36~

Annual

Report

For the Fiscal YearEnded June 30 th
SECURITIES AND EXCHANGE COMMISSION

lIead~arters Oflice

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

HAMER H. BUDGE, Ohairman*

HUGH F. OWENS

RICHARD B. SMITH

JAMES J. NEEDHAM

A. SYDNEY HERLONG, JR.

ORVAL L. DuBoIS, Secretary

*Chairman Budge announced his resignation, effective at the end of the 91st

Congress, on November 13,1970.

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

Washington, D.C. 20402- Price $1.00(paper cover)
LETTER OF TRANSMITTAL 

SEGURITIE~ AND EXCXANQECoxnr~ssro~ 

Washington,D.C. 


SIRS:On behalf of the Securities and Exchange Commission, I have 

the honor to tmnsmit to you the Thirty-Sixth Annual Report of the 

Commission covering the fiscal yeas July 1,1969 to June 30,1970, in 

accordance with the provisions of Section %(b) of the Securities 

Exchange Act of 1934, as amended; Section 23 of the Public Utility 

Holding Company Act of 1935;Sectlon46 (a) of the Investment Campany Act of 1940; Section 216 of the Investment Advisers Act of 

1940; Section 3 of the Act of June 29, 1M9, amending the Bretton 

Woods Agreement Act; Section 11(b) of the Inter-American Development Bank Act; and Section 11(b) of the Asi'zn Development Bank 

Act. 

Respectfully, 

1Iua11 F. OWE~YS, 

Conzmissioner. 

THE PRESIDENT OF THE SENATE, / 

THESPEAKW OF THE HOUSE OF REPRESENT.~TIVES,

Washingtwn, D.C. 

I11 


COMMISSIONERS AND PRINCIPAL STAFF OFFICERS

(As of December 1, 1970)

Term

Commissioners !J'!;~e:

HAMER H. BUDGEof Idaho, Chairman 1974

HUGH F. OWENS of Oklahoma 1975

RICHARDB. SMITH of New York 1972

JAMES J. NEEDHAM of New York 1973

A. SYDNEYHERLONG,Jr. of Florida 1971

Secretary: ORVALL. DuBoIS

Executive Assistant to the Chairman: TIMOTHY G. GREENE

Principal Staff Officers

ALAN B. LEvENSON, Director, Division of Corporation Finance.

THOMAS N. HOLLOWAY,Associate Director.

RALPH C. HOCKER,Associate Director.

SOLOMONFREEDMAN,Director, Division of Corporate Regulation.

AARONLEvY, Associate Director.

A.LLANS. MOSTOFF,Associate Director.

IRVINGM. POLLACK,Director, Division of Trading and Markets.

SHELDONRAPPAPORT,Associate Director.

STANLEY SPORKIN, Associate Director.

PHILIP A. LooMIS, Jr., General Counsel.

DAVID FERBER, Solicitor.

WALTER P. NORTH, Associate General Counsel.

ANDREWBARR, Chief Accountant.

A. CLARENCESAMPSON,Jr., Associate Chief Accountant.

GENEL. FINN, Chief Economist, Office of Policy Research.

LEONARDHELFENSTEIN, Director, Office of Opinions and Review.

W. VICTORRODIN,Associate Director.

ALFREDLETzLER, Associate Director.

WILLIAM E. BECKER, Chief Management Analyst.

FRANK J. DONATY,Comptroller.

ERNEST L. DEBSECKER,Records and Service Officer.

HARRy POLLACK,Director of Personnel.

RALPH L. BELL, EDP Manager.

v
REGIONAL AND BRANCH OFFICES

Regional Offices and Regional Administrators

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

New York, New York 10007.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine.-Floyd H. Gilbert, Suite 2203, John F. Kennedy Federal

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

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

Carolina, Georgia, Alabama, Mississippi, Florida, that part of Louisiana

lying east of the Atchafalaya River.-Jule B. Greene, Suite 138, 1371

Peachtree Street, N. E., Atlanta, Georgia 30309.

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin.-John 1. Mayer, Room 1708,

Everett McKinley Dirksen Bldg., 219 South Dearborn Street, Chicago,

Illinois 60604.

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

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

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

76102.

Region 6. 'Vyoming, Colorado, New Mexico, Nebraska, North Dakota,

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

Stout Street, Denver, Colorado 80202.

Region 7. California, Nevada, Arizona, Hawaii, Guam.-Arthur E. Pennekamp, 450 Golden Gate Avenue, Box 36042, San Francisco, California

94102.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. Newton, 900 Hoge Bldg., Seattle, 'Washington 98104.

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of Columbia.-Alexander J. Brown, Jr., Room 532, Crystal Mall No.

2 Bldg., 1921 Jefferson Highway, P.O. Box 2247, Arlington, Va. 22202.

Branch Offices

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

Lakeside.

Detroit, Michigan 48226.-230 Federal Bldg.

Houston, Texas 77022.-Room 6617 Federal Office & Courts Bldg., 515

Rusk Ave.

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

Spring Street.

Miami, Florida 33l30.-Room 1504, Federal Office Bldg., 51 S.W., First

Ave.

St. Louis, Missouri 63102.-Room 1452, 210 North Twelfth Street.

Salt Lake City, Utah 84111.-Room 6004, Federal Bldg., 125 South State

Street.

VI
COMMISSIONERS

Hamer H. Budge, Chairman

Chairman Budge was born in Pocatello, Idaho, on November 21,

1910. He attended the College of Idaho, Caldwell, Idaho, and received an A.B. degree from Stanford University, Palo Alto, California, majoring in political science, and an LL.B. degree from the University of Idaho in Moscow, Idaho. He is admitted to practice

before the Supreme Court of Idaho and the Supreme Court of the

United States and practiced law in the city of Boise, Idaho, :from

1936 to 1951, except for 3% years in the United States Navy

(1942-1945), with final discharge as Lieutenant Commander.

Elected to the Idaho State Legislature, he served three sessions, two

as assistant Republican floor leader and and one as majority floor

leader. First elected to Congress in November 1950, he represented

Idaho's Second Congressional District in the U.S. House of Representatives during the 82d, 83d, 84th, 85th, and 86th Congresses. In

the House he was a member of the Rules Committee, Appropriations

Committee, and Interior Committee. During the period :from 1961

until his appointment to the Commission he was District Judge in

Boise. He took office as a member of the Commission on July 8,

1964, for the term expiring June 5, 1969, and was reappointed for

the term expiring June 5, 1974. He was designated Chairman of the

Commission on February 22, 1969.

Hugh F. Owens

Commissioner Owens was born in Muskogee, Oklahoma, on October 15, 1909, and moved to Oklahoma City in 1918. He graduated

from Georgetown Preparatory School, Washington, D.C., in 1927,

and received his A.B. degree from the University of Illinois in 1931.

In 1934, he received his LL.B. degree from the University of Oklahoma College of Law, and became associated with a Chicago law

firm specializing in securities law. He returned to Oklahoma City in

-Ianuary 1936, to become associated with the firm of Rainey, Flynn,

Green and Anderson. From 1940 to 1941, he was vice president of

the United States Junior Chamber of Commerce. During World

War II he attained the rank of Lieutenant Commander, U.S.N.R.,

and served as Executive Officer of a Pacific Fleet destroyer. In 1948,

he became a partner in the firm of Hervey, May and Owens. From

1951 to 1953, he served as counsel for the Superior Oil Company in

VII
VIII SECURITIES AND EXCHANGE COMMISSION

Midland, Texas, and thereafter returned to Oklahoma City, where

he engaged in the general practice of law under his own name. He

also served as a part-time faculty member of the School of Law of

Oklahoma City University. In October 1959, he was appointed Administrator of the then newly enacted Oklahoma Securities Act and

was active in the work of the North American Securities Administrators, serving as vice president and a member of the executive

committee of that Association. He took officeas a member of the Securities and Exchange Commission on March 23, 1964, for the term

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

June 5, 1970 and 1975. Since June 1964, he has served on the executive committee of the National Association of Regulatory Utility

Commissioners.

Richard B. Smith

Commissioner Smith was born in Lancaster, Pennsylvania, on

July 9, 1928, and attended public schools there. He received a B.A.

degree from Yale University in 1949 and an LL.B. degree in 1953

from the University of Pennsylvania, where he was a Law Review

editor. Upon graduation he became associated with the New York

City law firm of Reavis & McGrath (then Hodges, Reavis, McGrath,

Pantaleoni & Downey). He remained with that firm from 1953, except for a period with the legal department of W. R. Grace & Co. in

1956-57, until his appointment to the Commission, having become a

partner of the firm in 1963. Commissioner Smith is a member of

The Association of the Bar of the City of New York (Chairman,

Committee on Aeronautics, 1963-66), the New York State Bar Association, the American Bar Association and the American Law Institute. He took office as a member of the Commission on May 1,

1967, for the term expiring June 5, 1967, and was reappointed to a

5-year term ending June 5, 1972.

James J. Needham

Commissioner Needham was born in Woodhaven, New York, on

August 18, 1926. He received a B.B.A. in 1951 from St. John's University. During 1944-46, he was in the Naval V-5 Program at

Cornell University. At the time of his appointment to the Commission, Commissioner Needham, a Certified Public Accountant, was associated with A. M. Pullen & Company, based in Greensboro, North

Carolina, serving as partner in charge of its New York office, and as

a member of the firm's Executive Committee. Previously, he was associated with Raymond T. Hyer & Company and with Price, Waterhouse & Co. Commissioner Needham has been active in professional

and business organizations, including the American Institute of Cer-
COMMISSIONERS IX

tified Public Accountants (as a member of Council) ; the New York

State Society of Certified Public Accountants (including service as

Treasurer and as a member of its Board of Directors and Executive

Committee); the New York Chamber of Commerce; and the Accountants Club of America, Inc. He also has participated actively in

many community organizations. Prior to assuming officeon July 10,

1969, for the term expiring June 5, 1973, he resided in Plainview,

New York.

A. Sydney Herlong, Jr.

Commissioner Herlong was born in Manistee, Alabama, on February 14, 1909, and in 1912 moved to Sumter County, Florida, and

later to Lake County, Florida, where he attended public schools. He

received an LL.B. degree from the University of Florida, Gainesville, Florida, in 1930, and commenced practicing law in his home

town of Leesburg, Florida. Commissioner Herlong continued practicing law until 1937 when he was elected County Judge of Lake

County, Florida. He continued serving as County Judge until 1948

when he was elected to the U.S. House of Representatives, in which

body he served until January 1969, when he voluntarily retired.

While serving in Congress, Mr. Herlong was a member of the Post

Officeand Civil Service Committee, the Agriculture Committee, and,

for the last seven terms, the Ways and Means Committee. Upon retirement from Congress, he became a consultant to the Association

of Southeastern Railroads. He is a past president of the Florida

County Judges Association, the University of Florida Alumni Association and the Florida State Baseball League. Mr. Herlong received

the Good Government Award from the Florida Junior Chamber of

Commerce and the Distinguished Alumni Award from the University of Florida. He took officeas a member of the Securities and Exchange Commission on October 29, 1969, for the term of officeexpiring June 5, 1971.

TABLE OF CONTENTS

Page

Commissioners and principal staff offleera.; , __________________________ v

Regional and branch offices__________ _____ __ __ __________ _____ VI

Biographies of Commissioners, ______________________________________ VII

PART I

IMPORTANT RECENT DEVELOPMENTS_______________________ 1

Recent market trends . . 1

Operating and financial condition of broker-dealer firms; _ __________ 2

Proposed legislation to provide increased protection against brokerdealer insolvency ._ _____ ____________ _ 3

Structure and level of commission rates . ______________ 5

1. History of the current proceedings; _ ______________________ 5

2. Interim surcharge______________ __ _______________________ 7

Institutional investor study . 8

Implementation of the recommendations of the disclosure pohey

study______________________________________________________ 9

Legislative reform of the Investment Company Aotc , _ _ ____________ 13

1. Investment advisory fees; _ _ _ _ _________________ 14

2. Performance fees________________________________________ 15

3. The front-end load on contractual plans , __ ________________ 15

4. Levels of sales charges____________ ________________ 16

5. Bank and savings and loan administered investment companies_______________________________________________ 16

6. Oil and gas drilling funds _ _ ______________________________ 17

7. Fund holding companies., ________________________________ 18

8. The front-end load on face-amount certificates______________ 18

Other pending Iegislation., __ __ _______________________ 19

1. Increase in exemption for small issues of securities___________ 19

2. Amendment to take-over bid law_________________________ 19

3. Transfer of Public Utility Holding Company Act functions to

Federal Power Commission , _ _ 20

PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURITIES_ ___ _______ ____ ______________________ 22

A. Disclosure in connection with public offerings__________________ 22

Type of information included in registration statement- ________ 23

Guides for preparation and filing of registration statements; _____ 24

Amendment of rules relating to industrial revenue bonds; _ _____ 25

Amendments of rules relating to mechanics of fiIing_______ ______ 25

Amendment of Form S-7___________________________________ 26

Whisky warehouse receipts as secllrities______________________ 26

Requirement of deposit on purchase price of stock prior to effective date of registration; ________ ________ _______ 27

Staff examination of registration statementa., , ________________ 27

XI
XII TABLE OF CONTENTS

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURITIES-Continued

A. Disclosure in connection with public offerings-Continued Page

Time required to complete registration_______________________ 28

Statistics regarding registration statements filed_______________ 29

Statistics regarding securities registered , _ ________ ____________ 31

Examinations and investigations_____________________________ 34

Stop order proeeedings., ______ _______________________ 34

Exemption from registration of small issues, __________________ 36

Exempt offerings under Regulation A______________________ 37

Reports of sales_____________________________________ 38

Suspension of exemption.;., ____ ____________________ 38

Exempt offerings under Regulation B______________________ 39

Reports of sales , _ ___ _______________________ 39

Exempt offerings under Regulation E______________________ 39

Exempt offerings under Regulation F _ __ _ ____ 40

B. Continuing disclosure requirements_____________ _____ ___ 40

Registration of securities on exchanges , ___________________ 41

Registration of over-the-counter seouritdea, ___________________ 41

Exemptions from registration___________________________ 42

Periodic reports; _ ___ _______ _ _______________ 42

Administrative proceedings to obtain compliance with Exchange

Act registration or reporting requirements___________________ 43

Proxy sollcitationa.; _________ _____ ________________ 45

Scope and nature of proxy regulation_____________________ 45

Statistics relating to proxy and information statements.L; , 46

Stockholders' proposals.L, ; ___ ___ __________ 47

Ratio of soliciting to nonsoliciting companies______________ 47

Proxy contests________________________________________ 48

Litigation relating to proxy rules; _ ___ ________________ 48

Disclosure in connection with takeover bids and other large acquisitdona.; ____________ _ __ ____________ 50

Insiders' security holdings and transactions___________________ 51

Ownership reports; _____ __ ____ _______________ 51

Recovery of short-swing trading profits___________________ 52

Investigations with respect to reporting and proxy provisions; _ _ 52

Summary suspension of trading_____________________________ 53

C. Accounting and auditing matters_____________________________ 54

Relations with the accounting profession and the public, _______ 56

The work of the Accounting Principles Board and committees of

the AICP A_ _______________ ___ ____ __________ ___ 57

Other current developments_____ _ ______ ______________ _ 58

D. Exemptions for securities of international banks________________ 60

International Bank for Reconstruction and Development-______ 60

Inter-American Development Bank__________________________ 62

Asian Development Bank___________________________________ 63

E. Trust Indenture Act of 1939_________________________________ 64

PART III

REGULATION OF SECURITIES MARKETS____________________ 66

Regulation of exehangea.c..Lc , , ___ ______ _______ 66

Registration and exemption of exchanges; ____________________ 66

Review of exchange rules and procedures, ____________________ 67

_
TABLE OF CONTENTS XIII

REGULATION OF SECURITIES MARKETS-Continued

Regulation of exchanges-Continued Page

Inspections of exchanges ___ _ _______________________________ 68

Delisting of securities from exchanges , _______________________ 69

Automated trading information systems___ ________________ 71

Statistics relating to securities traded on exchanges _ _______________ 72

Number of issuers and securities_____________________________ 72

Market value of securities available for trading________________ 72

Volume of securities traded_________________________________ 74

Foreign stocks on exchanges., _ ___________ 74

Comparative exchange statistics_____________________________ 75

Block distributions reported by exchanges____________________ 77

Unlisted trading privileges on exchanges.L; ______ _ 77

Supervision of activities of National Association of Securities Dealers,

Inc. .._______________ 79

Commission review of N ASD rules and policies ________________ 80

Over-the-counter trading in common stocks listed on the N ew York

Stock Exchange_____________________________________________ 81

Regulation of broker-dealers and investment advisers_____________ 82

Registration; __ ________ __________________ 82

Microfilming of records _____________________________________ 83

Financial reports of broker-dealers..; _________________________ 84

Broker-dealer income and expense reports; _ __ ________________ 84

Disclosure of credit terms in margin transactions., _____________ 86

Factual basis for securities quotations ________________________ 86

Regulation of broker-dealers who are not members of a registered

securities association , _ __ ______ _______________ 87

Statistical studies , ___ __ __ ______ _______________ 89

Issues registered under the Securities Act of 1933._____________ 89

New securities offerings____________________________________ 89

Individuals' saving ._____ _____ __________________ 90

Private noninsured pension funds. ___________________________ 90

Stock transactions of financial instltutions , ___________________ 90

Financial position of corporations ____________________________ 90

Plant and equipment expenditures___________________________ 90

Directory of registered eompanies., __ _ _______________________ 91

Stock market data_________________________________________ 91

PART IV

CONTROL OF IMPROPER PRACTICES______________________ 92

Detection of improper practices. _ ______ _______ ______ 92

Public complaints and inquiries., ____________________________ 92

Inspections_______________________________________________ 93

Market surveillance ________________________________________ 94

Use of computer for name searches., _ _____ _______________ 94

InvestigatiollS_________________________________________________ 95

Enforcement of investigative subpoenas , _____________________ 96

Enforcement and remedial action ________________________________ 97

Administrative prooeedings , ______ _______________________ 98

Judicial review of administrative decisions. ___________ 106

Civil proceedings___________________ __ _____ _______ 108

Participation as amicus curiae___________________________ 118
XIV TABLE OF CONTENTS

CONTROL OF IMPROPER PRACTICES-Continued

Enforcement and remedial action-Continued PaKe

Criminal prooeedlngs .; ___ ____ __ _____ 119

Organized crime program_______________________________ 123

Proposed Swiss treaty 123

Disciplinary action by self-regulatory organizations________________ 124

Exchanges________________________________________________ 124

NASD___________________________________________________ 124

Commission review of N ASD disciplinary action; _________ 125

Commission review of N ASD action on membership __ _____ 126

Cooperation with other enforcement agencies .________________ 126

Section of securities violations ______ __________________ 127

Enforcement problems with respect to foreign securlties., ___________ 128

Disqualification from practice before Commission __________________ 131

PART V

REGULATION OF INVESTMENT COMPANIES______________ 133

Companies registered under the Act_____________________________ 134

Investment company assets_____________________________________ 135

Investment company filings, other than applieations., ______________ 136

New developments in the investment company field_______________ 137

Investment companies sponsored by foreign interests ___________ 137

Fund managed by an affiliate of the French government____ 137

Investment company selling exclusively to non-resident

aliens______________________________________________ 137

Commission policy on restricted securities; ___________________ 138

Foreign sales guidelines., _ _ __ ____ __ _ _ 138

Amendment of Rule 22d-L________________________________ 140

Amendment of Rule 17d-L_______________ ___ 141

Rules relating to variable annuities and separate accounts______ 142

Applications for Commission aetion ,., ____________________________ 142

Control of improper practlces.L; _________________ ________ 149

Inspection and investigation program __ ______________________ 149

Civil and administrative proceedings _________________________ 150

Failure to register as an investment company _ ____________ 150

Prospectuses; sales literature________________ ____________ 151

Portfolio transactions and restricted securities ____________ 152

Gross abuse of trust; _ ___________ 154

Back office problems_____ _____ ____ ___________ 155

Improper accounting methods________ ______ 156

PART VI

REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES___ 158

Composition of registered holding-company systems________________ 158

Section 11 matters in registered holding-company systems__________ 160

Proceedings with respect to acquisitions, sales, and other mattera., __ 160

Financing of active registered public-utility holding companies and

thetrsubmdiaries____________________________________________ 164

Recent financing developments____________ ___ ____ 166

Competitive biddlng , _________________ 168

Policy as to refundability of preferred stock____ _______________ 172
TABLE OF CONTENTS

PART VII

xv

Page

PARTICIPATION IN CORPORATE REORGANIZATIONS________ 174

Summary of activities____ _ __ __________ 175

Jurisdictional, procedural, and administrative matters; ___ _______ 175

Trustee's investigation __ ___ _________ __________ ______________ 180

Reports on plans of reorganization_______________________________ 181

Activities with regard to allowances.Lc , , _________________________ 189

Intervention in Chapter XI proceedings; __ _________ ________ 194

PART VIII

SUPPORTING ACTIVITIES______ _________ _________________ 200

Public information services., ___ ______ _ ____ ________________ 200

Dissemination of information_______________________________ 200

Publications__________________________________________ 201

Availability of information for public inspection , ______________ 202

Rule concerning publication of interpretative and "no-action"

letters__________________________________________________ 204

Electronic data processing., _______________ ______________________ 205

Extension of application of automation techniquea.,., ___________ 206

Assistance to state and federal agencies_______________________ 206

Sharing of EDP facilities____________ __ ____________ 206

EDPtraining_____________________________________________ 207

Personnel and financial management________ _ ____ ___________ 207

Personnel program___ ______________________________________ 207

Personnel strength; financial management., _ __________________ 209

PART IX

APPENDIX-STATISTICAL TABLES

Table 1. A 36-year record of registrations effective under the Securities

Act of 1933-fiscal years 1935-1970________________________ 215

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

year ended June 30,1970_________________________________ 216

Part 1. Distribution by months_________________________________ 216

Part 2. Purpose of registration and type of security________________ 216

Table 3. Brokers and dealers registered under the Securities Exchange

Act of 1934--eliective registrations as of June 30, 1970, classified by type of organization and by location of principal offlce.,., 217

Table 4. Number of security issues and issuers on exchanges____________ 218

Part 1. Unduplieated count as of June 30, 1970 of the number of stock

and bond issues admitted to trading on exchanges, and the

number of issuers involved_____________________________ 218

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

June 30, 1970, classified by trading status, and number of

issuers involved , __ _________ ____________________ ___ 218

Table 5. Value of stocks on exchanges________________________________ 219

Table 6. Dollar volume and share volume of sales effected on securities

exchanges in the calendar year 1969 and the 6-month period

ended June 30,1970_____________________________________ 220

Part 1. 12 months ended December 31, 1969__ ____________________ 220

Part 2. 6 months ended June 30,1970___________________________ 220
XVI TABLE OF CONTENTS

Page

Table 7. Comparative share sales and dollar volumes on exchanges; _____ 221

Table 8. Block distributions of stocks reported by exchanges____________ 222

Table 9. Unlisted stocks on exchanges_______________________________ 222

Part 1. Number of stocks on the exchanges as of June 30, 1970_____ 222

Part 2. Unlisted share volume on the exchanges-calendar year 1969_ 223

Table 10. Summary of cases instituted in the courts by the Commission

under the Securities Act of 1933, the Securities Exchange Act

of 1934, the Public Utility Holding Company Act of 1935,

the Investment Company Act of 1940, and the Investment

Advisers Act of 1940_______ _____ ____________ __ 223

Table 11. A 37-year summary of all injunction cases instituted by the

Commission-1934 to June 30, 1970, by calendar year______ 224

Table 12. Summary of cases instituted against the Commission, cases

involving petitions for review of Commission orders, cases in

which the Commission participated as intervenor or amicus

curiae, and reorganization cases on appeal under Ch. X in

which the Commission participated_______________________ 225

Table 13. A 37-year summary of criminal cases developed by the Commission-1934 through 1970, by fiscal year________________ 226

Table 14. A 37-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1970______ 227

Table 15. Summary of criminal cases developed by the Commission which

were pending at June 30, 1970_ ___ __ _ __ 227
PART I

IMPORTANT RECENT DEVELOPMENTS

Recent Market Trends

Between 1964 and 1968, the securities industry experienced an

enormous and largely unanticipated increase in the volume of trading, with annual share volume on all registered stock exchanges rising from 2 to 5.3 billion shares. Since then, however, trading has

subsided and volume during the first half of 1970 was down 18 percent from the comparable 1968 period. The reduced trading volume

has been accompanied by substantial declines in stock prices and in

the number of new issues offered for distribution. There has also

been since 1964 a significant change in trading patterns, characterized by an increased participation by financial institutions in equity

markets and a proportionately decreased participation by individual

investors. Block transactions, or trades involving a large number of

shares, have increased along with the rise in institutional activity.

The rapid growth in trading in the mid-1960's caused serious operational problems throughout the brokerage industry. To cope with

these back-officeproblems, many firms made substantial investments

in automated equipment and hired new employees. These expenditures and a general inflation in operational costs accentuated the loss

of revenue that accompanied the decline in stock prices and trading

volume in 1969 and 1970. The rather extensive losses incurred hy

many broker-dealers forced some firms into bankruptcy or liquidation and a number of others have merged in an attempt to improve

their financial condition and operations.

Much of the Commission's time and attention has been devoted to

the problems created by these recent market developments. For example, the Commission has conducted extensive hearings concerning

the commission rate structure and has participated in drafting

legislation to provide increased protection against broker-dealer insolvency. The Commission has also been developing procedures to

accommodate the new automated trading systems and improved clearing procedures being introduced in the securities industry. Many of

these activities are described in greater detail in the following sections of this Report.

409-865--71-2
2 SECURITIES AND EXCHANGE COMMISSION

Operating and Financial Condition of Broker-Dealer Firms

The "back office" problems which beset the securities industry in

1969/ while still not completely resolved, have been overshadowed

during the past year by the serious financial difficulties experienced

by many firms. In part, the current financial squeeze grew out of efforts to meet the unprecedented trading volume of prior years

through the expansion of firms and the automation of facilities.

Some firms, wishing to take advantage of the increased trading volume, opened officesin locations which could not in normal times produce the amount of business needed for profitable operations. Other

firms experienced severe difficulties in attempting to go from manual

record keeping and securities handling procedures to automated systems. 'Vhen volume on the exchanges and in the over-the-counter

marked dropped, firms were forced to retrench by reducing the number of branch officesand by cutting back sales and clerical personnel.

Operating losses were widespread throughout the industry, and some

of the larger firms were sustaining large and consistent losses.

The continuing decline in securities prices in 1970, following that

of 1969, had an adverse effect on the financial condition of brokerdealers in two ways: first, it contributed to the decline in trading

volume; and second, it diminished the capital of firms both by lowering the value of trading and investment positions and by making

it more difficult :for firms to sell restricted securities or large positions of thinly-traded securities. In view of the declining profit margins and shrinking security prices, many firms were unable to replenish depletions of capital caused by the death or withdrawal of

partners or by the failure of subordinated lenders to renew their

loans.

A number of firms have merged in an effort to improve their financial condition. Other firms have been forced into liquidation because they could no longer comply with the financial responsibility

requirements of the Commission and the exchanges.

During the last fiscal year the Commission took action in a number of cases to enforce compliance with its net capital rule and other

rules designed for the protection of investors' funds and securities.

The net capital rule, which requires that broker-dealers have at least

$1 in net capital for every $20 in aggregate indebtedness, is designed

to assure that firms will maintain enough liquid assets to meet normal demands from customers for the delivery of their funds and securities. The various measures taken when it appeared that these

rules were being violated included the institution of 45 administra1See 35th Annual Report, PP. 1-4.
TEITRTY-SIKTH ~AL REPORT 3

tive proceedings and 29 injunctive actions; the Commission obtained

the appointment of receivers in 21 of the injunctive proceedings.

Certain of the exchanges also took action against their members to

enforce compliance with similar rules, and they forced other firms to

merge or to liquidate their business.

The New York Stock Exchange made commitments from its Special Trust Fund to protect the customers of troubled member firms,

and certain other exchanges with trust funds also acted to assume

responsibility for the obligations of certain of their members who

had become insolvent. However, by the spring of 1970 the amount of

money remaining uncommitted in various exchange trust :funds appeared to be inadequate to do more than indemnify the customers of

those firms which were at that time already in serious financial difficulty. Consequently, both the Commission and the Administration

engaged in intensive efforts to secure adoption of legislation which

would insure funds and securities of customers of brokerage firms

against future insolvencies much as bank deposits are insured.

Proposed Legislation To Provide Increased Protection Against Broker-Dealer

Insolvency

The first legislative proposals for broker-dealer insurance were introduced by Senator Muskie of Maine in June 1969. Congressional

hearings on these and similar legislative proposals were held beginning in April 1970. With the encouragement of the Congressional

committees concerned, the Commission joined with representatives of

the securities industry, the Treasury Department and other government agencies to draft revised legislation which would meet certain

objections to the original proposals. A "consensus" bill, which was

submitted in July 1970 to Congressional subcommittees, provided

for the creation of a nonprofit membership corporation, to be known

as Securities Investor Protection Corporation (SIPC), to administer

the insurance program. At the date of writing in October 1970, the

appropriate committees of both houses of Congress had approved versions of the bill and it awaits a floor vote in each house. The versions

approved by the House and Senate Committees differ from the consensus bill as well as from each other. However, the basic program

and the overall plan of implementation, as proposed in the consensus

bill, remain.*

A bill embodying this proposed. legislation, H.R. 19333, was passed by the

House on December 1, 1970. The bill, with added. amendments, was passed. by the

Senate on December 10, 1970 and then went to a Conference Committee which

issued a report (H. Rept. No. 91-1788) on December 18, 1970. The Conference

version of the bill was passed by the House on December 21, 1970 and by the

Senate on December 22, 1970. The enrolled bill was signed by the President on

December 30,1970 and is now Public Law 91--598.

•
4 SECURITIES AND EXCHANGE COMMISSION

Under both bills, all registered broker-dealers and all members of

national securities exchanges would be members of the Corporation

unless exempted. The bills would provide insurance coverage of up to

$50,000 per customer in the event of failure of a broker-dealer. The

insurance program would be funded by the industry, with $1 billion

in standby credit from the United States Treasury. A £und of at

least $75 million, to be raised from the industry by assessments on

its members and by bank lines of credit, would be available within

120 days of enactment of the legislation. Broker-dealers would be

assessed annually lh of 1 percent of their gross revenues from the

securities business until such time as the fund reached $150 million.

Thereafter, assessments could fall to % of 1 percent until all lines of

credit were phased out. If at any time the fund were to fall below

$100 million, the lh of 1 percent assessment would be reinstated. Securities exchanges would be able to transfer trust funds they maintain for the protection of customers of their members to the Corporation as a credit against future assessments on their members.

If the fund accumulated by the assessments and bank lines of

credit should prove to be insufficient, the Commission could borrow

up to $1 billion from the Treasury and advance these funds to the

Corporation. As a condition of any such loan, the Commission would

have to certify to the Secretary of the Treasury that the loan is necessary to protect investors and maintain confidence in United States

securities markets and that the Corporation has submitted a plan

providing a reasonable assurance of prompt repayment through the

imposition of additional assessments. The Commission could impose

a transaction fee (up to a specified percentage of the purchase price)

on equity securities purchases of $5,000 or more if necessary to satisfactorily repay the loan.

Under the proposed legislation, the existing self-regulatory organizations would continue to inspect their members for compliance

with "financial responsibility rules" and make such reports on these

inspections as the Corporation might require. The Commission,

moreover, would have additional powers to require any self-regulatory organization to (1) alter or supplement rules relating to the

frequency and scope of inspection of the financial condition of its

members, (2) furnish the Corporation and the Commission with reports relating to such financial condition, and (3) inspect members

in relation to their financial condition.

The legislation would authorize the Corporation to apply to a

court for a decree adjudicating that customers of a broker-dealer

member are in need of protection whenever it appears to the Corporation that a member has failed or is in danger of failing to meet its
THIRTY-SIXTH ANNUAL REPORT 5

obligations to customers. If one or more specified conditions were

found by the court to exist, an application would have to be granted

and a trustee appointed to liquidate the broker-dealer. The trustee

would have the same powers as a trustee in bankruptcy and a trustee

under Chapter X of the Bankruptcy Act. He would promptly return

specifically identifiable property to customers. It is made clear that

securities held in bulk segregation or as part of a central certificate

service are to be considered to be specifically identified. In addition,

the trustee would be required to pay any remaining claims of customers

up to the $50,000limit with funds advanced by the Corporation and to

supervise the liquidation and winding up of the broker-dealer.

The legislation would also amend Section 15(c) (3) of the Securities Exchange Act of 1934 to extend the coverage of that section to

broker-dealers who do business only on an exchange and to eliminate

certain doubts regarding the Commission's power to provide safeguards with respect to the financial responsibility of broker-dealers

to whatever extent the public interest requires, whether by capital

requirement rules or otherwise.

Structure and Level of Commission Rates

1. History of the Current Proceedings

In May 1968 the Commission requested the New York Stock Exchange to adopt an interim rate structure with a volume discount or,

as an alternative, to eliminate fixed rates of commission for large

transactions. This step was taken to correct apparent inequities in

the rate structure in effect at that time. At the same time, the Commission announced that it would institute public investigatory hearings to consider long-term changes in the stock exchange commission

rate structure and related matters including: (1) commission rate

levels for nonmembers and for members; (2) the services for which

commissions pay and the costs allocated thereto; (3) give-ups and

reciprocal practices among different categories of members and nonmembers; (4) membership for financial institutions on exchanges;

(5) economic access to exchange markets by nonmember brokerdealers; (6) competition among exchanges and other markets; and

(7) access of exchange members to the third market. These hearings

were begun in July 1968.

In August 1968 the New York Stock Exchange submitted to the

Commission a proposal to amend its constitution and rules to provide for reductions in (i) minimum commission rates paid by nonmembers on that portion of orders which involve more than 1,000

shares and in (ii) intra-member commission rates, and (iii) to prohibit the so-called "customer-directed give-up." This proposal was

approved by the Commission pending completion of the hearings
6 SECURITIES AND EXCHANGE COMMISSION

and the development of long-term solutions. A new schedule under

the interim plan became effective December 5, 1968.2

In September 1968, the New York Stock Exchange contracted to

have National Economic Research Associates (NERA), an economic

consulting firm, undertake such research as it deemed necessary for

the purpose of proposing a revised schedule of commission rates.

The premises and methodology of this study and, later, its results

were considered by the Exchange's Costs and Revenues Committee.

The completed study provided a basis for the proposed new minimum commission rate schedule presented by the Exchange to the

Commission on June 30, 1970. According to the Exchange, the

schedule was keyed to industry costs and was designed to meet relatively long-term financial requirements of the industry. In addition, the

Exchange proposed a review of rates every 2 years-and as frequently as every 6 months if warranted by changing conditions.

In response to the Exchange's proposals, the Commission reconvened its commission rate hearings from July 20 through August 7,

1970, to receive testimony and other relevant data concerning such

proposals," After reviewing these materials, the Commission announced on October 22, 1970, that it would not object if the proposed schedules were adopted, with certain modifications, upon the

understanding that the Exchange would take specified steps to provide a better basis for the determination of future commission rates.

The Commission concluded (i) that the proposed increases in rates

for round-lot orders of 100through 400 shares were unreasonable and

(ii) that the proposed rate schedule was unreasonable to the extent

that it fixed charges for that portion of an order in excess of

$100,000. Modification of the proposed rate schedule would, therefore, be required in these areas. The Commission's action was also

conditioned on the understanding that no member firm which traditionally has accepted small customer accounts will impose or continue any limitation on the size of such customer's order or account

and that in connection with such business the firm will not charge

fees in excess of the proposed rates.

The Commission has requested the Exchange to present on or before June 30, 1971, a new rate structure based on a percentage scale

of the money involved in an order, a proposed revision of the intramember charges for floor brokerage and clearance, and flo proposal

for reasonable nonmember access. The Exchange was also requested

See 35th Annual Report, pp. 6-7, and 34th Annual Report, pp, 1-2.

a Securities Exchange Act Release No. 8924 (July 2,1970).

•
THIRTY-SIXTH ANNUAL REPORT 7

to develop a uniform system of accounts and uniform methods of

cost allocation by May 31, 1971.4

2. Interim Surcharge

On March 19, 1970,the New York Stock Exchange reported to the

Commission that many of its member organizations which do a public business had sustained substantial losses in 1969 and that the situation had further deteriorated in the first quarter of 1970. In an

attempt to provide interim financial relief to its members prior to

any final action by the Commission regarding a permanent r.aite

structure, the Exchange proposed a rule which would require member organizations to impose a surcharge in the form of a service fee

of $15 or fifty percent of the applicable minimum commission,

whichever is less, on orders of one thousand shares or less.

After an analysis of data submitted by the Exchange and additional data obtained by the staff, the Commission allowed the interim surcharge to take effect on a temporary basis (90 days). The

Commission's action was taken on the condition that full brokerage

services (some of which had recently been denied the small investor)

would be restored and that investors would not be charged more

than the minimum commission plus the surcharge. It was expected

that the additional revenues would be employed by member organizations to improve their operations and financial position. The Commission made it clear that any continuance of the surcharge beyond

the 90-day period would require a review of the economic conditions,

including transaction volume levels, existing at that time," On June

29, 1970, the Exchange submitted to the Commission a request for an

extension of the surcharge.

On July 2, 1970, the Commission announced that the commission

rate hearings would be reconvened on July 13, 1970, to receive evidence pertinent to the question of whether the interim service charge

should be continued. The Commission further indicated that it

would not take action to prevent the temporary continuation of the

surcharge pending consideration of the evidence to be developed."

The hearings were conducted from July 13 through July 17, 1970.

Upon the basis of its review of monitoring program data and other

relevant information developed in the commission rate hearings, the

Commission on August 31, 1970, announced that conditions did not

warrant termination of the service charge at that time and the surcharge would, therefore, be permitted to continue until such time as

4 Securities Exchange Act Release No. 9007 (October 22,1970).

5 Securities Exchange Act Release No. 8860 (April 2, 1970).

6 Securities Exchange Act Release No. 8923 (July 2,1970).
8 SECURITIES AND EXCHANGE COMMISSION

circumstances warrant its termination." With the exception of the

90-day limitation, the conditions imposed by the Commission when

the surcharge originally became effective were maintained upon continuance of the surcharge.

Institutional Investor Study

The Institutional Investor Study, which resulted from the Congressional directive to the Commission to study the impact on the

nation's economy of all types of institutional investors, has continued throughout the year," Both the language and the legislative

background of Public Law 90--438authorizing the Study make clear

that the Congress expects a comprehensive economic study, whose

first task will be to remedy sizable gaps in information about the activities of institutional investors and their impacts on both the securities markets and corporate issuers.

From the beginning, the Study has been envisioned as a massive

fact-finding effort whose talents, energies and resources would be

concentrated on the collection and analysis of information about institutional investors that has not been available before. The primary vehicles used for this purpose have been detailed questionnaires, supplemented by interviews, on the organization and operation

of institutional investors and securities firms and on their holdings

and transactions in portfolio securities.

The Study has developed, distributed, collected, corrected and analyzed data from 55 separate questionnaires, each of which covers as

many as 14 separate types of respondent institutions, some of which

include as many as 1,000 responding firms. Each of these questionnaires was developed in consultation with ad hoc technical committees voluntarily formed by the industries studied. The first of these

questionnaires was mailed to respondents during September 1969,

and the final questionnaire was mailed in April 1970.

The second stage of the major data collection effort by the Study

has involved the collection, editing, correction and preparation for

machine processing of questionnaire returns. The extent of industry

cooperation with the Commission is demonstrated by the willingness

of the great majority of respondents to return the data in machinereadable forms. More than 700,000punched-card responses have been

returned by private persons or firms. In addition, other agencies of

the government have made important contributions to this effort.

Analyses are being conducted on large, high-speed computers pro7 Securities Exchange Act Release No. 8969 (August 31,1970).

8 For a detailed summary of the background design of the Study, see the 35th

Annual Report, pp, ~12.
THIRTY-SIXTH ANNUAL REPORT 9

vided by the Federal Deposit Insurance Corporation and the Federal Reserve Board.

A primary interest of the Study has been the extent to which the

performance phenomenon has spread to different sectors of the

money management industry, and what its implications have been

for the structure of our securities markets, brokerage firms, corporate issuers and individual investors. Much of the data collected and

analyzed by the Study bear directly on this important phenomenon.

The Congress, by Joint Resolution, recently extended the reporting date of the Institutional Investor Study to December 31, 1970.o

Implementation of the Recommendations of the Disclosure Policy Study

During the fiscal year the Commission published for public comment proposals to implement a number of the recommendations made

in the Report of the Disclosure Policy Study." There were 349 letters of comment, covering 1,165 pages, in response to these proposals, all of which were considered by the staff and the Commission.

As described below, the Commission has recently made certain determinations on a number of the proposals.

The Commission decided not to adopt the proposed 160 series of

rules relating to underwriters, nonpublic offerings, and brokers'

transactions and, as an alternative, has proposed to adopt Rule 144.11

The proposed rule would provide that any affiliate of a company

(i.e., any person in a control relationship with the company) who

offers or sells securities of such company in accordance with the

terms and conditions of the rule is presumed not to be an underwriter of the securities within the meaning of Section 2 (11) of the

Securities Act of 1933 and is further presumed not to be an "issuer"

within the meaning of the last sentence of that section, which would

make his selling broker an underwriter. There would also be a presumption that any other person who, in accordance with the terms

and conditions of the rule, offers or sells securities which he acquired

from the issuer or from an affiliate of such issuer in a nonpublic transaction is not an underwriter of the securities within the meaning of

Section 2 (11).

Under the proposed rule, the person making the offering must

have owned the securities at least 18 months; however, the estate of

a deceased owner of securities, if not affiliated with the issuer, need

not conform to any holding period.

o Public Law 91-410.

10 See 35th Annual Report, pp. 18-22. See also 34th Annual Report, pp.

12-13.

11 Securities Act Release No. 5087 (September 22, 1970).
10 SECURITIES AND EXCHANGE COMMISSION

The proposed rule also provides that there must be publicly available current financial and other information concerning the issuer.

There is a presumption under the proposed rule that the required information is available with respect to an issuer which is required to

and does file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. With respect to other issuers, the seller

of the securities and the brokers involved in the transaction would

have the obligation to determine whether adequate current information is publicly available. Factors that would have to be considered

in making such determination are whether a reasonably current balance sheet and a profit and loss statement and current material information about the issuer's business and management have been

published or furnished to security holders.

The proposed rule further provides that, after the requisite holding period, the securities may be sold only in brokers' transactions

and only in limited quantities in any 12-month period. The quantity

limitations are related to the amount of the class of securities outstanding or, if the security is traded on a securities exchange, to recent trading volume. Sales by members of a person's family and

other associates would be considered sales by that person for purposes of determining the quantity he may sell during the relevant

period.

Should proposed Rule 144 be adopted, the staff of the Commission

will not thereafter issue "no action" letters with respect to matters

covered by the provisions of the rule. The burden will be on the sellers of securities to ascertain that an exemption is available.

The Commission also revised certain of the registration and reporting forms under the Securities Exchange Act, including Form

10, the general form for the registration of securities of commercial

and industrial companies pursuant to Section 12 of the Act.12 To a

large extent the revision of that form consists of amplification of the

instructions to indicate more precisely the information required to

be given. In addition, a new item has been added to the form calling

for a summary of operations for the past 5 years, similar to the

summary required in registration statements under the Securities

Act of 1933. The item relating to the registrant's business calls for

disclosure of certain information as to backlog of orders, if applicable and material to an understanding of the business, and for the estimated dollar amount spent during each of the last 2 fiscal years on

material research activities.

The disclosure requirements relating to management, remuneration

and transactions with insiders were revised so as to bring them into

12 Securities Exchange Act Release No. 8996 (October 14, 1970).
THIRTY-SIXTH ANNUAL REPORT 11

accord with the corresponding requirements under the Commission's

proxy rules. In addition, a statement of source and application of

funds for each of the 3 fiscal years for which a profit and loss statement is required must be included with the financial statements. Although the draft of the proposed form as published for comment

would have required certain additional information in regard to operations of companies in extractive industries, the Commission determined not to adopt these revisions at this time.

Form lo-K, the annual report for companies which are required

to file reports pursuant to Sections 13(a) or 15(d) of the Securities

Exchange Act, has also been revised." The purpose of the revisions

is to provide on an annual basis information which, together with that

contained in the proxy or information statement sent to security

holders, will provide a reasonably complete and up-to-date statement

of the business and operations of the registrant.

Primarily, the revised form provides for more detailed disclosure

by companies engaged in more than one line of business; 14 requires

a summary of operations for the past 5 years similar to that required under revised Form 10; and calls for a description of the

properties of the registrant and its subsidiaries. The items relating

to management, remuneration and transactions with insiders contained in Part II of the form have been revised to bring them into

accord with the corresponding requirements of the Commission's

proxy rules. The instructions as to financial statements have been revised to require comparative financial statements, including a source

and application of funds statement, for the last 2 fiscal years.

A new form for quarterly reports under the Securities Exchange

Act, Form lo-Q, was adopted to replace Form 9-K which has

been rescinded.w Reports on Form lo-Q are to be filed within 45

days after the end of each of the first three fiscal quarters of each

fiscal year by issuers which file annual reports on Form 10-K,

12-K or U5S.

The form calls for summarized financial information which is not

required to be certified. Profit and loss information in more detail

than was required by Form 9-K must also be furnished, including

data on earnings per share. In addition, information is required in

regard to the registrant's capitalization and stockholders' equity. Reports on Form lo-Q are not deemed to be "filed" for the purpose of

1S Securities Exchange Act Release No. 9000 (October 21, 1970).

14 A similar requirement had previously been added to Form 10 and certain

registration forms under the Securities Act of 1933. See 35th Annual Report,

pp.22-24-

15 Securities Exchange Act Release No. 9004 (October 28,1970).
12 SECURITIES AND EXCHANGE COMMISSION

the liability provisions of Section 18 of the Act but are subject to all

other provisions of the Act.

The proposed Form 10-Q which was published for comment 16

would have required the reporting on a quarterly basis of certain

specified events similar to those required to be reported on Form

8-K. The form would also have required the prompt reporting of

any significant acquisitions of assets or businesses along with financial statements of businesses acquired. After further consideration,

the Commission determined not to rescind Form 8-K at this time

and to adopt as Form 10-Q only that portion of the proposed form

which relates to the quarterly reporting of summarized financial information.

A new Form 7-Q, to replace Form 7-K which has been rescinded,

was adopted for quarterly reports of certain real estate companies

under the Securities Exchange Act.17 It provides for the furnishing

of the same type of financial information as Form 10-Q.

The Commission also adopted certain amendments to Form S-7

under the Securities Act of 1933.18 This is a short form which may

be used for registration of securities to be offered to the public for

cash by companies having established records of earnings and stability of management and business. The amendments are primarily designed to broaden the availability of Form 8-7 by relaxing the

qualifying conditions which have been placed upon its use.

Heretofore, in order to use the form, a registrant, among other

things, must have been subject to and complied with the requirements

of Sections 13 and 14 of the Securities Exchange Act for a period of

at least 5 fiscal years. This period has been reduced to 3 fiscal years.

Further, the precondition that the registrant must have been engaged in a business of substantially the same character for its last 5

fiscal years has been deleted; additional information must now be

supplied as to material changes, if any, in the general character of

the business during the 5-year period.

The previous condition that a majority of the existing directors of

the registrant must have been directors during each of the last 3

fiscal years has been amended to require that a majority of the existing board must have been directors of the registrant or a predecessor

during each of the last 3 fiscal years.

In another area, it was previously required that the registrant and

its consolidated subsidiaries must have had sales or gross revenues of

at least $50 million for the last fiscal year and net income of at least

16 Securities Exchange Act Release No. 8683 (September 15, 1969).

17 Securities Exchange Act Release No. 9005 (November 2,1970).

18 Securities Act Release No. 5100 (November 12, 1970).
THIRTY-SIXTH AJ\TNUALREPORT 13

$2.5 million for such fiscal year and $1 million for each of the preceding 4 fiscal years. The revised form deletes the requirement with

respect to sales or gross revenues and provides that the registrant

need only have had a net income after taxes, but before extraordinary items, of at least $500,000 for each of the last 5 fiscal years.

Finally, the form was amended to require a source and application

of funds statement for each fiscal year or other period for which an

income statement is required.

Legislative Reform of the Investment Company Act

Efforts to obtain much needed reform of the Investment Company

Act of 1940 have continued in the Second Session of the 91st Congress. As described in previous Annual Reports, legislation which

would have implemented proposals of the Commission was originally introduced in May 1967.19 The principal Commission proposals

involved the reduction of sales loads imposed on the acquisition of

fund shares, the elimination of the so-called "front-end load," and

establishment of a means to test the fairness of management fees.

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

Commission's opinion required legislative action.

As noted in the Commission's last Annual Report, on June 10,

1969, Chairman Moss of the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce introduced H.R. 11995 (91st Cong., 1st Sess.), This bill, which is identical

to the bill that had passed the Senate in May 1969, S. 2224 (91st

Cong., 1st Sess.), embodied many of the Commission's original legislative recommendations. In November and December, 1969, the above

Subcommittee held hearings on H'R. 11995, as well as on HiR. 14737

introduced by Congressman W. S. Stuckey on November 6, 1969,

and a similar bill, R.R. 12867, previously introduced by Congressman Stuckey. On April 29, 1970, Congressman Harley O. Staggers

introduced another bill, H.R. 17333 (91st Cong., 2nd Sess.}, which

was similar to the Stuckey bills, and on that date the Subcommittee

reported that bill, rather than H.R. 11995, to the full Committee on

Interstate and Foreign Commerce. After further consideration, the

full Committee approved several amendments to conform H.R. 17333

more closely to S. 2224 and favorably reported it to the House. On

September 23, 1970, the House passed H.R. 17333 by voice vote with

a minor amendment. The House and Senate then appointed conferees to meet and attempt to agree on a version acceptable to both

19 See 35th Annual Report, PP. 12-18. See also 34th Annual Report, PP. 4-6,

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

Houses. At the writing of this Report in October 1970, the conferees

had not yet met and the legislation was still pending. * In proposing mutual fund legislation in 1967, the Commission recognized that most of the specific abuses aimed at in the Investment

Company Act had been substantially eliminated. However, the dramatic growth of the industry and accompanying changes have created new situations which were not anticipated in 1940. While the

industry accepted or even welcomed many of the changes proposed

by the Commission, it took exception to the principal recommendations of the Commission, and as a result these have been modified in

the pending legislation. And, while many of the provisions of H.R.

17333 are the same as those found in S. 2224, there are significant

differences, described below.

1. Investment Advisory Fees

The Commission had recommended that the Act be amended to

provide expressly that compensation received by investment advisers

and other persons affiliated with investment companies shall be "reasonable" and that there be opportunity for judicial enforcement of

this standard. This recommendation reflected the Commission's view

that a requirement that compensation not be unreasonable was inherent in the fiduciary relationship existing between an investment company and its manager or adviser. The Commission also considered

that the Federal courts would provide an appropriate forum in

which the reasonableness of compensation could be tested.

S. 3724 (90th Cong., 2nd Sess.), a bill which had passed the Senate in July 1968, substantially adopted these recommendations, with

certain changes designed to meet some of the industry's objections.

However, the industry, while not objecting to the concept that compensation should be reasonable, continued to oppose the form of the

amendments. Following the April 1969 Senate hearings, the Commission and industry representatives resumed their discussions of

this matter and in May 1969 agreed on and jointly submitted to the

Senate Committee a substitute provision which specified that an investment adviser has a fiduciary duty with respect to such compensation. This was in accord with the Commission's recommendation

that the presently applicable standards of "waste" and "gross abuse

of trust" as applied to management fees be replaced with a more

meaningful standard. The Senate Committee and the Senate adopted

Amended versions of S. 2224 were passed by both the Senate and the House

and then went to a Conference Committee. The Committee's report (H. Rept. No.

91-1631) of November 25,1970 was accepted in both houses and the enrolled bill

was signed by the President on December 14, 1970 90S Public Law 91-547.

•
THIRTY-SIXTH ANNUAL REPORT 15

in S. 2224 the management fee proposal in substantially the language proposed by the Commission and the industry representatives.

H.R. 17333, like S. 2224, contains, in Section 20 of the bill, a provision declaring that the investment adviser of a registered investment

company has a fiduciary duty with respect to the receipt of compensation and authorizing the Commission, or a security holder of the

investment company, to bring an action in court for breach of this

fiduciary duty. The provisions in both bills on this subject are much

the same, although H.R. 17333 requires a security holder to be "acting in good faith and with justifiable cause" while S. 2224 contains

no such restriction.

2. Performance Fees

Performance-based fees are a specialized type of advisory compensation which have been used increasingly in recent years. TIns type

of compensation arrangement generally relates the adviser's compensation either to the realized or unrealized appreciation of the client's

portfolio or to the performance of a specified securities index. The

proposed legislation, in addition to subjecting such arrangements to

the fiduciary standards of Section 36(b), includes provisions specifically directed to performance-based fees. The Commission originally

proposed that the prohibition of performance-based fees now applicable to advisers of private clients be extended to advisers of registered investment companies. However, after discussion with industry

representatives, a modified provision, permitting a limited type of

performance fee, was incorporated into S. 2224 and H.R. 17333.

Under that provision, contracts which base any part of the adviser's

fee on a specified percentage of the company's capital appreciation

would be prohibited. On the other hand, fees which increase and decrease proportionately on the basis of investment performance measured against an appropriate index of securities prices or other appropriate measure of performance would be permissible, The "base"

or "standard" fee would be permitted only at the point that the

fund's performance equals that of the index.

However, H.R. 17333 would make this prohibition of performance

fees inapplicable to contracts made by registered investment advisers

with certain types of "off-shore" funds.

3. The Front-End Load on Contractual Plans

The Commission had recommended the abolition of the so-called

"front-end load" on periodic payment plan certificates (i.e., certificates issued in connection with contractual plans for the accumulation of fund shares on an installment basis) under which as much as

50 percent of the payments made by the investor during the first
16 SECURITIES AND EXCHANGE COMMISSION

year may be deducted for sales charges. S. 2224 and H.R. 17333permit a front-end load under two alternative methods. Under the first

alternative provided in S. 2224, periodic payment plan certificates

could be sold with the presently authorized 50 percent front-end

load, provided that, if the investor elected for any reason to redeem

his certificate for cash during the first 3 years after its issuance, he

would be entitled to receive a refund of the net asset value of his

certificate plus the difference between the total sales charges paid by

him and 15percent of such payments. H.R. 17333,however, would permit a refund only within the first year and then only of the excesssales

charge over 20 percent. Under both bills, the Commission would be

authorized to adopt rules and regulations specifying the form of refund notice and setting forth reserve requirements so that sellers

could meet their obligations.

The other alternative, provided by both bills, would permit sellers

of periodic payment plan certificates to charge a sales load which

does not exceed 20 percent of any payment nor average more than 16

percent over the first four years.

4. Levels of Sales Charges

The Commission had originally proposed that a 5 percent ceiling

be placed on the charge for mutual fund sales subject to authority in

the Commission to approve appropriate higher ceilings. S. 2224 and

H.R. 17333would give the National Association of Securities Dealers ("NASD") authority to make rules to prevent excessive sales

charges, subject to Commission oversight.

5. Bank and Savings and Loan Administered Investment Companies

S. 2224 expressly permits the operation by banks of so-called

"commingled managing agency accounts," functionally identical to

mutual funds. That bill, as well as H.R. 17333,permits the commingled agency account to have a majority of its directors affiliated

with the bank or the savings and loan association. Both bills also

impose specific restrictions on the operation of such acconnts including a prohibition on the charging of any sales load. However, H.R.

17333 would not expressly permit the operation of such investment

companies, but would make their operation subject to the provisions

and restrictions of other state and Federal law. Thus, under H.R.

17333 the right of banks and savings and loan associations to operate registered investment companies would be determined either by

subsequent legislation or by interpretation of existing legislation,

primarily the national banking laws. The question of whether banks

may operate such funds consistent with the national banking laws is

now pending in the United States Supreme Court in Investment

Oompany Institute v, Oamp (No. 61, October Term 1970).
THIRTY-SIXTH ANNUAL REPORT 17

6. Oil and Gas Drilling Funds

S. 2224 would amend Section 3(c) (11) of the Act to terminate the

exclusion from the Act of those oil and gas funds which issue redeemable securities or sell their securities on the installment plan.

Oil and gas funds in which investors make only a single payment

and do not receive a redeemable security would still be excluded

from the definition of investment company.

The new provision would not become effective until 18 months

after passage. The discussion on the floor of the Senate regarding S.

2224 makes it clear that it is intended that the Commission and oil

and gas industry representatives confer during that interval to work

out an equitable arrangement for regulation which would protect

investors and not impose an unreasonable burden on the industry.

Subsequent to the passage of S. 2224, the Commission staff conferred with representatives of the oil and gas industry. During hearings before the House Subcommittee in December 1969, the Commission confirmed its original view that there is a need for regulation to

some degree of the type provided in the Investment Company Act

for this industry but that such regulation would appear to present

certain real problems for the industry, primarily because of the difficulty of accommodating the industry structure contemplated by the

Investment Company Act with the structure in fact adopted by this

industry in order to provide favorable treatment for its investors

under the Internal Revenue Code.

Therefore, the Commission stated to the House Subcommittee that

if the Committee wished to delete the oil and gas amendment from

the bill, the Commission would not object. The Commission stated

that it made this suggestion on the assumption that representatives

of the oil and gas industry would cooperate with the Commission in

drafting a reasonable regulatory statute consistent with the protection of investors for submission to Congress within 18 months after

passage of the mutual fund legislation. Subsequently, in reporting

H.R. 17333 to the House of Representatives, the Committee on Interstate and Foreign Commerce deleted the amendment, explaining

that it had done so because of the assurance of the Commission and

industry representatives that they will work diligently and expeditiously toward the goal of recommending an effective scheme for

providing investor protection in this area and that those recommendations will be available to the Congress before 18 months after the

enactment of mutual fund legislation. In the event this goal is not

achieved, the Commission will submit appropriate legislation in the

next Congress to provide necessary investor protection in this area.

409-865--71----3
18 SECURITIES AND EXCHANGE COMMISSION

7. Fund Holding Companies

The Commission originally recommended and has always adhered

to the view that fund holding companies should be prohibited."

Nevertheless, S. 2224 and H.ll. 17333 permit the operation of fund

holding companies subject to specified restrictions, of which the most

significant are the requirement that not more than 3 percent of any

stock of any individual investment company may be owned by such

a holding company and that only one percent of the securities of

any portfolio fund may be redeemed in any period of less than 30

days. S. 2224 provides that the sales load of the holding company

cannot exceed 1% percent, but H.ll. 17333 diverges from this requirement by permitting any sales load which, when added to the

sales load for acquisition of stock in any portfolio fund, is not excessive under Section 22(b) of the Act and applicable NASD or Commission rules.

8. The Front-End Load on Face-Amount Certificates

On August 27, 1969, the Commission submitted to the Senate

Committee on Banking and Currency a "Report on Face-Amount

Certificate Companies," the result of an in-depth study conducted at

the request of the Committee." In this Report, the Commission reasserted the position taken in its 1966report that the imposition of the

front-end load on installment face-amount certificates (i.e., certificates which have a fixed ultimate value and a reduced rate of return

if redeemed prior to maturity) is contrary to the public interest and

the interest of investors. It recommended that such practice, as well

as the practice of imposing equivalent surrender charges, be discontinued. A bill, H.ll. 13754,which would implement the Commission's

recommendation, was introduced in the House of Representatives on

September 11, 1969.

While H.ll. 13754 was not reported to the House of Representatives by the Committee on Interstate and Foreign Commerce, H.R.

17333 would provide for a type of spread load for sales charges on

face-amount certificates. It would require that the front-end load be

spread over the first 5 years of the plan so that, in effect, a 20 percent load would be taken in each of the first 3 years, a 10 percent

load in the fourth year, a 7 percent load in the fifth year, and no

more than a 4 percent load in all subsequent years. This change, for

20 SEC, Public Policy Implications Of Investment Company Growth (1966),

pp. 311-324.

