1 9 9 8

Annual Report

United States

Securities and Exchange Commission
For sale by the U.S. Government Pnntinq Office

Supenntendent of Documents, Mall Stop: SSOP,Washington, DC 20402-9328

ISBN 0-16-050008-7
The Honorable Albert Gore, Jr.

Vice President of the United States

and President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable J. Dennis Hastert

Speaker of the House of

Representatives

Washington, D.C. 20515

I am pleased to send you the annual report of the Securities and Exchange

Commission (SEC or Commission) for fiscal year 1998. The activities

and accomplishments identified in the annual report continue the

Commission's long tradition of effective enforcement in and regulation of

our nation's capital markets. I have highlighted some of the

Commission's achievements below.

Enhancing Investor Protections

The Commission remains vigilant in pursuing its law enforcement

responsibilities. This past year, in an undercover investigation in the

over-the-counter market, the Commission filed enforcement actions

against 58 defendants. Of the 58 defendants, 14 are or have been the

subject of parallel criminal proceedings involving conduct related to that

alleged in our complaints.

The Commission sanctioned a broker-dealer and four individuals for more

than $5 million in fines for fraudulent sales practices. The Commission

determined that the broker-dealer's compensation, production, hiring, and

training policies created an environment that enabled the firm's brokers to

engage in abusive sales practices such as churning, unauthorized and

unsuitable trading, and lying to customers. This action makes clear that

iii
brokerage firms must place the interests of their clients first, and must

avoid practices that put the firm and its brokers in conflict with the

interests of their clients.

We also kept up our focus of coordinating examinations with foreign,

federal, and state regulators and self-regulatory organizations to enhance

cooperation. During the year, Commission staff conducted examinations

with the Hong Kong, China Securities and Futures Commission; the

United Kingdom's Financial Services Authority acting as the Investment

Management Regulatory Organization; the Australia Securities Authority;

and the Bundesaufsichtsamt Fur Das Kreditwesen.

To motivate Americans to get the facts they need to save and invest

wisely, the Commission and a coalition of other government agencies,

businesses, and consumer organizations launched a "Facts on Saving and

Investing Campaign". As part of this campaign, the Commission released

a brochure entitled Get the Facts on Saving and Investing, which explains

the basics of saving and investing, and conducted the first-ever national

town meeting on saving and investing.

Disclosure Developments

For the past several years, the Commission has been actively reevaluating

the current securities registration system. In November 1998, we

published proposals that would modernize the regulation of capital

formation and provide significant benefits to public investors, issuers of

securities, and securities professionals The proposals are based on the

recognition that these benefits will be recognized only if the registration

system is flexible enough to adapt to changes in the capital markets of

today and the future. The proposals also would update and simplify the

regulations applicable to takeover transactions to address changes in deal

structure and advances in technology.

We also overhauled the prospectus disclosure requirements for mutual

funds in order to provide investors with clearer and more understandable

information about funds. At the same time, we permitted a mutual fund

IV
to offer investors a new disclosure document, called the "Profile," that

summarizes key information about the fund.

Technology

One of the most significant areas we have been focusing on is automation

and the many technological challenges facing the industry. First among

them is preparing for the year 2000. This past year, our Compliance

Inspections and Examination staff conducted nationwide examinations

that were dedicated to obtaining information on the year 2000 problem.

We also announced a moratorium on the implementation of new

Commission rules that would require major reprogramming of computer

systems by securities industry participants. As we approach the

millennium, the Commission will continue its year 2000 program, taking

any actions we believe will help ensure that the securities industry is

prepared for the year 2000.

In light of the important role of technology, and the increasing

competition in today's securities markets, we adopted a new regulatory

framework for alternative trading systems. The new framework allows

alternative trading systems to choose to register as exchanges or to

register as broker-dealers and comply with additional requirements

specifically designed to address their unique role in the market. It also

better integrates alternative trading systems into the regulatory

framework for markets, and is flexible enough to accommodate the

business objectives of, and the benefits provided by, alternative trading

systems.

We awarded a three-year contract for the modernization of our Electronic

Data Gathering, Analysis, and Retrieval (EDGAR) system. While

EDGAR is one of the government's most successful large information

system initiatives, the dramatic changes in technology over the past few

years necessitate its modernization. EDGAR modernization will improve

substantially the presentation quality and structure of SEC filings. The

EDGAR architecture will be converted to an Internet-based system and

will support the attachment of graphical files. This modernization will

greatly benefit issuers, investors, SEC staff, and other data users.

v
International Listings

We continued our efforts to widen the range of choices available to U.S.

investors by promoting the internationalization of our markets. In 1990,

434 foreign companies were reporting in the U.S.; today, there are over

1,100 foreign companies from 56 countries. We will continue to do all

we can to encourage more companies to list here to afford U. S. investors

the protections of U.S. securities laws.

Accounting

An area of great concern to the Commission is inappropriate earnings

management. While this is not a new problem, it has risen in a market

unforgiving of companies that miss Wall Street's estimates. During the

year, our staff issued guidance on various issues relating to the

presentation of earnings per share

***

The markets today are very different from the ones that existed just a few

years ago. Over the last five years, the markets have experienced

phenomenal growth and technological advances that have made our

markets more accessible to more people. Change has always been the

hallmark of our markets, and the SEC has succeeded by recognizing that

fact and responding to it. I have every confidence that the Commission

will continue to perform its responsibilities with the professionalism and

dedication that all of us have come to expect.

S7iAt

Arthur Levitt

Chairman

VI
Commission Members and Principal Staff Officers

Biographies of Commission Members

Table of Contents

XI

XIV

4

1:

1,

1

,

1

i

J,

j

Arthur Levitt. Norman S. Johnson. Isaac C. Hunt, Jr. •

Laura S. Unger. Paul R. Carey

Regional and District Offices

Enforcement

Key 1998 Results

Significant Enforcement Actions

International Affairs

Key 1998 Results

Regulatory Initiatives • International Organizations •

Enforcement Cooperation. Technical Assistance

Investor Education and Assistance

Key 1998 Results

Investor Complaints and Inquiries • Investor Outreach

Regulation of the Securities Markets

Key 1998 Results

Securities Markets, Trading and Significant Regulatory

Issues. Broker-Dealer Issues. Oversight of

Self-Regulatory Organizations

XIX

1

11

16

21

vii
Investment Management Regulation

Key 1998 Results

Significant Investment Company Act Developments •

Significant Investment Advisers Act Developments •

Significant Public Utility Holding Company Act

Developments

Compliance Inspections and Examinations

Key 1998 Results

Investment Company and Investment Adviser Inspections •

Broker-Dealer and Transfer Agent Examinations.

Self-Regulatory Organization Inspections

Full Disclosure System

Key 1998 Results

International Activities. Review of Filings •

Recent Rulemaking, Interpretive, and Related Matters •

Conferences

Accounting and Auditing Matters

Key 1998 Results

Accounting-Related Rules and Interpretations. Oversight

of Private Sector Standard Setting • International

Accounting and Auditing Standards

Other Litigation and Legal Activities

Key 1998 Results

Significant Litigation Developments • Significant

Adjudication Developments • Legal Policy •

Significant Legislative Developments. Corporate

Reorganizations • Ethical Conduct Program

Vlll

38

52

58

69

77
Municipal Securities Initiatives

Key 1998 Results

Municipal Securities Disclosure • Outreach •

Technical Assistance

Economic Research and Analysis

Key 1998 Results

Economic Analysis and Technical Assistance

Program Management and Administrative Support

Key 1998 Results

Policy Management • Administrative Support

Endnotes

Appendix

95

97

102

107

116

Enforcement Cases Initiated by the Commission During Fiscal Year

1998 in Various Program Areas • Fiscal 1998 Enforcement Cases

Listed by Program Area. Investigations of Possible Violations of

the Acts Administered by the Commission • Administrative

Proceedings Instituted During Fiscal Year Ending September 30,

1998 • Injunctive Actions • Right to Financial Privacy • Types of

Proceedings. Self-Regulatory Organizations: Expenses, Pre-Tax

Income, and Balance Sheet Structure • Consolidated Financial

Information of Self-Regulatory Organizations. Self-Regulatory

Organizations-Clearing Corporations, 1997 Revenues and

Expenses. Self-Regulatory Organizations-Depositories, 1997

Revenues and Expenses • Certificate Immobilization • Section

13(£)(1) Reports • Exemptions • Corporate Reorganizations •

The Securities Industry: Revenues, Expenses, and Selected

Balance Sheet Items • Unconsolidated Financial Information for

ix
x

Broker-Dealers, 1993-1997 • Unconsolidated Annual Revenues

and Expenses for Broker-Dealers Doing a Public Business, 1993-

1997 • Unconsolidated Balance Sheet for Broker-Dealers Doing a

Public Business Year-end, 1993-1997 • Carrying and Clearing

Firms • Securities Industry Dollar in 1997 for Carrying/Clearing

Firms • Unconsolidated Revenues and Expenses for

Carrying/Clearing Broker-Dealers. Unconsolidated Balance Sheet

for Carrying/Clearing Broker-Dealers. Securities Traded on

Exchanges. Market Value of Equity/Options Sales on U.S.

Exchanges. Volume of Equity/Options Sales on U.S. Securities

Exchanges • Share Volume by Exchanges • Dollar Volume by

Exchanges • Securities Listed on Exchanges • Value of Stocks

Listed on Exchanges. Appropriated Funds vs. Fees Collected.

Budget Estimates and Appropriations • Securities and Exchange

Commission Organization Chart
Commission Members and Principal Staff Officers

(As of November 5, 1998)

Commissioners

Arthur Levitt, Chairman

Norman S. Johnson, Commissioner

Isaac C. Hunt, Jr., Commissioner

Laura S. Unger, Commissioner

Paul R. Carey, Commissioner

Principal Staff Officers

Jennifer Scardino, Chief of Staff

Term Expires

2003

1999

2000

2001

2002

Brian J. Lane, Director, Division of Corporation Finance

Vacant, Deputy Director

Martin Dunn, Senior Associate Director

William E. Morley, Senior Associate Director

Robert A. Bayless, Associate Director

Mauri OsherofT,Associate Director

Shelley E. Parratt, Associate Director

David A. Sirignano, Associate Director

Vacant, Associate Director

Richard Walker, Director, Division of Enforcement

Vacant, Deputy Director

William Baker, Associate Director

Paul V. Gerlach, Associate Director

Thomas C. Newkirk, Associate Director

Joan E. McKown, Chief Counsel

Christian J. Mixter, Chief Litigation Counsel

xi
Stephen J. Crimmins, Deputy Chief Litigation Counsel

Walter Schuetze, Chief Accountant

James A. Clarkson, m, Director of Regional Office Operations

Vacant, Director, Division of Investment Management*

Kenneth J. Berman, Associate Director

Barry Miller, Associate Director

Robert Plaze, Associate Director

Douglas Sheidt, Associate Director

Richard Lindsey, Director, Division of Market Regulation

Robert L.D. Colby, Deputy Director

Larry E. Bergmann, Associate Director

Belinda Blaine, Associate Director

Michael A. Macchiaroli, Associate Director

Catherine McGuire, Associate Director

Harvey Goldschmid, General Counsel, Office of General Counsel

Paul Gonson, Solicitor and Deputy General Counsel

David M. Becker, Deputy General Counsel

Karen Burgess, Associate General Counsel

Anne E. Chafer, Associate General Counsel

Richard M. Humes, Associate General Counsel

Diane Sanger, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

Lori A. Richards, Director, Office of Compliance Inspections and

Examinations

Mary Ann Gadziala, Associate Director

Gene Gohlke, Associate Director

C. Gladwyn Goins, Associate Director

*Paul Roye joined the Commission as Director of the Division of

Investment Management on November 22, 1998.

'VII
Lynn E. Turner, Chief Accountant, Office of the Chief Accountant

Brenda Murray, Chief Administrative Law Judge, Office of the

Administrative Law Judges

Erik R. Sirri, Chief Economist, Office of Economic Analysis

Deborah Balducchi, Director, Office of Equal Employment Opportunity

James M. McConnell, Executive Director, Office of the Executive

Director

Michael Bartell, Associate Executive Director

Wilson A. Butler, Jr., Associate Executive Director

Margaret Carpenter, Associate Executive Director

Jayne Seidman, Associate Executive Director

Marisa Lago, Director, Office of International Affairs

Nancy M. Smith, Director, Office of Investor Education and Assistance

Susan Ochs, Director, Office of Legislative Affairs

Paul S. Maco, Director, Office of Municipal Securities

Christopher Ullman, Director, Office of Public Affairs, Policy

Evaluation and Research

Jonathan G. Katz, Secretary to the Commission

Xlll
Biographies of Commission Members

Chairman

Arthur Levitt is the 25th Chairman ofthe

United States Securities and Exchange

Commission. First appointed by President

Clinton in July 1993, the President reappointed

Chairman Levitt to a second five-year term in

May 1998. His term expires on June 5, 2003.

As SEC Chairman, Arthur Levitt's top priority

is investor protection, which is reflected by the

key successes of his first term: reforming the debt markets; improving

broker sales and pay practices; promoting the use of plain English in

investment literature as well as in SEC communications with the public;

preserving the independence of the private sector standard setting

process, ensuring the independence of accountants; and encouraging

foreign companies to list on U. S. markets.

Chairman Levitt created the Office of Investor Education and Assistance

and has held a series of investor town meetings to educate investors about

how to safely and confidently participate in the securities markets. Under

Chairman Levitt's leadership the Commission created a web site

(www.sec.gov), which allows the public free and easy access to corporate

filings, and an 800 number that enables the public to report problems and

request educational documents.

Chairman Levitt has also worked to sever ties between political campaign

contributions and the municipal underwriting business, as well as

improving the disclosure and transparency of the municipal bond market.

Chairman Levitt has sought to raise the industry's sales practice standards

and eliminate the conflicts of interest in how brokers are compensated. In

XIV
partnership with the securities industry, Chairman Levitt developed the

"Fund Profile" and other plain English guidelines for investment products

to make disclosure documents easier to understand while maintaining the

value of the information provided to investors.

In his second term, Chairman Levitt will maintain his focus on investor

protection by: increasing cooperation with the criminal authorities to

combat securities fraud; fighting fraud in the micro cap stock market,

working to ensure that the securities industry's computers are prepared

for the year 2000 (Y2K); maintaining quality accounting standards;

harmonizing international accounting standards; and creating a regulatory

framework that embraces new technology.

Before joining the Commission, Mr. Levitt owned Roll Call, a newspaper

that covers Capitol Hill. From 1989 to 1993, he served as the Chairman

of the New York City Economic Development Corporation, and from

1978 to 1989 he was the Chairman of the American Stock Exchange.

Prior to joining the AMEX, Mr. Levitt worked for 16 years on Wall

Street. He graduated Phi Beta Kappa from Williams College in 1952

before serving two years in the Air Force.

Commissioner

Following his appointment by President

Clinton, and his confirmation by the Senate,

Norman S. Johnson was sworn in as a United

States Commissioner on February 13, 1996 in a

ceremony presided over by the Chief Federal

District Judge in Salt Lake City, Utah.

Prior to his nomination, Commissioner Johnson

was a senior partner in the firm Van Cott, Bagley, Cornwall & McCarthy

and had a long and illustrious legal career focusing on federal and state

securities law. Commissioner Johnson commenced his career in the

private practice after serving as a staff member of the SEC from 1965

through 1967. In addition, Commissioner Johnson served as an Assistant

xv
Attorney General in the Office of the Utah Attorney General from 1959

to 1965 and also served as a law clerk to the Chief Justice of the Utah

Supreme Court.

During his career, Commissioner Johnson served as President of the Utah

State Bar Association, was chosen as a State Delegate, House of

Delegates, American Bar Association, and was named Chairman of The

Governor's Advisory Board on Securities Matters, State of Utah. In

addition, Commissioner Johnson served on the Governor's Task Force on

Officer and Director Liability, State of Utah and numerous other

committees and groups concerned with the application of federal and

state securities laws

Commissioner Johnson has received numerous honors and awards in

recognition of the outstanding contributions he has made to the Securities

Practice in the Rocky Mountain area. He has authored several articles

published in legal periodicals, one of which is much cited, "The Dynamics

of SEC Rule 2( e) A Crisis for the Bar."

Commissioner Johnson has involved himself in many community groups,

including the Utah Supreme Court Committee on Gender and Justice.

Married since 1956 to the former Carol Groshell, Commissioner Johnson

has three grown daughters, Kelly, Catherine and Lisa, all whom reside in

Utah.

Commissioner

Isaac C. Hunt, Jr. was nominated to the

Securities and Exchange Commission by

President Bill Clinton in August 1995 and

confirmed by the Senate on January 26, 1996.

He was sworn in as a Commissioner on

February 29, 1996

Prior to being nominated to the Commission,

Mr. Hunt was Dean and Professor of Law at

xvi
the University of Akron School of Law, a position he held from 1987 to

1995. He taught securities law for seven of the eight years he served as

Dean. Previously, he was Dean of the Antioch School of Law in

Washington, D.C. where he also taught securities law. In addition, Mr.

Hunt served during the Carter and Reagan administrations at the

Department of the Army in the Office of the General Counsel as Principal

Deputy General Counsel and as Acting General Counsel. As an associate

at the law firm of Jones, Day, Reavis and Pogue, Mr. Hunt practiced in

the fields of corporate and securities law, government procurement

litigation, administrative law, and international trade. In addition, Mr.

Hunt commenced his career at the SEC as a staff attorney from 1962 to

1967.

Mr. Hunt was born on August 1, 1937 in Danville, Virginia. He earned

his B.A from Fisk University in Nashville, Tennessee in 1957 and his

LL.B. from the University of Virginia School of Law in 1962.

Commissioner

Laura S. Unger was sworn in on November

5, 1997 as a member of the Securities and

Exchange Commission, for a term expiring

June 2001. Before being appointed to the

Commission, Ms. Unger served as Counsel to

the United States Senate Committee on

Banking, Housing and Urban Affairs where

she advised the Chairman, Senator Alfonse

M. D' Amato (R-NY). As counsel, Ms. _

Unger followed legislative issues relating to banking and securities.

Prior to working for the Senate Banking Committee, Ms. Unger was a

Congressional Fellow for Banking and Securities matters in the office of

Senator D' Amato. Before coming to work on Capitol Hill, Ms. Unger

was an attorney in the Enforcement Division of the Securities and

Exchange Commission in Washington, D.C.

xvii
Ms. Unger received a B.A. in Rhetoric from the University of California

at Berkeley and a J.D. from New York Law School.

Commissioner

Paul R. Carey was nominated to the Securities

and Exchange Commission by President Bill

Clinton and confirmed by the Senate on

October 21, 1997 for a term which expires

June 5,2002.

Prior to being nominated to the Commission,

Mr. Carey served as Special Assistant to the

President for Legislative Affairs at the White

House where he had been since February of 1993. Mr. Carey was the

liaison to the United States Senate for the President, handling banking,

financial services, housing, securities, and other related issues. Prior to

joining the Administration, Mr. Carey worked in the securities industry

focusing on equity investments for institutional clients.

Mr. Carey received his B.A. in Economics from Colgate University.

