I

T: U.S,

39TIf"ANNUAl REPORT OF THE SECURITIES AND EXCHANGE COMMISSION

For the Fiscal Year Ended June 30th
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

RAY GARRETT, JR., Chairman

HUGH F. OWENS.

PHILIP A. LOOMIS, JR.

JOHN R. EVANS

A. A. SOMMER, JR.

GEORGE A. FITZSIMMONS, Secretary

*On November 20, 1973, the resignation of Mr. Owens as Com.

missioner became effective. On November 21, he assumed the

duties of chairman of the Securities Investor Protection Corporation.

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

Washington, D.C. 20402 Pnce $1.60 cents

Stock Number 4600.00095

-
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

Sirs: On behalf of the Securities and Exchange Commission,

I have the honor to transmit to you the Thirty.Ninth Annual Report

of the Commission covering the fiscal year July 1, 1972 to

June 30, 1973, in accordance with the provisions of Section 23(b)

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

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

of the Investment Company Act of 1940; Section 216 of the

Investment Advisers Act of 1940; Section 3 of the Act of

June 29, 1949, amending the Bretton Woods Agreement Act;

Section II(b) of the lnter-Amerlcan Development Bank Act; and

Section ll(b) of the Asian Development Bank Act.

Respectfully,

RAY GARREn, JR.

Chairman

THE PRESIDENT OF THE SENATE

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.C.

III
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COMMISSIONERS AND

PRINCIPAL STAFF OFFICERS

(As of November I, 1973)

COMMISSIONERS

Term expIres

June 5

RAY GARRETT, JR., of Illinois, Chairman 1977

HUGH F. OWENS, of Oklahoma 1975

PHILIP A. LOOMIS, JR., of California 1974

JOHN R. EVANS of Utah 1978

A. A. SOMMER, JR., of Ohio 1976

Secreary: GEORGEA. FITZSIMMONS

Executive Assistant to the Chairman: HARVEY L. PITT

PRINCIPAL STAFF OFFICERS

ALAN F. BLANCHARD, Executive Director

ALAN B. LEVENSON, Director, Division of Corporation Finance

THOMAS N. HOLLOWAY, Associate Director

RALPH C. HOCKER, Associate Director

RICHARD H. ROWE, Associate Director

IRVING M. POLLACK, Director, Division of Enforcement

STANLEY SPORKIN, Deputy Director

LEE A. PICKARD, Director, Division of Market Regulation

JOHN M. L1FTIN, Associate Director

SHELDON RAPPAPORT, Associate Director

ROBERT C. LEWIS, Associate Director

ALLAN S. MOSTOFF, Director of Investment Company Regulation

ANNE P. JONES, Associate Director

AARON LEVY, Director, Division of Corporate Regulation

LAWRENCE E. NERHEIM, General Counsel

WALTER P. NORTH, Associate General Counsel

DAVID FERBER, soucrtor

CHILES T. A. LARSON, Acting Director, Office of Public Information

JOHN C. BURTON, Chief Accountant

A. CLARENCE SAMPSON, JR., Associate Chief Accountant

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

BERNARD WEXLER, Director, Office of Opinions and Review

ALFRED LETZLER, Associate Director

MAX O. REGENSTEINER, Associate Director

WARREN E. BLAIR, Chief Administrative Law Judge

v
ANDREW P. STEFFAN, Director, Office of Policy Planning

FRANK J. DONATY, Comptroller

CHARLES A. MOORE, Director, Office of Records

RICHARD J. KANYAN, Director, Office of Service

ALBERT FONTES, Director, Office of Personnel

JAMES C. FOSTER. Director, Office of Registrations and Reports

RALPH L. BELL, EDP Manager

VI
REGIONAL AND BRANCH OFFICES

REGIONAL OFFICES AND ADMINISTRATORS

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

Plaza, NewYork, New York 10007.

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

Hampshire, Maine.-Floyd H. Gilbert, 150 CausewaySt., Boston,

Mass. 02114.

Region 3. Tennessee, Virgin Islands, Puerto Rico, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Florida, part

of Louisiana.- Jule B. Greene, Suite 138, 1371 Peachtree St.,

N.E., Atlanta, Georgia 30309.

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

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

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

Chicago, 111.60604.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas

(except Kansas City).-Robert F. Watson, 503 U.S. Court House,

10th & Lamar Sts., Fort Worth, Texas 76102.

Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota, Utah.-Donald J. Stocking, 7224 Federal Bldg., 1961

Stout St., Denver, Colo. 80202.

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

Boltz, Room 1043, U.S. Court House, 312 North Spring St.,

Los Angeles, Cal. 90012.

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

E. Newton, Room 810, 1411 4th Ave. Bldg., Seattle, Wash. 98101.

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

District of Columbia.-William Schief, Room 300, Ballston

Center Tower No.3, 4015 Wilson Blvd., Arlington, Va. 22203.

BRANCH OFFICES

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

9th at Lakeside.

Detroit, Michigan 48226.-1044 Federal Bldg.

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

515 RuskAve.

Miami, Florida 33131.-Suite 701 DuPont Plaza Center, 300 Biscayne Boulevardway.

vII
Philadelphia, Pa. 19106.-Federal Building, Room 2204, 600 Arch

St.

St. louis, Missouri 63101.-Room 1452, 210 North Twelfth St.

Salt lake City, Utah 8411l.-Room 6004, Federal Reserve Bank

Bldg., 120 South State St.

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

36042.

viii
COMMISSIONERS

RAY GARRETT, JR., Chairman

Chairman Garrett was born on August 11, 1920, in Chicago, Illinois. In 1941 he was graduated from Yale University and he received

his LL.B from Harvard Law School in 1949. Immediately prior to

joining the Commission as Chairman, Mr. Garrett was a partner in

the Chicago law firm of Gardner, Carton, Douglas, Children and

Waud where he had been since 1958. From 1954 to 1958, he

was on the staff of the Securities and Exchange Commission,

serving for most of that period as Director of the Division of

Corporate Regulation. In 1965, Mr. Garrett was Chairman of the

Section of Corporation Banking and Business Law of the American

Bar Association and has also served as Chairman of the ABA Committee on Developments in Corporate Financing. He is presently

Chairman of the Advisory Committee for the Corporate Department

Financing Project of the American Bar Foundation, a member of

the Board of Editors of the American Bar Association Journal, and

consultant to the "Reporter" for Codification of Federal Securities

Laws Project of the American Law Institute. Prior to joining the

SECstaff, he was a teaching fellow at Harvard Law School and Assistant Professor of Law at New York UniverSity. For several years

he was a visiting lecturer at the Northwestern University School of

Law. Mr. Garrett was sworn in as Chairman of the Securities and

Exchange Commission on August 6, 1973, for a term expiring on

June 5, 1977.

HUGH F. OWENS

Commissioner Owens was born in Muskogee, Oklahoma, on

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

graduated from Georgetown Preparatory School, Washington,

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

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

Unlversrty of Oklahoma College of Law, and became associated

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

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

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

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

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

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

as counsel for the Superior 011 Company In Midland, Texas, and

thereafter returned to Oklahoma City, where he engaged in the

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

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

University. In October 1959, he was appointed Administrator of

the then newly enacted Oklahoma Securities Act and was active

In the work of the North American Securities Administrators,

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

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

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

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

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

PHILIP A. LOOMIS, JR.

Commissioner Loomis was born in Colorado Springs, Colorado,

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

from Princeton Ilniversity in 1938 and an LL.B. degree, cum

laude, from Yale Law School in 1941, where he was a Law

Journal editor. Prior to joining the staff of the Securities and

Exchange Commission, Commissioner Loomis practiced law with

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

attorney with the Office of Price Administration, and the period

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

Aircraft, Inc. Cornrnlssroner Loomis joined the Commission's

staff as a consultant in 1954, and the following year he was

appointed Associate Director and then Director of the Division

of Trading and Exchanges. In 1963, Commissioner Loomis was

appointed General Counsel to the Cornrnlssron and served in that

capacity until his appointment as a member of the Commission.

Commissioner Loomis IS a member of the American Bar Association, the American Law Institute, the Federal Bar Association, the State Bar of California, and the Los Angeles Bar

ASSOCiation. He received the Career Service Award of the Natronal CIVil Service League in 1964, the Secunties and Exchange

Commission Distinguished Service Award in 1966, and the Justice

Tom C. Clark Award of the Federal Bar Association in 1971. He

took office as a member of the Securities and Exchange Commission on August 13, 1971, for the term of office expiring

June 5, 1974.

JOHN R. EVANS

Commissioner Evans was born in Bisbee, Arizona, on June 1,

1932. He received his B.S. degree in Economics in 1957, and his

M.S. degree in Economics in 1959 from the University of Utah.

He was a Research Assistant and later a Research Analyst at

x
the Bureau of Economics and Business Research at the University

of Utah, where he was also an Instructor of Economics during

1962 and 1963. He came to Washington in February 1963, as

Econorrucs Assistant to Senator Wallace F. Bennett of Utah. From

July 1964 through June 1971 Commissioner Evanswas a member

of the Professional Staff of the U.S.Senate Committee on Banking,

Housing and Urban Affairs serving as minority staff director. He

took office as a member of the Securities and Exchange Commission on March 3, 1973, for the term expiring June 5, 1978.

A. A. SOMMER, JR.

Commissioner Sommer was born in Portsmouth, Ohio on April 7,

1924. He received his B. A. degree from the University of Notre

Dame In 1948 and LL.B. degree from Harvard Law School in

1950. At the time he was appointed to the Commission, he was

a partner in the Cleveland law firm of Calfee, Halter, Calfee,

Griswold & Sommer. Mr. Sommer was formerly Chairman of the

American Bar Association's Federal Regulation of Securities Committee and a member of the Committee on Corporate Laws and

Committee on Stock Certificates. He was also a member of the

Board of Governors of the National Association of Securities

Dealers, a lecturer on securities law at Case-WesternReserve Law

School and a lecturer at various institutes and programs dealing

with securities law, corporation law and accounting matters. Commissioner Sommer was formerly a member and Past-Chairman

of the Corporation Law Committee of the Ohio State Bar Association. He has authored articles dealing with corporate reorganization, conglomerate disclosure and other securities and accounting

topics. He took office as a member of the Securities and Exchange

Commission on August 6, 1973, for the term of office expiring

June 5, 1976.

xl

TABLE OF CONTENTS

Organizational Chart. . . . iv

Commissioners and principal staff officers..... v

Regional and branch offices.......... vii

Biographies of Commissioners..... ... ix

PART 1

IMPORTANT DEVELOPMENTS...... .... .. . . 3

Market structure and regulation... .. .. .. .. 3

Industry advisory committees.. 4

Advisory Committee on Market Disclosure. 4

Advisory Committee on a Central Market System 5

Advisory Committee on Block Transactions. . . . . 5

Central market system policy statement.. 6

Commission rates . 7

NASDreciprocal brokerage rule... .. . .. . 8

Rule 19b-2.... 8

Consolidated ta pe.. .. 9

Option market regulation... . .. 10

Legislative initiatives...... 11

H.R.5050............ 11

S. 470.............. .. 12

Tax shelters... 12

Disclosure related matters .. . . . . . . . . .. .. .. 13

"Hot" issues. . . . 13

Forecasts of economic performance........ 14

Rule 144............. .. 15

Rule 145 .. 15

Rule 146.. .. . .. . 16

Rule 147 , 16

Advisory committee on industrial issuers. 16

Qualityofearnings.... 17

Real estate matters. . 17

Real Estate Advisory Committee. .. 17

Interpretations regarding condominiums and other

real estate units.... .. ...... ..... ... 18

Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . ... 18

xlii

'"

"
IMPORTANT DEVELOPMENT5-Continued

Investment companies ....

Mutual fund distribution

Variable life insurance

Proposed offshore fund legislation ..

Enforcement matters. . .

SEC.NASDtask force.

Swiss treaty . .

Significant cases..

New Office of Registrations and Reports

PART 2

THE DISCLOSURE SySTEM .

Public offering: the 1933 Securities Act ..

Information provided.

Reviewing process .

Environment and civil rights

Foreign offerings .. . .

Time for registration

Organizational changes

Investment company disclosure policy and procedure ....

Office of Disclosure Policy and Proceedmgs...

Office of International Corporate Finance...

011 and gas.

Tax shelters .

Small issue exemption.

Regulation A

Regulation B .

Regulation F....

Continuing disclosure: The 1934 Securities ExchangeAct

Registration on exchanges

Over-the-counter registration ...

Exemptions . . ...

Periodic reports .

Proxy solicitation s. . .. ...

Takeover bids, large acquisitions

Insider reporting. ..

Accounting. .

Relations with the accounting profession

Accounting and auditing standards ...

Other developments.... . ..

Exemptions for international banks .

Trust Indenture Act of 1939 .. .. . . . .

Information for public inspection; Freedom of Information

Act

Publications .

Freedom of information act litigation

XIV

19

19

19

20

21

21

22

22

24

29

29

29

30

30

31

31

31

31

32

32

33

33

34

34

35

35

35

35

35

36

36

36

37

38

38

39

39

40

41

43

43

44

45

"
PART 3

REGULATION OF SECURITIES MARKETS... 51

Regulation of exchanges.. .. .. 51

Registration.. .. . .. .. 51

Delisting.. 51

Exchangedisciplinary actions.............. .. 52

Exchangerules................. 52

Litigation on exchange rules. . 53

Inspections..... .. . 53

Supervision of NASD... .. 54

NASDRules 54

Inspections..... . 55

NASDdisciplinary actions...... 55

Reviewof NASDdisciplinary actions........... . 55

Reviewof NASDmembership action. . 56

Broker-dealer regulation. . 56

Registration.......... . .. 56

Financial reports. .. 57

Income and expense reports................. 57

Early warning system..... 57

Advisory Committee on Reportsand Registration...... 57

Broker-dealer examinations.... 58

Rule changes..... .. .. .. . 59

SECObroker-dealers. 61

SIPCLitigation. . 62

PART 4

ENFORCEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Detection... ... .. . .. .. 67

Complaints..... 67

Market surveillance.. . .. .. .. . .. . 67

Investigations... 68

Litigation. .. . .. .. 68

Enforcement proceedings . 69

Administrative proceedings. .. .. 70

Disciplinary proceedings.. . 70

Disqualification of accountants and attorneys...... ... 71

Reports. . . . . . . . . . . . . . . . . . .. . . . .. . . . . . . . . . . . .. . . . . . . . . . 72

Trading suspensions. . .. 72

Civil proceedings..... 73

Participation as amicus curiae. . . 85

Criminal proceedings..... .. 88

Organized crime program. 89

Cooperation with other enforcement agencies 90

Foreign restricted list. . . .. 90

xv

'"

'"
PART 5

INVESTMENT COMPANIES AND ADVISERS 97

Proposed legislation.... .. 97

ProposedOil and Gas Investment Act .. .. 98

Sale of investment adviser. ... 98

Municipal bond rating services 98

Institutional disclosure... .. . 99

Mutual fund distribution. . . . . . 99

Advisory Committee on Investment Management Services. 101

Investment adviser regulation 101

Liaison procedures with small business adrnrntstratrcn., . 101

Number of registrants....... 102

Applications. . 102

Rules and guidelines .... .. . 104

Codesof ethics... . .. . 104

Performance fees. . 105

Recordkeeping requirements 106

PART 6

PUBLlC.UTILITY HOLDING COMPANIES . .. .. 109

Composition....... .. .. 109

Proceedings .. 109

Financing..... . .. 111

Volume....... 111

Leasing.. ..... 112

Allowance for funds used during construction 112

Joint ventures ... .. .... . 113

PART 7

CORPORATE REORGANIZATIONS.

Proposed Chapter X rules

Summary of activities

Administrative matters.

Trustee's investigation

Reports .

Allowances

Intervention In Chapter XI

PART 8

SEC MANAGEMENT OPERATIONS

Organizational changes

Creation of major divisions .

Office of Policy Planning .

New staff units .

Personnel management

Financial management .

Information handling .

xvi

117

117

118

118

121

123

125

126

133

133

133

133

134

134

135

135

'"
PART 9

153

150

151

151

151

152

152

152

152

153

153

153

154

154

155

156

156

157

158

139

" ..... 139

139

140

141

141

143'

142

143

143

., 144

146

145

146

146

147

.........147

147

148

148

149

149

STATISTICS

The securities industry ....

The securities industry dollar .

Chart: Securities industry dollar: 1972

Income and expenses .

Table 1: Broker-dealer income and expenses

Assets and liabilities .

Table 2: Broker-dealer assets and liabilities ..

Registered broker-dealers ....

Chart: Broker-dealer registrations . . .

Table 3: Location of broker-dealers .

Broker-dealers, branch offices, employees .

Chart: Broker-dealers and branch offices-Employees.

SECDbroker-dealers. .

Table 4: Principal business of SECDbroker-dealers ..

Financial institutions...... .. . .. .

Stock transactions...... .. . .. .. ....

Table 5: Institutional stock transactions

Stock holdings , .

Table 6: Institutional stock holdings.

Investment companies .

Table 7: Registered investment companies .

Chart: Number and assets of registered investment

companies .

Investment company registrations .

Table 8: New investment company registrations.

Table 9: Investment company registrations terminated

Private noninsured pension funds: market value ....

Table 10; Market value of private noninsured pension

funds......... . . .

Private noninsured pension funds: book value .

Table 11; Book value of private noninsured pension

funds ..

Private noninsured pension funds: receipts and disbursements. . .. . .' .. . .. ..... .

Table 12: Receipts and disbursements of private noninsured pension funds .. ,

Securities on exchanges .. . .

Exchangevolume .

Table 13:Exchangevolume: 1972 ...

Stock volume by exchanges, NASDAQvolume ...

Table 14: Share and Dollar volume by exchanges .

Third market volume.... . .

Chart: 'Third market' volume in NYSEstocks..

Table 15: Comparison of third market and NYSE

volume. . . .. . . .. .. . .. . .

Block distributions .

xvII

524-127 0 - 74 - 2

'"

"

"
STATISTICS-Continued

Securities on exchanges-Continued

Table 16: Block distributions reported by exchanges.. 158

Value and number of exchangesecurities

Chart: Market value of securities traded on all U.S.

. . 159

Table 17: Value of securities on exchanges.. .. ... .. 159

stock exchanges .... .. ... 160

Table 18: Value of stocks on exchanges. . 161

Securities on exchanges. .. ... ... . . .... 162

Table 19: Unduplicated count of securities on exchanges. .. ..... ..... ... . 162

Table 20: Securities traded on exchanges. 162

1933 act registrations.. .. ... ... . ... . 163

Effective registrations: statements filed 163

Table 21: Effective registrations ... ... 163

Chart: Securities effectively registered 164

Purpose of registration.. 165

Table 22: Effective registrations by purpose and type

of security: fiscal 1973 165

Newcorporate securities for immediate cash sale 166

Chart: Newcorporate securities effectively registered 166

Regulation A offerings.... . . ..... . 166

Table 23: Regulation A offerings..... 166

Enforcement.... . . ..... 167

Types of proceedings... . 167

Table 24: Types of proceedings.... . 167

Enforcement proceedings 170

Table 25: Administrative proceedings 170

Table 26: Injunctive actions 170

Table 27: Criminal cases. 170

Public utility holding companies . 171

Assets .. . 171

Table 28: Public-utility holding company systems. 171

Financing .. 172

Table 29: Financing of holding company systems. 172

Corporate reorganizatrons .. . . 173

Commission particrpation 173

Table 30: Proceedings under Chapter X of the bank.

ruptcy act In which the Commission partlcloatwt

fiscal year 1973 173

SECoperations.. 176

Net cost ... 176

Chart: Appropriated funds vs. fees collected. . 176

Table 31: Budget estimates and apprOPriation. .. 177

xvru


Part 1

Important

Developments

MARKET STRUCTURE

AND REGULATION

In the past few years, increasing

stresses on the nation's securities markets have made necessary the consideration of broad changes in the structure

of those markets. Among the many factors contributing to the stresses observed

were: increased institutional dominance of

our markets; a substantial increase in the

number of so-called "block transactions;"

and the fragmentation of trading in listed

securities.

As previously noted,' the Commission

has assumed the initiative in defining

structural changes in the securities markets. These initiatives began in 1968,

with administrative hearings concerning

the commission rates which all national

securities exchanges require their members to charge.

In October 1971, the Commission held

hearings which focused specifically upon

the issue of an appropriate structural

blueprint for the further development of

our securities markets. Based in part

upon these hearings, the Commission, in

February 1972, issued its Policy Statement on the Future Structure of the Securities Markets in which it discussed the

major policy issues confronting the nation's capital market system, and delineated the directions in which the Commission intended to go in order to alleviate those problems. The Commission

recommended that the following steps

be taken to develop and implement the

policies enunciated in the Policy

Statement:

1. the formation by the Commission of

Advisory Committees which would study,

report on, and make recommendations

with respect to (a) the development of a

comprehensive market disclosure system;

(b) the structure, regulation and governance of a central market system; and (c)

rules designed to ease the impact and

improve the handling of large blocks of

secuntles:

2. the reduction of the level above

which commission rates would be negotiated from $500,000 to $300,000;

3. the formulation and promulgation by

the NASD,at the Commission's direction,

of rules designed to prohibit the use of

portfolio executions by investment company managers to reward broker-dealers

which sell the investment company's

shares;

4. the prompt adoption by all exchanges

of rules excluding from membership any

organization whose primary function is

to route orders for the purpose of rebating or recapturing commissions, directly

or indirectly; and

5. consultation with exchanges and

other interested persons with the object

of formulating exchange rules designed

to require that exchange members engage in a "predominantly public" brokerage business.

During fiscal 1973, the Commission

3
took important and major steps to implement the recommendations in Its

PolIcy Statement-these are set forth

below. At the same time, in response

to the recommendations set forth in its

Study of Unsafe and Unsound Practices

of Brokers and Deelers," and the Congressional mandate expressed In the Securrtres Investor Protection Act of 1970,

the Commission embarked upon a program designed to strengthen the financial responsibility of brokers and dealers

in securities and to ensure a broader

measure of protection to the investing

public. These efforts to increase the professional quality and capabilities of partrcipants in the brokerage industry were

combined with a program designed to

avoid duplication with respect to their

reporting requirements or other responslbrlities which may impair the efficient

functioning of the brokerage industry.

During the last fiscal year, the Commission and ItS staff have also been increasingly preoccupied with legislative

efforts by subcommittees of both houses

of the Congress. The Commission's actions foreshadow basic changes in the

structural and regulatory framework of

the securities industry. It is anticipated

that these changes WIll result in a truly

competitive and efficient capital market

system-one capable of providing public

investors a broad range of services with

a minimum of risk.

Industry Advisory Committees

Following the issuance of the Commission's February 1972 Policy Statement, three industry advisory committees were established to provide the

Commission with detailed recommendations for implementation of some of the

Statement's major proposals. These committees were asked to analyze and make

recommendations concerning the effective dissemination of information to investors, block trading and the structure,

regulation and governance of a central

market system.

(1) Advisory_. Committee on Market

Disc/osure--The Advisory Committee on

Market Disclosure met from April through

September 1972, and issued two reports.

The first specified a recommended format and method of operation for a composite last sale reporting system. The

second made Similar recommendations

with respect to a composite quotation

system.

The report on the last sale reporting

system recommended that there be two

separate "streams" of data, one consisting of all trading in stocks listed on the

New York Stock Exchange and the other

consisting of all trading In all other qualified listed stocks, in each case on a realtime. baSIS. All domestic transactions in

listed secunties rnvolvmg a registered

broker-dealer as principal or agent would

be reported, with certain exceptions for

transactions such as underwntings, The

report contemplated a central processor

or service bureau, which would be free

from the control of any particular market

center and which would receive, validate,

sequence and retransmit last sale reports

from the various participating self-regulatory orgaruzations. The report also dIScussed conditions under which access to

and retransmission of last sale reports

could be regulated, and recommended a

review procedure for those denied access

or the right to retransmit. The information

to be reported would include the price,

size and location of each transaction, and

this information would be displayed by

means of both moving tickers and interrogation devices. It was also recommended that the maximum time from the

execution of a trade until its entry in the

system should be one minute, after which

the trade would be considered as reported

out of sequence.

The report on a composite quotation

system recommended that the system be

open to all listed securities and be available for use by all market makers prepared to undertake certain responsibilities with respect to each stock for which

they would enter quotatlens. Generally,

a market maker would be required to deal

in a particular security in a stabilizing

manner for a specified minimum period of

time, such as one year, and would not be

permitted to cease such dealings except

4
for good cause. Other broker-dealers

would have to Insert quotations through

eligible market makers, whether on their

own behalf or for customers. Surveillance

and capital requirements for participating market makers were also discussed.

The Committee recommendedthat the

quotation system be administered by the

same central processorrecommendedfor

the last sale reporting system. The information to b~-displayed would include a

designation representing the market

maker, or the exchange, and its respective bid and offer. Market makers would

be permitted, but not required, to indicate

the number of shares their bids and

offers covered, if in excess of one unit

of trading. Quotations would have to be

"firm" for at least one unit of trading, or

whatever sizewas shown, unlessa market

maker could demonstrate that he was in

the process of updating his market after

having consummated a transaction. The

Committee recommendedthat the quotation system be an exclusive system: all

quotations in listed securities would have

to be stored in a common data bank to

which all users of the system would have

access and all elements of the system

would be governed by a single set of

rules. The quotation system would be

compatible with existing cornrnumcations

equipment and would thus encourage

the development of improved equipment

and methodology. In closing, the report

emphasized the importance of the auction process generally in trading listed

securities and specified limited criteria

for denials of access, with a right of appealto the Commission.

Many of the recommendations of the

Committee's report on a last sale reporting system are embodied in Securities

Exchange Act Rule 17a-15, adopted on

November 8, 1972, which is discussed

below.

(2) Advisory Committee on a Central

Market System-The Advisory Committee

on a Central Market System met from

Apnl through December 1972, and also

Issuedtwo reports. The first specified the

minimum regulatory changes deemed

necessaryto implement a composite last

sale reporting system. The second contained the Committee's recommendations on the structure, regulation and

governance of a central market system.

The first report recommended three

prerequisites to full operation of a composite tape: (1) adoption of a uruforrn

rule regulating short sales in all markets

for listed securities; (2) adoption of a

uniform rule by all exchangesto prevent

use of the tape for manipulative purposes; and (3) development of a mechanism to coordmate trading suspensions

in cases where a security is traded in

more than one market. The report analyzed the problems raised by a uniform

short sale rule in considerable detail, and

set forth various specific recommendations. TheCommission adoptedthose recommendations in its PolIcy Statement on

the Structure of a Central Market System, issued on March 29, 1973. The

Statement is discussed more fully below.

The report on a central market system,

presented two distinct points of view

analyzing tha best means of developing

such a system. Several members of the

Committee were in favor of introducing

.the composite last sale and quotation

reporting systems and perrrutlng regulatory and operational rules to evolve as

dictated by experience with the new

equipment. Other members of the Committee, however, expressedthe view that

the regulatory Jinks between market centers would never evolve adequately without affirmative Commission rulemaking

at the outset, in conjunction with the introduction of communication ties. Another principal point of difference between the two groups was that those who

favored the first approach also believed

that all trades in listed secunties should

ultimately be limited to exchanges-that

is, they supported the eventual elimination of the "third market" in listed

securities.

(3) AdvIsory cornmrttee on Block

Transactions-The Advisory Committee

on Block Transactions submitted its reo

port to the Commission on August 7,

1972. The report reviewedthe rapid trend

toward the institutionalization of the na5
tion's secunties markets and studied the

manner and method of integrating block

transactions into a central market system. The Committee considered the possibility of directly restricting an

institution's freedom to buy and sell

blocks of particular securities as well as

restrictions that would accomplish the

same thing indirectly-for example, by

limiting price changes in the trading markets. The Committee concluded, however, that institutions should remain free

to purchase and sell in a future central

market system "In a manner and at a

time of their own choosing," although

the Committee did note that the ability

of the market to absorb large blocks of

stock should be strengthened.

In ItS report, the Committee specifically

recommended: (1) that the Commission

re-examine present regulation over the

alternative means for disposing of blocks

of securities In order to facilitate their

use; (2) that Institutions be permitted to

disclose their interest to specialists who

could explore the size and timing of

blocks coming Into the market and might

be encouraged to participate in a forthcoming block transaction; and (3) that

block positroners be permitted, after the

implementation of a composite tape and

on a trial basis, to register In securities

as an "upstairs market maker." The

Committee also recommended that a

specialist be permitted this same pnvilege In stocks other than those In which

he is registered.

The Committee rejected a suggestion

that separate markets for institutions and

individuals be maintained, the so-called

"two-tier concept." Instead, It explored

alternatives intended to permit the small

public investor to participate in the block

trading process. The Committee recommended that, at a minimum, pre-existing

orders should be permitted to displace a

block order In any block sale at a discount or block purchase at a premium.

The Committee also Indicated ItS view

that the Commission should confirm that

the normal handling of a block transaction does not involve a "distributron"

within the meaning of Exchange Act Rule

1Ob-6.

In line with Its recornmendatron that

the Commission reexamine ItS regulations

affecting the disposition of blocks of secunties with the object of facrlrtating such

drsposition, the Committee urged a reexamination of Exchange Act Rule 10b-2.

That rule generally prohibits the practice

of strmulating exchange jctivity in securities which are the subject of a drstnbutron

by prohibiting payment of extra or special

compensation for soliciting purchases of

the securrtres being distributed. On April

9, 1973, the rule was amended to permit

a broker or dealer who is participating or

financially Interested In a distnbution to

pay compensation to regular employees

for such solicitation not only in the form

of regular salary (as previously permitted)

but also in the form of usual and customary cornrnissrons."

The Committee concluded that the evolutronary nature of the block trading process makes impracticable any definitive

mandate to create a block trading market

structure, but indicated ItS willingness to

meet with and advise the Commission

on a case-by-case basis as special problems anse.

Central Market System

Policy Statement

On March 29, 1973, the Commission

issued ItS Policy Statement on the Structure of a Central Market System-setting

forth the results of ItS extensive review

of the recommendations contained in

the advisory reports just discussed, two

recent Congressional studies' and an

analysis by ItS staff with respect to the

development of a central market system

for listed securities. The Policy Statement

is Intended to give direction to the development of the structure and regulatory

framework within which such a system

would operate. In the Commlssron's view,

a central market system, by bringing together all existing markets for listed securities, would produce the beneficial

results of equaliZing the regulation of

those markets and making their transactions visible to all. At the same time,

6
competition would be encouraged, resulting in a substantial benefit to investors.

At the heart of the central market system described In the Policy Statement

would be a comprehensive communications linkage betweenmarket centers consisting of a real-time composite last sale

reporting system, a composite quotation

system displaying the bids and offers of

all qualified market makers in listed securities, and a central electronic repository for limit orders. Implementation of

such a communications system would

necessarily precipitate major changes in

the way securities are traded today.

Rather than let such changes occur without direction, the Commission anticipated

some of the problem areas and sketched

out a broad regulatory framework within

which the new communications network

could operate efficiently.

The major proposals may be grouped

into three broad categories: first, regulation to maintain the integrity of the communications linkage, such as eligibility

criteria for secuntres to be included, short

sale regulation and anti-manipulative

rules; second, regulation of competing

market makers within the system, particularly with regard to their responsibilities

to maintain a fair and orderly market; and

third, regulation to ensure that the system

will maintain the best auction features of

the exchange markets and thereby provide a favorable environment for individual public investors. These auction features include an "auction trading" rule

and a "public preference" rule, both of

which are designed to maximize the opportunity for public orders to meet without the intervention of a dealer. These

rules should have the effect of centralizing all buying and seiling Interest in listed

securities and eliminating the fragmentation which heretofore has plagued our

markets.

The Policy Statement sets forth in detail the Commission's preliminary conclusions and the steps It plans to take,

or to request the self-regulatory bodies

to take, for their realization. The Commission emphasized, however, that because of the complexity of the issues and

the unique efficiency already attained by

our domestic capital markets, any major

structural changes must be analyzed in

detail before, and monitored closely after,

their implementation. Therefore, the

Commission requested comments from

all Interested persons-including investors, self-regulatory bodies, brokerdealers and government agencies-on all

aspects of the views expressed In the

Policy Statement.

Work towards implementing the concrete steps recommended in the last

section of the Policy Statement is currently underway, and it is anticipated

that a considerable amount of progress

will be achieved during the present year.

Commission Rates

In its February 1972 Policy Statement,

the Commission indicated its determination to require that fixed commission

rates on that portion of orders above

$300,000 be eliminated, and thrs objective has been accomplished. Fixed

rates on the portion of orders over $500,-

000 had previously been eliminated at

the Commission's urging.

In March 1973, the Commission announced that It would not seek any further reduction in the breakpoint until

April 1974, when It would be reduced

from $300,000 to $100,000. The Commission considered an interim reduction

at that time Imprudent in light of, among

other things, the capital and operational

pressuresto which the member firm community had been subjected in recent

years, and the Immediate financial

stresses produced by a combination of inflated costs and declining profitability.

On September 11, 1973, the Commission announced that it would not take the

halfway measure of seekmg a further

breakpoint reduction in April 1974. Instead, it will act promptly to terminate

entirely the fixing of commission rates

by stock exchanges after April 30, 1975,

if the exchanges do not adopt rule

changesachievmgthat result."

7
NASD Reciprocal Brokerage Rule

The Commission's February 1972 Po/-

icy Statement noted the widespread

practice by investment company managers of usrng portfolio brokerage of mutual funds to reward broker-dealers for

sales of fund shares. It reviewed the regulatory problems and abuses related to

this practice and urged the NASD to

initiate measures designed to end its

members' participation in such practices.

Subsequently, the NASD filed with the

Commission proposed amendments to

its Rules of Fair Practice which were

designed to accomplish that result. On

May 14, 1973, the Commission announced that It had reviewed and would

not disapprove the proposed amendments." The amendments, which became

effective July 15, 1973, are Intended to

prohibit members from favonng or discnminating against the distribution of

shares of open-end Investment companies (mutual funds) on the basis of

brokerage commissions received, soliciting or making promises of an amount

or percentage of brokerage commissions

In connection with the distnbutron of

such shares, and seeking orders for the

execution of portfolio transactions on the

basis of sales of fund shares. While the

Rule does not, by its terms, apply to

possible reciprocal brokerage practices

In connection with the distribution of

shares of other types of investment companies, such as closed-end funds, vanable

annuities and vanable life separate accounts, the Commission has requested

the NASD to consider the question of

whether or not comparable regulatory

measures should be adopted in these

areas. The appropnate NASD committees are currently consrderrng such

measures.

In order to assure equality of treatment for all broker-dealers, the Commission, on June 27, 1973, issued a release

proposing the adoption of Rule 15b1D-10

under the Exchange Act to prohibit similar reciprocal brokerage practices by

SECO broker-dealers-those registered

broker-dealers which are not members

of the NASD.r The comment penod on

this rule expired July 31, 1973, and the

Commission's staff is currently considering the comments received.

Rule 19b-2

In its February 1972 Policy Statement,

which reflected the culmination of more

than four years of study of various aspects of the operations of the nation's

secuntres markets, the Commission outlined the specific problems It had observed In the functioning of the securities industry and their relationship to the

development of a central market system.

The problems noted by the Commission

included: the growing "institutionalization" of the securities markets; dispersion of trading, resulting In an erosion of

the public's ability to know whether best

execution of orders has been obtained

and Impairment of marketplace liqurdlty:

proliferation of reciprocal practices; and

increased trading In listed secunties not

disclosed to the public. The Statement

committed the Cornrnissron to a program

of upgrading competition In the securities industry. In addition to reaffirming

the Congressional goal that exchange

membership should be used for public

purposes! the Commission also called

for elimination of the so-called "parent

test"-the means by which some exchanges had precluded some institutional

affiliates from gaining direct access to

the exchange marketplace."

On May 26, 1972, the Commission

requested each national securities exchange to adopt, no later than July 31,

the substance of a proposed rule dealing

With the appropnate utilization of exchange membership. On August 3, 1972,

after it had become apparent that most

of the exchanges had not adopted the

rule suggested by the Commission, the

Commission published proposed Exchange Act Rule 19b-2 for public comment to In light of its Importance, requests

for comments were directed not only to

the exchanges but to their members, financial institutions and all other interested persons. Thereafter, oral hearings

on the Commission's proposed rule were

held, at which time interested persons

8
presented their views and were questioned by the Commission and Its staff.

On January 16, 1973, the Commission

adopted Rule 19b-2." Pursuant to the

rule, each securities exchange registered

with the Commission must adopt rules

which require every member of that exchange "to have as the principal purpose

of Its membership the conduct of a public securities business." For purposes of

the rule, it is presumed that a member

is conducting a public securities business

If at least 80 percent of the volume of

exchange secunties transactions effected

by it (a) is effected for or with other

than affiliated persons," or (b) consists of

certain kinds of transactions which contribute to the liqurdity or stability of the

markets, such as those effected by a stock

exchangespecialist in a security in which

he is registered, or a bona fide arbitrage

transaction. A phase-in period was included in the rule whereby exchange

members, who acquired their membership prior to January 16, 1973, weregiven

up to three years to comply fully with

ItS provisions. The Commission stated

that, following the adoption of the Rule,

all exchanges would be expected to

amend their access provisions to the extent necessaryto eliminate any parent or

related test.

Subsequent to the adoption of the rule,

various parties, Including the Philadelphia-Baltimore-Washington Stock Ex.

change (PBW), sued to test its validity."

On March 19, 1973, the United States

Court of Appeals for the Third Circuit

stayed the effectiveness of the rule as to

PBW members whose membership antedated the rule's adoption. On March 22,

the Commission announced that all ex.

changes which had not yet adopted Rule

19b-2 would be required to do so sub.

ject to these conditions: (1) all members

who jomed an exchangeafter January 16,

1973, the date of the rule's adoption,

would be expected to comply fully with its

terms; (2) those members who Joined

prior to that date could continue in memo

bership, if their exchange so decided,

without complying with the rule's public

business requirements, provided that

their volume of business did not increase

substantially pending the outcome of the

litigation as to the rule's validity."

Rule 19b-2, as adopted by the New

York and American Stock Exchanges,requires all members to abide by the public

business requirement, no matter when

they joined the exchange. The rule as

adopted by the other exchanges applies

that requirement only to members who

joined on or after January 16, 1973.

On September 28, 1973, the Court of

Appeals for the Third Circuit granted the

Cornrnisston's motion to disrruss for lack

of JUrisdiction the lawsuit seeking to test

the validity of Rule 19b-2.

Consolidated Tape

Oneof the more Significant steps taken

by the Commission during the past fiscal

year to implement its Policy Statement

on the Future Structure of the Securiues

Markets was the adoption of Rule 17a15 under the Exchange Act. That Rule

requires registered national securities exchanges, national securities associations

and broker-dealers who are not members

of such organizations, to make available

on a composite basis price and volume

reports as to completed transactions In

listed securities.

Rule 17a-15 contemplates that registered securities exchangesand associanons (and nonmembers thereof) will file

"plans," on a joint basis if desired, which

will specify the manner of disseminating

the required rnformatron. In order to become effective, such plans must be approved by the Cornrmssron. The New

York, American, Midwest, PBW and Paerne Stock Exchanges, and the NASD,

filed a joint plan with the Commission

pursuant to the Rule on which the Commission invited public comment. Nearthe

close of the fiscal year, the Commission

announced that It had sent a letter to the

sponsors of the plan commenting on

certain of ItS aspects. The Comrnissron

made the text of ItS letter public and

invited further comment from the sponsors and other interested persons."

9

"
Option Market Regulation

A significant event of the past year was

the registration of the Chicago Board

Options Exchange, Inc. ("CBOE") as a

national securities exchange." The Commission determined to permit the CBOE,

as a new exchange and the first national

securities exchange to experiment with

the trading of options, to test the market

for such options within a controlled environment. The CBOE operation is currently limited to trading in call options 18

in approximately 20 underlying stocks but

it intends gradually to increase that number and to extend operations to other

types of options as experience is gained,

and the market and its regulatory arrangements are tested. The CBOEnot only provides a market place for the initial buying

and selling of option contracts but has

also established a secondary market for

the resale of options during their lifetime.

Prior to the formation of the CBOE, options initially were bought and sold overthe-counter, with only a very limited secondary market. The options traded on the

CBOEare registered under the Securities

Act,19 and relate to underlying stocks

which are listed on another national securities exchange. The initial option registration related solely to the underlying

common stocks of companies listed on

the New York Stock Exchange.

For the period of the CBOE's experimental status, and in line with the needto

maintain flexibility in regulating this new

kind of exchange market, the Commission

decided to postpone a definitive determination as to whether the CBOEshould be

required to include in its rules a nonmember access provision. The Commission also determined, pending further

consideration regarding the viability of

existing fixed commission rates and the

nature of the CBOE's actual operations,

to permit the CBOEto structure its commission rates in a manner analogous to

those provided by other national securities exchanges.

OnApril 26, 1973, the date upon which

the CBOE's registration as a national securities exchange became effective, the

Antitrust Division of the Department of

Justice filed suit alleging that the maintenance of minimum commission rates,

floor brokerage and other fees by the

CBOEviolated Section 1 of the Sherman

Act."" The CBOE, it is alleged, is engaged

in an unlawful combination to restrain

trade and commerce in the providing of

brokerage services for the trading of

options.

Interest in the trading of put and call

options has increased markedly the past

few years causing the Commission to

assess the adequacy of existing protections available to public investors who

participate in this activity. In an effort to

ensure that investors in options are afforded protections similar to those provided investors in more common debt or

equity securities, the Commission has

already promulgated some rules 21 and

proposes to adopt other rules relating to

trading in options. Thus, on January 9,

1973, the Commission announced that it

was considering the adoption of Rule 9b1 under the ExchangeAct."" The rule, as

proposed, specifies procedures to be followed in connection with the adoption

or alteration of rules of a registered national securities exchange relating to acts

and transactions in options on the exchange. The Commission is considering

the comments it has received on proposed Rule 9b-1 and expects to act with

regard to this subject in the near future.

In addition to overseeing exchange

rules relating to trading In put and call

options, the Commission has proposed

rules directed to the options themselves

as well as those persons who deal in

them.

On February 8, 1973, the Commission

published for comment proposed Securities Act Rule 238."" That rule would

exempt put and call options from the

registration requirements of the Securities Act if certain conditions were met.

Theseconditions are: (1) that the security

underlying the put or call option is either

registered on a national securities exchange or meets certain criteria if traded

only over-the-counter; (2) that the gross

proceeds from the sale of related options

10
received by the writer or by all writers

with the same endorser do not exceed

$500,000 (all puts or all calls on the

same underlying security and having a

last possible expiration date in the same

calendar month are considered to be

related); (3) that the writer of the option

is not the issuer of the underlying security, an affiliate of the issuer, or an underwriter with respect to the security; and

(4) that the endorser of the option is a

broker-dealer who is registered with the

Commission.

On the same day, the Commission

also published for public comment proposed Exchange Act Rule 9b-2!' That

rule, among other things, would require

that prior to the execution of a customer's

Initial option transaction, a broker or

dealer would be required to furnish the

customer a disclosure statement which

clearly explained the obligations and risks

attendant upon writing or purchasing an

option. In addition to this requirement,

the proposed rule specifies standards of

surtability for customers dealing in puts

and calls; requires endorsers of options

to report their option transactions and

outstanding endorsements on a weekly

and monthly basis; and requires that endorsers maintain net capital of not less

than $50,000.

The Commission is currently considering revisions in proposed Rules 238

and 9b-2 based upon the many comments it has received on the rules as

originally proposed.

Legislative Initiatives

(1) H.R. 5050

In 1972 the Subcommittee on Commerce and Financeof the House Committee on Interstate and Foreign Commerce

completed a comprehensive examination

of the securities industry." After taking

a voluminous amount of testimony, the

Subcommittee issued a report setting

forth the information and analysis obtained along with conclusions and legislatlve recommendations concerning almost every aspect of the securities industry with which the Division of Market

Regulation IS concerned." On March 1,

1973, a bill entitled the Securities Exchange Act Amendments of 1973, designated H.R. 5050, was Introduced In the

House and referred to the Committee on

Interstate and Foreign Commerce.

Title II of H.R.5050 ISdesigned,among

other things, to conform Section 6 of the

ExchangeAct to Section 15A of that Act

so that national securities exchangesand

national secunties assoclatrons, as well

as their members, would be subject to

substantially identical regulation. In this

connection, Title II would expandthe oversight authority of the Commission to include exchange rule-making and disciplinary actions. It would also phase-outfixed

commission rates on national securities

exchanges, prohibit persons from providing both managementand brokerageservices for the same institutional account,

direct the Commission to take the necessary steps to establish a central market

system, prohibit exchangesfrom preventing their members from executing trans.

actions for customers in other markets,

and require the Commission to adopt

rules designed to ensure best execution.

TItle III of H.R. 5050 would amend Exchange Act provrsions relating to the regulation of brokers, dealers and exchange

members. The revisions, among other

things, would modify financial responsibility requirements; the broker-dealer application, registration and examination

process; and certain of the reporting requrrernents, They would clarify the Commission's authority to require a composite

transaction tape and a composite quotation system, and grant the Commission

expanded authonty over the accounting

procedures of broker-dealers and exchange members.

TItle IV of H.R. 5050 provides for the

development of an integrated national

system for the prompt and accurate processing and settlement of securities transactions and Includes provrsrons relating

to the regulation and registration of clearrng egencies, secunties depositones and

transfer agents. It also directs the Commission to eliminate the use of the stock

certificate as a means of settlement by

11
December 31, 1976, and clarifies the

Commission's authority to deal with miss'

mg or stolen secunties.

Provisions of Title IV would designate

the Commission as the sole regulator of

clearing agencies,depositones and transfer agents, regardless of whether certain

of these entities were incorporated and

authorized to operate as banking organizations. The Commission would be authorized to set standards for such entities,

admmister registration requirements,

conduct mspections and ensure compliance with the standards it had set.

By way of contrast, the Senate version

of Title IV (S. 2058) would provide for

dual regulation of securities deposrtories,

clearing agencies and transfer agents."

TheCommission would havegeneralover.

sight responsibility with respect to those

entities and would coordinate ItS activities, to the maximum possible extent,

with the Federal bank regulatory authorities, i.e., the Federal Reserve Board, the

Comptroller of the Currency and the Federal Deposit Insurance Corporation. With

regard to deposrtories, transfer agents

and c1eanng agents incorporated as

banks, however,the Federal bank authorities would have the pnmary responsibility to conduct mspections and enforce the

bill's provisions.

(2) S.470

On June 18, 1973, S. 470 was passed

by the Senate and sent to the House of

Representatives for consideration. This

bill would grant the Commission authority

to regulate or prevent trading by members on national securities exchanges,

either on or off the exchange floor, for

the member's own account or the account of any affiliated person, and make

it unlawful for a member to trade in contravention of rules the Commtssion might

adopt. The bill would also make it unlawful after a prescribed period, for a member of a national securities exchange to

effect any transaction on such exchange

for or with its own account or that of any

affiliated person or managed institutional

account.

Such prohibition would not become effective prior to the last date on which any

national securities exchange maintains

or enforces any rule fixmg rates of comrrussion,or prior to April 30, 1976, whichever is later. Moreover, the prohibition

would not be absolute until the expiration of two years from the date that fixed

commission rates are totally eliminated,

or Apnl 30, 1976, whichever is later.

S. 470 would also amend the Investment Company and Investment Adviser

Acts: (1) to provide that under specified

conditions, it would not be unlawful or a

breach of fiduciary duty for an investment

adviser to pay a higher commission to a

broker for effectmg a transaction than

that charged by other brokers for effecting similar transactions; and (2) to establish standards with respect to the sale

of an interest in an mvestment adviser.

The latter section is designed to remedy

certain problems raised by a recent court

decrsron,> which held that the general

principle in equity that a fiduciary cannot

sell his office for personal gain is impliedly incorporated into Section 15(a) of

the Investment Company Act requiring

shareholder approval of any new investment advisory contract. For a more detailed discussion, see Part 5.

Tax Shelters

During the fiscal year, the NASD and

the Commission's staff gave extensive

consideration to the regulatory problems

associated with the public offering of taxshelter programs. Shortly after the close

of the year, the Commission announced

that it was requesting public comments

on proposed NASDRules of Fair Practice

which would establish a system of regulation for the distribution of such programs.""The proposed rules, among other

things, would prohibit NASD members

from participating in the distribution of

tax-sheltered programs which did not

meet prescribed standards of fairness and

reasonableness. These standards relate

to the underwriting and other terms and

conditions of the public distribution, including all elements of compensation to

be paid to sponsorsor broker-dealers,and

12
to the operation, structure and management of such programs SUitability standards for investment in such programs,

and requirements concerning the content

and filing with the NASO of advertising

and supplemental sales literature would

also be established.

The Commission has requested public

comment on the NASO's proposals not.

only to aid in ItS consideration of the

specifics of the NASO's proposed plan,

but also to provide It with a broadened

base upon which to develop its own policies in the area of tax shelter programs.

DISClOSURE.RELATED MATTERS

"Hot" Issues

In February 1972, the Commission

began public, fact-finding investigatory

proceedings on "hot issues" securities

markets (l.e., markets in which new issues have experienced substantial price

rises in their after-markets) to determine

the adequacy of existing disclosure and

regulatory protection for investors.

On July 26, 1972, following completion of the first phaseof the hearings, the

Commission requested the registered national securities exchangesand the NASO

to consider the establishment of appropriate standards to alleviate some of the

problems found to exist in such markets-particularly with respect to the

adequacy of investigations by underwriters and the suitability for customers of

the securities being distributed. As a result of this request, the NASO established a committee to review the Commission's comments and to make appropriate recommendations designed to

strengthen regulatory and disclosure con.

trol over the sale of new issues of securities to public investors. On March 14,

1973, the NASO'sBoard of Governors requested membership and public com.

ments on the committee's recornmendations that: (1) special customer suitability rules be adopted with respect to

first time offerings of companies in a

promotional stage; (2) a rule be adopted

to require that written procedures be

established and followed by underwriters

in conducting due diligence mvestigations: (3) a new category of qualification

and registration for broker-dealer personnel be established ("underwriter pnncipals"): and (4) the NASO's regulations

stress a member's obligation to make a

bona fide public offering In all new

issues. At the end of the fiscal year, the

numerous comments receivedconcerning

these recommendations were reviewed

and considered by the NASO.

OnJune 1, 1973, the Commission published a number of releases dealing with

the first phase of the "hot issues"

hearings."

The amendments to the registration

and reporting forms adopted in these releases require more meaningful disclosure relating to all registrants, Including

information concerning the status of new

product development and general competmve-colfdltlons, the position of the

Issuer In the industry in which it operates,

and, in the case of certain registrants

offering securities to the public for the

first time, a description of their plan of

operation.

The amendments added a new guide,

59, to the Guides for Preparation and

Filing of Registration Statements under

the Securities Act requiring that all prospectuses on Forms S-l and S-2 Include,

Immediately following the cover page, a

summary highlighting the salient features of the offering with appropriate

cross references to the prospectus.

Guide 5, "Preparation of Prospectuses," as amended, notes that stock

phrases or "boiler plate" relating to subjects such as the company's chances of

success or competrtron often do not provide meaningful disclosure and, therefore, should usually be accompanied by

a brief explanation of the basis for the

statement and the effect such condrtions

may have on the registrant's business. In

addition, it now requires disclosure in

preliminary prospectuses actually circulated of the estimated maximum offering

price and number of shares or other units

to be offered, or, with respect to debt secunties, the estimated principal amount

to be offered for first time public offer13
Forecasts of Economic Performance

On November I, 1972, the Commission announced a public rulernakmg proceeding relating to the use, both In filings

With the Commission and otherwise, of

estimates, forecasts or projections of economic performance by Issuers whose

securrtres are publicly traded." Heanngs

were ordered by the Commission for the

purpose of gathering information relevant

to a reassessment of Commission polio

cies relating to disclosure of projected

sales and earnings. The Division of Cor.

poratron Finance conducted public hear.

ings from November 20 to December 12,

1972, and received testimony from 53

Witnesses, Including representatives or

publrcly-held corporations, the secunties

Industry, the acaderruc community, the

self-regulatory organizations, and the acings. In addition, disclosure IS now re- \ counting and legal professions. In ad.

quired of factors that were considered! ditron, letters from over 200 persons

In establishing the offenng pnce, and an I were received and made part of the

estimate, with appropriate caveats, of i public record.

the value placed on outstanding secun- On February 2, 1973, the Commission

ties of the registrant as a result of the ') Indicated that it plans to take the first

estimated offering pnce. Such bare bones, steps toward integrating projections into

statements as "the initial public offenng\ the disclosure system.": In summary, the

pnce has been arbrtranly determined by \) Commission determined that:

the company" or "such pnce has been 1. Disclosure of projections In Com'

established by negotiations between the rrussion filings should not be required ex.

underwriter and the registrant" are no cept under the circumstances set forth in

longer sufficient. paragraphs 7 and 8 below.

Guide 16 was amended to deal spe- 2. Issuers which are reporting comcrfically with the due diligence inquiry pames and meet certain standards relatrequired of underwnters of new or spec- mg to their earnings histories and budget.

ulative Issues. rng experience should be permitted to

The second phase of the "hot issues" include projections in filings made with

proceedings which began In September the Commission pursuant to the Securi1972 and focused on distribution and ties Act and the Exchange Act.

aftermarket trading is continuing. In 3. Projections disclosed In cornrrusNovember 1972, the Commission an- sion filings should meet certain standnounced that three new Issues of secu- ards. For example, the underlying asritres which were distributed dunng cal. surnptions should be set forth, the proendar year 1972 had been selected for [ection should be of sales and earnings

analysis during public heanngs scheduled and expressed as a reasonably definite

to be held beginning December 11, 1972 figure, and the projections should be for

In New York."! The selection of the three a reasonable penod of time.

issues was based solely on the fact that 4. Any Issuer which files projection inthey expenenced a pnce Increase of ap- formation should be required to update

proximately 100 percent or more from the filed projection on a regular basis

the initial offenng pnce, and whenever the Issuer matenally

changes ItS projection.

5. Any issuer which has previously

filed projection Information should be

allowed to stop filing such information

If It discloses its decision and the reasons

therefor.

6. No statement of venfication or certification of the projections by any third

party should be permitted in any filing

with the Commission at this time.

7. Any Issuer which discloses projections outside of filings with the Commission, whether through financial media, financial analysts or otherwise, should be

required to file such projections with the

Commission on a special projection form.

8. Any issuer subject to the reporting

requirements of the Exchange Act which

discloses a projection, whether in a Com.

mission filing or not, should be required

to Include in its annual report on Form

14

"

-
lQ-K for the fiscal year during which

the projection was made a statement of

the projection, the circumstances under

which it was disclosed, and a comparison

of the projection with actual results.

9. The Commission should adopt rules

under the securitres laws to define the

circumstances under which a projection

would not be considered a misleading

statement of a material fact.

10. The Commission should Issue a

release setting forth certain standards

for the preparation and dissemination of

projections by the management of public companies, financial analysts, and

other members of the financial community. The release should highlight the

Commission's reservations as to whether

anyone who makes a projection With respect to an issuer having a limited hrstory of operations can meet the standards necessary to avoid liability. In addition, the adverse consequences of selective disclosure of material information

such as projections should be emphasized.

