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Table of Contents

Chairman's Letter of Transmittal . . . . . . . . . . . . . . . . . . . . . . 1

Enforcement Program _ . . . . . . . . . . 7

Key 1988 Results 7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Program Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Insider Trading 10

Manipulative Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Corporate Control :.: ; . . . . . . . . . . . . .. . . . . . . . . . 15

Securities Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Financial Disclosure , . , . . . . . . . . 17

Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Investment Advisers _ . . . .. 21

Broker-Dealers ,....... 22

Sources for Further Inquiry " 24

Full Disclosure System 25

Key 1988 Results 25

Review of Filings 26

Rulemaking, Interpretive, and Legislative Matters . . . . . . . . .. 28

Scope of Registration Requirements . _ . . . . . . . . . . . . . . . 28

Resales to Institutional Investors _ . . . .. 28

Change in Holding Period for Restricted Securities. . . . . . .. 29

Proxy Rules 29

Shareholder Proposal Rule ,.. 29

Prospectus Delivery Requirements _ .. __ . . . . .. 30

Change in Fiscal Year/Quarterly Reporting , .. 30

Acquisitions by Limited Partnerships . . . . . . . . . . . . . . , .. 30

Regulation D Exemptions From Registration Requirements . . 30

Securities Act Exemptions for Compensatory Benefit Plans . . 31

Defense Contracts Procurement Inquiry . . . . . . . . . . . . . . . 31

Publication of No-Action and Interpretive Letters " 32

Trust Indenture Legislative Proposal ..............,.. 32

Conferences . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . , " 32

SEC Government-Business Forum' on Small Business Capital

Formation .' . : , .. ; -J;. • • 32

SEC/NASAA Conference under Section 19(c) of the r,

Securities Act , : ; , ' \ '. 32 J I:

. Accounting and Auditing Matters _ .. :; !.:. 33

Key 1988 Results ........,...................... 33

Accounting-Related Rules and Interpretations . . . . . . . . . . . .. 34

: ~

"

~
National Commission on Fraudulent Financial Reporting . . . . . 34

Opinion Shopping . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 34

Management Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Peer Review 35

Timely Reviews By Auditors of Interim Information 35

Enforcement Remedies . . . . . . . . . . . . . . . . . . . . . . . . .. 35

Reexamination of Audit Committee Requirements by

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 35

Oversight of Private Sector Standard-Setting . . . . . . . . . . . . . 35

FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Postemployment Benefits Other Than Pensions 36

Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Financial Instruments 36

Other Activity 36

Timely Financial Reporting Guidance . . . . . . . . . . . . . . . 36

AICPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

ASB 37

AcSEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

SECPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

International Accounting and Auditing Standards . . . . . . . . . . 38

The EDGAR Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Pilot System 39

Operational System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Office of EDGAR Management 42

Conclusion 42

Regulation of the Securities Markets . . . . . . . . . . . . . . . . . . . 43

Key 1988 Results 43

Securities Markets, Facilities, and Trading . . . . . . . . . . . . . . . 44

The October 1987 Market Break 44

The National Market System 46

National System for Clearance and Settlement of Securities

Transactions ..............................• 47

Securities Immobilization . . . . . . . . . . . . . . . . . . . . . . . . 48

Internationalization 48

Options and Other Derivative Products 50

Regulation of Brokers, Dealers, Municipal Securities Dealers,

and Transfer Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Broker-Dealer Examinations 53

Municipal Securities Underwriters . . . . . . . . . . . . . . . . . . . 53

Government Securities Brokers and Dealers . . . . . . . . . . . . 54

Bank Securities Activities . . . . . . . . . . . . . . . . . . . . . . . . 55

Broker-Dealer Registration Application 56

Short Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

ii
Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . . . 56

Oversight of Self-Regulatory Organizations . . . . . . . . . . . . . . 57

National Securities Exchanges. . . . . . . . . . . . . . . . . . . . . 57

National Association of Securities Dealers, Inc . . . . . . . . . . 59

Municipal Securities Rulemaking Board . . . . . . . . . . . . . . . 59

Clearing Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 60

Inspections of SRO Surveillance and Regulatory Compliance .. 60

Applications for Re-entry . . . . . . . . . . . . . . . . . . . . . . . . . 63

SRO Final Disciplinary Actions 63

Securities Investor Protection Corporation . . . . . . . . . . . .. 64

Investment Companies and Advisers 65

Key 1988 Results 65

Significant Legislative Developments . . . . . . . . . . . . . . 66

Disclosure Requirements 66

EDGAR Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Regulatory Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Significant Investment Company Act Developments . . . . . .. 67

Significant Investment Advisers Act Developments 68

Significant Insurance Product Developments . . . . . . . . . . . . 68

Significant Public Utility Holding Company Act Developments. 68

Significant Institutional Disclosure Program Developments . . 69

Significant Applications and Interpretations . . . . . . . . . . . . . . 70

Investment Company Act Matters . . . . . . . . . . . . . . . . . . . 70

Investment Advisers Act Matters . . . . . . . . . . . . . . . . . . .. 71

Holding Company Act Matters ... . . . . . . . . . . . . . . . . . . 71

Other Litigation and Legal Activities . . . . . . . . . . . . . . . . . . . 73

Key 1988 Results 73

Litigation 74

Insider Trading 74

Constitutional Challenges to Commission Enforcement

Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Broker-Dealers and Market Professionals . . . . . . . . . . . . .. 76

Definition of a Security. . . . . . . . . . . . . . . . . . . . . . . . . . 78

Liability Under Section 12 of the Securities Act 79

Tender Offer and Merger Litigation . . . . . . . . . . . . . . . . . . 80

Constitutional Challenges to State Takeover Statutes . . . . . . 83

First Amendment Challenge 84

Motions to Vacate Injunctions 84

Discovery Matters in Commission Enforcement Actions 85

Litigation Involving Requests For Access to Commission

Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 85

Actions Under the Equal Access to Justice Act 86

Actions Against the Commission 86

Actions Against Professionals Under Commission Rule 2(e) .. 86

Actions Under the Right to Financial Privacy Act . . . . . . . . . 87

iii
Actions Raising Equal Employment Issues . . . . . . . . . . . .. 87

Significant Legislative Developments .. . . . . . . . . . . . . . . . . 87

Insider Trading 87

International Enforcement . . . . . . . . . . . . . . . . . . . . . . . . 88

Securities and Exchange Commission Authorization Act of

1987 89

Foreign Corrupt Practices Act 89

Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Securities Law Enforcement Remedies Act . . . . . . . . . . . .. 90

Market Break Proposals 91

Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .. 92

Corporate Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . 93

Committees 93

Estate Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Disclosure Statements/Plans of Reorganization 97

Compliance with the Registration Requirements of the

Securities Act 98

Economic Research and Analysis 100

Key 1988 Results 100

Management and Program Support 102

Key 1988 Results 102

Policy Management , 102

Consumer Affairs and Information Services , 102

Public Reference , 103

Equal Employment Opportunity , 103

Facilities Management , 104

Financial Management 104

Information Systems Management . . . . . . . . . . . . . . . . . . .. 105

Personnel Management 105

Commission Operations , 106

Public Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 106

Commission and Principal Staff Officers . . . . . . . . . . . . . . . ., 108

Biographies of Commissioners 110

David S. Ruder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., 110

Charles C. Cox 111

Joseph A. Grundfest III

Edward H. Fleischman 112

Regional and Branch Offices and Administrators .. . . . . . . . ., 114

Footnotes 117

Appendices

iv

130
Appendix Tables

1 Unconsolidated Financial Information for Broker-Dealers 131

2 Unconsolidated Annual Revenues and Expenses for

Broker-Dealers Doing a Public Business 132

3 Unconsolidated Balance Sheet for Broker-Dealers Doing a

Public Business 133

4 Securities Industry Dollar in 1987 for Carrying/Clearing

Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 135

5 Unconsolidated Revenues and Expenses for Carrying/

Clearing Broker-Dealers . . . . . . . . . . . . . . . . . . . . . . . .. 136

6 Unconsolidated Balance Sheet for Carrying/Clearing

Broker-Dealers " 137

7 Broker-Dealers and Branch Offices. . . . . . . . . . . . . . . . .. 138

8 Brokers and Dealers Registered Under the Securities

Exchange Act of 1934 . . . . . . . . . . . . . . . . . . . . . . . . .. 139

9 Applications and Registrations of Brokers, Dealers, and

Investment Advisers 140

10 Applications and Registrations of Brokers, Dealers, and

Investment Advisers 141

11 Consolidated Financial Information of Self-Regulatory

Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 145

12 Self-Regulatory Orqanlzatlons-Clearlnq Agencies 1987

Revenues and Expenses . . . . . . . . . . . . . . . . . . . . . . . .. 146

13 Municipal Securities Rulemaking Board Statements of

Revenues and Expenses and Changes in Fund Balance .... 147

14 Companies Registered Under the Investment Company Act

of 1940 as of September 30, 1988 149

15 Companies Registered Under the Investment Company Act

of 1940 Since (1941) . . . . . . . . . . . . . . . . . . . . . . . . . .. 150

16A Market Value of Equity/Options Sales on U.S. Securities

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 151

16B Volume of Equity/Options Sales on U.S. Securities

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., 152

17 Market Value of Equity/Options Traded on All U.S.

Securities Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . .. 154

18 Share Volume by Exchanges. . . . . . . . . . . . . . . . . . . . .. 155

19 Dollar Volume by Exchanges 156

20 Special Block Distributions Reported by Exchanges 157

21 Securities Listed On Exchanges . . . . . . . . . . . . . . . . . . ., 158

22 Value of Stocks Listed on Exchanges . . . . . . . . . . . . . . .. 159

23 Securities Traded on Exchanges 160

24 Immobilization Trends , 160

25 Effective Registrations . . . . . . . . . . . . . . . . . . . . . . . . .. 161

26 Securities Effectively Registered with SEC . . . . . . . . . . . .. 162

27 Securities Effectively Registered with SEC . . . . . . . . . . . .. 163

28 Effective Registrations by Purpose and Type of Security:

Fiscal Year 1987r 165

v
29 Effective Registrations by Purpose and Type of Security:

Fiscal Year 1988p . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 165

30 Effective Registrations Cash Sale for Account of Issuers . . .. 166

31 Cash Offerings Under Regulation A 167

32 Types of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .. 168

33 Fiscal 1988 Enforcement Cases Listed by Program Area ... 172

34 Enforcment Cases Initiated by the Commission During

Fiscal 1988 in Various Program Areas 177

35 Investigations of Possible Violations of the Acts Administered

by the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . .. 178

36 Administrative Proceedings Instituted During Fiscal Year

Ending September 30, 1988 " 178

37 Injunctive Actions " 178

38 Reorganization Proceedings Under Chapter 11

of the Bankruptcy Code in Which

Commission Entered Appearance 182

39 Appropriated Funds vs Fees Collected 185

40 Budget Estimates and Appropriations 186

vi
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. DC 20S49

o....le!! 0" THE CHAIRMAN

May 23,1989

The Honorable Dan Quayle

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Thomas S. Foley

Speaker of the House

Washington, D.C. 20515

It is an honor to transmit the Fifty-Fourth Annual Report of the Securities and

Exchange Commission for the fiscal year ended September 30, 1988.

Although the 1988 fiscal year was dominated by activities relating to the October

1987 market break, the Commission carried out its statutory responsibilities

successfully during the fiscal year.

Statutory responsibilities of the Commission include enforcing the federal securities laws, mandating complete and accurate disclosure by issuers, overseeing stock

exchanges and secondary market participants, regulating investment companies

and investment advisers and engaging in appellate and other litigation. The

Commission successfully discharged these responsibilities during the fiscal year in

both headquarters and regional offices.

The chart below shows some indicators of Commission activities during the year:"

1984 1985 1986 1987 1988

Enforcement Actions 299 269 312 303 252

Filings Given

Full Review 7,237 9,571 10,526 10,797 10,985

Broker-Dealer

Oversight Exams 389 447 481 452 421

SRO Inspections 20 21 22 23 21

Investment Co. and

Adviser Inspections 1,334 1,606 1,906 2,033 2,150

Resources: Although the Commission carried out its mission successfully during fiscal year 1988. several

factors have severely strained resources. One has been an Increase In the number of complex enforcement

cases requiring extensive commitment of resources. Another has been the continued dramatic growth in

the numbers of broker-dealers, investment companies. and investment advisers subject to Commission

regulation. The October 1981 market break and its aftermath have created resource demands, and

Increasing internationalization of the securities markets is also having an on.going effect on the

Commission and its resources. As a means of addressing resource constraints. and in response to a

request from the Senate Banking Committee. the Executive Director's Office of the Commission prepared

a study and offered legislative alternatives on the feasibility of various means of self.fundlng the agency

while retaining accountability to Congress. The study also analyzed the effects of salary differentials

between the Commission and those in the private sector or in the industry the Commission regulates.

1

•
Enforcement: During the fiscal year, the Commission initiated 252 enforcement

actions. These cases involved insider trading, market manipulation, deficient or

fraudulent corporate reporting and accounting, broker-dealer violations, and other

matters. Some of the most significant cases in the Commission's history were

initiated or successfully litigated during the time period. The number of complex

cases, requiring substantial resources, increased markedly during the year,

accounting for a lower number of cases brought than in previous fiscal years.

The Commission took steps to enhance enforcement authority, both domestically

and internationally. During the fiscal year, the Commission developed and sent to

Congress the International Enforcement Cooperation Act of 1988. The Act was

designed to strengthen the Commission's ability to protect investors and to enforce

the federal securities laws in increasingly internationalized markets. (Significant

aspects of this legislation were enacted after the close of the fiscal year.) As part of

its internationalization efforts, the Commission signed memoranda of understanding with three Canadian provinces and with Brazil, which serve as models for future

negotiations. In addition, the Commission transmitted to Congress a legislative

proposal, the "Securities Law Enforcement Remedies Act of 1988;' based on

recommendations in the Report of the National Commission on Fraudulent

Financial Reporting (the Treadway Commission) that would increase enforcement

remedies for a broad range of securities law violations.

Market Manipulation Task Force: In response to increasing abuses in the penny

stock market, the Commission established the Market Manipulation Task Force.

The Task Force, composed of representatives of both headquarters and regional

offices, is considering a number of initiatives to combat the growing problem of

penny-stock fraud and market manipulation, believed to be spreading nationwide.

Working closely with other law enforcement agencies, the self. regulatory orqanlzations, and state securities regulators, the Task Force is considering a variety of law

enforcement and regulatory actions to protect investors against the risks of market

manipulation and fraud.

Full Disclosure: Both on-going responsibilities and the challenges presented by

changes in the marketplace and internationalization were met in the Full Disclosure

program during the fiscal year. The total number of filings given full reviews

increased during the fiscal year. The number of filings relating to tender offers,

"going-private" transactions, and proxy statements given full reviews during the

year also increased, as did the number of annual report reviews. (Registration

statements received during the fiscal year declined somewhat, as a result of the

October 1987 market break.) A special analysis was undertaken of registrant

disclosures in "management's discussion and analysis of financial condition and

results of operations."

Domestic rulemaking projects were completed during the fiscal year in the areas of

proxy rules, prospectus delivery, availability of no-action and interpretive letters,

and shareholder communications. The Commission also adopted rules intended to

facilitate capital formation by small businesses.

The far-reaching implications of increasing internationalization of the securities

markets were a major focus of the full disclosure program. Rules governing the

transnational scope of registration requirements under the Securities Act of 1933

2
were proposed during the year. The Commission also proposed a rule providing a

safe harbor from requirements for resales of securities to institutions, which may

afford foreign issuers greater access to United States capital markets. In addition,

Commission staff discussed the development of a coordinated registration process

for multi-jurisdictional securities offerings and tender offers with the Canadian

provinces of Ontario and Quebec.

Accounting and Auditing Matters: During the fiscal year, on-golng activities in

regard to disclosure issues and oversight of private sector standard setting were

carried out. Additionally, new challenges were addressed, such as those presented

by the recommendations in the Treadway Commission Report and by internationalization. Nine Staff Accounting Bulletins were issued during the year, and rules

were adopted concerning changes by public corporations of their independent

accountants. Rulemaking initiatives were also undertaken concerning opinion

shopping and management reports in response to the report of the Treadway

Commission. Oversight of private sector standard setting continued, as the

standard setting bodies dealt with both emerging issues and with projects designed

to enhance the quality of financial reporting.

During the fiscal year, the Commission continued its work with international

groups, such as the International Organization of Securities Commissions and the

International Federation of Accountants, to facilitate capital formation by addressing questions of differing international accounting and auditing standards.

EDGAR: The Commission's EDGAR system (Electronic Data Gathering, Analysis,

and Retrieval) functioned successfully and effectively during its fourth year of

operation, and plans were implemented for the operational stages. During the fiscal

year, the Request for Proposals (RFP) for the operational project was issued and

amended as necessary. Three offers were received and evaluated based on specific

criteria, on-site visits, and face-to-face discussions, with a goal of selecting the

offeror whose proposal was most advantageous to the government, considering

costs and other factors set forth in the RFP.(The contract was awarded on January

3, 1989, after the close of the fiscal year.)

Regulation of the Securities Markets: The October 1987 market break occurred

two weeks into the fiscal year. Activities related to this event were the major focus

in regulation of the markets. Immediately prior to, during, and after the break, the

Commission engaged in intensive monitoring and analysis of market movements

and indicators; the financial condition of broker-dealers and clearing and transfer

agents; the financial and operating condition of stock exchanges; and other

relevant facets of the market. Communications and coordination with market

participants, exchange officials, and other government regulators on concerns

about credit, liquidity, financial soundness, and international ramifications of

developments were frequent and productive. Further intensive study resulted in the

publication, in February 1988, of the Staff Report of the Division of Market

Regulation on the October 1987 Market Break, containing descriptions of the

events and recommendations for further exploration. During this period, the

Commission also cooperated with the Presidential Task Force on Market Mechanisms (the Brady Commission), exchanging information on various market developments. Subsequent testimony by the Commission before several Congressional

committees incorporated some of these recommendations, as means for preventing

3
or ameliorating certain aspects of stress on market systems and mechanisms in the

future. The Commission was a participant in the President's Working Group on

Financial Markets, formed on March 18, 1988. In May 1988, the Working Group

issued an interim report to the President of the United States. The Commission also

acted on several proposals submitted by exchanges and others designed to address

concerns over the events of October 1987. The Commission also transmitted

recommendations for legislation to Congress.

Additionally, the Commission worked with other regulatory agencies and with

exchanges to take steps, in addition to those outlined above, based on analysis of the

October 1987 market break. These steps addressed the most pressing issues identified

in the staff report: expanding capacity, improving coordination and retarding market

velocity. Specialist and market-maker performance, capital adequacy, and clearing and

settlement concerns were also addressed during and after the fiscal year.

Economic Research and Analysis: During the fiscal year, the Commission consolidated its economic program to provide more comprehensive economic analysis

and financial data. The revised Office of Economic Analysis incorporates existing

economic functions, and will also compile, analyze, and disseminate macroeconomic and financial data to the Commission. The Office continued to perform

regulatory flexibility analyses, and other required functions.

Litigation and Legal Activities: The Office of General Counsel represents the

Commission in appellate and other litigation, and acts as Chief Legal Officer for the

Commission. During the fiscal year, the Office represented the Commission in 314

litigation matters. The Commission also participated amicus curiae in 50 cases,

and entered its appearance in 50 reorganizations under Chapter 11 of the United

States Bankruptcy Code. Results favorable to the Commission were obtained in

almost all matters that were concluded during the fiscal year in the Supreme Court,

and the appellate and district courts.

The General Counsel also assists the Commission in preparation of testimony on a

number of important issues, and on legislative proposals submitted to Congress.

During the fiscal year, the number of Congressional appearances reached an

all-time high. Testimony and legislative proposals often involved complex and

difficult interpretations of existing laws and their history (such as the Glass-Steagall

Act) or of new and challenging developments in the marketplace, such as market

reform in the wake of the October 1987 market break.

Investment Companies and Advisers: Again this fiscal year, the number of

investment companies, investment advisers, and assets managed by them

increased, while staff in the Division of Investment Management remained essentially unchanged. Examinations completed by headquarters and regional staff

during the year numbered 2,150, a substantial increase that was made possible in

part by the use of computers.

During the year, the Division published a report on financial planners. The report,

prepared at the request of the Subcommittee on Telecommunications and Finance

of the Energy and Commerce Committee of the House of Representatives, explored

the status of the financial planners/investment advisers, and issues of abuse, and

included demographic data and a report on a pilot project of inspections of

4
investment advisers registered as broker-dealers with the National Association of

Securities Dealers (NASD). Based on the data gathered for the study, the staff report

concluded that violations by planners were not materially different from those by

advisers (although they were more frequent), that potential for self. interested

behavior exists when planners provide advice and sell products, and that demon.

strated abuses by both planners and advisers involve only a very small portion of

the industry. The study also said that the NASD's pilot project demonstrated the

feasibility of having NASD inspectors conduct examinations of financial planners.

Also during the fiscal year, the Commission adopted rules on disclosures of

changes of accountants and disclosures of fees in tabular form in mutual fund

prospectuses. Additional rules standardized computation of performance data in

advertisements and sales literature to enhance comparability of data for the benefit

of investors. Other rules adopted during the year require investment advisers to

retain records relating to performance advertisements. Among rules proposed

during the year are some that would, if adopted by the Commission, permit mutual

funds and unit investment trusts to make exchange offers under certain conditions,

clarify provisions of Rule 12b-1 plans, permit contingent deferred sales loads under

certain conditions, and exempt some small financial advisers from federal regula.

tion if they register with state regulatory authorities.

Management and Program Support: During the fiscal year, management and

administrative support activities were provided regarding domestic and international policy issues, and regarding the Commission's deliberations on such issues.

For example, during the year, the Commission testified 24 times on issues such as

the October 1987 market break, the President's Working Group on Financial

Markets, Glass-Steagall reform, international enforcement, insider trading, arbitration, financial planners, and the Commission's authorization and appropriations.

During the year, a study and proposed legislative language on alternative

approaches to transferring the agency to self-funding status were substantially

completed by the Office of the Executive Director. (Soon after the close of the fiscal

year, the study was transmitted to Congress.) This study was conducted at the

request of the Securities Subcommittee of the Senate Committee on Housing,

Banking and Urban Affairs. In this regard, it is significant that for the sixth

consecutive year, and the seventh time in its 54-year history, the Commission

collected revenues in excess of its appropriation. During fiscal year 1988, $250

million, most of it from filing fees, was transmitted to the United States Treasury.

During the year, about 49,000 complaints or inquiries from investors, and 2,308

Freedom of Information Act requests were received and processed. The increase of

22 percent in consumer inquiries was primarily a result of the October 1987 market

break. Other requests under the Privacy Act and for records were processed during

the year as well.

Also during the fiscal year, activities were carried out to increase or locate space for

various offices; to modernize financial systems; to increase the number and use of

computers in carrying out the Commission's mission; and to implement a number

of measures relating to hiring, retention, and personnel management.

As the new fiscal year began on October 1, 1988, the aftermath of the October

5
market break continued to be of concern and to occupy Commission resources. In

addition, a dominant theme, which appears throughout the Report and affects all

areas of the Commission, was internationalization of the securities markets.

Positioning the Commission to exercise leadership in international securities

regulation has been a major endeavor, and efforts in this area are continuing.

As the fiscal year drew to a close, preparations were underway for, among other

efforts, presentation of a paper on regulation of international securities markets to

the International Organization of Securities Commissions. Presented in Melbourne,

Australia after the close of the fiscal year, the paper, unanimously approved by the

Commission, has served as a working document for international securities

regulation.

J);;:Z)M

David S. Ruder

Chairman

6
Enforcement Program

Key 1988 Results

In fiscal 1988, the Commission continued to devote significant enforcement

resources to the investigation and litigation of complex cases involving

potential insider trading, financial disclosure and market manipulation violations. There was also a notable increase in the number of securities offering

cases, as well as cases primarily involving investment advisers and investment

companies.

Total Enforcement Actions Initiated

FY'84 FY'85 FY'86 FY'87 FY'88

Total 299 269 312 303 252

Civil Injunctive Actions 179 143 162 144 125

Administrative Proceedings 114 122 136 146 109

Civil and Criminal Contempt Proceedings 4 3 14 13 17

Reports of Investigation 2 1 0 0 1

In fiscal year 1988, the Commission obtained court orders requiring

defendants to return illicit profits amounting to approximately $26.1 million,

either as disgorgement or as restitution to defrauded investors or entities.

Disgorgement orders in insider trading cases amounted to $1.9 million. Civil

penalties under the Insider Trading Sanctions Act of 1984 (llSA) amounted

to $1.2 million.

The Commission referred matters, or granted access to its files to federal

and state prosecutorial authorities in 136 cases. An estimated 50 criminal

indictments or informations and 55 convictions were obtained by criminal

authorities during fiscal year 1988 in Commission. related cases.

Introduction

An aggressive and comprehensive program to enforce the federal securities

laws is essential to investor protection and to investor confidence in the

integrity, fairness and efficiency of the securities markets. The Commission's

enforcement program is designed to maintain a presence in all areas within

the Commission's jurisdiction, to concentrate on particular problem areas,

and to anticipate emerging problems.

The Commission's enforcement actions generally are preceded by an

examination pursuant to the Commission's inspection powers or an lnvestlgation. The Commission is empowered to conduct examinations of broker.

dealers, municipal securities dealers, investment advisers, investment

companies, transfer agents and self.regulatory organizations. The Commission conducts informal and formal investigations. Informal investigations are

7
conducted on a voluntary basis, with the Commission requesting persons with

relevant information to cooperate by providing documents and testifying

before the Commission staff. The federal securities laws also empower the

Commission to conduct formal investigations providing the Commission with

the authority to issue subpoenas compelling the production of books and

records and the appearance of witnesses to testify. Both types of investigations

are generally conducted on a confidential, nonpublic basis.

The federal securities laws authorize the Commission to institute both civil

and administrative enforcement actions. The Commission may file injunctive

actions, seek civil penalties in insider trading cases, and institute administrative proceedings. The Commission may also refer matters to the appropriate

governmental authority or self-regulatory organization for enforcement

action.

The primary enforcement action utilized by the Commission is the injunctive action. The federal securities laws authorize the Commission to seek

temporary restraining orders and preliminary and permanent injunctions

against any person who is violating or about to violate any provision of the

federal securities laws. Conduct which violates the courts' injunctions is

punishable by civil or criminal contempt and violators are subject to fines or

imprisonment. In addition to seeking orders prohibiting future violations, the

Commission often seeks other equitable relief in the form of an accounting

and disgorgement of illegal profits, rescission or restitution. When seeking

temporary restraining orders the Commission often requests an order freezing

assets to prevent concealment of assets or dissipation of proceeds of illegal

conduct.

The Commission is specifically authorized to seek civil penalties in connection with insider trading violations. Pursuant to the Insider Trading

Sanctions Act of 1984 (ITSA), the Commission may seek and the court may

impose civil penalties of up to three times the profits gained or losses avoided.

In August 1988 the Commission was authorized to seek civil penalties of up

to $10,000 in connection with violations of Section 30A, the anti-bribery

provision of the Exchange Act.

The Commission is also authorized to institute several types of administrative proceedings. Section 8(d) of the Securities Act of 1933 (Securities Act)

enables the Commission to institute proceedings to suspend the effectiveness

of a registration statement which contains false and misleading statements.

Administrative proceedings pursuant to Section 15(cX4) of the Securities

Exchange Act of 1934 (Exchange Act) may be instituted against any person

who fails to comply and any person who is a cause of failure to comply with

the reporting, beneficial ownership, proxy and tender offer provisions; respondents may be ordered to comply or effect compliance with the relevant

provisions. The Commission may also institute administrative proceedings

against regulated entities and associated persons. Sanctions include censures, limitations on activities, suspension or revocation of the registration of

such entities. The Commission may impose similar sanctions on persons

associated with such entities and persons affiliated with investment companies. Administrative proceedings may be instituted against persons who

8
appear and practice before the agency such as accountants and attorneys and

may impose sanctions including suspensions or bars.

Under appropriate circumstances the Commission refers matters to other

federal, state or local authorities or self-regulatory organizations such as the

New York Stock Exchange or the National Association of Securities Dealers.

The Commission's staff may render substantial assistance to criminal authorities such as the Department of Justice for the criminal prosecution of

securities violations.

As a result of developments in the securities markets, the complexity of the

Commission's enforcement activities has increased. Over the past several

years the number of broker-dealers and investment advisers has grown,

trading volume and the volatility of the markets have increased, and new and

more complex trading vehicles and strategies are being offered.

The increased internationalization of the securities markets often has

required the Commission to obtain evidence in its investigations and litigation

from persons residing outside the United States. To accommodate this

development, the Commission has expanded its Office of International Legal

Assistance which coordinates international aspects of the Commission's

enforcement activities. This office also assists in the negotiation of memoranda of understanding with other countries. The Commission has signed

Memoranda of Understanding with Switzerland, the United Kingdom and

Japan. During fiscal year 1988, the Commission entered into comprehensive

agreements with three provinces in Canada and Brazil. These memoranda of

understanding have substantially facilitated the Commission's efforts to

obtain evidence essential to its enforcement program.

A result of the Commission's efforts to conduct an aggressive, comprehensive and effective enforcement program is an increase in protracted litigation.

The Commission has been litigating an important injunctive action against a

brokerage firm, SEC v. rust Jersey Securities, Inc., 1 alleging violations of the

antifraud provisions and seeking disgorgement. During the course of discovery in that action, employees of the firm refused to produce corporate

documents based upon an assertion of the privilege against selfincrimination. The Commission prevailed on this issue but only after litigating

the matter in the Court of Appeals. The Commission is currently litigating a

significant market manipulation case, SEC v. Monarch Funding Corp., et al.,2

and a case involving allegations of antifraud violations by a major public

accounting firm, SEC v. Price Waterhouse. 3

Program Areas

During 1988, the Commission maintained an aggressive enforcement

presence in each of the areas within the Commission's jurisdiction. The

Commission also established new programs and maintained existing programs to address particular problem areas. The principal program areas for

1988 included insider trading and other violations related to contests for

corporate control; manipulation of over-the-counter stocks; securities offering

violations; financial fraud; and broker-dealer, investment adviser and invest9
ment company violations. The Commission has utilized the full complement

of enforcement remedies available to it during the past fiscal year, selecting

the type of action and relief appropriate in light of the violative conduct and

parties involved.

Insider Trading

Insider trading refers generally to the purchase and sale of securities in

breach of a fiduciary duty or a relationship of trust or confidence, while in

possession of material nonpublic information about an issuer or the trading

market for an issuer's securities. The federal securities laws prohibit such

trading not only by corporate officers and directors and other persons having

a relationship of trust or confidence with the issuer or its shareholders, but

also by persons who misappropriate material nonpublic information from

sources other than the issuer. Tippees of such persons may also be subject to

the prohibition. Insider trading in the context of tender offers is also prohibited. Although cases involving insider trading are only one component of the

Commission's comprehensive enforcement program, the magnitude and

gravity of the cases recently brought by the Commission and the criminal

prosecutions initiated by the U.S. Attorney's Office for the Southern District

of New York reflect the continuing importance of this issue.

With respect to insider trading cases the Commission has filed actions

seeking temporary restraining orders and asset freezes to prevent the concealment and movement of illegal profits. The Commission has also sought

permanent injunctions and other equitable relief including disgorgement of

profits or losses avoided. Generally, in insider trading cases the Commission

has sought civil penalties under ITSA. Also, if broker-dealers or investment

advisers or persons associated with such entities engage in insider trading

violations the Commission will institute administrative proceedings and seek

suspensions or bars from further association with the securities industry. This

past fiscal year, the Commission brought 25 enforcement actions based

primarily on insider trading violations, and 2 other actions which included

insider trading allegations.

Many of the insider trading cases brought by the Commission this fiscal year

reflected aspects of the continuing internationalization of the securities

markets. The Commission dealt with challenges such as obtaining service of

persons abroad and securing and protecting assets against movement outside

the Commission's jurisdiction. In SEC v. Wang and Lee,4 a major international

insider trading case filed in June 1988, the Commission alleged that an

analyst in the mergers and acquisitions department of a major investment

banking firm provided information concerning proposed mergers or other

extraordinary transactions involving the firm's clients to an investor who was

a Taiwan national residing in Hong Kong. While in possession of this

information, the investor allegedly directed the purchase and sale of securities

of at least 25 issuers through various accounts, realizing at least $19 million

in illegal profits.

The Commission obtained a temporary restraining order which included a

freeze of all assets belonging to the defendants. Following entry of the order,

10
one defendant attempted unsuccessfully to retrieve funds in Hong Kong from

a bank. At the Commission's request, the court ordered the defendants not to

seek further relief from the previous order in either foreign or other United

States courts, and ordered the bank holding the investor's funds, which had

a branch in New York which was utilized in defendant's fund transfers, to pay

over $12 million into the registry of the court for safekeeping pending further

order of the court. A default judgment was entered against the foreign investor

in October 1988 and at year end proceedings were continuing before a

Magistrate to fix the amount of disgorgement. The bank has noticed an appeal

with respect to the order requiring payment into the registry.

The analyst, who admitted receiving $200,000 from the trading scheme,

pleaded guilty to these felony charges and was sentenced to a three-year

prison term, to be followed by three years of probation.

Two fiscal 1988 insider trading cases highlighted the importance of multinational agreements and cooperation. In one, the Commission made use of

the Hague Convention to effect service on two foreign nationals named as

defendants. In SEC v. Kerherve 5 the Commission alleged that the two foreign

nationals, who resided in Cairo, Egypt, unlawfully traded in the securities of

Texas International Co. while in possession of inside information about the

discovery of a major oil field in Egypt. Within days of filing the case, and the

entry of a temporary restraining order and an order freezing assets, the two

defendants in Egypt were personally served with process at their offices in

Cairo, Egypt pursuant to the Hague Convention. The Department of State and

the Egyptian authorities provided extraordinary assistance in this case.

Shortly after being served, defendants consented to the entry of injunctions

against them and to over $50,000 in disgorgement and penalties.

In SEC v. ColLier,6 an action involving inside information about proposed

takeover attempts by clients of an international investment bank, a managing

director of the investment bank allegedly used this information to purchase

and direct the purchases of shares in the target companies. United States

accounts were used to purchase shares on the London Stock Exchange;

trading was also effected through a Cayman Islands entity. Injunctions were

entered, by consent, against the two defendants. The British Department of

Trade and Industry provided assistance in this matter, in accordance with the

Memorandum of Understanding executed by the two countries.

Among the cases alleging violations of Section 14(e) and Rule 14e-3 of the

Exchange Act, which prohibits insider trading in connection with tender

offers, were SEC v. Sierchio 7 and SEC v. Chestman.8 In these cases, the

Commission alleged that the defendants traded in securities of Waldbaum,

lnc., while in possession of inside information obtained from the president of

Waldbaum concerning an imminent tender offer for the company. Injunctions,

disgorgement orders and ITSA penalties were entered by consent against two

of the three defendants. Defendant Chestman, against whom the injunctive

action remained pending at the close of the year, was subsequently indicted;

this indictment was the first to allege criminal violations of Section 14(e).

The Commission filed an injunctive action against Marcus Schloss & Co.,

Inc., a registered broker-dealer, alleging that trades for the account of Marcus

11
Schloss were made based on information concerning proposed mergers and

acquisitions obtained from Michael N. David. David, an associate of a law firm,

was enjoined previously. Injunctions by consent were entered this year against

Marcus Schloss 9 and against Andrew Solomon,"? an employee of Marcus

Schloss. Marcus Schloss agreed to pay $136,900 in disgorgement of trading

profits and an ITSA penalty of $273,800. An injunctive action filed this fiscal

year against Douglas Ronald Yagoda, another employee, remained pending at

the end of the fiscal year. 11

The Commission also took additional remedial administrative action.

Solomon, who had also allegedly tipped David concerning a proposed

leveraged buyout which Marcus Schloss had been approached about, received

a 12-month suspension from association with a broker-dealer and certain

other regulated entities. 12 Marcus Schloss was censured and ordered to adopt

and implement recommendations of an independent consultant employed to

review relevant policies and procedures of the firm.13

Considerable staff resources are used in insider trading cases, many of

which are litigated over an extended period of time. The Commission

successfully litigated an action against two alleged tippees named in SEC v.

Musella. 14 This injunctive action, instituted in 1983, alleged that a number of

individuals traded while in possession of nonpublic information concerning

proposed mergers or acquisitions obtained from a law firm by an employee of

that firm. In January 1988, the court ruled that the remaining two defendants,

who had no direct link with either the primary tipper or the first tier of tippees,

had not insulated themselves from a finding of scienter by consciously

avoiding learning about the confidential sources of the information. Summary

judgment was entered against the two tippees.

A judicial determination also resolved competing claims for priority to

profits ordered to be disgorged by defendants in two settled cases, SEC v.

Levine,lS and SEC v. Wilkis.16 In addition to the entry of injunctions,

defendants in these cases had consented to orders to disgorge approximately

$14.8 million. The court denied claims for priority for payment by government

tax authorities, and approved a Commission plan pursuant to which all

disgorged funds will be made available to investor claimants. At the close of

1988, this matter was on appeal.

Other significant insider trading cases during fiscal year 1988 included SEC

v. Karcher,l? in which the Commission alleged that a number of employees of

Carl Karcher Enterprises and members of the Karcher family sold shares while

in possession of inside information prior to the announcement of anticipated

decreased earnings for the company in the coming quarter. This case was in

litigation at the end of the fiscal year. In SEC v. Russolillo, 18 the Commission

obtained the entry of an injunction against an insider who allegedly purchased

8,000 shares of stock while in possession of information concerning an

imminent merger proposal from another bank. Russolillo also consented to an

order of disgorgement in the amount of $33,307 and payment of $49,961 in

civil penalties. In related criminal proceedings, six persons were charged with

trading while in possession of inside information in this case, and, by the close

of the fiscal year, Russolillo and three others had pleaded guilty.

12
Manipulative Activities

The Commission is charged with ensuring the integrity of trading on the

national securities exchanges and in the over-the-counter markets, and, along

with the exchanges and the NASD, engages in continuing surveiIlance of

these markets. Attempts to manipulate the market may take many forms, and

may involve raising or lowering the price of listed securities as well as "penny"

stocks (low-priced securities traded in the over-the-counter markets). The

Commission has attempted to deal with these violations by instituting a

number of different types of enforcement proceedings.

In September 1988 the Commission filed SEC v. DrexeL Burnham Lambert, 19

an injunctive action alleging that a multi-service investment banking firm

registered as a broker-dealer with the Commission, its vice-president and

manager of its high yield and convertible bond department, and others

devised and carried out a scheme involving stock manipulation, fraud on the

broker-dealer's own clients, failure to make required disclosures regarding the

beneficial ownership of securities, insider trading and numerous other

securities law violations. The complaint alleged that at least sixteen series of

violative transactions were undertaken pursuant to a secret arrangement with

Ivan Boesky, who last year was enjoined and sanctioned administratively by

the Commission based on alleged insider trading violations.

Defendants allegedly retained an undisclosed beneficial interest in securities which were purportedly sold and were the subject of proposed merger or

acquisition activity. These securities were traded by the Boesky organization,

in certain instances under the direction of the Drexel defendants. This

arrangement allegedly allowed the firm, among other things, to trade secretly

in securities on its restricted list, and to profit from use of material nonpublic

information to which it had access solely because of its fiduciary relationship

with corporate clients. The complaint also alleged that the firm and its

vice-president traded while in possession of inside information received from

clients in at least two transactions not involving Boesky, and that other

persons arranged to have Boesky take securities positions for them, and failed

to disclose their beneficial ownership as required. This action was in litigation

at the close of the year.

This fiscal year the Commission proceeded administratively against a

broker-dealer and its president alleging manipulative activities in connection

with three securities offerings (In the Matter of Rooney, Pace, Inc. 20). The

Commission found, among other things, that the broker-dealer sold to its own

customers almost all of the shares of an offering which it underwrote and

thereafter manipulated the market which it dominated, that it failed to

exercise due diligence in connection with another offering it underwrote, and

that, acting as an undisclosed underwriter of a third offering, it sold stock

short in advance of the secondary offering and failed to report acquisition of

an interest in over five percent of the outstanding shares. By consent, the

broker-dealer withdrew its registration with the Commission; the president

was suspended for nine months and agreed to certain limitations on his

conduct for five years.

13
Market manipulation may also occur on the international level. In SEC v.

Zico Investment Holdings, Inc.,21 a British Virgin Islands corporation and

citizens of Great Britain were enjoined, by consent, based on allegations that

they had engaged in a manipulative scheme to depress the market price of the

common stock of Bancroft Convertible Fund, Inc. (a closed-end investment

fund traded on the American Stock Exchange) in order to depress the price

prior to the commencement of a tender offer by Zico for Bancroft.

"Penny" stocks have become the subject of numerous manipulative

schemes. Typically, these schemes involve "shell" companies, either newly

formed "blank check" companies (companies which conduct registered

offerings disclosing that the proposed use of proceeds is to seek business

opportunities) or older companies with no assets or operations, but small

trading markets. These companies are then merged with private companies

purported by the promoters to have great growth potential. Stocks in the

merged companies are promoted through releases announcing the merger

and marketed to the investing public through the use of extreme highpressure tactics. The securities may then be manipulated to reach inflated

prices, at which point the promoters may dump shares they own, and move on.

Participants in these schemes may include promoters, broker-dealers,

attorneys, accountants, and transfer agents. While the shares are low-priced,

often actually priced in pennies, profits of broker-dealers involved in trading

these stocks can be enormous, and investors can suffer major losses. These

schemes have spread nationwide, and the Commission has commenced active

programs to deal with them, including establishment of an in-house task force

to propose regulatory solutions.

In 1988 in SEC v. Porto 22 the Commission initiated an injunctive action in

which it alleged that a loose confederation of defendants created corporations,

took them public and manipulated the price of the stocks in the aftermarket.

Five issuers, also named in the enforcement action, allegedly filed false and

misleading registration statements with the Commission that, among other

things, failed to disclose their control by two of the major promoters.

Figureheads or persons totally unassociated with the issuers were listed as

officers, directors and controlling shareholders. All of the issuers' filings were

untimely or delinquent, and many were false and misleading and contained

forged or unauthorized signatures. The defendants also allegedly misappropriated money raised from the investors and engaged in kickback schemes.

The offering documents and structures of the companies were similar, each

a blank check offering lnvolvlnq units consisting of common stock and

warrants. All of the issuers and securities were listed in the "pink sheets" and

generally traded at substantial premiums above their offering price in aftermarket trading. Each issuer, through the same financial public relations firm,

allegedly disseminated false and misleading information concerning impending mergers and acquisitions.

In January 1988, the district court froze the assets of the defendant

companies. The Commission also instituted five separate administrative

proceedings pursuant to Section 8(d) of the Securities Act, based on alleged

misstatements and omissions in companies' registration statements. Pursu14
ant to default judgments, the Commission issued stop orders suspending the

effectiveness of the registration staternents.P

In November 1987, the Commission successfully litigated an action against

SEC v. Steven A. Keyser.24 The United States District Court for the District of

Utah enjoined the former president of the company, who was alleged to have

diverted all of the proceeds of the initial "blank check" offering of the

company to his own use. As part of the remedial relief, shares he held in the

company were returned.

In fiscal 1988, the Commission, pursuant to Section 12(k) of the Exchange

Act, instituted ten-day suspensions of trading of 124 penny stocks listed in the

"pink sheets." In most instances, trading suspensions are ordered because of

substantial questions as to the adequacy, accuracy or availability of public

information concerning a company's financial condition or business operations or because transactions in the company's securities suggested possible

manipulation or other violations.

In the first proceeding of its type instituted recently, the Commission

censured a broker-dealer, In the Matter of Richfield Securities, Inc.,25 which

consented to findings that it had no reasonable basis for believing that

information in its files concerning a previously suspended security was

reasonably reliable and current, as required by Rule 15c2-11 of the Exchange

Act. The broker-dealer was also ordered to comply with its undertakings to

implement procedures to assure future compliance with Rule 15c2-11.

Where possible, the Commission brings proceedings against professionals

who take an active part in penny stock schemes. In November 1987, for

example, in In the Matter of Tommy B. Duke, an attorney who had previously

consented to be enjoined in connection with the fraudulent promotion and

manipulation of shares of two formerly dormant shell companies, and who,

among other things, had written opinion letters and facilitated the issuance of

the shares, consented to an order pursuant to Rule 2(e) of the Commission's

Rule of Practice denying him the privilege of practicing before the Commission for 18 months.26

Corporate Control

Sections 13 and 14 of the Exchange Act require, among other things,

disclosures in connection with the acquisition of more than five percent of a

class of equity securities registered with the Commission, proxy solicitations

and tender offers for more than five percent of a class of equity securities

registered with the Commission. These requirements are intended to ensure

that investors have material information needed to make informed investment

or voting decisions concerning potential changes in the control of a corporation. The Commission instituted both administrative and injunctive proceedings in corporate control cases this fiscal year.

In June 1988, following a trial on the merits, the United States District Court

of the District of Columbia, in SEC v. First City Financial Corp., 27 determined

that the defendants had engaged in a "parking" scheme to conceal their

intentions to accumulate shares of stock of Ashland Oil Corp. The court

determined that the defendants violated Commission requirements for timely

15
disclosure of accumulations of over five percent of a class of securities by

accumulating shares held in various nominee and proprietary accounts held

by a New York broker-dealer. Noting that these requirements serve a "vital

public function to alert the marketplace to every large. rapid aggregation of

accumulation of securities, regardless of technique employed," the court

ordered injunctions entered against the defendants. The court also adopted

the Commission's proposal for disgorgement. ordering the defendants to

disgorge over $2.7 million, representing the difference between the price the

defendants paid for the securities after their disclosure obligations arose and

the amount they received for the shares.

Securities Offerings

Securities offering cases represent a major portion of the Commission's

enforcement activities. These cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act and may also

involve material misrepresentations concerning risks involved. return on

investment and the uses of proceeds of the offering. These cases cover a broad

range of securities offerings. from $20 million in unregistered promissory

notes (SEC v. Towers Credit COrp.28)to $5 million of securities in a Brazilian

gold mine (SEC v. Hunter Maek Belton 29) to $8.5 million of securities in an

unregistered investment company (SEC u Joseph Anthony Belmonte 3e,.

A number of securities offering cases are filed on an emergency basis. In

addition to seeking injunctive relief. the Commission may also seek asset

freezes, accountings. disgorgement of profits and the appointment of

receivers.

Disgorgement in the amount of $5.4 million was ordered in SEC v.

Bramble.31 a case involving unregistered offerings of investment contract

interests in stallionlbroodmare syndications. misrepresentations concerning

the quality of the mares. the financial condition of the company. and the use

of proceeds of the offering. The Commission also obtained disgorgement

orders in a case alleging misuse of proceeds of a $3.2 million offering of

unregistered securities (SEC v. James Simpson 32). and a case involving an

unregistered offering which generated at least $13 million based on false

representations that the offeror company was in the business of refining gold

from the beaches of Costa Rica (SEC v. Goldeor, Inc. 33).

The Commission frequently seeks follow-up administrative sanctions in

offering cases. For example, the Commission barred a previously enjoined

registered representative alleged to have misappropriated proceeds from the

unregistered sale of investment securities in amounts of $600.000 (In the

Matter of John A. Grant 34). It barred from practice before the Commission an

attorney who prepared registration statements in connection with fraudulent

public offerings which raised $32.5 million (In the Matter of James F.

McGovern 35).

The Commission also barred the owner and principal of a broker-dealer and

an investment adviser who had been enjoined from violations of the antifraud

and registration provisions in connection with a $3 million offering of oil, gas

and real estate limited partnerships (In the Matter of Katherine Williams

16
McGuire 36). In a similar proceeding, the Commission sought sanctions

against another principal of a broker-dealer and an investment adviser based

on the entry of an injunction in connection with the unregistered offering of

interests in real estate partnerships and misappropriation of at least $7 million

of the proceeds (In the Matter of William Edgar Crowder 37). That proceeding

was pending at the close of the fiscal year.

Financial Disclosure

Actions involving false and misleading disclosures concerning the financial

condition of companies and the issuance of false financial statements are

often complex and require more resources than other types of cases, but their

effective prosecution is essential to preserving the integrity of the disclosure

system. In fiscal year 1988 the Commission brought 28 cases containing

significant allegations of financial disclosure violations against issuers, regulated entities or their employees (including 5 actions in which financial

disclosure violations were alleged in addition to other primary violations).

Many of these cases included alleged violations of the accounting provisions

of the Foreign Corrupt Practices Act. The Commission also brought 5 cases

alleging misconduct on the part of accounting firms or their partners or

employees.

With respect to financial fraud cases, the Commission instituted a variety of

enforcement actions. The Commission filed injunctive actions against issuers

and responsible officers and directors. Administrative proceedings pursuant

to Section 15(c)(4) were instituted against persons who failed to comply with

certain provisions of the federal securities laws and persons who caused such

failures. The Commission also instituted administrative proceedings pursuant

to Rule 2(e) against both accountants who served as chief financial officers of

issuers and against accountants who were involved in audits of publicly-held

companies.

A number of cases involved the improper recognition of revenue or income.

These included recognition of sales of computer systems despite contingencies affecting customer obligations to pay for the systems (SEC v. Flexible

Computer COrp.38),recognition of sales of franchises despite the absence of

reasonable assurances that the purchase price was collectible (SEC v. Primo,

Inc.39) and improper recognition of six "bill and hold" transactions totalling

$4.5 million (SEC v. Electro-Cetheier Corp. 40).

In SEC v. The Cannon Group Inc.41 the Commission alleged that a film

producer and distributor had materially overstated reserves by, among other

devices, underamortizing film costs and overestimating anticipated revenues

from the sale of films. In addition to the entry of permanent injunctions

against defendants, Cannon was required, among other things, to undergo a

review by its auditors of the adequacy of its accounting procedures and

controls.

Some cases were based on violations of the books and records and internal

controls provisions of the Exchange Act in connection with interim or

quarterly financial statements. In SEC v. Stereo Village 42 an injunction was

entered based on allegations that books and records which were not posted on

17
a current basis resulted in an overstatement of earnings for the first three

quarters of the year; the corrected figures resulted in reductions of between 47

and 98 percent in net earnings for each quarter. In SEC v. Lane Telecommunications, lnc., 43 the Commission alleged that the company overstated revenues by approximately $1.4 million and pretax net income by approximately

$754,000 for the second quarter of its 1984 fiscal year, and as a result,

materially overstated its revenues and understated its loss at year end. Two

defendants consented to the entry of an injunction; at year end the action was

pending with respect to a third defendant.

The Commission used its authority pursuant to Section 15(cX4) of the

Exchange Act to order future compliance with the reporting provisions by

persons found to be a "cause" of financial reporting violations. These included

the chief financial officer of an insurance company, found to be a cause of the

company's improper recognition of gains upon simultaneous sale and repurchase of debt securities (In the Matter of USF&G COrp.44); three officers and

directors of an operating company, found to have made inadequate provision

for bad debts in the company's financial statements (In the Matter of Michael

p. Richer 45); and the chief financial officer of a computer services and

equipment company, found to be a cause of improper recognition of sales of

ATM terminals due to false and inadequate information concerning the

transactions in the company's books and records, (In the Matter of Steven L.

Komm46).

The Commission also instituted proceedings under Section 15(cX4),ln the

Matter of E.F. Hutton Group, Inc., 47 finding that internal accounting controls

deficiencies prevented adequate disclosure to customers of the risks of

trading in certain industrial revenue bonds and created a potential loss

contingency for the broker-dealer. The Commission ordered future compliance by the broker-dealer, and further ordered it to include an explanation of

issues raised in the Order in its forthcoming annual report.

In a combined proceeding, the Commission issued a Report of Investigation

and the Federal Home Loan Bank Board instituted administrative proceedings

pursuant to Section 15(cX4), In the Matter of American Savings and Loen

Association of Florida (ASLA),48based on the false and misleading disclosures

ASLA made in periodic reports and proxy materials concerning the unusual

nature of and risks attendant to repurchase and reverse repurchase transactions that resulted in an overcollateralized position of approximately $100

million with E.S.M. Securities, Inc., ultimately causing a $69 million after-tax

loss to ASLA. Pursuant to Section 15(cX4), the FHLBB ordered ASLA to

comply in the future with applicable provisions of the federal securities laws,

and also ordered that outside counsel review various ASLA filings and press

releases for a period of five years. The Commission published a Report of

Investigation pursuant to Section 21(a) of the Exchange Act, setting forth in

detail its findings and conclusions in the matter.

Proceedings against accountants are an important part of the Commission's

enforcement program. Pursuant to Rule 2(e) of the Commission's Rules of

Practice, the Commission instituted proceedings alleging improper professional conduct on the part of a chief financial officer who prepared financial

18
statements which materially misstated net income In the Matter of Keith

EHelajac;49 a chief financial officer who was responsible for financial statements which improperly recorded financial transactions as sales (In the Matter

of Steven L. Komm);50 and an independent auditor found to have conducted an

inadequate audit with respect to recordation of taxes and inventory, resulting

in overstatement of net income by the subject company (In the Matter of

Norman Abrams).51 Commission-lmposed sanctions ranged from permanent

bars from practicing before the Commission, to bars with a right to reapply to

practice after a period of years and upon satisfying certain specified conditions, to review by supervisors or outside auditors of work to be filed with the

Commission.

Investment Companies

With respect to investment companies the Commission initiated civil

actions seeking injunctive relief and further equitable relief including accountings, suspension of redemption of fund shares, and the appointment of a

disbursing agent to liquidate a trust. The Commission also filed an injunctive

action against the officers and interested directors of an investment company,

its adviser and its underwriter. During fiscal 1988, the Commission instituted

the first administrative proceedings involving distribution plans pursuant to

Rule 12b-1.

In two instances, the Commission sought the liquidation of investment

companies as ancillary relief in civil injunctive proceedings. In SEC v. The

Santa Barbara Fund,52 the Commission alleged that the fund, among other

things, breached various stated investment restrictions, exceeded stated

expense limitations, and sold and redeemed shares based on a materially

incorrect net asset value. The Commission also alleged that the fund's

president and adviser had redeemed initial shares of the fund at considerable

personal gain, in violation of representations made in the fund's prospectus.

The fund consented to entry of an order permanently enjoining it, together

with the ancillary remedies of an accounting, suspension of redemption of

fund shares pending liquidation, and liquidation. In SEC v. Westem Guerenteed Income Trust, Series 85-1, et al., 53 the Commission obtained a permanent

injunction by consent against several registered unit investment trusts and

their affiliates, alleging that in connection with offerings of interests in the

trusts the defendants had overstated trust assets in prospectuses and annual

reports to unitholders, failed to deposit trust monies with a custodian as

represented, and incurred operating fees greatly in excess of prospectus

estimates. As ancillary remedies, the court ordered an accounting and

appointed a disbursing agent to liquidate the trusts.

Several other cases highlighted the unique strictures according to which

investment companies, their affiliates, and governing bodies are required to

operate under the Investment Company Act of 1940. In In the Matter of The

Gabelli Group, lnc., 54 the adviser and other affiliates of two registered

investment companies consented to the entry of an administrative order

finding that they participated in a joint enterprise with the funds (i.e., the

concerted acquisition and holding of stock of a company included within the

19
funds' portfolios for the purpose of a leveraged buy-out of the portfolio

company by the affiliates) without first obtaining the Commission's review and

approval of the transaction, as required by Section 17(d) and Rule 17d-1 of the

Investment Company Act, as well as findings of failure to comply with the

beneficial ownership reporting provisions of Section 13(d) and Rule 13d-1 of

the Exchange Act.

In SEC v. Forty Four Management, Ltd., et al.,55 the Commission obtained a

permanent injunction against officers and interested directors of a registered

investment company, the fund's underwriter, and its adviser, finding that the

defendants had breached fiduciary duties owed to the fund and its shareholders by, among other things, causing the fund to incur legal fees (including fees

paid to one of the defendant directors) to bring a lawsuit seeking damages

solely for the benefit of the underwriter. Two defendants, both disinterested

directors of the fund, contested the Commission's allegations that their failure

to oppose the investment company's funding of the underwriter's lawsuit

constituted a "breach of fiduciary duty involving personal misconduct;' under

Section 36(a) of the Investment Company Act; these actions remained

pending at the close of the fiscal year. The remaining defendants consented to

being permanently enjoined from participating in the operation of any

registered investment company.