Mr. Carey was born in Brooklyn, New York on October 18, 1962.

xviii
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Central Regional Office

Daniel F. Shea, Regional Director

1801 California Street, Suite 4800

Denver, Colorado 80201-1648

(303) 844-1000

Fort Worth District Office

Harold F. Degenhardt, District Administrator

801 Cherry Street, 19th Floor

Forth Worth, Texas 76102

(817) 978-3821

Salt Lake District Office

Kenneth D. Israel, Jr., District Administrator

50 South Main Street, Suite 500

Salt Lake City, Utah 84144-0402

(801) 524-5796

Midwest Regional Office

Mary Keefe, Regional Director

Citicorp Center

500 West Madison Street, Suite 1400

Chicago, Illinois 60661-2511

(312) 353-7390

Northeast Regional Office

Carmen 1. Lawrence, Regional Director

7 World Trade Center, Suite 1300

New York, New York 10048

(212) 748-8000

Boston District Office

Juan M. Marcelino, District Administrator

73 Tremont Street, 6th Floor

Boston, Massachusetts 02108-3912

(617) 424-5900

xx
Philadelphia District Office

Ronald C. Long, District Administrator

The Curtis Center, Suite 1120 E.

601 Walnut Street

Philadelphia, Pennsylvania 19106-3322

(215) 597-3100

Pacific Regional Office

Valerie Caproni, Regional Director

5670 Wilshire Boulevard, 11th Floor

Los Angeles, California 90036-3648

(213) 965-3998

San Francisco District Office

David B. Bayless, District Administrator

44 Montgomery Street, Suite 1100

San Francisco, California 94104

(415) 705-2500

Southeast Regional Office

Randall J. Fons, Regional Director

1401 Brickell Avenue, Suite 200

Miami, Florida 33131

(305) 536-4700

Atlanta District Office

Richard P. Wessel, District Administrator

3475 Lenox Road, N.E., Suite 1000

Atlanta, Georgia 30326-1232

(404) 842-7600

XXI

Enforcement

The SEC's enforcement program seeks to protect investors and foster

confidence by preserving the integrity and efficiency of the markets.

Key 1998 Results

In 1998, the SEC obtained judicial and administrative orders requiring

securities law violators to disgorge illegal profits of approximately

$426 million. Civil penalties authorized by the Enforcement Remedies

and Penny Stock Reform Act of 1990, the Insider Trading Sanctions

Act of 1984, and the Insider Trading and Securities Fraud Enforcement

Act of 1988 totaled more than $51 million.

Enforcement Actions Initiated

1994 1995 1996 1997 1998

Civil Injunctive Actions 196 171 180 189 214

Administrative Proceedings 268 291 239 285 248

Contempt Proceedings 23 23 32 14 15

Reports of Investigation -..Q _1 -.2 _1 ---.Q

Total 487 486 453 489 477

In SEC-related cases, criminal authorities obtained 74 indictments or

informations and 61 convictions during 1998. The SEC granted access to

its files to domestic and foreign prosecutorial authorities in 286 instances
Significant Enforcement Actions

Most of the SEC's enforcement actions were resolved by settlement with

the defendants or respondents, who generally consented to the entry of

judicial or administrative orders without admitting or denying the factual

allegations made against them. The following is a sampling of the year's

significant actions. .

Internet-Related Cases

• The Commission filed a complaint against Steven Samblis, a self-styled

stock picker, and his corporation New Stock, Inc., for failing to disclose

that Samblis was paid for the companies he hyped in the magazine he

published, "New Stock" (SEC v. Steven Samblis, et al. 1). The SEC

alleged that Samblis enthusiastically recommended the securities of

certain publicly-traded companies without disclosing that he had been

paid at least $20,000 to make these recommendations. The SEC also

alleged that Samblis was paid to issue thousands of e-mails over the

Internet regarding these same securities. In addition to a preliminary

injunction, the SEC seeks a permanent injunction, disgorgement, and civil

money penalties.

• The SEC filed a complaint against a radio talk show host, Jerome M.

Wenger, who promoted the stock ofa company on his radio program,

"The Next SuperStock," without disclosing that he was being paid by the

company to do so (SEC v. Jerome M Wenge?). Wenger received

$4,000 in cash and stock that he sold for approximately $71,000. The

SEC's complaint seeks a finaljudgment permanently enjoining Wenger

and ordering him to disgorge his ill-gotten gains plus prejudgment interest

and to pay civil penalties. Wenger was arrested and charged criminally by

the U.S. Attorney's Office with securities fraud.

2
Broker-Dealer Cases

• The SEC filed an action against Michael R. Milken and MC Group, a

firm owned and controlled by Milken (SEC v. Michael R. Milken and

MC Group']. Me Group, through Milken and others, acted as a

broker in connection with two transactions in which it introduced

companies; proposed business arrangements involving the purchase,

sale, or exchange of securities; and participated in negotiations

regarding the structure of the transactions and securities to be issued.

As a result of these activities, MC Group received $42 million in

transaction-based compensation. The SEC alleged that Milken

violated the 1991 SEC order barring him from associating with a

broker, and that MC Group failed to register as a broker, conduct for

which Milken was responsible. Milken and MC Group consented to

the entry of injunctions and to orders requiring them to pay

disgorgement of $42 million plus prejudgment interest of $5 million.

• The SEC charged a broker-dealer, Olde Discount Corp., with creating

an environment which encouraged its registered representatives to

engage in churning, unauthorized trading, misrepresentations and

omission of material facts, and unsuitable recommendations (In the

Matter of Olde Discount Corp., et al.4). In an order issued by

consent, the Commission made findings against the firm and three of

its senior executives. The Commission held Olde Discount directly

liable for fraudulent sales practices flowing from the firm's

compensation, production, hiring, and training practices. The

Commission also found that the firm's founder, Ernest aide, failed to

supervise and caused the violations and that two former sales

executives willfully induced and caused those violations and failed to

supervise. The Commission imposed remedial relief, censures, ceaseand-desist orders, and a total of $5 .15 million in penalties against the

firm and four individuals.

3
Microcap Cases

• The SEC filed 5 federal civil enforcement actions against 58

defendants resulting from an undercover investigation into illegal

manipulation of the over-the-counter markets for "penny stock" or

"micro cap" securities (SEC v. Szur, et aI.5). Of the 58 defendants 14

are, or have been, the subject of parallel criminal proceedings

involving conduct related to that alleged in the SEC's complaints.

The fraudulent schemes alleged in the 5 actions filed include:

payments of undisclosed bribes totaling approximately $3.3 million to

brokers who, in tum, induced their customers to purchase micro cap

securities; manipulation of the prices set by market makers for

purchase and sale of those microcap stocks; and material

misrepresentations about the issuers of micro cap securities. The SEC

is seeking permanent injunctions, court orders prohibiting the

defendants from future participation in offerings of penny stocks, and

disgorgement and prejudgment interest. These cases were pending at

the end of the fiscal year.

• The SEC filed an emergency lawsuit in federal district court to halt

the unregistered and fraudulent sale and manipulation of the stock of

Electro-Optical Systems Corporation (EOSC ) by Thomas Cavanagh

and other defendants (SEC v. Thomas Edward Cavanagh, et ai.6).

The court ordered the defendants to immediately cease their

fraudulent activity and froze their assets pending further litigation.

The SEC also temporarily suspended trading in the securities of

EOSC for a ten-day period because of questions regarding the

accuracy of statements and material omissions concerning the

company. The complaint alleged, among other things, that defendants

were conducting a fraudulent scheme to create a controlled market

for the stock ofEOSC in order to artificially inflate the price of the

stock which they sold to unsuspecting investors, including numerous

small investors purchasing over the Internet. The complaint alleged

that defendants and relief defendants had made at least $5 million on

sales ofEOSC stock, and the fraud was continuing. As a result of

defendants' actions, the complaint alleged, the price ofEOSC stock

rose more than 1000% in one day and was maintained by defendants

4
at that level for several months through control of the supply of the

stock and issuance of false and misleading information about the

company and its potential product. The court entered a temporary

restraining order prohibiting violations of the securities laws.

Investment Adviser and Investment Company Cases

• The SEC instituted administrative and cease-and-desist proceedings

against Monetta Financial Services, Inc. (Monetta), a registered

investment adviser; Robert Bacarella, Monetta's president; and William

Valiant, Paul Henry, and Richard Russo--each of whom is a director of

one of two mutual funds advised by Monetta (In the Matter of Monetta

Financial Services, Inc., et al.\ The SEC alleged that Monetta

received profitable short-term trading opportunities in certain "hot" initial

public offerings (IPOs) from broker-dealers underwriting those offerings

to whom Monetta had directed brokerage business generated by the

funds. At Bacarella's direction, Monetta directed the hot IPOs to the

personal accounts of Valiant, Henry, and Russo who accepted them

without disclosing the practice to the funds' shareholders and obtaining

the consent of disinterested representatives of the Funds. Valiant, Henry,

and Russo then "flipped" or sold the hot IPO shares for profits totaling

more than $51,000. This is a process called "spinning." The SEC further

alleged that Monetta's allocation of the shares resulted in conflicts of

interest because the receipt of the shares by Valiant, Henry, and Russo

placed them in a position where their judgment and exercise of their

responsibilities to the funds in general could be influenced by

considerations of personal gain dispensed by Monetta. Monetta's IPO

allocations constituted material information that was relevant to the

operation of the funds because of these serious conflicts of interest. The

SEC is seeking disgorgement and civil penalties. The case was pending

at the end of the fiscal year.

• The SEC filed an injunctive action against Sweeney Capital Management,

Inc. (SCM), a registered investment adviser; Timothy Sweeney, its

owner; and Susan Gorski, a portfolio manager, for misappropriating more

than $109,000 in client-owned soft dollar credits and for failing to

disclose SCM's use of soft dollar credits for a variety of defendants'

5
business and personal expenses (SEC v. Sweeney Capital Management

Inc., et al.8). The complaint alleged that during the fiscal year ended

December 31, 1994, SCM paid approximately 70% of its operating

expenses with soft dollars misappropriated from its advisory clients and a

hedge fund whose assets SCM managed. The defendants engaged in

other fraudulent soft dollar practices, including submitting false invoices

to soft dollar brokers for non-existent consulting work to pay for

Gorski's salary, SCM's rent, and personal loans to Sweeney and

submitting multiple invoices for the same goods and services. The SEC

also alleged that defendants filed false forms with the SEC, distributed

misleading marketing materials to the public, made false claimsto

investors about the competitiveness of SCM's advisory fees, misused

client assets in its custody, and misappropriated an elderly client's funds.

The SEC is seeking permanent injunctions, disgorgement, and civil

penalties. This case was pending at the end of the fiscal year.

Offering Violations

• The SEC obtained a temporary restraining order in its action against

International Heritage Incorporated (Heritage Incorporated),

International Heritage, Inc. (IHI), and other individuals associated

with these two entities for a fraudulent pyramid scheme (SEC v.

International Heritage, Inc., et al.9). The SEC alleged that IHI raised

more than $150 million from over 155,000 investors through a

pyramid scheme. In addition to selling interests in the pyramid

scheme, the defendants sold $5 million in notes convertible into shares

of IHI common stock. The defendants knowingly misrepresented

IHI's financial condition to investors and concealed the fact that IHI

was operating a pyramid scheme. The Court also appointed a

receiver for IHI. This matter was pending at the end of the fiscal

year

• The court in SEC v. American Automation, Inc., et al. 10 entered a

preliminary injunction against American Automation, Inc., Kendyll R.

Horton, Hazel A. Horton, and Merle B. Gross. In addition, the court

ordered the continuation of an asset freeze, previously granted in

connection with a temporary restraining order against all defendants,

6
including five relief defendants. The court also appointed a receiver

to take possession of the assets of American Automation. The SEC's

complaint alleged that the defendants raised over $4.5 million through

the fraudulent offer and sale of American Automation stock to over

1,400 investors in several states. The complaint also alleged that the

defendants told investors that American Automation would develop

and place automated insurance vending machines in high traffic areas

and that projected profits would be almost $100 million by the end of

its third year of operation; however, no automated vending machines

have been sold and American Automation's only source of revenue

has come from investors' funds. Additionally, the defendants

allegedly used investor funds to pay for their personal expenses and

for business expenses unrelated to American Automation's

operations. This matter was pending at the end of the fiscal year.

Financial Disclosure Cases

• The SEC instituted administrative proceedings in which it alleged that

KPMG Peat Marwick LLP engaged in improper professional conduct

and issued an unqualified report on the 1995 year-end financial

statements of a client from which it lacked independence (In The

Matter of KPMG Peat Marwick LLp11). Peat Marwick organized and

capitalized KPMG BayMark, a firm owned by Edward R. Olson and

three others, as a vehicle for new lines of business, including the

"corporate turnaround" business. As part of a turnaround

engagement, KPMG BayMark installed Olson as president and chief

operating officer of Porta Systems Corp., a financially troubled audit

client of Peat Marwick's Long Island office. When Peat Marwick

audited Porta's 1995 year-end financial statements and prepared its

audit report, its financial and business relationships with Porta and

KPMG BayMark impaired Peat Marwick's independence. This case

was pending at the end of the fiscal year.

• The Commission issued a settled cease-and-desist order against Sony

Corporation and Sumio Sano (In the Matter of Sony Corp. and Sumio

Sano12) and filed a related settled complaint against Sony in the U.S.

District Court for the District of Columbia for violations of the federal

7
securities laws based on Sony's inadequate disclosures concerning the

performance of its subsidiary, Sony Pictures (SEC v. Sony Corp. 13).

Without admitting or denying the matters set forth therein, Sony

consented to the issuing of a cease-and-desist order in which the

Commission found, among other things, that Sony, a Japanese

corporation whose securities trade on the New York Stock Exchange

in the form of American Depositary Receipts, violated the periodic

reporting provisions applicable to foreign private issuers. Specifically,

the Commission found that during the four months preceding Sony's

November 1994 writedown of approximately $2.7 billion of goodwill

associated with the acquisition of its Sony Pictures subsidiary, Sony

made inadequate disclosures about the nature and extent of Sony

Pictures' net losses and their impact on the consolidated results Sony

was reporting. The Commission also noted that during the relevant

period, Sony did not report the results of Sony Pictures as a separate

industry segment, but instead reported the combined results of Sony

Pictures and Sony's profitable music business as a single

"entertainment" segment, which had the effect of obscuring the losses

sustained by Sony Pictures. The Commission ordered Sony to cease

and desist from committing or causing violations of the periodic

reporting provisions of the Exchange Act and to comply with various

undertakings. Without admitting or denying the allegations in the

Commission's complaint, Sony consented to the entry ofa final

judgment imposing a $1 million civil penalty.

Insider Trading Cases

• The SEC obtained a temporary restraining order against unknown

purchasers who traded just before the September 2, 1998

announcement that DST Systems, Inc. intended to acquire USCS

International, Inc. (SEC v. One or More Unknown Purchasers of Call

Options and Common Stock of USCS International, Inc. 14). The SEC

alleged that the unknown persons purchased 200 out-of-the-money

USCS call options and 61,800 shares ofUSCS common stock for

more than $1.6 million through an account in Zurich, Switzerland.

The buyers sold the option contracts on September 3, obtaining

profits of nearly $70,000, and transferred the proceeds to

8
Switzerland. The SEC also alleged that on September 3 the unknown

persons sold all 61,800 shares ofUSCS common stock for profits of

as much as $500,000. This action was pending at the end of the fiscal

year.

Municipal Securities Cases

As part of the SEC's initiative to address unfair practices in the municipal

securities industry, the SEC recently brought two "yield-burning" cases

• One was filed against Rauscher Pierce Refsnes, Inc. and its former

Senior Vice President, James R. Feltham, in connection with the

issuance of$129 million of Series 1992B Refunding Certificates of

Participation by their financial advisory client, the State of Arizona

Department of Administration (DOA) (SEC v. Rauscher Pierce

Refsnes, Inc. and James R. Fe1tham15). The SEC alleged that

Rauscher and Feltham sold certain United States Treasury securities

(escrow securities) to DOA at above-market prices, which reduced

the yields on those securities. According to the SEC's complaint, that

practice allowed Rauscher to make illegal, undisclosed profits of

$707,037 at the expense of the federal government, while purporting

to comply with the federal tax laws governing the certificates offering

The complaint also alleged, among other things, that Rauscher and

Feltham charged DOA a fraudulent and excessive undisclosed markup

on the escrow securities and that Rauscher's profit was unreasonable

in light of the circumstances surrounding the sale. The matter was

pending at the end of the fiscal year.

• The second case alleged that Meridian Capital Markets, Inc., a former

municipal securities dealer, and two of its registered representatives,

Steven T. Snyder and Martin 1. Stallone, charged school districts and

other governmental authorities in Pennsylvania and West Virginia

excessive prices on Treasury securities sold in connection with 22

advance refundings and 2 other types of tax-exempt refinancings (In

the Matter afMeridian Securities, Inc., et a1.16). In conjunction with

the Internal Revenue Service and the Department of Justice, the SEC

entered into a $3.8 million settlement with all parties except Snyder.

9
10

The settlement preserved the tax-exempt status of the bonds issued,

thereby protecting investors. The case against Snyder was pending at

the end of the fiscal year.
International Affairs

The SEC operates in a global marketplace. Our international affairs

staffpromotes international cooperation among regulators and

encourages the adoption of high regulatory standards by negotiating

information-sharing arrangements for enforcement and regulatory

matters, conducting technical assistance programs, and furthering the

SEC's interests In international organizations

Key 1998 Results

The SEC develops global regulatory initiatives to better protect U S

investors. This year, the Asian financial crisis highlighted the importance

of high regulatory standards and the need for disclosure and transparency.

We devoted substantial resources to respond to the Asia crisis, in addition

to implementing international enforcement and technical assistance

programs.

Regulatory Initiatives

In 1998, the importance of cross-border and cross-sector regulatory

cooperation in promoting financial stability was noted by the Group of

Seven (G-7) countries (Canada, France, Germany, Italy, Japan, the UK,

and the U. S) The SEC worked closely with the U S Treasury

Department on initiatives of the G-7 and the Group of Twenty- Two

Finance Ministers and Central Bank Governors (G-22).

11
Work on Financial Stability

G-7 Summit

Our staff helped shape the G-7 Finance Ministers Summit Report, which

called for improved international cooperation among regulators and law

enforcement authorities, and compliance with Ten Key Principles of

Information Sharing.

G-22

In response to the Asian financial crisis, the G-22 issued reports on

transparency and accountability, and strengthening the international

financial architecture. We played an active role in the development of

these reports.

Core Principles of Securities Regulation

In 1998, the International Organization of Securities Commissions

(IOSCO) adopted the "Objectives and Principles of Securities

Regulation" (the Core Principles), which represent consensus on sound

practices for regulating securities markets. Our staff worked within

IOSCO to develop the Core Principles. The principles will guide

securities regulators and assist international organizations in assessing

securities regulation in emerging markets.

International Disclosure Standards

In 1998, IOSCO adopted non-financial statement disclosure standards

that will allow issuers to prepare a single disclosure document for capital

raising and listing in multiple jurisdictions.

International Accounting Standards

The SEC chairs IOSCO's working party on multinational disclosure and

accounting. In early 1999, the International Accounting Standards

Committee expects to finalize a core set of standards. The SEC and other

12
IOSCO members will then consider whether to allow foreign issuers to

use these standards for cross-border securities offerings.