The staff of the Drvisron of Corporation

Finance is currently preparing specrfic

releases and the rule and form changes

necessary to Implement the foregoing

conclusions. The rule and form changes

will be published for comment prior to

adoption.

Rule 144

In April 1972, Rule 144, "Persons

Deemed Not to be Engaged In a Distribution and Therefore Not Underwriters," became effective. It provides a method of

resale for securities acquired In private

placements and for securities held by affiliates. During the first months of the

rule's operation, the DIVISion of Corporation Finance received a number of requests for interpretations of the rule. In

September 1972, the Divisron consolidated some of the more Important interpretations in question and answer form

and, with Commission approval, published them." Among the significant interpretations were those dealing With

securities acquired by an underwriter in

524-127 0 - 74 - 3

connection With a public offering, the

solicitatron of customers' orders, and the

use of a moving average of trading volume for calculating the amount of securities that might be sold under the rule.

In addrtion, the Commission proposed

for comment an amendment to the rule

which would permit brokers to continue

their quotations In an mterdealer quotation service while seiling securities pursuant to the rule, subject to certain condrtions." Under the proposal, quotations

could be continued provided they were incident to the maintenance of a bona fide

interdealer market. To Insure that a

broker was a bona fide market maker

the proposal would require him to have

published quotations on at least 15 out

of the last 20 trading days, and 4 out

of the last 5, prior to receipt of the order.

To insure that the predominant percentage of a market maker's transactions on

a given day In the particular secunty

were unrelated to Rule 144 transactions,

the proposal suggested a limitation on

the number of shares to be sold pursuant

to Rule 144 based on p percentage of

the dealer's average daily trading volume In that security over a prior period

of time.

The Commission received numerous

comments on this proposed amendment

and ItS staff is currently reviewing them.

On June 14, 1973, the Commission

reminded persons selling securities pursuant to Rule 144 of their obligation to

~flle a duly completed Form 144.36 It

pointed out that Form 144 must be filed

at the time an order to sell is placed, not

after the sale. Other common mistakes

in using the form were also noted, and

sellers were reminded that strict compliance with the rule IS necessary.

Rule 145

The Commission's 1969 Disclosure

Policy Study 3; recommended the resetssion of Rule 133 under the Securities Act,

which exempted from registration securities Issued in certain types of business

combinations under a "no sale" theory,

and adoption of a special form for regis15
tration of securities Issued in such transactions.

In October 1972, the Commission in

accordance with that recornernndation,

rescinded Rule 133, adopted Rule 145,

and took other related actions." Rule 145

provides that the submission to a vote of

security holders of a proposal for certain

mergers, consolidations, reclassifications

of securities or transfers of assets is

deemed to Involve an "offer" or "sale"

of the securities to be issued in the transaction. The effect of the rule is to

require registration of such securities unless an exemption is available.

In order to facilitate the registration of

securities issued in transactions of the

kind referred to In Rule 145, the Commission revised Form 8-14. Thrs form permits the prospectus to be In the format

of a proxy or information statement.

Rule 145 and the other actions taken

In connection with its adoption became

effective January I, 1973.

Rule 146

The so-called "private offering" exemption from registration under the Securities

Act provided by Section 4(2) has long

been a source of uncertainty for issuers

wishing to sell their secunties in private

placements. In November 1972, the Commission released for comment proposed

Rule 146 under the Securities Act, "Transactions by an Issuer Deemed Not to Involve Any Public Offerlng.":ro The pro.

posed nonexclusive rule IS intended to

provide more objective standards for determrning when the offer or sale of securities by an issuer is a transaction not

involvrng any public offering Within the

meanrng of Section 4(2). In general, the

proposed rule would require that (1) no

general advertising be used in the offer

and sale of the securities; (2) all offerees,

or their representatives, be persons With

knowledge and experience In frnancial and

business matters; (3) all offerees be able

to bear the economic risk of the investment; (4) all offerees, or their representatives, have access to the type of informanon that registration would disclose; (5)

there be no more than 35 purchasers of

the issuer's securities in any 12 month period; and (6) that certain steps be taken

to prevent resale of the securities in violation of the registration provrsrons, In

addition, a Form 146 would have to be

filed describing the transaction. In connection with Rule 146, the Commission

proposed an amendment to Rule 257 to

allow an offering under Regulation A not

in excess of $100,000, WIthout use of an

offering Circular, for certain employee

benefit plan offerings. The Commission

is presently considering the comments received on the proposed rule,

Rule 147

The application of Section 3(a)(11) of

the Securities Act, which exempts from

registration secunties that are part of an

issue offered and sold only to persons

resident in a spectfic state by an issuer

that is also resident and dorng business

Within that state, has also been a source

of inquiry and uncertainty for many years.

In January 1973, the Cornrnlssron released for comment proposed Rule 147

which IS intended to define certain terms

In, and clarify certain condrtions of, the

Intrastate offering exemption." In general

it would define "part of an issue" to include all offers and sales of securities by

an issuer and its afftliate Within a six

month period. In addition, It would define

"person resident" and "doing business

within" for purposes of the exemption,

and would also place certain limitations

on reoffer and resale. The Commission

is presently consrdermg the comments

received on the proposed rule.

Advisory Committee on

Industrial Issuers

On September 26, 1972, the Chairman appointed an Advisory Committee

on Industrial Issuers to review the reporting and other paperwork requirements of the Cornmisston and self-regulatory bodies with respect to industrial

companies. In its report to the Commission, submitted December 22, 1972, the

Committee made a series of recommendations relating to the annual report to

16
shareholders, interim reporting to the

Commission, discretionary releasesto the

public, and certain other areas. With regard to the annual report, the Comrnrttee recommended that issuers be required to Include, among other things,

hne-of-business disclosure and summary

of operations Information similar to that

required in the annual report on Form

10-K. In the areas of discretionary releases and interim reporting, the Committee observed that guidelines would be

useful and made some specific suggestions for improving dissemination of information. The Committee also made recommendations relating to the use of

Forms 5-7, S-8 and S-9, coordination

of disclosure by the stock exchangesand

the Commission and by the states and

the Commission, guidelines for filing documents under the ExchangeAct, and Improved line-of-business reporting.

On January 22, 1973, a Task Force on

Forms and Reports was appointed from

the Commission staff to develop specific

proposals basedon the recommendations

of the Advisory Committee.

Quality of Earnings

In December 1972, the Commission

announced that it was proposing to

amend Guide 22, "Summary of Earnrngs", of the Guides for the Preparation

and Filing of Registration Statements

under the Securities Act of 1933." The

proposed amendment is designed to

make more meaningful and understandable disclosure of financial information

presented In prospectuses. Item 6 of

Forms 5-1 and 5.7 requires that, in addition to the columnal presentation of

summary financial data, registrants must

supply information of material significance to investors In appraising the results shown. The proposed amendment

would clarify the type of supplementary

information and data to be included In

order to enable investors to appraise the

quality of earnings reported in the summary. A non-exclusive list of examples

that registrants should consider In making disclosure would be set forth. The

Commission announced that it is considering adoption of the substance of the

amendedGuide22 as GUide1 of proposed

Guides for the Preparation and Filing of

Reports and Registration Statements

under the Securities Exchange Act of

1934. The comments received on these

proposals are being studied by the staff.

Real Estate Matters

The applicability of the Federal securities laws to the sale of real estate units

is an area of evolving interpretation and

practice. The Commission has undertaken a number of actions to state Its

position on questions In thrs area, and has

sought the advrce of the industry regarding future actions.

(a) Real Estate Advisory CommitteeOn May 3, 1972, the Real Estate AdVIsory Committee was established by the

Cornmissron to examine disclosure procedures and policy objectives In the area

of real estate security interests. The

Committee, in ItS report dated October 12, 1972, concluded that proper investor protection can best be achieved

through informative, understandable and

Uniform economic disclosure In real

estate secunty offerings. The report

stated that such a process should result

in more competition among various types

of real estate securities and between real

estate securities and all other types of

securities In the equrty markets. The

Committee also stated that the various

regulatory agencies involved in regulating the offer and sale of real estate secunties should act so as to facilitate an

equitable, competitive flow of funds into

such secuntres from the investing public.

The committee recommended, among

other things, that the Cornrnissron establish a "staffed permanent real estate

advisory committee, composed of representative state regulators, securities

associations, the real estate Industry,

attorneys and accountants." Although It

urged the Commission to continue ItS

enforcement of applicable provrsions of

the Securities Act and the ExchangeAct,

It recommended that the Commission

refrain from developing new regulatory

17
procedures with respect to real estate

securities pending the formation and recommendations of the committee.

In addition, the Committee made

specific recommendations in areas relating to the offer and sale of real estate securities such as sales literature, fees,

conflicts of interest among promoters

and managers, the applicability of Regulation "T", and the broker-dealer registration, net capital and reporting requirements of the Exchange Act as they may

relate to those who sell real estate securities such as condominiums and cooperatives.

Since publication of the Committee's

report, the Commission has taken a number of steps relating to the offer and sale

of real estate secunties. For example, as

discussed below, the Commission has issued guidelines with respect to the applicability of the Federal securities laws to

offers and sales of condominiums or units

in a real estate development, and, as

noted above, has asked for public comments on NASD proposals relating to tax

shelter programs, including those involving real estate. The Cornrnlsston's staff is

currently studying other recommendations made by the Committee.

(b) Interpretations Regardmg Condornrmurns and Other Real Estate UnltsIn January 1973, the Commission Issued

guidelines as to the applicability of the

Federal securities laws to offers and

sales of condominiums and other types

of units In a real estate development."

The Commission stated that an offering

of condominiums or other Units will be

viewed as an offering of securities in

the form of Investment contracts If they

are offered and sold: (1) with emphasis

on the economic benefits to the purchaser to be denved through the managerial efforts of the promoter, or a third

party designated or arranged for by the

promoter, by rental of the units; (2) In

connection with an offering of participations in a rental pool arrangement; or

(3) In connection with the offering of

a rental or Similar arrangement whereby

the purchaser must hold his Unit available for rental for any part of the year,

must use an exclusive rental agent, or is

otherwise matenally restncted In his occupancy or rental of his Unit. The Comrrussron noted that there might be other

types of arrangements, not presently anticipated, that might render an offering

of condominiums an offenng of securities

and stated that the staff of the Commission will respond to written inquiries

on such matters.

In April 1973, the Commission issued

a release '3 emphasizing the applicability

of certain requirements of the Federal securities laws to advertismg and sales

practices In connection with units of real

estate which are deemed to be securities.

The release discusses the effect of Rules

134 and 135 under the Securities Act on

the types of communications which may

be used before, during and after the regrstration process. The release also notes

the protubiiton on acceptance of purchase

pnce payments, deposits or purchase

commitments prior to the time a registration statement IS effective and a statutory prospectus delivered to a purchaser.

Accounting

During the year the Commission issued

proposals for supplemental disclosure by

registrants of their accounting policres

and any changes made In those policies,

and of data concerning Income tax expense, leased assets, and items affecting

liquidity. Studies are being conducted to

determine whether improvements can be

effected for the benefit of the investing

public in other areas, including line-ofbusiness reporting, pro forma financial

statements, and reporting and audit requirements for broker-dealer firms.

The Commission is also studying ways

to assist accountants practicing before it

to maintain their independence, and to

aid in Improving thelt audit procedures

and practices. In cooperation With the

accounting profession, the Commission

has developed a new approach in its continurng effort to correct deficient auditing

practices. This approach, which was applied dunng the year In disciplinary proceedings against an accounting firm,"

18
calls for an Investigation to be made of

an accounting firm's professional practice to insure that the firm is following

proper auditing standards and procedures. The investigation may be made

either by the staff of the Commission, or

by a team of qualified professional accountants selected either by the American Institute of Certified Public Accountants (AICPA) or by the Chief Accountant

of the Commission from persons the

AICPA designates.

INVESTMENT COMPANIES

Mutual Fund Distribution

During the last fiscal year, the Com ission, after reviewing the Study of the

Potential Economic Impact of the Repeal

of Section 22(d), conducted by ItS staff,

and the Economic Study of the Distribution of Mutual Funds and Variable Annuities, conducted for the NASD, determined that it would be appropriate to

re-examine traditional administrative positions and explore new possibilities in

order that mutual funds may be marketed

more efficrently at a reasonable cost to

investors. Section 22(d) requires, in part,

that in the sale of a mutual fund security

to the public, the principal underwriter

and any dealer must sell the security at

the current public offering prlce--net

asset value plus stated sales charge--

set forth In the prospectus.

In order to obtain a wide range of viewpoints With respect to the justification for

this retail price maintenance provrsron,

the options which would be open to the

industry if Section 22(d) were eliminated,

and Industry adjustment to such a

change, the Commission solicited the

views of all interested persons." The notice also requested comments With respect to the following matters: further

liberalization of mutual fund advertising

rules; simplified and more readable mutual fund prospectuses; group sales; and

reduction of paper work In small transactions.

More than 100 written submissions

were received in response to the Commission's notice and placed In the record.

The public hearings included 15 days of

testimony from 72 witnesses. Individuals

from all facets of the mutual fund industry particrpated and expressed a broad

range of opinions. At the end of the fiscal

year, the Commission's staff was in the

process of analyzrng the views and information presented.

Variable Life Insurance

On January 31, 1973, the Commission

announced ItS conclusions on regulation

of variable life insurance," Variable life

insurance refers to Insurance contracts

in which the death benefit, cash surrender value and other benefits vary to reflect the Investment experience of a life

insurance company's separate account

which Invests primarily in equity securities. The Commission's action stemmed

from public hearings last year on rules

proposed by the American Life Convention and the Life Insurance Association

of America which would have exempted

certain variable life insurance contracts,

issuers and related persons from the securities acts.

In brief, the Cornrnlssron determined

that: (1) the investment character of variable life contracts would make them securities, so that any public offering of the

type of contracts contemplated In the

hearings would have to be registered

under the Securities Act; (2) people seilmg these variable life contracts would

generally have to register as broker-dealers under the Exchange Act; (3) the separate account of a company engaged in

Issuing and selling these variable life

contracts would fall Within the definition

of an investment company under the Investment Company Act; and (4) an insurance company or other entity providing investment advice mcidental to the

Issuance of variable life contracts would

be an investment adviser under the Advisers Act. However, the Commission de'

termined to exempt by rule such separate

accounts from the elaborate regulatory

requirements of the Investment Company

Act in deference to state regulation of

insurance and because of complex administrative problems that would arise in pro19
viding the substantial exemptions from

the Act that would be necessary to make

the operations of these accounts feasible.

For essentially the same reasons, the

Commission determined to exempt by

rule from the Advisers Act insurance companies or affiliated companies acting as

advisers to these accounts.

In determining not to adopt an exemptive rule with respect to variable life contracts under the Securities Act, the Commission in its release said: "(T)he important investment features of the contract-the opportunity to participate in

the investment experience of the separate

account In order to achieve Increased life

insurance benefits Including death protections and cash value--require that

contract-holders be afforded the protections of full disclosure which would be

developed by registration of the contracts

under the Securities Act."

At the same time, the Commission decided not to exempt these contracts from

the provisions of the Exchange Act because the complex nature of the investment elements of variable life insurance

make it particularly important that the

disclosure made be communicated by

salesmen and firms subject to Commission regulation.

After the close of the fiscal year, the

Commission proposed amendments to

the rules granting exemptions from the

Investment Company and Advisers Acts

which would, if adopted, condition the exemptions on prior Commission determination that state law and regulations

applicable to variable life insurance contracts provide investor protections substantially equivalent to those afforded by

the acts!'

The Commission also announced that

a registration statement covering the

offer and sale of variable life Insurance

contracts would not be accepted for filing under the Securities Act in the absence of a prior determination by the ISsuer that such policies can be legally sold

in the [unsdictron In which offers Will be

made. The Commission based its decision

on its view that the Securities Act contemplates that, at the time a registration

statement is filed, there must be a present intention to commence sales upon its

becoming effective, and a reasonable certainty that the securities to be offered

can be legally sold."

Proposed Offshore Fund

legislation

In April 1973, the Commission submitted to Congress legislative proposals

which would enable creation of Foreign

Portfolio Sales Corporations or Trusts to

be organized in the United States for the

sale of mutual fund shares to foreigners." The legislation was prepared by the

staff of the Commission With the assistance of the staff of the Treasury Department and would amend the Investment

Company Act and the Internal Revenue

Code. The proposals were developed by

an Inter-agency Offshore Fund Task Group

assembled on the initiative of the Commission and comprised of representatives

of the Commission, the Treasury Departrnent, the State Department and the Federal Reserve Board. The Task Group also

received valuable advice and assistance

from an informal advisory group.

The Task Group was formed as a follow-up to recommendations in the Commission's Institutional Investor Study

submitted to Congress in March 1971.

In the Study the Commission noted the

well-publicized difficulties experienced by

certain offshore funds and their sponsors

and stated its belief that foreign investor

confidence in offshore funds investing in

American securities could be significantly

bolstered if they were to become subject

to Cornrrussron regulation under Federal

securities laws. The Commission further

noted that offshore funds currently receive competitive advantages under the

Internal Revenue Code over domestic,

registered investment companies seeking

to sell In offshore markets. It suggested

that equalization of these advantages

would enable United States registered investment companies to compete more

effectively with unregulated offshore

funds and that the net result would be

beneficial to foreign investor protection

20
and the United States securities markets,

as well as to the United States balance

of payments.

After reviewing existing United States

laws with the assistance of the business

advisory group, the Task Group generally agreed on the outline of a new proposal for a Foreign Portfolio Sales Corporation as a new form of United States

mutual fund, organized in the United

States and registered with the Commission but directing its sales efforts at nonresidents and noncitizens of the United

States.

Under the proposed legislation, the Investment Company Act would be

amended to provide specifically for the

registration and regulation of domestic

Investment companies organized for the

sale of their securities to foreigners. Related amendments would provide the

Commission with greater flexibility under

the Act in allowing registration of foreign investment companies and would

enable the Commission to deal with the

problem of "shell" companies organized

in the United States with foreign officers,

directors, and trustees. Thrs portion of the

proposed legislation will be considered

initially,

The Commission recommended that if

the amendments to the Investment Company Act are considered favorably by

Congress, Congress should then consider

amending the Internal Revenue Code so

that the United States mutual funds

which register with the Commission could

sell their shares exclusively to foreign investors With tax benefits to the latter comparable to those presently available to

foreigners who invest in United States secunties through offshore funds.

The portion of the legislative proposals

Involving amendments to the Investment

Company Act was introduced in the House

of Representatives In May 1973.:;0

ENFORCEMENT MATTERS

SEC.NASD Task Force

In the latter part of fiscal 1972, the

Commission became aware of a substantial number of Situations involving new

issues of securities in which there was a

substantial increase in the aftermarket

price of the stock shortly after the public offering. The run-up in pnce was usually followed by an equally precipitous

and dramatic decline, resulting in severe

losses to the Investing public. In a number of these situations, the sharp drop

in price resulted In a number of brokerdealers being forced out of business because of financial losses. The described

pattern of activity indicated extensive

manipulation which could not have occurred Without the active involvement of

broker-dealers who, because of their

strategic position In the securities industry, are essential to the successful consummation of such schemes.

To combat thrs problem, the Commission and the NASD created a JOint task

force. Teams of Commission and NASD

personnel were set up to conduct intensive examinatrons and investigations of

selected broker-dealers, and a substantial number of serious Violations were uncovered. To date, the Commission has

brought SIX injunctive actions and two

administrative proceedings as a result

of the task force's efforts, and one criminal indictment has resulted. The Commission and the NASD expect to continue

the program as long as circumstances

warrant.

One of the actions which best exemplifies the accomplishments of the task

force IS the administrative proceeding

brought against the broker-dealer firm of

Cohen Goren Equitres, Inc., seven other

broker-dealers, and certain of their principals and associated persons. The order

for proceedings in that case alleges,

among other things, that a substantial

portion of a public offenng of securities

was withheld from public sale and placed

in nominee accounts by persons associated With Cohen Goren, the underwriter.

It is further alleged that the price of the

stock was arbitranly Inflated from the offering price of $10 a share to a high of

$26 a share, and that the stock Withheld from the offering was then sold at

a substantial profit. As part of the effort

to Inflate the price of the security, cer21
tain broker-dealers allegedly agreed to

make a market rn the stock pursuant to

arrangements whereby they were guaranteed profits. The Commission accepted an

offer of settlement under which Cohen

Goren's registration was revoked, and its

two principals barred from association

with any broker-dealer with a right to

apply for association in a limited capacity

after two years."

Swiss Treaty

On May 25, 1973, the United States

and Switzerland signed a Treaty on Mutual Assistance in Criminal Matters. The

signing was the result of more than four

years of difficult negotiations, largely

caused by substantial differences between

the two legal systems. A representative

from the Cornrmssion has partrcipated in

the negotiations since they began early

in 1969.

The treaty contains 41 articles grouped

into 9 chapters and a schedule lrsting 35

categories of offenses to which the treaty

IS applicable In general, it provides for

broad cooperation between the two countries in criminal matters. Provision is

made for assistance in locating witnesses,

obtaining witnesses' statements and testimony, the production and authentication of business records, and the service

of judicial and administrative documents.

The treaty also provides for special assistance in cases involving organized crime.

The treaty should be of assistance to

the Commission where Swiss frnancial institutions are utilized to engage in securities transactions in the United States, or

where funds resulting from Illegal activities are secreted in such institutions.

Significant Cases

On November 27, 1972, the Commission filed an injunctive action m Federal

District Court in Manhattan against Robert L. Vesco, International Controls Corp.

("ICC"), IDS, Ltd. ("IDS"), and 41 other

corporate and mdrvidual defendants associated with IDS and Vesco alleging

violations of antifraud, frlmg, and proxy

provisions of the Federal securities laws."

IDS IS a non-resident Canadian corporation which acts principally as a holding

company for offshore mutual fund management companies. ICC, listed on the

American Stock Exchange, is 25 percent

owned by Vesco and was the corporate

vehicle for Vesco's assumption of control over IDS.

The complaint alleged a scheme by

Vesco and others to mulct four IDS offshore mutual funds of rrulhons of dollars

by hquidating marketable secuntres of

established companies in their portfolios

and placing the proceeds rn companies In

which Vesco and his associates had an

rnterest. The four affected mutual funds,

which Invested pnmarily In U S. markets,

had more than $300,000,000 in assets m

the spring of 1972 which were primanly

invested in substantial companies listed

on the New York Stock Exchange. Vesco

and his associates allegedly caused the

funds to sell all their U.S. investments

with a value of around $224,000,000 and

invest over $120,000,000 of this money

in newly formed Costa Rican, Panamanian

and Bahamian shell corporations. It is

further alleged that m connection with his

takeover of IDS, Vesco caused a shell

company to purchase Bernard Cornfeld's

control block of 6,000,000 IDS shares for

about $5,500,000, and made false reports

to the public and the SEC regarding this

transaction.

On September 21, 1973, the district

judge announced that he was granting

most of the preliminary relief requested

by the Commission, including the appointment of temporary receivers for the funds

and their management companies and

preliminary injunctions against Vesco and

a number of individual corporate defend.

ants associated with him. The district

judge also stated he was granting a de.

fault judgment: (a) appointing a receiver

for certain Bahamian corporate defendants controlled by the Vesco group; (b)

enjoining these defendants and defendant LeBlanc, a close associate of Vesco;

and (c) ordering LeBlanc to render an accounting for and to disgorge misappropriated fund monies.

22
Prior thereto the district court had issued certain preliminary injunctions

which were designed to maintain the

status quo. These Included a consent

order restricting new Investments by the

funds; an order freezmg $6,000,000 on

deposit in United States banks that had

originated with one of the funds; an order

freezmg $47,000,000 In bank deposrts

belonging to a closed-end real estate fund

under the control of the Vesco group;

and an order restraining the disposition

of substantial real estate assets in this

country.

The Commission has been working

closely with other government regulatory

authorities, particularly the Banking

Commissioner of Luxembourg, the Ontario and Quebec Securities Commissions and the Canadian government in a

concerted effort to protect investors in

the lOS world-wide enterprise. A cooperative program designed to recover and

protect the assets of the funds and to

achieve an orderly liquidation is presently

underway.

In April 1973, the Commission filed an

action against Equity Funding Corporation

of America seeking an injunction and the

appointment of a new board of directors

and a special investigative counsel in a

case which involves one of the most massive frauds ever perpetrated on the investing pubhc." The essence of the fraud was

Equity Funding's creation and maintenance of nonexistent insurance policies,

and its sale of those policies to reinsurers

for immediate cash. The most recent estimates are that over $2 billion of the approximately $3 billion face amount of life

insurance purportedly written by a life insurance subsrdiary of Equrty Funding was

fictitious. Elaborately falsified records and

reports were made regarding non-existent

Insureds, as well as non-existent assets

and earnings.

The Commission obtained an injunction and Equlty Funding's board resigned.

Subsequently, the company filed a petition for reorganization under Chapter X of

the Bankruptcy Act, and the Commission

IS participating in the reorganization proceeding. In addition, its investigation is

continuing along with investigations by

other state and federal law enforcement

and regulatory agencies. The investrganons have a twofold purpose; to gather

information in order to hold the wrongdoers accountable in Civil and/or criminal

proceedings, and to determine whether

there are areas In which the laws (State or

Federal or both) should be changed to

make It less likely that this type of situation Will recur.

In May 1973, the Commission instituted an Injunctive action In the United

States District Court for the Southern Dis.

trict of New York charging Weis Secunties, Inc., a member firm of the New York

Stock Exchange, and certain associated

persons with violations of antifraud and

other provisrons of the Federal secunties

laws."

The Commission charged that Weis

failed to disclose to its customers, brokerdealers and the investing public ItS serious flnancral problems, particularly the

fact that It had engaged In business while

not in compliance with the Exchange's financial responsibility rules. The com.

plaint also alleged that the firm's serious

financial problems had been masked by a

deliberate falsification of its books and

records and flnancrat reports.

In addition to seeking an injunction

against each of the defendants, the Commission requested the appointment of a

temporary receiver of Wels's assets and

books and records in order to ascertain

the firm's true financial condition and to

obtain a report as to measures necessary

to protect the Investing public. On May 3D,

1973, the court, pursuant to the provrsions of the Securities Investor Protection

Act, appointed a trustee for Wels. On June

It permanently enjomed the firm, with its

consent, from further Violations.

On July 16, 1973, a Federal grand jury

in New York City returned indictments

against individual defendants in the Weis

injunctive action in connection with the

alleged falsification of Weis's books and

records. Among other things, the Indict.

ment alleged that the defendants caused

a false financial report to be filed with

23
the Commission which showed a $1.7

million profit forWeis in fiscal 1972, when

In fact the firm had lost more than $1.5

million. The defendants were also charged

with mailing false financial statements to

the firm's customers, and Arthur Levine,

Weis's chairman, was charged with

falsely stating under oath that the 1972

financial report was, to the best of his

knowledge, true and correct."

All of the defendants pleaded not guilty

to the charges.

In June 1973, the Commission ordered

public administrative proceedingsagainst

Memll Lynch, Pierce, Fenner and Srmth,

Inc., persons in its research department

and 47 account executives, arising from

the sale to approximately 4,000 Memll

Lynch customers of more than 400,000

shares of Scientrfrc Control Corporation

at prices ranging from $24 to $70.

The proceedings are based upon staff

allegations that Mernll Lynch prepared

research reports and wire flashes recommending SCientific stock which were misleading and Without a reasonable basis.

Much of the information on which the recommendation was based allegedly

emanated from SCientific'Smanagement

and was not verified through independent

analysis or inquiry. The order allegesthat

Mernll Lynch failed to conduct a diligent

analysis of, among other things, the financial condition, business actrvitres and

prospects of Scientific.

It is further alleged that, in the offer

and sale of Sclentrfrc stock, the 47 account executives made a series of material misstatements and omissions concerning, among other things, projections

of the future price of Scientific shares,

the likelihood of the shares being listed

on a national securities exchange, and

comparisons of Scientrftc With highly successful and well established companies

in the computer industry."

NEW OFFICE OF REGISTRATIONS

AND REPORTS

On October 29, 1972, the Commission

created the Office of Registrations and

Reports (ORR) in order to concentrate in

a single organization the receipt, initial

24

examination and distribution of over

150,000 filings and reports received by

the Commission annually.

ORR IS also responsible for performrng the substantive examination of (1)

ownership ("Insider") reports, (2) reports of sales of unregistered stock pursuant to Rule 144, and (3) applications

for registration as a broker-dealer or investment adviser (and amendments to

such applications). In addition, ORR is

responsible for analyzing and responding to investor complaints; extracting

data from all filings for computer input;

preparing certain data-basedpublications

and directones: and determining which

registrants are delinquent In filing required reports.

Since It was established, ORR has

made Significant progress toward the

goals set by the Commission which include (1) one-stop service to the filing

public; (2) the elimination of duplicative effort; (3) a unified system of processing; (4) the assignment of personnel

to areas of peak workload; (5) streamlined computer input; (6) prompt service to operating divrsrons, regional offices

and other staff offices; and (7) a single

authontative source of information respecting the processing of all filings and

reports.

NOTES TO PART 1

1 38th Annual Report, pn 7-10.

'H. Doc. No. 92-231, 92d Cong., 1st

Sess. (1971). See 38th Annual Report,

pp 4-5.

'Securities Exchange Act Release No.

10088, 1 SECDocket No. 11, p. 9.

Securities Industry Study, Report of

the Subcommittee on Securities of the

Senate Committee on Banking, HOUSing

and Urban Affairs, 93rd Cong., 1st Sess.

(Comm. Print, 1973); Securities Industry

Study, Report of the Subcommittee on Commerce and Finance of the House

Committee on Interstate and Foreign

Commerce,H. R. Reo.No.92-1519, 92nd

Cong., 2d Sess. (1972).

5 Securities Exchange Act Release No.

10383,2 SECDocket 425. o Securities ExchangeAct Release No.

10147,1 SECDocket No. 16, p. 3. 1Securities ExchangeAct Release No.

10246, 2 SECDocket 39.

8 See H. R. Rep. No. 1383, 73d Cong.,

2d Sess. 15 (1934).

•
The so-called "parent test:' employed

by a number of exchanges, required that

the "parent" of any exchange member

have as its primary purpose the transaction of business as a broker or dealer in

secunties. 10 Secuntres ExchangeAct Release No.

9716. 11 See Securities ExchangeAct Release

No. 9950.

"The term "affrhated person" is defined in the rule to include, among others,

"any person directly or indirectly controlling, controlled by or under common

control with such member, whether by

contractual arrangement or otherwise

"

13 PBW Stock Exchange, Inc. v. S.E.C.,

C.A. 3, No. 73-1116 (February 8, 1973);

EqUIty Servrces,Inc. v. S.E_C.,C.A.3, No.

73-1165 (February 20, 1973); Connecticut Nutmeg Securities, Inc. v. S.E.C.,

C.A. D.C., No. 73-1233 (March 6, 1973);

Robert I. Berdon v. S.E.C.,C.A. D.C., No.

73-1240 (March 7, 1973). By order dated

Apnl 2, 1973, the two actions filed in the

District of Columbia Circuit were transferred by that Court to the United States

Court of Appeals for the Third Circuit and

consolidated with the actions pending

there. In addrtion to the petitioners, a number of persons and organizations,

including the Antitrust Divisron of the

Department of Justice and the states of

Pennsylvania, Ohio, Oregon and Kansas,

filed briefs generally supporting the

petitioners.

Securities ExchangeAct ReleaseNo.

10052 (March 22, 1973), 1 SEC Docket

No.8, p. 3.

SeeSecunties ExchangeAct Release

No. 9850 (November 8, 1972).

re Securitres ExchangeAct ReleaseNo.

10218 (June 13, 1973), 1 SECDocket No.

20, p. 6.

11 The CBOE's application for registration was granted on February I, 1973

and became effective on April 26.

18 The term "call option" refers to a

contract whereby the seller of the option,

for a certain sum of money, grants to the

buyer of the option the irrevocable nght

to demand, within a specified time, the

delivery by the seller of a specified number of shares of a stock at a frxed price.

,. Securities Act Release No. 5383

(April 9, 1973) (1 SEC Docket No, 11,

p. 3) adopted new Rule 457(k) under the

Act relative to the registration fee required for put and call options traded on

a national securities exchange and registered by such exchange.

::0 United States v, Chicago Board Options Exchange, Inc., N.D. III., No. 73C

1085.

ei For example, the Commission has

amended ExchangeAct Rule 3a11-1 to

make It clear that the term "equity se- cunty," for purposes of the Act, Includes

put and call options. See Securrtres Exchange Act ReleaseNo. 10129 (Apnl 27,

1973), 1 SEC Docket No. 13, p. 7. ee Securities ExchangeAct ReleaseNo.

9930. ea Securities Act Release No. 5366, 1

SEC Docket No.2, p, 2.

Securities ExchangeAct ReleaseNo.

9994, 1 SEC Docket No.2, p. 6.

so SeeStudy of the Securities Industry,

Heanngs Before the Subcommittee on

Commerce and Finance of the House

Committee on Interstate and Foreign

Commerce, 92d Cong., 1st and 2d Sess,

Parts 1-9 (1971, 1972).

'0 H. R. Rep. No. 92-1519, 92d Cong.,

2d Sess.(Oct. 4, 1972).

,.,S.2058 was passed by the Senate on

JulX 30, 1973.

Rosenfeld v. Black, 445 F. 2d 337

(CA 2, 1971).

ea Securities ExchangeAct Release No.

10260 (July 2, 1973), 2 SECDocket82. 30 Secunties Act Release Nos. 5395

through 5398 (June 1, 1973), 1 SEC

Docket No. 18, pp 1-20.

31 Securities Act ReleaseNo. 5335 (November 24, 1972).

32 Securities ExchangeAct ReleaseNo.

9844 (November 1, 1972). sa SecuritiesAct ReleaseNo. 5362 (February 2, 1973), 1 SECDocket No_1, p. 4.

SecuritiesAct ReleaseNo. 5306 (September 26, 1972).

ss SecuritiesAct ReleaseNo. 5307 (September 27, 1972).

36 Securities Act R'elease No. 5403

(June 14, 1973), 1 SEC Docket No. 20,

p. 1.

37 See35th Annual Report, p, 21.

38 Securities Act ReleaseNo_5316 (October 6, 1972).

Securities Act ReleaseNo. 5336 (November 28, 1972).

40 SecuritiesAct ReleaseNo. 5349 (January 8, 1973).

"Securities Act Release Nos. 5342

through 5344 (December 18, 1972).

Securities Act ReleaseNo. 5347 (January 4, 1973).

43 Securities Act Release No. 5382

Apnl 9, 1973), 1 SECDocket No. 11, p. 1.

See Securities ExchangeAct Release

No. 10172, (May 23, 1973) 1 SECDocket

No. 17, p. 11.

<5 Investment CompanyAct ReleaseNo.

7475 (November 3, 1972).

4. Secunties Act ReleaseNos. 5360 and

5361. 47 Investment CompanyAct ReleaseNo.

8000 (September 20, 1973), 2 SEC

Docket 481.

25

•

"'

""

"

"

'"

"

"
.. Securities Act Release No. 5413 (August 2, 1973), 2 SEC Docket 218. •• Investment Company Act Release No.

7751 (April 3, 1973), 1 SEC Docket No.

10, p. -14.

GO H. R. 8256 (93d Cong., 1st Sess.).

61 See Securities Exchange Act Release

Nos. 10252 (June 28, 1973) and 10261

(July 2, 1973),2 SECDocket 70 and 87.

26

5' 72 Civ. 500l.

53 73 Civ. 714 (C.D. Cal.).

50 See Litigation Release No. 5906 (May

25, 1973), 1 SEC Docket No. 18. p. 5l.

55 See Litigation Release No. 5988 (July

23, 1973), 2 SEC Docket 209.

56 Securities Exchange Act Release No.

10233 (June 22, 1973), 2 SEC Docket 9.


Part 2

The Disclosure

System

A basic purpose of the Federal securities laws is to provide disclosure of material financial and other information on

companies seeking to raise capital

through the public offering of their secunties, as well as companies whose

securities are already publicly held. This

aims at enabling Investors to evaluate the

securities of these companies on an informed and realistic basis.

The Securities Act of 1933 generally

requires that before securities may be offered to the public a registration statement must be filed with the Cornrrussron

disclosing prescribed categories of information. Before the sale of securities can

begin, the registratton statement must

become "effective." In the sales, investors must be furnished a prospectus containing the most significant information

in the registration statement.

The Securities Exchange Act of 1934

deals in large part with securities already

outstanding and requires the registration of securities listed on a national securities exchange, as well as over-thecounter securities in which there is a substantial public interest. Issuers of registered securities must file annual and

other periodrc reports designed to provide a public file of current material information. The Exchange Act also requires disclosure of material information

to holders of registered securrties in solicitations of proxies for the election of directors or approval of corporate action at

a stockholders' meeting, or in attempts

to acquire control of a company through

a tender offer or other planned stock acquisition. It provides that insiders of companies whose equity secunties are registered must report their holdings and

transactions in all equity securities of

their companies.

PUBLIC OFFERING: THE 1933

SECURITIES ACT

The baSICconcept underlying the Securities Act's registration requirements is

full disclosure. The Commission has no

authority to pass on the merits of the secunties to be offered or on the fairness

of the terms of distribution. If adequate

and accurate disclosure is made, It cannot deny registration. The Act makes It

unlawful to represent to Investors that the

Cornrnrssron has approved or otherwise

passed on the merits of registered securities.

Information Provided

While the Secunties Act specifres the

information to be included In registration

statements, the Commission has the authority to prescnbe appropriate forms and

to vary the particular Items of information required to be disclosed. To facrhtate the registratron of securities by different types of issuers, the Cornrnissron

has adopted special registration forms

which vary in their disclosure requirements so as to provide maximum dis29
closure of the essential facts pertinent in

a given type of offering while at the same

time minimizing the burden and expense

of compliance with the law. In recent

years, It has adopted certain short forms,

notably Forms S-7 and S-16, which do

not require disclosure of matters already

covered in reports and proxy material

filed or distributed under provisions of the

Securities Exchange Act. During the last

year, certain amendments were made to

Form S-16 to clanfy the disclosure required, and to expand the situations In

which the form may be used.

Reviewing Process

Registration statements frled with the

Cornrrussion are examined by Its Division

of Corporation Finance for compliance

with the standards of adequate and accurate disclosure Various degrees of review procedures are employed by the

Division. While most deficiencies are corrected through an Informal letter of comment procedure, where the Commission

finds that material representations In a

registration statement are rrusleading, inaccurate, or incomplete, It may, after notice and opportunity for heanng, Issue a

"stop-order" suspending the effectiveness of the statement.

Environment and Civil Rights

As discussed in last year's Annual Report 7 the Commission has taken certain

actions to require disclosure of civil

rights and environmental matters which

may have a matenal impact upon an issuer's business. A guideline release' issued In July 1971 stated that the disclosure requirements of the forms and

rules under the Securrtres Act and the

Exchange Act relative to legal proceedings and description of business are interpreted to include matenal environmental

and Civil nghts matters. That release remains in effect with respect to disclosure

of civil rights matters.

With respect to environmental matters, the Commission, In February 1972,

stated that it was considering amendments to some registratron and report

30

forms. These would require, as a part

of the descriptron of an issuer's business,

appropriate disclosure of the material

effects which compliance with environmental laws and regulations could have

on the capital expenditures, earnings and

competitive posrtlon of an issuer and its

subsidiaries Information would also be

required on pending government, and

private enforcement proceedings under

environmental laws or regulations, and

any such proceedings contemplated by

government authorities. Upon review of

the letters of comment received on the

proposals, the Cornrnissron adopted the

amendments, effective July 3, 1973.'"

Apart from disclosure of environmental

matters, the amendments also reduced

from 15 to 10 percent of current assets

the standard of materiality With respect

to disclosure of legal proceedings involving pnrnanly a claim for damages.

In Natural Resources Defense Council, Inc. v. SEC., 7 the petitioners had previously sought direct review in the Court

of Appeals for the District of Columbia

Crrcuit of the Cornrnissron's denial of

their request that It adopt amendments

to ItS rules to conform them to what the

petitioners claimed to be the requirements of the National Environmental PolICy Act [NEPAl" The court of appeals drsmissed the petition, holding that the

Commission's actron In declining to

adopt the requested rules was not a final

order subject to review In a court of appeals under the review provisions of the

Securities Act or the Exchange Act. It also

stated that whether the Commission had

improperly delayed action under NEPA or

had Improperly interpreted that Act were

Issues that could be resolved in a United

States District Court.

Subsequently, the petitioners brought

SUIt in the United States District Court

for the Drstnct of Columbia' seeking,

among other things, to compel the Comrnrssron to complete the review it was

then conducting to determine whether

ItS rules and regulations should be

amended In light of the enactment of

NEPA. Shortly thereafter, the Commission completed its review, and as noted

'

~
above, adopted amendments to its forms

and reports to comply with the mandates of NEPA.The petitioners promptly

petitioned the Court of Appeals for the

District of Columbia Circuit to review the

sufficiency of the Commission's amendments. That action 8 is presently pending,

and petitioners' motion to stay the district court proceedings pending appellate

review was granted by the district court.

Foreign Offerings

In February 1973, the Commission

adopted Rule 434C under the Securities

Act to permit United States issuers offering their secunties simultaneously in

Japan and the United States to use a different prospectus in each country, each

prospectus complying with local law."

Thrs rule was born of the fact that Japan

requires offerings in that country to be

made by a prospectus which differs in

form and content from that required by

the Securities Act. ThUS,the rule recognizes both the appeal of the United States

capital markets to Japanese investors.

and Japan's interest in regulating its own

securities markets.

Time for Registration

The Commission's staff tries to complete examination of registration statements as quickly as possible. The Securities Act provides that a registration

statement shall become effective on the

20th day after it ISfiled (or on the 20th

day after the filing of any amendment).

Most registration statements require one

or more amendments and do not become

effective until some time after the statutory 20-day period. The period between

filing and effective date is Intended to

give investors an opportunity to become

familiar with the proposed offering

through the dissemination of the preliminary form of prospectus.The Commission

can accelerate the effective date to

shorten the 20-daywaiting period-taking

into account, among other things, the

adequacyof the information on the Issuer

already available to the public and the

ease with which facts about the offering

can be understood.

During the 1973 fiscal year, 3,281 registration statements becameeffective. Of

these, 192 were amendments filed by investment companies pursuant to Section

24(e) of the Investment Company Act

of 1940, which provides for the registration of additional securities through

amendment to an effectrve registration

statement rather than the filing of a new

registration statement. Forthe remaining

3,089 statements, the median number of

calendar days between the date of the

original filing and the effective date was

4l.

Organizational Changes

Duringthe past fiscal year,the Division

of Corporation Finance completed certain orgarnzatlonaland personnelchanges

necessitated In part by the Cornrrussron's

reorganization of August 1972." These

changes Involved disclosure procedures

with respect to Investment companies,

and the creation within the Division of

Offices of DIsclosure Policy and Proceed.

ings and International CorporateFinance.

Investment Company Disclosure

Policy and Procedure

Beginning with the assumption of its

responsrbrutresfor investment company

disclosure, resulting from the Cornrmssion's reorganizatron, the Dtvision commenced a study of the substance, use,

and review of Investment company prospectuses and other filings. While this

study IS not yet complete and many of

ItS findings will not be made public until

fiscal 1974, some Significant steps were

taken.

In September 1972, the Commission

published the Divrsron's procedures for

processing investment company posteffective amendments." Theseprocedures

were designed to curtail the amount of

time spent in review,and to separatematters of disclosure from matters of regulatory policy under the Investment Company Act during the review process.

This latter objective is reflected In the

report of the Advisory Committee on

Investment Companies and Advisers

submitted to the Commission on Decem31
ber 29, 1972, which included recommendations for a simplified prospectus

and an integrated reporting system. As a

result of these recommendations and its

own independent judgment, the Division

is considering a new registration form

which will completely supplant those presently in use.

In addition, to make prospectuses more

readable and understandable through visual aids and otherwise, the Commission

made clear, during the past year, that investment company Issuers could include

in their prospectuses "sales literature" as

defined in the Cornrnission's Statement

of Policy."

The nature of investment companies

which filed and had their registration

statements declared effective during the

past year IS indicative of both the economy and of the types of business to which

capital IScurrently allocated by Investors.

As a result of current interest rates, bond

funds, primarily of the closed-end, management type, registered and offered to

the public securities having a total offering price of over $2 billion. A substantial

number of these companies were sponsored and managed by Insurance companies or bank affiliates.

Secondly, a number of Investment

companies registered during the year proposed to engage substantially, if not exclusively, in real estate related investments. One such company, the BacheHuntoon Paige Ginny Mae Trust Series 1,

is a unit investment trust whose units

represent an undivided fractional interest in a portfolio consisting of Ginny Mae

securities These mortgage. backed securities are guaranteed as to pnncipal

and interest by the Government National

Mortgage Assocratron, The REIT Income

Fund, Inc. registered as a closed-end diversified company with a leveraged capital structure. This company offered approximately 1.4 million common shares

and 215,000 cumulative preference

shares, and invested a substantial

amount of the proceeds of this offenng

in secunties issued by real estate investment trusts.

Finally, during the past year the Ministry of Finance of Japan amended its ordinance on foreign investment to permit

American investment companies to offer their shares in Japan and invest the

proceeds of their offenngs in United

States Issuers. The Ministry of Finance

required that such investment companies register under the Securities Act of

1933 and the Investment Company Act of

1940, as well as the applicable Japanese

securities laws. As a result of the change

in this ordinance, Merrill Lynch, Pierce,

Fenner and Smith formed an underwnting

syndicate With Nomura Secunties Co.,

Ltd. to sell in Japan shares of Fundamerica of Japan, Inc. Further, IDS New

DImensions Fund, Inc. and the Dreyfus

Fund, Inc., through their principal underwnters, offered their shares for the first

time in Japan.

Office of Disclosure Policy

and Proceedings

In October 1972, the Cornrrusslon created the Office of Disclosure Policy and

Proceedings Within the Division. ThIS Of.

fice has the responsibility for the continuous review and necessary revision of rnajor disclosure pohcy, rules and regulanons in the light of changing economic

condrtions, and for developing methods

to anticipate drsclosure problems and

deal With them In their incipiency. This

Offrce Will also conduct informal and

formal fact finding and analytical studies

and proceedings (public and private) as a

basis for proposed new rules or proposed

amendments to existing rules.

Office of International

Corporate Finance

In recogrution of the increased internationalization of capital markets and the

secunties business, the Commission in

January 1973 established the Office of

International Corporate Finance Within the

DIVision. The establishment of the Office

also conforms to the Commission's recent policy of structural organization

along functional and specialized lines or

areas of responsrbrlrty.

32
This Office is responsible for administration of the securities laws in situations

involvtng:

1. offerings by U.S. companies of registered securities to foreign investors;

2. offerings by foreign issuers of registered securities to U.S. investors;

3. financial reporting by foreign issuers

under the ExchangeAct;

4. promulgation of special Securities

Act registration forms and rules for U.S.

issuers, including investment companies,

who offer their securities in foreign markets;

5. offerings of American Depositary Receipts to U.S. investors;

6. development of guidelines as to

when securities recently issued by foreign

Issuers and not registered under the Securities Act may be traded by U.S. brokerdealers in this country in reliance upon

the exemptions of Sections 4(3) and 4(4)

of the Act;

7. development of guidelines as to

when offerings by U.S. issuers to foreign

investors must be registered;

8. development of specialized forms,

rules or regulations to encourage and facilitate the handling of offerings Originating abroad or to be sold abroad;

9. the resolution of disclosure problems which may arise as a result of differ .

ences in disclosure, financial reporting

and auditing requirements of various junsdictlons: and

10. a centralized collation of information on international capital markets.

Oil and Gas

In April 1971, the Dlvisron assigned to

its 011 and Gas Section processing responsibility for all oil and gas dnlling program filings as well as filings on Form

5-10 covering fractional undivided interests in 011 and gas rights. This assignment was the first attempt by the Division

to concentrate all filings of one industry

type in one processing unit. The result

has been an improved handling of the

registrations and more unrform and complete disclosure. Filed during the fiscal

year were 105 registration statements

for oil and gas drilling programs, totaling

$894 million, and 10 statements covering

fractional undivided interests in oil and

gas rights, aggregating $7.4 million.

Additional data regardingthe types and

amounts of oil and gas filings IS contained

in the Information in thrs Part relating to

Regulation B.

Tax Shelters

In February 1972, a branch of the DIvision of Corporation Finance was designated to process all registration statements covering tax shelter programs other

than oil and gas and real estate invest.

ment trusts. These programs Include real

estate syndications, condominiums with

an investment feature, cattle feeding, cattle breeding and citrus and pistachio

groves and other agn-business.

The disclosure generally emphasizedIn

tax shelter registration statements has included the compensation paid or to be

paid to the program sponsors, the conflicts ot Interest inherent in such offerings, the record of the general partner

in prior offerings of tax shelter investments, a delineation of Investment objectives for the program to be offered,

and the effect of Federal tax provisions.

In real estate syndications, the trend

continues to be strongly in the direction

of "blind pool" programs-I.e., programs

with either no properties specified for

purchase or construction programs with

no economic history upon which to base

an investment decision.

The U.S. Department of the Treasury,

on April 30, 1973, submitted a number

of proposals for tax change in this area

to the Congress.The potential Impact of

these proposals on the number or types

of filings in the tax shelter area cannot be

assessedat thrs time.

In July 1973, the Division reorganized

the non-oil and gas tax shelter registration statement processing responsibility

into a two branch function With one

branch havmg responsibility for cattle

feeding and breeding, agn-business, and

condominium offerings, and the second

branch having responsibility for real estate and the other miscellaneoustax shelters. A third branch has processing re33
sponsrbllity for all 011and gas tax shelter

offerings.

Seethe discussion in Part 1 under the

heading "Real Estate Matters" for a deSCription of certain releases relating to

condominiums and real estate units.

SMALL ISSUE EXEMPTION

The Commission is authorized under

Section 3(b) of the Securities Act to exempt securities from registration if it

finds that registration for these securities

is not necessaryto the public interest because of the small amount offered or the

limited character of the public offering.

The law Imposes a maximum lirnitatron

of $500,000 upon the size of the Issues

which may be exempted by the Commission.

The Commission has adopted the following exemptive rules and regulations:

RegulationA: Generalexemption for

U.S. and Canadian issues up to

$500,000.

Regulation B. Exemption for fractional undivided interests in 011 or

gas rights up to $250,000.

Regulation F. Exemption for assessments on assessablestock and for

assessable stock offered or sold

to realize the amount of assessment up to $300,000.

Rules 234-236: Exernpions of first

lien notes, securities of cooperative housing corporations, and

shares offered in connection with

certain transactions.

Under Section 3(c) of the Securities

Act, the Commission IS authorized to

adopt rules and regulations exempting secunties issued by a small business investment company under the Small Business Investment Act.The Commission has

adopted RegulationE,which conditionally

exempts such securities issued by companies registered under the Investment

Company Act of 1940 up to a maximum

offering price of $500,000. The regulation

IS substantially similar to Regulation A,

described below.

Regulation A

RegulationA permits a company to obtain needed capital not in excess of

$500,000 (including underwriting commissions) in anyone year from a public

offering of ItS securities Without registration, provided specified conditions are

met. Among other things, a notification

and offering circular supplying basic information about the company and the

securities offered must be filed with the

Cornrnissron and the offering Circular

must be used in the offering. In addition,

RegulationA permits selling shareholders

not in a control relationship with the issuerto offer In the aggregateup to $300,-

000 of securrties which would not be included in computing the issuer's $500,-

000 ceiling. During the fiscal year, the

Commission amended Regulation A, effective August I, 1973, to require, in the

case of new ventures, delivery of the offering circular to prospective purchasers

48 hours in advance of the mailing of a

confirmation of sale. The Regulation was

also amended to require dealers trading

in securities offered under the Regulation

where the issuers are not subject to the

reporting requirements of the Exchange

Act, to deliver an offering circular for a

period of 90 days after commencement

of the offering to any purchaser who has

not previously received one.

During the 1973 fiscal year, 817 notifications were filed under Regulation A

covering proposedofferings of $298,634,-

215 compared with 1,087 notifications

covering proposed offerings of $404 million in the prior year. A total of 578 reports of sales were filed reporting aggregate sales of $106,395,501. Such reports

must be filed every 6 months while an

offering is in progress and upon its termination. Sales reported during fiscal

1972 had totaled $107 million. Various

features of RegulationA offerings overthe

past 3 years are presented In the statistical section of this report.

In fiscal 1973, the Commission temporarily suspended Regulation A exernptions With respect to 20 issuers where it

had reasonto believethere had been non34
compliance with the conditions of the

regulation or with the disclosure standards, or where the exemption was not

available for the securities. Added to 19

cases pending at the beginning of the

fiscal year, this resulted in a total of 39

cases for disposition. Of these the temporary suspension order became permanent in 20 cases: in 7 by lapse of time, in

4 cases after hearings, and in 9 by acceptance of an offer of settlement. In one

case the temporary suspension order was

vacated. Eighteen cases were pending at

the end of the fiscal year.

Regulation B

During the 1973 fiscal year, 725 offering sheets and 1,020 amendments

thereto were filed pursuant to Regulation

B and were examined by the Oil and Gas

Section of the Division of Corporation Finance. During the 1972 and 1971 fiscal

years, 1,124 and 941 offering sheets, respectively, were filed. A total of 17,076

sales reports were filed during the year,

reporting aggregate sales of $29.8 million. Sales during the preceding year had

totaled $21 million.

Major revisions of Regulation B rules

were adopted by the Commission and became effective January 1, 1973." Several

were made because of changes In economic and industry conditions and because of abuses in past selling practices.

The revisions included an increase in the

dollar amount of the offering exempted

from $100,000 to $250,000; a restriction

on the use of sales literature and other

forms of advertising; a requirement that

the offering sheet be delivered 48 hours

before any sale is made; a denial of the

exemption to any person where he or

certain related persons have been in.

volved in violations of the Federal securities laws in connection with the sale

of securities; a revision of the suspension procedure; and a requirement for a

report to be made to the participants as

to the results of the offering.

The Regulation B rules have not been

revised significantly since 1937. The present revisions enable filings under this

regulation to meet present economic

conditions in a realistic manner.

Regulation F

During the 1973 fiscal year, 15 notifications were filed under Regulation F, covering assessments of stock of $408,374,

compared With 17 notifications covering

assessments of $398,025 in 1972.

CONTINUING DISCLOSURE: THE

1934 SECURITIES EXCHANGE ACT

The secuntles Exchange Act of 1934

contains significant disclosure provrsions

designed to provide a fund of current material Information on companies in whose

securities there IS a substantial public interest. The Act also seeks to assure that

security holders who are solicited to exercise their voting rights, or to sell their

securities in response to a tender offer,

are furnished pertinent information.

Registration on Exchanges

Generally speaking, a security cannot

be traded on a national securities exchange until it is registered under Section 12(b) of the Exchange Act. If it

meets the listing requirements of the

particular exchange, an issuer may register a class of securities on the exchange

by filing with the Commission and the exchange an application which discloses

pertinent information concerning the issuer and its affairs. During fiscal 1973, a

total of 239 Issuers listed and registered

securities on a national securities exchange for the first time and a total of

523 registration applications were filed.