In a pair of unrelated administrative cases, the Commission brought its first

enforcement cases alleging violations of Section 12(b) of the Investment

Company Act, and Rule 12b-1, pursuant to which registered open-end

investment companies are authorized to adopt arrangements enabling fund

assets to be expended for the purpose of facilitating the distribution of fund

shares. In In the Matter of Carey Fund Management, Inc., 56 the Commission

alleged, among other things, that an adviser had caused the fund, notwithstanding its prospectus and proxy representations to the contrary, to acknowledge an aggregate $400,000 liability to the fund's distributor for distribution

expenses exceeding the annual ceiling of 0.4 percent of the fund's annual

average daily net assets, as was provided by the distribution plan adopted by

the fund pursuant to Rule 12b-1. The adviser was censured and ordered to

comply with remedial undertakings to forego the payment of past unreimbursed distribution expenses, to reimburse the fund for non-distributlon

related expenses previously allocated to the fund, and to institute and

maintain improved procedures to oversee the operation of any distribution

plan adopted under Rule 12b-1 by any of the adviser's current or future

investment company clients.

The second 12b-1 case was In the Matter of Continental Equities Corporation

of America, 57 in which a registered broker-dealer serving as the distributor of

shares of a complex of registered open-end investment companies consented

to findings that it had failed reasonably to supervise its employees with a view

towards preventing violations of Exchange Act recordkeeping provisions

relating to the implementation of the 12b-l distribution plans of the

investment companies. Inadequate recordation of expenses prevented the

broker-dealer from furnishing to the trustees of the investment companies

fully detailed information regarding expenses allocated for payment pursuant

20
to their 12b-l plans. The broker-dealer was censured and ordered to comply

with remedial undertakings.

Investment Advisers

The Commission also instituted several significant enforcement actions

involving investment advisers. These actions included injunctive actions

alleging the misappropriation of client funds and seeking injunctive relief and

further equitable relief in the form of the freezing of assets, and accountings,

disgorgement and liquidation. The Commission also instituted administrative

proceedings involving investment advisers who made unsuitable recommendations and who failed to disclose to investors material information concerning the cost and execution of trades.

In SEC v. David Peter Bloom 58 the Commission obtained a permanent

injunction prohibiting an individual and his controlled corporation from future

violations of the registration and antifraud provisions of the Investment

Advisers Act of 1940. The defendants consented to findings that, without

registering as investment advisers, they had engaged in an advisory business

whereby more than $10 million of funds obtained from approximately 100

clients since January 1986 had been diverted to their own use. Instead of

investing their clients' funds in securities, as they had indicated they would,

the defendants diverted approximately $8 million to the acquisition of various

paintings, real estate, furnishings, and jewelry. Additional client funds were

expended upon substantial donations to various art and educational institutions. As ancillary remedies, the court appointed a receiver to perform an

accounting and liquidation of the defendants' assets. In parallel administrative

proceedings, the defendants also consented to the entry of orders barring

them from association with any broker, dealer, investment adviser, investment

company, or municipal securities dealer. 59

SEC v. Dennis L. Jeffers, et at.60 involved a scheme known as the "College

Assistance Program" wherein a registered investment adviser, its principal

owner, and other employees advised clients to place second mortgage loans

upon their residences and invest the proceeds of the loans in a series of highly

speculative ventures controlled by the principal owner. Clients were falsely

advised that there was little or no risk in the investment program; that their

investment would generate income sufficient to meet their monthly mortgage

expenses and the costs of educating their college-age children; and that, after

four years, they would receive a lump sum to payoff the mortgage and any

outstanding student loans, together with a residual return upon their investment. Approximately $3.1 million was raised from a total of 96 clients.

Defendants were enjoined from further violations of the antifraud prohibitions

of the Investment Advisers Act.

Several other Investment Advisers Act cases pointed up the fiduciary duties

owed by advisers to their clients. In one administrative proceeding, In the

Matter of Marie Bailey &Co.,61 a registered investment adviser and its principal

consented to the entry of an order finding that the respondents had, among

other things, failed to disclose to their clients (75 percent of whom were

referred to the registrant by registered representatives of a broker-dealer firm)

21
that use of the brokerage firm to effect transactions in their account could cost

the customers excess commissions and not result in best execution of trades.

As sanctions, the respondents were censured and ordered to comply with

remedial undertakings to, among other things, fully disclose all potential

conflicts of interest associated with the registrant's brokerage practices.

In another proceeding, In the Matter of Westmark Financial Seroices, Corp., 62

a registered investment adviser and its principal consented to the entry of an

administrative order finding that the respondents had breached fiduciary

duties owed to their clients by failing to disclose that they would receive

brokerage commissions for sale of certain securities recommended to be

purchased by their clients and that the clients could purchase the securities

from other unaffiliated broker-dealers, and by recommending securities

unsuitable for their clients' investment needs and circumstances. As sanctions, the registrant was censured and the principal was suspended from

association with any broker, dealer, municipal securities dealer, investment

company, or investment adviser for a period of 120 days.

Finally, in In the Matter of Edwin FIShbaine,63a registered investment adviser

consented to the entry of an administrative order finding violations of Section

17(b), the anti-touting provision of the Securities Act, as well as the antifraud

provisions of the Investment Advisers Act, based on his failure to disclose the

receipt of cash and other consideration in exchange for publishing favorable

articles and recommendations regarding the securities of various issuers. As

sanctions, the respondent's registration as an investment adviser wasrevoked,

and he was permanently barred.

Broker-Dealers

A major segment of the Commission's enforcement cases involve brokerdealers. Allegations in these cases typically include violations of the financial

responsibility and the broker-dealer books and records provisions, or involve

fraudulent sales practices such as excessive markups. These types of cases

remain a priority with the Commission. This past year, the Commission

instituted a broad range of enforcement actions involving broker-dealers.

The Commission filed a series of proceedings involving the conduct of a

former registered representative at a broker-dealer firm with offices nationwide, and the failure of his branch manager and the firm to adequately

supervise him. The registered representative allegedly had made material

misrepresentations and omissions in connection with his solicitation of

customers to buy almost 15 percent of the float of a company traded on the

American Stock Exchange; approximately half of this stock was purchased on

margin. Administrative proceedings were brought and settled against the

registered representative, In the Matter of Bryce S. Kommerstad,64 and the

branch manager, In the Matter of Dale E. Berlage;65 the registered representative was also enjoined, SEC v. Kommerstad.66 Noting that a system of

supervision which relies solely on supervision by branch managers is not

sufficient, the Commission censured the broker-dealer, In the Matter of Dean

Witter Reynolds, Inc.,67 and ordered it to modify, adopt and maintain procedures to assure effective supervision of the activities of its employees.

22
The Commission's financial recordkeeping and reporting provisions

require broker-dealers subject to the Currency and Foreign Transaction

Reporting Act of 1970 to report currency transactions in excess of $10,000.

In April 1988, the Commission instituted injunctive proceedings in which

a broker-dealer together with its principal officers consented to the entry of

permanent injunctions, SEC v. Flagship Securities, Inc. ,68 based on allegations that they sought to avoid currency transaction reporting requirements

by splitting deposits of cash into separate deposits on different days and

setting up fictitious accounts. In subsequent administrative proceedings, In

the Matter of Flagship Securities, Inc., 69 the broker-dealer was censured and

ordered to comply with undertakings to engage in no currency transactions

with customers, and to undergo periodic review by independent accountants. The two principals were barred for the greater of six months or the

period of incarceration or probation which may be imposed in the criminal

proceeding pending against them.

In another proceeding involving currency transaction reporting, a brokerdealer, whose employees attempted to avoid these reporting requirements by

converting cash into checks to be deposited in customers' accounts, was

censured and undertook to review and revise its internal control procedures In

the Matter of E.F. Hutton & Co., Inc. 70 The manager of the branch office which

engaged in the conduct was suspended for 30 days. An administrative

proceeding was also instituted against a salesman at the branch office, In the

Matter of Brian J. Lareau.71 This proceeding was pending at the close of the

fiscal year.

In In the Matter of Paine Webber, Inc. 72 the Commission found that excessive

markups had been charged to customers in sales of stripped United States

Treasury bond coupons. The registered broker-dealer, which set up a program

of voluntary repayment, was censured and ordered to comply with procedures

designed to prevent a reoccurrence of the conduct.

In other settled administrative proceedings, the Commission barred a

registered representative of a broker-dealer from association with any broker,

dealer, municipal securities dealer, investment adviser or investment company on the basis of his criminal conviction in California State Court involving

the theft of over $93,000 in customer funds, In the Matter of Paul Gerald

White. 73 In a proceeding against an unregistered broker-dealer who engaged

in the business of selling securities, In the Matter of Petro-Source Securities,

Inc.,74 the Commission also imposed a bar, with a right to reapply after three

years.

Finally, the Commission instituted proceedings which alleged that a brokerdealer had allowed persons who had been convicted of crimes to become

associated with it, in violation of Section 15(bX6) of the Exchange Act, and

had also allowed an individual subject to an outstanding Commission bar to

become associated with it. At the close of the fiscal year, the proceeding had

been settled against all respondents except the broker-dealer, In the Matter of

Robert M. Winston.75

23
Sources for Further Inquiry

The Commission publishes in the SEC Docket litigation releases which

describe its civil injunctive actions and criminal proceedings involving

securities-related violations. Among other things, these releases report the

identity of the defendants, the nature of the alleged violative conduct, and the

disposition or status of the case. Commission orders that institute administrative proceedings or provide remedial relief also are published in the SEC

Docket.

24
Full Disclosure System

The full disclosure system is administered by the Division of Corporation

Finance. The system is designed to provide investors with material information, foster investor confidence, contribute to the maintenance of fair and

orderly markets, facilitate capital formation, and inhibit fraud in the public

offering, trading, voting, and tendering of securities.

Key 1988 Results

Administration of the full disclosure program was affected by a number of

economic and legal developments in fiscal year 1988. In the months immediately following the October 1987 market break, there was a significant

decline in the number of registered public offerings filed with the Commission. Throughout the year, the number of those filings remained below prior

year levels. A total number of 3,484 registration statements were filed in fiscal

year 1988 (exclusive of post-effective amendments and filings that become

effective without staff action), a decrease of 29 percent from the prior fiscal

year. That decrease resulted from a 28 percent decline in the number of debt

offerings (77 4 versus 1,082) and a 29 percent decline in equity offerings (2,710

versus 3,841). The number of initial public offerings (IPOs) decreased in fiscal

year 1988 by 23 percent from fiscal year 1987, which included an 18 percent

decline in registration statements filed on Form S-18 with the regional offices

(687 versus 835). Over half of the regional filings (56 percent) were blank

check offerings, representing a 1 percent increase from the prior fiscal year

(384 versus 380). Resources in the regional offices continued to be needed to

review post-effective amendments containing new financial statements and

descriptions of properties and businesses acquired with the proceeds of such

blank check offerings. With the decline in the number of filings under the

Securities Act of 1933 (Securities Act), the staff was able to review the financial

statements and management's discussion and analysis in approximately twice

as many annual reports. Additional resources were used to review tender offer

and merger proxy filings, which increased considerably in the last three

quarters of the year. A special review of registrants' disclosures in their

management's discussion and analysis of financial condition and results of

operations was undertaken.

A major focus of the program was the far-reaching implications of the

increasing internationalization of the securities markets. Securities markets

around the world are changing as an increasing number of issuers offer both

debt and equity across national boundaries and in offerings in several markets

at one time. As a result, the lines of demarcation between international and

domestic capital markets are beginning to blur, and domestic markets face

serious competition from a largely unregulated, international financial mar25
keto Internationalization of the markets raises numerous issues under United

States securities laws for domestic issuers raising capital offshore, and for

foreign issuers selling to United States investors, at home or abroad. In its

activities during the year, the Commission took action to address the

internationalization of the securities markets, including proposing rules to

govern the transnational scope of the registration requirements of the

Securities Act. The Commission also proposed a safe harbor from the

registration requirements for resales of securities to institutions, which may

afford foreign issuers greater access to United States capital markets. The

Commission also undertook discussions with the Canadian provinces of

Ontario and Quebec concerning development of a coordinated registration

process for multi-jurisdictional securities offerings and tender offers.

In other rulemaking activity, the Commission adopted rules that eliminated

the need for issuers to file preliminary proxy material under certain circumstances, expedited the availability of no-action and interpretive letters,

reduced the statutory aftermarket prospectus delivery period for certain public

securities offerings, and exempted securities held by participants in employee

benefit plans from certain shareholder communications requirements. The

Commission also adopted rules intended to facilitate capital formation by

small businesses. These included an expansion of the accredited investor

definition under Regulation 0, and a provision exempting from registration

securities of non-reporting issuers offered pursuant to compensatory benefit

plans. In addition, the Commission issued an interpretive release regarding

issuer disclosure obligations with respect to the defense contract procurement

inquiry, and submitted proposed legislation to the Congress to modernize the

Trust Indenture Act of 1939 (Trust Indenture Act).

Review of Filings

During the year, the Division continued its efforts to have at least 50 percent

of its review staff comprised of accountants. As this program recognizes,

accounting expertise is essential to review the increasingly innovative financial instruments being publicly offered, and the complex and diverse capital

structures being created as a result of recent financing transactions. With an

increased percentage of accountants, review efforts will be concentrated on

financial statements and related management's discussion and analysis

disclosures of issuers.

During fiscal year 1988, the staff fully reviewed the financial statements and

related management's discussion and analysis disclosures of 2,941 reporting

issuers, issuers which file reports under the Securities Exchange Act of 1934

(Exchange Act). This was accomplished through the full review of 599

reporting issuer registration statements filed under the Securities Act, 2,166

Form 10-K annual reports, and 314 merger proxies, and through the full

financial statement review of the annual reports of 567 issuers. The staff

reviewed 1,444 and 156 registration statements filed by new issuers under the

Securities Act and the Exchange Act, respectively, proxy material relating to

93 contested proxy solicitations, 276 going private transaction filings, and

26
248 Schedules 14D-1 with respect to third-party tender offers for 213 issuers.

In addition, another 78 Schedules 140-1 were reviewed with respect to 9

limited partnership roll-up transactions. The table below sets forth the number

of selected filings receiving a review during the last five fiscal years.

1,572 1,171 1,775 1,949 1,444

586 597 807 775 640

519 617 695 707 1,045

1,283 2,135 1,741 1,389 2,166

(Not Applicable) 60 567

121 148 146 201 248

220 256 210 230 276

60 86 68 65 93

181 255 240 248 314

716 792 992 2,563 790

Full Disclosure Reviews

FY FY FY FY FY

1984 1985 1986 1987 1988

(Data Not Available) 1,729 2,941

7,237 9,571 10,526 10,797 10,985

Reporting Issuer

Reviews

Total Filings

Reviewed

Major Filing Reviews

Securities Act

Registrations

New Issuers

Repeat Issuers

Post-Effective

Amendments ••

Annual Reports

Full Reviews •••

Full Financial

Reviews

Tender Offers

(140-1) ....

Going Private

Schedules

Contested Proxy

Solicitations

Proxy Statements

Merger

Other ......

•

••

Reporting issuers reviewed includes those issuers whose financial statements and management discussion and analysis disclosures were reviewed

in Securities Act and Exchange Act registration statements, annual reports

and proxy statements. It does not include issuers whose financial statements

were reviewed in tender offer filings .

In fiscal years 1987 and 1988, filings are included only if they contain new

financial statements.

••• Includes reports reviewed in connection with other filings.

•••• Excludes limited partnership roll-up transactions. In fiscal year 1988, there

were nine roll-up transactions involving 78 limited partnerships .

••••• Excludes reviews of revised and additional preliminary proxy material.

27

•
Rulemaking, Interpretive, and Legislative Matters

Scope of Registration Requirements

On June 10, 1988, the Commission published for comment proposed new

Regulation S, a series of rules intended to clarify the extraterritorial application of the registration provisions of the Securities Act.76 Proposed Regulation

S consists of a general statement that the registration provisions apply to

offers and sales that occur within the United States, but do not apply to offers

and sales that occur outside the United States. The general statement would

provide that the elements to be examined in determining whether an offer or

sale is made outside the United States include the locus of the offer or sale,

the absence of directed selling efforts in the United States, the likelihood of

the securities coming to rest outside the United States, and the justified

expectations of the parties to the transaction as to the applicability of the

registration requirements.

The proposed regulation also provides safe harbor provisions designed to

protect against an indirect offering in the United States. One safe harbor (the

issuer safe harbor) would apply to offers and sales by issuers, securities

professionals participating in the distribution process pursuant to contract,

and their affiliates. The other safe harbor (the resale safe harbor) would apply

to resales by other persons. Two general conditions would apply to the safe

harbors. First, the sale must be made in an "offshore transaction;' and second,

no directed selling effort could be made in the United States.

The issuer safe harbor would establish several classes of securities based on

the nationality and reporting status of the issuer, and the degree of United

States market interest in the issuer's securities. In addition to the general

requirements, a class would be subject to specific restrictions on sales,

depending on the degree of likelihood that the securities sold would "flow

back" to the United States. The resale safe harbor would permit persons not

affiliated with either the issuer or professionals involved in the distribution

process to resell any securities in generally the same manner in which they

could be sold in a primary distribution, and also to resell certain securities on

or through the facilities of a foreign securities exchange.

Resales to Institutional Investors

On October 21, 1988, the Commission published for comment a proposed

new Rule 144A that would provide a non-exclusive safe harbor from the

registration requirements of the Securities Act for resales to institutions with

respect to three tiers of transactlons.F The first tier (the qualified institutional

buyer tier) would permit unlimited resales of any securities of any issuer,

provided that the purchaser was a specified institution with assets in excess of

$100 million, or that the seller reasonably believed that the purchaser was

such a qualified institution. The second tier (the non-fungible securities tier)

would allow unlimited resales of securities to a wider class of specified

institutions ifsecurities of the class offered or sold were not traded publicly in

the United States, and the securities were non-convertible debt securities,

28
non-convertible preferred stock, or securities issued by a company subject to

the reporting requirements of the Exchange Act. The third tier (the fungible

securities tier) would cover resales of non-convertible debt securities, nonconvertible preferred stock, and securities of reporting companies that are

traded in a public market in the United States to the same class of institutions

as permitted in the second tier. Such resales would be subject to greater

restrictions than resales made pursuant to the first two tiers.

Change in Holding Period for Restricted Securities

In the release proposing new Rule 144A, the Commission also proposed

amendments to the rules concerning the public resale of restricted securities

that would amend the provisions of those rules relating to the required holding

period for such securittes.?" To sell restricted securities under current Rules

144 and 145, a person must have beneficially owned the securities for at least

two years, no matter how long a period has transpired since the issuer or any

affiliate thereof originally sold the securities. Requiring the securities to be

held for two years by each successive holder before permitting public resales,

without regard to the time elapsed from the actual offering by the issuer or

affiliate, appears unnecessarily restrictive. Accordingly, the amendments

would redefine the two-year holding period to commence on the date the

securities were acquired from an issuer or its affiliate, and to run continuously

from the date of the acquisition. A comparable change would be made in the

calculation of the three-year period prescribed by Rule 144(k).

Proxy Rules

On December 21, 1987, the Commission adopted amendments to its proxy

rules that were proposed in fiscal year 1987. The amendments eliminated

filing requirements for preliminary proxy and information statements where

the only matters to be considered at a non-contested annual shareholder

meeting are the election of directors, selection or ratification of auditors,

andlor shareholder proposals.I?

Shareholder Proposal Rule

In the release adopting the proxy rule amendments, amendments to the

shareholder proposal rule also were adopted.P? These amendments deleted

the provision that had permitted exclusion of a shareholder proposal from a

registrant's proxy materials where a proponent delivered written proxy materials to holders of more than 25 percent of a class of the registrant's securities.

They also specified requirements with respect to requests by a registrant for

documentary support of a proponent's beneficial ownership.

Shareholder Communications

On April 27, 1988, the Commission adopted amendments to exclude

specified employee benefit plan participants from the operation of the proxy

processing and direct communications provisions of the shareholder communications rules.'" Under these amendments, the exclusion is mandatory with

29
respect to participants in employee benefit plans established by the registrant,

but optional where such plans are established by an affiliate of the registrant

and hold registrant securities. In either case, the registrant is required to cause

proxy material to be furnished to plan participants. The definition of employee

benefit plan was also amended, for purposes of the shareholder communications rules, to include those plans that are established primarily for employees, but also include other persons, such as consultants.

Prospectus Delivery Requirements

On April 4, 1988, the Commission adopted an amendment to its rule

governing the obligation of dealers to deliver prospectuses in aftermarket

transactions following registered public offerings of companies not subject to

the reporting requirements of the Exchange Act.82 For registered offerings of

securities listed on a national securities exchange or authorized for inclusion

in an electronic inter-dealer quotation system of a registered securities

association, the amendment reduced the 40 or 90 day prospectus delivery

period to 25 calendar days after the date of the offering.

Change in Fiscal Year/Quarterly Reporting

On June 2, 1988, the Commission published for comment a proposal to

revise the reporting requirements applicable when an issuer changes its fiscal

year end.83 The Commission also proposed revisions to make the new

reporting requirements consistent with the existing quarterly reporting system, and to modify the period covered in a new registrant's first quarterly

report. The proposed rules would permit the filing of a quarterly report for

transition periods of less than six months, in lieu of a more detailed annual

report. The proposed rules also would codify existing staff administrative

practices relating to acceptance of less than full year financial statements.

Acquisitions by Limited Partnerships

On July 8, 1988, the Commission published for comment two alternative

versions of a new Rule 465 concerning Securities Act disclosure requirements

for acquisitions by limited partnerships during the selling period for a

registered public offering.84 The proposed rule would permit automatic

effectiveness of post-effective amendments that are filed to provide information concerning significant acquisitions by blind pool limited partnerships in

specified industries. Under both alternatives, offers and sales of limited

partnerships could continue after an acquisition became probable, if the

prospectus were supplemented with specified acquisition information and a

post-effective amendment containing required acquisition information were

filed by a specified date. Under either alternative, failure to file the posteffective amendment in a timely manner would require the sales effort to be

suspended until such filing occurred.

Regulation D Exemptions From Registration Requirements

On March 3, 1988, the Commission adopted several amendments to the

30
rules comprising Regulation D, which provides certain exemptions from the

registration requirements of the Securities Act.85 The amendments revised

the definition of accredited investors to (a) include additional institutional

investors such as savings and loan associations, credit unions, broker/dealers,

and certain trusts, partnerships, and corporations; (b) permit a joint as well as

an individual income test for accrediting natural persons; and (c) eliminate a

purchaser of securities valued at $150,000 or more. For some transactions,

the total offering price limit was raised from $500,000 to $1 million, if at least

$500,000 is registered at the state level, and a general solicitation now will be

permitted in states which provide no qualifying registration procedure under

certain circumstances. A new level of disclosure requiring that a certified

balance sheet be prepared was also adopted for offerings of less than $2

million.

At the same time, the Commission proposed several additional revisions to

Regulation D.86 The proposed revisions would add to the list of accredited

investors certain employee benefit plans established and maintained by state

governments or their political subdivisions, agencies, or instrumentalities.

The proposed revisions also would eliminate the requirement to file a Form D

as a condition to the Regulation D exemption, and would provide that isolated

and minor deviations from the requirements of Regulation D that occur

despite a good faith and reasonable attempt to comply would not cause loss

of the exemption.

Securities Act Exemptions for Compensatory Benefit Plans

On April 14, 1988, the Commission adopted Rules 701, 702, and 703,

which provide an exemption from the registration requirements of the

Securities Act for certain offers and sales of securities made pursuant to the

terms of compensatory benefit plans or written contracts between the issuer,

its parent or majority owned subsidiaries, and their employees, directors,

general partners, officers, consultants, and advisors, ifthe issuer is not subject

to the reporting requirements of the Exchange Act.87 The amount of securities that may be subject to outstanding offers in reliance on the exemption,

plus the amount of securities sold in the preceding 12 months pursuant to the

exemption, may not exceed $5 million. The rules also require that a Form 701

be filed with the Commission no later than 30 days following the first sales

which bring aggregate sales over $100,000.

Defense Contracts Procurement Inquiry

On August 1, 1988, the Commission issued a statement with respect to the

disclosure obligations of companies affected by the government's inquiry into

illegal or unethical activity in the procurement of defense contracts.88 The

statement reminded registrants of their obligations under the federal securities laws to disclose material information on the inquiry. Among other

matters, specific attention was directed to the requirements of Regulation S-K

regarding disclosure of a registrant's business operations, material legal

proceedings involving the registrant or its management, and management's

31
discussion and analysis of the registrant's financial condition and operating

results. The Commission also reminded registrants that the disclosure

requirements apply equally to companies that are subject to the inquiry, and

to companies that, although not targeted in the investigation, otherwise may

be materially affected by it.

Publication of No-Action and Interpretive Letters

On April 7, 1988, the Commission adopted rule amendments to provide for

the expedited publication of interpretive and no-action correspondence at the

time a response is sent or given to the requesting party, unless temporary

confidential treatment is granted.89 The Commission simultaneously codified

the application of the existing publication rule to certain exemption letters.

Trust Indenture Legislative Proposal

On November 30, 1987, the Commission submitted to Congress its

recommendations for amendment of the Trust Indenture Act.90 Ifenacted, the

proposed bill, entitled the Trust Indenture Reform Act, will comprehensively

modernize federal regulation of publicly offered debt securities. Under the

proposed bill, mandatory indenture terms would be self-executing and

imposed by law, a measure that will simplify preparation of indentures.

Conflicts of interest would be relevant to a trustee's eligibility only after

default. The proposal also would broaden the Commission's exemptive

authority to allow variation from the statute, and would allow foreign

trusteeships in specified circumstances.

Conferences

SEC Government-Business Forum on Small Business Capital Formation

The seventh annual SEC Government-Business Forum on Small Business

Capital Formation was held in Washington, D.C. on September 26-27, 1988.

Approximately 250 small business executives, accountants, attorneys, government officials, and other small business representatives were in attendance. The format of the conference was structured around a series of lectures

and discussion groups on debt financing techniques. A report on the forum

will set forth a list of recommendations for legislative and regulatory changes

developed by the participants. The report will be sent to Congress and made

available to the public.

SEC/NASAA Conference under Section 19(c) of the Securities Act

On April 18-19, 1988, approximately 60 senior staff officials of the

Commission met with approximately 65 representatives of the North American Securities Administrators Association in Washington, D.C. to discuss

methods of effectuating greater uniformity in federal and state securities

matters. Following the conference, the staff issued a final report that described

a number of resolutions that were approved, summarized the discussions of

the working groups, and identified conference participants.

32
Accounting and Auditing Matters

Key 1988 Results

Fiscal year 1988 was characterized by a number of significant public and

private sector initiatives intended to enhance the reliability of financial

reporting and to ensure that the accounting profession meets its important

public responsibilities imposed under the federal securities laws.

For example, the Commission adopted rules to improve the disclosures

concerning changes in independent accountants and initiated a related rule

proposal which would accelerate the timing of these disclosures. The Commission also issued a rule proposal to require managements of publicly held

companies to explicitly state their responsibilities for the presentation of

financial information and the effectiveness of their companies' internal

controls. Also. under Commission oversight, the Auditing Standards Board of

the American Institute of Certified Public Accountants (AICPA) adopted nine

new auditing standards designed to enhance auditors' communication and

responsibilities. These actions are reflective of a comprehensive system of

public and private sector initiatives-which includes the Commission's programs, private sector standard-setting, the peer review program of the AlCPA,

state licensing activities, and civil litigation-under which the integrity of

financial reporting for public companies is constantly being reviewed, modified and improved.

The following are the primary Commission programs to achieve compliance

with the accounting and financial disclosure aspects of the federal securities

laws:

Rulemaking initiatives to supplement accounting standards, implement

financial disclosures and establish independence criteria for

accountants;

The review and comment process resulting in improvement of filings,

identification of emerging accounting issues (which can result in

rulemaking or private sector standard-setting), and identification of

problems warranting enforcement actions;

The enforcement program imposing legal sanctions and serving to

deter irregularities by enhancing the care with which registrants and

their accountants analyze accounting issues; and

Oversight of private sector efforts, conducted principally by the

Financial Accounting Standards Board (FASB) and the AICPA, to

establish accounting and auditing standards and to improve the quality

of audit practice.

The Commission's review and comment process and enforcement programs

are discussed elsewhere in this report. The remainder of this section summarizes the Commission's accounting-related rulemaking initiatives and its

oversight of private sector activities. In addition, this section comments on

33

•

•

•

•
several initiatives addressing issues arising out of the continued internationalization of the securities markets.

Accounting-Related Rules and Interpretations

Regulation S-X provides guidance as to the form and content of financial

statements filed with the Commission. The Commission has also adopted

various rules that specify disclosure of financial information outside of the

financial statements. For example, certain supplementary financial information, selected financial data, and a management's discussion and analysis of

a company's financial condition and results of operations are required by

Regulation S-K. In addition to requiring financial disclosure by registrants,

Commission rules also address the qualifications of accountants (including

their independence) and accountants' reports on financial statements.

To address significant accounting issues, the Commission may issue

interpretive releases and, when announcing rule changes, provide guidance

for compliance with new or amended rules. In addition, the Commission staff

periodically issues Staff Accounting Bulletins (SABs) to inform the financial

community of the staffs views on accounting and disclosure issues.

Nine SABs were issued during fiscal year 1988. The SABs addressed topics

such as: the appropriate income statement classification by utilities for

disallowed or abandoned plant costs; requirements for financial statements of

properties securing mortgage loans; the application of the "push down" basis

of accounting; the appropriate disclosures concerning the potential impact of

issued but not yet adopted accounting standards; the appropriate financial

reporting for a proposed Mexican Debt Exchange transaction; the effect of

certain de minimis sales by affiliates on pooling of interests accounting; the

appropriate accounting for the allocation of debt issue costs; accounting for

quasi-reorganizations; and accounting for transactions undertaken by a company's principal shareholder for the benefit of the company?'

National Commission on fraudulent financial Reporting

In recognition of the accounting profession's responsibilities in the area of

reliable and complete financial reporting, various organizations came

together to sponsor the National Commission on Fraudulent Financial

Reporting (Treadway Commission).92 The Treadway Commission studied

issues involved in the prevention and detection of fraud in the context of

financial reporting, and issued its final report in October 1987.93 The report

contains recommendations for the public company, the independent public

accountant, the Commission, and others to improve the regulatory and legal

environment.

The SEC has taken the following rulemaking actions in areas discussed in

the Treadway Commission report.

Opinion Shopping-The SEC has adopted amendments to its disclosure

requirements regarding changes in accountants and potential opinion shopping sltuatlons.P" Subsequent to fiscal year end, the SEC also adopted rule

amendments to accelerate the timing for reporting these disclosures.f"

34
Management Reports- The SEC has proposed requiring a report regarding

management's responsibilities for the preparation of the registrant's financial

statements and the registrant's system of internal controls.P"

Peer Review-The SEC has proposed mandatory peer review for auditors of

SEC registrants.97

Tunely Reviews By Auditors of Interim Information- The SEC voted to issue

a concept release soliciting comments on whether its rules should be

amended to require that a registrant's independent accountant review on a

timely basis interim financial information filed with the SEC.

In addition to these rulemaking activities, the SEC has taken the following

other actions on matters discussed in the Treadway Commission report.

Enforcement Remedies- The SEC forwarded to Congress a legislative

proposal entitled the "Securities Law Enforcement Remedies Act of 1988;'

which would permit assessment of civil money penalties in administrative and

civil proceedings under the federal securities laws, would permit the SEC and

the courts to suspend or bar violators of these laws from service as an officer

or director of any company that files reports with the SEC, and would expand

the scope of Section 15(cX4) of the Exchange Act to cover violations of the

proposed Act. 98

Reexamination of Audit Committee Requirements by Exchanges- The Commission voted to communicate with self-regulatory organizations (other than

the New York Stock Exchange, which already imposes a requirement for an

audit committee comprised of members independent of management) to

encourage them to consider upgrading and expanding the scope of their audit

committee standards.

Oversight of Private Sector Standard-Setting

Through active oversight, the Commission monitors the structure, activity,

and decisions of the private sector standard-settinq organizations.

FASB-Financial statements filed with the Commission are presumed to be

misleading unless they are prepared in accordance with accounting principles

that have substantial authoritative support. In this regard, the Commission's

approach has been to look to the FASS to establish and improve accounting

principles, and the FASS's performance continues to be generally satisfactory.

Oversight of the process involves not only Commission review of the

standards established by the FASS, but also the direct participation of staff

members and, in some instances, the Commission itself in the initial setting

of standards. The Commission and its staff monitor the progress of FASS

projects and developments closely, maintain frequent contact with the FASS

to discuss topical issues, and participate in meetings, public hearings, and

task forces.

During fiscal year 1988, some constituents expressed concern about the

nature and extent of FASS standards. While the Commission recognizes the

right of all parties to express their concerns, criticisms and suggestions for

change (and indeed encourages such expressions), it believes that the FASS's

independence and the openness of its processes are vital to the FASS's ability

to serve the public interest and perform its tasks well. The Commission staff

35
is working with the FASB and the Financial Accounting Foundation to

consider practical ways to improve the FASB's procedures while maintaining

its independence and openness.

A brief discussion of FASB activities follows.

Postemployment Benefits Other Than Pensions-Subsequent to fiscal year

end, the FASB issued an exposure draft of a standard on employers' account.

ing for postemployment benefits other than pensions.99 Research has indlcated that the cost of these benefits is significant for some companies and the

FASB has tentatively concluded that postretirement health care benefits

represent a form of deferred compensation and that an obligation should be

recognized as services are rendered. A public hearing is planned on this

subject for 1989.

Income Taxes-In December 1987 the FASB issued a statement on accounting for income taxes. 100 The statement changes the method of accounting for

income taxes by adopting a liability approach resulting in, among other

things, the recognition in current earnings of the impact of an enacted change

in corporate income tax rates. Subsequent to fiscal year end, the FASB

decided to defer the effective date of this statement for one year to allow

companies and their auditors more time to effect compliance with the

statement. 101 Also, the FASB will publish interpretive gUidance to assist

companies and accountants in implementing the new standard.

Financiel lnstrumems-« The FASB continues to work on its major long-term

project to address financial instruments and off-balance sheet financing

issues. An exposure draft was issued in November 1987 that would require

certain disclosures about financial assets, liabilities and instruments not now

recognized in the financial statements. 102 Subsequent parts of the project will

include issues related to: (a) accounting for rlsk-transfer instruments such as

guarantees and interest rate hedging instruments; (b) off-balance sheet

financing arrangements; (c) the appropriate measurement basis for financial

instruments; and (d) accounting for securities with both debt and equity

characteristics, including the impact on stock compensation.

OtherActivity- The FASB also issued statements during the fiscal year

dealing with: accounting and reporting by insurance enterprises for long

duration contracts; and sales and leasebacks involving real estate.t03 Other

significant projects on the FASB's agenda include: (a) consolidations and the

reporting entity; (b) discounting; and (c) impairment of long lived assets.

Tunely Finencisl Reporting Guidance-The FASB's efforts to provide more

timely guidance on emerging issues resulted in the issuance during fiscal year

1988 of a technical bulletin concerning accounting for mortgage servicing

fees and rights. 104 Subsequent to fiscal year end, technical bulletins dealing

with the right of setoff and accounting for leases were issued. 105

The FASB's Emerging Issues Task Force (EITF), in which the Commission's

Chief Accountant participates, continues to perform an important and useful

role in identifying and resolving accounting issues. Since its inception in

1984, the EITF has discussed over 190 issues covering a broad range of topics

including financial instruments, business combinations, accounting for lever.

aged buyouts (LBOs), and income taxes. Registrants are expected to follow the

36
positions agreed upon by the EITF. Those that do not follow these positions

will be asked to justify departure from any consensus reached.

AICPA-In addition to oversight of the private sector process for setting

accounting standards, the Commission also oversees various activities of the

accounting profession conducted primarily through the AICPA. These

include: the Auditing Standards Board (ASB) which establishes generally

accepted auditing standards; the Accounting Standards Executive Committee

(AcSEC) which provides guidance on specific industry practices through its

issuance of statements of position and practice bulletins and prepares issue

papers on accounting topics for consideration by the FASB; and the SEC

Practice Section of the Division for CPA Firms (SECPS) which seeks to

improve the quality of audit practice by member accounting firms that audit

public companies through various requirements, including peer review.

ASB-During fiscal year 1988, the ASB adopted nine auditing standards in

connection with its so-called "expectation gap" project. 100The standards were

developed in close cooperation with the Commission's staff. The new standards should enhance and clarify auditors' responsibilities and thus promote

better audits.

AcSEC-AcSEC has a key role in the identification of accounting practices,

including those in specialized industries not sufficiently addressed by existing

authoritative literature. During fiscal year 1988, the Commission staff worked

with AcSEC to provide guidance in a number of areas, including accounting

for past due interest received in connection with the Brazilian debt restructuring, accounting for the airline industry (including frequent flyer awards),

accounting for revenues relating to computer software, and various issues

relating to government contractors. Also, the Commission's Chief Accountant

sent a letter during fiscal year 1988 requesting AcSEC to address accounting

issues related to the recognition of interest received in connection with various

kinds of lending activities by financial institutions and others. AcSEC

responded by undertaking a project in this area.

SECPS- The membership requirements of the SECPS are designed to

strengthen the quality control systems of member firms, thus enhancing the

consistency and quality of practice before the Commission. According to the

1988 SECPS annual report, 87 percent of public companies are audited by

SECPS member firms, and the revenues of those companies constitute 99

percent of the total revenues of all public companles.P" Member firms are

committed to a tri-annual peer review under the close scrutiny of the Public

Oversight Board (POB). The SECPS also reviews and makes inquiries regarding the quality control implications of alleged audit failures involving public

clients by SECPS member firms.

The Commission exercises oversight of the SECPS through frequent

contact with the POB and members of the executive and peer review

committees of the SECPS. In addition, the staff reviews POB files and selected

working papers of the peer reviewers. This oversight has shown that the peer

review process contributes significantly to improving the quality control

systems of member firms and, therefore, that it should enhance the consistency and quality of practice before the Commission.

37
International Accounting and Auditing Standards

Significant differences currently exist between countries in accounting and

auditing standards. These differences serve as an impediment to multlnational offerings of securities. The Commission, in cooperation with other

members of the International Organization of Securities Commissions (IOSC),

has participated in initiatives by international bodies of professional accountants to establish appropriate international standards which might be considered for use in multinational offerings. For example, the Commission staff has

worked with the International Accounting Standards Committee (IASC), an

international body with membership in 71 countries, to revise international

accounting standards. In fiscal year 1988, an IOSCIIASC working group

proposed significant changes in the international accounting standards to

reduce accounting alternatives as an initial movement toward appropriate

international accounting standards. Subsequent to fiscal year end, the IASC

published the proposals for a nine month comment period. Issues of completeness and lack of specificity in international accounting standards still

need to be addressed.

The Commission staff also began to work with the International Federation

of Accountants (IFAC)to revise international auditing guidelines. Auditors in

different countries are subject to different independence standards, perform

different procedures, gather varying amounts of evidence to support their

conclusions, and report the results of their work differently. The Commission

staff, as part of an IOSC working group, began participating this year in a

project by IFAC to expand and revise international auditing guidelines to

narrow these differences. The Commission staff will continue to participate in

these initiatives.

38
The EDGAR Project

Introduction

The primary purpose of EDGAR is to increase the efficiency and fairness of

the securities markets for the benefit of investors, securities issuers, and the

economy. Through EDGAR, information will be filed electronically for acceptance and review by the Commission staff. Once accepted, public information

also will be rapidly available to investors, the media and others via computer

screens in the Commission's public reference rooms and through various

subscription services. When fully operational, EDGAR will accelerate dramatically the filing, processing, dissemination and analysis of time-sensitive

corporate information filed with the Commission.

The EDGAR Pilot system completed its fourth full year of successful

operation on September 24, 1988. It has demonstrated clearly the feasibility

of electronic filing and review procedures. As of the end of fiscal year 1988,

over 40,000 electronic filings had been made since September 1984.

The Commission also continued to move ahead with its plan to develop a

fully operational EDGAR system. Offers were received initially on April 29,

1987 in response to the Commission's Request for Proposals. The Operational

contract was awarded on January 3, 1989 to The BDM Corporation, bidding

with Mead Data Central, Sorg Incorporated, and Bechtel Information Services.

Pilot System

The Pilot system serves a group of volunteer companies whose filings are

processed by the Corporation Finance Division and the Investment Management Division. At the end of fiscal year 1988, there were over 500 registrants

fully participating in the Pilot. In addition, over 900 other registrants were

participating in the Pilot on a partial basis by electronically submitting filings

of specific form type. The latter group includes investment companies

submitting annual and semi-annual reports on Form N-SAR, registered

public utility holding company systems or subsidiaries submitting forms

required under the Public Utility Holding Company Act, and institutional

investment managers submitting Form 13 F-E to report securities held in

their managed accounts.

During fiscal year 1988, several enhancements were added to the Pilot to

make electronic filing more convenient and to test potential features of the

Operational system. For example, a multiple registrant filing procedure was

added on April 23, 1988. This enhancement enables up to ten co-registrant

companies to be named when submitting one filing. Prior to the change, the

Pilot procedures required each registrant to submit a separate filing. One of

the registrants (the "primary" filer) submitted the text of the entire filing and

each of the other registrants (the "non-primary" filers) submitted a filing

39
consisting of a statement incorporating by reference the primary filer's filing.

The new, streamlined procedures allow a single filing to be submitted on

behalf of all registrants involved. The filing is stored only once on the system,

but is keyed to each registrant listed in the submission header so that it can

be displayed on an EDGAR terminal as a filing by each registrant. In addition,

a complete microfiche copy of the filing is made for each registrant and the

filing is entered in the Commission's workload system for each registrant.

Another Pilot enhancement involves the acceptance of special characters by

the Pilot. The Pilot was designed to accept electronic text only in the American

Standard Code for Information Interchange (ASCII).The ASCII character set

includes letters, numbers and a fewspecial characters such as spaces, periods,

commas and dollar signs. However, the ASCII set excludes many common

control characters such as vertical tab (VT), line feed (LF), and form feed (FF).

These characters were considered invalid for direct Pilot transmissions.

Consequently, when a filer workstation inadvertently transmitted such characters to the Pilot, the filing was either rejected or the invalid characters

appeared in the text of the filing. To avoid these difficulties, filers had to ensure

that these special characters were removed from their filings before transmission. As of June 30, 1988, the Pilot system was enhanced to recognize and

accept specific control characters in direct transmissions. This change has

simplified direct transmission of electronic filings since it permits more

effective use of popular word processing and communications software on filer

workstations.

In April 1988, an updated version of IBM's operating system software was

successfully installed on the Pilot mainframe. As a result of this change, the

Pilot operates more efficiently and is easier to maintain.

During fiscal year 1988, an independent validation and verification test

procedure for Pilot enhancements was developed and implemented. It is

designed to test new system features in a user/filer environment before they

are incorporated in the Pilot production system. These tests are in addition to

the normal program and system tests that have always been performed by the

Pilot contractor. The effectiveness of this test procedure will be monitored with

a view toward adopting it for use in the development of the Operational

system.

Operational System

During the past fiscal year, plans for Operational EDGAR continued to move

forward. The EDGAR RFP was originally released on May 7, 1986 and bids

were received on February 27, 1987. However, prior to awarding the contract,

the Commission announced its intention to reopen competition because of a

change in the funding strategy for the Operational contract.

On October 23, 1987 an amended RFP was issued, with proposals due in

late January 1988. After two extensions, the Commission received initial

proposals for the Operational EDGAR system on April 29, 1988. Preliminary

evaluation of those proposals was completed in October 1988. Following

face-to-face discussions with the offerors, best and final proposals were

40
received on December 2, 1988. The Operational contract was awarded on

January 3, 1989 to the BDM Corporation bidding with Mead Data Central,

Sorg Incorporated, and Bechtel Information Services.

Benefit Analysis

In fiscal year 1988, the Commission contracted with the MITRE Corporation

to perform an independent study of the external (non-SEC) benefits and costs

of the EDGAR Operational system, including one-stop filing. One-stop filing

would occur if a filing made with the Commission also could be utilized to

fulfill filing requirements with state regulatory agencies and self-regulatory

organizations (SROs) such as the New York Stock Exchange. The study took

several months to complete, and the two final reports were delivered to the

Commission in late December, 1988 and early January, 1989. A previous

Commission study had documented the expected SEC internal benefits and

costs of Operational EDGAR.

In doing the external benefit/cost study, MITRE analyzed three possible

scenarios. First, MITRE analyzed the external benefits and costs attributable

to the EDGAR Operational system assuming it will be developed as defined by

the EDGAR RFP.The RFP provides for the transmittal of designated electronic

filings from EDGAR to the SROs or their agent, and to the states through their

agent, the North American Securities Administrators Association (NASAA).

Based on the MITRE analysis, the EDGAR system, as defined by the RFP,

would have net external benefits in excess of $200 million over the eight year

life of the EDGAR contract. Based on the earlier SEC study, the net internal

benefits of EDGAR would exceed $20 million over the same period. Thus, the

total net benefits over eight years are calculated to exceed $220 million. These

benefits are more than double the estimated cumulative cost of the Pilot and

Operational systems combined including the contractor-funded cost of disseminating the electronic filings under a regulated fee schedule.

Second, MITRE analyzed the incremental benefits and costs that would be

attributable to one-stop filing if the EDGAR system were enlarged to accommodate direct, interactive access to the EDGAR database by the states

through its agent, NASAA, and the self-regulatory organizations. Based on

the MITRE analysis, the EDGAR system with direct, interactive access by

NASAA and the SROs would realize a significant fraction of $150 million as

net external benefits over the life of the EDGAR contract. These incremental

benefits would exceed the estimated $20 million in additional costs that would

be required to expand the EDGAR system to permit direct, interactive access

by NASAA and SROs representatives.

Finally, MITRE analyzed the incremental benefits and costs attributable to

one-stop filing if the EDGAR system were augmented with "satellite" EDGARcompatible systems at NASAA and two major SROs. Based on the MITRE

analysis, the estimated incremental cost of this approach would be $30

million for establishing and operating satellite EDGAR system to NASAA only

or $75 million for establishing and operating satellite EDGAR systems at

NASAA and two major SROs.

41
Office of EDGAR Management

The Commission has enhanced its managerial and technical expertise in

preparation for the Operational system by creating a separate Office of

EDGAR Management.

The Director reports to the Chairman of the Commission and has overall

responsibility for the procurement, implementation and operation of the

EDGAR system. In addition to overseeing the Office of EDGAR Management,

the Director is the Contracting Officer for the project with responsibility for

maintaining liaison within the Commission and with filers and users of the

filed information. The Director will be assisted in these tasks by a professional

staff consisting of a Deputy Director and a counsel, as well as three branch

chiefs. Staffing for fiscal 1988 included approximately 15 positions.

Conclusion

Although there have been several delays in the award of the contract for

Operational EDGAR, the Commission is firmly committed to proceeding with

it. Following the award of the EDGAR contract in January 1989, work will

focus on the design of the Operational system and the associated rulemaking.

42
Regulation of the Securities Markets

Key 1988 Results

The Division of Market Regulation, with the assistance of the regional

offices, is charged with the responsibility of overseeing the operations of the

nation's securities markets and market professionals. In fiscal year 1988 over

11,000 broker-dealers and nine active exchanges, as well as the overthe-counter markets, were subject to the Commission's oversight.

Market Value of Equity and Options Sales on (J.S. Exchanges

in billions

FY'84 FY'85 FY'86 FY'87 FY'88

$1,025 $1,147 $1,735 $2,367 $1,907

BID Oversight Examinations

FY'84 FY'85 FY'86 FY'87 FY'88

389 447 481 452 421

Surveillance and Regulatory Compliance Inspections of SROs

FY'84 FY'85 FY'86 FY'87 FY'88

20 21 22 23 21

SRO Final Disciplinary Actions

FY'84 FY'85 FY'86 FY'87 FY'88

1,123 971 845 991 1,336

The October 19, 1987 market break generated several analyses and studies,

including an 850-page report by the Division. After the market break the

Commission responded to Congressional inquiries, provided testimony, developed legislative proposals, processed rule proposals from the various selfregulatory organizations (SROs), and conducted inspections of SRO activities

related to the markets' volatility.

Fiscal year 1988 was also an active year in the international arena.

Additional multinational market linkages were completed and memoranda of

understanding were concluded with other countries to share needed regulatory and surveillance information.

The broker-dealer field examination program was enhanced through the

use of portable computers to review firms' net capital and mark-up compliance. Further enhancement to the program is underway through the development of software that focuses on sales practice activities.

43
Securities Markets, Facilities, and Trading

The October 1987 Market Break 108

During October 1987, the nation's securities markets experienced an

extraordinary surge of volume and price volatility. The most widely followed

indicator of the United States stock market, the DowJones Industrial Average

index of 30 New York Stock Exchange (NYSE) stocks, had reached an

intra-day record high of 2746.65 on August 25, 1987. On October 2, the DJIA

closed at 2640.99. During the week of October 5, the index declined by

158.78 points and, during the week of October 12, by 235.47 points. On

October 19, the DJIA declined 508.32 points, and by its low point mid-day on

October 20 it had declined to 1708.70, or over 1,000 points (37 percent) below

its August 25 high. Even with its erratic but substantial recovery over the next

few trading sessions, by October 30, the DJIA stood at 1,994, down over 26

percent from its August high.

Broader indexes also declined sharply for the month of October. For

example, the Standard & Poors index of 500 stocks declined 21.8 percent, and

the composite indexes for the nation's three principal equities markets, the

NYSE, the American Stock Exchange (Amex), and the National Association

of Securities Dealers' automated quotations system (NASDAQ) for overthe-counter stock trading, experienced declines in October of 21.9 percent, 27

percent, and 27.2 percent, respectively. Similarly, record-breaking trading

volume was experienced on each market. On the NYSE, projections that

trading volume would increase steadily from daily averages of less than 200

million shares to daily averages of more than 300 million shares were

shattered by consecutive 600 miIlion share trading sessions on October 19

and 20. The American Stock Exchange and NASDAQmarkets were similarly

tested by record trading with average daily volume for the week of October 19

of 31.7 and 244.4 million shares, respectively, compared to average daily

volume in September of 12.4 and 148.3 million shares, respectively.

In light of these extraordinary events, the Division conducted a comprehensive study of the causes, effects, and regulatory ramifications of this market

activity. The purpose of the resulting report was to provide an independent

factual basis to enable the Commission to determine appropriate regulatory

responses to help ensure the soundness of the nation's securities markets and

the protection of investors. 109

The primary focus of the Division's report was the effect of derivative

products upon the securities markets in general, and on the October

market in particular. The Division found that although no single factor

caused the market break, the existence of various trading strategies

involving derivative stock indexes accelerated or exacerbated the decline.

The Division concluded that the market break left a legacy of continued

high volatility and decreased market quality. Further, these factors were

believed to have potentially long-term negative effects on the participation

of individual investors in the stock market. Finally, while citing its

continued belief that the derivative index markets perform valuable

hedging and market timing functions, the Division made a large number of

44
recommendations for corrective action, including the introduction of

trading in market baskets of stocks, increased margins and modified price

limits for futures transactions, and improved reporting requirements.

The Division also reviewed the responsibilities and performance of

exchange specialists. It concluded that, despite questionable practices on the

part of some firms, on the whole specialists met their market making

obligations. The Division did stress, however, that the NYSE and the Amex

should review carefully individual specialist performance and commence

reallocation proceedings or disciplinary action where appropriate. The Division also reviewed the capital requirements of specialists in light of the

changing market environment. Similar analyses were conducted for market

makers in the over-the-counter market, and specialists and market makers in

the options markets. The report also included comprehensive reviews of the

financial responsibility rules, clearance and settlement systems, exchange

and NASDAQ operational performance, and issuer repurchase activity.

In addition, the Commission devoted considerable resources to the preparation of Congressional testimony regarding the October 1987 market break.

In particular, the Chairman testified at various times before the Senate

Committee on Banking, Housing and Urban Affairs; the Senate Committee on

Agriculture, Nutrition, and Forestry; the Subcommittee on Telecommunications and Finance of the House Committee on Energy and Commerce; and the

House Committee on Agriculture. In general, the testimony focused on

descriptions of the Commission's actions during and after the market break

and outlined numerous financial market reforms designed to lessen the

likelihood of another serious market decline.

In late June and early July 1988, the Commission transmitted to Congress

a series of legislative proposals designed to enhance the efficiency and

fairness of the United States capital markets and to help avoid future market

declines. 110 The Commission's proposed legislation, if enacted, would have

(1) granted the Commission emergency authority regarding trading hours,

position limits, and clearance and settlement; (2) allowed the Commission to

suspend securities trading during emergencies; (3) permitted the Commission

to require enhanced reporting of large securities positions and of the activities

of holding company systems; (4) required coordination of clearance and

settlement; (5) modified the margin-setting structure for stocks and stock

index derivative products and required that margin be set at "prudential"

levels; and (6) transferred to the Commission jurisdiction over equity index

futures and options on such futures.

The Commission also responded to a significant number of Congressional

inquiries during fiscal year 1988 pertaining to the Commission's actions and

recommendations regarding the October 1987 market break. 111 These letters

discussed, for example, contingency planning and information-sharing during

market emergencies, upgrading of securities exchanges' order handling and

execution systems, and international cooperation regarding the securities

markets.

The Commission participated in the President's Working Group on Financial Markets, which was appointed by President Reagan to consider the major

45

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issues and recommendations included in the various studies of the October

1987 market break and possible actions to carry out those

recornrnendatlons.W The Working Group, which, in addition to Chairman

Ruder, included top officials of the Treasury Department, the Federal Reserve

Board, and the Commodity Futures Trading Commission, submitted a report

to the President in May 1988.113 The Working Group's report contains

recommendations regarding trading halts, margin levels for securities and

derivative products, coordination of clearance and settlement systems, and

contingency planning for market emergencies.

The Commission also participated actively in the formulation and implementation of various actions taken by the SROs to address the problems

associated with the October 1987 market break. Market reforms were undertaken by the SROs in a wide range of areas, including trading systems'

capacity; individual investor access to markets; market maker performance

and capital; market information, coordination, and contingency planning;

clearance and settlement; portfolio trading; and circuit breakers. 114 Further

information on these actions will be set out in the following sections.

The National Market System

Rule 11Aa2-1 under the Exchange Act provides procedures for designating

certain securities as National Market System (NMS) securities and Rule

lIAa3-1 requires that transactions in NMS securities be reported on a

real-time basis, increasing market efficiency and improving execution of

orders. Under these rules, all securities-whether traded on exchanges or

over-the-counter (OTC)-for which transaction reports are required to be

submitted pursuant to an effective transaction reporting plan are designated

as NMS securities. As a result of the October market break, the number of

OTC securities designated as NMS securities decreased to 2,900, about 200

less than in fiscal year 1987.

During fiscal year 1988, the Commission approved a number of NASD

proposals relating to market structure issues. The Commission approved a

proposal that authorizes the NASD to halt OTC trading in exchange-listed

securities when the primary market for the securities halts trading pending

the dissemination of material news. lIS The Commission also approved a

proposal by the NASD to develop a new service consisting of a low-speed

ticker signal through which subscribers could obtain a moving display of last

sale reports for all NASDAQ/NMS securities from any of a number of

vendors.116

In addition, the Commission adopted an amendment to its rule governing

transaction fees, to continue to exempt exchange transactions in OTONMS

securities from the imposition of Section 31 transaction fees for one year.117

The Amex and NASD submitted rule proposals to establish systems to

facilitate trading of unregistered securities. Arnex's proposed system, called

SITUS (System for Institutional Trading of Unregistered Securities), would be

available only to institutions, and would include only the securities of

non-reporting compenles.U'' On the other hand, the NASD's proposal,

PORTAL(Private Offerings, Resale and Trading through Automated Linkages),

46
would be open to both institutions and highly capitalized individuals and

would include the securities of any foreign or domestic "world-class"

company.119 The Division has requested that the Amex and NASD provide,

prior to publication of the proposals for comment, specific information

regarding the clearing and trading facilities of their systems and the Commission's access to trading information.

The Commission published for comment an NASD proposal to establish a

permanent subscriber fee of $50.75 per month for each interrogation or

display device receiving NASDAQ transaction and quotation data disseminated through the National Quotation Data Service (NQDS), and to request

that the Commission approve the retroactive application of the fee to all

subscribers currently receiving the NQDS from vendors. 120

Finally, the Commission issued a release endorsing the North American

Securities Administrators' Association (NASAA) development of "Blue Sky"

exemptive standards for NASDAQlNMS securities that are comparable to the

States' exemptive standards for exchange-listed securities. 121

National System for Clearance and Settlement of Securities Transactions

During fiscal year 1988, the National Clearance and Settlement System

(National System) was tested by high trading volume and price volatility. As

reported in the Commission's testimony before Congress and as described in

the Division of Market Regulation's Report on the October 1987 Market Break,

all components of the National System performed well despite the pressures

of unprecedented volume and price volatility.l22 Nevertheless, the Commission's testimony and the Division's Report contain many recommendations for

enhancements to all components of the National System.l23

As reported above, the Commission participated actively in the President's

Working Group on Financial Markets. The Interim Report of the Working

Group details many initiatives for consideration and implementation to

improve intermarket clearing, credit and payment systems.F" During fiscal

year 1988, the Commission worked actively with clearing agencies, banks,

broker-dealers and other federal regulators to consider and implement those

changes. For example, the Commission granted the Intermarket Clearing

Corporation (ICC) temporary registration as a clearing agency 125 and

approved proposals by ICC and the Options Clearing Corporation (OCC) to

establish mechanisms for maintaining and margining portfolios of options

and futures contracts on related underlying foreign currency and stock index

products.P" The Commission also submitted to Congress proposed legislation that would, among other things, authorize the Commission and the

Commodity Futures Trading Commission (CFTC) to facilitate the development of coordinated clearing facilities for securities, options and related

futures transactions.