Responses to Changes in Technology

Our staff contributed to IOSCO's development ofa complementary

international regulatory approach to the Internet, including the issuance of

a 1998 report entitled "Securities Activity on the Internet."

Year 2000 Prepardness

Through its work with IOSCO and other international organizations, the

SEC is promoting Y2K preparedness internationally, including testing and

contingency planning.

International Organizations

The SEC promotes its views on the U.S. securities markets and develops

international consensus on regulatory and market oversight issues in

various international forums.

International Organization of Securities Commissions

IOSCO is the predominant international forum for collaboration in the

securities regulatory community. Its membership includes 90 countries,

covering most of the world's securities regulators.

Council of Securities Regulators of the Americas (COSRA)

COSRA is a regional organization whose membership includes the SEC

as well as securities regulators from 25 nations in North, Central and

South America, and the Caribbean. In 1998, COSRA's key initiatives

included (1) launching an innovative, hemisphere-wide "Facts on Saving

and Investing Campaign," including town meetings, radio and television

shows, and seminars, and (2) producing a report on collective investment

13
schemes that provides information about the mechanisms used to oversee

a variety of investment vehicles.

Organization for Economic Cooperation and Development (DECD)

Our staff's expertise on disclosure resulted in the inclusion of strict

accounting and auditing guidelines for companies in the DECD's treaty

criminalizing foreign bribery. The treaty will go into effect in early 1999.

Enforcement Cooperation

The SEC needs assistance from foreign authorities to protect U.S.

investors from cross-border fraud. We have entered into over 30 formal

information-sharing arrangements with foreign counterparts.

eration Results

275

15% increase from 1997

412

13% increase from 1997

1998 Enforcement Coo

Requests to Foreign Authorities for

Enforcement Assistance

Requests for Enforcement Assistance from

Forei n Authorities

The following cases illustrate the effectiveness and importance of the

SEC's international enforcement program.

• SEC v. Euro Security Fund, et al. In this insider trading matter, the

SEC identified substantial purchases in the United States, through

European banks, of Elsag Bailey's options and equities immediately

prior to an announcement of a tender offer for Elsag Bailey by a

Swiss-Swedish company The SEC simultaneously obtained a U.S.

court order freezing $6.6 million in potential profits and requested

information about the identity of traders from European securities

authorities With this assistance, the SEC identified one of the foreign

traders as a company insider and obtained information to support a

preliminary injunction

14
• SEC v. Cavanaugh, et at In this micro cap fraud case, several

Spanish entities controlled accounts involved in a manipulative trading

scheme. The SEC's counterpart in Spain was instrumental in helping

the SEC locate $5 million in proceeds at a bank in Spain The money

was then frozen to permit its return to defrauded U.S. investors.

Technical Assistance

The SEC's technical assistance program helps emerging securities

markets develop regulatory structures that promote investor confidence

The program is multifaceted and includes training, reviewing foreign

securities laws, and responding to detailed requests

1998 Technical Assistance Results

Requests for Technical Assistance 216

from Foreign Authorities (35% increase from 1997)

U.S. Training Provided 374 Officials from 94 Countries

Overseas Training Provided Over 200 Officials

The cornerstone of the SEC's technical assistance program is the

International Institute for Securities Market Development, a two-week,

management-level training program covering the development and

oversight of securities markets. In addition, the SEC conducts a weeklong International Institute for Securities Enforcement and Market

Oversight.

Our staff participated in a range of training initiatives in conjunction with

the China Securities Regulatory Commission, including a program on

accessing the U.S. capital markets, and commented on Chinese draft

securities legislation.

15
Investor Education and Assistance

Our Investor Education and Assistance staff serves investors who

complain to the SEC about investment fraud or the mishandling of their

investments by securities professionals. The staff responds to a broad

range of investor inquiries, produces and distributes educational

materials, and organizes town meetings and seminars.

Key 1998 Results

During the year, the investor assistance specialists analyzed and

responded to 51,3 11 complaints and inquiries from the public. Our

actions helped investors recover approximately $1.2 million. We

launched the Facts on Saving and Investing Campaign, an unprecedented

campaign to help Americans become financially fit. As part of the

campaign, we conducted the first-ever National Town Meeting on Saving

and Investing.

The SEC participated in 6 investors' town meetings and organized 32

educational seminars on investing wisely. In addition, we released three

new publications, A Plain English Handbook: How to Create Clear SEC

Disclosure Documents, Get the Facts on Saving and Investing, and

Investment Clubs. We also compiled the Financial Facts Tool Kit, a

collection of educational brochures from the campaign's partners.

Investor Complaints and Inquiries

Rising Volume of Investor Requests for Assistance

In 1998, our investor assistance specialists analyzed and responded to

51,311 complaints and inquiries, an increase of more than 7% over 1997.

The volume of investor contacts agencywide has increased more than

16
45% since 1993. About 30% of the investor complaints and inquiries are

received through our Investor Education and Assistance electronic

mailbox (help@sec.gov).

SEC Complaint & Inquiry

Totals by Fiscal Year

+6% ~51311

+10%

+7% 70/ 48169

~453

+ 12%

39./

42575

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55000

50000

45000

40000

35000

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25000

20000

15000

10000

5000

o

1993 1994 1995 1996 1997

+7%

1998

o Complaints 0 lnquiries II Other Contacts" • Totals

% = percentage increase/decrease over previous year

"other contacts Includes repeat contacts, contacts WIth InsuffICient Informatron to process,

and contacts not within our Jurisdiction.

Complaint Trends

The most common investor inquiries we received in 1998 involved (1)

questions about the laws governing the securities industry, (2) questions

concerning the filing status of companies, and (3) requests for SEC

publications.

17
The most common complaints received were

• misrepresentation in selling a product,

• unauthorized transactions;

• delays in transfers of accounts or transfer problems,

• failure to follow an investor's instructions;

• about the way a corporation conducts its ordinary business;

• failure to process or delays in handling orders;

• failure to distribute money to investors;

• problems concerning 401K plans or pension plans;

• failure to send stock certificates to investors, and

• harassing cold calls from broker-dealers.

Referrals

When a complaint contains allegations of serious misconduct or suggests

a pattern of widespread abuses, the investor assistance staff refers the

complaint to the Division of Enforcement or the Office of Compliance

Inspections and Examinations. In 1998, investor assistance specialists

referred over 1,700 complaints to SEC divisions and offices or to other

regulatory agencies

Investor Outreach

Because a well educated investor provides one of the most important

defenses against securities fraud, we have a number of programs to

educate investors

The Facts on Saving and Investing Campaign.

The Facts on Saving and Investing Campaign is an ongoing educational

effort to motivate individuals throughout the Western Hemisphere to get

the facts about saving and investing. During the kick-off week of March

29 to April 4, 1998, 21 countries throughout the Americas participated in

the campaign. In the United States, campaign partners-Including federal

18
agencies, 46 states, consumer organizations, and financial industry

associations--held educational events and distributed information. Key

campaign events during the year included:

• National Town Meeting on Saving and Investing. The National Town

Meeting was held in Washington, D.C. and transmitted by satellite to

34 cities throughout the United States. The audio portion was

simulcast over the Internet through the Alliance for Investor

Education's Web site.

• Widespread Distribution of the "Ballpark Estimate." The "Ballpark

Estimate" is a single-page worksheet created to help individuals

calculate how much they will need to save each year for retirement.

Investors' Town Meetings and Seminars

We participated in town meetings in Bangor, Maine, Des Moines, Iowa;

Los Angeles, California; Minneapolis, Minnesota; Palo Alto, California;

and Washington, D.C. In coordination with the securities industry, we

held 32 educational seminars as part of the town meeting program.

New Publications

Our investor assistance staff has prepared and distributes over a dozen

brochures that explain in plain English how the securities industry works,

how to invest wisely, and what to do if something goes wrong. This year

we published:

• Get the Facts on Saving and Investing-an introduction to the basics

of saving and investing.

• A Plain English Handbook: How to Create Clear SEC Disclosure

Documents-a guide for writing in plain English.

19
• Financial Facts ToolKit-a collection of educational brochures from

campaign partners to help individuals save and invest wisely.

In August 1998, we unveiled an on-line version of the tool kit at

www.sec.gov/consumer/toolkit.htm. Within two weeks of its

release, the on-line toolkit received more than 16,000 hits.

• Investment Clubs-a new brochure on investment clubs, which have

been popular with individual investors.

Toll-Free Information Service

Our toll-free information service (800-SEC-0330) provides investor

protection information and allows investors to order educational

materials. During the year, we received over 65,000 calls to this service.

Internet Site

Investors who access the SEC's Web site can read and download the

agency's educational publications and see our latest investor alerts.

During 1998, the investor assistance and complaints section was viewed

by over 250,000 users from around the world.

20
J

!

j

t

Regulation of Securities Markets

The Division of Market Regulation oversees the operations of the

nation's securities markets and market participants. In 1998, the SEC

supervised approximately 8,300 registered broker-dealers with over

70,000 branch offices and over 591,000 registered representatives. In

addition, the SEC oversaw 8active registered securities exchanges, the

National Association of Securities Dealers and the over-the-counter

securities market, 16 registered clearing agencies, 1,210 transfer agents,

the Municipal Securities Rulemaking Board, and the Securities Investor

Protection Corporation.

Broker-dealers filing FOCUS reports with the Commission had

approximately $2.4 trillion in total assets and $145 billion in total

capital for fiscal year 1998. Average daily trading volume reach 666

million shares on the New York Stock Exchange and 786 million shares

on the Nasdaq Stock Market in calendar year 1998.

Key 1998 Results

The Commission proposed and adopted important rules to revise the

regulation of exchanges and give alternative trading systems the option of

registering as an exchange or a broker-dealer subject to enhanced

regulation relating to transparency, fair access, and systems capacity.

These rules are part of our efforts to ensure that the SEC's regulatory

framework responds to change in the U.S. securities markets due to

technological advances.

We adopted an alternative regulatory structure for over-the-counter

(GTC) derivatives dealers. These dealers, which must be affiliated with

fully regulated securities firms, will operate subject to exemptions that

permit them to compete more effectively in the global market place.

21
We also approved the rule filing implementing the merger of the

American Stock Exchange (AMEX) and the National Association of

Securities Dealers, Inc (NASD) on October 30, 1998.

Our staff conducted an extensive review of the debt securities markets in

the United States, with particular emphasis on price transparency. As a

result of the staff's efforts, the NASD has agreed to pursue measures that

should improve price transparency in the corporate bond market.

The Commission continues to monitor industry progress in preparing for

the year 2000. The Commission adopted rules requiring certain brokerdealers and non-bank transfer agents to report on the status of their year

2000 preparations, including a report prepared by an independent public

accountant regarding their processes for preparing for year 2000.

Securities Markets, Trading, and Significant Regulatory Issues

Corporate Debt Transparency

During 1998, the staff reviewed the debt securities market in the United

States, with particular emphasis on price transparency. This review found

that, as a whole, the market for government securities is characterized by

reasonably good quality pricing information for investors. It also found

that GovPX, a private information vendor formed by a consortium of

interdealer brokers and primary dealers in the U.S. Treasury market,

currently distributes quotation and transaction information provided by

five ofthe six interdealer brokers in Treasury bills, bonds, and notes. I?

The staff found improvement in price transparency in the municipal

securities market, but determined that price transparency is deficient in

the corporate bond market. Accordingly, Chairman Levitt announced on

September 9, 1998 that the Commission had requested that the NASD act

on certain recommendations of the staff to improve price transparency in

the corporate bond market. 18

22
1

,

e

,

The NASD specifically agreed to:

• adopt rules requiring dealers to report transactions in U S. corporate

bonds and preferred stocks to the NASD and to develop systems to

receive and redistribute transaction prices,

• create a database of transactions in corporate bonds and preferred

stocks, and

• create a surveillance program to better detect fraud in these markets

Alternative Trading Systems

In April 1998, the Commission published two releases to address changes

in the securities markets due to technological developments. First, we

proposed a new regulatory framework for alternative trading systems,

which was adopted--Iargely as proposed--in December 1998. The new

framework allows alternative trading systems to choose to register as

exchanges or broker-dealers and comply with additional requirements

specifically designed to address their unique role in the market. Most of

the rule amendments and new rules composing this framework become

effective on April 21, 1999, with the remainder becoming effective on

August 30, 1999.

Second, we proposed allowing registered exchanges to be for-profit and

proposed certain deregulatory measures to provide registered exchanges,

and other markets operated by self-regulatory organizations (SROs),

opportunities to better compete. These measures were adopted in

December 1998. Specifically, we adopted a streamlined procedure to

allow SROs to quickly begin trading new derivative securities products.

In addition, SROs may operate pilot trading systems for up to two years

without filing for approval of the system by the Commission During this

trial two-year period, the pilot trading system is subject to strict volume

limitations. Finally, we made clear that we will work to accommodate,

within the existing requirements for exchange registration, exchanges

wishing to operate under a proprietary structure.

23
Automation Initiatives

Rule 17a-23 under the Exchange Act establishes recordkeeping and

reporting requirements for registered broker-dealers that operate brokerdealer trading systems. In 1998, our staff reviewed 34 initial operation

reports, 25 notices of proposed material change, 155 quarterly activity

reports, and 7 reports of cessation of operations.

Order Handling Rules

The staff issued several no-action letters to electronic communications

networks (ECNs) regarding their compliance with the provisions in the

order handling rules applicable to the ECN Display Alternative. In 1998,

letters were issued for the Instinet Real-Time Trading Service, the Island

System, the Bloomberg Tradebook System, the TONTO System, the

Routing and Execution DOT Interface Electronic Communications

Network, the ATTAIN System, BRUT, the Strike System, and the PIM

Global Equities Trading System. 19

Matching Services

The Commission issued an interpretive release concluding that entities

that provide trade matching services for transactions in institutional

securities are clearing agencies and must be registered with the SEC. The

release requested comment on ways to encourage entities to provide

matching services through modified regulation as clearing agencies or

conditional exemption from registration. 20

Merger of Depository Trust Company and Participants Trust Company

The Commission approved proposals relating to a merger between The

Depository Trust Company (DTC) and Participants Trust Company

(PTC)?1 In addition, we approved a proposed rule change filed by DTC

that incorporated the rules and procedures of PTC, with certain

modifications, into DTC's rules and procedures and increased the size of

DTC's Board of Directors. 22

24
II

Reduction of Clearing Services

The Commission approved a series of proposals relating to the

Philadelphia Stock Exchange's (PID..X) withdrawal from the securities

depository business that was offered through its wholly-owned subsidiary,

Philadelphia Depository Trust Company (Philadep) and to its

restructuring and limiting its clearance and settlement business offered

though its wholly-owned subsidiary, Stock Clearing Corporation of

Philadelphia (SCCP).23

Trading Reconstruction

Trading Analysis a/October 27 and 28, 1997

On September 14, 1998, the staff issued a report entitled Trading

Analysis a/October 27 and 28, 1997. The report analyzes the impact of

the cross-market trading halt circuit breaker procedures that were

triggered for the first time on October 27, 1997 when the Dow Jones

Industrial Average declined 554 points (7%). The report's findings were

reflected in the SRO revisions of circuit breaker procedures that became

effective on April 15, 1998?4

Staff Legal Bulletin-Circuit Breakers

The staff's trading analysis of October 27 and 28, 1997 also resulted in

the publication of a staff legal bulletin on September 9, 1998.25 The

bulletin provides guidance to broker-dealers on handling customer orders

and notifying customers when marketwide circuit breakers halt trading. It

also reminds broker-dealers about their responsibility to maintain

adequate internal systems capacity.

The Year 2000

The Commission continues to monitor industry progress in preparing for

the year 2000 and work with the SROs and industry groups on a range of

year 2000 issues, including testing and contingency planning. The

purpose of these coordinated actions is to promote remediation of

25
industry systems, so that the consequences of any year 2000-related

failures can be minimized

Surveys of SROs

Since 1996, our staff has conducted five surveys of the exchanges,

clearing agencies, and NASD regarding their year 2000 efforts. As part

of these surveys, they ask the SROs to report the progress made in

moving their mission critical systems through the various phases towards

achieving year 2000 compliance. They also request that the SROs report

on any problems meeting time schedules and their contingency planning

efforts.

Moratorium on Rules

As part of its efforts to support market participants' efforts to remediate

and test systems that are critical to the operation of the nation's capital

markets, the Commission announced a moratorium on the implementation

of new Commission rules that require major reprogramming of computer

systems by SEC-regulated entities between June 1, 1999 and March 31,

2000.26 This moratorium further facilitates participants' efforts to

allocate significant time and resources to addressing potential problems

caused by the year 2000 problem.

Broker-Dealer and Transfer Agents Reporting Requirements

In July 1998, we amended rule 17a-5 under the Exchange Act to require

certain broker-dealers to file new Form BD- Y2K with the Commission

and with their designated examining authority. We also adopted new rule

17Ad-18 under the Exchange Act to require non-bank transfer agents to

file new Form TA-Y2K with the Commission.V The first forms were

filed on August 31, 1998, reflecting broker-dealer and transfer agents'

year 2000 efforts as of July 15, 1998. The second and final forms are

required to be filed no later than April 30, 1999, reflecting the brokerdealers' and the transfer agents' efforts to prepare for the year 2000 as of

March 15, 1999. In addition, in October 1998, we amended rule 17a-5

and rule 17Ad-18 to require certain broker-dealers and certain non-bank

26
transfer agents to file with their second Y2K form a report prepared by an

independent public accountant regarding their processes for preparing for

the year 2000.28 By the end of 1998, over 6,700 reports had been

received.

AMEX/NASD Merger

On April 8, 1998, the AMEX and the NASD Boards unanimously

approved the terms of a Transaction Agreement that would result in

AMEX becoming a subsidiary of the NASD At a Special Meeting of

Members on June 25, 1998, the AMEX Membership ratified the

Transaction Agreement. Our staff discussed the proposed merger

extensively with the NASD and AMEX and reviewed the Transaction

Agreement and the overall terms of the merger The NASD submitted

two rule filings and AMEX submitted one rule filing relating to the

merger, which the Commission published for notice and comment and

approved on October 30, 1998.29

International Securities Exchange

On November 10, 1998, the International Securities Exchange (ISE)

announced its intention to register with the SEC as a for-profit all

electronic options exchange." Our staff held extensive discussions with

the ISE regarding its structure during the preceding months. To fund the

formation of this new exchange, memberships have been sold to a

consortium of broker-dealers.

Intermarket Trading Systems

The Commission published on July 24, 1998 a proposal to amend the

Intermarket Trading System (ITS) Plan to expand the inter-market

linkage to include all listed securities and to change the requirement for

approving Plan amendments from a unanimous vote to a two-thirds

majority vote." We also published a proposal on July 15, 1998 to amend

the ITS Plan to link Pacific Stock Exchange's (PCX) OptiMark System to

ITS.32

27
Derivatives

The Commission also approved several SRO proposals that strengthened

market stability and integrity while facilitating the use of exchange-traded

derivatives for risk management purposes

Foreign Debt Obligations

On June 8, 1998, the Commission proposed an amendment to rule 3a12-8

under the Exchange Act to add Belgium to the list of countries whose

debt obligations are exempted by the rule, thereby permitting the sale of

futures on those debt obligations in the United States.33

Hedge Funds

On September 23, 1998, 14 commercial and investment banks announced

a private-sector acquisition of Long Term Capital Management (LTCM),

a large hedge fund that had relied heavily on the use of leverage to

implement its investment strategies. Our staff testified before a

Congressional subcommittee on the issues arising from the financial

turmoil surrounding LTCM.34 We are also working with other members

of the President's Working Group on Financial Markets on a study of

hedge funds.