The registrations of all securities of 141

issuers were terminated. Detailed statistics regarding securities traded on exchanges may be found in the statistical

section.

Over-the-Counter Registration

Section 12(g) of the Exchange Act requires a company with total assets exceeding $1 million and a class of equity

securities held of record by 500 or more

persons to register those securities with

the Commission, unless one of the ex35
emptions set forth in that section is available or the Commission issues an exemptive order under Section 12(h). Upon registration, the reporting and other disclosure requirements and the Insider trading provrsions of the Act apply to these

companies to the same extent as to those

with securities registered on exchanges.

During the fiscal year, 908 registration

statements were ftled under Section 12

(g). Of these, 626 were filed by issuers

already subject to the reporting requirements, either because they had another

security registered on an exchange orthey

had registered secuntres under the Securities Act.

Exemptions

Section 12(h) of the Act authorizes the

Commission to grant a complete or partial

exemption from the registration provisions of Section 12(g) or from other disclosure and Insider trading provisrons of

the Act where It is not contrary to the

public interest or the protection of investors.

At the beginning of the fiscal year, 12

exemption applications were pending, and

12 applications were filed during the year.

Of these 24 applications, 3 were withdrawn, 2 were granted, and 1 denied. The

remaining 18 applications were pending

at the end of the fiscal year.

Periodic Reports

Section 13 of the Securities Exchange

Act requires issuers of securities registered pursuant to Sections 12(b) and 12

(g) to file penodic reports, keeping current the information contained in the registratron application or statement. From

time to time, the Cornrnissron has ISsued statements calling attention to registrants' obligation to report current

events and explaining procedures to be

followed In certain unusual types of situations. For example, on June 30, 1972,

the Commission issued a release" discussing the manner In which compliance

with Section 13 may be achieved by registrants which have ceased or curtailed

operations, or have become the subject

of proceedings under Chapter X of the

Bankruptcy Act. Also, during the 1973

fiscal year, the Cornrnissron issued a release 16 expressing concern as to issuers'

failure to file periodic and current reports

timely and properly. The release discusses

the possible actions available to the Commission In the event of non-compliance

with these reporting provisions, and advises registrants of the means for requesting an extension of time.

In 1973, 49,596 reports-annual,

quarterly and current-were filed.

Proxy Solicitations

Where proxies are solicited from holders of securities registered under Section 12 or from security holders of registered public-utility holding companies,

subsidiaries of holding companies, or

registered Investment companies, the

Commission's proxy regulation requires

that disclosure be made of all matenal

facts concerning the matters on which

the security holders are asked to vote, and

that they be afforded an opportunity to

vote "yes" or "no" on any matter other

than the election of directors. Where

management is soliciting proxies, a security holder desiring to communicate

with the other security holders may require management to furnish him with a

list of all security holders or to mail his

communication for him. A security holder

may also, subject to certain limitations,

require the management to include in

proxy material an appropriate proposal

which he wants to submit to a vote of

secunty holders, or he may make an independent proxy solicitation.

Copies of proposed proxy material

must be filed with the Commission in

preliminary form prior to the date of the

proposed solicitation. Where preliminary

material falls to meet the prescribed disclosure standards, the management or

other group responsible for its preparation is notified informally and given an

opportunity to correct the deficiencies in

the preparation of the definitive proxy

material to be furnished to security

holders.

36
Issuers of securities registered under

Section 12 must transmit an inforrnatron

statement comparable to proxy material

to security holders from whom proxies

are not solicited wrth respect to a stockholders' meeting.

During the 1973 fiscal year, 7,023

proxy statements in definitive form were

filed, 7,000 by management and 23 by

nonmanagement groups or lndrvidual

stockholders. In addition, 141 information statements were filed. The proxy and

information statements related to 6,820

companies, and pertained to 6,744 meetings for the election of directors, 369

special meetings not involving the election of directors, and 28 assents and

authorizations.

Aside from the election of directors,

the votes of security holders were solicited with respect to a variety of matters, including mergers, consolidations,

acqursitions, sales of assets and drssolution of companies (321); authorizations

of new or additional securities, modifications of existing secunties, and recapitalization plans (1,013): employee pension

and retirement plans (37); bonus or

profit-sharing plans and deferred compensation arrangements (261); stock option

plans (899); approval of the selection by

management of Independent auditors

(3,121) and rruscellaneous amendments

to charters and by-laws, and other mat.

ters (2,235).

During the 1973 fiscal year, 401 proposals submitted by 56 stockholders for

action at stockholders' meetings were included in the proxy statements of 224

companies. Typical of such proposals

submitted to a vote of security holders

were resolutions on amendments to charters or by-laws to provide for cumulative

voting for the election of directors, preemptive rights, limitations on the grant

of stock options to and their exercise by

key employees and management groups,

the sending of a post-meeting report to

all stockholders, and limitations on charitable contrlbutions.

A total of 264 additional proposals submitted by 87 stockholders were omitted

from the proxy statements of 117 companies In accordance with the provisions

of the rule governing such proposals. The

most common grounds for omission were

that proposals were not submitted on

time or were not accompanied by a proper

notice of intentron to present the proposals.

In fiscal 1973, 23 companies were involved In proxy contests for the election

of directors which bring special requirements into play. In these contests, 451

persons, including both management and

non management, filed detailed statements required of partrcipants under the

applicable rule. Control of the board of

directors was involved in 18 instances.

In seven of these, management retained

control. Of the remainder, six were settled by negotiation, four were won by

nonmanagement persons, and one was

pending at year end. In the other five

cases, representation on the board of directors was involved. Management retained all places on the board in one contest, opposition candidates won places on

the board in two cases, and two were

pending as of June 30, 1973.

Takeover Bids, Large Acquisitions

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

and (f) of the Secunties Exchange Act,

enacted in 1968 and amended In 1970,

provide for full disclosure in cash tender

offers and other stock acquisrtlons involving changes in ownership or control.

These provisrons were designed to close

gaps in the full disclosure provisions of

the secunties laws and to safeguard the

interests of persons who tender their securities In response to a tender offer.

During the 1973 fiscal year, 950

Schedule 130 reports were filed by persons or groups which had made acquisitions resulting In their ownership of more

than 5 percent of a class of securities.

Seventy-five such reports were filed by

persons or groups making tender offers,

which, if successful, would result in more

than 5 percent ownership. In addition, 37

Schedule 140 reports were filed on solicitations or recommendations in a tender

offer by a person other than the maker

of the offer. Ten statements were filed for

37
the replacement of a majority of the board

of directors otherwise than by stockholder

vote. Onestatement was filed under a rule

on corporate reacquisitions of securities

while an issuer IS the target of a cash

tender offer.

Insider Reporting

Section 16 of the Securities Exchange

Act and corresponding provisions in the

Public Utility Holding Company Act of

1935 and the Investment Company Act

of 1940 are designed to provide other

stockholders and investors generally with

information on insider securities transactions and holdings, and to prevent unfair use of confidential information by

Insiders to profit from short-term trading

in a company's securities.

Section 16(a) of the ExchangeAct requires every person who beneficially

owns, directly or indirectly, more than

10 percent of any class of equity security

which is registered under Section 12, or

who is a director or an officer of the

issuer of any such security, to file statements with the Commission disclosing

the amount of all equity securities of the

issuer of which he is the beneficial owner

and changes in such ownership. Copies

of such statements must be filed with exchangeson which the securities are listed.

Sirrular provisions applicable to insiders

of registered public-utility holding companies and registered closed-end investment companies are contained in the

Holding Company and Investment CompanyActs.

In fiscal 1973, 111,689 ownership reports were filed. These included 17,850

initial statements of ownership on Form

3, 87,791 statements of changes in

ownership on Form 4, and 6,048 amendments to previously filed reports.

All ownership reports are made available for public inspection when filed at

the Commission's office In Washington

and at the exchanges where copies are

filed. In addition, the information contained in reports flied With the Commission is summarized and published In the

monthly "Official Summary of Security

Transactions and Holdings," which is distributed bythe GovernmentPrinting Office

to about 11,500 subscribers.

ACCOUNTING

The securities acts reflect a recognition by Congress that dependable financial statements are Indispensable to informed investment decisions. A major

objective of the Commission has been to

Improve accounting and auditing standards and to assist in the establishment

and maintenance of high standards of

professional conduct by public accountants. The primary responsibility for this

program rests With the Chief Accountant

of the Commission.

Under the Commission's broad rulemaking power, it has adopted a basic

accounting regulation (Regulation S-X)

which, together Withopinions on accounting principles published as "Accounting

Series Releases," governs the form and

content of financial statements filed

under the securities laws. The Commission has also formulated rules on accounting and auditing of broker-dealers

and prescribed uniform systems of accounts for companies subject to the Public Utility Holding Company Act of 1935.

The accounting rules and opinions of the

Cornrnlssron,and its decisions in particular cases, have contributed to clarification and wider acceptanceof the accounting principles and practices and auditing

standards developed by the profession

and generally followed In the preparation

of financial statements.

However,the specific accounting rules

and regulations-except for the uniform

systems of accounts which are regulatory reports-prescribe accounting principles to be followed only in certain limited areas. In the large area of financial

reporting not covered by its rules, the

Commission's principal meansof protecting investors from Inadequate or improper financial reporting is by requiring

a report of an independent public accountant, basedon an audit performed in

accordance with generally accepted auditing standards, which expresses an

opinion whether the financial statements

are presented fairly in conformity with

38
accounting principles and practices that

are recognized as sound and have attained general acceptance. The requirement that the opinion be rendered by an

independent accountant, which was initially established under the Securities

Act of 1933, is designed to secure for the

benefit of public investors the detached

objectivity and the skill of a knowledgeable professional person not connected

with management.

The accounting staff reviews the financial statements filed with the Commission to insure that the required standards are observed and that the accounting and auditing procedures do not remain static in the face of changes and

new developments in financial and economic conditions. New methods of doing

business, new types of business, the combining of old businesses, the use of more

sophisticated securities, and other innovations create accounting problems

which require a constant reappraisal of

the procedures. It IS anticipated that in

fiscal 1974, a new publication senes will

be initiated. It Will provide information

to the public regarding informal admirustrative practices and gurdellnes developed

by the accounting staff with respect to

specific accounting and auditing problemsconsidered in the reviewof the financial data filed.

Relations With the Accounting

Profession

In order to keep abreast of changing

conditions, and in recognition of the need

for a continuous exchange of views and

information between the Commission's

accounting staff and outside accountants

regarding appropriate accounting and auditing pohcies, procedures and practices,

the staff maintains continurng contact

with individual accountants and various

professional organizations. The latter include the American Institute of Certified

Public Accountants (AICPA) and the Financial Accounting Standards Board

(FASB), the principal professional organizations concerned with the development and improvement of accounting and

auditing standards and practices. The

Chief Accountant also meets regularly

with his counterparts in other regulatory

agencies to improve coordination on policies and actions between the agencies.

Because of its many foreign registrants and the vast and increasing foreign operations of Amencan companies,

the Commission has an interest in the

improvement of accounting and auditing

principles and procedures on an international basis. To promote such improvement, the Chief Accountant, in October

1972, participated in the 10th International Congressof Accountants in Sydney,

Australia, and held informal discussions

with representatrves of the Ministry of

Finance in Tokyo. In March 1973, he con.

ferred with foreign accountants in Mexico City. A committee to develop baSIC

lnternatronal accounting standards was

recently formed by representatives of accountancy groups from nine countries.

The Commission Will cooperate closely

with the committee In its efforts to promote improvements.

Accounting and Auditing Standards

The FASBhas supplanted the Accounting Principles Board (APB) of the AICPA

as the orgamzatron which establishes

standards of financial accounting and

presentation for the guidance of issuers

and public accountants. A new organizational structure had been recommended

by a committee appomted by the AICPAin

early 1971 to explore ways of irnprovmg

this function. Under the new structure,

a financial accounting foundation consisting of representatives of leading professional organizations appoints the seven

members of the FASBwho serve on a salaried, full-time basis, and the members

of an Advisory Council to the Board who

serve on a voluntary basis. The Commission endorsed the new structure, which

it feels will provide operational efficiencies and insure an impartial Viewpoint in

the development of accounting standards

on a timely basis.

The Chief Accountant and the FASB

have developed liaison procedures for

39
consultation on projects of either the

Board or the SEC which are of mutual

interest. The Board has moved expeditiously in adopting an initial agenda covering seven topics which urgently require

consideration. They include accounting

for foreign currency translation, accrual

of future losses, reporting by diversified

companies, accounting for leases by

lessee and lessor, accounting for such

costs as research and development, materiality criteria, and broad qualitative

standards for financial reporting.

Another committee was appointed in

early 1971 by the AICPAto study and refine the objectives of financial statements. It has studied the basic questions

of who needs financial statements, what

information should be provided, how it

should be communicated, and how much

of it can be provided through the accounting process.The committee's conclusions

and recommendations will provide valuable guidance to the FASBin determining

the direction and future priorities of its

efforts.

During the fiscal year, the APBeffected

significant improvements in accounting

and financial reporting standards through

the issuance of seven opinions pertaining to accounting for stock issued to employees, early extinguishment of debt,

accounting for lease transactions by

manufacturer or dealer lessors, interim

financiaI reporting, accounting for nonmonetary transactions, reporting the results of operations, and disclosure of

lease commitments by lessees.The Board

or its chairman also approved for publication Accounting Guides prepared by other

committees of the AICPAon the subjects

of accounting for retail land sales, profit

recognition on sales of real estate, and

accounting for motion picture films all of

which will Improve practices in these

areas of accounting. Improvements in

auditing standards were also effected during the fiscal year by the AICPA'sissuance

of Audit GUides applicable to stock life

insurance companies, savings and loan

associations, broker-dealers, and investment companies.

Other Developments

During the fiscal year the Commission

issued 18 Accounting Series Releases to

provide interpretations or gurdelines on

matters of accounting princrples and auditing standards, to require improved disclosure of financial information by

amendment of reporting forms or Regulation S-X, or to announce decisions in disciplinary proceedings under Rule 2(e) of

the Commission's Rules of Practice concerning accountants appearing before it.

An advisory release 17 was issued which

set forth current guidelines employed by

the staff in resolving questions concerning the independence of accountants in

relation to their clients who are registrants of the Commission. Two interpretative releases18 were issued pertaining to

the applicability of pooling-of-interests accounting in certain situations connected

with Rule 145 under the Securities Act.

Other interpretative releases dealt With

the reporting of leases in financial statements of lessees," disclosure of contingent liabilities arising under the Economic

Stabilization Act of 1970,"°accounting for

catastrophe reserves," financial statements of life insurance companies," and

the reporting of cash flow and other related data."

In conjunction with the Division of Investment Management Regulation, an advisory release24 was Issueddiscussing the

development of an adequate economic

data base for mutual fund sales charges.

This release was intended to stimulate

comments during hearings on mutual

fund distribution and the potential impact of the repeal of Section 22(d) of the

Investment Company Act of 1940.

A general revision of Article 9 of Regulation S-X, pertaining to financial statements of banks and bank holding companies, was adopted"" in consonance

with major revisions made in the prior

fiscal year in several other sections of the

regulation. Subsequently, two releases"

were issued containing Interpretations of

various items in the revisions and minor

amendments to them.

40
Amendments to various registration

and reporting forms were adopted in a release to require more detailed and

timely reporting, and timely review by independent accountants, of extraordinary

or unusual charges and credits to income

or provisions for material losses effected

by registrants.

Additional proposals for amendments

to Regulation S-X were issued for public

comment which would require improved

disclosures in registrants' financial data

regarding accounting policies followed,"

components of income tax expense,"

leased assets and related lease commitments,"" and compensating balances, effective interest rates on borrowings and

other items affecting liquidity." After

comments on these proposals are received and considered, amendments to

the regulations will be issued.

In connection with administrative proceedings under Rule 2(e) of the Commission's Rules of Practice, the Commission

permanently disqualified an accountant

from practice before it," accepted the resignations of three others," and censured one accountant." In another actron." based upon the entry of a consent judgment of permanent injunction

against an accounting firm in an action

brought by the Commission, the Commission ordered that the firm be: (1) prohibited, for a period of 30 days, from accepting new professional engagements

from new clients which could be expected

to result, within a year, in filings, submissions or certifications with or to the Commission; (2) prohibited, for a specified period, from effecting any merger with or

acquisition of any other accounting firm

without first submitting to the Chief Accountant of the Commission evidence

that its procedures respecting mergers

or acquisitions are being followed; and

(3) required to permit an investigation to

ascertain whether it is conducting its professional practice in compliance with the

standards and procedures required by

the injunction.

EXEMPTIONS FOR

INTERNATIONAL BANKS

Section 15 of the Bretton WoodsAgreement Act, as amended, exempts from registration securities Issued, or guaranteed

as to both principal and interest, by the

International Bank for Reconstruction

and Development. The Bank IS required

to file with the Commission such annual

and other reports on securities as the

Commission determines to be appropriate. The Commission has adopted rules

requiring the Bank to file quarterly reports

and copies of annual reports of the Bank

to its Board of Governors. The Bank is

also required to file advance reports of

any distribution in the United States of

its primary obligations. The Commission,

acting in consultation With the National

Advisory Board on International Monetary

and Financial Problems, is authorized to

suspend the exemption for securities issued or guaranteed by the Bank. The following summary of the Bank's activities

reflects information obtained from the

Bank. Except where otherwise indicated,

all amounts are expressed In U.S. dollar

equivalents as of June 3D, 1973.

Net income for the year was $186 million, compared With $183 million the previous year. At July 31,1973, the Bank had

taken no action regarding disposition of

its net income for fiscal 1973.

Repayments of principal on loans received by the Bank dUring the year

amounted to $455 million, and a further

$123 million was repaid to purchasers of

portions of loans. Total principal repayments by borrowers through June 3D,

1973, aggregated $5.3 billion, including

$3.3 billion repaid to the Bank and $2

billion repaid to purchasers of borrowers'

obligations sold by the Bank.

Outstanding borrowings of the Bank

were $8.9 billion at June 3D, 1973. During

the year, the bank borrowed $440 million

through the Issuanceof 2.year U.S.dollar

bonds to central banks and other governmental agencies in some 60 countnes; D. M. 1.2 billion (U.S. $371 million) in Germany; 180 billion yen (U.S.

$605 million) in Japan; SwF 100 million

(U.S. $31 million) in Switzerland; KD27.5

41

"
million (U.S. $84 million) in Kuwait; and

the equivalent of U.S. $153 million in

other countries outside the United States.

The above U.S. dollar equivalents are

based on officral exchange rates at the

times of the respective borrowings. The

Bank also issued $10 million in bonds

that had been sold in previous years under delayed delivery contracts.

These borrowings, in part, refunded

maturing Issues amounting to the equivalent of $518 million. After retirement of

$60 million equivalent of obligations

through sinking fund and purchase fund

operations, the Bank's outstanding borrowings showed an increase of $1.9 billion

from the previous year, of which $1 billion represented appreciation in terms of

U.S. dollars of the value of the non-dollar

currencies in which the debt was denommated.

The Inter-American Development Bank

Act, which authorizes the United States to

participate in the Inter-American Development Bank, provides an exemption for

certain secunties which may be issued

or guaranteed by the Bank similar to

that provided for securities of the International Bank for Reconstruction and

Development. Acting pursuant to this authorrty, the Commission adopted Regulation lA, which requires the Bank to file

with the Commission substantially the

same type of information, documents and

reports as are required from the International Bank for R'econstruction and Development. The following data reflects information submitted by the Bank to the

Commission.

On June 30, 1973, the outstanding

funded debt of the Ordinary Capital resources of the Bank was the equivalent of

$1.3 billion, reflecting a net increase in

the past year of the equivalent of $230

million. During the year, the funded

debt was increased through public bond

issues totaling the equivalent of $71.4

million as well as private placements for

the equivalent of $49.9 million including, with respect to Spain, $12.7 million

of undrawn commitments at June 30,

1973, and $5.4 million of drawings under arrangements entered Into during the

previous year with Japan. Additionally,

$53.3 million of 2-year bonds were sold

ill Latin America, essentially representing a roll-over of a maturing borrowing of

$47.3 million. The funded debt increased

by approximately $142.7 million due to

upward adjustment of the U.S. dollar

equivalent of borrowings denominated in

non-member currencies. The funded debt

was decreased through the retirement of

approximately $21.9 million from sinking fund purchases and scheduled debt

retirement.

The Asian Development Bank Act,

adopted in March 1966, authorized United

States participation in the Asian Development Bank and provides an exemption

for certain securities which may be issued

or guaranteed by the Bank, similar to the

exemptions accorded the International

Bank for Reconstruction and Development

and the Inter-American Development

Bank. Acting pursuant to this authority,

the Commission has adopted Regulation

AD which requires the Bank to file with

the Commission substantially the same

type of information, documents and reports as are required from those banks.

The Bank has 40 members with subscriptions totaling $1 billion.

As of June 30, 1973, 12 countries had

contributed or pledged a total of $242

million to the Bank's Special Funds. In addition to the $26.6 million set aside from

Ordinary Capital in 1969 and 1971 by the

Board of Governors for Special Funds

purposes, another $51.6 million was set

aside in April 1973, making a total of

$78.2 million set aside. In addition, Congress has authorized a $100 million U.S.

contribution to the Bank's Special Funds,

and is considering the appropriation of

these funds in fiscal 1974. There have

been indications from other countries of

additional contributions.

Through June 30, 1973, the Bank's borrowings totaled the equivalent of $229

million. In 1972, the Bank issued obligations of the equivalent of $58.6 million

in Japan ($32.5 million), Luxembourg

($8.9 million) and Italy ($17.2 million).

The last U.S. borrowing, in 1971, was $50

million, half in 5-year notes at 6lh per42
cent and half in 25-year bonds at 7%

percent. Before selling securities in a

country, the Bank must obtain the country's approval.

TRUST INDENTURE ACT

OF 1939

This Act requires that bonds, debentures, notes and similar debt securities

offered for public sale, except as specifically exempted, be issued under an indenture which meets the requirements of

the Act and has been duly qualified with

the Commission.

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the

Securities Act of securities to be issued

under a trust indenture subject to the

Trust Indenture Act is not permitted to

become effective unless the indenture

conforms to the requirements of the latter Act designed to safeguard the rights

and interests of the purchasers. Moreover, specified information about the

trustee and the indenture must be included in the registration statement.

The Act was passed after studies by

the Commission had revealed the frequency with which trust indentures failed

to provide minimum protections for security holders and absolved so-called

trustees from minimum obligations in the

discharge of the trusts. It requires,

among other things, that the indenture

trustee be a corporation WIth a minimum

combined caprtal and surplus and be free

of conflicting interests which might interfere with the faithful exercise of its

duties on behalf of the purchasers of the

securities, and it imposes high standards

of conduct and responsibihty on the

trustee. During fiscal 1973, 345 trust indentures relating to securities in the aggregate amount of $14.1 billion were

filed.

INFORMATION FOR PUBLIC

INSPECTION; FREEDOM OF

INFORMATION ACT

Registration statements, applications,

declarations, and annual and periodic reports filed with the Commission each

year, as well as many other public documents, are available for public inspection and copying at the Cornrnrssron's

public reference room in its principal

offices in Washington, D.C. and, in part,

at its regional and branch offices.

The categories of available materials

and those categories of records that are

generally considered nonpublic are

specified In the Commission's rules concerning records and information which include the rule (17 CFR 200.80) adopted

by the Comrnrssion to implement the

provisions of the Freedom of Information

Act (5 U.S.C.552). That rule establishes

the procedure to be followed in requestmg records or copies and provides for

a method of administrative appeal from

the denial of accessto any record. It also

provides for the imposition of fees when

more than one-half man-hour of work is

performed by the Commission's staff to

locate and make records available. In

addition to the records described, the

Commission makes available for inspection and copying all requests for no action and interpretative letters received

after December31, 1970, and responses

thereto (17 CFR 200.81). Also made

available since November I, 1972 are materials frled under Proxy Rule 14a-8(d),

which deals with proposals offered by

shareholders for inclusion In management

proxy-solrcrtrng materials, and related materials prepared by the staff (17 CFR

200.82).

The Commission has special public reference facilities in the New York, Chicago

and Los Angeles Regional Offices and

some facilities for public use in other

regional and branch offices. Eachregional

office has available for public examination copies of prospectusesusedin recent

offerings of securities registered under

the SecuritiesAct; registration statements

and recent annual reports fIled under the

Securities Exchange Act by companies

having their principal office in the region; recent annual reports and quarterly

reports filed under the Investment Company Act by management investment

companies having their principal office in

43
the region; broker-dealer and investment

adviser applications onginatmg in the region; letters of notification under Regulation A filed in the region, and indices of

Commission decisions.

During the 1973 fiscal year, 20,608

persons examined rnatenal on file in

Washington; several thousand others examined frles in New York, Chicago, Los

Angeles, and other regional offices. More

than 45,536 searches were made for information requested by individuals, and

approximately 5,368 letters were wntten

on information requested.

The public may make arrangements

through the Public Reference Section at

the Commission's principal office to purchase copies of matenal In the Commissron's public files. The copies are produced by a commercial copying company

which supplies them to the public at

pnces established under a contract with

the Commission. Current prices begin at

12 cents per page for pages not exceeding 8112" x 14" In size, with a $2 minimum

charge. Under the same contract, the

company also makes microfiche and

microfrlrn copies of Commission public

documents available on a subscription

or individual order basis to persons or

frrrns who have or can obtain viewing facilities. In microfiche services, up to 60

'mages of document pages are contained

on 4" x 6" pieces of film, referred to as

"fiche."

Annual microfiche subscriptions are

offered in a' variety of packages covering

all public reports filed on Forms 100K,

100Q, 8-K, N-IQ and N-IR under the

Securities Exchange Act or the Investment Company Act; annual reports to

stockholders; proxy statements; new issue registration statements; and final

prospectuses for new Issues. The packages offered include vanous categories

of these reports, including those of companies listed on the New York Stock Exchange, the Amencan Stock Exchange,

regional stock exchanges,or traded overthe-counter. Reports are also available

by standard industry classifications. Arrangements also may be made to subscribe to reports of companies of one's

own selection. Over one hundred million

pages (microimagery frames) are being

distributed annually. The SUbscription

services may be extended to further

groups of frlrngs in the future if demand

warrants. The copying company will also

supply copies in microfiche or microfilm

form of other public records of the Commission desired by a member of the

public.

Microfiche readers and reader-printers

have been installed in the public reference areas In the Commission's headquarters office, and the New York, Chicago, and Los Angeles regional offices,

and sets of microfiche are available for

inspection there. Visitors to the public

reference room of the Commission's

headquarters office may also make immediate reproduction of material on

photostatic-type copying machines. The

cost to the public of copies made by use

of all customer-operated equipment is 10

cents per page. The charge for an attestation with the Commission seal is $2.

Detailed information concerning copying

services available and prices for the various types of services and copies may be

obtained from the Public Reference Section of the 'Commission.

PUBLICATIONS

In addition to releases concerning

Commission action under the securities

laws and litigation involving securities

violations, the Commission issues a number of other publications, including the

following:

Dally:

News Digest; reporting Commission announcements, decisions, orders, rules and rule

proposals, current reports and

applications filed, and litigation developments."

Weekly:

Statistrcal Bulletin."

SEC Docket; a compilation of

Commission releases."

Monthly:

Official Summary of Securities

Transactions and Holdings of

44
Officers, Directors and Principal

Stockholders. a

Annually:

Annual Report of the Cornrmssion."

Securities Traded on Exchanges

under the Securities Exchange

Act of 1934.b

List of Companies Registered

under the Investment Company

Act of 1940.

Classification, Assets and Location of Registered Investment

Companies under the Invest.

ment Company Act of 1940.b

Directory of Companies Filing Annual Reports with the Commission under the Securities Ex.

change Act of 1934.'

Other Publications:

Decisions and Reports of the

Commission.' (Out of print,

available only for reference pur.

poses in SECWashington, D.C.

and Regional Offices.)

The Work of the Securities and

ExchangeCommission.

Report of SEC Special Study of

Secunties Markets, H. Doc. 95

(88th Congress)'

Institutional Investor Study Re.

port of the Securities and Ex.

change Commission, H. Doc.

64 (92nd Congress)'

Part 8 of the Institutional Investor

Study Report, containing the

text of the Summary and Con'

c1usions drawn from each of

the fifteen chapters of the

report.'

Statement of the Securities and

Exchange Commission on the

Future Structure of the Securities Markets, February 2, 1972.

The Financial Collapse of the Penn

Central Company, Staff Report

of the Securities and Exchange

Commission to the Special

Subcommittee on Investigations, August 1972.'

Report of the Real Estate Advisory Committee to the Securities and Exchange Commission.'

Report of the Industrial Issuers

Advisory Committee to the Secunties and ExchangeCommission."

Acts and General Rules and Regulations for all Securities Acts."

Compilation of Releases Dealing

With Matters Frequently Arrsmg

under the Securities Act of

1933."

Compilation of Releases Dealing

with Matters Arising under the

Securities Exchange Act of

1934 and Investment Advisers

Act of 1940."

Compilation of Releases,Commission Opinions, and Other Material Dealing with Matters

Frequently Arising under the Investment Company Act of

1940.-

"Must be ordered from the Superintendent of Documents, Government

Printing Office, Washington, D.C. 20402

"This document is available In photocopy form. Purchasers are billed by the

printing company which prepares the

photocopies.

FREEDOM OF INFORMATION

ACT LITIGATION

The meaning of various exemptions

from the general disclosure requirements

of the Freedom of Information Act was

the subject of litigation Involving the

Commission dunng the fiscal year.

In Steadman Security Corporation v.

SEC.,'o parties to a then pending ad.

ministrative proceeding, who had been

denied discovery of the contents of the

Commission's Investigatory file, sought

to obtain access to the file pursuant to

the Freedom of Information Act." The

United States District Court for the Dis.

trict of Columbia granted the Commission's motion for summary judgment and

refused to enjoin the administrative proceeding, holding that the documents

sought were exempt from the disclosure

requirements of the act because they

were "Investigatory files compiled for

45
law enforcement purposes .... ss The

court further held that some of the documents were exempt because they were

"commercial or financial information obtained from a person and privileged or

confidential." 39 While the court recognized that it might, in a proper case,

have junsdiction to enjoin an agency

proceeding pending resolution of a claim

under the Act, It did not find thrs to be

such a case. The court also held that it

did not have junsdlctlon to review the

order entered by the administrative law

Judge In the administrative proceeding,

which had denied the plaintiffs discovery of the documents they sought. That

order was held to be reviewable only by

the Commission and thereafter a United

States Court of Appeals.

In Moore v. S.E.C.,'" the United States

District Court for the District of Columbia

granted the Commission's motion for

summary judgment in an action brought

under the Freedom of Information Act

to obtain disclosure of transcripts of

testimony given in the course of the Commlssron's investigation into the collapse

of the Penn Central railroad company.

The Commission successfully argued

that even though the non-public transcripts had been utilized in the preparation of a Commission staff study on the

Penn Central debacle," which study had

been made public, the transcripts were,

nonetheless, exempt from disclosure

under the Act as "investigatory files

compiled for law enforcement purposes ... ," particularly since enforcement action was under active consideration at the time the disclosure request

was made.

NOTES TO PART 2

1Securities Act Release No. 5265

(June 27, 1972); Securities Act Release

!,!o. 5265A (August 3, 1972); Securities

Act Release No. 5346 (January 5, 1973).

2 Securities Act Release No. 5231

(February 3, 1972).

3 See 38th Annual Report, pp. 25-26.

Securities Act Release No. 5170

(July 19, 1971).

••secunnes Act Release No. 5386

(April 20, 1973), 1 SEC Docket No. 12,

p. 1.

46

5 ['72-'73 Decisions] CCH Fed. Sec. L.

Rep. 93,784 (C.A. D.C., 1973).

642 U.S.C. 4321 et seq.

1 Natural Resources Defense Council,

Inc. v. SEC., CIV. No. 409-73.

b Natural Resources Defense Council,

Inc. v. SEC., No. 73-159l.

10 Securities Act ReleaseNo. 5365 (February 7, 1973), 1 SECDocket No.2, p. l.

11 See 38th Annual Report, pp, 19-20.

12 Securities Act Release No. 5305,

(September 21, 1972).

1J Securities Act Release No. 5359,

(January 26, 1973).

H Securities Act Release No. 5314

(October 11, 1972).

r'Securlties Exchange Act Release No.

9660.

10 Securities Exchange Act Release No.

10214 (June 11, 1973), 1 SEC Docket

No. 20, p.3.

11 Accounting Series Release No. 126

(July 5, 1972).

1< Accounting Series Release No. 130

(September 29, 1972) and Accounting

Series ReleaseNo. 135 (January 5, 1973).

"Accounting Series Release No. 132

(November 17,1972).

2' Accounting Series Release No. 133

(December 14, 1972).

., Accounting Series Release No. 134

(January 3, 1973).

2! Accounting Series Release No. 137

(January 11, 1973).

'J Accounting Series Release No. 142

(March 15, 1973), 1 SEC Docket No.7,

p. 1.

2t Accounting Series Release No. 140

(January 18, 1973).

25 Accounting Series Release No. 128

(September 20, 1972).

ee Accounting Series Release No. 136

(January 11, 1973) and Accounting

Series Release No. 141 (February 15,

1973), 1 SECDocket No.3, p. 3.

(January 12, 1973).

2S Securities Act Release No. 5343 (December 18, 1972).

es Securities Act Release No. 5344 (December 18, 1972).

30 Securities Act Release No. 5401

(June 6, 1973), 1 SEC Docket No. 19,

p. 1.

31 Securities Act Release No. 5384

(April 12, 1973), 1 SEC Docket No. 11,

p. 4.

32 Accounting Series Release No. 127

(September 11, 1972).

33 Accounting Series Release No. 129

(September 26, 1972), Accounting Series

Release No. 131 (October 19, 1972),

and Accounting !"Prles Release No. 139

(January 17, 1973).

"

•
.. Accounting Series Release No. 143

(March 20, 1973), 1 SEC Docket No.8,

p. 26.

Securities Exchange Act Release No.

10172 (May 23, 1973), 1 SEC Docket

No. 17, p. 11.

eo ['72-'73 Decisions] CCH Fed. Sec. L.

Rep. U 93,735 (D. D.C., 1973).

524-127 0 - 74 - 5

ar 5 U.S.C. 552.

as See 5 U.S.C. 552(b)(7).

39 See 5 U.S.C. 552(b)(4).

40 CIV. No. 2371-73 (D. D.C., 1973).

41 Staff Report of the Securities and

Exchange ccmrntss.cn, The Financial

Collapse of the Penn Central Company

(1972).

47

""



Part 3

Regulation of

Securities Markets

In addition to the disclosure provisions

discussed in the preceding chapter, the

Exchange Act assigns to the Commission significant regulatory responsibilities for securities markets and persons

in the securities business. The Act, among

other things, requires securities exchanges to register with the Commission

and provides for Commission supervision of the self-regulatory responsibilities

of registered exchanges. The Act requires registration and regulation of

brokers and dealers doing business in

the over-the-counter markets, and permits registration of associations of

brokers or dealers exercising self-regulatory functions under Commission supervision. The Act also contains provisions

designed to prevent fraudulent, deceptive,

and manipulative acts and practices on

the- exchanges and in the over-the-counter markets. Some recent developments

concerning regulation of the securities

markets are discussed in Part 1.

REGULATION OF EXCHANGES

Registration

The Exchange Act generally requires

an exchange to register with the Commission as a national securities exchange

unless the Commission exempts it from

registration because of the limited vollime of transactions. As of June 3D, 1973,

the following 13 securities exchanges

were registered with the Commission:

American Stock Exchange, Inc.

Boston Stock Exchange

Chicago Board Options Exchange,

Inc!

ChicagoBoard of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange,Inc.

National Stock Exchange

NewYork Stock Exchange,Inc.

Pacific Stock Exchange,Inc.

PBWStock Exchange,Inc.

Intermountain Stock Exchange

SpokaneStock Exchange

Delisting

Pursuant to Section 12(d) of the Exchange Act, securities may be stricken

from listing and registration upon application to the Commission by an exchange, or withdrawn from listing and

registration upon application by an issuer,

in accordance with the rules of the exchange and upon such terms as the Commission may impose for the protection of

investors.

The standards for delisting vary among

the exchanges, but generally delisting actions are based on one or a combination

of the following factors: (1) the number

of publicly held shares or shareholders

is insufficient (often as a result of an

acquisition or merger); (2) the market

value of the outstanding shares or the

trading volume is inadequate; (3) the

company no longer satisfies the ex51

•
change's criteria for earnings or financial

condition; or (4) required reports have

not been filed with the exchange.

During fiscal 1973, the Commission

granted exchangeapplications for the delisting of 100 stock issues and 32 bond

issues. The largest number of applications came from the New York Stock Exchange (33 stocks and 30 bonds). The

number of applications granted other exchanges are American (27 stocks); National (23 stocks); PBW (6 stocks); Midwest (5 stocks and 2 bonds); Pacific (3

stocks); Cincinnati, Detroit and Intermountain (1 stock each).

The Commission also granted the application of one issuer to withdraw its

securities from listing and registration

on the Pacific Stock Exchange.

In Commission review of a delisting

action, the Cornrnissron granted the

American Stock Exchange'sapplication to

delist the stock of Ecological Science

Corp. (ESC).' The delisting application

was based on ESC's failure to meet the

exchange's guidelines for continued listing of its secunties due to net lossesin its

two most recent fiscal years and a net

tangible asset deficit. In its decision, the

Commission reiterated its view that in

evaluating delisting applications it IS not

the Commission's function to substitute

its judgment for that of an exchange,and

that where the rules of an exchangewith

respect to delisting have been complied

with, the Commission is required to grant

a dehsting application, its authority in

such cases being limited to the imposition of such terms for the protection of

investors as it deems necessary.

Exchange Disciplinary Actions

Although the Exchange Act does not

specifically grant the Commission authority to monitor disciplinary actions

taken by exchanges,' each national securities exchange reports to the Commission action taken against members and

member firms and their associated persons for violation of any rule of the exchange or of the ExchangeAct or of any

rule or regulation under the Act.

During the fiscal year, 6 exchanges reported 62 separate disciplinary actions including the imposition in 3 cases of fines

ranging from $10 to $30,000; the revocation of the membership of 5 firms and the

expulsion of 3 individuals; the suspension from membership (for periods ranging from 1 month to 1 year) of 6 member firms and 16 Individuals; and the

censure of 26 member firms. The exchanges also reported the imposition of

various other sanctions against 13 registered representatives and other employeesof memberfirms.

Exchange Rules

The Commission's staff continually reviews the rules and practices of the nation's registered securities exchanges to

deterrnrne the adequacyand effectiveness

of the self-regulatory scheme. To facilitate Commission oversight, each national

securities exchange is required to file

with the Commission a report of any

proposed change in rules or practices

net less than 3 weeks (or such shorter

period as the Commission may authorize) before acting to effectuate the

change.

During the fiscal year, 163 proposed

changes in exchange rules and practices

were submitted to the Commission. The

following are among the more significant:

1. In 1935 all of the national securities exchanges adopted, at the Commission's request, a rule which provided that

no specialist or odd-lot dealer, no firm

in which such specialist or odd-lot dealer

was a participant, and no partner of such

firm, could acquire, hold or grant, directly

or indirectly, any interest in a put, call,

straddle, or option in any security in

which such specialist or odd-lot dealer

was registered. All the national securities

exchanges also prohibited a member

while on the floor from initiating the purchase or sale of securities on the exchangefor any account in which he or his

firm or any participant for the firm held

or had granted an option.

Several firms presently dorng business

on other exchangesas specialists or market makers applied for membership on

52
the new Chicago Board Options Exchange

(CBOE). Some of those exchanges have

been considering changes In the above

rules in order to permit such firms to act

(and continue to act) as specialists, market makers or floor traders in the same

secuntres that underlie options In which

SLJchfirms would act as dealers on the

CBOE and perhaps elsewhere. In view

of the actual and potential abuses which

led to the original adoption of those rules,

the Division of Market Regulation has requested the exchanges not to change

their rules to permit such activities

pending the Commission's review of the

Issues raised by the proposed changes.'

2. All of the exchangesadopted rules in

connection with the Commission's new

Rule 19b-2 under the ExchangeAct. For

further drscussion of these changes, see

Part 1.

3. The New York Stock Exchange's

Wholly-owneddepository and the Midwest

Stock Exchange's Wholly-owned clearing

and depository entity submitted by-law

and rule changes and other information

to the Cornmlssron in connection with

their respective proposals to operate as

limited purpose trust companies. The proposals included the proposed rules under

which the depositories would operate and

the procedures and systems they would

utilize. After consideration of the proposals, the Cornrmssion commented fa.

vorably on them, and they were adopted.

Litigation on Exchange Rules

Thill v. New York Stock ExchangeThis case raises the issue of whether the

NYSE's fixed minimum commission rate

system, and the rules necessary to preserve the integrity of that system such

as the anti-rebate rule, are legal under

antitrust laws. In 1970, the Court of

Appeals for the Seventh Circuit reversed

a district court order granting summary

Judgment to the Exchange." The Commission and the Antitrust Division of the

Department of Justice subsequently intervened in the district court proceedings.

In 1972, during the course of those proceedings, the Exchange appealed to the

Seventh Circuit the district court's denial

of its motion to refer to the Commission

the question of whether the NYSE'santirebate rule is "necessary to make the

Securities ExchangeAct work." The Commission opposed the NYSE's request for

a primary jurisdiction reference on the

ground that it had already irnphcrtly

found the exchange's rule "necessary or

appropriate" under the standards of Section 19(b) of the Exchange Act. The

Seventh Circuit sustained the order denying referral, but stated that the Commission's argument that "the anti-rebate

rule should be reviewed by the SEC

under the standards of the Securities

Exchange Act of 1934 rather than by a

court [under the standards of the antitrust laws]" had been adversely decided

to the SEC's position in the earlier appeal.' The case then proceeded to trial.

While the Cornmissron did not participate on a day-to-day basis, It did file posttrial briefs in which it took the position

that the antitrust action was incompatible

with its pervasive ongoing regulatory

jurisdiction over national securities

exchanges.

Inspection

An important element of the Commission's supervision of exchange self-regulation IS its program of regular inspections of various phases of exchange

activity. These mspections enable the

Cornmissronto recommend, where appropriate, Improvements designed to increase the utility and effectiveness of

selt-regulation.

In fiscal 1973, the Commission's staff

conducted 13 Inspections. Included were

general Inspections Involving the Boston,

Cincinnati, Chicago Board Options, Midwest (two general Inspections) and Pacific Stock Exchanges. Five separate inspections were made at the New York

Stock Exchange covering ItS net capital

rule, advertising rules, financial surveillance, stock watch and floor surveillance

(including specialists), and disciplinary

activities.

In additron an inspection was made of

the Pacific Stock Exchange's depository.

53
:>U. t."VI.,luN lJIF NASD

The ExchangeAct provides for registration with the Commission of national

securrties associations and establishes

standards and requirements for the registration and operation of such associations. The Act contemplates that such

associations will serve as a rnedrurn for

self-regulation by over-the-counter brokers and dealers. In order to be eligible for

regrstration, an association must have

rules designed to protect investors and

the public interest, to promote just and

equitable principles of trade, and to meet

other statutory requirements. Nationalsecunties associations operate under the

general supervisory authority of the Commission, which is authorized, among

other things, to review disciplinary acnons taken by an assocratron, to disapprove changes In association rules and

to alter or supplement rules relating to

specified matters. 'The National Association of Securities Dealers, Inc. (NASD)

is the only association to have registered

With the Commission under the Act.

In adopting legislation permitting the

formation and regrstration of national securitres aSSOCIatIOns, Congress provided

an rncentiveto membership by permitting

such associations to adopt rules which

preclude members from dealing with a

nonmember broker or dealer except on

the same terms and conditions and at

the same pnce as the member deals with

the general public. The NASD has

adopted such rules. As a practical matter, therefore, membership is necessary

for profitable participation In underwritings since members may properly grant

price concessions, discounts and similar

allowancesonly to other members.

At the close of the fiscal year, the

NASD had 3,884 members, reflecting a

net loss of 346 members durrng the year.

This loss reflects the net result of 228

adrrussions to and 574 terminations of

membership. The number of members'

branch offices nevertheless increased by

206, to 6,790, as a result of the opening

of 1,454 new offices and the closing of

1,248. DUringthe fiscal year, the number

of registered representatives and principals (these categories include all partners, officers, traders, salesmen and

other persons employed by or affiliated

with member frrrns in capacities which

require registration) increased by 7,125

to 205,028 as of June 3D, 1973.8 This increase reflects the net result of 28,203

initial registrations, 27,466 re-registrations and 48,544 terminations of registration during the year.

DUring the fiscal year, the NASD administered 72,142 qualification examinations of which 44,129 were for NASD

qualification, 2,567 for the Commission's

SECDprogram, and the balancefor other

agencies,including major exchangesand

various states.

NASD RULES

Under the Exchange Act, the NASD

must fIle for Commission review copies

of any proposed rules or rule amendments 30 days prior to their intended

effective date. Any rule changes or additions may be disapproved by the Commission If it finds them to be inconsistent

With the requirements of the Act. The

Commission also normally reviews, In advance of publicatron, general policy statements, directives, and Interpretations

proposed to be issued by the Association's Board of Governors pursuant to its

powers to administer and interpret

NASDrules.

During the fiscal year, numerous

changes in or additions to NASD rules,

polrciss and interpretations were submitted to the Cornrrussronfor its con.

sideration. Among the more significant

whrch were not disapproved by the Comrrusslon were:

(1) Amendments to the Code of Arbitration Procedureto authorize the Board

of Governors to compel a member to

arbitrate any dispute arising out of or in

connection With its securities business,

including disputes betweenmemberfirms

and their associated persons, at the instance of a member or an associated person. The Code previously provided for

arbitration only of disputes arising out of

a securities transaction at the Instance

54
of another member or a public customer.

In addition, the eligibility period for the

submission of a dispute to arbitration was

extended from 3 to 5 years.

(2) Amendments to Schedule D of the

NASD By-laws to provide for restructuring

the daily lists made available to nEWSpapers and other media of prices and

volume in securities quoted on NASDAQ,

the Assoclatron's automated quotation

system. Under the new format, the NASD

makes available for pubhcation price and

volume data of the 1,400 most active

NASDAQ stocks as determmed by trading volume" and price data only for the

900 next most actrve NASDAQ stocks.

Securities must also meet certain price

criteria to be eligible for inclusion on

either list.

At the end of the fiscal year, another

significant rule proposal was pending before the Commission. This proposal,

which would add a new Section 34 and

Appendix C to Article III of the NASD's

Rules of Fair Practice, would require

NASD members to obtain blanket fidelity

bond coverage. Every NASD member having employees which is required to join

the Securities Investor Protection Corporation and is subject to the Commission's net capital rule, would be required

to obtain such coverage.

Inspections

The Commission is charged with the

general oversight of national securities

assocratrons 10 the performance of their

self-regulatory functions, and the staff

conducts periodic inspections of various

phases of NASDactivity. DUring the frscal

year, the staff inspected the overall operations of the Association's district offices

in Atlanta, Cleveland, Philadelphia and

New Orleans. These inspections included

a broad review of the operations of each

district office, including its examination

program, financial morutoring and disciplinary policies and procedures in order

to determine their effectiveness and,

where appropriate, to make recommendations for changes in existing programs or

the institution of new programs. In additlon, the staff reviewed the operations

of NASDAQand the NASD's Membership

Department.

NASD Disciplinary Actions

The Commission receives from the

NASD copies of Its decrsions in all cases

where disciplinary action IS taken against

members and persons associated with

members. Generally, such actions are

based on allegations that the respondents

violated specified provisions of the

NASD's Rules of Fair Practice. Where violations by a member are found, the NASD

may impose sanctions which include expulsion. suspension. fine or censure. If

the violator IS an individual, hrs registration with the Association may be suspended or revoked, he may be suspended

or barred from being associated with any

member, and he may be fmed and/or

censured.

During the past fiscal year, the NASD

reported to the Commission its final disposition of 629 disciplinary complaints

(including 210 cornplamts involving

NASDAQ)in which 526 members and 451

mdividuals were named as respondents.

Complaints against 62 members and 64

individuals were dismissed for failure to

establish the alleged violations, Forty-two

members were expelled from membership

and 20 members were suspended for

periods ranging from 1 day to 6 months.

In many of these cases, a fine was also

imposed. In 384 cases, members were

fined amounts ranging from $25 to $25,-

000, and in 18 cases members were

censured.

In disciplinary sanctions imposed on individuals associated with member firms,

98 persons were barred or revoked, and

78 had their regrstratrons suspended for

periods ranging from 1 day to 5 years. In

addition, 211 other individuals were censured and lor fined amounts ranging from

$100 to $25,000.

Review of NASD Disciplinary

Actions

Disciplinary action taken by the NASD

is subject to review by the Commission

on ItS own motion or on the timely appli55
cation of any aggrieved person. In these

cases, effectiveness of any penalty imposed by the NASD is automatically

stayed pending Commission review, unless the Commission otherwise orders

after notice and opportunity for hearing.

If the Commissron finds that the Visciplined party committed the acts found

by the NASDand that such acts violated

the specified rules, the Commission must

sustain the NASD's action-unless it

finds that the penalties imposed are excessive or oppressive, in which case it

must reduce them or set them aside.

At the beginning of the fiscal year, 25

proceedings to review NASD disciplinary

decisions were pending before the Commission and, during the year, 22 additional cases were brought up for review.

The Commission disposed of 25 cases. In

nine cases, the Commission affirmed the

NASD's action. It permitted the withdrawal of two applications for review and

remanded one case back to the NASD.

In nine cases,the NASD'sfindings and/or

penalties were modified, and in four cases

the NASD's action was set aside. At the

close of the fiscal year, 22 cases were

pending.

Review of NASD Membership

Action

1he Exchange Act and NASD By-laws

provide that no broker or dealer can be

an NASD member if he or any person

associated with him is subject to specified disabrlitles. These disabilities can be

waived only with specific approval of the

Commission. Commission approval or a

direction by it to admit a person to membership in the Association or to continue

the. membership of any person is generally made after initial submission to

the NASD by the member or applicant

for membership. The NASD in its discretion may then file an application with the

Commission on behalf of the petitioner. If

the NASD refuses to sponsor an application, the broker or dealer may apply

directly to the Commission for an order

directing the NASD to admit him to or

to continue him in membership. At the

beginnmg of the fiscal year, eight appllcations for approval of admission to or

continuance in membership were pending. During the year, nine additional applications were filed, sevenwere approved

and six were withdrawn, leaving four applications pending at the end of the year.

BROKER. DEALER REGULATION

Registration

Brokers and dealers who use the mails

or other means of interstate commerce in

the conduct of an over-the-counter securities business are required to register

with the Commission.

As of June 30, 1973, 4,407 brokerdealers were registered compared with

4.734 a year earlier. This reduction reo

suited from the termination of 704 registrations as against only 377 new applications filed. For further comparative statistics, see the statistical section.

On July 3, 1973, the Commission issued a proposal to amend Form BD, the

form usedto apply for broker-dealerregistrction and for amendments to that

appllcaticn."

The principal change would add an inquiry as to whether the registrant, applicant or certain associated persons

were ever an officer, director, general

partner, 10 percent shareholder or controlling person of a broker or dealer for

which a Securities Investor Protection

Corporation (SIPC) trustee was appornted. Under the SIPCAct the Commission may bar or suspend such persons if,

after notice and opportunity for hearing, it finds such action to be in the public: interest.

The Commission found that many

broker-dealer failures which resulted in

the appointment of a SIPC trustee have

involved a gross failure to maintain

proper books and records and substantial violations of financial responsibility

rules. The proposed amendment is designed in part to detect an attempt on the

part of persons who may have been responsible for such violations to effect re56
entry into the securities business, giving

the Commission an opportunity to take

remedial action prior to the effective date

of registration.

Financial Reports

Registered broker-dealers are required

to file annual reports of financial condition with the Commission. Generally,

these reports must be certified by an

independent public accountant. Dunng

the fiscal year, 4,446 annual reports were

filed, compared to a total of 4,224 filed

during fiscal 1972.

Income and Expense Reports

In 1968, the Commission adopted Exchange Act Rule 17a-lO, effective January I, 1969.11 The rule requires registered

broker-dealers and exchange members to

file income and expense reports for each

calendar year with the Commission or

with a registered self-regulatory organization (an exchange or the NASD) which

has qualified a plan under the rule. The

self-regulatory organizations are required

to send copies of the reports filed with

them to the Commission.

Since 1970, the Commission has approved plans of the NASD,the American,

Midwest, New York and PBW Stock Exchanges." These plans provide that the

self-regulatory organization will adopt and

implement appropriate internal procedures for review of the reports submitted

by members, review all reports filed for

reasonableness and accuracy, transmit

edited reports to the Commission, and

undertake certain other obligations.

The reports covering calendar year

1972 of SECDbroker-dealers13 and nonNASD members of those exchanges

which have not qualified a plan have been

received and reviewed by the Commission. The 1972 reports of all NASDmembers and of non-NASDmembers of those

exchanges which have qualified a plan

have been received by the Commission

from the respective self-regulatory organizations. Information based on these reports is included in the statistical section.

Early Warning System

Rule 17a-11 was adopted to provide

the Commission and the self-regulatory

authorities with an adequate and timely

flow of Information on the financial and

operational condition of broker-dealers.It

is a part of the early warning system that

the Commission has developed to evaluate the condition of registered brokerdealers.

The rule has four major provisions:

(1) immediate telegraphic notice to the

Commission and to any self-regulatory

organlzation of which It is a member, followed by a financial report within 24

hours, when a broker-dealer's net capital

falls below the level required by any capital rule to which it IS subject; (2) the

filing of special monthly reports until its

capital position shows improvement for

3 successive months when a brokerdealer ascertains that its aggregate indebtedness exceeds 1,200 percent of its

net capital-or that its total net capital

is less than 120 percent of the minimum

net capital required of It by any capital

rule to which It is subject; (3) telegraphic

notice to the appropriate regulatory authorities, followed by a written report

within 48 hours, when a broker-dealer's

books and records are not current; and

(4) notification to the Commission by a

self-regulatory organization when it learns

that a member has failed to give notice

or file any report required by the rule.

During the past fiscal year, a total of

339 broker-dealers sent telegrams and/

or filed reports pursuant to the rule.

Advisory Committee on Reports

and Registration

In September 1972, the Commission

appointed an Advisory Committee on

Broker-Dealer Reports and Registration

Requirements composed of knowledgeable persons from the securities industry, the accounting and legal professions,

and the Commission's staff to study

methods of simplifying and standardizing

reports and eliminating duplicative recordkeeping requirements.

57
In its report submitted to the Commission in December 1972, the Committee concluded that present regulatory

reports submitted by broker-dealers require a wasteful duplication of effort by

firms and regulators. The Committee

made a number of recommendations for

improvement including (1) the elimination of provisions requiring a brokerdealer to file reports concerning its financial condition and operational activities with more than one regulatory authority, and (2) the adoption of the Joint

Regulatory Report of the New York Stock

Exchange, with appropriate modifications, as a replacement for other reports

currently in use, such as Form X-17A-5

and Form X-17A-I0.