During fiscal year 1988, the Commission approved clearing agency proposals that continued expansion of the services of the National System to

mortgage-backed, U.S. Government, mutual fund, and municipal securities.

For example, the Commission approved, as a permanent service, the National

Securities Clearing Corporation's (NSCC) Mutual Fund Settlement, Entry, and

47
Registration Verification Service, which provides centralized automated handling of mutual fund orders. 127 The Commission also approved the temporary

registration of the Government Securities Clearing Corporation, to provide

comparison services for inter-dealer and brokers' brokers' trades in U.S.

Treasury securttles.F" The Commission also extended the temporary registration of MBS Clearing Corporation (MBSCC), which provides clearing and

certificate depository services for mortgage-backed securities.129

Securities Immobilization

The October 1987 market break tested securities industry processing

systems with unprecedented high volume. As discussed in the Division of

Market Regulation's report on the market break, efforts during the last decade

to immobilize securities certificates and to automate, to the extent possible,

transfer agent and securities depository recordkeeping and transfer tasks

facilitated smooth processing of record numbers of transfers and deliveries. 130

In fiscal year 1988, the Commission continued to make progress in its

efforts to facilitate the immobilization of securities certificates. For example,

the Commission approved changes to NYSE and NASD rules to require that

members use securities depositories to confirm, affirm and settle institutional

trades in corporate equity securities for delivery against payment or receipt

against payment. 131 Also, the Commission approved, as a permanent system,

the Depository Trust Company's (DTC) same-day funds settlement system,

which expands DTC's certificate immobilization and book-entry delivery

services to certain securities settling in same-day funds, such as municipal

notes and auction-rate preferred stock. 132

Internationalization

As part of its secondary market internationalization program, the Commission continued to foster the development of international linkages between

clearing agencies and to foster foreign participation in the National Clearance

and Settlement System. For example, the Commission issued two no-action

letters concerning links that will facilitate settlement of international securities transactions through centralized clearing entities. International Securities

Clearing Corporation (ISCC) entered into a link agreement with Centrale de

Livraison de Valeurs Mobilieres (CEDEL) whereby ISCC members who also are

members of CEDEL may request ISCC to transmit instructions to CEDEL

concerning custody, clearance and settlement within the CEDEL system. 133

ISCC also entered into a link agreement with Central Depository (Pte) Ltd.

(CDP), a subsidiary of the Stock Exchange of Singapore, whereby ISCC would

maintain a sponsored account at DTC for the custody of U.S. securities held

by members of CDp'134 The Commission also approved OCC rule changes

that permit members to deposit certain Canadian government securities to

meet OCC margin requtrements.P"

During fiscal year 1988, the Commission took several actions with respect

to the application of Rules 10b-6, 1Ob-7, and 10b-8 under the Exchange Act

to offerings involving concurrent United States and foreign distributions. Rule

48
10b-6 proscribes certain conduct by persons participating in a distribution to

prevent such persons from artificially conditioning the market for a security to

facilitate the distribution. Rule 1Ob- 7 governs market stabilization activities

during distributions. Rule 10b-8 governs the market activities of participants

in a rights offering. The Commission continued to review and grant requests

for relief under these anti-manipulation rules for multinational offerings on a

case-by-case basis. The Commission's actions permitted non-Gnited States

distribution participants to continue certain customary market activities in

foreign jurisdictions, subject to certain conditions designed to prevent a

manipulative impact on the United States market. For example, letters were

issued which permitted Spanish,136 United Kingdom,137 and Norwegian 138

distribution participants to bid for and purchase securities in their respective

domestic markets during multinational rights distributions in accordance

with certain "passive market making" conditions. 139

As a result of the enactment of the Financial Services Act of 1986 (FSA) in

the United Kingdom (U.K.),United States (U.S.) broker-dealers doing business

in the U.K. require authorization by U.K. regulators and, among other things,

those firms become subject to U.K. net capital standards. The U.K. regulators

are authorized by the FSA to disapply U.K. net capital standards where waiver

would not result in undue risk to investors. In August 1988, U.K. regulators

(i.e., the Securities and Investments Board (SIB), the Bank of England (BoE)

and four U.K. self-regulatory organizations 140) entered into an information

sharing agreement with the Commission and four U.S. self-regulatory organizations (SROs) 141 permitting the U.K. regulators to rely on U.S. SROs and

the Commission to monitor the capital adequacy under U.S. capital requirements of U.S. brokerage firms that have branches in the U.K.

The terms of the agreement provide that the SIB, the BoE and U.K. SROs

will waive their capital adequacy rules as to particular broker-dealers where

the U.S. SROs provide to the U.K. regulators copies of quarterly reports filed

with them and certain other non-routine information of a material nature

related to the financial or operational condition of the broker-dealers. The

Commission agreed to notify the SIB or BoE where it becomes aware that a

particular broker-dealer's financial or operational condition is materially

impaired. The U.K. regulators agreed to notify the Commission where they

become aware that a U.K. branch of a U.S. broker-dealer has a substantial

financial, operational or other problem.

In response to the increasing cross-border activities of securities firms, the

Commission issued a release clarifying the United States broker-dealer

registration requirements under the Exchange Act for foreign brokerdealers.142 The release included a staff interpretive statement regarding the

applicability of United States broker-dealer registration requirements to

foreign entities engaged in securities activities involving United States investors, and sought comments prior to adopting a Commission interpretive

statement on this subject. In the release, the Commission also proposed for

comment Rule 15a-6, developed from previous staff interpretive positions,

which would exempt from broker-dealer registration foreign entities that deal

with certain non-United States persons or with specified United States

49
institutional investors under limited conditions. Subsequently, the Commission published a comment letter presenting an alternative formulation of

proposed Rule 15a-6 that would broaden the scope of Rule 15a-6 to include,

in rule form, the substance of the staffs interpretive statement. 143

Options and Other Derivative Products

During fiscal year 1988, the Commission reviewed several rule changes that

were intended to address market volatility concerns, including the problems

disclosed in the staffs study of the October 1987 market break. First, the

Commission reviewed rule changes submitted by the NYSE, Chicago Board

Options Exchange (CBOE), Arnex, NASD, and Midwest Stock Exchange

(MSE) that established, on a one-year pilot basis, coordinated circuit breaker

procedures. The new rules provide for a one-hour halt in the trading of all

equity and options securities after a 250-point decline in the Dow Jones

Industrial Average (DJIA) and a two-hour trading halt after a 400-point

decline. 144The Commission also reviewed an NYSE proposal to apply certain

limitations on program trading when the price of the Standard and Poor's 500

Stock Index futures contract traded on the Chicago Mercantile Exchange

(CME) falls 12 points below the previous day's closing value. Also examined

was an NYSE proposal to provide priority delivery to the specialist's post, via

the NYSE's Designated Order Turnaround System (DOT), to individual investors' market orders of 2,099 or fewer shares on any trading day on which the

DJIA moves 25 points from the previous day's close. These three proposals

ultimately were approved early in fiscal year 1989.145 These procedures

replaced a six-month NYSE pilot program that had prohibited index arbitragerelated stock transactions through DOT on days when the DJIA had moved 50

or more points from the previous day's close. 146

Second, the Commission approved an NYSE rule change that adopted, on

a permanent basis, certain auxiliary market opening procedures to accommodate increased order flow experienced on quarterly expirations of stock

index derivative products. 147These procedures permit the NYSE to handle in

a more orderly and efficient manner the large volume of stock trading that

often occurs on quarterly expirations.

Third, in the wake of the October 1987 market break, the Commission

approved rule changes by the options exchanges in November 1987 and May

1988, to amend their rules to increase customer margin requirements for

equity and index options. 148

In fiscal year 1988, the Commission worked on new derivative product

proposals in several different areas. First, the CBOE submitted to the

Commission a proposed rule change containing procedures that will be

applicable to participants in the CBOE's joint venture with the Chicago Board

of Trade (CBT).149

Second, pursuant to Section 2(aXl XB)of the Commodity Exchange Act, the

Commission sent to the CFTC several comment letters concerning proposed

new stock index futures contracts. Among these was a letter not objecting to

the designation of the CBT as a contract market to trade futures contracts on

the CBOE 50 and 250 Stock Indexes.15o The CBOE 50 and 250 both are

50
capitalization-weighted indexes. The CBOE 50 is comprised of the 50

highest-capitalization stocks traded on the NYSE that are eligible for options

trading on the CBOE, while the CBOE 250 includes the highest market value

United States equities listed on the NYSE. The futures contracts will trade on

the CBOE floor pursuant to the CBOE/CBT joint venture agreement.

The Commission's comment letters also dealt with a variety of proposals

evidencing the growing internationalization of markets. The Commission sent

to the CFfC a letter not objecting to designation of the CST as a contract

, market to trade futures contracts based on the CBT Japanese Stock Index

(TOPIX).151The TOPIX is a capitalization-weighted stock index based on the

prices of all of the approximately 1,110 stocks traded in the first section of the

Tokyo Stock Exchange (TSE).

In addition, the Commission sent a letter to the CFfC not objecting to the

designation of the CME as a contract market to trade futures contracts on the

Nikkei Stock Average (Nikkei). 152The Nikkei is a price-weighted stock index

based on the prices of 225 stocks traded in the first section of the TSE. The

Commission also sent a letter to the CFfC not objecting to designation of the

CME as a contract market to trade options on its Nikkei futures contracts. 153

Further, the Commission sent a letter to the CFfC not objecting to the

designation of the CME as a contract market to trade futures contracts based

on the Europe, Australia, and Far East (EAFE) Index.154 The EAFE is a

capitalization-weighted stock index and consists of 981 stocks from 19

nations. It is designed to be a barometer of the securities markets of Europe,

Australia, and the Far East, which represent over half of the capitalization and

trading volume of the world's stock exchanges.

The Commission also issued a comment letter to the CFfC not objecting to

designation of the Coffee, Sugar, and Cocoa Exchange as a contract market to

trade futures contracts on the International Market Index (lMI).155The IMIis a

capitalization-weighted index based on the prices of 50 foreign stocks traded

in the European Community, Japan, and Australia. The IMIcomponent stocks

are traded either directly or as American Depositary Receipts on the Amex or

the NYSE, or through NASDAQ.

In response to a CFfC request, the Commission sent a letter to the CFfC

not objecting to a CFfC no-action position concerning a Toronto Stock

Exchange proposal to offer and sell stock index futures contracts based on the

Toronto Stock Exchange "35" Index and on the Toronto Stock Exchange "35"

Spot Index to United States citizens.156 Each index is composed of 35

Canadian "blue chip" stocks included in the top 50 Toronto Stock Exchangelisted companies in terms of market value.

Third, the Commission approved two separate amendments to Rule 3a12-8

under the Exchange Act, again reflecting internationalization trends. The first

amendment designated government debt securities issued by Australia,

France, and New Zealand as "exempted securities" for purposes of the

marketing and trading in the United States of futures contracts on those

securities. 157The most recent amendment, adopted early in fiscal year 1989,

added Austria, Denmark, Finland, the Netherlands, Switzerland, and West

Germany to Rule 3a12-8's list of eligible sovereign issuers.158 The rule

51

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previously had exempted the debt securities of Great Britain, Canada, and

Japan for purposes of futures trading.

Fourth, the Commission sent to the CFfC a comment letter on the CFfC's

advance notice of proposed rulemaking regarding the regulation of hybrid

and related lnstruments.P? Hybrid instruments combine a commodity or

option component with a traditional debt or equity security. The CFfC had

proposed a regulatory framework to determine the legal status of these

instruments, provide certain exemptions from CFfC regulation, and establish

a no-action position concerning certain hybrid products. The Commission's

letter detailed concerns about the proposal and recommended that the CFfC

rescind the notice of proposed rulemaking because many of the hybrid

instruments were already adequately regulated under other laws.

In fiscal year 1988, the Commission also took several actions relating to the

options exchanges' automated order routing and execution systems. In

particular, the Commission approved a proposed rule change filed by the

Amex to expand its automatic execution system, known as Auto-Ex, to all

equity options on a permanent basis. 100 The expansion is designed to afford

public customers a more efficient method of executing small market and

marketable limit orders in such options. The Commission also approved a rule

change by the CBOE to make the CBOE's Retail Automatic Execution System

(RAES) a permanent facility for classes of equity options designated by the

CBOE.161 Finally, the Commission approved a rule change by the Philadelphia Stock Exchange (Phlx) that established as a pilot program a small order

options routing system called the Automated Options Market (AUTOM)

system. 162

In other significant actions, the Commission approved a rule change

modifying the hours that trading in foreign currency options may be conducted on the Phlx.163 The rule change provides Phlx with the flexibility to

conform its trading hours to coincide with trading hours in the European and

Far East foreign exchange markets.

The Commission approved a proposed rule change filed by the CBOE to

speed up the opening rotation process for Standard & Poor's 100 Stock Index

options (OEX), especially during extreme market conditions such as those

encountered during the October 1987 market break. 164 The Commission also

approved a CBOE rule change to list long-term index and equity option series

that expire 12 to 24 months from the time they are Iisted.165

In addition, the Commission approved CBOE and Amex rule changes that

provide for a one-year pilot program during which public customers may

apply for a "hedge exemption" from broad-based index option position

Iimits.1OO The Commission also approved rule changes from the CBOE, the

Amex, the Phlx, and the PSE that provide for a two-year pilot program during

which certain hedged positions will be exempt, without application, from

equity option position Iimits.167

In fiscal year 1988, the securities self-regulatory organizations published

revised policy statements concerning their respective prohibitions of index

options frontrunning.l68 Frontrunning generally refers to trading a stock,

option or future while in possession of material non-public information

52
regarding an imminent block transaction that is likely to affect the price of the

stock, option, or future.

Finally, in a proceeding under Section 19(c) of the Exchange Act, the

Commission held public hearings regarding whether to adopt Rule 19c-5,

which would establish a policy permitting the trading in more than one market

of the same options on exchange-listed stocks and direct the options

exchanges to remove their current regulatory restrictions on such "multiple

trading." 169 The proposed rule was under consideration at year-end.

Regulation of Brokers, Dealers, Municipal Securities Dealers, and

Transfer Agents

Broker-Dealer Examinations

During fiscal year 1988, the Commission staff expanded its use of portable

computers to conduct broker-dealer examinations. Regional office examiners

were provided with computers as well as with training in the use of net capital

and mark-up software programs developed during 1987. Also, the Commission fostered coordination among various SROs regarding the practical use of

computers in their own examination programs and continued its development

of additional software programs.

The broker-dealer oversight program continued to emphasize reviews of

sales practice activities at large, national firms. On-site sales practice and

operations reviews were performed at both the headquarters and branch

offices of such firms. In addition, numerous oversight examinations of

newly-registered government securities firms were conducted. In preparation

for examining these firms, regional office examiners were provided with

special training, as well as a checklist and a manual tailored for examinations

of government securities broker-dealers.

The number of enforcement referrals continued to increase from previous

years. As a result of a broad range of violations found during examinations,

there was a 23 percent increase in these referrals in fiscal year 1988. For

instance, a special sweep of examinations at a large number of "penny stock"

broker-dealers resulted in referrals to enforcement for numerous sales practice

violations, including undisclosed, excessive mark-ups on principal trades.

The Commission staff completed 510 examinations, of which 421 were

oversight and 89 were cause examinations. The number of oversight examinations completed represents an eight percent decrease from the prior year,

whereas the number of cause examinations represents a 37 percent increase.

The decrease in oversight examlnations and the increase in cause examinations resulted from the need for the Commission to respond to crisis situations

growing out of the October 1987 market break and to an increased incidence

of sales practices abuses by penny stock broker-dealers.

Municipal Securities Underwriters

The Commission issued a release proposing for comment Rule 15c2-12

under the Exchange Act, which would require municipal underwriters partic53
ipating in offerings exceeding $10 million to (a) obtain and review copies of

nearly final official statements prior to bidding for or purchasing the offerings;

(b) contract with issuers or their agents to obtain final official statements in

sufficient quantities to make them available in accordance with rules established by the Municipal Securities Rulemaking Board (MSRB); and (c) make

available copies of preliminary and final official statements to investors and

other interested persons on request.'?? In the release, the Commission also

emphasized the responsibility of municipal underwriters to have a reasonable

basis for believing in the accuracy of key representations concerning the

securities that they underwrite, and requested comment on a proposal by the

MSRB to establish a central repository to collect information concerning

municipal securities.171

The Commission took these steps in conjunction with the release of its

report concerning municipal securities regulation 172 and the staffs report

concerning the Washington Public Power Supply System (WPPSS) default. 173

The staff report examined the circumstances surrounding the default on $2.25

billion of municipal revenue bonds issued by WPPSS to finance the construction of two nuclear power plants, and discussed significant areas in which

disclosures made to investors were deficient. The Commission report set forth

a four-part approach to developments related to municipal securities disclosure, including (a) proposing for public comment Rule 15c2-12; (b) emphasizing the responsibility of municipal securities underwriters, under the

antifraud provisions of the federal securities laws, to have a reasonable basis

for recommending the securities that they underwrite in both negotiated and

competitive offerings; (c) commenting favorably on other initiatives, such as

the Government Finance Officers Association Disclosure Guidelines and the

development of the Government Accounting Standards Board, and seeking

comment on the MSRB's proposal to establish a central repository for

municipal securities disclosure documents; and (d) issuing a supplemental

staff memorandum concerning unit investment trusts, which are a substantial

component of the municipal securities market, and which will undergo special

inspections by the Commission's Division of Investment Management and its

regional offices to determine whether regulatory changes are needed.

Government Securities Brokers and Dealers

Several government securities brokers that are registered with the Commission under Section 15C of the Exchange Act (Applicants) requested an

exemption from the registration requirements of Section 15(a) regarding the

offering of securities by those firms to the public in connection with a federal

program to reduce foreign military debt to the United States. 174 The promissory notes underlying the securities were guaranteed only 90 percent as to

principal and interest by the Defense Security Assistance Agency of the

Department of Defense, and the remaining 10 percent was secured by United

States Government securities or derivatives thereof. Without deciding

whether the securities were government securities within the meaning of

Section 3(aX42) of the Exchange Act, the Commission exempted the Applicants from the requirements of Section 15(a), based on Applicants' represen54
<-, '1 tations that they would (a) effect transactions in these securities exclusively

1 with broker-dealers or government securities broker-dealers registered with

the Commission pursuant to Section 15(a); (b) comply with alI rules adopted

by the Secretary of the Treasury under Section 15C, including applicable net

capital regulations; and (c) publish quotations and effect transactions in these

securities solely in connection with their normal activities as interdealer

brokers in the government securities markets. 175

Bank Securities Activities

In conjunction with the federal banking regulators, the Commission submitted to Congress proposed amendments to S. 1886, the Financial Modernization Act of 1987. The amendments included various provisions relating to

the status of banks under the Exchange Act registration requirements for

i securities "brokers" and "dealers." The definition of "broker" in the Exchange

1 Act would have been amended to exclude a bank unless it publicly solicited

brokerage business or received incentive compensation for brokerage. Brokerage for trust accounts would not have been included, however, unless the

bank received incentive compensation and publicly solicited brokerage

business other than by advertising, in conjunction with advertising its other

trust activities, that it effected securities transactions. This exemption for trust

accounts would not have applied to securities safekeeping, self-directed

Individual Retirement Accounts, or managed agency or other functionalIy

equivalent accounts of the bank, unless the bank did not publicly solicit this

business and did not receive incentive compensation for these activities.

Also, exemptions from the "broker" definition would have been created for

so-called bank "networking" arrangements, where a bank contracted with an

independent broker-dealer to provide brokerage services on the premises of

the bank; transactions for employee benefit accounts; bank "sweeps" of

depositors' funds into money market accounts; transactions in certain exempt

securities, commercial paper, bankers' acceptances, or commercial bills;

banks' transactions for their affiliates' accounts; and primary offerings of

securities by an issuer, not involving a public offering, to certain purchasers.

Banks that limited their brokerage activities to fewer than 1,000 transactions per year (other than transactions exempted from the amended "broker"

definition), and that did not have a subsidiary or affiliate registered with the

Commission as a broker-dealer, also would have been excluded from the

"broker" definition. Further, a bank without a securities affiliate could have

effected transactions in municipal securities without being deemed a

"broker;" where the affiliate existed, however, the bank would have been

required to spin out alI its municipal securities dealing business into the

affiliate.

The proposed amendments would have amended the "dealer" definition in

the Exchange Act in a complementary fashion, by excluding banks that

engaged in certain purchases and sales for their own account. A bank would

not have been deemed a "dealer" by engaging in transactions involving

exempted securities other than municipal securities, or commercial paper,

bankers' acceptances, or commercial bills. Similarly, trust and other fiduciary

55
activities would not have brought a bank within the amended "dealer"

definition. A bank that engaged in the issuance or sale of securities backed by

or representing an interest in obligations originated or purchased by the bank

or its affiliates or subsidiaries also would not have been a "dealer," provided

that the underlying obligations were not third-party securities. In addition, a

bank without a securities affiliate could have bought and sold municipal

securities without being deemed a "dealer."

Moreover, the proposed amendments would have conferred on the Commission the authority to exempt, by rule. regulation. or order. any person or

class of persons from the amended "broker" and "dealer" definitions consistent with the public interest, the protection of investors, or the purposes of the

Exchange Act. The broker-dealer registration requirements in Section 15 of

the Exchange Act would have been amended to require banks that came

under the amended "broker" or "dealer" definitions to create a separate

subsidiary or affiliate to perform these activities. unless they engaged in these

activities on an exclusively intrastate basis. This change would not have

restricted. however, the substantive authority of any bank or bank holding

company, under the national banking laws or any provision of state banking

law.to offer any permitted securities brokerage or dealing services through an

affiliate or subsidiary.

Congress did not enact the proposed amendments before adjourning.

Broker-Dealer Registration Application

The Commission adopted revisions to Form BD. the uniform broker-dealer

registration application, to provide that the applicant's consent to service of

process would apply to actions or proceedings brought by the Commission or

any self-regulatory organization in connection with the applicant's brokerdealer activities,176 and to an application for a protective decree filed by the

Securities Investor Protection Corporation (SIPC).177

Short Sales

In August 1988, the Commission adopted Rule lOb-21(T) under the

Exchange Act to address manipulative short selling prior to underwritten

public offerings.178 The rule prohibits a person who effects short sales of an

equity security during the period beginning at the time that a registration

statement under the Securities Act of 1933 relating to the same class of equity

securities is filed and ending at the time that sales may be made in the

offering. from covering such short sales with offered securities purchased from

an underwriter or other broker or dealer participating in the offering. The

Commission adopted Rule lOb-21(T) on a temporary basis to consider, at a

later date, whether the rule is achieving its intended purpose.

Lost and Stolen Securities

During fiscal year 1988, the Commission adopted changes to Rule 17f-l

under the Exchange Act. which sets forth participation, reporting, and inquiry

requirements for the Lost and Stolen Securities Program (program). Among

56
other things, the amendments to Rule 17f-1 require government securities

brokers and dealers to participate in the Program.179

Statistics for the calendar year 1987 (the most recent year available) reflect

the Program's continuing effectiveness. As of December 31, 1987, 21,356

institutions were registered in the Program. During the year, registered

institutions reported as lost, stolen, missing or counterfeit 643,648 certificates

valued at $2,765,976,343. Those institutions also reported the recovery of

192,611 certificates valued at $685,518,298. At the end of 1987, the value of

securities contained in the Program's data base was $12,837,687,098. Registered institutions made inquiry concerning 2,195,967 certificates. Inquiries

concerning 2,564 certificates valued at $9,230,307 matched reports of lost,

stolen or missing securities on file in the data base.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1988, nine active exchanges were registered with the

Commission as national securities exchanges. During the fiscal year, the

Commission granted exchange applications to delist 71 debt and equity

issues and 15 options issues and granted applications by issuers requesting

withdrawal from listing and registration for 31 issues. In addition, during the

fiscal year, the Commission granted 1,142 applications by exchanges for

unlisted trading privileges.

During fiscal year 1988, the Commission adopted Rule 19c-4 under the

Exchange Act (commonly called the "one share-one vote" rule). This new rule

amends exchange and association (i.e., NASD) rules to prohibit the listing on

an exchange, or the authorization for quotation on an inter-dealer quotation

system, the common stock or other equity securities of a company, if it issues

securities or takes other corporate action that would have the effect of

nullifying, restricting, or disparately reducing the per share voting rights of its

existing common stock shareholders.P? The Commission adopted the rule

after holding public hearings on the issue in December 1986, and again in

July 1987.

During fiscal year 1988, the Commission received 180 proposed rule

changes from the stock exchanges. The Commission approved several

significant rule filings, including proposals of the NYSE to revise Rule 103A,

the Exchange's Specialist Performance Evaluation and Improvement Process.

The revisions, among other things, incorporate newly developed objective

performance measures into the Rule 103A process, codify Exchange reallocation procedures, and establish minimum standards for specialist performance. The revised Rule is being implemented on a two-year pilot basis. The

Commission also approved a NYSE proposal that amends both the minimum

standards for listing on the Exchange and for continued listing, particularly to

take into account the special trading characteristics of very high-priced stock

issues.181

The Commission approved an NYSE rule proposal that significantly

strengthens the requirements for internal trade review, reporting, and other

57
compliance procedures for NYSE members. 182 Under the rule, NYSE member

firms are now required to establish procedures for the review of member,

employee, and proprietary trades for violations of securities laws and

Exchange rules prohibiting insider trading and the use of manipulative or

deceptive devices. NYSE members also would have to prepare an annual

report for internal review by management detailing compliance efforts and

problems during the previous year. The Commission also approved proposed

rule changes from the Amex and NYSE that eliminate the maximum limit on

the amount of fines that may be imposed in connection with an exchange

disciplinary action.183

An NYSE proposal to regulate off-floor telephone access to members on

the floor of the Exchange was approved by the Commission during fiscal

year 1988.184 The rule specifically prohibits the use by members of

portable telephones on the floor, but permits telephone wire linkages to

members' off-floor offices. While the rule also allows a specialist unit to

establish a telephone link to its off-floor offices, it prohibits using such

telephones to transmit to the trading floor any orders for the purchase or

sale of securities.

In addition, the Commission approved proposed rule changes from the

NYSE, Amex, and CBOE that require member firms to submit certain

customer and proprietary trading information in an automated format. 185The

exchanges routinely request this information in connection with their market

surveillance inquiries. Automating such submission should facilitate the

Exchanges' efforts in this area.

The Commission also approved proposed rule changes of the NYSE and

Amex that raise capital requirements from $100,000 to $600,000 for Amex

specialists and from $100,000 to $1 million for NYSE speclaltsts.l'" In

addition, early in fiscal year 1989, the Commission approved a proposed rule

change of the NYSE that raises capital requirements for other members who

execute transactions on the floor from $50,000 to $100,000.187

The Commission approved a proposed rule change by the PSE that permits

the addition of up to five specialist posts each for its Los Angeles and San

Francisco equities trading floors, for a total of up to 10 new specialist posts. 188

It also approved. for a six month trial period, a proposed rule change by the

Boston Stock Exchange (BSE) that permits the Exchange to establish an

automated, small order communication, order routing and execution system

for member organizations to be known as BEACON.189

Finally, the Commission approved a proposed rule change from the NYSE

that, among other provisions, requires the registration of securities lending

representatives, securities traders and their direct supervisors; expands the

definition of the term "registered representative" to include employees

involved in the handling of accounts or orders for the purchase or sale of

securities or handling of business in connection with investment advisory or

investment management services; and requires that securities lending representatives and their direct supervisors sign a "code of ethics" agreement as an

addendum to their Forms U-4, the uniform SRO application form for the

registration of members' associated persons. 190

58
Other significant Commission activities relating to its oversight of exchange

and NASD rulemaking, including developments in the options markets, are

discussed in the section of this chapter, above, entitled "Securities Markets,

Facilities, and Trading."

National Association of Securities Dealers, Inc.

The NASD, the only national securities association registered with the

Commission, has over 6,500 member firms. In fiscal year 1988, the NASD

reported a total of 712 final disciplinary actions, which consisted of 542 formal

and summary disciplinary actions by its District Committees and 170 formal

and summary actions by its NASDAQ and Market Surveillance Committees.

In addition, the Commission received 64 filings of proposed rule changes

from the NASD and approved 54 proposed rule changes in fiscal year 1988.

Among the important changes approved by the Commission 191 were proposals to create a link for the transmission of end-of-day quotations in certain

NASDAQ securities to the Stock Exchange of Singapore, 192 and to establish

the Order Confirmation Transaction (OCT) service allowing eligible firms to

negotiate trades and confirm order executions of all sizes through computer

terminals.193 The Commission also approved an NASD proposal, based in

large part on the October 1987 market break experience, requiring participation in the NASD's Small Order Execution System (SOES) for all market

makers in NASDAQlNMS securities. 194 This rule further provides that SOES

will continue to operate when the inside quote is locked or crossed and

prohibits those who voluntarily withdraw as market makers in NASDAQ

securities from re-entering quotes in NASDAQ for 20 business days. The

Commission also reviewed NASD proposals which, in general, prohibit the use

of non-cash compensation in connection with the sale of direct participation

programs and in public offerings of other securities.195

The Commission also examined an NASD proposal, approved in early fiscal

year 1989, that is designed to improve the regulatory environment with

respect to OTC securities that are not part of the NASDAQ system (so-called

"pink sheet" stockS).l96 Under the proposal the NASD established an electronic system for mandatory price and volume reporting by members for these

securities and amended its Best Execution Interpretation relating to retail

transactions in these stocks. In addition, the Commission published for

comment an NASD proposal to establish a six-month pilot program for the

electronic display of current market-maker quotations and expressions of

interest in pink sheet stockS.197

Municipal Securities Rulemaking Board

In fiscal year 1988, the Commission received seven proposed rule changes

from the Municipal Securities Rulemaking Board and approved 11 MSRB rule

filings, some of which were received during fiscal year 1987. Of particular note

was the approval of an amendment concerning the delivery of interchangeable

municipal securities and the confirmation of transactions for these securities

that would permit a delivery of municipal securities to be either in registered

59
or bearer form unless the parties to the transaction specifically agree to a

particular form.198

The Division also evaluated a request from the MSRB concerning whether

stripped coupon municipal securities should be regarded as municipal

securities for purposes of the MSRB's regulatory jurisdiction. The request

raised a number of difficult legal and policy issues. The Division's response,

dated January 19, 1989, states that under certain conditions stripped coupon

municipal securities should be regarded as municipal securities for purposes

of the MSRB's regulatory jurisdiction.

Clearing Agencies

During fiscal year 1988, the Commission received 89 proposed rule

changes from registered clearing agencies and approved 86 rule changes. For

example, the Commission approved NSCC's proposal to establish comparison

services for member transactions in foreign securities,l99 MBSCC changes to

its depository division rules concerning default assessments,200 and OCC

changes to its by-laws and rules concerning cross-margin of closely-related

options and futures 201and, based largely on the October 1987 market break

experience, the waiver of margin requirements in extreme market

conditions.202

Inspections of SRO Surveillance And Regulatory Compliance

The inspections staff devoted considerable resources in fiscal year 1988 to

gathering and analyzing trading information for the Division's October 1987

Market Break Report_ This effort was closely coordinated with similar studies

of the Presidential Task Force on Market Mechanisms (known as the Brady

Commission) and the Commodity Futures Trading Commission and included

the assistance of the Commission's regional offices and Division of Investment

Management. It encompassed collecting data directly from a wide range of

market participants, including firms active in futures-related program trading,

other broker-dealers, futures commission merchants, mutual funds, investment advisers, and others. Further, a special purpose inspection was conducted that involved field work at each of the major self-regulatory

organizations in January and February 1988 to evaluate the impact of the

market break on their operations and the adequacy of the SROs' proposed

remedial actions.

Also, a comprehensive inspection of the New York Stock Exchange regulatory programs for specialist trading was conducted between July and

September 1987. While the inspection staff found that the Exchange's

surveillance, investigatory and disciplinary programs for specialists functioned adequately, in early fiscal year 1988, the Division recommended

improvements in a number of specific areas, including increased use of minor

fines in lieu of informal discipline, remedial actions for investor complaints

involving executions of stop orders, and enhancements to file management

and documentation. In addition, recommendations were made to coordinate

better specialist disciplinary actions with the process of allocating newly-listed

60
securities to specialists. In addition to the comprehensive inspection, two

special purpose post-market break inspections were conducted in March and

April 1988. The first inspection reviewed the Exchange's final determinations

concerning inquiries into poor market-making performance by some specialists during the October 1987 market break. The inspection found that, overall,

the Exchange adequately addressed those instances of specialist performance

that generated staff investigations. The second post-break inspection reviewed

specialist financial surveillance programs. The inspection found that, while

necessary data collection enhancements still are being developed, recent

improvements to this program have responded adequately to the concerns

raised in the October 1987 Market Break Report.

An inspection of the Boston Stock Exchange found that, while interim

surveillance procedures which the Commission recommended earlier are in

place, the project to develop surveillance capabilities from the Exchange's

Automated Communications Order-Routing Network is approximately two

years behind schedule in its full implementation. The Commission recommended that this project be completed as soon as practicable.

Inspections of the Philadelphia Stock Exchange surveillance, investigatory,

and disciplinary programs for equities and options trading found that the

Exchange had addressed most of the concerns raised in the previous inspection in 1986. While these programs now are functioning adequately, with

increased automation of equities and options market surveillance, the Commission recommended that the Exchange review its procedures for detecting

prearranged trading in options and compare its procedures to those of other

exchanges to determine if further enhancements in this area are warranted.

The Commission conducted an inspection of the NASD's surveillance

program for trading in NASDAQ securities. The inspection found that while

market surveillance for NASDAQ issues is functioning adequately, there

remain certain areas where continued progress is needed, especially in the

acquisition of accurate daily audit trail data. Some of these deficiencies also

were identified by the NASD's own Regulatory Review Task Force and

consultants hired to perform an overall review of its compliance programs. The

Commission encouraged the NASD to commit resources to implement these

recommendations promptly.

The inspections staff also completed several reviews of program trading and

its effects in periods of extreme market volatility. One such study analyzed

trading on January 8, 1988, when the Dow Jones Industrial Average fell

140.58 points. This review found that while program trading was not the cause

of the market decline, it may have accelerated this price movement. Additional reviews conducted for April 6, 1988 (when the DJIA rose 64.16 points)

and April 14, 1988 (when the DJIA fell 101.46 points) found a similar

relationship between program trading and these instances of price volatility.

The reviews for April 6 and 14, 1988 also raised significant questions

regarding the effectiveness of the New York Stock Exchange's attempts to

minimize market volatility by placing restrictions on the use of automated

order-routing systems for index arbitrage programs when the DJIA moved 50

points from the previous closing value. Analyses of trading on April 6 and 14,

61
1988 indicated, however, that program orders could be routed easily without

the use of automated systems. Accordingly, revised restrictions on trading

during periods of extreme market volatility were proposed by the Exchange as

Rule 80A, and were approved by the Commission on October 19, 1988, after

the close of the fiscal year.203

The inspections staff also participated with other Commission staff and

respresentatives of the NYSE and several broker-dealers in a review of the

regulatory issues raised by trades designed to capture dividend payments.

This trading strategy has attracted considerable media and Congressional

interest because on some days trading volume associated with these strategies

accounts for unusually large percentages of daily volume in individual stocks

as well as of consolidated volume in all NYSE.listed issues. A memorandum

concerning the staffs findings was sent to Congress after the year-end.204

In addition, the inspections staff worked closely with the self-regulatory

organizations (SROs) constituting the Intermarket Surveillance Group. Two

areas were of particular concern for the Commission and the ISG in 1988.

First, efforts continued to monitor improvements in surveillance and investigatory programs to address insider trading, with particular emphasis on

reducing the average time required for the SROs to refer suspicious trading to

the Commission's enforcement staff. In this regard, progress was made in

implementing a system to have the SROs and the Commission obtain selected

trading data from broker-dealers in a standardized, electronic format as part

of the "Electronic Blue Sheeting Project." Second, the Commission, together

with the CFTC and the ISG, addressed cross-market surveillance, and related

regulatory issues, between the securities and index futures markets.

The staff conducted inspections of the advertising review programs at the

CBOE, Amex and NYSE. At the CBOE and Amex the inspections focused on

the exchanges' review of options communications submitted prior to use by

member firms and the review of member options communications during the

exchanges' routine options sales practices examinations. At the NYSE, the

inspection focused on the NYSE's review of options and equities communications submitted by members prior to use, the periodic review or "spot

checks" of a sample of all members' advertising, educational material and

sales literature conducted by the NYSE on a biennial cycle, and the review of

communications during the routine broker-dealer examination program.

Although minor deficiencies were noted in each inspection, the staff concluded that all programs were satisfactory. The staff offered recommendations

to each exchange where appropriate and concluded that some regulatory

issues requiring improved coordination among the exchanges should be

referred to the Options Self-Regulatory Council to help assure that all

exchanges use uniform standards when reviewing options communications of

broker-dealers belonging to multiple self-regulatory organizations.

The staff conducted inspections of the formal disciplinary programs at the

NASD District Offices in Atlanta, Chicago and New York. Those inspections

focused on delays in processing disciplinary matters occurring during the

earliest stages of case development (l.e., anticipated actions) and in presenting potential cases to the appropriate District Committee for initial consider62
ation. The staff found minor delays in the District Offices in Atlanta and New

York and major delays in the District Office in Chicago. The staff noted that

significant improvements had occurred in the formal disciplinary program in

New York since the last inspection of that office.

Also, the regional office staff conducted inspections of seven of the fourteen

NASD District Offices, including the Association's offices in Seattle, San

Francisco, Los Angeles, Kansas City,Chicago, Cleveland, and Philadelphia. As

in prior years, the staff noted isolated deficiencies in the Districts' financial

surveillance, cause investigation, formal disciplinary and broker-dealer examination programs. However, the staff concluded that, overall, the NASD was

successfully meeting its statutory responsibility at the District level.

The staff conducted an inspection of the CBOE to assess implementation of

changes initiated by the CBOE as the result of previous inspections of the

Departments of Compliance and Enforcement. The staff found that the

Department of Compliance conducts thorough and well-documented options

sales practice examinations and cause investigations and that the Department

of Enforcement prosecutes violations aggressively and in a timely manner. All

three programs were found to be substantially improved since the previous

inspection.

The staff conducted an inspection of the NYSE Division of Enforcement to

assess implementation of the changes arising out of four previous inspections

of the NYSE. The inspection disclosed that the NYSE had implemented many

of the staffs previous recommendations. The staff also found that the NYSE

had developed a number of management and procedural initiatives and had

made a significant commitment of additional staffing resources. The staff is

continuing to monitor the NYSE's progress in addressing deficiencies noted in

the previous inspections.

In addition, the staff continued to meet on a quarterly basis with the NYSE

and NASD to discuss current regulatory issues affecting the Commission's

examination and inspection programs.

Applications for Re-entry

During fiscal year 1988, the Commission received 100 SRO applications to

permit persons subject to statutory disqualifications, as defined in Section

3(aX39) of the Exchange Act, to become or remain associated with brokerdealers. The distribution of filings among the SROs was the following: NASD

(78); NYSE (20); and MSE (2). Of the total filings processed, 5 were subsequently withdrawn, 95 were completed and 5 were pending at year-end.

SRO Final Disciplinary Actions

Section 19(dX1) of the Exchange Act and Rule 19d-1 require all selfregulatory organizations to file reports with the Commission of all final

disciplinary actions.

A Rule 19d-1 filing reports a completed action that may have been initiated

at any time during the previous years. The duration of a SRO action frequently

reflects the severity of the violation(s) charged, the number of respondents

63
involved, and the complexity of the underlying facts. SROs generally conclude

cases involving minor or technical violations with a single respondent in less

than a year. Cases involving serious trading violations (e.g., price manipulation, prearranged trading, front-running, etc.) require more time to complete

because of the necessity of demonstrating specific intent to the disciplinary

panel that acts as a trier of fact. Consequently, the volume of Rule 19d-1

notices submitted by a SRO in a given year is not a precise measure of its

proficiency in market surveillance and compliance. Nevertheless, the number

of actions reported can be useful in assessing the regulatory effectiveness of

different SROs over similar time periods, and this information has proved

useful in focusing inspections of SRO regulatory programs.

In fiscal year 1988 the Amex filed 47 Rule 19d-1 reports, the CBOE filed

168; the NYSE filed 134; the PHLX filed 205; the PSE filed 70; the registered

dearing agencies, the BSE and the MSE flled none; and the NI\SD fi\ed

712.205

SRO Final Disciplinary Actions

1984 1985 1986 1987 1988

Exchanges 394 530 419 382 624

NASD:

District Committees 667 348 252 415 542

NASDAQ and Market

Surveillance Committees 62 93 174 194 170

TOTALS 1123 971 845 991 1336

Securities Investor Protection Corporation

The SIPC Fund amounted to $390.5 million on September 30, 1988, an

increase of $1.3 million from September 30, 1987. Further financial support

for the SIPC program is available through a $500 million confirmed line of

credit established by SIPC with a consortium of banks. In addition, SIPC may

borrow up to $1 billion from the United States Treasury Department through

the Commission.

During fiscal year 1988, the Commission acted favorably on a number of

SIPC actions providing for the reimposition, beginning January 1, 1989, of

revenue based assessments on its member broker-dealers at the rate of 3/16

of 1 percent of each member's annual gross revenues from the securities

business, with minimum assessments of $150 per year for each member.2°6

64
Investment Companies and Advisers

Key t 988 Results

The Division of Investment Management oversees the regulation of investment companies and investment advisers under two companion statutes, the

Investment Company Act of 1940(Investment Company Act) and the Investment Advisers Act of 1940 (Investment Advisers Act), and administers the

Public Utility Holding Company Act of 1935(Holding Company Act).

Number of Active Registered Investment Companies

and Investment Advisers

Investment Companies

Investment Advisers

FY'84 FY'85 FY'86 FY'87 FY'88

2,210 2,458 2,912 3,305 3,530

9,083 10,908 11,707 12,690 14,300

84-88

%

Increase

72%

103%

84-88

%

FY'88 Increase

$1,200 233%

$4,500 477%

FY'84 FY'85 FY'86 FY'87

$370 $525 $742 $1,200

$850 $1,170 $1,400 $3,500

Investment Company and Adviser Assets Under Management

(in billions)

Investment Companies

Investment Advisers

116%

90%

98%

FY'88

750

1,400

2,150

FY'87

739

1,294

2,033

FY'86

643

1,263

1,906

FY'85

567

1,039

1,606

FY'84

497

837

1,334

Inspections/Examinations of Investment Companies and Advisers

84-88

%

Increase

Investment Companies

Investment Advisers

Total Examinations

During fiscal year 1988 the number of registered investment companies

increased by 7 percent. The number of registered investment advisers

increased by 13 percent, and the assets they manage increased by 29 percent.

The number of investment company and investment adviser examinations

increased by 6 percent during fiscal year 1988.

During fiscal year 1988 the Division and the regional offices continued

efforts to coordinate their regulatory activities with state authorities that share

the Commission's jurisdiction over investment advisers by conducting joint

examlnatlons and routinely sharing examination results. Training was also

provided for state examiners.

65
Significant Legislative Developments

In February 1988, the Commission sent a staff report, Finsncial Planners:

Report of the Staff of the United States Securities and Exchange Commission to

the House Committee on Energy and Commerce's Subcommittee on Telecommunications and Finance, to the House Subcommittee in response to its July

1986 request that the Commission study investment advisers (advisers) and

financial planners. The staff report provided statistical information on financial planners and their clients and reviewed recent Commission inspections of

registered advisers that are financial planners. The staff found that: (a) the

types and significance of the violations found in inspections of financial

planner registrants generally were not materially different from those found in

inspections of other types of advisers, although the percentage of financial

planners cited for deficiencies was higher than for other advisers; (b) there is

potential for self-interested behavior when financial planners both provide

advice and sell financial products; and (c) demonstrated abuses by investment

advisers and financial planners involve only a very small portion of the

advisory industry.

Disclosure Requirements

In November 1987, the Commission adopted an amendment to the

disclosure requirements of Form N-SAR, the semi-annual report form for

registered investment companies, to require the change of accountant disclosures currently required of other types of issuers on Form 8_K.207

In February 1988, the Commission adopted revisions to Form N-1A, the

mutual fund registration statement form, to require a fee table at the front of

each fund prospectus that: (a) lists all transactional expenses, such as sales

loads; (b) lists all annual fund expenses, such as management expenses; and

(c) includes an "Example" which illustrates the amount of expenses that would

be incurred by an investor at the end of one, three, five, and ten years. The

Commission also adopted amendments to Form N-1A that improve the

narrative prospectus disclosure of fees deducted under, and the nature of, Rule

12b-1 distribution plans. The revisions of Form N-1A allow investors to more

easily compare expense structures of different funds?08

In February 1988, the Commission adopted a package of new rules and rule

amendments that standardize the computation of mutual fund performance in

advertisements and sales literature to enhance investors' ability to compare

performance c1aims.209

In June 1988, the Commission proposed Rule 30b 1-3 under the Investment

Company Act to require registered investment companies to file specified

reports covering a defined transition period. The new rule, if adopted, would

require investment companies that change their fiscal year end to file a Form

N-SAR report within 60 days of either the close of the period between the end

of their old fiscal year and start of the new fiscal year, or the date they

determine to change their fiscal year.210

In August 1988, the Commission proposed three new forms, Forms

N-17f-1, N-17f-2, and ADV-E, to be used by accountants when meeting

66
current filing requirements under the Investment Company Act and the

Investment Advisers Act. The proposed forms would, if adopted, facilitate the

required filing of accountant examination certificates with the Commission,

which should increase for both investors and the Commission's staff accessibility to the information on those certificates.211

EDGAR Filings

In July 1985, the Office of Public Utility Regulation began accepting

electronic filings from registered public utility holding company systems and

their member companies. An EDGAR Pilot Branch was formed in October

1985, which began processing electronic filings for a volunteer group of

investment company registrants in November 1985. The volunteers include a

representative group of 199 management investment companies and 78 unit

investment trusts with over 3300 separate series. Electronic filings of semiannual reports on Form N-SAR also were made by 848 registered management investment companies not participating full-time in the EDGAR Pilot.

As of September 30, 1988, the Commission received 29,752 investment

company filings through the EDGAR Pilot Branch.

Over one-third of all active registered management investment companies

are now making electronic filings on Form N-SAR. The Division of Investment Management has asked the Commission's Office of Information Systems Management to continue work on the Commission's N-SAR database to

provide an efficient means to transfer the information contained in these

filings to the database, and permit the automated manipulation of that

information. The number of filers filing their N-SARs electronically has

reached a point where the Commission's N-SAR database, using data

extracted from reports filed through EDGAR, can be a useful resource in the

investment company inspection program and other Commission activities.

Regulatory Policy

Significant Investment Company Act Developments-In July 1988, the

Commission proposed revised Rule 11a-3 under the Investment Company

Act, which, if adopted, would permit a mutual fund or its principal underwriter,

under certain conditions, to make an exchange offer to the fund's own

shareholders or to shareholders of another fund in the same family of

funds.212 At the same time, the Commission requested additional comment

on proposed Rule 11c-1 under the Investment Company Act, which, if

adopted, would conditionally permit a unit investment trust or its sponsor to

make exchange offers to certain unit holders.

In June 1988, the Commission proposed amendments to Rule 12b-1 under

the Investment Company Act.213 Rule 12b-1 permits, subject to specified

conditions, a mutual fund to adopt a plan to use fund assets to pay costs

associated with the distribution of fund shares. The proposed amendments, if

adopted, would: (a) clarify and enhance standards for approval or continuation

of distribution plans; (b) ensure that payments under a distribution plan are

made on a current basis and for specific distribution services actually provided

67
to the fund; and (c) prohibit funds that adopt or continue distribution plans

from being held out to the public as "no-load" funds or from being otherwise

offered in a misleading manner using similar terminology. At the same time,

the Commission proposed amendments to Rule 17d-3 under the Investment

Company Act, which exempts from the requirement of prior Commission

approval certain distribution agreements between funds and their affiliated

persons. The proposed amendments, if adopted, would expand the ability of

affiliated funds to finance distribution efforts jointly. The Commission also

proposed to amend Form N-1A, the registration statement form for mutual

funds. The proposed amendments, if adopted, would require additional

disclosure regarding the amount of payments under distribution plans.

In November 1988, the Commission proposed Rule 6c-10 under the

Investment Company Act, which, if adopted, would permit under specified

conditions mutual funds and certain related to impose sales loads that are

payable on a deferred basis.214 At the same time, the Commission proposed

amendments to Form N-1A, which would accommodate the deferred sales

loads that would be permitted if Rule 6c-10 is adopted.

Significant Investment Advisers Act Developments-In November 1987, the

Commission proposed, and in August 1988, adopted, amendments to Rule

204-2, the recordkeeping rule under the Investment Advisers Act, to require

registered investment advisers to keep for Commission inspection all of their

advertisements and to make and keep all records necessary to form the basis

for performance information in their advertisements. The rule amendments

permit Commission inspectors to examine advertisements and the basis for

performance information in advertisements for compliance with the antifraud

provisions of the Investment Advisers Act.215

In September 1988, the Commission proposed two rules under the Investment Advisers Act, Rules 203(bX1)-1 and 203(bX3)-2, that, if adopted, would

exempt certain small advisers from federal registration as advisers if they

register in each state in which they do business. The Commission also

proposed amendments to relieve advisers that would be exempt under the

proposed rules from the Investment Advisers Act's recordkeeping rule,

advertising rule, cash solicitation rule, disciplinary disclosure rule, and

restrictions on principal and agency cross transactions. These exemptions

would significantly reduce federal regulation for certain small advisory businesses that are regulated at the state leveI.216

Significant Insurance Products Developments-In July 1988, the Commission proposed for comment revisions to Forms N-3 and N-4, the registration

statement forms used by insurance company separate accounts issuing

variable annuity contracts under the Investment Company Act and the

Securities Act of 1933.217 The proposed amendments would, if adopted,

consolidate prescribed expense data in a tabular presentation (fee table) near

the front of the prospectus.

Significant Public Utility HoLding Company DeveLopments- There are 13

registered public utility holding company systems with aggregate assets, as of

June 30, 1988, of $89.3 billion, an increase of $2.0 billion, or 2.3 percent over

June 30, 1987. Total operating revenues for the twelve months ended June 30,

68
1988, were $32.7 billion, an $800 million increase from the twelve months

ended June 30, 1987. There are 70 electric or gas utility subsidiaries, 84

non-utility subsidiaries, and 22 inactive companies in the 13 registered

systems, a total of 189 companies operating in 24 states (excluding six power

supply subsidiary companies).

During fiscal year 1988 the Commission authorized $5.9 billion of senior

securities and common stock financing for the 13 registered systems: $4.6

billion in long-term debt financing and $1.3 billion in common and preferred

stock. Long-term debt financing decreased by 8.0 percent from fiscal year

1987, primarily due to the volume of refinancings undertaken in prior years.

In addition, $624 million in pollution control financing and $4.9 billion in

short-term debt financing were approved. The pollution control financing was

a 45.1 percent increase from amounts authorized in fiscal year 1987. Shortterm debt decreased by 10.1 percent from the previous year. Total authorizations in fiscal year 1988 of $11.5 billion were less than financings authorized

in fiscal year 1987 by $800 million, a decrease of 6.5 percent. The Commission also authorized the expenditure of $575 million for nuclear fuel and oil

and gas development and exploration expenditures of $34 million. The

Commission's continuing review of holding company fuel procurement activities, accounting policies, audits of service companies, as well as its review of

annual reports of holding company subsidiary service companies and fuel

procurement subsidiaries and quarterly reports by holding company nonutility subsidiaries, resulted in savings to consumers during fiscal year 1988

of approximately $36.6 million. These savings came about primarily as a

result of requiring electric utility subsidiaries of registered public-utility

holding companies to credit revenues from their sale of excess oil and gas

($14.2 million) and from subleasing coal and oil barges ($22.1 million) to the

cost of fuel billed to customers, and through the audits of service companies

($.3 million).

Significant Institutional Disclosure Program Developments-Securities

Exchange Act Section 13(f)(1) and Rule 13f-1 require specified "institutional

investment managers" to file quarterly reports on Form 13F. Under Rule

l3f-2(T), these managers may file the report on Form l3F-E through

magnetic tape by using the Commission's pilot electronic disclosure system,

EDGAR. Managers filing these reports disclose specified equity holdings of

the accounts over which they exercise investment discretion. As of June 30,

1988, Form l3F reports had been filed by 1,691 managers for holdings

totaling $1.199 trillion. Through September 1, 1988, 50 managers electronically filed Form 13F-E reports for the quarter ended June 30, 1988, reporting

almost 17,000 securities holdings totaling over $61 billion.

Form l3F reports are available to the public at the Commission's Public

Reference Room promptly after filing. Two tabulations of the information

contained in these reports are available for inspection: (1) an alphabetical list

of the individual securities, showing the number of shares held by the

managers reporting the holding; and (2) a list with the total number of shares

of a security reported by all reporting managers. Both tabulations normally

are available two weeks after the date on which the reports must be filed.

69
Significant Applications and Interpretations

Investment Company Act Matters-In August 1988, the Commission authorized Merrill Lynch & Co. to offer a dual distribution system for its group of

mutual funds that will give investors a choice in how to pay distribution and

sales fees.218 The system gives investors the option of either paying a

conventional front-end sales load or paying an annual distribution fee and a

deferred sales load that decreases each year until eliminated. Although these

alternatives have been available in the form of separate funds, the Merrill

Lynch plan allows individual funds to offer two separate classes of shares: one

class with the front-end sales load; the other with the annual distribution fee

and deferred sales load. The two classes of shares represent interests in one

securities portfolio within a particular fund. Investors may also switch between

funds in the Merrill Lynch group of funds so long as they stay with their class

of shares.

Two banks filed applications as trustees on behalf of separate trusts

established to acquire loans from the Department of Education and the

Department of Housing and Urban Development, and to issue bonds and

certificates of beneficial interests in the trusts collateralized by such loans. The

non-recourse loans would be sold as part of the federal government's loan

asset sales program. The Commission issued exemptive orders under the

Investment Company Act for the trusts on May 3 219and July 28, 1988.220

On January 12, 1988, the Commission ordered an administrative hearing

on an application filed by the Teachers' Insurance and Annuity Association

and the College Retirement Equities Fund (TIAA-CREF) for exemptive relief

from certain provisions of the Investment Company Act concerning variable

annuity separate accounts.221 The hearing was originally scheduled to begin

on June 6, 1988. However, in light of proposed changes in TlAA-CREPs

operations and in order to allow settlement discussions between TlAA-CREF

and the Commission staff and the entities and individuals who requested the

hearing to proceed, the hearing was postponed on several occasions.

On August] 7, 1988, the staff granted no-action relief with respect to certain

trusts to be created by the State of Israel, which would issue securities to the

public without registering as investment companies.222 The net proceeds of

each offering would be loaned to Israel in order to prepay all or a portion of

foreign military sales loans made by the Federal Financing Bank to Israel for

purchase of defense articles, defense services, design and construction

services, and related expenses.

On August 2, 1988, the staff granted no-action relief to a foreign investment

company operating abroad where it proposed to make a private placement

offering of securities under Rule 506 of Regulation D in the United States

coincident with a public offering of its securities outside the United States, and

where, upon completion of the offerings, no more than 100 persons that were

nationals or residents of the United States would be beneficial owners of the

foreign investment company's securities.223

On June 7, 1988,224 and again on July 15, 1988,225 the staff granted

no-action relief to separate New York State agencies of foreign banks that

70
proposed to issue commercial paper in the United States without registering

as investment companies. Although it ordinarily takes the position that

foreign banks and branches of foreign banks are not banks for purposes of the

Investment Company Act, the staff granted narrow relief here to permit the

New York State agencies to rely on their counsel's opinion that the nature and

extent of federal and state regulation and supervision of these New York

agencies, established under New York State banking laws, was substantially

equivalent to the regulation of New York state-chartered banks.

