apnl 24,1975 June 24,1975

Scranton Corp J M 0 Pa Apnl 3 1959 Ap,,1 15,1959

Edward N Siegler & Co NO OhiO May 23 1966 June 7,1966

Sierra Trading Corp J 1 o Colo July 7 1970 July 22,1970

Sound Mortgage Co, Inc WO Wash July 27 1965 Aug 31 1965

Southern land Title Corp EO la Dec 7 1966 Dec 31 1966

Stanndco Developers, Inc WONY Feb 5 1974 March 7 1974

Stifling Homex Corp WONY July 11, 1972 July 24, 1972

Sunset International Petroleum Corp J NO Tex May 27 1970 June 10,1970

TMT Trailer Ferry, Inc J SOFia June 27 1957 Nov 22 1957

Thermo-llyjJe, Inc I WO Okla Feb 24 1978 June 5 1978

Iilce, Inc J o Kans Feb 7,1973 Feb 22 1973

Tower Credit Corp i M 0 Fla Apnl 13 1966 Sept 6 1966

Traders Compress Co WO Okla May 12 1972 June 6 1972

Trans-Internalional Computer Investment NO Cal March 22 1971 July 26 1971

Tnnlty Baptist purch of JacksonVille Inc I NO Fla June 24 1977 Oct 3 1977

Trustors' Corp CD Cal Sept 13 1961 Oct 9 1961

'u" Drstnct BUIldIOg Corp W 0 Wash Dec 9 1974 Dec 9 1974

US FlOanCial Inc SO Cal Sept 23 1975 Nov 3 1975

UniverSity BaptISt Church of Jacksonville Honda Inc I M 0 Fla May 23 1977 Oct 3 1977

Vlatron Computer Systems CQ{P , o Mass Ap,,1 29 1971 Apnl 29 1971

Vlfgm Islan1 Properties, Inc o V I Oct 22 1971 Apnl II 1972

Vmco Corp ED MlCh March 29 1963 Apnl 9 1963

Waltham lndustnes Corp CO Cal July 14 1971 Aug 19 1971

Washmg10n Group, Inc M 0 N C June 20 1977 July 25 1977

Webb & Knapp Inc J SONY May 7 1965 May II 1965

H R WeISsberg Corp , NO III March 5 1968 Ap"l 3,1968

Western Growth Capital Corp o Am Feb 10,1967 May 16 1968

Western National Investment Corp' o Utah Jan 4 1968 March II 1968

Westgate-California Corp SO Cal Feb 26 1974 March 8 1974

~I~d~~:;s IR~tem Inc i

CO Cal March 10 1967 June 7 1967

SONY May 24 1965 May 28, 1965

ICommISsIOn fried notices of appearance ,n frscal year 1978

2: Reorganization proceedings closed dunng usee! year 1978

J Plan has been substantially consummated but no frnal decree has been entered because of pendrng matlers

116

'

l
SEC OPERATIONS

Net Cost

The Commission collected $26.1 million dollars 10 fees 10 fiscal year 1978

This represents approximately 42 percent of the total funds appropriated by

the Congress for Commission operations. By statute, the Commission is required by law to collect fees for: 1) the

registration of securities; 2) the qualification of trust indentures; 3) the transactions of national secuntres exchanges

and registered brokers and dealers; 4)

the registration of brokers and dealers

who are registered with the Commission

but are not members of the National

Association of Securities Dealers; and

5) the certrfrcatron of documents filed

with the Commission. In addition, by fee

schedule, the Commission Imposes fees

for certarn filrngs and services. These

Include, but are not limited to, the filing

of annual reports and preliminary proxy

material.

117
APPROPRIATED FUNDS YS FEES COLLECTED

Dollars Millions

70

60

50

40

30

20

10

o

....... ,. .... . ... .. .... . ........ ,.. .::::::': ::::", ::: . ..... . ... .

.:: ~::::::::::' .:':::.'

::.::::"::::::: ".:::::' ::

1971 72 73 74 75 76 71 19781/

J.I Estimated

118 GA-l00278-1

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