21 A summary of the salient conclusions of this Report may be found in the

35th Annual Report, pp. 16-17.
TEURTY-SIXTH ~AL REPORT 19

the most part, reflects existing industry practice. Over 95 percent of

face-amount certificate sales are now being made within this proposed limitation.

Other Pending Legislation

I. Increase in Exemption for Small Issues of Securities

S. 336, which would amend Section 3(b) of the Securities Act of

1933 to increase from $300,000 to $500,000 the maximum aggregate

amount of securities which may be exempted from registration

under the Act pursuant to rules and regulations of the Commission

(the most widely used of which is Regulation A), was introduced in

the Senate on January 16, 1969.

When the Act was passed in 1933, the limitation under Section

3(b) was set at $100,000.A 1945 amendment increased the amount to

$300,000. Costs have risen throughout the economy since the last

amendment with the result that the $300,000 of 1945 has substantially less purchasing power today. In many cases it is an inadequate

amount to finance properly either a small established business seeking to modernize or expand, or a newly organized venture requiring

a substantial amount of seed capital. Since the original purpose of

Section 3(b) was to aid small businesses in raising capital, the Commission believes that a further increase in the exemption is appropriate at this time and it has accordingly supported the bill.

S. 336 was passed by the Senate on August 13, 1970, and was

transmitted to the House where it is pending before the Committee

on Interstate and Foreign Commerce. Hearings on the bill were held

before the House Committee on October 12, 1970.*

2. Amendment to Take-Over Bid Law

The take-over bid law (commonly referred to as the Williams

Bill), which was enacted on July 29, 1968, was designed to provide

for appropriate disclosure in connection with the solicitation of

tender offers for securities and other large securities acquisitions and

to give the Commission additional powers to prevent improper practices in those contexts. The experience gained in administering this

law has demonstrated certain areas in which the Commission believes its effectiveness could be improved. At the request of the Securities Subcommittee of the Senate Banking and Currency Committee, the Commission prepared a draft bill covering these areas,

and Senator Harrison A. Williams, Jr., the Chairman of that Sub-

*8. 336 was passed by the House on December 7, 1970. The enrolled bill was

signed by the President on December 19,1970 and is now Public Law 91-565.
20 SECURITIES AND EXCHANGE COMMISSION

committee and the sponsor of the original law, introduced this draft

bill as S. 3431 on February 10, 1970.

S. 3431 would revise the take-over law in five respects. The most

important of these would be to decrease from 10 percent to 5 percent

the amount of stock ownership which would bring the law's provisions into play. The principal reason for this proposed revision is

that there is evidence that disclosure has frequently been avoided by

limiting acquisitions of a company's securities to around nine percent. The other revisions would extend the coverage of the law to insurance companies; would require disclosure where the take-over is

effected by means of an exchange of securities and not only, as

under present law, where it is effected by cash purchase of shares;

and would generally broaden the Commission's rule-making power

in the take-over area.

S. 3431 was passed by the Senate on August 18, 1970, and was

transmitted to the House of Representatives where hearings were

held on October 12, 1970, before the House Committee on Interstate

and Foreign Commerce. Chairman Budge testified in support of the

bill on the Senate side on March 25, 1970, and on the House side on

October 12, 1970.*

3. Transfer of Public Utility Holding Company Act Functions to Federal

Power Commission

On December 2, 1969, the Commission transmitted to the Congress

a draft bill which would transfer to the Federal Power Commission

most of the jurisdiction of the Securities and Exchange Commission

under the Public Utility Holding Company Act of 1935. Under this

bill the SEC would retain only the types of responsibilities with respect to such holding companies which it now exercises as to publicly owned corporations generally, such as those relating to proxy

solicitations, periodic reports, and insider trading. Jurisdiction over

such companies would also be retained under the Securities Act of

1933and the Trust Indenture Act of 1939.

Congressman Staggers introduced the bill in the House of Representatives on January 22, 1970, as H.R. 15516,and it was referred to

the Committee on Interstate and Foreign Commerce where it is still

pending. The Commission favors the bill on the ground that the

principal mission entrusted to it of eliminating or reorganizing the

*S. 3431, with added amendments, was passed by the House on December 7,

1!)70.The final version of the bill was passed by the Senate and the House, respeettvely, on December 9 and 10, 1970. The enrolled bill was signed by tbe President

on December 22,1970 and is now Public Law 91-567.
THIRTY-SIXTH ANNUAL REPORT 21

complex, unwieldy, and unsound holding company strnctures has

largely been accomplished and the present problems of the industry

relate primarily to technological developments as to which the Federal Power Commission has more familiarity.*

*As this report goes to press, H.R. 15516 is still in Committee on the House

side and no corresponding bill has ever been introduced in the Senate.
PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE

ISSUERS OF SECURITIES

One basic purpose of the Federal securities laws administered by

the Commission, in particular the Securities Act of 1933 and the Securities Exchange Act of 1934, is to provide disclosure of financial

and other information about publicly held companies and those companies seeking to raise capital through the public offering of their

securities, so as to enable public investors to evaluate the securities

of these companies on an informed and realistic basis. To this end,

the Securities Act, generally speaking, requires a company proposing to offer its securities to the public to file a registration statement

with the Commission disclosing prescribed categories of financial

and other information and further requires that in connection with

the sale of the securities investors be furnished a prospectus containing the most significant information set forth in the registration

statement. The Securities Exchange Act, which deals in large part

with securities already outstanding, requires the registration of securities listed on a national securities exchange as well as of over-thecounter securities in which there is a substantial public interest. It

also requires the issuers of such securities to file annual and other

periodic reports which are designed to keep the information in the

Exchange Act registration statement current. That Act also requires

disclosure of material information to holders of registered securities

in connection with the solicitation of proxies for the election of

directors or the approval of corporate action at a stockholders' meeting, and in connection with attempts to acquire control of a company through a tender offer or other planned stock acquisition, and

it requires "insiders" of companies whose equity securities are registered to report their holdings of and transactions in all equity securities of the company with which they are affiliated.

A. DISCLOSURE IN CONNECTION WITH PUBUC OFFERINGS

In order to provide disclosure with respect to securities to be offered for public sale, either by an issuing company or a person in a

control relationship to such company, the Securities Act requires

that, unless an exemption is available for the securities or the partie-
THIRTY-SIXTH ANNUAL REPORT 23

ular offering, (1) a registration statement containing certain required financial and other information be filed with the Commission,

and (2) a prospectus which is a part of the registration statement

and contains the more significant data set forth in that statement be

furnished to investors so as to enable them to evaluate the securities

and make an informed investment decision.

The registration statement is available for public inspection as

soon as it is filed. Although the securities may be offered for sale

upon filing of the statement under prescribed limitations, actual

sales may not be made until the statement has become effective. The

Commission has no authority to pass on the merits of the securities

to be offered or the fairness of the terms of distribution. In fact, the

Act makes it unlawful to represent to investors that the Commission

has approved or otherwise passed on the merits of registered securities.

Type of Information Included in Registration Statement

Generally speaking, a registration statement relating to securities

issued by a corporation or other private issuer must contain the information specified in Schedule A of the Act, while a statement relating to securities issued by a foreign government must include the

information specified in Schedule B. The Act empowers the Commission to classify issues, issuers and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or diminish, the particular items of information required to be disclosed

as the Commission deems appropriate in the public interest or for

the protection of investors. To facilitate the registration of securities

by different types of issuing companies, the Commission has prepared special registration forms which vary in their disclosure requirements so as to provide maximum disclosure of the essential

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

minimizing the burden and expense of compliance with the law.

In general, the registration statement of an issuer other than a

foreign government must disclose such matters as the names of persons who participate in the management or control of the issuer's

business; the security holdings and remuneration of such persons;

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

directors, officers and principal stockholders in material transactions

with the issuer; pending legal proceedings; and the purposes to

which the proceeds of the offering are to be applied, and must include financial statements certified by an independent accountnnt.
24 SECURITIES AND EXCHANGE COMMISSION

The registration statement of a foreign government must contain information concerning the purposes for which the proceeds of the offering are to be used, the natural and industrial resources of the issuer, its revenues, obligations and expenses, the underwriting and

distribution of the securities being registered, and other material

matters, but need not contain certified financial statements.

Guides for Preparation and Filing of Registration Statements

During the fiscal year, the Commission continued its publication

of guides for the preparation and filing of registration statements

under the Securities Act. These guides represent policies and practices followed by the Commission's Division of Corporation Finance

in the administration of the registration requirements of the Act.

They do not, however, purport to furnish complete criteria for the

preparation of registration statements.

One guide adopted during the year, relating to the misleading

character of certain registrants' names, was discussed in the 35th

Annual Report.' In January 1970, a guide concerning the preparation of prospectuses relating to interests in oil and gas programs

was published." The guide indicated the general content of disclosures

to be made in such prospectuses, and the sequence in which they

should appear. It is designed to obtain, to the extent feasible, uniformity in both the sequence and general content of disclosure, and

should sene to assist issuers in the preparation of registration statements on Form S-l as well as offering circulars under Regulation

A involving oil and gas drilling programs and to facilitate the understanding and analysis of such programs by investors.

In March 1970, a proposed guide relating to the interests of counsel and experts in the registrant was published." The release stated

that it had come to the attention of the Division that persons who

are named in the prospectus as counsel for the issuer or underwriter

with respect to a registration statement, as well as counsel who pass

upon the legality of the securities being registered, are in some cases

owners of securities of the registrant or are to receive such securities

or rights to subscribe thereto, or are associated with owners of such

securities or rights. The proposed guide would point out that in such

cases the interest of these persons and their associates in the registrant and the offering should be disclosed. It would also draw atten1Page 29.

2 Securities Act Release No. 5036 (January 19, 1970).

3 Securities Act Re!p(\se No. 5051 (March 16, 1970). Subsequent to the end of

tile fiscal year, the proposed guide was adopted substantially as proposed. Securities Act Rl'leasp No. 5094 (October 21, 1970).
TIDRTY-SIXTH ANNUAL REPORT 25

tion to the fact that counsel's interest in the issuer or participation

in its affairs may constitute him a promoter, finder, or executive officer, in which case specific disclosures with respect to such relationship are required by the registration forms. The guide would also

point out that similar considerations may apply to persons named as

experts in the prospectus.

Amendment of Rules Relating to Industrial Revenue Bonds

Rule 131 under the Securities Act and Rule 3b-5 under the Securities Exchange Act of 1934 relating to "industrial revenue bonds"

were amended during the fiscal year.' These rules are designed to define the circumstances under which bonds issued by a municipality

or other governmental unit are deemed to involve the issuance of a

separate security by an industrial or commercial enterprise under a

lease, sale or loan arrangement. The purpose of the amendment was

to clarify exclusionary paragraphs describing certain situations

where no such separate security is deemed to be involved.

Questions had been raised whether such a security was involved

where bonds were issued by municipal and other governmental units

to finance airport improvements for leasing to airlines serving their

areas. In view of the concern expressed that the exclusionary paragraphs in their original form might be construed as being applicable

only if a particular airport facility, such as a hangar, were to be operated and controlled by or on behalf of a governmental unit, the

Commission amended these paragraphs to make it clear that it is not

their purpose to require that each separate facility constituting part

of a public project be operated and controlled by a governmental

unit if the project as a whole is owned by and under the general

control of a governmental unit or instrumentality thereof.

The amendment also made it explicit that the rules do not apply

to any obligation which is payable not only out of the payments

from the lease or other arrangements with an industrial or commercial enterprise but also from other substantial sources of revenue of

the governmental unit.

Amendments of Rules Relating to Mechanics of Filing

The Commission adopted certain amendments to Rules 402, 424,

470 and 472 under the Securities Act, which relate to the mechanics

4 Securities Act Release No. 5055 (March 31, 1970). For a discussion of these

rules as originally adopted, see 34th Annual Report, pp. 21-22. Under Public Law

91-567 (December 22, 1970), certain industrial development bonds are exempt

from the registration provisions of 'the Securities Act and Securitles Exchange

Act and the provisions of the Trust Indenture Act of 1939.
26 SECURITIES AND EXCHANGE COMMISSION

of filing registration statements and amendments to such statements,

so as to facilitate compliance with the rules and expedite the filing

and examination of such documents." The amendments related principally to the number of copies which must be filed.

Amendment of Form 8-7

Section 10(b) of the Securities Act authorizes the Commission to

provide for the use of a summary prospectus which may be readily

transmitted through the mail or published in certain periodicals. It

is intended to enable an issuer or underwriter to secure indications

of interest prior to furnishing the complete prospectus. However, a

copy of the complete prospectus must be furnished upon consummation of any sale of the securities. Rule 434A under the Act permits

the use of summary prospectuses if the form used for registration of

the securities to be offered provides for the use of such a prospectus

and if the registrant files reports with the Commission pursuant to

Section 13 or 15(d) of the Securities Exchange Act of 1934 or meets

certain other conditions specified in the rule. Form S-7, which had

not previously contained instructions permitting the use of summary

prospectuses, was amended to add such instructions. 6

Whisky Warehouse Receipts as Securities

Faced with an increase in the public promotion and distribution

of whisky warehouse receipts, the Commission during the year called

attention to the fact that the promotion and sale of such receipts

may involve an offering of a security in the form of an investment

contract within the meaning of the Securities Act and the Securities

Exchange Act and that any public offering of such securities must

comply with the disclosure and antifraud provisions of those acts,"

In most cases, the whisky warehouse receipts have been sold in

order to finance risks involved in the final production of a blended

whisky. A receipt ordinarily covers casks of unblended whisky being

aged in warehouses, and the sales arrangement generally contemplates that the whisky will continue to be stored until it is aged and

will eventually be sold for the purchaser to blenders. The Commission pointed out that a purchaser was not being offered or sold such

receipts with a view to acquiring and taking possession of the

whisky, but was making an investment under an arrangement which

5 Securities Act Release No. 5058 (April 7, 1970).

6 Securities Act Release No. 5046 (February 12, 1970). For a discussion of

recent revisions of Form S-7 expanding the categories of issuers which may

use that form, see pp. 12-13, 8upra.

7 Securities Act Release No. 5018 (November 4,1969).
THIRTY-SIXTH ANNUAL REPORT 27

contemplates that others will perform services to increase the value

of the whisky and eventually sell the whisky under circumstances

expected to result in a profit to him. In this connection, it referred

to the Supreme Court's decision in S.E.O. v, lV. J. Howey 00., 328

U.S. 293, 301 (1946) that the test of whether or not a "security" is

being offered "is whether the scheme involves an investment of

money in a common enterprise with profits to come solely from the

efforts of others. If that test be satisfied, it is immaterial whether

the enterprise is speculative or non-speculative, or whether there is a

sale of property with or without intrinsic value. The statutory policy

of affording broad protection to investors is not to be thwarted by

unrealistic and irrelevant formulae."

Requirement of Deposit on Purchase Price of Stock Prior to Effective Date of

Registration

During the fiscal year the Commission issued a release expressing

its concern that Section 5(a) of the Securities Act was being violated in connection with some public offerings in which portions of

the issue were reserved for employees or other designees of the registrant and deposits were solicited from them in advance of the effective date of the registration statement,"

The Commission reiterated that the time between the filing of a

registration statement and its effective date is a waiting period designed to enable dealers and investors to become familiar with the

securities issue and arrive at "an unhurried decision" as to its merits. The purchase price may not be paid or received during that period and no contracts of sale can be made. These requirements, the

Commission pointed out, apply to the offer and sale of securities reserved for employees and other designees of management as well as

to the balance of the registered offering.

Staff Examination of Registration Statements

Registration statements filed with the Commission are examined

by its staff for compliance with the standards of adequate and accurate disclosure. This examination is primarily the responsibility of

the Division of Corporation F'inance," Expedited review procedures

adopted in November 1968 to cope with the tremendous volume of

registration statements filed were described on pages 11-12 of the

S Securities Act Release No. 5071 (June 29,1970).

9 Statements filed by investment companies registered under the Investment

Company Act of 1940 are examined by the Division of Corporate Regulation.

See Part V for further discussion of the processing of investment company

registration statements.
28 SECURITIES AND EXCHANGE COMMISSION

34th .Annual Report. Generally speaking, if it appears that a statement fails to conform, in material respects, with the applicable requirements, the issuing company is notified by a letter of comment

and is afforded an opportunity to file correcting or clarifying

amendments. The Commission also has the power, after notice and

opportunity for hearing, to issue a "stop-order" suspending the

effectiveness of a registration statement if it finds that material representations are misleading, inaccurate or incomplete. In certain instances, such as where the deficiencies in a registration statement appear to stem from careless disregard of applicable requirements or

from a deliberate attempt to conceal or mislead, a letter of comment

is not sent and the Commission either conducts an investigation to

determine whether "stop-order" proceedings should be instituted or

immediately institutes such proceedings. The exercise of the "stoporder" power during fiscal year 1970is discussed on pages 34-36.

Time Required To Complete Registration

The Commission's staff endeavors to complete its examination of

registration statements in as short a time as possible. The Act provides that a registration statement shall become effective on the 20th

day after it is filed (or on the 20th day after the filing of any

amendment thereto). Since most registration statements require one

or more amendments, they usually do not become effective until some

time after the original 20-day period. The period between filing and

effective date is intended to afford investors an opportunity to become familiar with the proposed offering through the dissemination

of the preliminary form of prospectus. The Commission can accelerate the effective date so as to shorten the 20-day waiting period, taking into account, among other things, the adequacy of the information respecting the issuer theretofore available to the public and the

facility with which the facts about the offering can be understood.

During the fiscal year, 3,393 registration statements became effective. Of these, 272 were amendments filed by investment companies

pursuant to Section 24(e) of the Investment Company Act of 1940,

which provides for the registration of additional securities through

amendment to an effective registration statement rather than the

filing of a new registration statement. With respect to the remaining

3,121 statements, as a result of the continuing high number of filings

and the resulting backlog the median time from the date of original
TEURTY-SIXTH ~AL REPORT 29

filing to effective date rose to 70 calendar days, from 65 days for

3,316 registration statements in fiscal year 1969 and 44 days for

2,131 registration statements in fiscal year 1968.

The following table shows by months during the 1970 fiscal year

the number of registration statements which became effective, and

the number of calendar days elapsed during the registration process

for the median registration statement.

Time in Registration Under the Securities Act of 1933 by Months During the Fiscal

Year Ended June 30, 1970

NUMBER OF CALENDAR DAYS

Number of Totalnum- Numbero! Totalnumregistra- berof days registra- ber o!days Months tlon state- In registra- Months tlon state- in registraments tlon ments tlon

effective' effectlve'

July ______________________ 1969 197o-Contll1ued

273 63 February ________________ 176 83 August. __________________ 228 65 March ____________________ 236 76 September. _______________ 280 83 ApnL ____________________ 308 39 October __________________ 342 95 May______________________ m 36 November _______________ 261 76 June ______________________ 250 40 December _. ______________ 319 70

FIScal 1970for median 1970 effectlve registratron January __________________ 221 110 statement ______________ 3,121 70

This figure excludes 272amendments filed by Investment companies pursuant to Sectton 24(e) ofthe In- vestment Company Act of 1940.

Statistics Regarding Registration Statements Filed

During the 1970 fiscal year, 4,314 registration statements were

filed for offerings of securities aggregating $66.9 billion, as compared with 4,706 registration statements filed during the 1969 fiscal

year for offerings amounting to $86.8 billion. This represents a decrease of 8.3 percent in the number of statements filed and 23.0 percent in the dollar amount involved.

Of the 4,314 registration statements filed in the 1970 fiscal year,

2,071, or 48 percent, were filed by companies that had not previously

filed registration statements under the Securities Act of 1933. Comparable figures for the 1969 and 1968 fiscal years were 2,350, or 50

percent, and 893, or 34 percent, respectively.

A cumulative total of 40,881 registration statements has been filed

under the Act by 17,819 different issuers covering proposed offerings

of securities aggregating over $552.8 billion from the effective date

of the Securities Act of 1933to Jnne 30, 1970.

•

•
30 SECURITIES AND EXCHANGE COMMISSION 

Particulars regarding the disposition of all registration statements 

filed under the Act to June 30, 1970, are summarized in the following table : 

Number and Disposilion of Registration Statements Filed 

Rsglstratlon 

_ 

statements: 

................................................ -= n(aoasitinn: ~-~~ 

EfIeotive ((net).............................................. 
 Under stop orrefusal order ................................. 
 Withdrawn................................................. 
 Pending st June80,1860.................................... 1,697


Pen- at June 30.1570 	 2. Me 

... Aggregate dollar amount: AE filed in bU0lls)......................................... $486. 0 


AS cmbmos,..~.................................. 


The reasons given by registrants for requesting withdrawal of the 

650 registration statements that were withdrawi during the 1970 

fiscal year are shown in the following table: 

Reason far registrant's withdraws1 request 

1. Withdrawal requsted after receipt of tlle std's oommentF................ 60 8.6 
 2. Cung~lnfinanelng plans ................................................ 276 42.6
 3. Changein markst oondttiom............................................. 258 89.6 
 4. RBalstrant usn unable to negotiate aeceptabls agreement wlth underWlter................................................................... 21 4,Z
 5. Wiu BLe on proper form................................................... 3 .4 
 6. Wfflfile new registration statsmt ....................................... 28 4.4 


7. 	Exemptionaavailable..................................................... 2 .3 


Total................................................................. 6M 100.0 

TffiRTY-SIXTH ANNUAL REPORT 31

Statistics Regarding Securities Registered

During the fiscal year 1970, a total of 3,389 registrations of securities in the amount of $59.1 billion became effective under the Securities Act.10 'Vhile the number of statements showed a moderate decline from the previous year, the dollar amount of registrations was

down 32 percent from the record 1969fiscal year. The chart on page

32 shows the number and dollar amounts of fully effective registrations from 1935to 1970.

The above figures cover all effective registrations including secondary distributions, securities registered for other than cash sale,

and issues reserved for conversion or for options. Of the dollar

amount of securities registered in 1970, 82 percent was for the account of the issuer for cash sale, 12 percent for the account of the issuer for other than cash sale, and 6 percent for the amount of

others.

The following table compares the volume of securities registered

for the account of the issuer and for the account of others for the

past three fiscal years.

(Millum$ ojdollaT3)

1970 1969 1968

For account of issuer for cash sale___________________________________48,198 52,039 37,269 For account of issuer, other than cash sale __________________________ 7,355 29,577 13,530 For account of other than ISSUer____________________________________ 3,563 4,841 3,137 TotaL ________________________________________________________ .59,116 86, 456 53,936

ThIS figure excludes lease obligations relating to mdustnal bonds of $21rmlhon which were registered

during the 1970 fiscal year . ThIS figure excludes lease obligations relating to industrial bonds of $354nnlhon winch wcre registered during the 1969 fiscal year.

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

referred to above and on pp. 28 and 30,see appendix table 2.

•

•

•
32 SECURITIES AND EXCHANGE COMMISSION

SECURITIES EFFECTIYEL Y REGISTERED WITH S.E.C.

Dollars Billions

90

1935-1970

1935 40 45 50 5S 60 6S 1970

(F.sca' Years)
--- 

--- 

THIRTY-SIXTH ANNVAL REPORT 33 

As the above table shows, the amount of securities offered for cash 

sale for the account of the issuer was $3.8 billion less than in the 

preceding fiscal year. Registration of securities for the account of 

the issuer for other than cash sale was sharply lower than the record 

amount of $29.6 billion for this category set in the previous ha1 

year. This decrease primarily reflects the substantial decline in the 

volume of swurities registered for purposes of exchange; only $2.0 

billion of securities were registered during fiscal year 1970 for exchange purposes, as compared to $17.8 billion during the prior year. 

Fkgistrations of secondary offerings totaled $3.6 billion, $1.2 billion 

less than in the preceding fiscal year. Appendix Table 1 shows the 

number of statements which became effective and total dollar 

amounts registered for each of the fiscal years 1935-1970, and contains a classification by type of security of issues to be offered for 

cilsh sale for account of issuers during those years. More detailed information for 1970 may be found in Table 2. 

Corporate issues intended for immediate cash sale totaled $26.0 

billion, an increase of $8.7 billion over the preceding year. New corporate debt aggregated a record $17.8 billion, as compared to $10.8 

billion registered in fiscal year 1969, and was $5.2 billion more thm 

in 1968, the previous record. Common stock accounted for $7.4 billion of the 1970 volume while preferred stock totaled $768 million. 

Most of the issues offered over an extended period were common 

stocb. These included investment company issues, stock to be issued 

under employee purchase plans and stock called for by warrants and 

options. , 

The following table shows the distribution of issues registered 

during the last 8 fisdal years for the account of issuers to be offered 

for cash sale : 

IS~BSdersd for immedlata sala: 

Bonds, notes md debenhlre.3 ..................................... 17.8% 10,818 12,6433
 Prsferredstook................................................... 768 615 9%
 commonsw&................................................... 7, asa 6.94s 2,8M 


Total......................................................... 26,976 17,182 16.861 


F~remgovernment.. .............................................. 405 7ll 1.167 


Total forimmedlsb aale...................................... 26 170 17 889 17.W 


Issues offered over an mended period.............................. a:128 34:~ 18.149 


Total for cash sale forsomuntollmuers.......................1 69,lSS I 62,039 1 3r,m 

34 SECURITIES AND EXCHANGE COMMISSION 

Registration of issues to be offered over an extended period 

amounted to $21.7 billion, down $12.3 billion from the record 

amount in fiscal year 1969. These issues are classified below: 

Imadment Company issuas: 

Mao~gemento en end ......................................... 11,080 16,129 11,861 


~anagament&sei-en;i: ......................................... 131 664 119 


Unit invrstment trust............................................ 2,274 2,279 1.682 


FBOB%~OU~~ ce~tffimte .......................................... ---

116 128 z7a


T~talln$~almenl EO~IPBIII*I ....................... 1J.611 li.,12h 13.S'I 


Era1.10~~ 5avIn~ ilbn <vlllR~~I(.s .......................... 
 l,4tl BwurIttr~1 r en.! 1oyn.r rtv~t"1.1, 1" 13:bl#l..................... :Y I :E:I 3.31


other. lndud~na st. :k lor ~vsrntt~u ar.<lolltlorn.. ............... 3,%% i,,lr 
 L. 111

Examinations and Investigations 

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

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

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

connection therewith is empowered to examine witnesses and require 

the production of pertinent documents. In addition, investigations 

into the adequacy and accuracy of registration statements may be 

conducted pursuant to Section 20(a) of the Act which authorizes the 

Commission to conduct an investigation to determine whether any 

provision of the Act or any rule or regulation prescribed thereunder 

has been or is about to be violated. The following tabulation shows 

the number of examinations and investigations relating to registration statements which were in progress during thcycar : 

Pending at beginning of fiscal year ............................. 42 


Initiated during fiscal year .................................... 28 


- 70 

Closed during fiscal year .......................................... -

27 

Pending at close of fiscal year .................................... 43 


Stop Order Promedings 

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

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

order "suspending" the effectiveness of a registration statement 

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

state any material fact required to be stated therein or tlecessary to 

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

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

begun, is to bar distribution of the securities so long as the order remains in effect. Although losses which may have been suffered by 
THIRTY-SIXTH ANNUAL REPORT 35

investors before issuance of the order are not restored to them by a

stop order, the Commission's decision and the evidence on which it is

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

their own recovery suits. As provided by the Act, a stop order is

lifted when the registration statement has been amended to correct

the deficiencies.

At the beginning of the fiscal year, three stop order proceedings

were pending and during the year six additional proceedings were

instituted. Six of the proceedings were terminated through the issuance of stop orders, in each instance pursuant to an offer of settlement by the registrant consenting to entry of a stop order and,

solely for purposes of the stop order proceeding, to findings of certain deficiencies in its registration statement. One proceeding was

discontinued subject to certain conditions, and two proceedings remained pending as of the end of the year.

In the cases where stop orders were issued, the deficiencies involved

-failure to disclose that the issuer was surety on a personal

promissory note of its president."

-failure to disclose that the issuer had sold unregistered

promissory notes and that such sales, which were in violation of

Section 5 of the Securities Act, gave rise to a contingent liability to the purchasers of the notes (an additional ground for issuance of the stop order here was the issuer's failure to cooperate

in the examination pursuant to Section 8(e) preceding institution of the stop order proceedings) .12

-failure to disclose accurately the principal products which

the issuer intended to develop and produce, the planned use of

the proceeds of the proposed stock offering and the cost to its

president of assets he transferred to the issuer in exchange for

stock,"

-failure adequately and accurately to disclose the educational

and business background of the issuer's president, the fact that

a similar company while operated by him sustained extensive

losses and had been subject to a suspension ordered by the Com11Philadelphia Bronze Oorporation, Securities Act Release No. 5000 (August

22, 1969).

12 Smentijic Research Development 00., Securities Act Release No. 5040 (January 26, 1970).

18 International Patents and Development Oorp., Securities Act Release No.

5006 (September 22, 1969). Pursuant to its settlement, the issuer filed an

amendment correcting the deficiencies in the registration statement, which had

not become effective, and the statement as amended became effective five days

after entry of the stop order.
36 SECURITIES AND EXCHANGE COMMISSION

mission pursuant to Regulation A of the Securities Act, and the

fact that the issuer had no patent, prototype or production

equipment for a device for which a major portion of the proceeds was designated."

-failure to disclose, in a registration statement covering limited partnership interests, material facts regarding the history,

business and control of the parent company of the general partner for whose stock the limited partnership interests were to be

exchangeable in the future."

-failure to disclose adequately and accurately the executive

functions of a person not named as an officer, the interests of

management in certain loans made by the issuer and circumstances surrounding the sale of unregistered securities."

In Doctor Dolittle Animal Fairs, Inc.,17the Commission found

that the registration statement filed by the issuer, a newly organized

franchise corporation, was materially deficient in describing the experience and background of its president who was the only full-time

executive employee and the only officer represented to have any

franchise experience. However, during the pendency of the proceeding the issuer filed an amendment which described the institution of

the proceeding, cured the deficiencies and reported that the president

was no longer associated with the company. Under all the circumstances, including the facts that none of the securities had been sold

to the public and that there appeared to be no fraudulent intent by

the issuer's management, the Commission found it appropriate to

discontinue the proceeding on the condition that a final corrected

prospectus describing the proceeding and its disposition and a copy

of the Commission's findings and opinion be furnished to all persons

who had received copies of the deficient preliminary prospectus.

EXEMPTION FROM REGISTRATION OF SMAIL ISSUES

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

terms and conditions as it may prescribe therein, any class of securities from registration under the Act, if it finds that the enforcement

of the registration provisions of the Act with respect to such securities is not necessary in the public interest and for the protection of

14 Laser Nucleonics, Inc., Securities Act Release No. 5041 (February 2, 1970).

15 First Dyna Ray Exploration Fund-1969, Securities Act Release No. 5023

(November 18, 1969).

16 Creative Financing, Inc., Securities Act Release No. 5048 (February 18,

1970).

17 Securities Act Release No. 5062 (.April 24, 1970).
TEITRTY-SIXTiI~AL REPORT 37

investors by reason of the small amount involved or the limited

character of the public offering. The statute imposes a maximum

limitation of $300,000 upon the size of the issues which may be exempted by the Commission in the exercise of this power."

Acting under this authority, the Commission has adopted the following exemptive rules and regulations:

Rule 234: Exemption of first lien notes.

Rule 235: Exemption of securities of cooperative housing corporations.

Rule 236: Exemption of shares offered in connection with certain transactions.

Regulation A: General exemption for U.S. and Canadian issues up to

$300,000.

Regulation B: Exemption for fractional undivided interests in oil or gas

rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of assessment thereon.

Under Section 3(c) of the Securities Act, which was added by

Section 307(a) of the Small Business Investment Act of 1958, the

Commission is authorized to adopt rules and regulations exempting

securities issued by a small business investment company under the

Small Business Investment Act. Acting pursuant to this authority

the Commission has adopted Regulation E, which is described below.

Exemption from registration under Section 3(b) or 3(c) of the

Act does not carry any exemption from the provisions of the Act

prohibiting fraudulent conduct in the offer or sale of securities and

imposing civil liability or criminal responsibility for such conduct.

Exempt OHerings Under Regulation A

Regulation A permits a company to obtain capital not in excess of

$300,000 (including underwriting commissions) in anyone year from

a public offering of its securities without registration, provided specified conditions are met. These include the filing of a notification

supplying basic information about the company with the Regional

Office of the Commission in the region in which the company has its

principal place of business, and the filing and use in the offering of

an offering circular. However, an offering circular need not be filed

or used in connection with an offering not in excess of $50,000 by a

company with earnings in one of the last 2 years.

During the 1970 fiscal year, 1104 notifications were filed under

Regulation A, covering proposed offerings of $293,666,784,compared

with 1043 notifications covering proposed offerings of $267,074,784in

the 1969 fiscal year.

18 A bill (S. 336) which raises the maximum to $500,000was enacted in December 1970. See p. 19, 8upra.
38 SECURITIES AND EXCHANGE COMMISSION 

The following table sets forth various features of the Regulation 

A offerings during the past 3 fiscal yean: 

Offerings Under Regulation A 

sizs: 

s1w.OW or lees ........................................................ nm,m$zw,ow ...................................................... $rn,aaS.wo,~ ...................................................... 

Tom ............................................................... --- 1.1M 1,043 616 

Underwrltem: 

Used ................................................................. 610 144 

Not Used ............................................................. --- 60i a71 

OEerora: 

IsSUlng mpaULe8 .................................................... 1,101 1,021 488 

Stockholdsra ......................................................... 2 27 

ISSUBIS ma 8t&holdm lointly ....................................... 1 7 

Reports of Sales.-Regulation A provides that within 30 days 

after the end of each 6-month period following the date of the original offering circular required by Rule 256, or the statement required 

by Rule 257, the issuer or other person for whose account the securities are offered must file a report of sales containing specified information. A final report must be filed upon complqtion or termination 

of the offering. 

During the fiscal year 1970,1394 reports of sales were filed reporting aggregate sales of $116,399,452. 

Suspension of Exemption.-The Commission may suspend an 

exemption under Regulation A where, in general, the exemption is 

sought for securities for which the regulation provides no exemption 

or where the offering is not made in accordance with the terms and 

conditions of the regulation or with prescribed disclosure standards. 

Following the issuance of a temporary suspension order by the Commission, the respondents may request a hearing to determine whether 

the temporary suspension should be vacated or made permanent. If 

no hearing is requested within 30 days after the entry of the temporary suspension order and none is ordered by the Commission on its 

om motion, the temporary suspension order becomes permanent. 

During the 1970 fiscal year, temporary suspension orders were issued in 29 cases, which, added to the 8 cases pending at the beginning of the fiscal year, resulted in a total of 37 cases for disposition. 

Of these, the temporary suspension order became permanent in 18 

cases: in 11 by lapse of time, in 6 by withdrawal of a rqu& for 

hearing, and in 1 by acceptance of an offer of settlement. The remaining 19 cases were pending at the end of the fiscal year. 
THIRTY-SIXTH ANNUAL REPORT 39

Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1U70,74Uoffering sheets and

572 amendments thereto were filed pursuant to Regulation Band

were examined by the Oil and Gas Section of the Commission's Division of Corporation Finance. During the 1V69 and 1968 fiscal

years, 613 and 453 offering sheets, respectively, were filed. The following table indicates the nature and number of Commission orders

issued in connection with such filings during the fiscal years

1968-70. The balance of the offering sheets filed became effective

without order.

Action Taken on Offering Sheets Filed Under Regulation B

FIscal year

Temporary suspensIOn orders (under Rule 340(a»

Orders termmating proceeding after amendment

Orders terminating efleetrveness of offering sheet

Orders fixing effective date of amendment (no proceeding pending)

Orders consenting to WIthdrawal of offering sheet and termmatmg proceeding

Orders consenting to withdrawal of offering sheet (no proceeding pending)

Total number of orders o

1070 1960 lOGS

--- ---

4 3 10

1 3 6

0 0 0 470 376 344

0 0 0

10 7 8

--- --- --- 485 389 3GS

Reports of sales.-The Commission requires persons who make

offerings under Regulation B to file reports of the actual sales made

pursuant to that regulation. The purpose of these reports is to aid

the Commission in determining whether violations of laws have occurred in the marketing of such securities. The following table

shows the number of sales reports filed under Regulation B during

the past 3 fiscal years and the aggregate dollar amount of sales during each of such fiscal years.

Reports of Sales Under Regulation B

1970 1969 1968

Number of sales reports filed ____________________________ 8,136 9,012 5,863

Aggregate dollar amount of sales reported _______________ $11,757,060.32 $11,221,563.80 $7,034,723.31

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies which are licensed under the Small Business Investment

Act of 1958 or which have received the preliminary approval of the

Small Business Administration and have been notified by the Administration that they may submit an application for such a license.

The regulation, which is similar in many respects to the general

0 _

_

_

_

- _

0 _ 0 _

_
40 SECURITIES AND EXCHANGE COMMISSION

exemption provided by Regulation A, requires the filing of a notification with the Commission and, except in the case of offerings not

in excess of $50,000, the filing and use of an offering circular containing certain specified information.

Regulation E also authorizes the Commission to suspend an exemption, substantially on the same grounds as those specified in

Regulation A.

No notifications were filed under Regulation E during the 1970

fiscal year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000 in anyone year. It requires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the

purposes for which the proceeds of the assessment are proposed to

be used. Copies of any other sales literature used in connection with

the assessment must be filed. Like Regulation A, Regulation F provides for the suspension of an exemption thereunder where the regulation provides no exemption or where the offering is not made in accordance with the terms and conditions of the regulation or in

accordance with prescribed disclosure standards.

During the 1970 fiscal year, 19 notifications were filed under Regulation F, covering assessments of $498:220, compared with 18 notifications covering assessments of $492,076 filed in the 1969 fiscal year.

These notifications were filed in three of the nine regional offices of

the Commission: Denver, San Francisco and Seattle. Underwriters

were not employed in any of the Regulation F assessments. No Regulation F exemption was suspended during the fiscal year.

B. CONTINUING DISCLOSURE REQUIREMENTS

The Securities Exchange Act of 1934, as amended, contains a

number of significant disclosure provisions with respect to securities

traded in the securities markets. These provisions, applicable in general to issuers of securities listed on exchanges and issuers of securities traded over-the-counter which meet minimum asset and number

of stockholder tests, include requirements for the registration of securities with the Commission and for periodic reports, as well as for
THIRTY-SIXTH ANNUAL REPORT 41

appropriate disclosure in connection with the exercise of stockholders' voting rights, takeover bids and insiders' securities transactions.

Registration of Securities on Exchanges

Unless a security is registered on a national securities exchange

under Section 12(b) of the Exchange Act or is exempt from registration, it is unlawful for a member of such exchange or any broker

or dealer to effect any transaction in the security on the exchange. In

general, the Act exempts from registration obligations issued or

guaranteed by a State or the Federal Government or by certain subdivisions or agencies thereof and authorizes the Commission to

adopt rules and regulations exempting such other securities as the

Commission may find necessary or appropriate to exempt in the

public interest or for the protection of investors. Under this authority the Commission has exempted securities of certain banks, certain

securities secured by property or leasehold interests, certain warrants and, on a temporary basis, certain securities issued in substitution for or in addition to listed securities.

Pursuant to Section 12(b) of the Exchange Act, an issuer may,

if it meets the requirements of the exchange, register a class of securities on an exchange by filing with the Commission and the exchange

an application which discloses pertinent information concerning the

issuer and its affairs. Information must be furnished regarding the

issuer's business, its capital structure, the terms of its securities, the

persons who manage or control its affairs, the remuneration paid to

its officers and directors, and the allotment of options, bonuses and

profit-sharing plans. Financial statements certified by an independent

accountant must be filed as purt of the application.

Form 10 is the form used for registration by most commercial and

industrial cornpanies.> There are specialized forms for certain types

of securities, such as voting trust certificates, certificates of deposit

and securities of foreign governments.

Statistics regarding securities traded on exchanges may be found

in Part III of this report and in Appendix Tables 4-9.

Registration of Over-the-Counter Securities

Section 12(g) of the Exchange Act requires a company with total

assets exceeding $1 million and a class of equity securities held of

record by 500 or more persons to register those securities with the

Commission, unless one of the exemptions set forth in that section is

19 Form 10 was revised following the close of the fiscal year. See pp. 10-11,

supra.
42 SECURITIES AND EXCHANGE COMMISSION

available," or the Commission issues an exemptive order under Section 12(h).

During the fiscal year, 1,157 registration statements were filed

under Section 12(g). This makes a total, from the enactment of Section 12(g) in 1964, through June 30, 1970, of 4,976 registration

statements filed. Nine of these statements were withdrawn before

they had become effective upon determination that they were not required to be filed under the Act.

Of the 1,157 registration statements filed under Section 12(g) in

fiscal year 1970, 670 were filed by issuers already subject to the reporting requirements of Section 13 or 15(d) of the Act. The latter

figure includes 28 registration statements filed by issuers with another security registered on a national securities exchange, and 642

filed by issuers subject to the reporting requirements of Section

15(d) because they had registered securities under the Securities

Act. These latter companies, however, had not been subject to the

proxy solicitation and other disclosure and insider trading provisions of Sections 14 and 16 of the Exchange Act. The remaining 487

issuers which filed registration statements had not been subject to

any of the disclosure or insider trading provisions and became subject to them through registration.

Exemptions From Registration.-Section 12(h) of the Act

authorizes the Commission, either by rules and regulations or by

order upon application of an interested person, to grant a complete

or partial exemption from the provisions of Sections 12(g), 13, 14,

15(d), or 16 if the Commission finds that because of the number of

public investors, the amount of trading interest in the securities, the

nature and extent of the activities of the issuer, the income or assets

of the issuer, or otherwise, the exemption is not inconsistent with the

public interest or the protection of investors.

At the beginning of the fiscal year 8 applications were pending

and 5 were filed during the year. Of these 13 applications, 2 were

withdrawn and 2 were granted. The remaining 9 applications were

pending at the end of the fiscal year.

Periodic Reports

Section 13 of the Exchange Act requires issuers of securities registered pursuant to Section 12(b) or 12(g) to file periodic reports

keeping current the information contained in the application for

20 Section 12(g) contains various exemptive provisions with respect to certain types of securities. Of particular significance are the provisions relating

to securities issued by insurance companies and securities of foreign issuers.

See dlscusstons in 32nd Annual Report, p. 13, and 33rd Annual Report, pp.

13--14,respectively.
THIRTY-SIXTH ANNUAL REPORT 43 

rcgistration or rcgistration statement. The periodic reports include 

annual, semi-aimual, and currelit reports. The principal annual report form is Form 10-I<, which is designed to give current information regarding the mattem covered in the original filing. Semiannual reports required to be filed on Form 9-IT are devoted chiefly 

to furnishing mid-year financial data. Current reports on Form 

8-K are required to be filed for each month in which any of certain 

specified events of immediate interest to investors has occurred. A 

report on this form deals with matters such as changes in control of 

tlie registrant, important acquisitions or dispositions of assets, the 

institution or termination of important legal proceedings and important changes in the issuer's securities. Certain real estate companies 

are required to file quarterly reports on Form 7-K. Section 15(d) 

of the Exchange Act, generally speaking, requires issuers which 

have registered securities under the Securities Act of 1933 and 

which have no securities registered under Section 12 to file the reports described above.z1 

The following table shoms the number of reports filed during the 

fiscal year pursuant to Sections 13 and 15 (d) of the Exchange Act. 

As of June 30, 1970, there were 2,980 issuers having securities listed 

on a national securities exchange and registered under Section 12(b) 

of the Act, 3,963 issuers having securities registered under Section 

12(g), and 2,414 additional issuers which-were subject to the reporting requirements of Section 15(d) of the Act. 

Number of annual and other periodic reporls $led by issuers under the Securities 

Exchange Act of 1994 during thejk-a1 year ended June 90,1970 

Issuers filing 

reportsunder 

Type 01 reports Seotioas 13 & 

16(d) 

Annual rewrb-. 7.067 
 Send-ual rep, 6.072 Cunent reports..... 11,781 

Quarterlyreparb.... 429 

Total reportsfile 24,348 

Administrative Proceedings To Obtain Compliance With Exchange Act 

Registration or Reporting Requirements 

Section 15(c) (4) of the Exchange Act empowers the Commission 

to hd, after notice and opportunity for hearing, that any person 

subject to the provisions of Section 12,13 or 15 (d) of the Act or the 

rules thereunder has failed in any material respect to comply wit11 

any of those provisions. It thus provides an administrative proce210ertain of the above forms were revised or rescinded following the close 

Of the fiscal year. Seepp. 11-12, supra. 
44 SECURITIES AND EXCHANGE COMMISSION

dure, similar to that provided by Section 19(a) (2) of the Act with

respect to proceedings to delist securities, for apprising investors of

materially misleading filings and for the resolution of accounting

and other complex and technical questions involving the disclosure

provisions of the Act. Under Section 15(c) (4) the Commission can

publish its findings and issue an order requiring compliance and,

when the circumstances of a particular case so warrant, apply to a

U.S. district court for enforcement of its order.

At the beginning of the fiscal year, two proceedings pursuant to

Section 15(c) (4) of the Securities Exchange Act were pending and

during the year one additional proceeding was instituted. The Commission issued decisions in two of the proceedings during the year

and issued a decision in the third proceeding shortly after the end

of the year.

The Susquehanna Oorporation 22 involved the adequacy of disclosure contained in a Schedule 13D statement filed by Susquehanna in

connection with its tender offer to purchase common stock of Pan

American Sulphur Company. This was the first administrative proceeding arising out of the "Takeover Bid Bill" enacted in July

1968.23

In response to a requirement that the tender offeror disclose any

plans to make a major change in the business of the target company,

the schedule stated, among other things, that

"Susquehanna does not plan or propose to liquidate Pan American, to sell

its assets to, or merge it With, any other person, or to make any other

major change in its business or corporate structure. However, if, at some

subsequent time, it should appear the interests of the Pan American stockholders would be better served by any of the foregoing courses of action,

Susquehanna may propose or adopt such course."

The Commission found this statement to be materially false and

misleading in failing to disclose that at the time of filing Susquehanna planned, upon acquiring control, to use the assets of Pan

American to effect acquisitions or mergers. The Commission ordered

Susquehanna to amend its Schedule 13D statement to disclose such

plan. An amended statement was subsequently filed.

The other two cases were disposed of on the basis of offers of settlement, under which the respective companies consented to findings

that reports filed by them with the Commission were misleading and

otherwise deficient, and agreed to correct such reports and to advise

their shareholders of the proceedings. In Great Northern M anage22 Securities Exchange Act Release No. 8933 (July 17, 1970).

23 See pp. 50-51, intra.
THIRTY-SIXTH ANNUAL REPORT 45

ment Oompany, Inc.,24 the Commission found that annual reports on

Form 10-K for the years ended December 31, 1965 and 1966 and a

current report on Form 8-K for October 1967 which were filed by

Great Northern (registrant) were materially misleading and deficient, in that they failed adequately or accurately to disclose that registrant's initial capitalization had consisted in part of debt obligations which were to be repaid out of the proceeds of the public sale

of registrant's stock purportedly offered by selling stockholders;

that registrant had made public offerings of unregistered securities

and incurred contingent liabilities thereby; that a purportedly unaffiliated company had been organized and dominated by persons in

control of registrant and used to sell registrant's stock; and that

proceeds from such sales and other funds derived from registrant

were used by such controlling persons to purchase, through nominees

and another purportedly unaffiliated company in fact controlled by

the same persons, shares of another issuer. The Commission concluded that no further action by it was necessary because Great

Northern had filed correcting amendments to its reports.

In Federated Purchaser, Ino.,25 the Commission found among

other things that an annual report on Form 10-K filed by Federated was misleading and deficient in that it contained a certified balance sheet showing substantial value for a promissory note received

from an affiliated company in exchange for assets carried at no

value and failed to disclose that the basis on which the accountants

certified such balance sheet had ceased to exist prior to the filing of

the report. The Commission ordered Federated to file correcting

amendments and to send copies of its Findings, Opinion and Order

to all shareholders.

Proxy Solicitations

Scope and Nature of Proxy ReguIation.-Regulation 14A under

the Exchange Act, implementing Section 14(a) of that Act, governs the

manner in which proxies or other authorizations may be solicited

from the holders of securities registered under Section 12 of that

Act, whether for the election of directors, approval of other corporate action, or some other purpose." It requires that in any such solicitation, whether by the management or minority groups, disclo24 Securities Exchange Act Release No. 8856 (April 3, 1970).

25 Securities Exchange Act Release No. 8848 (March 30, 1970).

26 Tbis regulation also applies to securities holders of registered publle-utility bolding companies, their subsidiaries and registered investment companies.
46 SECURITIES AND EXCHANGE COMMISSION

sure must be made of all material facts concerning the matters on

which security holders are asked to vote, and they must be afforded

an opportunity to vote "yes" or "no" on each matter other than elections. The regulation also provides, among other things, that where

the management is soliciting proxies, a security holder desiring to

communicate with other security holders may require the management to furnish him with a list of all security holders or to mail his

communication to security holders for him. A security holder may

also, subject to certain limitations, require the management to include in its proxy material any appropriate proposal which he wants

to submit to a vote of security holders. Any security holder or group

of security holders may at any time make an independent proxy solicitation upon compliance with the proxy rules, whether or not the

management is making a solicitation. Certain additional provisions

of the regulation apply where a contest for control of the management of an issuer or representation on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation. Where preliminary material fails to meet the prescribed

disclosure standards, the management or other group responsible for

its preparation is notified informally and given an opportunity to

correct the deficiencies in the preparation of the definitive proxy material to be furnished to security holders.

Under Section 14(c) of the Act, issuers of securities registered

under Section 12 must, in accordance with rules and regulations prescribed by the Commission, transmit information comparable to

proxy material to security holders from whom proxies are not solicited. with respect to a stockholders' meeting. Regulation 14C implements this provision by setting forth the requirements for "information statements."

Statistics Relating to Proxy and Information Statements.-During

the 1970 fiscal year, 5,595 proxy statements in definitive form were

filed, 5,581 by management and 14 by nonmanagement groups or individual stockholders. In addition, 114 information statements were

filed. The proxy and information statements related to 5,390 companies, some 319 of which had a second solicitation during the year,

generally for a special meeting not involving the election of directors.

There were 5,095 solicitations of proxies for the election of directors, 487 for special meetings not involving the election of directors,

and 13 for assents and authorizations.
THIRTY-SIXTH ANI-.'1JALREPORT 47

The votes of security holders were solicited with respect to the

following types of matters, other than the election of directors:

Mergers, consolidations, acquisitions of businesses, purchases and sales

of property, and dissolution of companies________________________ Gli8

Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, con- solidations, etc.) 1,706

Employee pension and retirement plans (including amendments to

existing plans) 80

Bonus or profit-sharing and deferred compensation arrangements (including amendments to existing plans and arrangements) 146

Stock option plans (including amendments to existing plans) 964

Stockholder approval of the selection by management of independent auditors 2,117

Miscellaneous amendments to charters and by-laws, and miscellaneous

other matters (excluding those listed above) 2,258

Stockholders' Proposals.-During the 1970 fiscal year, 241

proposals submitted by 25 stockholders were included in the proxy

statements of 150 companies under Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of security holders were resolutions relating to amendments to charters or

by-laws to provide for cumulative voting for the election of directors, preemptive rights, limitations on the grant of stock options to

and their exercise by key employees and management groups, the

sending of a post-meeting report to all stockholders, and limitations

on charitable contributions.

A total of 52 additional proposals submitted by 24 stockholders

was omitted from the proxy statements of 31 companies in accordance with Rule 14a-8. The principal reasons for such omissions and

the number of times each such reason was involved (counting only

one reason for omission for each proposal even though it may have

been omitted under more than one provision of Rule 14a-8) were as

follows:

Reason tor Omission ot Proposals

Number

Concerned a personal grievance against the company_____________________ 22

'Vithdrawn by proponent_____________________________________________ 17

Not a proper subject matter under State law____________________________ 3

Related to the ordinary conduct of the company's business______________ 5

Outside scope of rules________________________________________________ 1

Not timely subnrltted_________________________________________________ 3

Insufficient vote at prior meetings______________________________________ 1

Ratio of Soliciting to Nonsoliciting Companies.-Of the 2,980

issuers that had securities listed and registered on national securities

exchanges as of June 30, 1970, 2,732 had voting securities so listed
48 SECURITIES AJ.'I"DEXCHANGE COMMISSION

and registered. Of these 2,732 issuers, 2,48G,or 91 percent, solicited

proxies under the Commission's proxy rules during the 1970 fiscal

year for the election of directors.

Proxy Contests.-During the 1970 fiscal year, 24 companies were

involved in proxy contests for the election of directors. A total of

550 persons, both management and non-management, filed detailed

statements as participants under the requirements of Rule 14a-ll.

Proxy statements in 20 cases involved contests for control of the

board of directors and those in 4 cases involved contests for representation on the board.

Management retained control in 9 of the 20 contests for control of

the board of directors, 2 were settled by negotiation, non-management persons won 3, and 6 were pending as of June 30, 1970. Of the

four cases where representation on the board of directors was involved, management retained all places on the board in one contest

and opposition won places on the board in three cases.

Litigation Relating to Proxy Rules.- Two recent judicial decisions

have important implications with respect to private actions instituted to enforce duties arising under the proxy rules that the Commission has promulgated pursuant to Section 14(a) of the Securities

Exchange Act.

In Mills v. The Electric Auto-Lite UO.,21 a misleading proxy statement was found to have been issued to Auto-Lite shareholders in an

attempt to induce them to vote for a merger of Auto-Lite with Mergenthaler Linotype Company. 'Vith regard to the determination concerning a "causal relationship of the proxy material and the

merger," which is required under J. I. Case 00. v. Bomlc,28 the Supreme Court held:

Where there has been a finding of materiality, a shareholder has made a

sufficient showing of causal relationship between the violation and the injury for which he seeks redress if, as here, he proves that the proxy solicitation itself, rather than the particular defect in the solicitation materials,

was an essential link in the accomplishment of the transaction."29

The Court, as urged by the Commission, amicus curiae, rejected

the holding of the court of appeals that if the defendants could

prove that the terms of the merger were fair, there could be no liability, although the Court noted in regard to the appropriate relief

that the fairness of the merger terms may be an important factor.so

In this connection the Court held, in accordance with the Commission's suggestion, that violation of the Commission's proxy rules to

21396 U.S. 375 (1970).

28377 U.S. 426, 431 (19M).

29396 U.S. at 385.

so 396 U.S. at 389-397.
THIRTY-SIXTH ANNUAL REPORT 49

effect shareholder approval of a proposed merger does not necessarily require that the merger be voided. 1iVhilesuch relief was not

ruled out, the Court reiterated its statement in Borak that the lower

courts are "to be alert to provide such remedies as are necessary to

make effective the congressional purpose." 31 The Court also adopted

the Commission's recommendation that proof of violation of the

proxy rules entitled the plaintiff to an interim award of litigation

expenses and reasonable attorneys' fees.32

Shortly after the close of the fiscal year, the Court of Appeals for

the District of Columbia Circuit decided a case affecting the remedies available to a shareholder where a corporate management has

refused to include in the company's proxy statement a proposal

timely submitted by the shareholder pursuant to Rule 14a-8 under

the Securities Exchange Act. A determination by the Commission

not to take enforcement action with respect to such a matter was

held to be partially subject to judicial review in Medical Committee

for Human Rights v, S.E.O.33 The Medical Committee, a shareholder of the Dow Chemical Company, had requested Dow to submit

to its shareholders a resolution concerning its sale of napalm. In accordance with Rule 14a-8(d) Dow had advised the Medical Committee and the Commission's staff that it did not intend to include

the Committee's proposal in its proxy statement since it did not believe that it was required to do so. After the Commission'sstaff indicated that it concurred in Dow's legal analysis, the Commission, at

the Committee's request, considered whether enforcement action

would be appropriate should the company omit the proposal from

the proxy materials. The Commission determined that it "would

raise no objection" if the proposal were omitted; it did not articulate any basis for its decision or express any view on the merits of

its staff's legal interpretation.

The court of appeals rejected the Commission's contention that because no order had been entered the court lacked jurisdiction of a

petition for review. Instead, it took the position that the Committee

had been compelled to bring its controversy with Dow to the Commission and to exhaust whatever administrative remedies were available and that an adverse decision by the Commission on the merits

could be determinative should the Committee subsequently seek to

31396 U.S. at 386, quoting 377 US. at 433, 434.

32 Since the question of ultimate relief was not before the Court, the Court

declined to express a view on the Commission's additional suggestion that

plaintiffs also be reimbursed for the litigation expenses and attorneys' fees to

be incurred in litigating the question of relief.

33432 F.2d 659 (1970), petition tor certiorari filed December 24. 1970.

409-865-71-5
50 SECURITIES AND EXCHANGE COMMISSION

litigate its dispute with Dow in the district court. Primarily because

of this analysis, and because the court found the Commission's procedures to be sufficiently formal and adversary in character, it held

that the determination by the Commission was reviewable to the extent that it embodied a view of the legal merits of Dow's position.

After offering extensive dicta on the meaning of the Commission's

shareholder-proposal rules, the court remanded the matter to the

Commission for an exposition of the rationale behind the Commission's determination to take no action in the circumstances.

The court of appeals thereafter denied the Commission's petition

for rehearing, which suggested that no procedures existed to be exhausted and that the kind of decision made by the Commission was

not of a character entitled to significant deference in judicial proceedings.

Disclosure in Connection With Takeover Bids and Other Large Acquisitions

Sections 13(d) and (e) and 14(d), (e) and (f) of the Securities

Exchange Act, which were enacted in July 1968, as implemented by

temporary rules and regulations adopted by the Commission, provide among other things for full disclosure in connection with cash

tender offers and other stock acquisitions which may cause a shift in

control. These provisions were designed to close gaps in the full disclosure provisions of the securities laws and to safeguard the interests of persons who tender their securities in response to a tender

offer.84

Rule 13d-l under the Act requires the filing with the Commission

of a Schedule 13D report by a person or group which acquires any

of a class of equity securities registered pursuant to Section 12 of

the Act or issued by a closed-end investment company registered

under the Investment Company Act of 1940, if such acquisition results in the ownership by such person or group of more than 10 percent of such class of securities. During the 1970 fiscal year 291

Schedule 13D acquisition reports were filed. Rule 14d-l requires the

filing of a Schedule 13D report by a person or group making a

tender offer (other than an exchange offer pursuant to a registration

statement under the Securities Act of 1933) which, if successful,

would result in such person or group owning more than 10 percent

of any class of equity securities subject to Section 14(d). Thirtyfour Schedule 13D tender offer notices were filed during the fiscal

year.

In addition, 27 Schedule 14D reports were filed pursuant to Rule

14d-4 involving solicitations or recommendations in connection

84 Legislation to enlarge the coverage of these provisions (S. 3431) was

enacted in December 1970. See pp. 19-20, supra.
THIRTY-SIXTH ANNUAL REPORT 51

with a tender offer by other than the maker of the offer, and 10

statements were filed pursuant to Rule 14£-1. The latter relate to the

replacement of a majority of the board of directors otherwise than

by stockholder vote pursuant to an arrangement or understanding

with the person or persons acquiring securities in a transaction subject to Section 13(d) or 14(d) of the Act. One statement was filed

pursuant to Rule 13e-1 relating to corporate reacquisitions of securities while the issuer is the target of a cash tender offer.

In a related area the Commission during the fiscal year adopted

Rule 10b-13,35which prohibits a person making a cash tender offer

or an exchange offer from purchasing equity securities of the same

class (or any other security immediately convertible into or exchangeable for that security) during the period after the announcement of a tender or exchange offer until the close of the tender or

exchange period, otherwise than pursuant to the offer itself. The

Commission pointed out that other purchases were often fraudulent

and manipulative in nature and could deceive the investing public as

to the true state of affairs, and it stated that the rule would safeguard the interests of persons who have tendered their securities in

response to a cash tender or exchange offer.

Insiders' Security Holdings and Transactions

Section 16 of the Securities Exchange Act and corresponding provisions in Section 17 of the Public Utility Holding Company Act of

1935 and Section 30(f) of the Investment Company Act of 1940 are

designed to provide other stockholders and investors generally with

information as to insiders' securities transactions and holdings, and

to prevent the unfair use of confidential information by insiders to

profit from short-term trading in a company's securities.