Investment Advisers Act Matters-On September 23, 1988, the staff advised

the Investment Company Institute that it would not recommend any enforcement action to the Commission with respect to investment advisers who

advertise performance without deducting clients' advisory fees from the gross

returns derived from those accounts ifthe performance results are provided to

prospective clients only in one-on-one, private transactions.226 This position

modifies the staffs earlier position that, in all circumstances, advisers

advertising performance results must deduct advisory expenses.

Holding Company Act Matters-The Commission authorized WPL Holdings,

Inc. (Holdings) to acquire all of the common stock of Wisconsin Power and

Light Company (WPL), and exempted it from all provisions of the Holding

Company Act except Section 9(aX2).227WPL holds all of the capital stock of

Beloit Water, Gas and Electric Company and 33.1 percent of the capital stock

of Wisconsin River Power Company. Holdings stated that the principal reason

for the reorganization was to facilitate diversification and to provide additional

financing flexibility for the holding company system. Separate requests for a

hearing and for permission to intervene as a full party were denied. The matter

has been appealed by the intervenors to the District of Columbia Circuit Court

of Appeals. The Commission authorized The Southern Company (Southern),

a registered holding company, to acquire all of the outstanding common stock

of Savannah Electric and Power Company (Savannah).228 Holders of Savannah

common stock received 1.05 shares of Southern common stock for each

Savannah share owned. At the time of the acquisition, Savannah had total

assets in excess of $400 million and annual revenues of about $180 million.

Southern estimated that efficiencies created by the combination could result

in annual savings of approximately $50 million.

The Commission authorized Sierra Pacific Resources (Resources) to acquire

a 14.5 percent common stock interest in a new electric generating company,

Enterprise, which will construct and operate a coal-fired generating unit

estimated to cost $600 million and to be located at the Thousand Springs

Project (Project) in Nevada.229 While the Project may ultimately include seven

additional generating units, any acquisition by Resources of any securities of

Enterprise to construct any additional units will be subject to further Commission authorization. Requests for a hearing were denied. The matter has

been appealed by the intervenors to the U.S. Court of Appeals for the Ninth

Circuit.

The Commission authorized EUA Power Corporation (EUA Power), a

wholly-owned subsidiary of Eastern Utilities Associates (EUA), a registered

holding company, to reorganize its existing debt through an exchange of

71
securities and the issuance of additional shares of preferred stock to EUA.23o

The reorganization was necessitated by the delay in the licensing of Unit 1 of

the Seabrook Nuclear Power Project in which EUA Power is a 12.13 percent

owner. The transaction allows EUA Power, at its option, to pay interest in cash

or "in-kind" by issuing additional debt securities. Jurisdiction was reserved

over transactions to be effected with regard to EUA Power on or after May 15,

1989.

The Commission authorized EUA and New England Electric System

(NEES), both registered holding companies, to form new wholly-owned

subsidiaries and to participate as general partners, through the new subsidiaries, in Ocean State Power (aSP), a partnership formed to construct, own,

and operate a combined cycle electric generating facility in Rhode Island.231

Capital provided to the new subsidiaries by EUA and NEES will not exceed

$30 million and $25 million, respectively. Blackstone Valley Electric Company, a wholly-owned subsidiary of EUA, will sell the property for the facility

to asp for approximately $1.6 million.

By prior Commission order, Central and South West Corporation (CSW), a

registered holding company, was authorized to organize and acquire CSW

Credit, Inc. (CSW Credit), a corporation created to factor accounts receivable

of the CSW electric utility companies. Subsequent orders authorized CSW

Credit to expand its factoring activities to include the purchase of receivables

of electric and gas utilities not associated with the CSW system. The amount

of nonassociate receivables acquired, however, was not permitted to exceed

the amount of receivables acquired from CSW associate companies. CSWand

CSW Credit have requested removal of the limitation on the factoring of

receivables of nonassociate utilities.232 The Commission determined that it

was appropriate in the public interest that a hearing be held with respect to the

proposed transaction. The hearing began on September 16, 1988, and

testimony concluded on October 27, 1988. The parties and participants will

be submitting proposed findings of fact and conclusions of law and briefs to

the administrative law judge.

72
Other Litigation and Legal Activities

Key 1988 Results

FY'84 FY'85 FY'86 FY'87 FY'88

Win Loss Other. Win loss Other. Win loss Other. Win loss Other. Win Loss Other.

Supreme Court and

Appellate Courts 37 8 5 36 4 5 32 3 2 31 3 2 24 3 0

District Court 26 2 2 23 3 2 21 0 1 14 3 0 16 2 5

Bankruptcy Court 13 3 2 20 5 0 13 3 1 4 7 1 8 3 1

Other •• 4 0 0 7 0 0 4 1 0 3 0 0 2 1 1

Issue not reached. split decision, etc .

•• State Courts and Administrative Tribunals.

The General Counsel represents the Commission in all litigation in the

United States Supreme Court and the courts of appeals. This litigation

includes appeals of district court decisions in Commission injunctive actions

and petitions for review of Commission orders. The General Counsel also

defends the Commission and its employees when sued, prosecutes adrnlnistrative disciplinary proceedings against securities professionals, and appears

amicus curiae on behalf of the Commission in significant private litigation

involving the federal securities laws. In addition, under the supervision and

direction of the General Counsel, the regional offices represent the Commission in corporate reorganization cases under the Bankruptcy Code that have

a substantial public investor interest. The General Counsel also analyzes

legislation that would amend the federal securities laws or otherwise affect the

Commission's work and prepares legislative comments and congressional

testimony. In addition, the General Counsel reviews proposed Commission

action to ensure that enforcement and regulatory programs are consistent

with the Commission's statutory authority.

The General Counsel represented the Commission in 314 litigation matters

in fiscal year 1988. During the year, 27 court of appeals and Supreme Court

cases were concluded, all but three favorably to the Commission. There were

26 appeals in Commission injunctive actions, three of which were concluded,

with no outcomes unfavorable to the Commission. By comparison, the

General Counsel handled 304 litigation matters in fiscal year 1987 and 285

litigation matters in fiscal year 1986. In fiscal year 1987, there were 16 appeals

in injunctive actions, six of which were concluded, with only one outcome

unfavorable to the Commission.

In fiscal year 1988, there also were 29 appellate and district court actions

seeking to overturn Commission orders in administrative proceedings or

affirming self-regulatory organization (SRO) disciplinary proceedings against

securities professionals. Of these appeals, six were' concluded, with only one

adverse result. Ten such actions were concluded in fiscal year 1987, with only

one adverse result.

73

•
The federal securities laws provide for private remedies as well as government enforcement actions. Because decisions in private cases may have

precedential effect on its own regulatory activities, the Commission's participation in such cases is an important supplement to its enforcement program.

The Commission participated as amicus curiae (friend of the court) in 50 cases

during the year, compared to 46 cases in fiscal year 1987 and 42 cases in fiscal

year 1986. It participated in 17 private cases that were decided, only three of

which resulted in a decision adverse to the Commission.

The General Counsel also handled more than 209 other proceedings before

the Commission or in the federal district courts. These included 61 suits

brought against the Commission or its staff and 95 suits seeking access to

Commission documents, including actions under various public information

statutes. Of the latter, 89 suits involved discovery subpoenas in private actions

where the Commission is not a party. In fiscal year 1987, there were 56 suits

brought against the Commission or its staff and 86 suits (including 78

third-party subpoenas) under the various public information statutes.

During fiscal year 1988, 108 debtors with publicly-held securities registered

under the Securities Exchange Act of 1934 (Exchange Act) commenced

Chapter 11 reorganizations. The Commission entered its appearance in 50 of

these cases, which, together with four non. registered companies, involved

assets of about $10 billion and nearly 230,000 public investors. A list of

pending Chapter 11 cases in which the Commission has filed a notice of

appearance is set forth in Table 38 of the Appendix to this report.

In addition to litigation, the General Counsel is involved in significant

legislative and regulatory work. For example, the office assisted the Chairman

and the Commissioners in preparing testimony on issues such as the structure

of the financial services industry and proposals to amend laws governing the

securities activities of banks; proposed legislation defining insider trading;

tender offer reform; and the Report of the National Commission on Fraudulent

Financial Reporting. The Office also assisted the Commission in preparing

legislative proposals concerning, among other things, the sanctions and

remedies available to the Commission; the definition of insider trading; and

the authority of the Commission to conduct investigations on behalf of a

foreign securities authority.

Litigation

Insider Trading-In Lomberdnn, S.p.A. v. SEC and Trasatlantic Financial Co.

v. SEC,233 the Commission successfully urged that the Supreme Court deny

review of a decision by the United States Court of Appeals for the Second

Circuit 234 affirming a judgment in favor of the Commission against defendants who traded on nonpublic information that had been misappropriated

from the bidder in a corporate takeover. The defendants' petitions to the

Supreme Court raised three issues: (1) whether notice by publication in a

European newspaper was adequate under the Constitution (the primary issue

addressed by the Second Circuit); (2) whether trading on misappropriated

non public information is a violation of antifraud rules; and (3) whether

74
disgorgement is available as a remedy when allegedly no private investors

have a valid action for restitution. The Commission argued that review was

unnecessary because the lower courts correctly decided that under the

circumstances of this case-including efforts by the Italian defendants to

deceive the Commission about their involvement in the illegal trades and

difficulties posed by foreign bank secrecy laws-the published notice was

adequate and did not violate constitutional due process guarantees. The

Commission further argued that petitioners' conduct clearly fell within the

proscriptions of the federal securities laws, and that disgorgement is a

well-established remedy to prevent the unjust enrichment of wrongdoers.

In the insider trading cases of SEC v. Levine and SEC v. WiLkis,235 the United

States District Court for the Southern District of New York agreed with the

Commission that the defendants had acquired no more than bare legal title to

trading profits obtained illegally and that a constructive trust had attached to

the profits in favor of the victimized investors. The court therefore concluded

that the disgorged funds were not available to satisfy claims against the

defendants by the Internal Revenue Service and other tax authorities, because

at no time did the defendants have the kind of property interest in the funds

to which tax liens could have attached. The court subsequently approved a

distribution plan designed to return all disgorged trading profits to investors

who traded contemporaneously with the defendants.P''

Constitutional Challenges To Commission Enforcement Actions-In a number of recent Commission enforcement actions, the defendants have argued

that the Commission, as an independent agency whose members are not

removable at will by the President, is barred by Article II of the Constitution

from bringing enforcement actions. The Commission has argued that the

President's substantial authority over the Commission, including "for cause"

removal power, satisfies the constitutional requirement that the President

"take care that the Laws be faithfully executed." In SEC v. Blinder, Robinson &

CO.,23?the United States Court of Appeals for the Tenth Circuit adopted the

Commission's position on this issue. In so ruling, the Court relied heavily on

the Supreme Court's recent decision upholding the constitutionality of the

independent counsel statute 238 and the Supreme Court's decision in Humphrey s Executor v. United States.239

In a case related to the Tenth Circuit action, Blinder, Robinson & Co. and

Meyer Blinder v. SEC,24o the Blinder defendants challenged the constitutionality of the Commission's actions and sought review of a Commission order in

an administrative proceeding in the United States Court of Appeals for the

District of Columbia Circuit. The District of Columbia Circuit agreed with the

Commission that it should not reach the Article IIissue because that issue was

on appeal to the Tenth Circuit. Subsequently, as described below under

litigation concerning broker-dealers and market professionals, the Commission successfully opposed Supreme Court review of the District of Columbia

Circuit decision on a different issue.

In fiscal year 1988, two federal district courts also rejected constitutional

challenges to the Commission's enforcement authority. In SEC v.

Moskowitz,241 the court denied the constitutional challenge. In SEC v.

75
Davis,242 the court denied a motion to dismiss and concluded that the SEC's

exercise of civil enforcement responsibilities does not constitute an unconstitutional delegation of enforcement authority.

Broker-Dealers And Market Professionals-In Blinder, Robinson, Co. and

Meyer Blinder v. SEC,243 as urged by the Commission, the Supreme Court

denied certiorari. Petitioners argued that it is a violation of due process for the

Commission to litigate an injunctive action in district court and then initiate

an administrative proceeding to impose sanctions for the same conduct. In

opposition to the grant of certiorari, the Commission argued that the

Exchange Act gives it the authority both to seek injunctions and to determine

whether administrative remedies are in the public interest, and does not

require the Commission to elect between the two types of proceedings.

Further, the Commission noted, as established by the Supreme Court in

Withrow v. Larkin,244 an administrative agency may combine adversarial and

adjudicative functions without offending due process.

During fiscal year 1988, the Commission also defended two Commission

orders in Antoniu v. SEC. 245 Petitioner, a securities professional convicted of

insider trading, seeks review of a Commission order directing the National

Association of Securities Dealers (NASD) to disapprove his proposed employment with a Minneapolis broker-dealer and a subsequent Commission order

barring him from association with any broker-dealer. Concerning the first

order, the Commission's brief argues, among other things, that the Commission has broad discretion to review determinations by the NASD and other

self-regulatory organizations concerning the proposed employment of persons who are disqualified under the Exchange Act from association with an

NASD member firm. The brief also refutes the petitioner's argument that the

procedure employed by the Commission in issuing its order violated Section

15A(gX2) of the Exchange Act and his right to due process, explaining that the

statute provides for such a Commission veto of an NASD determination to

allow proposed employment. The procedural protections provided in the

NASD hearing satisfy due process concerns.

In The Stuen-Jemes Co., Inc. and Marc N. Geman v. SEC,246 the United

States Court of Appeals for the District of Columbia Circuit affirmed a

Commission decision interpreting the Commission's net capital rule and

upholding the NASD's imposition of sanctions against a broker-dealer and its

executive vice-president. The court agreed with the Commission that the

company had erred in calculating its net capital in connection with a

firm-commitment underwriting, giving deference to the Commission's interpretation of its net capital rule. At the commencement of such an underwriting, a broker-dealer is committed to purchasing the securities at a discount

from the offering price but does not know whether it will be able to sell those

securities at the offering price. At that time the broker-dealer must calculate

net capital, taking a "haircut" or deduction from the face amount of the

offering to reflect the risk of loss that the broker-dealer bears. Under the net

capital rule, this "haircut" may be diminished, and net capital in effect

increased, by the amount of "unrealized profit" from the offering. The firm in

this case argued that a non-accountable expense allowance should be treated

76
as "unrealized profit." The Commission interprets the term "unrealized profit"

to exclude such an expense allowance and to include only the "concession"

received by the broker-dealer from the issuer, which is the discount from the

offering price. The court rejected the petitioners' contention that the Commission had violated the Administrative Procedure Act and the Freedom of

Information Act in not publishing its interpretation of the rule prior to any

adjudicatory proceeding, reasoning that the Commission's interpretation

simply explained an already existing regulation. In contrast, if the Commission had adopted a new rule or substantially modified an existing rule,

publication might have been required.

The United States Court of Appeals for the Eighth Circuit affirmed a

Commission order imposing sanctions on a broker-dealer's registered representative in Kane v. SEC. 247 The Commission had suspended the representative from association with any broker-dealer for six months because of his

participation in the sale of unregistered securities. The Commission took the

position that the representative was responsible for determining whether the

securities could be lawfullysold without registration, and that he had willfully

failed to make the "searching inquiry" necessary for this determination. The

court agreed with the Commission that the six-month sanction imposed on

the representative was justified, rejecting the representative's contention that

the illegal sale of unregistered securities to the public was merely a "technical"

violation of the federal securities laws.

The United States Court of Appeals for the Tenth Circuit also affirmed the

Commission's decision in C.E. Carlson, Inc. and Charles E. Carlson v. SEC,248

suspending C. E. Carlson, Inc.'s broker-dealer registration for two months,

barring Mr.Carlson's association with any broker or dealer for eight months,

and prohibiting both of them from participating in any securities offering. The

court held that: (1) the Commission's findings that respondents violated

antifraud provisions of the securities laws were supported by substantial

evidence; (2) the Commission did not abuse its discretion in denying certain

discovery motions that were intended to produce evidence relevant to a

selective prosecution defense; and (3) the Commission did not abuse its

discretion in its selection of sanctions.

In Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 249 a suit between a

brokerage firm and its customer, the Commission participated as amicus

curiae, arguing that it is a fraud under Exchange Act Rule IOb-5 for a

broker-dealer to charge undisclosed excessive mark-ups. Agreeing with the

position urged by the Commission, the United States Court of Appeals for the

Third Circuit reversed the district court's decision that a broker-dealer's

compliance with routine disclosure requirements set forth in Exchange Act

Rule IOb-l 0 precludes fraud liability. The Third Circuit recognized that the

Commission, in adopting Rule IOb-IO, had set a minimum standard for

customer confirmation disclosure and did not intend that compliance with

that rule would provide a broker-dealer with a safe harbor for fraud.

The Commission filed amicus curiae briefs, both in district court and on

appeal, in McLaughlin, Piuen, Vogel, Inc. v. Oross,250concerning arbitration

under rules adopted by the various self-regulatory organizations and approved

77
by the Commission. The United States Court of Appeals for the Third Circuit

agreed with the Commission that the hearing provision in the small claims

arbitration rule adopted by the Municipal Securities Rulemaking Board (and

other SROs) does not deny broker-dealers either due process or equal

protection. In this case, a broker-dealer challenged an arbitration decision

awarding the brokerage firm's customers $2,500. The decision was based on

written submissions. The brokerage firm argued that the procedure was

constitutionally defective because, although the firm could submit whatever it

wanted in writing, the firm could obtain an oral hearing only if the arbitrator

decided that one would be appropriate or necessary or if the customer had

consented. The customer, however, could obtain an oral hearing upon request.

The Commission argued that the rule gives broker-dealers an ample opportunity to present their cases, which is all that due process requires, and that the

difference in the treatment of broker-dealers and public customers under the

rule has a rational basis.

Finally, in SEC v. Suter,251 the Seventh Circuit rejected Suter's appeal from

a district court order that denied reconsideration of the court's prior decision

not to vacate a permanent injunction entered against him. In this appeal, Suter

argued unsuccessfully for the third time that his publication of an investment

newsletter rendered him immune from any Commission regulation. The court

characterized his arguments on the merits as frivolous, and sua sponte

awarded the Commission costs incurred in defending the suit.

Detiniiion of a Security- The Commission has participated as a friend of the

court in selected private lawsuits involving the question of whether a particular

instrument is a security. In fiscal year 1987, the Commission filed such an

amicus brief in Sanderson v. Rothenmund.252 In fiscal year 1988, the district

court in that case adopted the Commission's position, holding that certain

debt instruments called International Certificates of Deposit, which were

issued by a corporation that was not subject to bank regulation, were "notes"

within the definition of "security" in the Securities Act of 1933 (Securities Act)

and the Securities Exchange Act of 1934. The court concluded that: (l) the

instruments were indistinguishable from standardized notes of small denomination sold to the public, which have been consistently held to be securities;

and (2) because these instruments were "notes" within the statutory definition

of security, the court did not need to determine whether the instruments

constituted "investment contracts" -also defined by the Securities Act as

securities-within the meaning of SEC v. \¥oJ. Howey Co. 253

In response to the United States Supreme Court's request for the views of the

United States, and in accord with the Commission's position, in Variable

Annuity Life Insurance Co., et el. v. Otto 254 the Solicitor General filed a brief

urging that the Court grant certiorari. The United States Court of Appeals for

the Seventh Circuit had held that a fixed-annuity contract with a variable

component was a security subject to the federal securities laws, rather than an

"annuity contract" exempt from regulation under Securities Act Section

3(aX8). The brief took the position that review was appropriate because the

Section 3(aX8) exemption for annuity contracts might be applicable and many

similar instruments have been marketed in reliance on this exemption. The

78
brief discussed several factors that are significant in determining the applicability of the exemption, including: (1) whether the insurance company

assumes substantial investment risk; (2) the manner in which the contract is

marketed and whether the appeal to customers is made on the basis of

stability and security; and (3) whether the insurance company assumes a

meaningful mortality risk under the contract. The brief contended that the

annuity contract at issue met the investment-risk criterion because the issuer

assumed all risk with respect to principal paid and an adequate minimum

fixed rate of interest. The Supreme Court declined review.

At the invitation of the United States Court of Appeals for the Fifth Circuit,

the Commission filed an amicus brief in Adena Exploration, Inc. v. Sylvan,255

urging that certain interests in oil and gas rights are securities under the

federal securities laws. The Commission's brief argues that the Supreme

Court's analysis in Landreth Timber Co. v. Landreth 256 is applicable to these

interests. Like "stock"-the interest at issue in Landreth-these oil and gas

rights lend themselves to consistent definition and are plainly within the

Securities Act definition of a security. The Securities Act lists "fractional

undivided interest in oil, gas, or other mineral rights" as one category of

"security." Thus, the Commission explains, in determining whether the oil and

gas interest at issue is a security, a court should examine only whether the

interest has the characteristics typically associated with a "fractional undivided interest in oil, gas, or other mineral rights." The Commission's brief also

states that the degree of sophistication of the parties and the extent of the

investor's participation in exploration of the oil and gas leasehold have no

relevance to the determination of whether these interests are securities under

the federal securities laws.

InArthur Young&Co. v. Reves,257the Commission filed a friend-of-the-court

memorandum in the United States Court of Appeals for the Eighth Circuit in

support of a petition for rehearing and suggestion for rehearing en bane. The

court of appeals panel had concluded that certain demand notes that were

widely offered and sold to the public by an Arkansas farmers' cooperative are

not securities. The panel reasoned that: (1) the demand feature of the notes

took them out of the definition of security; and (2)interest on a note does not

constitute "profit" under the SEC v. \¥oJ. Howey Co. 258 test for "investment

contract." The Commission contends that the demand feature of the notes is

not determinative of their status under the federal securities laws; that the

"investment contract" test is inapplicable where an instrument is a security

under any of the tests for "notes;" and that, in any event, "profit" under Howey

includes any type of return on an investment, including interest.

Liability Under Section J 2 of the Securities Act-Substantially agreeing with

the Commission's arguments as amicus curiae, and reversing the United States

Court of Appeals for the Fifth Circuit, the Supreme Court held in Pinter v.

Dahl 259 that the in pari delicto, or equal fault, defense is available in a private

action under Section 12(1) of the Securities Act, which affords a private

remedy of rescission forsales of unregistered securities in violation of the Act.

Under the in pari delicto doctrine, judicial relief may be denied because of a

plaintiffs own culpability. As the Commission had urged, the Court applied a

79
two-pronged test for application of the defense in a Section 12 action: (1) the

plaintiff must be at least equally responsible for the issuer's illegal failure to

register the securities or its failure to conduct the sale in a manner that

satisfies the Act's registration exemption provisions; and (2) the plaintiff must

be primarily a promoter of the securities offering, rather than an investor. The

Court also held that only persons who either pass title to a security or solicit

a purchase may be liable as sellers under Section 12(1). Further, the Court

endorsed the Commission's position that one does not "solicit" unless he is

"motivated at least in part by a desire to serve his own financial interests or

those of the securities owner." The Court declined to take a position on

whether its decision as to the scope of "seller" liability under Section 12(1)

applies to Section 12(2) of the Securities Act, a provision which imposes

liability on persons who offer or sell a security by means of a material

misstatement or omission. The case law, however, generally holds that the

term "seller" has the same meaning in Section 12(1) as it does in Section

12(2). The Court also did not reach the question whether aiding and abetting

liability is available in actions under Section 12.

Shortly after the close of the fiscal year, at the invitation of the United States

Court of Appeals for the Second Circuit, the Commission addressed the scope

of "seller" liability under Section 12(2) of the Securities Act, an issue left open

by the Supreme Court in Pinter v. Dahl.26o In Wilson v. Ruffa &Hanover, P.c.,261

the Commission argued as amicus curiae that a law firm cannot be held liable

under Section 12(2) as a statutory "seller" where the law firm did no more than

prepare allegedly false offering materials and send the materials to several

prospective buyers, including the plaintiff, at the issuer-client's request. The

Commission stated that the Pinter reasoning, while addressed to actions under

Section 12(1), also governs actions under Section 12(2). Thus, the Commission contended, the law firm can be held primarily liable under Section 12(2)

only if it passed title to the securities-which it plainly did not do-or

"solicited" the plaintiffs purchase. The Commission reasoned that a person

cannot be deemed to have solicited a purchase unless he contacts the buyer,

either personally or through an agent, in a meaningful manner, and that the

merely ministerial act of sending the buyer offering materials at the request

of the client-issuer is not such an action. The Commission also stated that

there is no aiding and abetting liability under Section 12(2) of the Securities

Act, because, just as the Supreme Court in Pinter found no indication that

Congress intended in Section 12 to impose primary liability on collateral

participants, there is no indication that Congress intended to impose liability

on such persons through secondary liability concepts. The Commission

pointed out that while the language of Section 12(2) requires this narrow

construction, a plaintiff may be able to proceed under Exchange Act Rule

10b-5, as to which courts have permitted aider and abettor liability, assuming

the requirements of an action under that Rule are met, including scienter and

causation.

Tender Offer and Merger Litigation-In the past fiscal year, the Commission

has participated in several cases raising significant federal securities law issues

in the context of mergers and tender offers. In Basic, Inc. v. Levinson, lnc., 262

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the Supreme Court adopted the Commission's view on the proper standard

under Rule 10b-5 for determining materiality of preliminary merger neqotlations. In that case, a company had issued statements effectively denying that

it was involved in merger discussions, when in fact it was involved in

discussions that ultimately led to its being acquired at a premium. As the

Commission urged, the Supreme Court concluded that materiality is to be

determined by whether a reasonable investor would consider the information

important to his investment decision. The Court, again agreeing with the

Commission, held that in merger cases this determination requires balancing

the significance of the proposed merger against the likelihood of its occur.

renee. The Court also endorsed the Commission's view that the failure to

disclose such material information could constitute fraud on the market.

Under that view where an active secondary market such as the New York Stock

Exchange is involved, reliance on corporate statements can be established by

a rebuttable presumption that investors relied on the integrity of a market

price that reflected those corporate statements.

In Nationwide Corp. v. Howing Co., 263 the Supreme Court requested the

views of the United States as to whether to grant certiorari to review a

decision of the United States Court of Appeals for the Sixth Circuit that

there is an implied private right of action under Section 13(e) of the

Exchange Act. That provision governs going.private transactions, including mergers that involve the issuance of proxy statements. The violation

involved in the case concerned a failure to make disclosures required by

Rule 13e-3 to appear in a proxy statement relating to a going.private

transaction. This rule requires an issuer to state in a proxy statement

soliciting approval of a going.private merger whether the issuer believes

that the transaction is fair to shareholders and to explain in reasonable

detail why it holds this belief. This information must be prominently

displayed and must contain more than mere conclusory statements. The

Solicitor General filed a brief arguing, in accord with the Commission's

position, that Supreme Court review was unnecessary because shareholders have a well-established cause of action under Section 14(a) of the Act

to redress violations of the Commission's proxy rules, and the plaintiffs in

this case therefore had a cause of action regardless of whether there is an

implied cause of action under Section 13(e). The Court denied certiorari.

In two separate cases in the federal courts of appeals, Newmont Mining Corp.

v. Pickens 264 and IU International Corp. v. NX Acquisitions Corp.,265 the

Commission participated as amicus curiae, stating its view as to the Williams

Act's disclosure requirements with respect to financing for a tender offer. In

both cases, the courts adopted the Commission's position that neither the

Williams Act nor Commission rules promulgated thereunder require a tender

offeror to have firm financing in place before it begins its offer. The courts

noted, in accord with the Commission's view, that the Act and rules do require

the offeror to fully and accurately disclose whatever financing has been

arranged or planned. The courts agreed with the Commission that, if and

when a tender offeror acquires firm financing during the offer, the offeror must

amend its disclosure statement accordingly and may have to extend the

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period of the offer to give shareholders an adequate opportunity to consider

the new information before deciding whether to tender their shares.

The Commission further explained its view of Williams Act requirements in

connection with financing in R.H. Macy & Co. v. Campeau Corp. 266 Responding to the court's request, the Commission participated as amicus curiae,

advising the district court that if a tender offeror does not have firm financing

commitments at the outset of a tender offer, then, when the offeror obtains

substantially all the necessary firm financing commitments, the terms and

conditions of that financing would have to be disclosed. Commission rules

require that investors be provided at least five business days to consider such

a change in the offer, and, iffewer than five business days remained in the offer,

the offer would have to be extended to provide shareholders at least five days

to consider it. The Commission further advised the court that "expressions of

willingness" to commit to purchase $1.8 billion in notes from a tender offeror

made in letters by three banks did not amount to firm financing, since the

"expressions of willingness" were not legally binding commitments. Before

the district court could rule on the issue, the target company accepted one of

the tender offers and the suit terminated.

In Koppers v. American Express Co., 267 the Commission responded by

letter to a district court request for its view on whether the Williams Act is

violated if an investment banker both acts as a dealer-manager for a tender

offeror and proposes taking an equity interest in the offeror and fails to

point out this alleged conflict of interest in disclosure documents. The

Commission acknowledged that conflicts could arise where a multi-service

firm proposes to act in both capacities. However, conflicts of interest can be

avoided by using preventive policies and procedures commonly used in the

industry such as Chinese Walls, restricted lists, and watch lists. The

Commission noted that the Williams Act would not ordinarily require

disclosure of apparent conflicts or preventive measures because the

information would not ordinarily be deemed material to the target company's shareholders as they decide whether to tender their shares. However,

disclosure of apparent conflicts and preventive measures would be required

if a failure to follow proper procedures resulted in contingent liabilities

materially affecting a firm's ability to provide or obtain financing for the

tender offer. The court agreed with the Commission that the tender offer

should not be enjoined on this basis.

The Commission filed an amicus curiae brief in American Carriers, Inc. v.

Bay tree Investors, Inc.,268 a case raising the issue of when a tender offer

commences for purposes of triggering the Williams Act's disclosure

requirements. In that case, the offeror challenges a district court's finding

that it commenced a tender offer when it sent to the press a letter stating

an intention to make a tender offer for 51 percent of the target's stock,

subject to approval by the target's board of directors. The offeror failed to

file disclosure documents or withdraw the offer within five days after its

announcement, which the Commission argues violated the Williams Act

and Commission Rule 14d-2(b). The Commission asserts that its releases

proposing and adopting the rule make clear that an announcement of a

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prospective conditional offer that includes the specific terms of the offer

triggers the Williams Act disclosure requirements. The Commission also

points out that such an offer can, and in this case did, have a significant

impact on market activity, and this impact triggers shareholder need for

information about the offeror and its plans for the target company.

Constitutional Challenges to State Takeover Statutes-In fiscal year 1988, the

Commission participated, as amicus curiae, in three federal district court cases

challenging the validity of state takeover statutes under the Supremacy and

Commerce Clauses of the United States Constitution. RP Acquisition Corp. v.

Staley Continental, Inc.269 involved Delaware's takeover statute, which bars for

three years mergers and other combination transactions between a Delaware

corporation and a person (including any entity) acquiring 15 percent or more

of the company's stock, unless: (l) the company's board of directors approves

the transaction prior to the acquirer's acquisition of 15 percent of the

company's shares; (2) the acquisition results in the acquirer holding 85

percent or more of the target company's stock (exclusive of inside directors'

and employee stock plans' shares); (3) the transaction is approved by the target

company's board and two-thirds of its shareholders, exclusive of the acquirer,

after the 15 percent acquisition; or (4) the pre-acquisition board members

continuing in office approve certain tender offers by the issuer or a third party,

or mergers with or asset sales to third parties. The Commission's brief argued

that the statute vests incumbent management with broad power in determining whether a change-in-control transaction will go forward, thus frustrating

the fundamental purpose of the Williams Act, which is to foster shareholder,

rather than management, choice with respect to tender offers. Thus, the

Commission concluded that the Delaware statute was preempted under the

Supremacy Clause of the Constitution. The Commission also argued that the

Delaware statute was invalid under the Commerce Clause because it impedes,

and may in fact prevent, the interstate commerce in securities incident to a

tender offer. This burden on commerce significantly outweighs any legitimate

state interest promoted by the statute. The district court rejected these

arguments and upheld the constitutionality of the statute. The case became

moot, however, when the parties settled their dispute.

The United States District Court for the Eastern District of Wisconsin

accepted the Commission's Supremacy Clause argument without reaching

the Commerce Clause issue in KfE Corp. v. Mark IV Industries, Inc., 270 and

thus held Wisconsin's takeover statute unconstitutional. That statute

barred for three years any business combination between Wisconsin

corporations that have their principal executive offices in, or certain other

contacts with, Wisconsin and persons who acquire 10 percent or more of

the company's stock, unless the company's board approves the combinetion prior to the 10 percent acquisition. Unlike the Delaware statute in RP

Acqulsition Corp., the Wisconsin statute contained no other exceptions.

This case too became moot because the parties reached a settlement.

The Commission advanced the same arguments in Salant Acquisition Corp.

v. Manhattan Industries, Inc.271 to challenge a New York takeover statute. That

statute prohibited for five years combination transactions between certain New

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York corporations and persons acquiring 20 percent of such a company's

stock, unless the company's board of directors approves the transaction before

the acquirer crosses the 20 percent threshold. The court did not reach the

constitutional issues.

Flrst.Amendment Challenge- The United States Court of Appeals for the

District of Columbia Circuit this year affirmed the Commission's power to

assure that publications concerning securities are not misleading or deceptive. In SEC v. Wall Street Publishing Institute, lnc., 272 the Court of Appeals

reversed in part a district court order denying, on First Amendment grounds,

an injunction sought by the Commission pursuant to the anti. touting provisions of the Securities Act. The injunction would have required a magazine

publisher to disclose that it had received consideration from a securities issuer

for touting that company's stock. The District of Columbia Circuit held that

regulation of the exchange of information regarding securities is subject to

only limited First Amendment scrutiny. Applying that standard, the court held

that the disclosure injunction sought by the Commission was not an impermissible prior restraint on publication, because the injunction was imposed

only after full judicial review and was a narrowly-crafted injunction against a

continued practice of publishing articles without disclosure of consideration.

Nevertheless, the court refused to consider the provision of free text by a

company for use in the magazine to be a form of consideration, because that

would result in a constitutionally impermissible intrusion into the editorial

processes protected by the First Amendment.

Motions to Vacate Injunctions-In SEC v. Blinder, Robinson S Co., lnc., 273 the

United States Court of Appeals for the Tenth Circuit affirmed a district court

order denying a motion brought under Federal Rule of Civil Procedure 60(b)

to vacate injunctions entered against a broker-dealer firm and its principal. In

denying the motion, the district court pointed out that the firm's principal,

who remains in control of the firm, had orchestrated a program of disseminating "deliberately deceptive misinformation" and had acted with an "intent

to deceive" investors. As the Commission urged on appeal, the Tenth Circuit

held that the correct standard for determining whether a party is entitled to

Rule 60(b) relief from an injunction is the strict standard set forth in United

States v. Swift SCo, 274 and that in order to obtain such relief a party is required

to make a "clear showing of a grievous wrong evoked by new and unforeseen

circumstances." Agreeing with the Commission, the Tenth Circuit ruled that

petitioners had failed to make the requisite showing.

The Commission successfully opposed a motion to vacate a permanent

injunction in SEC v. AUison.275 The injunction had been entered in 1982 upon

a district court finding that petitioner had sold securities in violation of the

registration provisions of the Securities Act and had that same year been

enjoined by another federal court from fraudulently manipulating the securities market. The motion to vacate was grounded on petitioner's claims that

disclosure of the injunction would hinder a potential business opportunity to

serve as a corporate officer and that the injunction was causing him "psychological stress." Shortly after the close of the fiscal year, the district court

denied the motion.

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Discovery Matters In Commission Enforcement Actions-In SEC v. First

Jersey Securities, Inc. ,276 the United States Court of Appeals for the Second

Circuit affirmed a district court order finding a branch manager of First Jersey

in contempt for failing to produce subpoenaed corporate documents. The

court of appeals thus rejected the manager's assertion of the Fifth Amend.

ment's privilege against self. incrimination. The manager had contended that

the act of production itself would incriminate him, relying on cases upholding

the privilege if the act of production would reveal incriminating information

previously unknown to the government, such as the existence, authenticity or

possession of the documents. The Second Circuit agreed with the district

court that the testimonial effect of production would be negligible because the

existence, possession, and authenticity of the documents were foregone

conclusions. The court found it unnecessary to rule on the Commission's

contention that the act-of-production privilege, like the general Fifth Amendment privilege, does not apply to a custodian of corporate records.

Litigation InvolVing Requests For Access To Commission Records-Although

the Commission received more than 5,500 Freedom of Information Act (FOIA)

and confidential treatment requests in fiscal year 1988, only three of those

requests resulted in the filing of court actions against the Commission, all of

which are awaiting resolution. The Commission received 2,362 requests under

the FOIA for access to Commission records and 3,295 requests for confidential treatment from persons who submitted information. In fiscal year 1988,

there were 70 appeals of denials of FOIA requests to the Commission's

General Counsel and six appeals of denials of confidential treatment requests.

In fiscal year 1988, the Commission filed its brief in Occidental Petroleum

Corp. v. SEC,277 an appeal in which the Commission seeks to overturn a

district court order requiring the Commission to take additional procedural

steps in determining Occidental's claim for confidential treatment of documents requested by a third party under FOIA. The documents had been

obtained by the staff during its investigation of questionable foreign payments. The Commission's brief argues that the Commission's procedures give

a confidential treatment requestor adequate notice and opportunity to submit

evidence to the FOIA officer and the General Counsel, who conducts a de novo

review. The brief also argues that the additional procedures proposed by the

district court are either contrary to law or would establish bad policy. Shortly

after the beginning of the new fiscal year, the United States Court of Appeals

for the District of Columbia heard oral argument in this appeal.

In In re Sealed Case,278 plaintiffs in a private securities law civil action

sought to overturn a district court order upholding the Commission's claims

that information the plaintiffs were seeking through discovery was protected

from discovery by the attorney work product doctrine and the law enforcement

investigatory files privileges. The plaintiffs had sought testimony from Commission staff concerning information that the Commission had gathered in an

enforcement investigation. The Court of Appeals for the District of Columbia

Circuit agreed that both the law enforcement investigatory privilege and

attorney work product immunity applied to the information sought, and had

been properly asserted by the Commission. Because both privileges are

85
qualified, however, the court remanded the case to allow the district court to

balance competing public and private interests.

Actions Under the Equal Access ToJustice Act (EAJA)-In SEC v. Fox,279the

United States Court of Appeals for the Fifth Circuit affirmed the district court's

denial of attorneys' fees under the EAJA to the prevailing party in a

Commission insider trading action. The court held that the district court had

not abused its discretion in determining that the Commission was substantially justified in bringing the action, even though Fox won the case on the

merits. In the court's view, the facts established by the Commission could have

supported a finding that the information possessed by defendants when they

traded was material and that the defendants acted with scienter.

Actions Against the Commission-The United States District Court for the

District of Columbia granted a Commission request for attorneys' fees as a

sanction under Federal Rule Civil Procedure 11 in Awkard v. SEC. 280 The

district court adopted the Commission's method of using market rates for

private attorneys of commensurate experience in calculating the amount of

fees, and indicated that the government may similarly seek attorneys' fees as

a sanction under Federal Rule of Civil Procedure 37 against private litigants

who violate federal discovery rules.

In Panaro v. von Stein,281 the court dismissed an action which alleged that

the Commission and several employees had violated the plaintiffs constitutional rights during a Commission investigation. Plaintiff had repeatedly

failed to appear for her deposition and had subsequently moved for a

voluntary dismissal of the lawsuit which would enable her to reinstate it at a

later date. The court dismissed the lawsuit with prejudice as to certain

defendants and without prejudice as to the remaining defendants. To date,

plaintiff has not reinstated her allegations. .

In SEC v. The Electronic Warehouse, Inc. ,282 a Commission injunctive action,

defendant William A. Calvo filed a counterclaim alleging that the staff had

engaged in misconduct. The United States District Court for the District of

Connecticut held that defendant Calvo's counterclaim was barred by Section

21(g) of the Exchange Act, which prohibits consolidating Commission injunctive actions with other actions absent Commission consent. The court also

struck Calvo's affirmative defenses based on alleged staff misconduct, and

permanently enjoined Calvo from violating antifraud provisions of the federal

securities laws. The violations stemmed from Calvo's role as the underwriter's

attorney in the public offering of stock of The Electronics Warehouse, Inc.

In SEC v. The Royale Group, Ltd.., 283 the United States District Court for the

District of Columbia denied a motion by defendants, The Royale Group, Ltd.,

and entered an order against them imposing sanctions. The court had entered

the contempt order based on defendants' failure to file annual and quarterly

reports as required by an injunction to which they consented in 1982. The

court rejected defendants' arguments that they had mistakenly consented to

the injunction without realizing that contempt could be imposed "without

further notice."

Actions Against Professionals Under Commission Rule 2(e) The staff is

litigating against a number of professionals under Commission Rule 2(e).

86
During the last fiscal year, two such actions were concluded. In In re Bill R.

Thomas,284 the Commission found that a partner in a national accounting firm

had engaged in improper professional conduct, had violated antifraud provisions of the federal securities laws and had aided and abetted violations of the

reporting provisions when he audited the financial statements of a publiclyowned corporation in which he owned stock. The Commission permanently

denied the respondent the privilege of appearing or practicing before it.

Shortly after the end of the fiscal year, the United States Court of Appeals for

the Fifth Circuit affirmed the Commission in all respects.285

In In re SchuLtzenberg,286 after two weeks of trial, a partner in the national

accounting firm of Touche, Ross & Co. consented to a Commission order that

censured him and ordered him not to practice before the Commission for one

year, subject to certain conditions. The staff had alleged that the partner

engaged in improper professional conduct by issuing an "unqualified" audit

report when he lacked a reasonable basis for expressing an opinion on the

adequacy of the allowances reserved for certain potential losses, and failed to

address inaccuracies with respect to aging accounts information that was

contained in the client's public filings.

Actions Under the Right to Financial Privacy Act-The district courts

dismissed two actions filed under the Right to Financial Privacy Act seeking

to block Commission subpoenas of customer financial information from their

banks.287 In each of these cases, the Court found that the Commission was

seeking the records for a legitimate law enforcement purpose, and that the

records were relevant to the investigation. The courts therefore ordered

compliance with the Commission's subpoenas.

Actions Raising Equal Employment Issues-In Broderick v. Ruder,288 the

United States District Court for the District of Columbia found that Title VIIof

the Civil Rights Act of 1964 was violated when the management of the

Commission's former Washington Regional Office created and left unrernedied a sexually hostile work environment which impaired the plaintiffs ability

to perform her job. The court also found that the plaintiff had been retaliated

against because of her complaints regarding the environment. The Commission subsequently settled the case, and retained an Equal Employment

Opportunity (EEO) expert to review the Commission's EEO process and

policies and make recommendations for improvement.

Significant Legislative Developments

Insider Trading-At the conclusion of the session, the 100th Congress

passed The Insider Trading and Securities Fraud Enforcement Act of 1988.

That Act included a variety of provisions designed to enhance the effectiveness of Commission enforcement efforts and increase the penalties for insider

trading. The Act amended the Insider Trading Sanctions Act to provide actions

for civil penalties against controlling persons who fail to take appropriate steps

to prevent or detect insider trading violations by their employees or controlled

persons. Provisions of the Act also require broker-dealers and investment

advisers to establish, maintain, and enforce written policies and procedures

87
that are reasonably designed to prevent the misuse of material, nonpublic

information. The Act increased the criminal penalties for securities law

violations, expressly granted private rights of action for damages to contemporaneous traders in insider trading cases, and authorized the Commission to

award payments to persons who provide information in insider trading cases.

As discussed below, the Act also included a provision designed to enhance

cooperation in international enforcement efforts. Finally, it authorized a

special study of the securities laws to be conducted by the Commission,

contingent upon the subsequent appropriation of funds. The Insider Trading

and Securities Fraud Enforcement Act of 1988 was signed by President

Reagan on November 19, 1988.

During the second session of the 100th Congress, the Senate continued its

consideration of a statutory definition of insider trading. Following a series of

hearings before the Subcommittee on Securities of the Senate Banking,

Housing and Urban Affairs Committee, which included consideration of a

Commission legislative proposal, the Commission submitted a revised proposal to define insider trading on November 18, 1987. Chairman Ruder

testified concerning this revised definition at a hearing before the Subcommittee on December 15, 1987. On February 8, 1988, the Commission

proposed language for inclusion in the legislative history to accompany the

revised insider trading definition.

International Enforcement-On June 3, 1988, the Commission sent to

Congress the International Securities Enforcement Cooperation Act of 1988.

The legislation, in an attempt to facilitate greater international cooperation

among securities authorities, proposed an amendment to Section 21(a) of the

Exchange Act to provide the Commission with discretion to conduct investigations for the purpose of assisting a foreign securities authority. It specified

that, in exercising this discretion, the Commission shall consider whether the

requesting authority has agreed to provide reciprocal assistance in securities

matters to the Commission, and whether compliance with the request would

prejudice the public interest of the United States. This provision was included

in the Insider Trading and Securities Fraud Enforcement Act of 1988.

Other provisions of the proposed bill would permit the Commission to

maintain the confidentiality of certain records obtained from foreign authorities under reciprocal agreements, and would make explicit the Commission's

rulemaking authority to grant both domestic and foreign persons access to the

Commission's investigative files. Finally, the proposed legislation would

amend the Exchange Act, the Investment Company Act of 1940, and the

Investment Advisers Act of 1940 to permit the Commission to impose

sanctions on securities professionals found by a foreign tribunal to have

engaged in misconduct abroad that, had the same misconduct taken place in

the United States, would have subjected the professional to a Commission

disciplinary proceeding. Chairman Ruder testified in support of the proposed

legislation before the Subcommittee on Securities of the Senate Banking,

Housing and Urban Affairs Committee on June 29, 1988, and before the

Subcommittee on Telecommunications and Finance of the House Energy and

Commerce Committee on August 3, 1988.

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Securities and Exchange Commission Authorization Act of 1987 -In November 1987, Congress passed the Securities and Exchange Commission Authorization Act of 1987, which included budget authorizations for fiscal years

1988 and 1989 and a number of technical amendments to the federal

securities laws previously proposed by the Commission. President Reagan

signed this legislation into law on November 4, 1987.

The Act authorizes appropriations of $158 5 million and $172.2 million for

fiscal years 1988 and 1989, respectively, including expenditures of $15

million and $20 million in those years for the development of the Commission's proposed electronic data gathering, analysis and retrieval project

(EDGAR). The most significant of the Act's technical amendments enhanced

the enforcement authority of the Commission and the bank regulatory

agencies over transfer agents and persons associated with them. This new

authority is comparable to the Commission's authority over brokers and

dealers, municipal securities dealers, government securities brokers and

dealers, and persons associated with those entities.

Foreign Corrupt Practices Act-On August 23, 1988, President Reagan

signed into law the Omnibus Trade and Competitiveness Act of 1988. Title V

of the Trade Act amended the accounting and anti-bribery provisions of the

Foreign Corrupt Practices Act of 1977_ The Commission had previously

testified before the 100th Congress in favor of a bill that proposed similar

amendments.

The amendments modified the accounting provisions of Section 13(b) of

the Exchange Act in several ways. They added a new subparagraph (5) that

prohibits any person from knowingly circumventing or failing to implement a

system of internal accounting controls, or knowingly falsifying any required

book, record, or account. The amendments also provided that criminal

liability may be imposed only for violations of new subsection (bX5). In

addition, they specify that an issuer's books and records need contain only the

level of detail and degree of assurance that would satisfy prudent officials in

the conduct of their own affairs.

With respect to the anti-bribery provisions of Section 30A, Title V changed

the standard of liability for payments made through third parties from the

prior "knowing or having reason to know" standard to a "knowing" standard.

The amendments also established an affirmative defense to liability based on

a showing that the payment was lawful under the written laws and regulations

of the foreign official's country or that it was for certain reasonable and bona

fide expenditures incurred by or on behalf of a foreign official. Finally, Title V

raised the maximum criminal fine for violations of Section 30A to $2 million

for issuers and $100,000 for individuals, and authorized the Commission to

seek a civil penalty of up to $10,000 for a violation.

Finencisl Seroices-During the 100th Congress, Chairman Ruder testified

four times before Congressional committees that studied the structure and

regulation of the financial services industry and considered proposed legislation to repeal or modify the Glass-Steagall Act.289 Chairman Ruder

expressed the Commission's support for its own legislative proposal, the

proposed Bank Broker-Dealer Act, which was introduced in the House as H.R.

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2557 and in the Senate as S. 1175. That proposed legislation would generally

subject banks engaged in securities activities to the same regulations,

enforced by the Commission, that apply to all other entities engaged in those

activities. In February 1988, the Commission's staff, in conjunction with the

staffs of the bank regulatory agencies, drafted proposed amendments to the

federal securities laws to address investor protection concerns raised by the

expansion of bank securities activities. Those amendments would bring most

bank securities activities within the broker-dealer regulatory framework

designed by Congress for the protection of investors, and would also address

investor protection issues raised by bank entry into investment company

activities.

At the request of Chairman Edward J. Markey, the Commission prepared a

report on issues raised by Glass-Steagall Act repeal for the Subcommittee on

Telecommunications and Finance of the House Energy and Commerce

Committee. The Commission's report, as well as Chairman Ruder's testimony

before the Subcommittee on April 13, 1988, expressed support for modification or repeal of the Glass-Steagall Act, provided that such modification or

repeal is accompanied by the amendments to the federal securities laws

drafted by the staffs of the Commission and the banking regulators.

Securities Law Enforcement Remedies Act-On September 28, 1988, the

Commission sent to Congress the "Securities law Enforcement Remedies Act

of 1988;' a legislative proposal which would amend the Securities Act, the

Exchange Act, the Investment Company Act, and the Investment Advisers Act

to provide the Commission with new enforcement remedies. The proposed

legislation would provide that civil money penalties could be imposed by the

Commission in administrative proceedings, and by courts in civil actions

brought by the Commission. It would also provide the Commission with

administrative authority to bar or suspend corporate officers and directors

from service in that capacity with a public company, and affirms the authority

of courts to impose such remedies in Commission civil actions. Finally, the

proposed legislation would expand the scope of Section 15(c)(4) of the

Exchange Act to permit sanctions to be imposed under that section for

violations of Section 16(a) of the Act.

The proposed legislation was based, in part, on recommendations of the

National Commission on Fraudulent Financial Reporting (the Treadway

Commission). The Treadway Commission Report, which was issued in

October 1987, made forty-nine recommendations to reduce the incidence

of fraudulent financial reporting. The recommendations were directed to

public companies, the accounting profession, the Commission and other

regulatory authorities, and the academic community. On May 2, 1988,

Chairman Ruder presented the Commission's views before the House

Subcommittee on Oversight and Investigations concerning the thirteen

recommendations that were addressed to, or that would have a direct

impact on, the Commission. Chairman Ruder stated that the Commission

would, in addition to drafting the legislation described above, consider

implementing certain other Treadway Commission recommendations

through rulemaking.

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Market Break Proposals-During the fiscal year, Chairman Ruder testified at

a series of hearings held by various Congressional committees on issues

raised by the October 1987 market break.29O In particular, on June 14, 1988,

Chairman Ruder testified before the House Committee on Agriculture concerning legislative proposals that were endorsed by the Commission at an

open meeting on May 26, 1988. Subsequently, the Commission transmitted

specific legislative recommendations to Congress on June 23, July 6, and

July 7, 1988. Congress did not take action on these proposals before it

adjourned.

The legislative proposals sent to Congress on June 23, 1988, consist of four

separate recommendations. First, the Commission proposed that it be provided with authority to take a variety of actions to respond to a market

emergency. Such authority, which would be roughly equivalent to current

Commodity Futures Trading Commission (CFTC) emergency authority, would

include the authority to implement delayed openings and early closings of the

securities markets as well as temporary trading halts.291 Second, the Commission recommended amendments to the Exchange Act and the Commodity

Exchange Act to add certain findings to those Acts expressing the need for an

enhanced clearing system and directing the Commission and the CFTC to

facilitate the establishment of integrated, cross-market clearance and settlement systems. Third, the Commission proposed amending the Exchange Act

to include a holding company risk assessment provision that would expressly

authorize the Commission to require certain entities registered with the

Commission, including brokers and dealers, to report information relating to

their associated persons that may have a material impact on the financial or

operational condition of the registered entity. Fourth, the Commission sought

authority to adopt reporting rules regarding large securities transactions and

certain transactions in futures markets that are related to transactions in the

securities markets. The Commission expressed the view that such authority

would enhance its ability to identify and monitor activities that are likely to

affect the equities markets. The Commission also recognized that confidentiality and privacy protections must be an essential part of such legislation.

On July 6, 1988, the Commission sent to Congress another portion of the

proposed legislation endorsed by the Commission at the May 26 meeting.

That proposal would amend the Exchange Act and the Commodity Exchange

Act to establish a new regulatory scheme for setting initial and maintenance

margin levels on securities (other than exempted securities) and equity index

futures (and options on such futures). The proposal would allocate responsibility for setting margins to the securities and commodities self-regulatory

organizations, and provide for regulatory oversight by the Commission and

the CFTC of "prudential" margins, i.e., the margin levels deemed necessary to

protect securities and commodities futures firms and clearing corporations

from margin defaults. The Board of Governors of the Federal Reserve System

would have residual authority to regulate margins as it deems necessary or

appropriate to accommodate commerce and industry, to maintain fair and

orderly financial markets, or to govern the use of credit to finance securities

transactions, having due regard for general credit conditions of the economy.

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On July 7, 1988, the Commission transmitted to Congress the final portion

of its legislative package. That proposal, which was designed to create a more

consolidated regulatory structure for the securities and stock index futures

markets, would amend the federal securities laws and the Commodity

Exchange Act to provide the Commission with regulatory authority over

equity and derivative equity instruments-stocks, options, stock index

futures, and options on stock index futures.

Municipal Securities-On September 22, 1988, the Commission authorized

the release of a 376-page report prepared by its staff (Staff Report) containing

a comprehensive discussion of the facts and circumstances that led to the

largest default of publicly-issued securities in the history of the capital

markets: In the Matter of Transactions in Washington Public Power Supply

System (WPPSS)Securities. The Staff Report described the participation of the

parties involved in the WPPSS project and itsfinancing, and discussed several

areas in which the disclosures made to investors in WPPSS securities were

deficient. In a separate letter transmitting the Staff Report to Congress,

Chairman Ruder stated that the Commission had determined to close the

investigation without initiating an enforcement action after considering the

facts set forth in the Staff Report in the context of applicable legal standards

and industry practices, the potential costs and benefits that would be

associated with Commission enforcement action, and the extent to which the

WPPSS matter reflected systematic characteristics of the regulatory framework for municipal securities that might be addressed more appropriately by

regulatory or legislative initiatives.

In order to put into perspective certain of its decisions concerning the

municipal securities markets, including the WPPSS matter, the Commission issued a Report of the Securities and Exchange Commission on

Regulation of Municipal Securities (Report). That Report described the

background against which the Commission's decisions in this area were

made, including the existing regulatory framework applicable to municipal

securities, the circumstances surrounding both the 1975 New York City

fiscal crisis and the WPPSS matter, and the extent to which voluntary

efforts by various entities had improved the degree of investor protection

in the municipal securities market.

In addition, the Report discussed a Commission release requesting comment on a proposed rule that would require underwriters of issues of

municipal securities having an aggregate offering price in excess of ten

million dollars to obtain and review a nearly final official statement before

bidding for or purchasing the securities. That release also requested comment

on the Commission's interpretation of the legal standards applicable to

municipal underwriters, based upon judicial decisions and previous administrative actions, which emphasized that underwriters must have a reasonable

basis for believing the key representations concerning any municipal securities that they underwrite. Finally, the release requested comment on a

proposal by the MSRB and members of the industry to establish a central

repository to collect information concerning municipal securities. The Report

also described the institution of a special inspection project to evaluate the

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unit investment trust industry and determine whether any regulatory changes

are needed.

Corporate Reorganizations

The Commission acts in a statutory advisor's role in reorganization cases

under Chapter 11 of the Bankruptcy Code to see that the interests of public

investors are adequately protected. In these cases a debtor generally is allowed

to continue business operations under court protection while it negotiates a

plan to rehabilitate the business and to pay the company's debts. Reorganization plans often provide for the issuance of new securities to creditors and

shareholders in exchange for part or all of their claims or interests in the

debtor, under an exemption in the Bankruptcy Code from registration under

the Securities Act.

In its capacity as special advisor, the Commission may raise or present its

views on any issue in a Chapter 11 case. Although the Commission may not

initiate an appeal, it frequently participates in appeals taken by others. While

Chapter 11 relief is available to businesses of all sizes, the Commission

generally limits its participation to cases involving debtors that have publicly

traded securities registered under the Exchange Act. In fiscal year 1988, the

Commission presented its views on a variety of issues.