In February 1973, the Commission appointed a task force composed of staff

members to analyze the recommendations and to prepare specific proposals in

regard to both the method and cost of

implementing them. The Commission also

sought the advice of self-regulatory authorities and SIPCas to the best methods

for implementation of the Committee's

proposals. During the next fiscal year,

the Commission intends to develop and

implement a coordinated report program

with the objective of eliminating duplication.

Broker-Dealer Examinations

The Office of Broker-Dealer Examinations was established by the Commission

in January 1972, in order to deal more

effectively with the problems detailed in

the Commission's 1971 "Study of Unsafe and Unsound Practices of Brokers

and Dealers." By creating this new Office, the Commission has substantially

strengthened its continuing efforts to prevent a recurrence of the crisis which

confronted the secunties industry in the

years 1968 through 1970. During that

period, there occurred widespread failures of broker-dealer firms, accompanied

by substantial customer losses of cash

and securities. One major outgrowth of

these crises was the passage in 1970 of

the Securities Investor Protection Act.

There are three types of examinations

used in the Commission's nationwide program of broker-dealer examinations:

routine, cause and oversight. Routine examinations cover all aspects of a brokerdealer's operations and generally involve

broker-dealers which are not members

of any self-regulatory organization (SECO

broker-dealers), but members of the selfregulatory organizations are also subject

to such examinations. The Office is working to establish a regular examination

cycle in which each SECObroker-dealer

is examined 30 to 60 days after it becomes registered with the Commission

and on an annual basis thereafter.

Cause examinations are usually conducted as a result of a complaint received

from a customer or another broker-dealer

which indicates a need to review certain

aspects of the operations of a particular

broker-dealer. Cause examinations are

usually limited to the subject matter of

the complaint. The examiner, however,

may enlarge the scope of the examination if he believes that the firm's operations warrant further study.

The oversight examination program is

a two-fold operation consisting of (1)

examinations of members of self-regulatory organizations to determine if they

are in compliance with the securities laws,

and (2) examination of a member of a

particular self-regulatory organization together with a concurrent review of the

report and working papers of the latest

examination performed by that organization to determine whether its examination

program is thorough and effective.

In conjunction with its oversight examination functions, the Office has instituted a program of continuous review of

the policies and procedures used by the

various self-regulatory organizations in

examining their members to insure that

stated policies and procedures are being

implemented and that all areas of a

broker-dealer's operations are being

examined.

In fiscal 1973, the Commission conducted a total of 1,044 broker-dealer examinations which is a 17 percent increase

over the previous year's total of 893. Of

58
the 1,044 examinations conducted, 387

were routine, 451 were for cause and

206 were oversight examinations.

In an effort to improve the caliber of

the examination staff of both the Commission and self-regulatory authorities,

the Office developed a series of training

courses for broker-dealer examiners.

During fiscal 1973, it conducted or sponsored six such programs in various areas

of the country. These programs were attended by members of the Commission's

staff as well as representatives of the

NASD, the several stock exchanges, the

Federal ReserveBoard, SIPC,and various

law enforcement and related agencies.

The Office also supervised the development of a computerized surveillance system. The implementation of Phase I of

this system will provide data to be utilized

in coordinating examinations conducted

by the Commission's staff and the various

other regulatory authorities. Work IS continuing on improvements and expansion

of this program in an effort to accumulate

and organize pertinent data concerning

all broker-dealers registered with the

Commission.

In addition to the above-described activities, members of the staff of the Office

serve on an Advisory Committee on a

Model Compliance Program for BrokerDealers. This Committee, which includes

representatives of the various exchanges

and the NASD, IS considering the feasibility of developing a Model Guide to

Broker-Dealer Compliance covering all aspects of a broker-dealer's regulatory responsibility to its customers.

Rule Changes

Uniform Net Capital Ru/e-On December 5, 1972, the Commission proposed

the adoption of a uniform net capital

rule for broker-dealers which will provide

minimum standards for both exchange

members and nonmembers." The most

significant feature of the proposed rule

is a minimum equity requirement aimed

at insuring permanency of broker-dealer

capital. This provision would require that

at least 30 percent of a broker-dealer's

total capitalization consist of equity, thus

limiting the amount of subordinate debt

that could be incurred.

Among other things, the proposed rule

would (1) eliminate the exemption from

the Commission's present net capital rule

for members of exchangesthat have net

capital rules deemed more cornprehensive than the Commission's, (2) reduce

the maximum permissible ratio of aggregate indebtedness to net capital from

20 to 1 to 15 to I, (3) establish minimum

capital requirements for market makers

and writers and endorsers of options,

and (4) include new provisions for the

treatment of stock record differences,

free shipment of securities and dividends

and interest receivable.

The Commission has received comments on this proposal and its staff is

currently analyzing those comments.

Reserve and Segregation Require.

ments-The Securities Investor Protection Act of 1970 authorized the Commission to prescribe rules regarding the

custody and use of customers' funds and

securities. On January 15, 1973, Rule

15c3-3 under the ExchangeAct became

effective." The rule provides a formula

for the maintenance by broker-dealers of

basic reserveswith respectto customers'

cash and cash realized through the utilization of customers' securities, and enunciates standards for broker-dealers with

respect to the physical possession or

control of customers' fully-paid and excess margin securities.

The rule is designed, among other

things: (1) to insure that customers'

funds held by a broker-dealer are used

only in safe areas of a broker-dealer's

business relating to the servicing of customers, or deposited in a reserve bank

account; (2) to require a broker-dealer

promptly to obtain and maintain possession or control of all customers' fullypaid and excess margin securities; (3)

to accomplish a separation of the firm's

brokerage business from other activities;

(4) to require a broker-dealerto maintain

more current records; (5) to motivate

the securities industry to process its

securities transactions in a more expedltrous manner; (6) to inhibit the unwarranted expansion of a broker-dealer's

59
business through the use of customers'

funds, and (7) to ensure that all fullypaid and excess margrn securities in the

possession or control of a broker-dealer

will constitute property of the customers

entitled thereto, as evidenced by the

broker-dealer's records or as otherwise

established.

Pending further study, the Commission subsequently suspended, with respect to exempted securities, the provision of the rule requiring a broker-dealer

to buy-in securities sold for a customer

when the broker does not obtain possession of the secunties within 10 business

days after the settlement date." The

Commission has published releasesclarifyrng the rule for the gurdance of the

broker-dealer community and self-regulatory authorities."

Margin Exemption for Credit to Market Makers and Block Positioners-Under

the Exchange Act, the Board of Governors of the Federal Reserve System has

authority to regulate credit in the securities markets while the Commission has

administrative and enforcement responsibilities with respect to these credit

regulations.

In 1969, the Board amended its Regulation U to exempt from specified margrn requirements loans by banks to

broker-dealers which make over-thecounter markets in securities placed by

the Board on its list of aTC margin stocks.

The Board deemed it desirable, in the

interest of fair and orderly markets, to

grant such an exemption if a brokerdealer met certain net capital requirements and was a bona fide market

maker. In order to implement the Board's

rule, the Commission adopted Rule 17a12 under the Exchange Act to require

reports from market makers in aTC

margin stocks. During the fiscal year, the

Commission amended its rule to eliminate the filing of reports by brokerdealers which do not use the credit

exemption."

In September 1972, the Board

amended Regulation U to grant a similar exemption to over-the-counter market

makers in listed securities ("third mar60

ket makers") and broker-dealers who

position blocks of securities in order to

facilitate the sale or purchase by their

customers of quantities which cannot

otherwise be absorbed by normal exchange facilities. Simultaneously, the

Cornrnissron adopted Rules 17a-16 and

17a-17 under the Exchange Act imposing certain minimum net capital and

other requirements on broker-dealers

who desire to use this exemption, and

requinng them to file certarn notices and

reports with the Comrnlssron."

As of June 3D, 1973, 59 broker-dealers

had filed notices that they were using

or intended to apply for aTC market

maker exempt credit under Rule 17a-12;

6 broker-dealers filed notices under Rule

17a-16 that they were using or intended

to use third market maker exempt credit;

and 14 broker-dealers filed notices under

Rule 17a-17 that they had applied or

intended to apply for block positioner

exempt credit.

Reports to Customers-Qn June 30,

1972, the Commission adopted amendments to Rule 17a-5 under the Exchange

Act which require broker-dealers (other

than mutual fund dealers and broker.

dealers who do not carry customer funds

or securities) to report their financial

condition to customers." Customers are

to receive quarterly and annual balance

sheets along with statements setting

forth, among other things, the brokerdealer's net capital position.

In addition, the broker-dealer must

make available to its customers for inspection a statement setting forth any

comments made by the broker-dealer's

independent accountant concerning material rnadequacies in the broker-dealer's

accounting system, its internal accounting control or its procedures for safeguarding securities.

The amended rule also requires brokerdealers to furnish additional financial

statements to the Commission.

Mortgage Dealing Exemptions-The

Commission has been working with the

Federal Home Loan Mortgage Corpora.

tion (FHLMC)in connection with FHLMC's

responsibility to expand the secondary

market in conventional mortgages (not
guaranteed or insured by a Federal or

State agency) on residential property.

As part of this effort, the Commission has

adopted Rule 3a12-1 under Section 3(a)

(12) of the Exchange Act!' The principal

impact of the new rule is that brokerdealers dealing solely in certain mortgages and other exempt securities are

not subject to the registration, net capital

and other provisions of the Exchange Act

which are not by their terms applicable to

"exempted securities." Transactions in

securities exempted by Section 3(a)(12)

or Commission rules adopted thereunder

are still subject to the antifraud provisions

of the Exchange Act.

Employment Discrimination-In November 1972, a petition was filed with

the Commission requesting that It promulgate rules requiring the securities

industry to take affirmative action to

eliminate discrimination in employment

practices. Smce the petition raised complex questions concernmg the Commission's authority to adopt rules m this

area as well as the merits of adopting

the rules proposed, the Commission invited public comment on the petition."

To aid further in ItS inquiry, the Commission sought and obtained the views

of various governmental agencies, including the Department of Justice. The

comment period, after one extension, expired on March 13, 1973.

The Commission has received a substantial number of responses from interested mdividuals and groups and

those comments, along with possible

statutory bases for adoption of rules of

the type proposed, are currently being

studied by the Commission's Division

of Market Regulation which expects to

submit its conclusions and recommendations to the Commission in the near

future.

SECO Broker-Dealers

Under the Exchange Act, the Commission is responsible for establishing and

administering rules on qualification

standards and busrness conduct of

broker-dealers who are not members of

the NASD 23 in order to provide regulation

of these SECO broker-dealers comparable

to that provided by the NASD for its

members.

DUring the fiscal year, the number of

nonmember broker-dealers registered

With the Commission decreased from 294

to 276 and the number of associated persons of such firms (i.e., partners, officers,

directors and employees not engaged in

merely clerical or ministerial functions)

decreased from 20,600 to approximately

16,303'" (Investors Diversified Services,

Inc., which joined the NASD rn September 1972, accounted for a decrease of

5,902 SECO associated persons.)

On December 4, 1972, the Commission

adopted Rules iseio-s and 15blO-9

under the Exchange Act relating to the

public offering by SECO broker-dealers of

their own securities or those of an

affrhate." Similar rules had been adopted

by the NASD as described in the Commission's last annual report."

Rule 15b-l0-8 requires, with respect

to publrc offerings of the secunties of nonmember broker-dealers, whether or not

self-underwritten, that: (1) certain financial statements be included in the prospectus; (2) sales by stockholders amount

to no more than 25 percent of their respective equity interests; (3) the amount

of the offering not exceed three times

the nonmember's net worth; (4) the nonmember's net capital ratio not exceed 10

to 1 after completion of the offering; (5)

certain financial data be sent regularly

to shareholders; and that (6) no subsequent offering be made to the public for

at least one year.

Rule 15blo-9 in general permits a

nonmember to underwrite or partrcipate

in the distribution of its own securities

or those of an affiliate if It obtams two

qualified mdependent underwriters With

at least 5 years' experience in the securities business, 3 of which have been profitable, to certify to the fairness of the

offering price and to exercise due diligence in connection with the preparation

of the registration statement. The independent underwriters are required to assume the full legal responsibility and

liability of an underwriter under the

61
Securities Act. In addition, the nonmember, the independent underwriters and a

majority of the directors of their reo

spective boards are required to have been

in the securities business for at least 5

years, 3 of which must have been

profitable.

The rule allows a nonmember to underwrite or participate In the distribution

of its own or an affiliate's securities

Without the two qualified Independent

underwriters provided there is a bona

tuie active Independent market for the

secuntres, Otherwise, the nonmember

can participate only to the extent of 10

percent of the distribution If there is a

firm commitment underwriting.

Finally, In an offering of the nonmember's securities, the nonmember's associated persons and their Immediate

families are prohibited from seiling any

portion of their equity interest In the

nonmember unless there is a bona fIde

active independent market for the securities and such securities are sold pursuant to a firm commitment underwriting

by an independent underwriter.

Rule 15b9-2 imposes an annual assessment to be paid by nonmember broker-dealers to defray the cost of regulation. During the fiscal year, the Commission increased the base fee from $150 to

$175 and the fee for each associated

person from $7.50 to $10.00."

SIPC Litigation

S.E.C. v. Oxford Securities, Ltd.:8-

This was an appeal by the Securities Investor Protection Corporation (USIPC")

and the Commission to the United States

Court of Appeals for the Second Circuit

of an order of the district court denying

an application of SIPC, under the Securities Investor Protection Act," for the

appointment of persons it had designated

to be trustee and counsel to the trustee

for the purpose of liquidating Oxford, a

broker-dealer in securities. The district

court had held that Section 5(a)(2) of the

SIPC legislation, which provides that a

court supervising a liquidation under the

Act is to appoint as trustee and attorney

for the trustee such persons as SIPC may

62

designate, was unconstitutional in that it

Imposed purely ministerial duties on the

court, offending the separation of powers

of the legislative, Judicial and executive

branches of the government. The court of

appeals, per curiam, reversed the district

court order, and on remand the persons

designated by SIPC were appointed.

NOTES FOR PART 3

1 See the report on the registration of

thrs exchange In Part 1.

In March 1971, the Executive Committee of the Board of Trade adopted a

resolution to close the Board's securities

market. However, it has not Withdrawn its

registration.

'Securities Exchange Act Release No.

10217 (June 13,1973),1 SEC Docket No.

20, e.s,

Under legislation proposed by the

Commission and discussed in Part 1 of

this report, the Commission would be

given authority to review exchange disciplinary actions.

5 See Securities Exchange Act Release

No. 10312 (August 1, 1973), 2 SEC

Docket 223.

e Thill Securities Corp. v. New York

Stock Exchange, 433 F. 2d 264 (C.A. 7,

1970), cert. denied, 461 U.S. 994 (1971).

'Thill Securities Corp. v. New York

Stock Exchange, 465 F. 2d 14 (C.A. 7,

1972). 8 Investors Diversified Services, lnc.,

which JOined the NASD in September

1972, accounted for an increase of approximately 5,900 registered representatives.

Shortly after the close of the fiscal

year, the NASD submitted for membership comment a proposal to use dollar

rather than trading volume as the governing criterion in these lists.

10 Securities Exchange Act Release No.

10262,2 SEC Docket 65.

11 Securities Exchange Act Release No

8347 (June 28, 1968).

Securities Act Release Nos. 8876

(Apr. 30, 1970); 8896 (Mav 28, 1970);

8946 (June 28, 1970); 8954 (Aug. 11,

1970); 9495 (Feb. 15. 1972).

13 Those registered broker-dealers

which are not NASD members are referred

to as SECO broker-dealers.

14 Securities Exchange Act Release No.

9891.

"Securities Exchange Act No. 9856

(November 10, 1972).

te Securities Exchange Act Releac;e No.

9974 (January 31, 1973), 1 SEC Docket

No.1, p. 7. On March I, 1973, the Commission extended the suspension period

and, on April 10, further extended it in-

•

•

•

"
definitely. Securities Exchange Act Release No. 10093, 1 SEC Docket No. 11,

p.13. 17 See Securities Exchange Act Release

Nos. 9922 (January 2, 1973); and 10178

(May 30, 1973), 1 SEC Docket No. 18,

p.27. 18 Securities Exchange Act Release No.

9762 (September 12, 1972). 1. See Securities Exchange Act Release

Nos. 9760 and 9761 (September 12,

1972). 20 Secunties Exchange Act Release No.

9658. ei Securities Exchange Act Release No.

9865 (November 17, 1972).

". Securities Exchange Act Release No.

9908 (December 14, 1972).

524-127 0 - 74 - 6

.. The Act does not specifically refer to

members of the NASD but to brokerdealers which are not members of a registered "national securmes association."

The NASD however, is the only such

association.

.. Nonmember broker-dealers must file

a prescribed form (SECQ-2) with the

Commission for each associated person.

Securities ExchangeAct Release No.

9883.

00 38th Annual Report, pp. 10-11.

Securities ExchangeAct Release No.

10125 (April 25, 1973), 1 SECDocket No.

13, p. 6.

28 C.A.2, No. 73-1377 (April 11, 1973).

.. 15 U.S.C.78aaa, et seq.

63

""

'"



Part ~

Enforcement

The Commission's enforcement activities, designed to combat securities fraud

and other misconduct, continued at a

high level during the past year. These

activities encompass civil and criminal

court actions as well as administrative

proceedings conducted internally. Where

violations of the securities laws or rules

are established, the sanctions which may

result range from censure by the Comrmsslon to prison sentences imposed by

a court. The enforcement program is designed to achieve as broad a regulatory

impact as possible within the framework

of resources available to the Commission. In light of the capability of selfregulatory and state and local agencies

to deal effectively with certain securities

violations, the Commission seeks to promote effective coordination and cooperation>between its own enforcement activities and those of the other agencies.

DETECTION

Complaints

The Commission receives a large volume of communications from the public.

These consist mainly of complaints

against broker-dealers and other members of the securities community. During

the past year, some 5,000 complaints

against broker-dealers were received,

analyzed and answered. Most of the

above-mentioned complaints dealt with

operational problems, such as the failure to deliver securities or funds

promptly, or the alleged mishandling of

accounts. In addition, there were some

4,000 complaints received concerning

investment advisers, issuers, banks,

transfer agents and mutual funds.

The Commission seeks to assist persons in resolving complaints and to furnish requested information. Thousands

of investor complaints are resolved

through staff inquiry to firms involved.

While the Commission does not have authority to arbitrate private disputes between brokerage firms and investors or

to directly assist investors in the legal

assertion of their personal rights, a complaint may lead to the institution of an

investigation or an enforcement proceeding, or it may be referred to a self-regulatory or local enforcement agency.

Market Surveillance

To enable the Commission to carry out

surveillance of the securities markets,

its staff has devised procedures to identify possible manipulative activities.

These include surveillance of listed securities, coordinated with the stock watching operations of the New York, American

and regional stock exchanges.

The Commission's market surveillance

staff maintains a continuous watch of

transactions on the New York and American Stock Exchangesand reviews reports

of large block transactions to detect any

unusual price and volume variations. The

67
Litigation

In S.E.C. v. Brigadoon Scotch Distribut.

ing Co.' the Commission had commenced

a formal investigation to determine

whether certain persons were violating

registration and antifraud provisions of

the SecuritiesAct and the ExchangeAct in

connection with sales of whiskey warehouse receipts. In the course of the investigation, subpoenas were issued to three

companies calling for documents from

which it could be determined whether

those provisions had been violated. After

the companies declined to respond to the

subpoenas, the Commission commenced

a subpoena enforcement action against

them in the United States District Court

for the Southern District of NewYork.

The district court enforced so much

of the subpoenas as it thought would en.

able the Commission to make a determlnation whether the companies' products

were "securities" within the purview of

the Federal securities laws but refused

to enforce the subpoenas any further

without a showing that the products in

fact constituted securities. In addition,

the district court imposed a requirement

on the Commission that it give to each

subpoenaed person a statement prepared

by the court describing the nature and

scope of the investigation and the posltion asserted by each of the subpoenaed

companies.

On cross-appeals by the Commission

and the subpoenaed companies, the

Court of Appeals for the Second Circuit,

consistent with its decision in S.E.C. v.

INVESTIGATIONS

Each of the acts administered by the

Commission authorizes investigations to

determine if violations have occurred.

financial news tickers, financial publica- Most are conducted by the Commission's

tions and statistical services are closely regional offices. Investigations are carrieC:r

followed. Also, the staff has supplemented out on a c.onfidential basis, consistent

its regular reviews of daily and periodic with effective law enforcement and the

stock watch reports of exchanges with needto protect persons against whom una program for review of special surveil- founded charges might be made. Thus,

Jance reports providing a more timely the existence or findings of a nonpublic

analysis of the information developed by. investigation are generally not divulged

the exchanges. i unless they are made a matter of public

For those securities traded by means record in proceedings brought before the ,

of the NASD's NASDAQsystem, the Com- \ Commission or in the courts. During fisair

mission has also developed a surveillance I year 1973, a total of 472 investigations

program, which is coordinated wi~h the were opened, as against 374 the precedNASD'smarket surveillance staff, through ing year.

a review of weekly and special stock

watch reports. For those over-the-counter

secunties not traded through NASDAQ,

the Commission uses automated equipI1li\nt to provide more efficient and comprehensive surveillance of stock quotatations distributed by the National Quotation Bureau. This is programmed to

identify, among other things, unlisted

securities whose price movement or

dealer interest varies beyond specified

limits in a pre-established time period.

When a security is so identified, the

equipment prints out current and historic market information. In addition, the

Commission developed further programs

this year which supplement this data by

including sales of securities pursuant to

Rule 144 under the Securities Act, ownership reports, and periodic company filings

such as quarterly and annual reports.

This data, combined with other available

information, is analyzed for possible further inquiry and enforcement action.

The staff also oversees cash tender

offers, exchange offers, proxy contests

and other activities involving efforts to

change control of public corporations.

Such oversight involves not only reviewof

trading markets in the secunties involved,

but also filings with the Commission of

required schedules, prospectuses, proxy

material and other materials.

68

~

-
Wall Street Transcript Corp.,' held that

since the subpoenas caJledfor documents

relevant to a properly authorized Commission investigation, the Commission need

not demonstrate facts showing either the

probability of coverage or the likelihood

of violation of the statutes to secure

their enforcement. The court further held

that absent "evidence of abuse" by the

Commission, it was entitled to conduct a

fuJI inquiry into both potential coverage

and potential violation of the Federal securities laws. The court did state that the

Commission was not at liberty to act unreasonably and that in appropriate circumstances a court could inquire into the

reasons for an investigation and into its

effects, but the burden of showing that an

agency subpoena was unreasonable "remains with the respondent" and "is not

easily met." FinaJly, the court agreed

with the Commission that the district

court's requirement that a statement be

made to each witness was unjustified.

ENFORCEMENT PROCEEDINGS

The Commission has available a wide

range of possible enforcement actions. It

may in appropriate cases refer its files to

the Department of Justice with a recommendation for criminal prosecution. The

penalties upon conviction are specified

in the various statutes and include imprisonment for substantial terms and

fines.

The securities laws also authorize the

Commission to file injunctive actions in

the Federal district courts to enjom continued or threatened violations of those

laws or applicable Commission rules. In

injunctive actions the Commission has

frequently sought to obtarn anciJlaryrelief

under the general equity powers of the

Federal district courts. The power of the

Federal courts to grant such relief has

been judiciaJly recognized.' The Commission has often requested the court to appoint a receiver for a broker-dealer or

other businesswhere investors were likely

to be harmed by continuance of the exist.

ing management. It has also requested,

among other things, court orders restricting future activities of the defendants, reo

quiring that rescission be offered to securities purchasers, or requiring disgorgement of the defendants' ill-gotten gains.

The SEC'sprimary function is to protect

the public from fraudulent and other unlawful practices and not to obtain damages for injured individuals. Thus, a request that disgorgement be required is

predicated on the needto deprive defend.

ants of profits derived from their unlawful conduct and to protect the public

by deterring such conduct by others.

If the terms of any injunctive decree

are violated, the Commission may file

criminal contempt proceedings, as a result of which the violator may be fined

or imprisoned.

The Federalsecurities acts also authorize the Commission to impose remedial

administrative sanctions. Most commonly, administrative enforcement proceedings involve aJlegedviolations of the securities acts or regulations by firms or

persons engaged in the securities business,although the Commission's jurisdiction extends to aJl persons. GeneraJly

speaking, if the Commission finds that a

respondent willfuJly violated a provision

of or rule under the securities acts, failed

reasonaby to supervise another person

who committed a violation, or has been

convicted for or enjoined from certain

types of misconduct, and that a sanction

is in the public interest, it may revoke or

suspend the registration of a brokerdealer or investment adviser, bar or suspend any person from the securities business or from association with an investment company, or censure a firm or individual. Proceedings may also cover

adequacy of disclosure in a registration

statement or in reports filed with the

Commission. Such cases may lead to an

order suspending the effectiveness of a

registration statement or directing compliance with reporting requirements. The

Commission also has the power to suspend trading in a security summarily

when the public interest requires.

Proceedings are frequently completed

without hearings where respondents

waive their right to a hearing and submit

settlement offers consenting to remedial

69
action which the Commission accepts as

an appropriate disposition of the proceedings. The Commission tries to gear

its sanctions in both contested and settle.

ment cases to the circumstances of the

case. For example, it may lirnrt the sanction to a particular branch office of a

broker-dealer rather than sanction the entire firm, prohibit only certain kinds of

activity by the broker-dealer during a period of suspension or only prohibit an

individual from engaging in supervisory

activities.

A chart listing the various types of en.

forcement proceedings, as well as stattstics on such proceedmgs,in the statistical

section.

ADMINISTRATIVE PROCEEDINGS

Summarized below are some of the

many administrative proceedings pending or disposed of in fiscal 1973.

Disciplinary Proceedings

Continental Investment Corporation.-

During the fiscal year, proceedings were

instituted against Continental, two brokerdealer subsidiaries, Waddell & Reed Inc.

and Kansas City Securities Corporation

{KCSC}, and The First National Bank of

Boston. Waddell & Reed is investment

adviser and principal underwriter for the

United Funds complex, a group of registered investment companies with net assets in excess of $2.5 billion.

The Continental respondents were

charged by the Commission's staff with

abuse of their fiduciary duty in that they

effected Fund portfolio transactions principally for their own benefit, rather than

for the benefit of the Funds and their

shareholders. Among other things, it was

alleged that portfolio transactions were

effected through KCSCalthough its services were not needed, and that Continental and Waddell, together with First

National, improperly used Fund custodian accounts and the balances therein to

provide compensating balances for a loan

to Continental. The loan, originally for

about $82.5 million, was used by Continental to purchase Waddell. As part of

this course of conduct, the respondents

were charged with causing United Science

Fund to enter into a custodian contract

with First National on a basis less favorable than that enjoyed by the bank's other

custodial clients.

On June 13, 1973, the Commission issued an order censuring First National

pursuant to an offer of settlement! First

JIlational renegotiated its fee structure

with United Science Fund and recomputed its fees, thereby effecting a repayment of approximately $117,000 to the

fund.

Butcher and Sherrerd.5-This firm, a

broker-dealer and investment adviser, and

six partners submitted a settlement offer

consenting to certain fmdings without admitting staff allegations against them.

The Commission found, pursuant to the

offer, that the respondents violated antifraud provisions of the securities laws in

connection with their activities and transactions with respect to the common stock

of Penn Central Company. For a 10-year

period, the firm induced customers to purchase Penn Central stock on the basis of

the firm's investment judgment. Then

the firm changed its recommendation so

as to advise sale of the stock instead of

purchase, but the change was communicated only on a selected basis to certain

preferred customers, and not to others

who still held shares of the stock which

they had purchased on the firm's recornmendation. Pursuant to the offer, the

Commission suspended the retail sales

department of the firm for 10 business

days and suspended the firm's partners

for varying periods from association with

any broker-dealer, investment adviser or

investment company. In addition, the firm

established a $350,000 escrow fund for

customers in order to ameliorate their

losses on Penn Central transactions.

During the past fiscal year, the Commission stepped up its enforcement activities with respect to the improper use

of inside information. During that time,

seven proceedingswere instituted against

approximately 50 tippers and tippees. As

the Commission noted in the Faberge

case, discussed below, "few practices,

70
short of manipulation, have as deleterious

all effect on the investing public's confidence in corporate institutions and the

securities markets as the selective disclosure of and misuse of inside information." 8

In connection with trading in Faberge

stock, the Commission ordered administrative proceedings against three broker.

dealers and a bank basedon staff charges

that the broker-dealers conveyed adverse

inside information concerning the sales

and earnings of Faberge, Inc., for its third

quarter ended September 30, 1970, to

certain select customers, and recommended the sale of Faberge securities

while in possession of such Information.

The brokers, according to the charges,

received the information from a Faberge

VICe,president,' and the bank, from a

broker-dealer. The Commission an.

nounced at the same time that it had accepted waivers of the formal institution

of administrative proceedings, and con.

sents to certain findings and conclusions,

from two other broker-dealers and three

firms operating as investment advisers

of investment companies, in connection

with misuse of the same inside inforrnation, Based on the waivers and consents,

the Commission found that the conduct

of the five firms violated antifraud provisions of the Exchange Act and was

censurable.

In its opinion accepting the waivers

and consents," the Commission stated

that proper and adequate disclosure of

significant corporate developments can

only be effected by a public release

through the appropriate public media, designed to achieve a broad dissemination

to the investing public generally and

without favoring any special person or

group. To hold otherwise, the Commission asserted, would be to sanction com.

petition for tips in which the ordinary individual investor would inevitably be at

a serious disadvantage.

The Commission emphasized the importance and necessity of broker-dealers

investment advisers, and institutional in:

vestors, as well as issuers, instituting and

implementing effective procedures calculated to deter and detect the misuse

of inside Information. The opinion included a discussion of some elements of

an effective compliance program, including the training and education of employees and an ongoing review of trading

to spot trading concentrations by em.

ployees.

Disqualification of Accountants and

Attorneys

Laventho/, Kreksteln, Horwath & Horwath -The Commission accepted an offer of settlement from the accounting

firm of Laventhol, Krekstein, Horwath &

Horwath In an administrative proceeding

instituted pursuant to Rule 2(e) of the

Cornrnissron's Rules of Practice With respect to Laventhol's qualifications to appear and practice before It. A permanent

Injunction against the firm had been

entered, With ItS consent and Without ItS

admitting or denying the allegations of the

complaint, In a Commission action which

alleged that Laventhol was involved In

the preparation and drsserrunatron of

false and misleading certified financial

statements and other fmancial information of Takara Partners, a limited partnership engaged In Investment activities.

The complaint In that action further allegedthat Laventhol was not Independent

or qualified to certify Takara's ftnancral

statements because partners or employees of the branch office working on

the Takara audit received approximately

$17,000 In payments from the general

partners of Takara In the guise of profits

from participating In the purchase and

sale of "hot Issues." Pursuant to ItSoffer,

Laventhol was ordered to permit an investigation, Within a specrfied period, to

ascertain whether ItS professional practice ISbeing conducted In compliance With

the standards and procedures which the

injunctive decree required It to adopt and

maintain. The Cornrmssron's order also

placed restncnons, for specifred penods,

on mergers and acquisrtrons by the firm

and on ItS acceptance of certain new

professional engagements.

Stuart SchIffman. 1°-Stuart Schiffman,

a lawyer, was permanently suspended

71
from practice before the Commission

under Rule 2(e)(3) of the Commission's

Rulesof Practice.The order of suspension

was based upon an injunction against

violations of the registration and antifraud provisions of the securities acts

that had been entered against Schiffman

in December 1972," and upon fmdings

by the Commission in an administrative

proceeding that Schiffman willfully violated and willfully aided and abetted violations of antifraud, net capital, recordkeeping and reporting provisions of those

acts." In the Rule 2(e) proceeding, Schiffman did not petition the Commission to

lift the temporary suspension it had ordered, and the suspension therefore became permanent by operation of Rule

2(e)(3)(ii).

Emanuel Fields!8-The Commission

entered an order pursuant to Rule2(e)(3)

of the Commission's Rules of Practice

summarily suspendmg FIelds, a lawyer,

from appearing or practrcrng before it.

The order was based upon the entry of a

judgment in SEC v. Emanuel Fields, et

a/.," permanently enjoinmg Fields from

violating the registration and antifraud

provisions of the Federal securities laws.

Pursuant to Rule 2(e)(3), Fields petitioned the Commission to lift the ternporary suspension. The Commission

denied the petition and, as required by

the rule, set the matter down for hearing

to determine what ultimate sanction, if

any, should be imposed. Fields then

waived an evidentiary hearing, and, after

briefing and oral argument, the Commission issued an order permanently

disqualifying him from appearing or practicing before it. The Commission rejected

Fields' contention that his summary sus.

pension violated due process. It stated

that summary action was appropriate

when predicated on previous findings of

serious misconduct."

Reports

Great Southwest Corporation.'G-ln a

detailed opinion, the Commission directed Great Southwest to file amended

financial statements on Form 1D-K for

the years 1968 and 1969 in order to exelude profits on certain transactions and

eliminate related sales and cost of sales.

The company's annual reports, filed pursuant to Exchange Act requirements,

treated certain real estate transactions,

involving amusement parks in Texas and

Georgia and raw land in California, as

sales, and recorded profits.

The Commission found that although

the transactions may have met the formal

legal requirements for a sale, the corporation retained control over management

of the properties and substantially all

risk of loss and opportunity for gain. Accordingly, the Commission concluded that

the method of accounting employed by

the corporation did not reflect the economic realities of the transactions at

issue.

Trading Suspensions

The Securlties ExchangeAct authorizes

the Comrrussron summarily to suspend

trading in a security traded on either a

national securities exchange or in the

over-the-counter market for a period of

up to 10 days if, in the Commission's

opinion, it is required in the public

interest.

During fiscal 1973, the Commission

suspendedtradmg in the securities of 174

companies, an increase of about 270 percent over the 47 securities suspended in

frscal 1972. In most instances, this action

was taken either because of substantial

questions as to the adequacy, accuracy

or availability of public information concerning the companies' financial condition or business operations or becauseof

transactions in the companies' securities

suggesting possible manipulation or other

vrolations. Although trading suspensions

are freauently a prelude to other enforcement action, the Commission during 1973

began temnorarily susnending trading in

the securities of issuers who were delinquent in filing reauired reoorts with the

Cornrnisslon." This was dane in order to

alert the public to the lack of adequate,

accurate and current information concerning such issuers. Of the 174 susoenslons

initiated by the Commission this year, 95

were instituted for that reason. For ex72
arllple, trdlding in Met eports Centers,

Inc. was suspended in February 1973 for

failure to file ID-K Annual Reports for

1970, 1971, and 1972, ID-Q quarterly

reports for 1971 and 1972, and a 9-K

report for the 6 months ending March

1970.'8 The following examples Illustrate

circumstances under which the Commission may suspend trading.

On March 28, 1973, the Commission

suspended exchangeand over-the-counter

trading in all securities of Equity Funding

Corporation of America, listed on the New

York Stock Exchange, because rumors

concerning the financial condition and

operations of the company were circulating in the investment community." The

suspension was also ordered because of

an increased volume of trading and a

dramatic decline in the prices of Equity's

securities.

In April 1973, at the request of Giant

Stores Corp., the Commission suspended

trading in the company's securities, listed

on the American Stock Exchange,because

of the unavailability of adequate and accurate financial information concerning

the company and indications of possible

record-keeping irregularities in connection

with the preparation of its financial statements." Subsequently, several members

of the company's management resigned,

and the company's independent auditors

withdrew their opinion on company financial statements because of certain irregularities in connection with the accounts of

the company and its subsidiaries.

Trading in the securities of Marcon

Electronics Corporation was suspended in

January 1973, at a time when five brokerdealers were making a market In the stock

of the company, because it had been

adjudicated bankrupt in 1969 and had no

stockholder equity remaining, its assets

having been sold and the proceeds distributed to creditors." Additionally, the

company had no offices, no transfer

agent, and the Secretary of State of New

Jersey had declared it a "voided corporation" becauseof its failure to pay taxes.

On December 5, 1972, the Commission

suspended trading in the securities of

U.S. Financial, lnc., listed on the New

York Stock Exchange." The suspension

was initiated because of the lack of accurate and reliable information concerning

the company's flnancial condition. The

company's independent auditor had Withdrawn its certification of the company's

1971 annual report, and the company had

announced that it intended to re-audrt

its 1971 financial statements and conduct a special audit With respect to financial reports contained in 1972 filings.

On June 5, 1973, the Commission suspended trading in the securities of

Coastal States Gas Corp., listed on the

New York Stock Exchange, because of

rumors concerning the company's gas

reserves and its abllity to meet contractual commitments, and the impact of

such rumors on the market for Coastal

securities.'"

CIVIL PROCEEDINGS

During fiscal 1973, the Commission

instituted a total of 178 injunctive actions. Some of the more noteworthy of

these injunctive proceedings and significant developments in actions instituted

in earlier years are reported below.

Coordination between self-regulatory

bodies and the Division of Enforcement resulted in several enforcement actions, as well as investigations. Among

the more important actions was an injunctive suit, S.E.C. v. Eisenberger, et

el.," resulting from a joint effort by the

Commission and the American Stock Exchange. Eisenberger, an unregistered investment adviser, had purchased stock of

Vetco Offshore Industries, Inc. and call

options on the stock for his own account,

for a limited partnership of which he was

the general partner, and for accounts

maintained with a European investment

adviser which had given him discretionary

authority to invest funds in the accounts.

Through such purchases of stock and call

options, control was acquired over approximately 27 percent of Vetco's outstanding stock. The Commission charged

that Eisenberger,the limited partnership,

lind the foreign investment adviser constituted a "group" within the meaning of

Section 13(d)(3) of the Exchange Act

73
(The Williams Act) and had failed to file

the required Schedule 130 with the Commission disclosing ownership interests

and other information. Consent injunctions were obtained from Eisenberger

and the limited partnership, as well as

from the European investment adviser

which had not been named a party to

tile litigation. Pursuant "thereto, a statement on Schedule 130 was filed with the

Commission reflecting the dates and

amounts of purchases and sales of the

Vetco shares and options, the manner in

which certain of the option transactions

were effected, and the effect such transactions may have had on transactions in

underlying Vetco common stock on the

American Stock Exchange.

As a further result of cooperation with

self-regulatory bodies, an investigation

was begun into the improper disclosure

of inside information concernmg the earnings decline of Liggett & Myers, Inc. in

the second quarter of 1972. The Commission charged, in a complaint filed on

June 25, 1973, that Liggett & Myers

and an assistant vice president of the

company violated antifraud provisions by

disseminating undisclosed material inside

information concerning the earnings decline to certain preferred individuals."

The case is still pending.

SEC v. Shapiro."'-In this injunctive

action, the district court permanently

enjoined two partners of a firm specializing in corporate mergers and acquisitions

from further violations of Rule 10b-5

under the Exchange Act, and ordered

them to disgorge to a court-appointed

trustee the profits derived from their unlawful purchases of stock of Harvey's

Stores, lnc., a publicly held corporation

listed on the American Stock Exchange.

The court held that these defendants had

violated the rule by purchasing stock

without disclosing to the sellers material

nonpublic information concerning a proposed merger which they had acquired

as a result of their positions as finders

and through friendship with corporate officials of the prospective merger partners.

The court further held that the defendants were also SUbject to liability for

'tipping" inside information concerning

the proposed merger to others in order

that the "tippees" might benefit. Prior to

the court's decrsion all other defendants

in the action, including tippees of parties

privy to the merger negotiations, consented to the entry of fmal judgments of

permanent rnjunctron and orders of disgorgement.

In rejecting the defendants' contention

that they did not have to make disclosure since the possibility of merger was

remote and the information was therefore not material, the court found that at

the time of the defendants' first purchases the proposed merger was a "viable possibility" which became "even

more distinct" during the period encompassing their subsequent purchases. Followmg the standard for materiality enunciated in S.E.C. v. Texas Gulf SUlphur

CO.,21the court considered the defendants' own trading activities as the most

convincing factor illustrating the materiality of the information, noting that

there existed "very significant [uxtaposlnons between the timing of the defendants' purchases and critical events in

the negotiations" and that "the pace

and quantity of defendants' purchases

increased as developments grew more

prorrusing for an eventual merger." The

court also held that injunctive relief was

particularly appropriate in view of the

fact that the defendants' repeated and

persistent violations arose out of their

activities as corporate "marriage brokers" and there was no indication that

they planned to change professions or

cease their business activities. At fiscal

year-end, appeals taken by these defendants were pending.

S.E.C. v. Bausch & Lomb, Inc., et

al."'-In another action alleging the improper disclosure and use of inside information, the Commission filed an injunctive complaint against Bausch &

Lomb, its chief executive officer, and nine

other defendants. The information in

question related to the company's disappointing sales and earnings from its

soft contact lens. The complaint alleges,

among other things, that one of the tip74
pees, a brokerage firm secunties analyst,

withdrew his "buy" recommendation

shortly after receiving the adverse inside

information during the course of an interview with Bausch & Lomb's chief executive officer, and that, after receipt of the

information, the head securities trader at

the brokerage firm sold 2,300 shares of

Bausch & Lomb common stock held in

his and 13 family-related accounts. It is

further alleged that an investment adviser

and an investment manager caused the

sale of 72,000 and 3,000 shares, respectively, of Bausch & Lomb stock after

receipt of the information.

S.E.C. v, Lums, Inc. et al.""-Investors

Diversified Services, Inc. (IDS), a defendant in another Commission suit involving

inside information, consented, without admitting or denying the allegations of the

complaint, to a permanent injunction

which among other things, required the

firm to implement the Statement of Policy

described below." The Commission's

complaint had alleged the improper use of

adverse inside information in connection

with the sale of IDS's position of 83,000

shares of Lum's common stock. The

Statement of Policy requires an IDS employee who receives "material informat;on about a company which he knows or

has reason to believe is directly or indirectly attributable to such company (or its

insiders), [to] determine that the information is public" before utilizing it. If the

employee has any doubt at all as to

whether the information has been made

public, he must consult with IDS' in-house

counsel.

S.E.C. v. J. C. Bradford & Company, et

al.31-Qn November 10, 1972, the Commission, in another action in this area,

filed an injunctive complaint against J. C.

Bradford & Co., a New York Stock Exchange member firm, two of its officers,

and two Bradford subsidiaries including Life Stock Research Corporation, a

registered investment adviser. The action

sought an injunction for alleged violations

of antifraud provisions, and disgorgement of defendants' profits for allegedly

trading in securities of The Old Line Life

Insurance Company of America while in

possession of material non-public information. That rnforrnatron concerned another corporation's interest rn acquiring

Old Lme by offering a share for share exchange of stock that would have nearly

doubled the value of Old Line shares. The

defendants, without admitting or denying

the allegations of the cornplarnt, consented to entry of an injunction and

agreed to set up a fund of more than

$100,000 to provide for payment of

claims arising out of their trading in Old

Line stock. As part of the settlement, the

defendants also consented to the imposttion of admmistrative sanctions."

S.E.C. v. Bangor Punta Corporeuon.s-«

This was an appeal from a district court

order denymg mjunctrve relief in a Commission action alleging violations of the

antifraud provrsions of the Securities Act

and the ExchangeAct in connection With

a contest between Bangor Punta Corporation and Chns-Craft Industries, Inc. for

control of Piper Arrcraft Corporation. On

May 29, 1969, Bangor filed With the Commission a registration statement and prospectus for an offering of ItSsecurities in

exchange for Piper stock, in which It was

not disclosed that the Bangor and Aroostook Railroad, owned by Bangor and

earned on its books at $18,400,000, was

being negotiated for sale at between $5

and $7 rrnlnon." The district court found

that the safe of the railroad was not delayed, as the Cornrnissronhad charged, to

avoid an adverse effect on the tender

offer, but that the registration statement

was rmsleading m orrnttrng to disclose the

negotiations to sell the railroad at a

greatly reduced value. The district court

directed Bangor to make a restricted offer

of rescission to Piper shareholders who

had accepted the Bangor exchange offer,

but denied injunctive relief sought by the

Commission to restrain Bangor from future violations of the securities laws.'" On

appeal, a divided panel of the Court of Appeals for the SecondCircuit affirmed (2 to

1) the district court's denial of injunctive

relief. The court of appeals, however,

found that the failure to disclose "clearly

was unreasonable" and demonstrated

"reckless disregard" so that the refusal

75
of the distnct court to award damages

in the related private action was

erroneous." In addition, the court of appeals affirmed the order requiring Bangor

to offer rescission, and, as urged by the

Commission, concluded that a condition

Imposedon the offer by the district court

was inappropriate. On May 8, 1973, the

court of appeals denied the Commission's motion for rehearing and suggestion for rehearing en banc, three judges

dissenting. OnAugust 15, 1973, the Commission filed a petition with the United

States Supreme Court for a writ of

certiorari to overturn the court of appeals

affirmance of the denial of injunctive

relief.

The Court of Appeals for the Ninth

Circuit In Securities and Exchange Commission v. Untted Financial Group, Inc.,3.

affirmed the district court's conclusion

that It had JUrisdiction under the Securities Act and the ExchangeAct over the

activities of the defendant offshore

mutual funds, although there had been

only a few sales by those funds to American investors. The court stated that the

proper focus should be upon the activities of the defendants in this country and

the impact of those activities on American investors, that the Federal securities laws should be broadly construed to

promote their remedial purposes and,

that the "jurisdictional hook need not

be large to fish for securities laws

violations...

The court also construed Section 30(b)

of the ExchangeAct which provides that

the Act does not apply to any person

"Insofar as he transacts a business in

securities without the jurisdiction of the

United States," unless in contravention

of Commission rules adopted to prevent

evasion of the Act. The court held the

section inapplicable, stating that the

"jurisdiction of the United States" does

not mean terntorial limits. Moreover, offers and sales were made by defendants

to United States citizens, and defendants

carried on substantial activities in the

United States in order to facilrtate the

saleof secunties abroad.

In S.E.C. v. Computer Statistics, tnc;"

the United States Court of Appealsfor the

Distnct of Columbia CirCUItaffirmed, in

a per cut/am order, the district court's

entry of summary judgment in the Commission's favor requinng the defendant

to file timely and proper periodic

reports." It also affirmed the lower court's

denial of defendant's motion to dismiss

for improper venue or, in the alternative,

to transfer venue to the Northern District

of Texas where the defendant had its

principal place of business. The court of

appeals rejected the contention that sum.

mary judgment should not have been

granted because there was an issue of

fact as to whether a reasonable likelihood of future vlolatrons existed in light

of the defendant's assertion that it would

attempt to comply with reporting requirements In the future.

S.E.C. v. Allegheny BeverageCorporat/on.o6_ln May 1973, the Commission

instituted an injunctive action against Allegheny and 24 other defendants alleging

violations of reporting, antifraud, and registration provisions of the securities acts.

In addition to Allegheny, the defendants

include Value Vend Credit Corporation

(VVCC) (an Allegheny subsidiary), four

Allegheny officers, the company's auditors, the underwriter of a VVCC public

offering, counsel for the underwriter,

counsel for VVCC,and the escrow agent

for the public offering, Suburban Trust

Company.

The complaint alleges that various

Allegheny financial reports disseminated

to the public and filed with the Commission in 1971 and 1972 were materially

false and misleading. The reports allegedly included income from improperly

reported salesand materially understated

certain expenses.Another portion of the

cernplaint relates to a 1971 public offering of $25 million of WCC debentures.

The prospectus stated that $10 million

of such debentures had to be sold and

paid for within a specified period or all

money received from subscribers, to be

maintained in a special account at Suburban, would be returned. It is alleged that

VVCCwas able to sell only $500,000 of

76
the debentures but entered into fraudulent arrangements, aided by certain of

the defendants, to make it appear that

$10 million had been sold.

S.E.C. v. Frlg/temp Corp.'.-In March

1973, the Commission filed an injunctive

complaint against Frigitemp and four

other defendants alleging violations of

the registration and antifraud provisions

of the Federal securities laws. Thereafter, the defendants, without admitting

or denying the allegations, consented to

entry of a permanent injunction and certain ancillary relief sought by the

Commission.

The Commission had alleged that the

defendants filed false and misleading registration statements, offered and sold

unregistered Frigitemp securities, rnanlpulated the market for Frigitemp stock,

and engaged in a fraudulent scheme involving cash payments to "induce the

awarding of contracts to Frlgrternp. As

requested by the Commission, the four

individual defendants agreed to pay the

company $185,000, approximating the

monies paid by Frigitemp to induce the

awarding of contracts. The defendants

also agreed to Implement a plan under

which independent directors would supervise Frigitemp's operations for a specified

period.

S.E.C. v. General Host Corporation, et

al.41-ln connection with its surveillance

of corporate takeover attempts, the Commission filed an injunctive action against

General Host and nine other defendants

charging a fraudulent scheme to acquire

control of Armour and Company. In addition, the suit alleged violations in connection with General Host's efforts to dispose of its Armour noldmgs to Greyhound

Corporation and further violations 10 connection with General Host's acquisition,

through merger, of U'I General Stores,

Inc. The Commission obtained a consent

injunction against Kleiner, Bell & Co.,

lnc., one of the dealer-managers of General Host's exchange offer for Armour!"

The case is still pending with respect to

the remaining defendants.

In S.E.C. v. M. A. Lundy Associates"

the United States District Court for the

District of Rhode Island preliminarily

enjoined further violations of the registration and antifraud provisions of the secunties laws in connection with the offer

and sale of scotch whiskey warehouse receipts and certrfrcates of beneftcral interest in certain trusts. It held, in accordance With the Cornrnlssron's VIews, that

the warehouse receipts offered by some

of the defendants were securities, noting

that "the success of most, if not all, of

the investors in said scotch whiskey warehouse receipts is dependent on the advice

of the brokers thereof." The district court

also rejected the defendants' contention

that the certificates of beneficial interest

in the trusts were exempt from the registration requirements of the Securities Act

by virtue of Section 3(a)(3)" which relates to various forms of short term commercial paper, hold 109 that the certificates could not be considered to be

within the class of prime quality negotiable commercial paper not normally

available for purchase by the general

public which Congress intended to be

covered by the exemption."

During the past fiscal year, the Commission sought injunctive relief against

three so-called pyramid promotion

schemes. In all three cases, the promoters purported to offer franchises for the

retail sale of goods or services. In S.E.C.

v. Glenn W. Turner Enterprises, Inc." the

defendants purported to offer "distributorships" for the sale of tape recorded

self-improvement courses through Dare

to Be Great, lnc., a subsidiary of Turner

Enterprises. The overwhelming emphasis

of defendants' promotion, however, was

upon the financial rewards that an investor might obtain by sharing with the

promoters in the profits to be derived

from the recruitment of other investors

into the scheme. The new recruits could,

in turn, obtain a similar profit from the

recruitment of still other investors. The

United States District Court for the District of Oregon found, as the Commission

urged, that the scheme depended for its

success upon high-pressure, deceptive

sales tactics featuring emotionally

charged gatherings of investors and pro77
spective investors orchestrated by defendants. As requested by the Comrmssion, the court held that the interests

offeredand sold weresecuntres within the

Securires Act's descnptive terms "investment contract," "certificate of Interest or

participation In any profit-shanng agreement," and "any interest or Instrument

commonly known as a 'secunty.''' The

district court observed that "the subjection of the Investor's money to the risk of

an enterprise over which he exercises no

managerial control ISthe basic economic

reality of a securities transaction."'7 It

preliminarily enjoined defendants from

offering or seiling such securities absent compliance with the registration provisions of the SecuntresAct and all other

applicable provisions of the federal securities laws.

The United States Court of Appeals

for the Ninth Circurt affirmed, holding the

Interests sold to be "Investment contracts" and hence "secunties.' It applied the test for an "Investment contract" contained in S.E.C.v. W. J. Howey

Co.,"-"an investment of money In a

common enterprise wrth profits to come

solely from the efforts of others."

Although it was necessary for Investors

to perform some recruitment functions,

the court of appeals concluded that the

"efforts" whrch Howey requires to be

made by persons other than the investor

are "the undeniably significant ones,

those essential managerial efforts which

affect the failure or success of the enterprise." 49 Defendants have petitioned

the SupremeCourt for a writ of certloran

to which the Comrrussion has filed a

memorandum In opposition.

In SEC. v. Koscot Interplanetary,

lnc.," the Commission sought to enjoin

the fraudulent offer and sale of unregistered interests in a substantially identical pyramid promotion scheme run by

Koscot Interplanetary, lnc., another subsidiary of Turner Enterpnses. Contrary

to the conclusion reached by the Court

of Appeals for the Ninth Circuit in Turner

Enterprises, however, the United States

Distnct Court for the Northern District of

Georgia held that the interests offered

78

and sold by Koscot were not securities

Within the statutory definitions. Accordingly, the court granted defendants' motion to dismiss for failure to state a claim

upon which relief could be granted. The

Commission's appeal of this decision is

now pending before the United States

Court of Appeals for the Fifth Circuit."

The third pyramid case, SEC. v. Holiday Magic, Inc. et al."' Involves a substantially Similar but unrelated promo.

tron The action is now pending in the

United States District Court for the

Northern District of California where the

Commission has requested an Injunction

against future violations of the registration and antifraud provrsions, as well as

an accounting and disgorgernent of profItSand the appointment of a receiver for

the assetsof the company.

S.E.C.v. Datronics Engineers, Inc.03

The United States Court of Appeals for

the Fourth Circuit held, contrary to the

decision of the district court, that spinoff drstnbutions by Datronics to its

shareholders of stock of nine non-public

companies involved the "sale" of unregistered securities and therefore violated

the registration provisions of the Securities Act. Agreeing with the decision in

S.E.C. v. Harwyn Industries Corp.,"' the

court concluded that the spin-off distributions-which were effected solely to

create trading markets in the spun-off

stocks-were "dispositions of a secunty . . . for value" and thus "sales"

within the meaning of Section 2(3) of the

Act. The court found that "value" accrued to Datronics and to ItSofficers and

agents in that the creation of trading

markets gave added value both to the

spun-off stock retained by Datronics and

to the stock received by its officers and

agents as compensation for legal and

other services rendered to the spin-off

companies.

The court further ruled that the spinoffs were not exempt as transactions by a

person other than an issuer, underwriter

or dealer under Section 4(1) of the Securities Act, since Datronics was "actually an issuer, or at least a co-issuer."

Datronics was also found by the court to

-
be an underwriter within the meaning of

Section 2(11) of the Act In that it purchased stock from the spin-off cornparues

wrth a view to the distribution of the stock

to Datrorucs shareholders.

Having determined that the spin-off

distributions were sales, the court further

held that the defendants violated the anti'

fraud provisions of the ExchangeAct by

disseminating false and misleading information in connection with the spin-offs.

The court also found that the nature and

extent of the violations, including the

number and magnitude of the unregistered distributions, warranted the grant

of an injunction to prevent recurrences,

and accordingly directed that a preliminary injunction be entered.

In two enforcement actions, S.E.C. v.