Ownership Reports.-8ection 16(a) of the Exchange Act requires

every person who beneficially owns, directly or indirectly, more than

10 percent of any class of equity security which is registered under

Section 12, or who is a director or an officer of the issuer of any

such security, to file statements with the Commission disclosing the

amount of all equity securities of the issuer of which he is the beneficial owner and changes in such ownership. Copies of such statements must also be filed with exchanges on which securities are

listed. Similar provisions applicable to insiders of registered publicutility holding companies and registered closed-end investment companies are contained in Section 17(a) of the Public Utility Holding

Company Act and Section 30(£) of the Investment Company Act.86

85 Securities Exchange Act Release No. 8712 (October 8,1969).

86 Amendments to Rule 16a-1 adopted during the fiscal year were discussed

in the 35th Annual Report, at pp. 50-51.
52 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year, 95,952 ownership reports (21,337 initial

statements of ownership on Form 3 and 74,615statements of changes

in ownership on Form 4) were filed with the Commission. By comparison, during fiscal year 1969, 93,708 such reports were filed

(16,036initial statements and 77,672statements of changes).

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's officein Washington and

at the exchanges where copies are filed. In addition, the information

contained in reports filed with the Commission is summarized and

published in the monthly "Official Summary of Security Transactions and Holdings", which is distributed by the Government Printing Officeto more than 20,000subscribers.

Recovery of Short-Swing Trading Profits.- In order to prevent

insiders from making unfair use of information which they may have

obtained by reason of their relationship with a company, Section

16(b) of the Exchange Act, Section 17(b) of the Holding Company

Act, and Section 30(f) of the Investment Company Act provide for

the recovery by or on behalf of the issuer of any profit realized by

insiders (in the categories listed above) from certain purchases and

sales, or sales and purchases, of securities of the company within

any period of less than 6 months. The Commission at times participates as amicus curiae in actions to recover such profits when it

deems it important to present its views regarding the interpretation

of the statutory provisions or of the exemptive rules adopted by the

Commission thereunder.

Investigations With Respect to Reporting and Proxy Provisions

Sections 21(a) of the Exchange Act authorizes the Commission to

make such investigations as it deems necessary to determine whether

any person has violated or is about to violate any provision of the

Act or any rule or regulation thereunder. The Commission is authorized, for this purpose, to administer oaths, subpoena witnesses, compel their attendance, take evidence and require the production of records. The following investigations were undertaken pursuant to

Section 21(a) in connection with the enforcement of the reporting

provisions of Sections 12, 13, 14 and 15(d) of the Act and the rules

thereunder, particularly those provisions relating to the filing of annual and other periodic reports and proxy material:

Investigations pending at beginning of fiscal year______________________ 49

Investigations initiated during fiscal year____________________________ 31

80

Investigations closed during the fiscal year___________________________ 26

Investigations pending at close of fiscal year__________________________ 54
THIRTY-SIXTH ANNUAL REPORT 53

Summary Suspension of Trading

Section 19(a) (4) of the Exchange Act authorizes the Commission

to suspend summarily exchange trading in a security listed on a national securities exchange for up to 10 days if in its opinion the

public interest so requires. Under Section 15(c) (5) of that Act the

Commission may summarily suspend over-the-counter trading in any

non-exempt security for up to 10 days if it believes that such action

is required in the public interest and for the protection of investors.

During the 1970 fiscal year, the Commission temporarily suspended trading in 55 securities, compared to 33 in fiscal 1969 and 39

in fiscal 1968. In seven instances, exchange-listed securities were

involved;" In each of these cases, the exchange on which the securities were listed had previously halted trading.

As in the past, the principal ground for suspension in most instances was the unavailability to investors of accurate and complete

information concerning the issuer and its securities. Other grounds

for suspension included dissemination of inaccurate and misleading

financial information, a need for clarification of certain corporate

events, and investors' need to be apprised of a Commission-instituted

court action.

A number of the suspensions involved the securities of "shell" corporations-eompanies which are essentially defunct, with no assets

or earnings." On several occasions, the Commission announced the

suspension of trading in a number of securities of "shells" simultaneously, when it appeared that the "shells" were being reactivated

by promoters who circulated inadequate and inaccurate information

concerning them."

The suspensions involved a wide variety of factual circumstances.

In the case of Arkansas Valley Industries, Inc., the suspension was

ordered at the request of the company so that it could issue a statement to clarify the extent of the impact of a U.S. Department of

Agriculture announcement," The Department had announced that it

had found pesticide residues in turkeys produced by Arkansas Valley; that it was not allowing the marketing of turkeys and turkey

37 Securities Exchange Act Release Nos. 8646 (July 2, 1969), 8663 (August

1, 1969),8665 (August 6, 1969), 8754 (November 11, 1969), 8810 (January 30,

1970), 8883 (May 13, 1970) and 8913 (June 25, 1970).

38 See the discussion of proposed Rule 15c2-11 in part III, pp. 86-87.

39 Securities Exchange Act Release Nos. 8724, 8725, 8726, and 8727 (October

21, 1969); Securities Exchange Act Release Nos. 8766, 8767, 8768 (December

4, 1969) ; Securities Exchange Act Release Nos. 8793 (January 7, 1970), 8800

(January 12, 1970), 8842 (March 17, 1970), 8857 (April 2, 1970), and 8903

(June 15, 1970).

40 Securities Exchange Act Release No. 8747 (November 10,1969).
54 SECURITIES AND EXCHANGE CO:MMISSION

products either known or suspected to contain this pesticide; and that

it was investigating whether live turkeys had also been contaminated.

In the case of Professional Health Services, the Commission suspended trading by reason of the absence of complete and accurate

information about the company and to provide an opportunity for

the dissemination of clarifying information prior to the resumption

of trading. Certain New York State agencies had declined to pay

Medicaid claims factored by that company, which had been listed as

a major part of the company's receivables. Further, the company

and certain of its principals had been indicted for violations of and

conspiracy to violate Sections 5(b) and 17(a) of the Securities Act,

the indictment alleging the use of false and misleading statements in

a prospectus used in the company's public stock offering."

The temporary suspension of over-the-counter trading in the securities of Health Evaluation Systems, Inc.42 was ordered because of

the inadequacy of available information about the issuer and because

of a recent, rapid rise in the price of the common stock which, according to management, was not justified by any developments in

the business or by any improved prospects for the corporation. A

foreign-based mutual fund had purchased in a short period of time

about one-half of all publicly traded Health Evaluation System

shares, which apparently created the substantial rise in the price of

the stock. The company, which purported to be engaged in providing health examinations through the use of instruments, technicians

and nurses rather than medical doctors, reported that it had little

revenue and was currently operating at a loss.

During the fiscal year, several injunctive proceedings and criminal

actions were instituted involving securities which had been the subject of trading suspensions."

Commission releases announcing the terminations of trading suspensions frequently carry a warning to investors to exercise care in

transactions involving the securities in question, and remind brokers

and dealers of their responsibilities under the Federal securities laws

for full disclosure of all material facts in connection with the execution of securities transactions.

C. ACCOUNTING AND AUDITING MATTERS

The several Acts administered by the Commission reflect a recognition by Congress that dependable financial statements of a com41 Securities Exchange Act Release No. 8749 (November 13,1969).

42 Securities Exchange Act Release No. 8913 (June 25,1970).

43 See the discussion of remedial and enforcement action in Part IV, infra.
THIRTY-SIXTH ANNUAL REPORT 55

pany are indispensable to an informed investment decision regarding

its securities. The value of such statements is directly dependent 011

the soundness of the judgment exercised in applying accounting

principles and practices in their preparation, and on the adequacy

and reliability of the work done by public accountants who certify

the statements. A major objective of the Commission has been to improve accounting and auditing standards and to assist in the establishment and maintenance of high standards of professional conduct

by certifying accountants. The primary responsibility for this program rests with the Chief Accountant of the Commission.

Pursuant to the Commission's broad rulemaking power regarding

the preparation and presentation of financial information, it has

adopted a basic accounting regulation (Regulation S-X) which, together with opinions on accounting principles published as "Accounting Series Releases," governs the form and content of financial

statements filed under the statutes administered by the Commission.

The Commission has also formulated rules with respect to accounting for and auditing of brokers and dealers and has prescribed uniform systems of accounts for companies subject to the Public Utility

Holding Company Act of 1935. The accounting rules and the opinions of the Commission and its decisions in particular cases have

contributed to clarification and wider acceptance of the accounting

principles and practices and auditing standards developed by the

profession and generally followed in the preparation of financial

statements.

The rules and regulations thus established, except for the uniform

systems of accounts which are regulatory reports, prescribe accounting principles to be followed only in certain limited areas. In the

large area of financial reporting not covered by its rules, the Commission's principal means of protecting investors from inadequate or

improper financial reporting is by requiring a certificate of an independent public accountant, based on an audit performed in accordance with generally accepted auditing standards, which expresses an

opinion whether the financial statements are presented fairly in conformity with accounting principles and practices which are recognized as sound and which have attained general acceptance. The requirement that the opinion be rendered by an independent

accountant is designed to secure for the benefit of public investors the

detached objectivity of a knowledgeable professional person not connected with the management.

The accounting staff examines the financial statements filed with

the Commission to insure that the required standards are observed

and that the accounting and auditing procedures do not remain static
56 SECURITIES AND EXCHANGE COMMISSION

in the face of changes and new developments in financial and economic conditions. New methods of doing business, the formation of

new types of business, the large number of combinations of old businesses, the use of more sophisticated securities, and other innovations,

create accounting problems which require a constant reappraisal of

the procedures.

Relations With the Accounting Profession and the Public

In order to keep abreast of such changes and new developments

and in recognition of the need for a continuous exchange of views

and information between the Commission's staff and outside accountants regarding appropriate accounting and auditing policies, procedures and practices for the protection of investors, the staff maintains continuing contact with individual accountants, other

government agencies, and various professional organizations. These

include the American Accounting Association, the American Institute of Certified Public Accountants, the American Petroleum Institute, the Financial Analysts Federation, the Financial Executives

Institute, the National Association of Accountants, and the National

Association of Railroad and Utilities Commissioners. Since the

American Institute of Certified Public Accountants is the principal

professional organization involved in the development and improvement of accounting and auditing standards and practices, regular liaison is maintained with it through its Committee on Relations with

Securities and Exchange Commission and Stock Exchanges. Conferences are held from time to time at which the staff is briefed on the

work being done by the Institute's Committees on Ethics and Auditing Procedures and the Accounting Principles Board and problems

of mutual interest are discussed. The Commission's accounting staff

also meets with the Committee on Corporate Reporting of the Financial Executives Institute to coordinate efforts toward the improvement of standards.

As part of the Commission's effort to maintain a continuing exchange of views with the accounting profession, the Chairman, other

Commissioners, the Chief Accountant and other members of the

accounting staff from time to time address, or participate in panel

discussions at, professional society meetings. In this way the Commission can indicate problem areas in accounting where it believes

the profession can aid in developing solutions. As an example, both

the Chairman and the Chief Accountant urged the profession to restudy the accounting principles applicable to business acquisitions or

combinations in order to develop criteria which will prevent abuses

arising from inadequate restrictions on the choice between the alternatives of purchase or pooling-of-interests accounting to be accorded
THIRTY-SIXTH ANNUAL REPORT 57

such transactions. (The Chairman also commented on this matter in

testimony before Committees of the Congress.") The Chief Accountant also accepts engagements to explain the work of the Commission at colleges and universities throughout the country.

Because of its many foreign registrants and the vast and increasing foreign operations of American companies, the Commission has

an interest in the improvement of accounting and auditing principles and procedures on an international basis. To promote such improvement the Chief Accountant corresponds with foreign accountants, interviews many who visit this country, and, on occasion,

participates in foreign accounting conferences or writes for foreign

professional journals. In September 1970he presented a paper at the

First Annual Conference of the British Accounting and Finance Association in Edinburgh, Scotland.

The Work of the Accounting Principles Board and Committees of the AICPA

The Accounting Principles Board sponsors research studies of

problem areas in accounting and formulates formal opinions and advisory statements for the improvement of accounting standards and

practices. The advisory statements contain recommendations of the

Board which companies may adopt voluntarily. In furtherance of

the policy of cooperation between professional organizations and the

Commission, the Board submits drafts of these studies, opinions and

statements to the Chief Accountant for review and comment prior to

publication, and representatives of the Board confer with him on

projects in progress or under consideration. Standing committees of

the AICP A develop statements on auditing standards and procedures for the guidance of the profession in much the same manner

that APB opinions are developed.

In July 1969 the Board issued a Statement on "Financial Statements Restated for General Price-Level Changes" in which the benefits of such statements when presented on a supplemental basis are

discussed, but which recommends against their substitution for the

basic historical dollar financial statements. The Board issued exposure drafts of two opinions in February 1970 entitled "Accounting

Methods and Estimates" and "Business Combinations and Intangible

Assets." It adopted separate definitive opinions on "Business Combinations" and "Intangible Assets" in July 1970.

Other topics on which the Board or its subcommittees are working

with a view to issuing opinions are: the equity method of account44 SUbcommittee on Antitrust and Monopoly of the Senate Committee on the

.Judiciary, February 18, 1970; Antitrust Subcommittee of the Committee on the

.Judiciary of the House of Representatives, May 14, 1970; .Joint Economic Committee of the United States Congress, .July 10, 1970.
58 SECURITIES AND EXCHANGE COMMISSION

ing for intercorporate investments, segmented data in the financial

statements of diversified companies, capitalization of leases, preparation of interim financial statements, and components of a business

enterprise. Subcommittees are also developing a document pertaining

to basic concepts and accounting principles underlying financial

statements of business enterprises and a statement urging that companies include a statement of their accounting principles in their annual reports.

An Accounting Research Study, "Financial Reporting in the Extractive Industries," was published in November 1969. Other

research studies are being conducted on the subjects of materiality,

research and development, foreign operations, stockholder equities,

asset and liability valuation in income determination, inventory pricing, and depreciation methods.

In connection with the development of opinions in major problem

areas, the Board sponsors symposiums which are attended by representatives of all professional groups, including the SEC, concerned

with the particular accounting problems, in order to foster a better

understanding of the problems and agreement on the proposed solutions.

The AICP A Committee on Bank Accounting and Auditing issued

a supplement to the guide "Audits of Banks" in November 1969

which incorporates specific standards in previously unsettled areas

which were agreed upon by representatives of the banks, the federal

regulatory agencies and the Institute committee.

The AICP A Committee on Auditing Procedure issued Statements

on Auditing Procedure pertaining to "Subsequent Discovery of

Facts Existing at the Date of the Auditor's Report" and "Reporting

When a Certified Public Accountant is Not Independent" in October

and November 1969, respectively. This committee is also developing a

Statement on Auditing Procedure on "Confirmation of Receivables

and Observation of Inventories."

Other Current Developments

The Chief Accountant's office has submitted proposed revisions of

Articles 1, 2, 3, 4, 5, and 11 and Rules 12-01 through 12-17 of

Regulation S-X, the Commission's basic accounting regulation, to

certain professional groups for an informal review prior to their

being issued for public comment. These general revisions, the first

since 1950, represent changes, additions or eliminations that have become necessary as a result of changing conditions over the years. A

committee of the AICP A had submitted many helpful suggestions,

and more recently the Commission's Disclosure Study Group recom-
THIRTY-SIXTH ANNUAL REPORT 59

mended certain revisions of Regulation S-X, particularly with respect to the required schedules.

The Commission issued a proposal in September 196945 to include

in Regulation S-X a section which would specify the content of a

statement of source and applications of funds. This proposal reflected recommendations by the Study Group, as well as by the

AICP A and other professional groups, that such statements be required in certain filings made by registrants. At that time the Commission also issued proposals 46 to require such statements in certain

registration statements and annual reports filed under the securities

acts. Following consideration of comments received, the Commission,

in the fall of 1970,adopted amendments with respect to these matters. 47

During the fiscal year four Accounting Series Releases were issued, three of which related to investment companies. One release 48

dealt with the problems of valuation of restricted securities held by

registered investment companies. Another release 49 clarified disclosure requirements concerning restricted securities. These two releases

are discussed in greater detail in Part V of this report. 50 The third

release 51 announced the adoption of amendments of rules in Regulation S-X and under the Investment Company Act of 1940 with respect to provision by registered investment companies for Federal

income taxes.

During the fiscal year a number of registration statements were

filed which included accountants' opinions that were qualified regarding the registrant's ability to attain profitable operations and/or

successfully to obtain additional capital, matters of such significance

to the registrants that there was a serious question whether the opinions met the Commission's certification requirements. The Commission issued an Accounting Series Release 52 which specified, in part,

that "an accountant's report cannot meet the certification requirements of the 1933 Act unless the registrant can arrange its financial

affairs so that the immediate threat to continuation as a going business is removed. The independent accountant must be satisfied that

45 Securities Act Release No. 4998 (September 15, 19(9).

46 Securities Exchange Act Release Nos. 8681 and 8682 and Securities Act

Release No. 4996 (September 15, 1969).

47 Securities Act Release Nos. 5090 (October 14,1970) and 5100 (November 12,

1970); Securities Exchange Act Release Nos. 8996 (October 14, 1970) and 9000

(October 21, 1970).

48 Accounting Series Release No. 113 (October 21, 1969).

49 Accounting Series Release No. 116 (April 13, 1970).

50 See page 138,intra.

51 Accounting Series Release No. 114 (December 31,1969).

52 Accounting Series Release No. 115 (February 19, 1970).
60 SECURITIES AND EXCHANGE COMMISSION

it is appropriate to use conventional principles and practices for

stating the accounts on a going concern basis before a registration

statement under the 1933Act can be declared effective."

D. EXEMPTIONS FOR SECURITIES OF INTERNATIONAL BANKS

International Bank for Reconstruction and Development

Section 15 of the Bretton Woods Agreement Act, as amended, exempts from registration under both the Securities Act and the Securities Exchange Act securities issued, or guaranteed as to both

principal and interest, by the International Bank for Reconstruction

and Development. The Bank is required to file with the Commission

such annual and other reports with respect to such securities as the

Commission determines to be appropriate in view of the special

character of the Bank and its operations, and necessary in the public

interest or for the protection of investors. Pursuant to this authority, the Commission has adopted rules requiring the Bank to file

quarterly reports and also to file copies of each annual report of the

Bank to its Board of Governors. The Bank is also required to file reports with the Commission in advance of any distribution in the

United States of its primary obligations. The Commission, acting in

consultation with the National Advisory Board on International

Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed

by the Bank during the period of such suspension. The following

summary of the Bank's activities reflects information obtained from

the Bank.

During the fiscal year ended June 30, 1970, the Bank made 69

loans totaling $1,580million in 39 countries, compared with a total

of $1,399million the previous year. In addition, in fiscal 1970, the

Bank lent $100million to its affiliate, the International Finance Corporation, to assist in financing the Corporation's loans and investments in private enterprises.

Net income for the year was a record high of $213 million, a gain

of $41.5million over net income reported for fiscal 1969.The Bank's

Executive Directors have recommended to its Board of Governors

that $100 million of net income be transferred as a grant to its affiliate, the International Development Association. The remainder will

be trans~er:ed to the Bank's Supplemental Reserve, increasing it to

$1,150million. Total reserves of the Bank, including the Special Reserve, will amount to $1,442million.

Gros~ ~co~e for fiscal 1970 aggregated $504 million including

$149 million income from investments, $344 million income from
THIRTY-SIXTH A1\TNUALREPORT 61

loans and $11 million income from other sources. As compared to

the prior year, income from investments was $61 million higher in

the year as a result of both a higher level of investments and higher

yields. Income from loans was $30 million higher primarily due to

expansion of the Bank's loan portfolio. The interest charged on new

loans increased during the fiscal year from 6% percent to 7 percent.

Expenses in fiscal 1970 totaled $291 million compared with $239

million the previous year. Interest on the Bank's own bonds and

other financial costs amounted to $246 million, an increase of $49

million over fiscal 1969 reflecting both increased borrowings and

higher interest rates. Administrative expenses were $4 million higher

at a total of $45 million, after deduction of $15.8million in management fees charged to the International Development Association.

The Bank increased its investments in liquid securities during the

year by $344 million to an aggregate of $1,720 million at June 30,

1970. Other liquid investments held in the Bank's Special Reserve,

on the same date, amounted to $292 million, bringing its liquid securities to a total of $2,012 million. This compares with a total of

$1,667million in similar holdings at June 30, 1969.

Repayments of principal on loans received by the Bank during

the year amounted to $329 million; and a further $113 million was

repaid to purchasers of parts of loans. Total principal repayments

to the Bank through June 30, 1970, aggregated $3,763 million, including $2,126million repaid to the Bank and $1,637million repaid

to purchasers of borrowers' obligations sold by the Bank.

Outstanding funded debt of the Bank was $-1,568million on June

30, 1970. During the year the Bank borrowed $349.5million through

the issuance of 2-year U.S. dollar bonds to Central Banks and other

governmental agencies in more than 60 countries; 72 billion yen

(U.S. $200 million), the first sale of Yen obligations by the 'Vorld

Bank; and DM:719 million (U.S. $185.5 million) in Germany. The

Bank also issued $97.6 million of bonds that had been sold previously under delayed delivery contracts.

These borrowings, in part, refunded maturing issues amounting to

the equivalent of $377 million. After the retirement of U.S. $58.8

million equivalent of obligations retired through sinking fund and

purchase fund operations, the Bank's outstanding funded debt

showed an increase of $487million from the previous year.

Southern Yemen, Swaziland and the Yemen Arab Republic became members in the year, bringing total membership to 113 countries on June 30, 1970.The Democratic Republic of Congo, Jamaica

and Nigeria increased their subscriptions to the Bank's capital. On
62 SECURITIES AND EXCHANGE COMMISSION

June 30, 1970 aggregate subscribed capital of the Bank was $23,158.8

million of which the equivalent of $2,315.9million had been paid in

to the Bank and the remaining $20,842.9million was subject to call

only to meet the obligations of the Bank.

Inter-American Development Bank

The Inter-American Development Bank Act, which authorizes the

United States to participate in the Inter-American Development

Bank, provides an exemption for certain securities which may be issued or guaranteed by the Bank similar to that provided for securities of the International Bank for Reconstruction and Development.

Acting pursuant to this authority, the Commission adopted Regulation IA, which requires the Bank to file with the Commission substantially the same information, documents and reports as are required from the International Bank for Reconstruction and

Development. The following summary of the Bank's activities reflects information submitted by the Bank to the Commission.

During the year ended June 30, 1970, the Bank made 21 loans totaling the equivalent of $223,823,000from its Ordinary Capital resources, bringing the net total of loan commitments outstanding,

after cancellations, to 193, aggregating $1,327,312,073.During the

year, the Bank sold or agreed to sell $1,166,187in participations in

the aforesaid loans, all such participations being without the guarantee of the Bank. The loans from the Bank's Ordinary Capital resources were made in Argentina, Brazil, Chile, Costa Rica, Ecuador,

Mexico, Peru, Uruguay and Venezuela.

During the year the Bank also made 39 loans totaling the equivalent of $451,660,000from its Fund for Special Operations, bringing

the gross total of loan commitments outstanding to 257, aggregating

$1,807,152,484.The Bank made no loans during the year from the

Social Progress Trust Fund, which it administers under an agreement with the United States, leaving the gross total of loan commitments outstanding from that Fund at 116, aggregating $495,333,014.

On June 30, 1970, the outstanding funded debt of the Ordinary

Capital resources of the Bank was the equivalent of $774,561,704reflecting a net increase in the past year of the equivalent of

$60,490,206.During the year the funded debt was increased through

public bond issues in Austria and Germany, AS 150,000,000 (US

$5,769,000) and DM 100,000,000 (US $27,322,000), respectively, as

well as private placements in Japan, Latin America, Switzerland

and the United Kingdom in the aggregate U.S. equivalent of

$61,389,000.The revaluation of the Deutsche Mark in October 1969

resulted in an increase in the funded debt in the U.S. dollar equiva-
THIRTY-SIXTH ANNUAL REPORT 63

lent of $8,825,000.The funded debt was decreased through the retirement of $25,350,000 of short-term dollar bonds and $17,465,000

through sinking fund purchases.

The subscribed ordinary capital of the Bank on June 30, 1970 was

the equivalent of $2,282,255,000of which $1,893,775,000represented

callable capital.

Asian Development Bank

The Asian Development Bank Act adopted in March 1966 authorized United States participation in the Asian Development Bank

and provides an exemption for certain securities which may be issued or guaranteed by the Bank similar to the exemptions accorded

the International Bank for Reconstruction and Development and the

Inter-American Development Bank. Acting pursuant to this authority the Commission has adopted Regulation AD which requires the

Bank to file with the Commission substantially the same information, documents and reports as are required from these Banks. Approval during the fiscal year of the applications of Fiji and France

for membership in the Bank, with subscriptions of $1 million and

$25 million, respectively, brought the Bank's total membership to 35,

including 21 countries in the region and 14 nonregional developed

countries, with subscriptions totaling $1,004million.

The fourth of the United States' five $20 million installments on

its paid-in capital subscription was paid in August 1969 and consisted of $10 million in cash and $10 million in the form of a noninterest-bearing letter of credit which may be drawn on in the future when required by the Bank for disbursement. Of the $489.5

million subscriptions on paid-in capital for all members as of June

30, 1970, installments totaling $389.6 million had matured as of that

date.

As of June 30, 1970, Australia, Canada, Denmark, Japan, the

Netherlands and the United Kingdom had offered to contribute a

total of $159.45million to the Bank's Special Funds, of which $72.5

million had been made available to the Bank. In addition, the

$14.575 million set aside from Ordinary Capital in 1969 by the

Board of Governors for Special Funds purposes is also available for

such lending. On February 25, 1970, President Nixon submitted to

the Congress a proposal for a $100million United States contribution

to the Bank's Special Funds over a period of 3 years. The proposed

legislation is pending before the Congress.

In September 1969 the Bank sold DM 60 million ($15 million) 7

percent Deutsch Mark bonds in the Federal Republic of Germany. In

April 1970 the Bank sold AS 130 million ($5 million) Austrian
64 SECURITIES AND EXCHANGE COMMISSION

schilling '[ percent bonds in Austria. As of J Wle 30, 1970,these constituted the Bank's only borrowings.

During the year ending June 30, 1970, the Asian Development

Bank approved 12 loans amounting to $62.035million from its Ordinary Capital resources and 8 loans amounting to $33.658 million

from its Special Funds resources. This brought the Bank's loans

since its inception to a total of 25 from Ordinary Capital amounting

to $138.435million, and to 9 from Special Funds amounting to $34.648

million. As of June 30, 1970,the Bank had undertaken 27 technical assistance projects in 13 countries, as well as important regional activities.

E. TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures, notes, and similar debt

securities offered for public sale, except as specifically exempted, be

issued under an indenture which meets the requirements of the Act

and has been duly qualified with the Commission.

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities

Act of securities to be issued under a trust indenture subject to the

Trust Indenture Act is not permitted to become effective unless the

indenture conforms to the requirements of the latter Act designed to

safeguard the rights and interests of the purchasers. Moreover, specified information about the trustee and the indenture must be included in the registration statement.

The Act was passed after studies by the Commission had revealed

the frequency with which trust indentures failed to provide minimum protections for security holders and absolved so-called trustees

from minimum obligations in the discharge of their trusts. It requires that the indenture trustee be free of conflicting interests

which might interfere with the faithful exercise of its duties in behalf of the purchasers of the securities. It requires also that the

trustee be a corporation with a minimum combined capital and surplus; imposes high standards of conduct and responsibility on the

trustee; precludes preferential collection of certain claims owing to

the trustee by the issuer in the event of default; provides for the issuer's supplying evidence to the trustee of compliance with indenture terms and conditions such as those relating to the release or

substitution of mortgaged property, issuance of new securities or

satisfaction of the indenture; and provides for reports and notices

by the trustee to security holders. Other provisions of the Act prohibit impairment of the security holders' right to sue individually

for principal and interest except under certain circumstances, and
THIRTY-SIXTH ANNUAL REPORT 65 

require the maintenance of a list of murity holders which may be 

used by them to communicate with each other regarding their rights. 

Namber of Indentures Filed Under the Trust Indenture Act of 195'0 

Aggregate

amaunt 

In6enhlrespending .June30,1989............... lW R.732,%57.885


~~d~ntrne~ Rled during the meal year..................................... 647 21,214,MZ 
 689

Total lor dboosal.................................................... 1 */I 22,948,910.664

New York Stock Exchange

Pacific Coast Stock Exchange

Philadelphia-Baltimore- Washington

Stock Exchange

Salt Lake Stock Exchange

Spokane Stock Exchange

PART III

REGULATION OF SECURITIES MARKETS

In addition to the disclosure provisions discussed in Part II of

this report, the Securities Exchange Act of 1934 gives the Commission significant responsibilities with respect to the securities markets

and persons engaged in the securities business. Among other things,

it requires securities exchanges to register with the Commission and

provides for Commission supervision of the self-regulatory responsibilities conferred on registered exchanges. The Act also provides for

the registration and regulation of brokers and dealers doing business

in the over-the-counter markets, and grants to registered associations

of brokers or dealers self-regulatory functions under the Commission's

supervision. In addition, it contains provisions designed to prevent

fraudulent, deceptive, and manipulative acts and practices on the exchanges and in the over-the-counter markets.

This and the next part of the report deal with developments and

actions taken in these areas during the 1970 fiscal year. Statistical

information concerning the securities markets is presented in this

part. Certain recent developments of particular significance are discussed in Part I.

REGULATION OF EXCHANGES

Registration and Exemption of Exchanges

The Securities Exchange Act requires an exchange to be registered

with the Commission as a national securities exchange unless the Commission exempts it from registration because of the limited volume of

transactions effected. As of .Iune 30, 1970, the following 12 stock

exchanges were registered:

American Stock Exchange

Boston Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

Effective December 30, 1969, the Pittsburgh Stock Exchange was

acquired by and merged into the Philadelphia-Baltimore-Washington

66
THIRTY-SIXTH ANNUAL REPORT 67

Stock Exchange," The Honolulu Stock Exchange and the Richmond

Stock Exchange were exempt from registration during the fiscal year.

Review of Exchange Rules and Procedures

A major aspect of the Commission's supervisory function with respect to national securities exchanges is the continuous review by its

Division of Trading and Markets of the existing rules, regulations,

procedures, forms, and practices of all exchanges. Such review is necessary in order to: (1) ascertain the effectiveness of the application

and enforcement by the exchanges of their rules; (2) determine the

adequacy of exchange rules and of related statutory provisions and

rules administered by the Commission in light of changing market

conditions; and (3) anticipate and define problem areas so that

members of the Commission's staff can meet with exchange representatives to work out salutary procedures within the framework of

cooperative regulation. In addition, Rule 1'l'a-8 under the Exchange

Act provides that each national securities exchange must file with

the Commission a report of any proposed amendment or repeal of,

or addition to, its rules and practices not less than 3 weeks (or such

shorter period as the Commission may authorize) before taking any

action to effectuate the change. These proposals are submitted for review and comment to the Branch of Regulation and Inspections of

the Division of Trading and Markets.

During the 1970 fiscal year, 134 changes in exchange rules and

practices were submitted to the Commission pursuant to Rule

17a-8. Among the more significant were:

1. Amendments to the New York, American, Midwest and Pacific

Coast Stock Exchange Constitutions and Rules to permit limited

public ownership of member organizations. To minimize inherent

conflict of interest problems involved in public ownership, the

amendments, with certain exceptions, prohibited member organizations from trading in their own securities,"

2. The adoption of a new rule by the Midwest Stock Exchange

which gives the Exchange's president, or by delegated authority a

senior vice president, the power to impose such conditions and restrictions on member organizations as may be suitable and reasonable to avoid violations of the Exchange's net capital and aggregate

indebtedness ratio requirements or to avoid development of an unhealthy financial condition by a member organization.

1Securities Exchange Act Release No. 8789 (December 24, 1969). See 35th

Annual Report, p. 69, note 1.

2 A registration statement covering a common stock offering by a New York

Stock Exchange member firm, Donaldson, Lufkin and Jenrette, Inc., became

effective on April 10, 1970.
68 SECURITIES AND EXCHA.L~GE COMMISSION

3. Changes in the policies of the American Stock Exchange which

clarify the reporting and disclosure responsibilities of listed companies and set forth expanded and more detailed disclosure guidelines.

4. An amendment of the Pacific Coast Stock Exchange Rules raising the minimum capital requirement for specialists from $100,000

in cash or liquid assets for each post at which a specialist is registered to the greater of $100,000in cash or marketable securities or 25

percent of the sum of the market value of its securities positions both

long and short.

5. Amendments to the New York Stock Exchange and American

Stock Exchange Constitutions requiring that all certificates for

listed securities issued on or after January 1, 1971, carry the appropriate CUSIP Identification number. CUSIP is a numbering system

for securities which specifically, uniformly and permanently identifies both the issuer of a security and the particular issue by an

eight-character code number.

Inspections of Exchanges

Pursuant to the regulatory scheme of the Exchange Act, the Commission actively oversees the discharge by the national securities exchanges of their self-regulatory responsibilities. As part of the program, the Branch of Regulation and Inspections in the Division of

Trading and Markets conducts regular inspections of various phases

of exchange activity. These inspections are a means of ensuring exchange performance of regulatory responsibilities and enable the

Commission to recommend, where appropriate, improvements and

refinements designed to increase the effectiveness of self-regulation.

In cases where it appears that revisions in internal policies are desirable in order to improve an exchange's performance, the Commission's staff communicates its views to the particular exchange and

discussesthe matters with exchange personnel to arrive at appropriate

solutions.

In fiscal 1970, the Branch of Regulation and Inspections conducted eighteen formal inspections. General inspections of the Midwest, National and Pacific Coast Stock Exchanges were conducted,

while inspections of the New York, American and Philadelphia-Baltimore-Washington Stock Exchanges were limited to exchange activities in specific areas.

In May 1970, following wide price fluctuations in certain securities, the Commission examined the activities of the specialists on the

New York and American Stock Exchanges. The inspections

concentrated upon but were not limited to the performance of the

specialists during the period of these fluctuations. Each specialist's

daily net sale or purchase balances in particular stocks were com-
THIRTY-SIXTH ANNUAL REPORT 69

pared with the daily price change for that stock. This is termed the

"net balance destabilizing test" and is one of the means utilized to

determine the effectiveness of the specialist in helping to maintain

an orderly, fair and stable market. The Commission'sstaff also studied other aspects of the specialists' performance and gathered information concerning the capital and financing arrangements of specialists. Recommendations based on these inspections are being

prepared by the staff.

Recent market activity which affected the financial condition of

many broker-dealers prompted the staff to inspect the administration

and interpretation by the New York Stock Exchange of its net capital rule." The net capital rules of the Commission and the various

exchanges are designed to provide safeguards for public investors by

setting standards of financial responsibility for brokers and dealers.

Members in good standing and subject to the capital rules of the

New York Stock Exchange and other major exchanges are exempt

from the Commission's rule. The basic concept of the net capital

rules is adequate liquidity; they are intended to require that the broker or dealer maintain sufficientliquid assets to cover his current indebtedness at all times. An adequate net capital rule, properly enforced, is, therefore, an important aspect of the regulation of brokers

and dealers in the public interest and for the protection of investors.

The results of this special inspection are being evaluated.

As a result of an examination by the Commission staff of the procedures of the Philadelphia-Baltimore-'Vashington Stock Exchange

for evaluating the financial condition of its members, particularly

odd-lot dealer-specialists, significant rule and policy changes were

implemented by the Exchange. These changes included more stringent reporting requirements for members so as to provide more frequent and complete records of the financial condition of odd-lot

dealer-specialists. In addition, procedural changes to eliminate certain floor activities that resulted in the reporting of double volume

figures in certain securities transactions were instituted.

Delisting of Securities From Exchanges

Under Section 12(d) of the Securities Exchange Act and the

Commission's Rule 12d2-2 thereunder, securities may be stricken

from listing and registration upon application by an exchange, or

withdrawn from listing and registration upon application by an issuer, in accordance with the rules of the exchange and upon such

terms as the Commission may impose for the protection of investors.

3 See Part I for further discussion of problems relating to the financial responsibility of brokers and dealers, and of measures being taken to deal with

these problems.
70 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year ended June 30, 1970, the Commission

granted applications for the removal of 57 stock issues, representing

53 issuers, and 2 bond issues from listing and registration. Since 3

stocks were each delisted by two exchanges and 1 stock was delisted

by three exchanges, the total of stock removals was 62. The distribution of these removals among exchanges was as follows:

Sloch Bond.

American Stock Exchange

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

New York Stock Exchange

Pacific Coast Stock Exchange

21

2

1

8

4

20

6

2

Total____________________________________________ 62 2

Delisting applications by exchanges are generally based on the

ground that continued listing is no longer appropriate because of a

reduced number of shares of the issue in public hands or an insufficient number of shareholders (sometimes resulting from acquisitions

or mergers) ; the low market value of outstanding shares; insufficient

trading volume on the exchange; failure to meet the exchange's requirements as to earnings or financial condition; failure to file required reports with the exchange; cessation of operations by the

issuer; or a combination of these factors.

During the fiscal year, the Commission in two instances granted

delisting applications by the American Stock Exchange which were

opposed by issuers. In Intercontinental Industries, Inc. ("INI"),4

the Exchange had found that INI disseminated or permitted the

dissemination of inaccurate or misleading information concerning corporate developments. Its application was based primarily on an Exchange delisting guideline that securities of a company which fails

to comply with its listing agreement with the Exchange (requiring

among other things prompt disclosure of material developments) are

subject to suspension and, "unless prompt corrective action is taken,

removal from listing."

INI contended, among other things, that the delisting guideline

relied on by the Exchange permits removal only if following a suspension of trading prompt corrective action is not taken, and

pointed to instances of suspensions based on misrepresentations

where the Exchange permitted resumption of trading after corrective action had been taken. It further contended that the Exchange's

rules should be construed to permit delisting only where there had

4 Securities Exchange Act Release No. 8858 (April 3, 1970).

_

_

_

_

_

_

_
THIRTY-SIXTH ANNUAL REPORT 71

been a continuous pattern of misrepresentations amounting to willful fraud, and it stressed that unlike the situation in other delisting

cases it met the Exchange's criteria for listing.

The Commission rejected these arguments and granted the Exchange's application. Stressing the importance of prompt and accurate disclosure of material corporate developments, it held among

other things that it could not find unreasonable the Exchange's interpretation of its rules as requiring that an issuer take corrective

action promptly, and not merely, as contended by INI, promptly

after the Exchange has had to resort to a suspension of trading. The

Commission noted that over 2 months had elapsed from the time

INI disseminated misleading information until it had published a

clarification, despite a marked increase in the price of, and volume

of trading in, INI stock, and inquiries by the Exchange as to the

cause of such increase,"

In the other case, Lee Motor Products, Ine.,6 the Exchange's action was based on Lee's failure to meet assets and earnings tests

specified in the Exchange's delisting guidelines. The Commission, in

granting the application, held among other things that the Exchange's failure to find or assert noncompliance with general factors

recited in the introductory section of its delisting guide did not require denial of the application; that the Exchange properly acted on

the basis of established facts rather than on the basis of a Pl'O forma

situation assuming consummation of certain proposed acquisitions by

Lee; and that it was not improper for the Exchange to consider

lossesincurred prior to the date of guideline revisions.

Automated Trading Information Systems

During the 1970 fiscal year three automated trading information

systems developed primarily to facilitate trading in large blocks of

securities commenced operations. These systems are Instinet, .Autex

and the Block .Automation System (B.AS) of the New York Stock

Exchange.' Instinet's system is designed so that it can operate without the services of separate brokers acting as intermediaries for

large purchasers and sellers of securities, particularly institutions,

and permits the conduct of negotiations via its computer . .Autex and

B.AS, on the other hand, also provide information as to the available

markets for the securities in the system but rely on the services of

intermediary brokers to handle negotiations and executions outside

of the system. The B.AS system has been limited to displaying inter5 A petition for review of the Commission's order is pending before the U.S.

Court of Appeals for the Fifth Circuit. (Docket No. 29861).

6 Securities Exchange Act Release No. 8672 (August 25,1969).

1See 35th Annual Report, pp. 4-6, for a further discussion of these systems.
72 SECURITIES AND EXCHANGE COMMISSION

est messages in New York Stock Exchange listed stocks, but the Exchange has announced plans to include American Stock Exchange

securities in the near future.

During the fiscal year the staff visited the main officesof Instinet,

Autex and BAS. These visits were designed to further acquaint the

Commission with the individual systems and to enable the Commission to better evaluate possible regulatory approaches to them. As

noted in the 35th Annual Report," proposed Rule 15c2-10 under the

Exchange Act, which would provide a regulatory framework for automated trading information systems that are not within the existing scope of regulation of exchanges and national securities associations,? was published for comment last year. The comments on this

proposal that were received are under review.

STATISTICS RELATING TO SECURITIES TRADED ON EXCHANGES

Number of Issuers and Securities

As of June 30, 1970, 5382 stock and bond issues, representing 3073

issuers, were admitted to trading on securities exchanges in the

United States. Of these, 5245 securities issues (3459 stock issues and

1786 bond issues), representing 2980 issuers, were listed and registered on national securities exchanges, the balance consisting primarily of securities admitted to unlisted trading privileges and securities listed on exempted exchanges, The listed and registered issues

included 1811 stock issues and 1515 bond issues, representing 1592 issuers, listed and registered on the New York Stock Exchange. Thus,

with reference to listed and registered securities, 51.8 percent of the

issuers, 52.4 percent of the stock issues and 84.8 percent of the bond

issues were on the New York Stock Exchange. Table 4 in the appendix to this report contains comprehensive statistics as to the number

of securities issues admitted to exchange trading and the number of

issuers involved.

During the 1970 fiscal year, 346 issuers listed and registered securities on a national securities exchange for the first time, while the

registration of all securities of 130 issuers was terminated. A total of

710 applications for registration of securities on exchanges was filed.

Market Value of Securities Available for Trading

As of December 31, 1969, the market value of stocks and bonds

admitted to trading on U.S. stock exchanges was approximately

$786 billion. The tables below show various components of this

figure.

S 35th Annual Report, pp. 5.

9 See Securities Exchange .Act Release No. 8661 (August 4,1969).
THIRTY-SIXTH ANNUAL REPORT 73

With reference to the ta:bles,it should be noted that issues are not

traded on both the New York and American Stock Exchanges and

that the figures below Tor "other exchanges" do not include issues

also traded on the New York or American Stock Exchanges. Accordingly, the total figure reflects the number of separate issues admitted to trading on national securities exchanges. The figures exclude issues suspended from trading and a few inactively traded

issues for which quotations were not available.

Number Market value

of Dec. 31, 1969

Issues (millions)

Stocks' New York Stock Exchange ____________________________________________ 1,789 $629,453 American Stock Exchange _____________________________________________ 1,152 47,716 Exclusively on other exchanges ________________________________________ 435 5,435

Total stocks _________________________________________________________ 3,376 682,604

Bonds: New York Stock Exchange., __________________________________________ 1,574 100,618 American Stock Exchange _____________________________________________ 175 2,202 ExclUSively on other exchanges ________________________________________ 24 287

Total bonds 1,773 103,107

Total stocks and bonds ____________________________________________._ 5,149 785,711

The number and market value as of December 31, 1969 of preferred and common stocks separately were as follows:

Preferred stocks Commou stocks

Market Market

Number value Number value

(millions) (millions)

New York Stock Exchange_._. ________________________ 499 $22,630 1,290 $606,823 American Stock Exchange _____________________________ 73 988 1,079 46,728 ExclUSlve1y on other exchanges 119 2$ 316 5,177

Total. 691 23,876 2,685 658,728

The 3,376 common and preferred stock issues represented over 18.2

billion shares.

The New York Stock Exchange has reported aggregate market

value of all stocks listed thereon monthly since December 31, 1924,

when the figure was $27.1 billion. The American Stock Exchange

has reported totals as of December 31 annually since 1936. Aggregates for stocks exclusively on the remaining exchanges have been

compiled as of December 31 annually since 1948.The available data

since 1936 appear in Table 5 in the Appendix of this Annual Report. Itshould be noted that changes in aggregate market value over

the years reflect not only changes in prices of stocks but also such

factors as new listings, mergers into listed companies, removals from

listing and issuance of additional shares of a listed security.

_________________________•• _________________• ____________

__________________• ______

______• _________________________• __________
74 SECURITIES AND EXCHANGE COMMISSION 

Volume of Seenritiea Traded 

The total volume of securities traded on all exchanges in calendar 

year 1969 was 5.1 billion shares, including stocks, rights and warrants, and $5.1 billion principal amount of bonds. The 1969 total 

dollar value of all issues traded was $181 billion. Trading in stocks 

declined 7 percent in share volume and 11 percent in dollar value 

over 1968. Furthermore, during the first 6 months of 1970, stock 

trading volume declined somewhat from the 1969 pace. 

The figures below show the volume and value of securities traded 

on all stock excl~anges (registered and exempted) during the calendar gear 1969, and the first 6 months of 1970. Tables 6 and 7 in the 

Appendix of this Annual Report contain more comprehensive statistics on volume, by exchanges. 

Volume and Value of Trading on all Ezchanges 

(Amouots in Thwsends) 

Calendar Fint6mths IIIIMI M 

Volume: 

8toolrs (shares) 4,881,191 2,221 017 

170,801 188: 819 

~,IB,M~ 2.829.no 

176.311,W 63,178 808 

1 018 757 244:973 . 4:~1:263 2,216,279 

Total o..~ ............... ~.~~..~ ......... ~ ....~..~ .......
~ ........... I 180,891,028 I 70,638. IG


I Does not inelude U.8. Gmemmeot Bonds. 

Foreign Sfocks on Exchanges 

The estimated market value on December 31, 1969 of all shares 

and certificates representing foreign stocks on U.S. stook exchanges 

was $18.8 billion, of which $14.3 billion represented Canadian and 

$4.5 billion represented other foreign stocks. 

Foreion Stocks on Ezchonoes 

Canadian Other foreign Total 

December 31.1969 -

-

~sue value Issues ~due IsueB VS~UB i / I 1 

Exchange:

N Y .............. 18 $8 817 767 OW 


nrnerimn.~~.-~~.~...~-~. as 
 5:23o'71i7oo

Others only~.~..~~...~... 3 n:14z,3m 84,~z.ag 

Total...~.~~...~ ....... 67 14.2&5,612,a?S 


I I I I I 


The number of foreign stocks on the exchanges declined from 115 

in 1968 to 106 in 1969, continuing a steady decline which began in 

1960 when 173 foreign issues were being traded. However, trading in 

foreign stocks on the American Stock Exchange represented 10.70 

percent of aggregate share volume on that exchange in 1969 as com- 
THIRTY-SIXTH ANNUAL REPORT 75 

pared to 10.02 percent in 1968. On the New York Stock Exchange 

trading in foreign stocks in relation to aggregate volume also increased, from 2.4 percent in 1968 to 3.4 percent in 1969. 

Comparative Exchange Statiatica 

During the fiscal year 1970, there was a moderate increase in the 

total number of stocks listed on exchanges. The increase in listings 

on the New York and American Stock Exchanges was consistent 

with the trend of recent years; the number of stocks listed exclusively on other exchanges increased for the second straight year, 

continuing the reversal of the downward trend that had prevailed 

for many years. 

Net Number of Stocks on Ezchanges 

New York American Ereluslvely Total rune 30 1 / 8bck 1 onothsr 1 stmk8on 

Exohange B U Elehsnge exchanges erohangm 

I I I 

The aggregate value of shares listed on the New York Stock Exchange relative to the total share value on all exchanges increased in 

1969,-while the percentage of the total share value accounted for by 

American Stock Exchange stocks declined. The percentage for stocks 

traded exclusively on other exchanges mas unchanged from the 1968 

level. 

Value of Shares Listed on Ezchnges, in Percentages 

Dwmber 31 

The figures below show the annual volume of shares traded, including rights and warrants, on all exchanges during selected years 

since 1940. In 1969 both share and dollar volume of trading on all 
76 SECURITIES AND EXCHANGE COMMISSION

exchanges halted their steady climb of the preceding 6 years and

declined 5 and 11 percent, respectively. In the first 6 months of 1970,

the rates of decline over the comparable period in 1969 were 10 percent for share volume and 27 percent for dollar value, with most of

these reductions attributable to the marked decline in trading on the

American Stock Exchange.

Share and Dollar Volume on Exchanges

New York I

American

I

All other

I Stock Stock exchanges Total Calendar year Exchange Exchange

Share volume (thonsands)

1940____________________________________________ 285,059 49,882 42,957 377,898 1945____________________________________________ 506,564 163,860 98,595 769,019 1950____________________________________________ 681,806 120,908 90,606 893,320 1955____________________________________________ 909,785 253,531 158,084 1,321,401 1960____________________________________________ 986,878 320,906 133,263 1,441,048 1961____________________________________________ 1,392,573 548,161 201,790 2,142,523 1962____________________________________________ 1,220.854 344,347 146,744 1,711,945 1963____________________________________________ 1,371,808 354,305 154,686 1,880,798 1964____________________________________________ 1,542,373 411,450 172,551 2,126,374 1965____________________________________________ 1,867,223 601,844 201,944 2,671,012 1966____________________________________________ 2,297,884 756,942 257,558 3,312, 383 1967____________________________________________ 2,992,805 1,320,462 333,258 4,646,525 1968____________________________________________ 3,352,169 1,608,325 448,244 5,408,737 1969____________________________________________ 3,243,333 1,417,764 473,898 5,134,995 1970 (First 6 months) ___________________________ 1,684,731 501,071 225,063 2,410,866

Dollar volume (thousands)

1940____________________________________________ 7,170,572 646,146 603,065 8,419,783 1945____________________________________________ 13,474,271 1,759,899 1,020,382 16,254,552 1950____________________________________________ 18,734,723 1,493,706 1,579,855 21,808,284 1955____________________________________________ 32,830,838 2,657,016 2,551,253 38,039,107 1960____________________________________________ 37,972,433 4,235,686 3,098,484 45,306,603 1961. ___________________________________________ 52,820,306 6,863,110 4,388,207 64,071,623 1962____________________________________________ 47,353,334 3,736,619 3,765,941 54,855,894 1963____________________________________________ 54,897,096 4,844,912 4,696,065 64,488,073 1964___________________________________________ 60,501,229 6,127,236 5,833,285 72,461,750 1965____________________________________________ 73,234,393 8,874,875 7,439,825 89,549,093 1966____________________________________________ 98,653,005 14,647,166 10,366,272 123, 666, 443 1967____________________________________________ 125, 362, 700 23,491,312 13,335,199 162,189,211 1968____________________________________________ 144,992,721 35,479,186 16,646,050 197, 117, 957 1969____________________________________________ 129,622,648 31,036,896 15,730,215 176, 389, 759 1970 (First 6 months) __________________________ 52,677,444 8,841,144 6,903,282 68,421,871

In 1969, the ratio of share volume on the New York Stock Exchange to the total on all exchanges reversed the declining trend of

the past five years, but its value ratio declined slightly. On the

American Stock Exchange, where the percentage of share and dollar

volume had risen steadily since 1963,slight declines were registered.

The regional exchange percentage of both share and dollar volume

increased moderately in 1969.In the first 6 months of 1970, both the

share volume and dollar volume ratios for the New York Stock Exchange increased markedly, while these ratios for the American

Stock Exchange declined significantly. Both ratios for regional exchanges showed moderate gains. Stocks, rights and warrants are included in the following presentation. Annual data in more detail are

shown in Appendix Table 7 of this report.
THIRTY-SIXTH ANNUAL REPORT

Annual Sales of Stock on Exchanges, in Percentages

77

Value

(dollars)

Percent of share volume Percent of dollar volume Calendar year

New York American .All other New York American .All other

1940__________________________ 76.44 13.20 11.36 85_17 7.68 7_15 1946__________________________ 66.87 21.31 1282 82.76 10_81 6.44 1950__________________________ 76. 32 13.04 10 14 85.91 6.85 7.24 1965__________________________ 68.85 19.19 11. 96 86.31 6.98 6.71 1960__________________________ 68.48 2227 9.26 83_81 9.36 6.84 1961. _________________________ 64.99 26.58 9.43 8244 10.71 6.85 1962__________________________ 71_32 20 12 8.58 86.32 6.81 6.87 1963__________________________ 72.94 18.84 8.22 85.19 7.62 7.29 1964__________________________ 72.04 19.35 8.11 83.49 8.46 806 1965__________________________ 69.91 22.63 7.58 81. 78 9.91 8.31 1958__________________________ 69.37 22.85 7.78 79.78 11.84 8.38 1967__________________________ 64. 41 28.42 7.17 77.30 14.48 8 22 1968__________________________ 61. 98 29.74 828 73.58 18.00 8.44 1969__________________________ 63.16 27.61 9.23 73.49 17.60 8. 91 1970 (FIrSt 6 months) _________ 69.88 20.78 9.34 76.99 1292 10.09

Block Distributions Reported by Exchanges

The usual method of distributing blocks of listed securities considered too large for the auction market on the floor of an exchange is

to resort to "secondary distributions" over the counter after the close

of exchange trading. There were 142 secondary distributions in 1969

compared to 174 in the preceding year. The dollar value of the

shares sold in this manner declined 21 percent to $1,244.2 billion.

During the first 6 months of 1970,there were 31 secondary distributions with a total value of $205.8million.

Special Offering Plans were adopted by many of the exchanges in

1942, and Exchange Distribution Plans in 1953, in an effort to keep

as much trading as possible on their floors. There were no special offerings last year. Exchange distributions continued to decline from

the record of 72 in 1963 to 32 in 1969. The value of the 1969 exchange distributions fell 44 percent to $52.2million.

Block Distributions of Stocks Reported by Exchanges

Number I Shares I Shares In offer sold

12 months ended December 31,1969-

Special offerings

Exchange dlstnbutlons

Secondary dlstrrbutlons

.,;~

01 0 I 0 I 0 32 2, 143,585 I, 706, 572 52, 198,372 142 37, 189, 104 38, 224, 799 I, 244, 186,322

6 months ended June 30, 1970

Special offerlngs_ -------------------------------- 0 I 0 I 0 I 0 Exchange dlstrtbutlons , 20 1,043,696 926,066 23,861,661

Secondary dlstributlons__________________________ 31 7,996,639 8,351,870 205,843,010

-Details of these dtstnbutlons appear In the Commission's monthly Statistical Bulletins. Data for prior years are shown In Appendix Table 81n this Annual Report.

Unlisted Trading Privileges on Exchanges

The number of stocks with unlisted trading privileges which are

not listed and registered on other exchanges further declined during

_

_

_

_
78 SECURITIES AND EXCHANGE COMMISSION

the fiscal year from 89 to 62. The decline was accounted for by the

removal of 25 such stocks by the American Stock Exchange, and of

two by the Honolulu Stock Exchange. During the calendar year

1969, the reported volume of trading on the exchanges in stock with

only unlisted trading privileges decreased to about 47,958,150shares,

or about 0.97 percent of the total volume on all exchanges, from

about 52,321,064shares, or about 0.98 percent of share volume, during calendar year 1968. About 98 percent of the 1969 volume was on

the American Stock Exchange, while two other exchanges contributed the remaining 2 percent. The share volume in these stocks on

the American Stock Exchange represented 3.5 percent of the total

share volume on that exchange.

Unlisted trading privileges on exchanges in stocks listed and registered on other exchanges numbered 2,091 as of June 30, 1970. The

volume of trading in these stocks for the calendar year 1969 was reported at about 168,901,733shares. About 95.7 percent of this volume

was on regional exchanges in stocks listed on the New York or

American Stock Exchanges. The remaining 4.3 percent represented

unlisted trading on the American Stock Exchange in issues which

were listed on regional exchanges but as to which the primary market was the American Stock Exchange. While the 168,901,733share

volume amounted to only 3.5 percent of the total share volume on all

exchanges, it represented a substantial portion of the share volume

of most regional exchanges, as reflected in the following approximate percentages: Cincinnati 56.9 percent, Boston 77.9 percent, Pacific Coast 29.6 percent, Midwest 34.5 percent, and Pittsburgh 60.1

percent.t?

Applications by exchanges for unlisted trading privileges in

stocks listed on other exchanges, filed pursuant to Rule 12f-1 under

Section 12(f)(1)(B) of the Securities Exchange Act, were granted

by the Commission during the fiscal year ended June 30, 1970, as

follows:

Number

oj 8tOCktJ

Boston__________________________________________________________ 93

Cincinnati 1

I>etroit --_______________________________________________________ 29

lfidvvest ----------------________________________________________ 56

Pacific Coast_____________________________________________________ 21

Philadelphia-Baltimore- Washington 79

TOTllL 279

I.The distribution of unlisted stocks among the exchanges and share volume

therein are shown in .Appendix Table 9.
THIRTY-SIXTH ANNUAL REPORT 79

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Exchange Act provides for registration with

the Commission of national securities associations and establishes

standards and requirements for such associations. The National Association of Securities Dealers, Inc. (NASD) is the only association

registered under the Act. The Act contemplates that such associations will serve as a medium for self-regulation by over-the-counter

brokers and dealers. Their rules must be designed to protect investors and the public interest, to promote just and equitable principles

of trade, and to meet other statutory requirements. They are to operate under the general supervision of the Commission, which is authorized to review disciplinary actions taken by them," to

disapprove changes in their rules, and to alter or supplement their

rules relating to specified matters. Review of NASD rules is carried

out for similar purposes as the review of exchange rules described at

page 67.

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive to

membership by permitting such associations to adopt rules which

preclude a member from dealing with a nonmember broker or dealer

except on the same terms and conditions as the member affords the

general public. The NASD has adopted such rules. As a result,

membership is necessary to profitable participation in underwritings

since members may properly grant price concessions, discounts and

similar allowances only to other members.

At the close of the fiscal year the NASD had 4,482 members, reflecting a net increase of 380 members during the year. This increase

was the net result of 712 admissions to and 332 terminations of

membership. At the end of the year NASD member firms had 7,375

branch offices,reflecting a net increase of 276 officesduring the year.

This increase was the net result of the opening of 2,025 new offices

and the closing of 1,749 offices.During the year the number of registered representatives and principals, which categories include all

partners, officers,traders, salesmen and other persons employed by or

affiliated with member firms in capacities which require registration,

increased by 34,341 to stand at 193,370 as of June 30, 1970. This increase was the net result of 51,694initial registrations, 31,331 re-registrations and 48,684terminations of registrations during the year.

During this period the NASD administered 105,574 qualification

examinations, of which approximately 73,095 were for NASD quali11 This aspect; of the Commission's supervisory authority is discussed at pp.

125-126, infra.
80 SECURITIES AND EXCHANGE COMMISSION

fication and the balance for other agencies, including major exchanges, the Commission and various States.

Commission Review of NASD RnIes and Policies

Under Section 15A(j) of the Exchange Act, the NASD must file

for Commission review, 30 days in advance of their effectiveness,

copies of any proposed rules or rule amendments; these may be disapproved by the Commission if not consistent with the requirements

of the Act. In practice, the Commission also normally reviews in advance of publication general policy statements, directives, and interpretations proposed to be issued by the Association's board of

governors pursuant to its powers to administer and interpret NASD

rules.

During the fiscal year, numerous changes in or additions to

NASD rules, policies and interpretations were submitted to the

Commission pursuant to these procedures. Among the significant

matters covered in such submissions were:

1. A revised interpretation of the Board of Governors concerning corporate financing and covering such matters as the

fairness of underwriting arrangements and compensation; and a

new statement of policy concerning venture capital and other

investments by members prior to public offerings.

2. The establishment of and amendments to NASD Emergency Rules of Fair Practice to assist in alleviating members'

back officeand operational problems, particularly those regulating trading hours and undue delays in the delivery of securities; and related amendments to the NASD's Uniform Practice

Code provisions governing procedures used in "buy-ins", and in

ex-rights, ex-warrants, and ex-dividend trading. In addition, the

National Clearing Corporation, developed as a subsidiary of the

NASD, was created to facilitate nationwide stock clearing operations for NASD members in the over-the-counter market. In

another related area, the NASD amended its standards for

over-the-counter quotations published in news media so as to require issuers whose securities are so quoted to include CUSIP

numbers (Committee on Uniform Securities Identification Procedures) on all stock certificates and bond instruments issued on

or after January 1, 1971.