Trading Practice Developments

Rule 15c2-11

The Commission proposed amendments to rule 15c2-1l that, among

other things, would require all broker-dealers to: (1) review information

about the issuer when they first publish or resume publishing a quotation

for a security subject to the rule, (2) document that review, (3) annually

update the information if they publish priced quotations, and (4) make the

information available to other persons upon request. 35

An exemption was issued to Nasdaq and NASD Regulation (NASDR) to

permit broker-dealers that had been publishing quotations for unregistered

28
foreign equity securities and American Depositary Receipts (ADRs) in the

over-the-counter Bulletin Board (OTCBB) to initiate quotations for those

securities in the Pink Sheets." The exemption related to an NASD rule

change prohibiting the quotation in the OTCBB of unregistered foreign

equity securities and ADRs after March 30, 1998.37

Rule JOb-J3

Our staff granted exemption letters from rule 10b-13 to United Kingdom

(UK.) market makers and principal traders to continue their UK. market

activities during cross-border tender and exchange offers subject to the

City Code.38

Regulation M

Our staff granted an exemption from rule 101 of Regulation M that

permits broker-dealers effecting block transactions through the facilities

ofthe NYSE and AMEX to make bids or purchases required by NYSE or

AMEX rules in conjunction with the block transactions."

Broker-Dealer Issues

OTC Derivatives Dealers

On October 23, 1998, the Commission approved an alternative regulatory

structure for a class of registered dealers that are active in the OTC

derivatives markets. This structure permits a US. securities firm to

establish a separately capitalized entity, called an OTC derivatives dealer.

Among the rules amended was the net capital rule that will allow OTC

derivatives dealers to use Value-at-Risk models to calculate market risk

capital. The rule changes will permit these dealers to compete more

effectively against banks and foreign dealers in global OTC derivatives

markets. The rules become effective on January 4, 1999.40

29
Internet Issues

The staff issued two no-action letters dealing with Internet dividend

reinvestment plans The first letter conditionally grants relief from the

section 15(a) broker-dealer registration requirements to StockPower, Inc.

Among other things, StockPower represented that it would pass through

to participating bank transfer agents certain charges imposed by third

parties, but would not otherwise receive transaction-related

• 41 compensation.

The second letter conditionally grants relief from the section 15(a)

broker-dealer registration requirements to issuers and their directors,

officers, and employees. Under this letter, an issuer may (1) use

StockPower software to offer issuer dividend reinvestment and stock

purchase plans (DRSPP) related materials on the Internet, (2) allow

investors to communicate directly with bank transfer agents operating

those DRSPPs, and (3) place "tombstone" ads on the Web site without

those ads being considered seIling efforts or methods.?

Extension of Credit

In 1998, the Commission began to issue orders exempting broker-dealers

from Exchange Act section II(d). We issued these orders using our

general exemptive authority under section 36 of the Exchange Act. In all

cases, the relief is based on specified representations.

We granted relief from section 11(d) for the installment sale of a large

global offering 43 In addition, we permitted for the first time the

installment sale of securities in a non-privatization offering to the U S

public at large 44

We also permitted the acceptance of payment by credit card for the

purchase of shares in a venture capital fund. The credit cards had to be

issued by financial institutions unaffiliated with the broker-dealer selling

the shares." Finally, we permitted the margining of mutual fund shares

offered through a wrap fee mutual fund asset allocation program. The

mutual fund shares were acquired in exchange for shares that were also

30
acquired through the program and sold to a customer more than 30 days

prior to the extension of credit. Some of the exchanged shares offered

through the program were in mutual funds managed and advised by an

unaffiliated broker-dealer. 46

Transaction Confirmations

Our staff confirmed that in transactions effected as agent, the yield to

maturity (YTM) required to be disclosed by rule IOb-I0 under the

Exchange Act must take into account sales commissions charged by

broker-dealers. They also clarified that, under rule 1Ob-I0, YTM

calculations in agency transactions do not have to include incidental

transaction fees and miscellaneous charges. In addition, they granted

temporary no-action relief, for six months, to permit broker-dealers not

currently in compliance with that requirement to make the systems

changes necessary to comply with the rule."

Floor Trading

On August 21, 1998, in response to a request from the Intermarket

Surveillance Group, staff clarified that any compensation arrangement

that results in an exchange member sharing in the trading profits or

trading losses of a customer account, however structured, would

constitute an interest in the account for purposes of section I 1(a)(1) of

the Exchange Act and rule 11a-I. Because some compensation

arrangements may give rise to violations of section 11(a)(1) or other

securities laws, the staff stated that a SRO cannot fulfill its obligation

under section I9(g) of the Exchange Act to determine if violations exist

unless it surveils and investigates its members' compensation

arrangements. They also clarified that an SRO is not fixing commission

rates by prohibiting a compensation arrangement that results in a violation

of applicable securities laws 48

Net Capital

In a no-action letter to the NYSE and the NASD Regulation, staff stated

that an introducing broker may include its proprietary assets held at a

31
clearing firm (PAIB Assets) as allowable assets in its net capital

computation so long as the introducing and clearing brokers follow the

guidance described in the letter. Because introducing and clearing

brokers must make operational changes to comply with the terms of the

letter, introducing firms may continue their current practice of treating

PAlB Assets as allowable until June 1, 1999.49

Additionally, our staff issued a no-action letter to the Government

Securities Clearing Corporation (GSCC) regarding deficit charges for

repurchase transactions. When computing net capital, GSCC netting

members may exclude certain outstanding repurchase deficits from their

calculations when they meet the conditions discussed in the letter. 50

Books and Records

In October 1998, the Commission reproposed for comment amendments

to the Commission's books and records rules for broker-dealers 51 The

reproposed amendments incorporate comments received in response to

the original proposal and are designed to clarify and expand broker-dealer

recordkeeping requirements with respect to purchase and sale documents,

customer records, associated person records, customer complaints, and

certain other matters. In addition, the reproposed amendments specify

the books and records that broker-dealers would have to make available

at their local offices. The reproposed amendments are specifically

designed to assist securities regulators in conducting sales practice

examinations.

Arbitration

The Commission approved several significant rule proposals that affect

the way securities industry disputes are resolved. On June 22, 1998, we

approved an NASD rule change that ended the NASD's requirement for

securities industry employees to arbitrate their statutory discrimination

claims Securities firms and employees, however, may still voluntarily

enter into agreements to arbitrate these clairns.f We also published for

public comment a proposal by the NYSE that would make its arbitration

forum unavailable for the arbitration of statutory employment

32
discrimination claims unless the agreement to arbitrate the claims was

entered into after the dispute arose. 53 In addition, on October 15, 1998,

we approved two NASD rule proposals that provide for the list selection

of arbitrators by parties for both investor and intra-industry arbitration

cases, giving parties a greater role in choosing who will decide their

cases. 54

Lost and Stolen Securities

As of December 31, 1997, 25,436 institutions were registered in the

program, a 1% increase of 1996. The number of securities certificates

reported as lost, stolen, missing or counterfeit decreased 4% from

2,093,233 in 1996 to 2,007,611 in 1997. The aggregate dollar value of

these reported certificates decreased 78% from $56,177,860,398 in 1996

to $11,809,945,634 in 1997. The total number oflost and stolen

recovery reports received increased 16% from 162,076 in 1996 to

192,586 in 1997. The dollar value of recovery reports received increased

178% from $7,000,530,298 in 1996 to $19,468,888,875 in 1997. The

total number of certificates inquired about by institutions participating in

the program increased .03% from 8,538,192 in 1996 to 8,565,639 in

1997. In 1997, the dollar value of certificate inquires that matched

previous reports of lost, stolen, missing, or counterfeit securities

certificates decreased 4% from $5,164,280,780 to $4,961,362,068.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1998, there were eight active securities exchanges

registered with the SEC as national securities exchanges: AMEX, Boston

Stock Exchange (BSE), Chicago Board Options Exchange (CBOE),

Cincinnati Stock Exchange (CSE), Chicago Stock Exchange (CHX),

New York Stock Exchange (NYSE), Philadelphia Stock Exchange

(PHLX), and Pcx. We granted exchange applications to delist 123 debt

and equity issues, and granted applications by issuers requesting

withdrawal from listing and registration for 55 issues. The exchanges

33
submitted 313 proposed rule changes during 1998. We approved 243

pending and new filings, and 26 were withdrawn. Approved rule filings

included:

• amendments to revise the circuit breaker rules to increase the trading

halt levels from declines of 350 and 550 points to declines of 10%,

20%, and 30% of the Dow Jones Industrial Average," and

• a proposal by the NYSE to modify its margin requirements to

accommodate changes to the federal margin requirements. 56

National Association of Securities Dealers, Inc.

The NASD is the only national securities association registered with the

SEC and includes more than 5,500 member firms. The NASD owns and

operates The Nasdaq Stock Market as a wholly-owned subsidiary The

NASD submitted 98 proposed rule changes to the SEC during the year.

We approved 83 proposed rule changes, including some pending from the

previous year, and the NASD withdrew 7. Among the significant changes

we approved or that were effective upon filing were:

• rules adopting the Order Audit Trail System to track orders in Nasdaq

equity securities from the point of origination or receipt through

execution.V

• an NASD proposal requiring each registered representative who

engages in proprietary or agency trades in equities, preferred

securities, or convertible debt securities, or who directly supervises

such activities, to register as a limited representative-equity trader;"

• amendments to NASD rule 3010 to require tape recording of

conversations when a certain percentage, varying from 40% of a small

firm to 20% of a larger firm, of a member firm's sales force is

comprised of registered persons who were employed within the last

three years by a firm that has been expelled from membership in a

securities industry SRO that has had its registration as a broker-dealer

revoked by the SEC;59 and

34
• amendments to the NASD rules on continuing education to establish a

supervisors' program, separate from the registered representatives'

continuing education program."

At Congressman Dingell' s request, the staff also prepared a report

discussing changes made by the NASD in response to the Commission's

1996 21(a) report. They noted that, although the changes are ongoing,

the NASD has made significant improvements to its policies and

procedures.

Letters to the Commodity Futures Trading Commission

Our staff responded to requests from the Commodity Futures Trading

Commission (CFTC) for our views regarding various proposals to trade

financial products. In addition, they issued a letter to the CFTC on

December 4, 1997 objecting to the designation of the Chicago Board of

Trade (CBOT) as a contract market for futures and futures options on the

CBOT Dow Jones Utilities Average Index (DJUA) and the Dow Jones

Transportation Average (DJTA).61 On July 16, 1998, the Commission

issued an order upholding the staff's position.f concluding that neither

the DJUA or the DJT A satisfies the substantial segment requirement of

the law." The CBOT appealed the Commission's decision to the Seventh

Circuit Court of Appeals, where it is pending.

Self-Regulatory Organization Corporate Governance

The Commission approved several SRO proposals in 1998 enhancing

public and non-industry participation in the SRO governing processes

Specifically, we approved proposals ensuring that the public and nonindustry members of the NASD, PHLX, and CHX governing boards

equal or exceed the number of industry members. 64 The public governors

include senators, representatives, professors, and distinguished individuals

who have no connection with the securities industry. The non-industry

governors include representatives from both large and small companies

. who are not directly involved in the securities business. Similar changes

to the membership of many important SRO committees, including those

35
that involve SRO oversight responsibilities and policymaking, have been

d

. . d 65 propose or Institute .

Municipal Securities Rulemaking Board

The Municipal Securities Rulemaking Board (MSRB) is the primary

rulemaking authority for municipal securities dealers. In 1998, we

received 23 new proposed rule changes from the MSRB. A total of 19

new and pending proposed rule changes were approved, and one was

withdrawn. Approved proposals included interpretations of rules

concerning consultants, transaction reporting procedures, continuing

education requirements for registered persons, and political

contributions." The MSRB also focused on strengthening the

underwriting process by addressing syndicate practices and disclosure

requirements In this regard, we approved an amendment to rule G-32

that strengthened the provisions relating to dissemination of official

statements among dealers and incorporated a long-standing interpretation

relating to disclosures required to be made to customers in connection

with negotiated sales of new issue municipal securities. 67

We also approved an amendment to rule G-38 concerning consultants

that clarified the definition of payment and whether bank affiliates and

their employees may be deemed consultants under the rule." In addition,

we approved the MSRB' s commencement of a service to provide daily

reports from the MSRB Transaction Reporting Program." This service

will summarize information about customer and interdealer transactions in

municipal securities that are reported to the MSRB.

Tradepoint

On November 20, 1997, Tradepoint filed an application for exemption

from registration as a national securities exchange under section 6 of the

Exchange Act. Tradepoint, a Recognised Investment Exchange under the

U'K. Financial Services Act of 1986, is a screen-based electronic market

for the trading of securities listed on the London Stock Exchange.

Tradepoint wishes to make its system available in the United States,

36
primarily to institutional investors. We solicited comments on the filing

on July 2, 1998.70

Clearing Agencies

Sixteen clearing agencies were registered with the Commission at the end

of 1998. On February 13, 1998, we registered the Emerging Markets

Clearing Corporation (EMCC) as a clearing agency to clear and settle

Brady bonds." We also exempted Euroclear from registration as a

clearing agency Registered clearing agencies submitted 98 proposed rule

changes to us, and we processed 96 new and pending proposed rule

changes.

Applications for Re-entry

Rule 19h-l under the Exchange Act prescribes how the Commission

reviews proposals submitted by SROs to allow persons subject to a

statutory disqualification to become or remain associated with member

firms. In 1998, we received 22 filings or notices from SROs

recommending that certain persons be permitted to become or remain

associated with member firms notwithstanding a statutory

disqualification: 15 from the NASD, 5 from the NYSE, 1 from the

AMEX, and 1 from the CBOE. One filing was withdrawn.

37
Investment Management Regulation

The Division of Investment Management regulates tnvestment compantes

(which include mutual funds) and investment advisers under two

companion statutes, the Investment Company Act of 1940 and the

Investment Advisers Act of 1940. The Division also administers the

Public Utility Holding Company Act of 1935.

Key 1998 Results

During 1998, the Commission adopted major changes to the primary

disclosure form used by mutual funds We also adopted a rule permitting

the use of a "profile," which is a new disclosure document intended to

provide investors with a summary of key information about a mutual

fund. These initiatives are part of the SEC's continuing efforts to

increase the effectiveness of disclosure provided to investors. In addition,

we continued implementing provisions of the National Securities Markets

Improvement Act of 1996 (NSMIA) and issued no-action and interpretive

letters addressing numerous changes in the investment company and

investment advisory industries.

Significant Investment Company Act Developments

Rulemaking

Mutual Fund Disclosure Initiatives

• Amendments to Mutual Fund Registration Form. The Commission

adopted amendments to Form N-IA, the mutual fund registration

form, to improve prospectus disclosure 72 The amendments. (1)

minimize prospectus disclosure about organizational and legal matters

that do not help investors evaluate mutual funds and (2) focus

38
disclosure on essential information about a fund that investors need to

know before investing. In recognition of the importance of risk

disclosure to investors, the amendments require a new risk/return

summary at the beginning of a mutual fund prospectus (and the new

profile). This risk/return summary includes a concise narrative

description of a mutual fund's overall risks, a bar chart of a fund's

annual returns for 10 years that illustrates performance fluctuations

from year to year, and a table that compares a fund's performance to

that of a broad-based securities market index.

• Fund Profiles. The Commission adopted rule 498, which permits

funds to use a short-form disclosure document called a "profile.?"

The profile summarizes key information about a mutual fund in a

standardized format designed to facilitate comparison among funds

If a fund uses a profile, an investor can purchase the fund's shares

based on the profile, or request and review the fund's prospectus and

other information before making an investment decision All investors

would receive a prospectus no later than confirmation of purchase.

Money Market Funds

The Commission adopted technical amendments to rule 2a-7, the rule that

regulates money market funds." The amendments revise the rule's

terminology and its treatment of certain instruments to reflect market

usage. The amendments also resolve certain interpretive issues, including

the application of other amendments adopted in 1996 concerning taxexempt money market funds and investments in asset-backed securities.

We also amended our advertising rules to clarify the formula used to

calculate yield for money market funds and reduce the potential for

investors to be misled or confused by the presentation of the money

market fund's short term total return.

Delivery of Disclosure Documents to Households

The Commission proposed a new rule 154 under the Securities Act that

enables issuers and broker-dealers to satisfy prospectus delivery

requirements by sending a single prospectus to two or more investors

39
sharing the same address." We also proposed similar amendments to

rules 30d-1 and 30d-2 under the Investment Company Act, and to rules

14a-3, 14c-3 and 14c-7 under the Exchange Act, which govern the

delivery of annual or semi-annual reports to shareholders. The proposed

rule and rule amendments would provide greater convenience for

investors and cost savings for issuers by reducing the amount of

duplicative information that investors receive.

Advisory Contracts

The Commission proposed amendments to rule 15a-4, the rule that

permits an investment adviser, in certain circumstances, to advise

temporarily an investment company under a contract that the investment

company's shareholders have not approved." The proposed amendments

would (1) expand the exemption provided by the rule to include

temporary advisory contracts entered into after a merger or similar

business combination involving the fund's adviser or a controlling person

of the adviser and (2) lengthen the period during which the adviser may

serve under a contract without shareholder approval.

Disclosure

Filings Reviewed

In 1998, the staff reviewed 80% of the 2,100 new portfolios filed with the

SEC, including 96% of newly-filed open-end and closed-end portfolios.

The staff also reviewed 91% of the 645 proxy statements filed, 20 % of

the 18,715 post-effective amendments filed, and 100% of the 200

insurance contract filings.

Exemptive Orders

The Commission issued 320 exemptive orders to investment companies

(other than insurance company separate accounts) seeking relief from

various provisions of the Investment Company Act. We also issued 53

exemptive orders to investment companies that are insurance company

separate accounts. Over 13% of all exemptive orders issued in 1998

40
(other than orders issued to insurance company separate accounts)

concerned mergers involving investment advisory firms or funds. The

number of these types of orders nearly doubled from the previous year,

reflecting the trend toward consolidation in the financial services industry.

Some of the other significant developments with regard to exemptive

orders in 1998 are discussed below

Open-End Interval Fund

The Commission issued an order permitting a registered closed-end fund

to convert into an open-end fund that would redeem its shares at monthly

intervals rather than daily. The fund invests in equity securities of issuers

in developing countries, and sought relief in order to provide its

shareholders with greater liquidity while maintaining a relatively illiquid

portfolio. Under the terms of the order, the fund's new investors will be

limited to "qualified purchasers," as defined by section 2(a)(51) of the

Investment Company Act. 77

Mutual Insurance Company

The Commission issued an order permitting certain registered and

unregistered funds to enter into insurance agreements with an affiliated

mutual insurance company. The agreements would provide limited

insurance coverage for certain money market assets held by the funds."