Continental Commodities Corporation, et

al.'" and S.E.C. v. Goldstein, Samuelson,

lnc., et al."" the Comrnissron urged that

schemes which in form purported to involve the offer and sale of options on

commodity futures involved, in sub.

stance, the offer and sale of "securities"

within the meaning of the Federal securities laws. In both cases the promoters

undertook to pay a sum of money to investors contingent upon favorable market

price movements of certain unregulated

commodities. The Commission alleged in

each case, however, that neither the "option" acquired nor the payment made by

an investor had any necessary relationship to any commodities futures or

actual commodities to be bought, sold,

accepted or delivered 0/ the defendants.

Accordingly, the contributed capital of all

investors, which was subjected to the

risks of the promoters' corporate enterprise, could be devoted to any purpose

unrelated to commodities that the promoters might choose; and whether the

promised payment could be made to investors depended upon the successof the

promoters' management of the enterprise

to Which the investors' funds had been

committed. Consistent with these facts it

was alleged that the Interests offered and

sold were "investment contract[s],"

"evidence[s] of indebetedness" and interests or Instruments "commonly known

as a security."

On March 21, 1973, the district court

In the Continental case appointed a temporary receiver for the company's assets at the request of the Commission.

Thereafter, however, the court denied the

Commission's motion for a prelimmary injunction on the ground that neither the

interests sold in the form of purported

commodity options nor the promissory

notes that were issued to Investors in lieu

of payments due them were securities

within the statutory definitions. The

Cornrnissron has appealed the ruling on

the promissory notes to the United States

Court of Appeals for the Fifth Circuit. The

temporary receivership remains in effect

pending appeal.

The Goldstein case is stili pending in

the district court.

S.E.C. v. Geo Tek Resources Fund,

Inc."7-ln May 1973, the Commission

brought suit seeking the appointment of

a receiver for Geo Tek and an injunction

restraining the company and 25 other

defendants from violating registration,

antifraud and reporting provisions of the

securities acts. According to the complaint, from January, 1964 through January, 1972, the defendants obtained

about $30 million in violation of the securrties acts from more than 2,000 public

investors in various oil and gas programs.

The Commission alleged that the defendants (1) sold unregistered securities and

certain of them misappropriated the proceeds, (2) disseminated to investors and

prospective investors materially false and

misleading prospectuses, reports and

offering circulars; and (3) filed with the

Commission materially false and misleading information as to (a) the financial

conditron and business operations of various oil and gas programs, and (b) transactions involving certain officers, directors, employees and affiliates of the

programs

S.E.C. v. Flotuie East Coast Railway

Company."'-In January 1973, the Comrnisston instituted an Injunctive proceeding against the railroad and three other

defendants alleging violations of the re79
porting, proxy and antifraud provisions of

the securities acts.

The Commission charged that the railroad filed a false and misleading proxy

statement with the Commission in February, 1972 pertaining to a proposed increase In Its authorized capital stock and

an exchange of that stock for its outstanding First MortgageBonds.The complaint also charged the Alfred I. duPont

Testamentary Trust, one of the defendants, with purchasing the bonds whrle in

possession of material non-public rnformatron concerning the proposed exchange offer, and the railroad, with purchasing its Second Mortgage Bonds in

the open market while in possession of

material non-public information concerning their retirement. The Commission sought a permanent injunction and

certain ancillary relief.

In May 1973, the railroad disseminated to stockholders new proxy soliciting material in cvnnection with obtaining

a new shareholder vote on the exchange

offer. The Commission filed a motion for

a preliminary injunction and a temporary

restraining order to prevent the holding

of a scheduled stockholders' meeting and

a vote on the matters raised in the proxy

materials, which the Cornrrussionalleged

were materially false and misleading.The

court denied the motion for a temporary

restraining order and consolidated for

trial the motion for a preliminary injunction and the action seeking a permanent

injunction.

In October 1972, the Commission fi'ed

two complaints in the United States District Court for the WesternDistrict of Tennessee seeking to enjoin a total of 7

municipal bond dealers, not registered

With the Cornrruaslon,and 23 individual

de'endants from Violations of antifraud

provisions of the Federalsecurities laws.

In one case, S.E.C. v. Investors Associates of America, Inc., et al.... all of the

defendants consented to preliminary injunctions, with the exception of one

dealer and one individual who consented

to permanent injunctions." The defendants were charged with having engaped

in a scheme to sell municipal bonds by

80

means of high pressure, "boiler-room"

sales techniques. It was alleged that, in

furtherance of the scheme, they employed a campaign of mtensive long

distance telephone solicitation of customers in order to induce the purchase

of low quality rnurucrpal bonds by means

of fraudulent representations concerning

among other things, the source, quality

and market price of the bonds. In the

secondcase,S.E.C.v. Charles A. Morris &

Associates, tnc.," the Commission alleged that similar misconduct had occurred. Following a hearing, the court

granted the Commission's motion for a

preliminary injunction against all of the

defendants, with the exception of three

who consentedto ::J permanent injunction.

In S.E.C.v. American Agronomics Corporation et aLG the Commission obtained

consent decreesof permanent injunction

against 14 defendants alleged to have

violated the registration and antifraud

provisions of the Federal securities laws

in connection with the sale of orange

grove investment contracts. In addition to

consenting to permanent injunctions,

Agronomics, its wholly owned subsidiary,

and two principal owners and officers

agreed to a court ordered undertaking

whereby rescission will be offered to all

orange grove investors for whom the investment is determined to be unsuitable

by a special counsel appointed by the

court. Additionally, the two owners and

officers agreed to deposit with the corporation 60,000 shares of their personal

Agronomics stock to defr..y any expense

incurred by the corporation as a result

of the Comrntssion's action and the conduct alleged In its complaint. The settlement also requiresthe corporation to take

steps to assure the proper allocation of

investors' orange grove maintenancefees

and the proper intercompany transfer of

funds, and to keepgroveownersinformed

as to the condition and care of their individual groves.

SEC v. Westgate-CalIfornia Corporation, et alo, is an injunctive action instituted by the Commission in May 1973

against Westgate and others alleging

violations of registratlon, antifraud, re-

'

-
porting and proxy provisions of the securities acts. The defendants Include C. Arnholt Smith. (chairman, chief executive

and former president of Westgate). Philip

Toft (president and director of Westgate),

and several privately-held companies allegedly owned and controlled by Smith

or M. J. Coen, another defendant.

The complaint alleges that Smith and

Toft assisted Westgate In perpetrating a

fraudulent course of business by lending

its assets on an Interest-free basis to

corporations controlled by Smith. These

cornparues would allegedly pledge the

"lent assets" as collateral for millions of

dollars worth of loans from the United

States National Bank of San Diego,

owned in part and controlled by Smith.

In order to avoid detection, the lent assets

would allegedly be returned to Westgate

apparently unencumbered, just prior to

exarninatron of ItS accounts by independent auditors.

This complaint also alleges a second

fraudulent course of business. The object of this second scheme was allegedly

to manufacture earnings for Westgate in

order to present a false appearance of

profrtatnlrty. It is alleged that In order to

generate bogus earnings, Smith and Toft

arranged for the sale of Westgate assets

for cash, and for Smith to loan the purchasers the funds necessary to complete

the transactions, funds Smith allegedly

borrowed from the bank. The complaint

further alleges that the purchasers In

these arranged sales were insulated from

any losses or costs. According to the

complaint, in many instances the pur.

chasers were assured a profit resulting

from an option arranged by Smith where'

by the purchaser obtained the nght to reo

sell the asset at a gain. It is alleged that.

as a result of this course of conduct.

Westgate recorded many millions of dol.

lars in profits over the last 4 years from

sales which were not arms-length, were

totally devoid of economic substance, and

which resulted in a distorted and misleading presentation of the company's

profitability.

The complaint seeks. among other

things. a permanent injunction against

further violations by the defendants, the

apporntrnent of a receiver to conduct the

operations of Westgate. an injunction

prohibiting srmtn and Toft from serving

as an officer or director of any public

company wrthout sufficrent assurance

that they Will not engage In srrrular misconduct, and an agreement from Smith

and Toft to indemnify Westgate against

any losses Incurred as a result of their

actions.

At a hearing on July 23, 1973, the

court entered an interim order placing

restrictrons on certain sales of Westgate

assets and ordering Westgate to place an

addrtronat director on ItS board who will

also be a member of Its executive commit.

tee. The director Will submit reports on

Westgate's activities to the court as

req uested .•

In December 1972, after an extensive

investigation, the Commission filed an

action, SEC v. Brozyrnes InternatIonal

Ltd., et et: against five lndividuals and

two corporations. including Joseph "Bayonne Joe" Zicarelli, Guido Orlandi and

Andrew R. L. McNaughton, seeking to enJoin them from further violations of the

registration and antifraud provisions of

the Federal securitres laws In connection

with the sale of Brozvrnes stock. The Commission's complaint charged that Biozyrnes, a Canadian corporation that

claims to own an alleged cancer cure drug

known as "Laetrile," sold millions of its

unregistered shares to Investors in the

United States and other countries by

means of fraudulent statements including

the representation that Biozymes' stock

would be traded on a stock exchange by

a specific date. The Food and Drug Ad.

ministration has banned the manufacture, sale and administering of Laetrile

In the United States. On March 21, 1973,

consent Injunctions were entered against

Zicarellr, Orlandi, and McNaughton. On

April 27, 1973, Biozymes was perrnanently enjoined on the basis of its default.

The case is strll pending against other

defendants.

In April 1973, the Commissron filed an

rnjunctrve action, S.E.C. v. Accurate Cal.

culator Corp., et a/ .... against the corpo81

'
rate defendant and six individual defendants, including Anthony Salerno and

Irwin "Steve" Schwartz, to prevent further violations of registration and antifraud provisions of the securities acts in

connection with transactions In Accurate

securities. The New York Times of

May 31, 1973 stated that Salerno was

"reported to be one of the most powerful

Mafia figures in the metropolitan area."

The complaint charged a scheme involving a distnbution of unregistered shares,

the dissemination of false and misleading

statements regarding the corporation

and the misappropriation of a substantial

portion of the proceeds of the offering.

Administrative proceedings were instituted against several United States and

Canadian broker-dealers With respect to

the unlawful sales.

SECv. Normandie Trust Company, et

al.°7-The Commission in this case obtained Injunctions against Normandie

Trust Company ("Normandie") and ten

Individuals. Normandie was an off-shore

company incorporated In Panamafor the

purpose of defrauding U.S. citizens

through the sale of letters of credit. The

defendants prepared a fraudulent balance sheet which showed Normandie as

having more than $170,000,000 in assets, when in fact it had little if any. The

defendants informed purchasers that

Normandie's letters of credit could be

utilized to obtain loans from banks, and

purchasers were required to pay into escrow in advanceanywherefrom 1 percent

to 4 percent of the face value of the

letter of credit to show their "good

faith." The money was then paid out of

escrow to the defendants upon the issuanceof a letter of credit to the purchaser.

In this manner, defendants obtained approxirnatelv $150,000 in exchangefor letters of credit having a face value of more

than $25.000,000.

In SEC. v. First American Bank &

Trust Company," the court of appeals reversed a distnct court order that had denied, except in one respect, the Commission's request for an injunction restraining the defendants from violating antifraud provisions. The Commission had

82

alleged that a sales brochure distributed

by the defendants describing certain securities Issued by the bank contained

various materially false and misleading

statements. The only statement that the

district court enjoined was the representation that the bank, which was not subject to Federalor State deposit insurance,

was "bonded and insured for the protection of depositors." The court of appeals

affirmed this aspect of the order. The

district court also found misleading the

brochure's statement that the bank paid

"guaranteed" interest on deposits, but

the court ruled that the misstatement

was not matenal because there was no

evidence that any investor had relied on

the statement. The court of appeals disagreed with this position stating, as the

Commission had argued, that the question of reliance has no part in the consideration of whether the materiality

standard has been met. In addition, the

court of appeals indicated dissatisfaction

with the district court's finding that certain other statements in the brochure

were not misleading because they were

recognizableas mere "puffing."

Securitres and Exchange Commission

v. Radio Hill Mines Co., Ltd.so-The court

of appeals held in this casethat a Federal

district court has power to include within

an injunctive decree, prohibiting further

violations of the registration and antifraud provisions of the Federalsecurities

laws, a requirement that the defendant

file with the Commission an initial and

periodic reports of his secunties holdings

and transactions, where such ancillary

relief is necessaryto aid enforcement of

the injunction. The Commission's showing that the defendant had made a practice of concealing his illegal transactions

necessitated the reporting requirement.

The court of appeals further held, citing

California v. Byers," that the Fifth Amendment privilege against self-incrimination

may not be invoked as a basis for noncompliance with the reporting requirement, Since "securities regulation is an

essentially 'non-criminal and regulatory

area of inquiry' n, the ownership of securities "is generally a completely 'lawful
activity' ", and "disclosure of such ownership is not an admission of an '10-

herently suspect' activity."

SEC. v. Spectrum, Ltd.71-The district

court refused to enter a preliminary injunction agarnst a lawyer who wrote an

opinion letter stating that the common

stock of Spectrum, Ltd., held by some 58

persons, could be sold without registration under the Securities Act. In fact, as

the court found, the 58 persons included

a number of nominees for a statutory

underwriter of the shares in question, and

the letter had been sought as part of a

scheme to sell the shares illegally. The

court stated that the lawyer could be an

aider and abettor of the Section 5 violations only if he had knowledge of the

improper scheme and, with the purposeof

furthering it, had performed an act necessary to its execution. The court concluded

that while the lawyer may have been

negligent in preparing the opinion letter,

there was insufficient evidence that he

was guilty of more serious misconduct.

The Commission appealed, arguing (1)

that the district judge erred in declining

to hold an evidentiary hearing even

though he found various facts concerning the lawyer's knowledgeof the scheme

to be in dispute, and (2) that the Commission may obtain injunctive relief

against an attorney who issues an opinion that securities may be sold without

registration where a reasonable investigation would havedisclosed that such was

not the case.

S.E.C. v. Ezrine "-The Commission

brought an enforcement action to enjoin

Ezrine, an attorney, from continuing to

appear and practice before it in violation

of Rule 2(e) of the Commission's Rules

of Practice and orders issued by the Commission pursuant thereto. The Commission charged that after Ezrine had been

temporarily and then permanently suspended from practice before the Commission, he continued to appear and practice by representing certain respondents

in an administrative proceeding conducted before an administrative lawjudge

of the Commission and by continuing to

serve as house counsel to a broker-dealer,

advising the broker-dealerwith respect to

its responsibilities under the Federal secunties laws. Ezrine's temporary suspension was predicated on his misconduct involving a public offering of securities of

Manor Nursing Centers, Inc. for which

he had been permanently enjoined in an

earlier Commission enforcement action

from further violations of the registration

and antifraud provisions of the Federal

securities laws." He was thereafter permanently disqualified from appearing and

practicing before the Commission by operation of Rule 2(e)(2) as a result of his

being convicted of conspiracy to violate

Federal Reserve Board Regulation T, a

felony."

In addition to seeking injunctive relief,

the Commission requested the district

court to direct Ezrine to disclose to all

personswho seekto retain his services in

connection With any matters relatmg to

the Federal securities laws, the fact that

he has been permanently disqualified

from appearing and practicing before the

Commission. The Comrnissron further requested that Ezrine be restrained from

obtaining any legal fees or other consideration for services he may render 10-

volving matters before or within the juris.

diction of the Commission, and that he be

ordered to disgorge all legal fees obtained

for services rendered during the period

of hrs disqualification.

The United States District Court for the

Southern District of New York, on the

Commission's motion for temporary reo

lief, preliminarily enjoined Ezrine from

continuing to appear and practice before

the Commission. For purposes of the injunction, the term "appearing and practicing" was determined to include, (1)

participatmg in a representative capacity

in an admmistrative proceeding or investigation instituted by the Commission;

(2) participating in a representative capacity in any formal or informal conference with the Commission or its staff;

(3) representing or advising any entity or

person in connection with the preparation or filing of documents with the Commission; and (4) representing, in connection with any matters arising under the

83
Federalsecurrtres laws,any broker-dealer,

investment company or Investment adviser registered or required to be registered with the Commission. The court

further ordered that, pending disposition

of the Commission's request for permanent relief, Eznne advise all present and

prospective clients, who have retained or

seek to retain his legal services in connection with matters involving the Federal

securrtres laws, that he cannot and will

not practice before the Commission. The

court also restrained Ezrine from receivmg or retaining legal fees or other compensation which he may receive or claim

for services rendered subsequent to the

date of the order and in contravention

thereof.

S.E.C.v. EverestManagementCorp."-

The court of appeals affirmed the district

court's denial of a motion by an investment company and its adviser to intervene as plaintiffs in a Commission enforcement action for the purpose of

seeking damages from certain of the 44

defendants named in the suit. The Commission had charged the defendants with

violations of antifraud provisions of the

Investment Company Act designed to

prevent self-dealing and gross abuse of

trust. In holding that the district court

did not abuse its discretion In denying the

request for intervention, the court of appeals agreedwith the Commission's argument that the action would become

unduly confused and complex since intervention would add new issues and interfere with the expeditious conduct of the

action and the possibility of negotiating

consent decreeswith some of the defendants. The court noted that, while under

unusual circumstances it might be appropriate for a district court to allow a pnvate

party to intervene in a Commission enforcement action, the propriety of the district court's denial of intervention was

clearly supported where the complicating

effect of the additional issues and additional parties outweighed any advantage

of a single dlsposrtion of the common

issues.

SEC. v. National Student Marketing

Corporation ("NSMC")'6-The Commission brought suit to enjoin 20 defendants, including NSMC and a number of

its officers and directors, its outside auditors, its outside legal counsel, various officers and directors of, and outside counsel to Interstate National Corporation

("Interstate"), a company acquired by

NSMC,and a lawyer representingthe purchasers of a company sold by NSMC,

from further violations of the antifraud,

proxy and reporting provisions of the Federal securities laws. The law firm that had

beenoutside counsel to NSMCand one of

the firm's partners filed a motion to dismiss basedon improper venue in the District of Columbia and an alternative motion to severthe claims against them and

transfer them to the Southern District of

New York. The district court denied both

motions. On the venue claim, the court

held that, since the Commission had alleged a common scheme among the defendants to violate the securities lawsand

since some of the transactions alleged to

have been made in furtherance of the

scheme had concededly occurred in the

District of Columbia, venue was proper

there as to all of the defendants, whether

or not a particular defendant had himself performed a violative transaction in

the Distnct of Columbia. In addition, the

court held that venue once established

under either the Securities Act or the ExchangeAct is sufficient for both acts. The

court denied the alternative motion for

severance and transfer on the grounds

that while such a severancemight be convenient to the moving defendants, it

would be inconvenient to other parties

and witnesses who, as a result of the

transfer, would have to undergo two

separate trials.

The court also denied motions for summary judgment and, in the alternative, to

dismiss, which were filed by the president

of Interstate and its counsel. The allegations 'against these defendants concern

the closing of a merger between NSMC

and Interstate and a contemporaneous

sale of NSMCstock by certain Interstate

insiders after these defendants had received a draft "comfort letter" from

NSMC's auditors stating that the finan84
cial statements of NSMC that had been

presented to the shareholders of both

companies in seeking their approval of

the merger required certain significant

adjustments. In denymg the motions, the

court observed that receipt of the draft

comfort letter "would provide the basis

for an inference of an awareness that

previously received financial information

was false and misleading, and, consequently, that the acts performed by the

movants were done knowingly and wilfully." The court granted summary judgment in favor of three other Interstate

directors who had been present at the

closing and had sold NSMC stock on

that day on the theory that, assuming

these defendants had knowingly and wilfully violated the securities laws, there

was no reasonable likelihood of a future

violation by them, since they had either

retired or were approaching retirement.

The Commission moved to have dis.

missed from the action cross-claims filed

by various of the defendants against their

co-defendants. The court dismissed them,

observing in Its opinion that "[w]here

suit IS brought by the government to enforce the law, public policy militates

against the pendency of pnvate claims

and the concomitant delay, confusion

and cornnlexrty they introduce."

However, over the Commission's opposition, the Judicial Panel on Multidistrict Litigation, pursuant to 28 U.S.C.

S 1407, ordered the action consolidated

for pre-trial proceedings with seven prrvate actions seekmg monetary damages,

pending rn other judicial distncts." AI.

though conceding that its action shared

common questions of fact With the prtvate suits, the Commission urged that

its action be excluded from Section 1407

on the ground that such pre-trial proceedings would delay and complicate resolution of the action and frustrate its purpose of securing prompt Injunctive relief

to protect the public from further viola'

tions of the Federal securtties laws. The

Cornrnissron emphasized that the irnportance to the public of securing injunctive

relief as quickly as possible and the danger that a request for Injunctive relief

would be delayed by those seeking reo

compense for injury already suffered were

the very considerations which prompted

Congress to enact in Section 1407(g) an

exemption from pre-trial consolidation for

government antitrust injunctive suits.

The Panel ruled, however, that 28 U.S.C.

S 1407 could not be construed to pro.

vide an exception for Commission in.

junctive actions. It based thrs deterrninanon on the ground that, apart from the

express antitrust suit exemption, Section

1407 did not limit the Civil actions Within

ItS purview. Accordingly, the Panel con.

eluded that to exclude the Cornrnissron's

action would be "Violative of the basic

statutory purpose" to secure the Just

and efficient conduct of multidistnct litigation. A Cornrnissron petition for a writ

of mandamus to seek review of the

Panel's decisron was dismissed by the

court of appeals.

Pnor to the Panel's dacrsron In thrs

case, government enforcement actions

had not been subjected to Section 1407

pre-trial consolidation, and on two ear.

Iier occasions, the Panel had specifically

declined to consolidate Commission actions with pnvate damage SUitS. But in

these instances," it refused only be.

cause the Cornrnisston's litigation was

either ready for tnal or was on appeal

from the grant of preliminary relief reo

quested by the Comrrussron. The precedent established in this case has since

resulted in a pre-mal consolidation of

S.E C. v. Lum's, Inc., et al.'9 with a number of private damage SUits involved In

In re Caeser's Palace Securities Litiga.

tlon."" In view of the substantial adverse

effect of the Panel's decision on the

Commission's enforcement activtties, the

Cornrnissron has prepared and trans.

nutted to the Congress a draft bill to

amend Section 1407 to exempt Cornrnission enforcement actions from that

statute's coverage.

Participation as Amicus Curiae

The Commission frequently participates as amicus cunae in litigation be.

tween private parties under the securities

laws where it considers it Important to

85
present its views regarding the interpretation of the provisions involved. For the

most part, such participation is In the appellate courts.

Safeway Portland Employees' Federal

creon Union v. C. H. Wagner & Co.,

Inc."-Thls is a private action brought

under Section 12(1) of the Securities Act

by a purchaser of brokered certificates of

deposit. The Commission has argued in

ite armcus cunee bnef in the court of

appeals that such certificates must be

registered under the Securities Act and

do not fall within the "bank-issuedsecunties" exemption of Section 3(a)(2)

of that Act. A brokered certificate of deposit is a bank certificate combined with

a broker's promise to pay bonus inter.

est over and above the interest payable

by the bank. The interest to be paid by

the broker comes from a person who

wishes to borrow money from the bank

but lacks sufficient funds to satisfy the

bank's compensating balance require.

merit. The prospective borrower approaches a broker who undertakes to fmd

an investor to purchase a certmcate of

deposit in the bank in lieu of the compensating balance, and the broker

charges a fee to the borrower, part of

which fee the broker uses to pay the

bonus interest to the investor. The Com.

mission has taken the position that the

brokered certificate is an Investment con-

'tract issued by the broker since the

broker offers an investment involving

different economic inducement and

different degree of risk from those associated with a bank certificate of deposit.

In a suit against C. H. Wagner & Co.,

Inc. and various corporations and indivrduals affiliated with it, the Commission obtained a permanent injunction

against the defendants' sale of "brokered" certlfrcates of deposits." No appeal was taken.

Lanza v. Drexel & Co.83-ln this case,

the court of appeals, sitting en bane, held

that a director of a corporation engaged

in selling its securities is not liable for

damages to a purchaser of those securities under Exchange Act Rule lOb-5,

even though the purchaser acquired the

securities on the basis of materially false

and misleading statements by the corporation. The court based its decision on a

district court opinion, rendered after trial,

which concluded that the director in question did not know that any of the information supplied to the purchaser was

false or mrsleading and, under the circumstances, did not have any reason

to believe that it was. At the request of

the court, the Commission participated

amicus curiae in this case. In its brief,

the Commission asserted that it could

not be determined from the district

court's opinion whether the director had

reason to believe that other corporate

officers had engaged in improper conduct. The Commission urged that if the

district court on remand were to find the

circumstances such as to put a reasonable director on notice of improper

conduct, then the director's failure to

discover the false statements was

actionable.

The court of appeals, with four judges

drssenting, rejected the Commission's

position on the ground that a corporate

director owes no "duty of diligence to

prospective purchasers to insure that all

material adverse information is conveyed

to such purchasers. . . ." After review.

ing the evidence and finding that the director was not negligent, the court held

that directors are not insurers. It concluded that "proof of a willful or reckless

a disregard for the truth is necessaryto esa tablish liability under Rule lOb-5."

In Travis v. Anthes Imperial Limited,"

the United States Court of Appeals for

the Eighth Circuit held, as the Commission had urged, that the district court

erred in dismissing a suit by Missouri

residents who alleged that, in the course

of telephone calls they placed from Missouri to Canada, Canadian defendants

had fraudulently induced them to refrain

from selling certain securities, in violation of Section lO(b) of the ExchangeAct

and Rule lOb-5 thereunder. The court

accepted the Commission's position that

the Exchange Act was applicable even

though the plaintiffs initiated the telephone calls and even though the securi86
ties in question were neither issued by an

American corporation nor traded on an

American exchange.The court stated that

the "real question is whether the mails

or instrumentalities of interstate commerce were used to mislead the plain.

tiffs."

In its brief the Commission had also

urged the court to abandon the doctrine

established by Birnbaum v. Newport Steel

Corp.," that permits only a purchaser or

seller of securities to recover monetary

damages in a private action under Rule

1Ob-5. While the court found it unnecessary to reach this issue-holding that the

plaintiffs were in fact sellers of securities

since they eventually sold the securities

they had allegedly been fraudulently induced to hold-it did express some doubt

as to the doctrine's validity.

In Blakely v. Lisac," a private action

for damages under Section lO(b) of the

Securities ExchangeAct and Rule lOb-5,

the Commission filed a memorandum as

amicus curiae expressing its views concerning the showing of reliance and causation requited to support recovery.Some

of the plaintiffs had purchased shares of

a company based upon a fraudulent prospectus during the initial public offering; other purchases had been made in

the after-market when materially misleading company reports were being released.

The Commission argued, in accord with

MIlls v. Electric Auto-Lite Co.51 and Affiliated Ute Citizens v. United States," that

causation would be adequately established by proof that material omissions

had been made in the prospectus or reports. Accordingly, there would be no

need for individual proof of causation

whether through reliance or otherwise. As

to affirmative misrepresentations, the

Commission argued that, at least where

injury is alleged to result from the adverse impact of fraudulent statements

upon the market price of a security,

causation would be adequately demonstrated by a showing of materiality, and

no individual proof should be required

from individual members of the class.

In Naftalin & Co., Inc. v. Merrill Lynch,

Pierce, Fenner & Smith, Inc.," the United

States Court of Appeals for the Eighth

Clrcurt, while remanding for further proceedings, expressed general agreement

With the previously reported decision of

the district court 00 m a proceeding

brought by six broker-dealers to have

Naftalrn & Co., Inc., also a broker-dealer,

adjudicated an involuntary bankrupt. The

district court had found that Naftalm purported to sell secunties It did not own

through special cash accounts it maintained With each of the SIXbroker-dealers,

and that the broker-dealers failed to

liqurdate those accounts until long after

the dates on which Naftalm agreed to

make delivery of the securities. The district court disallowed the broker-dealers'

claims to the extent they arose out of

unlawful extensions of credit to Naftalin

in Violation of the provisions of the Federal ReserveBoard's Regulation T." In accord with views expressed by the Comrnissron as amicus cutiee, the court of

appeals generally agreed with the district

court that the broker-dealer appellants

had Violated Regulation T if they had

not timely bought in securities to cover

Naftalm's sales when Naftalin failed to

make prompt delivery of the securities,

but disagreed with that court that (by

analogy to the seven-day liquidation period applicable to purchase transactions) delivery was required on or before the seventh day after sale. The court

of appeals recognized, as the Cornmission had argued, that the good faith of a

broker-dealer in expecting prompt delivery is determinative; that at some point

In time inquiry is required, and that only

reliance upon a credible explanation for

further delay would prevent a violation

from occurring. The court of appeals further held that a broker-dealer's Regulation T Violation limited its claim against

Naftalin, notwithstanding Naftalin's perpetration of a fraud, to the difference between the sales price of the securities

sold for Naftalin and the price at which

the broker-dealer should have bought in

the securrtres when Naftalin failed to

deliver.

In Herbst v. Able,"" a private action

arising out of the sale of debentures by

87

"'
Douglas Aircraft Company, Douglas, its

underwriters and Its accountants were'

charged with filing a false and misleading

registration statement and prospectus

and with violations of the antifraud provrsrons of the securities laws. The de.

fendants attempted to introduce evidence

of "approval" of certain statements in

the prospectus by Cornmissron staff

members at pre-filing conferences.

Plaintiffs moved to exclude this evidence.

The Commission filed a memorandum as

amicus curiae in support of the motion,

arguing that responsibility for the accuracy of a registration statement is upon

those who participate in its preparation

and file it; and that responsibility cannot

be shifted to the Commission, which does

not have authority to "approve" registration statements. In any event, the Commlssion noted, views expressed by members of the Commission's staff do not

necessarily reflect the views of the Commission. The court held that evidence of

the conferences was inadmissible as to

whether the statements in the prospectus

were accurate, and also inadmissible to

prove the "due dilligence" defense of all

defendants except the accountants.

CRIMINAL PROCEEDINGS

As a result of investigations conducted by its staff, the Commission during the past fiscal year referred 49 cases

to the Department of Justice for criminal

prosecution. This represents a very substantial increase over the 38 cases referred during the preceding fiscal year.

As a result of these references, 40 indictments naming 178 defendants were returned, as compared to 28 indictments

against a total of 67 defendants during

the previous year. In addition, during the

past fiscal year, the Commission authorized its staff to file five criminal contempt actions and convictions were obtamed against eight defendants.

Members of the staff of the Commission who have investigated a case and

are familiar with the facts involved and

the applicable statutory provisions and

legal principles, are usually requested

by the Department of Justice to partrcipate and assist in the trial of a criminal

case referred to the Department, and to

participate and assist in any subsequent

appeal from a conviction. During the past

fiscal year, 83 defendants were convicted

In the 26 criminal cases that were tried.

Convictions were affirmed in four cases

that had been appealed, and appeals

were still pending in nine other cases at

the close of the period.

The criminal cases that were handled

during the fiscal year demonstrated the

great variety of fraudulent practices that

have been devised and employed against

members of the investing public.

U.S. v. Richard Mackay and Chester

Brewer o. was a case that involved a

fraudulent scheme in which Mackay, a

Dallas attorney, aided and abetted by

Brewer, a Dallas banker, purchased a controlling stock interest (93.3 percent) in

Federated Security Insurance Corporations, and 19.5 percent of the stock of

Transwestern Life Insurance Co., and

misappropriated Federated's entire securities portfolio with a book value of approximately $5,500,000 in order to pay

for the stock purchased in both companies. Mackay and Brewer intended to use

. the companies to acquire other insurance

companies which they could strip of their

liquid assets and then merge with or exchange for still other companies at a

profit to themselves.

Following a jury trial, both defendants

were found guilty of all 15 counts of the

indictment. They were each sentenced in

March 1973 to serve 1 year on each of

the 15 counts, to be served consecutively,

and fined $27,000. Both defendants were

released on bond pending appeal.

In the case of U.S. v, Seymour Vlgman," the defendant, who was the president of a Miami broker-dealer, was indicted for a scheme to defraud public investors. The broker-dealer was underwriter for 250 Aero Systems, Inc. warrants each giving the purchaser the right

to buy 100 shares of Aero common stock.

The indictment alleged that Vrgman withheld 113 warrants from sale by placing

88
them with friends and relatives, and sold

them more than a year later for a profit

of $750,000. Vrgman pleaded guilty to

ten counts of the indictment and was

fined $100,000.

In the case of Umted States v. Jack

L. Clark, et et.," Clark, former president

of Four Seasons Nursing Centers of America, Inc., pleaded guilty to one count of

conspiracy to violate the antifraud and

false filing provisions of the secunties

acts and mall fraud. Clark was charged in

the conspiracy count with falsifying the

financial statements of Four Seasons,

whose stock was traded on the American

Stock Exchange at a price of over $100

per share pnor to ItS eventual bankruptcy. He was further charged With obtaining In excess of 6 million dollars from

the public through the use of a prospectus which contained false financial

statements.

As a result of the Commission's referral of the files in the Everest Management

Corporation case," nine cnminal actions

were brought charging 19 persons with

violations of the sscuntres laws. Among

those cited, John Peter Galanis and

Akiyoshi Yamada were charged With looting the securities and cash of domestic

and offshore mutual funds .•s Galanis was

also charged, along with Robert Hagopian, Stephen Sanders and Ramon D'Onofrio, with engaging in a scheme to defraud

domestic and foreign mutual funds.""

Galanis, Yamada, Hagopian and Sanders

were sentenced to prison 1()(), and D'Onofrio is awaiting sentencing.

Organized Crime Program

The prosecution of secunties cases is

often based on circumstantial evidence

requiring extensive investigation by

highly trained personnel. The difficulties

in such investigations and prosecutions

are compounded when elements of organized crime are Involved. Witnesses are

usually reluctant to cooperate because

Of threats or fear of physical harm.

Books, records, and other documentary

evidence essential to the investigations

and to a successful prosecution may be

destroyed or nonexistent. The organized

cnme element IS adept at drsguismg

Its participation in transactions through

the use of aliases and nominee accounts,

operating across international boundanes, and taking advantage of foreign bank

secrecy laws. It frequently operates

through "fronts" and infiltrates legitimate

busmess concerns. Organized cnrne has

an extensive network of affiliates throughout this country in all walks of life, and

In many foreign nations. Despite these

difficulties, the Commission, working in

cooperation With other enforcement

agencies, has been able to make major

contnbutions to the fight against organrzed cnme.

As a result of an intensive Cornrrussion mvestrgatron, and a subsequent

Criminal tnal In the Southern District of

New York in the case of U.S. vs. DIOguardi, et aI., tru seven individuals, in.

cludmg John Dioguardi, also known as

Johnny Dio, and Anthony Soldano, were

convicted of securities fraud, mail fraud

and conspiracy In connection With transactions in the securrtres of Belmont

Franchising Corporation ("Belmont").

Three other defendants in the case

pleaded gurlty prior to trial. The scheme

involved the manipulation of the price of

Belmont's stock from approximately $5

per share In February 1970 to approximately $42 per share In May 1970. On

Apnl 12, 1973, Dioguardi was sentenced

to 9 years imprisonment and fined

$30,000. Soldano was later sentenced to

2 years Imprisonment. The defendants

have filed notices of appeal.

In another significant case, U.S. vs.

Aloi, et al. a Federal grand jury in the

Southern District of New York indicted

12 indrvrduals, Including Vincent AIOI,

Sebastian Aloi, and John Dioguardi, on

charges of violatrng the antifraud provlsrons of the Federal securities laws and

conspiracy to violate these statutes. The

indictment charged a scheme involving

the defendants' fraudulent acquisition of

control of At-Your-Service Leasing Corp.

in order to misappropriate corporate

funds.

89

'""
Cooperation with Other

Enforcement Agencies

In recent years the Commission has

given increased emphasis to cooperation

and coordination of Its own activities with

the various other enforcement agencies,

including the self-regulatory organizations, enforcement agencies at the State

and local level, and certain foreign agencies. Its programs In this area cover a

broad range. For example, the Commission believes that certain cases are more

appropriately enforced at the local rather

than the Federal level where the violations, while involving the Federal securities laws, are of a local nature. In these

instances, the Commission authorizes the

referral of the case to the appropriate

State or local agency, and members of

the staff familiar with it are made available for assistance to that agency in its

enforcement action.

The Cornrnissron has also fostered programs designed to provide a comprehensive exchange of information concerning mutual enforcement problems and

possible securities violations. During the

fiscal year, It continued its program of

annual regional enforcement conferences.

These conferences are attended by personnel from State securities agencies, the

U.S. Postal Service, Federal, State and

local prosecutors' offices and local offices

of self-regulatory associations such as the

NASD. They provide a forum for the exchange of information on current enforcement problems and new methods of enforcement cooperation. One result of

these conferences has been the establishment of programs for Joint investigations.

Although the conferences were Initially

hosted by the Commission's regional offices, many State agencies are now serving as sponsors or co-sponsors.

The Commission is constantly seeking

ways to improve these conferences. One

approach that was tried in some regions

was to open one session to the brokerage

community and to private practitioners in

the secunties field. The resulting exchange of views has proven to be very

beneficial to all concerned, and the use

of this approach has been expanded.

The Commission's Proceedings and

Litigation Records Branch provides one

of the means for cooperation on a continuing baSIS with other agencies having

enforcement responsibilities. The Branch

acts as a clearinghouse for information

regarding enforcement actions in securities matters that have been taken by

State and Canadian authorities, other

governmental and self-regulatory agencies, and the Commission itself. It answers req uests for specrfic information

and in addition publishes a penodic bulletin which IS sent to contributing agencies and to other enforcement and

regulatory bodies. During fiscal 1973, the

branch received 3,710 letters either providing or requesting Information, and sent

out 3,099 communications to cooperating

agencies. Records maintained by the

Branch reflect a steady increase In recent

years in the number of enforcement actions taken by State and Canadian authorities. The data in the SV (Securities

Violation) Files, which is computerized is

useful in screening issuers and applicants

for registration as securities or commodities brokers or dealers or investment

advisers, as well as applicants for loans

from such agencies as the Small Business

Administration.

FOREIGN RESTRICTED LIST

The Commission maintains and publicizes a Foreign Restricted List designed

to alert broker-dealers, financial institutions, investors and others to possible

unlawful distnbutions of foreign secunties. The list consists of names of foreign

companies whose securities the Commission has reason to believe have recently been, or are currently being,

offered for public sale In the United

States in violation of registration requirements. Most broker-dealers refuse to effect transactions in securrties issued by

companies on the list. This does not necessarily prevent promoters from Illegally

offering such securities directly to United

States investors. During the past fiscal

year 14 corporations were added to the

90
Foreign Restncted List, bringing the total

number of corporations on the list to 75.

The following companies were added

dunng the year:

Rodney Gold Mines Llmited."\3-This is

a Canadian corporation that was inactive

from 1946 until November 1971. Its only

known asset IS a mining claim rn Ontano.

In December 1971 it registered 633,214

shares with the Ontano Secunties Commission includmg a secondary offenng of

383,214 shares acquired that same

month for less than 1/5 of a cent per

share. The shares m the secondary offering were sold at prices ranging from 35

cents to 48 cents per share. On February 2, 1972, the Ontano Secunties Commission suspended trading in this security due to the apparently unjustified

sharp increase m ItS market price.

Antel International Corporation. Ltd.,

Canterra Development Corporation, Ltd.,

Cardwell 0" Corporation, Ltd.""-These

three interrelated Canadian corporations

were placed on the list at the same time.

Antel was the successor to Amencan Mobile Telephone & Tape Company Ltd.,

already on the list, which had sold unregistered shares fraudulently, whose investors had never received their shares,

and whose officers had pleaded nolo

contendere to the felony of selling shares

not qualified under California securities

laws. Antel was to merge with Canterra

in a purported effort to give defrauded

investors some measure of restitution,

until the California Department of Corporations determined that Canterra was

not a viable entity srnce it had no income

from business operations. The proposed

reorganization contemplated issuance of

unregistered shares of Cardwell, which

appeared to be the true assignee of the

telephone devrce purportedly transferred

from American Mobile to Ante!.

Tam O'Shanter, Ltd.,'" and Warden

Walker Worldwide Investment Company!"

These two corporations, the former Swiss

and the latter British, were engaged in

selling by mail to investors in the United

States warehouse receipts or other documents evidencing ownership of Scotch

whiskey in storage and ageing in Scotland. The circumstances were such that

rnvestors ordrnanly looked to the corporation to manage their investments. Under

the circumstances, investors were really

being offered a secunty.

S. A. Valles & Co. Inc."r.-This is a

Philippine corporation whose president

came to the United States and sold investors unregistered shares of stock and

evidences of indebtedness by means of

fraudulent representations. Although the

corporation's ostensible purpose was to

purchase and own real estate in the

Philippines, It never engaged in any business. Investors were falsely told that a

Philippme bank had approved a loan

commitment of 50 million pesos to the

corporation for a low cost housing project near Manila, and that the company's

securities would be listed on the New

York and Manila Stock Exchanges.

Clara vella Corporatron.?" This Costa

Rican corporation solicited mvestors in

the United States by marl to reserve

shares of its stock at $2.00 per share in

any amount from 100 to 5,000 shares

With a view to financmg a possible diamond dnlhng program in Costa Rica and

pre-production development work.

Caye Chapel Club, Ltd.'oo Thrs corporation was organized in 1967 rn Bntish

Honduras to burld a resort hotel on Caye

Chapel Island off the coast of Bntish Honduras. The company had obtained a mortgage loan from a bank with the Island

and hotel properties as security. The

bank had instituted foreclosure proceedings and the receiver that had been

appointed had advertised the properties

for sale without receiving a bid in sufflcient amount to discharge the indebtedness on the mortgage. The corporation

and its president had also obtamed another loan of $145,000 from another

bank which had instituted legal proceedings because no payments had been

made on its loan.

Societe Anonyme de Refinancement

(now known as Northern Trust Company,

S.A.)."0 This is believed to be a joint

stock company, incorporated in Switzerland. Certificates of deposit purportedly

Issued by this company were distributed

91
10 the United States and attempts were

made to pledge these certificates with

banks as collateral on loans. However,

the company refused to honor Its certrncates of deposit. In addition, a number

of indrvrduals attempted to purchase

securities through United States brokerdealers using this company as a credit

reference. Although the company's Drrector and Admmistrator indicated that these

mdrviduals had substantial accounts with

the company, in a number of cases the

mdivrduals never paid for the securrtres

purchased through the broker-dealers.

Western International Explorations,

Ltd.III This IS a Bahamian corporation.

Solicitations to United States investors

were mailed from Toronto, Canada, urg109 them to send money for investment

to Inter-State Investments, limited of

Kingston, Jamaica. The Assistant Comrmssroner of Police of the Jamaican constabulary reported that Inter-State's office

was never open for business but was

merely used to receive mall, including

checks from investors, which promoters

came to Jamaica at intervals to collect.

The United States Postal Service had

previously issued a number of Foreign

Postal Fund Fraud Orders agarnst InterState for the purpose of having postal

officials mtercept and return to the senders mail addressed to this company.

NOTES FOR PART 4

1480 F. 2d 1047 (C.A. 2, 1973).

2422 F. 2d 1371, certiorari denied, 398

U.S. 958 (1970).

3 See e.g. the decision 10 S.E.C. v, Texas

Gulf Sulphur Company, 446 F. 2d 1301

(C.A. 2, 1971).

, Investment Company Act Release No.

7859, 1 SEC Docket No. 20, p. 22.

5 Securities Exchange Act Release No.

9894 (December 11, 1972).

e Securities Exchange Act Release No.

10174 (May 25, 1973), 1 SEC Docket No.

18, at p. 23.

'The United States District Court for

the Southern District of New York has,

with their consent, permanently enjoined

Faberge and two of its officers from further violations of the antifraud provisions. (See litigation Release No. 5548,

September 28,1972.)

92

'Faberge, lnc., Securities Act Release

No. 10174 (May 2:5, 1973), 1 St.C Docket

No. 18, p. 21.

U Securrties Exchange Act Release No.

10172 (May 23,1973),1 SEC Docket No.

17, p. 11.

Administrative Proceeding File No.

3-4193.

r, Securities and Exchange Commission

v. Ramon D'Onofrio, et al., S.D.N.Y. No.

72 c.v, 3507.

12 Stuart Schiffman, Securities Ex.

change Act Release No. 9885 (Dec. 4,

1972). Schiffman, who was president of

a broker-dealer, was barred from association with any broker or dealer.

11 Securities Act Release No. 5404

(June 18, 1973), 2 SEC Docket 1.

H S.D. N.Y., 71 C,V. 5416 (December 13, 1971).

A petition by Fields for review of the

order of permanent disqualification is

pending 10 the Court of Appeals for the

District of Columbia Circuit (No. 73-

1722).

16Secunties Exchange Act Release No.

9934 (January 15, 1973).

10 Securities Exchange Act Release No.

10214 (June 11, 1973), 1 SEC Docket No.

20, p.4.

te Securities Exchange Act Release No.

9980 (February 1, 1973).

19Secunties Exchange Act Release No.

10064, 1 SEC Docket No.9, p. 4.

eo Securities Exchange Act Release No

10131, 1 SEC Docket No. 14, p. 1.

21 Securities Exchange Act Release No.

9962 (January 23, 1973).

n Securities Exchange Act Release No.

9896. 23 Securities Exchange Act Release No.

10202, 1 SEC Docket No. 19, p. 6.

2' See litigation Release No. 5765

(March 1, 1973), 1 SEC Docket No.5,

p. 25.

2> See litigation Release No. 5943,

2 SEC Docket 61.

ee 349 F. Supp. 46 (S.D.N.Y., 1972),

appeal pendmg, C.A. 2, No. 72-1927.

2, 401 F. 2d 833 (C.A. 2. 1968), cert.

denied. 394 U.S. 976 (1969).

ea 73 Civil Action No. 2458 (S.D.N.Y.).

29 70 Civ. 5280 (S.D.N.Y.).

30 CCH Fed. Sec. L. Rep. 11 93,659 (Novernber 9, 1Q72). 3172 Civ. 4776 (S.D.N.Y.).

32 See litigation Release No. 5917

(June 1, 1973), 1 SEC Docket No. 18,

p, 54.

ca The railroad was sold for $5 million,

less than three months after the registration statement became effective.

3t SEC v, Bangor Punta Corporation,

331 F. Sunp. 1154 (S.D.N.Y., 1971).

as The Commission's appeal was decided together with two related private

actions. Chris-Craft Industries, Inc. v.

'"

"
,

;

!

Piper Aircraft Corpcration, 480 F. 2d 341

(1973).

J6474 F. 2d 354. See 38th Annual Report, p. 77.

JO No. 72-1230 (C.A. D.C., 1973).

cs See Securities and Exchange Commission, 38th Annual Report, 80 (1972).

co CIvil Action No. 932-73 (D.D.C.).

,. CIvil Action No. 596-73 (D.D.C.).

"See Litigation Release No. 5699

(January 17, 1973).

<Z See litigation Release No. 5973

(July 13, 1973), 2 SEC Docket 156.

'J CIvil Action No. 4999 (D.R.I.).

H 15 U.S.C. 78c(a)(3) .

., Another decrsion concluding that

whiskey warehouse receipts are securities

Within the meaning of the Securities Act

was subsequently handed down. SEC v.

Haffenden-Rimar Internatrona], Inc.,

Civil Action No. 108/73A (E.D. Va. August 8, 1973). The Cornrnisston has instituted administrative proceedings based

on staff allegations of registration and

antifraud Violations in connection with

the offer and sale of such receipts. McGIvney and Company, Inc., et aI., Administrative Proceeding File No. 3-4336

(July 24, 1973).

.. 348 F. Supp. 766 (D. Oreg., 1972),

affirmed, 474 F. 2d 476 (C.A. 9, 1973),

petitton for certiorari flied, 41 U.S.L.W.

3609 (May I, 1973) (No. 72-1480).

"348 F. Supp. at 773.

<S 328 U.S. 293, 301 (1946).

,. On June 22, 1973, the district court

entered an order of permanent injunction.

50 [Current] CCH Fed. Sec. L. Rep.

93,960 (N.D. Ga., April 19, 1973).

51 No. 73-2339.

52 N.D. Cal., No. C 73-1095.

.., CCH Fed. Sec. L. Rep. 94,082 (C.A.

4, 1973).

M 326 F. Supp. 943 (S.D.N.Y., 1971).

50 N.D. Texas, No. CA-3-6976-D;

C.A. 5, No. 73-2429.

c" C.D. Cal., No. 73-472.

.. CiVil Action No. 73-0819 SW (N.D.

Calif.).

es Civil Action No. 152-73 (D.D.C.).

50 See Litigation Release No. 5583

(October 26, 1972).

lJO See litigation Release No. 5763

(February 28, 1973), 1 SEC Docket No.

5, p. 24.

6' See Litigation Release No. 5584

(October 26, 1972).

62 N.D. ome, No. C72-331

6:t S.D. Cal., 73 CIV. 217N.

G< See Litigation Release No. 5995

(July 26, 1973), 2 SEC Docket 212.

0;; N.D. Calif., C72-2217-SW.

GO S D.N.Y., 73 Civ. 1557.

67 S.D. Fla., Civil No. 72-1531.

lIS Nos. 72-1306 and 72-1313 (cross

appeals) (C.A. 8).

00 CCH Fed. Sec. L. Rep. [Current

Binder] 94,016, Nos. 72-1615 and 72-

1746 (C.A. 2, 1973).

;0402 U.S. 424 (1971).

"C.A. 2, Docket No. 72-2369.

;2 S.D.N.Y., No. 72 CIV. 3161 (CBM).

'J Secuntres and Exchange Cornrnrssron

v. Manor Nursing Centers, tnc., 340 F.

Supp. 913 (S.D.N.Y., 1971), affirmed,

458 F. 2d 1082 (C A. 2, 1972).

U.S. v. Ezrine, S.D.N.Y., No. 70 Crim.

1118.

;-,475 F. 2d 1236 (C.A. 2, 1972).

to D.D.C., CIVil Action No. 225-72.

;; CCH Fed. Sec. L. Rep. 93,694

(J.P.M.L., December I, 1972) and 93,-

743 (J.P.M.L, January 29, 1973), petition for Writ of mandamus drsrnissed,

C.A.D.C. No. 73-1199 (1973).

In Re Glenn W. Turner Enterprises

Lrtrgatron, J.P.M.L. Docket No. 109 (De.

cember 18. 1972 and January 30, 1973),

involving SEC v. Glenn W. Turner Enterpnses, Inc., et aI., D. Oreg., CIV. No.

72-390, and In Re King Resources Securities litIgatIOn, 342 F. Supp. 1179

(J.P.M.L., 1972), mvolvmg S.E.C. v.

Crofters, Inc., et aI., S.D. orno, Civil Action No. 70-351.

7. S.D.N.Y., 72 Civ. 1145 .

WI J.P.M.L. Docket No. 110 (December 10, 1972).

"C.A. 9, No. 72-1429.

"S.E.C. v. C. H. Wagner & Co., Inc., et

a/., D. Oreg., CiVil Action No. 71-386.

"CCH Fed. Sec. L. Rep. [Current

Binder] 93,959 (C.A. 2, 1973).

M See Litigation Release No. 5831

(Aprrl 5, 1973), 1 SEC Docket No. 10,

p. 22.

!oO C.A. 8, No. 71-1587, reported previously In 38th Annual Report, pp. 84-85.

56 193 F. 2d 461 (C.A. 2, 1952), cert.

denied, 343 U.S. 956 (1952).

D. Oregon, No. 70-377.

ss 396 U.S. 375 (1970).

so 406 U.S. 128 (1972) .

00 469 F. 2d 1166 (C.A. 8, 1972).

01 336 F. Supp. 136 (D. Minn. 1971),

38th Annual Report, p. 83.

62 12 CFR 220.1 et seq.

!l'J Section 4(c) of Regulation T, 12 CFR

220.4(c).

.. S.D.N.Y., 66 Civ. 3216-CBM.

l1G S.D. Fla. No. 72-151-CR.

ec S D.N.Y., 72 CR 1356.

97 See the 38th Annual Report, p. 81.

., S.D.N.Y., Nos. 72 CR 520 and 528.

6' S.D.N.Y., No. 72 CR 884.

100 See litigation Release No. 5753

(February 22, 1973), 1 SEC Docket No.

4, p. 19; Nos. 5772 and 5773 (March 5,

1973), 1 SEC Docket No.6, pp. 28-29;

and No. 5992 (July 24, 1973), 2 SEC

Docket 211.

93

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Part 5

Investment Companies

and Advisers

Under the Investment Company Act of

1940 and the Investment Advisers Act

of 1940, the Commission IS charged with

extensive regulatory and supervisory responsibilities over investment companies

and investment advisers. Unlike the other

Federal securities laws which emphasize

disclosure, the Investment Company Act

provides a regulatory framework within

which investment companies must operate. Among other things the Act: (1) prohibits changes in the nature of an investment company's business or Its investment policies without shareholder

approval; (2) protects against management self-dealing, embezzlement or abuse

of trust; (3) provides specific controls to

eliminate or mitigate inequitable capital

structures; (4) requires that an investment company disclose its financial condition and Investment policies; (5) provides that management contracts be submitted to shareholders for approval, and

that provision be made for the safekeeping of assets; and (6) sets controls to

protect against unfair transactions between an investment company and its

affiliates.

Persons advising others on their securities transactions for compensation must

register with the Commission under the

Investment Advisers Act. This requirement was extended by the Investment

Company Amendments Act of 1970 to include advisers to registered investment

companies. The Advisers Act, among

other things, prohibits performance fee

contracts which do not meet certain requrrernents: fraudulent, deceptive or

manipulative practices; and advertising

which does not comply With certain

restnctrons

The August 1972 reorganization of the

Commission for the first time placed responsrbrhty for both Investment companies and Investment advisers in one DIVISion-the Divrslon of Investment Company Regulation. In January 1973, to reflect its responsibilities more accurately,

the DiVISion's name was changed to the

Division of Investment Management Regulation.

PROPOSED LEGISLATION

Investment companies provide an Important vehicle for the pooling of the collective resources of mdividuals for investment in the nation's capital markets.

Investor confidence IS Vital to their success in attracting the savings of lndrviduals, and the safeguards provided by

the Investment Company Act contribute

to sustaining such confidence. As drscussed in Part 1 of thrs report, the Comrrussron has submitted proposed legislation to the Congress designed to bolster

foreign investor confidence in offshore

funds Investing in Amencan secunties by

creating a new type of mutual fund,

organized in the United States and registered With the Cornrnissron but directing

its sales efforts at foreigners.

97
Proposed Oil and Gas 


lnvestment Act 


Another business area where the Commission deems further regulation neces. 

sary for investor protection is that of oil 

and gas drilling funds and programs. In 

June, 1972, the Commission submitted 

to the Congress legislation which would 

provide such protection by requiring 

registration of oil programs and by subjecting them to comprehensive reguiation. 

It would provide controls designed to pre. 

vent co~flicts of interest and unfair 

transactions between oil programs and 

their managers, and to insure financial 

responsibility of program managers: pro. 

hibit changes in fundamental policies of 

an oil program without approval of the 

participants; and require that a person 

acting as a program manager do so under 

a written contract which contains certain 

provisions. Some provisions of the pro. 

posed statute would be administered 

primarily by the National Association of 

Securities Dealers with Commission over. 

sight. These relate to sales charges, sales 

literature, sdtability of an investment and 

a classification system for the various 

forms of management compensation. 