3. Amendment to Schedule "D" of the NASD by-laws to provide for: (a) the qualifications for securities to be included in
THIRTY-SIXTH ANNUAL REPORT 81

the association's automated quotations system (NASDAQ); 12

and (b) the establishment of high and low usage charge plans

for NASDAQ Levels II and III service."

OVER-THE.COUNTER TRADING IN COMMON STOCKS LISTED ON

THE NEW YORK STOCK EXCHANGE

In accordance with Rule 17a-9 under the Exchange Act, since

January 1965 brokers and dealers who make markets in common

stocks listed on the New York Stock Exchange (sometimes referred

to as the "third market") have been reporting their trading over the

counter and on exchanges in those New York Stock Exchange common stocks in which they make markets. They also report certain

off-board trading in other common stocks listed on the Exchange.

Brokers-dealers who are not market makers report their large third

market transactions. The reporting system is designed to reflect all

sales to persons other than broker-dealers, i.e., to individuals and institutions. Prior to 1967, reports were also required for common

stocks listed on other registered securities exchanges. This requirement was discontinued, however, since about 98 percent of over-thecounter volume in listed common stocks is in New York Stock Exchange issues.

During the calendar year 1969, total over-the-counter sales of

common stocks listed on the New York Stock Exchange continued to

increase as they have in every year since 1965.Third market sales in

1969 amounted to 155.4 million shares, valued at $7,128 million.

Third market volume also continued to increase at a greater rate

than Exchange volume. As a result, over-the-counter dollar volume

in New York Stock Exchange common stocks amounted to 5.5 percent of the dollar volume in COITUnonand preferred issues on the

Exchange, a new high ratio.

In the first half of 1970, volume in the third market declined but

not as sharply as Exchange volume. Consequently, over-the-counter

dollar volume in New York Stock Exchange common stocks rose to

a record high of 7.1 percent of the dollar volume on the Exchange.

12 For a description of NASDAQ. see 35th Annual Report. pp. 5-6. NASDAQ

is expected to become operational in December 1970

13 Level II service will supply trading departments of securities firms and

such other persons as the NASD's Board of Governors may authorize with actual current quotations of over-the-counter market makers for securities included in the system. Level III service is similar to that of Level II except that

it will be available only to market makers registered with the NASD and will

include input devices to enable market makers to insert their current quotations

into the system.

409-865--71-----7
82 SECURITIES AND EXCHANGE COMMISSION

Over-the-Counter Volume in Common Stocks Listed on the New York Stock Exchange

Ratio of Over-the-counter Ncw York Stock over-the-counter

sales of common Exchange sales to New York stocks volume Stock Exchange

volume

(percent)

Share volume (thousands)

1965______________________________________________ 48,361 1,809,351 2.7 1966______________________________________________ 58,198 2,204,761 2.6 1967______________________________ . _______________ 85,081 2,885,748 2 9 1968 ______________________________________________ 119,730 3,298,665 3.6 1969______________________________________________ 155,437 3,173,564 4.9 1970 (FIrst 6 months) ____________ --------------- 94,602 1,529,889 6.2

Dollar volume (thousands)

1965______________________________________________ 2,500,416 73,199,997 3.( 1966 ______________________________________________ 2,872,660 98,565,294 2 9 1967______________________________________________ 4,151,917 125,329, 106 3.3 1968______________________________________________ 5,983,041 144, 978, 416 4 2 1969______________________________________________ 7,127,834 129, 603, 420 5 5 1970 (First 6 months) _____________________________ 3,711,825 52,614,986 7.1

REGULATION OF BROKER.DEALERS AND INVESTMENT ADVISERS

Registration

Subject to limited exemptions, the Securities Exchange Act requires all brokers and dealers who use the mails or the means of interstate commerce in the conduct of an over-the-counter securities

business to register with the Commission. Similarly, investment advisers (with certain exceptions) must register under the Investment

Advisers Act of 1940,which establishes a pattern of regulation comparable to that established by the Exchange Act with respect to brokers and dealers. Applicants for registration which are subject to a

statutory disqualification may be denied registration, and misconduct

following registration may result in suspension or revocation of the

registration. 14

As of June 30, 1970, 5,224 broker-dealers and 3,060investment advisers were registered. These figures reflect substantial increases in

both categories during the year.

The following tabulation reflects various data with respect to registrations of brokers and dealers and investment advisers during the

1970 fiscal year:

14 For a discussion of the various types of disqualifications and of enforcement actions taken by the Commission and the self-regttlatory agencies with respect to broker-dealers and investment advisers, see Part IV of this report.
THIRTY-SIXTH ANNUAL REPORT 83

Broker-Dealers

Effective registrations at close of preceding year 4,793

Applications pending at close of preceding year______________________ 82

Applications filed during year_____________________________________ 952

Total 5,827

Applications denied________ __ __ _ 0

Applica tions withdra Wll______ __ __ __ __ _ 9

Registra tions withdra wn___ ____ __ __ _____ 493

Registrations canceled____________________ 23

Registra tions revoked.,., __ 12

Registra tlons suspended________ __ 1

Registrations effective at end of year 5,224

Applications pending at end of year 63

Total 5,827

Investment Advisers

Effective registrations at close of preceding year 2,'476

Applications pending at close of preceding year_____________________ 67

Applications filed during year 822

Total 3,365

Registrations canceled or withdrawn_____________________________ 208

Registrations denied or revoked___________________________________ 3

Applica tions wi thdra wn______ ____ 15

Registrations effective at end of year 3,060

Applications pending at end of year 79

Total 3,365

Microfilming of Records

The Commission has encouraged the use of automation in many

facets of the securities business, including the maintenance of books

and records, so as to promote economies and efficienciesas well as

improved service for the public. Rule 17a-4 under the Exchange

Act, prior to its amendment during the fiscal year, required preservation of records in hard copy form except that it permitted the

substitution of a photograph on film after a period of two years following creation of the record. The Commission amended Rule

17a-415 to permit records to be immediately produced on microfilm

and maintained and preserved in that form, provided that a brokerdealer using the microfilm record has readily available at all times

appropriate equipment for Commission examination of the records

15 Securities Exchange Act Release No. 8875 (April 80, 1970).
84 SECURITIES A..."N"DEXCHANGE COMMISSION

and for the prompt production of such records in "hard copy" form

upon request of the Commission. In addition, as protection against

possible loss of records, the amendment provides that duplicate copies must be made of all microfilm records on a current basis and

stored separately.

Financial Reports of Broker-Dealers

Rule 17a-5 under the Exchange Act requires registered brokerdealers to file annual reports of financial condition with the Commission. These reports must be certified by a certified public accountant or public accountant who is in fact independent, with certain

limited exemptions applicable to situations where certification does

not appear necessary for customer protection. During the fiscal year

4,459 reports were filed with the Commission.

These reports enable the Commission and the public to determine

the financial position of broker-dealers. They provide one means by

which the staff of the Commission can determine whether a brokerdealer is in compliance with the net capital rule. Failure to file required reports may result in the institution of administrative proceedings to determine whether the public interest requires remedial

action against the registrant, as well as possible injunctive or criminal action.

Form X-17A-5, the form for filing annual broker-dealer financial reports, was amended during the fiscal year to require that securities listed in "failed to deliver" accounts with respect to

transactions which had been outstanding 30 days or more be classified according to the length of time that the transactions had been

outstanding." This amendment corresponds to the amendment of the

net capital rule during the previous fiscal year 17 which required that

in computing net capital, deductions be made based on outstanding

items in the "failed to deliver" account.

Broker-Dealer Income and Expense Reports

In order to obtain improved financial information concerning the

securities industry, the Commission, in June 1968, adopted Rule

17a-10 under the Securities Exchange Act, effective January 1,

1969.18 This rule requires registered broker-dealers and exchange

members to file income and expense reports for each calendar year

with the Commission or with a registered self-regulatory orzaniza- b I:>

tion [an eXClhangeor the Kational Association of Securities Dealers,

Inc. (NASD)] which has qualified a plan pursuant to paragraph

16 Securttles Exchange Act Release No. 8825 (February 20, 1970).

17 See 35th Annual Report, pp. 85--86.

18 Securities Exchange Act Release No. 8347 (June 28, 1968) ; also see 34th

Annual Report, pp. 14-15.

~
THIRTY-SIXTH ANNUAL REPORT 85

(b) of the rule. The self-regulatory organization is to transmit copies of such reports to the Commission. All reports are submitted to

the Commission on a confidential basis.

Since the end of the 1969 fiscal year, the Commission has approved the plans of the NASD, and the American, Midwest, and

Philadelphia-Baltimore-'Vashington Stock Exchanges under paragraph (b) of the rule." In summary, these plans provide that the

self-regulatory organization will (1) adopt and implement appropriate internal procedures for review of the reports submitted by members, (2) review all reports filed for reasonableness and accuracy,

(3) transmit edited reports to the Commission (excluding the names

and addresses of the respective firms), and (4) undertake certain

other obligations.

The reports covering calendar year 1969 of SECO brokerdealers 20 and non-NASD members of those exchanges which have

not qualified a plan have been received and reviewed by the Commission. The 1969 reports of all NASD members and of non-NASD

members of those exchanges which have qualified a plan have been

received by the Commission from the respective self-regulatory organizations. Itis anticipated that the Commission or the NASD will

publish aggregate information based on all the data received.

During the fiscal year, the Commission amended Rule 17a-10 to

extend the time within which the required reports must be filed. As

amended, the rule requires reports to be filed within 120 days after

the close of the calendar year instead of the 90-day period previously provided. This amendment was adopted because the program

is new and it appeared that a number of firms would have difficulty

in meeting the previous time schedule." The rule was also amended

to provide an orderly procedure for obtaining extensions of time

(for a maximum of 30 days) for filing the report in cases of undue

hardship.>

The Commission also amended the income and expense report

form (Form X-17A-10) in certain respects. The changes were

largely technical in nature and did not require the filing of additional financial information. They were designed primarily to aid in

maintaining the statistical continuity of the data to be compiled

19 Securities Exchange Act Release Nos. 8876 (April 30, 1970) ; 8896 (May

28,1970) ; 8946 (JUly 28,1970) ; and 8954 (August 11, 1970).

20 Those registered broker-dealers who are not members of the NASD are

commonly referred to as SECO broker-dealers.

21 Securities Exchange Act Release No. 8812 (February 9,1970).

22 Ibid.
86 SECURITIES AND EXCHANGE COMMISSION

from the reports over a period of time and to clarify questions

which had arisen regarding the reporting requirements."

Disclosure of Credit Terms in Margin Transactions

The "Truth in Lending Act" specifically exempts brokers' margin

loans to customers from its disclosure requirements. The Commission

had advised Congress that it had adequate authority under the Securities Exchange Act to require disclosure of the cost of credit, and

the Senate Committee on Banking and Currency, in its report on the

legislation, stated that it intended that the Commission adopt appropriate regulations as soon as possible. In response to this mandate

the Commission, in December 1969, adopted Rule 10b-16 under the

Securities Exchange Act to require meaningful disclosure of the

credit terms to securities customers in margin transactions." The

Rule requires broker-dealers who extend credit to customers to

finance securities transactions to furnish specified information with

respect to the amount of and reasons for the credit charges, including an initial disclosure and periodic subsequent disclosures. The initial disclosure is designed to insure that the investor, before his account is opened, understands the terms and conditions under which

credit charges will be made. This will enable him to compare the

various credit terms available to him and to understand the methods

used in computing the actual credit charges. The purpose of the periodic statement is to inform the investor of the actual cost of credit

and, with the aid of the initial disclosure, enable him to accurately

assess that cost.

Factual Basis for Securities Quotations

The Commission is constantly concerned about practices which result in substantial amounts of unregistered securities entering the

public market in the absence of any reliable information regarding

the issuer and at prices for which there is no reasonable basis. As

discussed in last year's report," on July 2, 1969, the Commission issued a release drawing particular attention to situations involving

"spin offs" of securities and trading in the securities of shell

corporations."

The Commission pointed out in that release that the unlawful

practices there described depended for their consummation in many

23 Ibid.

24 The Commission postponed the effective date of the Rule from April I,

1970, to July I, 1970, when it was advised that operational problems would

make it difficult for a number of firms to comply by April 1. Securities Exchange Act Release No. 8844 (March 18, 1970).

2535th Annual Report, pp. 30-31.

26 Securities Act Release No. 4982, Securities Exchange Act Release No. 8638.
THIRTY-SIXTH A1I.TNUALREPORT 87

instances on the activities of brokers and dealers, who were reminded of their obligation "to make diligent inquiry concerning the

issuer and [obtain] sufficient information to justify their activity in

the security." The broker-dealer conduct in question, which has also

occurred in other settings, has included "the hasty submission of

quotations in the daily sheets of the National Quotation Service,

Inc. in the absence of any information about the security or the issuer and before an opportunity is afforded to public investors to

acquire such information in order to make an informed investment

judgment. In many cases this practice has resulted in an irresponsible 'numbers' game which, apart from having the effect of foisting

unseasoned securities on the investing public, is not only disruptive

of the market but fraught with manipulative potential." 27

To furnish appropriate safeguards in these respects, the Commission announced a proposal to adopt Rule 15c2-11 under the Exchange Act.28 The rule would provide that a broker-dealer may not

submit a quotation to an inter-dealer-quotation-system for a security

which has not been the subject of quotations on a regular basis during the previous 30 days or which is not currently subject to and

meeting certain statutory disclosure or reporting requirements unless

the broker-dealer has furnished certain specified financial and other

pertinent information to the inter-dealer-quotation-system at the

time of the submission of the quotation and makes that information

available to anyone expressing an interest in the security.

Regulation of Broker-Dealers Who Are Not Members of a Registered Securities

Association

Under the Exchange Act, as amended in 1964,the Commission has

the responsibility for establishing and administering rules relating

to qualification standards and business conduct of broker-dealers

who are not members of the National Association of Securities Dealers, Inc. (NASD) 29 and persons associated with them, so as to provide regulation for these nonmember broker-dealers (also referred to

as "SECO" broker-dealers) comparable to that provided by the

NASD for its mernbers.s?

During the fiscal year, the number of nonmember broker-dealers

decreased from 455 to 336 and the number of associated persons of

such firms (which includes principally partners, officers, directors,

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

28 Ibid.

29 The .Act does not specifically refer to the N.ASD, but to broker-dealers who

are not members of a registered "national securities association." However, the

N.ASD is the only such association.

30 See pp. 79-81 for the discussion of N.ASDregulation.
88 SECURITIES AND EXCHANGE COMMISSION

and employees not engaged in merely clerical or ministerial functions) decreased from 19,750to 19,504.31The principal reason for the

decrease in the number of nonmember broker-dealers was the deregistration of 94 general agent broker-dealers engaged in the marketing of variable annuities, who subsequently became associated

persons of a single nonmember broker-dealer.

Number of Nonmember Broker-Dealers by Princi-pal Type of Business as of June 30,

1970

Principal type of business Number

Exchange member primarily engaged In floor activitles_______________________________________ .32

Exchange member primarily engaged in exchange commission busiocss_______________________ '18 Broker or dealer III general securities business, _______________________________________________ 82

Mutual fund underwriter and distributor .__ 35

Broker 01 dealer selling variable annultles____________________________________________________ 15 Solicitor of savings and loan accounts ._________ 19

Real estate syndicator or mortgage broker and banker________________________________________ 20 Broker or dealer selling 011and gas 1Oterests__________________________________________________ 4

Put and call broker or dealer or option writer________________________________________________ 'J:T

Broker or dealer selling securities of only one issuer or assocrated ISSuers______________________ 16 Broker or dealer selling church securities .______ 20 Government bond dealer______________ ____ ____________ 24

Broker or dealer in other securities business ,____ _____ ________ ___ 21 Inactive in securities business, __ _ ________ 4

Total. .______________ 336

Includes 13 New York Stock Exchange members and 10 American Stock Exchange members . Includes 3 New York Stock Exchange members and 4 American Stock Exchange members.

, Includes, among others, finders in mergers and acquisitions, sellers of theatrical partiorpations, a private

banker and appraisers of estates

Various rules have been adopted by the Commission since 1964 in

the development of its regulatory program for nonmember brokerdealers." One of the requirements is that each associated person engaged in specified securities activities successfully complete the Commission's General Securities Examination or an examination deemed

by the Commission to be a satisfactory alternative. Alternative

examinations include those given by the NASD, by certain of the

national securities exchanges and by many states. During the fiscal

year the list of states administering acceptable alternative examinations was updated as the result of a survey conducted by the Commission's staff.33 The Commission also discontinued its recognition of

Part I of the National Association of Insurance Commissioners

(NAIC) examination as an acceptable alternative for variable annuities salesmen." The NAIC had requested such action.

Rule 15b9-2 under the Act provides for an annual assessment to

be paid by nonmember broker-dealers to defray the costs of regula31 Nonmember broker-dealers must file a prescribed form (Form SECO-2)

with the Commission for each associated person.

32 See 31st Annual Report, pp. 11-13; 32nd Annual Report, pp. 16-18; 33rd

Annual Report, pp. 15-18; sun Annual Report, pp. 83-8;); 35th Annual Report, pp. 86-88.

33 See Securities Exchange Act Release No. 8935 (JUly 21, 1970). 34 Securities Exchange Act Release No. 8915 (June 26, H)70).

• • ___

•

•

•
THIRTY-SIXTH ANNUAL REPORT 89

tion. Itincludes a base fee, a charge £01' each office,and a charge £01'

each associated person. The rule also provides that the maximum

amount payable by anyone SECO member is set each year on the

assessment form which must be filed by each firm. The maximum £01'

fiscal year 1970was raised from $20,000to $25,000.35

Pursuant to the inspection program for nonmember broker-dealers, 48 inspections were conducted during the fiscal year. These

inspections were designed to determine compliance with applicable

Commission rules and to obtain information which will pro\'e helpful in the further development of the SECO program.

STATISTICAL STUDIES

The regular statistical activities of the Commission and its participation in the overall Government statistical program under the

direction of the Office of Statistical Standards, Office of Management and Budget, were continued during fiscal 1970 in the Commission's Office of Policy Research. The statistical series described

below are published in the Commission's monthly Statistical Bulletin. In addition, current figures and analyses of data are published

quarterly on new securities offerings, stock transactions of financial

institutions, the financial position of corporations, and plant and

equipment expenditures.

Issues Registered Under the Securities Act of 1933

Monthly statistics are compiled on the number and volume of registered securities. Summary statistics £01' the years Hl35-70 are

given in Appendix Table 1 and detailed statistics £01' the fiscal year

1970 appear in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate and noncorporate issues offered £01' cash sale in the United

States. The series includes not only issues publicly offered but also

issues privately placed, as well as other issues exempt from registration under the Securities Act, such as intrastate offerings and offerings of railroad securities. The offerings series include only securities actually offered £01' cash sale, and only issues offered £01' the

account of issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting, from the amount

of estimated gross proceeds received by corporations through the

sale of securities, the amount of estimated gross payments by COl'pOrations to investors £01' securities retired. Data on gross issues, re35 Securities Exchange Act Release No. 8893 (May 27,1970).
90 SECURITIES AND EXCHANGE COMMISSION

tirements and net change in securities outstanding are presented for

all corporations and for the principal industry groups.

Individuals' Saving

The Commission no longer compiles quarterly estimates of the

Volume and Composition of Individuals' Saving in the United

States. During the fiscal year 1970 these savings statistics were made

consistent with those published by the Federal Reserve Board, and

the Board now produces and publishes saving statistics as part of its

flow-of-funds statistical program, including seasonally adjusted as

well as unadjusted data.

Private Noninsured Pension Funds

An annual survey is published of private pension funds other

than those administered by insurance companies, showing the flow of

money into these funds, the types of assets in which the funds are

invested and the principal items of income and expenditures. Quarterly data on assets of these funds are published in the Statistical

Bulletin.

Stock Transactions of Financial Institutions

A statistical series containing data on stock trading of four principal types of financial institutions is published quarterly. Information on purchases and sales of common stock by private noninsured

pension funds and nonlife insurance companies has been collected on

a quarterly basis by the Commission since 1964; these data are combined with similar statistics prepared for mutual funds by the Investment Company Institute and for life insurance companies by the

Institute of Life Insurance.

Financial Position of Corporations

The series on the working capital position of all U.S. corporations,

excluding banks, insurance companies, investment companies and

savings and loan associations, shows the principal components of

current assets and liabilities, and also contains an abbreviated analysis of the sources and uses of corporate funds.

The Commission, jointly with the Federal Trade Commision, compiles a quarterly financial report of all U.S. manufacturing concerns.

This report gives complete balance sheet data and an abbreviated income account, data being classified by industry and size of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce,

conducts quarterly and annual surveys of actual and anticipated

plant and equipment expenditures of all U.S. business, exclusive of

agriculture. After the close of each quarter, data are released on ac-
THIRTY-SIXTH ANNUAL REPORT 91

tual capital expenditures of that quarter and anticipated expenditures for the next two quarters. In addition, a survey is made at the

beginning of each year of the plans for business expansion during

that year.

Directory of Registered Companies

The Commission annually publishes a list of companies required

to file annual reports under the Securities Exchange Act of 1934. In

addition to an alphabetical listing, there is a listing of companies by

industry group classified according to The Standard Industrial Classification Manual.

Stock Market Data

The Commission regularly compiles statistics on the market value

and volume of sales on registered and exempted securities exchanges,

round-lot stock transactions on the New York and American Stock

Exchanges for account of members and nonmembers, odd-lot transactions in 100 selected stocks on the New York Stock Exchange and

block distributions of exchange stocks. Since January 1965,the Commission has been compiling statistics on volume of over-the-counter

trading in common stocks listed on national securities exchanges (the

so-called "third market") based on reports filed under Rule 17a-9 of

the Securities Exchange Act.

Data on round-lot and odd-lot trading on the New York and

American Stock Exchanges are released weekly. The other stock

market data mentioned above, as well as these weekly series, are

published regularly in the Commission's Statistical Bulletin.
PART IV

CONTROL OF IMPROPER PRACTICES

One of the major areas of the Commission's work is its enforcement activities, which encompass the detection and investigation of

possible violations of the Federal securities laws and the taking of

appropriate action to curtail fraudulent and other improper activities. The Commission's enforcement program is designed to achieve a

broad regulatory impact within the framework of its limited manpower. In addition to direct action by the Commission, the various

self-regulatory organizations have a responsibility (subject to Commission oversight) to ferret out and take appropriate action with respect to improper practices by their respective members. Moreover,

there is a significant degree of coordination between the enforcement

activities of the Commission, the self-regulatory agencies, the various states, and certain foreign securities agencies.

This part of the report deals with some of the more significant aspects of these enforcement activities conducted during the fiscal

year 1 and with developments in litigation arising out of prior enforcement actions. It also summarizes certain noteworthy cases involving private litigation under the securities acts in which the

Commission participated as amicus curiae.

DETECTION OF IMPROPER PRACTICES

Public Complaints and Inquiries

The Commission receives many communications from the public,

consisting predominantly of complaints against members of the securities industry and requests for information about issuers. These

complaints and inquiries are given careful attention. In most instances the matters raised can be informally resolved, However,

where violations of the Federal securities laws are indicated, the

matters are referred to the enforcement officials of the Commission

for appropriate action. The Commission may also refer matters to

the stock exchanges or the National Association of Securities Dealers, Inc. (NASD). Analysis of complaints and inquiries helps the

Commission to recognize problems being experienced by a particular

firm or by the industry in general.

1Enforcement activities related to investment companies are discussed in

Part V, at pp. 149-157.

92
THIRTY-SIXTH AJ\TNUAL REPORT 93

1'"'1

"'1 During fiscal uno the Commission received some 15,000 written

and telephonic complaints and inquiries from the public relating

specifically to broker-dealers, of which about 85 percent involved

back-office problems. The remainder were divided between complaints of improper conduct and inquiries regarding various industry practices.

Other sources of information regarding possible securities violations include information received from stock exchanges, the NASD,

brokerage firms, State and Canadian securities authorities, better

business bureaus, and various law enforcement agencies.

Inspections

The program of surprise inspections of broker-dealers and investment advisers by the Commission's staff is another important device

for the detection of improper practices. During fiscal 1970, the staff

conducted 707 broker-dealer inspections (as compared with 732 the

previous year) and 96 inspections of investment advisers (as compared

to 128 during the previous year).

The table below shows the types of infractions indicated by the

inspections conducted during the fiscal year:

Broker-Dealers

Number of Type Broker-Deulere

Insufficient net capitaL___________________________________________ 115

Improper hypothecation__________________________________________ 7

Unreasonable prices in securities purchases and sales_______________ 21

Noncompliance with Regulation T_________________________________ 49

"Secret Profits"__________________________________________________ 2

Noncompliance with confirmation and bookkeeping rules_____________ 186

Other 180

Total indicated violations_______________________________________ 560

Investment Advi.'1ers

Number of

'l'ype In t.estmen t Admscrs

Books and records deficient_______________________________________ 18

Registration application inaccurate________________________________ 10

False, misleading, or otherwise prohibited advertising_______________ 10

Improper "hedge clause" * 12

Failure to provide for nonassignability in investment advisory contract 7

Other . .___ 8

Total indicated violations_______________________________________ 65

* "Hedge clauses" used in literature distributed by investment advisers generally state in substance that the information furnished is obtained from sources

believed to be reliable, but that no assurance can be given as to its accuracy. A

clause of this nature may be improper where the recipient may be led to believe

that he has waived any right of action against the investment adviser.
94 SECURITIES AND EXCHANGE COMMISSION

Market Surveillance

In order to enable the Commission to meet its responsibilities for

the surveillance of the securities markets, the market surveillance

staff has devised a number of procedures to identify possible manipulative activities. A program has been adopted with respect to surveillance over listed securities, in which the staff's activities are

closely coordinated with the stock watching operations of the New

York and American Stock Exchanges. 'WIthin this framework, the

staff reviews the daily and periodic stock watch reports prepared by

these exchanges and, on the basis of its analysis of the information

developed by the exchanges and other sources, determines matters of

interest, possible violations of applicable law, and the appropriate

action to be taken.

In addition, the market surveillance staff maintains a continuous

ticker tape watch of transactions on the New York and American

Stock Exchanges and the sales and quotation sheets of regional exchanges to observe any unusual or unexplained price variations or

market activity. The financial news ticker, leading newspapers and

various financial publications and statistical services are also closely

followed.

If any of these sources reveals possible violations, the market surveillance staff conducts a preliminary inquiry into the matter. These

inquiries, some of which are conducted with the cooperation of the

exchange concerned, generally begin with the identification of the

brokerage firms which were active in the security. The staff may

communicate with partners, officers or registered representatives of

the firm, with customers, or with officials of the company in question

to determine the reasons for the activity or price change in the securities involved and whether violations may have occurred.

The Commission has also developed an over-the-counter surveillance program involving the use of automated equipment to provide

more efficient and comprehensive surveillance. That equipment is

programmed to identify, among other things, unlisted securities

whose price movement or dealer interest varies beyond specified limits in a pre-established time period. When a security is so identified,

the automated system prints out current and historic market information concerning it. This data, combined with other available in.

formation, is collated and analyzed to select those securities whose

activity indicates the need for further inquiry or referral to the

Commission's enforcement staff.

Use of Computer for Name Searches

The use of the Commission's computer for "name searches" in the

enforcement program has resulted in a substantial increase in the
THIRTY-SIXTH ANNUAL REPORT 95

amount of information available and the speed with which it can be

obtained. The names of suspected securities law violators are

checked against the more than 1 million entries presently stored in

the computer. Upon request, the Commission also performs "name

searches" on prospective securities salesmen and others whose names

are submitted by the exchanges, the NASD, and the State securities

commissions. If the subject checked has been named in formal filings

with the Commission, has been a party to a proceeding, or has been

involved in an investigation, such information, together with pertinent dates, relationships, and cross references, is available immediately on a printout. Formerly a time-consmning manual search of

indices and files was required.

INVESTIGATIONS

Each of the Acts administered by the Commission specifically authorizes it to conduct investigations to determine whether violations

of the Federal securities laws have occurred.

The nine regional officesof the Commission are chiefly responsible

for the conduct of investigations. In addition, the Officeof Enforcement of the Division of Trading and Markets at the Commission's

headquarters office conducts investigations dealing with matters of

particular interest or urgency, either independently or with the assistance of the regional offices.The Officeof Enforcement also exercises general supervision over and coordinates the investigative activities of the regional officesand recommends appropriate action to

the Commission. Investigations are also conducted by the Divisions of

Corporation Finance and Corporate Regulation in the areas under

their respective jurisdictions.

It is the Commission's general policy to conduct its investigations

on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities involved, resulting in injury to

investors with no countervailing public benefits. Moreover, members

of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be

made public. Accordingly, the Commission does not generally divulge

the existence or findings of a nonpublic investigation unless they are

made a matter of public record in proceedings brought before the

Commission or in the courts.
96 SECURITIES AND EXCHANGE COMMISSION

When it appears from a preliminary investigation that a serious

violation of the Federal securities laws has occurred or is occurring,

a full investigation is conducted. Under certain circumstances the

Commission may issue a formal order of investigation which designates members of its staff as officersto issue subpoenas, take testimony under oath, and require the production of documents. During

the fiscal year ended June 30, 1970, the Commission issued 176 such

formal orders.

The following table reflects in summarized form the investigative

activities of the Commission during fiscal 1970:

Investigations of Possible Vlolatione of the Acts Administered by the Commission

Pending June 30, 1969____________________________________________ 800

Nevv Cases_______________________________________________________ 408

Total 1208

Closed 346

Pending June 30, 1970____________________________________________ 862

Enforcement of Investigative Subpoenas

In S.E.O. Y. Wall Street Transcript Oorp.,2 the Court of Appeals

for the Second Circuit, reversing the decision of the district court 3

previously reported,' ordered enforcement of an administrative subpoena duces tecum issued in the course of an investigation instituted

to determine whether the 'Vall Street Transcript Corporation by

publishing the Wall Street Transcript was an unregistered investment adviser. The court of appeals applied the general principle that

whether a particular person or entity is or is not included within

the coverage of a regulatory statute is a question properly to be determined by the regulatory agency in the first instance. It held:

"So long as an agency establishes that an investigation 'will be conducted

pursuant to a legitimate purpose, that the inquiry may be relevant to the

purpose, that the information sought is not already within [its] possession,

and that the administrative steps required ... have been followed,' no

showing of probable cause need be made to the district court unless a statute indicates otherwise." 5

The court specifically rejected a contention that the express exclusion of the publishers of a "bona fide newspaper . . . or financial

publication" from coverage under the Investment Advisers Act is

based upon constitutional considerations. Itstated:

"The phrase 'bona fide' newspapers, in the context of this list [of exclusions from the definition of Investment Adviser], means those publications

2422 F.2d 1371, certiorari denied, 398 U.S. 938 (1970).

3294 F. Supp.298 (S.D.N.Y., 19(8).

433th Annual Report, p. 92.

5 422 F.2d at 1375.
THIRTY-SIXTH ANNUAL REPORT 97

which do not deviate from customary newspaper activities to such an extent that there is a likelihood that the wrongdoing which the Act was designed to prevent has occurred. The determination of whether or not a

given publicatton fits within this exclusion must depend upon the nature of

its practices rather than upon the purely formal 'indicia of a newspaper'

which it exhibits on its face and in the size and nature of its subscription

list" (footnotes omitted). 6

The court noted that moennewspapers are subject to governmentul

regulation and concluded that "[t]he Investment Advisers Act does

not on its face abridge freedom of press simply because it may be

applied to publications which are classified firmly as part of the

'press' for some purposes but are not 'bona fide newspapers' excluded

under the Act." 7 In any event, the court found, a distinction must

be drawn between political or social speech, on the one hand, and

purely commercial speech, on the other, in determining the scope of

First Amendment privileges.

No fault was found in the breadth of the Commission's subpoena,

the court recognizing its similarity to the subpoena that had been

sustained by the Supreme Court in Oklahoma Press Publishinq 00.

v. Walling.s And the court concluded that no showing had been

made that either the Commission's investigation or the production

contemplated by the subpoena would restrict the Transcript's freedom of expression. In rejecting the district court's view that the

Commission's subpoena went to the "jugular of the Transcript as a

publishing firm," 9 the court of appeals found that the subpoena

calls "for the production of certain correspondence and advertising

materials which appear to be directly related to an investigation of

the type of practices which might cause a newspaper to fall outside

the Act's exclusion." 10

ENFORCEMENT AND REMEDIAL ACTION

",Vhenthe Commission determines, based upon staff investigation,

that enforcement action appears appropriate, it may authorize the

staff to institute civil court proceedings for injunctive relief, or, in

particularly serious cases, it may refer the matter to the .Iustice Department with a recommendation for criminal prosecution. In the

case of broker-dealers, persons associated with them, and investment

advisers, the Commission may, on the basis of staff allegations, initiate administrative proceedings which can result in a Commission

order imposing remedial sanctions on the respondent or respondents.

6422 F.2d at 1377.

7422 F.2d at 1379.

8327 U.S. 186 (1946).

9422 F.2d at 1381.

10 Ibid.

409-865--71----8
98 SECURITIES AND EXCHANGE COMMISSION

The Commission may also refer matters to state and local enforcement agencies or to industry self-regulatory organizations.

Administrative Proceedings

Under the Securities Exchange Act, as amended in 1964, the Commission has available to it a wide range of administrative sanctions

which it may impose against brokers and dealers and persons associated with them. The Commission may deny a broker-dealer's application for registration. With respect to a broker-dealer already registered, it may impose sanctions ranging from censure through

suspension of registration to revocation of registration. It may also

suspend or terminate a broker-dealer's membership in a stock exchange or registered securities association. Associated persons of broker-dealers may be censured, suspended, or barred from association

with any broker-dealer. Under the Investment Advisers Act, the

Commission may impose comparable sanctions against investment

advisers but has no authority to take direct disciplinary action

against persons associated with investment advisers.

Generally speaking, the Commission may impose a sanction only

if, after notice and opportunity for hearing, it finds (1) that the respondent willfully violated any provision of the securities acts or

the rules thereunder; aided and abetted such violations by others;

(in the case of broker-dealer proceedings) failed reasonably to supervise another person who committed such violations; or is subject

to certain disqualifications, such as a conviction or injunction relating to specified types of misconduct; and (2) that a particular sanction is in the public interest.

"While all respondents in broker-dealer and investment adviser

proceedings are entitled to a hearing, such proceedings are frequently disposed of without hearings where respondents waive a

hearing and consent to the imposition of certain sanctions or submit

offers of settlement which the Commission accepts as an appropriate

disposition of the proceedings. In those instances where hearings are

held, the hearing officerwho presides normally makes an initial decision, including an appropriate order, unless such decision is waived

by the parties. If Commission review is not sought, and if the case is

not called up for review on the Commission's own initiative, the initial decision becomes the final decision of the Commission, and the

examiner's order becomes effective.

In those instances where it prepares its own decision upon review

or waiver of an initial decision, the Commission is generally assisted

by the Officeof Opinions and Review. This Officeis directly responsible

to the Commission and is completely independent of the operating

divisions of the Commission, consistent with the principle of separation
THIRTY-SIXTH ANNUAL REPORT 99

of functions embodied in the Admininistrative Procedure Act, Where

the parties to a proceeding waive their right to such separation, the

operating division which participated in the proceeding may assist

in the drafting of the Commission's decision.

The Commission's opinions are publicly released and are distributed to the press and to persons on the Commission's mailing list. In

addition, they are printed and published periodically by the Government Printing Office in bound volumes entitled "Securities and

Exchange Commission Decisions and Reports."

Set forth below are statistics regarding administrative proceedings

pending during fiscal 1970 with respect to brokers and dealers and

investment advisers.

Broker-Dealers

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants a________________________________ 81

Against broker-dealer applicants a_________________________________ 2

Against nonregistered broker-dealers a_____________________________ 2

Against individuals only 8

Total 93

Proceedings instituted during fiscal year:

Against broker-dealer registrants a______________________________ 80

Against broker-dealer applicants a_______________________________ 3

Against nonregistered broker-dealers a___________________________ 1

Against individuals only________________________________________ 6

Total 90

Total proceedings current during fiscal year______________________ 183

Disposition of proceedings: b

Registra tion revoked_____ ______ ________ 10

Registration revoked and firm expelled from NASD_________________ 3

Registration revoked and firm expelled from stock exchange_________ 1

Registrant suspended from NASD for period of time________________ 1

Registrant suspended from certain activities for period of time______ 39

Registrant censured______________________________________________ 18

Registrant censured and suspended from NASD for perrod of timp____ 1

All securities activities of registrant suspended for period of time_____ 1

Withdrawal of registration permitted and proceedings dlseontinued;., 3

Withdrawal of application permitted and denial proceedings discon- tinued 1

Individuals barred or su~penrled__________________________________ 8

Total 86

In most of these proceedings one or more Individuals associated with the broker-dealer

respondents, or other individuals or firms, were nIso named as respondents.

For action taken in these cases as to respondents other than broker-dealers, where the

only action Indicated is against broker-dealers, see the table below.

•

•
100 SECURITIES AND EXCHANGE COMMISSION

Proceedings pending at end of fiscal year:

Against broker-dealer registrants__________________________________ 76

Against broker-dealer applicants__________________________________ 3

Agnlust nonregistered broker-dealers______________________________ 2

Against individuals only__________________________________________ 10

Total proceedings pending at end of year_________________________ 97

Total proceedings accounted for 183

Action taken against indlvlduals associated with broker-dealers included above

or with broker-dealers previously sanctioned:

Barred 41

Suspended 65

Censured 22

Censured and suspended__________________________________________ 4

Disassociated from registrant for periods of time___________________ 2

Censured and dissociated from registrant for period of time_________ 1

Total

Investment Atiulscrs

13;)

Proceedings pending a t beginning of fiscal year:

Against investment adviser registrants_____________________________ 5

Against investment adviser applicants_____________________________ 1

Total 6

Proceedings instituted during fiscal year:

Against investment adviser registrants____________________________ 11

Against investment adviser applicants_____________________________ 1

Total 12

Total proceedings current during fiscal year______________________ 18

Disposition of proceedings:

l1egistration suspended___________________________________________ 10

Reglstra tion revoked.,., _ _______ _______ ___ __ 2

l1egistration denied______________________________________________ 1

Total 13

Proceedings pending at end of fiscal year:

Against investment adviser registrants_____________________________ 4

Against investment adviser applicants_____________________________ 1

Total proceedings pending at end of year__________________________ 5

Total proceedings accounted for_________________________________ 18
THIRTY-SIXTH AJ\TNUAL REPORT 101

Certain of the more significant administrative decisions rendered

during the fiscal year in broker-dealer proceedings are summarized

below:

In Jaffee & Oompany,l1 the Commission found violations of its

Rule 10b-6 under the Exchange Act in connection with a registered

secondary offering of stock of Solitron Devices, Inc. Rule 10b-6 in

substance prohibits participants in a distribution of securities from

bidding for or purchasing such securities until their participation is

completed.

:M. L. Lee & Co., Inc. was the "exclusive agent" for the Solitron

offering which covered 107,700shares held by 3! stockholders, including 'Wilton L.• Jaffee, Jr., principal partner of Jaffee & Company.

The shares were to be offered by the sellers from time to time "in

the proximate future" at then prevailing market prices. During the

course of the offering, Greene & Company, through its trader, Bernard Horn, purchased over 25,000 shares of registered stock from

Lee for resale. At the same time, although Greene and Horn were

aware that the stock purchased from Lee was part of a registered

offering, Greene, through Horn, continuously inserted bids for Solitron in the quotation sheets published by the National Quotation

Bureau, Inc. and purchased Solitron stock that was not a part of the

offering. Lee was aware that Greene was entering bids for Solitron

in the sheets. Yet it continued to sell registered Solitron stock to

Greene. Jaffee made purchases of Solitron stock for his own account

during the offering and requested Horn to enter bids for the stock in

the sheets.

The Commission held that an offering of stock pursuant to a registration statement by its verv nature constitutes a distribution

within the meaning of Rule 10b-6, and that the fact that the Solitron shareholders were able to control the timing of their sales "in

no way obviated the need for the protections of the Rule or gave rise

to any exemption from it." Itstated that persons like Greene, engaging in market making activities in a security which at the same time

is being offered in a registered distribution. must not participate in

the distribution unless they have terminated their bidding and purchasing in the open market; that the Rule could be circumvented if

Lee were permitted to sell stock to other broker-dealers engaged in

bidding and purchasing activities although itself refraining from

such conduct; and that .Iaffee, having agreed to participate in the

Solitron offering, became a participant in the distribution irrespective of any sales of his own registered shares, a participation which

11 Securities Exchange Act Release No. 8866 (April 20, 1970). Petitions for

review by Jaffee & Co and W. L. Jaffee are pending (C.A. 2, No. 348JU).
102 SECURITIES AND EXCHANGE COMMISSION

continued for so long as any of his shares remained unsold or until

they were withdrawn from registration.

The Commission further held that Greene and Horn had violated

Section 5(b) (2) of the Securities Act by failing to deliver Solitron

prospectuses to certain customers. It imposed a thirty-day suspension on Horn, 20-day suspensions on Jaffee and Jaffee & Company,

and censure on Greene and Lee.

Commissioner Smith dissented from the Commission's findings of

violations of Rule 10b-6 by Greene, Horn, and Lee. He disagreed

with the majority's determination that a registered offering was per

se a "distribution" within the meaning of the Rule and concluded

that a sufficient showing had not been made on the record that

Greene and Horn had engaged in the kind of activity which would

support a finding they were participants in a distribution for purposes of the Rule.

In Riohard N. Oea,'2 the Commission, on the basis of findings of

violations of antifraud provisions of the securities acts, barred several persons from further association with any broker-dealer and revoked the broker-dealer registration of a firm which was controlled

by two of the respondents and which employed another respondent.

The Commission found that during the period January 1963 to

October 1964 when they were employed as salesmen by another broker-dealer, the individual respondents, in the offer and sale of securities of Home Makers Savings Corporation ("HMS"), made optimistic representations and predictions concerning the financial condition and prospects of the company and a prospective rise in the

market price of its stock despite knowledge that HMS had never operated at a profit, that its brief history was marked by continual

losses and increasing deficits, and that its only product, an antacid

tablet, had been seized by the Federal government in a condemnation

proceeding in which the government alleged that the name of the

product and the company's advertising material were false and misleading and violated the Federal Food, Drug and Cosmetic Act.

In addition, the Commission found that two of the respondents induced customers to engage in securities transactions which were excessive in size and frequency in light of the character of the customers' accounts, and that certain of them "falsely represented,

expressly or impliedly," to customers who had disclosed their financial needs and investment objectives, that certain highly speculative

securities met those needs and objectives. The Commission observed:

"It was incumbent on the salesmen in these circumstances, as part of

12 Securities Exchange Act Release No. 8662 (August 6, 1969), petition for

review dismissed (O.A.D.O., November 26, 1969).
THIRTY-SIXTH ANNUAL REPORT 103

their basic obligation to deal fairly with the investing public, to

make only such recommendations as they had reasonable grounds to

believe met the customers' expressed needs and objectives."

In D. H. Blair and 00.,13 which involved extensive transactions

through an account maintained at Blair in the stock of an obscure

oil company with negligible operations, the Commission found that

the account was used by a controlling person of the company to distribute unregistered stock and to manipulate the market in such

stock. It held that the salesman who handled the account violated

the registration, anti-fraud, and anti-manipulative provisions of the

securities acts, and it barred him from association with any broker

or dealer. Various other broker-dealer firms and individuals were

also sanctioned for participation in the violations or inadequate supervision, certain of them pursuant to offers of settlement accepted

by the Commission.

With respect to one of the respondent firms, which cleared Blair's

accounts and which was found to have failed reasonably to supervise

its margin and bookkeeping departments with a view to preventing

violations of the Securities Act registration requirements, the Commission stated, in response to the firm's argument that clearing firms

should not be required to exercise a general responsibility over the

operations of their "correspondent" firms:

"We do not undertake in this opinion to impose such a general obligation

on a clearing firm. Arrangements between clearing and correspondent firms

are a matter of contract between them, so long as the public customers' interests are not jeopardized. But where, as here, the record shows that personnel of the clearing firm were aware of serious irregularities in an account, it seems to us both reasonable and in the public interest to impose

on that firm an independent obligation to make appropriate inquiry and

take prompt steps to terminate any participation in activity violative of the

securities laws."

In Abbett, Sommer &: 00., Inc.,14 the Commission found, among

other things, that a broker-dealer, its controlling person and a corporation also controlled by him violated the registration provisions

of the securities acts in connection with the offer and sale of certain

mortgage notes. The respondents purchased these notes from, or sold

them as agent for, a company engaged in the business of buying such

notes at a discount from building contractors and others and reselling them "with recourse" against it in the event of default by the

note maker. The Commission rejected the respondents' claim that the

offer and sale of the notes were exempt from the registration require13 Securities Exchange Act Release No. 8888 (May 21, 1970).

14 Securities Exchange Act Release No. 8741 (November 10, 1969), aff'd without opinion (C.A.D.C., September 25, 1970).
104 SECURITIES AND EXCHANGE COMMISSION

ments of the Securities Act by virtue of Rule 234 which exempts

notes secured by a first lien on real estate if offered in accordance

with specified terms and conditions. It found that an "investment

contract" was in\'01ved in the offering of the notes and that, under

the terms of the Rule, the exemption was therefore unavailable.

The Commission pointed out that prior judicial and Commission

decisions had concluded that various contracts which in form involve nothing more than the sale of interests in real estate or chattels were in fact investment contracts and therefore securities because accompanied by an offer of or representation concerning

services upon which the investor relied to obtain a profit on his purchase. In this case, the notes were sold pursuant to arrangements

under which the note-discounter and the broker-dealer provided various services, including an investigation of the property and the

mortgagor, the collection of monthly payments for investors, and an

undertaking to some purchasers to repurchase the notes. The Commission stated that it did not

"consider it significant that in the "investment contract" cases previously

cited the services were designed to create a profit whereas in the present

case the services were directed essentially toward minimizing the risks involved in the investment. In both types of situations, the investor relies

upon the services and undertakings of others to secure the return of a

profit to him."

The Commission also found that the respondents made misrepresentations in the sale of the mortgage notes and that the brokerdealer failed to maintain certain records as required. It revoked the

broker-dealer's registration, found the other corporation a "cause" of

the revocation, and barred the controlling person from association

with a broker or dealer.

In Alfred B. Tallman, JJ'.'5 the Commission addressed itself,

among other things, to the obligation of broker-dealers to maintain

effective mechanisms to insure compliance with applicable requirements. One of the respondents in the proceeding had been employed

as a broker-dealer's compliance director. However, he was only 23

when he became so employed, and, although he was clothed with apparently broad compliance responsibilities, he in fact had yery limited authority and was given inadequate assistance, and he did not

effectively carry out the supervisory duties assigned to him.

The Commission stated:

"Broker-dealers have a responsibility to take effective measures to insure

compliance with the statutory standards and requirements. That responsibility is not discharged by the setting up of a compliance program with the

creation of a position designated Compliance Director which does not con-

,;; Securities Exchange .ActRelease No. 8830 (March 2, 1970).
THIRTY-SIXTH ANNUAL REPORT 105

fer the authority and provide the personnel, procedures and means necessary to accomplish its objectives. In such case there is created merely an

appearance of an effective compliance mechanism. Persons who are assigned to positions of Compliance Directors should be accorded the powers

to initiate and implement steps required to achieve compliance."

Although this respondent consented, in an offer of settlement, to

being censured, the Commission determined that under all the circumstances, including his young age and inexperience and the fact

that this was the first case involving charges against a compliance

employee as such, the public interest did not require that he be censured, and it discontinued the proceedings as to him.

In Investors Management 00., Inc., a proceeding involving the obligations of persons who receive non-public material information

from insiders, an initial decision was rendered during the fiscal year

by a Commission hearing examiner censuring a number of such

"tippees," The information in question, which related to a significant

deterioration in the earnings of Douglas Aircraft Co., Inc., had been

obtained by Merrill Lynch, Pierce, Fenner & Smith, Inc., in its

capacity as managing underwriter of a proposed debenture offering by

Douglas in 1966 and had boon conveyed to certain large customers of

Merrill Lynch who effectedsales and short sales of Douglas stock prior

to public disclosure of the earnings information and without making

disclosure to purchasers.v

In his initial decision, the examiner censured 12 "tippee" respondents who he found had willfully violated antifraud provisions of the

securities acts in effecting such sales." The examiners held that persons

other than traditional insiders who obtain material corporate nonpublic information and know or should know of its non-public nature

must either disclose such information or abstain from trading in the

securities of the corporation until it is public. He further held that

these obligations exist notwithstanding the absence of any continuing

or close relationship between the corporation or insider and the person using the information.

Neither the Commission's staff nor any of the respondents sought

Commission review of the initial decision, and the Commission con16 With respect to disposition of the proceedings as against Merrill Lynch

and certain persons associated with it, see Securities Exchange Act Release No.

8459 (November 25, 1968), discussed in the 34th Annual Report at pp. 8-9.

See also Oity Assootates, Securities Exchange Act Release No. 8fi09 (January

31,1969).

11 He ordered dismissal of the proceedings as to one respondent who he

found made no use of the infurmation obtained from :\Ierrill Lynch and discontinuance as to two respondents who he found merely occupied control relationships to some of the violators and did not merit a sanction.
106 SECURITIES AND EXCHANGE COMMISSION

sidered that there was not sufficient reason to order review of that

decision with respect to the examiner's factual findings and inferences, or with respect to the adequacy of the sanctions imposed or

his determination to dismiss or discontinue the proceedings as to certain respondents. The Commission determined, however, to review

on its own initiative the legal issues involved. !t pointed out that

such determination did not necessarily imply disagreement with the

examiner's opinion, but was based on the fact that the issues respecting the obligations of "tippees" were important matters having significant implications as to which it was desirable that the Commission express its own views.

Judicial Review of Administrative Decisions.-In Armstrong,

Jones & 00. V. S.E.0.,18 the Court of Appeals for the Sixth Circuit

affirmed an order of the Commission 19 which, as previously reported," imposed sanctions upon Armstrong, Jones & Co., a brokerdealer, and Thomas W'. Itin, its chief executive officer. The court

held that substantial evidence supported the Commission's findings

that the petitioners violated the registration provisions of the Securities Act when they effected sales of a Michigan insurance company's unregistered stock to non-Michigan residents shortly after the

firm commenced trading in the stock. Although an intrastate exemption from registration was claimed, the Commission found that Itin

had actively sought orders for the stock, to be executed immediately

after trading in the stock began, from non-residents of Michigan

and also that sales were made during this period to persons whom

Itin knew or should have known were nominees for non-residents. In

sustaining the Commission's finding that the firm willfully violated

antifraud provisions of the Securities Act, the court approved "the

position of the Commission that a broker-dealer may be sanctioned

for the willful violations of its agents under the doctrine of respondeat superior." The applicability of that doctrine was held unaffected by "[t]he fact that Congress enacted an additional provision

giving the Commission the power to impose a sanction on a brokerdealer for failure to adequately supervise its employees' acts ... " 21 The

court also rejected a contention that facts set forth in various public

records could serve in lieu of the written notice of the fact of common control between the issuer of a security and the broker-dealer

offering it for sale, which notice is required to be given to a cus18421 F.2d 359, certiorari denied, 398 U.S. 958 (1970).

19 Securities Exchange Act Release No. 8420 (October 3, 1968), rehearing

denied, Securities Exchange Act Release No. 8478 (December 27,1968).

20 35th Annual Report, p. 97.

21 421 F.2d at 362.
THIRTY-SIXTH Ai'rnlJAL REPORT 107

tomer pursuant to Rule 15cl-5 under the Securities Exchange Act.22

The court affirmed the Commission's holding that it was both fraud

and a violation of record-keeping provisions for the firm to have

confirmed sales of a new issue of securities to customers who had not

in fact agreed to the purchases; the court did not reach the question

whether an indication of interest, which had been given by all of

these customers, could ever, without more, be considered a binding

commitment to purchase securities."

In three separate opinions, the Court of Appeals for the Second

Circuit affirmed various aspects of the Commission's decision in

Richard Bruce and 00., Inc.24 In Hillel' v. 8.E.0.,25 and Gross v.

8.E.0.,26 the court affirmed the imposition of sanctions upon two of

the three principals of Bruce & Co., a broker-dealer firm. The court

found, in the Hiller case, that Bruce & Co. had acted in disregard of

the "basic obligation of fair dealing [which is] borne by those who

engage in the sale of securities to the public" when it actively solicited purchases of certain speculative securities "without reasonable

grounds for believing that reports disseminated in connection with

such solicitation had a basis in fact." 27 The court held that there

was substantial evidence in the record that Hiller, the firm's president, had authorized and even encouraged active solicitation of orders for stock on the basis of unconfirmed reports and rumors and,

for that reason, had properly been held responsible for the firm's

fraudulent course of conduct.

In affirming the Commission's determination that Gross, who had

been vice-president and secretary of Bruce & Co., had aided and

abetted violations of the antifraud provisions, the Court noted that

Gross had been "aware of the inadequacy of the information available" concerning the company whose securities were being offered by

the firm and had "also [been] aware of the active solicitation of .•.

stock purchases by representatives of his firm notwithstanding the

deficiency of information." 28 In Fink v. S.E.O., 29 the court upheld imposition of sanctions upon one of the salesmen of Bruce & Co., reaffirming its holding in Hanly v. 8.E.0.30 that the Commission had

the power to increase the sanction imposed by a hearing examiner.

22 Ibid.

23 421 F.2d at 864.

24 Securities Exchange Act Release No. 8808 (April 80, 1968), reported in the

84th Annual Report at pp, 92-98.

25 429 F.2d 856 (1970).

26418 F.2d 108 (1969).

27429 F.2d at 858.

28418 F.2d at 107.

29417 F.2d 1058 (1969).

30415 F.2d 589 (1969), reported in the 35th Annual Report at p. 102.
108 SECURITIES AND EXCHANGE COMMISSION

In another review of a broker-dealer proceeding, the Court of Appeals for the Sixth Circuit, in Klopp v, S.E.C.,31 reversed the Commission's finding, previously reported," that a registered representative

had violated the antifraud provisions of the Securities Act and the

Securities Exchange Act. Specifically, the Commission found that

Ralph 1\1. Klopp, a salesman for Paine, Webber, Jackson & Curtis, induced excessive trading in the accounts of two customers by means of

false representations concerning the securities activities of another

customer. The court of appeals held that the Commission's decision

was not supported by substantial evidence because the customer witnesses' testimony was not credible,

As previously reported." in Beck v, S.E.C.,34 the Court of Appeals for the Sixth Circuit upheld findings by the Commission of

willful violations by Beck, a securities salesman, of the antifraud

provisions of the securities acts, but it remanded the case to the

Commission for further explanation of the reasons for the sanction

imposed on Beck (a 4-month exclusion from the securities business

with a requirement that subsequent employment be in a nonsupervisory capacity). The Commission thereafter issued an opinion containing such explanation;" After the close of the fiscal year, upon a

renewed petition for review, the Court of Appeals set the sanction

aside." It held that the Commission abused its discretion when it ordered remedial sanctions based on the deterrent effect on Beck and

on others in the securities industry. The court found "no reason to

believe that ... [Beck] is inclined to commit any further illegal or

fraudulent acts," 37 and expressed doubt concerning the authority of

the Commission to impose sanctions on violators in order to deter

others. It concluded that under the circumstances, the Commission's

order was punitive, not remedial, and, as such, was not authorized.

Civil Proceedings

Each of the several statutes administered by the Commission authorizes the Commission to seek injunctions in the Federal district

courts against continuing or threatened violations of those statutes

or the Commission's rules thereunder. During the past fiscal year the

Commission instituted a total of 111 injunctive actions." A substan31427 F.2d 455 (1970), rehearing denied.

3235th Annual Report, p. 97.

3335th Annual Report, pp. 101-102.

34413 F.2d 832 (1969).

35Securities Exchange Act Release No. 8720 (October 16, 1969).

36430 F.2d 673 (1970).

37430 F.2d at 674.

38 More detailed statistics regarding the Commission's civil litigation activities are contained in Appendix tables 10-12.
THIRTY-SIXTH ANNUAL REPORT 109

tial number of these actions were designed to restrain further violations of the registration or antifraud provisions of the Securities

Act and the Securities Exchange Act; many others sought injunctions against operation of broker-dealers in violation of net capital

or other investor protection requirements.

The nature of some of the more noteworthy of these actions, and

certain appellate decisions in injunctive proceedings, are summarized

in the following pages.

In S.E.O. v. Parrin. Dohrmann 001npany,39 the Commission filed a

complaint in October 1969 against 18 defendants seeking to enjoin

further violations of the antifraud, reporting, proxy solicitation, and

extension-of-credit provisions of the Securities Exchange Act in

connection with the purchase and sale of securities of Parvin Dohrmann Company. It was alleged that one of the defendants, Delbert

1V. Coleman, had organized a group of investors for the purpose of

acquiring sufficientstock to obtain control of Parvin Dohrmann and

had filed untimely statements concerning the group with the Commission and the American Stock Exchange, pursuant to Section 13(d) of

the Securities Exchange Act, which were false and misleading.

The complaint further alleged that after acquiring control of Parvin Dohrmann, Coleman and other defendants manipulated the market price of Pan-in Dohrmann stock by, among other things: (i)

purchasing substantial amounts of the stock for the purpose of creating actual and apparent market activity and thereby inducing

purchases by others; (ii) restricting the floating supply of the stock

and thereby causing a rise in its market price; (iii) touting the

stock to certain large institutional and other investors, making available to them certain material. nonpublic information concerning the

company; and (iv) arranging for purchases off the exchange market

when it was learned that holders of large blocks of stock were about

to sell their interests in open market transactions.

The complaint also alleged that pursuant to an exchange agreement negotiated by Parvin Dohrmann with defendant Denny's Restaurants, Inc., in carly June 1969, each Parvin Dohrmann shareholder was to have received four shares of Denny's Restaurants

stock in return for each Parvin Dohrmann share held. According to

the complaint, the arrangement was thereafter renegotiated, however, to provide that certain defendants, all of whom were members

of the Coleman "control" group, would receive cash and notes in the

amount of $150 for each share of their Parvin Dohrmann stock,

while the remaining shareholders would receive only :n~;shares of

39 S.D.N.Y., 69 Civ. 4543 (ELP).
110 SECURITIES AND EXCHANGE COMMISSION

Denny's Restaurants (having a market value of $100 on July 10,

1969, the date of the public announcement of the renegotiated arrangement) for each of their Parvin Dohrmann shares. It was

charged that these acts unfairly and fraudulently preferred the interests of certain defendants over those of the public shareholders of

Parvin Dohrmann.

It was also alleged that Coleman, Sidney R. Korshak, Nathan V0-

loshen and other defendants acted to conceal these unlawful activities by filing false, misleading, and inaccurate reports with the

Commission and the American Stock Exchange, by issuing and disseminating various false and misleading press releases, and otherwise by attempting to suppress and conceal the material facts. In

this connection, it was alleged that Coleman, Korshak, and V0-

loshen, on the basis of a short press release that was totally uninformative, and while suppressing the true facts, attempted to induce

the Commission immediately to terminate a trading suspension that

had been imposed with respect to Parvin Dohrmann securities.

In addition to an injunction against future violations of the securities laws, the complaint requested that appropriate filings be directed to be made with the Commission and that the defendants be

required to disgorge profits received as a result of their unlawful

conduct.

In October and November 1969, the United States District Court

for the Southern District of New York, upon their consent, entered

final judgments of permanent injunction against Parvin Dohrmann,

Coleman, 'William C. Scott and Denny's Restaurants. The judgment

provided all the relief demanded in the complaint as to these defendants.