Committees-Official committees are empowered to negotiate with a

debtor in possession on the administration of a case and to participate in all

aspects of the case, including formulation of a reorganization plan. With court

approval, an official committee is permitted to employ, as a cost of administration, one or more attorneys, accountants, or other professionals to assist

the committee in performing its duties. In addition to a committee representing creditors holding unsecured claims, the Code allows the court or a United

States Trustee to appoint additional committees for stockholders and others

where necessary to assure adequate representation of their interests. During

fiscal year 1988, the Commission moved or supported motions for the

appointment of committees to represent investors in three Chapter 11

cases.292

In two cases-In re Global Marine, lnc., et al.293 and In re Allegheny

International, lnc., et al.294_the Commission supported efforts by certain

indenture trustees to form separate official committees to represent public

holders of subordinated debentures. In both cases, the mandatory unsecured

creditors' committee had represented not only the general unsecured creditors (senior creditors) but also the subordinated debentureholders. In Global

Marine the committee consisted of four holders of general unsecured claims

and four representatives of holders of public subordinated debentures. In

Allegheny, the sole representative for debentureholders on the committee was

the indenture trustee. In both cases, the debtors' proposed plans of

reorganization-which provided for disparate treatment for holders of senior

unsecured debt and subordinated debt-created a conflict of interest between

the members of the committee which prevented the committee from effectively representing the interests of the subordinated debenture holders. Consequently, negotiations of the plan of reorganization were stymied.

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The Commission argued in both cases that the conflict of interest

impeded the existing committee from providing holders of the public debt

with adequate representation at a critical juncture of the case-the

negotiation of the terms of plan of reorganization. The Commission

therefore urged that it was critical that public investors be represented by

a separate committee able to advocate their interests. The Commission

pointed out that since the proceedings were in the latter stages the

increased administrative costs of an additional committee should not be a

significant burden to the estate. In GLobaLMarine, the bankruptcy court

agreed with the Commission that a separate committee should be

appointed but limited the scope of the duties of the new committee to

negotiation of a reorganization plan. In Allegheny, the bankruptcy court

denied the motion to appoint a separate committee of debentureholders

but ordered the United States trustee to appoint two additional members to

the unsecured committee to represent debentureholders.

The Commission addressed another important issue relating to committees

in In re MeLridge, Inc.295 In this case, objections were filed by creditors and an

indenture trustee raising the issue of the proper standard to be applied to the

review of an interim fee application of counsel for an official equity securityholders' committee where the estate proves to be insolvent. The Commission

argued that: (1) the statutory language and the policy underlying the Bankruptcy Code required that official committee counsel be compensated for

services reasonably related to the performance of the committee's official

responsibilities; and (2)whether the debtor is, or may be, insolvent isirrelevant

to whether compensation should be awarded to official equity committee

counsel pursuant to Section 330 of the Bankruptcy Code. After a hearing, the

bankruptcy court, without deciding the question of whether the debtor's

insolvency was relevant to an award of compensation under Section 330 of the

Code, granted counsel's interim fee application.

Estate Administration- The Commission acts to protect the interests of

public investors in reorganization cases by participating on selected issues

involving administration of the debtor's estate that have a significant impact

upon the rights of public investors.

In In re Beldunn-United Corp. et aL., 296 the Commission, in an appeal to the

district court, addressed the question of the proper legal standard for

determining whether an indenture trustee is entitled to compensation from

the estate as an administrative expense for its activities on behalf of the

bondholders during the course of the reorganization. The bankruptcy court

had denied almost all of an indenture trustee's request for reimbursement as

an administrative expense under Section 503(b) of the Bankruptcy Code,

which authorizes reimbursement for services that make "a substantial contribution in a case." The court found that, for the most part, the indenture

trustee's activities and those of its counsel benefitted only the bondholders

and thus did not constitute a demonstrable benefit to the estate as a whole. In

the Commission's view,the bankruptcy court applied too stringent a test in

requiring a direct benefit to the estate stemming from the indenture trustee's

participation in the reorganization process.

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The Commission urged in its brief that an indenture trustee should be

entitled to compensation pursuant to the "substantial contribution" standard

if:

(1) the indenture trustee has, through its representation of the interests of

bondholders, made demonstrable efforts towards furthering the reorganization process; and

(2) the indenture trustee's services or those of its counsel do not duplicate

the services of official participants or other indenture trustees.

This test strikes a proper balance between the purposes of the administrative

expenses provision of Section 503(b)-encouraging participation of parties in

interest in reorganization proceedings-and preserving the assets of the

estate for rehabilitation of the debtor and ultimate distribution to creditors.

This matter is still pending.

In In re Allegheny International, Inc. ,297 the Commission participated in

litigation on the issue of whether an annual meeting of stockholders can be

held during the pendency of a Chapter 11 case. The regular annual meeting

had been scheduled by Allegheny's board of directors after the company filed

its Chapter 11 petitions. Creditors of Allegheny had sought unsuccessfully to

enjoin the annual meeting and a proxy contest for control of the board of

directors conducted under the direction of the official equity securityholders'

committee. The Commission urged that: (1) the correct legal standard in

deciding whether or not to enjoin an annual shareholder meeting, consistent

with the position urged by the Commission in In re Johns-Manville Corp., 801

F.2d 60 (2d Cir. 1986), isthat an annual meeting that issought during the plan

negotiation phase of a Chapter 11 reorganization case should not be enjoined

absent a showing of "clear abuse" of the shareholders' corporate governance

rights, such that holding the meeting would jeopardize any possibility of

reorganization; and (2) the district court correctly held that the record in this

case did not support a finding of clear abuse. The annual meeting took place

pursuant to a district court order and management retained control of the

board. The pending appeal before the Third Circuit was thereafter terminated

by stipulation.

With regard to a question of adequacy of notice for the filing of claims, in

In re Standard Metals,298 the United States Court of Appeals for the Tenth

Circuit, in a decision on rehearing, agreed with the Commission's position that

both the debtor and the bankruptcy court have a duty to assure that adequate

notice is given to unscheduled creditors of the date by which claims against

the debtor must be filed (claims bar date), at least when their existence

becomes known prior to the filing of a plan of reorganization. In this case, the

bankruptcy court and the district court had dismissed as untimely a class

claim filed on behalf of industrial revenue bond purchasers who had securities

fraud claims against the debtor. The claims were not listed on the debtor's

schedules, and no notice was given to unscheduled creditors of the claims bar

date. The bankruptcy court, in a opinion upheld by the district court, ruled

that neither the debtor nor the bankruptcy court has a duty to assure notice

of the claims bar date to unscheduled creditors.

The Tenth Circuit ruled, on rehearing, as the Commission had urged, that

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where no notice of the claims bar date was directed to holders of the bonds and

an individual bondholder filed a late claim on behalf of the bondholder class,

notice to the bondholders was required once the existence of their claims

became known. Observing that the bondholder claimants in the case became

known to the debtor and to the bankruptcy court early in the reorganization

proceeding, the court ordered that notice now be directed to the bondholders

and that they be given an opportunity to file claims in the reorganization case.

The Tenth Circuit left standing, however, its earlier ruling that class claims are

not permissible in bankruptcy.299

During the fiscal year, the Commission reiterated in a number of bankruptcy

cases its position taken in several cases last year (53rd Annual Report at 73),

that class claims are permissible in bankruptcy. The Commission believes

that, under principles of statutory construction, the well-recognized right to

file class claims outside of bankruptcy is equally available in bankruptcy

cases. Further, the Commission concludes that there are sound policy reasons

for allowing class claims in bankruptcy. The class action is a particularly

suitable device for the assertion of multiple small claims where, although no

one individual has a stake in the outcome sufficient to support the costs of

filing and pursuing the claim, the litigation may be conducted economically

if the claims are aggregated. Finally, allowing class claims in bankruptcy

fosters the bankruptcy policy of resolving all legal obligations of the debtor in

one proceeding.

In In re American Reseroe,300 the Commission won an important victory

when the Seventh Circuit, agreeing with the statutory and policy arguments

made by the Commission, ruled that class proofs of claim are permissible in

bankruptcy. In In re Standard Metals Corporation 301 the Solicitor General of

the United States filed a brief on behalf of the Commission in the Supreme

Court on a petition for a writ of certiorari in that case. The brief reiterated the

Commission arguments that, under the Bankruptcy Code and Rules, class

proofs of claim are permissible in bankruptcy proceedings. For several

reasons unique to this case, however, the brief concluded that certiorari should

not be granted. Subsequently, the petition for a writ of certiorari was dismissed

after the parties had reached a settlement providing for most of the relief they

sought before the Supreme Court.

The Commission has participated in several other cases urging that class

claims are permissible in bankruptcy. In In re Charter CO.302 an appeal is

pending in the Court of Appeals for the Eleventh Circuit. Appeals are also

pending before the district courts in In re L7V Corporation 303 (class claim

denied) and in In re Allegheny International, Inc. et al.304(class claim denied).

Finally in a case of note, in In re Allis.Chalmers Corporation, et al.305 the

bankruptcy court, in a ruling that was not appealed, disagreed with the

Commission and ruled that class proofs of claim are not permissible in

bankruptcy cases. Instead, it (1) directed the debtor to provide notice by

publication or other means calculated to alert members of the class of the

pendency of the class action, and (2) extended the claims bar date for a

reasonable period to allow individual claims to be filed by such potential

creditors.

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In In re Melridge, Inc.306 the Commission addressed the question of whether

an indenture and debentures qualified under the Trust Indenture Act of 1939

were executory contracts. In this case the indenture trustee moved to require

the debtor to assume the indenture, claiming it was an executory contract. The

effect of assuming the indenture would be to automatically make the

indenture trustee's services during the case an administrative expense. In

response, the debtor moved to reject the indenture and debentures themselves, as burdensome executory contracts. The effect of such rejection would

be to eliminate participation in the bankruptcy proceeding by the indenture

trustee. The Commission argued in response that the indenture and debentures issued under it are not executory under the Code because nothing

remains for the bondholder to do except receive payment. Moreover, the

post-default duties of an indenture trustee are not obligations for the benefit

of the debtor/issuer, which can be subject to rejection under Section 365, but

rather are for the benefit of the bondholders. The Commission also pointed

out that to allow rejection would contravene the policies of the Trust Indenture

Act and the Bankruptcy Code which both contemplate an active role for the

trustee. Finally, the Commission pointed out that assumption of the indenture

as requested by the indenture trustee, which would automatically secure an

administrative expense priority for its services, is contrary to the statutory

scheme established in the Bankruptcy Code for compensating indenture

trustees for services rendered in connection with reorganization proceedings.

The bankruptcy court denied the debtor's motion but did not reach the

question of whether the indenture or the debentures were executory contracts.

Disclosure Statements/Plans of Reorganization-A disclosure statement is a

combination proxy and offering statement used in soliciting acceptances of a

plan of reorganization. Such plans often provide for the exchange of new

securities for claims and interests of creditors and shareholders of the debtor.

The Bankruptcy Code provides that adequate disclosure is to be made without

regard to whether or not the information provided would otherwise comply

with the disclosure requirements of the federal securities laws. But, in

recognition of the Commission's special expertise on disclosure questions,

the Bankruptcy Code recognizes the Commission's right to be heard, distinct

from its special advisory role, on the adequacy of disclosure. For this reason,

the Bankruptcy Rules require service on the Commission of all disclosure

statements.

During fiscal year 1988, the Commission received approximately 6,713

disclosure statements filed in Chapter 11 cases involving both privately-held

and publicly-held corporations. The staff limits its review to those disclosure

statements filed in cases involving a publicly-held company or a company

likely to be publicly traded as a consequence of the reorganization. During

1988, the staff reviewed 151 disclosure statements.

In its review of disclosure statements, the staff seeks to determine whether

the issuance of securities under a plan is consistent with the exemption from

registration in the Bankruptcy Code and otherwise in compliance with the

federal securities laws. The Commission also reviews statements to determine

whether there is adequate disclosure concerning the proposed plan. Generally,

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the Commission seeks to resolve questions concerning bankruptcy disclosure

through staff comments to the plan proponent. If questions cannot be

resolved through this process, the Commission may object to the disclosure

statement in the bankruptcy court.

During fiscal year 1988, the Commission commented on disclosure statements in 83 cases, the vast majority of which were adopted by debtors. The

Commission was compelled to object to disclosure statements in two cases. In

In re Vidalia Sweets Brand, Inc. ,307 the Commission filed objections to the

debtor's disclosure statement arguing that it did not contain adequate

information because it failed to disclose: (1) the rationale or authority for

substantively consolidating the debtor with another Chapter 11 debtor; (2)

sufficient financial information, including a current and pro forma balance

sheet and projections of future operations; (3)a liquidation analysis to support

the debtor's conclusion that shareholders would receive nothing upon liquidation; (4) a basis on which to determine whether the proposed plan is

feasible; (5) the debtor's intention with respect to meeting its reporting

requirements under the Exchange Act; (6)the effect of dilution upon existing

shareholders; and (7) tax consequences of the plan to creditors and stockholders. The disclosure statement also failed to disclose, accurately, the

transactional exemption from registration of the securities proposed to be

issued under the plan. The bankruptcy court agreed with the Commission's

objections and declined to approve the disclosure statement. In In re The

Rolfite Company 308 the Commission filed objections to the debtor's disclosure statement arguing that it did not contain adequate information because

it failed to: (1) contain a required provision prohibiting the issuance of

non-voting equity securities; (2) characterize existing equity securityholders,

whose voting rights are to be substantially diluted under the proposed plan, as

impaired, thus denying them the opportunity to review the disclosure statement and vote on the plan; and (3) provide additional or more complete

financial information concerning the debtor. The debtor consented to amend

the disclosure statement to meet the principal objections posed by the

Commission.

Compliance with the Registration Requirements of the Securities Act-Section

1145 of the Bankruptcy Code contains a limited exemption from registration

under the Securities Act for the distribution of securities by a debtor, or an

affiliate or successor to the debtor, pursuant to a plan of reorganization and in

exchange for claims against or securities of the debtor or such affiliate. The

issuance of securities pursuant to a plan is deemed to be a "public offering;'

which means that there is no restriction on resale of such securities unless the

seller is an "underwriter" as specifically defined in Section 1145(b).

In one case litigated this year, In re Cordyne Corporalion,309 the Commission

filed objections to confirmation of the debtor's plan of reorganization for

failure to comply with the registration provisions. The plan, if confirmed,

would have resulted in a unrelated privately-held entity becoming a public

company through the issuance of unregistered securities pursuant to a merger

with the debtor, a publicly-held company with no assets. The plan also sought

to raise new capital for the reorganized entity through the issuance of

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certificates of indebtedness to certain lenders resulting, on conversion of the

certificates, in the issuance of the debtor's unregistered securities. First, the

Commission argued that the proposed merger transaction to issue stock to

the shareholders of an unrelated entity did not qualify for the Section 1145

exemption. Those shareholders did not have a pre-petition or any other claim

against or interest in the debtor. Nor could the shareholders of the unrelated

entity, which had no preexisting relationship with the debtor, be considered as

shareholders of affiliate of the debtor for purposes of Section 1145. Second,

the Commission argued that the securities (common stock and warrants) to be

issued to the lenders also did not qualify for the Section 1145 exemption.

Since the funds to be raised were to be used solely after confirmation by the

reorganized debtor, Section 364, the provision governing the issuance of

certificates of indebtedness, was not applicable and the certificates issued to

the lenders were not valid administrative claims. Section 364 authorizes a

debtor to borrow funds as an administrative expense for the debtor's business

operations during the case, not for post-confirmation purposes. Hence, the

Commission argued that Section 1145, which exempts from registration the

issuance of securities in exchange for administrative claims, could not be

relied upon to exempt the issuance of debtor's securities in exchange for the

lenders' certificate of indebtedness. Finally, the Commission objected to

confirmation of the debtor's plan of reorganization pursuant to Section

1129(d) because, even if the court concluded that the foregoing transactions

were within the Section 1145 exemption, the plan still could not be confirmed

since its principal purpose was to avoid the application of Section 5 of the

Securities Act. The Commission argued that the debtor's plan was a device by

which a privately owned corporation would become publicly owned without

complying with the registration provisions of Section 5 of the Securities Act

of 1933. The bankruptcy court, accepting the Commission's arguments,

denied confirmation.

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Economic Research and Analysis

Key 1988 Results

The economic and statistical research program provides analysis and

technical support designed to aid the evaluation of the economic aspects of

Commission and self-regulatory regulation and its impacts on the rapidly

changing global marketplace. This program is carried out by the Office of

Economic Analysis (OEA).

The economic staff provides the Commission with economic advice and

research sudies on rule proposals, established policy, and the capital markets.

The staff assists the Commission in making decisions affecting the fairness,

efficiency, and structure of our nation's securities industry and markets. In

addition, the program encompasses statistical monitoring of major program

initiatives impacting the securities industry and the preparation of monthly

reports on developments in domestic and international capital markets.

Several developments have increased the volume and complexity of the

work performed by the Economic and Statistical Program, including the

October 1987 market break, the application of new technology within the

industry, and the increasing use of economics and financial theory in

enforcement cases. In addition, the growing internationalization of securities

markets has increased the need to keep abreast of economic, regulatory, and

institutional changes in foreign securities markets that could have an effect on

the operation and competitiveness of the United States securities markets.

Internationalization presents both challenges and opportunities for the

United States securities markets and its regulators. The events of October

1987 indicated once again the extent to which the world's securities markets

have become interrelated. Further growth and integration of international

securities markets is anticipated in the years ahead, presenting numerous

regulatory and economic issues. This integration and growth of the global

markets will require the development of a global regulatory perspective that

preserves the efficiencies associated with international capital mobility, while

maintaining the integrity and fairness of the United States market. The rapid

maturation of foreign securities markets and the regulatory restructuring that

is now occurring in the United Kingdom, Canada, Japan, and the European

Community offer important regulatory challenges to the Commission. It is

essential to maintain the fairness and integrity of our markets while leaving

U.S. firms free to meet the challenges of increased international competition

in the provision of financial services.

During fiscal year 1988, the economics staff reviewed 115 rules, encompassing the full range of the Commission's regulatory program. In addition,

the economics staff reviewed 95 RFAanalyses and certifications, and provided

advice, technical assistance, and empirical analyses of 310 issues of concern

to the Commission and its operating divisions. Twelve monitoring programs

100
were developed or maintained to study the implementation of major rules,

new trading facilities, and developments in the domestic and international

securities markets. The economics staff created or maintained approximately

75 computerized databases needed to analyze issues and prepared about 600

written responses to technical and data inquiries.

In the securities markets area, the staff prepared a monthly monitoring

report on developments in domestic and international financial markets.

The staff is completing a follow-up report to the Commission's July 1987

Report on the Internationalization of the Securities Markets which was

submitted to Congress. Specifically, the staff is analyzing the extent and

nature of international trading in securities, United States and foreign

portfolio investment patterns, the growth of the international bond and

equity markets, major regulatory restructuring in overseas markets, and

the emergence of various international funds as vehicles to facilitate

international capital flows. The staff continues to monitor and analyze

major developments impacting financial markets, including the effects of

changes in the macroeconomic environment on domestic and international securities markets. The staff helped develop a system to detect and

analyze possible instances of market manipulation involving the use of

options. The staff also assisted the Division of Market Regulation in

responding to Congressional inquiries concerning the extent and impact of

dividend capture programs of Japanese life insurance companies.

Following the October 1987 market break, the staff prepared a comprehensive analysis of the financial condition of securities firms. The staff also

analyzed the impact of the market break on bid-ask spreads, quotation depth

and intraday price volatility on a cross-section of stocks. This analysis was

included in the Division of Market Regulation's report on the October 1987

market break.

In the full disclosure area, the staff responded to a request from the

Chairman to examine the "blank check" phenomenon. The study profiled the

principals and outside professionals associated with blank check offerings,

periodic reporting compliance, post-effective acquisitions, and the market

maker participation in these issues.

The staff assisted the Commission by providing technical assistance in

litigation regarding the new Delaware takeover law.The analysis indicated the

frequency with which various categories of firms would have been affected by

the new law.The staff also examined the effect that the new law has had on

reincorporations and on underlying stock prices.

Studies completed in the corporate control area covered such topics as

leveraged buyouts, sources of tender offer financing, dual class recapitalizations, effects of defeating takeover attempts, and market anticipation of

takeovers. These studies provided the Commission with comprehensive

information identifying important trends in this area. The staff also prepared

a study on the profitability of acquisitions made by target firms of hostile bids.

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Management and Program Support

Key 1988 Results

The goals of program direction are to formulate and communicate policy

and to manage agency resources, enabling the Commission to fulfill its

statutory responsibilities. These goals are accomplished by performing two

functions-policy management and administrative support. Policy management encompasses policy formulation, information dissemination, and management of the agency's resources. Administrative support entails services

such as accounting, data processing, staffing and logistics to support Com.

mission objectives.

Policy Management

In carrying out its mission, the Commission made special efforts to solicit

a wide range of viewpoints on issues affecting investors and the securities

industry. Chairman Ruder and the other Commissioners conferred with

industry and investor representatives on such issues as market volatility,

reform of the securities laws and internationalization. With respect to internationalization, the Commission negotiated cooperative memoranda of

understanding with Canada and Brazil. Additionally, the Chairman visited

regulatory officials in Japan, the United Kingdom and other countries to

discuss the need for greater coordination among the international capital

markets.

The Commission held 74 meetings in fiscal year 1988, during which it

considered 380 matters including rule proposals, enforcement actions, and

other matters that significantly affect the securities markets and the nation's

economy. The Commission also considered 627 routine or emergency items

seriatim.

The Commission's management staff maintained a comprehensive program of oversight, conducting a series of management studies and initiating

special projects throughout the year. The Office of the Executive Director

conducted a special study, requested by the Securities Subcommittee of the

Senate Committee on Banking, Housing and Urban Affairs, into transforming

the agency from appropriated to self-funded status. The study report will be

provided to the Senate Committee early in fiscal year 1989. Among other

projects conducted during fiscal year 1988 were evaluations of investor

complaint processing and public reference room procedures and reviews of

internal controls. In addition, internal audits were conducted of Commission

organizations, programs, functions and activities.

Consumer Affairs and Information Services

Consumer affairs specialists responded to approximately 49,000 complaints and inquiries during fiscal year 1988. Of these, approximately 28,000

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involved investor disputes with registered broker-dealers. 9.100 related to

general investor inquiries. 6,100 concerned issuers of securities, and 2,500

pertained to mutual funds. The remaining 3,289 involved transfer agents,

banks, investment advisers, or self-regulatory organizations (SROs).

The number of complaints and inquiries represents a 22 percent increase

over the previous year. The primary factor contributing to the increase was the

stock market break in October 1987. A secondary factor was the increased

public awareness of the SEC due to publicity of recent insider trading cases.

During fiscal year 1988, the Office of Consumer Affairs participated with

other SEC organizations in developing the staff report on the October 1987

market break. The office conducted an analysis of "market break complaints"

received by the SEC and the SROs during October 14-30, 1987. Over 1,500

written complaints were directly attributable to the market break. An additional 9,300 telephone complaints and inquiries were received during a

six-week period, beginning October 19. Findings resulting from the consumer

complaint analysis are contained in Chapter 12 of the staff report entitled, The

October 1987 Market Break.

The Office of Consumer Affairs and Information Services also responds to

a variety of information requests. During fiscal year 1988, the office processed

2,308 Freedom of Information Act requests, 35 Privacy Act requests, and

3,295 requests for confidential treatment. In addition, the office coordinated

3,725 requests from the Congress for Commission records, an 87 percent

increase over the previous year.

The Office of Consumer Affairs also assists the Commission's program

areas by gathering specialized data from complaints in support of program

objectives. For example, the office compiles data pertaining to broker-dealer

sales practice abuses and overall complaint trends within the financial services

industry. Investor complaints constitute a prime source of investigatory leads

for the agency's enforcement program.

Public Reference

The Commission maintains public reference rooms in the Washington D.C.,

New York and Chicago offices. In response to the need to improve control over

the Commission's resources, while at the same time enhancing services to the

public, the SEC restructured the Public Reference Room in Washington, D.C.

During fiscal year 1988, more than 43,700 visitors used the Commission's

primary Public Reference Room in Washington D.C. At this facility, the public

can view most corporate filings, broker-dealer and investment adviser registrations, Commission releases, and other public materials. Approximately

380,907 pieces of microfiche, containing 329,431 public documents, were

made available to the public during the fiscal year.

Equal Employment Opportunity

During 1988, the EEO office conducted a national seminar focusing on

EEO and Affirmative Action Programs. Among those attending were EEO

Counselors, Federal Women's Program Coordinators, and Hispanic Employ103
ment Coordinators. In addition, the Commission continued to train agency

staff members on the prevention of sexual harassment in the workplace.

At the same time, the Commission re-activated its Federal Women's

Program. The program emphasized issues important to female employees,

such as personal security and childcare. As in previous years, the Commission

conducted special activities recognizing minority group achievements during

Afro-American History Week, Asian-Pacific American Heritage Week, Hispanic Heritage Week, and Women's Week.

During fiscal year 1988, the Commission made gains in the employment of

minority groups and women. By the end of fiscal year 1988, women

constituted almost one-half of the total SEC workforce. In fiscal year 1988, the

employment of black males increased from 5.6 percent to 7.0 percent, and

black females rose from 20.9 percent to 22.0 percent. During the same period,

the employment of Hispanic females increased from 1.4 percent to 2.0

percent, while employment percentages remained constant for Hispanic

males and American Indian/Alaskan natives at 1.0 percent. Additionally,

employment of Asian American/Pacific Islander men and women grew by 1.1

percent and 0.9 percent, respectively.

The SEC-Securities Industry Committee on Equal Employment Opportunity continued its financial support of minority students by awarding $11,100

in scholarships. In addition, through the committee, the Commission coordinated with industry in developing employment strategies to maintain a

balanced workforce of minorities and women during the time of severe

personnel cutbacks in the industry followinq the October 1987 market break.

Facilities Management

Fiscal year 1988 presented numerous space and logistical challenges for

the Office of Administrative Services. The office acquired additional office

space for the Denver Regional Office and for headquarters in Washington, D.C.

The headquarters acquisition provided space for an increase in staff, as well as

continuing consolidation of program staffs. Additionally, the office worked

with General Services Administration (GSA) in locating new space for the

forced relocation of the New York Regional Office.

The Office of Administrative Services exercised increased responsibility in

contracting activities as well. Through authority acquired from GSA, the

agency assumed contracting activities for lease arrangements and service

contracts. The office awarded approximately $13 million in contracts in fiscal

year 1988, an increase of approximately $4 million over fiscal year 1987. A

significant portion of the increase is attributed to the purchase and installation

of a new mainframe computer that replaced the Commission's obsolete unit.

Financial Management

Throughout fiscal year 1988, the Commission continued to modernize its

automated financial systems. The Commission installed a new U.S. Treasuryapproved accounting system, the Federal Financial System (FFS). FFS

provides all accounting and financial reporting operations, and will permit the

104
SEC to decentralize the input of financial data by providing organizations with

on-line access. The Commission continued to expand its use of microcomputers in the preparation of financial reports required by Congress, the Office

of Management and Budget, and other executive oversight agencies.

The Commission also continued to enhance its internal financial operating

procedures. The processing of employee travel claims was improved, thereby

allowing the Commission to achieve a 16.5 percent reduction in its value of

outstanding employee travel advances. The use of electronic funds transfer

was expanded to pay two-thirds of all Commission employees, which greatly

reduced "float" time and increased the amount of funds in U.S. Treasury

interest-bearing accounts.

During fiscal year 1988, Commissioners participated in 59 meetings and

conferences. To pay the cost of attendance, private entities reimbursed the

Commission $41,991 while the government's portion amounted to $3,007.

The Commission was reimbursed $117,953 for staff participation in 320

meetings and conferences, while the government's portion of these costs

totaled $20,841.

Information Systems Management

During fiscal year 1988, the Office of Information Systems Management

(ISM) made great strides towards modernizing the Commission's computer

equipment and systems. First, replacement of the agency's outdated central

processing unit was accomplished, responding to concerns expressed by

Congress. Second, the Commission dramatically expanded its inventory of

microcomputers, integrating more efficient computer applications into pro.

gram activities. The Commission acquired over 600 desktop and laptop

microcomputers. This equipment was systematically distributed to regional

and headquarters offices, thereby enhancing staff activities in all program

areas. Third, ISM upgraded communications capability of regional offices to

headquarter's mainframe systems, and improved administrative systems.

To ensure efficient use of the new computer equipment, ISM provided

enhanced user services and specialized programming assistance. ISM established a new training center and extended existing services offered by the User

Support Information Center to encompass technical reference, user assistance, and traditional and self-paced instruction. A comprehensive training

course was conducted for regional and headquarters staff assigned laptop

computers for use in examination and investigatory programs.

In addition to general user support, ISM developed microcomputer applications capable of storing, retrieving, and analyzing large amounts of data for

use in major enforcement actions. ISM also provided specialized computer

services to Commission staff to support the market break study and increased

staff access to external market databases.

Personnel Management

During fiscal year 1988, the Office of Personnel revised regulations on

within-grade increases and quality step increases by linking pay raises more

105
closely with job performance, implemented new regulations that facilitate

more timely resolution of employee grievances, and amended merit promotion announcement procedures to reduce lapse time in filling vacancies.

The personnel office responded to the Commission's automation initiatives

with a priority computer training program. In fiscal year 1988, approximately

1,200 employees received training on computer systems or applications.

The Office of Personnel responded to increased emphasis on employee

benefits and quality of worklife by creating a unit specializing in health

benefits, retirement plans, injury compensation, and employee development.

Additionally, the Commission developed regulations pertaining to employee

drug testing, implemented smoking regulations, provided funds for shared

federal day-care facilities, enhanced employee counselling activities, and

instituted a program for leave sharing.

The Commission continued to be challenged in recruiting and retaining

qualified staff. To meet this challenge, the personnel office implemented a

continuing program for the recruitment of attorneys, accountants, securities

compliance examiners, computer programmers, and secretaries. The SEC

also successfully lobbied the Office of Personnel Management (OPM) for

additional direct hiring authority and promptly implemented OPM delegations of authority. Finally, the Commission persuaded OPM to revise the

qualification standards for securities compliance examiners in order to reach

a greater number of qualified individuals.

During fiscal year 1988, the Commission administered a balanced personnel management program through appropriate recognition of employee

performance. In fiscal year 1988, the SEC awarded more than $800,000 in

incentive and performance awards. During the same time, the Commission

brought disciplinary actions against 13 employees and allowed another 21

employees to resign in lieu of removal because of performance or conduct.

Commission Operations

For the sixth consecutive year, and the seventh time in its 54-year history, in

fiscal year 1988 the SEC collected revenue in excess of its appropriation. The

Congress appropriated $135,221,000 for the Commission in fiscal year 1988;

the Commission delivered to the U.S. Treasury $250 million in fee collections

and disgorgements. Fee revenue is collected from four basic sources: securities registrations under the Securities Act of 1933 (49 percent of the total fiscal

year 1988 fee revenue), transactions on securities exchanges (35 percent),

tender offer and merger filings (13 percent), and miscellaneous filings (3

percent).

Public Affairs

The Office of Public Affairs communicates information on Commission

activities to those interested in or affected by Commission actions, including

regulated entities, the press, employees of the Commission and the general

public. Both on-going activities and special projects are undertaken by the

office in support of the Commission's mission.

106
During fiscal year 1988, the October 1987 market break and its aftermath

and increasing internetionallzation of the securities markets created new and

intensive challenges for the office. Workload increased substantially, in almost

all areas. These increases seem likely to continue into the present and future

fiscal years.

All on-going programs of the office, designed to disseminate information to

those affected by or interested in the Commission's work, were carried out

during the year.

Public Affairs staff prepares the SEC News Digest every business day. The

Digest provides information on virtually all SEC actions-rule changes,

enforcement actions against individuals or corporate entities, acquisition

reports, releases, decisions on requests for exemptions, upcoming Commission meetings, and other events of interest. Information on Commission

activity is also disseminated through notices of administrative actions,

litigation releases, and other materials. The News Digest is available in the

Public Reference Room.

Press releases issued prior to Commission meetings and press briefings

conducted after these meetings provide insight into proposed and adopted

changes in policies and regulation. The office also issues press releases on

upcoming events, on-going programs, and special projects. In all, 89 news

releases were issued during the year. Special projects such as studies and

reports on emerging issues in the financial markets are also publicized. Many

Commission actions are of nationwide, and increasingly, international interest. When appropriate, these actions are drawn to the attention of regional,

national and international press.

The office directs publication of the SEC Annual Report that provides

information on Commission activities to Congress, the securities bar and

other interested parties, and through the Depositary Library System, to

selected colleges and universities throughout the country.

Speeches presented by Commissioners and senior staff and testimony are

retained and disseminated in response to requests from the public. During the

year, the staff responded to approximately 72,000 requests for information

and coordinated programs for 275 foreign visitors. Also during the year, the

staff updated and revised such publications as the "SEC Publications Guide",

"SEC Concise Directory" and "Work of the SEC".

Public Affairs publishes a regular newsletter for employees, the Employee

News, and prepares a daily summary of news clips for Commission employees.

107
Commissioners and Principal Staff

Officers

(As of September 30, 1988)

Joseph A. Grundfest

Edward H. Fleischman

VACANT

Secretary: Jonathan G. Katz

Executive Assistant to the Chairman: Linda D. Fienberg

Commissioners

David S. Ruder, Chairman

Charles C. Cox

Term Expires

1991

1988

(renominated)

1990

1992

Principal Staff Officers

George G. Kundahl, Executive Director

Kenneth A. Fogash, Deputy Executive Director

Linda C. Quinn, Director, Division of Corporation Finance

Elisse B. Walter, Deputy Director

Mary E. T. Beach, Associate Director

Ernestine M. R. Zipoy, Associate Director

Howard P. Hodges, Jr., Associate Director

Mauri L. Osheroff, Associate Director

William E. Morley, Associate Director

Gary G. Lynch, Director, Division of Enforcement

John H. Sture, Associate Director

William R. McLucas, Associate Director

Joseph I. Goldstein, Associate Director

Michael D. Mann, Associate Director

Thomas A. Ferrigno, Chief Counsel

Thomas C. Newkirk, Chief Litigation Counsel

Richard G. Ketchum, Director, Division of Market Regulation

Mark D. Fitterman, Associate Director

Brandon C. Becker, Associate Director

Larry E. Bergmann, Associate Director

Kathryn B. McGrath, Director, Division of Investment Management

Marianne K. Smythe, Associate Director

Gene A. Gohlke, Associate Director

Mary S. Podesta, Associate Director

William C. Weeden, Assistant Director, Office of Public Utility Regulation

108
Daniel L. Goelzer, General Counsel

Paul Gonson, Solicuor

Jacob H. Stillman, Associate General Counsel

Benjamin Greenspoon, Associate General Counsel

Phillip D. Parker, Associate General Counsel

Mary M. McCue, Director, Office of Public Affairs

Chiles T. A. Larson, Deputy Director

Edmund Coulson, Chief Accountant

Glen L. Davison, Deputy Chief Accountant

Kenneth Lehn, Chief Economist, Office of Economic Analysis

Jeffry L. Davis, Deputy Chief Economist

Terry M. Chuppe, Associate Chief Economist

David H. Malmquist, Associate Chief Economist

William S. Stern, Director, Office of Opinions and Review

Herbert V. Efron, Associate Director

R. Moshe Simon, Associate Director

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Henry I. Hoffman, Assistant ComptroUer

Richard J. Kanyan, Director, Office of Administrative Services

David L. Coman, Deputy Director

James C. Foster, Director, Office of Personnel

William E. Ford, II, Assistant Director

Wilson Butler, Director, Office of Applications and Reports Services

Bonnie Westbrook, Director, Office of Consumer Affairs and Information

Services

Gregory Jones, Sr., Director, Office of Information Systems Management

VACANT, Deputy Director

Nina G. Gross, Director of Legislative Affairs

James A. Clarkson, III, Director of Regional Office Operations

Ernest B. Miller, Manager, Equal Employment Opportunfty

John O. Penhollow, Director, Office of EDGAR Management

109
Biographies of Commissioners

David S. Ruder

David Sturtevant Ruder was sworn in as the 23rd Chairman of the Securities

and Exchange Commission on August 7, 1987, by Associate Justice Antonin

Scalia of the Supreme Court of the United States.

Recently he appointed a special Commission task force to deal with the

increasingly prevelant problem of fraud and market manipulation in penny

stock.

The October 1987 market break focused increased attention on the role of

the Commission in addressing securities market problems. Since that time

Chairman Ruder has taken an active role concerning market problems

through Congressional testimony, Commission legislative proposals, oversight of the Commission's Division of Market Regulation, discussions with

self-regulatory organizations and industry leaders, and participation in the

President's Working Group on Financial Markets.

In addition to market matters, Chairman Ruder has addressed continuation

of the Congressional policy of balance in the tender offer area; legislation to

define insider trading; emerging issues in internationalization of the securities

markets; increased disclosure in the municipal securities markets; and reform

of the financial services industry. He has presided over Commission decisions

on improving the arbitration process for investors, adopting advertising rules

for mutual funds, and amending proxy and shareholder communications

rules, among other matters.

Before his nomination to the Commission, Chairman Ruder was a member

of the faculty of Northwestern University School of Law from 1961 to 1987,

where he taught corporate and securities law.He was a visiting professor at the

University of Pennsylvania Law School in 1971 and a faculty member at the

Salzburg Seminar in American Studies in 1976. As Dean of Northwestern's

LawSchool from 1977 to 1985, he conducted an extensive faculty recruitment

program; actively participated in the successful completion of a $25 million

Law School Campaign and in the construction of the School's Arthur Rubloff

Building; and helped to persuade the American Bar Association to move its

headquarters to the Rubloff Building.

Before coming to the Commission, Chairman Ruder authored many articles

on corporate and securities law matters, was a speaker and participant in

continuing legal education programs of numerous organizations, and was

active in bar association activities in the corporate and securities law field.

While at Northwestern, he played a primary role in the organization and

on-going activities of the School's Corporate Counsel Institute, the Ray

Garrett, Jr., Corporate and Securities LawInstitute, and the Corporate Counsel

Center, which sponsors legal research and provides continuing professional

education programs for corporate lawyers.

110
A native of Wausau, Wisconsin, Chairman Ruder received a bachelor's

degree, cum laude, in 1951 from Williams College, where he was a member

of Phi Beta Kappa and Gargoyle, the senior honorary society. He was

editor-in-chief of the Williams Record, the college newspaper.

He received his law degree with honors in 1957 from the University of

Wisconsin, where he was a member of the Order of the Coif and the recipient

of the Salmon W.Dalberg Prize as the outstanding graduating student. He was

editor. in-chief of the Wisconsin LawReview.Mr.Ruder served in the U.S. Army

from 1951 to 1954, attaining the rank of First Lieutenant.

From 1957 to 1961, he was an associate with the Milwaukee law firm of

Quarles & Brady. While teaching at Northwestern, he was also of counsel to

the Chicago law firm of Schiff, Hardin & Waite from 1971 to 1976.

Charles C. Cox

Charles C. Cox was sworn in as the 62nd Member of the Securities and

Exchange Commission on December 2, 1983. His term expired in June 1988

and he was renominated.

Mr. Cox joined the Commission on September I, 1982, as Chief Economist.

He organized the Office of the Chief Economist to analyze the economic

effects of proposed rules and legislation, evaluate established Commission

policy, and study various capital market topics.

Previously, Mr.Cox was a professor of management at Texas A&MUniversity

from 1980 to 1982, and a professor of economics at Ohio State University

from 1972 to 1980. He served as a National Fellow of the Hoover Institution

at Stanford University from 1977 to 1978.

During his academic career, Mr.Cox focused his research on the economics

of public regulation of economic activity. He has published various articles on

this topic in scholarly journals. Mr. Cox is a member of the American

Economic Association and the Mont Pelerin Society.

Mr. Cox was born in Missoula, Montana, on May 8, 1945. He received his

undergraduate education at the University of Washington where he was

elected to Phi Beta Kappa in 1966, and earned a B.A. degree, magna cwn

laude, with distinction in economics in 1967. He received A.M. and Ph.D.

degrees in economics from the University of Chicago in 1970 and 1975,

respectively.

Joseph A. Grundfest

Joseph A. Grundfest was sworn in as the 65th Member of the Securities

and Exchange Commission on October 28, 1985. His term expires in June

1990.

Mr. Grundfest came to the Commission from the Council of Economic

Advisers in the Executive Office of the President, where he was counsel and

senior economist for legal and regulatory matters. While at the Council, he

played an active role in the formulation of Administration policy regarding

regulation of securities markets, financial institutions, international trade,

and the antitrust laws. Mr.Grundfest is both an attorney and economist. He has

111
practiced law with Wilmer, Cutler & Pickering and has served as an economist

with The Rand Corporation, and the Brookings Institution.

Mr. Grundfest is author or co-author of numerous publications dealing with

topics such as contests for corporate control, insider trading, international

securities regulation, regulation of markets subject to kickback schemes, the

economics and regulation of markets for broadcast stations and television

advertising, and the role of citizen participation in administrative proceedings.

During his academic career, Mr. Grundfest served as a Brookings Institution

Fellow, a Stanford University Fellow and a California State Fellow for the Study

of Law and Economics.

Mr. Grundfest was born in New York City on September 8, 1951. He received

his undergraduate education at Yale University where he earned a B.A. degree

in economics in 1973. During an undergraduate year abroad. Mr. Grundfest

completed the M.Sc. Program in Mathematical Economics and Econometrics

at the London School of Economics. Between 1974 and 1978, he earned his

J.D. degree from Stanford University and completed all requirements, other

than the dissertation, for a doctorate in economics.

Edward H. Fleischman

Edward H. Fleischman was sworn in as the 66th Member of the Securities

and Exchange Commission on January 6, 1986. His term expires in June

1992.

He formerly practiced law with Gaston, Snow, Beekman & Bogue (previously Beekman &Bogue), where he specialized in securities and corporate law

and related areas.

During his career, Mr. Fleischman has been elected a member of the

American Law Institute, the American College of Investment Counsel and the

American Society of Corporate Secretaries, and has served as an Adjunct

Professor of Lawteaching securities regulation at the New York University Law

School. He has been a lecturer at seminars dealing with securities and futures

law and practice. He was co-author of a series of articles relating to Commission Rule 144.

Mr. Fleischman was born in Cambridge, Massachusetts, on June 25, 1932.

A member of the U.S. Army from 1952 to 1955, he served with the 173rd

Military Intelligence Platoon in Germany from 1954 to 1955. Mr. Fleischman

received his undergraduate education at Harvard College and graduated with

a B.A. degree cum laude in history. He was a Stone Scholar at Columbia Law

School, where he received his LL.B. degree in 1959.

Mr. Fleischman was admitted to the New York Bar in 1959 and to the bar of

the U.S. Supreme Court in 1980. He serves on the Committee on Federal

Regulation of Securities where he has chaired the Ad Hoc Subcommittee on

Rule 144 and the Subcommittee on Broker-Dealer Matters. and was a

co-draftsman of the Committee letter on utilization and dissemination of

"inside" information. He is also a member of the Committee on Counsel

Responsibility, and currently chairs the Committee on Developments in

Business Financing where he co-drafted the Committee paper on resale of

112
institutional privately placed debt and chaired the Subcommittee on Simplified Indentures in addition to the Annual Review of Developments. Other bar

activities include membership on the Committee on Developments in Investment Services, and the Administrative Law Committee on Securities, Commodities and Exchanges where he was vice chair for Commodities before

taking the chair for three years.

113
REGION 1

REGION 2

REGION 3

REGION 4

114

Regional and Branch Offices and

Administrators

lawrence lason

NEW YORKREGIONAL OFFICE

26 Federal Plaza, Room 1028

New York NY 10278

2121264-1636

Region: New York and New Jersey

Douglas Scarff

BOSTON REGIONAL OFFICE

John W. McCormack Post Office

and Courthouse Building, Suite 700

Boston MA 02109

617/223-9900

Region: Maine, New Hampshire, Vermont, Massachusetts,

Rhode Island, and Connecticut

Richard P. Wessel

ATLANTAREGIONAL OFFICE

1375 Peachtree Street, NE, Suite 788

Atlanta GA 30367

404/347-4768

Region: Tennessee. Virgin Islands, Puerto Rico, North Carolina,

South Carolina, Georgia, Alabama, Mississippi, Florida,

and Louisiana east of the Atchafalaya River

Charles C. Harper

MIAMIBRANCH OFFICE

Dupont Plaza Center

300 Biscayne Boulevard Way, Suite 500

Maimi FL 33131

305/536-5765

William D. Goldsberry

CHICAGO REGIONAL OFFICE

Everett McKinley Dirksen Building

219 South Dearborn Street, Room 1204

Chicago IL 60604

312/353-7390

Region: Michigan, Ohio, Kentucky, Wisconsin, Indiana, Iowa,

Illinois, Minnesota, and Missouri
REGION 5

REGION 6

REGION 7

T. Christopher Browne

FORT WORTH REGIONAL OFFICE

411 West Seventh Street, 8th Floor

Fort Worth TX 76102

817/334-3821

Region: Oklahoma, Arkansas, Texas, Louisiana west of the

Atchafalaya River, and Kansas

Joseph C. Matta

HOUSTON BRANCH OFFICE

7500 San Felipe Street, Suite 550

Houston TX 77063

713/266-3671

Robert H. Davenport

DENVER REGIONAL OFFICE

410 17th Street, Suite 700

Denver CO 80202

303/844-2071

Region: North Dakota, South Dakota, Wyoming, Nebraska,

Colorado, New Mexico, and Utah

Donald M. Hoerl

SALT LAKE BRANCH OFFICE

U.S. Post Office and Court House

350 South Main Street, Room 505

Salt Lake City UT 84101

801/524-5796

Irving M. Einhorn

LOS ANGELES REGIONAL OFFICE

5757 Wilshire Boulevard, Suite 500 East

Los Angeles CA 90036-3648

213/468-3098

Region: Nevada. Arizona, California, Hawaii, and Guam

VACANT

SAN FRANCISCO BRANCH OFFICE

901 Market Street, Suite 470

San Francisco CA 94103

415/995-5165

115
REGION 8

REGION 9

116

Jack H. Bookey

SEAlTLE REGIONAL OFFICE

3040 Jackson Federal Building

915 Second Avenue

Seattle WA 98174

206/442- 7990

Region: Montana, Idaho, Washington, Oregon, and Alaska

James C. Kennedy

PHILADELPHIA REGIONAL OFFICE

600 Arch Street, Room 2204

Philadelphia PA 19106

215/597-3100

Region: Pennsylvania, Delaware, Maryland, Virginia,

West Virginia, and District of Columbia
Footnotes

1SEC v. First Jersey Securities, Inc., Litigation Release No. 10919 (October 31,

1985), 34 SEC Docket 725.

2SEC v. Monarch Funding Corp., et el., Litigation Release No. 10864

(September 9, 1985),33 SEC Docket 1693.

3SEC v. Price Waterhouse, et el., Accounting and Auditing Enforcement

Release No. 62 (June 20, 1985),33 SEC Docket 611.

4SEC v. Stephen Sui-Kuen Wang, Jr., et el., Litigation Release No. 11780 (June

27, 1988), 41 SEC Docket 443.

5SEC v. Joseph Kerherve, et el., Litigation Release No. 11643 (January 13,

1988), 40 SEC Docket 76.

6SEC v. Geoffrey \.¥. Collier, et al., Litigation Release No. 11817 (July 26,

1988), 41 SEC Docket 837.

7SEC v. Joseph Sierchio, Litigation Release No. 11647 (January 14,1988),40

SEC Docket 81.

8SEC v. Robert Chestman, et el., Litigation Release No. 11671 (October 6,

1987), 39 SEC Docket 675.

9SEC v. Marcus Schloss & Co., Inc., Litigation Release No. 11653 (February 3,

1988), 40 SEC Docket 285.

10SEC v. Andrew Solomon, Litigation Release No. 11685 (March 28, 1988), 40

SEC Docket 1053.

11SEC v. Douglas Ronaid Yagoda, Litigation Release No. 11654 (February 3,

1988), 40 SEC Docket 287.

12/n the Matter of Andrew Solomon, Securities Exchange Act Release No.

25588 (April 14, 1988),40 SEC Docket 1180.

131n the Matter of Marcus Schloss & Co., lnc., Securities Exchange Act Release

No. 25315 (February 5, 1988),40 SEC Docket 299.

14SEC v. Dominick Musella, et el., Litigation Release No. 9862 (January 11,

1983), 26 SEC Docket 1979.

15SEC v. Dennis Levine, et el., Litigation Release No. 11095 (May 12, 1986), 35

SEC Docket 1212.

16SEC v. Robert M. Wilkis, et el., Securities Exchange Act Release No. 23385

(July 1, 1986), 36 SEC Docket 9.

17SEC v. Carl N. Karcher, et el., Litigation Release No. 11702 (April 14, 1988),

40 SEC Docket 1231.

18SEC v. Gary E. Russolillo, M.D., Litigation Release No. 11795 (July 12,

1988), 41 SEC Docket 658.

19SEC v. Drexel Burnham Lambert, Inc., et el., Litigation Release No. 11859

(September 7, 1988),41 SEC Docket 1294.

2°ln the Matter of Rooney, Pace, lnc., et sl., Securities Exchange Act Release

No. 25125 (November 16,1987),39 SEC Docket 1077.

21 SEC v. Zico Investment Holdings, et al., Litigation Release No. 11763 (June

13, 1988),41 SEC Docket 294.

22SEC v. Carl Porto, et el., Litigation Release No. 11659 (February 8, 1988), 40

SEC Docket 390.

231n the Matter of Sheppard Resources, Inc., (no release) (January 26, 1988); In

117
the Matter of Transworld Network Corp., Securities Act Release No. 6772 (May 9,

1988), 40 SEC Docket 1501; In the Matter of Vanguard Finsnciel lnc., Securities

Act Release No. 6773 (May 9, 1988), 40 SEC Docket 1504; In the Matter of

Chatsworth Enterprises, Securities Act Release No. 6774 (May 9, 1988), 40 SEC

Docket 1508; and In the Matter of Pilgrim Venture Corp., (no release) (January 26,

1988).

24SEC v. Steven A. Keyser, Litigation Release No. 11607 (November 18, 1987),

39 SEC Docket 1178.

251n the Matter of Richfield Securities lnc., Securities Exchange Act Release No.

26129 (September 29, 1988),41 SEC Docket 1521.

261n the Matter of Tommy B. Duke, Securities Exchange Act Release No. 25165

(November 30, 1987), 39 SEC Docket 1233.

27SEC v. First City Financial Corp., Ltd., et el., Litigation Release No. 11195

(August 14, 1986),36 SEC Docket 519.

28SEC v. Towers Credit Corp., et el., Litigation Release No. 11829 (August 4,

1988), 41 SEC Docket 935.

29SEC v. Hunter Mack Belton, et el., Litigation Release No. 11644 (January 13,

1988), 40 SEC Docket 77.

30SEC v. Joseph Anthony Belmonte, Jr., et ai., Litigation Release No. 11834

(August 23, 1988),41 SEC Docket 999.

31SEC v. James R. Bramble, Litigation Release No. 11650 (January 21, 1988),

40 SEC Docket 134.

32SEC v. James Simpson, et el., Litigation Release No. 11725 (May 5, 1988),

40 SEC Docket 1495.

33SEC v. Goldcor, Inc., et el., Litigation Release No. 11808 (July 20, 1988),41

SEC Docket 768.

341n the Matter of John A. Grant, Securities Exchange Act Release No. 25921

(July 15, 1988),41 SEC Docket 679.

351n the Matter of James F. McGovem, Securities Exchange Act Release No.

25379 (February 22, 1988), 40 SEC Docket 488.

361n the Matter of Katherine Williams McGUire, Securities Exchange Act Release

No. 25793 (June 9, 1988),41 SEC Docket 128.

371n the Matter of William Edgar Crowder, et aI., Securities Exchange Act

Release No. 25393 (February 24, 1988), 40 SEC Docket 511.

38SEC v. Flexible Computer Corp., et el., Litigation Release No. 11594

(November 3, 1987), 39 SEC Docket 995.

39SEC v. Primo, lnc., et el., Accounting and Auditing Enforcement Release No.

167 (October 29, 1987),39 SEC Docket 917.

40SEC v. Electro-Catheter Corp., et el., Litigation Release 11347 (February 4,

1987), 37 SEC Docket 1084.

41 SEC v. The Cannon Group, et ei., Litigation Release No. 11603 (November 9,

1987), 39 SEC Docket 1064.

42SEC v. Stereo Village lnc., et ei., Accounting and Auditing Enforcement

Release No. 188 (March 3, 1988),40 SEC Docket 1496.

43SEC v. Lane Telecommunications, lnc., et el., Accounting and Auditing

Enforcement Release No. 198 (August 18, 1988), 41 SEC Docket 1098.

44ln the Matter of USF&G Corp., et el., Accounting and Auditing Enforcement

Release No. 182 (March I, 1988), 40 SEC Docket 602.

451n the Matter of Michael P. Richer, et ei., Accounting and Auditing

Enforcement Release No. 184 (March 29,1988),40 SEC Docket 997.

118
461n the Matter of Steven L. Komm, Securities Exchange Act Release No.

25254 (January 11, 1988) 40 SEC Docket 7.

471n the Matter of E.F. Hutton Group, lnc., Accounting and Auditing

Enforcement Release No. 183 (March 29, 1988),40 SEC Docket 1058.

481n the Matter of American Savings and wan Association of Florida, Securities

Exchange Act Release No. 25788 (June 8, 1988), 41 SEC Docket 95.

491n the Matter of Keith Bjelajac, Securities Exchange Act Release No. 26124

(September 28, 1988),41 SEC Docket 1504.

50In the Matter of Steven L. Komm, Accounting and Auditing Enforcement

Release No. 178 (February 9, 1988), 40 SEC Docket 398.

51In the Matter of Norman Abrams, et el., Accounting and Auditing

Enforcement Release No. 179 (February 12, 1988),40 SEC Docket 478.

52SEC v. The Santa Barbara Funds, et el., Litigation Release No 11712 (April

25, 1988), 40 SEC Docket 1388.

53SEC v. Westem Guaranteed Income Trust, Series 85-1, et el., Litigation

Release No. 11655 (February 4, 1988), 40 SEC Docket 290.

54In the Matter of the Gabelli Group, lnc., et el., Securities Exchange Act

Release No. 26005 (August 17, 1988), 41 SEC Docket 1038.

55SEC v. Forty Four Management, Lid., et el., Litigation Release No. 11717

(April 28, 1988), 40 SEC Docket 1393.

56 In the Matter of Carey Fund Management, lnc., Securities Exchange Act

Release No. 16564 (September 19, 1988),41 SEC Docket 1446.

57 In the Matter of Continental Equities Corporation of America, Securities

Exchange Act Release No. 26091 (September 19, 1988) 41 SEC Docket 1380.

58SEC v. David Peter Bloom, et el., Litigation Release No. 11641 (January 12,

1988), 40 SEC Docket 73.

59In the Matter of David Peter Bloom, Investment Adviser Act Release No. 1101

(January 12, 1988), 40 SEC Docket 69; In the Matter of Greater Sutton Investors

Group, Investment Adviser Act Release No. 1102 (January 12, 1988),40 SEC

Docket 71.

6°SEC v. Dennis L. Jeffers, et ei., Litigation Release No. 11796 (July 12, 1988),

41 SEC Docket 659.

611n the Matter of Mark Bailey & Co., et el., Investment Advisers Act Release

No. 1105 (February 24, 1988),40 SEC Docket 555.

62/n the Matter of Westmark Financial Services, Corp., et el., Investment

Advisers Act Release No. 1117 (May 16, 1988), 40 SEC Docket 1718.

631n the Matter of Edwin Fishbsirie, Investment Advisers Act Release No. 1108

(March 9, 1988),40 SEC Docket 742.

641n the Matter of Bryce S. Kommerstad, Securities Exchange Act Release No.

25945 (July 26, 1988), 41 SEC Docket 793.

651n the Matter of Dale E. Berlage, Securities Exchange Act Release No. 25562

(April 8, 1988),40 SEC Docket 1157.

66SEC v. Bryce S. Kommerstsd, Litigation Release No. 11818 (July 26, 1988),

41 SEC Docket 839.

67In the Matter of Dean Witter Reynolds, lnc., Securities Exchange Act Release

No. 26144 (September 30, 1988),41 SEC Docket 1680.

68SEC v. Flagship Securities, Inc., et el., Litigation Release No. 11690 (April I,

1988) 40 SEC Docket 1127.

691n the Matter of Flagship Securities Inc., et el., Securities Exchange Act

Release No. 25790 (June 8, 1988), 41 SEC Docket 119.

119
70ln the Matter of E.F. Hutton & Co., Inc., et sl., Securities Exchange Act

Release No. 25054 (October 22, 1987), 39 SEC Docket 756.