The legislation was introduced in both 

houses of the 92d Congress, but was not 

acted upon. It was reintroduced in the 

93d Congress in 1973.' 

Sale of lnvestment Adviser 

In 1972, the Commission also pro. 

posed legislation ' to modify those sec. 

tions of the lnvestment Company Act 

that were affected by the decision of the 

Court of Appeals for the Second Circuit 

in Rosenfeld v. Black.B In that case, the 

court held that the general principle in 

equity that a fiduciary cannot sell his 

office for personal gain is impliedly in. 

corporated into Section 15(a) of the Act 

requiring shareholder approval of any 

new investment advisory contract. Consequently, a retiring investment adviser 

of an investment company viol&:es the 

Act by receiving compensation 'which 

reflects either (1)a payment contingent 

upon the use of influence to secure approval of a new adviser or (2) an assurance of profits for the successor adviser 

under a new advisory contract and 

renewals. 

In submitting the proposed legislation. 

the Commission expressed its view that 

the principles of equity were appropri. 

ately applied to the facts of the above 

case, which involved an outright sale 

by an investment adviser of its advisory 

contract with a registered investment 

company. While the Rosenfeld case did 

not involve the sale of an outgoing investment adviser's assets, the sweep of 

the Court's language nevertheless cast 

doubt on whether an investment adviser 

could profit when it sold its business in 

that manner. 

In its statement accompanying the 

legislation, the Commission suggested 

that it would be in the public interest to 

remove the uncertainty in the mutual fund 

industry generated by the Rosenfeld 

decision. Thus, the proposed amendments are intended to permit an investment adviser, or an affiliated person of an 

adviser, to obtain a profit in connection 

with a transaction which results in an 

assignment of the advisory contract if 

certain conditions are met. These conditions are designed to prevent a retiring 

investment adviser or an affiliate, in connection with the sale of the adviser's 

business, from receiving any payment or 

other benefit which includes any amount 

reflecting its assurance that the investment advisory contract will be continued. 

The proposed bill was not enacted in 

the 92d Congress. Durina the oast vear . > 

it was reintroduced in modified form and 

passed by the Senate.' 

Municipal Bond Rating Services 

In March 1973, a bill was introduced in 

the House of Representatives which would 

amend the lnvestment Advisers Act to 

provide substantive regulation of persons 

rating municipal bonds and qualitative 

assessment of municipal bond ratings.' 

Under the bill, the Commission would be 

required to prescribe substantive standards governing municipal bond ratings 
and impose requirements which would

assure that rating procedures used by

municipal bond rating agencies were fair

to issuers and guarantors of municipal

bonds. Finally, the bill would allow any

person "aggrieved or adversely affected"

by any action of a municipal bond rating

agency to file a complaint with the Commission, which could order any remedial

action to be taken that it determined to

be in the public interest. By the end of

the fiscal year, the Commission had not

commented on the proposed legislation.

Institutional Disclosure

In the Letter of Transmittal of the

InstItutional Investor Study Report, the

Commission stated that "gaps (exist) in

the information about the purchase, sale

and holdings of securities by major

classes of institutional investors," and

recommended that such gaps be eliminated by amending the secunties laws

"to provide the Commission with general

authority to require reports and disclosures of such holdings and transactions

from all types of institutional investors."

Since then, the Commission's position

has received widespread support.

On Apnl 25, 1973, it was announced

that the Commission would draft and

sponsor institutional disclosure legislation which would require all institutional

investors to report all of their securities

holdings and their institution-sized trades.

Such institutional disclosure would permit Commission study of the effects of institutional trading and hold rngs on the

securities markets, and the charactenstics of institutional investors, for the

purpose of developing possible further

disclosure requirements and, If needed,

further regulatory controls on institutional investors. After the end of the fiscal

year, Senator Harrison A. Williams, Jr.,

Chairman of the Senate Subcommittee on

Securities, introduced legislation in the

Senate along these conceptual lines," with.

the Commission's support as to the objectives of the bill.

MUTUAL FUND DISTRIBUTION

As in pnor years, the Commission's

concern over the cost to investors of particlpatrng in mutual funds, and with regulatory problems associated With the distnbution system, was manifested in a

number of areas.

As discussed in Part 1 of this report,

extensive hearings were held by the Commission on these matters during the fiscal

year. In addition, certain specifrc proposals were made. The Commission, on

December 21, 1972, proposed an amendment of Rule 22d-1 under the Investment

Company Act to permit quantity discounts for group purchases of open-end

investment company securities under certain limited circumstances. Section 22(d)

of the Act, in effect, prohibits registered

investment companies from selling redeemable securities to any person other

than a dealer or princrpal underwriter at

a pnce less than that at which the secunties are sold to the public, but provides

that the Commission may permit excepnons to this retail price maintenance provision by rule. R'ule 22d-1 adopted under

Section 22(d), presently permits quantity

discounts to rndividual purchasers, their

spouses and children under 21, and to

trustees of single fiduciary accounts, includmg qualified pension and profttsharing plans, but not to groups of

purchasers.

The proposal would, in effect, give each

Issuer a choice between (a) giving quantity discounts to the persons now speerfred in Rule 22d-1 and not to groups or

(b) offering quantity discounts to certain "bona fide" groups as well as to

purchasers to whom they are presently

available. Eligible groups would be defined to exclude any groups not in existence for at least six months or which

have no other purpose than to purchase

mutual fund shares at a discount. In

addition to written comments, the Comrnlssron solicited comments on the rule

proposal from those appearing at the

mutual fund distribution hearings held

10 February 1973.

The need to develop new markets for

fund shares IS a product of increased

99

•
competition for investors' savings. One

means adopted by certain funds to attract

investors has been to reduce or eliminate

the sales load previously Imposed on

sales of their shares. As a result of the

Commission's opinion in United Funds,

lnc.," which granted certain open-end investment companies an exemption from

Section 22(d) to permit their shareholders

to use redemption proceeds to repurchase shares Without the payment of

a sales load Within 15 days after requesting redemption, numerous applications

were received from open-end companies

for similar exemptions. During the fiscal

year, the Commission published for comment proposed Rule 22d-2." The proposed rule is designed to codify the

exemptive relief afforded United Funds,

Inc. and to extend the permissible period

between redemption and reinvestment

from 15 to 30 days. No final action has

yet been taken on the proposal.

During the fiscal year, the Commission

continued to seek liberallzation of its

mutual fund advertising rules," which

may also have an impact on the drstrrbution process. On January 18, 1973, the

Commission publIshed for comment a

proposed amendment to Rule 134 which

would permit greater flexiblhty in investment company advertisements by further

expanding the categories of information

which could be included." The proposals

were published prior to commencement of

the mutual fund distribution hearings in

February In order to provide a concrete

basis for the discussion of advertising

problems.

Under the proposed amendment an investment company with an effective registration statement could Include in its

advertisements a description of its own

special features, method of operation and

services; name Its principal officers and

directors and describe its key advisory

personnel: state its date of Incorporation

and total net asset value; and use any

design or illustration contained in the

prospectus not involving performance

figures. The use of such material would

require inclusion of a statement of certain fees and charges and a coupon to

request a prospectus. Proposed Rule

4258 would require that the prospectus

sent in response to a coupon request

from such an advertisement contain a

statement stressing the Importance of

reading the prospectus before making an

Investment decision.

Litigation initiated dunng the fiscal year

may also affect the distrtbution of mutual

funds On February 22, 1973, the Antitl ust DIVision of the Department of Justice Instituted an action In the Distnct of

Columbia Federal Distnct Court against

the National ASSOCiatIOn of Securities

Dealers ("NASD"), certain mutual fund

underwnters and various retail brokerdealer firms." The Antitrust Division's

complaint generally alleges that the contractual agreements between certain mutual fund underwriters and retail brokerdealer firms prevent or inhibit the development of a secondary dealer or

brokerage market in the shares of those

mutual funds. Specifically, the contractual agreements allegedly (1) prohibit a

broker-dealer firm from selling mutual

fur.d shares as a broker, (2) prohibit sales

to non-contract broker-dealers by brokerdealers under contract at less than the

current public offering price, which includes a sales load, and (3) require that

all shares tendered to the contract brokerdealer be returned for redemption to the

fund underwriter. The following relief was

requested by the Antitrust Division: (1)

a permanent Injunction against the use of

these contractual restrictions; (2) disclosure in mutual fund prospectuses of

the potential existence of brokerage or

secondary dealer markets; (3) disclosure

in NASD pubhcatrons that NASD members are free to act as brokers with respect to mutual fund transactions; and

(4) disclosure by broker-dealers to their

prospective customers of the potential

existence of a brokerage market and its

potential cost savings. By the end of the

fiscal year, proceedings in the Justice

Df'partment suit and related class actions

filed by private investors had not developed beyond preliminary stages.

100
ADVISORY COMMITTEE ON

INVESTMENT MANAGEMENT

SERVICES

On January 23, 1973, the Commission

released the report of the Cornrnlssron's

Advisory Committee on Investment Management Services for Individual Investors.

This industry committee was appointed

by the Commission rn October to study

problems in the development of investment management services for direct investors with relatively small amounts to

invest. A major problem for those wishing

to develop such services is the uncertainty as to when such services can be

deemed to involve the sale of a security

or the operation of an investment company and thus be subject to the vanous

registration provisions.

The Advisory Committee's report contains the results of a survey on practices

in the selection and use of brokers, custodial and record-keeping services, the

designation of investment objectives, the

use of model accounts and approved lists,

and other ingredients of the mvestment

management process.

Among the Committee's principal

recommendations: (1) Investment management services for small accounts

should not be treated as investment companies for purposes of the Investment

Company Act, whether or not they furrush

individualized service, as long as there is

no pooling of clients' accounts; (2) These

services should not be treated as involving the public offering of a security

for purposes of the Securities Act if they

furnish clients individualized service or

make recornrnendations only and have no

discretion in the execution of portfolio

transactions; (3) The Commission should

adopt guidelines, as suggested by the

Committee, for persons offering these

services to determine what constitutes

"individualized service;" (4) Firms offering these services should be required to

give prospective clients a written disclosure statement to aid them in deciding whether to retain the services of

a particular firm; (5) The Commission

should adopt rules or publish interpretations to provide necessary protection for

clients of small account services against

cortain conflicts of interest, such as those

that can arise from fee-sharing promotronal arrangements, broker affiliations.

and the use of mside mforrnatron: (6) The

Commission should take appropnate action to promulgate standards governing

thE' professional qualifications and financial responsibility of investment advisers

and a system of self-regulation for rnvestment advisers.

The Cornrnissron is studying the Committee's recommendations and considering staff proposals for action based on the

recommendations.

INVESTMENT ADVISER

REGULATION

Dunng the latter part of the fiscal year,

the Cornmissron directed the Drvrsion of

Investment Management Regulation to

develop for Commission consideration a

comprehensive program to tighten regulation of investment advrsers, The program

may include new rules regarding disclosure, reportmg and other matters concerrung advisory operations, a staff inqurry into exrsting industry practices, and,

where such inquiry reveals substantial

defrciencres, the proposal of additional

new rules or legislation. Particular consideratron WIll be given to the necessity of

minimum qualifications for advisory employees, frnancial responsibility of investment advisers, and problems of potential

conflrcts of interest.

LIAISON PROCEDURES WITH

SMALL BUSINESS

ADMINISTRATION

During the frscal year, the Divisions of

Corporation Finance and Investment Management Regulation designated staff

members as a [omt committee to coordinate SEC-SBA acnvrtles affecting Small

Business Investment Companies

("SBICs"). Informal discussions were

held concerning more effective liaison in

such matters as the integration of statistical information for SBICs with closedend investment companies; significant

101
changes affecting the status of licensed

companies which require reporting or

other action pursuant to the Federalsecuritres laws or the Small Business Investment Act; SECexamination, investigation

and proceedings against registered SBICs;

and proposed SEC and SBA rules and

regulations affecting SBICs. Formal lines

of communication have not yet been completely established.

NUMBER OF REGISTRANTS

As of June 30, 1973, there were 1,361

investment companres regrstered under

the Act, with assets having an aggregate

market value of over $73 billion. Compared With corresponding totals at

June 30, 1972, those figures represent an

increase of 28 in the number of registered companies but a decrease of nearly

$8 bilhon in the market value of assets.

Further data is presented in the statistical

section of the report.

On June 18, 1973, the Commission

determined that more than 750 investment advisers were no longer in existence

or were not engaged in business as investment advisers and issued an order

cancelling their registratrons." The Commission had previously Issued a nonce of

mtentron to cancel the registrations of

more than 800 registered investment advisers," principally based on the fact that,

despite prior cornrnurucations that annual

assessments for 1971 and/or 1972 were

due and payable, payments had not been

made. Fourteen of those investment advrsersWithdrewfrom registration, and the

Commission received payment of 1971

and/or 1972 annual assessments, totaling approximately $8,300, from about 59

registrants. At June 30, 1973, 2,892 investment advisers were registered WIth

the Comrnisston, representing a decrease

of 919 from a year before.

During the fiscal year, the staff of the

Cornrrussion conducted 170 investment

company examinations and 272 investment adviser examinations, representing

increases of 60 percent and 84 percent,

respectively, over the prior fiscal year.

During the same penod, approximately

$815,628 was recovered by investment

cornparues and their shareholders as a

result of the Commission's various compliance and enforcement actlvttres.

APPLICATIONS

One of the Commission's principal

activities in its regulation of investment

compames and investment advisers is

the consideration of applications for

exemptions from various provisions of the

Investment Company and Investment Advisers Acts or for certain other relief un.

der those Acts. Applrcations may also

seek determinations of the status of persons or cornpanies. During the fiscal year,

347 applications were filed under both

Acts, and final action was taken on 326

applications. As of the end of the year,

158 applications were pending under both

Acts!' Of the totals described, the predominant number were applications under the Investment Company Act. With

respect to the Advisers Act, 3 applications

were flied, final action was taken on I,

and 2 were pending at year end.

Under the Investment Company Act,

affiliates of a registered investment company cannot participate In a joint arrangement with the registered company or

purchase from or sell securities to the registered company unless they first obtain

the Comrnlssron's approval. life Insurance Investors, Inc., a registered openend investment company which owned

8.06 percent of the stock of Old line Life

Insurance Company, certain affiliates of

Life Insurance Investors who also owned

stock of Old Line, and Old line, filed

an application for an order permitting them to vote their holdings of

Old Line stock to merge Old Line with a

wholly-owned subsrdiary of USLIFE Corporation and to receive common stock of

USLIFEthrough the conversion of all the

outstanding common stock of Old line

into common stock of USLIFE. As orlginally contemplated, the merger terms

called for the payment of a $650,000 fee

to an affiliate of Life Insurance Investors

for arranging the merger. After the staff

pointed out that payment of such a fee

might raise problems under the standards

of Section 17 of the Act. the applicants

102
eliminated provision for this fee and Improved, by a comparable amount in the

aggregate, the terms offered all Old Line

shareholders. During the pendency of

this application, it became apparent that,

in previously acquiring stock of Old Line,

certain affiliates of Life Insurance Investors might haveviolated provisions of the

securities laws. The Commission commenced a legal action in a Federal court

charging such violations against these

persons, seeking a preliminary and permanent injunction and an order directing

the defendants to disgorge all profits."

Council for defendants then represented

that certain defendants would (and they

subsequently did) deposit certain sums

in an escrow account, subject to determination in such action as to how the account should be distributed. In ruling on

the application, the Commission noted

that separate action to achieve accountability for any violations arising from previous acquisitions of Old Line stock was

available to the Commission and other

interested persons, and concluded that,

under those circumstances and in view of

the total stockholder Interests affected by

the proposed merger, an order granting

the application was appropriate."

In Chase Investors Management Corporation New York,'" the applicant requested that the Commission issue an

order declaring that it was not an investment adviser as defined in Section 202

(a)(l1) of the Advisers Act. The applicant was a subsidiary formed by Chase

Manhattan Corporation, the bank holding

company which also owns Chase Manhattan Bank, to take over and expandthe

advisory services conducted by the bank.

The subsidiary indicated its intent to

offer investment research, advisory and

management services to the bank, to the

public, and to institutional Investors such

as employee benefit funds and, possibly,

investment companies. The applicant

argued that its status as a bank holding

company subsidiary subjected It to the

same regulation as a bank or bank holding company, thereby qualifying it for

the "bank" exclusion from the Advisers

Act. A hearing was ordered by the Commrssron on the application. Prior to

commencement, the hearing was can.

celed when the applicant withdrew ItS

application and registered under the Advisers Act. Subsequently, a number of

other non-bank investment advisory subsidranes of bank holding companies have

registered with the Commission under

the Advisers Act.

In order to market its shareseffectively

in foreign countries, a registered mutual

fund may find it necessaryto conform to

seiling practices prevailing abroad. Those

practices, however, may In some Instances conflict with the requirements of

the Investment Company Act, and the

utilization of different practices in diverse

locations may itself be impermissible

under that Act. For example, a practice

in Japan pursuant to which shares of

mutual funds are sold to the public in

block offerings at prices based on net

assetvalues previously determined rather

than at prices determined after the sale,

as required by the Act, could not be followed by a registered fund without an

order of exemption. Similarly, a registered

fund may not, without another exemption,

sell its shares to the public in Japan at

prices, including sales loads, which differ

from those applicable in the United

States. The Commission granted exempnons to The Dreyfus Fund, Incorporated

to permit ItS shares to be sold In Japan

at prices and with sales loads which are

determined in conformity with the usual

and customary Japanese practice with

respect to the sale of mutual fund

shares."

Under the Investment Company Act,

an affiliated company of a registered investment company cannot sell any security to or participate In any joint arrangement with the investment company abo

sent an order of the Commission. Christiana Securities Company, a closed-end

Investment company with assets valued

at market in excess of $2.2 billion and

which owns 28 percent of the common

stock of E. I. duPont de Nemours and

Company, filed a [ornt application with

duPont for an order permitting Christiana

and duPont to merge. DuPont common

103
stock held by Christiana represents 98.7

percent of the value of Christiana's assets. Pursuant to the merger terms,

duPont common stock would be issued

to the Christiana common shareholders,

whose Christiana shares would be retired,

and duPont would be the surviving corporation. For purposes of the merger, the

Christiana common shares were valued

at approximately 97.5 percent of their

net asset value. The Commission held

hearings In response to requests from

several shareholders who alleged the

merger terms were unfair." After the close

of the fiscal year, the Commission heard

oral argument in the matter and took It

under advisement.

In September 1971, Pacific Scholarship Trust Sponsored by the Pacific

Schotarship Fund filed an application requesting exemptions from certain secnons of the Investment Company Act to

pel mit the sale of scholarship plans. The

plans would require investors to deposit

sums in bank savings accounts, from

which earnings would be penodrcally

transferred to a trust fund and invested

to provide funds for the eventual college

education of designated child beneficraries A portion of the payouts to students

who did attend college would be derived

frcm amounts torteited by other investors in the plans. A forfeiture would reo

suit if the designated child failed to enter

college or to complete the first year sue.

cessfully, or If the investor failed to main.

tain his savings account or to make

required periodic payments. In order to

offer plans which include such a forfeiture feature, the trust required exemptions from several sections of the Act,

including an exemption from Section

27(c)(1), which prohibits the sale of

non-redeemable periodic payment plan

certificates. On May 24, 1972, the Com'

rrussion ordered hearrngs on the application to determine whether the granting

of the requested exemptions would be

necessary or appropriate in the public

interest and consistent with the protection of investors and the purposes fairly

Intended by the policy and provrsions of

the Act." Hearings were conducted from

June 17 through June 21, 1972. An initial decision by the administrative law

judge was waived, and the Commission

heard oral argument on March 9, 1973.

No decision had been reached by the

end of the fiscal year.

Section 22(d) of the Investment Company Act prohibits a registered investment company from selling its redeemable securities at a price other than the

current public offering price described in

the prospectus. Putnam Investors Fund,

Inc., a registered open-end investment

company, filed an application for exemption from Section 22(d) so that its

shares could be issued in exchange for

the assets of Refractory Service, lnc., a

personal holding company." As the application was originally filed, only 23.5 percent of the assets of Refractory were securities which would be retained in Putnam's portfolio. Following staff comment

with regard to the brokerage costs to

Putnam shareholders for resulting portfolio adjustments, Refractory's portfolio

was adjusted prior to the transaction at

its expense so that securities to be retained would amount to a minimum of 60

percent.

RULES AND GUIDELINES

Continued implementation of the investment Company Amendments Act of

1970 as well as the normal continuing review of rules In light of changing con.

drtions and administrative experrence

resulted in the revision of various rules

under the Investment Company and Investment Advisers Acts during the fiscal

year.

Codes of Ethics

In 1963, the Commission's Report of

Special Study of Securities Markets," after

examining the nature and extent of trading in the portfolio securities of an investment company by persons with access to

the company's investment information,

concluded that securrties transactions by

such persons often placed them in a conflict of interest position. It recommended

clarification of the nature and extent of

104
obligations in this area. Subsequently,

after further examination in its report,

Public Policy Implications of Investment

Company Growth," the Commission recommended that the Investment Company

Act be amended to empower the Commission to adopt rules for the protection

of investors In connection with purchases

or sales of securities by persons with

access to the investment company's

decision-making process ("access persons"). In response to this recommendation Section 170) was added by the Investment Company Amendments Act of

1970.

On December 26, 1972, the Commission proposed for public comment Rule

17j-l to implement the provisions of

Section 17(j).%5 As proposed, the rule

would provide a general antifraud provision, similar to those contained in Rules

10b-5_and 15c-2 under the Exchange

Act and Section 206 of the Advisers

Act, in the context of the purchase or

sale by an access person of a security

which is held or to be acquired by the

investment company with which he is

affiliated. Further, it would contain a specific antifraud provision prohibiting any

access person from purchasing or seiling a security for his own account when

he knows the investment company IS

purchasing or selling it or the investment

adviser is recommending or is considering recommending that the investment

company purchase or sell that security.

This prohibition would apply to situations

where consideration of a recommendation has reached an advanced stage. To

enforce the general and specific antifraud provisions, proposed Rule 17J-l includes a reporting requirement for access

persons which is patterned after Rule

204-2(a)(12) under the Advisers Act.

Finally, the rule proposal would require

investment companies, their investment

advisers and principal underwriters to

adopt Codes of Ethics establishing, as a

minimum, such standards as may be

reasonably necessary to prevent access

persons from engaging in any activity

which violates the specific antifraud provisions. To provide greater certainty and

protection for access persons, Rule 17j-l

would permit Codes of Ethics to allow

"prior clearance" procedures under which

access persons could receive pre-transaction guidance as to the applicability of

the specific antifraud provisions. During

the comment period, the Commission received 105 letters concerning various provisrons of proposed Rule 17j-1. As a result of these comments, it is expected

that the Commission will revise the rule

and re-circulate It for public comment.

Performance Fees

Section 205 of the Advisers Act was

amended by the Investment Company

Amendments Act of 1970 to deal with

the problem of unfair compensation arrangements between Investment advisers

and their clients. Many performance fees

did not decrease when performance was

poor, or, if they did, the decrease was disproportionate to the increase for good

performance. The 1970 amendment was

designed to align, as nearly as possible,

the interests of the Investment adviser

and its clients by prohibiting incentive

fee arrangements where the compensation does not increase or decrease proportionately with investment performance

over a specified period in comparison

with the investment record of an appropriate index of securities prices. The

"fulcrum" point from which increases

and decreases must be measured is the

fee which is earned or paid when the investment performance of the advisory

account ISequivalent to that of the index.

Section 205, as amended, allows such incentive fee arrangements only with respect to persons (except collectivelyinvested employee benefit funds) With

managed assets in excess of $1 million

and registered Investment companies.

During the fiscal year, the Commission

adopted Rule 205-1 under the Advisers

Act.'. The rule IS designed to assure that

"investment performance" of an investment company is computed on the same

basis as the "investment record" of an

Index, so as to make the two comparable.

The Commission also adopted Rule 205-2

105
which requires that the performance portion of the advisory fee be more closely

based upon the assets upon which performance was achieved and not be influenced unduly by the amount of assets

added or subtracted from the advisory

account."

Recordkeeping Requirements

During the fiscal year, Rule 31a-2

under the Investment Company Act was

amended to allow microfilm records to

be maintained by investment companies

in lieu of hard copy records." The

amended rule requires, however, that

equipment and facilities for reading and

making hard copies from microfilm be

available, and contains certain other safeguards, such as requiring the maintenance of duplicate copies at other locations in case of fire or other loss.

NOTES FOR PART 5

1 H.R. 6821, S. 1050 (93d Cong., 1st

Sess.).

2 S. 3681, H.R. 15304 (92d Cong., 2d

Sess.).

3 445 F. 2d 1337 (C.A. 2, 1971).

S. 470 (93d Cong., 1st Sess.).

H.R. 5532 (93d Cong., 1st Sess.).

SEC, Institutional Investor Study Report, H.R. Doc. 64, 92d Cong., 1st Sess.,

Vol 1 at X, XI (March 10, 1971).

, S. 2234 (93d Cong., 1st SessIon.).

Investment Company Act Release No.

7189 (May 25, 1972).

Investment Company Act Release No.

7555 (December 8, 1972).

106

10 See 38th Annual Report, pp. 97-98.

11 Securities Act Release No. 5357.

1Z U.S. v. N.A.S.D., Inc., Civrl Action No.

338-73 (D.D.C. 1973).

13 Investment Advisers Act Release No.

384 (June 18, 1973), 2 SEC Docket 21.

1l Investment Advisers Act Release No.

367 (March 19, 1973), 1 SEC Docket No.

8, p.16.

"These figures represent only those

applications processed in the Division of

Investment Management Regulation and

exclude applications frled pursuant to

Section 9 of the Investment Company Act

which are processed by the Commission's

Division of Enforcement.

re S E.C. v. J. C. Bradford & Co., et aI.,

72 Civ. 4776 (S.D.N.Y.). For a further

diSCUSSIon of thrs action see Part 4.

Life Insurance Investors, lnc., Investment Company Act Release No. 7523

(November 22, 1972). I. Investment Advisers Act Release No.

333 (August 21, 1972).

,. Investment Company Act Release No.

7631 (January 18, 1973).

20 Investment Company Act Release No.

7563 (December 13, 1972).

21 Investment Company Act Release No.

7196 (May 24, 1972).

22 Investment Company Act Release No.

7913 (July 31, 1973), 2 SEC Docket 242 .

.. SEC, Report of Special Study of Securities Markets, H. Doc. No. 95, 88th

Cong., 1st Sess., pt. 4 at 235-255 (1963).

.. SEC, Public Policy Implications of

Investment Company Growth, H. Rep. No.

2337, 89th Cong., 2d Sess., at 195-200

(Dec. 2,1966).

Investment Company Act Release No.

7581 (Dec. 26, 1972).

26 Investment Advisers Act Release No.

327 (August 8, 1972).

Investment Advisers Act Release No.

347 (November 10, 1972).

28 Investment Company Act Release No.

7724 (March 16, 1973), 1 SEC Docket No.

7, p. 15.

"

• '" •

•

"

•

•


Part 6

Public Utilities

Holding Companies

Under the Public Utility Holding Company Act of 1935, the Commission regulates interstate public-utility holdingcompany systems engaged in the electric

utility business and/or retail distribution

of gas.The Commission's jurisdiction also

covers natural gas pipeline companies

and other non-utility companies which are

subsidiary companies of registered holding companies. There are three principal

areas of regulation under the Act: (1)

the physical integration of public-utility companies and functionally related

properties of holding-company systems,

and the simplification of intercorporate

relationships and financial structures of

such systems; (2) the financing operations of registered holdmg companies

and their subsidiary companies, the acquisition and disposition of securities and

properties and certain accounting practices, servicing arrangements, and inter-company transactions; (3) exemptive

provisions relating to the status under

the Act of persons and companies, and

provisions regulating the right of persons

affiliated with a public-utility company to

become affiliated with another such

company through acquisition of securItles,

COMPOSITION

At fiscal year-end, there were 23 holding companies registered under the Act.

Twenty were included in the 17 "active"

registered holding-company systems.'

The remammg three registered holding

companies, which are relatively small,

are not considered part of "active" systems" In the 17 active systems, there

were 84 electric and/or gas utility subsidiaries, 62 non-utility subsidiaries, and

16 inactive companies, or a total, including the parent holding companies and the

subholding companies, of 182 system

companies. A table in Part 9 lists the active systems and their aggregateassets.

PROCEEDINGS

Cities of Lafayette and Plaquemine,

Louisiana v. SEC."The Court of Appeals

for the District of Columbia Circuit affirmed the Commission's denial of a motion filed by the cities of Lafayette and

Plaquemine, Louisiana ("Cities"),' seeking reopening of the record, closed 14

months prior to the filing of the motion,

and affirmed the Commission's approval

of the acquisition of the common and

preferred stock of Arkansas-Missouri

PowerCompany by Middle South Utilities,

lnc., a registered holding company." The

Cities had alleged that certain activities

of Louisiana Power & Light Company, a

subsidiary of Middle South, violated

Federalantitrust laws.Thecourt observed

that where the administrative process is

far advanced in a particular case, a party

seeking to present new evidence must at

least demonstrate the probability that

consideration of such evidence would

alter the agency's decision, a showing the

109
court found wanting. In essence, the

court found that since the CIties' objection was untimely and their allegations

bore only a dubious nexus to the transaction at Issue, their motion was properly

denied.

Amencan E/ectnc Power Company,

Inc ." Shortly after the close of the trscal

year, an adrmrustrative law judge Issued

an mitral decisron denying the apphcation of American Electric, a registered

holding company, to acquire, by a tender

offer, the common stock of Columbus

and Southern Oruo Electric Company, a

non-associate electric utility company.

The administrative law Judge found, as

urged by the Divrsron of Corporate Regulatron and the Department of Justice,

that the proposed acquisinon would have

antrcompetrtrve effects warranting disapproval under Section 10(b)(1) of the Act

and would not produce sufficrently sigrufrcant economies to justify approval

under Section 10(c)(2). The Cornrnrssron

has granted petitions for review filed by

American Electric, Columbus and Southern, and others.

Delmarva Power & LIght Company. T

The Commission instituted a proceeding

under Sectron 11 (b)(l) of the Act WIth

respect to Delmarva which operates both

electric and retail gas drstnbution systems in Delaware and has electric utriity

subsidrary companies operating In two

other states. Delmarva has asserted that

its principal Integrated public-utility system IS its electric system and that the

gas properties are retainable under the

standards of Section l1(b)(l). Delmarva

also filed an application for exemption

from the Act pursuant to Section 3(a)(2).

Both proceedings have been consolidated

for hearing and disposition." The Delaware Public Service Commission intervened as a party in support of Delmarva.

The hearing has been completed and

briefs are to be filed with the administrative law judge.

New England Electric System." The

Commission ordered a hearing on a plan

of divestiture filed by New England Electric proposing to sell three of its gas

utility subsidiaries to Eastern Gas & Fuel

ASSOCIates, an exempt holding company.

The Antitrust Division of the Department

of Justrce intervened in the proceeding.

Petitrons for intervention In oppositron to

the proposed sale were filed by Massachusetts Congressman Michael J. Harrington, the Associatron of Massachusetts

Consumers, the towns of WakefIeld, Peabody and Gloucester, Massachusetts, and

an individual prospective bidder, After

the close of the frscal year, the opposing

Intervenors entered into settlement WIth

Eastern. An initial decision was waived

and the matter was taken under advisement by the Comrnlssron.

Umon Electric Company." During the

fiscal year, the administrative law judge

issued an lrutral decision on an application by Union Electric, an exempt holding

company and an operating electric and

gas utility company, for permlssion to acquire, by tender offer, the outstanding

common stock of MiSSOUri Utilities Company, an electnc and gas company. The

initial decisicn concluded that the application should be granted, but only on condition that the gas, water and certain

electric properties of Missouri Utilities

and the gas properties of Union Electnc

and its present subsidiary companies be

divested. At year-end, the case was pending for decision by the Commission on

review of the initial decision.

In two companion cases, Pacific lighting Corporation and National Utilities &

Industries Corporatton," the Commission,

which was then one Commissioner short

of full strength, was evenly divided on

the question of the extent to which an

exempt holding company could engage

in businesses unrelated to its utility

operations." All Commissioners agreed

that exempt holding companies were not

subject to the absolute prohlbrtion against

functionally unrelated activities to which

registered holding companies are held.

Two Commissioners were of the view that

prudent and limited diversification was

not likely to present undue risks to in.

vestors or consumers and could serve

a beneficial purpose. They proposed the

adoption of certain restrictions and guide110
lines for diversification and found that

Pacific and National conformed substantially to the proposed limitations. The

other Commissioners considered that an

exempt holding company should be permitted to engage only In such non-utility

activities as are related or complementary in a significant way to its utility

business. Other non-utility activities, they

said, would dilute the predominant utility

orientation and tend to Impair the stability associated by Investors with publicutility operations.

The result of the even division of the

Commission was not the same in the two

cases. In Pacific, the issue was whether

a 1936 exemption order should be revoked or modified; the even division

left the exemption in effect. In National,

the question was whether the company's

application for exemption should be

granted; the division left the application

pending. In the meantime, National has

the benefit of an interim exemption provrded by the Act for a company which

files an exemption application In good

farth,

In three opinions," the Commission

granted exceptions from the competitive bidding requirements of Rule 50

under the Act for the sale of common

stock of gas utility companies to be divested by electric utility systems. Objectrons were flied In two of the cases by

municipalities professrng an interest In

the purchase of a segment of the gas

company's properties, and preferred

stockholders objected in the third case.

The municipalities, in essence, contended that their proposed bids rrught not

receive serious consideration. The Commission noted, in rejecting their contentions, that merely granting the exceptions did not constitute a decrsion as to

the method or conduct of negotiations,

or determine the successful bidder. After

a sale agreement is concluded the company must apply for authorization to

conclude the sale, and appropriate inquiry

could then be made with respect to the

maintenance of competitive conditions

as required by Section 12(d) of the Act.

524-127 0 - 74 - 9

In the third case the gas properties

subject to divestiture were owned by a

subsrdrary which was also engaged In the

electnc utility business: the gas properties were to be transferred to a newly

organized company In exchange for its

stock; and -drvestrnent was to be accomplished either by a sale of the stock or

physical assets. The preferred stockholders of the subsrdiary urged that,

Without their prior consent or payment

of the voluntary redemption price, which

the company declined to pay, the gas

properties could not be transferred or

divested The Commission observed that

the grant of the exception would not

prejudice their Interests. The questions

of when and how much they would be

paid was deferred pending an application

for authonzatron to sell,

FINANCING

Volume

During fiscal 1973, a total of 14 active

registered holding-company systems issued and sold 55 Issues of long-term debt

and capital stock for cash aggregating

$2.71 billion 11 pursuant to authonzations

by the Commission under Sections 6 and

7 of the Act. All but 3 of these Issues were

sold at competitive bidding to raise new

capital. The public utility fmancmg table

in the statistical section presents the

amount and types of securrtles Issued

and sold by these holding company

systems.

The volume of external financing during 1973 decreased by 3 percent from

the record amount issued and sold during fiscal 1972. Bonds, debentures and

preferred stock Issued and sold decreased

by 3 percent, 15 percent and 46 percent.

respectively, while the amount of common stock issued and sold increased by

53 percent from fiscal 1972.

The lower volume of financrng was accompanied by a slight increase In the

earnings coverages of interest and preferred dividends reversing a long-term

downward trend For the calendar year

1972, the earnings (after taxes) of the 17

111
active registered holding company systems represented an average of 2.10

times their Interest and preferred dividend requirements as compared to 2.0A.

times in 1971.

Leasing

In recent years, the use of leases to

finance significant additions to utility facilities has developed. Such transactions

are involved in only a small portion of

the massive expansion the utility industry has experienced in this period, but are

far from negligible in absolute amount.

The title retained by the lessor, usually

a financial Institution, under such a lease

makes It the owner of a utility facility.

As such, it would be defined as an electric

or a gas utility company by Sections 2(a)

(3) and 2(a)(4) of the Act and subject to

various obligations thereunder. Lessors

sought relief by applications for exemption under those sections.

While these sections do contain exemptive authority, they were designed for

other purposes and it became clear with

experience that grant of such exemptions

was not an appropriate source of relief.

During the fiscal year therefore, the

Commission promulgated Rule 7(d) under

the Act which declares that the lessor's

title retained under leases meeting ItS

condrtions shall not constitute ownership

of a utility facility within the meaning of

Sections 2(a)(3) or 2(a)(4).

The conditions are drawn to insure that

HIe excluded lease does, in fact, vest effective control over the facrlity in an

operating public utility company, leaving

the lessor With only the passive title on

which the exclusion is premised.

The terms of the lease must also have

been expressly approved by a regulatory

authonty having jurisdiction over the

rates and services of the lessee, to make

certain that the excluded transaction is

examined by an appropnate public agency

responsible for the protection of investors and consumers.

The exclusion becomes effective on the

filing with the Commission of a simple

certificate, Form U 7D, identifying the

lease. The Cornrnissron also amended

Rule 106 under the Act, to reduce the fee

for ftlmg such certificate from $2,000 to

$200 As of July 31, 1973, 21 certificates

had been filed.

Allowance for Funds Used

During Construction

"Allowance for Funds Used During

Construction" (AFC) is an amount generally permitted by rate-regulatory agencies to be included In the cost of construction and subsequently recovered

after commencement of commercial

operation through rates charged consumers over the life of the related assets. AFC

represents the net cost, during the penod of construction, of funds borrowed

for construction purposes plus a reasonable rate for other funds when so used.

Dunng the period of construction, (i.e.,

before the asset is placed in service)

AFC is reflected in the income statements

of the utility as an item of "Other

Income."

When the Item of AFC was relatively

small, its Inclusion In utilities' Income

statements received little attention. In

recent years, however, the electric industry's continuous huge construction

programs, coupled With sharply higher financing costs, has caused a rapid increase in the AFC Item-both in an absolute sense and relative to reported net

income. Thus, in the past fiscal year, the

amount of AFC reflected in income statements of subsidiaries of registered holding companies has ranged as high as 43

percent of reported net income; and generally the same has been true for the

electnc utility industry as a whole.

With the constant growth of the AFC

item and its often substantial impact on

reported net income, considerable controversy has arisen in the accounting and

investment communities regarding the

nature of AFC and the traditional treatment of this non-cash amount as an item

of "Other Income" in the income statement. Recognizing the importance of this

112
subject, the Commission has in the past

fiscal year required fuller disclosure of

AFC for all utility companies (including

subsidiaries of registered holding companies) in the registration of security offerings. The expanded requirements 10-

elude a clear definition of AFC; the rate

applied to construction work in progress

in computing the amount of AFC; a separation of AFC rnto Its two components of

(a) interest paid on borrowed funds used

for construction, and (b) the Imputed

cost of other funds when so used; and the

ratio that such imputed cost of "other

funds" bears to net income reported as

available for common stock. Fuller dISclosure requirements should help to develop uniformity in the accounting for

AFC and its presentation in the mcorne

statement.

Joint Ventures

Traditionally, the retail gas utility 10-

dustry has obtained the bulk of Its natural

gas requirements through contractual

purchase arrangements with large interstate pipe line companies. However, the

steady shrinkage of natural gas reserves,

coupled with steadily increasing demands,

has in recent years forced the gas hold109 company systems to intensify their

efforts to develop additional sources of

supply through exploration and development programs of their own. The many

complex problems, technical and financial, inherent 10 such programs have led

increasmgly to joint ventures with nonassociated 011 and gas interests. Individual joint agreements vary in detail, but

in general the objective of the gas company participants is to obtain direct entitlement to, or first call on, gas reserves

developed through the joint ventures.

Where these ventures involve participation by registered holding companies or

subsidiary companies thereof the Commission must pass upon the fmancing of

their participations and related matters

under applicable provisions of the Act.

Prior to fiscal 1973, the Commission approved serveral such joint-venture participations by registered gas utility hold.

ing companies or their subsidiaries."

In fiscal 1973, the Commission approved participation by the ColumbIa Gas

System in a jornt venture with two nonaffiliated 011 and gas interests, Energy

Ventures, Inc. and Forest 011 Corporation,

to bid for offshore oil and gas leases

offered by the U.S. Department of the

Interior. The total initial capital requirements were estimated at $200 million,

about half of which would be Columbia's

obligation rc In American Natural Gas

Company, the Commission authorized

frnancmg of up to $50 million for participation by the company's production

subsrdrary in a group brdding jointly for

offshore Texas tracts offered 10 June

1973, by the Interior Department."

The exploration and development activities of gas utility systems are generally

conducted through non-utility subsidrarres, In the early phases of exploration and

development projects, these subsidiaries

often Incur substantial net tax losses

whrch are included 10 the system's consolidated tax returns, thus reducing the

consolidated tax liability. Rule 45(b)(6)

promulgated under the Act some years

ago requires in effect that, unless the

Commission otherwise permits, the benefit of tax savrngs ansmg from the tax

losses of the exploration subsidiaries be

distributed among the other subsidiaries

having taxable income." In light of the

substantial amounts of capital required

ill exploration and development activrtles

and the risks involved, the gas holding

company systems have requested permissron to deviate from Rule 45(b)(6) so as

initially to give the cash equivalent of the

tax savings to the exploration subsidiaries

and thereby aid their programs for the development of new gas reserves. In recognition of the VItal need for these programs

in the context of the nationwide energy

shortage, the Commission, during fiscal

1973, authorized deviations from the rule

in response to declarations filed by the

three largest gas utility holding company

systems, Consolidated Natural Gas Company," American Natural Gas Company,'"

and the Columbia Gas System."

113
NOTES FOR PART 6

1 Three of the 20 were subholding

utility companies in these systems. They

are The Potomac Edison Company and

Monongahela Power Company, public.

utility subsidiaries of Allegheny Power

System, lnc., and Southwestern Electric

Power Company, a pubhc-utilrty sub.

sidrary of Central and South West

Corporation.

2 These holding companies are British

American Utilities Corporation; Kmzua

Oil & Gas Corporation and its subsidiary

company, Northwestern Pennsylvania

Gas Corporation; and Standard Gas &

Electric Company, which has been dissolved and its assets distributed.

3 C.A.D.C., No. 71-1337 (June 29,

1973).

Holding Company Act Release No.

17081 (March 30, 1971).

'Holding Company Act Release No.

17116 (May 5, 1971).

Previously reported in 38th Annual

Report, p. 108; 37th Annual Report, p,

170; 36th Annual Report, p. 160; 35th

Annual Report, p. 149; 34th Annual Report, p. 138.

7 See 38th Annual Report, p, 108.

8 Holding Company Act Release No.

17748 (November 2, 1972).

9 Holding Company Act Release No.

17908 (March 14, 1973), 1 SEC Docket

No.7, p, 8.

10 Previously reported in 38th Annual

Report, p. 109; 37th Annual Report, pp.

172-73.

11 Previously reported, 38th Annual Report, page 109.

12 Pacific Lighting Corporation, Holding Company Act Release No. 17855 (Jan.

uary 11, 1973); National UtIlities & In.

dustries Corporation, Holding Company

Act Release No. 17857 (January 11,

1973).

13 Connectrcut Light & Power Co.,

Holding Company Act Release No. 17905

(March 5, 1973), 1 SEC Docket No.6,

114

p. 13; Middle South UtilIties, Inc., Holding Company Act Release No. 17944

(April 25, 1973), 1 SEC Docket No. 13, p.

14; American Electric Power Co., lnc.,

Holding Company Act Release No. 18007

(June 19, 1973), 2 SEC Docket 12.

H Debt securities are computed at their

price to company, preferred stock at the

offering price, and common stock at the

offering or subscription price.

I', See, for example, The Columbia Gas

System, lnc., (i) Holding Company Act

Release No. 17213 (August 2, 1971), joint

venture with BP Oil Corp.-SOHIO for de.

velopment of 011 and gas reserves at

Prudhoe Bay, Alaska, at an estimated

cost of $800-900 million of which Co'

lumbia's share IS about $200 million; and

(II) Holding Company Act Release No.

17290 (September 27, 1971), Joint venture With Dome Petroleum, Ltd., for gas

exploration In the Canadian Arctic Islands, In which Columbia has a 50 percent interest at an estimated cost of $30

million. See also Consolidated Natural

Gas Company, Holding Company Act Release No. 17559 (May 1, 1972), covering

partrcrpatrons in three ventures for explorations of gas acreage in Canada.

16 Holding Company Act Release No.

17809 (December 14, 1972).

17 Holding Company Act Release No.

17984 (June 5, 1973), 1 SEC Docket No.

19, p. 16.

18 The rule was designed to conform

with the method of allocating consolidated taxes prescribed by Section 1552

(a)(l) of the Internal Revenue Code of

1954. Like the rule, the Code affords pro'

cedures for devrations from the pre.

scribed method.

19 Holding Company Act Release No.

17875 (February 6, 1973),1 SEC Docket

No.2, p. 12.

:!O Holding Company Act Release No.

17984 (June 5, 1973), 1 SEC Docket No.

19, p, 16.

Holding Company Act Release No.

18000 (June 12, 1973), 1 SEC Docket

No. 20, p. 14.

•

•

"


Part 7

Corporate

Reorganizations

The Commission's role under Chapter

X of the Bankruptcy Act, which provides

a procedure for reorganizing corporations

in the United States district courts, differs from that under the various other

statutes which it administers. The Commission does not- initiate Chapter X proceedings or hold its own hearrngs, and it

has no authority to determine any of the

Issues in such proceedings. The Commission participates in proceedings under

Chapter X to provide independent, expert

assistance to the courts, participants, and

investors in a highly complex area of

corporate law and finance. It pays special attention to the interests of public

security holders who may not otherwise

be represented effectively.

Where the scheduled indebtedness of

a debtor corporation exceeds $3 million,

Section 172 of Chapter X requires the

jUdge, before approving any plan of reorganization, to submit it to the Commission for its examination and report.

If the indebtedness does not exceed $3

million, the judge may, if he deems it

advisable to do so, submit the plan to

the Commission before deciding whether

to approve it. When the Commissron files

a report, copies or summaries must be

sent to all secunty holders and creditors

when they are asked to vote on the plan.

The Commission has no authority to veto

a plan of reorganization or to require its

adoption.

The Commission has not considered it

necessary or appropriate to participate in

every Chapter X case. Apart from the excessive administrative burden, many of

the cases involve only trade or bank

creditors and few public investors. The

Commission seeks to participate principally in those proceedings in which a substantial public investor interest is involved. However, the Commission may

also particrpate because an unfair plan

has been or is about to be proposed, public security holders are not represented

adequately. the reorganization proceedings are being conducted in violation of

important provisions of the act, the facts

indicate that the Commission can perform a useful service, or the judge requests the Commission's participation.

The Commission in its Chapter X activities has divided the country into five geographical areas. The New York, Chicago,

Los Angeles and Seattle regional offices of

the Commission each have responsibility

for one of these areas. Supervision and

review of the regional offices' Chapter X

work is the responsibility of the Division

of Corporate Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field offrce

for the southeastern area of the tlmted

States.

PROPOSED CHAPTER X RULES

The Advisory Committee of the Committee on Rules of Practice and Procedure

of the Judicial Conference of the United

States has proposed new Chapter X rules.

117
In response to a general invitation for

comment, the Commission's staff submitted a comprehensive report, dated

July 5, 1973, generally critical of many

aspects of the proposed rules. Subsequently, the Commission adopted the

staff report as its official position, contending that the draft rules repeatedly

abolish, without comment, carefully devised Congressional safeguards for public investors. In the Commission's view,

the rules would also make it more difficult to perform the responsibilities imposed upon the Commission by Congress

with respect to Chapter X proceedings,

and do not adequately reflect the differences between procedures needed to

bring about the reorganization of an enterprise under Chapter X in order that it

may continue as a going concern, and

procedures necessary to accomplish

liquidation in ordinary bankruptcy proceedings.

SUMMARY OF ACTIVITIES

In fiscal 1973, the Commission entered

18 new Chapter X proceedings involving

companies with aggregate stated assets

of approximately $750 million and aggregate indebtedness of approximately

$664 million.

Including the new proceedings, the

Commission was a party in a total of 117

reorganization proceedings during the

year.' The stated assets of the companies

involved in these proceedings totaled

approximately $2.2 billion, and their indebtedness about $1.8 billion.

During the year, 8 proceedings were

closed, leaving 109 in which the Commission was a party at fiscal year-end,

ADMINISTRATIVE MATTERS

In Chapter X proceedings, the Com.

mission seeks to have the courts apply

the procedural and substantive safeguards to which all parties are entitled.

The Commission also attempts to secure

judicial uniformity in the construction of

Chapter X and the procedures thereunder.

King Resources Co.'-The Court of

Appeals, as urged by the Commission,

118

affirmed Without opinion the order of the

lower court in transferring this Chapter X

proceeding from Texas to Denver,

Colorado.'

Petitioning creditors had argued on appeal that the judge did not afford them

an opportunity to file exceptions to the

special master's recommendation pursuant to Rule 53 of the Federal Rules

of CIvil Procedure. The Commission

pornted out that the order conformed to

the standard practice in the Texas district court, that it did not prejudice appellants' appeal, and that the departure

from Rule 53 was permitted by General

Order 37.

Congaree Iron & Steel Company,

Inc.'-A lawyer who had actively represented creditors in the filing of an involuntary Chapter X petition was later

appointed general counsel to the Chapter X trustee. The debtor's answer to the

involuntary petition questioned the valid.

ity of the claim of one of the petitioning

creditors, thereby creating a situation

where the general counsel to the trustee

would have to inquire into the validity of

a former client's claim.

Though not participating in the case,

the Commission urged the court that

counsel was not disinterested as required by Sections 157 and 158 of

Chapter X, even though he had ceased to

represent the petrtioning creditors on his

appointment as general counsel to the

trustee. The matter is still pending before

the district court.

Titco, Ine."-A lawyer, associated with

the law firm which acted as counsel for

the debtor within 2 years oreceding the

filing of the Chapter X petition, was appointed by the court as general counsel

to the Chapter X trustee. The law firm

as well as an individual partner were

named as defendants in three class actions brought against the debtor corporation and its principals. The Commission

advised the lawyer that he was not disinterested as required by Sections 157 and

1"R of Chanter X. and he resigned.

The debtor, Tllco, is a publicly-held

holding company with a number of

wholly-owned subsidiaries engaged in the

business of producing oil and gas. One of
the debtor's subsidiaries, Natural Resources Fund, Inc. (NRF), is the general

partner in six limited partnerships formed

for the purpose of exploring, drilling, and

operating oil and gas properties. About

5,500 Investors contributed in excess of

$27 million for interests In the SIX limited

partnerships."

The debtor's Chapter X petition purported to include all wholly-owned subsidraries. NRF's only source of income

was its fees and charges as general partner In the various limited partnerships.

Although it had approximately $1 million

in cash on hand, this represented earnings of the respective limited partnerships. The Cornrnisston took the position

that these funds, as well as the properties which generated them, belonged to

the publicly-owned hrruted partnerships

and could not be appropriated for Trlco's

Chapter X proceeding. The Commission

supported NRF's management in obtainIng an order authorizing the distribution

of approximately $750,000 of the limited

partnerships' accumulated earnings to

the limited partners.

Subsequently, a voluntary Chapter X

petition by NRF was approved. This

brought all of the partnership properties

into the Chapter X court. However, the

order of approval, as urged by the Commission, prohibited consolidation of

NRF's partnership assets with those of

Trlco and its other subsidiaries, but authorized their joint administration.

Imperial-American Resources Fund,

Inc!-The debtor was the general partner in 13 limited partnerships with a total

investment of over $100 million contributed by more than 16,000 investors.

An individual sought to form a protective committee for the limited partners

and began soliciting funds from them

as well as authority to represent them in

the Chapter X proceeding. The Commission objected to the individual's activities,

claiming that he had not complied with

the applicable provisions of Chapter X or

the Commission's proxy rules." Upon the

application of the Commission, the district court ordered the individual to make

no further solicitations and to submit an

accounting for all funds received and drsbursements thereof.

The Commission subsequently filed objections to the accounting and requested

disallowance of substantially all expenses, including attorneys' fees incurred

by the mdrvrdual In defending agarnst the

Commission's action. The referee declined to exercise [unsdrction on the question of the propriety of these expenses,

holding that restitution was a matter between those who made the contributions

and the Individual. The Commission has

petitioned the district court for review of

the referee's decisron.

TMT Trailer Ferry, Inc."-The Committee which has represented common stockholders since 1957 appealed from an

order directing it to frle new authorrzations from stockholders and requiring that

each shareholder granting such authorization disclose detailed information as to

the acquisition of his stock, The committee had fully complied With Section 211

on entering ItS appearance,'. had reiterated the facts as to its composition from

time to time and supplied such informaion as was available without a general

sohcitation of stockholders.

The Commission supported the committee's appeal. Although the Commission acknowledged that the Chapter X

court has broad power to regulate committees and to require full disclosure, it

argued that the type of mforrnation

sought from individual shareholders was

not relevant to the Committee's standing." The requirement that new authorizations be solicited seemed inconsistent

with a previous order of the court of appeals," and was not based on any new

development.

The court of appeals reversed and

vacated the order of the lower court, finding it to be "another episode in the continuing pattern of harassment of the committee"." The court of appeals indicated

that it was unwilling to allow the role of

the committee to be downgraded or impeded, particularly in view of the important services which it has rendered during the reorganization.

119
Traders Compress Co."-The debtor is

a small publicly-owned corporation engaged primarily in the sale and drstnbution of hqurfied petroleum gas ("LPG")

to over 8,500 rural customers In Oklahoma. A major supplier sought to discontinue sales of LPG to the debtor,

asserting a shortage in supply. The supplier made no attem pt to ration LPG to

its customers, but proposed to solve the

shortage by eliminating the debtor's allocation completely.

Since other sources of supply were

unavailable, the trustee sought an inJunction to restrain the supplier from terminating the supply of LPG. The trustee

urged that termination of the contract

to supply the debtor would jeopardize

any hope for a successful reorganization

and would leave many of the debtor's

customers without a source of supply. He

contended that the laws of Oklahoma prohrbrtsd such drscnrnlnation. The Commission argued that the Chapter X court

had jurisdiction to enter an injunction to

preserve the going-concern value of the

debtor for the benefit of its creditors

and shareholders if the governing local

law prohibited the attempted termination. The district court found that it had

jurisdiction, and permanently enjoined

the supplier from terminating its agreement to supply the debtor, finding that

the action of the supplier was discriminatory and violative of the Oklahoma

public utility and antitrust laws. The injunctive order has been appealed to the

court of appeals, where the matter is

now pending."

Sales of major assets under authority

of Section 116(3) of Chapter X rather

than pursuant to plans of reorganization

were involved in four cases in this fiscal

year. The Commission objected to only

one.

The Commission is satisfied that any

proposed sale of all or a critical portion of

a debtor's assets under the summary

procedure of Section 116(3) involves a

conflict with the policy of Chapter X.