In S.E.O. v, Madison Square Carden 00rp.4() the United States

District Court for the Southern District of New York entered a

judgment of permanent injunction, by consent," against all the defendants in an action instituted by the Commission in October 1969,

against Madison Square Garden Corp. and a wholly owned subsidiary; Goldman, Sachs and Co., a New York broker-dealer; and a

New York investment partnership. The action arose out of the alleged conduct of the defendants in connection with a tender offer

that G & W Land and Development Corp. had made for 400,000 of

the 1,300,000outstanding shares of common stock of Roosevelt Raceway, Inc. At the time of that offer, Madison, through its subsidiary,

held 348,200Roosevelt shares and had announced its intention to aequire 100 percent ownership of Roosevelt.

40 S.D.N.Y., 69 Civ. 4364, April 29, 1970.

41 The defendants did not admit the allegations of the complaint.
THIRTY-SIXTH Al\TNUALREPORT 111

The Commission's complaint alleged that on the day after G & W

formally made the tender offer, which had earlier been announced,

Madison issued a press release stating that Madison had reached an

agreement in principle with Goldman-Sachs whereby GoldmanSachs and certain of its institutional clients would purchase up to

120,000 shares of Roosevelt common stock. Pursuant to the agreement, the stock acquired was to be held for 1 year, at which time the

purchasers would have the right to require Madison to purchase the

shares from them at 120 percent of their cost.42 The complaint further alleged that the defendants' combined purchases caused the

market price of Roosevelt common stock to exceed the tender offer

price during the entire period of the tender offer.

The Commission claimed that by entering into the arrangement

with Madison, Goldman-Sachs unlawfully extended and arranged

for the extension of credit to Madison in violation of Regulation T,

adopted by the Board of Governors of the Federal Reserve System

under Section 7(c) of the Securities Exchange Act. It was further

alleged that the defendants' conduct constituted a solicitation or recommendation to Roosevelt shareholders to reject the G & 'V tender

offer and, in connection therewith, that the defendants had failed to

file with the Commission a statement containing the information

specified in Schedule 14D, as required by Section 14(d) (4) of the

Act. The Commission also charged that the defendants had acted as

a group for the purpose of acquiring, holding, or disposing of Roosevelt shares, which group, after acquiring Roosevelt shares, held

more than 10 percent of that class of security, but that the group

had not filed with the Commission a statement containing the information required by Schedule 13D, adopted pursuant to Section

13(d) (1) of the Exchange Act and Rule 13d-1 thereunder. Finally,

the Commission asserted that the defendants had violated Section

10(b) and Rule 10b-5 thereunder as well as Section 14(e) of that

Act.

In accordance with the relief demanded in the Commission's complaint, the consent judgment declared the agreement between Madison and Goldman-Sachs to be null and void. Goldman-Sachs was ordered to dispose in an orderly manner of the Roosevelt shares it had

purchased in connection with that agreement under terms assuring

that it could not profit thereby. The order also contemplated that

clients of Goldman-Sachs, who had purchased Roosevelt shares in

connection with the agreement, would not exercise any right against

Madison that they might have acquired but would, instead, dispose

42 A few days later, Madison reached a similar agreement, concerning 10,000

shares, with the investment partnership named as a defendant.
112 SECURITIES AND EXCHANGE COMMISSION

of their holdings in the open market in an orderly manner. In addition, the defendants were enjoined from engaging in any act, practice or course of business-or entering any agreement so to engage

-which operates or would or is intended to operate artificially to inflate the market price of Roosevelt securities in connection with any

exchange or tender offer. And the judgment further enjoined the defendants from future violations of the filing requirements of Sections 13 and 14 of the Exchange Act with respect to Roosevelt securities and ordered them to file with the Commission statements on

Schedules 13D and 14D with respect to the matters complained of.

In S.E.O. v. Wriking Food Beverage Systems, Inc., et al.,43an action directed against use of the "spin off" device in alleged violation

of the Securities Act registration requirements," the Commission

charged in its complaint that Broadcast Industries Corporation, its

president, and another individual had organized Wriking and

shortly thereafter caused 275,000 shares of Wriking stock to be issued to Broadcast in exchange for a small cash payment and certain

loan commitments; that, shortly after its receipt of the Wriking

shares, Broadcast "spun off" 189,455shares to Broadcast's shareholders; that such "spin off" caused an immediate public market to be

developed for 1Vriking stock; that Broadcast's president sold 19,700

shares of 'Yriking stock through several broker-dealers in the overthe-counter market at prices ranging from $1 to $17 per share and

sold another 7,000 shares to persons who subsequently sold the stock

through brokers; that other officers and directors of Broadcast sold

approximately 27,000 additional 'Yriking shares in the over-thecounter market; and that no registration statement was ever on file

or in effect with the Commission covering the public distribution by

the defendants of the lYriking shares issued in the "spin off." The

defendants, without admitting the allegations of the complaint, consented to entry of a permanent injunction against further violation

of the registration provisions.

"Spin offs" in violation of the registration provisions were also alleged in S.E.O. v. Standard Oomputer & Pictures Oorp., et ril.45 and

S.E.O. v. Met Sports Centers, Imo., et al.46 In those cases the complaints additionally alleged violations of antifraud provisions of the

securities acts resulting from the dissemination of false and misleading information concerning the issuers of the securities which had

43 S.D.N.Y., 69 Civ. 3777.

44 See the Commission's release concerning "spin oft's" of securities and trading

in the securities of inactive or shell corporations, Securities Act Release No.

4982 (July 2, 1969), summarized in the 35th Annual Report, pp, 30-31.

45 S.D. Fla., 69-1522 Civ-TC.

46 S.D.N.Y., 69 Civ. 5410.

-
THIRTY-SIXTH ANNUAL REPORT 113

been spun off. Permanent injunctions were entered by consent in both

cases.

During the fiscal year, a final judgment providing for injunctive

and other relief with respect to alleged antifraud violations was also

entered, by consent, in the previously reported case of S.E.O. v. Golconda Mining 00.47 The judgment enjoins Golconda and Harry F.

Magnuson, a controlling person of Golconda, from fraudulently

using material information, not generally available to the public,

that they may obtain by virtue of an insider relationship to any corporation, in connection with the purchase or sale of any security. In

addition, they were required to disgorge, with interest, the profits

which, according to the Commission's complaint, they obtained

through unlawful use of inside information in violation of Rule

lOb-5 under the Securities Exchange Act. A court-appointed trustee has, with the Commission's help, undertaken to locate those persons with whom the defendants dealt in order to pay them a share of

the fund provided by the defendants pursuant to the decree.

In S.E.O. v. Dupere/8 the Commission sought to enjoin a former

staff attorney from disclosing to Memory Magnetics International

confidential information obtained in the course of his employment

with the Commission and from being employed by that company,

which had been the subject of an investigation by the Commission.

Relief was also sought against the company and its president to prevent them from obtaining confidential information from Dupere and

from employing him. After a trial on the merits, but prior to a decision, the action was disposed of by an agreement between the parties, pursuant to which a decree was entered enjoining Dupere from

divulging any confidential or non-public information. The decree

further directed the defendants to comply with their undertaking,

which recited that Dupere's employment by the company had terminated and that he would not be reemployed for 3 years or at any

time when a proceeding under the Federal securities laws should be

pending against the company or its president. At the same time, a

counterclaim seeking to restrain the Commission and two employees

from issuing false press releases and interfering with the company's

business was dismissed, with prejudice, by an order entered upon

consent.

47 S.D.N.Y., No. 65 Civ, 1512. The institution of this action is described in

the 31st Annual Report, p. 123. The summary judgment granted to the Commission with respect to defendant Harry F. Magnuson's failure timely to file

ownership reports pursuant to Section 16(a) of the Securities Exchange Act is

described in the 35th Annual Report, pp. 59-60.

48 C.D. Cal. No. 69-1025-HP.

409-865--71----9
114 SECURITIES AND EXCHANGE COMMISSION

In 8.£.0. 'T. Nortlc American Iiesearcli and Derelopineut OOI']J.t'

on cross appeals from an order granting a preliminary injunction

as to some defendants and denying such an injunction as to others,

the Court of Appeals for the Second Circuit rendered significant

rulings concerning the broad applicability of the registration and

antifraud provisions of the securities laws. It held that a public distribution of unregistered securities occurred through the joint action

of persons in Utah, who bought up a minority of the shares of a

shell corporation, and other persons, in Canada, to whom the shares

were sold and who in turn sold the shares back into the United

States. The district court had found that the scheme had been devised by one Edward White, who had acquired the majority block of

shares but had not, at the time of the action, offered his shares for

sale. The court of appeals held that "where such joint action is

proved the beneficent purposes of the securities acts for the protection of investors and in the public interest can be accomplished only

by treating such new distributions as jointly conceived and jointly

consummated," 50 and it found those who had aided and abetted sales

by others to be guilty of violations. The court affirmed so much of

the district court's determination 51 as had preliminarily enjoined

North American, 'White, and another principal participant from

further violations of the registration requirements of Sections 5(a)

and (c) of the Securities Act of 1933and vacated and remanded for

further consideration the district court's refusal to enter preliminary

injunctions against four peripheral participants in the distribution."

Although the company's president did not have a central role in

the distribution, the court held that he had "aided and abetted the

furtherance of the unlawful scheme by the major participants" since

he had helped in the preparation of a "Progress Report" that had

been employed as a selling device.53 Concerning two additional participants, the court of appeals held, contrary to the district court,

that "no financial stake or motivation is required to support a

charge of Section 5 violation." 54 And, noting that the conduct of

participants in an unlawful distribution may be "classified as joint

49424 F.2d 63 (1970).

50 424 F.2d at 71.

51280 F. Supp. 106 (S.D.N.Y., 1968).

52 The shares of North American had first been offered to the public prior to

the effective date of the Securities Act, but the court found the "grandfather"

exemption of Section 3 (a) (1) unavailable to the defendants because there had

been a "new offering" of North American shares.

53424 F.2d at 81.

54 Ibid.
THIRTY-SIXTH ANNUAL REPORT 115

participation or aiding and abetting .... ","5 the court explicitly recognized that they may be found to violate Section 5 even absent a

finding that they are underwriters.

With reference to the "Progress Report," which was found materially false and misleading, the court reiterated its holding in S.E.O.

v, Texas Gulf Sulphur 00.,56 that false, misleading, or incomplete

assertions made "in a manner reasonably calculated to influence the

investing public" violate Rule lOb-5 under the Securities Exchange

Act regardless of the motive involved in making the material

public." Itheld that actions of the principal participants were "precisely the opposite of [the] diligence and good faith dissemination"

of information by corporate management that might have prevented

violation of the antifraud provisions. The court held that "the Corporation could not abdicate responsibility for ... transmission [of

the Progress Report] to persons not shareholders by claiming that it

... intended the report for the eyes of shareholders only." 58

The district court's refusal to enjoin the company's president

from antifraud violations was vacated on the basis that his participation in the preparation of the Progress Report alone

"is enough to establish the . . . [antifraud] charge ... if the District

Court finds that he did not exercise 'due diligence' in ascertaining the accuracy of the information contained in the Progress Report, irrespective of

whether he engaged in the sale of any North American shares, intended to

effect a distribution of the shares, or had any financial interest as a result

of the sale of the shares." 59

Other defendants who "were not managerial insiders of North

American," were, the court found, "not casual tippers either", and

the district court's reliance on their motivation and lack of financial

interest was held to be error." With respect to a broker defendant,

the court held that the" 'special relationship' between a broker and

the public creates an implied warranty that the broker has an adequate and reasonable basis in fact for his opinion, and ... the SEC

has the power to enforce that warranty against a broker by an injunctive action.... " 61

After the close of the fiscal year, the district court, upon remand,

applied the principles enunciated by the court of appeals and en55 424 F.2d at 82.

56401 F.2d 833 (C.A. 2, 1968), certiorari dented, 394 U.S. 976 (1969). See

34th Annual Report at pp, 6-8. 57424 F.2d at 78.

58424 F.2d at 79.

59424 l!'.2d at 83.

60424 F.2d at 83-86.

61 424 F.2d at 84.
116 SECURITIES AND EXCHANGE COMMISSION

tered preliminary injunctions against the four defendants as to

whom the Commission had taken its appeal."

In S.E.O. v, Texas Gulf Sulphur 00.,63 upon remand pursuant to

the previously reported decision of the Court of Appeals for the

Second Circuit," the United States District Court for the Southern

District of New York determined that a press release issued by

Texas Gulf on April 12, 1964, would have been misleading to a reasonable investor using due care and, since the framers of the release

had not exercised due diligence in its issuance, that Texas Gulf violated Section 10(b) of the Securities Exchange Act and Rule 10b-5

thereunder. Injunctive relief was granted against two individual defendants who had purchased Texas Gulf stock after issuance of the

April 12, 1964, release and before a correcting release was issued on

April 16, 1964.The court declined to grant the Commission's request

for an injunction against the company, however, determining that it

could not conclude, on the record before it, that there was a reasonable likelihood of future violations. For comparable reasons the court

also denied injunctive relief against most of the individual defendants who had been found to have violated Section 10(b) and Rule

10b-5 by having purchased Texas Gulf stock on the basis of material undisclosed information.

The court also held, in accordance with the views of the Commission, that a district court has authority to deprive defendants of

profits realized through the misuse of inside information and found

it appropriate to do so in this case. Accordingly, those defendants

who had not sold their stock back to Texas Gulf were ordered to

pay the difference between their cost and the mean price of the stock

on the New York Stock Exchange on the day after the issuance of

the correcting press release." The one defendant who was charged

had failed to return illegally acquired stock options to Texas Gulf,

the court ordered that the options be rescinded and canceled.

with giving tips as well as with purchasing stock was held liable not

only for his own profits but also for the profits of his tippees; he

was not, however, charged with the profits of those to whom his tippees had made recommendations. 'W'ith respect to a defendant who

62 S.D.N.Y., No. 67 Civ. 3724, August 14, 1970. The injunction against one

defendant was based on its consent. 63312 F. Supp.77 (1970).

64401 F.2d 833 (1968), certiorari denied, 394 U.S. 976 (1969). See 35th Annual Report, p. 109 and 34th Annual Report, pp. 6-8.

65 The money is to be held by Texas Gulf in escrow until the court orders

its disposition; in the absence of such an order, the money is to become the

property of Texas Gulf.
THIRTY-SIXTH ANNUAL REPORT 117

Texas Gulf and the individual defendants are appealing the district court's decision."

In S.E.O. v. 1I1aoEl'L'ain,67 the Court of Appeals for the Fifth Circuit held that the offer of fractional undivided interests in mining

claims to offshore lands, when coupled with an implied promise to

litigate the validity of the title to the land being sold for the benefit

of all purchasers, constituted an "investment contract" and therefore

a "security," within the meaning of the Securities Act. In affirming

the entry of an injunction against violations of the registration requirements of that Act, the court stated that "a defendant's assertion

of the correctness of his behavior is a ground for restraint," and a

"court's power to grant injunctive relief survives discontinuance of

the illegal conduct and can even be utilized without a showing of

past wrongs." 68

In S.E.O. v. Boioler." the Commission had adduced evidence

which showed that the individual defendants had been guilty not

only of numerous violations of the registration and antifraud provisions of the Securities Act but also of mismanagement, self-dealing,

and gross abuses of trust with respect to six corporate defendants.

The Court of Appeals for the Fourth Circuit reversed an order of

the district court," which had granted a permanent injunction

against violations of the Securities Act but denied the Commission's

motion for the appointment of a receiver and had, instead, approved

a plan for reorganization of the corporate defendants proposed by

the individual defendants which would have allowed them to retain

an active management role.

The court of appeals found that the district court's injunction was

insufficientto protect the public interest, stating that "the limited injunction against improper security dealings would provide no brake

against mismanagement, other than security dealings in violation of

the Securities Act.... " 71 It held that, in the absence of a proceeding under Chapter X of the Bankruptcy Act, the appointment of "a

receiver is ... appropriate where necessary to protect the public interest and where it is obvious, as here, that those who have inflicted

serious detriment in the past must be ousted." 72

66 By a subsequent order, the court granted the Commission's motion for a

default judgment against one defendant who had failed to respond to the Commission's complaint. No appeal is being taken from this order.

67417 F.2d 1134 (1969), certiorari denied, 397 U.S. 972 (1970) 68417 F.2d at 1137.

69427 F.2d 190 (C.A. 4, 1970).

70 The opinion of the district court is not reported.

71427 F.2d at 197.

72 427 F.2d at 198.
118 SECURITIES AND EXCHANGE COMMISSION

Participation as Amicus Curiae.- The Commission frequently

participates as amicus curiae in litigation between private parties

under the securities laws where it considers it important to present

its views regarding the interpretation of the provisions involved.

For the most part, such participation is in the appellate courts.

In Ohrie-Oraft Industries, Inc. v. Bamqor Punta Uorporation J"

the Court of Appeals for the Second Circuit, sitting en bane, agreed

with the positions taken by the Commission, amicus curiae, (1) that

a press release issued by Bangor Punta Corporation announcing a

forthcoming exchange offer for the shares of Piper Aircraft Corporation, which release placed a dollar value on the package of securities Bangor Punta was to offer, constituted a "glm-jumping" offer

for sale of securities in violation of Section 5(c) of the Securities

Act; and (2) that cash purchases of Piper stock made by Bangor

Punta during the exchange offer violated Section 10(b) of the Securities Exchange Act and Rule 10b-6 thereunder.

The Commission had expressed the view that, in the context of an

impending exchange offer, a press release that fully sets forth all the

facts permitted to be disclosed by Rule 135 under the Securities Act

(Notice of Certain Proposed Offerings) complies with the full disclosure requirements of Section 10(b) and Rule 10b-5 under the Secnrities Exchange Act, even though other material facts pertaining

to the transactions are not contained in the release. The court of appeals did not reach this issue. It found that it was not a material

fact, as defined in S.E.O. v. Texas Culf Sulphur Oompany,74 that a

provision in an agreement with members of the Piper family, which,

among other things, committed Bangor Punta to make the exchange

offer, stated that each share of Piper would be exchangeable for a

package of Bangor securities "having a value, in the written opinion

of the First Boston Corporation, of $80or more."?"

73426 F.2d 569 (1970).

74401 F.2d 833 (C.A. 2, 1968), certiorari denied, 394 U.S. 976 (1969).

75 Judge Anderson concurred with the majority opinion, but disagreed with

the majority's determination that the dollar valuation was not "material" In his

opinion, which is very closely akin to the argument made in the Commission's

hrief, Judge Anderson states:

"The Court's holding, in which I concur, is simply that the possible application of disclosure principles discussed by ... [the Texas Gulf Sulphur]

cnse is here 'outweighed by the danger that substantial numbers of investors were misled by the figure's publication' in a manner violating Rule

135."

In a dissenting opinion, Chief Judge Lumbard stated that, in his view, that

information was material and was required to be announced under the ra tlonnle

of TeaJas Gulf.

Judge Moore concurred in that part of the opinion affirming the trial court's

denial of a preliminary injunction (an issue not argued by the Commission),
THIRTY-SIXTH ANNUAL ImpORT 119

The court also held that cash purchases of the stock of a target

company by a person whose exchange offer is outstanding with respect to that stock have a manipulative effect upon the market and

that the prevention of this kind of manipulation comes within the

spirit and letter of Rule lOb-G.That rule, among other things, prohibits the issuer of a security from purchasing the security or "any

right to purchase any such security" while a distribution of such security is in progress. Here, as a result of Bangor Punta's exchange

offer, the Piper shares carried the right to acquire Bangor Punta securities.

In Rekant v. Desser.» the Court of Appeals for the Fifth Circuit, in accord with views expressed by the Commission, amicus curiae, held that a stockholder may bring a derivative action under

Rule lOb-5 based on his corporation's transfer of its own securities

to insiders for inadequate consideration even though there was no allegation that any of the directors of the corporation were deceived

as to the nature of the transfer. Because the complaint did not allege that misrepresentations or omissions had influenced the investment judgment of either the plaintiff or other shareholders, however,

the court held, as the Commission urged, that no claim for individual or class relief had been stated. For that reason also, the court

did not reach the merits of the Commission's further suggestion that

Rule lOb-5 would be violated if misrepresentations and omissions

influence investment judgment but do not induce an actual purchase

or sale of a security. The court also found it unnecessary to determine

whether there is a private right of action under Section l5(d) of the

Securities Exchange Act, since in this case any cause of action under

that provision and under Hu1elOb-5 overlapped.

Criminal Proceedings

The statutes administered by the Commission provide that the

Commission may transmit evidence of violations of any provisions

of these statutes to the Attorney General, who in turn may institute

criminal proceedings. ViTherean investigation by the Commission's

staff indicates that criminal prosecution is warranted, a detailed report is prepared. After careful review by the Office of Criminal

Reference and Special Proceedings and the General Counsel's Office,

the report and the General Counsel's recommendations are considered by the Commission. If the Commission believes criminal proceedings are warranted, the case is referred to the Attorney General,

stated that the ll~tl'rl\ljllntion of tlu- other i;;i<lll'>;should have !lppn dpfprJ"pll

until after a trial on the merits. hut went on to indicnte hi« dii>n~rpelllpnt wit h

the majority on the "gUIl-jllIIJllill~" and Rule 1011-(; i,,,,l1'~

16425 F.2d 872 (1970).
120 SECURITIES AND EXCHANGE COMMISSION

who in turn refers the case to the appropriate U.S. Attorney. Commission employees familiar with the case generally assist the U.S.

Attorney in the presentation of the facts to the grand jury, the

preparation of legal memoranda for use in the trial, the conduct of

the trial, and the preparation of briefs on appeal.

During the past fiscal year, 35 cases were referred to the Department of Justice for prosecution. As a result of these and prior referrals, 36 indictments were returned against 102 defendants during the

year. Fifty-five convictions were obtained in 28 cases. Convictions

were affirmed in 9 cases, and appeals in 12 other cases were pending

at the close of the year.

Among the cases in which indictments were obtained during the

fiscal year, the following are particularly noteworthy: Harry A.

Lowther, Jr. and three others were indicted 77 for alleged violations

of the antifraud provisions of the Securities Act of 1933 and conspiracy to violate those and other provisions of the Securities Act

and the Securities Exchange Act in connection with the offer and

sale of common stock of Elkton Company, a corporate shell which

Lowther allegedly revived by causing it to acquire assets of questionable value. The indictment charges that the price of Elkton

stock was subsequently manipulated by means of fraudulent misrepresentations and that a distribution of unregistered shares of the

stock followed.

Simon J. M:essitte and others were indicted 78 for alleged violations of the anti-manipulative provisions of the Securities Exchange

Act and the antifraud provisions of the Securities Act and conspiracy to violate these provisions. This case involved alleged cash payoffsto broker-dealers in order to raise the price of Alloys Unlimited,

Inc. stock on the American Stock Exchange.

Lewis L. Colasurdo and 10 others connected with Crescent

Corporation and Pakco Companies, Inc. were indicted 79 for alleged

conspiracy to violate the disclosure provisions of the Securities Exchange Act. In addition, Colasurdo and certain other defendants

were variously charged with mail fraud, wire fraud, false filings

with the Commission, submission of false statements to the United

States Government, and obstruction of justice. The indictment alleged that Colasurdo obtained control of Crescent by using the assets

of both Crescent and Pakco, Through his control position, Colasurdo,

aided and abetted by the other defendants, was allegedly able to engage

in and conceal the unauthorized use of the assets of both companies.

71 D. Colo.

18 S.D.N.Y.

79 S.D.N.Y.
TIDRTY-SIXTH ANNUAL REPORT 121

Pedro Manuel Martinez and several others were indicted 80 for violations of the antifraud provisions of the Securities Act, mail fraud,

and conspiracy. The indictment alleges that Martinez and others

purchased a majority of the shares of Alaska .Western Life Insurance Company from another defendant by using the assets of that

company to finance their purchase. It further alleges that after gaining control of the company, certain of the defendants converted

large amounts of the company's assets to their personal use.

An indictment was returned against J. R. Cissna and others 81

oharging violations of the antifraud provisions of the Securities Act,

mail fraud, and conspiracy. Cissna allegedly schemed with others to

sell investment contracts consisting of 1/8000 fractional undivided

interests in a proposed recreational development called Recre-Plex.

It was represented that funds from these sales would be used to

build the recreational complex when allegedly they were used

mainly to meet the expenses of Federal Shopping Way, Inc., a company of which Cissna was chairman of the board and chief executive officer.

An indictment superseding a previous indictment has been returned against John B. Walling and others 82 charging violations of

the mail fraud statute, the antifraud provisions of the Securities Act,

the stolen property act, and the conspiracy statute. The defendants

allegedly induced 22 churches to issue bonds by representing that the

bonds would either be purchased outright or held in escrow by

World Oil and Gas Corporation of Delaware or its affiliated insurance companies and, in turn, funds would be advanced to the

churches as needed for construction of church facilities. The indictment charges that World Oil, purportedly a multimillion dollar corporation owning Tennessee real estate valued at $26million, had little

if any assets.

Convictions were obtained in the following cases, among others:

Ernest A. Bartlett, Jr. was found guilty 83 on each of 26 counts of

an indictment charging violations of the antifraud and registration

provisions of the Securities Act, mail fraud, wire fraud, and conspiracy to commit these crimes. The indictment charged that Bartlett and others induced investors to purchase securities of Arkansas

Loan & Thrift Corporation by making false statements concerning

the safety of the investment, the financial condition and earnings of

the company, and the sources of dividends. It was also charged that

8°D. Alaska

81 W.D. Wash.

82 N.D. Tex.

83W.D. Ark.
122 SECURITIES AND EXCHANGE COMMISSION

the defendants falsely claimed that debt securiues issued by Arkansas Loan & Thrift were insured by Savings Guaranty Corporation,

when in fact that corporation was affiliated with Arkansas Loan &

Thrift and had no assets of its own, and that they diverted assets of

Arkansas Loan & Thrift to their own use and benefit.

As reported in last year's annual report,84 Frank D. Mills and

Jerome Deutsch were indicted for violations of provisions of the Investment Company Act of 1940.85 During the fiscal year Mills

pleaded guilty to violating Section 17(d) of that Act, relating to

joint ventures between investment companies and their affiliates, and

Deutsch was convicted of aiding and abetting violations of Section

17(e) of the Act, the "kickback" provision. Deutsch was found to

have made an unlawful payment to Mills, at a time when the latter

was vice president and portfolio manager of an investment company,

in the form of a bargain price on the purchase of a security from a

company of which Deutsch was an officer.

In a case involving a widespread distribution of unregistered

shares of Petron Corporation by the use of nominees and the use of

selected brokerage houses which employed "boiler-room" tactics and

received kickbacks for selling the securities, Forrest and Donald

Parrott were found guilty 86 on charges of conspiracy to sell unregistered securities, sale of unregistered securities, fraud in the sale

of securities, mail fraud and fraud by wire. Their convictions were

subsequently affirmed by the United States Court of Appeals for the

Second Circuit."

In a prosecution arising out of transactions in the securities of

Eastern Mass. Street Railway Company;" Vincent Carrano pleaded

guilty to an indictment charging violations of the antifraud provisions of the Securities Exchange Act and mail fraud, and Gordon

M. Copp and Allan L. D'Honau were convicted after trial of violations of the antifraud and anti-manipulative provisions of the Securities Exchange Act, mail fraud, and conspiracy. The indictment

charged that the defendants placed orders with various broker-dealers for the purchase of securities but paid for the securities only if

the market price of the securities rose and refused payment when

the market price of those securities dropped.

Harold N. Leitman, former president and chairman of the board

of VTR, Inc., was found guilty 89 under an indictment charging him

84 Page 116.

85 S.D.N.Y.

86 S.D.N.Y.

81425 F.2d 972 (1970), cert. denied (October 12,1970).

88 C.D. Cal.

89 S.D.N.Y.
THIRTY-SIXTH ANNUAL REPORT 123

with filing false financial information for VTR with the Commission and the American Stock Exchange. In a related matter, Alvin

Leitman and Milton Rubin each pleaded guilty 90 to two counts of

an information charging that they aided and abetted violations of

the rules and regulations governing filings with the Commission,

which would have required that schedules be filed with the Commission showing the indebtedness of certain insiders to VTR.

The Commission has continued its efforts to assure that injunctions

obtained by it are adhered to. During the past fiscal year, 10 persons

and companies were convicted of criminal contempt for violating injunctions, and, in one case, also for violation of a court order directing compliance with a Commission subpoena. Substantial prison

terms and fines were imposed on the defendants. A number of other

contempt cases were pending at the close of the year.

Organized Crime Program.-The Commission has always given

priority to the investigation of cases where there is an indication

that organized crime may be involved. Pursuant to Executive Order

11534,91 the Chairman of the Commission was designated to be a

member of the National Council on Organized Crime. In that capacity, the Chairman will join with other government officials in seeking to formulate a national strategy for the elimination of organized

crime.

The Commission maintains a close liaison with the Organized

Crime and Racketeering Section of the Department of Justice and

submits quarterly reports relating to organized crime investigations.

During the 1969 fiscal year, the Commission had placed four enforcement staff members on the New York Strike Force against organized

crime. Current plans call for the placing of additional enforcement

personnel on certain other Strike Forces. During the 1970 fiscal year,

the Commission established an organized crime section in its headquarters officeto focus on the involvement of organized crime in the

securities markets. This unit acts as a "back-up" unit to the various

Strike Forces and as an enforcement unit investigating certain securities violations in which persons with organized crime associations

are believed to be involved.

Proposed Swiss Treaty.-Since approximately January 196V, a

representative of the Commission has participated with the State

Department and other agencies of the United States Government in

discussions looking toward a possible Treaty of Mutual Assistance

in Criminal Matters between the United States and Switzerland. It

is believed that such a Treaty would be of assistance to the Commis90S.D.N.Y.

9135 F.R. 8865, June 9, 1970.
124 SECURITIES AND EXCHANGE COMMISSION

sion in dealing with problems presented by the use of Swiss financial institutions in connection with securities transactions taking

place in the United States.

The Commission's representative has participated in a series of informal discussions between U.S. and Swiss officials in 1Vashington,

D.C. and in Bern, Switzerland. These meetings have resulted in an

informal agreement by the working group on an English text of a

draft treaty. ""Vorkon this matter is continuing.

DISCIPLINARY ACTION BY SELF-REGULATORY ORGANIZATIONS

Exchanges

Although the Exchange Act does not provide for Commission review of disciplinary action by exchanges, each national securities exchange reports to the Commission actions taken against members

and member firms and their associated persons for violations of any

rule of the exchange or of the Exchange Act or of any rule of regulation under that Act.

During the fiscal year, eight exchanges reported 129 separate actions, including impositions of fines in 78 cases ranging from $100 to

$150,000,with total fines aggregating $735,900; the suspension from

membership of 20 individuals; and the censure of 21 member firms.

These exchanges also reported the imposition of various sanctions

against 86 registered representatives and other employees of member

firms.

NASD

The Commission receives from the NASD copies of its decisions

in all disciplinary actions against members and registered representatives. In general, such actions are based on allegations that the respondents violated specified provisions of the NASD's Rules of Fair

Practice. Where violations are found, the NASD may impose one or

more sanctions upon a member, including expulsion, suspension, fine,

or censure. If the violator is an individual, his registration as a representative may be suspended or revoked, he may be suspended or

barred from being associated with any member, and he may be fined

and/or censured. Under Section 15A(b) (4) of the Exchange Act

and the NASD's by-laws, no broker-dealer may be admitted to or

continued in NASD membership without Commission approval if he

has been suspended or expelled from membership in the NASD or a

national securities exchange; he is barred or suspended from association with a broker or dealer or with members of the NASD or an

exchange; his registration as a broker-dealer has been denied, suspended, or revoked; he has been found to be a cause of certain sanctions imposed upon a broker-dealer by the Commission, the NASD,
THIRTY-SIXTH ANNUAL REPORT 125

or an exchange; or he has associated with him any person subject to

one of the above disqualifications.

During the past fiscal year the NASD reported to the Commission

its final disposition of disciplinary complaints against 179 member

firms and 117 individuals associated with them. 'With respect to 10

members and 18 associated persons, complaints were dismissed because the alleged violations had not been established. In the remaining cases, violations were found and penalties were imposed on 169

members and 99 registered representatives or other individuals. The

maximum penalty of expulsion from membership was imposed

against 12 members, and 16 members were suspended from membership for periods ranging from 2 days to 2 years. In many of these

cases, substantial fines were also imposed. In another 137 cases, members were fined amounts ranging from $100 to $40,000. In 4 cases,

the only sanction imposed was censure, although censure was usually

a secondary penalty where a more severe penalty was also imposed.

Various penalties were also imposed on associated individuals

found in violation of NASD rules. The registrations of 27 registered

representatives were revoked, and 30 representatives had their registrations suspended for periods ranging from 5 days to 2 years. Fines in

various amounts were also imposed against many revoked or suspended

representatives. In addition, 39 other representatives were censured

and/or fined amounts ranging from $100 to $10,000.Three individuals were barred from association with any NASD member.

Commission Review of NASD Disciplinary Action.-Section

15A(g) of the Exchange Act provides that disciplinary actions by

the NASD are subject to review by the Commission on its own motion or on the timely application of any aggrieved person. This Section also provides that upon application for or institution of review

by the Commission the effectiveness of any penalty imposed by the

NASD is automatically stayed pending Commission review, unless

the Commission otherwise orders after notice and opportunity for

hearing. Section 15A(h) of the Act defines the scope of the Commission's review. If the Commission finds that the disciplined party

committed the acts found by the NASD and thereby violated the

rules specified in the determination and that such conduct was inconsistent with just and equitable principles of trade, the Commission

must sustain the NASD's action unless it finds that the penalties imposed are excessive or oppressive, in' which case it must cancel or reduce them.

At the start of the fiscal year, three NASD disciplinary decisions

were pending before the Commission on review. During the year

seven additional cases were brought up for review. Two cases were
126 SECURITIES AND EXCHANGE COMMISSION

disposed of by the Commission. In one case the Commission sustained

in full the disciplinary action taken by the NASD, and in the other

it modified the penalties." Eight cases were pending at the end of

the year.

Commission Review of NASD Action on Membership.-As previously noted, Section 15A(b) (4) of the Act and the bylaws of

the NASD provide that, except where the Commission finds it

appropriate in the public interest to approve or direct to, the contrary, no broker or dealer may be admitted to or continued in membership if he, or any person associated with him, is under any of the

several disabilities specified in the statute or the NASD by-laws. A

Commission order approving or directing admission to or continuance in Association membership, notwithstanding a disqualification

under Section 15A(b) (4) of the Act or under an effective Association rule adopted under that Section or Section 15A(b) (3), is generally entered only after the matter has been submitted initially to the

Association by the member or applicant for membership. The Association in its discretion may then file an application with the

Commission on behalf of the petitioner. If the Association refuses to

sponsor such an application, the broker or dealer may apply directly

to the Commission for an order directing the Association to admit

or continue him in membership, At the beginning of the fiscal year,

one application for approval of admission to or continuance in membership was pending. During the year, 8 additional applications

were filed, and 4 were approved, leaving 5 applications pending at

the year's end.

COOPERATION WITH OTHER ENFORCEMENT AGENCIES

In recent years the Commission has given increased emphasis to

the coordination of its enforcement activities with those of the various state and local authorities, the self-regulatory agencies, and foreign securities agencies. This program encompasses the referral to

state and local authorities for investigation and prosecution or other

action of those violations where the amounts of money or the number of investors involved do not appear to be substantial enough to

warrant development of the case at the Federal level. The Commission frequently provides manpower assistance to these authorities in

the development of such cases. In addition, the Commission's regional officeshave taken steps to improve the coordination of inspections and other activities with state securities administrators and

with the NASD in those areas where their respective jurisdictions

92 Securities Exchange Act Release Nos. 8769 (Deeember 5, 1969) and 8816

(February 13, 1970).
THIRTY -SIXTH ANNUAL REPORT 127

overlap. Staff members of the Commission and of certain state authorities have conducted joint inspections which have made the entire inspection program more effective.

During the fiscal year, the Commission continued its program of

cooperative regional enforcement conferences at each of its regional

offices.These conferences, during which Commission personnel meet

with personnel from state securities agencies, post officeinspectors,

Federal, state, and local prosecutors and local representatives of

self-regulatory agencies such as the NASD, are designed to promote

the exchange of information concerning regional enforcement problems, the development of methods of increasing cooperation and

communication, and the elimination of needless effort and waste of

manpower and other resources in the regulation of the securities

markets. Although the Commission served as the primary agency in

establishing those cooperative enforcement conferences, they have

progressed to the point where state securities agencies frequently

serve as hosts of the programs.

For the past 4 years, the Commission has held one or two-week

nationwide enforcement training sessions at its headquarters office

in Washington, D.C. to which it has invited staff members of state

and foreign securities agencies. The 1970 session was attended by

representatives of various Federal, state, and Canadian agencies, as

well as by staff members from each of the Commission's offices

throughout the country.

Section of Securities Violations

The Commission's Section of Securities Violations provides one of

the means for cooperation on a continuing basis with other agencies

having enforcement responsibilities. This Section acts as a clearing

house for information regarding enforcement actions in securities

matters taken by state and Canadian authorities, by other governmental and self-regulatory agencies, and by the Commission. In addition to handling requests for specific information, the Section publishes a periodic Bulletin which is sent to contributing agencies and

to other enforcement and regulatory organizations. The Bulletin

contains current information which is a matter of public record regarding the institution and disposition of remedial and enforcement

proceedings.

Among other things, the data in the SV files (which are maintained in a computer) constitute a valuable tool for screening applicants for registration as securities or commodities brokers or dealers

as well as applicants for loans from such agencies as the Small

Business Administration and the Economic Development Administration of the Department of Commerce.
128 SECURITIES AND EXCHANGE COMMISSION

During the fiscal year, the Section received 4,210 letters either

providing or requesting information and sent out 2,631 communications to cooperating agencies. State and Canadian securities administrators reported 118 criminal actions, 27 injunctive actions, 168 actions in the nature of cease and desist orders, and 173 other

administrative orders, such as denials, suspensions, and revocations

of issuers, broker-dealers, and salesmen. As of the end of the fiscal

year, the number of names in the SV files totalled 78,465,representing a net increase of 209 during the year.

ENFORCEMENT PROBLEMS WITH RESPECT TO FOREIGN

SECURmES

The past fiscal year was marked by extensive efforts by various

promoters and others to distribute foreign securities in the United

States without complying with the registration and disclosure provisions of the Securities Act and generally in violation of antifraud

provisions of the securities laws. In some instances companies which

were represented as having issued the securities were in fact non-existent. Known securities law violators, as well as individuals associated with organized crime, appeared to be connected with some of

the more flagrantly fraudulent offerings of foreign securities.

To alert brokers and dealers, financial institutions, investors, and

others to possible unlawful distributions of foreign securities, the

Commission maintains and publicizes a Foreign Restricted List. That

list is comprised of the names of foreign companies whose securities

the Commission has reason to believe recently have been, or currently are being, offered for public sale and distribution in the

United States in violation of the registration requirements of the

Securities Act. The number of companies on the list increased from

39 at June 30, 1969, to 46 at the end of the 1970 fiscal year. Most

brokers and dealers refuse to effect transactions in securities issued

by companies on the list; however, this does not necessarily prevent

promoters from illegally offering such securities directly to investors

in the United States, either in person or by mail.

One of the names placed on the Foreign Restricted List during

fiscal year 1970 was San Salvador Savings and Loan Co., Ltd., a

purported Bahamian company." The Commission had reason to believe that $1,600,000in 11 percent bearer bonds, issued under that

name, had been offered for sale in the United States. The Government of the Bahamas reported that a corporation by this name had

changed its name to Regency Properties, Ltd. in 1965, indicating

that securities printed in 1969 using the San Salvador name may be

93 Securities Act Release No. 5043 (January 30, 1970).
THIRTY-SIXTH ANNUAL REPORT 129

counterfeit. The Bahamian government further reported that there

was no record of the required government authorization to issue and

sell bonds abroad. Moreover, the certificates purporting to represent

the bonds had no coupons attached.

In a case involving the distribution of securities of Paulpic Gold

Mines, Ltd., a Canadian corporation, it appeared that two residents

of the United States, after purchasing 450,000 shares of stock of

Paulpic in Canada at prices ranging from 18 to 43 cents per share,

induced 76 investors in California and Ohio to purchase 70,000unregistered shares from the Canadian broker for the two individuals at

prices of $3.00 and $3.50 per share although no intervening event

had occurred in the affairs of the company to warrant such increase

in the price of the shares. The Ontario Securities Commission

alerted the staff of this Commission to these activities, and the company was placed on the Foreign Restricted List.v

The Bank of Sark and First Liberty Fund, Ltd. were also placed

on the Foreign Restricted List 95 during the fiscal year. Securities

purporting to be bank drafts and certificates of deposit of the

"Bank of Sark" and shares of First Liberty Fund, Ltd. had been offered in the United States by the same promoters. The available evidence indicates that the purported bank is merely a corporate shell

and has consistently refused to pay bank drafts sent to it for collection or to honor the certificates of deposit. The assets of First Liberty, a Bahamian corporation, were represented to be in the custody

of the "Bank of Sark."

On Jnne 30, 1970, the following companies were on the Foreign

Restricted List:

94 Securities Act Release No. 5044 (February 6, 1970). The Ontario Commission conducted extensive public hearings and published a lengthy opinion exposing the fraudulent character of this promotion.

95 Securities Act Release No. 5065 (May 28, 1970).

409-865--71----10
SECURITIES AND EXCHANGE COMMISSION

BAHAMIAN

American International Mining

Compressed .Air Corporation Limited

Durman, Ltd., formerly known as

Bankers International Investment

Corporation

First LilJerty Fund, Ltd.

:::lan Salvador Savings and Loan Co.,

Ltd.

United Mining and Milling

Corporation

BRI1'ISH HO.YDURAN

Curihbean Empire Company, Ltd.

CANADIAN

Allegheny Mining and Exploration

Oompany, Ltd.

Amalgamated Rare Earth )Iines, Ltd.

American Mobile Telephone and Tape

oc., Ltd.

Antoine Silver Mines, Ltd.

Briar Court Mines, Ltd.

Claw Lake Molybdenum l\Ii!ws, Ltd.

Ethel Capper Mines, Ltd.

Golden Age Mlnes, Ltd.

Ironco Mining and Smelting Company,

Ltd.

Jupiter Explorations, Ltd.

Kr-nltworth Mines, Ltd.

Klondike Yukon Mining Co

Kokanee Moly :Mines,Ltd.

Lynbar Mining Corp., Ltd.

Norart Minerals, Limited

Northland Minerals, Ltd.

Obseo Corporation, Ltd.

Pacific Northwest Development;" Ltd.

Paulpic Gold Mines, Ltd.

Pyrotex Mining and Exploration

Company, Ltd.

Radio Hill Mines Company, Ltd.

Richwood Industries, Ltd.

Trihope Resources, Ltd.

'Wee Gee Uranium :\fineR,Ltd.

Yukon 1'j'oh'erine :\Iining Company

EUROPEAN

Central and Southern Industries Corp.

PANAMANIAN

British Overseas )futual Fund

Corporation

Cerro Azul Coffee Plantation

Continental and Southern

Industries, S. A.

Crossr'oads Corporation, S. A

Darien Exploration Company. S. A.

DeYeers Consolidated )fining

Corporation, S. A.

Euroforeign Banking Corporation,

Ltd.

Global Explorations, Inc.

Panamerican Bank and Trust

Company

Security Capital Fiscal and Guaranty

Corporation, S. A.

Victoria Oriente, Inc.

UNITED I(JNGDOM

Bank of Snrk, of the Isle of Guernsey

WEST INDIAN

California and Caracas

130
THIRTY-SIXTH ANNUAL REPORT 131

DISQUALIFICATION FROM PRACTICE BEFORE COMMISSION

In Paui JJI. [{aufman,06 the Commission, pursuant to Rule 2(e) of

its Rules of Practice, temporarily denied the privilege of appearing

or practicing before it to a member of the New York bar, pending

disposition of his appeal from criminal convictions of conspiracy to

violate and violations of the antifraud provisions of Section 17(a)

of the Securities Act of 1933. The Commission rejected Kaufman's

contention that his convictions could not be considered evidence of

lack of "character or integrity" within the meaning of Rule 2(e) because, pending disposition of his appeal, they were not final. The

Commission stated that "[i]f the public is to be protected and the

public's confidence in the legal profession and in this Commission

maintained, an attorney convicted of a serious crime such as securities fraud should not be permitted to hold himself out as entitled to

represent others in securities matters before us merely because an

appeal is pending." The Commission's order further provided that

Kaufman's disqualification would become final if and when any of

his convictions were affirmed and no longer subject to direct

review."

The Kaufman case indicated the need for an expeditious disqualification procedure in situations such as that involved in that case

and in comparable situations. Accordingly, in September 1970, the

Commission amended Rule 2(e) of its Rules of Practice to provide

for the automatic suspension from appearance or practice before it

of (1) any attorney who has been suspended or disbarred by a court

of the United States or in any State, Territory, District, Commonwealth, or Possession; (2) any accountant, engineer, or other expert

who has had his license to practice revoked or suspended by any

State, Territory, District, Commonwealth, or Possession; or (3) any

person who has been convicted of a felony or of any misdemeanor

involving moral turpitude." The suspension will take effect regardless of whether an appeal from the underlying suspension, revocation, disbarment, or conviction is pending or could be taken, provided, however, that if all grounds for the underlying action are

removed, the suspension from practice before the Commission will

be lifted upon appropriate application. The revised rule also provides that the Commission may suspend :from practice any person

who, after notice and opportunity for hearing, is found to have will96 Securities Exchange Act Release l'\o. 8925 (.J uly 2, 1970).

97 On July 22, 1970, the United States Court of Appeals for the Second Circuit affirmed the judgment of conviction on all counts. United States Y. J(auf1I1,un, et al., 429 F.2d 240, certiorari denied, 39 U.S.L.W. 322G (November 24, W70).

9B Securities Act Release No. 5088 (September 24, 1970).
132 SECURITIES AND EXCHANGE COMMISSION

fully violated, or willfully aided and abetted violations of, the Federal securities laws.

The Commission has also invited comments 99 on a proposal further to amend Rule 2(e) to provide that any person who has been

permanently enjoined from violating the federal securities laws, or

who has been found by the Commission or any court to have willfully violated, or willfully aided and abetted violations of, the federal securities laws, may be ordered by the Commission to show

cause why he should not be censured or disqualified from appearing

or practicing before it.

99 Ibid.
PART V

REGULATION OF INVESTMENT COMPANIES

In broad terms, an investment company is any arrangement by

which a group of persons invests funds in an entity that is itself engaged in investing in securities. Investment companies are important

vehicles for public participation in the securities markets. They enable small as well as large investors to participate in a professionally managed and diversified portfolio of securities.

The Investment Company Act of 1940sets forth the Commission's

responsibilities in protecting investors in such companies.' It

provides a comprehensive framework of regulation which, among

other things, prohibits changes in the nature of an investment company's business or in its investment policies without shareholder approval, contains prohibitions against theft or conversion of assets or

gross abuse of trust, and provides specific controls to eliminate or

mitigate inequitable capital structures. The Act also requires that an

investment company disclose its financial condition and investment

policies; requires that management contracts be submitted to shareholders for approval; prohibits underwriters, investment bankers, or

brokers from constituting more than a minority of an investment

company's board of directors; regulates the custody of investment

company assets; and provides specific controls designed to protect

against unfair transactions between investment companies and their

affiliates.

In addition to complying with the requirements of the Investment

Company Act, an investment company must comply with the Securities Act of 1933when offering its securities, and it is subject to certain provisions of the Securities Exchange Act of 1934, including

those relating to proxy and tender offer solicitations and insider

trading and reporting.

1For a discussion of legislation amending the Investment Company Act, which

was enacted after the close of the fiscal year, see Part I of this report.

133
134 
 SECURITIES AND EXCHANGE COMMISSION 


COMPANIES REGISTERED UNDER TEE Am 

As of June 30, 1970, there were 1,328 investment companies registered under the Act, whose assets had an aggregate market value of 

approximately $56.1 billion. Compared with corresponding totals at 

June 30, 1969, these figures represent an over-all decrease of approximately $16.4 billion, or about 23 percent, in the market value of assets although there was an increase of 161, or almost 14 percent, in 

the number of registered companies. 

The following table shows the numben and categories of registered companies and the approximate market value of the assets in 

each category as of June 30,1970. 

Companies Registered Underthe Inveslment Company Act oj'1.940 as of June 30,1970 

Approrimate Number of regislerod Eampanim market wiue orweis 

Management oopn-end ("Mntual Funds")~........... MI4 M,E42 


Funds having no losd ar load not exceeding 3 pereent of net met value ........................... 
 Vadable annuity-mpaarateaccannte. .............. 
 CB italleve ecompaniea........................ 
 nlPotherlmZ~~as ............................... 


Management olased-end ............................. 


Unit lnne~tment trusts..~ ............................ 


I I I I 

"1n~~ti~e"refers toregisteredoompanioswhichasofJune30, iW0, werelo thepraoar$of&gU uidated

ormeaed, or bavediedsn appllcationpumuant to Seotion8(f) of the Act f~rdsregistrstte~, or~bqobhspa otherwise gone oot of eaisteoceand remalo registeredody until such time as the Com&sian is?oes arders 

under BmtlonB(f) termlnatlng their regkcration. "Total eroluda~24 wtiw separate accountsof Uainaacdneecompeniar (assat value of 5710 1m233) with 

m8t to which exemption from registretion under Rule Be1 under the Invmtment corhpaby ~ o Lst 

01 ad. 

The approximately $6.6 billion of assets of the registered unit investment trusts includes approximately $6.1 billion of assets of unit 

investment trusts which invest in securities of other registered investment companies, substantially all of them mutual funds. 

A total of 187 conlpanies registered under the Investment Company Act during the fiscal year, a greater number than registered in 

any other year since the adoption of the Act except fiscal 1969 when 

222 registered. The following table shows the various categories of 
THIRTY-SIXTH ANNUAL REPORT 135

companies registered during the fiscal year and those which terminated their registrations.

New Regislrations, and Terminations of Registralion, DUllIIg the Fiscal YeUl Ended

June 30, 1970

Management open-end ("Mutual Funds")

Funds having no load or load uot exceeding 3 percent of uet asset value____ 12 Variable annuity-separate accounts. _ _ _ _ !J

Allotherloadfunds_______________ _ _ 82

Registered

during the

flscal ) e.u

Bub-total.

I

Registratton

terminated

during the I fiscal) ear

[--

12

Management closed-end

Small business investment cornparnes All other closed-end Iunds

Sub-total,

Unit mvestrnent trusts Variable annulty-separate accounts All other unit investment trusts

1

26

27

11

14

2

H

11

o

3

Sub-totaL________ __ _____ __ ____ 25 3

1====.-

Face::~:_e_~r_t~~~_t~_ ~~~~~::~~ ::::: : _::::::: _:::::::::::::::::::: -~--i8~I~~

As the table shows, 20, or approximately 11 percent, of the newly

registered companies were variable annuity separate accounts of insurance companies." Including these companies, there were 70 active

variable annuity separate accounts registered at June 30, 1970, consisting of 21 unit investment trusts and 49 management open-end investment companies. A significant part of the Commission's regulatory effort with respect to variable annuities has involved the

application of the requirements of the Investment Company Act to

the patterns and procedures which have grown up in the insurance

industry.

INVESTMENT COMPANY ASSETS

The following table sets forth the number of investment companies registered under the Investment Company Act and their estimated aggregate assets, in round amounts, at the end of each fiscal

year, 1941through 1970.

2 The applicability of the requirements of the Investment Company Act to

variable annuity contracts was discussed in prior annual reports. Typically, a

variable annuity contract provides payments for-life commencing on a selected

date with the amounts of the payments varying with the investment performance of equity securities which are set apart by the insurance company in a

separate account which is registered with the Commission as an investment

company. The separate accounts now registered are either open-end management companies or unit investment trusts.

______ ___ __* _ _ _

_

_

_

_

_

_

-
136 SECURITIES AND EXCHANGE COMMISSION

Number of companies Estunated

aggregate

FIScal year ended June 30 market value Registered Registered Registration Registered of assets at at begmnmg durmg year terminated at end of end of year of year duung year year (Ill nnllions)»

1941_____________________________ a 450 14 436 $2,590 1942_____________________________ 436 17 46 407 2,400 1913_____________________________ 407 14 31 390 2,300 1941. ____________________________ 390 8 z: 371 2,200 1945_____________________________ 371 14 19 366 3,250 1946_____________________________ 366 13 18 361 3,750 1947_____________________________ 361 12 21 352 3,600 1948_____________________________ 352 18 11 359 3,825 1949_____________________________ 359 12 13 358 3,700 1950_____________________________ 358 26 18 366 4,700 1951. ____________________________ 366 12 10 368 5,600 1952_____________________________ 368 13 J.l 367 6,800 1953_____________________________ 367 17 15 369 7,000 1954. ____________________________ 369 20 5 384 8,700 1955_____________________________ 384 37 34 387 12,000 1956_____________________________ 387 46 34 399 14,000 1957_____________________________ 399 49 16 432 15,000 1958_____________________________ 432 42 21 453 17,000 1959_____________________________ 453 70 11 512 20, 000 1960_____________________________ 512 67 9 570 23,500 1961_____________________________ 570 118 25 663 29,000 1962_____________________________ 663 97 33 727 27,300 1963_____________________________ 727 48 48 727 36,000 1964. ____________________________ 727 52 48 731 41,600 1965_____________________________ 731 50 54 727 44,600 1966_____________________________ 727 78 30 775 49,800 1967_____________________________ 775 108 41 842 58,197 1%8 _____________________________ 842 167 42 967 69,732 1969_____________________________ 967 222 22 1,167 72,465 1970' ____________________________ 1,167 187 26 1,328 56,337

-Tbe aggregate assets reflect tbe sale of new secunnes as well as capital appreciation.

'Does not mclude tbe 25 sepal ate accounts of hfe rnsurance companies (asset value of $710,150,233) with

respect to WhICh exemption from reglstratron under Rule 6e-l under the Investment Company Act IS

churned. (Ooe such separate account filing waS withdrawn)

INVESTMENT COMPANY FILINGS, OTHER THAN APPLICATIONS

As previously noted, investment companies offering their shares

for sale to the public must register them under the Securities Act of

1933. Registration statements filed by such companies are reviewed

for compliance with that Act as well as with the Investment Company Act. Proxy soliciting material filed by investment companies is

reviewed for compliance with the Commission's proxy rules. The

number of registration statements and proxy soliciting materials

filed or processed during the fiscal year was as follows:

Pending Pending

Type of material June 30, Filed Processed June 30, 1969 1970

Registratron statements and post-effective amendments under the SecuntJes Act of 1933______________________ 248 1,301 1,241 308 Regtstratron statements under the Investment Com- pany Act of 1940_____________________________________ 160 -180 I 173 167 Proxy sohcltlng material, ______________________________ 173 701 759 115

-Although 187 companies registered during the fiscal year by filing notificatiou of registratJon on Form N-8A, only 180 of these companies filed full registratJon statements on Form N-8B-1.

Investment companies also filed 713 annual reports, 2,787 quarterly reports, 1,853 periodic reports to shareholders containing financial statements and 1,927copies of sales literature.
THIRTY-SIXTH AJ\TNUALREPORT 137

NEW DEVELOPMENTS IN THE INVESTMENT COMPANY FIELD

Investment Companies Sponsored by Foreign Interests

Fund Managed by an Affiliate of the French Government.- During

the year an investment company managed by an affiliate of the

French Goyernment, SoGen International Fund, Inc., filed a registration statement and commenced operations. The Fund's investment

adviser and principal underwriter is SaGen International Corporation, all of whose outstanding stock is owned by Societe Gencralc,

one of France's largest banks and its affiliate, Societe Generale Alsacienne de Banque, Strasbourg, France. Societe Generale is owned by

the French Government."

The Fund's prospectus states that the adviser conducts its operation independent of Societe Generale and neither Societe Generale

nor the French Government supervises the Fund's managcment or

investment practices or policies.

Shares of the Fund are offered for sale both in the United States

and abroad. Foreign investors are able to purchase Fund shares directly or may purchase Bearer Depository Receipts representing registered shares of the Fund which will be issued by a Luxembourg

subsidiary of the adviser.

The Fund's investment policy allows it to invest in companies organized and operating in the United States or elsewhere in the free

world. 'Vhile the Interest Equalization Tax is in effect, most or substantially all of the Fund's investments will be in companies organized in the United States. Foreign investments will also be limited

by any mandatory guidelines that the Federal Reserve Board may

adopt pursuant to Executive Order. To the extent that the Fund invests in a foreign issuer its investment policies allow it to engage in

forward currency transactions in an attempt to protect the Fund

from devaluation of that country's currency. This policy may be

used only defensively and the Fund may not sell forward currency

of a particular country to an extent greater than the then current

value of its investment in issuers incorporated or operating in that

country.

Investment Company Selling Exclusively to Non-resident Aliens.-

A British-organized fund, the Cheapside Dollar Fund Limited, registered under the Investment Company Act during the year and proposed to offer its shares only outside of the United States, and principally to residents of the United Kingdom, through the Fund's

London office.4Registration under the Investment Company Act results in certain advantages under British tax law and flow-through

S Smith Barney Corporation acts as sub-investment adviser to the Fund.

4 Its registration statement under the Securities Act of 1933 became effective

July 21, 1970.
138 SECURITIES AND EXCHANGE COMMISSION

treatment under Subchapter M of the Internal Revenue Code of

1954.

Commission Policy on Restricted Securities

During the fiscal year, the Commission issued an official policy

statement on the acquisition and holding of restricted securities by

investment companies." These securities, sometimes called "letter

stock," are securities acquired in private placements or which for

some other reason require registration under the Securities Act of

1933 before they may be resold to the public. The Commission's release discussed the problems of valuation of such securities, problems

of disclosure regarding such valuation, and problems of portfolio

management where restricted securities are included in the portfolio.

The release also expressed the Commission's view that a 10 percent

limitation (in terms of net assets) on holdings of restricted securities

or other assets not readily marketable should bemaintained by an openend investment company so as to avoid liquidity problems. A later

release 6 made clear that the disclosure requirements for unregistered

securities pertained not only to registration statements, but also to reports filed with the Commission or distributed to shareholders, and to

salesliterature and proxy statements.

Foreign Sales Guidelines

On June 23, 1970, the Commission published guidelines on the

applicability of the Federal securities laws to the offer and sale outside the United States of shares of registered open-end investment

companies." As discussed in the last annual report," the Commission

had proposed the guidelines in February 1969, in response to the

rapid expansion of many registered domestic investment companies

into overseas markets and the concern that some foreign governments exhibited about the activities of such companies in their countries. The purpose of the guidelines is not only to publicize the Commission's views on the applicability of the statutes which it

administers to sales of registered open-end investment company

shares outside the United States to foreign investors, but also to set

forth what are believed to be appropriate standards for the marketing of United States investment company securities abroad.

The guidelines will insure that substantially the same disclosure

required by the Federal securities laws for American investors will

5 Investment Company Act Release No. GR47 (October 21, 1969). See also

33th Annual Report, I'P. 130-131.

G Investment Compuny Ad Relea<;eNo. 6026 (Allril13, 1970).

7 Securities Act Release No. ;;068, Securities Exchange Act Release No. 8907,

and Investment Company Act Reloa-e 1\"0. 6082,

8 33th Annual Report, p, 132.
THIRTY -SIXTH Al\TNUAL REPORT 139

generally be available to foreign investors purchasing shares of

American registered investment companies. Such disclosure at the

point of sale helps protect the United States securities market as a

whole by insuring that foreign investors will not seek redemptions

because of later realization that they had been inadequately informed about their investment. Loss of confidence in the integrity of

American registered investment companies could trigger widespread

redemptions resulting in lossesto foreign and domestic investors and

damage to the United States securities market.

The guidelines call for Securities Act registration of open-end investment company shares sold abroad and for the use in connection

with foreign sales of a prospectus substantially similar to the one

used domestically. The prospectus used in any foreign country

should be printed in a language readily understood by that segment

of the foreign public being solicited, and dealer agreements with

foreign broker-dealers should provide for prospectus delivery to all

purchasers. Copies of the prospectus used abroad along with the

English version of the prospectus upon which the foreign language

prospectus is based are to be filed with the Commission.