Denial of a Request for a Hearing

The Commission denied a request for a hearing on an application

concerning the foreign custody arrangements of certain unit investment

trusts. The Commission's order, among other things, reiterated the

standard for determining whether a person requesting a hearing is an

"interested person" with respect to an application for purposes of rule

0-5(c) under the Investment Company Act. The Commission denied the

hearing request because the person was not an interested person and

failed to demonstrate that a hearing was necessary or appropriate in the

public interest or for the protection of investors. 79

41
Interested Director Status

The Commission issued an order finding that a director of a fund

complex, who also is an outside director for the parent company of a

broker-dealer firm that provides de minimis distribution services to the

fund complex, should be deemed an independent director under the

Investment Company Act. 80

Interpretive and No-Action Letters

The Division's Office of Chief Counsel, which handles most requests for

guidance directed to the Division, responded to 888 formal and informal

requests for guidance during 1998 Some of the more significant

interpretive and no-action letters are discussed below.

Termination of Investment Advtsory Contract

The Commission stated that it may consider pursuing enforcement action

against a closed-end fund if the fund excluded a shareholder proposal

seeking termination of the fund's investment advisory contract. The fund

contended that under applicable state law only its directors could

terminate the contract. The Commission concluded, however, that

section 15(a)(3) of the Investment Company Act provided the fund's

shareholders with independent authority to terminate the contract. Due

to the novelty of this request, the Commission and not our staff

considered this matter. 81

Fund Supermarkets

Our staff provided interpretive guidance regarding certain legal issues

under rule 12b-l of the Investment Company Act arising from the

participation of mutual funds in fund supermarkets. The staff concluded

that whether a fund's payment of all or part of a supermarket fee must be

made pursuant to a rule 12b-1 plan depends on an analysis by the board

of directors of the purpose for which the payment is made.82

42
Reorganization of Investment Advisers

Our staff concluded that if a reorganization does not result in a change of

actual control or management of an investment adviser, the adviser may

rely on rule 202(a){l)-1 under the Investment Advisers Act and rule 2a-6

under the Investment Company Act to conclude that no assignment of the

adviser's contracts will occur as a result of the reorganization. Whether

there is a change of actual control or management, however, is a factual

issue to which the staffwill not respond. 83

Our staffagreed that the acquisition by J.P. Morgan & Co. Incorporated

(JPM) of 45% of the outstanding equity interest of American Century

Companies, Inc. (ACC), amounting to 10.83% of the voting power in ACC,

along with certain minority stockholder protections, would not result in an

assignment of the advisory contracts of the mutual funds advised by a

subsidiary of ACC. The staff based its position on representations that,

among other things, JPM would not have a controlling influence over the

management or policies of ACe. 84

Delayed Offerings of Securities by Closed-End Funds

Our staff took the position that a closed-end fund may conduct a delayed

at-the-market shelf offering of equity securities to the general public in

reliance on rule 415(a){l)(x) under the Securities Act to take advantage

of opportunities when its shares are trading at a premium to its net asset

value. The fund must meet the substantive requirements of the rule

(including those that do not apply to funds), file quarterly reports with the

Commission, register the offering on Form N-2, and make sure that the

gross proceeds to the fund less the underwriting commission equal or

exceed net asset value. 85

Section I3(f) Confidential Treatment Filings

Our staff issued a letter providing general guidance to investment

managers with section 13(f) reporting obligations and reminding filers of

the Commission's long-standing position that confidential treatment may

be accorded to Form 13F information only in limited circumstances."

43
Deferred Compensation Plans for Investment Company Directors

Our staff clarified its position regarding the status of deferred

compensation plans for investment company directors under the

Investment Company Act. They stated that investment companies that

wish to implement deferred compensation plans are not required to seek

orders from the Commission covering the plans. 87

Investment Adviser Advertisements

Our staff stated that it would not recommend enforcement action under

section 206(4) of the Investment Advisers Act or rule 206(4)-1 (a)(l)

thereunder, ifDALBAR, Inc. advertises certain numerical ratings of

unaffiliated investment advisers, notwithstanding the staff's position that

the numerical ratings, based on DALBAR's surveys of investment

advisory clients, are testimonials by DALBAR and the advisory clients.

The staffbased its position on representations that, among other things, a

DALBAR rating does not emphasize the favorable client responses or

ignore the unfavorable responses. The staff also provided guidance

regarding some of the factors that advisers should consider when

determining whether any advertisements containing a DALBAR rating

would be false or misleading 88

Private Investment Companies

Our staff took the position that the securities of an investment company

that relies on the exclusion from the definition of investment company

provided by section 3(c)(1) or section 3(c)(7) of the Investment Company

Act (Investing Pool), which are held by the Investing Pool's

"knowledgeable employees," may be excluded when determining whether

all of the beneficial owners of the Investing Pool's securities are qualified

purchasers for purposes of rule 2a51-3(b). They also took the position

that those securities owned by "knowledgeable employees" may not be

excluded for purposes of rule 2a51-3(a).89

44
Foreign Investment Companies

Our staff stated that a foreign fund generally would not be deemed to be

making a public offering for purposes of section 7(d) of the Investment

Company Act if certain functions (known as the "ten commandments"

activities) that, for US. tax purposes, previously had been performed

offshore by or on behalf of the foreign fund, are performed in the U.S 90

Our staff also confirmed that as long as a foreign fund is conducting only

a global private offering, a foreign investor who is temporarily in the U S.

may meet with the fund's personnel, and purchase an interest in the fund,

without causing the fund to be deemed to be making a public offering for

purposes of section 7(d) of the Investment Company Act or to have to

count or qualify the foreign investor under section 3(c)(1) of 3(c)(7) of

the Act.91

Interpretive Releases

Offshore Internet Offers

The Commission provided interpretive guidance concerning the

application of the registration requirements of the U.S. securities laws to

offshore offers of securities or investment services made on Internet Web

sites by foreign investment companies and investment advisers. The

release indicates that offshore offers and solicitation activities would not

be considered to be made "in the US." if the Internet offer is not targeted

to the U.S. The release suggests non-exclusive measures, such as the use

of disclaimers that state that the offer is not being made in the U. S., or

screening mechanisms designed to ensure that offering materials or other

communications are not sent to U.S. persons, as a means of indicating

that offers are not targeted to the U.S 92

Principal and Agency Transactions by Investment Advisers

The Commission provided interpretive guidance concerning section

206(3) of the Investment Advisers Act. This section generally prohibits

an adviser from engaging in or effecting principal or agency transactions

45
with an advisory client unless the adviser discloses certain information

and obtains the client's consent prior to the completion of the transaction.

This guidance (I) supersedes a prior position taken by the Commission

and permits investment advisers to make required disclosures and obtain

client consent after execution but before settlement of a principal or

agency transaction and (2) clarifies that if an investment adviser receives

no compensation for effecting an agency transaction between advisory

clients, the transaction is not subject to section 206(3).93

Insurance Products

FormN-6

The Commission proposed a.new Form N-6 for insurance company

separate accounts that are registered as unit investment trusts and that

offer variable life insurance policies. The form would register these

separate accounts under the Investment Company Act and register their

securities under the Securities Act. It would focus prospectus disclosure

on essential information to assist investors in deciding whether to invest

in a particular variable life insurance policy. In addition, it would

minimize prospectus disclosure about technical and legal matters, improve

disclosure of fees and charges, and streamline the registration process by

replacing two forms that were not specifically designed for variable life

insurance policies with a single form tailored to these products. 94

Separate Account Conversions

Our staff took the position that the conversion of a managed separate

account into a unit investment trust with an underlying fund could

proceed, without registering interests in the separate account or the

shares of the underlying fund on Form N-14 under the Securities Act,

where the restructuring involved a change in legal form only that would

not materially change a contract holder's interest in the contract, the

underlying portfolio assets, or the separate account. This position applies

only to reorganizations of managed separate accounts that are similar in

all material respects to the reorganization described in the letter. 95

46
State and Local Government Deferred Compensation Plans

Our staff took the position that an insurance company that offers and sells

group annuity contracts and interests in separate investment accounts

funding the group annuity contracts to state and local government

deferred compensation plans qualifying under section 457 of the Internal

Revenue Code of 1986, as amended, is not required to register the group

annuity contracts or the separate investment accounts under the federal

securities laws. They had previously taken the position that registration

was not required in these cases subject to certain conditions restricting

the ability of an employer to withdraw assets from the plan." but

modified their position in light of the amendment of section 457 by the

Small Business Job Protection Act of 1996 that extended an "exclusive

benefit" requirement to section 457 state and local government plans."

Significant Investment Advisers Act Developments

Rulemaking

Rule Amendments Under NSMIA

Under NSMIA, the Commission is primarily responsible for regulating

investment advisers with more than $25 million of assets under

management; smaller investment advisers must register with state

securities regulators and generally are prohibited from SEC registration

During 1998, the Commission adopted amendments to rules governing

this jurisdictional division.

• Multi-State Advisers. The Commission amended rule 203A-2 to

permit investment advisers required to register in 30 or more states,

but that do not have $25 million of assets under management or

otherwise meet the criteria for SEC registration, to register with the

SEC.98

• Investment Adviser Representatives. The Commission amended rule

203A-3(a) to revise the definition of investment adviser representative

47
to permit certain supervised persons employed by or associated with

SEC-registered investment advisers to provide advisory services to

one or a few institutional business clients without being subject to

state qualification requirements. Under the revised rule, supervised

persons may have the greater of 5 natural person clients or a number

of natural person clients equal to 10% of all their clients before being

subject to state qualification requirements. 99

Performance Fees

The Commission liberalized rule 205-3 to give investment advisers and

eligible clients greater flexibility in negotiating the terms of a performance

fee arrangement. The amendments eliminate requirements for specific

contractual terms and disclosures when advisers charge a performance

fee, and raise the financial thresholds for client eligibility They also

expand client eligibility to include certain qualified purchasers, such as

high net worth individuals and "knowledgeable employees" of the

investment adviser. 100

Year 2000

In January 1998, our staff issued a Legal Bulletin describing investment

advisers' obligations under the Investment Advisers Act regarding their

preparedness for the year 2000 computer problem. Advisers that are

unprepared or uncertain about their year 2000 readiness must disclose

this fact to their clients if the failure to address the year 2000 issue could

have a material effect on their clients. 101

The Commission also adopted a new rule 204-5, and accompanying Form

ADV -Y2K, to require most registered investment advisers to file reports

with the SEC on their readiness for year 2000. Under the rule, advisers

must report on their year 2000 preparedness with respect to all clients,

and those advisers that are sponsors or administrators of a fund complex

must report on the readiness of the investment companies they advise. 102

48
Significant Public Utility Holding Company Act Developments

Developments in Holding Company Regulation

As a result ofthe current trend toward consolidation, the Commission

considered a number of proposed utility combinations, including several

involving companies that owned gas properties with companies that

owned electric properties. Three of these proposals resulted in the

creation of new registered holding companies. Registered holding

companies also continued to demonstrate their interest in nonutility

activities, both in the U.S and abroad. As a result, the complexity of

applications and requests for interpretive advice continued to increase.

The Commission expects these trends to continue in 1999, as the

restructuring of the industry continues.

Registered Holding Companies

As of September 30, 1998, there were 19 public holding companies

registered under the Public Utility Holding Company Act. The registered

holding companies systems' were comprised of 101 public utility

subsidiaries, 37 exempt wholesale generators (EWGs), 114 foreign utility

companies (FUCOs), 498 nonutility subsidiaries, and 87 inactive

subsidiaries, for a total of 856 companies and systems with utility

operations in 31 states. These holding company systems had aggregate

assets of approximately $188 billion and operating revenues of

approximately $73 billion for the period ended September 30, 1998.

Financing Authorizations

The Commission authorized registered holding company systems to issue

approximately $19.5 billion of securities, an increase of less than 1% from

last year. The total financing authorizations included $3.9 billion for

investments in EWGs and FUCOs.

49
Examinations

The staff examined three service companies, three parent holding

companies, and nine special purpose corporations. The examinations

focused on: (1) the methods of allocating costs of services and goods

shared by associate companies, (2) internal controls, (3) cost

determination procedures, (4) accounting and billing policies, and (5)

quarterly and annual reports of the registered holding company systems.

By uncovering misallocated expenses and inefficiencies through the

examination process, consumers saved approximately $9.9 million.

Applications and Interpretations

The Commission issued various orders under the Public Utility Holding

Company Act. Some of the more significant orders included:

Sempra Energy

The Commission authorized the acquisition by Sempra Energy, a

company not previously subject to the Holding Company Act, of (1)

Pacific Enterprises, a California public utility holding company exempt

from all provisions of the Holding Company Act except section 9(a)(2),

and, through this acquisition, Southern California Gas Company; and (2)

Enova Corporation, a California public utility holding company exempt

from all provisions of the Holding Company Act except section 9(a)(2),

and through this acquisition, San Diego Gas & Electric Company.i'" The

Commission also granted Sempra Energy an order under section 3(a)(l)

exempting it from all provisions of the Holding Company Act, except

section 9(a)(2), following the acquisition. In approving the transaction,

the Commission determined that a holding company may acquire utility

assets that will not, when combined with the acquired company's utility

assets, make up an integrated system, provided that there is defacto

integration of contiguous utility properties and that the holding company

will be exempt from registration under section 3 of the Holding Company

Act following the acquisition.

50
WPL Holdings, Inc.

The Commission authorized the acquisition by WPL Holdings, Inc.

(WPL), a public utility holding company exempt from registration by

order of the Commission under section 3(a)(I) of the Holding Company

Act, ofIES Industries, Inc., a public utility holding company exempt from

registration by rule 2 under section 3(a)(1) of the Holding Company Act,

with the surviving entity to be renamed Interstate Energy Corporation

(Interstatej.l'" The Commission also authorized the acquisition by WPL

Acquisition Co., a wholly-owned subsidiary ofWPL, ofInterstate Power

company, a public utility company. As a result of these transactions,

Interstate will own, directly and indirectly, four electric and gas utility

companies. In finding that the transactions satisfied the Holding

Company Act's standards for having more than one integrated system,

the Commission evaluated several factors, including the loss of economies

associated with divesting existing gas and electric operations. Interstate

has registered as a holding company under section 5 of the Holding

Company Act.

Financing Orders

The Commission authorized two regulated holding companies, American

Electric Power Company (AEP) and Cinergy Corporation, to use

financing proceeds to invest in EWGs and FUCOs, and to guarantee the

obligations of EWGs and FUCOs, in amounts that, together with all other

investments in EWGs and FUCOs, do not exceed 100% of each holding

company's consolidated retained earnings.l'" The orders require AEP

and Cinergy to provide quarterly information to facilitate the monitoring

of their respective investments in EWGs and FUCOs and their effects on

the holding company systems.

51
Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations manages the

SEC's examination program. Inspections and examinations are

authorized by the Securities Exchange Act of 1934, the Investment

Company Act of 1940, and the Investment Advisers Act of 1940. Entities

subject to this oversight include brokers, dealers, municipal securities

dealers, self-regulatory organizations, transfer agents, clearing

agencies, investment companies, and investment advisers.

Key 1998 Results

During 1998, the staff conducted examinations concentrating on the areas

of greatest compliance risk (1. e., Smart Exams). The examinations

included an assessment of risk factors, identification of areas to be

covered, and the refinement of the appropriate inspection techniques.

The areas the staff covered and the inspection techniques they used varied

because of the diverse population of registrants, risk assessment results,

market conditions, and/or other industry developments. The staff

considered the unique characteristics of each registrant and, in particular,

the presence or lack of effective internal controls and compliance

procedures.

We continued to increase cooperation among SEC examiners responsible

for different types of regulated entities to increase effectiveness and

productivity and enhance investor protection. For example, when

appropriate, SEC examinations of firms with broker-dealer and

investment advisory activities were conducted by multi-disciplinary

examination teams.

Our staff also enhanced cooperation with foreign, federal, and state

regulators, as well as with self-regulatory organizations (SROs). The

staff conducted coordinated examinations with staff from the Hong Kong

52
Securities and Futures Commission, the United Kingdom's Financial

Services Authority acting as the Investment Management Regulatory

Organization, the Australia Securities Authority, and the

Bundesaufsichtsamt FOr Das Kreditwesen.

We issued a report on soft dollar practices based on 355 examinations of

broker-dealers and money managers. The report described the current

state of soft dollar practices and made recommendations for regulatory

action and industry compliance practices.

The staff conducted approximately 4,350 special reviews of registrants'

programs for dealing with the year 2000 computer problem. The staff

discussed the year 2000 problem with registrants and gathered selected

information about their remediation programs. In approximately 9% of

these reviews, the staff brought significant deficiencies to registrants'

attention The most commonly noted deficiencies were failing to plan for

external testing and lagging significantly behind the Commission's

guidance that corrections should be completed by December 3 1, 1998.

Investment Company and Investment Adviser Inspections

Investment Companies

Our examiners inspected 259 investment company complexes, including

17 fund administrators discussed below. Excluding special inspections

and year 2000 reviews, this number resulted in an average frequency of

inspection for the 1,128 investment company complexes of once every

4.7 years. The complexes inspected had total assets of $1.1 trillion in

2,636 portfolios, which represented approximately 37% of the mutual

fund and closed-end fund portfolios in existence at the beginning of 1998.

The complexes inspected represented a mix oflarge and small complexes.

Twenty of the inspections were done on a "for cause" basis, which means

the staff had some reason to believe that a problem existed.

Serious violations found during 11 examinations warranted referrals for

further investigation by the Division of Enforcement. The most common

53
violations resulting in referrals involved fraud, the role of the fund's

Board of Directors, registration and Commission filings, and books and

records.

Investment Advisers

The staff completed 1,280 inspections of investment advisers, not

including the year 2000 reviews, achieving an average inspection

frequency of once every 5 years. The non-investment company assets

managed by the advisers inspected totaled $1.7 trillion. The staff

inspected 78 investment advisers for cause.

Serious violations warranting enforcement referrals were uncovered in 52

of the examinations. The most common violations resulting in referrals

involved fraud, Form ADV or brochure disclosure or delivery, books and

records, and conflicts of interest.

Mutual Fund Administrators

Many mutual fund complexes use third party administrators to perform

their accounting and administrative functions During 1998, examiners

inspected 17 fund administrators. One of the examinations resulted in an

enforcement referral.

Variable Insurance Products

In response to the rapid growth in variable insurance product assets and

the emergence of new channels of distribution, specialized insurance

product teams conducted examinations in this area. These teams

identified and examined variable life and annuity contract separate

accounts. Special emphasis was placed on examining branch offices of

broker/dealers selling these products to determine patterns of sales

practice abuses. A total of 3 1 insurance company complexes were

examined, representing 25% of all the insurance sponsors as of the

beginning of 1998. This maintains a five-year inspection cycle for

insurance sponsors. None of these examinations resulted in an

enforcement referral.

54
Broker-Dealer and Transfer Agent Examinations

Broker-Dealers

A total of338 oversight and 308 cause and surveillance examinations of

broker-dealers, government securities broker-dealers, and municipal

securities dealers were conducted in 1998. Of these examinations, 123

took place in broker-dealers' branch offices, reflecting an emphasis on

examining the adequacy of supervision over the activities of salespersons

in branch offices. Serious violations in 139 examinations warranted

referrals for further investigation by Enforcement staff Findings in an

additional 55 examinations were referred to SROs for appropriate action.

The most common violations and deficiencies found were record keeping

deficiencies, misrepresentations and unsuitable recommendations to

customers, and unauthorized trading in customers' accounts.