Such a sale terminates the effort to

reorganize and frustrates the purposes

of the proceeding.'. While Section 216

(10), dealing wrth plans of reorganization,

expressly permits a plan to provide for

the sale of any or all of the debtor's

property, that power is not committed

to the court's sole discretion, but is

dependent upon compliance with the

safeguards with which Congress has surrounded adoption of a plan of reorganization. In particular, it requires the

consent of the statutory majority of the

creditors and stockholders who are beneficial owners of the property being dealt

with. Resort to Section 116(3) as a substitute for Section 216(10) effectively

drsenfranchrses the creditors and shareholders and normally reduces the plan

of reorganization to ratlftcatron of a fait

accompli. In short, there must be a

strong presumption against the propriety

of such a transection However, the presurnptron is not conclusive. There are

situations in which use of the powers

granted by Section 116(3) may be justified. The case of a warehouse full of

deteriorating produce is not the only, or

even the most important, example." The

emphasis on the "wasting asset" concept rs is an unfortunate and misleading

turn taken by the law in this field. The

trustee should not be required to cry

"spoiled fish" in order to justify a sale.

With the increasing cornplexrtres of

corporate business, and particularly the

indiscriminate dlversrftcatron which may

precede corporate failures, the need to

prune a debtor's business Into reorgaruzable shape has become an almost

routine aspect of Chapter X administration. Chapter X does not require that the

debtor be frozen in the unsatisfactory

position which caused its insolvency.

Sound business judgment may require

rather substantial sales independent of a

plan of reorganization.

The Commission does not insist that

Section 2J6(10) be complied with regardless of consequences. In given circumstances, where an adequate price is

offered, it may not be feasible to embody

the sale in a plan. In that event, Section

116(3) is an effective procedure, provided ample notice is afforded creditors

and stockholders. But it cannot be em120
phasized too strongly that a real, as distinguished from a self-created, need must

be present to justify such elimination of

the right of creditors and stockholders to

decide affirmatively whether or not their

property should be sold.

Bubble Up Delaware, Inc., et al.'9_

After competitive bidding and negotiations, the trustees presented to the court

two offers to purchase substantially all of

the debtors' operating assets. They relied

on Section 116(3) of Chapter X as authority for the sale.

Although sales and profits of the debtors had increased dunng the Chapter X

proceeding, one of the trustees testified

that in his opinion the business had

reached its peak; that operating difficulties could set in as a result of an adverse court decision In an antitrust SUit;

and that controversies as to the relative

rights of the creditors and stockholders of

the several corporations involved might

take time to litigate, thus precluding a

sale pursuant to a plan of reorganization. After an extensive evrdentiary hearing, the judge found that an emergency

situation confronted the trustees and approved the sale to the party he found had

made the highest offer. An appeal by the

unsuccessful bidder was withdrawn and

the sale was consummated.

Bermec Corporation.20-The trustee

sought authority to sell most of the

debtor's operating assets to certain competitors for approximate!y $8.1 million,

having concluded after a thorough

analysts that the business could not survive. The Commission did not dispute the

trustee's decision to sell, but opposed acceptance of the initial offer on the ground

that there was no showing that the price

was adequate and reasonable. The court

ordered an auction to be held, setting

$8.1 million as the minimum upset price.

The operating assets were ultimately sold

for $9.4 million, and additional assets

were sold for about $1.4 million.

Beck Industries, Inc.21-The Commission objected to the sale of a large furnlture retailing subsidiary to its former owners citing inadequate consideration and

the circumstance that the proposed sale

appeared to be another step in the

hqurdation of the debtor outside of a plan

of reorganization. The purchasers increased their offer, which the district

judge approved:"

TRUSTEE'S INVESTIGATION

A complete accounting for the steward.

ship of corporate affairs by prior management is a requisite under Chapter X. One

of the primary duties of the trustee is to

make a thorough study of the debtor to

assure the discovery and collection of all

assets of the estate, Including claims

against officers, directors, or controlling

persons who may have mismanaged the

debtor's affairs. The staff of the Commission often aids the trustee in his investigation.

King Resources Company. "-The

trustee resolved several primary problems

regarding the estate durmg the past

year. For one, he was successful In negotiating a compromise settlement With

some 83 lien creditors and other parties

asserting conflicting claims to 25 domestic oil or gas leases. Under the terms

of this settlement, each of the lien

creditors agreed to release his lien, and

forego contractual interest and attorney's

fees, in return for a cash payment of 75

percent from accumulated production

and allowance of the 25 percent balance

as an unsecured claim. As part of the

settlement, the balance on production

payments due to various parties was

reduced by $519.000. These production

payment holders will receive their agreed

share of the 011 and gas produced, thereby

reducing the burden of interest payments

on the estate.

The trustee also settled for $2.5 million a plenary SUIt he had brought

against the surety under a fidelity bond

of the debtor. The suit was based on

misappropriation of the debtor's funds

in connection With former management's

attempt to take control of Investors Overseas Service. The settlement as approved by the court amounted to 50

percent of the bond. The trustee used

these funds to reduce the balance of his

outstanding certificates.

121
The trustee rejected two pre-Chapter

X agreements by the debtor to sell fractional interests in Canadian 011 and gas

exploration permits to John M. King and

his private corporation, the Colorado

Corporation. The rejection of the con.

tracts was approved by the drstnct court

and upheld on appeal."

DoIly Madison Industries, Inc.os-Two

shareholders filed a class action against

the debtor, certain of Its former officers

and directors, and its former accountants, alleging violations of the antifraud

provisions of the Federal securities laws

in that certain financial statements of

the debtor were false and misleading.

The plaintiffs also filed a class proof of

claim In the reorganization proceeding to

enforce the same liability against the

debtor. The class actions sought about

$10 million for the loss sustained by

shareholders who had purchased the

debtor's stock during the period from November 8, 1969, when the financial statements were made public, to February 18,

1970, when they were corrected.

After 11 weeks of trial, a settlement

was reached under which the class claimants were allowed a $1.5 million unsecured claim against the debtor in the

reorganization proceeding and approximately $1,950,000 in cash and securities from the other defendants In the

class action. The settlement of the civil

action also provided for an enlargement

of the class to Include purchasers and

sellers up to June 26, 1970, the date of

susnension of trading following the Chanter X petition. Under Rule 23 of the Federal Rules of CIVil Procedure, class members were entitled to prove their claims

against the settlement fund subsequent

to the settlement. However, an order had

been entered in the Chapter X case barring class members who had failed to

file individual proofs of claim from par.

ticrpating in any recovery against the

debtor.

The Commission did not object to the

amount of the settlement, but urged, unsuccessfully, that the court should reopen the time for filing claims under Section 119 in order to permit individual

proofs of claim to be filed in the Chapter

X proceeding.

One shareholder, who failed to file a

timely claim In the reorganization proceeding, appealed from the order approving the settlement. After the close of the

fiscal year, the shareholder entered into

a stipulation with the debtor, which the

court approved, providing for withdrawal

of the appeal and permitting a late filing

at 75 percent of the claim. The Commission opposed the approval of the stipulation on the ground that, Since the appellant had asserted rights common to the

entire class of excluded shareholders, it

was improper to terminate the appeal by

a settlement limited to his claim."

TMT Trailer Ferry, Inc.-In 1968, the

Supreme Court reversed confirmation of

a plan of reorganization for TMT.27 The

Court held that the district court had

erred in finding the debtor insolvent and

excluding shareholders from participation

through the use of improper valuation

standards, and in accepting the trustee's

decision to allow two major contested

claims since the record was insufficient to

permit an informed, independent judgment as to the fairness and equity of the

trustee's acceptance of the claims. The

Supreme Court remanded for further

proceedings, since the record did not permit conclusions as to whether or not the

debtor was solvent or whether the disputed claims should be allowed.

In the last fiscal year, both these major

claims were dealt With, after an investigation by the new trustee. An agreement to

settle the claim of Merrill-Stevens, Inc.

for $525,000, post bankruptcy interest

being waived, was heard and approved.

The claim had previously been allowed

for $1.6 million pnncioal, which would

be equivalent to about $3.2 million with

interest. A settlement of the "Caplan

m0rtpal1e" claim Wi"S affirmed by the

court of appeals." Although the major

part of this claim was held to be valid,

certain participants in the loan were excluded from the settlement on equitable

grounds, and their claims have since

been adjusted or denied on the merits.

122
The new trustee's operation of TMT

has been far more profitable than was

forecast in the erroneous valuation findings. A cash offer more than sufficient to

pay all creditors In full, with Interest, has

been received and is being weighed

against other reorganization prospects.

REPORTS

Generally, the Commission files a formal advisory report only in a case which

involves substantial public investor interest and presents significant problems.

When no such formal report IS filed the

Commission may state its views briefly

by letter, or authorize its counsel to make

an oral or written presentation. DUring

the fiscal year the Commission published

no formal advisory report, but its views

on five plans of reorganization were presented to the courts either orally or by

written memoranda."

American Loan & Finance Company.30-Thls equity receivership, which

originated in an injunctive action by the

comrrusslon," was superseded by a Chapter X proceeding after the receiver had

determined that a sale of the debtor as a

going-concern could best be effected by a

Chapter X plan of reorganization. The

debtor was insolvent, but provision was

made for participation by the publiclyheld 7 percent preferred stock. The holders of this stock, as urged by the Commission, were accorded creditor status

under the plan, since the stock was sold

to them in violation of the Securities Act."

The proceeds of the sale were distributed,

pro rata, to these stockholders and to the

public investment certificate holders at

the rate of about 75 percent of their

claims.

Four Seasons Nursing Centers of

America, Inc.33-The court of appeals

affirmed the Chapter X court's order approving the plan of reorganization which

included a settlement of claims asserted

against the debtor by persons who had

allegedly been fraudulently induced to

purchase its stock in violation of Federal

securities laws." Pursuant to the com.

promises embodied in the plan, the de'

frauded stockholders, whose claims exc: -127 0 74 rn

ceeded $100 million, received one-third of

the equity of the reorganized company

valued at $11.4 rrullron." Holders of unsecured claims against the debtor, totaling

about $27 million, received the remainrng equity valued at $22.8 million. Since,

as a consequence of the settlement, the

debtor was insolvent, the plan made no

provision for stockholders who had purchased their stock after the filing of the

Chapter X pennon and disclosure of the

alleged fraud.

A nonparticipating stockholder appealed. He urged that he should be included among the stockholders In the

settlement or, In the alternative, the

claim of fraud should be litigated and decided on the merits rather than

compromised.

The court of appeals agreed with the

trustee and the Commission 3<l that the

lower court had properly found that there

was a strong probability that Violations

of the Federal securities laws had occurred for which the debtor would be

liable; that a compromise of claims based

on such violations was farr; and that there

were no countervailing equtties favonng

inclusion of post-Chapter X stock purchasers in the reorganization plan. The

court pointed out that the class of share.

holders represented by appellant had full

knowledge of the hazards involved and

such purchases were motivated by

"opportunism.

Farrington Manufacturing Co., et

al.3'-After determining that the debtor

could not be reorganized, the trustee obtained court approval to sell its assets

pursuant to Section 116(3). As a result,

the domestic estates' assets were

basically reduced to cash and receivables, about $3 5 million. After the close

of the fi-scal year, the court approved the

trustee's plan to distribute the cash to

creditors only, inc'uding certain "creditorstockholders" as discussed below, since

the debtor was insolvent.

Pursuant to his extensive Section 167

investigation. the trustee had reported

that certain of Farrington's shareholders

might have causes of action against the

company for Violations of the Federal

123

"
securities laws becauseof the publication

of' false and misleading information.

Such claims were estimated at more than

$30 million. If allowed in full, they would

have represented more than 40 percent

of total liabilities. After negotiation and

compromise between the trustee and

various interests, a class of "creditor.

stockholders" was recognized under the

plan in order to avoid litigating these

complex issues.

The settlement reached allots to Far.

nngton's "creditor.stockholders" 17 per.

cent and other creditors 83 percent of the

domestic estates. The costs of counsel

who represented the class will be de.

ducted from the allotment to the "credIter-stockholders" which will also bear its

share of administration expenses. The

Commission advised the court that the

plan was fair and equitable.

San Francisco & Oakland Helicopter

Airlines, Inc.os_As urged by the Com'

mission, the trustee operated the debtor's

business for an additional year. Improve.

ment in helicopter operations enabled

him to propose another internal plan. It

provided that the reorganized company

would assume a portion of the secured

debt and would issue stock to Its unsecured creditors. Since the debtor was

insolvent, shareholders were accorded

no participation under the plan. The court,

as recommended by the Commission,

found the plan fair, equitable and

feasible.

The Commission objected to a pro'

vision In the plan allowing the trustee to

select the directors of the reorganized

company. Such provision was amended

to comply with Section 221(5) which reo

quires that the judge find that the appomtment of directors "is equitable,

compatible with the interests of creditors

and stockholders and . . . consistent

with public policy."

After confirmation of the plan, the

necessary authorizations for consumrnation were obtained from the Civil Aero.

nautics Board. The plan was substantially

consummated after the close of the fiscal

year.

Federal Coal Company."-The trustee,

as directed by the court," conducted a

thorough investigation into the debtor's

affairs, discovering numerous potential

causes of action against the family

group which had controlled the debtor. As

a result, a settlement was reached in

the form of a plan of reorganization. The

plan provides for the acquisition of full

ownership of the debtor by the family

group which had controlled it, by payment in cash of 112 percent of the principal amount of the debt to all bond.

holders, except the bonds owned by the

purchasing group. The cash payment,

which may be contrasted with the 30

percent originally offered in a Chapter XI

plan of arrangement, would take the form

of an additional payment of approximately 37 percent to those bondholders

who already received 75 percent by

accepting an unregistered tender offer

made during the proceeding, and a full

112 percent to those who had declined

to sell their bonds. Provision was made

for efforts to locate missing bondholders,

and for payment, in addition, of the costs

. of the proceeding.

No provision is made for participation by Federal's shareholders since the

debtor is hopelessly insolvent. However,

the exclusion of stockholders will have

little adverse effect on public investors

since there is a substantial identity be.

tween stockholders and debenture

holders. The Commission, in its memorandum, advised the court that the plan

was fair, equitable and feasible. The

memorandum pointed out that, when

measured against the trustee's valuation

of the debtor, the public bondholders

would be entitled to receive only about

63 percent of the face amount of their

bonds if the bonds held by the purchasing group were to share equally. The

settlement provided for a payment of

almost twice that sum. Shortly after the

close of the fiscal year, the plan was

substantially consummated.

Imperial '400' National, Inc.41-Four

plans of reorganization for this debtor,

which replaced the three which the Com.

mission's original advisory report con.

124
c1uded should not be approved, were referred to the Commission. After the end

of the fiscal year a supplemental advisory report was filed, concluding that

each of the new plans had defects, but

could be amended to be fair, equitable

and feasible."

The district court, before referring the

plans to the Commission, entered an order finding the value of the debtor to

be about $18.9 million, rather than $20.5

million which the Commission had

adopted in its original advisory report."

An appeal was filed by a stockholder,

who had proposed one of the four plans

and had presented testimony valuing the

debtor at about $22.5 million." The Commission sought to stay the appeal on the

ground that the finding of value should

not be reviewed except in the context of

approval or rejection of a plan. The court

of appeals denied the Commission's motion for a stay and granted the trustee's

motion for an expedited hearing.

Landmark Inns of Durham, Inc."-The

issue of the ground lease forfeiture having been disposed of in favor of the

trustee,'. he was able to turn his attention to reorganizing this debtor whose operations became profitable during his administration. A plan, based on an offer

by four individuals to purchase for cash

all of the stock of the reorganized corporation, was duly confirmed and has

been substantially consummated. The

plan provided for the payment in full of all

debts, including publicly-held debentures,

with post-petition interest. and the issuance of 7-year promissory notes at the

rate of $1 per share to the debtor's original shareholders.

ALLOWANCES

Every reorganization case ultimately

presents the difficult problem of determining the compensation to be paid to the

various parties for services rendered and

for expenses incurred in the proceeding.

The Commission, which under Section

242 of the Bankruptcy Act may not receive any allowance for the services it

renders, has sought to assist the courts

in assuring economy of administration

and In allocating compensation equitably

on the basis of the claimants' contributions to the administration of estates and

the formulation of plans. DUringthe fiscal

year, 319 applications for compensation

totaling about $14 million were reviewed.

Cybern Education, Inc."-The court of

appeals, as urged by the Internal Revenue

Service and the Commission, reversedthe

order of the lower court which awarded

the trustee and his counsel fees that

equaled the remaining cash left in the

debtor's estate after liquidation of all

of its assets,"

The court vacated the order allowing

the fees, and directed that the case be reassigned to another district judge, stating:

"The notice was clearly in violation of the mandatory requirements

of Section 247 even as the petition

violated Section 249 and Rule X-IS.

But our concern here runs deeper

than the statutory derelictions. It

goes to the applicants' paramount

interest in their own fees and to the

court's purporting to permit the entire estate to be wiped out by the

fees in a Chapter X proceeding which

was improvidently commenced and

should have been quickly terminated

with little or no expense. The fact

that it was not does not tend to reflect favorably upon the fee applicants nor upon the court's supervision of them."

It directed that notices of future fee applications be served on all persons specified by Section 247, and that:

"Notices of presentment of petitions shall in particular be served

upon the Secretary of the Treasury

and the Securities and Exchange

Commission sufficiently in advance

of hearing to permit their staffs to

formulate recommendations to their

superiors and to obtain authorization for positions to be taken upon

such petitions in the district court."

Four Seasons Nursing Centers of

America,Inc".-The indenture trustee of

125
the debtor's European debenture issue

filed an application for a final allowance

of $362,653, of which $123,653 was for

its own services and $239,000 for reimbursement of payments made to its local

and New York counsel.

The Commission noted that a large

portion of the time of the indenture

trustee and its counsel was devoted to

reviewing papers filed by others m the

proceeding. It pointed out that a creditor

cannot be compensated as an auxiliary

trustee, and that there was a duplication

of effort of major proportions by counsel

and the indenture trustee. The fact that

the indenture trustee had already paid

its counsel did not entitle it to recover

such payments from the estate since the

allowance of fees is within the exclusive

jurisdiction of the court which cannot be

negated by a private arrangement between a client and his attorney.

The Commission recognized that the

indenture trustee's responsibilities were

large, and that it dealt with novel and

important issues of law. The fact that its

legitimate concern for the interests of

debenture holders conflicted at times

with the objectives of the trustee should

not affect its right to compensation. Accordingly, the Commission recommended

allowances of $190.368 for the services

of the indenture trustee and its counsel,

and reimbursement of expenses.The district court awarded $158,012_

Counsel for shareholders, who had

filed and negotiated the settlement of the

fraud claim described above under "Reports," requested a final allowance of

9;200.000.The Commission acknowledged

that counsel were experienced in stockholder class actions and that their servo

ices were very beneficial to the estate.

However, the Commission noted that fee

standards in such actions are quite dif.

ferent from those prevailing in Chapter

X. It also pointed out that the charges

against the debtor. which appticants were

asserting in the Chapter X proceeding.

were also involved in a class action

against third parties. and that counsel

would share in the fee awarded in that

action which had been settled.

Accordingly, the Commission recommended an allowance of about $95,000

including expenses. The court awarded

applicants $47,000. Applicants sought

review but the court of appeals denied

leaveto appeal.

Jade 01/ & Gas Co., et at.50-Twenty

applicants sought fmal allowances and

reimbursement of expenses in the total

amount of about $720,000, and the Commission recommended payment of

$382,000. The court awarded fees and

expenses aggregating about $530,000.

Since the estate did not have sufficient

funds, (he Commission suggested that,

to the extent funds were not available,

payments should be made on a deferred

basis and not in stock of the reorganized

company.

The issuance of stock to claimants for

administrative expenses does not fall

within the exemption from registration

under Section 5 of the Securities Act provided by Section 264a(2) of Chapter X.

In the absence of registration, securities

issued for such expenses cannot be resold unless some other exemption under

the Securities Act is available.

The court, however, ordered that applicants allowed more than $10,000 be

paid 75 percent in cash and 25 percent

in newly issued common stock valued at

25 percent belowthe current market price

to compensate for its restricted status.

One applicant agreed to accept stock

only. and applicants allowed less than

$10,000 received full payment in cash.

INTERVENTION IN CHAPTER XI

Chapter XI of the Bankruptcy Act pro.

vides a procedure by which debtors can

effect arrangements with respect to their

unsecured debts under court supervision.

Where a proceeding is brought under that

chapter but the facts indicate that it

should have been brought under Chapter

X, Section 328 of Chapter XI authorizes

the Commission or any other party in interest to make application to the court

to dismiss the Chapter XI proceeding unless the debtor's petition is amended to

comply with the requirements of Chapter

126
X, or a creditors' petition under ChapterX

is filed.

Attempts are sometimes made to misuse Chapter XI so as to deprive investors

of the protections which the Securities

Act and the ExchangeAct are designed to

provide." In such casesthe Commission's

staff normally attempts to resolve the

problem by informal negotiations. If this

proves fruitless, the Commission intervenes in the Chapter XI proceeding to

develop an adequate record and to direct

the court's attention to the applicable provisions of the Federal securities laws and

their bearing on the particular case.

Ateo Umversal."-The company, a

wholly-owned subsidiary of VTR, lnc.,"

had not beenin operation for over 2 years

and had virtually no assets. A plan of

arrangement called for the issuance of

over one million shares of the debtor's

stock to more than 300 of its unsecured

creditors in reliance upon the Section

393a(2) exemption of Chapter XI. The

Commission intervened and filed a brief

suggesting that the issue of these securities appeared to be motivated by stock

market considerations rather than by any

serious desire to rehabilitate a business, and that a plan so conceived lacked

the "good faith" required by Section

366(4) of Chapter XI. The debtor was

subsequently adjudicated a bankrupt.

Meister Brau, Ine."-A Section 328

motion was filed by shareholders to have

the proceeding transferred to Chapter X.

The Commission after making a preliminary investigation took no position because of its doubt that the debtor, a large

regional brewer, could be reorganized.

The lower court denied the shareholders'

motion. The court requested that the

Commission continue its investigation

into the debtor's affairs as an aid to the

court. Subsequently, the staff filed an

extensive factual report on the financial

history of the debtor. The report was

prepared entirely from the debtor's records and other public information and

stressed the primary reason for the

debtor's financial problems-a series of

improvident attempts at diversification on

borrowed money in the face of an increasingly difficult competitive situation.

It also pointed out that the debtor had

sold Its established brands just prior to

its filing, and had little hope of re-estabhshing a Viable brewery operation. Efforts to revive the debtor were fruitless

and It was adjudicated a bankrupt.

DCADevelopmentCorporation.""-The

debtor, a tile-rnakmg and housing development concern, attempted to effect

a Chapter XI arrangement with its unsecured creditors, including public debenture holders. The proceeding aborted

when the debtor was not able to raise the

necessary capital to fund its proposed

arrangement. It thereupon filed a Chapter X petition.

At the request of the Commission, the

court held an evidentiary hearing on the

"good faith" of that petition, which was

being contested by some creditors. Smce

the tile business was not In operation

and the housing businesswas not viable,

the court held "that it is unreasonable

to expect that a plan of reorganization

can be effected." Accordingly, it dismissed debtor's Chapter X petition pursuant to Section 146(3). The proceeding

then reverted to Chapter XI. Shortly

thereafter, the debtor, being unable to

effect a new arrangement, was adjudicated a bankrupt.

NOTES TO PART 7

1 A table listing all reorganization proceedings in which the Commission was a party dunng the year is contained in

Part 9. , D. Colo., No. 71-8-2921. Previously

reported in 38th Annual Report, pp. 114,

116-117. 3 In re King Resources Co., 467 F. 2d

944 (C.A. 5, 1972).

D. S.C., No. 72-72.

'D. Kansas, No. 23662.

Originally there were 12 limited partnerships in which the public invested

morethan $40 million. The initial six partnerships were dissolved with the limited

partnership interests being exchangedfor

stock in the parent corporation, Tilco,

Inc. This exchange transaction and the

127

•

•
related proxy solicitations were the subject of a Commission enforcement action.

See Litigation Release Nos. 5107 and

5190 (July 29 and October 19, 1971). 1 D. Colo., No. 72-8-556.

s Cf. Halsted v. Securities and Exchange Cornrnissron, 182 F. 2d 660,

663-64 (C.A. D.C.), cert. den., 340 U.S.

834 (1950). Unreported decisions are

compiled in the 38th Annual Report, pp.

117-18; 31st Annual Report, p. 98; and

30th Annual Report, p. 100.

S.D. Fla., No. 3659-M-8k-WM. Previously reported in 38th Annual Report, pp.

124-125; 37th Annual Report, pp. 191-

193; 36th Annual Report, pp. 179-180,

190, 191; 35th Annual Report, pp. 160,

168; 34th Annual Report, p. 153; 33d Annual Report, p. 135; 32d Annual Report,

pp. 92-93; 31st Annual Report, p. 100;

30th Annual Report, p, 105; 29th Annual

Report, pp, 91-92; 28th Annual Report,

p. 100; 27th Annual Report, pp. 132,

134; and 26th Annual Report, pp. 155,

158,160.

10 Section 211 requires every person or

committee representing more than 12

creditors or stockholders to file with the

court a statement under oath, which must

include information regarding the formation of the committee and the holdings

of the creditors or stockholders

repsesented,

11 Section 211(4): See In re Pittsburgh

Railways, 159 F. 2d 630 (C.A. 3, 1946),

cert. den., 331 U.S. 819 (1947). 1% Protective Committee v. Mehrtens,

457 F. 2d 104, 106 (C.A. 5), cert. den.,

409 U.S. 849 (1972).

13 Protective Committee v. Kirkland,

481 F. 2d 606 (C.A. 5, 1973).

H W.O. Okla., No. 8k-72-644.

13 C.A. 10, No. 73-1524.

16 In re Solar Mfg. Corp., 176 F. 2d 493

(C.A. 3, 1949). Cf. In the Matter of Penn

Central Transportation Company, F.

2d (C.A.3, 1973), and In re Pure Penn

Petroleum Co., Inc., 188 F. 2d 851 (C.A.

2, 1951), construing parallel provisions

of Section 77 and ChapterXI, respectively.

11 SeeFrank v. Drinc-o-matic, Inc., 136

F. 2d 906 (C.A. 2, 1943); In re Marathon

Foundry and Machine Company, 228 F.

2d 594 (C.A. 7, 1955), cert. den., 350

U S. 1014 (1956); In re Air and Space

Manufacturing, Inc., 394 F. 2d 900 (C.A.

7), cert. den, 393 U.S. 801 (1968); In

re The Dania Corporation, 400 F. 2d 833,

836 (C.A. 5, 1968), cert. den., 393 U.S.

1118 (1969); and see also In re Wonderbowl, lnc., 424 F. 2d 178, 180 (C.A. 9,

1970); In re Northern Illinois Development Corporation, 324 F. 2d 104 (C.A.7,

1963), cert. den., 376 U.S. 938 (1964)

(Chapter XI).

128

18 See In re Loewer's Gambrinus Brewery Co., lnc., 141 F. 2d 747 (C.A. 2,

1944) and its sequel, Patent Cereal v.

Flynn, 149 F. 2d 711 (C.A. 2, 1945).

Only in In re SITe Plan, Inc., 332 F. 2d

497 (C.A. 2), cert den., 379 U.S. 909

(1964), has possible physical deterioration been a significant factor.

I' C. D. Calif., Nos. 78641-FW, 78950-

FW' 79596-FW' and 80470-FW. Previously reported in 38th Annual Report,

pp. 115-116.

eo S.D. N.Y., No. 71-8-291. Previously

reported in 38th Annual Report, pp. 125-

126; 37th Annual Report, p. 179. 21 S.D. N.Y., No. 71-8-523. Previously

reported in 38th Annual Report, p. 116. %2 Forthe fourth case Involving Section

116(3), see Famngton Manufacturing

Company, Infra.

D.Colo., No. 71-8-2921.

2. King v. Baer, 482 F. 2d 552 (C.A. 10,

1973).

E.D.Pa.,No. 70-354. ee Cf. Young v. Higbee, 324 U.S. 204,

212-213 (1945). er Protective Committee v. Anderson,

390 U.S. 414 (1968). 28 Protective Committee v. Kirkland,

471 F. 2d 10 (C.A. 5, 1972). .. In re American Loan & Finance Co.,

E.D. Va., No. 508-72-N; In re Cochise

College Park, inc., D. Ariz., No. 13-72-

760-Phx.; In re Farrington Manufacturing

Co., et aI., E.D.Va., Nos. 17-71-A, 256-

71-A, and 257-71-A; In re Federal Coal

ce., S.D. W.Va., No. 69-270; In re San

Francisco & Oakland Helicopter Airlines,

lnc., N.D. Calif., No. 8-70-5175. 30 E.D.Va., No. 508-72-N. 31 See Securities and Exchange Commission v. F. Wallace Bowler, 427 F. 2d

190 (C.A. 4, 1970). 3% Id. at 193-194.

33 W.O. Okla., No. Bk-70-1 008. Previously reported in 38th Annual Report,

pp, 118, 120-121; 37th Annual Report,

pp.180-181. .. In re Four SeasonsNursing Centers

of America, Inc., 472 F. 2d 747 (C.A. 10,

1973).

The defrauded shareholders also reo ceived about $7 million in cash from

defendants other than the estate in settlement of related class actions. se The position urged by the Commission was in accord with its advisory report on the plan of reorganization, Corporate Reorganization Release No. 310

(March 16, 1972). See also 38th Annual

Report, pp. 120-121. 31 E.D. Va., Nos. 17-71-A, 256-71-A

and 257-71-A. Previously reported in

38th Annual Report, p. 118. 38 N.D. Calif.• No. 8-70-5175. Previously reported in 38th Annual Report, pp.

122-123.

•

""

""

-

-

""
3' S.D. W. Va., No. 69-270. Previously

reported in 38th Annual Report, pp. 118-

119; 37th Annual Report, p. 196; and

36th Annual Report, pp. 194-195. 40 In re Federal Coal Company, 335 F.

Supp. 1183 (S.D. W.Va. 1971); see also

38th Annual Report, pp. 118-119. H D.C. N.J., No. 656-65. Previously reported In 38th Annual Report, pp. 117,

122, 125; 36th Annual Report, pp. 176-

177, 190; 35th Annual Report, p. 161;

33rd Annual Report, pp. 132, 137; 32nd

Annual Report, p. 94.

Imperial '400' National, Inc., Cor.

porate Reorganization Release No. 313,

(August 29, 1973), 2 SECDocket377. 43 These are gross values and include

about $8.2 million of undefaulted mort.

gages. .. C.A.3, No. 73-8116.

"M.D. N.C., No. 8-198-69. Previously

reported in 38th Annual Report, p. 115;

37th Annual Report, p. 181; 36th Annual

Report, p. 179.

40 Weaver v. Hutson, 459 F. 2d 741

(C.A.4), cert. den., 409 U.S.957 (1972).

"N.D. III., No. 70-8-5299. Previously

reported In 38th Annual Report, p. 125.

"In re Cybern Education, Inc., F.

2d (C.A. 7, 1973). 4~ W.O.Okla., No. Bk 70-1008. 60 C.D. Calif., Nos. 17312-F and

17313-F. Previously reported In 36th Annual Report, pp. 181-183. 01 See 38th Annual Report, p. 126;

37th Annual Report, p. 198; 36th Annual

Report, p, 197.

02 W.O.Mich., No. 370-72-85.

na This publicly-held company has hada

history of securities law problems. See

litigation ReleaseNos.3311, 3314, 3335,

3356, 3370, 3985, 4142, 4265, 4287,

4490,4787,5001,5131, 5717 and 5864;

Securities Exchange Act Release Nos.

7692, 7894, 9980 and 10078.

.4 N.D. III., No. 72-B-3965.

ss D. Mass.,No. 73-152.

129

-

-

'"



Part 8

SECManagement

Operations

Major changes occurred in fiscal 1973

affecting the Comrmsslon's organlzation,

the management of its two cntical resources, people and money, and its information handling.

ORGANIZATIONAL CHANGES

Creation of Major Divisions

In August 1972, the first major reorganization of the Commission in 30

years occurred, changing the Commission's structure from one based on the

various Federalsecurities statutes to one

based on the Commission's three primary

functions-regulation, disclosure and

enforcement.

Three divisions were created to carry

out the basic regulatory responsibilities

for the diverse areas of Commission

jurisdiction. Market Regulation was given

responsibility for securities markets,

broker-dealers and the self-regulatory

agencies; Investment Management Regulation was made responsible for investment companies, investment advisers,

and other money managers; and Corporate Regulation was given jurisdiction

over public utility holding companies as

well as bankruptcy and reorganization

matters. All disclosure activity was concentrated in the Division of Corporation

Finance. Finally, responsibility for all in'

vestigative and enforcement matters was

consolidated in the new Division of En.

forcement. Experience to date has demo

onstrated that the new structure has effectively focused Cornmtssron resources

on its major responsibilities and facilitated the vigorous and efficient carrying

out of staff duties.

Office of Policy Planning

In October 1972, an Office of Policy

Planning was established to improve the

Cornmrssron's ability to anticipate and

plan for, rather then react to, possible

future capital market and investor needs.

Creation of such an office was recommended by, among others, Congressman

John Moss of California, Chairman of the

House Subcommittee on Commerce and

Finance of the Cornrruttee on Interstate

and Foreign Commerce, and the SEC's

1972 Advisory Committee on Enforcement Policies and Practices (the Wells

Committee).

The office is responsible for identifyir.g new trends in the financial markets,

such as the Increasing impact of instrtutional investors, and then assisting the

Commissron in developing appropriate

public policy. The office also works with

other offices and divisions to suggest

improvements In the Commission's rules

and procedures and in those of the securities industry's self-regulatory organizations, and to develop proposals for

changes in the statutory framework. The

office also provides Commission representation on various bodies concerned

with international finance, assists the

133
Commission and its staff in interpreting

important legislative developments, and

provides liaison with members of Congressional committees and their staffs.

New Staff Units

Three new staff units were created to

improve the Commission's service to the

public and internal efficiency. The Office

of Registrations and Reports, which

merged 8 separate units with about 100

employees, was created to centralize the

receipt, initial examination and drstributron of the more than 150,000 filings and

reports the Commission receives an.

nually. The office has full responsibility

for receiving filings, issuing receipts,

checking for rules compliance, extracting

data for computer input, calculating fees,

writing defrciency letters, and assigning

material to the appropriate branch for reo

view, as well as performing substantive

examination of those forms which do not

need professional review. Among the

benefits stemming from this consolrdation of functions was the introduction of a

central filing facility to which members

of the public can both submit filings and

raise questions as to the status of their

filings. A further description of the office

is contained in Part 1.

The Office of Records was established

to improve the Commission's control over

its records and to make such records

more readily available to the public and

the Cornrnlsstori's staff. The wealth of in.

formation submitted to the Commission

over the past 40 years provides a unique

and valuable data base for professionals.

The bulk of the information sometimes

makes it difficult to produce desired records efficiently. The new office is charged

with improving the quality of recordkeeping In the short run, and, In the long run,

with investigating fundamentally new approaches to record retention.

The Office of Adrrunisrative Services

was established to deal with the house.

keeping, staff transportation and staff

support problems generated by a rapidly

growing staff dispersed between two

Washington locations. The office provides

space management, transportation, and

communication services, and directs the

print shop and supply operations.

PERSONNEL MANAGEMENT

As shown by the table below, the per.

manent personnel strength of the Com.

mission totaled 1,556 employees on

June 30, 1973.

Commissioners . 3

Staff .

Headquarters Office .. 978

Regional Offices 575

Total Staff........................ 1, 553

Granf Tota!......................... 1, 556

Since the ability and motivation of the

staff is the major determinant of the qual.

ity of the Commission's performance,

every effort was made to attract, motivate

and employ effectively a high quality staff

in fiscal 1973. Normal recruiting patterns

were interrupted midway through the

year, first by a government-wide hiring

freeze and then by budgetary limitations

within the agency. The combined effects

of attrition and the freeze posed a potential workload problem at times, but

the Commrssron was able to avoid a serious disruption. An aggressive catch-up

effort resulted in the hiring of 315 new

employees, as compared with 319 terminations.

The deployment of the staff was signifrcantly affected by the reorganization.

More than 600 employees were trans.

ferred, had their job classifications reo

Viewed. or were given new functions to

perform. A major new career ladder was

created by development of a new Secunties Compliance Examiner series of

jobs, a title which encompasses certain

examiners, investigators and accountants

in grades 5 through 13.

Efforts to recognize and reward out.

standing performance continued. Dlsttngurshed Service Medals were awarded to

three staff members; five employees reo

ceived awards for 35 years of SEC servo

Ice; and nine others were honored for

30 years of service. Within.grade salary

134
Increases or cash awards in recognition

of high quality or special service were

also granted to 150 employees. In the

course of the year, 445 staff members

earned promotions to higher grades.

Finally, two exciting new programs

were developed to help attract talented

professionals to the SEC. The Attorney

Fellow and the Accounting Fellow Programs provide for two-year appointments

of outstanding professionals from the

private sector. The agency is expected to

benefit from the infusion of new Ideas

and perspectives, while the professionals

gain the opportunity of working with top

SEC staff members on significant legal

and accounting problems. The first Accounting Fellow entered on duty in June

1973.

FINANCIAL MANAGEMENT

In fiscal 1973, the Commission greatly

accelerated its efforts to minimize the

cost of Cornrnissron operations to the

general public through (a) rigorous review and improved control of the utilization of Cornrnissron resources, and (b)

the recovery of a fair but significant proportion of Commission costs through

user fees.

As part of the planning for the fiscal

1974 budget, the Cornrnissron's 29 operating divisions, regional offices and

support units were required to analyze

thoroughly the current use of their resources and the proposed use of any

additional resources requested. Precise

estimates were made of workload, current productlvrty, and the benefits, timetables, and costs of special projects. The

result was the establishment of a data

base on Commission operations which

will facilitate ongoing management information and cost control in the future.

During fiscal 1973, the Commission

collected fees for the (1) registration of

securities issues; (2) qualification of trust

indentures; (3) registration of exchanges;

(4) registration of brokers and dealers

who are not members of a registered national securities association; and (5)

certrficatlon of documents filed with the

Commission, based on a fee schedule

which became effective March I, 1972.

The fees collected, whrch are immediately

deposited Into the Treasury of the

Uruted States as miscellaneous receipts,

amounted to $22.2 million. Thrs represented 73 percent of the agency's Congressional appropnatron of $30.3 million.

Thus, the net cost of SEC operations to

the taxpayer was $8.1 million.

INFORMATION HANDLING

The handling of information is one of

of the SEC's most fundamental tasks.

Steps were taken In 1973 to Improve

both the supply of Information to the

public and its internal processins.

To further ItS primary goal of timely

disclosure, the Commission awarded a

two-year contract at no cost to the government for the dissemination of nonconfidential data filed with the SEC.

Building on earlier microfiche and copying services, the new contract incorporates (1) a new comprehensive master

rndexrng service for corporate filings,

both by Issuer and subject, (2) paper

copy reproductions of SEC documents In

public reference rooms at lower cost to

the public, (3) a new program aimed at

increasing dissemination of SEC information through libraries open to the public, and (4) a discount for college and

university users of SEC microfiche packages to offset charges for the new document Indexing service.

The Commission also held two informal briefings to acquaint members of the

professional communications community

With SEC activities and responsibilities.

It IS the Commission's hope that these

bnefmgs will stimulate a greater understandrng by the public of the SEC's role.

Finally, the Commission increased its

efforts to apply electronic data processing (EDP) to the internal collection

and analysis of important information.

Information derived from Form 144,

the "Notice of Proposed Sale of Securities Pursuant to Rule 144 under the

Securities Act of 1933" was computerized

and tied to other EDP systems to provide

135
the Commission with an up-to-date cross

analysis of securities traded under Rule

144.

Broker-dealer complaint information received and processed by the regional

offices was also computerized and added

to the operational Complaint Processing

System. This system and a centralized

data file containing statistical Information

on broker-dealer examinations conducted

by the various regulatory bodies will be

part of an automated "Broker-Dealer Informational Early Warning System"

planned by the Commission.

A computer file of data collected

through the Registered Investment Ad.

viser Examination Statement was created,

which assisted the staff in its development

of the proposed Institutional Disclosure

Act. Another system developed in fiscal

1973 will replace the Commission's present addressograph mailing process with

a computerized mailing list. Many additional EDP projects are planned for the

future.

136


Part 9

Statistics

THE SECURITIES INDUSTRY

Securities Industry Dollar

Of each dollar received by brokerdealers in calendar 1972, a total of 45.9

cents was derived from the securities

cornrrusston business, 13.3 cents from

trading actrvitres, 12.1 cents from the

underwriting business and the remaining 287 cents from secondary sources

of revenue such as Interest income on

customers' accounts, sale of Investment

company securities and gain or loss from

firm investments.

Total expenses amounted to 79.7 cents

of each securities Industry dollar. The two

largest components of expenses were

regrstered representatives' compensation,

18.3 cents per dollar, and clerical and

adrnrrnstrative employee costs, 23.3 cents

per dollar of revenue. Operating income

before partners' compensation and taxes

accounted for 20.3 cents of the average

securities industry dollar.

139
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Income and Expenses Total expenses increased 9 percent to 

$6.2 billion in 1972 from $5.7 biliion 

Gross revenue of broker-dealers from in 1971. interest expense and compenall activities rose 8 percent to $7.8 bil- sation paid to registered representatives lion in 1972 from $7.2 billion in 1971. and clerical and administrative employees Except for securities commission income accounted for more than two-thirds of 

and interest income on customers' aC- the $522 million increase. Each of the 

counts, the major income sources regis- other expense items also showed an 

tered minor declines compared to 1971. increase in 1972. Broker.dealersP operatThe miscellaneous category "other busi- ing income, before partners' compensaness" increased by $371 million, more tion and taxes, increased only slightly 

than double the increase in any other over the 1971 figure, reaching $1,574 

revenue item. million. 

Table 1 

BROKER DEALER INCOME AND EXPENSES' 

IDollarr in ihourandri 

Income 

seeuritier commiuion burinerr .......... ~ .....
~~ 

interest income on c~sloaers'account$.~~~...-..~. 

male,burinelt and/or tradina sflivitier..~ ........ 


Expense* 

Total expenses.. ....... ~~~ .........~... 


operatingincome or loss before taxesr..~~. 

Ieraaer.dealerr with grosa seeuritietincome of $2O,WO and wer. 2 Includes depreciation and a?onlzstlon. 
 t Refore oartnerr' cornDsnrati0n. 

m 00:0-10

~ COI~

~I;D

N ;I~

00

00

COM

1

(U

0: ..;:: I- 'E

.,

.Q

E

z:

co en

NO~

N ..,.

"'00 ..,.

N

N'"

NN

..,.-

M

o

ON"'- M

o

(I)

I-

...

(I)

(I)

«

N

ell

:E

III

I142

'"

'"

'"

~

=
Assets and Liabilities

Broker-dealers'reported assets totaled

$61.5 billion at year-end 1972 compared

wtih $63.3 billion at year-end 1971. This

decline In total assets was attributable

to assets unrelated to the securities business which decreased from $35 billion

at year-end 1971 to $28 billion at yearend 1972. Most of these assets represent

a small number of firms principally engaged in the insurance business. Of

assets related to the securities business,

long positions in securities totaled $12.4

billion at year-end 1972, or 20 percent

of total assets. Debit balancesearned for

customers' securities accounts (including

both cash and margin accounts)

amounted to $13.4 billion, nearly 22 percent of total assets.

Total liabilities, not including sub.

ordinated borrowings, were $49.9 billion

at year-end 1972, compared with $52.2

billion at year-end 1971. During this

period, liabilities unrelated to the securities business decreasedfrom $29.1 billion to $22 billion. Of liabilities related

BROKER-DEALER

As of End of Fiscal Number

5500

5000

4500

4000

to the securities business, the largest

component was money borrowed, which

amounted to $14.5 billion at the end of

1972.

Free credit and other credit balances

owed securities customers aggregated

$5.0 billion. Subordinated borrowings for

capital purposes-including subordinated

loans. accounts coveredby equity or subordination agreements and secured

demand notes-totaled $1.4 billion at

year-end 1972. Equity capital for both

secunties and non-securities related activities amounted to $10.2 billion.

Registered Broker-Dealers

During fiscal 1973, there was a further

net decline of 327 in the number of

broker-dealers registered with the CommiSSIOnto 4,407. Since fiscal 1970, the

net decline has totaled 817. However,

the number of registered firms at the

endof the past yearwasstill substantially

higher than that at the end of fiscal 1967

when the number of registered brokerdealers was only 4,175, the lowest number since 1954.

REGISTRATIONS

Years, 1963-1967

0_[ I I I I L I ,:=I

1963 64 67 68 69 70 71 72 1973

( Fiscal) 05-504 9

143
About one-fourth of all firms registered next highest number of firms. followed 


at the end of fiscal 1973 had their prin- by New Jersey with 203. and Pennsyl. 
 cipal office in New York City . Another vania with 202. About 70 percent of the 


367 firms maintained their principal of- registered broker-dealers were organized 


fice in other locations in New York State . as corporations . Of the remainder. the 


California. with 463. accounted for the majority were sole proprietorships. with 

Table 3 

LOCATION OF BROKER-DEALERS 

lJuns 30. 19731 

Number of firms Number of prilxipalrl 

. -- Principal onire Sole 

P part. Total prm nsr- 101- ships ships . 

Alabama .................................... 
 AIeka ..................................... 
 Arizona ..................................... 
 Arkanraa ................................... 
 California ................................... 
 Colorado .................................... 
 Connecticut ................................. 
 Delaw..e ................................... 
 Distticl of Columbia.......................... 
 Florida ..................................... 
 Georgia ..................................... 
 Hawaii ..................................... 
 Idaho ...................................... 
 Illinoil ..................................... 
 Indiana ..................................... 
 Iowa ....................................... 
 Kansas..................................... 
 Kentucky ................................... 
 Louisi~ns................................... 
 Maine ...................................... 
 Maryland ................................... Ma~~a~husetb ............................... 
 Michipn ................................... 
 Minnesota .................................. 
 Mi$sisippi .................................. 
 Missouri .................................... 
 Montana .................................... 
 Nebraska................................... 
 Nevada..................................... 
 New Hamprhirc ............................. 
 New Jeosy ................................. 
 New Mexico................................. 
 New York exciudtng New York Clly) North cardin. ......................... 1.1. 


Noah Dakota ................................ 
 ......... 
 OkI~homa................................... 
 Oregon ..................................... 
 Pennaylvaoia................................ 
 Rhode Island ................................ 
 South Cardine .............................. 
 South Dakota ................................ 
 Tenneuee .................................. 
 Tern, ...................................... 
 Utah ....................................... 
 Vermont .................................... 
 Virginia ..................................... 
 Washington................................. 
 Wart Virginia ................................ 
 Wi~mmin................................... 
 Wyoming ................................... 


lolal (excluding New York City) ......... 
 New Yark 

Total 

City 

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

............................... 
1....... 

a 4 , 373 / 617 1 558 j 3, 138 1 31.023 j 817 / 5, 165 1 25, 181 


.. . ' - -. I i 


Ohio 
........................ ....

1 IIIIWIID~$ maar on lne ban of matoon ol 08 nc pal oticen a1 !gos!tanU no! sc(da1 =at.onr at parsons . 2 lntluier sl tor nl 01 ol8an.zal am olner than sole Proprnelorth PI 900 ~211nelih pv 3 OOPS not inr ule 1$rep Itranlr rnJls prlncnpal ofire$ ole located n lolr an eodntrter or olher 1, 1 ra cl on* nal Irtod 
BROKER-DEALERS AND BRANCH OFFICES

o 3000

Broker-Dealers

6000

7479

~ I Branch Offices

9000

843-1

1969

1970

1971

1972

P=Prellrnfnary

o 100

R= Rc v t s e d

EMPLOYEES

{Thousands}

200 300 400

366

35:1'

Registered

Representatives

p= Pr c l n.i m n i v

P Other Employees

145

_

_
partnerships the least common form of

organization. By way of comparison, at

the end of fiscal 1968 only about 54 percent of the registered broker-dealerswere

corporations.

Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers and

branch offices has declined in each successive year Since 1969. The number of

employees declined between 1969 and

1970 but then Increasedduring 1971 and

1972. There were about 390,000 employees at year-end 1972. Registeredrepresentatives employed by the securities

industry totaled 234,000, or about 60 percent of total employment.

SECO Broker-Dealers

The number of broker-dealers who are

not members of a registered securities

association has declined in each fiscal

year since 1969. Of all broker-dealers

registered at the end of fiscal 1973, there

were 276 SECObroker-dealers compared

with 455 at the end of fiscal 1969.

The largest decrease in this category

was in the ranks of broker-dealers whose

principal business is the selling of variable annuities, which dropped from 134

in 1969 to 18 in 1973. This was due

primarily to the deregistration In fiscal

1970 of 94 general agent broker-dealers

who became employed by a single SECO

broker-dealer. The principal type of business of SECObroker-dealers is the general securities business.

Table 4

PRINCIPAL BUSINESS OF SECO BROKER DEALERS

Fiscal yearend

1969 1970 1971 1972 1973

--- --- --- --- Exchange member pnmanly engaged In floor activmes _____________________ 19 18 16 15 17 Exchange member primarily engaged In exchange ccmrnrssron busmess______ 37 32 37 33 28 Broker or dealer In general secunties business ____________________________ 83 82 79 69 66 Mutual fund underwnter and drstnbutor __________________________________ 35 35 27 27 24 Broker or dealer seiling vanable annurtres ________________________________ 134 15 22 21 18 Solrcrtor of savings and loan accounts. ___________________________________ 19 19 15 10 9 Real estate syndrcator and mortgage broker and banker ____________________ 13 20 16 18 21 Broker or dealer seiling 011and gas Interests ______________________________ 6 4 4 3 3 Put and call broker or dealer or option wnter _____________________________ 29 27 23 22 20

Broker or dealer seiling secunties of only one Issuer or associated Issuers

18 16 15 17 18 (other than mutual funds) ____________________________________________

Broker or dealer seiling church secunloes _________________________________ 14 20 21 15 16 Government bond dealer ________________________________________________ 5 24 4 3 3 Bro~er or dealer In other secunnes business ______________________________ 33 21 19 30 26 Inactrve ______________________________________________________________ 10 4 3 11 7

--- --- --- --- --- TotaL __________________________________________________________ 455 336 301 294 276

146
F,CNANClAL INSTITUTIONS panies-bought $56.2 billion of common 

stock and sold $45.4 billion. In 1971, 

Stock -	.. Transactions these tvoes of institutional investors

bought $53.6 billion and sold $38.7 bil- During 1972, four major financial in- lion. Net purchases during 1972 were 

stitutional groups-private noninsured 	 $10.8 billion; this amount is the second 

pension funds, open-end investment corn- largest net amumulationrecorded by 

panics, life insurance companies, and these groups. The record $14.9 billion 

property and liability insurance corn- was achieved in 1971. 

Table 5 

INSTITUTIONAL STOCK TRANSACTIONS 

IDollan in millions] 

Private noniorursd penrionfunds: Purchases ........................... 
 Saier................................... 


Netpurchases.......................... 
 Opewend invertmantcompanisr: Purchaser.............................. 
 sales................................... 


Net vurch?spr......................... 
 Property and liabtlmtyinsurance companies: Purchat- .............................. 
 sales..^ ................................ 


Net purchalea......................... 
 Total: 

Net purchases ......f................. 


1 Reflect$ trading in domestic isuer incluing preferred stat. 


sources: P?nrionlunds and Property and liability insurance comva?iel.SEC; imrrtment rampsnia, Investment Company
 Inrtituts;iik$muraneccompanier,imtltvteof LifeImurance; loreign Inveriarr, Treasury Department. 
Stock Holdings United States (and institutional investors

, not listed) owned 62.6 percent of total

The institutional investors listed in the stock. In 1960, the listed institutional

table below held $402 billion of corporate investors owned only 26.7 percent of outstock, both common and preferred, at standing stock and domestic individuals

year-end 1972; their holdings were $327 (and other institutions) owned 70.1perbillion at the end of the previous year. cent.The percentageof outstanding stock

These institutions owned 34.3 percent of owned by foreign investors was slightly

total stock outstanding; individuals in the over 3 percent in both 1960 and 1972.

Table 6

INSTITUTIONAL STOCK HOLDINGS

(Dollars in billionsl

1960 1966 1967 1968 1969 1970 1971 1972

------ --- --- I. Private nomnsured pension funds $16.5 $39.5 $51.1 $61.5 $61.4 $67.1 $88. 6 $115.2 2. Open-end investment compames 15.4 31.2 42. 8 50.9 45.0 43.8 r 52.6 58.0 3. other investment cemparues r 5.3 5.8 7.5 8.3 6.3 6.2 6.9 7.3 4. life Insurance compaOles 5.0 8.8 10.9 13.2 13.7 15.4 20.6 26.8 5. Property and liability insurance com- 7.5 13.0 14.6 13.3 13.2 20.5 panies , 11. 0 16.6 6. Common trust funds 1.7 3.3 3.9 4.8 4.6 4.6 5. 8 7.7 7. Personal trust funds 42.9 66.7 75.9 83.6 79.6 78.6 r 94.1 116.0 8. Mutual savings banks '.9 1.5 1.7 2.0 2.2 2.5 3.0 3.6 9. State and local retirement funds .4 2.1 2.8 4.1 5.9 8.0 11.2 14.2 10. Foundations 13.5 18.7 20.2 22. 0 20.0 22. 0 25.0 28.5 11. Educational endowments 4.2 6.3 7.8 8.1 r 7.6 r 7. 6 8.4 10.2

--------- --- --- 12. Subtotal' 113.2 194.8 237.4 273.1 259.6 269.1 332. 9 408.0

13. less; Institutional holdings of Invest. ment company shares .9 2.1 2.8 3.4 4.0 4.9 5.8 6.5

------------ --- 14. Total institutional Investors r 112.4 192.7 234.6 269.7 255.6 264.2 327.1 401.6 15. Foreign mvesters r 13.4 18.1 21. 5 26.0 25.2 26.7 r 29.5 35.7

16. DomestiC indiViduals (tine 17-14--15)" 295.4 437.0 568.7 679.2 580.6 563.9 648.0 731.2

--------------------- --- 17. Total stock outstanding' 421.2 647.8 824.8 974.9 861.4 854.8 1,004.7 1,168.5

r Revised.

, Excludes holdings of insurance company stock

Includes estimate of stock held as direct investment.

Computed as residual. Includes individuals as well as institutional groups not listed above . Revised estimates of market value, both common and preferred stock. Excludes Investment company shares but includes

foreign issues outstanding in the umted States.

148

--- --- --- ________

_________ • •

•

___________

___________ • ___ •

_____________________________ • ____________________ • ____________________

___________________

_________ •__________________________

•

• •

________________

--- --- --- •

___________________________

_______________

--- --- --- ____________

_____________________ •

___

________________ • •

• •

•

•
--- 

--- 

--- 

--- 

--- 

--- 

lnvestment Companies 

AS of the end of the 1973 fiscal year, 

1,361 investment companies were registered with thecommission, an increase of 

27 from the number one year earlier. Of 

the registered companies, 100 were 

classifled as "iflactive". Approximately 

62 percent of the active companies were 

management opemend companies ("mutual funds"). 