In the area of advertising, the U.S. distributor is expected to seek

compliance by foreign dealers with the standards of the Commission's Statement of Policy." by means of dealer agreements. Some

deviation from the standards for tombstone advertisements set forth

in Rule 134 under the Securities Act would be permitted as demanded by local custom, but, to the extent possible, all advertisements should be within the bounds of the Statement of Policy.

The guidelines also state that the regulatory requirements of the

Investment Company Act are generally applicable to the sale of

shares of open-end companies to foreign nationals abroad. For example, the guidelines indicate that applications for exemptions

under the Investment Company Act must be filed and granted to

permit sales of shares in foreign countries at prices other than the

public offering price in effect in this country. In accordance with

this guideline provision, several funds have been exempted from

Section 22(d) for foreign sales of their shares at prices which include salesloads different from those charged for domestic sales."

9 Investment Company Act Release No. 2621, Seeurities Act Release No. 3856

(October 31, 1957).

10 Pilgrim Fund, Investment Company Ad Release Xos linGS (February 5,

1970) and 599'2 (February 27, 1fl70) : Oppenheimer l:'i!Jslcmulic Capital d: Accumulation Programs, Investment Company Act Release Xos, G05:> (~lay 14,

1970) and 6070 (June 5, 1970) ; Les inpton Rc.~cu/'('" Fund. Inc. and Piedmont

Capita; Corporation, Investment Company Act Release Xo. 6148 (.Tuly 31,

1970).
140 SECURITIES AND EXCHANGE COMMISSION

Amendment of Rule 22d-1

On June 5, 1970,the Commission published notice 11 of a proposal

to amend Rule 22d-1 under the Act.12 Paragraph (h) of the Rule

presently allows sales of open-end investment company shares at a

reduced load or no sales load at all to directors, officersand partners

of the investment company, its investment adviser or principal underwriter, and bona fide full-time employees or sales representatives

of any of the foregoing who have acted as such for at least 90 days,

and to any trust, pension, profit-sharing or other benefit plan for

such persons. The provision was designed to permit such sales for

the purpose of promoting employee incentive and good will and was

adopted at a time when most investment advisers and principal underwriters for registered investment companies had relatively few

employees.

Because of the way Paragraph (h) is written, however, there are

certain anomalies in its applicability. For example, it permits employees of a life insurance company which acts as investment adviser

or principal underwriter for an investment company to benefit from

the reduced or eliminated sales load, while employees of an insurance company which performs the same services through subsidiaries

or affiliates are not eligible for such benefits.

Further, in recent years an increasing number of investment advisers and principal underwriters of investment companies have become part of large complexes of companies, and as a result, a number of applications have been filed for exemption from the

provisions of Section 22(d) of the Act to permit sales at reduced or

no load to employees of subsidiary or affiliated companies, many of

whom had no connection with the investment company business."

As a consequence, the Commission proposed to restrict the category of favored persons by limiting sales of open-end investment

company shares at a reduced or eliminated sales load to officers,

directors or partners of the investment company, its investment adviser or principal underwriter, employees or sales representatives of

the foregoing who spend more than half of their working time rendering investment advisory services to the investment company or

11 Investment Company Act Release No. 6069.

12 Section 22(d) prohibits a registered investment company, its principal underwriter, or a dealer in its redeemable securities from selling such securities

to "any person" except at a current public offering price described in the prospectus.

13 The first of the applications, that of Transamerica Capital Fund, Inc., was

discussed in the 35th Annual Report, p. 136.
TIDRTY-SIXTH ANNUAL REPORT 141

selling its shares, and any trust, pension, profit-sharing or other benefit plan for the benefit of such persons."

Amendment of Rule 17d-1

In April 1970, the Commission published a proposal to amend

Rule 17d-1 under the Investment Company Act so as to clarify the

applicability of the Rule to stock option and stock purchase plans of

companies controlled by registered investment companies and to exempt from the requirement of filing an application under the Rule

transactions in connection with such plans where no affiliated person

of any investment company, investment adviser or principal underwriter participates therein. The amendment was adopted substantially as proposed following the close of the fiscal year.15

Section 17(d) of the Act prohibits any affiliated person of or principal underwriter for a registered investment company from

effecting any transaction in which the registered company, or a company controlled by it, is a joint or a joint and several participant

with the affiliated person or principal underwriter in contravention

of any rules prescribed by the Commission for the purpose of limiting or preventing participation by the registered or controlled company on a basis different from or less advantageous than that of

other participants.

Rule 17d-1 prohibits affiliated persons of and principal underwritel'S for registered investment companies from effecting any transaction in connection with any joint enterprise or other joint arrangement or profit-sharing plan in which any such registered company,

or a company controlled by such registered company, is a participant unless an application regarding such joint enterprise has been

filed with, and granted by, the Commission.

As amended, the Rule enables operating companies controlled by

registered investment companies to adopt stock option or stock purchase plans for their officers, directors, or employees who are not affiliated persons of any investment company which is an affiliated

person of the controlled company, or of the investment adviser or

,. In almost all instances where the Commission granted exemptive orders

from Section 22(d), the orders contained an express condition that if an

amendment to Rule 22d-l more restrictive than the terms of the orders were

adopted, the orders would automatically terminate and the amended rule apply.

The release announcing the proposed amendment to the Rule indicated that

where orders have been granted without this condition the Commission would

institute appropriate proceedings for revocation or modification of such orders

so that all companies would be equally subject to the amended Rule

.15 Investment Company Act Release No. 6154 (August 10, 1(70). The notice

of the proposal was issued April 30, 1970. Investment Company Act Release

No. 6038.
142 SECURITIES AND EXCHANGE COMMISSION

principal underwriter of such an investment company, without seeking the approval of the Commission. The exemptive status of profitsharing plans of controlled companies was continued. As to all

plans, however, the availability of the exemption is predicated on

the conditions that participants in the plan (1) must not be affiliated

with the investment company, its adviser, or principal underwriter,

and (2) must not have been affiliated with any of them during the

life of the plan and for 6 months prior to institution of the profitsharing plan or the purchase of stock pursuant to a stock purchase

plan or the granting of options pursuant to a stock option plan.

This amendment was not intended to modify the prohibition contained in the Act against the issuance of stock options or the adoption of stock purchase plans either directly or indirectly by registered investment companies.

Rules Relating to Variable Annuities and Separate Accounts

Because of their special nature, variable annuity separate accounts

require exemptions from a number of provisions of the Investment Company Act. As a result of experience gained in processing

a number of applications for exemptions, the Commission concluded

that it would be appropriate to provide, through the promulgation

of rules under the Investment Company Act, certain limited exemptions which had previously been granted by individual exemptive orders. Accordingly, several rules were adopted on July 10, 1969.16On

April 30, 1970, the Commission published for comment four proposed rules which would provide certain additional exemptions."

These rules would eliminate the need for preparing, filing, and processing routine applications and provide a further specification of the

manner in which relevant regulatory provisions will be applied in

connection with the organization and operation of separate accounts.

APPLICATIONS FOR COMMISSION ACTION

Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt any person, security, or transaction from any provision of the

Act if and to the extent such exemption is necessary or appropriate

in the public interest and consistent with the protection of investors

and the purposes fairly intended by the policy and provisions of the

Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), 17(d), and

23(c), contain specific provisions and standards pursuant to which

the Commission may grant exemptions from particular sections of

the Act or may approve certain types of transactions. Also, under

16 See 35th Annual Report, p. 143.

17 Investment Company Act Release No. 6039.
THIRTY-SIXTH ANNUAL REPORT 143

certain provisions of Sections :2, :3, and 8, the Connnission may determine the status of persons and companies under the Act. One of the

principal acti vities of the Commission in its regulatron of investment companies is the consideration of applications for orders under

these sections.

During the fiscal year, 280 applications were filed under these

and other sections of the Act, and final action was taken on 217 applications. As of the end of the year, 307 applications were pending.

The following table presents a breakdown, by sections involved, of

the number of applications filed and disposed of during the year

and the number pending at the beginning and close of the year.

Applications Filed With Or Acted Upon By Commission Under The Investment

Company Act During The Fiscal Year Ended June 30,1970

Pend- PendSubject mg Ing

Sections July I, FlIed Closed June 1!J69 30,

1970

-- --- -- 3,6 •.. _.. _. __. ___ Status and exemption __.... ___.... __._ .. _._. _____.. _ 61 56 36 84 5 __. _____________ Subclassification ollnvestment companles ___. _______ I 0 0 I 7 ___.. ___________ Registration oflnvestment compames _____. ____. ____ 2 0 0 2 8(0 . . Termination of registration ._. . . . . 46 43 28 61 9,10,16 ______._ .. Regnlatlon of alliliation of directors, officers, em- 7 12 4 15 ployees, Investment advisers, underwriters and

others. 11,25 .. _._ ..... _. RegulatIon of secuntles exchange ofIers and reorga- 2 5 4 3

nlzatlon matters. 12, 14(a), 15..• __. Regulation of Iuncnons and activities of investment 20 14 19 15 companies. 17. ________.. _._. Regulation of transactions with affiliated persons .. _. 40 48 41 47 18,22,23_. _____._ Requirements as tocapltalstructure,loans, dtstubu- 56 93 78 71

tions and redemptions and related matters. 20____________... Proxies, voting trusts, circular ownershlp __... _. _... _ 1 0 1 0 27- .. ______... _.. Periodic payment plans ••......... __._ ... __.. _.. ___. 1 3 I 3 28._ ... __... _. ___ Regulation of face amount certificate comparnes., __. 1 2 0 3 0 ________... __._ Other penodie reports ______.. __.... _...... __...... _ 3 4 5 2

-- -- --- --- TotaL. ___ _______________ .________ .__________________ .._________ 244 280 217 307

3

The Equity Corporation; a closed-end non-diversified investment

company, applied pursuant to Section 8(f) of the Investment Company Act for an order declaring that it had ceased to be an investment company and terminating its registration.

Indenying the application, the Commission found that the Equity

management, in violation of Section 13(a) (4) of the Act, had

changed the nature of Equity's business so as to cease to be an investment company prior to obtaining a shareholders' vote of

approval." The Commission's opinion stated, however, that if Equity's management still desired that it not be an investment company,

it should present to the shareholders for their vote the question of

whether or not they wished Equity to be an investment company in

accordance with "a concrete plan prepared in good faith sufficient to

18 Investment Company Act Release No. 6000 (March 5, 1970).

___ _______ __ __ ___ __"' ___ __ _ ___
144 SECURITIES AND EXCHANGE COMMISSION

constitute a real alternative of a viable investment company business."

Equity filed a petition for rehearing which, among other things,

requested clarification of the stockholder-vote procedure and also

presented a plan which it considered might satisfy the Commission's

requirements. Following objections to the plan by the staff and

a group of objecting stockholders who participated in the proceedings, Equity submitted an alternative plan developed as a result of

discussions with the staff. The objecting stockholders also opposed

this plan. The Commission denied the petition for rehearing but

ruled that the alternative plan satisfied the conditions set forth in

its principal decision, authorized Equity to submit it to a vote of its

shareholders, and stated that, if the plan were disapproved by the

shareholders, it would enter a deregistration order upon appropriate

application."

An application under Section 8(f) was also filed by I ntermark I nvesting Oompany, Inc., which is registered as a closed-end investment company;" In September 1968, Intermark had obtained shareholders' approval of its proposal to surrender its license as a small

business investment company and pursue a program designed to

change the nature of its business to that of an operating company.

Thereafter it acquired all of the outstanding stock or assets of approximately twenty operating companies. In 10 of the acquisitions,

Intermark issued "earnouts"-that is, in addition to the issuance of

shares in exchange for the outstanding shares of companies acquired,

Intermark agreed to issue additional shares conditioned upon the

earnings of the acquired companies over the succeeding three years.

Following a hearing the hearing examiner concluded that the application should be denied. He found that the earnouts were "senior

securities," within the meaning of the Act, and had been issued in

violation of Section 18(c) of the Act and were therefore voidable.

The examiner also found that Intermark's proxy statement for the

September 1968 meeting was false and misleading in various respects, thus vitiating the vote of shareholders required under Section

13(a) (4) oftheAct.

The Commission granted petitions for review of the examiner's

initial decision filed by Intermark and the Commission's staff.

Alleghany Oorporation filed an application during the year for an

order pursuant to Section 8(f) declaring that it had ceased to be an

investment company as defined in the Act.21 In January 1970, the

19 Investment Company Act Release No. 6194 (September 23, 1970).

eo Investment Company Act Release No. 5904 (November 24,1969).

21 See Investment Company Act Release No. 6117 (July 16,1970).
TIDRTY-SIXTH ANNUAL REPORT 145

Interstate Commerce Commission authorized Alleghany to acquire

the operating rights and property of Jones Motor Co., Inc. and its

subsidiary, Erie Trucking Company, both motor carriers. Alleghany

asserted that by virtue of its acquisition of Jones it was subject to regulation under the Interstate Commerce Act as a motor carrier and

had thereby ceased to be an investment company by virtue of the

provisions of Section 3(c) (9) of the Act which excludes from the

definition of an investment company any company subject to regulation under the Interstate Commerce Act.

After the close of the fiscal year, the Commission granted the requested order.>

Midnite Mines, Inc. filed an application pursuant to Section

3(b) (2) of the Act which authorizes the Commission to exempt from

the Act any company which is primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding, or

trading in securities, either directly or through majority-owned subsidiaries or controlled companies conducting similar types of businesses. Midnite's principal asset is a 49 percent interest in Dawn

Mining Company which is engaged in operating the "Midnite

Mine," a uranium mine. The other 51 percent of Dawn is owned by

Newmont Mining Corporation. Midnite and Newmont jointly operate Dawn pursuant to a contract between them. The Commission

granted the exemption, finding that since the terms of this contract

provided that Dawn be operated jointly by Midnite and Newmont,

Dawn was a controlled company of Midnite, even though Midnite

held a minority interest."

National Rural Utilities Uooperatioe Finance Corporation. obtained from the Commission an order pursuant to Section 6(c),

granting a temporary exemption from all provisions of the Investment Company Act.24 National Rural, a non-profit cooperative association owned and operated by rural electric systems, intends to engage primarily in making loans to its members to finance their rural

electric services and facilities, thereby supplementing the Rural

Electrification Administration ("REA") loan program. To finance

this lending program, National Rural proposes to raise capital by

the sale of membership and capital term certificates to its member

electric systems, and by private placement and underwritten public

offerings of its debentures. The loans to members will be secured by

mortgage liens on the property of borrowing members. Although the

22 Investment Company Act Release No. 6168 (August 21,1970).

23 Investment Company Act Release No. 6123 (July 20, 1970).

24 Investment Company Act Release No. 6109 (July 7, 1970).

409-865--11----11
146 SECURITIES AND EXCHAi'l"GE COMMISSION

liens will attach to certain personal property, the primary underlying security will be the real estate and fixtures of the cooperative

borrowers.

A great majority of National Rural's loans will be made jointly

with the REA, which will control the timing and amount of such

loans. Once National Rural's loan program is fully implemented, it

will be primarily engaged in purchasing or acquiring mortgages and

other liens on and interests in real estate, and thus be excluded from

the definition of investment company in the Act by reason of Section 3(c) (6) (C). During the initial period of operations, however,

National Rural may not be able to rely on the Section 3(c) (6) (C)

exclusion. The Commission's order granted an exemption from the

Act for this initial period, not to exceed 3 years.

Talley Industries, Inc. filed an application, pursuant to Section

17(b) of the Investment Company Act, for an exemption from Section 17(a) to permit the merger into Talley of General Time Corporation. Section 17(a), generally speaking, prohibits an affiliate of an

investment company from purchasing or selling securities or other

property from or to the investment company. Section 17(b) requires

the Commission to exempt a proposed transaction from the provisions of Section 17(a) if evidence establishes that the terms of the

transaction are reasonable and fair, and that the proposed transaction is consistent with the policy of each registered investment company concerned and with the general purposes of the Act.

Under the merger plan, the common stockholders of General Time

were to receive one share of a new Talley cumulative preferred,

carrying annual dividends of $1 and convertible into %0 of a share

of Talley common, for each share of General Time, which had been

paying regular dividends. Alternatively they could elect to receive one

share of non-dividend paying Talley common for each such share.

Holders of General Time preferred were to receive four shares of the

new Talley preferred for each of their shares, or could elect to receive

four shares of Talley common for each such share.

American Investors Fund, Inc., a registered investment company,

owned about 6 percent of Talley's voting stock, making Talley an

affiliated person of the Fund under the Act. At the same time, the

Fund was a shareholder of General Time. The Commission rejected

the contention that since the Fund did not control and was not controlled by the companies being merged, there was no "purchase" or

"sale" involving the Fund within the meaning of Section 17(a). The

Commission held Talley's proposed acquisition of General Time

shares from the Fund a "purchase" and the exchange by Talley of
THIRTY-SLXTH A.... 1'ffl"UAL REPORT 147

its own shares for the General Time shares held by the Fund a

"sale" within the meaning of Section 17(a) .

Regarding the substantive terms of the merger, the Commission

concluded that it could not find the proposal fair to General Time

shareholders unless they were given a longer-term choice between

continuing to hold a dividend-paying security with a preferred status or accepting a common stock position in Talley, and that fairness required that this be accomplished by making the new Talley

preferred convertible into a full share of Talley common, and by

eliminating any issuance of Talley common to General Time shareholders. The Commission further held that the issuance of four

shares of new Talley preferred, each convertible into a full share of

Talley common, for each share of General Time preferred, would

satisfy fairness standards. The Commission stated that if Talley

filed an appropriate amendment to its merger plan within 30 days

incorporating the changes suggested by the Commission, an order

would be entered granting Talley's application." Talley filed an appropriate amendment, and its application was granted."

Ivy Fund, Inc. and its investment adviser, Studley, Shupert &

Co., Inc. of Boston, filed an application pursuant to Section 17(b) of

the Investment Company Act for an order exempting from the provisions of Section 17(a) the grant by the Fund to the adviser of a

license to use the word "Ivy" in a new name for the adviser and in

the names of other investment companies for which the adviser performs or in the future may perform advisory services."

The terms of the proposed license, for which the adviser agreed to

pay $2,000,provide that the license is terminable at the option of the

Fund if the adviser ceases to be its investment adviser and that the

right of any other fund to use the name "Ivy" pursuant to the license is terminable at the option of the Fund in the event the adviser ceases to be an investment adviser to either the Fund or such

other investment company. Following hearings, the hearing examiner overruled the objection of the Commission's staff that the consideration for the license had not been proven reasonable and fair

and concluded that the application met the statutory terms and

should be granted." The Conunission thereafter granted the staff's

petition for review.

Tlte America Group Com-panies Fund, State .~futual Life Assurance Oompany of A171e7'iraand other members of The America

25 Investment Companv Act Rp!ea;.p No. :i!l:i:: (Junum-y n. In70).

~6 Investment Company Ad Release No, :in77 (Fobruary 10, I!J70).

~7 Investment Company Act Release Xo. f)!)71 (February 6, 1U70).

~8 Administrative Proceeding File No, 3-217:J (August 2-1,1970).
148 SECURITIES AND EXCHANGE COMMISSION

Group applied for an exemption from the provisions of Section

17(d) of the Act, which prohibits joint transactions between an investment company and its affiliates, and Rule 17d-l thereunder, so

as to enable the Fund and members of The America Group to invest

in securities of the same issuer.

The Fund was formed to provide a means for the collective investment of funds committed to equity investment by several related

insurance companies constituting The America Group. Only institutional members of The America Group may become shareholders of

the Fund. Since State Mutual will control the Fund, it is an affiliated person of the Fund. Other members of The America Group,

upon acquisition of 5 percent or more of the voting stock of the

Fund, would also becomeaffiliated persons of the Fund.

The Commission granted the exemption requested," with the condition, to which State Mutual consented, that the investment of

State Mutual in the Fund will at all times amount to at least 50 percent of the value of the net assets of the Fund.

First llIultifnnd of America, I-nc. and First Multifund Advisory

Corp. filed an application for a declaratory order of the Commission,

pursuant to Section 554(e) of the Administrative Procedure Act

("APA"), that it is lawful, in accordance with Article III, Section

26 of the Rules of Fair Practice of the NASD, for members of the

NASD who are underwriters of the shares of mutual funds, to grant

concessions to members of the NASD who act as brokers for purchasers of such shares not excluding brokers who are affiliated persons of such purchasers. The Fund is an open-end investment company which invests solely in the shares of other open-end investment

companies. Its co-applicant, the Fund's adviser, had, prior to the

application, placed orders for the Fund for the purchase of shares

of other open-end investment companies, and had retained the dealers' concessionsreceived from the underwriters of those shares. The

adviser proposed to continue this practice in the future, and the application was filed in an effort to secure a Commission determination

that the practice was lawful.

Section 554(e) of the APA states that "The agency, with like effect as in the case of other orders, and in its sound discretion may

issue a declaratory order to terminate a controversy or remove uncertainty." The staff moved to dismiss the application because (1)

the questioned practices had preceded the filing of the application

by almost 2 years and (2) denial of the order would not terminate

the controversy because applicants could then file for exemptions

from the Act.

.. Investment Company Act Release No. 5788 (August 19,19(9).
THIRTY-SIXTH ANNUAL REPORT 149

The Commission denied the motion to dismiss under the then state

of the proceedings and ordered a hearing on the application to consider, in addition to the issues raised by applicants, certain issues

raised by the staff as to the propriety under the Act of applicants'

practices." Included in the specified issues were whether the Commission has the power to issue the declaratory order requested and,

if so, whether it should do so, and whether the adviser's practices

were prohibited by Sections 17(a) (1), 17(e) (1) and/or 22(d) of the

Act, unless exempted. Hearings were held, and at the close of the

fiscal year, the matter was pending.

In N.Ll.S.D. v, S.E.O., the Commission's order granting First National City Bank of New York exemptions from certain provisions

of the Investment Company Act with respect. to a Commingled Investment Account which the Bank established and registered under

the Act was affirmed by the Court of Appeals for the District of

Columbia Circuit," In the same opinion, the court reversed the

judgment of the district court in Investment Oompany Institute v.

Camp, which had invalidated Regulations of the Comptroller of the

Currency relied on by the Bank in establishing its Commingled Account. Petitions for certiorari filed by the NASD and the I.C.I. have

been granted by the Supreme Court. The brief filed by the Solicitor

General in the NASD case states that he has been advised by the

Commission that only two of the present members of the Commission participated in the Commission decision (one supporting the decision and one dissenting) and that the three subsequently-appointed

members were not prepared to take any position, and that accordingly the Commission expressed no position on the merits. The

Solicitor General, as an amicus curiae, urged affirmance.

CONTROL OF IMPROPER PRACTICES

Inspection and Investigation Program

During the fiscal year, the Commission's staff conducted 69 inspections pursuant to Section 31(b) of the Investment Company Act.

Many of these inspections disclosed violations of that Act and of

other statutes administered by the Commission. Among the violations were inadequate arrangements for safekeeping of the investment company's portfolio securities, inadequate disclosures concerning the activities of the company, failure to maintain adequate

fidelity bond coverage for persons dealing with investment company

assets and self-dealing transactions which included arrangements by

30 Investment Company .ActRelease No. 6044 (May 5, 1970).

31420 F.2d 83 (1969).
150 SECURITIES AND EXCHANGE COMMISSION

affiliates of investment companies to recapture fund brokerage for

their own benefit,

As in past years there have been a number of serious accounting

and bookkeeping problems. Some companies have priced shares inaccurately because their books did not enable them to compute net

asset value correctly. As a result of various operational problems,

several companies voluntarily suspended sales of shares pending the

resolution of these problems,

In light of the increasing number of registered investment companies, the Commission determined to expand the inspection program

carried on by its staff. Separate units for inspecting and investigating investment companies are being established in the Boston, Chicago and San Francisco regional offices.New York had previously

established such a unit. The other regional officesare being required

to allocate a greater portion of their manpower and resources to this

program.

Largely as an outgrowth of information obtained during inspections, 12 private investigations were commenced during the fiscal

year to develop facts concerning what appeared to be serious violations. As a result of the Commission's inspection and investigation

program, approximately $1.3 million was returned to investors either directly or indirectly during the year. This brings to about $8.1

million the sums returned to investors since the inception of the

inspection program in 1963.

Civil and Administrative Proceedings

During the fiscal year, the Commission instituted a number of

civil and administrative proceedings involving investment companies

and continued prosecution of other investment company proceedings.

Failure to Register as an Investment Company.-The Commission

brought an injunctive action in February 1970 in the United States

District Court for the Southern District of New York against First

N ational Oity Bank ("Citibank"), AIerl'ill Lynch, Pierce, F enmer

and 81nith, Inc. and Special Investment Advis01'y Service

("SIA.8") .3~ The complaint alleged that the defendants had violated

Section 7(b) of the Investment Company Act by operating an unregistered investment company and Sections 5(a) and (c) of the Securities Act by offering and selling unregistered securities issued by

SIAS. It was alleged, among other things, that Citibank and Merrill

Lynch had organized SIAS as an unincorporated fund which had

been primarily engaged since at least October 1, 1964,in the business

of investing, reinvesting, owning, holding, or trading in securities;

that SIAS had a value of approximately $35 million and over 1,000

32 See Litigation Release xo. 4:334(February 6,1970).
THIRTY-SIXTH ANNUAL REPORT 151

security holders; and that, while investments in SIAS were solicited

on the representation that each investor's investment would receive

personalized or individual attention, moneys received were in fact

invested in a virtually identical manner in one of two gronps of securities.

While the defendants denied that they had engaged in any illegal

or improper conduct, they entered into a Stipulation and Undertaking with the Commission, pursuant to which the court entered an

order disposing of the action but retained jurisdiction to ensure fulfillment of the terms of the Stipulation and Undertaking." These require that defendants cease the offer, sale, or redemption of securities issued by SIAS and the purchase or sale of securities for the

account of SIAS and refrain in the future from engaging in activities similar to those described in the complaint except in compliance

with the registration requirements of the Securities Act and the Investment Company Act. Mer-rill Lynch also agreed to terminate its

relationships with other banks and persons which offered sen-ices

similar to SIAS.

Prospectuses; Sales Literature.-In .Ianuary 1!:l70,the Commission

filed a complaint in the United States District Court for the Southern District of New York seeking an injunction against American

Goneral Lnsuranoe OO'lnpany and certain affiliated companies, Channing Financial Corporation, Channing Company, Incorporated, and

The Variable Annuity Life Insurance Company (VALIC).34 The

complaint alleged that commencing on September 3, 196!:l,and on

each succeeding 'Vednesday through October 2$),19G!:l,the defendants caused advertisements to be placed in the 'Vall Street Journal

offering for sale shares issued by the Channing group of investment

companies and variable annuity contracts issued by VALIC separate

accounts: that these ad vertisements failed to comply with the prospectus requirements of Section 5(b) (1) of the Securities Act; and

that the defendants failed to file copies of the advertisements with

the Commission as required by Section 24:(b) of the Investment

Company Act. The case was subsequently transferred to the United

State District Court for the Southern District of Texas."

Norman F. Dacey ill Associates, IIlC., a registered broker-dealer,

and its president, N orman. F. Dacey, were censured for securities

violations in connection with their offering of shares of Dacey Trust

Fund, a registered investment company." The sanction was imposed

3:[Md.

11 Hpp Lit lgn t lou Release Xo 4:;:!:.! 1.T:lllll:ll'r 1:;. ]!I70)

J, H.D Tex., Civ. Action No. 7o-U-:!!I1

36 See Sef'urities Exchnngo .\d HPiem:p XII :-,s7s (~Ia~' -1. I1I70).
152 SECURITIES AND EXCHANGE COMMISSION

in a hearing examiner's initial decision which became the final decision of the Commission when no appeal was filed. According to the

decision, after the Fund had filed a Securities Act registration statement, respondents prepared and used a form letter to answer inquiries concerning the prospective offering. It was found that these letters constituted the first step of an effort to sell Fund shares and, as

such, were "prospectuses." They did not, however, contain the information required to be included in a prospectus and were not accompanied or preceded by a prospectus meeting such requirements.

Their use therefore violated Section 5(b) of the Securities Act.

Moreover, the letters contained "materially misleading" statements

in that among other things they implied an assurance that an investor's capital would increase but did not point out the market risks

inherently involved in an investment in Fund shares.

Portfolio Transactions and Restricted Securities.-During the

fiscal year, the Commission instituted administrative proceedings involving Winfield Growth Fund, Lnc., a registered open-end investment company, certain broker-dealer and investment adviser firms

and individuals affiliated with the Fund, and others." The orders

for proceedings alleged, among other things, that respondents engaged in acts and practices designed to channel fund brokerage to or

for the benefit of affiliated persons of the Fund and that certain respondents caused the Fund to purchase and value restricted securities improperly. The orders alleged that these activities violated

various provisions of the Federal securities laws, including the selfdealing, pricing and redemption provisions of the Investment Company Act and antifraud provisions of the Securities Act and Securities Exchange Act. The Fund, without admitting or denying

the facts alleged, consented to findings that its registration statement

was deficient in that, among other things, it failed to disclose the

above practices, and to the entry of a stop order. Thereafter it

amended its registration statement which, as amended, was declared

effective." Following the close of the fiscal year, offers of settlement

submitted by the remaining respondents and providing for various

sanctions were accepted by the Commission." The Commission's definitive findings and opinion are to be issued at a later date.

Proceedings also involving alleged misuse of fund brokerage were

instituted against Provident Management Oorporation, investment

37 See Securities Act Release No. 5028 and securities Exchange Act Release

No. 8764 (December 2, 1969).

88 See Securities Act Release No. 5031 (December 15,1969).

39 Securities Exchange Release Nos. 8945 (July 28, 1970) and 8980 (September 17, 1970).
THIRTY-SIXTH ANNUAL REPORT 153

adviser to and principal underwriter for Provident Fund for Income, Inc.; Porteous & Company, Inc., a broker-dealer under common control with Management ; and certain other broker-dealers and

individuals. The allegations in the order for proceedings related

principally to the receipt of compensation by Porteous & Co. in the

form of clearance commissions directed to Porteous & Co. by certain

broker-dealers who were selected by the respondents affiliated with

the Fund to execute portfolio transactions for the Fund; the receipt

of tender fees by Porteous & Co. in connection with the tender of

Fund portfolio securities for which Porteous & Co. performed no

services; and the failure to disclose the receipt of such monies by

Porteous & Co. in the Fund's prospectus, proxy material and other

materials filed with the Commission.

Offers of settlement were submitted by the respondents, including

the unaffiliated broker-dealers who allegedly participated in the improper arrangements with respect to portfolio brokerage, and were

accepted by the Commission." The offers provided for the imposition of various sanctions and the findings of certain alleged violations, which were, however, not admitted. Detailed findings and an

opinion were issued by the Commission following the close of the

fiscal year.?

In June 1970, the Commission filed a complaint in the United

States District Court for the Southern District of New York for a

preliminary and final injunction against Arnold Bernhard &; 00.,

Ino., a registered investment adviser, and certain affiliated firms and

individuals." Bernhard & Co. publishes investment advisory publications under the name "Value Line" and acts as investment adviser

for several investment companies bearing that name.

The complaint alleges, among other things, violations by the defendants of the antifraud provisions of the securities acts arising out

of the failure to disclose Bernhard & CO.'s activities as a finder of

mergers, acquisitions, and financing in that firm's publications and

in investment company prospectuses; of Sections 17(e) (1) and

15(a) (1) of the Investment Company Act by virtue of the acceptance of compensation for placement of investment company portfolio transactions; and of Sections 20(a) and 34(b) of the Investment

40 Securities Exchange Act Release Nos. 8790 (December 31, 1969), 8822

(February 19, 1970) and 8846 (March 27, 1970). An order suspending the

effectiveness of the Fund's registration statement because of nondisclosure regarding the matters described above had been issued during the prior fiscal

year and had been vacated following the filing of a corrective amendment. See

35th Annual Report, p. 138.

41 Securities Exchange Act Release No. 9028 (December I, 1970).

42 See Litigation Release No. 4647 (June 25,1970).
154 SECURITIES AND EXCHANGE COMMISSION

Company Act and Rule 20a-1 thereunder in that proxy materials

and an annual report of one of the investment companies filed with

the Commission contained untrue statements and omitted material information regarding the above matters.

During the fiscal year, the Commission filed a brief objecting to a

proposed settlement in Eurach. v, Weissman, private litigation involving Dreyfus Fund, Inc." In essence, the settlement provided

that the Fund's advisory fee would be offset by certain net profits

derived from brokerage activities of a subsidiary of the Fnnd's investment adviser and it guaranteed a minimum benefit to the Fund

from this arrangement. "Net profits" was defined to include commissions received by the subsidiary in "reciprocal" transactions.

The Commission argued that the settlement was illusory because it

did not provide Fund shareholders with any benefits they were not

in any event entitled to receive. The Commission contended that an

investment adviser to a fund is under an obligation, in executing

portfolio transactions, not to ignore available means to enable the

fund to achieve the most favorable result nnder the circumstances.

The Commission also urged that Section 17(e) (1) of the Investment

Company Act precluded the subsidiary from receiving and retaining

reciprocal commissions where it did not perform an actual brokerage

function. After the Commission filed its brief, the parties to the action amended the proposed settlement so that the subsidiary's net

proceeds from reciprocal business would be credited to the Fund

without deductions except for expenses directly related to such receipts and would not be applied in reduction of the minimum recovery guaranteed to the Fund by its adviser under the settlement.

In March 1970, the court, noting that the amendment to the proposed settlement obviated some of the Commission's objections,

approved the settlement. The court reasoned that in view of the

"brokerage" exception of Section 17(e) and the absence of other relevant authority, it wold not be justified in holding that the subsidiary was obligated to turn over all of its brokerage profits to the

Fund."

Gross Abuse of Trust.-In January 1970,the United States District

Court for the District of Nevada entered a decree which among

other things permanantly enjoined Peter .A.. Strajaoe from further

acts constituting a gross abuse of trust with respect to Kent Growth

Fund, which the complaint alleged is nnder his control, and from

converting to his own use, or the use of another, any assets of the

43 S.D.N.Y., 67 Civ. 93.

H CCH Fed. Sec. L. Rep. 1192,607.
THIRTY-SIXTH ANNUAL REPORT 155

Fund." The decree also enjoined Straface, the Fund, Bonanza Investment Management Company (the Fund's investment adviser), and

National Capital Corporation, which are also allegedly controlled by

Straface, from making false statements and omitting material information concerning the operations, financial condition, personnel and

facilities of and capital contributions to the three companies and

failing to comply with the record-keeping, reporting and minimum

capital requirements of the Investment Company Act. The defendants consented to the decree.

Back Office Prohlems.-Two proceedings involved failure by

mutual funds, and investment advisers and managers of mutual funds,

to maintain on a current basis the books, accounts and other records

of the mutual funds as required by Section 31(a) of the Investment

Company Act and Rule 31a-1 thereunder.

In January 1970, the Commission filed a complaint in the U.S.

District Court for the Central District of California seeking to enjoin Enterprise Fund, Inc. ("Enterprise"), an open-end diversified

management investment company, and Shareholders Management

Company ("Management"), Enterprise's investment adviser and

principal underwriter, from further violations of certain "bookkeeping" requirements under Section 31(a) and Rule 3la-l,46 The complaint alleged that Enterprise, aided and abetted by Management,

had failed to maintain and keep current required books and records

and requested the court to enjoin the offer or sale of Enterprise

shares until that situation had been remedied.

On February 27, 1970, the court entered a final judgment of permanent injunction against Enterprise and an order approving a

stipulation and undertaking with respect to Management, which

prohibit the offer or sale of Enterprise shares until further court

order and direct Enterprise to make and keep current its accounts,

books and other records in compliance with Section 31(a) and Rule

31a-1 thereunder. The order also requires Management to make current and accurate those accounts, books and records of Enterprise

kept by it and to use its best efforts to insure compliance by Enterprise with Section 31(a) and Rule 31a-L Enterprise and Management consented to the entry of the permanent injunction and order

without admitting the violations charged in the complaint.

Pursuant to the stipulation and undertaking, Management, at

its own expense, must retain an independent certified public accounting firm to review the accounts, books and other records of Enterprise and to comment on any material inadequacies found to exist in

45 See Litigation Release No 4(;26 (January 20,1(70).

46 C.D. oai., Civ. Action No. 70--220-EC (l!l70).
156 SECURITIES AND EXCHANGE COMMISSION

the accounting system or the internal accounting controls and procedures. The report of the accounting firm is a condition precedent to

an application by Enterprise to the court for permission to resume

sales of its securities. In addition the accounting firm is to examine

Enterprise's capital accounts including control, subsidiary and individual shareholder accounts, and to render a report as to whether

these accounts are in compliance with Section 31(a).

The stipulation and undertaking also provides that, prior to application for resumption of sales, Management is to conduct or have

conducted, at its own expense, an analysis of the costs and expenses

incurred or paid by Enterprise and Management in connection with

the maintenance of Enterprise's accounts, books and other records, report thereon to Enterprise and the Commission, and pay Enterprise

for such costs and expenses incurred by Enterprise as shall be agreed

upon between Enterprise and Management and approved by the

court. At fiscal year end, the accountant's report and the cost and

expense analysis had not been completed.

In August 1969, the Commission instituted administrative proceedings under the Securities Exchange Act of 1934 against Value

Line Securities, Ino., a registered broker-dealer which acts as principal distributor for three registered investment companies, the firm's

president and the controlling shareholder of the firm's parent which

acts as manager of and investment adviser to the three companies.

The order for proceedings alleged that the respondents offered

and sold shares of the three investment companies by means of misleading prospectuses which failed to disclose a lack of personnel and

facilities necessary to service shareholders' accounts properly. It further alleged, among other things, that respondents violated Section

31 of the Investment Company Act by not properly maintaining the

books and records of Value Line Special Situations Fund, Inc. during the period April to December 1968, and that they filed misleading affidavits with the Commission."

Improper Accounting Methods.- The Commission instituted

proceedings under Section 8(d) of the Securities Act of 1933 to determine whether a stop order should be issued against a registration

statement filed by Monmouth Oapital Corporation; a small business

investment company registered under the Investment Company Act.

The proceedings were instituted on the basis of allegations by the

staff that Monmouth had made a series of stock distributions without adequate undistributed earned surplus to capitalize such distributions as required by proper accounting principles. The staff also alleged that Monmouth's failure to follow generally accepted

47 See Securities Exchange Act Release No. 8670 (August 21,1969).
TF.URTY-SLKTH ANNUAL REPORT 157

accounting principles in the preparation of its financial statements

rendered the financial statements misleading.

Monmouth submitted an offer of settlement in which it consented to

Commission findings that generally accepted accounting principles

were not followed with respect to the various stock distributions

since it did not have the requisite earned surplus. It further consented to a finding that its registration statement omitted to state

material facts required to be stated therein or necessary to make the

statements therein not misleading, in that the accountants' opinion

with respect to the financial statements contained therein did not

note that such statements were not prepared in accordance with generally accepted accounting principles. The offer of settlement was

conditioned upon the Commission dismissing the proceeding without

the entry of a stop order. Monmouth agreed to amend its registration statement so as to correct the deficiencies within 90 days after

acceptance of the offer by the Commission. The Commission determined that acceptance of Monmouth's offer would satisfactorily resolve the proceedings. Commission findings and an opinion dealing

with the improper practices and the misleading aspects of the financial statements were to be issued after the amendment had been filed.
PART VI

REGULATION OF PUBLIC.UTILITY HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935, the

Commission regulates interstate public-utility holding-company systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are

subsidiary companies of registered holding companies. There are

three principal areas of regulation under the Act. The first includes

those provisions of the Act which require the physical integration of

public-utility companies and functionally related properties of holding-company systems and the simplification of intercorporate relationships and financial structures of such systems. The second covers

the financing operations of registered holding companies and their

subsidiary companies, the acquisition and disposition of securities

and properties, and certain accounting practices, servicing arrangements, and intercompany transactions. The third area of regulation

includes the exemptive provisions of the Act, provisions relating to

the status under the Act of persons and companies, and provisions

regulating the right of persons affiliated with a public-utility company to become affiliated with a second such company through the

acquisition of securities.'

COMPOSITION OF REGISTERED HOLDING-COMPANY SYSTEMS

At the close of the 1970 fiscal year, there were 23 holding companies registered under the Act. Of these, 20 are included in the 17 "active" registered holding-company systems, 3 of the 20 being subholding utility operating companies in these systems." The remaining 3

registered holding companies, which are relatively small, are not

considered part of "active" systems," In the 17 active systems, there

1Pending legislation to transfer to the Federal Power Commission the Commission's functions under the Holding Company Act is discussed at pages 20-21,

supra.

2 The three subholding companies are The Potomac Edison Company and

:\Ionongahela Power Company, public-utility subsidiary companies of Allegheny

Power System, Inc., and Southwestern Electric Power Company, a public-utility subsidiary company of Central and South West Corporation.

3 These holding companies are British American Utilities Corporation; Kinzua Oil & Gas Corporation and its subholding company, Northwestern Pennsylvania Gas Corporation; and Standard Gas & Electric Company, which is in

the process of dissolution.

158
- - - 

THIRTY-SIXTH ANNUAL REPORT 159 

are 94 electric and/or gas utility subsidiaries, 48 nonutility subsidiaries, and 16 inactive companies, or a total, including the parent holding companies and the subholding companies, of 178 system companies. The following t.able shows the number of active holding 

companies and the number of subsidiaries (classified as utility, nonutility, and inactive) in each of the active systems as of June 30, 

1970, and the aggregate assets of these systems, less valuation reserves, as of December 31,1969. 

Classification of Companies as of June SO, 1970 -

Aggmgate 

Rwi6- Bystem 

Solcly tored EIsstcio Assts. 

Registered holding-mmPany- holdlng and/or NOD. InacUr~ Total Less 

systems ; operst. utn~ty mm- mm- Valuation gas panles panics Rweserres. 

Name mm- mm- subsir- iade st Decemwnies panics Larles ber 31 

holding ing utiht aubsid1989: 

(thousands) 

Subtotal. .....-........... 
 Adjustments (a) to eliminate 

duplicationin oompsoy munt and (b) to add the net asseta 

of nine jdntlydwned oom- mniesnot includedabovo.a..~~- Total mmpanies sod %sets in active systems.. i 
160 SECURITIES AND EXCHANGE COMMISSION

SECTION II MATTERS IN REGISTERED HOLDING-COMPANY SYSTEMS

W(Ulhington G(UILight Oompany, which was granted, pursuant to

Section 3(a) (2), an exemption from the Act except Sections

11(b) (2), 11(d) , and 11(e) , has filed a plan under Section 11(e) 4 proposing the elimination of the 0.7 percent publicly-held minority interest in the common stock of its gas utility subsidiary company,

Shenandoah Gas Company." A hearing on the plan was held after

the close of the fiscal year, and the case is pending for decision by

the Commission.

As reported previously," the Commission approved, as fair and equitable under Section 11(e) of the Act, a plan of liquidation and

dissolution of Standard G(UI and Electric Oompany, a registered

holding company. The plan was approved and enforced by the United

States District Court for the District of Delaware, which overruled

objections by the State of New York that under its abandoned property law it was entitled to receive funds due unlocated New York

stockholders. In a decision rendered on September 25, 1970, the

Court of Appeals affirmed.'

PROCEEDINGS WITH RESPECT TO ACQUISITIONS, SALES, AND

OTHER MATTERS

In American Electric Power Oompany, Inc., discussed previously,"

hearings were reopened at the instance of the company on its application to acquire, pursuant to an invitation for tenders, shares of

common stock of Cohunbus and Southern Ohio Electric Company, a

nonassociate electric utility company, in exchange for AEP stock, on

the basis of 1.3 shares of AEP common stock for each share of Columbus common stock. The Commission's Division of Corporate

Regulation opposes approval of the application, contending that the

proposed acquisition would have serious anti-competitive effects and

tend towards a concentration of control of a kind and to an extent

detrimental to the public interest, in contravention of Section

10(b) (1) of the Act. The United States Department of Justice has

also announced its opposition to approval of the proposed acquisition.

In New England Electric System, reported previously," the hearing continued during the fiscal year on the proposal for an affiliation,

through the creation of a new holding company, by NewEngland Elec4 Holding Company Act Release No. 16706 (May 1, 1970).

5 Holding Company Act Release No. 16784 (July 15, 1970).

G See 35th Annual Report, pp. 147-148.

7 Standard Gas and Electric Company, e..A.3, No. 18,334.

S See 35th .Annual Report, p. 148; 34th .Annual Report, p. 138.

9 See 35th Annual Report, p. 149; 34th .Annual Report, p, 138.
THIRTY-SIXTH ANNUAL REPORT 161

tric System and Eastern Utilities Associates, both registered holding

companies, and Boston Edison Company, a nonaffiliated electric utility

company.

In lJfiohigan Oonsolidated Gas Oompany/o the Commission denied

an application by Michigan Consolidated, a retail natural gas company and a subsidiary company of American Natural Gas Company,

a registered holding company, for permission to provide financing to

a subsidiary company which, pursuant to the National Housing Act,

proposed to construct in its service area two housing projects for

low and moderate income families. In a majority decision, in which

the Chairman and Commissioners Herlong and Needham joined and

which overruled an earlier Commission decision permitting an initial housing project,l1 the Commission held that the acquisition

would not meet the standards of Sections 10(c) (1) and 11(b) (1) and

ordered Michigan Consolidated to divest its interest in the two housing projects forthwith. Section 10(c) (1) bars approval of an acquisition detrimental to Section 11, and Section 11(b) (1) provides,

among other things, that the Commission may permit retention of

nonutility businesses which are "reasonably incidental, or economically necessary or appropriate to the operations" of an integrated

public-utility system. The majority, noting that the proposed housing ventures were related to the operations of the public-utility system "only in that [they] may be held to rehabilitate and preserve

areas serviced by Michigan Consolidated and thereby promote its

general gas utility business," concluded that such a "customer relationship" is not "the type of operating or functional relationship

which Congress contemplated when it established the standards of

the 'other business' clauses." Nor, found the majority, was the undertaking "in the ordinary course of business" so as to warrant an exemption under Section 9(c) (3).12

In a separate opinion, Commissioner Owens concurred in part and

dissented in part. He agreed with the majority that the application

could not be granted under the standards of Section 11(b) (1), but he

would have granted the application pursuant to Section 9(c) (3) on the

ground that the acquisition by Michigan Consolidated of the securities

of its housing subsidiary wasto be "in the ordinary course of business"

of Michigan Consolidated and was not detrimental to the public interest or the interest of investors or consumers. Commissioner Smith, in

10 Holding Company Act Release No. 16763 (June 22, 1970).

11 Holding Company Act Release No. 16331 (March 31, 1969). See 35th Annual Report, PP. 149-51.

12 On August 20, 1970, Michigan Consolidated filed a petition for review of

the Commission's order. Michigan OonsoUdated Gas Oompany v. S.E.O.,

C.A.D.C., No. 24564.

409-865--71----12
162 SECURITIES AND EXCHANGE COMMISSION

a dissenting opinion, urged adherence to the Commission's prior decision. In the alternative, he considered that an exemption under Section 9(c) (3) was warranted. IS

Subsequently, Michigan Consolidated and the subsidiary filed a

motion for an interim order authorizing them to complete the construction and financing of the two projects, as a step in implementing the divestiture order. This motion was denied (Commissioner

Smith dissenting}." Thereafter the subsidiary filed a further motion

seeking authority to issue and sell a mortgage note :for about

$:2,166,000on one of the projects, the proceeds to be used to operate

that project and pay contractors' bills for the other project during

the period required to implement the divestiture order. The Commission (Commissioner Smith dissenting) denied this motion as well.>

On August 20, 1970, a bill to amend the Holding Company Act to

enable holding company systems to participate in governmentally assisted low and moderate income housing programs was introduced in

the Senate." The amendment, which would add paragraph (4) to

Section 9(c) of the Act, would empower the Commission, by rule,

regulation, or order, to exempt from the acquisition provisions of

Section 10 of the Act (1) the securities of a subsidiary company engaged in the business of providing low and moderate income housing within its service area and pursuant to housing programs authorized by the National Housing Act, as amended, or a substitute

thereof, or (2) the securities of a company organized for such housing programs within its service area which receives assistance from

a company created or organized pursuant to Title IX of the Housing and Urban Development Act of 1968. In a letter of August 31,

1970, to the Chairman of the Senate Committee on Banking and

Currency, to which the amendment was referred, Chairman Budge

stated that the Commission would have no objection to enactment of

the bill.

In Hawaiian Electric Oompany, blC.,I7 the Commission approved

an application by Hawaiian Electric, an exempt holding company,

IS The Commission (Commissioner Owens concurring in part and dissenting

in part, and Commissioner Smith dissenting) subsequently denied applicattons

for the financing of housing projects by Mississippi Power and Light Company,

a subsidiary company of Middle South Utilities, Ine., a registered holding company, Holding Company Act Release No. 16814 (August 20, 1970), and by Ohio

Power Company, a subsidiary company of American Electric Power Company,

Inc., a registered holding company, Holding Company Act Release No. 16825

(September 9, 1970).

14 Holding Company Act Release No. 16819 (August 26, 1970).

15 Holding Company Act Release Xu 16&12(September 22,1970).

16 S. 4272, 91st Cong., 2d Sess.

17 Holding Company Act Release No. 16592 (January 26,1970).
THIRTY-SIXTH ANNUAL REPORT 163

to acquire all of the outstanding shares of common stock of Hilo

Electric Company. Although the electric utility companies operate

exclusively on different islands of the State of Hawaii and Section

2(a) (29) (A) requires that an integrated electric-utility system be either physically interconnected or capable of physical interconnection, the Commission decided that "in assessing the practicalities of

economic and physical integration in this case, [it should] give particular weight to the unique geography of the State of Hawaii in

light of the legislative history." 18

Illinois Pourer Oompany 19 involved an application by Illinois

Power, an exempt holding company, for approval of an acquisition,

pursuant to an invitation of tenders, of the common stock of Central

Illinois Public Service Company, also an exempt holding company.

Both companies are engaged in the electric and gas utility business

within the State of Illinois. The Commission approved the proposed

acquisition and continuation of the existing exemption of Illinois Power under Section 3(a) (1) of the Act but on condition that

the gas properties of both companies be divested. In imposing this

condition the Commission stressed the Supreme Court's emphasis, in

S.E.O. v, N e10 England Electric System,/o on the policy of the Act

favoring competition between electric and gas companies. The Commission denied the request by certain preferred stockholders of Central Illinois to require, as a condition of the acquisition, that the

several series of outstanding preferred stock of Central Illinois be

eliminated through redemption, exchange for Illinois Power stock,

or otherwise. Illinois Power subsequently announced that it did not

intend to make the tender offer because it could not accept the condition imposed by the Commission. Prior to this announcement the

preferred stockholders of Central Illinois petitioned for review of

the order insofar as it denied the condition they sought."

In Vermont Yankee Nuclear Power Corporation. and lUaine Yankee Atomic Pourer 007npany/2 the Commission approved amended

applications 23 by the sponsors of Vermont Yankee and Maine Yankee,

holding that the amended proposals afforded an opportunity to nonsponsor utilities to obtain low cost power at its source and certain

auxiliary services such as transmission and back-up reserves, and

18At the time of the passage of the Act (l935) , Hawaii was a territory

rather than a State, and. as such, the Act was then not applicable to it

19Holding Company Act Release Xo, 16m4 (Junuary 2,1970).

20390 U.S. 207 (1968).

21 Hutchinson, et al. v. S.E.C., C.A. 7, No. 18494.

22 Holding Company Act Release No. 16794 (July 31,1970).

23 See 35th Annual Report, pp. 151-Hi3; 34th Annual Report, p. 136; 33rd

Annual Report, pp. 123-124.
164 SECURITIES AND EXCHANGE COMMISSION

that the terms of such proposals resolved the issues previously raised

under Section 10(b) (1). Orders of the Commission approving the

original applications 24 had been reversed by the Court of Appeals 25

because of certain antitrust issues under Section 10(b) (1) of the

Act, and the cases had been remanded to the Commission."

In OMo Power Oompany,27 the Commission approved the acquisition by Ohio Power, a subsidiary company of American Electric

Power Company, Inc., of the municipal electric utility system owned

and operated by the City of Martins Ferry, Ohio, for a cash consideration of $4,825,000. The Commission determined among other

things that under the circumstances, including the deteriorated condition of the Martins Ferry facilities, the proposed acquisition did

not have anticompetitive effects requiring disapproval under Section

10(b)(1).

As previously reported, Middle South Utilities, Inc., a registered

holding company, has filed an application relating to a proposed offer

to acquire, through an invitation for tenders, the outstanding shares

of common stock of Arkansas-Missouri Power Company, a nonassociate electric and gas utility company, in exchange for Middle South

common stock." A hearing has been held, and the matter is now pending for determination by the Commission.

The Columbia Gas System, Inc., a registered holding company, filed

an application relating to a proposal under which, in effect, each share

of National Gas & Oil Corporation, a nonassociate gas utility company, will be exchanged for 0.6 shares of Columbia common stock. A

hearing has been ordered to determine whether the proposed acquisition meets the standards of Section 10 of the Act.29

FINANCING OF ACTIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During fiscal 1970, 15 active registered holding-company systems

issued and sold for cash a total of 59 issues of long-term debt and

capital stock, aggregating $1,684 million," pursuant to authoriza24 Holding Company Act Release Nos. 15958 (February 6, 1968) and 16006

(March 15, 1968).

25 Municipal Electric A880ciation of Ma88achusetts 1). SEa, 413 F. 2d 1052

(C.A.D.C., 1969).

26 Petitions to review intermediate orders entered by the Commission after

remand (Holding Company Act Release Nos. 16467-16470, September 5, 1969)

have been dismissed pursuant to stipulation. Municipal Electric AS80ciation v.

SEC, C.A.D.C, Nos. 23568 and 23569.

27 Holding Company Act Release No. 16753 (June 8, 1970).

28 Holding Company Act Release No. 16416 (June 25,1969).

29 Holding Company Act Release No. 16715 (May 6,1970).

30 Debt securities are computed at their principal amount, preferred stock at

the offering price, and common stock at the offering or subscription price.
THIRTY-SIXTH ANNUAL REPORT 165 

tions granted by the Commission under Sections 6 and 7 of the 

Act.S1 All of thew issues were sold for the purpose of raising new 

capital. The following table presents the amounts and types of securities issued and sold by the holdig-company systems.s2 

Securities Issued and Sold for Cash to the Public and Financial Institutims b y Active Registered Holding Cmnpanies and Their SubsidiariebFiscal Year 1970 

(In millions) 

Holding-oornmny systems 

a Three i6sna. 
 1 TWOWSU~. 


8%The active systems which did not sell stock or long-term debt secaritles to 

the public were: Eastern Utilities Associates and Philadelphia Electric Power 

Dompany. 

aZThe table does not include securities issued and sold by subsidiaries to 

their parent holding companies, short-term notes sold to banks, portfolio sales 

by any of the system companies, or securities issued for stock or assets of Don. 

amiated companies. Transactions of this nature also require authorization by 

the Commission except, as provided by Section 6(b) of the Act, the issuance of 

notes having a maturity of 9 months or less where the aggregate amount does 

not exceed 5 percent of the ,principal amount and par value af the other securities of the Issuer then outstanding. 
166 SECURITIES AND EXCHANGE COM:MISSION

Recent Financing Developments

The financing highlight of fiscal 1970 was the record volume of

external financing by registered holding companies and their subsidiaries. The $1,684million of new securities issued and sold for cash

by these companies, as shown in the preceding table, represents the

greatest volume of external financing by companies subject to the

Act for any year since passage of the Act, except for fiscal 1946

when approximately $2,158 million of securities were issued and

sold. Among other things, the $299.4million of common stock issued

and sold to the public and existing shareholders in fiscal 1970 represented the greatest amount of common equity financing since fiscal

1946.33This unprecedented volume of financing was accompanied by

record-high interest and preferred dividend rates, and the combination of these factors induced a number of departures from conventional financing methods during fiscal 1970.

For many years, the first mortgage bonds issued and sold by electric utility companies subject to the Act have uniformly carried

30-year maturities. Commencing in the last month of fiscal 1969,

variations began to appear. On June 18, 1969, Indiana & Michigan

Electric Company, an electric utility subsidiary of American Electric Power Company, Inc., a registered holding company, issued and

sold, pursuant to competitive bidding, $60 million principal amount

of first mortgage bonds having a 5-year maturity and a cost of

money to the company of 7.95 percent.s- In November 1969, Ohio

Power Company, another electric utility subsidiary of American

Electric Power Company, Inc., issued and sold, pursuant to competi33 This very large increase in volume of new capital financing by companies

subject to the Act occurred although during the 24-year period (1946-1970)

the number of electric and /?:asutility companies subject to the Act underwent

major coutraction clue to the integration and simplification requirements of

Section l1(b) of the Act. As of June 30, 1946, there were 49 registered holdingcompany systems which included 103 holding companies, 367 electric and/or

gas utility subsidiary companies, and 428 nonutility and inactive companies,

maldug a total of 898 companies subject to the Act. See 12th Annual Report,

p. 48. As of June 30, 1970, there were only 17 active regtstered hnlding-eompany systems, and they comprised 20 registered holding companies, 94 electric

and/or gas utility subxidiary companies, and 64 nonutility and inactive companies, making a total of 178 companies. See page 159, supra, for the tabulation

of companies as of June 30, 1970.

34 The Commission had authorized the company to issue the bonds with a

maturity having a range of from 5 to 30 years, the maturity date to be determined not less than 72 hours prior to the opening- of bids. Indiana <f .Michigan

Bleciric Companu, Holding Company Act Release No. 16391 (June 6, 1969).

The company determined that the 5-year period would be most advantageous

to it. Indiana &; Mictitaa« Electric Company. Holding Company Act Release

No. 16406 (June 18, 1969).
THIRTY-SIXTH ANNUAL REPORT 167

ti \ e bidding, $80 million principal amount of 25-year first mortgage

bonds, with a cost of money to the company of 8.92percent..<5

On March 25, 1970, Indiana & Michigan Electric Company was

authorized to issue and sell $50 million principal amount of first

mortgage bonds due 2000 and $15 million principal amount of first

mortgage bonds due 1975. Separate bids for each series of bonds

were invited, and both issues were sold on April 7, 1970.36 The issuer's interest costs were approximately 8.315 percent on the 5-year

series and 8.872percent on the 30-year series. On April 24, 1970,Appalachian Power Company, another subsidiary company of American Electric Power Company, Inc., was authorized to issue and

sell at competitive bidding $70 million principal amount of

first mortgage bonds with a maturity of 25 years." 'Yhen this

issue was not sold, the company was authorized by supplemental

order to issue and sell the bonds in one or two series, the principal

amount and maturity (not less than 5 years nor more than ;30years)

of each such series to be determined by the issuer not Jess than. 72

hours prior to the opening of bids." On .Iune 15, 1970,the company

issued and sold $20 million principal amount of bonds with a 25-

year maturity and $50 million of bonds with a 5-year maturity. The

company's interest costs were approximately 9.192 percent on the

5-year series and 10.114percent on the 25-year series.

Similarly, on March 20, 1970, The Narragansett Electric Company, an electric utility subsidiary of New England Electric System,

a registered holding company, was authorized to issue and sell at

competitive bidding $7,500,000principal amount of first mortgage

bonds with a maturity of not less than 5 years nor more than 30

years. The company chose a 5-year maturity and sold the bonds on

April 1, 1970, at an interest cost to the company of 8.367 percent."

Under Sections 6, 7, and l1(b) (2) of the Act, in holding-company

systems where senior-security financing is customarily done at the

operating subsidiary level, parent holding companies are generally

35 The company had proposed to issue and sell its bonds with a maturity of

from 23 to 30 years. Oliio Power Company, Holding Company Act Release No.

16511 (November 4,1969). The company, 72 hours prior to the openinz of bids.

chose the 25-year maturity, and the Commission authorized the issue and sale

of the bonds on this basis. Ohio Power Company. Holding Company Ar-t Release No. 16531 (November 26,1969).

36 Indiana a lJIichigan Electric Compa1lY. Holding Company .\ct Release No.

16662.

37 Appalachian Power Company. Holding Company Act Release No. 16606.

38 Appalachian Power Company. Holding Company Act Release No. 16734

(May 25, 1970).