The broker-dealer examination program devoted significant attention to

abuses in the underwriting, trading, and retail selling of low-priced,

speculative securities, frequently referred to as "microcaps."

Examinations also emphasized the supervision of registered

representatives classified as independent contractors operating in

franchised branch offices, the adequacy of broker-dealers' internal

controls and risk management activities, and retail sales of variable

annuities and mutual funds. The office also completed a review of

clearing firm policies and procedures.

During 1998, our staff continued initiatives to enhance cooperation with

foreign, federal, and state regulators, as well as with SROs. Examiners

worked with SRO and state regulators to achieve maximum coordination

with other broker-dealer regulatory programs. They also coordinated

overlapping examinations of broker-dealers, clearing agencies, and

transfer agents with bank regulators.

55
Transfer Agents

In 1998, our staff conducted 191 examinations of registered transfer agents,

including 20 federally regulated banks. This program resulted in 143

deficiency letters, 68 cancellations or withdrawals of registrations, 8 referrals

to the Division of Enforcement, 20 referrals to bank regulators, and 4 staff

conferences with delinquent registrants. In addition, the staff conducted year

2000 reviews of transfer agents, and completed 4 routine inspections of

clearing agencies

Self-Regulatory Organizations Inspections

In 1998, the staff inspected at least one program at the following SROs.

American Stock Exchange, Boston Stock Exchange, Chicago Board

Options Exchange, Chicago Stock Exchange, Cincinnati Stock Exchange,

National Association of Securities Dealers, New York Stock Exchange,

Pacific Stock Exchange, and Philadelphia Stock Exchange. The SRO

inspections focused on:

• arbitration programs;

• listing, maintenance, and unlisted trading practices programs;

• financial and operational examination programs;

• market surveillance, investigatory, and disciplinary programs;

• customer communication review programs;

• programs for detecting and sanctioning sales practice abuses; and

• ethics and conflicts of interest.

The inspections resulted in recommendations to improve the programs'

effectiveness and efficiency.

56
Our staff also conducted inspections of the regulatory programs

administered by the NASD's 13 district offices. These inspections

included reviews of NASD district offices' broker-dealer examination,

financial surveillance, and formal disciplinary programs The staff also

reviewed the district offices' investigations of customer complaints and

terminations of registered representatives for cause.

SRO Final Disciplinary Actions

Section 19(d)(1) of the Securities Exchange Act of 1934 and Rule 19d-1

require all SROs to file reports with the Commission of all final

disciplinary actions. In 1998, a total of 1,358 reports were filed with the

SEC, as reflected in the following table.

SRO Reports of Final Disciplinary Action

American Stock Exchange 14

Boston Stock Exchange 0

Chicago Board Options Exchange 100

Chicago Stock Exchange 4

Cincinnati Stock Exchange 3

National Association of Securities Dealers 1,026

National Securities Clearing Corporation 0

New York Stock Exchange 171

Options Clearing Corporation 0

Philadelphia Stock Exchange 23

Pacific Exchange 11

Total Reports 1,358

57
Full Disclosure System

Thefull disclosure system's goals are to foster investor confidence,

provide investors with material information; contribute to the

maintenance offair and orderly markets; reduce the costs of capital

raising; and inhibit fraud in the public offering, trading, voting, and

tendering of securities. The Division of Corporation Finance tries to

achieve this goal by reviewing the financial statements and business

disclosure in periodic reports and transactional filings by corporate

issuers and undertaking rulemaking that facilitates capital formation.

Key 1998 Results

Companies filed registration statements covering a record $2.55 trillion in

proposed securities offerings during the year, a 76% increase over the

$1.45 trillion in 1997. An increase in overall market activity, including

merger transactions, resulted in $1.45 trillion in common stock offerings

filed for registration in 1998 compared to nearly $800 billion in 1997.

Offerings filed by first time registrants (!POs) were a record, totaling

approximately $257 billion, 55% more than the $166 billion filed in 1997.

Registration Statements Filed

Dollar Value (Billions)

Security

Common Stock

Asset Backed

Debt

Unallocated Shelf"

Other Equity

Total

1997

$ Value

797.2

271.8

174.8

152.4

495

1,445.7

1998

$ Value

1,453.7

476.2

291.6

259.8

64.8

2,546.1

% Change

82%

75%

67%

70%

31%

76%

*A transactional filing where the issuer registers a dollar amount of securities without

specifying the particular amounts of each different security to be issued.

58
In November 1998, we published proposals that would modernize the

regulation of capital formation. We also issued a release proposing to

update and simplify the regulations applicable to takeover transactions

These important releases are discussed in more detail under Recent

Rulemaking, Interpretive, and Related Matters.

International Activities

Foreign companies' participation in the United States public markets

continued to show strong growth in 1998. During the year,

approximately 160 foreign companies from 34 countries entered the

United States public markets for the first time. At year-end, there were

over 1,100 foreign companies from 56 countries filing reports with us

Public offerings filed by foreign companies in 1998 totaled over $170

bilIion--a new record for an amount registered in a single year.

Review of Filings

In 1998, our Division of Corporation Finance reviewed 2,828, or nearly

21%, of the reporting issuers, along with 1,320 Securities Act IPOs, 338

registration statements under the Securities Exchange Act and 81

Regulation A exemptive filings. The following table summarizes the

principal filings reviewed during the last five years. Because the staff

reviews all new issuer filings (including IPOs), third party tender offers,

contested solicitations, and going private transactions, the number of

these filings that are reviewed reflects the increases and decreases in the

number of filings received.

59
Full Disclosure Reviews

1994 1995 1996 1997 1998

Reporting Issuer Reviews i!./ 3,400 3,930 3,210 3,513 2,828

New Issuer Reviews .12/ 1,599 1,150 1,658 1,604 1,658

Major Filing Reviews

Securities Act Filings

IPOs f./ 1,384 950 1,412 1,255 1,320

Repeat Issuers 863 815 769 723 720

P/E Amdts. f;;./ !I/ 204 215 140 41 28

Regulation A 100 69 77' 111 81

Exchange Act Initial

Registrations 215 200 246 349 338

Annual Report Reviews

Full f;./ 1,540 1,930 1,446 1,949 1,527

Full Financial 1,405 1,585 933 1,208 997

Tender Offers

(l4D-I) 82 140 165 234 259

Going Private

Schedules 75 77 100 94 115

Contested Proxy

Solicitations 42 59 62 83 59

Proxy Statements

Merger/Going Private 163 225 261 233 219

Others w/Financials 180 205 199 238 257

g/ Includes companies subject to Exchange Act reporting whose financial

statements were reviewed during the year .

.12/ Includes reviews of Securities Act or Exchange Act registration statements

of non-Exchange Act reporting companies. Excludes reviews of Regulation

A filers.

f;;./ Includes Regional Office reviews of small business filings for years prior

to 1996.

!I/ Includes only post-effective amendments with new financial statements.

f;./ Includes annual reports reviewed in connection with the review of other

filings that incorporated financial statements by reference.

60
Recent Rulemaking, Interpretive, and Related Matters

Reform of Commission Rules Under the Securities Act

For the past several years, we have been actively reevaluating the

registration system in response to the realities of the current marketplace

and changes in technology. On November 13, 1998, we published

proposals intended to create a more flexible system and provide

significant benefits to public investors, issuers of securities, and securities

professionals. 106 The proposed rules have the following objectives:

• to continue providing investors with the information they need when

they make an investment decision;

• to better enable small businesses to meet their capital requirements in

a changing market environment;

• to permit more communications to investors and the market around

the time of an offering;

• to give analysts more flexibility to report about foreign government

issuers and smaller, unseasoned companies;

• to make it easier for companies to tum a public offering into a private

offering, and vice versa; and

• to provide issuers with incentives to offer securities publicly rather

than privately.

The proposed rules, if adopted, also would result in more timely

information being available to the marketplace, as companies would be

required to:

• file annual and quarterly financial results sooner;

• make and update risk factors disclosure in their periodic reports;

• accelerate the due dates for some Form 8-K current reports; and

61
• expand the events that must be discussed in the current report Form

8-K

Regulation of Takeover and Security Holder Communications

On November 3, 1998, we issued a release proposing to update and

simplify the regulations applicable to takeover transactions.l'" The goal

is to conform the regulations with the realities of today' s environment.

The proposed rules, if adopted, would'

• permit significantly more communications with security holders and

the markets before the filing of a registration statement involving a

takeover transaction, a proxy solicitation, or a tender offer;

• put stock tender offers on a more equal regulatory footing with cash

tender offers;

• integrate the forms and disclosure requirements for tender offers with

going private transactions and consolidate the disclosure

requirements in one location;

• permit security holders to tender their securities during a limited

period after the successful completion of a tender offer;

• more closely align merger and tender offer disclosure requirements;

and

• update the tender offer rules to clarify certain requirements and

reduce compliance burdens where consistent with investor protection.

Plain English Initiative

During the year, we adopted the plain English rules to improve the

readability of prospectuses. 108 Our original release proposing the rules

was issued for public comment in January 1997.109

New Rule 421(d), the plain English rule, requires public companies to

prepare the cover page, summary, and risk factors section of their

prospectuses using the following basic principals:

62
• short sentences;

• definite, concrete, everyday language;

• active voice;

• tabular presentation or bullet list for complex material,

whenever possible;

• no legal jargon or highly technical business terms; and

• no multiple negatives.

Cross-Border Tender Offers, Business Combinations, and Rights

Offerings

On November 13, 1998, we issued a release soliciting public comment on

tender offer and registration exemptive rules for cross-border tender

offers, business combinations, and rights offerings.'!" If adopted, these

rules would make it easier for U.S. holders of foreign companies to

participate in these types of transactions. Currently, offerors often

exclude U. S. holders from these transactions because of the need to

comply with U.S. securities regulations.

Amendments to Beneficial Ownership Reporting Under Exchange Act

Section 13(d)

We adopted amendments to our beneficial ownership disclosure rules

under Section 13(d) of the Exchange Act. III The amendments allow the

use of the short-form Schedule 13G by:

• passive investors (those that do not have the purpose or effect of

changing or influencing control of the issuer) if they do not own 20%

or more of the outstanding securities; and

• more institutional investors.

63
Use of Internet Web Sites to Offer Securities, Solicit Securities

Transactions, or Advertise Investment Services Offshore

We issued an interpretive release that provides guidance on when offers

of securities or investment services made on Internet Web sites by foreign

issuers, investment companies, investment advisers, broker-dealers, and

exchanges would not be considered to be an offering "in the United

States." 112

The release also suggests measures that foreign Web site offerors could

implement to guard against targeting their offers to the United States.

For example, a foreign offeror could post an offer on its Web site without

registering the offer, if:

• the offeror includes a meaningful disclaimer on the Web site that

would specify intended offerees by identifying jurisdictions in which

the offer is or is not being made; and

• the offeror takes steps reasonably designed to prevent sales to U.S.

persons.

International Disclosure Standards

International disclosure standards are intended to facilitate cross border

capital raising and listing by permitting companies to comply with one set

of non-financial disclosure requirements for offerings in several

jurisdictions. For several years we have been working with the

International Organization of Securities Commissions (lOSCO) to

develop a set of international standards for non-financial statement

disclosures.

In May 1998, a draft of the standards was posted on the IOSCO Web site

(www.iosco.org) as a consultation document. IOSCO approved the nonfinancial statement disclosures standards at its annual conference in

64
September 1998. In February 1999, the Commission exposed for public

comment amendments to its regulations in order to conform with these

standards.

Amendments to Regulation S

We adopted Regulation S in 1990 to clarify the applicability of the

Securities Act registration requirements to offshore transactions. Since

its adoption, a number of abusive practices have developed involving

unregistered sales of equity securities by U.S. companies purportedly in

reliance upon the Regulation. These transactions have resulted in indirect

distributions of those securities into the United States without the

investor protection provided by registration. To address the continuing

abuses, we adopted measures 113 designed to eliminate the abusive

practices, while preserving many of the benefits of the Regulation for

capital formation.

Small Business Proposals

Rule 701 provides an exemption from the registration requirements of the

Securities Act for offers and sales of securities made to employees of

private companies. The staff proposed rules that would raise the amount

of securities that could be offered under the exemption. 114

Rule 504 of Regulation D exempts public sales by private companies of

up to $1 million of securities in a year from the registration requirements

of the Securities Act. 115 The staff has proposed amendments to address

concerns that the regulation may facilitate fraudulent securities

transactions by microcap companies.

Shareholder Proposals

We issued a release adopting amendments to Rule 14a-8, the shareholder

proposal rule, and related rules. 116 The proposals represented a package

of reforms to address a range of concerns raised by both shareholder and

corporate participants in the proposal process. The revisions:

65
• recast Rule 14a-8 into a plain English question and answer format;

• reverse the Cracker Barrel interpretive position so that employmentrelated shareholder proposals raising social policy issues are not

automatically excludable on ordinary business grounds; and

• provide shareholders and companies with clearer guidance on

companies' exercise of discretionary voting authority.

Year 2000 Interpretive Releases

We issued an interpretive release to elicit more meaningful year 2000

disclosure from public companies.l'" The release provides specific

guidance on disclosure by companies with a year 2000 disclosure

obligation, including:

• the company's state of readiness,

• the costs to address the company' s Year 2000 issues,

• the risks of the company's Year 2000 issues, and

• the company's contingency plans.

In addition, we published guidance in the form of frequently asked

questions to clarify some recurring issues raised by the Year 2000

interpretive release. 118

Proposed Amendments to Form S-8

Form S-8 is the short-form Securities Act registration statement used

primarily for legitimate employee benefit plans. Some companies,

including micro cap companies, have used Form S-8 improperly to

compensate consultants whose primary service to the company is

promotion and public sale of the company's securities. We issued a

release proposing amendments to Form S-8 and related rules designed to

deter this abuse.119 The proposals also would facilitate tax and estate

planning by permitting the form to be used to register options that would

be exercised by family members of employees.

66
Paper Filings No Longer Accepted

We adopted a new electronic filing rule (Rule 14 of Regulation S-T) to

make it clear that we will no longer accept filings made in paper that

should have been filed electronically. 120

Other Rulemaking Proposals

During the year, we also proposed:

• amendments to Rule 135b to provide that an options disclosure

document prepared in accordance with Rule 9b-l under the Exchange

Act is not a prospectus and accordingly is not subject to civil liability

under Section 12(a)(2) of the Securities Act;121and

• technical amendments to require disclosure of a business enterprise's

"operating segments," rather than its "industry segments," in

conformity with the Financial Accounting Standards Board's

Statement of Financial Accounting Standards No. 13.122

Staff Legal Bulletins

The Divisions of Corporation Finance, Market Regulation, and

Investment Management published Staff Legal Bulletin No.6 on July 22,

1998. The bulletin addresses disclosure obligations in connection with

the January 1, 1999 conversion by 11 member states of the European

Union to a common currency, the "euro."

On September 4, 1998, the Division of Corporation Finance published

Staff Legal Bulletin NO.7. The bulletin provides helpful information on

the plain English rule that applies to companies filing registration

statements under the Securities Act.

67
Conferences

Small Business Town Hall Meetings

Since 1996, several informal town hall meetings between our staff and

small businesses have been conducted through the United States. These

town hall meetings tell small businesses about the basic requirements for

raising capital through the public sale of securities They also provide us

with information on the concerns and problems facing small businesses.

During 1998, we held small business town hall meetings in Las Vegas,

Nevada; Austin, Texas; and Salt Lake City, Utah.

SECINASAA Conference Under Section 19(c) of the Securities Act

The 15th annual federal/state uniformity conference was held in

Washington, D.C. on May 4, 1998. Approximately 60 SEC officials met

with approximately 60 representatives of the North American Securities

Administrators Association, Inc. to discuss methods of achieving greater

uniformity in federal and state securities matters. After the conference, a

final report summarizing the discussions was prepared and distributed to

interested persons and participants.

SEC Government-Business Forum on Small Business Capital Formation

The 17th annual Government-Business Forum on Small Business Capital

Formation was held in Chicago, IL on September 24-25, 1998. This

platform for small business is the only governmentally-sponsored national

gathering for small business, which offers annually the opportunity for

small businesses to let government officials know how the laws, rules, and

regulations are affecting their ability to raise capital. Next year's

Government-Business Forum will be in the Washington, D.C. area.

68
Accounting and Auditing Matters

The Chief Accountant is the principal advisor to the Commission on

accounting and auditing matters arismg from the admtnistration of the

federal securities laws. Activities designed to achieve compliance with

the accounting and financial disclosure requirements of the securities

laws include:

• rulemaking and interpretation initiatives that supplement privatesector accounting standards and implement financial disclosure

requirements;

• review and comment process for agency filings directed to improving

disclosures in filings, identifying emerging accounting issues (which

may result in rulemaking or private sector standard setting), and

identifying problems that may warrant enforcement actions;

• enforcement actions that impose sanctions and serve to deter

improper financial reporting by enhancing the care with which

registrants and their accountants analyze accounting issues; and

• oversight of private sector efforts, principally by the Ftnancial

Accounting Standards Board (FASB), the American Institute of

Certified Public Accountants (AICPA), the Independence Standards

Board (ISB), and various international accounting bodies, which

establish accounting, auditing, and independence standards designed

to improve financial accounting and reporting and the quality of

audit practice, including standards applicable to multtnauonal

offerings.

Key 1998 Results

We adopted revised rules and the staff issued interpretive guidance to

conform with the provisions of new FASB standards on segment

reporting and earnings per share presentations. We also continued our

involvement in initiatives directed toward reducing the disparities that

69
currently exist between different countries' accounting and auditing

standards. We issued a policy statement acknowledging the

Independence Standards Board (ISB) as the private sector body to

establish independence standards applicable to auditors of public

compames.

Accounting-Related Rules and Interpretations

The Commission's accounting-related rules and interpretations

supplement private sector accounting standards and implement financial

disclosure requirements. Our principal accounting requirements are

contained in Regulation S-X, which governs the form and content of

financial statements filed with us.

Derivatives

During 1998, our accounting staff reviewed compliance by SEC

registrants with recently adopted rules to require additional disclosures

concerning derivatives and other financial instruments.t" The required

disclosures are designed to help investors better assess the market risk

exposures of registrants involved with these instruments and better

understand how those risks are managed. The rules clarify and expand

existing requirements for financial statement footnote disclosures about

accounting policies for derivatives and require disclosures outside the

financial statements of qualitative and quantitative information about the

market risks inherent in derivatives and other financial instruments.

Segment Reporting

We issued revised rules for segment reporting to conform with changes

made by the FASB in its new standard on segment disclosures.i" The

new standard was the result ofajoint undertaking of the FASB and the

Accounting Standards Board of the Canadian Institute of Chartered

Accountants. 125

70
Earnings Per Share

During 1998, our staff issued an accounting bulletin to provide guidance

on various issues relating to the presentation of earnings per share. 126

The bulletin responded to certain revisions to the requirements for

presenting earnings per share adopted in a new FASB standard. 127

Year 2000

We issued guidance to assist registrants in complying with their disclosure

obligations involving year 2000 issues.

Oversight of Private Sector Standard Setting

FASB. The SEC monitors the structure, activity, and decisions of the

private-sector standard-setting organizations, which include the FASB.