The 1,261 active companies had total 

assets having an approximate market 

value of $73.1 billion, with mutual funds 

accounting for about 75 percent of that 

value. The $73.1 billion figure represents 

about a 10 percent decline from the $80.8 

billion total at the end of the last fiscal 

year, the highest yeavend figure since 

the lnvestment company Act was passed. 

An appreciation of the tremendous 

growth of the investment company in. 

dustry in the intervening period may be 

gained by noting that in 1950 there were 

366 investment companies with total 

assets of about $4.7 billion, and that, as 

recently as 1960, there were only 570 

companies with assets of $23.5 billion. 

Table 7 


REGISTERED INVESTMENT COMPANIES 


llune 30. 19731 

Management open.end ("mutual funds") ........................... 


Funds havingno laad.........................................
 Varlable annulty-reparat: accounts ............................. 
 capital leueragecornpan~er .................................... 
 Ailotherloadfundr.......................................... 

Mananement closed-en 

Small business invertmen1 companies ........................... Capitalleveragecompsnies~,.................................. All other clored-endcampanter~............................... 

Unit investment trust 

Variable annuity-repara e acc 1\11 other unit investment trur 

Face-amaunt certificate companier~ ............................... 

Total 

1 ' nact .e retcrsto re^ 4r.w rJnlyrn~ernh cn as 01 ,me 30 19'3, 

umber oi rwistem companies ~pwmimte

market value ol - - arretr of ?dive 

Active Inactive 1 I Total

788 38 826 

231 .................... 
 52 .................... 


2 .................... 
 503 .................... 

ZOl 37 238 

__j--__i 

44 1:::~ ................. 
 7 ................ 
 150 .................... 


compances (millionr 

154,398 

7.079 

872 

54 46,393 

9.855 

223 

309 

~~~~~ 

9.323 

261 22 289 I7,825 

38 .................... I04 

229 .................... 7,720 

5 3 8 1.071 

1;261 100 1,361 73.149 

rrm .n inr plcces OI LB 12 .ar iwte?or me, ei njo am ra, on i.fr.alx le Ser 8(1) ei ine Ac1lol uefai rtru on 01 *r cn ni.ectnerr te 0.1 o.exTlenre an8rrma re1 rterco o,., .nc r~rn t*rnea$~neCrrnn~ rr unisr.cr ~laefs.jocf Sei b,l)tc~ma~~a. ng .he I rag r:.ar.rl> i Ihtlrlle~.LOJ~ $56 L I.I 01 ~IIOIXcl rfdnrnnc! n.eac in rnw tei LIolhel .n.~stn>entcornpan er r.bnlntadl a1 of tncm rn.t.2. lvnor 
NUMBER AND ASSETS OF

REGISTERED INVESTMENT COMPANIES

No. of Companies

1500

1000

500

o

;

~:~~f~~f~rgompaRies

umt Investment Trusts

Management Closed-End

Management Open-End

"Mutual Funds"

1351 1361

Dollars Bi lIions

70 71 72 1973

72.5

1964 65 66 67 68 69

;

Face Amount CertIficate Ccmparues

Unit Investment Trusts

Management Closed-End

Management Open-End !l8.2

"Mutual Funds"

o

80

20

60

40

(Fiscal)

150

_

-
----- 

----- 

----- 

----- 

----- 

----- 

----- 

Investment Company year which represented a steady decline 

Registrations in new companies since 1969. However. 

the number ... of existing companies terThe number of new investment corn. minating their registrations dripped from 

pany registrations in fiscal 1973, 91, was 108 in fiscal 1972 to 64 in fiscal 1973, 

the same as that for the previous fiscal resulting in a net gain of 27 companies. 

Table 8 

NEW INVESTMENT COMPANY REGlSTRATlONS 

Fixai 

1969 1970 1971 I972 1973 

mansgemmt open-end Ymutusl funds"): 	 33 42 19 10 I ~undshavlngnol~ads~loadnDtexceedlng3wrcentofnetaustvaius..... Variable annui~yreparate acmunb ................................... 	 14 9 4 0 5 


All other loadlund~..~ ............................................. 	 109 82 41 28 23 


1% 133 38 29
 subtotal __--- 63 

Management ~!~red-end: 

small buunen investment companies ................................ 2 1 5 1 2 


All other closed-end funds .......................................... 	 42 26 18 23 37 


subtotal 	 44 27 23 24 39 ____=.%===--

Unitinvertmsnttrustr: 

Variable snnuity.rcparate accountr 6 11 8 

22 

7 

22 

1 


All other unitinveslment trusts 16 14 27 


subtotal 

(~rlifi~ale 	

22 

0 

25 

2 

35 

0 

29 

0 

23 

0 Fa~~amPUnt mmpanlcs ____=

222 187 121 91 91 ~~la! 

Table 9 

INVESTMENT COMPANY REGISTRATIONS TERMINATED 

Fiscal 

1969 1970 1971 1972 1973 

-

Management open-end ("mula1 funds"): Fundrhsvingnoload orload noterceed8ng3percent of netsaretvalue .... 0 2 3 14 10 

0 variable anouity-reparatc ...................................... 3 

0 

9 

1 

41 

2 

50 

0 

34 AI ~therload lunds .................................................... 

subtotal __-==-- 3 12 46 64 44 

Management c!ared:end: 	 0 Small busnesrtnvertmenteompaniet................................ 0 2 3 7 


AII other ~lolsd-end funds.......................................... 16 9 38 27 I6 


Subtotal...................................................... ======== 
 16 11 41 34 I6 

Unit investment trudl: 	 0 Variable annuity-reparats acmuntt 	 0 

2 

0 

3 10 

0 1 

9 4 All om., ""it invertmenttru* ,......................................-----


Subtotal..............,- 2 3 10 9 4 


Face .mount cerlifi~at. mmpanlef 	 1 0 1 0 -__-- I 

TotalL.......................................................... 22 26 98 108 64 

-- 

- 

- 

- 

-- - - - - - 

---- 

- 

Private Noninsured Pension book value by only 19 percent at year. 


Funds: Market Value end 1971. The foliowingtables include de. 


~h~ market value ferred Profit-sharing Plans and pension
 of allprivate 

insured pension fund assets totaled funds of corporations, unions, m~1ti-e~. 

$154.3 billion at the end of 1972. This ployer groups, and nonprofit organiza. 

figure is 31 percent higher than book tions. Health, welfare, and other em. 

value, whereas market value exceeded ployee benefit plans are excluded. 

Table 10 

MARKET VALUE OF PRIVATE NONINSURED PENSION FUNDS 

loallart in millionsl 

1% 1% 1x7 1%8 1%9 1970 1971 1972 

Cash and dewsits....................... $500 $900 $1 300 $1 600 $1 600 $1 800 11.600 n.9~
 U.S. Government racudtira................ 2 700 2 700 2'200 i600 i 600 3:000 2 800 3 700
 Cor orah end other bond*..-............. 14:600 22:500 22'600 22'400 21'300 24,000 26: 100 26:200
 ~re!erredsloch .......................... 700 800 1'000 1'400 1'600 1 600 2 000 1900 
 Common aloch.................... ~ ..... 15,800 38,700 50'100 60'100 59'800 65'100 86:600 113:400 
 own company....................... 2,000 3.5~ OW $700 $700 5:900 7 500 8 8~
 Olhermmpanler ..................... 13.800 35.200 45,100 54'400 54200 59,500 79: 100 104:6~ 
 Morlg*ge$.............................. 1.300 3 800 4.000 3:600 3:500 3 WO 3.2W 2 100 
 Otherarrets............................ 1,400 3:500 4,200 4.W 4,300 (300 4,500 


Totsi anetr....-.....-.....--...-.37.100 72,800 85.500 96.000 94,600 104.700 

, .126.900 154.300 

.Revisd. 

Private Noninsured Pension 1971, and 10 percent in 1972; during 


Funds: Book Value the sixties the average rate of growth 


~ ~assets t
 (book ~ l value) of private was 12percent. At the end of 1972. $74.6 


noninsured pension funds were $117.5 billion, almost two.thirds of all pension 


billion on December31, 1972. The annual fud assets, Was invested in common 


growth rate for pension fund total assets stock: common Stock represented only 


was 7 percent in 1970. 10 percent in about one.third of aisets in 1960. 


Table 11 

BOOK VALUE OF PRIVATE NONINSURED PENSION FUNDS 

lDallarr in millions] 

10 17 1'9 1970 1971 1972 

Ceh and deposits.......................... ..... $550 $903 11320 $1 590 $1 620 $1 800 $1,640 $1 860 
 U.S.Gavernmentmuritier ...................... 2680 2750 2'320 i760 2'7% 3'030 2730 3:690 


CarPorate and other bands .................... li700 25:230 26: 360 27.0W 27:610 29:670 29:010 28.210 


Preferred stock .............................. 780 980 1330 1 760 l74U 1 770 1,280
 common %loch ............................... 10.730 29,070 34 950 4i 740 4i 860 51'740 6i 780 74,580 
 own mmpsny ........................... 890 2 000 is0 2:800 3'020 3'270 3'520 3 880 


Other~ompanie6........................ 9.850 26:~ 32,380 38940 44'840 48'480 59:260 70:710 


wottaaEer .................................. 1.300 3,910 4, 080 4070 6220 4:300 3.680 3.m 
 other assets................................. I.4W 3,520 4,230 4,580 4,720 4,730 4,800 4,710 


Total assets .......................... .. 33,140 66.170 74,240 83.070 90,580 97.010 106.420 117,530 

Private Noninsured Pension 

Funds: Receipts and Disbursements 

In 1972, net receipts of private noninsured pension funds were $11.6 billion 

compared to $10.3billion in the preVi0US 

year. Of the $20.1 billion in gross receipts, $12.7 billion was contributed by 

employers and $1.2 billion by emPlOYeeS. 

Investment income (interest, dividends, 

and rent) and net profit on sale of assets 

added $4.3 biliion and $1.7 billion, re 

spectively, to gross receipts. On the dis. 

bursement side of the ledger, pension 

fund beneficiaries received $8.3 billion 

in 1972:in the previous year, $7.1 billion 

in benefits was paid out. 

Table 12 

RECEIPTS AND DISBURSEMENTS OF PRIVATE NONINSURED PENSION FUNDS 

loollan in miiiionsl 

~otaireceipts............... 


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


~otaldirburrommts................... 


Benefill paid out ...,........................ 
 Eipenrer and other aabursemns............. 


SECURITIES ON EXCHANGES 

Exchange Volume 

Dollar volume of all securities transactions on registered exchanges totaled 

$215.1'billion in 1972, UP 10.2 percent 

from the $195.2billion volume in 1971. 

Of this total, $204 billion represented 

stock trading, $9.5 billion bond trading. 

and the balance, trading in' rights and 

warrants. New York Stock Exchange 

transactions, which amounted to $159.7 

billion in 1972, grew 8.6 percent. The 

record NYSE share volume of almost 4.5 

billion shares is 5.4 percent greater than 

the 1971 figure. On the American Stock 

Exchange value of shares traded advanced 15.8percent to 820,5 The 

AMW share of shares 

was 5.1 percent greater than the 1971 

total.~h~ largestgainsin trading were 

.gain made bv the regional exchanges --- ......... ~< -


whose share volume was 699.8 million 

shares, valued at $23.9 billion. Regional 

share volume advanced 16.4 percent as 

value of stock trading increased 17.8 

percent. 
Table 13 


EXCHANGE VOLUME: 1972 


{Data in thovrandrl 

Total Bonds 

dollar 

volume 

Dollar Principal volume amount 

Stocks Rights and warrants 

Dollar Share Dollar Number 

vdume 

---

volume volume ot ,#nit$ 

All regirteradexchanees.. 

American ..................... 
 sclton....................... 
 Chicago Board of Trade ........ 
 Cincinnati.................... 
 Detroit ....................... 
 Midwest...................... 
 National...................... 
 New York .................... 
 Pacific raart .................. 
 Philadelphis.Ballim~r.- Washington................. 
 Intermountain ................ 
 Smkane..~ .................. 


Exempted exchange-Honolulu. 

215, 063,444 9,515.65 10,077,350 M4.025.685 6,299,202 I.500. 114 144, 723 


22 133 071 753,819 840,216 20,452,646 1,103,222 924, 114 84.385 


1: 562: 882 0 0 1,562,151 38,472 682 127 


0 0 0 0 0 0 0 

103, 461 15 24 103 439 2 324 0 0 


362.790 0 0 362:390 9: 808 400 32 


8,435.037 1.018 1.206 8,627,981 228 7'1 I, W4 210 


112,948 SW 734 112 091 1i7i3 357 169 


168 894 823 8,717,243 9.168 524 159,7003 386 4.4%: 187 466,889 46.737 


8: 168:448 42,388 


5,283,160 682 


2.326 0 

4.498 0 


3,992 3 


65: 542 8,023,893 248,490 98,362 12,238 

0 0 0 

0 0 


2 3,990 1 565 0 


of Stock trading on regional exchanges 

exceeded that of trading on the AMEX. 

Since November 1, 1971, volume for 

much of the ove~the-counter market has 

been compiled by the NASD's automated 

quotation system (NASDAQ). Share 

volume and price information for almost 

3500 issues are now reported on a daily 

basis. In 1972, NASDAQ volume was 2.2 

billion shares, equivalent to 49 percent 

of NYSE share volume and almost double 

that of the AMEX. This trading volume 

reflects the number of shares bought and 

sold by market markers plus their net 

inventory changes. 

Stock Volume by Exchanges; 

NASDAQ Volume 

The NYSE portion of trading on all exchanges declined slightly in 1972 for both 

share and dollar volume. AMEX share 

volume again represented about 18 percent of all share volume, while its segment of dollar volume increased slightly 

to over 10 percent. The Midwest and 

Pacific Coast Stock Exchanges continued 

as leaders among the regionais. For the 

second time in as many years, the value 
Table 14 


SHARE VOLUME BY EXCHANGES 


Year Share rsler 

In percenlage 

_ 

NYS AMS MSE 

1935.............. 1940.............. 1945.............. 1950.............. 1955.............. 1956.............. 1951.............. 1958.............. 1959.............. l%O .............. 1961.............. 1962.............. 1%3 .............. 1964.............. 1x5.............. 1966.............. 1%7 .............. 1968.............. 1%9 .............. 1970.............. 1911.............. 

1972.............. 

681,970.500 

377 896 572 

769:018:138 

893.320. 458 

1.321.400.111 

1.182.487. 085 

1.293.021. 8% 

1.m.518. 512 

1.699.6%.619 

1.441.047.S64 

2.142.523.490 

1.711.945. 291 

1.880.198. 423 

2.126.373. 821 

2.671.011. 869 

3.312.383. 465 

4. M6.524.907 

5.408.737. 347 

5.134.994. 769 

4 834 427 929 

r8:172:103:700 

6.506.114.401 

73.13 

75.44 

65.81 

76.32 

68.85 

86.31 

70.70 

71.31 

65.59 

68.48 

6499 

71.32 

72.94 

72.54 

69.91 

69.37 

64.41 

61.98 

83.16 

71.29 

71.34 

70.61 

12.42 

13.20 

21.31 

13.54 

19.19 

21.01 

18.14 

19.14 

24.50 

22.27 

25.58 

20.12 

18.84 

19.35 

22.53 

22.85 

28.42 

29.74 

27.61 

19.03 

18.43 

18.26 

1.91 

2.11 

1.71 

2.16 

2.09 

132 

2.33 

2.13 

2.00 

2.20 

2.22 

2.34 

2.33 

2.43 

2.63 

2.57 

2.36 

2.63 

2.86 

3.16 

3.53 

3.55 

.83 

48 

41 

40 

45 

37 

39 

31 

21 

40 

43 

18 

51 

52 

43 

79 

55 

39 

49 

39 

35 

31 

53 

46 

33 

32 

12 

11 

16 

15 

. 05 

. 09 

. 05 

. 05 

. 06 

. 05 

.04 

.05 

.04 

. 05 

.04 

551 

261 

502 

5.27 

4.14 

2.74 

3.41 

2.21 

2.29 

1.83 

.72 

.86 

DOLLAR VOLUME BY EXCHANGES 

In percsntsw 

Year Dollar volume 

(Sthourandr) NYS AMS MSE PCS PBS BSE DSE CIN Other 

______- -- I935.............. $15 3% 139 86.64 7.83 1.32 1.39 .88 1.34 .40 .04 .I6 

1940.............. d 41d772 85.17 7.68 2.07 1.52 1.11 1.91 . 36 . 08 .09 


1945.............. 18.28isz 8275 10.81 2w 1.78 .% 1.16 . 35 06 . 13 


19% .............. zi8odz84 85.91 6.85 2.35 219 1.03 1.12 .39 . 11 . 05 


38'039 107 S.31 6.99 2.44 1. W 1.03 .18 .SJ .09 . 08 1955.............. .08 . 01 1956.............. 3<14j 115 84.95 7.71 2.75 2.08 . 1.08 . 80 .42 


1957.............. 3i21i846 85.51 7.33 2.69 2.02 1.12 . 18 .42 .08 .07 


1958.............. 38'419.560 85.42 7.45 2.11 2.11 1.10 .11 .37 .08 . 05 


1959.............. 52:~1:255 83.66 9.53 2.67 194 1.03 .66 .33 .07 . 05 


1960.............. 45 306 603 83.81 9.35 2.13 1.95 1.10 .6U . 34 .68 .01 


82.44 10.11 2.15 2M 1.10 .50 31 . 07 .06 1961.............. 64'071:623 .07 .05
 54'855 894 86.32 6.81 276 ZW 1.11 .46 . 42 1962.............. . 52 .06 .05
 1%3 .............. ~'43s.073 85.19 7.52 2.73 2.39 1.12 . 42 


1x4.............. 72.46<150 83.49 8.46 3.16 2.48 1.21 . 43 . 88 . CS .05 


1965.............. 89. 54d093 81.79 8.91 3.45 2.43 1.19 . 43 . 70 .08 .04 


79.78 11.84 3.14 2.85 1.14 . 57 .51 .08 . 03 1 s.............. 12$666:443 . 04
 162 189 211 77.29 14.48 3.08 2.80 1.16 . 67 .44 .04 1967.............. .02 . 08
 19f11f957 73.56 18.04 3.12 2.66 1.17 1.04 .35 

1969.............. 176.38d159 73.49 17.60 3.39 3.13 1.46 .67 1968.............. . 12 .01 . 13 


1970.............. 13i710.176 18.45 11.11 3.16 3.81 LW .68 . 11 . 03 . 05 


3.99 3.79 229 .m .19 . 05 .M 1971.............. 188'371.651 19.07 9.98 

4.10 3.95 2.57 . 76 . 18 . 05 .06
 1972.............. 20$547:385 17.93 10.40 


.Revised. 

Third Market Volume

During 1972, over-the-counter sales of

common stocks listed on the New York

Stock Exchange continued to increase

both in share and dollar volume as they

have every year since 1965, when reports

to the Commission regarding so-called

"third market" transactions were first

required. The rate of increase, however,

was considerably less than in former

years, reflecting the lack of institutional

activity in the latter part of the year which

particularly affected the third market

where institutions are the prime participants.

In 1972, third market volume

amounted to 327 million shares valued

at $13.6 billlon, compared with 298 million shares and $12.4 billion the previous

year. The increase in over-the-counter

sales of NYSEcommon stocks kept pace

with the increase in sales of all stocks

on the exchange.The ratio of third market

volume to NYSEvolume was 7.3 percent

on a share basis and 8.5 percent on a

dollar basis, both ratios slightly higher

than in 1971.

THIRD MARKET' VOLUME IN NYSE STOCKS

Dollars Bdlions Percent

12

Dollar Volume

12

8

4

8

4

156

o

1965 66 67 68 69 70 71 1972

OS-!50!52

o

•

~
COMPARISON OF THIRD MARKET AND NYSE VOLUME 

I Ra00 Dt I Ovel.lh~m~Odr Nee YOIX SIOCL DIBI.!~~COU~IC, 

~IPIC( h~sf. ~whange,alrme ra.e%tohen Yatk .~stedcommon I stock cienangs

, stocks ro.rms (percent) 

1 I 


shere ~olumeUhourandQ 

1965.. . . . .... . .. . .. . ............... ............. 48 361 l 8W 351 2.7 


2.6 

1967 85: 081 2'885'748 2.9 


1968.................. ......-- 119.730 3'298'665 3.6 


1966.. .. . .. . .. . ..... . .................-- 58) 198 2'2d 761 


155 437 31 173' 561 4.9
 1969 210:061 3'213'069 6.5 1970.............. . ................... . ... . .... . ...... . .. 1971..................................................... 297 850 4'26<279 7.0 


1972..................................................... 327: 031 4: 4%: 187 7.3 


Dollar volume (thousands) 
Block Distributions counted for the sale of over $3 billion ~~. 

Special distribution methods are in securities. 

utilized when blocks are considered too In another method, the exchange dis. 

large for the regular auction market on tribution, a group of member th; of exchanges. Most im. solicits buy orders sufficient to cross with 

Dortant is the secondarv distribution the block sell order. The exchange diswhich takes place off the floor of the tribution method was used 26 times in 

exchange, usually after trading hours. 1972. representing the transfer of $30 

The block is offered by firms at a price million of securities. 

USUally below the last transaction. In Special offerings, a third method, have 

1972, 229 secondary distributions ac- not been used since 1968. 

Table 16 
-------- 

Value and Number of 

Exchange Securities 

The market value of stocks and bonds 

on U.S. stock exchanges at year.end 1972 

was $1,047 billion, an increase of $119 

billion, or 13 percent, over the previous 

year-end figure of $928.1 billion. Of the 

total, $952 billion was comprised of corn. 

mon and preferred stocks. The value of 

listed bonds was $96 billion. Listed 

stocks increased their value by 20 percent 

over year-end 1971, while the vaiue of 

listed bonds declined almost 28 percent. 

Stocks listed on the New York Stock 

Exchange are the largest component of 

listings value. At $887 billion they represented 93 percent of the common and 

preferred stock total, a proportion virtually unchanged from year-end 1971. The 

value of NYSE-listed stocks increased 

from their 1971 year-end value by $146 

billion, or 20 percent. Stocks listed on the 

AMEX, as in 1971 accounting for 6 per. 

cent of the total, were valued at $58 

billion. The value of AMEX stocks advanced $9 billion, or 19 percent, from the 

December 1971 figure. Stocks listed ex. 

elusively on other exchanges were valued 

at $5.8 billion, an increase of 23 percent 

over the 1971 total. 

The number of stocks and bonds listed 

on exchanges increased by 186 issues, or 

three percent, over the twelvemonth 

period. The largest gain was recorded on 

the AMEX, where 105 issues were added 

to the list. Data on the ~iumber and 

vaiue of foreign securities are in a footnote to the first of the following tables. 

Table 17 


VALUE OF SECURITIES ON EXCHANGES 


lDecemher 31.1912i 

/ American Stmk New York Stak Exclu~ively on All U.S.

Exchange 

I 

Exchange / other exhanger 

I 

exhang811 

Type of irlue 

Stxks:] Common................ 
 Preferred ............... 
 Bonds...................... 


Total................. 


-

Yaiu~ Vslve Value Value 


Number (mil. Number ( (mil Number I W- Number I (mil.


lions) lions) lion>) lion0 

1,339 $51,037 1,511 $864 151 362 $4 151 3,212 1921 939 


65 1,367 526 27'254 1:018 711 29'639 


~~~~~~~~ 

191 3.006 1,946 92:5W 18 249 2,165 $5: 164 


1.595 161.410 3,983 $979,914 510 $6,018 6,088 $1,041,342 


I~xcludes Wcutitier which were suspended from tradiqat the end of ths year and recutitirr which bacaure el imctivity had ~l available uotcn 2 lncluder llhe lolioring foreign stocks: Value 

Exchanger: Numbsr (nillionr) New York.......................................................................... 34 $15 864 


Amerbn.......................................................................... 68 17:448 


All others .......................................................................... 7 131 


Total.......................................................................... 109 33.443 

MARKET VALUE OF SECURITIES TRADED

ON ALL U. S. STOCK EXCHANGES

0 Qs ee ,....... ,....

Bond.

0

0

0

,

80

120

Dollor. Bdlrons

220

100

18

14

16

20

60

40

20

o

1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

160

' •••
Table 18 

VALUE OF STOCKS ON EXCHANGES 

[Dollart in billianrl 
-- 

Securities on Exchanges 

As of June 30. 1973, a total of 6,353 

classes of securities, representing 3.475 

issuem, were admitted to trading on securities exchanges in the United States. 

This compare5 with 6,160 issues, involving 3.377 issuers, a year earlier. Over 

4,100 issues were listed and registered 

on the New York Stock Exchange, ac. 

counting for 52.7 percent of the stock 

issues and 90 percent of the bond issues. 

Data below on "Securities Traded on Ex. 

changes" involves some duplication since 

it includes both solely and dually listed 

Securities. 

Table 19 


UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES 


llune 30. I9131 

Reglrtered exchanger 1 Stocks I bnds

- Registered and listed .................................... Tempo~riiy exempted from rezidrstion................... Admitted to unlisted trading piiuilsger.~ .................. Exempted exchanger: Lt~led............................................. 
 Admined to unlined trading privileges ................ 


Total........................................... 


3,919 2,337 

2 

0 

4,006 2,341 

6,256 

6 

52 

32 

7 

6.353 

3,407 

2 

33 

20 

I 

3.415 

Table 20 


SECURITIES TRADED ON EXCHANGES 


1 Issuer exempted under SR. 3(8X12) of the Act, such as obligatmnr of the U.S. Government, the stater, and cities, are not 

ineluded in this table. 2 The regirtration of the Chicago Board Options Exchange sr a national securities exchange became effective on Feb. 1. 1913. 8 Exempted exchange had 42 listed stocks and 1admitted to vnlirted trading. 
1933 ACT REGISTRATIONS

Effective Registrations;

Statements Filed

The Cornrnissron declared effective

3,285 registration statements and cleared

the way for the offering of over $59 billion of secuntres In fiscal 1973. Although

the number of effective registrations

declined by 12 percent from the record

filings of a year earlier, there was only

a slight drop in the total dollar volume

as the number of large securities registrations rose.The record dollar volume of

effective registrations totaled nearly $87

billion in fiscal 1969.

There were 3,744 registration statements filed during fiscal 1973 covering

$63 billion of securities as compared with

4,112 registration statements filed in the

previous fiscal year with a dollar value

of $70 billion. This representsa decrease

of 9 percent In the number of statements

filed and a decreaseof 10 percent In the

dollar volume involved Included in the

statements filed were 1,309 statements

by companies filing with the Commission

for the first time, 62 less than in the

previous year but one thousand fewer

than the record number filed in fiscal

1969.

Table 21

EFFECTIVE REGISTRATIONS

[Dolla rs m rnnuons]

Total

Number Value

Fiscal year ended

June 30

19351

1936

1937

1938

1939

1940

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

Cumulative total.

284

689

840

412

344

306

313

193

123

221

340

661

493

435

429

487

487

635

593

631

779

906

876

813

1,070

1,426

1,550

1,844

1, t57

1,121

1,266

1,523

1,649

22,417

23,645

23,389

22,989

3,712

3,285

44,333

$913

4,835

4,851

2,101

2,579

1,787

2,611

2,003

659

1,760

3,225

7,073

6,732

6,405

5,333

5,307

6,459

9,500

7,507

9,174

10,960

13,096

14,624

16,490

15,657

14,367

19,070

19,547

14,790

16,860

19,437

30,109

34,218

254,076

286,810

259,137

269,562

62,487

59,310

721,421

Cash sale for account of Issuers

Common Bonds, Preferred

stock debentures, stock Total

and notes

$168 $490 $28 $686

531 3,153 252 3,936

802 2,426 406 3,635

474 666 209 1,349

318 1,593 109 2,020

210 1,112 110 1,433

196 1,721 164 2,081 263 1,041 162 1,465

137 316 32 486

272 732 343 1,347

456 1,851 407 2,715

1,331 3,102 991 5,424

1,150 2,937 787 4,874

1,678 2,817 537 5,032

1,083 2,795 326 4,204

1,786 2,127 468 4,381

1,904 2,838 427 5,169

3,332 3,346 851 7,529

2,808 3,093 424 6,326

2,610 4,240 531 7,381

3,864 3,951 462 8,277

4,544 4,123 539 9,206

5,858 5,689 472 12,019

5,998 6,857 427 13,281

6,387 5,265 443 12,095

7,260 4,224 253 11,738

9,850 6,162 248 16,260

11,521 4,512 253 16, 2~6

7,227 4,372 270 11,869

10,006 4,554 224 14,784

10,638 3,710 307 14,656

18,218 7,061 444 25,723

15,083 12,309 558 27,950

22,092 14,036 1,140 37,269

39,614 11,674 751 52,039

28,939 18,436 823 48,198

27,455 27,637 3,360 58,452

26,518 20,127 3,237 49,882

26,615 14,841 2, 578 ( 44,034

309,196 221,936 24,353 555,491

1 For 10 months ended June 30, 1935 .

Includes registered lease obligations related to industnal revenue bonds.

163

524.121 0 - 74 - 12

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

•
SECURITIES EFFECTIVELY REGISTERED

Dollars B.ll.on5

90

75

BILLIONS OF DOLLARS

60

45

30

15

30 NUMBER OF REGISTRATIONS

I I

I I' 20

I

10

o

1935 40 45 50 55 60 65 70

(Fiscal) OS 4737

164
Purpose of Registration 

Securities registered for cash sale for 

the account of the issuers aggregated 

$44 billion in fiscal 1973.This was over 

10 percent less than in fiscal 1972 and 

25 percent less than the record 1971 

amount. The decrease reflects the sharp 

drop in the registration of debt issues; 

approximately $15 billion of bonds, 

debentures and notes were registered for 

the account of the issuer during the year 

compared with $20 billion in 1972 and 

nearly $28 billion in 1971. Securities 

registered for the account of the issuer 

for other than cash sale, primarily common stock issues used in connection with 

merge= and consolidations, rose substantially, reflecting the new registration 

requirements of Rule 154 (effective January 1973). 

Registrations of secondary offerings 

(where the proceeds accrue to the selling 

shareholders) declined nearly onethird 

from the level of the previous year to 

approximately $5 billion. 

Registrations of immediate cash offer. 

ings amounted to over $27billion in fiscal 

1973,down 10 percent from 1972 and 

nearly 30 percent below the record level 

of 1971. Of that total, debt offerings 

amounted to $14.7 billion while equity 

issues totaled $12.6billion. 

Registrations of extended offerings 

amounted to nearly $17 billion in fiscal 

1973,a small decline in value from the 

previous year. Again, investment corn. 

pany shares represented the largest por. 

tion of extended offerings amounting to 

$9.6 billion, down slightly from the year 

earlier. 

Table 22 


EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL 1973 


(Dollars in millionrl 

1 Type of security 

Common 

stmw 

- all regirlratbnr (estimated value)........................ For ~CCOUO~ 01 issuer lor cash sale.................... Immediate offering............................. corporste................................. Onered to: General public ..................... Security holderr .................... ~oreign owinmentr.~.._ ................... Exl6ndsd cart sale and other ~ruer..~........... For ~CCDUOI of issuer for 0th~than earh rale .......... Secondary offerinp................................. Cash rsle...................................... Other........................................ 
-- 

New Corporate Securities for $4 billion from a year earlier and nearly 

Immediate Cash Sale $12 billion below the record set infiscal 

Securities cleared for immediate cash 1971. Equity issues accounted for nearly 

sale by corporations exceeded $27 bit. one.half of the total in 1973 Compared 

lion during fiscal 1973, a decline of over with 40 Percent in the previous year. 

NEW CORPORATE SECURITIES EFFECTIVELY REGISTERED 

GROSS PROCEEDS ~OLLARSBILLIONS 

40 

30 


20 

10 

0 

1963 64 65 66 67 68 69 70 71 72 1973 

0s- 5054 

Regulation A Offerings covering proposed offerings of $298,634,- 

During the 1973 fiscal year, 817 noti- 215. Issues between $400,000 and 

fications were filed under Regulation A $500,000 in size predbminated. 

Table 23 

REGULATION A OFFERINGS 

Fiscal year 

1961-70 

annv.1 

averace 1973 1972 

sue: $100.000 or lass.................................... $100,000 to I2M.WO ................................ $200.000 to f300,WO ................................ 1300,OW Is $400,000............................... $400,000 to $500,OW............................... 

120 

120 

455 

0 

0 

69 

101 

% 

86 

459 

118 

182 

689 

Totsi........................................... 695 817 1,087 

Undewrilers: 

Used............................................. 
 Not used .......................................... 

Total........................................... 

ORerorr: 

ls~uingc0mp8nies................................. 
 Sfwkholders ...................................... 
 lsruers and slockhalderr jointly ...................... 


Total.. ......................................... 


251 402 590 

444 415 491 

695 811 1,087 

663 781 1,052 

21 18 28 

12 12 7 

696 817 1,087 836
ENFORCEMENT

Types of Proceedings

As the table below reflects, the securities laws provide for a wide range of

enforcement actions by the Commission.

The most common types of actions are

injunctive proceedings instituted in the

Federal district courts to enjoin continued or threatened securities law violators, and administrative proceedings

pertaining to broker-dealerfirms and/or

individuals associated with such firms

which may lead to various remedial

sanctions as required in the public interest. When an Injunction is entered

by a court, violation of the court's

decree is a basis for criminal contempt

action against the violator.

Table 24

TYPES OF PROCEEDINGS

I. Administrative Proceedings

Basis for enforcement action

Broker-elealer, Investment adviser or associated person

Willful violallon of secunties acts provision or rule, aiding or abettmg of such violation, failure reasonably to supervise others; willful misstatement In filing With Commission, con- victlon of or injunction agamst certam secuntrss, or securities- related, Violations.

Member of registered securities association

Violation of 1934 act or rule thereunder; willful violation of

1933 act or rule thereunder.

Member of national securities exchange

Violation of 1934-.actor rule thereunder.

Any person

Same as first Item.

Violabon of 1934 act or rule thereunder; Willful violation of

1933 act or rule thereunder.

Willful Violation of secuntres acts provrsion or rule; aiding or abelllng of such violation, willful misstatement In filing With

Commission.

Principal of broker-dealer

Appointment of slPe trustee for broker-dealer.

Registered securities association

Rules do not conform to statutory requirements.

Vloiation of 1934 act or rule thereunder; failure to enforce comphance With own rules; engaging In acllvity tending to defeat purposes of provision of 1934 act authonzmg nallonal secunties associatsons.

Sanction or relief

Revocation, suspension, or denial of broker-dealer or invest- ment adviser registration, or censure of broker-dealer or Investment adviser. (1934 act, sec. 15(bX5); AdVisers Act, sec. 203(e».

Expulsnn or suspension from association (1934 act, sec. 15A(IX2».

ExpulSion or suspension from exchange. (1934 act, sec. 19(aX3».

Bar or suspension from association With a broker-dealer or Investment adviser, or censure. (1934 act, sec. 15(bX7);

AdViserAct, sec. 203(1)).

Bar or suspension from association with member of registered secuntres associatren, (1934 act, sec. 15A(I) (2».

ProhibitIOn, permanently or temporanly, from serving in

certain capacrties for a registered Investment company. (Investment Co. Act, sec. 9(b».

Bar or suspension from associallon With a broker-dealer.

(Secunlles Investor Protection Act, sec. 100b».

Suspension of regrstratron (1934 act, sec. 15A(b».

Revocallon or suspension of registratum (1934 act, sec.

15A(IXl».

167
Table 24-Continued

Basis for enforcement action

National securities exchange

ViolatIOn of 1934 act or rule thereunder; failure to enforce

compliance therewith by member or issuer of registered securities.

Officer or director of registered securities association

Willful failure to enforce association rules or willful abuse of

authonty.

Officer of national securities exchange

VIOlationof 1934 act or rule thereunder.

1933 Act registration statement

Statement matenally Inaccurate or Incomplete.

Investment company has not attained $100,000 net worth 90

days after statement became effective.

1934 Act reporting requirements

Material noncompliance.

Securities Issue

Noncompliance by Issuer with 1934 act or rules thereunder.

Public Interest requires trading suspension.

Registered Investment company

Failure to file 1940 act ragrstrauon statement or required

report; filing materially Incomplete or misleading statement or report.

Company has not attained $100,000 net worth 90 days after

1933 act registration statement became effective.

Name of company, or of securily Issued by It, deceptive or misleading.

Attorney. accountant, or other professional or expert

Lack of requlsite qualifications to represent others; lacking In character or integrity; unethical or improper protessronal conduct; Willful violation of securities laws or rules, or aiding and abetting of such violation.

Attorney suspended or disbarred by court; expert's license

revoked or suspended; conviction of felony or misdemeanor

Involving moral turpitude.

Permanent injunction or finding of Violation in Commissioninstituted action; finding of Violation by Commission In ad- mimstratlve proceeding.

Sanction or relief

Withdrawal or suspension of registration (1934 act, sec. 19(aXI».

Removal from office (1934 act, sec. 15A(IX3».

Expulsion or suspension from exchange (1934 act, sec. 19(aX3»

Stop order suspending effectiveness (1933 act, sec. 8(d».

Stop order (Investment Co. Act, sec. 14(a».

Order directing compliance (1934 act, sec. 15(cX4».

Demal, suspension of effective date, suspension or withdrawal

of registration on national secunties exchange (1934 act, sec. 19(aX2».

Summary suspension of over-the-counter or exchange trading (1934 act, sees. 15(cX5) and 19(aX4».

Revocation or suspension of registration (Investment Co. Act,

sec.8(e».

Revocation or suspension of reglstraton (Investment Co. Act, sec. 14(a».

Prohibition of adoption of such name (Investment Co. Act, sec. 35(d».

Permanent or temporary demal of privilege to ap&ear or practice before Commission (Rules of Practice, Rule eX I».

Automatic suspension from appearance or practice before

Oommlsslon (Rules of Practice, Rule 2(eX2».

Temporary suspension from a~pearance or practice before

Commission (Rules of Practice, ule (2eX3».

168
Table 24-Continued

11.Civil Proceedings in Federal District Courts

Basis for enforcement action Sanctum or relief

Any person

Person engaging or about to engage in acts or pracltces Injunction against acts or pracbces which constitute or would

violating secunltes acts or rules thereunder. consbtute vrolations (plus ancillaruelief under court's general equity powers). (1933 act, sec. ZO(b); 1934 act sec. 21(e);

1935 act, sec. 12(1); Investment Co. Act, sec. 42(e); Advisers

Act, sec. 209(e».

Noncompliance with provision of law, rule, or regulation Wrrt of mandamus directing compliance (1933 act, sec. 2O(c), under 1935 act, order issued by Commission, or undertaking 1934 act, sec. 21(1); 1935 act, sec. 12(g». in a registration statement

Issuer subject to reporting requirements

Failure to file reports required under section 15(d) of 1934 Forfeiture of $100 per day (1934 act, sec. 32(b». act

Registered Investment company or afllllate

Name of company or of security issued by it deceptive or Injunction against use of name (Investment Co. Act, sec. misleading. 35(d».

Officer, director, adviser, or underwriter engagmg or about Injunction against acbng m certain capaeitres for investment to engage In act er pracbce constltutmg breach of fiduciary duty company (Investment Co. Act, sec. 36(a».

involvmg personal misconduct.

Breach of fiduciary duty respecting receipt of compensation Award of damages (Investment Co. Act, sec. 36(b».

from investment company, by any person having such duly.

III. Referral to Attorney General for Crimmal Prosecution

Basis for enforcement action Sanction or rehet

Any person

Willful Violationof securities acts or rules thereunder. Maximum penalties: $5,000 fine and 5 years' Imprisonment under 1933 and 1939 acts, $10,000 fine and 2 years imprison- ment under other acts. An exchange may be fined up to $500,000, a pubhc-ubhty holdrng company up to $200,000.

(1933 act, secs. 2O(b), 24; 1934 act, sees. 21(e), 32(a); 1935

act, sees. 12(1), 29; 1939 act, sec. 325; Investment Co. Act,

secs., 42(e), 49; Advisers Act, secs. 209(e), 217).

169
Enforcement Proceedines Commission also issued 3 stop orders on ~~ ~ 

- registration statements, and permanently 

The tables show enforcement suspended 20 Regulation A exemptions. proceedings instituted, and, for injunc. Major categories of civil litigation, tive and criminal matters, developments other than injunctive actions in Federal in pending cases. district courts, in which the Commission in administrative enforcement Pro- was during the year included 23 

ceedings, the commission during the 

fiscal year revoked the of proceedink's in the courts of appeals upon 

50 broker.dealen .and 8 investmentreview of Commission decisions. 57 ap. 

barred 87 penons from asso- peals from district court decisions in 

ciation with a broker or dealer, and 7 injunction and miscellaneous cases and 

from association with investment ad- 9 actions between private litigants in 

visers, and imposed various suspensions which the Commission participated as 

on many other firms and individuals. The amicus curiae or intewenor. 

Table 25 

ADMINISTRATIVE PROCEEDINGS 

Stop order. Regulation A 

Invellmont adviser caws I PUS ension and other b Fiscal year Broker-dealer cares 8WlOSUtO Eases 

Table 26 


INJUNCTIVE ACTIONS 


Fiscal yur I Cases inaiit~led I tnjundionr ordered I Defmdanb lnloinsd

Table 27 


CRIMINAL CASES 


I / Fiscalyear Numberofcaterreferred Number af / Defendants indicted I Conviction* 

tolustice Department ~ndictmantr 
PUBLIC UTILITY HOLDING

COMPANIES

Assets

At fiscal year-end there were 20 active

holding companies registered under the

1935 Public Utility Holding Company Act.

The 17 active holding-company systems

in which those companies are included

represent a total of 182 companies. Aggregate consolidated assets, less valuation reserves, approximated $30.0 billion

at December 31, 1972.

Table 28

PUBLIC-UTILITY HOLDING COMPANY SYSTEMS

Solely Registered Electnc I Aggregate

registered holding and/or gas Nonuhllty Inachve Total system assets holding operating utility sub- compames cornparnes less valuallon comparues companies subsidranes sidrarres reserves. at

Dec. 31,1972

--- Allegheny powers~stem,lnc ____ 1 2 5 4 0 12 $1,523,916,000 American Etectric ower co., inc. 1 0 9 16 2 28 4, 434, 439, 000

Amencan Natural Gas Co_______ 1 0 3 5 0 9 I, 938, 789, 000 Central & Southwest Corp_______ 1 1 3 2 1 8 1,40£,719,000

Columb,a Gas System, Inc, the .. 1 0 9 9 0 19 2, 519, 491, 000

Consolidated Naturat Gas Co_____ 1 0 5 4 0 10 1,422,463,000 Delmarva Power & LIght Co.. ___ a 1 2 0 0 3 627,270,000 Eastern unnnes ASSOCiates______ 1 0 4 1 2 8 192,439,000 General Public Utilities Corp_____ 1 0 5 4 1 11 2,694,276,000 Middle South Utilities, Inc ______ 1 0 6 3 3 13 2,277,310,000 NatIOnal Fuel Gas Co____________ 1 0 3 2 0 6 387,842,000 New England Electnc System ____ I 0 9 2 0 12 I, 311, 398, 000 Northeast unuues ______________ 1 0 5 8 6 20 I, 985, 353, 000 Ohio Edison Co a 1 1 0 0 2 I, 272, 485,000

Phlladelph,a Electnc Power Co_.• a 1 1 0 1 3 57,995,000 Southern Co ,the _______________ 1 0 5 2 0 8 4, 502, 086, 000

Utah Power & light ce.. ________ 0 1 1 0 0 2 583,201,000

Subtotals ---- --- --- 13 7 76 62 16 174 29, 137,477,000

Adjustments (a) to take account of jOintly owned compames: (b) to add net assets of 8

jointly owned compames not Included above , ______________ 0 0 (al +8 0 0 (al +8 <bl 817,832,000 --- --- -------- --- Total compames and assets In active systems. 13 7 84 62 16 182 29, 955, 304, 000

I Represents the consolidated assets, less valuallon reserves, of each system as reported to the Ccmmrsslon on form U5S for

the year 1972. 2 These 8 companies are Beechboltom Power Co, Inc., whIch ISan indirect subsrdiary of Amencan Electnc Power Co, Inc and

Allegheny Power System, Inc.; OhIOValley Electnc Corp, and ItS subsrdiary, Ind,ana-Kentucky Electnc Corp., which are owned

37.8 percent by Amencan Electnc Power Co, Inc, 165 percent by Ohro Edison Co, 12.5 percent by Allegheny Power System, Inc., and 33.2 percent by other companres, The Arklahoma Corp, which IS owned 32 percent by Central & Southwest Corp.

system, 34 percent by MIddle South Utilities, Inc. system, and 34 percent by an electnc uhllty company not associated With a registered system, Yankee Atenuc Electnc Co, Connecticut Yankee Atcnnc Power Co, Vermont Yankee Nuclear Power ccrp., and Maine Yankee Atonuc Power Co, which are statutory ullllty subsidranes of Northeast Utilities and New England Electnc

System.

171

___________•_____

_______________•

'
-- 

Financing the previous year. Bonds issued and 

The volume of external financing by decreased 3 Percent, debentures 15 per 

these companies aggregated $2.71 bil- cent. and Preferred stock 46 percent. 

lion in fiscal 1973, a decrease of 3 per- However, the amount of common stock 

cent from the record total of $2.79 billion issued and sold increased 53 percent, 

Table 29 

FINANCING OF HOLDING-COMPANY SYSTEMS 1 

IFircal 19731 

Hoidineeompany rynlemr 

80066 Debenture* Preferred common *Lock stock 

370.6 .................................... 
 30.2 ............ 10.0 ............ 


15.0 ............ 15.0 ............ 
 20.1 ............ 2s. I ............ 


' a Two issues. 6 Long-term notes. 

Istatutory utility rubridiariss of Northeast Utdiitiei and New England Electric System, 
- -- 

CORPORATE REORGAN~ZATIONS Bankruptcy Act. These were scattered 

among district courts in 34 States, the 

Commission Participation District of Columbia, and 1 territory. In 

~~~i~~fiscal1973, the commission 19 proceedings, the Commission first 

was a party in a total of 117 reorganiza- entered its appearance during the year; 

tion proceedings under Chapter X of the 8 proceedings were closed. 

Table 30 

PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT IN WHICH THE COMMISSION PARTICIPATED; FISCAL YEAR 1973 

SEC notice 01 

D0bt0, 

1-

a," ,,,,+,LC, ips. Inrr ................................... I...... 0. AriZ-... 


....... J systems. inc 

& linanCeCO. ,. .............................. 
E.D. KY... ~8 ............................... 
 E.D. Va... 

,.,.., .lational ~ i s .. S-0. Ind ... 	 I ~ ~~~~t 	 ~ ..................................... ~ t ~ ~ 0. Ariz ............----I ,.!nr 41.1-'-
 -"' .- ,,20na 


~ar.23 1970 Apr. 1 1970 Du,Lv,, + .,, . ,,. A. i:1964 June 10: 1964 coast ~nveslon.1°C lvnc 6 1972 Ort. 13.1972 

cochise Collepe Paln 0. Kan ~uly 17: 1959 Aug. 10,1969 

Coffsy~illeLoan k I 0. Neu sept. 30,1970 Sept. 7,1972 

combined Metals Re 

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


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


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


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


............. Sept. 11 1970 Sept.25.1970 
 C""."l." .... Davenport Hotel. In ............. Doc. 20: 1972 Jan. 26,1973 


DCA Devslopment C 0. Marr~.............. Apr. 25.1973 May 2,1973 


Dumont-Airplane & Ma S.0.N.Y ............... Oet. 22,1958 NOW. 10,1953 


Educational Computer S D. ~rir ................ Apr. 26.1972 No". 3.1972 


., " ., :, .............. ~ct. 11.1967 act. 11 1967 


.T.~~~PO, E.D. ............. Nov. 25 1958 Jan. 16'1959
 .ic,,ler c0rp.a ................................................. b-581.
 -, 	 81.". 

El .. lne.z......................................... pa^.^ 	 Mar. 24: 1958 
 Equitable ........ pol ..... S.D. Calif. ............. Mar. 1f 1958 

.....,... P", p, qf ~~erica 1 R!? ;:!!<3, 9*"971 C.D. Calif. ............. f\. 9 1973 


Farrington M=~,,#,+,,,,~~ ,.,",,"..... cn ........................... E.D.Va ................ 1 uu*. rr.lziu I *-.,.
 Equity F"?*i". 

................... 	 .-,-


coal c~.~ ............................................. S.O. W. Va ............. ! Jan. 29,1971 ! Jan. 29,1971 


Holdin Ccrp.S............................................ S.D. lnd ............... ~ct. 7 1%~ 0%. 10,1%9 


Fin+ ~nmelertment co. 	 ............. Apr. 24: 1973 Apr. 24,1973 


............. ram* Mar. 11 2, 1970 107n Apr. net.
 15:1970 ................ 


Fwd Town I~~.~ i D. ~d.-~~ ............. July 28.19Sg Aug. 

14 1970 


..;...........................................
 Seaso)% centerr"f ................... W.O. Ohla ............. June 26.1970 July 13,1970
 N~~~,~.nmeilca.lm.8 

....... ~ay22.1964 July 16.1964
 General Untted Col Feb. 22 1973 Mar 6.1973 Wm. GluchinCa.. L s.o.N." ............... 

Gro.Plant lndurtria , N.D. FI~............... Aur. 30: 1972 Sspt. 13.1972 

...... Apr. 23 1%9 June M 1969 GUI? ~enl~~aee ~orp.2.................................... ----..---la". 31' 1973 Jan. 31: 1973 
 H~~~~~~ L ~1nr.1~ ~ , E.0- KY-- .............. 
 id^^^ carp? .......................................... N.D. Ohla .............. ~pr. 27'1972 June 6 1972 


R. nee & 	 JVIY 7: 1.9 JUIY id 1969 ,071 Mar. ~----l'-I- '". .." co.. I?C ........................................... S.D.N.Y. .............. 
 r-h i1911 H I ~ ~ d s ~ ~ ~ lne~ t................ ~ ~ ~ ~ S.D. Tex ----.----.
 ~ ~~~~~ddtion. ~, 

U " I" ..................................... D. Mont~ 


~oundationa.......................... S.D.Calif 
 .er Fllnd lnc ........................ 0. WIO~. 

Fodatnotes at end of table 

gn 
Table 30-20ntinued 

SIC notice of hbbr Dirtrlct court 1 Petilion filsd 1 appearawe 

filed 

-

W.D. Wash ............. Mar. 3, 1965 M~,.11,196~ 


C.D. Calif .............. ~une 29 1967 ~ug. 16 1967 


N.D. fir ............ oct. 2d 1972 No". i 1972 


Kirehofer & ............ AW. 16'1971 Oct. 19' 1971 
 ............................... No". 9: 1959 Nov. 12: 1959 


Lake Winnebago Davebpmcnt Co.. Inc ........................... 
 Landmark Inns of Durham, 1nc.a. ............................... Oct. 14,1910 OCt. 26.1910 


Sept. 3.1969 Dec. 10,1969 Little Missouri Minerals Asroelatian. Inc ......................... D.N.D.._..::_ July 1966 Jan, 29
 10s Angel.3 Land 6 Investments. Ltd ............................ 
 Louisima Loan k Thrill, Inc .................................... ~;~~~:::::::::::: g:2$!z~i $: 2$1$~


........... '"Y. LO.lilD3 mar. Zb, ,m 
 ........... May 71963 July 21963 
 ..................... Oct. 1912 Jan. 9'1913 
 ........... June 13: 1966 June 11'1966 
 ................ ...".","...-..........May 13.1969 May 21: 1969 


Phoenix Gem*, Inc.2 ........................................... 
 Phoenix RIC international Mortztgaze lndurtrief, Co ........................................... Inc ................................ !:!!::::::::I::::::::
 ADZ, iz $;. :k iz


N.0. Trx .............. sent. 16.1910 sc I23 1910
 John Rich Enterprise?. Ine ...................................... 'I. 'C "70
 D;~o. n-8....... A>.. 0, utah~ iep.' 6:1970 
 .................., "Y'. dl May 23,1961 


8wtsC0.~.................................................. M.D.N.C ............. Ftb. 12.1970 
 ~ar.23 1970 I!n:i-ko 8 Oakland Helicopter Airliner. 1°C.' ................. N.D. Calif ............l: July 31.1970 up 11:1910
 .t Carp...................... ...................... E.D. Wirc .............. 
 borp.'.................... M.D. Mey 19.1910 ~uns15 1910 
 ~mn ........................... pa ....,.......... 
 rmr. N. Siezler 8 Co.8 ......................................... .............. Apr. 3,1959 Avr. 15: 1959 
 N.D. Ohio May 23,1966 June 7,1966 

Trading Carp ............................. ...... 
Table 30--Continued 

~~i~c~vicar, S.D. Ind............... Dac. 4. 1970 Jan. 28. 1911 
 lnc ......................................... 
 viation Computer systems Corp ................................. D. Ma$............... Apr. 29. 1971 Apr. 29. 1971 


vim carp. s ................................................. E.D. Mich .............. Mar. 29. 1963 Apr. 9, 1963 


.................................... D.V.1 ............... ..Oct. 22.1971 Apr. 11. 1972 
 vir in Island Pmwrtia. lm July 14. I971 ACE. 19, 1911 waftham Industrisrcorp ....................................... C.D. Calif .............. 


wabb & ~mpp. lnc ........................................... S.D. N.Y ............... May 7. 1965 May 11. 1965 


H.R. weisrbergcorp ........................................... N.D. Ill ................ Mar. 5. 1968 Apr. 3. 1968 


wertec carp. r ....:.......................................... S.D. Tex............... Se 126 1966 Dct. 4 1966 


Western Growth Cap#tal Corp~.................................. D. Arir ............... ~r!.10: 1%7 may 1<, 1968 


Wsrtern National Investment Corp.3 0. Utah............... Jan. 4. 1968 Mar. 11. 1968 


wondsrbwl, lnc C.D.Caiif .............. 
 yale E~~~~~~system, S.O. N.Y ............... 

-. -

I cornm~sron I ed WIICO 01 a~ arme n r.ta L913 1 RPOI an1281100 proceld n r rfsrd ouron8 Iwal 1973 

~planftasmen iLoltanlldf, ronrrmmateo aLtw l.nal owae hat aen.nlereo berauwol prnd.0~ msttsrr 
SEC OPERATIONS

Net Cost

Fees collected by the Commission in

fiscal 1973 amounted to 73 percent of

funds appropriated by the Congress for

Commission operations. The Commission

is required by law to collect fees for (1)

registration of secunties issued; (2)

qualification of trust indentures; (3)

registration of exchanges; (4) brokers

and dealers who are registered with the

Commission but are not members of the

NASD;and (5) certification of documents

filed with the Commission. In addition, by

fee schedule, the Cornrrusslon imposes

fees for certain filings and services such

as the filing of annual reports and proxy

material.

APPROPRIATED FUNDS vs FEES COLLECTED

176

Dollars Millions

30

20

10

o

1968 69 70 71 72

.....

.., ...

. ::.. ..

":-::':'::.:' .

1973

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U. S. GOVERNMENT PRINTING OFFICE' 1974 0 524-127

177

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