39 The Narragansett Electric Company, Holding Company Act Release No.

16649.
168 SECURITIES AND EXCHANGE COMMISSION

not permitted to issue long-term debt securities, except under extraordinary circumstances. However, during the fiscal year, General

Public Utilities Corporation, a registered holding company whose

subsidiaries normally are financed in this manner, was authorized to

issue and sell at competitive bidding $50 million principal amount

of 5-year debentures, and to issue and sell, from time to time but not

later than December 31, 1972, commercial paper notes having an aggregate principal amount outstanding at any time not in excess of

$100 million. The company was authorized to borrow from commercial banks, not later than December 31, 1972,in an aggregate principal amount outstanding at any time not in excess of $85 million, for

the purpose of meeting such maturities of the commercial paper

notes as might not be refunded by the issuance of additional commercial paper notes. In addition, the company was authorized to

borrow an additional $50 million from banks not later than December 31, 1972. The net proceeds of the debentures, commercial paper,

and bank borrowings were to be used by General Public Utilities

Corporation to make additional investments in its public-utility subsidiary companies to finance their construction."

The sharp rise of interest rates in recent years has made it increasingly difficult for registered holding-company systems to maintain earnings coverage of interest requirements on their long-term

debt securities at sufficient levels to satisfy indenture requirements

and avoid impairment of the ratings of their debt securities by the

investment advisory services. One consequence of this development

has been increasing resort to preferred stock financing. In fiscal

1970, as shown in the table above, registered holding-company systems issued and sold 10 issues of preferred stock with an aggregate

value of $101.6 million, which, except for one year, was the largest

volume of this type of financing since 1947.

Competitive Bidding

Rule 50 under the Act requires that all proposed issuances or sales

of any securities of, or owned by, any company in a registered holding-company system be sold at competitive bidding unless an exception from such requirement is available under the terms of paragraphs (a) (1) to (a) (5), inclusive, of the rule. Of the 59 issues of

new securities shown in the preceding table, 56 issues, aggregating

$1,554 million, were offered for competitive bidding pursuant to the

requirement of Rule 50. The remaining three issues were common

stocks totaling $130 million, which were sold at prices and terms determined by the issuers or set by negotiation with investment bank40 General Public Utilities Oorporation, Holding Company Act Release Nos.

16540 (November 28,1969) and 16550 (December 8, 1969).
THIRTY-SIXTH ANNUAL REPORT 169

ers pursuant to orders of the Commission granting exceptions from

the competitive bidding requirement.

One of these issues was a negotiated underwritten public offering

of 2,540,097shares of additional common stock by American Electric

Power Company, Inc., a registered holding company, with aggregate

value of $76.8 million, which was offered on August 18, 1969 at the

closing market price on the New York Stock Exchange of $30.25per

share. Underwriters' compensation of $0.90 per share was equivalent

to 2.975 percent of the public offering price,'! The two other issues

which were not sold pursuant to competitive bidding were nonunderwritten rights offerings of common stock to its shareholders by General Public Utilities Corporation, a registered holding company. The

first of these two issues was an offering of 1,340,000shares, in September-October 1969, at a subscription price of $21.50 per share,

which represented a discount of 10.4 percent from the market price

of $24.00 per share. Participating dealers were employed to solicit

subscriptions by shareholders through exercise of their rights and to

sell any stock not so subscribed. A total of 1,322,500shares were sold

through exercise of rights and sales by participating dealers, who

received average compensation on all shares sold of $0.20 per share,

or 0.93 percent of the subscription price. The remaining 17,500

shares were withdrawn."

The second rights offering by General Public Utilities Corporation, in the amount of 1,405,000shares, was initially authorized by

the Commission as an underwritten rights offering with the subscription price to be determined by the issuer and underwriters'

compensation to be determined by competitive bidding pursuant to

the terms of Rule 50Y On May 14, 1970,the Commission authorized

the company to make the proposed rights offering without standby

underwriting and to employ participating dealers to solicit subscriptions by the company's shareholders and sell the unsubscribed

shares.w The offering was made in May-June 1970, at a subscription price of $17.50 per share, which represented a discount of 14.1

percent from the market price of $20.375 per share. Shareholders

were accorded oversubscription privileges, and all shares were subscribed by them. Participating dealers received average compensa41 American Electric Pincer Company. Inc. Holding Company Act Release

Nos. 16426 (July 9,1969) and 164G2(August 18, 1969).

42 General Public Ftillties Corporation, Holding Company Act Release No.

16473 (September 10, 1969).

43 General Public Utilities Corporation, Holding Company Act Release No.

16699 (April 27, 1970).

44 General Public Utili tics Corporation, Holding Company Act Release No.

16725.
170 SECURITIES AND EXCHANGE COMMISSION

tion on all shares offered of $0.0406per share, or 0.26 percent of the

subscription price.

In both rights offerings by General Public Utilities Corporation,

the sales of stock to stockholders through exercise of rights were automatically excepted from the competitive bidding requirement of

Rule 50 by the terms of paragraph (a) (1) thereof, and the sales of

unsubscribed shares through participating dealers were excepted

from competitive bidding by the Commission pursuant to the provisions of paragraph (a) (5) of the rule.

Two other issues shown in the preceding table received only one

bid each when offered for competitive bidding, and the Commission

granted exceptions from the competitive bidding requirement so as

to permit immediate acceptance of such bids. One of these was an

offering of $50 million principal amount of 10-% percent debentures

due 1974:of General Public Utilities Corporation," and the other

was an offering of 50,000shares of $9.40 cumulative preferred stock

of The Potomac Edison Company, an electric utility subsidiary company of Allegheny Power System, Inc., a registered holding

company."

In fiscal 1969 the Commission approved a plan of reorganization

under Section 11(e) of the Act, pursuant to which Pennzoil Company, then a registered holding company, and its gas utility subsidiary company, United Gas Corporation, were consolidated to form

Pennzoil United, Inc., subject to a condition that Pennzoil United

dispose of its interest in all of its gas utility properties." Subsequently, the gas properties were transferred to United Gas, Inc., a

new subsidiary company of Pennzoil United, which was authorized

to invite bids for stand-by compensation on a proposed underwritten

rights offering of United Gas common stock to the stockholders of

Pennzoil United." Following the failure to receive any bids for the

United Gas stock, the proposed rights offering was excepted from

the competitive bidding requirement of Rule 50 under the terms of

paragraph (a) (5) thereof, and Pennzoil United attempted to negotiate an underwritten rights offering." This attempt also was unsuc45 General Public Utilities Corporation, Holding Company Act Release Nos.

1().54{)(November 28, 1969) and 16550 (December 8, 1009).

46 The Potomac Edison Go-mpany, Holding Company Act Release Nos. 16688

(April 21, 1970) and 16711 (April 30, 1970).

47 See 34th Annual Report, p. 134; 33rd Annual Report, p, 121; and 32nd Annual Report, pp. 77-79.

48 P(711lZOlI U"itP!7, Inc., Holding Company Act Rl'lE'Rbe No. 16481 (September 23,

1969).

49 Pennzoil cnuea, Inc., Holding Company Act Release No. 16717 CMay 7,

1970).
THIRTY-SIXTH AJ\TNUALREPORT 171

cessful, and the Commission authorized Pennzoil United to make a

nonunderwritten rights offering with subscriptions to be solicited by

participating dealers." In June 19jO, Pennzoil United reported that

477,693 shares of the 4,056,714 shares of United Gas common stock

had been subscribed by Pennzoil United stockholders and by the officers, employees, and directors of United Gas.51 After the close of

the fiscal year, the Commission was advised that 5()8,;~!)()additional

shares had been sold.

Vermont Yankee Nuclear Power Corporation applied for an exception from competitive bidding in respect of the proposed issuance

and sale of $40 million principal amount of its first mortgage bonds,

and the Commission ordered a hearing, but subsequently the application was withdrawn." After the close of the fiscal year the Commission authorized Vermont Yankee Nuclear Power Corporation to

issue and sell, pursuant to competitive bidding, $80 million principal

amount of first mortgage bonds due 1998. Proceeds will be used to

repay short-term borrowings from banks and from sponsors."

On September 17, 1D70, the Commission announced that no exceptions from the requirements of competiti ve bidding will be granted

informally so as to permit negotiations with investment bankers for

the purpose of either choosing a pnrticular group of bankers to be

the underwriters or to establish the terms and conditions under

which the securities arc to be sold. All such matters will be considered only by way of a formal application ill accordance with the

requirements of subparagraph (a) (5) of Rule 50.54

During the period from May 7, W11, the effective date of Rule 50,

to June 30, 1970, a total of 1,109 issues with an aggregate value of

$18,462 million has been sold at competitive bidding under the rule.

These totals compare with 245 issues of securities with aggregat{)

value of $2,821 million which have been sold pursuant to orders

granting exceptions under paragraph (a) (5) of the rule. Of the

total amount of securities sold pursuant to such orders, 139 issues

with a total value of $2,332 million were sold by the issuers, and the

balance of 106 issues aggregating $489 million were portfolio sales.

Of the 139 issues sold by the issuers, 73 were in amounts of from $1

50 Penn::oil United, Inc., Holding Company Act Release No. 16747 (.Tune 2,

1970).

51 United Ga8. Inc , Recond Supplement to Prospectus dated June 2. 1970,

l~ile No. 2-33474-1.

52 Vermont Yankee Nuclear Potrcr Corporation, Holding Company Act Release Nos. 16:521(November 13, 19(9) and 16665 (March 30, 1970).

53 VeI"1mmt rankee Nuclear Pouter Corptn ation, Holding Company Act Release No. 16866 (October 13, 1970).

54 Holding Company Act Release No. 16832.
172 SECURITIES AND EXCHANGE COMMISSION

to $5 million each, 3 debt issues were in excess of $100 million each,"

2 stock issues totaling $36 million were issued in fiscal 1966 to holders of convertible debentures and employee stock options, and the remaining 61 issues were in amounts ranging from $5 million to $100

million.

Policy as to Refundahility of Preferred Stock

During the fiscal year certain registered holding-company systems

and other interested persons requested a modification of those provisions of the Commission's Statement of Policy Regarding Preferred

Stock Subject to the Public Utility Holding Company Act of 1935

which required that preferred stocks issued and sold pursuant to the

terms of Sections 6(b) and 7 of the Act be redeemable at the option

of the issuer "at any time upon reasonable notice and with reasonable redemption premiums, if any." 56 On April 20, 1970,the Commission published an invitation for comments." On June 22, 1970, the

Commission adopted certain modifications of its Statement of Policy

which permit the issuers of preferred stocks subject to the Act to include in the charters, by-laws, or related instruments defining the

rights, preferences, and privileges of new issues of preferred stock, a

provision prohibiting for a period of not more than 5 years the refunding of such stock by the issuance of debt securities at lower interest costs or other preferred stocks at lower dividend costs." Theretofore, the general redemption prices of preferred stocks had been

considered reasonable, within the meaning of the Statement of Policy, whenever such redemption prices did not exceed the sum of the

initial public offering price plus (1) 100 percent of the annual dividend rate during the first 5 years, (2) 75 percent of the dividend

rate in the second 5 years, (3) 50 percent of the dividend rate in the

third 5 years, and (4) 25 percent of the dividend rate for the remainder of the life of the stock. In conformity with this formula,

when the 5-year period of non-refundability authorized by the Commission expires, the general redemption price at which the preferred

stock may then be called will be the same as it would have been if

there had been no restriction on refundability.

The Commission's announcement stated that the modification of

the redemption policy would not apply to the redemption of preferred stock upon voluntary liquidation or to redemptions in

55 Ohio Valley Electric Corporation, a $360 million bond issue; United Gas

Corporation, a $116 million bond issue; and Pennzoil Oompany, a $135 million note

issue maturing in 18 months sold to underwriters.

56 Holding Company Act Release No. 13106 (February 16, 1956).

57 Holding Company Act Release No. 16685.

58 Holding Company Act Release No. 16758.
THIRTY-SIXTH ANNUAL REPORT 173

connection with mergers, sales of properties, or for other corporate

purposes, and that, upon the occurrence of any of such events, the

redemption price of the preferred stock was to be the same as if no

restriction on refundability had been authorized. The Commission

also emphasized that it would continuously review the effects of its

redemption policies, including specifically the foregoing modification, and based upon experience with the modification make such adjustments in these policies as may from time to time be deemed appropriate, including a rescission of the modification, extension of the

authorized five-year non-refunding period, or any other change

experience would warrant.
PART VII

PARTICIPATION IN CORPORATE REORGANIZATIONS

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the

United States district courts, differs from that under the various

other statutes which it administers. The Commission does not initiate Chapter X proceedings or hold its own hearings, and it has no

authority to determine any of the issues in such proceedings. The

Commission participates in proceedings under Chapter X in order

to provide independent, expert assistance to the courts, the participants, and investors in a highly complex area of corporate law and

finance. It pays special attention to the interests of public security

holders who may not otherwise be represented effectively.

"Wherethe scheduled indebtedness of a debtor corporation exceeds

$3 million, Section 172 of Chapter X requires the judge, before approving any plan of reorganization, to submit it to the Commission

for its examination and report. If the indebtedness does not exceed

$3 million, the judge may, if he deems it advisable to do so, submit

the plan to the Commission before deciding whether to approve it.

'Vhen the Commission files a report, copies or a summary must be

sent to all security holders and creditors when they are asked to vote

on the plan. The Commission has no authority to veto a plan of

reorganization or to require its adoption.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank

creditors and few public investors. The Commission seeks to participate principally in those proceedings in which a substantial public

investor interest is involved. However, the Commission may also

participate because an unfair plan has been or is about to be proposed, public security holders are not represented adequately, the reorganization proceedings are being conducted in violation of important provisions of the Act, the facts indicate that the Commission

can perform a useful sen-ice, or the judge requests the Commission's

participation.

For purposes of carrying out its functions under Chapter X, the

Commission has divided the country into five geographic areas. The

174
THIRTY-SIXTH AKNUAL REPORT 175

New York, Chicago, San Francisco and Seattle regional offices of

the Commission each have responsibility for one of these areas. Each

of these officeshas lawyers, accountants and financial analysts who

are engaged actively in Chapter X casesin which the Commission has

filed its appearance. Supervision and review of the regional offices'

Chapter X work is the responsibility of the Division of Corporate

Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field officefor the fifth area.

SUMMARY OF ACTIVITIES

In the fiscal year 1970, the Commission continued to maintain a

high level of activity under Chapter X. It entered its appearance in

19 new proceedings involving companies with aggregate stated assets

of approximately $227 million and aggregate indebtedness of approximately $156 million. The corporations involved in these proceedings were engaged in a variety of businesses, including, among

others, the manufacture of printing presses, textile machinery, and

various steel products; the operation of a motor hotel, n ski resort,

and fast food restaurants; real estate dcvelopment ; computer services; oil and gas drilling; and the sale of cemetery lots.

Including the new proceedings, the Commission was a party in a

total of 107 reorganization proceedings during the year. The stated

assets of the companies involved in these proceedings totaled approximately $1.05 billion and their indebtedness totaled approximately $860 million. The proceedings were scattered among district

courts in 35 states and the District of Columbia as follows: 12 in

New York; 10 in California; 9 in Arizona; 5 each in Florida, New

Jersey, and Texas; 4 each in North Carolina, Louisiana, Pennsylvania, Indiana, Illinois, and 'Vashington; 3 each in Oklahoma, South

Dakota, and Hawaii; 2 each in West. Virginia, Ohio, Kansas, Michigan, Arkansas, Nevada, and Utah; 1 each in Maryland, the District

of Columbia, Tennessee, Alabama, Massachusetts, Connecticut, Colorado, Iowa, Kentucky, Korth Dakota, "-isconsin, )Iinnesota, Montana, and Idaho.

During the year, 12 proceedings were closed. As of the end of the

fiscal year the Commission was a party in 95 reorganization proceedings.

JURISDICTIONAL, PROCEDURAL, AND ADMINISTRATIVE MATTERS

In Chapter X proceedings in which it participates, the Commission seeks to have the courts apply the procedural and substantive

safeguards to which all parties are entitled. The Commission also attempts to secure judicial uniformity in the construction of Chapter

X and the procedures thereunder.
176 SECURITIES AND EXCHANGE COMMISSION

In American National Trust and Republic National T1'ust,I the

Court of Appeals for the Seventh Circuit, as urged by the Commission, affirmed2 an order of the district court dismissing a motion by

a certificate holder of the debtor trusts to vacate and set aside the

orders approving reorganization petitions which had been filed by

other certificate holders. The motion questioned the status of the petitioning certificate holders as creditors of the debtors and the good

faith of the debtors' consent to the reorganization petitions. The

court of appeals stated that any objections to the standing of the petitioning certificate holders as creditors of the trusts should have

been raised at the hearing at which the petitions were finally approved by the court and trustees appointed, and it held that the orders approving the petitions had become final within the meaning of

Section 149 of Chapter X which provides that an order approving a

Chapter X petition which has become final is "a conclusive determination of the jurisdiction of the court,"

Subsequent to the end of the fiscal year, the Supreme Court

denied a petition for a writ of certiorari filed by the movant. Inits

brief in opposition to that petition, the Commission contended that

the orders approving the petitions had become final, within the

meaning of Section 149, when the times for filing contravening answers by the debtors or others pursuant to Sections 143 and 137 and

the time within which to appeal from those orders had expired; that

Section 149 precluded a subsequent vacation of the orders in the reorganization court or through collateral attack in a state court; and

that, in view of the debtors' consent to the involuntary petitions,

there was no need to satisfy the additional requirement of an involuntary petition as to the creditor status of the petitioners.

In Lniperiai '400' National, Inc.,3 the Court of Appeals for the

Third Circuit affirmed4 an order of the reorganization court enjoining further prosecution in another court of an ordinary bankruptcy

proceeding on behalf of a partnership which had a 25 percent interest in and operated a motel in which Imperial had a 75 percent

partnership interest," This motel is one of 97 motels each of which is

owned by a separate partnership in which Imperial has more than a

50 percent general partnership interest and the remaining partnership interest is owned by local co-owners who operate the motel.

1S.D. Ind., No. IP 68-B--447 and No. IP 68-B-609.

2In the Matter of American National Trust, 420 F.2d 1117 (C.A, 7, 1970),

oert, denied sub nom. Shanklin v. American National Trust and Republic National Trust, 400 U.S. 823 (1970).

3 D. N.J., No. B-656-65.

4 In the Matter of Imperial '400' National, Inc., 429 F.2d. 671 (1970).

5 See 35th Annual Report, pp. 161-162.
THIRTY-SIXTH ANNUAL REPORT 177

Agreeing with the Commission, the court of appeals emphasized that

broad jurisdiction is vested in the reorganization court in order to

achieve complete reorganization of a debtor in the Chapter X proceeding and that the term "property" as used in Section 111 of

Chapter X, which gives the reorganization court" ... exclusive jurisdiction of the debtor and its property, wherever located", should

be broadly construed. The court also rejected the use of a "separate

entity" concept of a partnership where strict adherence to it could

defeat the broad purposes of reorganization. In that connection, the

court restated in the following words the rationale of its landmark

opinion in In re Pittsburqli Railways Co.: G "In order to effectuate

the purpose of Chapter X proceedings ... traditional concepts of

property, title and separate entities may have to give way."

In another case concerning the motel involved in the appeal discussed above/ the court of appeals affirmed an order which had enjoined the lessor of the property on which the motel is situated from

terminating the lease and obtaining possession of the premises,

which had been constructed with Imperial's funds. In reaching its

conclusion, the court construed the lease liberally in order to avoid a

forfeiture.

In Federal Shopping TVay, f1W.,8 as previously reported," the

Commission participated in the debtor's appeal to the Court of Appeals for the Ninth Circuit from the order of the district court approving the petition for reorganization. The principal question was

whether the appointment of a receiver pendente lite constituted the

act of bankruptcy necessary to allow an involuntary petition for reorganization pursuant to Section 131(5) of Chapter X of the Bankruptcy Act. A related appeal from the district court's order by the

.Washington State Insurance Commissioner has been dismissed; only

the debtor's appeal remains. In addition, an indictment was returned

charging five of the debtor's promoters and officers with violations

of the antifraud provisions of the Securities Act of 1933 and the

Federal mail fraud and conspiracy statutes." The above matters

were pending at the close of the fiscal year.

In ill anufacturers' Oredit Oorporation.> as previously reported,"

the debtors, consisting of the parent and 25 affiliated and subsidiary

6155 F. 2d 477, 485, cert. denied 8ub nom. Philadelphia 00. v. Guggenheim,

329 U.S. 731 (1946).

7 In the Matter of Imperial '1,00' National, Ino., 429 F.2d 680 (C.A. 3, 1970).

8 W.D. Washington, Northern Div., No. 61609.

935th Annual Report, p. 161.

10 See Litigation Release No. 4644 (June 19, 1970).

11 D. N.J., No. B-1084-67.

12 34th Annual Report, p, 160.

409-865--71----13
178 SECURITIES AND EXCHANGE COMMISSION

companies, were engaged primarily in the business of operating bus

lines in New Jersey and vicinity. In affirming the order of the district court which had granted the Commission's Section 328 motion," the Court of Appeals for the Third Circuit 14 agreed with the

Commission that the proposed plan of arrangement under Chapter

XI (which would have turned the companies over to the creditors,

including the public noteholders) was not sufficient to protect the

public investors and that the full safeguards of a Chapter X proceeding were required. Thereafter, amended petitions under Chapter

X were filed for nineteen of the twenty-six corporations. However,

when the trustee sought to extend the Chapter X proceeding to include the remaining seven corporations, answers were filed by two

groups of creditors.

One group of creditors opposed the trustee's attempt to extend the

Chapter X proceedings to four corporations which were indirectly

wholly-owned by the parent. Pursuant to a settlement, supported by

the Commission, Chapter X petitions for three of the four corporations were dismissed with the stipulation that if the financial conditions of those companies deteriorated, the trustee could then file

Chapter X petitions for them. The financial conditions of all three

companies did deteriorate and the trustee filed Chapter X petitions

which were approved without opposition.

The second group of creditors opposed the extension of the Chapter X proceeding to three additional subsidiaries of the parent,

claiming, among other things, that the group had a secured interest

in all of the stock of those companies. The referee found that no

valid pledge existed and that the Chapter X proceeding should be

extended to cover the three companies. The Commission took the position that, on the basis of In re Pittsburgh Railways,15 extension

was both appropriate and necessary for the purpose of effectuating a

unitary administration of the companies. The district court confirmed the referee's report and extended the Chapter X proceedings

to include the three companies. An appeal to the Court of Appeals

for the Third Circuit was dismissed pursuant to stipulation. All 26

companies of the Manufacturers' Group are now under Chapter X.

In American National Trust and Republic National 1'rust/6 the

Commission supported and the district court approved a petition of

13 In the Matter Of ManUfacturers' Credit Corp., et al., 278 F. Supp, 384 (D.

N.J., 1968).

14 In the Matter of ManUfacturers' Credit Oorp., et al. v. 8.E.C., 395 F. 2d

833 (1968).

rs 155 F. 2d 477 (C.A. 3, 1946).

16 S.D. Ind., No. IP 68-B-447 and No. IP 68-B-609.
TEURTY-SrxTH ~AL REPORT 179

the trustee to reject, as executory, a contract which provided for the

construction and sale to the debtors of a shopping center plaza and

to order the return by the seller to the debtors of cash and rea]

property found by the court to have been transferred by the debtors

as security for the performance of the contract. The Court of Appeals for the Seventh Circuit 17 affirmed the rejection of the contract

but reversed that portion of the order directing the return of the

cash and real property on the basis that such order exceeded the

summary jurisdiction of the court because the property was in the

actual possession of the seller under a substantial adverse claim. The

Commission had taken the position that the reorganization court

had properly exercised its inherent equity power to restore the parties to their positions before the contract and thereby to avoid a

windfall for the seller at the expense of the debtors' creditors and

public investors.

In Landmark Inns of Durham, Inc.,18 the debtor had leased certain lands in 1964 for a term of 52 years. Pursuant to the lease, the

debtor built and operated a motel on the property. In 1969,the landlords, alleging various breaches of the lease agreement, including

failure to make timely rental and mortgage payments, petitioned the

Chapter X court to declare a forfeiture of the lease. The Commission, citing In re Fleetwood Motel 00rp.,19 argued that it would be

inequitable to permit the landlords to secure possession of the debtor's principal asset as the result of a forfeiture, thereby defeating

any possibility of a reorganization of the debtor in which the public

had a substantial investment., After the close of the fiscal year, the

referee denied the landlords' petition.

In R. Hoe & 00., Inc.,20 involving a major manufacturer of printing presses, the trustee sought authorization to sell the debtor's principal asset, its press division, outside of a plan of reorganization.

The Commission took the position that Section 116(3) of Chapter X

did not authorize such sale and that a sale would be tantamount to a

plan of reorganization stripped of the numerous statutory safeguards inherent in Chapter X. The district court, however, held that

the sale was desirable and authorized it pursuant to Sections 115

and 116(3) of Chapter X.

In TMT Traum' Ferry, Inc.,21 as previously reported." the Su17 In the Mattei' ot American National Trust, 426 F.2d 1059 (1970).

18 M.D. N.C., No. B-19lH.i9.

19 335 F. 2d 857 (C.A. 3, 1964).

20 S.D. N. Y., No. 69-B-461.

21 S.D. Fla., No. 3659-M-Bk.

22 35th Annual Report, p. 160.
180 SECURITIES AND EXCHANGE COMMISSION

preme Court reversed 23 the decision of the Court of Appeals 24

which had affirmed an order of the district court confirming a plan

of reorganization, which provided, among other things, for compromises of major claims without hearings on the merits of objections

to the claims or on the merits of the compromises. After an extensive evidentiary hearing before a special master on the smaller of

the two disputed claims which the Supreme Court had remanded for

further investigation, the trustee proposed a compromise of the

claim. This compromise was opposed by the Protective Committee

for Independent Stockholders. The Commission, although it had reservations as to the merits of certain aspects of the trustee's proposed compromise, determined that the compromise as a whole was

not unreasonable in light of the extensive evidentiary record developed before the special master, and therefore did not oppose it. At

the close of the fiscalyear, the matter was still pending.

In Spanish Language Television of Arizona, Inc.,25 a proceeding

in which the Commission was not participating, the Commission

called the court's attention to the fact that since the trustee whom

the court had appointed had been an employee of the debtor within

1 year prior to the commencement of the reorganization proceeding,

he was not disinterested within the meaning of Section 158 of the

Bankruptcy Act. Shortly thereafter the trustee resigned and a successor trustee was appointed. In York International B1tilding, Inc.,26

also a non-participating case, the Commission secured the withdrawal of a claim of a corporation in which the trustee owned a

substantial amount of stock in order to enable the trustee to meet

the standard of disinterestedness established by Section 158.

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the prior management is a requisite under Chapter X. One of the

primary duties of the trustee is to make a thorough study of the

debtor to assure the discovery and collection of all assets of the

estate, including claims against officers,directors, or controlling persons who may have mismanaged the debtor's affairs. The staff of the

Commission often aids the trustee in his investigation.

23 Protective Committee etc. v. Anderson, 390 U.S. 414 (1968).

24 Protective Committee etc. v. Anderson, 364 F. 2d 936 (C.A. 5, 1966). See

previous annual reports: 35th Annual Report, p. 160; 34th Annual Report, p.

153; 33rd Annual Report, p. 135; 32nd Annual Report, PP. 92-93; 31st Annual

Report, p. 100; 30th Annual Report, p. 105; and 2!lth Annual Report, pp.

!n-92.

25 D. Ariz., No. B-69-1182-Phx.

26 D. Hawaii, No. Bk-68-393.
THIRTY-SIXTH ANNUAL REPORT 181

In Oommonwealth Financial 001'p.,27 as previously reported," the

former president of the debtor had moved for a protective order

staying any attempts by the trustee to take his deposition in the

course of the trustee's Section 167 investigation, on the ground that

the Commission had no right to participate in that investigation. He

alleged that the Commission was conducting a separate and independent investigation of the affairs of the debtor, including his activities, and that any information obtained by the Commission

might be later used against him in a related criminal proceeding.

The district court had denied the motion and the Court of Appeals

for the Third Circuit had affirmed." The depositions of the former

president and the former secretary and counsel of the debtor were

taken, but both witnesses asserted their privileges against selfincrimination.

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only in a

case which involves a substantial public investor interest and presents significant problems. When no such formal report is filed

the Commission may state its view briefly by letter, or authorize its

counsel to make an oral or written presentation to amplify the Commission's views.

During the fiscal year the Commission published one formal advisory report.s" Its views on nine other plans were transmitted to the

court either orally or by written memoranda.v

The Commission's only formal advisory report of the year 32

dealt with the trustee's plan for the reorganization of Jade Oil &

Ga8 00.,33 a small, independent oil company. Although the company

had a history of losses and was insolvent on a book basis, the plan

gave the debtor's old common stockholders a 44 percent interest in

the reorganized enterprise. The trustee's approach was based on the

27 E.D. Pa., No. 30108.

28 See 34th Annual Report, p. 152, and 35th Annual Report, p, 162.

29 In the Matter ot Commonwealth Financial Corp., 408 F. 2d 640, certiorari

denied sub nom. Thal v. Common1vealth Financial Oorp., 395 U.S. 961 (1969).

30 In re Jade Oil cE Gas co., C.D. Cal., Nos. 17312-F, Corporate Reorganization Release No. 289 (Septem her 15, 1969).

31 In re Canandaigua Enterprises Corp., W.D. N.Y., No. Bk-63-1954; In re

Clute Oorp., D. Colo., No. 32895; In re Commonwealth Financial corp., E.D.

Pa., No. 30108; In re First Holding Corp., S.D. Ind., No. IP-69-B-2936; In

re Little Missouri Mineral~ Association, Inc., D. N.D., No. W67-103; In re

Lusk Oorp., D. Ariz., No. B-5696-Tuc.; In re Norman Finance &: Thrift Oorp.,

W.D. Okla., No. 68-1007; In re Tower Credit Corp., M.D. Fla., No.

66-171-Bk-T; and In re Vinco Corp., E.D. Mich., No. 63-192.

32 Corporate Reorganization Release No. 289 (September 15, 1969).

33 C. D. Cal., Nos. 17312-F and 17313-F.
182 SECURITIES AND EXCHANGE COMMISSION

premise that small, independent exploratory oil companies are valued on the basis of projected cash flow rather than on the basis of

probable "earnings" computed in accordance with generally accepted

accounting principles. The Commission agreed that prospective cash

flow was a key factor in the case, but pointed out that the cash flow

concept must be used with caution, particularly in the case of a

small oil company because (1) oil and gas are wasting assets; and

(2) by making no provision for depletion, cash flow analysis makes

no allowance for the need to generate funds to finance the exploration and development without which the enterprise is doomed to

eventual extinction. The Commission also noted that the trustee had

capitalized anticipated cash flow at a very high rate, which was said

to have been based on the multiples at which the stocks of other

small, speculative oil companies sold, and it observed that "market

data that merely reflect composite assessments of the odds for or

against lucky strikes and sensational finds-assessments shaped in

large measure by extravagant intangibles-are much too shaky a

foundation for judicial findings as to value and fairness." The Commission found that the stockholders' interest in the company was

marginal at best. Accordingly, it concluded that the trustee's plan

was unduly generous to the old stockholders at the expense of the

public investors who held the debtor's debentures and of other unsecured creditors.

The Commission also found the proposed capital structure unsound. It noted that since the company was an oil company of the

wildcat type, its stock would be extremely speculative in any event.

That characteristic was to be accentuated by the plan, which called

for the issuance of large quantities of preferred stock. The preferred

would pre-empt such asset values and earning power as the company

had, leaving the common an essentially spurious security. Moreover,

the number of common shares to be issued was extremely large. This

was bound to make the common stock even more volatile than it

would otherwise be. The Commission recommended a simple all-common capital structure with a much smaller number of outstanding

common shares than that envisaged by the plan.

One of the plan's key features was a proposal for raising the

funds needed in order to consummate it through the sale of a new

cumulative preferred. Since the company would be unable to pay

cash dividends on this preferred, it was planned to pay dividends in

common stock. The Commission observed that under this proposal

the new investors' interest in the enterprise would be progressively

enlarged at the expense of its old creditors. In addition, purchasers

of the preferred were to receive a large number of warrants entitling them to purchase common stock. The Commission considered
THIRTY-SIXTH ANNUAL REPORT 183

these warrants inconsistent with the standards of Chapter X because

they added still another speculative complication to an already dubious capital structure and gave the purchasers of the new preferred

an opportunity for gain unaccompanied by any risk of loss and because their effect would be to give the new investors a disproportionate share of any future increments in the value of the business.

The Commission was mindful of the high risks that the new investors would assume and of the need for appropriate compensatory incentives. It suggested, however, that such incentives be supplied by

giving the new preferred a larger share of the total equity than the

plan would have given rather than by way of warrants and massive

stock dividends.

Although the district court did not agree with all of the Commission's criticisms and sustained an allocation of the equity interest in

the reorganized company that the Commission believed unfair to

creditors, it did impose severe limitations on the benefits to be given

the purchasers of the new preferred." The court refused to approve

the plan unless amended so as to condition both the exercisability of

the warrants and the declaration of the proposed common stock dividends on the new preferred on the attainment of a prescribed level

of earnings. That level had not been reached at any time in the company's history, and there was no reasonable prospect of its being

reached in the foreseeable future. Hence the warrants and the dividend rights of the new preferred were stripped of all practical effect.

The plan was amended to conform to the court's holding, voted on

favorably by creditors and stockholders, and thereafter confirmed.

Consummation was deferred, however, until the new preferred issue

had been sold to the public. After the close of the fiscal year, a Securities .Act registration statement with respect to that issue became

effective," A public offering followed.

In Tower Oredit Oorporation,36 the Commission dealt with a plan

for the reorganization of an insolvent consumer finance company."

34 The matter came before the court on the Commission'sexceptions to a

special master's report rejecting in toto its attack on the plan and recommending approval,

35 File No. 2-36843.

36 M. D. Fla., No. 66-171-Bk-T.

31 For discussion of pre-pIan phases of this proceeding,see 33rd Annual Report, p. 130, and 34th Annual Report, pp. 146-147.See also B.B.a. v, Krentzman, 379 F. 2d 35 (C.A. 5, 1968) where at an earlier stage of the case the

court of appeals granted the Commission'spetition for a writ of mandamus requiring the district jndge to permit the Commission to cross-examine witnesses and to offer evidence. The court of appeals noted that limitations on

the extent to which the Commissioncould participate in Chapter X proceedings would hamper it severely in carrying out its tasks as adviser to the court

and protector of the public Interest.
184 SECURITIES AND EXCHANGE COMMISSION

The plan called for continuing the company's consumer finance business. But that was incidental. Its main feature was a proposal for

putting the debtor into the real estate business. The group of promoters who put the plan forward owned a large tract of heavily

mortgaged, unimproved land. Under the plan they were to transfer

that land to the reorganized company in exchange for a controlling

block of its common stock." Funds for an ambitious program of

land development and for the rehabilitation of the company's badly

debilitated loan business were to come from a projected post-reorganization public offering of a million shares of the reorganized company's common stock, at $10 a share. Although their plan turned on

this hoped-for financing, the prospective reorganizers had been unable to obtain any underwriters. They stated that they hoped to interest some securities houses in the financing after the reorganization

had been consummated.

The Commission found the plan unfeasible. Pointing out that

there was no assurance that the massive flotation of new securities

on which it turned would meet with a favorable reception in the

market place, the Commission's memorandum observed that "without

such successful offering the plan is merely a union of an ailing and

anemic debtor and a barren real estate speculation." Accordingly,

the Commission urged that the plan be amended so as to defer consummation and to reserve the court's jurisdiction over the debtor

until the proceeds of the contemplated public offering had been

received.

The proponents then amended their plan on several occasions.

After lengthy hearings, a simple plan was finally developed as a result of negotiations among the Commission's staff, the trustee, and

the proponents. The land acquisition and the projected public offering that had figured so prominently in the original plan were

dropped. Instead, the reorganizers undertook to contribute cash to

the reorganized enterprise. The Commission found this plan consistent with the statutory standards and recommended its approval.

After the close of the fiscal year, an order of approval was entered.

Creditors and stockholders then voted in favor of the plan, which

was subsequently confirmed.

At the Commission's insistence, the plan included certain

special investor protection features. The history of the proceeding

showed that the plan proponents, who were to hold a controlling

block of the reorganized company's stock and would also be its

3S Extensive cross-examination of the proponents of the plan by Commission

counsel showed that the cost of the land to the proponents had been materially

overstated and that one of the two mortgages by which the property was encumbered had recently been created by the proponents in their own favor.
THIRTY -SIXTH ANNUAL REPORT 185

directors and officers, had a strong self interest in selling unimproved land to the reorganized company. It was also apparent that

the proponents were likely to attempt to cause the reorganized company to confer large stock options on them. The Commission maintained that fairness required that decisions on these extremely important subjects be made after reorganization by a majority of the

disinterested shareholders. After the court had indicated its agreement with the Commission's views, a provision was added to the

plan requiring that for a period of 5 years after the plan's consummation purchases of unproductive real estate (other than those in

the normal course of the reorganized company's business), the grant

of stock options to officersand directors, and amendments to the certificate of incorporation be approved by a majority of the stock-exclusive of the stock owned of record or beneficially by the proponents of the plan.

In First Holding Oorp.,39 the plan provided that creditors whose

claims were secured by mortgages were to receive real estate contracts receivable at face value in satisfaction of their claims. Nonpublic, unsecured creditors were to be issued 6 percent installment

notes, while the public holders of the debtor's "collateral trust notes"

and "convertible secured bonds" would receive the entire equity interest in the reorganized company. The Commission pointed out that

the proposed plan was unfair in that it gave non-public creditors an

unjustified preference over the public investors who held the debtor's

"collateral trust notes" and "secured bonds". The Commission

stressed that the holders of these "secured" bonds and notes might

well be secured creditors and, if not, that they were at least unsecured creditors who should be treated equally with the other general

creditors. The court, however, approved the plan.

In Oanandaigua Enterprises Oorporationc» as previously reported," the district court considered a new plan of reorganization

after vacating its order confirming a prior plan. The new plan,

among other things, provided for stockholder participation, and

payment to unsecured creditors of 50 percent in cash, with the remainder, including accrued debenture interest, to be paid in preferred stock of the reorganized company. The Commission opposed

the new plan on the grounds that it was neither fair, equitable, nor

feasible. The Commission found the plan unfair because, among

other things, it provided for stockholder participation in the reorganization of an insolvent company. The Commission also stated that

39 S.D. Ind., No. IP-69-B-2936.

40 W.D. N.Y., No. Bk-63-1954.

41 See 35th Annual Report, p. 167, n. 41.
186 SECURITIES AND EXCHANGE COMMISSION

the plan was not feasible because there was no showing that the reorganized company would be able to raise approximately $5.4 million, the amount payable on redemption of the preferred stock 5

years after consummation, and because the plan established a reorganized company with an unsound capital structure in relation to its

asset value and foreseeable earnings. The court approved the new

plan and, over the objections of the Commission, confirmed it.

The indenture trustee for debenture holders appealed to the Court

of Appeals for the Second Circuit from the orders of the district

court vacating confirmation of the prior plan of reorganization and

approving the new plan.v Subsequently, the new plan was accepted by

89 percent of the principal amount of debenture holders voting, and

the indenture trustee moved to dismiss its appeal. While the Commission felt that the indenture trustee had a right to withdraw its appeal,

it urged the court of appeals to preserve the opportunity for any

debenture holder who might so desire to continue this appeal since

the time for appeal from either order had expired and debenture

holders might have relied on the trustee's appeal to protect their

interests."

In line with the Commission's recommendation, the court of appeals instructed the indenture trustee to notify all debenture holders

at its expense of the fact that it was seeking to dismiss the appeal.

The notice, which was to be approved by the district court, was to

include an explanation of the reasons why the trustee took the appeal initially and why it now believed that the appeal should be dismissed and to state that any debenture holder who desired to continue the appeal could within 15 days substitute himself for the

indenture trustee as appellant.

InThe Lusk Oorporation,u the trustee proposed a plan calling for

liquidation of the debtor's assets and distribution of the proceeds to

42 CA. 2, Nos. 34239 and 33330.

43 The Commission argued that: (1) the motion to dismiss the appeal presented a situation not unlike that contemplated by Rule 23(e) of the Federal

Rules of Civil Procedure, which provides that a class action may not be dismissed without approval of the court and specifies that notice of a proposed

dismissal shall be given to all members of the class; (2) the representative aspect of persons taking an appeal in a Chapter X proceeding was noted in

Yaung v. Higbee 00., 324 U.S. 204 (1945), where the Supreme Court stated

that two preferred stockholders who had appealed from an order confirming a

Chapter X reorganization plan were representatives of the class of stockholders, even though the appellants there expressly disclaimed any intention to

represent the class; and (3) in the case at bar, a fortiori, the indenture trustee as fiduciary for the class of debenture holders should not be permitted to

withdraw its appeal without adequate protection for the entire class.

44 D. Ariz., No. B-5696-Tuc.
TEURTY-SrKTH ~AL REPORT 187

its creditors, including public investors holding the debtor's subordinated debentures. Since those proceeds were insufficient to cover the

creditors' claims, shareholders could not participate. Although the

debtor's stock was worthless, the plan provided for the sale of such

stock by the trustee to the debtor's former chief executive. The Commission pointed out that the purpose of this sale was obscure and

that the proposal appeared to call for judicial approval of a scheme

for perpetuating a mere corporate shell. Accordingly, the Commission urged that the plan be amended so as to defer the sale of the

debtor's stock until evidence had been taken and a full record made

with respect to the purpose and probable consequences of the proposed sale. The plan was amended in accordance with the Commission's suggestion. At the close of the fiscal year, the matter had not

as yet been brought on for hearing.

In Olute 001'p.,45 the court, as recommended by the Commission,

approved a plan which provided, among other things, for a compromise treating defrauded stockholders as creditors, but limiting each

such stockholder's claim to half of the market price at the time of

purchase.

In Oontinental Vending Machine Oorp.,48 the plan called for the

liquidation of an insolvent enterprise and for participation by the

public investors who held the debtor's subordinated debentures in

the proceeds of the liquidation. Their right to participate stemmed

from a controversy between them and the indenture trustee, who was

also a senior creditor. The debenture holders and the debtor's trustee

had contended that the indenture trustee, a commercial bank, had

breached its fiduciary duties to the debenture holders by (1) making

loans to the debtor which had the effect of artificially prolonging its

existence and causing its financial position to deteriorate further to

the debenture holders' detriment; 41 and (2) failing to take appropriate action to prevent the debtor's chief executive from diverting

its funds to ventures of his own. The plan reflected a settlement by

which the indenture trustee agreed to waive its senior position for

the debenture holders' benefit, enabling the debenture holders to

recover approximately 18 percent of their claims. After the Commission advised that the settlement was fair and that it considered the

distribution to junior creditors thereunder consistent with the absolute priority rule, the plan was approved and confirmed.

In N O'l"lTUUT/, Finance re Thrift Oorp.,48 the plan provided for the

45 D. Colo., No. 32895.

48 EJ.D. N.Y., No. 63-B-663.

41 The debenture holders claimed that the debtor had agreed with the indenture trustee to refrain from drawing on the fund created by the loan.

48 W.D. Okla., No. 68-1007.
188 SECURITIES AND EXCHANGE COMMISSION

reorganized company to issue stock which would be purchased by

Triton Corp., the debtor's controlling stockholder. As consideration

for the stock, Triton Corp. would contribute the cash necessary for

the consummation of the plan and the payment of all administration

costs through the final decree. Under the plan, the secured creditors

were to receive the full value of their security upon its sale or other

disposition. Holders of thrift certificates, investment accounts, debentures and all other unsecured creditors whose claims amounted to

$100 or less were to receive a 40 percent cash payment. Those unsecured creditors and public investors whose claims were larger could

choose between 40 percent in cash to be paid within 15 months after

confirmation, or Triton Corp.'s own 4 percent non-cumulative, convertible preferred stock equal to the face amount of their claims.

The debtor's preferred and common stock were to be cancelled, since

the court found the debtor to be insolvent. The Commission advised

the court that the plan failed to meet the statutory standards and

purpose of Chapter X because (1) the plan was unfair and also violated Section 216(12) (a) by reason of its failure to provide for the

election of directors by preferred stockholders in the event of a default in the payment of dividends to the preferred stock; (2) the

turning over of the debtor's causes of action to the reorganized company violated Section 216(13); and (3) the absence of a provision

for periodic reports to security holders violated Section 216(12) (b).

The plan was amended to meet the Commission's objections, and

then approved and confirmed by the court.

In Little Missouri Minerals Association, Ine.,49 the trustee and the

debtor each proposed a plan of reorganization. The court agreed

with the Commission that the plan proposed by the trustee was fair,

equitable and feasible while the debtor's plan was not. The trustee's

plan called for the liquidation of the debtor, which had acquired

mineral interests from individual landowners by fraud, and for the

return of those interests to the defrauded landowners in exchange

for the Class A stock originally issued to them. The debtor's plan

provided for the company's restoration to its pre-reorganization status, with the mineral rights and corporate control continuing to reside with the former management. The Commission opposed the

debtor's plan because it was manifestly unfair in keeping both the

mineral rights acquired by fraud and corporate control in the hands

of the former management. The Commission also pointed out that

there was no prospect of obtaining the favorable vote required for

confirmation.

49 D. N.D., No. W-67-103.
THIRTY-SIXTH ANNUAL REPORT 189

In Rancho Montana de Oro, Inc.,50 a plan was proposed whereby

all of the assets of the debtor were to be sold to an unrelated corporation in exchange for a large block of the purchaser's stock. This

stock was then to be sold by the trustee to an investment banker for

the purpose of public distribution, with the proceeds to be distributed to the debtor's creditors and sole stockholder. Since the plan

proposed the sale of securities to the public without registration

under Section 5 of the Securities Act of 1933,the Commission intervened in the Chapter X proceeding solely for the purpose of enforcing the Federal securities laws. While the Commission agreed with

the contention of the trustee and the debtor that Section 3(a) (10) of

the Securities Act would exempt the transaction between the purchaser-issuer and the trustee from the registration requirements of

that Act, it contended that the exemption did not extend to any

public offering by the trustee of the securities to be received. After a

hearing on the plan the district. judge, in a minute order, rejected

the Commission's objections and approved the plan. The Commission

filed a notice of appeal from the minute order." The formal order

subsequently entered upon the district judge's minute order held

only that the Section 3(a) (10) exemption applied to the proposed

transaction between the issuer and the trustee. The district judge expressly refused to find that the exemption would apply if the trustee

sold the purchaser-issuer's stock to the public. The trustee then

agreed to amend the plan so as to provide for the distribution of

such stock directly to the administrative claimants and to the debtor's creditors in satisfaction of their claims with the balance to be

distributed to the debtor's sole stockholder.

ACfIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem

of determining the compensation to be paid to the various parties

for services rendered and for expenses incurred in the proceeding.

The Commission, which under Section 242 of the Bankruptcy Act

may not receive any allowance for the services it renders, has sought

to assist the courts in assuring economy of administration and in allocating compensation equitably on the basis of the claimants' contributions to the administration of estates and the formulation of

plans. During the fiscal year 223 applications for compensation totaling about $5.4 million were reviewed.

60 C.D. Cat, No. 6970B-TC.

51 The Commission, having intervened solely for the purpose of enforcing the

federal securities laws, took the position that the limitation of Section 208 (11

U.S.C. fi608) respecting appeals by the Commission in Chapter X proceedings

was inapplicable. See S.B.a. v. Bloomberg, 299 F. 2d 315 (CoA.1, 1962).
190 SECURITIES AND EXCHANGE COMMISSION

In a decision involving Imperial '¥JO' National, Inc., the Court of

Appeals for the Third Circuit considered an award of interim fee

allowances by the district court to the reorganization trustee and his

attorney. These allowances-$90,000 to the trustee and $125,000 to

his attorney-were the third interim allowances during the reorganization proceeding and were based not only on their work during the

third period but also on a reconsideration of services performed during the entire reorganization. The court of appeals reversed the

order, holding that the district court had erred in considering the

work done by the fee applicants during the entire reorganization

proceedings, in the absence of a showing "that the previous interim

awards did not adequately relieve any burden arising out of their

service during the first two periods"," The court of appeals found

the fees awarded to have been excessive when viewed in light of

services performed during the third period. Because the record did

not indicate what allowances of compensation would be necessary in

order that the administration of the debtor's estate would be carried

out as of the termination of the third period, the court held that the

fee applicants had not sustained their burden of proof and remanded the case to the district court for definite findings and conclusions unless the creditors agreed to the allowances recommended

by the Commission for the third period-$27,500 to the trustee and

$45,000 to his attorney. In this connection, the court observed that

the recommendations of the Commission on this matter "should be

given great weight ... [b]ecause of its experience in such matters, its

impartiality, and its sole familiarity with the relevant facts of this

case".

In TMT Trailer Ferry, Inc.,53 as previously reported;" attorneys

for the Protective Committee for Independent Stockholders applied

for an interim allowance of $100,000for services rendered and more

than $20,000 reimbursement of expenses. Because the committee had

rendered services for over 10 years and because the major services

related to successful opposition to confirmed plans of reorganization,

the Commission supported the application in principle but recommended an interim allowance of $60,000 for services rendered and

$10,000 reimbursement of expenses. The attorney for the successor

trustee, who had previously obtained an em parte order from the district court vacating the court's previous determination that committee counsel were entitled to an interim award, opposed counsel's

renewed application. He alleged that counsel had represented con52 In the Matte,. ot Imperial '.1,00'Nauonas, Inc., 432 F.2d 232 (1970).

53 S.D. Fla., No. 3659-M-Bk.

54 35th Annual Report, p. 168.
THIRTY-SIXTH ANNUAL REPORT 191

flieting interests in attempting to obtain creditor status for those

stockholders who were allegedly de:frauded in the purchase of their

stock and that the committee had exceeded the authority given it by

stockholders in opposing reorganization plans which provided for no

participation by stockholders in the reorganized company. The district court allowed committee counsel interim compensation of only

$10,000 and $5,000 reimbursement of expenses.

Trustee's counsel had also proposed that the depositions of the individual members of the committee and committee counsel be taken

and that this be done in Florida. The committee and its counsel applied to the district court for a protective order from the depositions

and for instructions as to future participation in the reorganization

proceeding. Since the committee members lived in New York and

California, committee counsel lived in the District of Columbia and

Florida, the facts which the trustee's counsel sought in his proposed

depositions were, in the view of the Commission, either already a

matter of record, irrelevant, or based on erroneous legal assumptions, and the activities of trustee's counsel tended to discourage active participation in the reorganization proceeding by representatives of public investors, the Commission supported the committee's

motion for a protective order and instructions. The district court denied the motion.

The committee and its counsel obtained leave :from the Court of

Appeals for the Fifth Circuit to file an appeal seeking revision of

the compensation award to the amounts originally requested. The

Commission urged the court to increase the award to the amounts it

had recommended to the district court. In addition, the committee

and its counsel, with the Commission's support, appealed separately

the district court's denial of its motion for a protective order and instructions. At the close of the fiscal year both appeals were still

pending.

In Oanandaigua Enterprises OmjJoration,65 the trustee, who had

been granted a first interim allowance of $100,000 in the prior year,

applied for a second interim allowance of $200,000 for services rendered by himself and his law firm 56 since the beginning of the proceeding. The Commission urged that the application be viewed as

separate requests for interim allowances by the trustee and his law

firm, since the services rendered were by separate persons and distinguishable. The Commission also contended that the application

66 W.D. N.Y., No. Bk-63-1954.

66 No attorney for the trustee was appointed during these proceedings. In the

interest of economy the court advised the trustee to act as his own attorney,

and, if necessary, to utilize the services of members of his firm.
192 SECURITIES AND EXCHANGE COMMISSION

should be viewed as a request for an interim allowance for the 9%

month period since entry of the order granting the first interim allowance, because an adjustment of the first award, absent unusual

circumstances not present in this case, would militate against orderly

administration of the estate. Accordingly, the Commission recommended awards of $7,500and $10,000to the trustee and his law firm,

respectively. The court, however, granted a single award of $100,000

to the trustee as an additional allowance on account of services rendered since the inception of the proceeding in December 1964.

In Manufacturers' Oredit Oor-porationr" as previously reported,"

the court granted the Commission's motion under Section 328, and

subsequently approved Chapter X petitions for the parent corporation and 18 subsidiaries. The Chapter XI receiver and his two attorneys sought interim allowances totaling $150,000 from the Chapter

X and XI estates for services rendered while the debtors were in

Chapter XI. The referee recommended interim awards of $40,000to

the receiver and $35,000to each of his attorneys, allocating 70 percent to the Chapter X companies and 30 percent to the Chapter XI

companies on the basis of the relative income of the debtors involved

rather than of services rendered. The Commission opposed the

award of interim allowances, urging that in Chapter X, in order to

assure the prompt and efficient rendition of services, interim allowances are appropriate for officersof the court who continue to render

substantial services to the estate, but not to the Chapter XI receiver

and his attorneys whose services had, for the most part, ceased. The

Commission also pointed to the stringent cash position of the estate.

The district court confirmed the referree's report and granted the interim allowances, but provided for installment payments over a period of 6 months.

InRoberts Oornpany,59 the trustee and his two attorneys made application for interim compensation at the rate of $4,000 per month

each for the trustee and his senior attorney, and $2,000 per month

for the trustee's junior attorney. After an evidentiary hearing the

Commission filed a memorandum recommending that the maximum

interim compensation of the trustee and his senior attorney be set at

$3,000 per month. The Commission further recommended that the

trustee's junior attorney, who was not involved in the major functions to be performed in the proceedings, be considered as functioning as the debtor's house counsel, and be compensated as such. It

recommended that he be retained at a salary of $2,000 per month,

57 D. N.J., No. B-1084-67.

58 See 34th Annual Report, p. 160. See also 35th Annual Report, pp. 168-169.

59 :\LD. N.C., No. B-37-70.
THIRTY-SIXTH ANNUAL REPORT 193

but that this be considered as payment in full. The referee agreed

with the Commission's position regarding the application of the

trustee and his senior attorney, but the district court awarded all applicants the full sums requested as interim compensation.

In Swan-Finch Oil 00l'p.,60 the trustee, who had been granted

$490,000 as a final allowance 4 years earlier, applied for a second

final allowance of $250,000 for services rendered since the previous

award, and counsel for the trustee, who had received no prior

award, applied for a final allowance of $162,500. The Commission

recommended a $60,000 allowance to the trustee in view of the substantial final allowance already awarded, the statement by the court

four years earlier that the trustee was expected to render some further services for which he was to make no further claim, and the

lack of time records, balanced against the inherent complexity of the

estate and the trustee's contribution. The Commission recommended

$90,000 for counsel to the trustee in view of the facts that amounts

recovered for the estate while counsel served the trustee were not attributable solely to his efforts, the services rendered in some measure

merely duplicated the trustee's work, and counsel could not be expected to be remunerated at the rates customarily charged private

clients in commercial matters. The court awarded $65,000 to the

trustee and $100,000to counsel for the trustee.

In Webb &: K1UJ,pp, Inc.,61 counsel for the trustee and the trustee,

each of whom had been granted three interim allowances totaling

$335,000 and $60,000, respectively, applied for a fourth interim allowance of $200,000 and $25,000, respectively, for services rendered

during a 22-month period. The Commission recommended deferral

of counsel's application with the alternative recommendation that if

the court were to make some award, it should not exceed $75,000.

The recommendation for deferral was based on the substantial

amount requested; the uncertainty as to what would be ultimately

available for final allowances, in view of a $35,000,000Internal Revenue Service claim; the fact that most of the estate's assets had already been liquidated, making reorganization impossible; and the

substantial prior awards. The Commission recommended that no further interim award be made to the trustee in view of the above factors and particularly since the trustee had not rendered such substantial services as to warrant an interim award in order to alleviate

economic hardship. After the close of the fiscal year, the court held

that a decision on the applications should be deferred so as to permit

60 S.D. N.Y., No. 93046.

61 S.D. N.Y., No. 65-B-365.

409-865--71----14

-
194 SECURITIES AND EXCHANGE COMMISSION

clarification of the status of the tax claims, on which the future course

of the proceedings in large part depended.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by

which debtors can effect arrangements with respect to their unsecured debts under court supervision. Where a proceeding is brought

under that chapter but the facts indicate that it should have been

brought under Chapter X, Section 328 of Chapter XI authorizes the

Commission or any other party in interest to make application to

the court to dismiss the Chapter XI proceeding unless the debtor's

petition is amended to comply with the requirements of Chapter X,

or a creditors' petition under Chapter X is .filed.

In Federal Ooal Oompany,62 the debtor had at the time of its organization made a public offering of units consisting of long-term

debentures and common stock. Massive interest arrearages accumulated over the years because of the debtor's inability to pay the interest due the debenture holders," When the debentures matured,

this accrued but unpaid interest was far in excess of the principal.

The debtor then sought to effect a Chapter XI arrangement with the

debenture holders, who were its only creditors. Under the proposed

arrangement persons whose debentures were in principal amounts of

less than $1,000 were to receive a modest cash settlement in full satisfaction of their claims.'" The claims of those who held debentures

in the principal amount of $1,000 or more were to be scaled down to

40 percent of principal. These larger holders were to receive new

long-term debentures in that reduced amount. Contending that the

arrangement would effect a drastic revision of the rights of almost

2,000 public investor creditors and that the debtor's history raised

questions calling for an investigation by a disinterested Chapter X

trustee, the Commission moved for dismissal pursuant to Section

328. That motion was opposed by the debtor which argued that

Chapter XI was appropriate because its stock was held by the same

people who held its debentures. The district court rejected the debtor's contentions and granted the Commission's motion." In its opinion the court pointed out that although all the debentures had originally been held by the stockholders in amounts directly proportional

to their stock holdings and although there was still a large degree of

82 S.D. W. Va., No. 69-270.

6B Interest was due only if earned. But the debenture holders were entitled

to accrued interest at maturity.

84 The proposed payment was 30 percent of principal, whIch was only about

12 percent of the total of principal plus accrued interest.

85 The opinion is unreported.
THIRTY-SIXTH ANNUAL REPORT 195

overlapping between the debenture holders and the stockholders, the

two groups were no longer identical. The court also stated that even

had there been such identity, that factor would not be controlling

because "the safeguards of Chapter X afford greater protection to

creditors and stockholders alike by providing greater judicial control over the entire proceedings, together with impartial and expert

administrative assistance in corporate reorganizations through the

active participation of the S.E.C., as well as the appointment of a

disinterested trustee." From this determination the debtor appealed

after the close of the fiscal year.

In Seourity Saoesoo, Inc.,66 creditors made a Section 328 motion.

When the court asked for the Commission's views with respect to

that motion, the Commission appeared and participated in the development of an evidentiary record. After reviewing that record, the

Commission advised the court that it was unable to support the motion. The movants thereafter consented to the denial of their motion.

The debtor dealt in single-family dwellings. It purchased such

properties, assumed the mortgages to which they were subject, and

then resold them to people who intended to occupy them. The buyers

agreed to make stipulated monthly payments to the debtor over protracted periods. A buyer was entitled to a deed only after he had

made all his payments. If a buyer was unable or unwilling to continue with his payments, the debtor would repossess the house. But

the debtor had no claim against such a defaulting buyer for the payments that were to be made over the remaining portion of the contract period."

The debtor had virtually no equity capital. The small amount of

stock that had been issued was held by management. The debtor had

financed itself by selling approximately $12 million of demand and

short-term debt securities to some 4,500 investors. Operations had

been unprofitable, with the resulting deficits being covered by the

sale of new debt securities. When continued deficit financing became

impossible, the debtor was constrained to seek relief under Chapter

XI. Shortly before the filing of the petition, the old control group

had sold its stock to an experienced entrepreneur, who had not previously been affiliated with the company. Concluding that the debtor's business was uneconomic and incapable of rehabilitation, new

management proposed a Chapter XI arrangement predicated on the

gradual liquidation of the debtor's inventory of repossessed homes

88 W.D. Wash., No. 66820.

81 Two of the Cbapter X cases in wbicb the Commissionis participating involve debtors engaged in real estate enterprises of this type, Arlington Di8-

count 00., S.D. Ohio, No. 48421; Fir8t Holding Oorp., S.D. Ind., No.