The Commission and staff work closely with the FASB in an ongoing

effort to improve the standard-setting process, including the need to

respond to various regulatory, legislative, and business changes in a

timely and appropriate manner. This close involvement includes staff

participation on all FASB task forces formed to consider major FASB

projects.

A description of FASB activities in which the staff was involved is

provided below.

To further its long-term project to address financial instruments and offbalance sheet financing issues, the FASB issued a final standard on

accounting for derivative instruments and hedging activities.V" The

standard requires that an entity recognize all derivatives as either assets or

liabilities on the balance sheet and measure those instruments at fair value.

Certain derivative instruments may be specifically designated as a hedge if

certain restrictive conditions are met. Under the standard, the recognition

of gains and losses of a derivative depends on the intended use of the

derivative and the resulting designation. Due to the complexities

associated with derivative instruments, the FASB has formed a

71
Derivatives Implementation Group to (1) identify issues related to the

Implementation of the new standard, and (2) develop recommendations

for their resolution.

In a related action, the FASB published the first special report on the

most frequently asked questions raised on its standard on reporting of

securitizations and other financial transactions in which financial assets

are transferred in exchange for cash and other assets. 129 The report is

designed to aid understanding and implementing Statement 125 and

represents the first of several reports on questions affecting a broad range

of companies and financial institutions. 130

The FASB continued its deliberations on the accounting for business

combinations presently encompassed by Accounting Principles Board

Opinion Nos. 16, Business Combinations, and 17, Intangible Assets.

They are considering whether two separate and distinct methods of

accounting for business combinations should continue. Commentators

responded to a FASB special report, Issues Associated with the FASB

Project on Business Combinations, published to solicit comment about

the scope, direction, and conduct of the project.

The FASB' s discussions have focused primarily on accounting for

goodwill arising from a purchase business combination. The FASB is not

limiting its evaluation solely to accounting practices used in the United

States, but also is evaluating practices in accounting for goodwill

followed in other countries, such as the United Kingdom, which recently

adopted a revised approach to accounting for goodwill. Comments will

be solicited on a position paper prepared by the G4+ 1 to narrow

significant differences in the existing business combination standards

within the members' jurisdictions. J3l

The FASB began work on a research project on business reporting. This

project evolved from previous recommendations made by the AlCPA

Special Committee on Financial Reporting and the Association for

Investment Management and Research through its study, Financial

Reporting in the 1990s and Beyond. Its objectives are to:

72
• develop recommendations for the voluntary and broad disclosure of

certain types of nonfinancial information for all or selected industries

that users of business reporting find helpful in making their investment

decisions;

• develop recommendations for ways to coordinate generally accepted

accounting principles and SEC disclosure requirements and to reduce

redundancies; and

• study present systems for the electronic delivery of business

information and consider the implications of technology for business

reporting in the future.

The FASB's Emerging Issues Task Force (EITF), in which our Chief

Accountant participates, continued to identify and resolve accounting

issues. During 1998, the EITF reached consensus on several significant

issues, including questions relating to accounting for financial

instruments, consolidation policies, and deferred compensation

arrangements. The objective of the process is to narrow divergent

reporting practices of public companies within the context of existing

authoritative accounting standards.

AICP A. Our accounting staff oversaw various processes and activities

conducted through the AICPA. These included (1) the Auditing

Standards Board (ASB), which establishes generally accepted auditing

standards; (2) the Accounting Standards Executive Committee (AcSEC),

which provides guidance through its issuance of statements of position

and practice bulletins; and (3) the SEC Practice Section (SECPS), which

seeks to improve the quality of audit practice by member accounting firms

that audit the financial statements of public companies.

ASB. During 1998, the ASB issued a standard to provide guidance to

auditors when performing an attestation engagement with respect to

management's discussion and analysis presentations of SEC registrants. 132

The ASB also issued guidance on agreed-upon procedures to be followed

by auditors in reporting year 2000 readiness by broker-dealers and certain

transfer agents subject to SEC reporting requirements.l" The ASB

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issued a series of annual Audit Risk Alerts to provide auditors with an

overview of recent economic, professional, and regulatory developments

that may affect 1998 year-end audits.

AcSEC. The AcSEC issued a position statement on accounting for

internal use computer software costs, 134 reducing diversity in accounting

for such costs. A position statement also was issued on the reporting of

start-up costs. 135 The AcSEC continued to address accounting issues

involving specialized industries, dedicating resources in such areas as

motion picture accounting, insurance accounting, and revenue recognition

from software transactions.

SEeps. Two programs administered by the SECPS are designed to

ensure that the financial statements of SEC registrants are audited by

accounting firms that have adequate quality control systems. A peer

review of member firms by other accountants is required every three

years, and the Quality Control Inquiry Committee (QCIC) reviews on a

timely basis the quality control implications of litigation against member

firms that involves public company clients.

The Commission exercises oversight of the SECPS through frequent

contacts with the Public Oversight Board (POB) and members of the

Executive, SEC Regulations, Peer Review, and Quality Control Inquiry

Committees of the SECPS. During the year, our accounting staff

selected a random sample of peer reviews and evaluated selected working

papers of the peer reviewers and the related POB files. The staff also

reviewed QCIC closed case summaries and related POB oversight files.

These reviews, together with discussions with the POB and QCIC staffs,

provided us with information to assess the SECPS and QCIC processes.

This oversight showed that the peer review and QCIC processes continue

to result in member firms focusing on and achieving the important goal of

maintaining and improving effective quality control systems. To help the

profession continue to achieve that goal, the SEC staff requested the POB

to study the audit process, including an assessment of the design and

effectiveness of member firm's quality control systems. We will

cooperate with and monitor the Panel on Audit Effectiveness, which was

appointed by the POB to undertake this study.

74
ISB. During 1998, we worked closely with the ISB, a new private sector

body formed to establish independence standards applicable to audits of

public entities. The standards are expected to promote investors'

confidence in the audit process and in the securities markets. The ISB

consists of eight members. Four are public members who are not

affiliated with auditing firms, three are managing partners in auditing

firms, and one is the president of the AICPA. The Chairman of the ISB is

required to be one of the four public members. ISB standard-setting

meetings are open to the public; draft ISB standards are published for

public comment. We oversee the ISB process in the same manner as we

oversee the FASB process.

In February 1998, we issued a policy statement acknowledging the ISB as

the private sector body responsible for establishing independence

standards for auditors of public entities.F" However, as in the areas of

accounting and auditing, we retain the authority to supplement or modify

ISB standards and to pursue enforcement and disciplinary proceedings.

The ISB issued a rule proposal that would require auditors of public

companies to disclose in writing to the company's audit committee all

relationships with the company that could affect auditor independence. A

final standard, Independence Discussions with Audit Committees, was

adopted after year-end.

International Accounting and Auditing Standards

Requirements for listing or offering of securities vary from country to

country. Issuers wishing to access capital markets in more than one

country may have to comply with requirements that differ in many

respects, including accounting principles to be used in the preparation of

financial statements. The differing requirements are believed to increase

compliance costs for registrants and create inefficiencies in accessing

multiple capital markets. Also, some countries' accounting principles are

more comprehensive and result in financial statements that provide

greater transparency of underlying transactions and events than others.

75
As a result, securities regulators around the world have been working on

several projects to enhance the quality of reporting and disclosure

requirements around the world.

For the past several years, the International Accounting Standards

Committee (lAS C) has been working to complete a core set of

accounting standards for financial reporting in cross-border securities

offerings. The International Organization of Securities Commissions

(IOSCO), of which we are a member, will assess the completed set of

standards to determine whether they should be endorsed for cross-border

listings and offerings of securities.

Our accounting staff will assess the completed core standards in 1999, to

determine whether we should propose changing the current reconciliation

requirements for foreign issuers that file financial statements prepared

using IASC standards.

During 1998, the SEC staff began parallel efforts to identify auditing and

quality control issues that could affect the effectiveness of financial

statements prepared in accordance with IASC standards. Potential issues

include:

• whether the accounting profession and firms have adequate auditing

standards, training, and technical resources to result in high quality

audits of financial statements prepared using international accounting

standards; and

• what type of quality controls to monitor the application of auditing

standards are needed for audits on non-U.S. GAAP financial

statements (for example, a peer review function like that administered

by thePOB).

The SEC staff also has participated in discussions with the International

Auditing Practices Committee (lAPC) of the International Federation of

Accountants and has, through IOSCO, commented on some ofIAPC's

recent proposed international standards on auditing.

76
Other Litigation and Legal Activities

The Office of General Counsel provides legal services to the

Commission concerning its law enforcement, regulatory, legislative, and

adjudicatory activities. The office represents the Commission in appeals

in enforcement cases and provides technical assistance on legislative

initiatives.

Key 1998 Results

With assistance from the General Counsel, the Commission adopted a

rule clarifying the "improper professional conduct" for which accountants

can be sanctioned under SEC Rule of Practice 102(e). The Commission

also testified regarding, and the staff played a significant role in the

enactment of, the Securities Litigation Uniform Standards Act of 1998,

which was signed by President Clinton in November 1998.

Significant Litigation Developments

Primary Violator Liability

In SEC v. US. Environmental.T' the United States Court of Appeals for

the Second Circuit ruled that a stockbroker could be liable as a primary

violator, and not just as an aider and abettor, for stock price manipulation

if he had, at the direction of the promoter of a manipulation, executed

matched orders and wash sales transactions that he knew were part of the

promoter's manipulative scheme. The court of appeals ruled that a

stockbroker could be so liable even if he did not stand to benefit

personally from the manipulative scheme (aside from receiving

commissions for executing the trades) and did not share the promoter's

purpose to manipulate the market.

77
In Klein v. Boyd, 138 the Commission filed a friend of the court brief

arguing that a person-sin this case a lawyer--who drafts a document

knowing that it contains material misrepresentations and omissions, and

who knows that the document will be given to investors, is liable as a

primary violator, even if his identity is not known to the investors. The

parties subsequently settled the case, and the appeal was dismissed.

Insider Trading

In SEC v. Adler, 139 the Court of Appeals for the Eleventh Circuit ruled

that the possession of material nonpublic information by an insider who

trades in his company's stock gives rise to a strong, but rebuttable,

inference that the insider used the information. In so ruling, the court did

not accept the position, urged by the Commission, that an insider who

trades in his company's stock while in possession of material nonpublic

information is liable for insider trading regardless of whether his trading

was based on that information.

In United States v. Smith,140 a criminal case in which the Commission had

filed a friend of the court brief, the United States Court of Appeals for the

Ninth Circuit stated in dictum that, in order for an insider to violate the

prohibition against insider trading in his company's stock, he must not

only have traded while in possession of nonpublic information but must

also have used the information in his trading. Because it was a criminal

case, the court declined to adopt an inference of use from the fact of

possession, but expressly left open whether it would do so in a civil case

brought by the Commission.

The Shingle Theory and Excessive Markups

In Banca Cremi v. Alex. Brown & Sons, Inc.,141the court of appeals, as

urged by the Commission in friend of the court briefs, held that a brokerdealer has a duty to disclose excessive markups by virtue of the "shingle

theory," under which a broker-dealer makes an implied representation of

fair dealing with customers. The court also agreed with the Commission

that whether a markup is excessive must be determined on a case-by-case

78
basis, taking into account all relevant factors. The court, however,

viewed debt securities as subject to the same 5% markup guideline

applicable to equity securities, in contrast with the Commission's position

that markups on debt securities should be significantly lower than those

on equity securities.

In Grandon v. Merrill Lynch & Co., 142 the court of appeals took judicial

notice of the Commission's briefs in the Banca Cremi case. The Second

Circuit endorsed the shingle theory, agreed with the Commission that

excessiveness of markups must be determined based on all relevant

factors in each case, and held that the absence of clear guidelines did not

preclude finding any percentage excessive in appropriate circumstances.

The court also recognized the Commission's longstanding view that

markups on debt securities should be significantly lower than those on

equity securities.

In the pending appeal in Press v. Chemical Investment Services Corp., 143

the lower court had dismissed the plaintiff's claim of a fraudulent

undisclosed excessive markup on the ground that the markup was below

3% and, in the district court's view, the Commission's decisions and

releases had established a safe harbor of3% to 3-1/2% for markups on

debt securities, below which markups as a matter of law could not be

excessive. The Commission filed a friend of the court brief in the court of

appeals, urging that there is no safe harbor percentage for excessiveness

of markups.

"In Connection With" Requirement

In Jakubowski v. SEC, 144 the court of appeals ruled in favor of the

Commission in a Commission action in which the defendant purchased

savings and loan conversion stock from the savings institutions by

misrepresenting on stock order forms that the purchasers were deposit

account holders, who had nontransferable stock subscription rights as

required by applicable banking regulations. The court rejected the

defendant's argument that the antifraud provisions of section 1O(b) of the

Securities Exchange Act of 1934 (Exchange Act) prohibit only

misrepresentations about the stock itself or the consideration paid,

79
holding that in the circumstances of this case the misrepresentations of the

purchasers' identities were "in connection with the purchase or sale" of

the stock within the meaning of section 1O(b) because they induced the

institutions to sell.

The Commission addressed the pleading standard under the Private

Securities Litigation Reform Act 1995 (Reform Act) in friend of the court

briefs filed in the pending appeals in Hoffman v. Comshare, Inc., 145 and In

re Silicon Graphics, Inc. Sec. Litig. 146 These briefs took the position that

the pleading standard did not eliminate recklessness as a basis for liability

and that courts should rely upon the Second Circuit tests in interpreting

the pleading standard of the Reform Act.

Disciplinary Standards for Accountants

In Potts v. SEC, 147 the United States Court of Appeals for the Eighth

Circuit affirmed a Commission decision disciplining an accountant for

improper professional conduct as concurring partner in an audit The

court found that substantial evidence supported the Commission's finding

that the accountant had recklessly failed to comply with the applicable

professional standards, and it rejected the accountant's assertion that

those standards were unconstitutionally vague as applied to a concurring

partner.

The Double Jeopardy Clause

In SEC v. Palmisano.r'" the United States Court of Appeals for the

Second Circuit rejected a defendant's claim under the multiple

punishment prong of the Fifth Amendment's Double Jeopardy Clause that

the Commission action for disgorgement and a civil penalty was barred by

his prior criminal conviction for the same misconduct. The court found

that neither disgorgement nor the civil penalty was punishment for

purposes of the Double Jeopardy Clause.

80
Significant Adjudication Developments

The staff submitted to the Commission 80 draft opinions and orders

resolving substantive motions. The Commission issued 47 opinions and

35 orders, and the staff resolved by delegated authority an additional 71

motions. Appeals from decisions of administrative law judges continue to

make up a high percentage of the Commission's docket.

Jurisdiction

The Commission in Morgan Stanley & Co., Inc. 149 considered whether it

has jurisdiction under the Exchange Act to consider an appeal of a

decision ofthe National Association of Securities Dealers, Inc (NASD)

to deny Morgan Stanley an exemption from a two-year prohibition

against engaging in municipal securities business in Massachusetts due to

a violation of Municipal Securities Rulemaking Board (MSRB) rule G-37

Section 19(d) of the Exchange Act authorizes Commission review of

NASD action generally if it:

• imposes any final disciplinary sanction,

• denies membership to any applicant,

• prohibits or limits access to services offered by such organization, or

• bars any person from becoming associated with a member.

The Commission concluded that, because the NASD's decision to deny

Morgan Stanley an exemption did not fall into any of these jurisdictional

categories, it was not reviewable by the Commission.

Sanctions

In VIctor Teicher, Victor Teicher & Co., L.P., & Ross S. Frankel, ISO the

Commission reaffirmed its authority under Meyer Blinder'?' to impose

collateral bars. It found that Ross S. Frankel's misconduct satisfied the

two-pronged test for imposing such a bar because it was both egregious

81
and, by its nature, flowed across the various securities professions and

posed a risk of harm to the investing public. Commissioner Isaac Hunt,

dissenting in part, stated his view that the Commission and its staff may

not seek collateral sanctions in litigated matters, and should not seek them

in settled matters.

Fraud/Sales Practices ViolationslFailure to Supervise

The Commission in LiC: Wegard & Co., Inc. & Leonard B. Greer'r'

concluded that the respondents deliberately assisted two brokerage firms

in manipulating securities. The respondents' purchases of certain

securities played a significant role in causing the price to nearly double in

10 trading days. The Commission concluded that scienter was established

by the firm's trading pattern, which was inconsistent with the legitimate

business objective of seeking a profit.

In Steven P. Sanders and Daniel M Porush, 153 the Commission upheld

NASD findings that Sanders was responsible for customers being charged

excessive and fraudulent prices, and that Porush was responsible for

deficient written supervisory procedures and a supervisory system that

failed to prevent or detect the pricing violations at issue The

Commission found that, because Stratton Oakmont dominated and

controlled the market for the underlying security, it was appropriate to

calculate Stratton's markups in the warrants based on its

contemporaneous wholesale cost In finding Porush liable for supervisory

failure, the Commission rejected his defense that, although Porush held

the title of president during the period at issue, another individual at the

firm was the actual chief executive officer. The Commission noted that

Porush executed a registration form for the firm, in which he described

himself as president, and that the record established that Porush did have

some supervisory responsibility.

The Commission remanded an administrative proceeding against D.E.

Wine Investments, Inc., W Randal Miller, Kenneth Karpf, and Duncan

Winel54 because it determined that the law judge's calculation ofD.E.

Wine's markups and markdowns conflicted with Commission precedent

82
in several respects. Specifically, the Commission found that the law

judge:

• improperly gave a preference to trades involving D.E. Wine over

other market makers in determining the prevailing market price for

the securities at issue,

• failed to use interdealer trades occurring after the particular retail

trade in question to determine the prevailing market price, and

• erroneously based some of the markups on D.E. Wine's

contemporaneous costs.

The Commission also considered and rejected respondents' argument that

they were entitled to base their retail prices on quotations, in view of the

abundance of information in the record concerning interdealer trades.

The Commission remanded the case for further factual findings and a

revised analysis consistent with its opinion.

Denial of Access Claims/Market Listing Issues

In Interactive Brokers LLC, 155 the Commission set aside action of the

Pacific Exchange, Inc. (PCX) restricting the use of hand-held brokerage

order routing terminals in its options trading crowds. Hand-helds are

computer devices that can receive customer orders directly. Floor

brokers carry them onto the trading floor, speeding execution of orders.

A pilot program to use hand-helds was established by the PCX in 1995.

Subsequently, the PCX adopted a formal policy on hand-helds that

created certain restrictions. The Commission held that the PCX

restriction on Interactive's use of hand-helds was an unlawful prohibition

or limitation of access to services. The Commission found that the pilot

program, which was never submitted to the Commission for its approval

as required by the Exchange Act, was an invalid rule. Because PCX's

restriction on the use of hand-he Ids was imposed under an invalid rule,

the Commission set it aside and ordered the PCX to allow the use of

hand-helds in trading crowds.

83
Net Capital Violations

In First Colorado Financial Services Company, Inc. and Mark P.

Augustine, 156 the Commission modified and remanded NASD disciplinary

action against First Colorado Financial Services and its registered

financial and operations principal Mark P. Augustine. The Commission,

unlike the NASD, determined that First Colorado, an introducing firm

operating as a $5,000 broker, did not violate the net capital rule by

participating in the firm commitment underwriting when the firm placed

for its customer a single order for 500 shares of a company (without

soliciting the order from its customer or marketing the offering). The

Commission, however, agreed with the NASD that First Colorado,

through Augustine, had filed an inaccurate Financial and Operational

Combined Uniform Single Report. Therefore, the proceedings were

remanded for a redetermination of sanctions because it was unclear what

sanctions the NASD would have imposed for the reporting violation

alone.