71In the Matter of Brian J. Lareau, Securities Exchange Act ReleaseNo. 26038

(August 29, 1988),41 SEC Docket 1189.

72In the Matter of Paine Webber, Inc., Securities Exchange Act ReleaseNo.

25418 (March 4, 1988),40 SEC Docket 693.

73In the Matter of Paul Gerald White, Securities Exchange Act Release No.

25085 (November 3, 1987), 39 SEC Docket 933.

74In the Matter of Petro-Source Securities, lnc., et el., Securities Exchange Act

Release No. 25381 (February 23, 1988) 40 SEC Docket 495.

75In the Matter of Robert M. Winston, et el., Securities Exchange Act Release

No. 25548 (April 4, 1988), 40 SEC Docket 1082.

76ReleaseNo. 33-6779 (June 10, 1988),41 SEC Docket 167.

77Release No. 33-6806 (October 21, 1988), 42 SEC Docket 91.

781d.

79ReleaseNo. 34-25217 (December 21,1987),39 SEC Docket 1443.

SOld.

81Release No. 34-25631 (April 27, 1988),40 SEC Docket 1407.

82Release No. 33-6763 (April 4, 1988), 40 SEC Docket 1067.

83 Release No. 33-6778 (June 2, 1988), 41 SEC Docket 3.

84ReleaseNo. 33-6784 (July 8, 1988),41 SEC Docket 572.

85ReleaseNo. 33-6758 (March 3, 1988), 40 SEC Docket 584.

86ReleaseNo. 33-6759 (March 3, 1988),40 SEC Docket 588.

87ReleaseNo. 33-6768 (April 14, 1988),40 SEC Docket 1150.

88ReleaseNo. 33-6791 (August 1, 1988),41 SEC Docket 853.

89ReleaseNo. 33-6764 (April 7, 1988),40 SEC Docket 1072. 90133 CongoRec. HI0741 (daily ed. November 30,1987).

91Staff Accounting Bulletin No. 72 (November 10, 1987), 39 SEC Docket 1068

(Income Statement Classification of Charges by Utilities for Disallowed Costs or

the Costs of Abandoned Plants); Staff Accounting Bulletin No. 71A (December

15, 1987),39 SEC Docket 1432 (Determining Adequacy of Borrowers' Equity in

Underlying Property); Staff Accounting Bulletin No. 73 (December 30, 1987) 39

SEC Docket 1568 (Application of Push-Down Accounting in Separate Financial

Statements of Subsidiaries Acquired in Purchase Transactions); Staff Accounting

Bulletin No. 74 (December 30, 1987), 39 SEC Docket 1568 (Disclosure by

Registrant When an Accounting Standard has been Issued but not yet Adopted);

Staff Accounting Bulletin No. 75 (January 4, 1988), 39 SEC Docket 1619

(Certain Accounting and Disclosure Issues Relevant to a Proposed Mexican Debt

Transaction); Staff Accounting Bulletin No. 76 (January 12, 1988),40 SEC

Docket 84 (Effect of Certain De Minimis Sales by Affiliates on Compliance with

ASRs 130 and 135 Regarding Risk Sharing in Business Combinations Accounted

for as Pooling of Interests); Staff Accounting Bulletin No. 77 (March 4, 1988), 40

SEC Docket 746 (Allocation of Debt Issue Costs in a Business Combination

Accounted for as a Purchase); Staff Accounting Bulletin No. 78 (August 5, 1988)

41 SEC Docket 1177 (Certain Matters Relating to Quasi-Reorganizations); and

Staff Accounting Bulletin No. 79 (September 2, 1988), 41 SEC Docket 1309

(Accounting for Transactions Undertaken by a Company's Principal Stockholder

for the Benefit of the Company).

92The National Commission on Fraudulent Financial Reporting, also known as

the Treadway Commission, was jointly sponsored and funded by the American

Institute of Certified Public Accountants, the American Accounting Association,

120
the Financial Executives Institute, the Institute of Internal Auditors, and the

National Association of Accountants.

93Report of the National Commission on Fraudulent Financial Reporting

(October 1987).

94Financial Reporting Release No. 31 (April 12, 1988),40 SEC Docket 1140.

95Financial Reporting Release No. 34 (March 2,1989),42 SEC Docket 1779.

96Release No. 33-6789 (July 19, 1988),41 SEC Docket 681.

9715 U.S.c. 78o(cX4). 9815 U.S.C. 78p(a). Expanding section 15(cX4) of the Exchange Act to include

section 16(a) would provide the Commission with an administrative remedy to

address violations of the stock ownership reporting requirements on persons

owning more than ten percent of any class of equity security registered pursuant

to Section 12 of the Exchange Act and officers and directors of issuers of such

securities.

99Proposed Statement of Financial Accounting Standards, Employers'

AccounUng for Postretirement Benefits Other than Pensions.

l00Statement of Financial Accounting Standards No. 96, Accounting for

Income Taxes.

101Statement of Financial Accounting Standards No. 100, Deferral of Effective

Date of FASB Statement No. 96.

102Proposed Statement of Financial Accounting Standards, Disclosures about

Financial Instruments.

103Statements of Financial Accounting Standards No. 97, Accounting and

Reporting by Insurance Enterprises for Certain Lonq-Dumiion Contracts and for

Realized Gains and Losses from the Sale of Investments and No. 98, Accounting

for Leases.

l04FASB Technical Bulletin No. 87-3, Accounting for Mortgage Servicing Fees

and Rights.

105FASB Technical Bulletins No. 88-1, Issues Relating to Accounting for Leases

and No. 88-2, Definition of Right of Setoff.

106Statements on Auditing Standards No. 53, The Auditor's Responsibility to

Detect and Report Errors and Irregularities, No. 54, Illegal Acts by Clients, No. 55,

Consideration of the Internal Control Structure in a Financial Statement Audit, No.

56, Analytical Procedures, No. 57, Auditing Accounting Estimates, No. 58, Reports

on Audited Fmancial Statements, No. 59, The Auditor's Consideration of an

Entity's Ability to Continue as a Going Concern, No. 60, Communication of

Internal Control Structure Related Matters Noted in an Audit and No. 61,

Communication with Audit Committees.

107SEC Practice Section, Annual Report 1987-1988, page 19.

108SEC, Division of Market Regulation, The October 1987 Market Break,

(February 1988).

l09ld.

11°Letters from David S. Ruder, Chairman, to George Bush, President, United

States Senate, and to James C. Wright, Speaker, United States House of

Representatives, (June 23, July 6, and July 7, 1988).

111See, e.g., letter from David S. Ruder, Chairman, to William Proxmire,

Chairman, Committee on Banking, Housing, and Urban Affairs, United States

Senate. (March 4, 1988).

112Executive Order No. 12631 (March 18, 1988),53 FR 9421.

113lnterim Report of the Working Group on Financial Markets (May 1988).

114The market reforms undertaken in response to the October 1987 market

121
break are described in detail in a letter from David S. Ruder, Chairman, to

William Proxmire, Chairman, Committee on Banking, Housing, and Urban

Affairs, United States Senate, (October 19, 1988).

115Securities Exchange Act Release No. 25669 (May 5, 1988),53 FR 16820.

116Securities Exchange Act Release No. 25890 (July 7, 1988),53 FR 26546.

117Securities Exchange Act Release No. 25671 (May 6, 1988), 53 FR 16399.

Section 31 of the Securities Exchange Act of 1934 requires national securities

exchanges to pay certain fees based on their transaction volume. Rule 31-1

under the Act provides exemptions for certain exchange transactions.

118File No. SR-Amex-87-32.

119File No. SR-NASD-88-23.

120Securities Exchange Act Release No. 26119 (September 27, 1988),53 FR

39002.

121Securities Act Release No. 6810 (December 16, 1988), 53 FR 52550.

122See SEC, Division of Market Regulation, The October 1987 Market Break

(February 1988), Chapter 10.

123/d.

1241nterim Report of the Working Group on FinanciaL Markets (May 1988).

125Securities Exchange Act Release No. 26154 (October 3, 1988),41 SEC

Docket 1707.

126Securities Exchange Act Release No. 26153 (October 3, 1988),41 SEC

Docket 1701.

127Securities Exchange Act Release No. 25146 (November 20, 1987),39 SEC

Docket 1191.

128Securities Exchange Act Release No. 25740 (May 28, 1988),40 SEC

Docket 1759.

129Securities Exchange Act Release No. 25957 (August 2, 1988),41 SEC

Docket 866.

130See footnote 108, supra.

131Securities Exchange Act Release No. 25102 (November 13,1987),39 SEC

Docket 998.

132Securities Exchange Act Release No. 26051 (August 31, 1988),41 SEC

Docket 1197.

133Letter from Jonathan Kallman, Assistant Director, to Karen L. Saperstein,

Associate General Counsel, ISCC, September 13, 1988.

134Letter from Jonathan Kallman, Assistant Director, to Karen L. Saperstein,

Associate General Counsel, ISCC, March 23, 1988.

135Securities Exchange Act Release No. 25610 (April 22, 1988), 40 SEC

Docket 1313.

136Letter regarding Banco de Santander, S.A. (October 23, 1987).

137Letter regarding Bardays PLC, Bardays de Zoete Wedd (Securities) Limited

(April 22, 1988); Letter regarding BarcLays PLC (April 29, 1988).

138Letter regarding Norsk Hydro a.s. (May 5, 1988).

139See, e.g., Letter regarding the IntemationaL Stock Exchange of the United

Kingdom and Republic of IreLand Limited (September 29, 1987).

140The Association of Futures Brokers and Dealers; The Financial

Intermediaries, Managers and Brokers Regulatory Association; Investment

Management Regulatory Organisation Limited; and The Securities Association

Limited.

141NYSE, NASD, CBOE, and AMEX.

122
142Securities Exchange Act Release No. 25801 (June 14, 1988),41 SEC

Docket 196.

143Securities Exchange Act Release No. 26136 (September 30, 1988),41 SEC

Docket 1662.

144Securities Exchange Act Release Nos. 26198 (October 19, 1988),42 SEC

Docket 43, and 26218 (October 26, 1988),42 SEC Docket 127.

145Securities Exchange Act Release No. 26198 (October 19, 1988),42 SEC

Docket 43.

146See Securities Exchange Act Release No. 25599 (April 19, 1988),40 SEC

Docket 1259.

147Securities Exchange Act Release No. 25804 (June 15, 1988),41 SEC

Docket 212.

148Securities Exchange Act Release Nos. 25081 (November 2, 1987),39 SEC

Docket 927, and 25701 (May 17, 1988),40 SEC Docket 1637.

149File No. SR-CBOE-88-17.

15°Letter from Jonathan G. Katz, Secretary, to Paula Tosini, Division of

Economic Analysis, CFTC (April 23, 1988).

151See letter from Jonathan G. Katz, Secretary, to Paula Toslni, Director,

Division of Economic Analysis, CFTC, (September I, 1988).

152Letter from Jonathan G. Katz, Secretary, to Paula A. Tosini, Director,

Division of Economic Analysis, CFTC, (April 18, 1988).

153Letter from Richard G. Ketchum, Director, to Paula Tosini, Director,

Division of Economic Analysis, CFTC, (October 7, 1988).

154Letter from Jonathan G. Katz, Secretary, to Paula Tosinl, Director, Division

of Economic Analysis, CFTC, (October 11, 1988).

155Letter from Jonathan G. Katz, Secretary, to Paula Tosini, Director, Division

of Economic Analysis, CFTC, (October II, 1988).

156Letter from Richard G. Ketchum, Director, to Marshall E. Hanbury, General

Counsel, CFTC, (August 12, 1988).

157Securities Exchange Act Release No. 25072 (October 29, 1987), 39 SEC

Docket 825.

158Securities Exchange Act Release No. 26217 (October 26, 1988),42 SEC

Docket 124.

159Letter from Jonathan G. Katz, Secretary, to Jean A. Webb, Secretary,

CFTC, (August 19, 1988).

160Securities Exchange Act Release No. 25996 (August 15, 1988),41 SEC

Docket 1023.

161Securities Exchange Act Release No. 25995 (August 15, 1988),41 SEC

Docket 1017.

162Securities Exchange Act Release Nos. 25540 (March 31,1988).40 SEC

Docket 1024, and 25868 (June 30,1988),41 SEC Docket 412.

163Securities Exchange Act Release No. 26087 (September 16, 1988), 41 SEC

Docket 1376.

164Securities Exchange Act Release No. 25627 (April 29, 1988),40 SEC

Docket 1401.

165Securities Exchange Act Release No. 24853 (August 27, 1987),39 SEC

Docket 30.

166Securities Exchange Act Release Nos. 25739 (May 24, 1988),40 SEC

Docket 1756, and 25938 (July 22,1988),41 SEC Docket 784.

167Securities Exchange Act Release Nos. 25738 (May 24, 1988), 40 SEC

Docket 1753, and 25811 (June 20,1988),41 SEC Docket 306.

123
168Securities Exchange Act Release No. 25233 (December 30,1987),39 SEC

Docket 1522.

169Public Hearing on the Multiple Trading of Options (File No. 4-334) (February

11, 1988).

170Securities Exchange Act Release No. 26100 (September 22, 1988),41 SEC

Docket 1402.

171Letter from James B.G. Hearty, Chairman, MSRB, to David S. Ruder,

Chairman, (December 17, 1987).

172Report of the Securities and Exchange Commission on Regulation of

Municipal Securities (September 22, 1988).

173 Staff Report on the Investigation in the Matter of Transactions in Washington

Public Power Supply System Securities (September 22, 1988).

174Foreign Operations, Export Financing, and Related Programs

Appropriations Act, 1988, Title III, Pub. L. No. 100-202, 101 Stat. 1329-131

(December 22, 1987).

175Letter from Jonathan G. Katz, Secretary, to Neil Flanagin, Esq., Sidley &

Austin (September 22, 1988).

176Securities Exchange Act Release No. 25285 (January 22, 1988),53 FR

2484,40 SEC Docket 143.

177Securities Exchange Act Release No. 25806 (June 16,1988),53 FR 23383,

41 SEC Docket 214.

178Securities Exchange Act Release No. 26028 (August 25, 1988) 41 SEC

Docket 1126.

179Securities Exchange Act Release No. 26096 (September 20, 1988),41 SEC

Docket 1390.

180Securities Exchange Act Release No. 25891 (July 7, 1988),41 SEC Docket

508.

181Securities Exchange Act Release No. 26150 (October 3, 1988),41 SEC

Docket 1695.

182Securities Exchange Act Release No. 25763 (May 27, 1988), 41 SEC

Docket 21.

183Securities Exchange Act Release No. 25276 (January 20, 1988), 40 SEC

Docket 97.

184Securities Exchange Act Release No. 25842 (June 23, 1988),41 SEC

Docket 337, affirmed in Higgins v. SEC, No. 88-4115 (2nd Cir. 1989).

185Securities Exchange Act Release No. 25859 (June 27,1988),41 SEC

Docket 398.

186Securities Exchange Act Release Nos. 25677 (May 6, 1988),40 SEC

Docket 1521 and 25863 (June 28, 1988),41 SEC Docket 406.

187Securities Exchange Act Release No. 26176 (October 13,1988),41 SEC

Docket 1773.

188Securities Exchange Act Release No. 25981 (August 8, 1988), 41 SEC

Docket 943.

189Securities Exchange Act Release No. 26029 (August 25, 1988),41 SEC

Docket 1147. The term "BEACON" is an acronym for Boston Exchange

Automated Communications Order-routing Network.

1905ecurities Exchange Act Release No. 25312 (February 4, 1988),40 SEC

Docket 247.

191See ''The National Market System" subsection, supra, for information on

additional NASD proposed rule changes.

124
1925ecurities Exchange Act Release No. 25457 (March 14, 1988),40 SEC

Docket 772.

1935ecurities Exchange Act Release No. 25690 (May II, 1988),40 SEC

Docket 1539.

1945ecurities Exchange Act Release No. 25791 (June 9, 1988),41 SEC Docket

122.

195File nos. SR-NASD-86-22 and SR-NASD-88-13. The proposals were

approved after the close of fiscal year 1988 in, respectively, Securities Exchange

Act Release No. 26185 (October 14, 1988),42 SEC Docket 19 and Securities

Exchange Act Release No. 26186 (October 14, 1988),42 SEC Docket 22.

1965ecurities Exchange Act Release No. 25637 (May 2, 1988), 40 SEC Docket

1421.

1975ecurities Exchange Act Release No. 25949 (July 28, 1988),41 SEC

Docket 800.

1985ecurities Exchange Act Release No. 26044 (August 31, 1988),41 SEC

Docket 1193.

1995ecurities Exchange Act Release No. 25575 (April 12, 1988),40 SEC

Docket 1167.

200Securities Exchange Act Release No. 25800 (June 13, 1988),41 SEC

Docket 193.

201Securities Exchange Act Release 1'10.26153 (October 3, 1988),41 SEC

Docket 1701.

202Securities Exchange Act Release No. 25841 (June 23, 1988),41 SEC

Docket 335.

203See footnote 145, supra, and accompanying text.

204See, e.g., letter from David S. Ruder, Chairman, to Edward J. Markey,

Chairman, Subcommittee on Telecommunications and Finance, United States

House of Representatives, (January 3D, 1989).

205Rule 19d-l authorizes certain SROs to report certain technical violations

quarterly in chart form. In fiscal year 1988, the number of cases reported in this

abbreviated format was as follows: American Stock Exchange-12, New York

Stock Exchange-79, Philadelphia Stock Exchange-191 and Pacific Stock

Exchange-19. These cases are included in the text discussion and chart.

206Securities Investor Protection Act Release No. 149 (September 9, 1988),41

SEC Docket 1366.

2071nvestment Company Act Release 1'10.16150 (Nov. 30, 1987),39 SEC

Docket 1229.

2081nvestment Company Act Release No. 16244 (Feb. I, 1988), 40 SEC Docket

201.

2091nvestment Company Act Release No. 16245 (Feb. 2, 1988),40 SEC Docket

207.

210lnvestment Company Act Release No. 16421 (June 2, 1988),41 SEC

Docket 3.

211Investment Company Act Release No. 16511 (Aug. 2, 1988), 41 SEC

Docket 911.

2121nvestment Company Act Release No. 16504 (July 29, 1988),41 SEC

Docket 892.

2131nvestment Company Act Release No. 16431 (June 13, 1988),41 SEC

Docket 252.

2141nvestment Company Act Release No. 16619 (Nov. 2, 1988),42 SEC Docket

257.

125
2151nvestment Advisers Act Release No. 1093 (Nov. 5, 1987), 39 SEC Docket

988 (Proposing release); Investment Advisers Act Release No. 1135 (Aug. 17,

1988), 41 SEC Docket 1093 (adopting release).

2161nvestment Advisers Act Release No. 1140 (Sept.16, 1988), 41 SEC Docket

1440.

217Securities Act Release No. 6787 (July 15, 1988),41 SEC Docket 672.

2181nvestment Company Act Release No. 16503 (July 28,1988),41 SEC

Docket 820 (notice); Investment Company Act Release No. 16535 (Aug. 23,

1988),41 SEC Docket 1165 (order).

2191nvestment Company Act Release No. 16366 (April 14, 1988),40 SEC

Docket 1209 (notice); Investment Company Act Release No. 16388 (May 3,

1988),40 SEC Docket 1483 (order).

220Investment Company Act Release No. 16479 (July 12,1988),41 SEC

Docket 642 (notice); Investment Company Act Release No. 16502 (July 28,

1988),41 SEC Docket 819 (order).

221Investment Company Act Release No. 16235 (Jan. 12, 1988), 40 SEC

Docket 124.

222State of Israel (pub. avail. Aug. 17, 1988).

223G.T. Global Financial Services, Inc. (pub. avail. Aug. 2, 1988).

224Bank Bumi Daya New York Agency (pub. avail. June 7, 1988).

225Bank Ekspor Impor Indonesia New York Agency (pub. avail. July 15, 1988).

2261nvestment Company Institute (pub. avail. Sept. 23, 1988).

227Holding Company Act Release No. 24566 (Jan. 28, 1988), 40 SEC Docket

161.

228Holding Company Act Release No. 24579 (Feb. 12, 1988),40 SEC Docket

442.

229Holding Company Act Release No. 24590 (Feb. 26, 1988),40 SEC Docket

634.

230Holding Company Act Release No. 24641 (May 12, 1988),40 SEC Docket

1547.

231Holding Company Act Release No. 24727 (Oct. 13, 1988),41 SEC Docket

1781.

232Holding Company Act Release No. 24669 (June 23, 1988),41 SEC Docket

344.

233Lomberdfin, S.p.A. v. SEC and Trasatlantic Financial Co. v. SEC, 108 S. Ct.

1751 (1988).

234SEC v. Tome, 833 F.2d 1086 (2d Cir. 1987).

235SEC v. Levine and SEC v. Wilkis, 689 F. Supp. 317 (S.D.N.Y. 1988), appeal

pending, No. 88-6294(L) (2d Cir.).

236SEC v. Levine, No. 86 Civ. 3726 (RO) and SEC v. Wilkis, No. 86 Civ. 5182

(RO) (single opinion Oct. 25, 1988).

237SEC v. Blinder, Robinson & Co., 855 F.2d 677 (10th Cir. 1988), cert. denied,

No. 88-850 (Feb. 21, 1989). Other issues in this appeal are discussed below in

connection with litigation involving broker-dealers and market professionals.

238Morrison v. Olson, 108 S. Ct. 2597 (1988).

239Humphrey's Executor v. United States, 295 U.S. 602 (1935).

240Blinder, Robinson & Co. and Meyer Blinder v. SEC, 837 F.2d 1099 (D.C. Cir.

1987), cert. denied, 57 U.S.L.w. 3235 (1988).

241SEC v. Moskowitz, Civ. No. H-87-862 (D. Md. 1988).

242SEC v. Davis, Fed. Sec. L. Rep. (CCH), 93,696 (S.D. Ohio 1988).

126
243Blinder, Robinson & Co. and Meyer Blinder v. SEC, 837 F.2d 1099 (D.C. Cir.

1987), cert. denied, 57 U.S.L.W. 3235 (1988).

244 Withrow v. Larkin, 421 U.S. 35 (1975).

245Antoniu v. SEC, Nos. 85-5384, 88-1095 (8th Cir.).

246 The Stusrt-Jemes Co., Inc. and Marc N. Geman v. SEC, No. 87-1402 (D.C.

Cir. Sept. 20, 1988).

247Kane v. SEC, 842 F.2d 194 (8th Cir. 1988).

248CE. Carlson, Inc. and Charles E. Carlson v. SEC, No. 86-2637 (10th Cir.

June 10, 1988) (pet. for rehearing denied Nov. 7, 1988).

249Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 835 F.2d 1031 (3d Cir.

1987).

250 McLaughlin, Ptuen, Vogel, Inc. v. Gross, No. 88-1367 (3d Cir. Oct. 13,

1988).

251SEC v. Suter, 832 F.2d 988 (7th Cir. 1987).

252Sanderson v. Rothenmund, 682 F. Supp. 205 (S.D.N.Y. 1988).

253SEC v. \.¥.J. Howey Co., 328 U.S. 293 (1946).

254 Variable Annuity Life Insurance Co., et al. v. Otto, 814 F.2d 1127 (7th Cir.

1987), cert. denied, 108 S. Ct. 2004 (1988).

255Adena Exploration, Inc. v. Sylvan, No. 87-1429 (5th Cir.).

256Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985).

257Arthur Young & Co. u Reves, 856 F.2d 52 (8th Cir. 1988).

258SEC v. \.¥.J. Howey Co., 328 U.S. 293 (1946).

259Pinter v. Dahl, 108 S.Ct. 2063 (1988).

26old.

261Wilson v. Ruffa & Hanover, P'C, No. 876-7357 (2d Clr.),

262Basic, Inc. v. Levinson, 108 S. Ct. 978 (1988).

263Nationwide Corp. v. Howing Co., 826 F.2d 1470 (6th Cir. 1987), cert. denied,

108 S. Ct. 2830 (1988).

264Newmont Mining Corp. v. Pickens, 831 F.2d 1448 (9th Cir. 1987).

265/U International Corp. v. NX Acquisitions Corp., 840 F.2d 220 (4th Cir. 1988).

266R.H. Macy s Co. v. Campeau Corp., No. 88 Civ. 1548 (LBSXS.D.N.Y.).

267Koppers v. American Express Co., 689 F. Supp. 1413 (W.O. Pa. 1988).

268American Carriers, Inc. v. Bay tree Investors, lnc., No. 88-1533 (10th Cir.).

269RP Acquisition Corp. v. Staley Continental, Inc., 686 F. Supp. 476 (D. Del.

1988).

27°RTE Corp. v. Mark IV Industries, lnc., Fed. Sec. L. Rep.(CCH) 193,789 (E.D.

Wis. May 6, 1988) (vacated June 22, 1988).

271Salant Acquisition Corp. v. Manhattan Industries, lnc., 682 F. Supp. 199

(S.D.N.Y. 1988).

272SEC v. Wall Street Publishing Institute, lnc., 851 F.2d 365 (D.C. Cir. 1988).

273SEC v. Blinder, Robinson & Co., lnc., 855 F.2d 677 (10th Cir. 1988), cert.

denied, No. 88-850 (Feb. 21, 1989).

274United States v. Swift & Co., 286 U.S. 106 (1932).

275SEC v. Allison, No. 81-19 (N.D. Cal. Oct. 7, 1988). Appeal pending.

276SEC v. First Jersey Securities, Inc., 843 F.2d 74 (2d Cir. 1988).

277 Occidental Petroleum Corp. v. SEC, No. 87-5279 (D.C. Cir.).

2781n re Sealed Case, No. 87-5290 (D.C. Cir. Sept. 2, 1988).

279SEC v. Fox, 858 F.2d 247 (5th Cir, 1988).

280Awkard v. SEC, No. CA 87-0835 (D.D.C. Sept. 15, 1987).

281Panaro v. von Stein, No. 87-1791 (S.D.N.Y.).

282SEC v. The Electronic Warehouse, lnc., 689 F. Supp. 53 (D. Conn. 1988).

127
283SEC v. The Royale Group, Ltd., C.A. No. 82-2415 (D.D.C. April 5, 1988).

2841n re Thomas, 41 SEC Dkt, 69 (June 14, 1988).

285 Thomas v. SEC, No. 88-4286 (5th Cir. 1988).

2861n re Schultzenberg, A.A.E.R. No. 200 (September 23, 1988), reprinted in

1988 Transfer Binder, Fed. Sec. L. Rep. (CCH), 73,669 (Oct. 12, 1988).

287Shub v. SEC, No. Misc. 88-0496 (E.D. Pa. Oct. 3, 1988); Falcone v. SEC,

No. 88-6556 (Civ.) (N.D. Fla. Aug. 29, 1988).

288Broderick v. Ruder, 685 F. Supp. 1269 (D.D.C. 1988).

289On October 5, 1987, and on April 13, 1988, Chairman Ruder testified

before the Subcommittee on Telecommunications and Finance of the House

Committee on Energy and Commerce; on December 3, 1987, he testified before

the Senate Committee on Banking, Housing, and Urban Affairs; and on

December 9, 1987, Chairman Ruder testified before the Subcommittee on

Financial Institutions Supervision, Regulation, and Insurance of the House

Committee on Banking, Finance, and Urban Affairs.

290Chairman Ruder testified before the House Committee on Agriculture

(June 14, 1988); the Senate Committee on Banking, Housing, and Urban Affairs

(May 24, 1988, March 31, 1988, February 3, 1988, and November 4, 1987); the

Subcommittee on Telecommunications and Finance of the House Energy and

Commerce Committee (May 19, 1988 and March 23, 1988); and the Senate

Committee on Agriculture, Nutrition, and Forestry (March 17, 1988).

291The proposal defined an emergency justifying the Commission's use of

such authority as "a major market disturbance characterized by, or constituting

(i) a substantial threat of sudden and excessive fluctuations of securities prices

generally that threaten fair and orderly markets, or (ii) a substantial disruption

of the safe or efficient operation of the national system for clearance and

settlement of securities."

292/n re Todd Shipyards Corp. and Todd Pacific Shipyard Corp. Nos.

87-5005-5006 (Bankr. S.D. N.Y. 1988) (the U.S. Trustee, acting on request by

the Commission, agreed to form a single committee to represent both common

and preferred shareholders); In re Global Marine, Inc., et al., Case Nos.

86-00771-H2-11 to 86-00782-H2-11 inclusive; Case No. 86-01308-H2-11;

and Case No. 86-11 035-H2-11 (Bankr. S.D. Texas 1988) (separate committee of

subordinated debenture holders formed); In re Allegheny International, Inc. et al.,

Bkcy, Nos. 88-448 through 88-450 (Bankr. W.O. Pa. 1988) (additional

debenture. holders appointed to official unsecured committee).

2931n re Global Marine, lnc., et el., Nos. 86-00771-H2-11 to 86-0078-H2-11

inclusive, No. 86-01308-H2-11; and No. 86-11 035-H2-11 (Bankr. S.D. Texas).

294/n re Allegheny International, Inc., et el., Nos. 88-448 through 88-450

(Bankr. W.O. Pa).

2951n re Melridge, lnc., Case No. 387-06589 P.l1 (Bankr. D. Ore).

296ln re Baldwin-United Corp., et el., Case No. 1-83-02495 (Bankr. S.D. Ohio),

appeal pending, Civil Case No. C-I-88-0056 (S.D. Ohio).

297/n re Allegheny International, Inc., Nos. 88-448 through 452 (Bankr. W.O.

Pa. May 17, 1988), rev'd Civil No. 88-1101 (W.O. Pa.), appeal dismissed, No.

88-3338, 3351 (3d Cir. 1988).

298ln re Standard Metals, 48 B.R. 778 (Bankr. D. Colo.), a{fd in part, No.

85-2-703 (D. Colo. Oct. 28, 1985), a{fg bankr. ct. on other grounds, 817 F.2d

625 (10th Cir. 1987), rev'd in part on rehearing, 839 F.2d 1383 (10th Cir.

December 29, 1987) (per curiam), pet. for cert. dismissed, No. 88-243 (S. Ct.

1988).

128
299/n re Standard Metals, 817 F.2d 625 (10th Cir. 1987).

300In re American Reserve, 80 B 4786 (Bankr. N.D. III. April 12, 1985), reo'd

71 B.R. 32 (N.D. III. 1987), reu'd, 840 F.2d 487 (7th Cir. 1988).

301In re Standard Metals Corp., 48 B.R. 778 (Bankr. D. Colo.), a{fd on other

grounds, No. 85-2-703 (D. Colo. Oct. 28, 1985), ar« in part, 817 F.2d 625 (lOth

Cir. 1987), rev'd on rehearing on other grounds, 839 F.2d 1383 (10th Cir. Dec. 29,

1987), pet. for cert. dismissed, No. 88-243 (S. Ct. 1988).

302/n re Charter Co., 76 B.R. 191 (Bankr. M.D. Fla. 1986), affd, No.

86-1079-CIV-J-16 (M.D. Fla.), appeal pending, No. 88-3303 (11th Cir.).

3031n re LTV Corp., Nos. 86 B 11270 to 11334, 11402 and 11464 (BRL) (Bankr.

S.D.N.Y.), appeal pending, 88 Civ. 645686488 (MEL). (S.D.N.Y.).

304In re Allegheny International, lnc., Nos. 88-448 through 88-452 (Bankr.

W.O. Pa.), appeal pending, CIV.ACT. No. 88-2345 (W.O. Pa.).

3051n re Allis.Chalmers Corp., Nos. 87 B 11225 to 11242 (Bankr. S.D.N.Y. Apr.

25, 1988).

306ln re Melridge, No. 387-065B9-Pll (Bankr. O. Ore Apr. 16, 1988).

307In re Vidalia Sweets Brand, Inc., No. 85-00050 (Bankr. S.D. Ga. March 18,

1988).

308ln re The Rolflte Co., No. 87-03250-BKC- TCB (Bankr. S.D. Fla. May 23,

1988).

309ln re Cordyne Corp., No. 386-047-03511 (Bankr. D. Oreg. Dec. 16, 1987).

129
THE SECURITIES INDUSTRY

Revenues, Expenses, and Selected

Balance Sheet Items

Broker-dealers that are registered

with the Commission produced revenues of $66.3 billion in calendar year

1987, three percent above the 1986

level. While brokerage revenues

increased markedly from earlier years,

the October stock market decline

adversely impacted the dealer side of

the business.

Pushed by record volume, revenues

from securities brokerage increased by

$2.6 billion (12 percent) in 1987. The

brokerage side accounted for 36 percent of total revenues in 1987, compared to 33 percent in 1986. The

increase in securities commissions of

$2.6 billion (18 percent) accounted for

the majority of this growth. Margin

interest also rose by $500 million, while

revenues from mutual fund sales

declined by an equivalent amount.

As broker-dealers maintain substantial positions in equity securities, the

October 1987 market decline resulted

in significant dealer losses. Revenues

130

APPENDIX

from trading and investment fell $3.7

billion (20 percent) in 1987 while profits from underwriting declined by $1.0

billion (15 percent).

"All other revenues," which are dominated by interest income from securities purchased under agreements to

resell and fees from handling private

placements, mergers, and acquisitions

rose $4.1 billion (23 percent) in 1987.

These revenues accounted for 33 percent of total revenues in 1987, compared to 28 percent in 1986.

The strong growth in stock market

trading volume in the first 9 months of

1987 resulted in an increase in

expenses of 13 percent to $63.2 billion.

Combined with the dealer-related drag

on revenues, pre-tax income fell 62

percent to $3.1 billion. The pre-tax

return on equity in 1987 was 9 percent,

compared to 27 percent in 1986.

Assets fell by eight percent to $479.2

billion at year-end 1987, with liabilities

declining 9 percent to $445.2 billion.

Ownership equity increased $4.9 billion during 1987 to $46.9 billion.
Table 1

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER.DEALERS

1983-1987

(Millions of Dollars)

1983' 1984' 1985' 1986' 1987P

R8VIlIJU6S

1. secunnes cornrmssions . .. $ 10,392.4 $ 9,269.7 $ 10,9550 $ 13,9765 $ 16,560.3

2. Gains (losses) In trading and

Investment accounts ••....•... .. 9,842.3 10,760.9 14,5492 18,1450 14,428.5

3. Profits (losses) from underwntlng

and selhng groups. ..•• ... .. 4,089.8 3,248.6 4,986 7 6,742.6 5,719.0

4. Margin Interest ....•• ... 2,233.4 2,9708 2,7460 3,0216 3,495.6

5. Revenues from sale of Investment

company shares ••• 1,4933 1,4520 2,7536 4,540.3 4,0679

6. All other revenues ...... ....... 8,8528 11,905.2 13,8538 17,997.8 22,071.7

7 Total revenues .... ............................... $ 36,904.1 $ 39,607.1 $ 49,844.3 $ 64,4238 $ 66,3430

Expenses

8 Registered representatives' compensation

(Part II only) 1 .......... ....... .. $ 6,6012 $ 6,1712 $ 8,184.0 $ 10,7010 $ 11,0514

9. Other employee compensation and

benefits ...•.. ..... .......... .. .. 6,4138 6,756 7 8,1490 11,002.6 12,132.9

10 Compensation to partners and voting

stockholder officers .. 1,5404 1,503.0 1,n89 2,232.7 2,4481

11. Oommlssrons and clearance paid

to other brokers .••....... ... .... ... .. 1,7872 1,9068 2,314.2 2,994.5 3,543.3

12. Interest expenses ........•.• ... ... ... .. 6,8466 10,6931 11,4698 14,232.9 16,7280

13. Regulatory fees and expenses ........ 1996 2258 3397 4165 4319

14 All other expenses 1 ...... 8,308 5 9,493.9 11,106.4 14,542.4 16,863.7

15. Total expenses ...••..•.... ., ............ .. $ 31,6973 $ 36,750.6 $ 43,3419 $ 56,122.6 $ 63,1993

Income end profttabJlIty

16. Pre-tax Income .

17. Pre-tax profit margin ..... ...• •..•.•....

18. Pre-tax return on eqUity ... .. •... .. .

Assets, LJabilitJesend Capital

$ 5,206.8 $ 2,856 6 $ 6,5024 $ 8,301 2 $ 3,143 7

141 72 130 129 47

307 15.2 267 26.8 92

19. Total assets ........... ., ......... .. $250,1037 $313,821.7 $452,463.3 $520,940 5 $479,2189

20. Uabllllles ..... ... ..... ......... ... ... a Unsubordlnated liabilities 230,ln.4 290,255.1 421,593.8 478,990.6 432,330 1

b Subordinated lIablllltes ....... ... ... 2,954 3 4,761.3 6,553 6 10,944 7 12,8605

c Total liabilities .. 233,1317 295,0164 428,1474 489,935.3 445,190.6

21 Ownership EqUity , ... .. $ 19,9262 $ 23,566 6 $ 30,8694 $ 41,9500 $ 46,888 7

Number of firms ... .. .. 7,374 8,272 8,957 9,436 9,196

1 Registered representatives' compensation for firms that neither carry nor clear IS Included In "other expenses" as trus

expense Item IS not reported separately on Part IIA of the FOCUS Report

FigUres may not sum due 10rounding

rlillreYlsed

p preliminary

Source' FOCUS Report

131

'"

-
Table 2

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1983-1987

(Millions of Dollars)

Revenues

1. 5ecunlJes commissions. . .

2 Gains (Iossas) 10 tradlOg and

investment accounts .... ......

3. Profits (Iossas) from underwriting

and seiling groups .

4 MarglO interest .

5. Revenues from sale of investment

company shares.... ..... .... ..... .....

6 All other revenues .. ...............•.....

7 Total revenues

Expenses

8. Registered representanvss' compensation

(Part II only) '. ..... .... ..... .... ....

9. Other employee compensation

and benefits .. .

10. Compensation to partners and voting

stockholder officers.... ....... ..... ...... ..

11. Commissions and clearance paid

to other brokers...... ......

12 Interest expenses .. ..

13. Regulatory fees and expenses .

14. All other expenses 1 .

15. Total expenses ..

Income and Profttab111ty

16. Pre-tax income.... .. ..

17. Pre-tax profit margin .

18. Pre-tax return on eqUity ..

Number of firms ...

1983'

$ 9,953.2

8,841.1

4,064.2

2,185.2

1,492.9

8,015.7

$34,5523

$ 6,540.3

6,163.4

1,416.5

1,673.0

6,139.9

174.6

7,843.6

$29,9513

$ 4,601.0

13.3

30.7

4,686

1984'

$ 8,9539

9,699.3

3,244.2

2,950.1

1,451.8

11,321.3

$37,6206

$ 6,162 3

6,621.7

1,367.6

1,794.1

to,122.4

202.9

9,129.1

$35,400.0

$ 2,220.6

5.9

13.3

5,350

1985'

$10,537.1

12,996.6

4,981.3

2,663.6

2,753.4

13,343.5

$47,295.6

$ 8,161.6

7,984.9

1,843.0

2,176.4

10,842.7

313.2

10,708.7

$41,632.6

$ 5,463.0

11.6

25.3

5,690

1986"

$13,488.2

16,284.5

6,737.9

2,999.4

4,539.8

17,388.7

$61,398.5

$10,653.6

10,777.0

2,037.2

2,n6.2

13,611.7

384.4

13,983.1

$54,223.2

$ 7,175.3

11.7

25.8

6,225

1987"

$18,029.2

12,4897

5,715.2

3,4691

4,068.1

21,485.1

$63,236.4

$11,036.0

11,693.5

2,188.9

3,341.9

16,258.3

400.2

16,298.6

$61,419.4

$ 1,817.0

2.9

5.8

6,309

1 Registered representatives' compensation for firms that neither carry nor clear IS included in "other expenses" as this

expense Item IS not reported separately on Part JlA of the FOCUS Report.

Figures may not sum due to rounding

r-=reYlsed

p preliminary

Source FOCUS Report

132

=
Table 3

UNCONSOLIDATED BALANCE SHEET FOR BROKER.DEALERS

DOING A PUBLIC BUSINESS

YEAR-END, 1983-1987

(MIllions 01 Dollars)

1983' 1984' 1985' 1986' 1987"

Assets

1. Cash ...... ............................................ $ 3,611.5 $ 4,217.3 $ 6,618.2 $ 8,916.3 $ 7,558.5

2. Receivables from oIher broker-deaJers ...... 26,809.9 29,801.0 63,289.8 85,279.2 61,854.7

3. Receivables from customers ..................... 32,413.3 30,537.4 47,632.3 54,132 3 36,736.7

4. Receivables from non-customers ............. 1,440.5 1,417.6 2,803.6 3,572.7 3,372.4

5. Long positions in seeurmes and

commodities ........ ........ .............. 74,496.1 108,2035 150,634 3 164,855.6 116,922.3

6. Securibes and Investments not readily

marketable ..................................... .... 316.7 651.2 425.9 490.3 4606

7. Secunbes purchased under agresments

to resell (Part II only) '... .. ................... 70,994.8 107,8593 140,634.2 185,482.7 211,927.3

8. Exchange membership ............................. 245.7 256.6 268.4 292.9 346.1

9 Other assets ................. ..................... 10,038.3 12,2257 16,0662 20,286.2 21,192.3

10. Total assets .......................................... $220,366.9 $295,169.6 $428,372.9 $503,108.2 $482,371.2

Uabilities and Equity Capital

11. Bank loans payable. ............................ $ 19,914.6 $ 27,351.0 $ 41,344.8 $ 38,471.2 $ 20,734.1

12. Payables to other broker-dealars .............. 23,364.7 24,999.3 52,275.9 50,987.6 43,164.0

13. Payables to non-custcrners .. .................. 1,687.2 1,691.9 3,197.1 3,403.1 4,185.3

14. Payables to customers ....... ..................... 18,811.8 19,997.9 31,723.6 40,671.0 34,331.0

15. Short positions in secunnes and

commodlbes ............. ...................... 36,779.8 45,779.6 79,162 2 76,851.0 73,734.2

16 Securities sold under repurchase

agresments (Part II only) , ........ 62,103.7 134,919.3 164,950.3 220,965.8 209,711.0

17. Other non-subordinated liabilities 1 .......... 17,996.8 19,290.1 28,197.4 34,024.9 32,833.7

18. Subordinated lIabllibes ..... ................ ... 2,723.1 4,425.0 5,965.2 9,904.1 12,446.0

19. Total liabilities ........................................ $205,401.7 $278,454.1 $406,816.6 $475,2786 $430,939.3

20. EqUity capital ........................................... $ 14,965.2 $ 16,715.5 $ 21,556.3 $ 27,629.6 $ 31,431.9

Number of firms ...................... ...................... 4,686 5,350 5,690 6,225 8,309

, Resale agresments and repurchase agresments for firms that neither carry nor clear IS Included In "other assets" and

"other non-subordinated Ilabtlities" respectively as these Items are not reported separalely on Part IfA 01 the FOCUS

Report.

Figures may not sum due to rounding.

(_revised

P D prelimInary

Source: FOCUS Report

133

'
Securities Industry Dollar In

1987 For Carrying and

Clearing Firms

Data for carrying and clearing firms

which do a public business are presented here to allow for more detail as

reporting requirements for firms which

neither carry nor clear differ and data

aggregation of these two types of firms

necessarily results in loss of detail. Carrying and clearing firms are those firms

which clear securities transactions or

maintain possession or control of customers' cash or securities. This group

produced 84 percent of the securities

industry's total revenues in calendar

year 1987.

Brokerage activity accounted for

about 34 cents of each revenue dollar in

1987, an increase from 31 cents in

1986. Securities commissions were the

most important component, producing

23 cents of each dollar of revenue,

while margin interest and revenues

from mutual fund sales generated six

cents and five cents, respectively.

The dealer side produced 60 cents of

each dollar of revenue. Twenty-one of

these cents came from trading and

investments, 10 cents from underwriting, and 30 cents from other

securities-related revenues. The latter

is comprised primarily of interest

income from securities purchased

under agreements to resell and fees

134

from handling private placements,

mergers and acquisitions.

Total expenses consumed 98 cents of

each revenue dollar, compared to 89

cents in 1986. The result was a pre-tax

profit margin of 2 cents per revenue

dollar, compared to 11 cents in 1986.

Employee-related expenses (registered representatives' compensation

and clerical and administrative employees' expenses) are the largest component of expenses. Employee-related

expenses consumed 38 cents of the

revenue dollar in 1987, a slight

increase from 1986. As a percent of

revenues, interest expense rose to 29

percent, from 25 percent in 1986.

Total assets of broker-dealers carrying and clearing customer accounts fell

by $42.3 billion to $452.6 billion at

year-end 1987. Long positions were the

most important factor, with the value of

inventory falling $47.7 billion to

$114.4 billion. Resale agreements was

one of the few asset categories to grow,

increasing 14 percent to $211.9 billion

at year-end 1987. Resale agreements

now comprise 47 percent of total

assets. Most of the remaining assets

represented receivables, either from

customers or other broker-dealers.

Total liabilities decreased $45.3 billion, or 10 percent to $424.6 billion.

Virtually all individual liability items

shared in this decline. Owners' equity

rose 12 percent, from $25.0 billion in

1986 to $28.0 billion in 1987.
"

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-

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135

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Table 5

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS

(MillIOns of Dollars)

R8venues

Dollars

1966'

Percent

of Total

Revenues Dollars

19871'

Percent

of Total

Revenues

Percent

Change

1986-1987

1. 5ecunlles commiSSIons ..

2 Gains (losses) In trading and

Investment accounts. ..... .... ..

3. profits (losses) from underwnllng

and seiling groups........ .. ..

4. Margin Interest. .. .

5. Revenues from sale of Investment

company shares ..

6. Other securilJes related revenues ..

7. All other revenues ...... ........ ..... ..

8. Total revenues

Expenses

9. ReglSlered representatJves'

compensation ..

10. Other employee compeneation

and benefits .

11. CompensalJon to partners and voting

stockholder officers ..

12. CommiSSIOns and clearance PlUd to

other brokers. .. .

13. Commumcations. .. ..

14. Occupancy and equipment costs ..

15. Data processlng costs.. .. .

16. Interest expenses .. .

17. Regulatory fees and expenses ..

18. Losses in error accounts and

bad debts ..

19. All other expenses ..

20. Total expenses. .. ..

Income and ProfitBbIIIty

21 Pre-lex income... .. ..

22. Pre-lex profit margin .

23. Pre-lex return on equity... .. .

Number of firms. .. ..

Rgures mey not sum due to roUnding.

r-revised

p preliminary

$10,906.4

15,484.0

6,298.6

2,999.4

3,205.1

13,090.6

2,275.8

$54,2599

$10,653.6

8,968.9

1,505 4

1,765 0

2,463.8

2,374.7

6876

13,496.5

323.5

456.6

5,420.4

$48,116.0

$ 6,143.9

1,216

20.1%

28.5

11.6

5.5

5.9

24.1

4.2

1000%

19.6%

16.5

2.8

3.3

4.5

4.4

1.3

24.9

0.6

0.8

10.0

88.7%

11.3

24.6

$12,945.3

11,737.3

5,381.0

3,469.1

2,743.4

16,158.5

3,1165

$55,551.1

$11,038.0

9,781.2

1,6016

2,301.3

2,n8.0

2,988 7

830.6

16,103.6

333.0

1,178.6

5,3825

$54,317.1

$ 1,234.0

1,194

23.3%

21.1

9.7

6.2

4.9

29.1

5.6

100.0%

199%

17.6

2.9

4.1

50

5.4

1.5

29.0

0.6

2.1

9.7

97.8%

2.2

4.4

18.7%

(24.2)

(14.6)

157

(14.4)

23.4

38.9

2.4%

3.6%

9.1

6.4

30.4

12.8

25.9

20.8

19.3

2.9

158.1

(0.7)

12.9%

(79.9)%

Note Includes Information tor firms doing B publIC bUSiness that carry customer accounta or clear secuntJes transaclions

Source FOCUS Report

136

-
Table 6

UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING BROKER.DEALERS

(Millions of Dollars)

Year-end 1986' Year-end 1987"

Dollars

Percent

of Total

Assets Dollars

Percent Percent

of Total Change

Assets 1986-1987

Assets

1. cash............ .. .. 2. Receivables from other broker-dealers ..

a. Secuntles faded to deliver.. ..

b. Secunbes borrowed. .. ..

c. Other . .. .. .. ..

3. RecelVllbles from customers ...

4. ReceIVables from non-customers .. .

5. Long positions In securibes and cornrnodmes

a. Bankers acceptances, cerbficates of deposn

and commercial paper ..

b. U.S. and Canadian government obllgabons ..

c. State and mUniCIpal government obligations ..

d. Corporate obligations .

e. Stocks and warrants.......... ..

f. Options ..

g. Arbitrage .

h. Other secuntles ..

I. Spot comrnodlbes .. ..

6. Secuntles and Investments not readily marketable

7. Securities purchased under agreements to resell ..

8. Exchange membership .. ..

9. Other assets .

10. Total assets ..

$ 8,3519

62,3402

14,089.1

35,711.0

12,540.1

54,132.3

3,059.9

162,098.6

11,9566

89,8708

16,3444

21,448.5

15,289.8

8721

4,646.1

1,0821

347.9

399.4

185,4827

2604

18,724.5

$494,850.1

17%

12.6

2.8

7.2

2.5

10.9

0.6

32.8

2.4

182

33

43

31

0.2

0.9

0.2

01

01

37.5

0.1

3.8

1000%

$ 6,978.1

58,3714

8,260.7

42,4745

7,636.2

38,738.7

2,157.3

114,3944

10,5677

63,538.5

8,001.0

17,351.9

9,883.4

5669

3,175.5

754.4

356.6

3412

211,9273

3007

19,366.7

$452,573.7

15%

12.9

1.8

94

17

8.6

0.5

25.3

23

14.0

18

38

22

0.1

0.7

0.2

0.1

0.1

468

0.1

4.3

100.0%

(16.4)%

(6.4)

(414)

18.9

(39.1)

(284)

(29.5)

(29.4)

(11.6)

(293)

(51.0)

(19.1)

(354)

(350)

(31.7)

(30.3)

2.5

(146)

14.3

155

34

(8.5)%

UabIIJties lUId Equity CspItaJ

11. Bank loans payable .

12 Payables to other broker-dealers .. ..

a. Securities failed to receIVe.. .. ..

b. Securities loaned .

c. Other .. .

13. Payables to non-customers ..

14. Payables to customers .

15. Short positions In secuntles and comrnodmes ..

16. Secuntles sold under repurchase agreements .

17. Other non-subordinated lIabilibes ..

18. Subordinated Iiabilibes .

19. TotaIllablllbes.. .. .

20 Equity capitaL ..

Number of firms .

Figures may not sum due to roUnding

r-1'lMSlId

p-prellmlnary

$ 38,414.3

50,129.9

13,945.1

26,4458

9,738.9

2,940.0

40,671.0

74,854.2

220,965.8

32,8538

9,068.8

$469,897.8

$ 24,9522

1,216

7 8% $ 20,685.4

10 1 42,872.3

2.8 7,6375

5.3 29,1722

2.0 6,062.7

06 3,2126

8.2 34,3310

15.1 70,3023

44.7 209,711 0

66 31,629.2

1.8 11,8451

95 0% $424,589.0

5.0% $ 27,984 7

1,194

4.6%

9.5

17

64

13

0.7

7.6

15.5

46.3

7.0

26

93.8%

6.2%

(462)%

(145)

(45.2)

10.3

(37.7)

9.3

(15.6)

(6.1)

(51)

(37)

306

(9.6)%

122%

Nole' IncludeS Information for firms dOing 8 publIC business that carry customer accounts or clear secunlles transacllOOS.

Source' FOCUS Report

Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers filing

FOCUS Reports fell three percent from

9,436 in 1986 to 9,196 in calendar year

1987. During the same period, the

number of branch offices increased

nineteen percent from 18,014 to

21,479. The number of registered representatives employed in the securities

industry rose from 404,000 to 459,000

in 1987, a fourteen percent increase.

137
Table 7

Broker-Dealers and Branch Offices Thousands

I- -

20.000 I-- 1-

-

16.000

iQ

<"l

oj--:

:g .....

'":!

1-

-

12.000 I-- ~-- --.'.1-

::

-

1985 1986 1987

: % of

:g .,.,. 0;

;. { 1L:':.- - ~:.,:::.: 1- ~:' - .::: 1-

:::. I'

:. .,' :.'.

.... .. .::. -:.

:;:: .:." .::: w.. . .•.

\ ..:' :j~ :~::.:" - :;:: ..

... .'" :. ::.: ::. _ .•• _ •. -:.:. i- ~~:: ~:~ :::; .;.

:::. -, ::: ":~:"~::::~.',::~: .•.•...••. - I ~; ::,:. :.: ..

::::

:,:.:. ::;.: :.

::::

- - ;;;

,:;:. .' '".;

<"l .. 0>

8.000 co

'" -- -~-'".'" co

co :' ". 0> 0>

,.. :6 '" :.:. <0

;! <0 :::. .. r-, ": : i! .0

J

'.:: '" .... .. '. '. .0 :::: :. : I':":" .. ...; ::: .. :.:: -x - ~~~: .'. :.. :::: '.' :. .... :

I :;:~ '.

il!

::: ... 4.000 - - -:::: - - .'. t :::: ..... r :::: '.' ...: '.' .'. -x ','

:::: .'.

~:~: .'. .'. x .... .:. .: .... ::~~ ::: : - :... :.: .:.: :::. .... .:.: .:. ... :.: j)j~ .'. :.:

@ ... :::: ::;~... ::::

.;::. .'.

:::: .'.

:::: t .'. :::: : 0 .... .:. ...