IP-69-B-2936.
196 SECURITIES AND EXCHANGE COMMISSION

and real estate receivables, and reinvestment of the proceeds in types

of commercial financing with which the company's new chief executive had considerable previous experience.

Under the proposed Chapter XI arrangement the public creditors

were to receive a 55 percent cash distribution over a 7-year period and

half of the equity interest in the reorganized company; the old stock

was to be extinguished; and the new chief executive would receive

the other half of the new stock in return for a contribution of new

assets and his undertaking to manage the company without compensation until the public investors had received all of the cash distributions to which they were entitled under the arrangement."

The creditors who moved for dismissal of the Chapter XI proceeding contended that since the proposed arrangement entailed a

drastic revision of the rights of public creditors, Chapter XI was

unavailable. The debtor replied that Chapter XI was appropriate

because a complete change in management had already been effected

and because this Chapter XI proceeding, in view of the peculiar circumstances involved, was assertedly more akin in substance to a

Chapter X proceeding than to the normal Chapter XI proceeding.

The Commission noted its emphatic disagreement with the suggestion that the proceeding was really tantamount to one under Chapter X.

In concluding that it was unable to support the creditors' motion,

the Commission stressed the uneconomic character of the debtor's

business, observing that "in the face of the debtor's history and the

character of its business, to speak of a 'reorganization' as that word

is generally understood in a Chapter X context is to engage in hyperbole." Relief under Chapter X being barred and liquidation

being a pressing economic necessity, the real question in the case was

whether the business was to be liquidated gradually in Chapter XI

or rapidly in ordinary bankruptcy. On that issue the Commission

took no position. Nor did it choose to express an opinion as to

whether Chapter XI permits the confirmation of an arrangement

under which an existing business is to be liquidated and the proceeds

used to launch a new and quite uncertain venture.

The Commission suggested that if the court did confirm the arrangement, certain amendments would be appropriate to assure the

public investors of representation on the board of directors and to

minimize the likelihood of uninformed, speculative trading in the

68 No dividends or other distributions are to be paid or accrued on the new

chief executive's shares until the creditors receive all of the cash to which the

plan entitles them.
THIRTY-SIXTH ANNUAL REPORT 197

new common stock, the value of which would remain conjectural for

many years.69

Efforts are sometimes made to misuse Chapter XI so as to deprive

investors of the benefits of the Securities Act and the Securities Exchange Act. When such cases come to the attention of the Commission's staff, it normally attempts to resolve the problem by informal

negotiations with the debtor's counsel. When such negotiations prove

fruitless or there appears to be a deliberate effort to evade the statutes administered by the Commission, the Commission intervenes in

the Chapter XI proceeding to assist in the development of an adequate record, direct the court's attention to the applicable provisions of the Federal securities laws, express its views as to their

bearing on the particular case, and thus discharge its statutory

investor protection responsibilities.

In United States Research Oorporation." the debtor used deceptive materials in order to induce its creditors to consent to the proposed arrangement. The funds needed to consummate the arrangement were to come from an unregistered offering of additional stock

to present stockholders. That offering was already in progress and

was being made with the aid of the same misleading material that

had been disseminated to creditors. After the Commission had intervened and developed the facts, the court adjudicated the debtor a

bankrupt.

In Reoleite, Inc.,71 the proposed arrangement called for the issuance of some 1.5 million shares of the debtor's stock to a small group

of persons who were to contribute certain properties to the debtor

and to take control of it after consummation." The plan of arrangement stated that the shares in question were to be issued "pursuant

to Section 393 of the Bankruptcy Act", which exempts certain trans69 The latter result was to be achieved by a sharp reduction in the number

of shares to be issued. Under the plan, as originally proposed, one share would

have been issued for each $10 in claims. The Commission recommended that

one share be issued for each $100 in claims.

70 N.D. Ga., No. 67509.

71 S.D. Fla., No. 63-244-Bk--DF.

72 This was originally a Chapter X proceeding . .After six years of admlnistration under that chapter, a plan was proposed which the Commission eonsldered and which the court found unfeasible. See 35th Annual Report, p, 166.

The court then found that no plan of reorganization was feasible and adjudicated the debtor 11 bankrupt. The proceeding thus became one in ordinary

bankruptcy. The debtor thereupon availed itself of the right to file a Chapter

XI petition given it by Section 321 of that chapter, which provides that "A

debtor may file a petition under this chapter in a pending bankruptcy proceed.

ing.••. "
198 SECURITIES AND EXCHANGE COMMISSION

actions in securities issued to creditors in Chapter XI proceedings

from the registration requirements of the Securities Act. The Commission intervened to point out that this claim to an exemption from

registration was invalid. In urging the court to strike the offending

reference to Section 393 from the plan of arrangement, the Commission pointed to the text of that section, exempting from registration

under the Securities Act "any transaction in any security issued pursuant to an arrangement in exchange for claims against the debtor

or partly in exchange and partly for cash and/or property ... ", and

noted its historic position that the section applies only to transactions with persons who were creditors at the time the petition was

filed. The Commission's memorandum said:

"The prospective recipients of these shares have no 'claims against the

debtor'. They are people who are eager to sell the debtor something in ex.

change for its stock. Section 393 promotes arrangements between embarrassed debtors and their creditors by facilltating the issuance of new securities by the former to the latter. It was not meant to enable promoters

to manufacture 'free' stock for themselves by putting assets into a dormant corporation that happens to have wound up in Chapter XI."

The debtor subsequently amended its arrangement so as to delete

the incorrect claim to a Securities Act exemption. The amended arrangement was confirmed and consummated after the Commission's

staff had made it clear to all concerned that the shares to be issued

in exchange for property had to be taken for investment and not

with a view to distribution pursuant to the exemption from registration for "transactions by an issuer not involving any public offering" provided for by Section 4(2) of the Securities Act, and that

any public offering of those shares would be unlawful unless such

offering were registered under the Securities Act or some exemption

from registration was available.

SP01'ts Arenas, lna.,73 was another case in which an effort was

made to claim a Section 393 exemption for securities to be issued in

exchange for property to be contributed to the debtor rather than

for "claims against the debtor" of which Section 393 speaks. The

Commission intervened and succeeded in obtaining a commitment

from the prospective recipients to take the securities for investment.

The plan of arrangement that was eventually confirmed provided

that the shares to be issued in exchange for property would bear an

appropriate restrictive legend.

In Atlantic General Fiberglass Products, lna.,U. and in White

Electromagnetics, Inc.,73 the Commission at the request of the court

73 C.D. Cal., No. 38368-BP.

u. S.D. Ala., No. 29,541.

7G D. Md, No. 14012.
THIRTY-SIXTH ANNUAL REPORT 199

attended the first meetings of creditors called for by Section 334 of

Chapter XI to assist in the development of adequate records on the

feasibility of the proposed arrangements and on their compatibility

with the best interests of creditors. Both debtors proved unable to

proceed with their plans, and each W~ adjudicated a bankrupt.
PART VIII

SUPPORTING ACTIVITIES

PUBLIC INFORMATION SERVICES

Dissemination of Information

As the discussion in prior sections of this Report indicates, most

large corporations in which there is a substantial public investor interest have filed registration statements or registration applications

under the Securities Act or the Securities Exchange Act with the

Commission and are required to file annual and other periodic reports. Widespread public dissemination of the financial and other

data included in these documents is essential if public investors generally are to benefit by the disclosure requirements of the securities

laws. This is accomplished in part by distribution of the prospectus

or offering circular in connection with new offerings. Much of the

data reflected therein and in the annual and other periodic reports is

also reprinted and receives general circulation through the medium

of securities manuals and other financial publications, thus becoming

available to broker-dealer and investment adviser firms, trust departments and other financial institutions and, through them, to public

investors generally. The documents mentioned above are also available for public inspection both at the officesof the Commission and

at the exchanges on which particular securities may be listed.

Various activities of the Commission also facilitate public dissemination of information filed as well as other information. Among

these is the issuance of a daily "News Digest" which contains (1) a

resume of each proposal for the public offering of securities for

which a Securities Act registration statement is filed; (2) a list of

issuers of securities traded over-the-counter which have filed registration statements under the Securities Exchange Act; (3) a list of

companies which have filed periodic reports disclosing significant corporate developments; (4) a summary of all notices of filings of applications and declarations, and of all orders, decisions, rules and

rule proposals issued by the Commission; (5) announcements of the

Commission's participation in corporate reorganization proceedings

under Chapter X of the Bankruptcy Act and of the filing of advisory reports of the Commission on the fairness and feasibility of reorganization plans; (6) a brief report regarding actions of courts in

200
THIRTY-SIXTH A1I."'NUALREPORT 201

litigation resulting from the Commission's law enforcement program; and (7) a brief reference to each statistical report issued by

the Commission. During the year, the News Digest included summary reports on the 4,038 Securities Act registration statements filed

with the Commission (not including investment company offering

proposals filed as amendments to previously filed statements), 1,099

notices of filings, orders, decisions, rules and rule proposals issued

by the Commission, 297 developments in litigation under its enforcement program, 9 releases on corporate reorganization proceedings,

and 81 statistical releases.

The News Digest is made immediately available to the press, and

it is also reprinted and distributed by the Government Printing

Office, on a subscription basis, to some 4,440 investors, securities

firms, practicing lawyers and others. In addition, the Commission

maintains mailing lists for the distribution of the full text of its orders, decisions, rules and rule proposals.

These informational activities are supplemented by public discussions from time to time of legal, accounting and other problems arising in the administration of the Federal securities laws. During the

year, members of the Commission and various staff officers made

speeches before a number of professional, business and other groups

interested in the Federal securities laws and their administration

and participated in panel discussions of like nature. Participation in

these discussions not only serves to keep attorneys, accountants, corporate executives and others abreast of developments in the administration of those laws, but it also is of considerable value to the Commission in learning about the problems experienced by those who

seek to comply with those laws. In order to facilitate such compliance the Commission also issues, from time to time, general interpretive releases and policy statements explaining the operation of particular provisions of the Federal securities laws and outlining

policies and practices of the Commission.

PubIications.-In addition to the daily News Digest, and releases

concerning Commission action under the Acts administered by it

and litigation involving securities violations, the Commission issues

a number of other publications, including the following:

Weekly:

Weekly trading data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).

Monthly:

Statistical Bulletin.s

Official Summary of Securities Transactions and Holdings of Officers,

Directors and Principal Stockholders.a
202 SECURITIES AND EXCHANGE COMMISSION

Quarterly:

Financial Report, U.S. Manufacturing Corporations (jointly with the Fed.

eral Trade Commission).a (Statistical Series Release summarizing this

report is available from the Publications Supply Unit.)

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities 01rerlngs.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

Annually:

Annual Report of the Oommtsslon.s

Securities Traded on Exchanges under the Securities Exchange Act of

1934.

List of Companies Registered under the Investment Company Act of 1940.

Classification, Assets and Location of Registered Investment Companies

under the Investment Company Act of 1940.11

Private Noninsured Pension Funds (assets available quarterly in the Sta.

tistical Bulletin).

Directory of Companies Filing Annual Reports with the Commission under

the Securities Exchange Act of 1934.a

Other Publications:

Decisions and Reports of the Commission.a (Out of print, available only

for reference purposes in SEC Washington, D. C. and Regional Offlees.)

Securities and Exchange Commission-The Work of the Securities and Ex.

change Commission.

Commission Report on Public Policy Implications of Investment Company

Growth.a

Cost of Flotation of Registered Equity Issues, 1963-1965.a

Report of SEC Special Study of Securities Markets.a (Out of print, available only for reference purposes in SEC Washington, D. C. and Regional

Offices.)

a Must be ordered from the Superintendent of Documents, Government Print.

ing Office, Washington, D.C. 20402.

11 This document is available in photocopy form. Purchasers are billed by the

printing company which prepares the photocopies.

Availability of Information for Public Inspection

The many thousands of registration statements, applications, declarations, and annual and periodic reports filed with the Commission

each year are available for public inspection and copying at the

Commission's public reference room in its principal officesin Washington, D.C. Also available at that location are other documents contained in Commission files and indexes of Commission decisions.

The categories of materials which are available for public inspection and copying are specified in the Commission's rule concerning

records and information, 17 CFR 200.80, as revised to implement the

provisions of the Public Information Amendment to Section 3 of the

Administrative Procedure Act which became effective July 4, 1967.

The rule also establishes a procedure to be followed in requesting
THIRTY-SIXTH ANNUAL REPORT 203

records or copies thereof, provides a method of administrative appeal from the denial of access to any record, and provides for the

imposition of fees when more than one-half man-hour of work is

performed by members of the Commission's staff to locate and make

available records requested.

The Commission has special public reference facilities in the New

York and Chicago Regional Offices, and some facilities for public

use in other regional and branch offices. Each regional office has

available for public examination copies of prospectuses used in recent offerings of securities registered under the Securities Act; registration statements and recent annual reports filed pursuant to the

Securities Exchange Act by companies having their principal office

in the region; broker-dealer and investment adviser applications

originating in the region; letters of notification under Regulation A

filed in the region; and indexes of Commission decisions. Additional

material is available in the New York, Chicago and San Francisco

regional offices.

Members of the public may make arrangements through the public

reference room at the Commission's principal officesto purchase copies of material in the Commission's public files. The copies are produced by a commercial copying company which supplies them to the

public at prices established under a contract with the Commission.

Current prices begin at 12 cents per page for pages not exceeding

8%11 x 14" in size, with a $2 minimum charge. Under the same contract, the company also makes microfilm and microfiche copies of

Commission public documents available on a subscription or individual order basis to persons or firms who have or can obtain viewing

facilities. In microfiche services, up to 60 images of document pages

are contained on 4'" x 6" pieces of film, referred to as "fiche." Annual microfiche subscriptions are offered in a variety of packages

covering all public reports filed on Forms 10-K, 9-K, 8-K,

N-1Q and N-1R under the Securities Exchange Act of 1934 or the

Investment Company Act of 1940; annual reports to stockholders;

proxy statements; new issue registration statements; and final prospectuses for new issues. The packages offered include various categories of these reports, including those of companies whose securities

are listed on the New York Stock Exchange, the American Stock

Exchange, or regional stock exchanges, or traded over-the-counter,

and standard industry classifications (S.I.C.). Arrangements also

may be made to subscribe to reports of companies of one's own selection. The subscription services system may be extended to further

groups of filings in the future if demand warrants. The company

also will supply, at reasonable prices, copies in microfiche or micro-
204 SECURITIES AND EXCHANGE COMMISSION

film form of other public records of the Commission desired by a

member of the public. Microfiche readers and reader-printers have

been installed in public reference areas in the Commission's headquarters officeand New York Regional Office,and sets of the microfiche are available for inspection there.

Visitors to the public reference rooms of the Commission's 'Vashington, D.C., New York and Chicago officesalso may make immediate reproductions of material in those offices on coin-operated

copying machines at a cost of 25 cents per 8%" x 14" page. The

charge for an attestation with the Commission seal is $2. Detailed

information concerning copying services available and prices for the

various types of service and copies may be obtained from the Public

Reference Section of the Commission.

Each year, many thousands of requests for copies of and information from the public files of the Commission are received by the

Public Reference Section in Washington, D.C. During the 1970fiscal

year, 12,496 persons examined material on file in 'Vashington and

several thousand others examined files in the New York, Chicago,

and other regional offices.More than 31,424 searches were made for

information requested by individuals and approximately 13,320 letters were written with respect to information requested.

Rule Concerning Publication of Interpretative and "No-Action" Letters

In September 1968, the Commission had published a request for

comments as to whether staff interpretative and "no-action" letters

should be made available to the public.' Interpretative letters are informal opinions regarding the application of the law to contemplated factual situations. In a "no-action" letter, an authorized staff

official states with respect to a specified proposed transaction that

the staff will not recommend to the Commission that it take enforcement action if the transaction is consummated in the manner described in the incoming letter.

The Commission received numerous comments in response to the

release, the overwhelming majority favoring public disclosure of the

matters treated in interpretative and "no-action" letters in one form

or another. It was suggested, however, that a means be found to give

confidential treatment to sensitive matters.

Shortly after the end of the fiscal year, the Commission published

for comment a proposed rule (17 CFR 200.81) concerning the publication of interpretative and "no-action" letters, and subsequently it

adopted the rule in modified form."

1Securities Act Release No. 4924 (September 20,1968).

2 Securities Act Release No. 5073 (July 14, 1970); Securities Act Release

No. 5098 (October 29,1970).
THIRTY-SIXTH ANNUAL REPORT 205

Section 200.81 provides that no-action and interpretative letters

submitted on or after December 1, 1970 and the responses thereto

will be available for public inspection or copying 30 days after the

staff has given or sent the response to the person requesting it. In

particular cases where it appears that a further delay in publication

would be appropriate, the letter and response thereto will be given

confidential treatment for a reasonable period not exceeding an additional 90 days upon application therefor. The burden will be on the

person requesting the no-action position or interpretation to establish the need for confidential treatment and it will not be granted

unless such need is clearly shown. Only in exceptional situations,

such as mergers or acquisition programs, will the full 90-day period

be allowed.

It is contemplated that from time to time, where the subject matter of a no-action or interpretative letter is of particular interest or

importance, such letter and response thereto will be published in

summarized form in the Commission's daily News Digest. This will

call attention to the position taken in the staff's response and interested persons can, if they so desire, inspect the full text of the letter

and response thereto in the public file. In addition, copies of the letter and response may be purchased at prescribed rates by writing to

the Public Reference Room, Securities and Exchange Commission,

'Washington, D.C. 20549.

A note to paragraph (b) of the rule requires that all requests for

interpretative advice or a no-action position shall indicate in a separate caption at the beginning of the request each section of the Act

or rule involved. If more than one section or rule is involved, a separate copy of the request must be submitted for each such section or

rule and an additional copy for the use of the staff of the Commission. The note was added in response to comments on the proposed

rule which indicated concern that the requests and responses thereto

should be available in a form which will facilitate reference to those

relating to a particular section or rule.

The Commission pointed out that no-action and interpretative responses by the staff are subject to reconsideration and should not be

regarded as precedents binding on the Commission.

ELECfRONIC DATA PROCESSING

During the 1970 fiscal year the Commission continued the implementation and improvement of existing and planned USI'S of EDP

which were described in previous annual reports. In addition, opera-
206 SECURITIES AND EXCHANGE COMMISSION

tional support was provided to the Institutional Investor Study for

the creation, editing and maintenance of its data files.

Extension of Application of Automation Techniques

In a further expansion of the use of automation for analysis of

data related to the financial structure of business and the economics

and practices of the securities industry, several new systems were developed and are currently in varying stages of implementation.

One of these is a system for compiling and analyzing plant and

equipment expenditure data reported quarterly by approximately

1700 selected firms. This system, which became operational in the

last quarter of the fiscal year, is one of the most important of the recurring statistical programs conducted within the Office of Policy

Research. It is used extensively within the Government by agencies

involved in business and economic analysis and is crucial to Government decisions relating to monetary and fiscal policies.

Another system, which can be categorized as a general purpose file

management system, was developed primarily for use by the Institutional Investor Study for the creation and maintenance of the many

data files to be used in its analysis of questionnaire data submitted by

firms covered in the study. As a result of its successful use in that

project, this program package is being applied by the permanent

staff of the Commission to several of its new EDP projects.

A coordinated effort was also begun to study the feasibility of utilizing the CUSIP numbering system in Commission reporting and

record-keeping activities. This numbering system provides a standard method for the identification of specific issuers and issues within

the securities industry. Another system, for which preliminary work

began in fiscal year 1970, is to be used for the compilation of periodic workload statistics and to generate various reports and analyses reflecting complaint processing operations.

As time and other resources permit, the use of EDP will be extended to other areas of Commission activities.

Assistance to State and Federal Agencies

The Commission continued, during this past year, to provide

certain information from its computer files to State authorities,

self-regulatory institutions and other Federal agencies as described

in previous annual reports,"

Sharing of EDP Facilities

During the past year the Commission continued its sharing arrangement with the Naval Ship Engineering Center, Department of

a See 34th Annual Report, p. 168; 35th Annual Report, p. 179.
THIRTY-SIXTH ANNUAL REPORT 207

the Navy. Under this arrangement the Commission provided appro.x~

imately 2400 hours of computer time at a significant savings to the

Government as compared with the prevailing rates of outside

sources. Due to changes in Department of the Navy programs, this

arrangement was terminated on June 30, 1970.

In an effort to continue the important Government-wide sharing

program, the Commission entered into an arrangement to provide a

maximum of 150 hours of computer time to the General Accounting

Office in fiscal year 1971, and it is currently negotiating similar arrangements with several other Federal agencies.

EDP Training

During the year the Commission continued its training programs

geared to the specific needs of its computer specialists and operators.

The program is designed to enable the Commission's EDP staff to

utilize more advanced hardware and programs in the development

and implementation of new and revised computer systems.

PERSONNEL AND FINANCIAL MANAGEMENT

Personnel Program

Highlights of the Commission's personnel management program

in fiscal 1970 included (1) adoption of a personnel management

evaluation system, (2) continued emphasis on employee training, (3)

the granting of the first SEC "Equal Employment Opportunity

Award," and (4) the transfer of its occupational health function to

the Public Health Service.

The President requested that there be established in each agency a

system to review periodically the effectiveness of personnel management within the organization. Pursuant to this directive, the Commission adopted such a system on June 15, 1970. A Personnel Management Evaluation Committee, chaired by the Executive Assistant

to the Chairman, was given responsibility for implementing the system by means of surveys or studies which are designed to measure

how effectively the Commission's personnel programs operate in its

various divisions and offices.Reports containing findings and recommendations of the Committee will be submitted to the Chairman.

Each of the three principal operating divisions of the Commission

in Washington, D.C., namely, the Division of Trading and Markets,

the Division of Corporation Finance, and the Division of Corporate

Regulation, regularly conducts its own training program. Such a

program typically consists of a schedule of lectures and discussions

by senior employees on the Commission's staff experienced in the

particular subjects to be covered. The Division of Trading and Mar-
208 SECURITIES AND EXCHANGE COMMISSION

kets conducted a week-long enforcement seminar in :May 1970. The

Division of Corporate Regulation conducted a training program

after hours during the spring of 1970, primarily for its newer employees, dealing with the Investment Company Act of 1940.The Division of Corporation Finance held weekly sessions for its new employees on the examination of registration statements and other

filings under the reporting and disclosure provisions of the Securities Act of 1933and the Securities Exchange Act of 1934.

The Commission's first Equal Employment Opportunity Award

was presented to its Washington, D.C., Regional Administrator, Alexander J. Brown, Jr., "for outstanding service as SEC coordinator

of a symposium on the Federal securities laws, sponsored by the

Howard University School of Law, in cooperation with the Securities and Exchange Commission, during February through May 1970,

for interested students attending Washington Metropolitan Area law

schools." The program involved an ll-week series of evening lectures

providing a broad overview of SEC functions and responsibilities in

which members of the Commission's staff served as the "faculty." A

group of 250 law students enrolled for the sessions, and 120 received

certificates for regular attendance.

The program has considerable potential for law school curriculum

development as evidenced by observations of the Curriculum Committee of Howard Law School contained in an evaluation report, as

follows:

"The need for developing expertise in the ever growing fields of law

makes it difficult to perform the essential task of developing basic cognitive legal skills of the law student. If the law school responds to the need

for developing various expertise by additions or changes in the curriculum,

it runs the risk of de-emphasizing the development of the basic lawyer

skills. The solution might very well be in the development of non-credit

and extra curricular symposia such as this one. In this respect the SEC

may have made a very profound contribution to legal education."

Pursuant to the Commission's request, the Public Health Service

(PHS) conducted a survey of the Commission's occupational health

program. The report submitted by PHS stated, in part, that the

health services offered by the Commission to employees in its Headquarters Office in "Tashington were "considerably below the minimum standard" of the Division of Federal Employee Health as well

as of recommendations of the Council on Occupational Health,

American Medical Association. On the basis of the PHS survey report and recommendations, the Commission, in January 1970, authorized the transfer of its Health Unit to the jurisdiction of the

Public Health Service. The transfer of function was effected on
THIRTY-SIXTH ANNUAL REPORT 209

schedule in April 1970 and Headquarters Office employees are now

accorded the same level of occupational health services enjoyed by

the Commission's regional and branch officeemployees.

As part of the Commission's Fifteenth Annual Service and Merit

Awards Ceremony held in October 1969, Distinguished Service

Awards were presented to the following officials of the Commission:

Solomon Freedman, Director, Division of Corporate Regulatton-i-vfn

recognition of a distinguished career spanning 27 years with the Securities

and Exchange Commission as a staff attorney and administrator and for

his outstanding contributions to the effective administration and enforcement of the Federal securities laws."

Leonard Helfenstein, Director, Office of Opinions and Review-"In

recognition of 26 years of distinguished Federal service and for his many

significant contributions to the development of administrative law embodied in the official Findings, Orders, and Opinions of the Securities and

Exchange Commission."

'Walter P. North, Associate General Counsel-"In recognition of a dis.

tinguished legal career with the Securities and Exchange Commission and

for his many significant contributions as an outstanding appellate advocate to the development of case law in the area of Federal securities

regulation."

Supervisory Excellence Awards were presented to Mary E. T.

Beach. Branch Chief, Division of Corporation Finance, for obtaining from her staff high productivity, quality performance and. sustained high morale; and to Stanley Sporkin, Associate Director

(Enforcement), Division of Trading and Markets, for developing an

accomplished enforcement staff. Eight employees were given 35-year

pins for SEC service and twelve received pins for 3D-year SEC service; within-grade salary increases in recognition of high quality performance were granted to 75 employees; and cash awards totalling

$34,D87were presented to 110 employees for superior performance,

special service, or adopted suggestions.

Personnel Strength; Financial Management

The following comparative table shows the personnel strength of

the Commission as of .rnne 30, 1969 and 1970.

June 30, 1969 June 30, 1970

Commisstoners .•. ....... .. ... .. .. . ....... _., 4 5

8taff:Headquarters Office_._.. __.•.. __., __. _.. __.. __., _"'" __.. __________ 911 1,007 Regional Offices•...• _____. ___. __., ..... _______________. ___... __.. ___ 481 442

Total 8 talI . .•. .. .. ....• ..... ...... .... . 1,392 1,449

Grand TotaL .. _______•____________. _____________•______________.. 1,396 1,454

409-865--71----15

__•_______ ____ __ __ __ ___ ___ __

____ _ _ ___'" _ ____ _ __ _ ____ __
210 SECURITIES AND EXCHANGE COMMISSION

The table on page 211 shows the status of the Commission's budget

estimates for the fiscal years 1966 to 1971, from the initial submission to the Bureau of the Budget to final enactment of the annual

appropriation.

The Commission is required by law to collect fees for or from (1)

registration of securities issued; (2) qualification of trust indentures; (3) registration of exchanges; (4) brokers and dealers who

are registered with the Commission but who are not members of a

registered national securities association (the National Association

of Securities Dealers (NASD) is the only such organization) ; and

(5) certification of documents filed with the Commission.'

The following table shows the Commission's appropriation, total

fees collected, percentage of fees collected to total appropriation,

and the net cost to the taxpayers of Commission operations for the

fiscal years 1968,1969and 1970.

Percentage of

Fees fees collected Net cost of

Year Appropriation collected to total COmmiSSlOD

appropnation operations

(percent)

1968................... _.•. _. _._ ..... __. $17, 730, 000 $14,622,667 82 $3,107,433 1969...••...... .•.•••. _._ .•.. ..•.. 18,624,000 21,996,362 118 (3,372, 362)

1970.•••. _.•. _•. _.•.•.•.•.•. _._ •.•...... 21,904,977 15,525,693 71 6,379,284

4 Fees collected are derived principally from categories (1), (3) and (4)

above. Rates for these are (1) 1/50 of 1 percent of the maximum aggregate

price of securities proposed to be offered, or 20~ per $1,000, with a minimum

fee of $100; (3) 1/500 of 1 percent of the aggregate dollar amount of the sales

of securities transacted on exchanges; (4) for fiscal 1968: a basic registration

fee of $100 for non-NASD broker-dealers plus $5 for each associated person,

with a maximum payment of $15,000; $30 for each office and $25 for each associated person for whom a nonmember broker or dealer has not previously

filed a personnel form; and an initial assessment fee of $150; for fiscal 1969

and 1970: the maximum payment was raised to $20,000for all fees payable.

__" _ _
THIRTY-SIXTH ANNUAL REPORT 211

I~

~~l ":1

....

g~

fifi ii

1O~1 :-'

I

I ~\\

PART IX

APPENDIX

STATISTICAL TABLES

Tnn~m1.-A 36-Yea7 Record oj Registrations Effective Under the Securities Act of 19S--Fiscal Years 1936-1970 

I I I cssh sale far mount of issoers 

Fiscal year ended June 30 Number of 

statemnCI 1 Preferred Cornman 

stack 

and notes -. 

1 9tltd1:l..ui5 W.BCL\L~L~ .*encau i)cpu,lr.lrg neertpls xg..lnlt outataxlriic* l..reipn srullIlPs ~1

prerlded by Form d-12 aro i:~.bnlrd. s For 110months endd Jum SO. 1935. r lorludm tllruo m ,r*met.lp rtyl.ulnng lem obll~uionn relarrrlg lo i~!duslr.nlresellus bonh of $140 mYIlO0. l~ncludaneight statements registering lee obligations relating te indusMe.1 revenue bands of $354 

million. 

r~ncludesfour statements registering lease obllgatlons] relsting to tndushisl revenue bond of Sn 

mLUl00. 

215 
- - 

- - 

--- 

216 BECURITIES AND EXCHANGE COMMISSION 

TABLE 2.-Regislrations Effective Under the Securities Ad of 1933, Fiscal Year 

Ended June SO, 1970 

!Amounts rounded to thousands of dollars and may not add to totals] 

PABT1.-Dlatribution by months 

All registrations Proposed far sale lor account of issuers 1 

Total* Corporate' Year and month Number Nomber 

olstat* 01 Amaunt 

men8 m.0~1 

N%"" 1 Amount 1
 Amount ISSUBS t issues 1 

1089 

July..................... ~ugust.................. September............... OOtOhW.................. November ............... December............... 302 

261 

297 

869 

280 

333 

313 

284 

331 

4% 

317 

368 

$6 065 434 

3'801'731 

4(697'~6

i4@3'161 ~'BB?'~w 

4:427:305 

275 

232 

276 

328 

266 

317 

$3 974 326 

2'866'860 

3'659.1~ 

S'~l4'230 

3:812:0~ 

3,336,855 

169 

118 

186 

216 

1W 

192 

$1 856 020 

1:111:363 

2 012 w6 

1:610:369 

1,917,439 

1,985,657 

1970 

January.................. ~sbww................ arch. .................. A21.................... 

Y..................... ~une..................... 

247 

zw 

247 

241 

261 

270 

m 

294 

401 

n7 

232 

4 103 342 

4'6n'w 

4'694'613 

%:66b:C43 

4,412,676 

4,830,813 

228 

m 

251 

368 ni 

232 

3 333 161 z'r'laa'ao 

3'7adj7a 

8:~$159 

3 885 616 

3:677:en 

147 

118 

173 

181 

82 11s 

1 910 rn 

1'869'89s 

a'w7'239 

4'2~9'612 

1:969:761 

----_c-_-

2.8ar.w 

Total, 5-1 year 1970' ............ 3,385 3,803 59,116,262 3,186 43,181.9W 1.850 26.91L7M 

1 Trps of security 

Purpose ofregistration 

All ~Istratlons (etimated uahe). ................ 
 For -00nt of imuer for cash sale. ............... 
 Immediate offeiiug8 ........................... 
 Cormrats.................................... 
 Offerad to: OBneral publio ........................... 
 Elacurity holdeis. ........................ 
 Other special groups. .................... 
 Foreigngovemmenh.. ...................... 
 Extended cash sale and othcr Isroes ? .......... 
 For account ollasuw for other than cssh sale..... 

For ~~cmnt of other than issuer ................. 
 Cash JBIB...................................... 
 Other.-....................................... 
 I 

1 Wsnanh are eroiuded fmmthe count of the numb= of issue slthoogh included in dollar amount. 1 Indudes iasues to be offered farsale mlltlnu~l~ over an -tended period of time, aocb as lnvetment

mmpany bsusr and seourltles reserved for aemse of warrants or ogtlans. 8 Covers only issum proposed for sale immediatelyfollowing effective reglstratimr. 8 The3 386eEecti~eregi~rtrafionstaternentsm~eredln thls tabls differfrom the3 328'hetW effective state. ments shbm inthekt tabls "Number and disPmltionofregbtrationstatementsheled.'asfollows: 

Inandad in effenlvss but excluded fmm net effective: 

Three reglatt~tloas effective inh l llga prior to reoeivlng competitive bids. The amendments disclaang the aooepted terms me recalved in Us& 1970. 

Sixty-low registrations e8ecthe Lo fiscal 1970whloh were later withdrawn. 

Elrcloded hom eUeoHvsr but included in net sffeotivsr: 

Pim registtloos effective Prior to rewi*g competitive bids. The amendments Wodng the 

aooepted terms me not rsoelued in Bsd 1970. 

Four regl8trations of lease oblltlans rebting to industrial revenuebonds. 

Two registrations etlective subject to oompstltlve bids in fiscal 1868, amendments not reoeivedIand 

withdram 

Uncludes lace smaunt eertilloates. I Inoludes oertiarates olpartld~tion, warrants and voting tmt eertieoatk.. 
THIRTY-SIXTH ANNUAL REPORT 217 

Tnsbe 3.-Brokers and Dealers Registered Under the Securities Ezchange Act of 

19$41-Effective Registrations as ?f June $0,1970, ClassZfced by Type qf Organization and by Location of Princepal Oflce 

/ Number orregistrants Kumber of pmpxietors, partners. ~nimrs.etO.2 8 

urntion oI prinolwi ofhw Sole 8018 
-- 

218 YECXJFLITIES AND EXCHANGE COMMISSION 


TABLE4.-Number of Security Isaues and Issuers on Eschangea 

PAN I.-UNDUPLICATED COUNT AS OF JUNE 30 1910 OF TEE NUMBER OF BTOCK AND 

BOND ISSUES ADMITTED TO TRADINa ON ~XCHANGES,AND THE NUMBER OF 

ISSUERS IYX'OLVED 

Status under the Act 1 Involved 

end bonds 

Registered pursuant to Seotions 12(b) (c) and (d) ...... 3,469 1,786 Temporarily erempted from registrailan by Commis810n m18 ............................................. 16 6 


Admitted to diated trading pdvueges on registered exchanges pursuant to Sectlon 12(0 .................. 68 8 

Llsted on exempted exohanges onder exemption ordem 

01 the CO-ISSIO~ ................................... 41 4 

Admitted to unlisted trsding privileges on exempted erchangesundereremption orden 01 the Cammlsslon. 8 0 

Totd...................................... 3,679 5803 


,C, nnu to,. 

Unlistcd on arm01 exch.wcr: Tile Cornmlanon'a e&Prnpllor, iorllan Spcllg that eretlntlrs u hlcl. won, Bllmlled I0 ~llllistwltrCxlll.~br1vlleg88 st tile dl!( 01 lhe 010Pl mB) Wntlllut Nrll Drlsllegel and loat no ~.ilrlonelsecllr.rle,mnsh*amirlcd tounlvttd t4log prirllegesewept upor, rmr~l~~neo'w,rh Yerllon 

121 

P~nr2.--SC.\IREIi OF 4TtOCK ASb B<oE;i>ISiUEi: ON F.lCL1 BXCUIY(1T: AS OF 1T3F 3 ) IF", CI.ABSIFiBD nY 'I'I(ADIN1; STATU?, AND Nl'hlBRH OF ISPULlLd INVOI.\FI) 

Stachs Bonds 


Erohanges 18%-


Ameticm............. 1,188 5118 1.194 187 


Boston................ W3 _ 12 


0hIesgoBd.ofTrade. 4 2 

Cinclanati............ 177 


Deholt ............... 
 Honolulu' ............ 
 Midaest ............. 
 Nation& ............. 
 New York............ 
 Padfl0 cost......... 
 Phila.-But-Wash .... ...... ...... Rlohmond' ........... 26 1 1 
 SaltLee............. a 66 ...... 
 Spokane.............. 33 29 ...... 


Svmhola. 11--~rr~rrl: X-mlporartiy esc:nl,t&; f-ndrnlttm U,llnlirud tmdlw prirllegni, XI.-

1191f4 on nn exrnnl,mi ars l.,!i:.~; SU-admlrled lo ilnlirIe.1 1ra.llng nn\ilrgt, orr atr erdx#,leoacel:u.pt 

NDtel~ue~ e~cmpredundo? dwlion 81a)ll'l, ul the Am, surb ns obilpnt1or.r of the T.J. c;c rrpn.n.,,r.t,

11," ~t~tes, ~lld~111~~. me 001 inrlu.leJ tn rblr table. 


'Esernptsd exchanges. 

THIRTY-SIXTH ANNUAL REPORT 


TABLE5.-Value of Slocka on Ezchanges 

- 

--- 

--- 

--- 

220 SECURITIES AND EXCHANGE COblMISSION 

TABLE6.-Dollar Volume and Share Volume of Sales Effecled on Securities Ezchanges in the Calendar Year 1969 and the &Month Period Ended June $0,

1970 

[Arnaunb In thousandsl 

PART 1.-12 MONTH8 ENDED DEC. 31. I868 

E~OD~S nights a11d 

warrants 

Erchsogea Dollar Shsre Dollar Numvolume volunle volume ber of 

""lt~ - 176,297,368 4963,428 1,078,167 174 804 

American................ 30,074,031 1,341.Wd 962,886 76,782 Baston................... 1,191,291 26.3BB 333 40 Cblesgo Board of Trade.. 0 0 0 0 

Cind!msU ............... 19,066 333 0 0 

Detmit................... 216,681 6.439 2 6 

476 6,9@,6SB 146,303 677 442 

179 739 26 483 0 0 ............... 128.8(0:420 4173:686 18.228 89,788 

6.421,M6 166.870 9%128 21,m 

............ 274 2.628 487 60.B06 3.822 2.121 ............... 463613 1.W 0 0 
 ................ 17,865 12.218 0 0 


Spokane................ 11,038 11,036 12,m 0 0 

Ersmpted exchanges. 14644 13, M4 763 0 0 

Honololu............... 11.879 716 0 0 

Richmond..........-..-- 0 1, Q+5 47 / 0 0 


PAnr 2.-6 MONTES ENDED JUNE 30, 1970 

Erehaogea 

T0td 

dollar -

Bonds Stocks. Rights and 

Warrant8 

cinclnnstl............... 4,m DetrolL.................. Midwest................. National ................. N~W~ork................ pedec Coast...-........ PhUedelphla-~altlmoreBslHmor~ Weshington............ 1,3WWP Salt Lee................ 4ml 

Spokane................. 4862 

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

4 

694 

1,024 

0 

0 

6,713 439 

0 
THIRTY-SETH ANNUAL REPORT 221 

Other 

6.91 

206 

6.51 

2.61 

6.02 

5.27 

4.14 

274 

3.41 

221 

2.29 

1.83 

1.38 

1.19 

.81 

.72 

.68 

.97 

.99 

.62 

.16 

.09 

.13 

.05 

.08 

.07 

.M 

.M 

.05 

.M 

.06 

.os 

.06 

.05 

.M 

.03 

.M 

.08 

.13 

.06 

Note,. Annd sales includi stac*s warrants and dghts, ap reported by sU U.S. exchanges to the 

Commission. Plgare.iar rnem%exDhsdges are included in thcse of tho exchanges lnta wblch theg were mema.Detaiis hr all years piior to I(U6 appear ln Table 7 in the AppenNI of the ad Annual Report. 8ymbala-NYB New Yark 6toc.k Erohange.AMS +medean Stock Ex&% M8E.Mldwest Stock 

~xehange;~cBp~sCostBtockErch~nge'P'B8ph~ladelphla-~altimrn~wIngtonStc&Erch~nge'

BEE Boston s'tock Exchange; DSE, ~ehol;S~o&Exchange PIT, Pittsburgh Btoch Exchange; GIN: 

clndndnnati stock Elobanga 

Mergeddth Phila.-Bait.-Wash. as of Deo.31, 1969. 

PIT 

0.34 

.31 

.40 

.18 

.10 

.11 

.13 

.11 

.07 

.ffi 

.M 

.05 

.C4 

.06 

... 

.M 

.m 

.02 

.@3 

.M 

.19 

.14 

.11 

.13 

.12 

.12 

.00 

.08 

.ffi 

.ffi .ffi .05 

.ffi 

.M 

.M 

.@3 

.m 

.W 

' 

on 

DSE 

0.88 

.82 

.79 

66 

.38 

.49 

.38 

.36 

.31 

.34 

.31 

.36 

.47 

.64 

.63 

.16 

.33 

.32 

.12 

.12 

.40 

.36 

.36 

.38 

.39 

.42 

.42 

.37 

.33 

.31 

.37 

.42 

.62 

.66 

.70 

.67 

.44 

.88 

.I2 

.12 

Exchanges 

CIN 

0.03 

.08 

.@h 

.W 

.M 

.05 

.08 

.06 

.M 

.M 

.04 

.06 

.M 

.09 

06 

05 

.03 

.01 

.01 

.01 

.M 

.W 

.ffi 

.11 

.09 

08 

.00 

.83 

.07 

.os 

.07 

.or 

.W 

.06 

.83 

.08 

.01 

.02 

.01 

.01 

and 

PC6 

268 

278 

298 

3.11 

3.08 

3.26 

273 

288 

281 

3.11 

3.42 

2.95 

2.83 

2.64 

2.34 

283 

246 

2.8 

3.48 

3.43 

1.39 

1.62 

1.73 21s 

1.90 

2.08 

2.02 

2.11 

1.84 

I. 

2.W 

2.w 

238 

288 

2.43 

2.86 

2.80 

2.88 

3.13 

3.36 

Dollar Volumes 

PBS I .......... 

% % % % % % % % % % 

0.76 

1.02 

.66 

.79 

.76 

.72 

.83 

.73 

.90 

.89 

.79 

.87 

.84 

.93 

.82 

.86 

.81 

.90 

1.23 

1. 

.88 

.92 

.82 

.sz 

.93 

.86 

1.W 

1.01 

1.01 

I.M 

1.M 

1.m 

I.& 

1.15 

1.13 

1.10 

1.13 

1.14 

1.43 

1.91 

NY8 

76.13 

76.44 

a.87 

78.32 

83. 8d 

66.31 

70.70 

71.31 

86.68 

83.48 

64.00 

71.32 

72.84 

72.64 

68.91 

68.37 

Be41 

6L98 

83.18 

69.88 

88. 84 

85.17 

82.76 

s.91 

88.31 

84.86 

85.61 

86.42 

23.88 

81.81 

82.44 

ea32 

&I9 

81.48 

81.78 

79.78 

77.29 

73.36 

73.49 

76.99 

Share Sales 

BSE 

0.98 

1.19 

.86 

.86 

.48 

.47 

.40 

46 

.37 

.a9 

.31 

.31 

.29 

.18 

.27 

.40 

.o 

.78 

.51 

.68 

1.34 

1.91 

1.16 

1.1a 

.78 

.80 

.76 

.71 

.66 

.M) 

.60 

.46 

.42 

. 43 

.43 

.67 

.67 

1.04 

.67 

.76 

TABLE7.-Comparative 

Year ( Ghareralcs I AMS 

12.42 

13.20 

21.31 

13.64 

19.19 

21.01 

18.14 

18.14 

7A.M)

a21 

23.a 

20.12 

18.84 

19.36 

228 

22.36 

28.42 

29.74 

27.61 

20.78 

7.81 

7.83 

10.81 

8.88 

6. B 

7.77 

7.33 

7.46 

9.63 

9.a~ 

10.71 

6.~1 

7.62 

848 

9.91 

11.34 

14.48 

18.~ 

17.80 

12.82 

.-

1936........... 1940........... 184.5........... 1964........... 1986........... 18W........... 1967........... 1868........... 1969........... IBBO........... 1% ........... 1982........... lsa? ........... 1864........... 1W........... 1986........... 1987 ........... 1888........... 1989........... 6h months to Jurn34 1970. 

1936........... 1840........... 1946........... 

1960........... 

191........... 1856........... 1967........... 1968........... 1869........... 

1964........... 1981........... 1062 ........... 

1- ........... 1% ........... I W........... 

IM........... 1Sf.7........... 1883r .......... 1989........... 9hmonths to June30,1970 

M8E 

1.81 

211 

1.77 

2 16 

6.00 

232 

2.33 

2.13 

2.W 

220 

2.Z 

231 

233 

2.43 

2.83 

2.67 

2.34 

2.83 

286 

3.02 

1.32 

2.07 

2.W 

2.36 

2.44 

2.76 

2.60 

2.71 

267 

2.73 

2.76 

2.76 

2.73 

3.16 

3.45 

3.14 

3.08 

3.12; 

3.39 

3.87 

6819706W 

377:890:672 

169 018 I38 

893:320:4ES 

l,321,4W, 711 

1,182,487,086 

1,283,021,866 

1,400,678,612 

1.699.888, 819 

1.441,~7,684 

2,142,621, 490 

1,711,846.281 

l,880,78a, 422 2 126 373 821 

2:671:011:330 

3312,333. 483 

464~,624,wr 

5 408 737, 347 

d136981.769 

2,410,885, 991 

Dollar 

volume (in

thousands) 

$16, 398 139 

8 419:772 

1dZ84.862 

21.m, 281 

38038107 

36'143'116 

32:2143 846 a8.419664 

62Wi~ 

43'36~ 

€4'071 623 ~:m:a94 

84 438 073 

7214311760 

8916481093 

1&66s'443 

183, l8<2ll 

181.117,%1 

170,889,769 

. 83,421, 871 
222 SECURITIES AND EXCHANGE COMMISSION

TABLE 8.-Block Distributions of Stocks Reported by Exchanges

[Value In thousands of dollars]

I Special offerings Exchange distnbutlons

I Secondary distnbutions

Year i Num.1 Shares Value Num.1 Num'l Shares Value Shares Value ber sold ber sold ber I sold

1942..•.... 79 812,390 $22,694 -------- ------------ ---------- 116 2,397,454 $82,840 1943.••.•.. 80 1,097,338 31,054 -------- ------ ....---- ---------- 81 4,270,580 127,462 1944....... 87 1,053,667 32,454 -------- ------------ .... ~----- 94 4,097,298 135,760 194L ...•. 79 947,231 29,878 -------- ...----------- ---------- 115 9,457,358 191,961 1946 ••. 23 308,134 11,002 100 6,481,291 232,398 1947. __.... 24 314,270 9,133 -------- ------------ ---------- 73 3,961,572 124,671 1948...• 21 238,879 5,466

~~~~~~~~ I~~~~~:~:~~~~ ---------- 95 7,302,420 175,991 1949.. ..... 32 500,211 10,956 86 3,737,249 104,062

1950_...... 20 150,308 4,940 77 4,280,681 88,743 195L ... __ 27 323,013 10,751 88 5,193,756 146,459 1952 ._ .. 22 357,897 9,931 ----.----- 76 4,223,258 149,117 195L ..... 17 380,680 10,486 -------- ------------ .... ------ 68 6,906,017 108,229 195L __... 14 189,772 6,670 57 705,781 $24,664 84 5,738,359 218,490 195L ..... 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,871

1956_...... 8 131,755 4,557 17 156,481 4,645 146 11,696,174 520,966 195L ..... 5 63,408 1,845 33 390,832 15,855 99 9,324,599 339,062 1958..... __ 5 88,152 3,286 38 619,876 29,454 122 9,508,505 361,886 1959___. __. 3 33,500 3,730 28 545,038 26,491 148 17,330,941 822,336 1960...••.. 3 63,663 5,439 20 441,664 11,108 92 11,439,065 424,688 196L •.... 2 35,000 1,504 33 1,127,266 58,072 130 19,910,013 926,514 1962.•...•. 2 48,200 588 41 2,345,076 65,459 59 12,143,656 658,780

196L""'1 0 0 0 72 2,892,233 107,498 100 18,937,935 814,984

1964_... .. 0 0 0 68 2,553,237 97,711 110 19,462,343 909,821

1965_._.... 0 0 0 57 2,334,277 86,479 142 31,153,319 1,603,107 1966__..... 0 0 0 52 3,042,599 118,349 126 29,045,038 1,523,373 196L ..... 0 0 0 51 3,452,856 125,404 143 30,783,604 1,154,479

1968......• 1 3,352 63 35 2,669,938 93,528 174 36,110,489 1,571,600 1969.. .•••• 0 0 0 32 1,706,572 52,198 142 38,224,799 1,244,186

Nole.-The first special offering plan was made effective Feb. 14, 1942; the plan of exchange distribution

was made effective Ang. 21, 1953, secondary distributions are not made pursuant to any plan but generally

exchanges require members to obtain approval of the exchange to participate in a secondary distrubltion

and a report on such distribution is filed With this Commission.

TABLE 9.-Unlisted Stocks on Exchanges

PART I.-NUMBER OF STOCKS ON THE EXCHANGES AS OF JUNE 30, 19701

only'

I

Admitted Admitted pnor to since Mar 1,1934 a Mar. I, 1934 I

I 51 10 2

I 0 85 471

0 2 0

0 0 157 0 10 202 8 0 0

0 0 232

0 40 174 0 145 556

I 1 0 1

2 1 3

i 62 I 293 1,798 I I

Exchanges

American, _." _•............ ..... . _ _._._._._.. __. __ Boston, _._._ __.. _. _. _ Chicago Board of Trade _._ •. ._. .. _.. _

Clneinnatd.; , .,. _"'" _ _ _.. _. __. _ Detroit. .• . •...... _.. . _. _. _. _. _. . __ Honolulu. ._ _. _. . .

Midwest .. .. _ __._ .. . _ _ _

Pacific Coast . __.. .. _._. _.. . _

Phlla' Balt.Wash '._ . _._. . _. _ _. _. _ Salt Lake._._ _ . _._. . _. __.. _

Spokane .• _. _._. _ , __. . . . .

Total' .. _. . .. .

Unlisted

Listed and registered on another exchange

__ -------- ------------ ----------

__•

___ ----- - - ----------

_

•

_

• __
THIRTY-SIXTH AXNUAL REPORT 223

PART 2.-UNLISTED SHARE VOLUME ON THE EXCHANGES-CALENDAR YEAR 1969

Listed and registered on another exchange

Unlisted Exchanges only'

Admitted I Admitted prior to since ;lIar I, 1934' lIIar I, 1934

merlcan.. ____________________________________________________ 47,958,150 6,886,890 348,990 Boston ________________________________________________________ 0 4,553,887 15,964,250 Chicago Board of Trade ______________________________________ 0 0 0 Orncmnati, ___________________________________________________ 0 0 186,260 Detroit; ______________________________________________________ 0 203,934 2,693,411 Hono1nlu _____________________________________________________ 64,680 0 0 dwest, _____________________________________________________0 0 49, OG2,646 Pacifle Coast, ________________________________________________ 0 773,000 44,343,304 Phrla- Bait-Wash ______________________________________________ 0 12,058,828 30,130,692 Pittsburgh ____________________________________________________ 0 249,179 563,322 Salt Lake _______________________________________.. ___. ________ 0 0 0 Spokane. ______________. ____. _. ___________. ___________________ 773,485 3,789 12,351

Total ._. ... ... .. _. . 48,796,315 24,729,507 143,338, 226

A

I Refer to text nnder heading "Unlisted Tradmg Privileges on Exchanges," in Part III of this Report Volumes are as reported by the stock exchanges or other reportmg agencies and are exclusive of those m short-term nghts. 2 Includes issues admitted under Clause 1 of Section 12(0 as in effect prior to the 1964 amendments to the Exchange Act and two stocks on the American Stock Exchange admitted nnder former section 12(f),

Clause 3. These issues were admitted under former Section 12(f), Clause l.

These figures include issues admitted under former Section 12(f) , Clauses 2 and 3 (except the two stocks

on the American Stock Exchange referred to m footnote 2), and under new Section 12(f)(I)(B).

, Includes secunties admitted to unlisted trading privileges on thePittsburgh Stock Exchange, which

merged With the Phuadelphia-Baltlmore-Washmgton Stock Exchange, effective December 30, 1969. , Duplication of issues among exchanges brings the total figures to more than the actual number of Issues

involved.

2

o 2

o

6 8

1

o 1o o

o

142 3

155

58

145

155

58

1,858

Total

cases In- stituted

up to end of 1970

fiscal

year

Types of cases

TABLE lO.-Summary of Cases Instituted in the Courts by Ihe Commission Under

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

Holding Company Act of 1935, the Investment Company Act of 1940, and the

Investment Advisers Act of 1940

Total Cases Cases Cases in- Total I Cases cases pending pending stituted cases closed

closed at end at end dunng pending dunng

up to end ofl970 ofl969 1970 during 11970 of 1970 fiscal fiscal fiscal 1970 fiscal fiscal year year year fiscal year year YPSf

---- .,5 -186'----

1,755 98 111 88

Actions to enjoin violations of the above acts .

Actions to enforce subpoenas

under the Securities Act and the Securities Exchange AcL

Actions to carry out voluntary

plans to comply with section ll(b) of the Holding Com- pany Act

Miscellaneons actionTotaL_. --z.m --2-,llO --m---7S- ---1-18- -----rn61---g;

•

' _______ _ _ __ _____________ ____________

•

•

_

_

_

_
224 SECURITIES AND EXCHANGE COMMISSION

TABLE ll.-A 37-Year Summary of All Injunction Cases Instituted by the Commission 1934 to June 30, 1970, by Calendar Year

Number of cases instituted Number of cases in which

by the Commission and the injunctions were granted Calendar year number of defendants and the number of

involved defendants enjoined!

Cases Defendants Cases Defendants

1934____________________________________________ 7 24 2 4 1935____________________________________________ 36 242 17 56 1936____________________________________________ 42 116 36 108 1937____________________________________________ 96 240 91 211 1938____________________________________________ 70 152 73 153 1939____________________________________________ 57 164 61 165 1940____________________________________________ 40 100 42 99 1941____________________________________________ 40 112 36 90 1942____________________________________________ 21 73 20 64 1943____________________________________________ 19 81 18 72 1944____________________________________________ 18 80 14 35 1945____________________________________________ 21 74 21 57 1946____________________________________________, 21 45 15 34 1947____________________________________________ 20 40 20 47 1948____________________________________________ 19 44 15 26 1949____________________________________________ 25 59 24 55 1950____________________________________________ 27 73 26 71 1951____________________________________________ 22 67 17 43 1952____________________________________________ 27 103 18 50 1953____________________________________________ 20 41 23 68 1964____________________________________________ 22 59 22 62 1955____________________________________________ 23 64 19 43 1956____________________________________________ 53 122 42 89 1957____________________________________________ 58 192 32 93 1958____________________________________________ 71 408 51 158 1959____________________________________________ 58 206 71 179 1960____________________________________________ 99 270 84 222 1961____________________________________________ 84 36 I 85 272 1962____________________________________________ 99 403 82 229 1963____________________________________________ 91 358 98 363 1964____________________________________________ 76 276 88 352 1965____________________________________________ 72 302 68 271 1966____________________________________________ 56 236 50 181 1967____________________________________________ 89 380 79 291 1968____________________________________________ 94 489 97 391

~~~~-{~::~ ~~~~~~~:~~~~~~~~~~~~~~~~~~~~~~~~I 99 584 102 518

61 242 52 258

1,853 6,869 2 1,711 5,470

SUIDURY

Cases Defendants

Actions instituted ___________________________________________________________1,853 6,869 Injunctions obtained ______________________________________________________1,683 5,470 Actions pending ___________________________________________________________ 36 1333

Other dispositions • - - - - -- -- 134 1,066

TotaL _________________________________________________________________1,853 6,869

I These columns show dtsposltlon of cases by year of dtsposition and do not necessarily reflect the disposi- tion ofthe casesshown as having been instituted in the same years. 2 Includes 28cases which were counted twice in this column because Injunctions against different defend- ants in the same cases were granted in different years. 1Includes 60defendants in 8 casesIn which injunctions have been obtained as to 47co-defendants

Includes (a) actions dismissed (as to 941 defendants); (b) actions discontinued, abated, abandoned,

stipulated, or settled (as to 73 defendants); «() actions in which judgment was denied (as to 48 defendants); (d) actions in which prosecution was stayed on stipulation to discontinue misconduct charged (as to 4 defendants).

--- --------------- - ------ -~-------------- ----- --

• •
THIRTY-SIXTH ANNUAL REPORT 225

TABLE 12.-Summary of Cases Instituted Against the Commission, Cases Involving

Petitions for Review of Commission Orders, Cases in Which the Commission

Participated as Intervenor orAmicus Curiae, and Reorganization Cases on Appeal under Ch, X in Which the Commission Participated.

Total Total Cases Cases Cases ill- Total Cases

cases m- cases pending pending stituted cases closed

strtuted closed at end at end during pending dunng

Types of cesea up to end up to end of 1970 of 1969 1970 during 1970

of 1970 of 1970 fiscal fiscal fiscal 1970 fiscal

fiscal fiscal year year year fiscal year

year year year

--- --- --- --- --- ---- Actions to enjoin enforcement

of Securities Act, Securities

Ex=Act or Public Util- Ity Hoi . g Company Act

with the exception of subpoenas Issued by the Com. mission. ... . 85 83 2 1 2 3 1

ActIOns to enjoin enforcement

of or compliance with subpoenas Issued by the Com- IlllSSIOU _________________ .. ____ 17 17 0 0 1 1 1

Petitions for review of Comnasion's orders by Courts of Appes1s under the various Acts admlnistered by the Commission. 10 29 18 _______________ 340 329 11 19

Miscellaneous actions agalnst

the COmDUSSIOn or officers of

the Commission and cases ID

WhICh the Comnussion partrcipsted as Intervenor or 13 llmlCU8 curiM _________________ 34" 333 9 17 5 22

AppeliBte proceedings under

Oh, X In which the Com- mission participated _________ 235 226 I 9 1 9 10 1

TotaL _. ._. ._._.. ---1--------/-,- 1,019 988 I 31 38 27 65 34

_ _________________~

___ __• __
226 SECURITIES AND EXCIfANUE COMMISSION 

TABLE 13.-A 37-Year Summary of Criminal Cases Developed by the Commiasion1934 Through 1970 by Fiscal Year 1 

[Seetable 14for danslficstlan of delendants] 
THIRTY-SIXTH ANNUAL REPORT 227 

TABLE14.-A $7-Year Summary Classifying All Defendants in Criminal Cases 

Developed by the Commieaion--1Y$4 to June $0,1970 

Number ss to vhm Number as umber Number Number cases were to whom 

indicted oonvicted acqu~tttted dmlsed oases are on motion pendJng of U.8. 

Attorneys 

I l"tl",l*i ,*I\ .,I, re IPIO~P*8, ..,I.llYI 1) ll"," Ol l"tl.CI".C"l. swunu4, wcroa1n.o.l 3 7 1.e PPrV)I,~rOl.~rrP(e i~ 111 !ILL. (~Iunl!~. x\~\.htl.not cnrapal lo ag..nFrai 1Jrlr.w 


ULTIIYUIexc<ptloc~ P~C;<<UIP~ 1.1YIO~II~IIUIIBW
 mwsnlciogvrurltwi icalliacrmrre. 

TABLE15.-Summary of Criminal Cases Developed by the Cmnmisaion Which 

Were Pendina at June SO, 1970 

IThe nk-rm 1. rhrc ~~1an.x. reore%er~t n4endanu who have I ...I,ronr~eted 
 and whse sppaL ire pmd- ILK. ~hesed~lendsnr.uraao illeludrd IMI,ham m a,:umn hrm. 


ZA$ the clovuolthe fl.eai ~rbr,illdletrnenu 1.r~ uot grt heen remrcxd as ro SO yrol he; defer~d~ntl is) 

30 caw rclsrred to the ~nywt~ent <I~u~lre. 
 ~1l-a ua renrct'd only 111rile recaplrulsttunof totals oc ,I.. bolbn~of the tnblc. Tho Rbwm lor l~t&lC M ~ilandlng u.eludcr I: ca%c, In a buswnxl CStBGIY.