1979 1980 1981 1982 1983 1984

/ J

;:::::::::::;::: Broker-Dealers C: ::::::J Branch Offices

r Revised p Prelutunarv

SOURCE: FOCUS REPORT and

National Assoclatron of Secunties Dealers

138

~ ~ ~ ~ ~

~

~ ~

" " ~ ~ ~ ~ ~ ~ " '"

- ~~~~ ' _

~

~

- ~~~

~~~~

= =
Table 8

BROKERS AND DEALERS REGISTERED UNDER

THE SECURITIES EXCHANGE ACT OF 1934

EFFECTIVE REGISTRANTS AS OF SEPTEMBER 30,1988

(Classified By Type of Orgamzations And By Locabon of Pnncipal Office)

ALABAMA.... . .

AlASKA . ..

ARIZONA..... . .

ARKANSAS. ••••• . , .. . .. . .

CALIFORNIA . . .

COLORADO . ..

CONNECTICUT . .

DELAWARE ..•••. .. ..•.•. •... . ..

DISTRICT OF COLUMBIA.. .. .

FLORIDA . .. .

GEORGIA.............. . ..

HAWAII ..

IDAHO .

ILLINOIS . ..

INDIANA....... . •• . .

IOWA .

KANSAS .. .

KENTUCKY . .

LOUISiANA .

MAINE ..

MARYLAND .

MASSACHUSETTS . .

MICHIGAN .

MINNESOTA .

MISSISSIPPI........... .. . .

MISSOURI.............. .. .

MONTANA . .

NEBRASKA .. .

NEVADA . .

NEW HAMPSHIRE. .. . .

NEW JERSEY .

NEW MEXICO ..

NEW'l'ORK ..

NORTH CAROLINA .. .. ..

NORTH DAKOTA.......... . ..

OHIO ..

OKLAHOMA . . .. . .. .

OREGON............ . .

PENNSYLVANIA..... . ..

RHODE ISLAND.... .. ..

SOUTH CAROLINA . ..

SOUTH DAKOTA. . .

TENNESSEE . .

TEXAS. .. . ..

UTAH .

VERMONT.. ..

ViRGINIA........ . .

WASHINGlON .. . .

WEST VIRGINIA. .

WISCONSIN . ..

W'l'OMING .. .... .

SUB Total.......... . .. . .

FOREIGN 2. ••• •••• •

1OTAL.. .. .

Number of Registrants

Sole Pro- Partner- CorporaTOl8I pnelorship ship tions'

42 2 1 39

6 1 0 5

110 2 4 104

51 2 0 49

1377 314 137 926

209 6 5 198

189 15 13 161

20 0 2 18

51 3 2 48

453 19 17 417

136 2 7 127

15 0 1 14

13 1 1 11

3326 2252 347 727

84 11 2 71

40 1 1 38

36 2 0 34

36 4 0 32

71 4 5 62

20 0 1 19

105 3 1 101

251 24 11 216

142 14 2 126

128 6 1 121

24 1 0 23

115 5 2 108

3 1 0 2

27 0 0 27

16 4 0 12

11 1 1 9

489 102 56 311

18 0 1 17

2712 771 397 1544

88 2 0 88

2 0 0 2

170 8 10 152

38 1 0 37

50 3 2 45

498 17 81 400

24 5 1 18

42 2 2 38

4 0 0 4

118 6 3 109

479 33 7 439

47 2 0 45

11 1 1 9

88 3 2 83

119 5 1 113

13 0 0 13

97 6 1 90

4 0 1 3

12198 3667 1130 7401

26 3 1 22

12224 3870 1131 7423

1 Includes all forms of orgamzabon ofher than sole propnetorshlps and partnerships

2 Registrants whose principal offices are located In foreign countnes or other junsdlctlOllS noI listed

139

•

•

•

•
Table 9

APPLICATIONS AND REGISTRATIONS OF BROKERS,

DEALERS, AND INVESTMENT ADVISERS

Fiscal Year 1988

Broker Dealers

ApplicatIons for RegistratIon

Received dunng Fiscal 1988 ..

Disposmon of Applications'

Registration Effected. ..

Returned . .. ..

Withdrawn

Denied .• . ... .... ...

Total Applications disposed of ..

Total Pending as of September 30,1988

Terminations of Registration

Withdrawn

Revoked ..

Cancelled ... . ...

Total Terminations dunng Fiscal 1988

Total Registrations at end of Fiscal 1988 ..

Investment Advisers

ApplicatIons for RegistratIon

Received dunng Fiscal 1988

DISposition of Applications

Registration Effected ...

Returned... ...

Withdrawn ...

Denied

Total AppllcalJons DIsposed of

Total Pending as of September 30, 1988 ...

Terminations of Registration.

Withdrawn

Revoked ..

Cancelled

Total Terminations at end of Fiscal 1988.

Total Registrations at end of Fiscal 1988

1 Thrs figure reflects resubrrussions of returned filings as well as Initlsl apphcanone.

2 ThiS figure reflects Improved accounting procedures

140

1,533

600

7

o

1,621

5

265

2,308

1,109

5

1

1,056

6

1,312

2,256'

2,140

118

1,891

12,0472

3,638

3,423

215

2,376

14,4642

-
Table 10

APPLICATIONS AND REGISTRATIONS OF BROKERS,

DEALERS, AND INVESTMENT ADVISERS

Fiscal Year 1988

MuniCipal 8ecunbes Dealers

14

4

o

o

Applications for Registration

Received dunng Fiscal 1988 •.•. .., . .. ...

Disposrtion of Applicabons

Registration Effected .. .

Returned .. .

Withdrawn .

Denied .. .. . ..

Total Applications disposed of . .. .. ..

Total Pending as of September 30, 1988 .. .

Terminations of ReglSlrabon:

Wrthdrawn... . , . 13

Revoked , . . 0

cancelled........ 0

Total Terrmnabons dunng Fiscal 1988. .. .

1btaI ReglstralJons at end of Fiscal 1988 .. .. .

Transfer Agents

19'

18

13

Applications for Registration:

Received dunng Fiscal 1988..... 136 1

DispoSlbon of Application:

RegistralJon Effected .. 110

Returned . 21

Wrthdrawn..... 2

Denied .. .. .. . . 0

Total Applications Disposed of.. .. .. 133

Total Pending as of september 30, 1988. 3

Terminations of Registration:

Wrthdrawn .. .. 99

Revoked........ . . .. 0

cancelled........ .. .. .., 39

Total Terminations at end of Fiscal 1988 136

Total Registrations at end of Fiscal 1988 .. .. .. .. esg2

1 This figure reflects resubmlsslons of returned filings as well as Initlsl applications.

2 This figure reflects Impt'lMld accounting procedUI1lS

141

~

•
Self-Regulatory Organizations:

Expenses, Pre-Tax Income and

Balance Sheet Structure

In 1987 the total revenues of selfregulatory organizations (SROs) with

marketplace jurisdiction rose approximately $118.4 million to $896.6 million, an increase of 15.2% over 1986

(the 1986 increase was 21 % over

1985). The New York Stock Exchange

(NYSE), National Association of Securities Dealers (NASD), American Stock

Exchange (Amex) and Chicago Board

Options Exchange (CBOE) accounted

for 79.2% of all SRO total revenues, up

from 79.0% in 1986. The SROs' revenues are earned primarily from listing,

trading, and market data fees. The

NYSE reported total revenues of $349.4

million, of which 58.2% consisted of

listing and trading fees, while 15.7%

($55 million) consisted of market data

fees. The Amex reported total revenues

of $114.5 million, the NASD reported

$144.8 million and the CBOE reported

$101.7 million. The NYSE experienced

the largest magnitude increase in revenues ($53 million), while the Cincinnati

Stock Exchange (CSE) experienced the

largest percentage increase (46%) in

revenues.

The total expenses of all marketplace

SROs were $765.2 million in 1987, an

increase of $117.7 million (18%) over

1986. The NYSE incurred the largest

magnitude increase in expenses ($33.4

million), while the CSE experienced the

largest percentage increase in total

expenses (57%).

Aggregate total expenses increased

commensurately with increases in

aggregate total revenues. Accordingly,

aggregate pre-tax income of these

SROs remained virtually unchanged in

1987 at about $125.2 million. The

NYSE experienced both the largest

magnitude increase in pre-tax income

($68.3 million) and the largest percentage increase (40%) from 1986. The

only other SRO that experienced a pre142

tax income gain from 1986 levels was

the CBOE, where pre-tax income

increased $.88 million, a 5% increase

from its 1986 level. The other marketplace SROs experienced a decline in

pre-tax income. The NASD's decrease

in pre-tax income of $7.69 million

(-29%) from its 1986 level was the

largest magnitude decrease in pre-tax

income experienced by any marketplace SRO, while the Pacific Stock

Exchange's (PSE's) 287% decrease

( $3.60 million) in pre-tax income was

the largest percentage decrease in pretax income, with the PSE sustaining a

loss, before taxes, of about $2.35 million. Only one other exchange, the

CSE, experienced a loss. The Amex

experienced a pre-tax income decrease

of $4.01 million, or -20%, the Philadelphia Stock Exchange (Phlx) a

decrease of $2.52 million, or 57%,

and the Boston Stock Exchange a

decrease of $ 70 thousand or 5%.

The Midwest Stock Exchange experienced a decrease in pre-tax income of

$2.64 million, a decrease of 57% from

1986. Finally, at the CSE 1987 pre-tax

income decreased $128,0.00 (- 57%),

while at the Spokane Stock Exchange

1987 pre-tax income decreased $9,000

(-38%).

The total assets of all marketplace

SROs were $1,286 million in 1987, a

decrease of 17% from 1986. The largest amount of increase in total assets

was experienced at the NYSE, where

total assets increased $80.2 million

(23 %) from 1986 to 1987. The total

assets of the NASD and the CSE also

increased significantly, while the Phlx

and the PSE experienced significant

asset decreases from 1986 levels.

The aggregate net worth of the marketplace SROs rose to $546.4 million in

1987 from $474.7 million in 1986, an

increase of 15%. The NASD and the

PSE both experienced declines in their

net worth, while all other SROs experienced positive growth in their net

worth, with the CSE as the largest

-

-

-
percentage gainer at 281 %. The

NYSE's net worth increased by 18%

from $184.8 million to $218.9 million.

Aggregate clearing agency service

revenue increased by 24 percent, or

$68 million, in 1987 due to increases in

securities trading volume and additional use of depository services. Total

depository service revenue increased

$44 million primarily due to a $39

million gain by the Depository Trust

Company (DTC), a $5 million gain by

the Midwest Securities Trust Company

(MSTC) and a $5 million increase at the

MBS Clearing Corporation (MBSCC), a

new registrant organized to service the

mortgage-backed securities industry.

Service revenue of clearing corporations increased almost $24 million,

largely because of increases of $10

million at the National Securities Clearing Corporation (NSCC) and almost $8

million at the Options Clearing Corporation (OCC).

Total depository pre-tax income was

down $8.5 million. The main reason

was MBSCC's pre-tax loss of $7.5 million, owing to a reorganization of its

depository division and its contemplated conversion to a limited purpose

trust company. In addition, DTC earned

$2.5 million less than the previous year,

when it retained fees in order to

increase shareholders' equity. DTC, as

with all clearing agencies, adjusts

refunds of fees and its fee structure to

provide the amount of earnings which

it wishes to retain.

The depositories continued to

expand their base for service revenues

by increasing the number of shares on

deposit and the face value of debt securities in custody. At the end of 1987,

the total value of securities in the

depository system reached $3 trillion,

of which DTC alone held over $1.8

trillion, not including some $1 trillion

in certificates held by transfer agents as

DTC's agent. This movement of certificates into depositories was due to further expansion of depository-eligible

issues and the desire of participants to

avail themselves of depository services.

The MSTC had 642.000 eligible issues

at year-end, up 19%. and DTC had

some 491,000. up 32%. The major

portion of the increase in securities

placed in depositories was in debt

issues, particularly municipal bonds,

which increased 33 %, to more than

two.thirds of the principal amount of all

municipal bonds currently outstanding

in the United States.

The clearing corporations recorded

an aggregate increase in pre-tax

income of almost $1.5 million. NSCC

posted a pre-tax earnings decrease of

$3.3 million, OCC recorded an increase

of $2.3 million, and the newly registered MBS Clearing Corporation

(MBSCC) had a gain of $4 million in its

clearing division's pre-tax income.

In April 1987. the PSE announced

the closure of the clearance and depository functions not essential to PSE's

trading operations. As a result. $47

billion of securities were moved to

DTC's custody at midyear. NSCC now

processes almost all of PSE's clearing

volume. The Pacific Clearing Corporation (PCC) incurred a pre-tax loss of

$2.6 million after a loss of $344.000 in

1986. Half of the 1987 loss resulted

from costs of discontinued operations.

The Pacific Securities Depository Trust

Company (PSDTC) reported pre-tax

income of $517,000 versus a pre-tax

loss of $291.000 in 1986. The combined stockholders' equity of PCC and

PSDTC was $45,000 after PSE converted $2.4 million of PCC debt to PSE

into contributed capital. PSE members'

equity totaled $14.4 million at the end

of 1987.

The aggregate net worth of all clearing corporations and depositories rose

by $6.6 million to a new high of over

$45 million. In addition to the increase

in net worth. participant clearing fund

contributions increased by $123 million, or 16%. These funds provide protection to the clearing agencies in the

143
event of a participant default by means

of a pro-rata charge against the clearing fund. The OCC's fund absorbed a

loss of $6.8 million due to the default of

a clearing member resulting from the

extraordinary market events of October

144

1987. The default assessment was the

first ever against non-failing partlclpants' contributions. Despite this loss,

the OCC participants' clearing fund

increased 39% to $292 million.
~mmSl

U;cO":ai'

!;t:e~::?

fl,tft9 .".

Lu

(f)

(f)

C08:eN T'"' .... t')C) ~~g*

_69-f&f&

:8c;;l;:8 .... 0(7)(\1

..,.69000

~I~~

~~~l8

f&69-M.f&

~~f~

~~~8i

...... ..,.fIt

~~8~

~C\icrfcr)

..... "'.

~~~8 ,...0>0.-

<6rO<6rO ,...,...C\lN

69-0f&f&

C)C') .... CD 1l),...ll)r

...... "":C\!.O!.

-- -

~m~f8

a>a)~~

06't06't

I I

O) ..... N .....

:8. CO. lll.

1ll;}j:8l8

f9 fI)"" 6t)

:g5l~lll

CD (I) 0)(1)

;::g~~

69-69690;

~~~:g

ca,...,...v

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

11),...10&0

~~~&l

C'i('juiC'i

lDcg ...... CO

......... -

!ll~l!lgj

(2) V t--"" ;ig~si

619-0061')

145

•

~~~~

~~~~

~

Table 13

MUNICIPAL SECURITIES RULEMAKING BOARD

STATEMENTS OF REVENUES AND EXPENSES AND

CHANGES IN FUND BALANCE

for the years ended September 30. 1988 and 1987

1988 1987

Revenues:

Assessment fees .

Annual fees ..

Initial fees .. ..

Investmentlocome .

Board manuals and other ..

Expenses:

5alanes and employee benefits ..

Board and commlllee ..

Operations .

Education and communication .

ProfeSSIonal seMcas.... .. ..

Depreciation and amortizaliOn ..

Excess of revenues over (Under) .

Fund balance. beginning of year .

Fund balance, end of year ..

$1,044,489 $2,201,829

278,500 264,500

30,600 29.400

307.787 337.292

55,423 90,018

1.716,799 2.923,037

881.735 798,048

674.844 478,329

427,492 424.080

332,137 338.298

119,598 141.548

85,021 58,014

2,520,827 2,232.313

(803,828) 890,724

5,115,485 4,424,741

$4.311,837 $5,115,485

Source: MSRB 1988 Annual Report. see that repor1 for pertinent notes to the financial atatemants

147

~
Exemptions

Section 12(h) Exemptions

Section 12(h) of the Exchange Act

authorizes the Commission to grant a

complete or partial exemption from the

registration provisions of Section 12(g)

or from other disclosure or insider trading provisions of the Act where such

exemption is consistent with the public

interest and the protection of investors.

For the year beginning October I,

1987 one application was pending and

an additional twenty four applications

were filed during the year. One of these

applications was granted. Twenty four

applications were pending at the end of

the year.

Exemptions For Foreign Private

Issuers

Rule 12g3-2 provides various

exemptions from the registration provisions of Section 12(g) of the

Exchange Act for the securities of foreign private issuers. Perhaps the most

important of these is that contained in

subparagraph (b) which provides an

exemption for certain foreign issuers

148

which submit, on a current basis, the

material specified in the rule. Such

material includes that information

about which investors ought reasonably to be informed and which the

issuer: (1) has made public pursuant to

the law of the country in which it is

incorporated or organized; (2) has filed

with a foreign stock exchange on which

its securities are traded and which was

made public by such exchange; and (3)

has distributed to its security holders.

Periodically, the Commission publishes

a list of those foreign issuers which

appear to be current under the exemptive provision. The most current list is

as ofJuly 13, 1988, and contains a total

of 1,040 foreign issuers.

FINANCIAL INSTITUTIONS

There were 3,497 companies registered under the Investment Company

Act of 1940 as of September 30, 1988.

New registrations totaled 338, with 124

registrations being terminated during

the fiscal year. This compares with

1987 fiscal year figures of 3,305 total

registrations, 505 new registrations

and 74 terminations.
Table 14

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

As of September 30.1988

2

40

8

130

118

$1,102

ApproxImate

MarklIl Value of

Asset of ActIve

Companies

(Bl11lon8)"

$808

o

o

1

13

14

20

Terminations

During

FY'88

90

o

3

87

90

53

194

New

ReglstratJons

During

FY '88

Management Oper>-End (Mutual Funds).... . .

(Nor>-Insurance Company)

Management Closed-End:

SBIC.s .........•..........•.............................•..........•

All others . .

Sub-Total .......•••.•.••..•••.••.•...•••.•••••..•.•....••..••.••.•••..•

"Unit Investment Trust ..

(Non-Insurance Company)

Face Amount Certificates .............•......................•...•

Insurance company. both

open-end management and

unl1lnve8lment trust .................•...............•....•....

lUTALS for Fiscal '88.. 338 124

Total Number of ActJVe Registered Investment Companies as of September 30. 1988: 3.497

There are approximately 289 inacbve companies registered. Inactlw refers to registered companies which 81 of

September 30, 1988. were in the process of being liqUidated or merged. or ha\I8 flied an appIlcatlon pursuant to Section

8(1) of the Act of deregistrBlJon. or whICh have otherwise gone out of existance and remain only untlllUCh time 81 the

Commission issues an order under Section 8(1) terminating lhelr registratlon.

The apprOlClmsle market value 01 sssets W88 cslculsted using vsrIoua pubIJahed aervtcee as well IIaff 8lItlmlllB8.

149

" •
Table 15

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY

ACT OF 1940

Since (1941)

Fiscal

year ended

September 30

1941 ,. . .

1942....... . .. . .

1943 ..........................................•.

1944.... ......................•........•...........

1945 . .

1946 . .

1947..... . . .

1948. . ..•....................

1949 ..

1950.. . .. ..

1951.... .. ..

1952.................... .. .

1953 ..

1954.. .. ..

1955 ..

1956.... .. ..

1957...... .. .

1958 ..

1959 ..

1960........ .. ..

1961 .

1962...... .. .

1963 ..

1964 .. .

1965. .. ..

1966 .. .

1967 ..

1968 .. ..

1969 .. ..

1970... ..

1971. .. .

1972 .

1973 , .

1974.. ..

1975.. .. ..

1976 ..

19n* ..

1978...... .. ..

1979 .. .

1980 ,

1981... .. .. ..

1982 .

1983 .. ..

1984 .. ..

1985. .. .

1986 .

1987* * .. ..

1988. .. ,

Approximate

market value

of assests

Registered Registered Registration Registered of active

at beglnmng dunng terminated at end of companies

01 year year dUring year year (mllhons)

0 450 14 436 $ 2,500

436 17 46 407 2,400

407 14 31 390 2,300

390 18 27 371 2,200

371 14 19 368 3,250

368 13 18 361 3,750

361 12 21 352 3,600

352 18 11 359 3,825

359 12 13 358 3,700

358 26 18 368 4,700

368 12 10 368 5,600

368 13 14 367 6,800

367 17 15 369 7,000

369 20 5 384 8,700

384 37 34 387 12,000

387 46 34 399 14,000

399 49 16 432 15,000

432 42 21 453 17,000

453 70 11 512 20,000

512 67 9 570 23,500

570 118 25 663 29,000

663 97 33 727 27,300

727 48 48 727 36,000

727 52 48 731 41,600

731 50 54 727 44,600

727 78 30 n5 49,800

755 108 41 842 58,197

842 167 42 967 69,732

967 222 22 1,167 72,465

1,167 187 26 1,328 56,337

1,328 121 98 1,351 78,109

1,351 91 108 1,334 80,816

1,334 91 64 1,361 73,149

1,361 106 90 l,3n 62,287

l,3n 88 66 1,399 74,192

1,399 63 86 1,376 80,584

1,403 91 57 1,437 76,904

1,437 98 64 1,471 93,921

1,471 83 47 1,507 108,572

1,507 136 52 1,591 155,981

1,591 172 80 1,683 193,362

1,683 305 45 1,944 281,644

1,944 287 50 2,181 330,458

2,181 256 54 2,331 250,321

2,331 299 47 2,583 525,000

2,583 422 44 3,074 742,000

3,074 505 74 3,305 1,210

3,305 338 124 3,497 1,102

* Began Fiscel Year Ending September 30, 19n

*. Figures Changed to Bllhons

150

"
SECURITIES ON EXCHANGES

Market Value and Share Volume

The market value of equity/option

transactions (trading in stocks, options,

warrants and rights) on registered

exchanges totaled $2.5 trillion in 1987.

Of this total, $2.3 trillion, or 92 percent, represented the market value of

transactions in stocks, rights and warrants and $204.8 billion or eight percent in equity (including exercises) and

non-equity options transactions. The

value of equity/option transactions on

the New York Stock Exchange (NYSE)

was $2.0 trillion, up 37 percent from

the previous year. The market value of

such transactions rose 62 percent to

$101.6 billion on the American Stock

Exchange (Amex) and increased 14

percent to $403.6 billion on all other

exchanges. The volume of trading in

stocks on all registered exchanges

totaled 63.8 billion shares in 1987, a 32

percent increase over the previous year,

with 83 percent of the total accounted

for by trading on the NYSE.

The volume of options contracts

traded on options exchanges (ex.

c1uding exercises) was 305.1 million

contracts in 1987, five percent higher

than in 1986. The market value of these

contracts increased 35 percent to

$118.9 billion. The volume of contracts

executed on the Chicago Board

Options Exchange increased one per.

cent to 182.1 million; option trading on

the Amex went up eight percent; con.

tract volume on the Philadelphia Stock

Exchange rose 19 percent; and option

trading on the Pacific Stock Exchange

increased 38 percent.

Table 16 A

MARKET VAUJE OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES 1

(Thousands of Dollars)

Total EqUity Options

Market Non-Equ~

Value Stocks 2 Warrants Rights Traded exercised Options 5,

AU Registered Exchanges for Past SIX Years

Calendar Year 1982 $ 693,850,963 $ 602,669,878 $ 423,236 $ 1,152 $53,659,796 $37,046,803 $ 50,098

1983 1,082,241,196 957,139,047 1,162,124 2,997 59,598,740 3 59,714,431 4,623,857

1984 1,059,716,263 950,654,453 430,292 9,754 33,822,259 55,640,028 19,159,4n

1985 1,308,353,791 1,199,419,614 744,715 25,162 29,952,739 49,182,980 29,028,581

1986 1,867,867,058 1,705,123,953 1,663,395 359,764 40,054,282 72,827,859 47,887,805

1987 $2,491,720.836 $2,284,165,520 $2,713,954 $ 23,314 $53,123,325 $85,946,102 $65,748,621

Breakdown of 1987 Data by RegIStered Exchanges 7

All Registered Exchanges

American Stock

Exchange $ 101,559,664 $ 52,548,101 $ 616,613 $ 1,578 $16,536,452 $22,649,215 $ 9,187,705

Boston Stock

Exchange 30,449,667 30,449,667 0 0 0 0 0

cmcmnan Stock

Exchange 7,986,792 7,986,792 0 0 0 0 0

Midwest Stock

Exchange 121,622,117 121,622,117 0 0 0 0 0

New York Stock

Exchange 1,986,549,119 1,983,311,276 1,498,107 20,252 407,229 839,785 472,470

PaCifiC Stock

Exchange 71,388,327 57,406,801 544,740 1,484 5,612,648 7,572,141 250,513

Philadelphia Stock

Exchange 47,761,828 30,810,930 54,494 0 4,733,648 7,402,330 4,760,427

Spokane Stock

Exchange 29,836 29,836 0 0 0 0 0

Chicago Board

Options 3 $ 124,393,486 $ 0 $ 0 $ 0 $25,833,348 $47,482,631 $S1,On,507

Note For footnotes see Table 16 B Trus table has been changed to more meamngfully reflec1 current changes In the

market

151
Table 16 B

VOWME OF EQUITY IOPTIONS SALES ON U.S. SECURITIES EXCHANGES 1

(Data In Thousands)

EqUity Opnons

Non-EqIU~

Stocks 2 Warrants Rights Traded Exercised 4 Options 5,

(Shares) (Units) (Units) (Contracts) (Contracts) (Contracts)

All Registered Exchanges For Past SIX Years

Calendar Year: 1982 22,423,023 56,053 21,500 137,266 9,202 41

1983 30,146,335 157,942 11,737 134,286 3 13,629 14,399

1984 30,456,010 n,452 13,924 118,925 11,917 n,512

1985 37,046,010 108,111 33,547 118,553 10,512 114,190

1986 48,337,694 195,501 47,329 141,931 14,545 147,234

1987 63,nO,625 238,357 74,014 164,432 17,020 140,698

Breakdown of 1987 Data by Registered Exchanges

All Registered Exchanges

American Stock Exchange 2,496,326 69,400 2,092 52,nl 5,188 18.179

Boaton Stock Exchange 819,633 0 0 0 0 0

.Clnclnnatl Stock Exchange 194,429 0 0 0 0 0

Midwest Stock Exchange 3,329,056 0 0 0 0 0

.New York Stock Exchange 53,037,522 134,364 71,515 1,306 157 2,193

PacIfic Stock Exchange 2,033.856 32,996 407 18,952 2,106 459

Philadelphia Stock Exchange 634,588 1,597 0 18.088 1.932 11,067

Spokane Stock Exchange 25,015 0 0 0 0 0

.ChlCago Board OptionS 3 0 0 0 73,315 7,637 108,799

Agures may not sum due to roUnding

N.A Not Available

Dsta of those exchsnges marked with an astensk cover transactions cleared dunng the calender month, clearance usually

occurs wrthln fiIIe d¥ of the execution of a trade Dsta of other exchanges cover transactJOOSwith effect trade dstes failing within

the reporting month

, Dsta on the value and volume of equity secunty sales are reported In connection WIth fees paid under SectIOll 31 of the

8ecuntHlS Exchange Act of 1934 as amended by the SecUnties Acts Amendments of 1975 They cover odd-klI as well as round-lot

transactions.

2 Includes voting trust certlficatas, certlflCsles of deposll tor stocks, and Amencan Depositary Receipts tor stocks but excludes

rights end werrants

3 Dsta tor June 1, 2, and 3, 1983 are not .ncluded

4 Exercised contracts do not Include January and February 1985 dsta

5 Includes all exchange trades of call and put options In stock indices, Interest rstas and tore'll" currencl8S

e Trading in non-equrty optJOOSbegan In October 22, 1982

7 Total mar1all value for Individual exchanges does not Include dsta for eqUity optIOns exercised.

Source SEC Form R-31 and OptJOOSCleanng Corporstlon StatistICal Report.

152

•

•

•

-

•
NASDAQ

(Volume and Market Value)

NASDAQ share volume and market

value information for over-the-counter

trading has been reported on a daily

basis since November 1, 1971. At the

end of 1987 there were 5,537 issues in

the NASDAQ system. Volume for 1987

was 37.9 billion shares, up 32 percent

from the 28.7 billion shares traded in

the previous year. It was the highest

volume in NASDAQ's IS-year history.

This trading volume encompasses the

number of shares bought and sold by

market-makers plus their net inventory

changes. The market value of shares

traded in the NASDAQ system was

$499.9 billion at the end of 1987, the

highest ever.

Share and Dollar Volume

by Exchange

Share volume on all registered

exchanges totaled 63.8 billion, an

increase of 32 percent from the previous

year. The New York Stock Exchange

accounted for 83 percent of the 1987

share volume; the American Stock

Exchange, six percent; the Midwest

Stock Exchange, five percent; and the

Pacific Stock Exchange, three percent.

The market value of stocks, rights

and warrants traded was $2.3 trillion,

34 percent over the previous year. Trading on the New York Stock Exchange

contributed 87 percent of the total. The

Midwest Stock Exchange and Pacific

Stock Exchange contributed five percent and three percent, respectively.

The American Stock Exchange

accounted for two percent of dollar

volume.

153
Table 17

Market Value of Equity/Options

Traded On All U.S. Securities Exchanges

Dollars Billions

2,600

OStocks, Rights

- - & Warrants

OOptions (Includes Exercises

an Non-EqUity Opttons)'

2,200

1,800

1,400

1,000

600

200

o

:

.c

. ~.'.:...',

..

..::. :.

'.'

. :.:

1608 2048

1976 77 78 79 80 81 82 83 84 85 86 1987

154

'Includes equrty options exercised as of 1/1180,non-equity options as of 10122/82

" "

'"

-

"
Table 18

SHARE VOWME BY EXCHANGES 1

In Percentage

Total Share Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other 2

1945 ......................... .... 769,018 65.87 21.31 1.77 2.98 106 0.66 005 6.30

1950 ................................ 883,320 76.32 13.54 2.16 311 0.97 065 0.09 316

1955 .............................. 1,321,401 68.85 19.19 2.09 308 085 0.48 0.05 5.41

1960 ................................ 1,441,120 6847 22.27 2.20 3.11 088 0.36 004 265

1961 ............................... 2,142,523 64.99 25.58 222 3.41 079 030 004 267

1962 ............................ 1,711,945 71.31 20.11 2.34 2.95 0.87 0.31 004 2.07

1963 ............... ............. 1,880,793 72.93 18.83 232 2.82 083 0.29 0.04 194

1964 ............................... 2,118,326 72.81 19.42 2.43 2.65 093 0.29 003 1.44

1965 ................................ 2,671,012 6990 22.53 2.63 2.33 0.81 0.26 005 149

1966 .............................. 3,313,899 69.36 22.84 2.56 268 086 0.40 005 1.23

1967 ............................... 4,646,553 64.40 28.41 2.35 2.46 0.87 043 0.02 106

1966 ............................... 5,407,923 61.98 29.74 2.63 264 0.89 0.78 001 133

1969 ............................... 5,134,856 63.16 27.61 2.84 3.47 122 051 0.00 1.19

1970 .............................. 4,834,887 71.28 19.03 3.16 368 1.63 0.51 0.02 0.69

1971 ................................ 6,172,668 71.34 1842 3.52 3.72 191 0.43 003 063

1972 ............................. 6,518,132 70.47 1822 3.71 4.13 2.21 059 0.03 0.64

1973 ................................ 5,899,678 74.92 13.75 4.09 3.68 219 071 004 0.62

1974 ................................ 4,950,842 7847 10.28 4.40 3.48 182 086 005 064

1975 ............................. 6,376,094 8099 8.97 3.97 326 154 0.85 013 029

1978 ................................ 7,129,132 80.05 9.35 387 3.93 142 078 044 0.16

1977 .............................. 7,124,840 79.71 9.56 3.96 3.72 149 0.66 064 026

1978 ................................ 9,630,065 79.53 10.65 356 3.84 1.49 0.60 0.16 0.17

1979 .............................. 10,960,424 79.88 10.85 3.30 3.27 1.64 0.55 0.28 023

1880 ................................ 15,586,988 79.94 10.78 3.64 2.80 154 0.57 032 021

1981 .............................. 15,969,188 80.68 9.32 4.60 2.87 155 0.51 037 010

1982 ................................ 22,491,935 81.22 6.96 5.09 3.82 218 0.48 0.36 0.07

1983 .. ........................... 30,318,014 80.37 7.45 5.48 3.56 220 0.65 0.19 0.10

1984 ........................... 30,548,014 82.54 5.26 6.03 3.31 1.79 0.85 018 004

1985 ............................... 37,187.567 8152 5.78 6.12 3.66 1.47 1.27 0.15 003

1988 ............................... 48,560,524 81.12 6.28 5.73 3.68 1.53 1.33 030 002

1987 ................................ 64,082,996 8309 5.57 5.19 3.23 1.30 1.28 0.30 004

r r8VIS8d

1 SheI8 volume lor exchanges Includes stocks, nghls, and warrants.

2 Includes all exchanges not hsted IndividUally

Source: SEC Fonn R-31

155

•
Table 19

DOLLAR VOWME BY EXCHANGES 1

In Percentage

Total Dollar Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other 2

1945 .... ...... 16,284,552 8275 10.81 2.00 1.78 096 116 0.06 048

1950 ... .... ..... ........ 21,808,284 85.91 6.85 2.35 2.19 1.03 1 12 011 0.44

1955 .•............. ......... ... 38,039,107 8631 6.96 2.44 1.90 103 0.78 009 0.47

1960 .•... ..... ...... ...... 45,309,825 83.80 9.35 2.72 194 103 060 0.07 0.49

1961 .. ......... ...... 64,071,623 82.43 10.71 2.75 1.99 1.03 0.49 0.07 053

1962 ... ...................... 54,855,293 86.32 6.81 275 2.00 1.05 0.46 007 0.54

1963 ..... ...... ..... ...... 64,437,900 85.19 751 272 2.39 1.06 0.41 0.06 0.66

1964. ................... 72,461,584 8349 8.45 315 2.48 114 0.42 0.06 081

1965 ... ...... .............. 89,549,093 81.78 9.91 3.44 2.43 1.12 042 008 0.82

1966 ...... ...... .............. 123,697,737 79.n 1184 314 2.84 110 0.56 0.07 0.68

1967 .. ........... ..... 162,189,211 n.29 14.48 3.08 2.79 113 0.66 0.03 0.54

1968. ........................ 197,116,367 7355 17.99 312 2.65 113 1.04 0,01 051

1969 ..... ....... ...... ...... 176,389,759 7348 1759 3.39 3.12 143 0.67 0,01 0.31

1970 ..... ....... ......... 131,707,946 78.44 11 11 3.76 3.81 199 0.67 0.03 0.19

1971 ... ..... ............. 186,375,130 79.07 9.98 4.00 3.79 2.29 058 005 0.24

1972 ..... ....... ........... 205,956,283 n.n 10.37 4.29 394 2.56 0.75 0.05 0.27

1973 ....... ...... ..... ..... 178,883,622 82.07 606 4.54 3.55 2.45 1.00 006 0.27

1974 ....... ..................... 118,828,270 83.63 4.40 4.90 3.50 2.03 1.24 006 0.24

1975 ... 157,256,676 85.20 3.67 4.64 3.26 1.73 1 19 017 0.14

1976 ..... ............... ... 195,224,812 8435 3.88 4.76 3.83 169 0.94 0.53 002

19n .............. ... ........ 187,393,084 83.96 4.60 4.79 3.53 162 0.74 0.75 001

1978 ... ..... .... ...... 251,618,179 83.67 6.13 4.16 3.64 1.62 0.61 0.17 0.00

1979 ..... ..... ..... ... 300,475,510 83.72 694 3.83 2.78 180 0.56 0.35 002

1980 ..... ....... .... 476,500,688 83.53 7.33 4.33 2.27 1.61 052 0.40 0,01

1981 491,017,139 84.74 5.41 504 2.32 1.60 0.49 0.40 0.00

1982 ...... ...... ...... ...... 603,094,266 85.32 327 5.83 3.05 159 051 0.43 0.00

1983 .... ...... ...... . 958,304,168 85.13 3.32 6.28 2.86 1.55 0.66 0.16 004

1984 ....... .. ........ 951,318,448 85.61 2.26 657 2.93 1.58 0.85 019 0.00

1985 ..... ..... .... 1.200,127,848 8525 2.23 659 3.06 1.49 1.20 018 0.00

1986 .. ... ....... ....... .... 1.707.117.112 8502 2.56 6.00 3.00 157 1.44 0.41 0.00

1987 ..... ..... 2,286,902,788 86.79 2.32 5.32 2.53 1.35 1.33 0.35 0.00

r .. revised

1 Dollarvolumelor exchanges meludesstocks, n9h1sand warrants.

2 Includes all exchanges not listed ,ndMdually

Source' SEC FormR-31

156

"
Special Block Distribution

In 1987. there wasone special block

distribution with a value of $554.4 mil.

lion, a decline from 12 special block

distributions during 1986.

Table 20

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In Thousands)

Secondary Distributions Exchange Distributions Special Offerings

Shares Shares Shares

Number Sold Value Number Sold Value Number Sold Value

1945 ••••..•..•.•..... 115 9.457.358 $ 191,961 0 $ 0 0 79 947.231 $29.878

1948 ................. 100 8.481,291 232.398 0 0 0 23 308.134 11,002

1947 ................. 73 3.961.572 124.671 0 0 0 24 314,270 9.133

1948 ................. 95 7,302.420 175,991 0 0 0 21 238,879 5,466

1949 ................. 86 3.737.248 104.062 0 0 0 32 500,211 10,956

1950 ................. rr 4.280.861 86.743 0 0 0 20 150.308 4,940

1951 ................. 86 5.193.756 146,459 0 0 0 27 323,013 10,751

1952 ................. 76 4,223,258 148.117 0 0 0 22 357,897 9.931

1953 ................ 66 6,906,017 108,229 0 0 0 17 380,680 10,466

1954 ................. 84 5.738.359 . 218.490 57 705,781 24.884 14 189,n2 6.670

1955 ................. 116 6,756.767 344,871 19 256,348 10,211 9 181,650 7,223

1958 ................. 146 11.696.174 520.966 17 156.481 4,845 8 131,755 4,557

1957 ................. 99 9,324,599 339,062 33 390,832 15.855 5 63,408 1.845

1958 ................. 122 9.508,505 381.886 38 819.876 29,454 5 88,152 3,286

1959 ................. 148 17.330.941 822.338 28 545.038 28,491 3 33,500 3.730

1960 ................. 92 11,439,065 424,886 20 441.644 11,108 3 63,663 5.439

1961 ................. 130 19,910,013 928,514 33 1,127,268 56,072 2 35.000 1,504

1962 ................. 59 12,143,656 658,780 41 2,345.076 85,459 2 48,200 588

1963 ................. 100 18.937,935 814.964 72 2,892,233 107,498 0 0 0

1964 ................. 110 19,462.343 909.821 66 2.553.237 97,711 0 0 0

1965 ................. 142 31,153,319 1.603.107 57 2.334,277 88.479 0 0 0

1966 ................. 128 29.045.038 1.523.373 52 3.042.599 118.349 0 0 0

1987 ................. 143 30,763,804 1.154,479 51 3.452,656 125,404 0 0 0

1966 ................. 174 36,110,489 1,571.600 35 2.889.938 93,528 1 3,352 63

1969 •.•........•..... 142 38.224,799 1.244,186 32 1.706,572 52,198 0 0 0

1970 ................. 72 17,830,008 504,582 35 2,086,590 48,218 0 0 0

1972 ................. 229 82,385.749 3.216.128 26 1,489.666 30.156 0 0 0

1973 ................. 120 30.825.890 1.151.087 19 802,322 9.140 91 6,862,111 79.889

1974 ................. 45 7.512.200 133,838 4 82,200 6,838 33 1.921,755 16.805

1975 ................. 51 34.149,069 1.409.933 14 483,846 6,300 14 1.252,925 11.521

1978 ................. 44 20.588.432 517.546 16 752,600 13,919 22 1.475,942 18,459

19n ................. 39 9,846,986 261.257 6 295,284 5,242 18 1,074.290 14,519

1978 ................. 37 15,233,141 589,487 3 79.000 1,429 3 130.675 1.820

1979 ................. 37 10.603,680 192,256 3 1,647,600 86,086 6 388.587 4.708

1980 ................. 44 24.979.045 813.542 2 '",900 5,101 4 434,440 7,097

1981 ................. 43 18,079,897 449.600 0 0 0 0 0 0

1982 ................. 76 40.024.988 1,264,492 0 0 0 3 717,000 11,112

1963 ................. 85 70,600,731 2.245,485 0 0 0 0 0 0

1984 ................. 23 21,180,207 680,543 0 0 0 0 0 0

1985 ................. 12 25,458,047 656,917 0 0 0 0 0 0

1988 ................. 12 16,747.273 861,407 0 0 0 0 0 0

1987 ................. 1 9,424,800 $ 554,400 0 $ 0 0 0 0 $ 0

Soun:e: NYSE and AMEX

157
Value and Number of Securities

Listed on Exchanges

The market value of stocks and

bonds listed on U.S. exchanges at the

end of 1987 was $3.8 trillion. an

increase of three percent over the previous year. The market value of stocks

was $2.2 trillion. about the same as a

year earlier. The value of listed bonds

increased 11 percent. Stocks listed on

the New York Stock Exchange had a

market value of $2.1 trillion and represented 97 percent of the value of common and preferred stocks listed on

registered exchanges. Those listed on

the American Stock Exchange accounted for almost all of the remaining

three percent of the total and were

valued at $67.0 billion, a decrease of

five percent over the previous year.

Table 21

SECURITIES LISTED ON EXCHANGES'

December 31,1987

EXCHANGE COMMON PREFERRED BONDS lOfAL SECURmES

Market Market Market Market

vaJue vaJue vaJue vaJue

Reglslered: Number (Million) Number (Million) Number (Million) Number (Million)

American 823 $ 83,787 103 $ 3,242 319 $ 18,922 1,245 $ 85,931

Boston 115 2,234 0 0 3 8 118 2.242

Cincinnati 4 151 2 1 6 92 12 244

MIdwe8l 7 489 3 14 0 0 10 503

New York 1,539 2,088,875 835 43,483 3,257 1,811,321 5,431 3,743,479

Pacific 80 1.570 36 918 95 2,407 191 4,893

Philadelphia 48 380 14 194 44 3 108 557

Spokane 34 19 0 0 0 0 34 19

Total 2,830 $2,157,285 793 $47,850 3,724 $1,832,753 7,147 $3,837,868

Includes Foreign

Stocks:

New York 87 $ 82,882 3 $ 1,271 89 $ 9,942 159 $ 94,095

American 54 22,292 4 884 4 134 82 23,110

PacIflc 5 21 1 + 2 2 8 23

Total 126 $ 105,195 8 $ 1,955 95 $ 10,078 229 $ 117,228

N.A. Not Available

+ Leas than 1 mlUlon

1 Excludes secuntle8 which were 8U8peIlded from trading at the end 01 the year, and securities which because ollnllCllvity had

no available quotll8.

Source: SEC Form 1392

158

-

•
Table 22

VAWE OF STOCKS LISTED ON EXCHANGES

(Billions of Dollars)

Dec 31

1938 .

1939 .

1940 .

1941 .

1942....... .. .

1943 .

1944 .

1945 .

1946 .

1947 .

1948 ..

1949 ..

1950 ..

1951 ..

1952 ..

1953 ..

1954 ..

1955 ..

1956 .

1957 ..

1956 ..

1959 ..

1960 .

1961 ..

1962 ..

1963 ..

1964 ..

1965 ..

1966 .

1967 ..

1968 .

1969 .

1970 ..

1971 .

1972 ..

1973 ..

1974 ..

1975 ..

1976 .

1977 .

1978 .

1979 ..

1980 ..

1981 ..

1982 .

1983 ..

1984 . .

1995 ..

1988 ..

1987 ..

Source: SEC Form 1392

New York

Stock

Exchange

47.5

465

41.9

35.8

38.8

47.6

55.5

73.8

68.6

68.3

67.0

76.3

93.8

109.5

1205

117.3

169.1

207.7

219.2

195.6

276.7

307.7

307.0

387.8

345.8

411.3

474.3

537.5

462.5

605.8

692.3

629.5

638.4

741.8

871.5

721.0

511.1

685.1

856.3

776.7

822.7

960.6

1,242.8

1,143.8

1,305.4

1,522 2

1,529.5

1,882.7

2,128.5

$2,132.2

Amencan

Stock

Exchange

10.8

10.1

8.6

74

7.8

9.9

11.2

14.4

13.2

12.1

11.9

122

13.9

16.5

169

15.3

221

27.1

310

25.5

31.7

25.4

24.2

33.0

24.4

28.1

28.2

30.9

27.9

430

61.2

47.7

39.5

49.1

55.6

38.7

23.3

29.3

36.0

37.6

39.2

57.8

103.5

894

776

80.1

52.0

63.2

70.3

$ 67.0

exclusively

On Other

Exchanges

$3.0

3.1

3.3

3.2

31

2.8

3.6

4.0

3.8

3.1

4.3

4.2

41

5.3

4.0

4.3

4.3

4.7

4.0

3.9

6.0

5.4

4.8

4.7

5.6

41

2.9

43

4.2

42

2.9

3.9

2.9

50

6.8

6.6

5.8

59

6.5

$5.9

Total

56.3

56.6

50.5

43.2

46.6

57.5

68.7

88.2

81.6

80.4

61.9

91.6

111.0

129.2

140.5

135.4

194.8

238.8

254.0

224.2

312.7

337.3

335.3

426.1

374.2

441.7

506.8

573.1

514.4

652.7

759.5

882.6

680.7

795.6

932.7

763.8

537.3

716.7

898.5

818.5

884.8

1,022.3

1,349.2

1,238.2

1,389.7

1,806.8

1,567.3

1,951.8

2,205.3

$2,205.1

159
SECURITIES ON EXCHANGES

As of September 30, 1988, a total of

7,890 securities, representing 2,558

issuers, were admitted to trading on

securities exchanges in the United

States. This compares with 7,909 issues,

involving 3,145 issuers a year earlier.

Over 5,600 issues were listed and registered on the New York Stock Exchange.

accounting for 58.0 percent of the stock

issues and 81.1 percent of the bond

issues. Data below on "Securities Traded

on Exchanges" involved some duplication since it includes both solely and

dually listed securities.

Table 23

SECURITIES TRADED ON EXCHANGES

Issuens Stocks Bonds'

Temporarily

Registered Exempted Unlisted Tolal

American Stock Exchange ....................... 864 1,341 6 997 281

Boston Stock Exchange ........................... 1,070 1,157 969 1,129 11

Chicago Board of Trade ............................. 1 5 0 1

CinCinnati Stock Exchange ...................... 1,082 1,204 1,115 1,138 46

Midwest Stock Elcchange ......................... 1,234 1,478 1,060 1,390 34

New York Stock Elcchange ........................ 1,715 5,446 2,470 2,706

PacIfIc Coast Stock Elcchange ................... 828 1,114 247 992 157

Philadelphia Stock Exchenge .................... 842 1,214 727 996 97

Spokane Stock Elcchange ............ ........... 22 22 3 19 3

, Issuers exempted under SecIlon 3(a)(12) of the Exchange Act, such as obIlga1lons of United States Government, the

states, and cItles, are not included In lhla table.

Table 24

IMMOBILIZATION TRENDS

1967 1986 1965 1984 1963 1962

Book-entry Deliveries at DTC

(in thousands) .................................... 78,000 88,700 55,800 48,000 50,000 37,000

Tolal C8rtJllcates Withdrawn

from DTC (in thouasnds) ........................ 10,000 9,200 9,100 10,100 13,800 12,500

Book-entry Deliveries per

CerlJficate Withdrawn ............................ 7.8 73 6.1 48 3.7 3.0

CERTIFICATE

IMMOBILIZATION

Book-entry deliveries continued to

outpace physical deliveries in the settlement of securities transactions among

depository participants. This tendency is

illustrated in Table 24, IMMOBIUZATION

TRENDS. The Table captures the relative

significance of the mediums employed,

in a ratio of book-entry deliveries to

certificates withdrawn from DTC. The

figures exclude municipal bearer bonds.

In 1987, while the number of shares

traded in U.S. markets increased by

32 %, the total certificates withdrawn

from DTC increased less than 10%, and

160

the ratio of book-entry deliveries to certificates withdrawn continued to grow. In

1987, the ratio was over two and a half

times the 1982 figure of 3.0 book-entry

deliveries rendered for f!Nery certificate

withdrawn.

1933 ACT REGISTRATIONS

Effective Registration Statements

During fiscal year 1988, 5.853 regis.

tration statements valued at $436.3

billion became effective. In fiscal year

1987, 8,520 statements, valued at

$539.0 billion, became effective.
Fiscal Year

Fiscal Year Ended June 30

1935 2.. .. .

1936 ..

1937 ..

1938 ..

1939 ..

1940 ..

1941 ..

1942 .

1943 ..

1944 .

1945 ..

1946 ..

1947. . ..

1946 .

1949 .

1950 .

1951 ..

1952 ..

1953 .

1954 .

1955 ..

1958.......... ..

1957 ..

1958 ..

1959 ..

1969.... .. .

1961 .

1962 ..

1963 .

1964 ..

1965 .

1966 ..

1967 ..

1966 .

1969 .

1970 ..

1971 .

1972 ..

1973....... .. .

1974 .

1975 ..

1976 .

TranSlllon Quartar:

JuJy-Sept 1976 ..

Fiscal Year Ended sept. 30

19n ..

19783 ..

1979 ..

1980 ..

1961 .

1982 .

1983 .

1994 ..

1965. .. .

1986 .

1967r. .. .

1986p . .

CumulatJve Total ..

Table 25

EFFECTIVE REGISTRATIONS

(Millions of Dollars)

Cash Sale lor Account of Issuers

Totel Common Bonds,

Number of Stock and Debentures Preferred

Statements value Other EqUity 1 and Notes Stock Total

284 $ 913 $ 168 $ 490 $ 26 $ 666

689 4,835 531 3,153 252 3,936

840 4,651 802 2,426 406 3,634

412 2,101 474 666 209 1,349

344 2,579 318 1,593 109 2,020

306 1,787 210 1,112 110 1,432

313 2,611 196 1,721 164 2,061

193 2,003 263 1,041 162 1,466

123 659 137 316 32 485

221 1,760 272 732 343 1,347

340 3,225 456 1,851 407 2,714

661 7,073 1,331 3,102 991 5,424

493 6,732 1,150 2,937 767 4,674

435 6,405 1,678 2,817 537 5,032

429 5,333 1,083 2,795 326 4,204

487 5,307 1,786 2,127 466 4,381

487 6,459 1,904 2,638 427 5,169

635 9,500 3,332 3,346 651 7,529

593 7,507 2,806 3,093 424 6,325

631 9,174 2,610 4,240 531 7,381

n9 10,960 3,864 3,951 462 6,2n

906 13,096 4,544 4,123 539 9,206

876 14,624 5,658 5,689 472 12,019

813 16,490 5,998 6,857 427 13,262

1,070 15,657 6,387 5,265 443 12,095

1,426 14,367 7,260 4,224 253 11,737

1,550 19,070 9,650 6,162 248 16,260

1,844 19,547 11,521 4,512 253 16,266

1,157 14,790 7,227 4,372 270 11,869

1,121 16,860 10,006 4,554 224 14,784

1,266 19,437 10,638 3,710 307 14,655

1,523 30,109 18,218 7,061 444 25,723

1,649 34,218 15,083 12,309 558 27,950

2,417 54,076 22,092 14,036 1,140 37,266

3,645 86,610 39,614 11,674 751 52,039

3,389 59,137 28,939 18,436 823 48,196

2,969 69,562 27,455 27,637 3,360 58,452

3,712 62,487 26,518 20,127 3,237 49,682

3,265 59,310 26,615 14,841 2,576 44,034

2,890 58,924 19,811 20,997 2,274 43,082

2,780 n,457 30,502 37,557 2,201 70,260

2,813 87,733 37,115 29,373 3,013 69,501

639 15,010 6,767 5,006 413 12,246

2,915 92,579 47,116 26,026 2,426 n,566

3,037 65,043 25,330 23,251 2,126 50,709

3,112 n,400 22,714 26,894 1,712 53,320

3,402 110,583 33,076 42,764 2,879 78,719

4,326 144,132 49,276 40,163 2,505 91,944

4,846 184,455 50,486 63,950 3,939 118,375

5,503 240,058 n,403 80,718 9,339 167,460

5,087 209,866 66,571 74,136 4,984 145,691

4,913 267,651 72,013 117,178 6,999 196,190

5,925 484,383 93,470 258,360 12,166 363,996

8,520 539,025 120,755 291,957 15,453 428,165

5,853 436,276 100,259 233,596 9,302 343,159

110,894 $3,810,168 $1,161,860 $1,597,924 $106,068 $2,865,872

r revised

p preliminary

1 Includes warrants, shares of beneficial Interest, certlfocates of partICipation and all other equrty Interests not elsewhere Included

2 For 10 months ended June 30, 1935

3 The adopbon of Rule 241-2 (17 CFR 270 241-2) effec!Ml November 3, 19n made It Impossible to report the dollar value 01

secuntJes registered by Investment companl8S

161

•

•
Table 26

Securities Effectively Registered With S.E.C

1935 - 1988

600

500

BILLIONS OF DOLLARS

200

400

1935 40 45 50 55 60 65 70 75 80 1988

o

300

100

(Fiscal Years)

In 1977 Fiscal Year End Changed from June to September

Data for Transition Quarter July-8eptember 1976 Not Shown on Charts

Value of RegIstrations $15 811110n

'Does Not Include Investment Companies As Of 1/1178 Due To Rule Change

r Revised

p Prelimmary

162

=

=
• o• w• en

s:

... i

CJ)

...

0ClC)

.- ClC)

0)0)

,...CJ)~ : a:

I

~~U')

-CW)

~O) .-

--- W---o

CJ)

.-... ...-

:so

CJ)

en

163

~

~

~
Purpose and Type of Registration

Effective registrations for cash sale

for the accounts of issuers in fiscal year

1988 amounted to $343.2 billion, a

decline of 20 percent from fiscal year

1987's total of $428.2 billion. In fiscal

1988, $95.4 billion of these reglstrations were for immediate cash sale, a

decline of $33.7 billion (26 percent)

from fiscal year 1987's figure of $129.0

billion.

Of the $95.4 billion, debt securities

accounted for $49.8 billion (52

percent), common stock and other

equity amounted for $39.8 billion (42

percent) and preferred stock totalled

$5.8 billion (6 percent).

Delayed and extended cash sales registered for the account of the issuer

totalled $247.8 billion or 57 percent of

all registrations. Of registrations for

delayed sales, domestic securities

accounted for $187.9 billion while foreign securities accounted for $11.0 billion. Registration for extended sales

came to $48.9 billion.

Securities registered for the account

of the issuer for other than cash sale

(e.g., for exchange offers) amounted to

$76.2 billion or 17 percent of all regis164

trations. Registrations of securities for

secondary offerings amounted to $16.9

billion or 4 percent of all registrations.

Registrations of all types were valued

at $436.3 billion in fiscal year 1988. Of

this amount, $247.1 billion in bonds

and other debt securities were registered. Another $176.6 billion of common stock and other equity were

registered and preferred stock registrations totalled $12.6 billion. Of the

$247.1 billion registered in debt securities, $49.8 billion (20 percent) were

registered for primary, immediate cash

sale and registrations for primary,

delayed and extended cash sales

accounted for $183.8 billion (74

percent). The total for preferred stock

($12.6 billion) included $9.3 billion

registered for issuers for cash sale, $2.2

billion registered for issuers for other

purposes and $1.1 billion registered for

secondary offerings. Of the $176.6 billion of registrations for common stock

and other equity securities, registrations for issuers for cash sale came to

$100.3 billion, other registrations for

issuers totalled $70.8 billion and regis.

trations for secondary offerings were

valued at $5.5 billion.
Table 28

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY

FISCAL YEAR 1987r

(Millions of Dollars)

Purpose of Registrations

All Registrations (Estimated Value) ..

Account ofl88Uer for Cash Sale ..

Immediate Offering ..

Delayed and Extended Cash Sale .

Domestic Delayed .

ForeIgn Delayed .

Extended ..

Account oflssU8f for Other Than Cash Sale ..

Secondary OfferIngs ..

Type of Secunty

Common

Bonds. Stock and

Debentures Preferred Other

TotsJ and Notes Stock Equity 1

539.025 306.295 24.421 208.309

428.165 281.957 15.453 120.755

129.049 62.533 9.724 56.792

299.116 229.424 5.729 63.963

239.182 221.028 «rrr 13.3n

9.867 8.366 0 1.501

50.067 30 952 49.085

92.008 5.847 8.081 78.280

18.852 8.891 887 9.274

r & revised

1 Includes wanants. sh8188 of benefiClaf 1ntsnl8t. certitk:ate8 of particlpalJon snd other equity Interests not elseWhere Included

Source' 1933 Act RegiSlration Statements

Table 29

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY

FISCAL YEAR 1988p

(Millions of Dollars)

Purpose of Registrations

All Reglstratlons (Estimated Value) .

Account of Issuer for Cash Sale ..

Immediate OfferIng .

Delayed and Extended Cash Sale ..

Domestic Delayed .

ForeIgn Delayed .

Extended .

Account of Issuer for Other Than Cash Sale .

Secondary OfferIngs ..

Type of Security

Common

Bonds. Stock and

Debentures Preferred Other

TotsJ and Noles Stock Equity 1

436.276 247.096 12.629 176.551

343.159 233.598 9.302 100.259

95.371 49.763 5.n3 39.835

247.788 163.835 3.529 80.424

187.924 173.567 3.506 10.651

11.009 10.252 0 757

48.855 16 23 48.816

76.207 3.252 2.196 70.759

16.910 10.246 1.131 5.533

p prellmlruuy

1 Includes wanants. 8h8188 of benefiClaf Interest. certif1ca18s of partIclpatlon and other equity Interests not elseWhere Included

Source: 1933 Act Regl8lratlon Stalaments

165

•
Table 30

Dollars Billions

300

Effective Registrations

Cash Sale For Account Of Issuers

1935 - 1988

270

Bonds-...

p

180

Preferred Stock

" r-; ............ '_' ...... ..-- .....•••. 0. _0 •••.•

Common Stock -,*"l\I '-

,

I

1'./

I

,., -' " o

90

1935 45 55 65

(Fiscal Years)

75' 85 1988

'In 1977 Fiscal Year End Changed from June to September

Dala for Transulon Quarter July-September 1976 Not Shown on Chart

Bonds S5 1 Billion, Preferred Stock $ 4 B'"lon, Common Stock $6 8 Billion

r ReVIsed

p Prellmmary

166

~ •• •• ,

=

=
Regulation A Offerings

During fiscal year 1988, 109 offering

statements for proposed offerings under Regulation A were processed and

cleared.

Table 31

CASH OFFERINGS UNDER REGULATION A

SIze: (In 000'8)

$ 500 or Lea .

501 1,000 .

1,001 1,500 .

1blaI .

UnderWriters:

Used .

Not Used .

TolaI........... .. .. ..

OfflllOlll'

leeuing Companle8 ..

Stockholders , ..

'- & SlockhoIders Jointly ..

TolaI ..

FIecaI Fi8C8J 1987 1988

45 45

28 28

26 38 --

99 109

16 13

83 96

--

99 109

99 109

0 0

0 0

99 109

167

-

-
Table 32

TYPES OF PROCEEDINGS

ADIIINISTRAnvE PROCEEDINGS

Persons Subject to Acts ConstliUtlOg,

and BasIs for, Enforcement Action.

8nlIlItNIn1er, municipal eec:urltles dea ....,

government eec:urltles dea ...., mlll.fer lIlJ8nt,

Investment edvIMr or lIAOCIated peraon

Willful violation of securities laws or rules; aiding or

abetting such violation; fallure reasonably 10 supervise

others; willful mllllllalement or omission In filing with the

Commission; conV1Clion of or InJuncllon agalOlIl certain

crimes or conduct.

Registered eec:urltles 8SlIOCIMIon

VIolation of or Inability to comply with the 1934 Act,

rules thereunder. or till own rules; unjull!lfJed failure to

enforce compliance WIth the foregoing or W1th rules 01

the Municipal Secuntles Rulemaklng Board by a

member or pereon associated with a member.

Member of registered eec:urltles

aAOClatlon, or lIAOCIated peraon

Entry of Commi8llKln order agaInlIl pereon pursuant to 1934 Act. Section 15(b); willful V1OIalIon of secuntles

laws or rules thereunder or rules of Municipal Securities

RulemakJng Board; effecting transaction for oIher person

with reason to believe thlll person Well commitbng

Violations of securities laws.

NdoMl eec:urltles exchange

Violation of or Inability to comply with 1934 Act, rules

thereunder or till own rules; unjulllifJed failure to enforce

compliance with the foregoing by a member or pereon

associated with a member.

Member of national securities

exchllnge, or aAOClated per80II

Entry of Comml8llKln order ag81nlll person pursuant to

1934 Act, 8ecllon 15(b); willful violation of securitJes

laws or rules thereunder, effecting transaction for other

pereon WIth reason to believe that person was

commrttlng violatJon of securitJes laws.

Registered curing lIlJ8ncy

Vlolallon of or Inability to comply with 1934 Act, rules

thereunder, or Its own rules; failure to enforce

compliance WlIh till own rules by partlctpantll.

PIInJcJpant In regJatered clurlng lIlJ8IlCy

Entry to Commission order ag8JnlIl participant pursuant

to 1934 Act. 8ectJon 15(b) (4); willful VIOlation of clearing

agency rules; effecbng tranaactlon for other person with

reaaon to beheve thlll pereon Well commrttlng violations

01 securities laws.

168

Censure or limitation on aetlvlties; 1lMlC8tIOn,

suspension or denial of regilllralion; bar or suapenslon

from association (1934 Act, 8ecIlons15(b) (4H8j, 15(c)

(1H2), 158(c) (2H6), 17A(c)(3); Advisers Act, S8ction

203(eHf).

SUspel1SlOl1 or revocatton of registration; censure or

limitation of aetlvlties, functions, or operations (1934 Act,

8eclion 19(h) (1».

Suspension or expulsion from the lIlI8OClatlon; bar or

suspension from association with member of lIlI8OClatlon

(1934 Act, Section 19(h) (2H3».

Suspension or revocatJon of regislration; censure or

Iimltabon of aetlvlties, functions, or operations (1934 Act.

8eclion 19(h) (1».

Suspension or expulllJon from 8llChange; bar or

Suspel1SlOl1 from association with member (1934 Act.

8eclion 19(h) (2H3».

Suspenswn or revocatJon 01 reglslratJon; censure or

IImltatlon of aetMties, functlona, or operations (1934 Act.

8e<:tton 19(h) (1».

Suspension or expulllJon from clearing agency (1934

Act, 8ecllon 19(h) (2».
Securities Information processor

Violation of or Inability to comply with provisions of 1934 Censure or IImltabon of actlVlbes; suspension or

Act or rules thereunder revocation of reglstrabon (1934 Act, Section 11A(b) (6».

Any person

Willful Vlolabon of 1933 Act, 1934 Act, Investment

Company Act or rules thereunder, aldlng or abetting

such Violation, Willful misstatement m filing with

CommiSSIon

OffIcer or director of self-regUlatory

organization

Willful Vlolabon of 1934 Act, rules thereunder or the

organlZ8bon's own rules; Willful abuse of authonty or

unjustified failure to enforce compliance.

Prlnclpalofb~r~8Iar

EngagIng In business as a broker-deater after

appointment of SIPC trustee

1933 Act registration statement

Statement materially inaccurate or Incomplete.

Temporary or permanent protubltion against serving In

certain capacities With registered Investment company

(Investment Company Act, Section 9(b»

Removal from office or censure (1934 Act, Section 19(h)

(4»

Bar or suspension from being or becoming associated

With a broker-dealer (SIPA, Section 10(b»

Stop order refUSing to permit or suspending

effectIVeness (1933 Act, SectJon 8(d».

Person subject to sections 12, 13, 14 or 15(d)

of the 1934 Act or associated person

Fatlure to comply wrth such provisions or having caused Order directing compliance or steps effecting

such faolure by an act or emlssron that person knew or compliance (1934 Act, Section 15(c) (4»

should have known would contnbute thereto.

Securl1Jes reglatered PUl8U8nt to

section 12 of the 1934 Act

Noncompliance by Issuer With 1934 Act or rules

thereunder.

Public interest requires tradIng suspension

Registered Investment company

Fatlure to file Investment Company Act reglstrabon

statement or required report; filing matenally Incomplete

or misleading statement or report.

Company has not attaoned $100,000 net worth 90 days

after 1933 Act reglstrabon statement became effective.

Attorney, accountant, or other

p~onalorexpert

Lack of requisite qualifications to represent others;

lacking In character or integnty; unethical or improper

professional conduct; Willful Violation of secunnes laws

or rules; or aiding and abetting such Vlolabon

Demal, suspension of effectIve date, suspension or

revocation of registration, prohlbl!lon against trading In

secunnes when reglstrabon suspended or revoked (1934

Act, SeclJon 12(j))

Summary suspension of over-the-counter or exchange

tradIng (1934 Act, Section 12(k»

SuspenSIon or revocation of registration (Investment

Company Act, Section 8(e»

Stop order under 1933 Act; suspension or revocanon of

registration (Investment Company Act, SeclJon 14(a»

Permanent or temporary dernal of pnvllege appeartng or

practicing before the Commission (17 CFR seenon

201.2(e) (1»

169
Attorney suspended or dIsbarred by court, expert's

license revoked or suspended, cormcnon of a felony or

of a misdemeanor invoMng moral turpitude.

Permanent InjunctJon against or finding of securil1es

VIolation In COmmlSSlon-instrtuted action, finding of

secunnes vlolabon by COmmission In administrabve

proceedingS.

Automabc suspension from appearance or practice

belore the COmmission (17 CFR SectIon 201.2(e) (2».

Temporary suspension from practicing before the

COmmission; censure; permanent or temporary

dlsquallficetlon from practicing before the Commission

(17 CFR SectJon 201.2(e) (3».

Member of Municipal Securities

Rulemaklng Board

Willful VIolation of 1934 Act, rules thereunder, or rules of Censure or removal from office (1934 Act, SectIon

the Board, abuse of authority 15B(c) (8».

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons SUbject to Acts COnstituting,

and BasiS for, Enforcement Acbon.

Any person

Engaging In or about to engage In acts or practices

vIolabng securities laws, rules or orders thereunder

(including rules of a regIstered self-regulatory

organization).

Noncompliance WIth provlSKlns of the laws, rules, or

regulabons under 1933, 1934, or Holding Company Act,

orders ISSUedby COmmiSSIon, rules of a regIstered

self-regulatory organizatIon, or undertaking In a

registration statement

Trading while In possession of material non-publlc

inlormation In a transaction on an exchange or from or

through a broker-dealer (and transaction not part of a

pUbliC offering), or aiding and abettmg such trading

IlISUer subject to section 12 or 15(d)

of the 1934 Act, officer, director, employee or agent

of IlISUer; stockholder acting on behalf of I_r

Payment to foreign official, foreign polmcal party or

offiCial, or candidate for foreign political office, for

purposes of seeking the use of influence In order to

assist Issuer In obtBJning or ratalnlng business for or

WIth, or dlrectJng business to, any person.

Securities Invetltor Protection Corporation

Refusal to commit funds or act for the protection of

customers.

Natlonsl securities exchange or

registered securities lI8lIOClstlon

FaIlure to enforce compliance by members or persons

associated with its members with the 1934 Act, rules or

orders thereunder, or rules of the exchange or

association.

170

SanclJon

InjunctJon agBlnst acts or prectIces which constitute or

would constrtute violabons (plus other equitable relief

under court's general equity powers) (1933 Act, Section

2O(b); 1934 Act, SectIon 21(d); Holding COmpany Act,

SectIon 18(1); Investment Company Act, SectIon 42(e);

AdVIsers Act, 8ectJon 209(e); 1hlst Indenture Act,

SectIon 321).

Writ of mandamus, injunction, or order dIrecting

compliance (1933 Act, SectIon 2O(c); 1934 Act, SectIon

21(e); Holding Company Act, SectIon 18(g».

Maximum eMi penalty: three times profit gBlned or loss

avoided as a result of transaction (1934 Act, SectIon

21(d).

MaxImum CIVIlpenalty: $10,000 (1934 Act, Section

32(c».

Order dlraclJng discharge of obligations and other

appropriate relief (SIPA, SectIon 7(b».

WrIt of mandamus, InjunctIOn or order directing such

exchange or assocIaIJon to enforce compliance (1934

Act, 8ectJon 21(e»
Reglster.d clearing sgency

FaJlure to enforce compliance by us par1Icipants wlth.ts Wnt 01mandamus, InJunct.on or order d.recting cleanng

own rules. agency to enforce compliance (1934 Act, SectJon 21(e».

1_ subject to section 15(d) of 1934 Act

FaIlure to file required Informat.on, documents or

reports.

Regl8tered Invntmenl company

Name of company or of secunly issued by tt deceplJve

or misleading

OffIcer, director, member of lIdvlsory board, adviser,

depoaItor, or underwrller of Invntment company

Engage In act or praence const.tulJng breach of fiduciary

duly involving personal misconduct

forfeiture of $100 per day (1934 Act, Section 32(b))

InjunclJon aga.nst use of name (Investment Company

Act, Section 36(d))

Injunction against acting In certain capacllJes for

Investment company and other appropnate relief

(Investment Company Act, SectJon 36(a»

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons Subject to Acts ConstltulJng,

and Basis for, Enforcement Act.on.

Any person

Willful violation of secunlJes laws or rules thereunder;

wlllfull mlsstaJement In any document required to be

flied by securilJes laws or rules; w.llful misstatement In

any document required to be filed by self ...egulatory

organization m connection with an application for

memberShip or essociation with member.

...... r subject to section 12 or 15(d) of the

1934 Act: officer or director of Issuer; stockholder

lICtIng on behalf of Issuer; employee or agent

subject to the jurl8cllctlon of the United Stele.

Payment to foreign offiCIal, foreign political party or

official, or candidate for foreign political office for

purposes 01seeking the use of Inftuence in order to

assist Issuer In obtaining or retslning busmess for or

with, or directJng busmees to, any person

SanctIOn

Maximum penalties' $100,000 flne and five years

impnsonment; an exchange may be lined up to

$500,000 (1934 Act, SectJon 21(d), 32(a»; $10,000 line

and five years rrnpnsonment, a public ut.,1ty holding

company may be lined up to $200,000 for vlolalJons of

Holding Comany Act (1933 Act, Sections 2O(b), 24;

Holding Company Act, Sections 18(1),29; Trust

Indenture Act, Sections 321, 325; Investment Company

Act, Sections 42(e), 49; Advisers Act, SectIOns 209(e),

217) .

Issuer-$2,ooo,ooo; officer, director, employee, agent or

stockholder-$1oo,ooo and five year Impnsonment

(issuer may not pay fine for others) (1934 Act, Section

32(0».

.Statutory references are as follows. "1933 Act," the Secunties Act of 1933, "1934 Act," the SecunlJes Exchange Act

of 1934; "Investment Company Act," the Investment Company Act of 1940, "Adv.sers Act," the Investment Advisers Act

ol194O; "Holding Company Act," the PUblic UlJIlly Holding Company Act of 1935; "Trust Indenture Act," the Trust

Indenture Act of 1939; and "SIPA," the Secuntles Investor Protection Act of 1970

171
Table 33

Fiscal 1988 Enforcement Cases

Listed by Program Area

(Each case mmated has been rncluded In only one category hsted below, even though many

cases Involve multiple allegations and may fall under more than one category.)

Program Araa-Broker-Dealer Back Office

Name of Case

In the Maller of E F Hutton & Co., lnc., et al .

In the Maller of Underwood, Neuhaus & Co , Inc, et al

In the Maller of Joseph T Cusack, et al

In the Maller of Jorge Sanchez

In the Maller of Flagship Securities Inc., et al ..

In the Maller of Wilham J Green, et al ..... ..

SEC v Flagship Securities Inc, et al

SEC v. Fitzgerald, DeArman & Roberts, Inc

SEC v.Wilham Green, et al

Program Area-Broker-Dea/er. Fraud ~amst Customer

Name of Case

In the Maller of Manna Secuntoes, Inc., et al ..

In the Maller of Gallagher & Co., et al ..

In the Maller of Elvyn Q. Evans, et al .

In the Maller of Alan C Refk.n, et al .

In the Maller of Paul Gerald White ... ... .. ... ..

In the Maller of Paine Webber Inc

In the Maller of Petro-Source Securities Inc, et al

In the Matter of Heidi Carolyn Drtchendorf

In the Matter of Dale E Barlage ..

In the Maller of Michael J Fee, et al

In the Matter of Steven E. Whiting ...

In the Matter of Robert T Wellman. ..

In the Maller of Wilham S. Craugh, et al,

In the Matter of S Mason Ackroyd .... ....

In the Maller of Anthony J Butnrner c.. . In the Matter of Wilham H Melhorn... ..

In the Maller of Dean Willer Reynolds, Inc ..

In the Maller of Bryce S. Kommerstad.. .. ..

In the Maller of ITEC Secuntles Corp., et al. .

In the Maller of Yasuhlro Nomoto ..

In the Matter of Proculo B Blando ..... ... ... .......

In the Maller of CDA Securities Inc, et al

SEC v Wilham Ray White

SEC v Windsor EqUity Corp., et al. ...

SEC v Vlrglma Melhorn .

SEC v. Michael W. Rehtorlk, et al

SEC v Krrk A Knapp

SEC v Damel B Ptak

SEC v. Anthony J Bummer ...

SEC v. Bryce S Kommerstad. .... .... ...

SEC v paM Blando Corp, et al

SEC v Denms L Aslom, et al .

Program Area-Broker-Dealer Other

Name of Case

In the Matter of Paul Goldberg... ........

In the Matter of Robert M Winston, et al

In the Matter of Frederick H Race, IV

In the Matter of Brian J Lareau .....

In the Matter of Richfield SecurllJes Inc

In the Matter of Wilham J. Gregerman

SEC v Wilham S Craugh, et al

Program Area-Broker-Deale,. Stock Loan

Name of Case

In the Matter of Alan H Komlnz ...

SEC v Alan Komlnz ..

172

Date Filed Release No.

102287 34-25054

121687 34-25200

021968 34-25374

050988 34-25675

060888 34-25790

093088 34-26135

021188 LR-11690

062888 LR-l1800

091688 LR-11887

Date Filed Release No.

111687 34-25130

112087 34-25142

102987 34-25070

110287 34-25087

110387 34-25085

030488 34-25418

022388 34-25381

021188 34-25347

040888 34-25563

062288 34-25827

060288 34-25n9

062188 34-25828

061588 34-25803

052788 34-25762

082488 34-26023

093088 34-26138

093088 34-26144

072688 34-25945

082288 34-26014

093088 34-26143

080188 34-25953

093088 34-26142

121487 LR-l1636

032188 LR-11693

050688 LR-11749

042588 LR-11755

051288 LR-l1746

061388 LR-11791

080388 LR-l1832

071288 LR-11818

071488 LR-11828

092088 LR-11871

Date Filed Release No

060288 34-25781

040488 34-25548

041888 34-25592

082968 34-26038

092968 34-26129

092888 34-26134

060188 LR-11769

Date Filed Release No.

092388 34-26105

091588 LR-11881
Program Ar8a-eontBmpt-Ctv1l

Name of Case

SEC v. Thomas A. Dentinger. .. ... .

SEC v Thomas C. Shlu. at aI....... .. . ..... . .

SEC v. Stephen L. Read. at aI.

SEC v Havard Lee... .. ..

SEC v. Phillip A. Justice .... .... ..

SEC v. Robert V. Yeo .

SEC v. Robert Cooper, at al.. ..

SEC v. Robert A. Dllanm . .

SEC v. Michael Joyce, at a!. ..

SEC v James Simpson, at aI ..

SEC v. James L Douglas......... ... ..

SEC v. International SwIss Investment Corp., at al.. ..... . . .. .

SEC v. Palmer financial Corp., at al....... .. .. . . .

SEC v. DaVId 0 Sterns .. . .. .. .. .

SEC v. William R. Cook...... .. . .. ..... . ..

Program At8a-ContBmpt-erlmlnai

Name of Case

U.S. ex reI. SEC v. Michael L Allred. at at .

U.S. ex rei. SEC v. Fredenck R. Lawrence... .. ....

Program ArBa-Corporats Control: BenefiCIal Ownership

Name of Case

In the Matter of The Gabelll Group Inc , at al... .... . ...

SEC v. Leonard Levy, at at... ..... .. .....

Program Araa-Corporats Control: Tender Offers

Name of Case

In the Matter of Meyers Parking System, Inc.. ..

Program Araa-Dellnquent Filings: Form 3 & 4

Name of Case

SEC v. Ronald A. Orr.... .

SEC v. Martin M. Rothschild , ..

Program Araa-Dellnquent Filings: Issuer Reporting

Name of Case

SEC v. Stephen L. Read........ ............

SEC v. Palmer Financial Corp., at al ..

SEC v. Scopus Technology Co., Inc .. . .. .

SEC v OliVIer Management Corp ........ ..

SEC v. Hanover Companies, Inc. .. .. ..

SEC v. PacIfic Eastern Corp

Program Araa-Fraud Against Regulated Entities

Name of Case

SEC v. Robert Pamer, at at.... .. ..

SEC v. A1eksandrs Launns .. . ..

Program Araa-Insider Trading

Name of Case

In the Matter of Marcus Schloss & Co., Inc. . .

In the Matter of Andrew Soloman. .

In the Matter of John E Kilfoyle.... .. . .

In the Matter of Gulseppe B. Tome, at a!. . ..

SEC v. Robert Chestman, at aI..... . . .....

SEC v. Shimon Lev .. ..

SEC v. Joseph Sierchio.. ... .. ..

SEC v. John Lombardi, at aI........ .. .. . SEC v. Joseph Kerherve, et al . ..

SEC v. Marcus Schloss & Co., Inc. .. .. .. . .

SEC v. Douglas Ronald Yagoda .... . ... .. . ..

SEC v. Andrew Solomon .. . ..

SEC v. Kurt A. Grey, at aI. .. . .....

SEC v. Cart N. Kercher, at aI ......... . .. .

Date Filed Release No

112587 NONE

100187 LR-11574

110587 LR-11597

121487 NONE

022488 LR-ll888

032988 LR-11730

040188 NONE

050588 LR-11726

041888 NONE

061888 NONE

070888 NONE

072888 LR-11876

071888 NONE

120887 LR-11735

032988 NONE

Date Filed Release No

021888 LR-11740

051388 NONE

Date Flied Release No

081788 34-26005

Ot2188 LR-11648

Date Filed Release No

091288 34-26069

Date Filed Release No

051688 LR-I1737

042788 LR-I1714

Date Filed Release No.

110587 LR-11597

020288 LR-II657

062188 LR-11775

042788 LR-11715

060688 LR-11760

082288 LR-II842

Date Filed Release No

031888 LR-II692

052588 LR-11758

Date Filed Release No

020588 34-25315

041488 34-25588

041888 34-25596

08t888 34-26008

100687 MER 181

102287 LR-II582

011488 LR-11647

032888 LR-II884

011388 LR-II643

020388 LR-ll653

020388 LR-l1654

032888 LR-11885

032288 LR-11696

041488 LR-11702

173

•

•

•
SEC v Ann Stephenson, et al . ..

SEC v. Armand Leone Sr, et al. .. .

SEC v MIChael O. Ingoldsby .... . .. .. .. ..

SEC v. Stephen Sut-Kuan Wang, Jr., et a1... .. ..

SEC v Gary E. Russohllo, M 0.... .. .. .

SEC v. Mohd A Aslaml . .., .. .

SEC v. Donald L. Sturm... .. .. . ..

SEC v. Charles A. Mills ..... .. .. .. .. .. .. ..

SEC v James Markham. ..

SEC v. Geoffrey W Colher, et al ..

SEC v. Robert Slattery.. .... .. ..

Program Area-Investment AdVIser

Name of Case

In the Matter of James M Wilson .. ... ... .

In the Matter of Philip S Wilson.

In the Matter of Steven J. Cullen . .

In the Matter of Edwin Rshbame... .. .

In the Matter of Advantage Investments, Inc, et al

In the Matter of Mark Bailey & Co , et al .. .... . ..

In the Matler of The Protessionats, Inc, et al . . . .. .

In the Maner of Greater Sunon Investors Group, Inc.... .. ..

In the Matler of John S lalonde.. .., . . ...

In the Matler of David Peter Bloom... . .. ...

In the Matler of Todd W. Skuller .. ... .... .. .. .. .. ..

In the Matter of Paul Freeman van Avery, et al .. ... . ... ..

In the Maner of Westmark Flnancral SeMces Corp., et aJ.. ... .. ... ..

In the Matter of F&C Management Co., Inc, et al ..... . . .

In the Matler of StrategIc Rnane,al Planmng Inc .. .. .. .. ..

In the Maner of Ronald H. Sirota .. .. .. .. .. .

In the Matter of Thomas C. Shlu . .. .. .

In the Matter of Dennis Lee Grossman .. .. .. ..

In the Matter of Proserv Inc, et aJ.... ., ...

SEC v. David Peter Bloom, et al . ... ..

SEC v. Forty Four Management Ltd , et at, . .. ..

SEC v.Pnvate Asset Management Group tnc., et al. . .. .. .

SEC v Denms L Jeffers, et a1... .. ... ...... .. .

SEC v. Stephen S. Femchell .. .. ..

SEC v. Tax ProfeSSionals Inc., et al ... .. ...... .. ....

Program Area-Investment Company

Name of Case

In the Matter of ConbnentaJ EqUlt,es Corp. of Amenca. ... .. .. .

In the Matter of VC Management (of Conn) Inc, et al .. .. ..

In the Matter of Carey Fund Management, Inc.. ......... . .. .

In the Maner of Leo J Frantzman. .. ...... .. . .. ..

SEC v. Western Guaranteed Income Trust .. .. . . ..

SEC v. The Santa Barbara Funds, et al.... .. ..... .. ..

SEC v. Internahonal SWISSInvestment Corp , et al .. .. ..

SEC v. Joseph Anthony Belmonte, Jr, et al .. ..

SEC v. George F Pavanru, et al... ........ .... .. ... ... ..

Program Area-Issuer FinanCIal Disclosure

Name of Case

In the Matter of Amencan Land Company ..

In the Maner of Gerald L. aidman........ . .

In the Maner of USF&G Corp., et al... ..

In the Matter of Steven L Komm.... ...

In the Matter of Michael P. Richer, et aJ... ... . .

In the Matter of The E.F Hutton Group Inc. ... ... ..

In the Matter of Amencan Savings & Loan Assoc of Fionda

In the Maner of Mokan Productions, Ltd .

In the Maner of Alta Gold Co.. .. ..

In the Matter of Stephen Grossman .

PRIVATE PROCEEDING. . .

In the Matter of Steven L Komm

In the Maner of Norman Abrams, et al .., ..

In the Maner of Keith BJelaj8f. ....... ..

174

051288 LR-11734

042188 LR-11711

050288 LR-11721

062788 LR-11780

062388 LR-11795

082988 LR-ll852

071188 LR-ll793

092888 LR-118n

092888 LR-11874

072688 LR-11817

090288 LR-ll856

Date Rled Release No.

111387 IA-l096

112587 lA-l094

111087 IA-1094

030988 IA-ll 08

032488 IA-1110

022488 IA-1105

021188 IA-1104

011288 IA-ll02

012588 IA-ll03

011288 IA-ll0l

051788 IA-1121

040888 IA-1114

051688 IA-1117

040888 IA-1113

051788 IA-1119

051788 IA-ll20

080188 IA-ll32

093088 1A-1142

072288 IA-1131

011188 LR-11841

042888 LR-11717

060288 LR-11757

062888 LR-11796

092088 LR-11888

092688 LR-l1899

Date Rled Release No.

091988 1e-16565

052488 IA-ll23

091988 IA-1141

040588 1e-16349

012988 LR-l1655

041388 LR-11712

041588 LR-l1704

071988 LR-11834

071488 LR-11801

Date Rled Release No

062188 34-25817

101887 AAER 197

030188 AAER 182

011188 AAER 175

032988 AAER 184

032988 AAER 183

060888 AAER 194

011588 AAER 180

050988 AAER203

111787 AAER 172

111287 NONE

020988 AAER 178

021288 AAER 179

092888 AAER201

'"

'"

'"
SEC v Richard W Schmader .. . ..

SEC v Mokan Productions, t.td., et aI. .. .. .. . ..

SEC v. CltlSource, tnc., et al.... .. .

SEC v The Cannon Group, Inc, et al .. .

SEC v Pnmo, Inc, et at, ... ..... ... .. . .

SEC v Rexlble Computer Corp., et al .

SEC v. Musd<ahn Corp., et al .... .. .

SEC v. Gary C. Armes... .. . ..

SEC v. Stereo Village Inc., et al.. .. .. .. .. .. .. .

SEC v. Endotromcs Inc.. .... ... .... .. .

SEC v Call Computer Systems Inc., et a!... .. . .. ..

SEC v. Lane Telecommunicabons, Inc., et al .. . ..

SEC v Colomal Internabonal Import Ltd , et al.... . .. .. . .

SEC v George Risk Industnes Inc.. .. .. . ..

Program Area-Issuer Related Party Transactions

Name of Case

SEC v American Blomatenals .. ..

SEC v. Frank DuVal, et al. .., ...

SEC v. Wilham A MacKay, et al... ...

Program Area-Issuer Reporting: Other

Name ofCase

In the Matter of York Research Corp.. .

SEC v Genetic Breedtng, Inc. .. .

Program AfBB-Market Manipulation

Name of Case

In the Matter of Rooney Pace Inc., et al . . ...

In the Matter of Bradley E. Bohhng... . .. .. .

In the Matter of Richard E Moyer, et at, .. .. .. .. . .. .....

In the Matter of Robert L. Smith ..... ... .. ..

In the Matter of Norman H. Ironside.... .. .. .. .. .

In the Matter of Wilham E. Fntz.... .. . . .. .

SEC v. Edward J. Roy, et al . ... .. .. .. .. ..

SEC v. Zico Investment Holdings, et al .. . .. .. .. .. ..

SEC v. Banco Resources, Ltd . et al . ." ..

SEC v Umoil, et aI...... .., . .. ..

SEC v Blaine C. Taylor, et al .. .. .. .

SEC v. Drexel Burnham Lambert, Inc, et al ..

SEC v Howard Blumenthal . ...... .. .. ..... ... ..

Program Area-Offenng VIolations (By Non-Regulated Entities)

Name of Case

In the Matter of Sheppard Resources, Inc. .. ..

In the Matter of Transworld Network Corp........ .

In the Matter of Vanguard Rnanclal Inc .

In the Matter of Chatsworth Enterpnses. .. .

In the Matter of Pllgnm Venture Corp....... .. .. .. ..

In the Matter of C8ntrac Associates Inc . .. ..

In the Matter of Cylotech Corp..... . ..... ... .. . .

In the Matter of New Era International, Inc . .. .. ..

In the Matter of Tommy B. Duke.. .. .

In the Matter of James F. McGovern . .. ,

In the Matter of Gary C Granal......... .. . .. .

In the Matter of Jonathan S Silverman .., .. ...

In the Matter of Wilham A. Calvo III ..... .. ..

In the Matter of Jerome Tepps, et at, .. .. . .. ..

SEC v. Hunter Mack Belton, et al, .. . .. .. ..

SEC v Phllhp A Justice, et al .. .. ....... .. ....

SEC v Milton Schralber . ." . ..

SEC v. Kanneth H. Kube . .. . .. .. ..

SEC v. Jerry M Traver .. .. .. .. ..

SEC v. Larry Jones, et al ., . . .. .

SEC v. Carl Porto, et aJ...... . . .. .

SEC v. J. Thomas Dotson, et a!. .. ..

SEC v. Wellness Research Corp , et al. . .. .

SEC v. James Simpson, et al .. .. . .. .. ..

100587 MER 165

121687 LR-ll632

122887 LR-ll633

110987 MER 171

102887 MER 167

110387 AAER 169

010488 LR-l1635

022388 LR-11671

030388 MER 188

050388 MER 189

051088 MER 190

081888 MER 198

092888 LR-11896

091388 MER 199

Date Rled Release No

041988 MER 187

092988 LR-11898

092988 MER 202

Date Rled Release No

060688 34-25786

051088 NONE

Date Filed Release No.

111687 34-25125

021188 34-25346

033188 34-25543

051788 34-25700

062188 34-25824

082988 34-26037

123087 LR-ll634

120287 LR-11617

071488 LR-11802

092888 LR-l1880

071388 MER 195

090788 LR-11859

092688 LA-11872

Date Rled Release No

012688 33-6751

012688 33-6n2

012888 33-6n3

012688 33-6n4

012688 33-6749

011588 33-6747

092988 33-6800

093088 33-8802

113087 34-25165

022288 34-25379

032488 34-25511

093088 33-8803

072788 34-25946

071388 34-25901

122287 LR-l1644

120487 LR-ll656

111887 LR-11611

101387 LR-11589

110687 LR-ll608

111987 LR-11622

011288 LR-11659

020888 LR-11672

041988 LR-11713

042588 LR-11725

175
SEC v. Qulta, Inc., et aI. .. ..

SEC v. Oex Inc., et aI .

SEC v. Magan's Superbr8d Racehorses, Inc., et aI .

SEC v. R. G. ReynoIda E~, Inc., et 81 ..

SEC v. Lee Lovett .

SEC v. Maxaxam Corp., et 81 .

SEC v. Zetex Ltd., et 81 .

SEC v. Russell C. Gray, et aI .

SEC v. Magee AnanclaJ Corp., et 81 ..

SEC v. GoIdcor, Inc., et aI .

SEC v. New Era IntematIonaJ, et 81 .

SEC v. Hiteek IntematIonaJ Produc:lS, Inc., et 81 ..

SEC v. Martin M. P1nllllll, et 81 ..

SEC v. G_ N. FlanIl88, et 81.......................................... . .

SEC v. Arst Houston CapItal Resources Fund, Inc., et 81 .

SEC v. Neteo, Inc., et 81 .

SEC v. Faspaq, Inc .

SEC v. 1bwenI Credit Corp., et aI ..

SEC v. DavId S. Wagner .

SEC v. Joseph R. Edington, et aI .

SEC v. Star-eom I Ltd., et 81. . .

SEC v. William Flynn, et 81 .

SEC v. Milton R. Bloomquist ..

SEC v. Jack Gafford .

PrognmI Ar8lJ-OfferIng VioIBtIons (By RsguIatBd Entities)

Name 01 Case

In the Matter of William Edgar Crowder, et 81 .

In the Matter 01 Kalherine Williams McGuire .

In the Maller of John A. Grant .

In the Maller of William R. Hedlund .

In the Matter of Rk:hanl L. Sawyer ..

In the Matter of Mk:haeI K. Thomas .

In the Matter of Bradley H. KDach.................. .. .

In the Matter of FPI Crest Securities .

In the Matter of MaJcoIm G. Bartels .

In the Matter of WorIdwlde Investment Research Ltd., et 81 .

SEC v. Oreo MIIl88, Inc., et aI .

SEC v: Robert Vincent YlIo Jr., et aI ..

SEC v. Horizons Research l.aboratorl8lIlnc., et aI ..

SEC v. Nallonal Energy DeII8Iopment, et 81. . ..

SEC v. Kalherine Williams McGuire .

SEC v. John A. Grant .

Progtem Anla-Publlcstlon DIacIosure

Name of Case

SEC v. Robert A. ~, et 81 .

Progtam Anla- TiansIer A(JBnt

Name of Case

In the Matter of National Stock 1tansfer Inc ..

SEC v. Effictent 1tansfer, Inc., et aI .

176

060888 LA-11764

O4t488 LR-11718

082188 LR-lln6

041288 LR-11707

082088 LR-11n1

040788 LR-11695

052688 LR-11784

051688 NONE

040588 NONE

071588 LR-l1808

092288 LR-11875

092788 LR-11886

080488 LR-11833

081886 LR-11851

080188 LR-11825

082388 NONE

093088 LR-11893

080488 LR-11829

081288 LR-11841

092888 LR-11890

101288 LR-11891

080388 LR-11827

030988 LR-11882

060188 NONE

Dale Aled Release No.

022488 34-25393

060988 34-25793

071588 34-25921

093088 34-28141

082488 34-28021

082488 34-26022

091888 34-28084

091888 34-28088

091888 34-28085

061588 1A-1128

022388 LR-11673

021888 LR-11674

022988 LR-11880

033188 LR-11698

052588 LR-11753

052488 NONE

Dale Aled Rei_No.

092988 LR-11879

Date Aled Rei_No.

092788 34-28120

032988 LR-1172O
Table 34

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL 1988 IN VARIOUS PROGRAM AREAS

(Each case mmated has been Included In only one category listed below, even though many

cases inVOlve multiple allegations and may fall under more than one category.)

Program Area In Which a

Civil Action or Administrative

Proceeding Was mmated

securities Offenng Cases

Civil Administrative

Actions 1.2 Proceedings 21A Reports

% of Total

Total' Cases

(a) Non-regulated Entity .•

(b) Regulated Entity .....

Total seeunnes Offering Cases

Broker-Dealer Cases

(a) Back Office •••.......•.

(b) Fraud Against Customer. .••. . .

(c) Stock Loan .••• .... . ...

(d) Other .•••.. ..•••• ...•.....

Total Broker-Dealer Cases.

Other Regulated EnlJty Cases

(a) Investment Advisers .••..

(b) Investment Companies .

(c) Transfer Agents. . ...

Total Other Regulated Enllty Cases.

Issuer Fmancial Statement and

ReportIng Cases

34 (154)

6 (25)

40 (179)

3 (6)

10 (15)

1 (1)

1 (2)

15 (24)

6 (13)

5 (22)

1 (1)

12 (36)

14

10

24

6

22

1

6

35

19

4

1

24

(15)

(13)

(28)

(14)

(35)

(1)

(11)

(61)

(25)

(5)

(1)

(31)

o

o

o

o

o

o

o

o

o

o

o

o

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

48 (169)

16 (38)

64 (207)

---

9 (20)

32 (50)

2 (2)

25 (38)

9 (27)

2 (2)

36 (67)

26%

21%

14%

Corporate Control VlOlaoons.. .. ... ...

o (0)

109 (162)

109 (162) 252 (601) 101%3

(a) Issuer FinanCial Disclosure

(b) Issuer Reporting Other ." ....

Total Issuer FinanCial Statement

and Reporting Cases ...

Insider Trading Cases.

Contempt Procaedlngs

Market Manlpulaoon Cases ...... ,

Fraud AglUnst Regulated EntIties.... .. ..

Related Party TransacOOns

PublICation DIsclosure

SUBTOTALS ..

Delinquent Fllmgs

(a) Issuer Reporting.

(b) Forms 3 & 4. .........

GRANO TOTALS ..

14 (51)

1 (2)

15 (53)

21 (47)

17 (37)

7 (37)

(3)

2 (3)

3 (6)

(1)

.. 134 (426)

6 (10)

2 (2)

142 (438)

13

1

14

4

o

6

2

o

o

o

o

(19)

(1)

(20)

(6)

(0)

(9)

(7)

(0)

(0)

(0)

(0)

1

o

o

o

o

o

o

o

o

o

o

(1)

(0)

(1)

(0)

(0)

(0)

(0)

(0)

(0)

(0)

(1)

(0)

(0)

(1)

28 (71)

2 (3)

30 (74)

25 (53)

17 (37)

13 (46)

3 (10)

2 (3)

3 (6)

(1)

244 (589)

6 (10)

2 (2)

12%

10%

7%

5%

1%

1%

1%

0%

2%

1%

1 The number of defendants and respondents is noted parenthetically

2 ThIScategory Includes Injunctive actions, and CIVil and cnrnmal contempt proceedings

3 Percentages total more than 100% due to rounding of figures

177

~

~
Table 35

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Funding as of October 1,1987 .. .. . .

Opened In fiscal year 1988 .., . •.. .• . .

Total , .. .. ..

Closed In fiscal year 1988. . .

Funding as 01 September 30, 1988...... . .

Formal Orders of Investigation

Issued In Fiscal Year 1988 . ....

Table 36

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30, 1988

805

366

1,171

227

944

68

124

Broker-Dealer Proceedings .,. 54

Investment Advtser, Investment Company and

Transfer Agent ProceedingS.... ...•. .. , 24

Stop Order and Regulation A ProceedingS... 10

Rule 2(e) Proceedings •... 10

Disclosure ProceedingS (Section 15(c)(4) of the Exchange Act). .. 8

Suspensions of Trading In SscUrrtlBS In

Fiscal Year 1988 .. . . .

Table 37

INJUNCTIVE ACTIONS

Fiscal Year

1979 ..

1980. . ... __

1981 ,.

1982 .

1983 . .. .

1984.... . .. .. .

1985 . .

1988 ..

1987 ..

1988..... .. ..

178

AclJons Initiated

108

103

114

136

151

179

143

163

144

125

Defendants Named

511

387

398

418

416

508

385

488

373

401

•
Foreign Restricted List

The Securities and Exchange Commission maintains and publishes a Foreign Restricted List which is designed to

put broker-dealers, financial institutions,

investors and others on notice of possible

unlawful distributions of foreign securities in the United States, The list consists

of names of foreign companies whose

securities the Commission has reason to

believe have been, or are being offered

for public sale in the United States in

possible violation of the registration

requirement of Section 5 of the Securities Act of 1933. The offer and sale of

unregistered securities deprives investors of all the protections afforded by the

Securities Act of 1933, including the

right to receive a prospectus containing

the information required by the Act for

the purpose of enabling the investor to

determine whether the investment is

suitable. While most broker-dealers

refuse to effect transactions in securities

issued by companies on the Foreign

Restricted List, this does not necessarily

prevent promotors from illegally offering

such securities directly to investors in the

United States by mail, by telephone, and

sometimes by personal solicitation. The

following foreign corporations and other

foreign entities comprise the Foreign

Restricted List.

1. Aguacate Consolidated Mines,

Incorporated (Costa Rica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration

Company, Ltd. (Canada)

4. Allied Fund for Capital Appreciation

(AFCA, S.A.) (Panama)

5. Amalgamated Rare Earth Mines,

Ltd. (Canada)

6. American Industrial Research S.A.•

also known as Investigation

Industrial Americana, S.A. (Mexico)

7. American International Mining

(Bahamas)

8. American Mobile Telephone and

Tape Co., Ltd. (Canada)

9. Antel International Corporation, Ltd.

(Canada)

10. Antoine Silver Mines, Ltd. (Canada)

11. ASCA Enterprisers Limited (Hong

Kong)

12. Atholl Brose (Exports) Ltd.

(England)

13. Atholl Brose Ltd. (England)

14. Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, Channel

Islands, U.K.)

16. Briar Court Mines. Ltd. (Canada)

17. British Overseas Mutual Fund

Corporation Ltd. (Canada)

18. California & Caracas Mining Corp.,

Ltd. (Canada)

19. Caprimex, Inc. (Grand Cayman,

British West Indies)

20. Canterra Development Corporation,

Ltd. (Canada)

21. Cardwell Oil Corporation, Ltd.

(Canada)

22. Caribbean Empire Company, Ltd.

(British Honduras)

23. Caye Chapel Club, Ltd. (British

Honduras)

24. Central and Southern Industries

Corp. (Panama)

25. Cerro Azul Coffee Plantation

(Panama)

26. Cia. Rio Banana, S.A. (Costa Rica)

27. City Bank A.S. (Denmark)

28. Claw Lake Molybdenum Mines. Ltd.

(Canada)

29. Claravella Corporation (Costa Rica)

30. Compressed Air Corporation,

Limited (Bahamas)

31. Continental and Southern Industries,

S.A. (Panama)

32. Crossroads Corporation. S.A.

(Panama)

33. Darien Exploration Company, S.A.

(Panama)

34. Derkglen, Ltd. (England)

35. De Veers Consolidated Mining

Corporation, S.A. (Panama)

36. Doncannon Spirits. Ltd. (Bahamas)

37. Durman, Ltd. Formerly known as

Bankers International Investment

Corporation (Bahamas)

38. Empresia Minera Caudalosa

de-Panama, S.A. (Panama)

39. Ethel Copper Mines, Ltd. (Canada)

40. Euroforeign Banking Corporation,

Ltd. (Panama)

41. Finansbanker a/s (Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining S.A. (Canada)

179
44. Global Explorations, Inc. (Panama)

45. Global Insurance, Company, Limited

(British West Indies)

46. Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

47. Golden Age Mines, Ltd. (Canada)

48. Hebilla Mining Corporation (Costa

Rica)

49. Hemisphere Land Corporation

Limited (Bahamas)

50. Henry Ost & Son, Ltd. (England)

51. Hotelera Playa Flamingo, S.A.

52. Intercontinental Technologies Corp.

(Canada)

53. International Communications

Corporation (British West Indies)

54. International Monetary Exchange

(Panama)

55. International Trade Development of

Costa Rica, S.A.

56. lronco Mining & Smelting Company,

Ltd. (Canada)

57. James G. Allan & Sons (Scotland)

58. Jojoba Oil & Seed Industries S.A.

(Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon Mining Company

(Canada)

62. KoKanee Moly Mines, Ltd. (Canada)

63. Land Sales Corporation (Canada)

64. Los Dos Hermanos, S.A. (Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bank and Trust & Co.,

Ltd. (Cayman Island)

68. Multireal Properties, Inc. (Canada)

69. J.P. Morgan & Company, Ltd., of

London, England (not to be

confused with J.P. Morgan & Co.,

Incorporated, New York)

70. Norart Minerals Limited (Canada)

71. Normandie Trust Company, S.A.

(Panama)

72. Northern Survey (Canada)

73. Northern Trust Company, S.A.

(Switzerland)

74. Northland Minerals, Ltd. (Canada)

75. Obsco Corporation, Ltd. (Canada)

76. Pacific Northwest Developments,

Ltd. (Canada)

180

77. Pan-Alaska Resources, S.A.

(Panama)

78. Panamerican Bank s Trust

Company (Panama)

79. Pascar Oils Ltd. (Canada)

80. Paulpic Gold Mines, Ltd. (Canada)

81. Pyrotex Mining and Exploration

Co., Ltd. (Canada)

82. Radio Hill Mines Co., Ltd. (Canada)

83. Rancho San Rafael, S.A. (Costa

Rica)

84. Rodney Gold Mines Limited

(Canada)

85. Royal Greyhound and Turf Holdings

Limited (South Africa)

86. S.A. Valles & Co., Inc. (Philippines)

87. San Salvador Savings & Loan Co.,

Ltd. (Bahamas)

88. Santack Mines Limited (Canada)

89. Security Capital Fiscal & Guaranty

Corporation S.A. (Panama)

90. Silver Stack Mines, Ltd. (Canada)

91. Societe Anonyme de

Refinancement (Switzerland)

92. Strathmore Distillery Company,

Ltd. (Scotland)

93. Strathross Blending Company

Limited (England)

94. Swiss Caribbean Development &

Finance Corporation (Switzerland)

95. Tam O'Shanter, Ltd. (Switzerland)

96. Timberland (Canada)

97. Trans-American Investments,

Limited (Canada)

98. Trihope Resources, Ltd. (West

Indies)

99. Trust Company of Jamaica, Ltd.

(West Indies)

tOO. United Mining and Milling

Corporation (Bahamas)

101. Unitrust Limited (Ireland)

102. Vacationland (Canada)

103. Valores de Inversion, S.A. (Mexico)

104. Victoria Oriente, Inc. (Panama)

t 05. Warden Walker Worldwide

Investment Co. (England)

106. Wee Gee Uranium Mines, Ltd.

(Canada)

107. Western International Explorations,

Ltd. (Bahamas)

108. Yukon Wolverine Mining Company

(Canada)
Right to Financial Privacy

Section 21(h) of the Securities

Exchange Act of 1934 (15 U.S.C.

78u(hX6») requires that the Commission "compile an annual tabulation of

the occasions on which the Commission used each separate subparagraph

or clause of [Section 21(hX21») or the

provisions of the Right to Financial

Privacy Act of 1978 [12 U.S.c. 3401-22

(the RFPA»)to obtain access to financial

records of a customer and include it in

its annual report to the Congress." During the fiscal year. the Commission

made no applications to courts for

orders pursuant to the subparagraphs

and clauses of Section 21(hX2) to

obtain access to financial records of a

customer. The table below sets forth

the number of occasions upon which

the Commission obtained accesss to

the financial records of a customer

using the procedures provided by (i)

Section 1105 of the RFPA [12 U.S.C.

3405J. applicable to administrative

subpoenas; (Ii) Section 1104 of the

RFPA [12 U.S.C. 3404). applicable to

customer consents; and (iii) Section

1107 of the RFPA [12 U.S.C. 3407).

applicable to judicial subpoenas.

Section Section Section

1104 1105 1107

34 150 8

181
CORPORATE

REORGANIZATIONS

During fiscal year 1988, the Commission entered its appearance in 54 reorganization cases filed under Chapter 11

of the Bankruptcy Code involving com.

panies with aggregated stated assets of

about $10 billion and close to 230,000

public investors. Counting these new

cases, the Commission was a party in a

total of 151 Chapter 11 cases during

the fiscal year. In these cases the stated

assets totalled approximately $50 billion and 1 million public investors were

involved, including the Texaco Chapter

11 case with assets of $18.3 billion and

about 275,000 public investors. During

fiscal year 1988, 42 cases were concluded through confirmation of a plan

of reorganization, dismissal, or liquidation, leaving 109 cases in which the

Commission was a party at year-end.

Table 38

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Aca Joe, Inc. .. . ...

AOI Electromcs. ..

A.H. RobinS Co , Inc........ . ." .. .. .

AlA lndustnes, Inc....... .

Air Aorida Systems. Inc. '. .. ..

Airlift InternalJonal. Inc .. .. ...

Allegheny International, Inc .

Alhs-Chalmers.. .. .. .

Allison's Place . . .. .. .

Altee Corp 1 ..... .. ..... .. ..

Amencan Fuel Teeh , Inc 3.. .. . . .. .

Amencan Healthcare Mgmt, Inc.. .. .

Amencan MoMor Corp .

Amfesco Ind. Inc. '.. .. .. ..

Anglo Energy, Inc 1 .. • .. .. •

ATI, Inc 1 •• .. ..

Basix Corporation........ ..

Baker Industnes Corp .. . . ..

Berry Industnes Corp .... .

BlrdvJew Satelhte CommumcalJons, Inc . .. .....

Branch Industnes, Inc .. . ..

Buttes Gas & 011Co . .. .. .. ..

Canton Industnal Corp.... .. . .

Care Enterpnses, Inc. ..

Castle Industnes, Inc... .. .., ..

Chalet Gourmet Corp. .. .

Charter Co. .. .. . ..

Cltel,lnc. .. . .

Citywide secunnes Corp .. ..

CLC of Amenca . .

Coated Sales, Inc. . ..

Coleca Industnes, Inc .. ..

Colonial X-Ray Corp 2.... .. • • .. .

Columbia Data Products. Inc ,..... .

Combustion Protection Corp 2.. .. .. ..

Commonwealth 011Refimng Co, Inc. .. ...

Connor Corp . .. .. ..

Cook Umted, Inc.2 .... .. .. ..

Cordyne Corp 3 ... .. ...... .. .. .

Crompton Co. Inc .. ..

182

F.Y

District Opened

NO. CA 1988

ED. NY 1987

E.O. VA 1985

E.O PA 1984

SO FL 1984

SO. FL 1981

W.O. PA 1988

SO NY 1987

CD CA 1988

C.O. CA 1985

O. DE 1987

N.D. TX 1988

5.0 IN 1986

ED NY 1986

5.0 NY 1988

0 NJ 1985

5.0 NY 1988

SO NY 1986

CD CA 1985

0 KS 1988

S.D. NY 1985

SO. TX 1986

C.O IL 1988

C.O. CA 1988

E.O. AR 1987

CD. CA 1985

MO FL 1984

NO CA 1985

SO NY 1985

E.O. MO 1986

SO NY 1988

SO. NY 1988

S.D. FL 1986

0 MO 1985

E.O. NY 1987

W.O. TX 1984

ED NC 1987

N.D. OH 1987

0 OR 1987

S.D. NY 1985

F.Y

Closed

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

'"

•

'
Table 38-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Dakota Mlnenals, Inc .

DeLaurentlls Entertainment. .. .... .. ..

Detroit-Texas Gas Gathering Co .. . , .

O'Lrtes of America, Inc. 1 •• .,. ••• •••• • ••

Eastmet Corp 1 • ••• ••• .,

Endotromcs, Inc 1 • ••••••••• ••• ••

Enterpnse TechnologIes, Inc ...

Equestnan Ctrs of Amer.• Inc.. ..

Evans Products Co . .

Fashion Channel Network . .

Fidehty Amencan FinanCial Corp. 2.4 .. ..

FinanCial & Bus Serv., Inc . ..

Finest Hour, Inc .. .. ..

Galaxy 011Company ,.... .. .. .

General Exploration Co. .. .. ........ ..

General Resources Corp .. ....

GIC GOVI Securities. Inc 2.4 .. ..

Global Marine, Inc ......... .. .., , ......

Hampton Healthcare, Inc... .. ... ... ... ..

Heck's Inc. .

Hehonenos, Inc ..

Holland Industnes, Inc...... .

Hohday Resources, Inc. ....

ICX.lnc ..

Infllght SelVlces, Inc..... ..

Intn'l Inst of Apphed Tech, Inc 2 .. .. ..

Intn'l Pharmaceutical Products. Inc .

InternalJonal Waste Water 2 ...... .

Interstate Airlines. Inc ..

Jerry Lamply 24... .

KaJser Steel Corp. .. ..

Ken81 Corp. ...... ..

The Key Company. .. ..

LTV Corporation .., . ..

Magic Circle Energy Corp .

McLean IndustrIes, Inc.. . .. .. ....

Magnoha Development 2,4 .. .

Manville Corp. 1 ..

Marathon Office Supply, Inc. .. .. .

MarVin Leon Warner 4 .. ..... .

Melrldge, Inc. . . .. ..

Michigan General Corp. . .. . .. ..

Microcomputer Memones. Inc. 2 .. ..

Mid-America Petroleum. Inc .. .

Midland Capital Corp..... .., .., ....

MISSIon Insurance Group, Inc .. ..

Munson Geothermal. Inc. .. ..

Murphy Industnes, Inc. 1 .. .

Mustang Resources Corp. ..,

Natn'l Bus. Communications Corp. 1 .. .. .. ,

New Brothers, Inc .. ..

Nicklos 011& Gas Co. 1 ..... .. .. .. ..

Nucorp Energy, Inc '... .. .. .. .. .

Ohio Ferro-Alloys Corp. .. .. ..

OllVElr's Stores.. ..... .. .

Overland Express. Inc. ..

Paclfic Express HoldIng, Inc. .. .

Pengo Industries. Inc. ... .. .. .. .

Distnct

o WY

CD CA

SO TX

NO GA

D. MD

o MN

SO TX

CD CA

SO FL

CD CA

ED. PA

W.O NC

CD. CA

N.O TX

N.D. OH

N.D GA

MD. FL

SO TX

M.D. FL

SO WY

CD CA

S.O NY

S.O TX

o CO

SO NY

o DC

CD CA

M.D. PA

ED AR

SO. MS

D.C CO

SO NY

WO NC

SO NY

WO OK

S.D NY

SO MS

SO NY

C.D CA

MD FL

o OR

N.D TX

C.D CA

N.D TX

SO. NY

C.D. CA

o NV

N.D TX

S.D TX

S.D. FL

SO GA

SO TX

SO CA

N.D. OH

ED NY

S.D IN

ED CA

N.D. TX

FY

Opened

1986

1988

1988

1986

1986

1987

1984

1985

1985

1988

1981

1986

1988

1987

1986

1980

1986

1986

1988

1987

1987

1988

1987

1987

1987

1983

1988

1985

1988

1988

1987

1987

1988

1986

1985

1987

1988

1982

1988

1988

1988

1987

1986

1986

1986

1987

1988

1987

1988

1986

1985

1986

1982

1987

1987

1988

1984

1988

FY.

Closed

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

183

'" "

•

•

'

•

•
Table 38-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

PetrcRlerve 2 •• • , ..

Pettibone Corp. .. .. .

Po'Folks, Inc .... .. ..

Psych Systems '.. ... .. .

Public SeMC8 Co of New HampshIre... .......

QT&T, Inc..... . ..

Radice Corporation ... •.

Refinement International, Inc .. .. .. .....

Revco O.S. Inc .. ....

The Rolfite Company 3 .. ..

Ronco Teleproducts, Inc .. ... ... ... ..

Royle Airlines. Inc .

Seatram unes, Inc .

Servamatic Systems, Inc .. ..

Shatterproof Glass Corp. 2 ..

Shearson-Murray Real Estate

Fund. Ltd. ......... ....

Sooner Defense of Aa... . ..

Southern Hospitality Corp.. . .

Specialty Ratall Concepts, Inc... . ..

Spencer Cos .• Inc. ..

Spring Meadows Associates ... ... .. ..

Standard Metals Corp .... . .. .

Slate Capttal Corp. 2... . .

Storage Technology. Inc. 1 ..

Swanton Corp ......

Systems for Health Care. Inc .

Taco Eds, Inc. 2.' .. .... Texaco, Inc. '... .. ..

Texas International Co. ..

Texscan Corp. .... .

TIdwell Industries, Inc

Todd Shipyards Corp .. .

Tomahawk Industnes. Inc. .. .......

Towle Manufaetunng Con. 1 ..

Traweek Investment Fund No 18, Ltd....... ... .. ...

Traweek Investment Fund No 20. Ltd. .... .. ...

Traweek Investment Fund No. 21, Ltd. .. .

Traweek Investment Fund No 22, Ltd... .

Twin City Barge. Inc '... .. ..

UNR Industnes, Inc. .. ..

The Veta Grande Cos , Inc 1 .. .

Vletona Station '. . .. ..

W & J. Sloane Corp. 1 .. .. ..

Wedtech Corp .... .. .....

Wespac Investors Trust II.... .. .. .. ..

The Western Co of No Amenca . ..

Westworld Communrty Healthcaser, Inc ..

Wheatland Investmant Co 2.' .. .. Wheeling-Pittsburgh Steel Corp. .. ..

Worlds of Wonder, Inc .. .. .

Zienth Corporation. ... .. .. ..

Zimmer Corp .. .. .

ZZZZ Best Co., Inc .. ..

Total Cases Opened (FY 1988)

Total Cases Closed (FY 1988)

Olstnet

SO. MS

NO IL

M.D. TN

o MO

o NH

ED NY

SO. FL

CD. CA

N.D. OH

M.O FL

NO. IL

WO LA

S.D. NY

NO CA

ED MI

NO. TX

MD. FL

M.O TN

W.O NC

O. MA

C.O. CA

o CO

M.D. FL

O. CO

S.D. NY

NO IL

N.O OH

S.O NY

W.O. OK

o AZ.

NO AL

O. NJ

W.O. TN

S.D. NY

C.O. CA

CD CA

C.O CA

CD. CA

O. MN

NO. IL

C.O. CA

NO. CA

SO NY

SO NY

C.D. CA

N.D. TX

C.D. CA

ED. WA

W.O. PA

N.D. CA

D. NJ

S.D. FL

C.D. CA

F.y.

Opened

1988

1988

1988

1986

1988

1987

1988

1988

1988

1988

1984

1988

1981

1986

1987

1987

1988

1988

1988

1987

1988

1984

1985

1985

1985

1988

1984

1987

1988

1988

1986

1988

1988

1986

1988

1988

1988

1988

1987

1982

1986

1988

1986

1987

1988

1988

1987

1985

1985

1988

1988

1988

1987

54

F.Y.

Closed

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

1988

42

1 Plan of reorgantzatlon confirmed

2 Debtor liqUidated under Chapter 7.

184

3 Chapter 11 case dismissed

Debtor's seeunues not registered under Section 12(g) of the Exchange N:t.

•

•
Table 39

Appropriated Funds vs Fees. Collected

Dollars MIllions

300

250

200

150

100

APPROPRIATION

50

o

... ..

e-

.,:: .:.

FY1976 77 78 79 80 81 82 83 84 85 86 87 1988

>excludes dlsgorgements from fraud actions

185

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: .... "<0N

N

~N :N :C\i ...... 0 0 0

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ai

I

g

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I

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CD

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e

o

::E

... Ol Ole c£g

u:: ..!. Ol Ole

c£.g

186

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