Denial of Proposed Futures and Futures Options Trading on Stock

Indices Under the Commodity Exchange Act

Following a hearing conducted pursuant to the Commodity Exchange Act

(CEA), the Commission in The Chicago Board of Trade 157 denied the

applications of the Chicago Board of Trade (CBOT) to trade futures and

futures options contracts on the Dow Jones Utilities Average Index and

the Dow Jones Transportation Average Index. These applications were

the first for non-diversified stock indices received by the Commission

since 1984 Non-diversified stock indices reflect securities of issuers in

the same or similar industry. The CEA requires that the Commission find

that a non-diversified stock index reflects a substantial segment of the

market as a whole, or be comparable to such a measure, in order to allow

the CBOT to trade in these stock indices. The Commission found, based

on the totality of the circumstances and in light of its experience in

regulating the equity markets, that the Dow Jones Utilities Average Index

and Dow Jones Transportation Average Index did not satisfy the CEA's

substantial segment requirement. In addition, the Commission interpreted

the "comparable to" standard to require that the proposed index must be

84
comparable to the widely-published index both in measuring and

reflecting the segment. Accordingly, the Commission rejected the

CBOT's view that an index was comparable to a second widely-published

index if the first index's movement tracked the widely-published index's

movement. Because the proposed contracts' inability to satisfy the

substantial segment requirement was alone sufficient to deny the CBOT's

applications, the Commission did not resolve the question whether the

proposed contracts met the alternative requirement that they not be

readily susceptible to manipulation.

Legal Policy

The General Counsel's responsibilities include providing legal and policy

advice on SEC enforcement and regulatory initiatives before they are

presented to the Commission for a vote. The General Counsel also

advises the Commission on administrative law matters, and has substantial

responsibility for carrying out the Commission's legislative program,

including drafting testimony, developing the Commission's position on

pending bills in Congress, and providing technical assistance to Congress

on legislative matters.

On the regulatory front, the General Counsel played a significant role in

drafting an SEC rule clarifying the improper professional conduct for

which accountants can be sanctioned under SEC Rule of Practice 102( e)

In the administrative area, the General Counsel took a lead role in

coordinating the preparation of reports to Congress on the year 2000

readiness of the securities industry, and on several matters related to the

Small Business Regulatory Enforcement Fairness Act of 1996 In the

legislative area, the General Counsel played a significant role in the

enactment of the Securities Litigation Uniform Standards Act of 1998.

85
Significant Legislative Developments

Litigation Reform

On November 3, 1998, President Clinton signed into law S. 1260, the

Securities Litigation Uniform Standards Act of 1998. The Act preempts

class actions involving certain securities (generally, nationally traded

securities and shares of open-end mutual funds) that are brought by

private plaintiffs in state court or under state law. The Act does not

preempt actions, such as shareholder derivative suits, that relate to certain

provisions of state corporate governance law. Notably, the Uniform

Standards Act does not affect the standard of liability in federal securities

fraud actions, and its legislative history stresses the importance of liability

for reckless conduct in such actions.

• In addition to its testimony regarding the impact of prior securities

litigation reform given on October 21, 1997 before the Subcommittee

on Finance and Hazardous Materials of the House Commerce

Committee, the Commission testified twice in 1998 with regard to the

House and Senate versions of the Uniform Standards Act, H.R. 1689

and S. 1260 The Commission testified regarding the Senate bill on

October 29, 1997 before the Subcommittee on Securities of the

Senate Banking Committee, and regarding the House bill on May 19,

1998 before the Subcommittee on Finance and Hazardous Materials

of the House Commerce Committee. The Commission's testimony

initially expressed concern that the bill was too broad and that the

need for further legislation to reform securities litigation was not

clearly established. Eventually, however, the Commission was able to

support the bill, based on the addition of the corporate law carve-out

and other amendments, and based on reassurances in the legislative

history that the bill was not meant to alter the intent standard for

private securities litigation that had been established by the Private

Securities Litigation Reform Act of 1995, and specifically, that

liability for reckless conduct would be preserved.

86
Foreign Corrupt Practices Act

On November 10, 1998, President Clinton signed into law S. 2375, the

International Anti-Bribery Act of 1998, which amended the Foreign

Corrupt Practices Act of 1977 (FCP A). This statute implements the

Convention on Combating Bribery of Foreign Public Officials in

International Business Transactions, a treaty negotiated by the

Organization for Economic Cooperation and Development. The

Convention establishes standards for prohibiting bribery of foreign

officials to obtain or retain business. The International Anti-Bribery Act

adds the concept of nationality jurisdiction to the FCP A, so that the

FCPA now covers acts of United States businesses and nationals in

furtherance of unlawful payments that take place wholly outside the

United States, whether or not the transactions involve interstate

commerce. The Act also changes certain provisions of the FCP A to

conform them to the Convention by banning payments made to secure

any improper advantage, expanding the definition of covered foreign

official to include officials of public international organizations, and

subjecting both foreign and United States citizens to civil and criminal

penalties. The Commission testified in support of these changes at a

hearing on the House version ofthe bill (H.R. 4353) on September 10,

1998 before the Subcommittee on Finance and Hazardous Materials of

the House Commerce Committee.

Securities Activities of Banks

In 1998, Congress again devoted considerable attention to Glass-Steagall

reform. The leading vehicle for banking reform, H.R. 10, the Financial

Services Competitiveness Act of 1998, was the subject of extensive

negotiations between the Banking and Commerce Committees before it

passed the House by a one-vote margin in May 1998. The bill was

referred to the Senate and, after several days of hearings, reported out of

the Senate Banking Committee in September 1998. Although H.R. 10

was never scheduled for a floor vote in the Senate, Representative Leach

re-introduced the Senate Banking Committee version ofH.R. 10 (as

H.R. 4870) in the House shortly before adjournment, and he expressed

87
his intention to do so again when the 106th Congress convened in January

1999.

On June 25, 1998, the Commission testified before the Senate Banking

Committee regarding H.R. 10 and its views regarding Glass-Steagall

reform. In general, the Commission has supported Glass-Steagall reform,

provided that the resulting regulatory structure is established along

functional lines. The concept of functional regulation would require that

a bank engage in most securities activities through a registered brokerdealer, fully subject to the federal securities regulatory scheme. The

Commission has testified that this is important because banking law does

not contain specific provisions that provide for investor protection; the

Commission believes that investors who purchase securities through

banks should receive the same investor protections as those who purchase

securities from broker-dealers. Functional regulation would achieve this

result. The Commission's testimony on HR. 10:

• supported the elimination of the bank exclusions from the federal

securities laws;

• advocated the concept of a "two-way street" to allow equal

competitive opportunities to all financial services providers; and

• criticized the application of bank-oriented safety and soundness

regulation to securities firms' activities, which would inhibit risktaking by securities firms affiliated with banks.

SEC-Commodity Futures Trading Commission Issues

In 1998, Congress imposed a moratorium on the Commodity Futures

Trading Commission's (CFTC's) regulation of the over-the-counter

(OTC) derivatives market, in response to a May 7, 1998 CFTC concept

release on the OTC derivatives market suggesting that the CFTC might

revisit the existence and scope of exemptions under CFTC rules for swaps

and hybrid instruments. The concept release raised concerns in the OTC

derivatives market about legal uncertainty and the validity and

enforceability of existing and future OTC derivatives contracts. Because

88
of the size and importance of the OTC derivatives market to the United

States economy, the Treasury Department, along with the Commission

and the Federal Reserve Board, sought legislative action to prevent the

CFTC from dismantling the swaps and hybrid instruments exemptions or

from imposing additional requirements on such products.

Two bills were introduced in the House to prevent the CFTC from acting

further with respect to OTC derivatives--H.R. 4062, on June 16, 1998,

and H.R. 4507, on August 6, 1998. The Commission testified in support

of the principles behind these bills at hearings on June 10, 1998 before the

House Agriculture Committee; on July 24, 1998 before the House

Banking Committee; and on July 30, 1998 before the Senate Agriculture

Committee. Ultimately, language inserted into H.R. 4328, the omnibus

spending bill passed at the end of the 105th Congress, placed a

moratorium on CFTC regulation of the OTC derivatives market until

March 30, 1999, or until the enactment of CFTC authorizing legislation.

As a result of the CFTC's concept release and the collapse of Long-Term

Capital Management, the President's Working Group on Financial

Markets is now preparing separate studies on hedge funds and the OTC

derivatives market, both of which are expected to be the subject of

congressional hearings in fiscal 1999.

Year 2000 Computer Issue

In response to an inquiry from Congressman Dingell of the House

Commerce Committee, the SEC staff submitted a report in June 1998 on

the readiness of the United States securities industry and public

companies to respond to the year 2000 computer issue, and on their

disclosure obligations regarding year 2000 issues. The Commission

testified four times in 1998 regarding year 2000 readiness and disclosure

issues--on October 22, 1997 and June 10, 1998 before the Subcommittee

on Financial Services of the Senate Banking Committee, and on July 6,

1998 and September 17, 1998 before the Senate Special Committee on

the Year 2000 Technology Problem. Congress passed S. 2392, the Year

2000 Information Disclosure Act of 1998, a bill promoted by the

Administration's Year 2000 Task Force and by industry groups, and that

was signed into law on October 19, 1998. The Act attempts to

89
encourage businesses and other entities to share information about their

year 2000 solutions by creating a safe harbor from private liability for

most statements about this information. The Act's safe harbor does not

apply to actions under the securities laws based on information contained

in SEC filings or on disclosures accompanying a solicitation of the offer

or sale of securities.

SEC Appropriations and Fees

On March 18, 1998, the Commission testified before the Subcommittee

on Commerce, Justice, and State, the Judiciary, and Related Agencies of

the House Appropriations Committee. The testimony supported the

President's 1999 budget request of $341.1 million for the Commission.

The Commission testified again in support of the Commission's budget

request on March 19, 1998 before the Subcommittee on Commerce,

Justice, and State, the Judiciary, and Related Agencies of the Senate

Appropriations Committee.

From October 1, 1998 until final signing of an omnibus appropriations bill

on October 21, 1998, the Commission operated pursuant to six

continuing resolutions, which provided the Commission with authority to

operate at its fiscal 1998 budget level. On October 21, 1998, H.R. 4328,

the Omnibus Consolidated and Emergency Supplemental Appropriations

Act of 1998, was enacted. The Act provides the SEC with $324 million

for 1998, and its legislative history states that the SEC is expected to use

an additional $6 million from its carryover funds. Separately, the SEC

also received $7.4 million in funding for year 2000 preparations. Because

of controversy over the census, which is included in the CommerceJustice-State appropriations package with the SEC, all agencies in that

package, including the SEC, are funded only though June 15, 1999. In

addition, three ultimately unsuccessful bills were introduced in 1998 to

cap SEC fee collections under section 31 of the Exchange Act--H.R.

4120, introduced June 23, 1998; H.R. 4213, introduced July 14, 1998;

and H.R. 4269, introduced July 17, 1998.

90
SEC Reauthorization

H.R. 1262, a bill reauthorizing the SEC at funding levels of $320 million

for 1998 and $342.7 million for 1999, passed the House on November

13, 1997. When the bill failed to move in the Senate, the House

Commerce Committee attached to H.R. 1689, the House version of the

Securities Litigation Uniform Standards Act, language reauthorizing the

SEC for appropriations of up to $351.3 million for 1999. This language

was preserved in conference and ultimately signed into law as part of S

1260 on November 3, 1998.

Bankruptcy

The omnibus spending bill signed into law on October 21, 1998 contained

provisions amending the Bankruptcy Code to protect the SEC's ability to

obtain asset freezes and receivers despite a bankruptcy filing by a

defendant. On March 18, 1998, our staff in the Division of Enforcement

testified in support of these provisions before the Subcommittee on

Commercial and Administrative Law of the House Judiciary Committee.

The new provisions remove any doubt that, in the context of a regulatory

proceeding, asset freezes, receiverships, and actions taken to recover

assets are unaffected by the automatic stay that follows the filing of a

debtor's bankruptcy provision. They may discourage defendants from

filing for bankruptcy as a litigation tactic.

The Public Utility Holding Company Act of 1935

In 1998, Congress continued to consider several bills to repeal the Public

Utility Holding Company Act of 1935 (PUHCA). Repeal ofPUHCA has

been stalled as Congress debates whether to simply repeal PUHCA or to

repeal it as part of more sweeping electric utility deregulation. Two bills

were introduced in 1998 to repeal PUHCA, both similar to a bill (S. 621)

that had been introduced in 1997. These were H.R. 3976, the Public

Utility Holding Company Act of 1998, introduced on May 22, 1998,

which was virtually identical to S. 621, and S. 2287, the Comprehensive

Electricity Competition Act, introduced on July 10, 1998, which linked

PUHCA repeal to reform of other aspects of the federal regulatory

91
scheme for electricity. Although the Commission was not asked to testify

regarding either of these bills, its testimony in prior years has supported

S. 621, the model for HR. 3976, but has taken no position on the broader

issues of electric utility deregulation.

Corporate Reorganizations

The Commission, as a statutory adviser in cases under Chapter 11 of the

Bankruptcy Code, seeks to assure that the interests of public investors in

companies undergoing bankruptcy reorganization are protected. During

the past year, the Commission entered a formal appearance in 36 Chapter

11 cases with significant public investor interest.

Committees

Official committees negotiate with debtors on the formulation of

reorganization plans and participate in all aspects of a Chapter 11 case.

The Bankruptcy Code provides for the appointment of official

committees for stockholders where necessary to assure adequate

representation of their interests During 1998, committees were

appointed in two cases as a result of informal discussions by our staff

with U S. Trustees, who have broad administrative responsibilities in

bankruptcy cases

Disclosure StatementslReorganization Plans

A disclosure statement is a combination proxy and offering statement

used to solicit acceptances for a reorganization plan. During 1998, the

Commission's bankruptcy staff commented on 92 of the 130 disclosure

statements it reviewed. Recurring problems with disclosure statements

included inadequate financial information, lack of disclosure on the

issuance of unregistered securities and insider transactions, and plan

provisions that contravene the Bankruptcy Code Most of the staff's

comments to debtors or plan proponents were adopted, formal

Commission objections were filed in seven cases.

92
The Commission made successful formal objections to five plans of

reorganization that improperly attempted to release officers, directors,

and other related persons from liability. The staffwas able to obtain the

deletion of improper third party release provisions in six cases during the

disclosure statement review and comment process. This is a significant

issue for investors because in many cases debtors improperly seek to use

the bankruptcy discharge to protect officers and directors from personal

liability for various kinds of claims, including liability under the federal

securities laws.

In three cases, the Commission successfully objected to attempts to

discharge claims of creditors and sell the remaining assetless public

corporate shell. The staffwas able to prevent improper attempts to use

the debtor's public shell in four cases during the disclosure statement

review and comment process. The trafficking in public company

corporate shells-which can lead to stock market manipulation-vis

specifically prohibited by the Bankruptcy Code

Law Enforcement Matters

Bankruptcy issues frequently arise in Commission enforcement actions.

In In re Bilzenan.r" the Eleventh Circuit concluded that the district court

was correct to apply the legal doctrine of collateral estoppel (that is, to

accept the factual findings of another court and preclude relitigation of

the issue) to the Commission's $33 million securities fraud disgorgement

judgment. The court found that all of the legal requirements for

excluding a debt from discharge in bankruptcy were established by the

prior criminal and civil proceedings against Bilzerian, and directed the

bankruptcy court to enter an order holding that the Commission's fraud

claim was not discharged by Bilzerian's bankruptcy 159

In In re Cross,160 the Commission appealed a bankruptcy court order

dismissing its $6.5 million debt against Cross, which was based upon an

illegal offering of unregistered debt securities, to the Bankruptcy

Appellate Panel for the Ninth Circuit. The Commission argued that this

debt could not be discharged in Cross' bankruptcy because it was based

on his fraudulent conduct. The bankruptcy court had held that the

93
Commission lacked standing as a creditor because payment of the

Commission's claim was to be made to a court-appointed receiver. 161

The Appellate Panel agreed with the Commission's position and reversed

the bankruptcy court's decision, holding, that "as the chief enforcer of the

securities laws, the Commission should not have to depend upon the

receiver to enforce its judgments," and that "designating the receiver as

the depository was merely a procedural step done for administrative

convenience.v'f'' The panel concluded that the Commission held a valid

claim against the debtor and was entitled to argue that this claim could

not be discharged in Cross' bankruptcy.

In In re Hibbard Brown, 163 a Chapter 11 case involving a penny stock

broker-dealer, the Commission objected to confirmation of a plan that

sought to implement an unfair settlement with former registered

representatives and employees who defrauded investors of more than

$115 million. The Commission argued that the proposed contributions by

these third parties were not enough to justify a release of all claims

arising from their fraudulent activity. The bankruptcy court confirmed

the plan notwithstanding the Commission's objection.

Ethical Conduct Program

In 1998, our ethics staff responded to 1,475 counseling inquiries and

reviewed and cleared 162 speeches and articles submitted by SEC

employees. The staff assisted in the renomination process of the

Chairman.

94
Municipal Securities Initiatives

The Office of Municipal Securities provides expertise on municipal

securities matters to the Commission and its divisions, and to municipal

market participants.

Key 1998 Results

The Office of Municipal Securities devoted significant attention to alerting the

municipal market of the need to disclose material issues arising from the year

2000. The staff also continued to coordinate the agency's efforts to end payto-play practices in the municipal securities markets.

Municipal Securities Disclosure

The Office of Municipal Securities worked closely with various SEC divisions

and offices and municipal market participants on a number of important

disclosure issues. Some of those issues included'

• the need to disclose material issues arising from the year 2000;

• implementation of, and compliance with, amendments to rule 15c2-12,

which requires secondary market disclosure; and

• recent SEC enforcement decisions that apply the antifraud provisions of

the federal securities laws to municipal securities.

Outreach

Our municipal securities staff met with numerous organizations representing

participants involved in the municipal finance industry. Among the

organizations were the Government Finance Officers Association, National

95
League of Cities, National Association of Counties, The Bond Market

Association, National Association of Bond Lawyers, and a variety of regional

and local municipal government educational groups. The meetings focused

on methods of improving compliance with existing regulations. The Office of

Municipal Securities acted as a point of contact for municipal bond issuers

and provided them access to the Commission.

Technical Assistance

The Office of Municipal Securities provided technical assistance to various

SEC divisions and offices on various municipal securities matters. Some of

the more significant matters included:

• enforcement cases involving municipal securities and the municipal

securities markets (e.g., Securities and Exchange Commission v.

Rauscher Pierce Refsnes, Inc. and James R FeithamJ64 and In the

Matter of Meridian Securities Inc. et al. 165);

• the tax exempt aspects of municipal securities, including the tax

regulations relating to situations involving potential yield burning;

• Municipal Securities Rulemaking Board rule G-37, which prohibits payto-play practices in the municipal securities markets;

• Municipal Securities Rulemaking Board rule G-38, which requires

disclosure regarding consulting arrangements;

• various issues surrounding the implementation of amendments to rule

15c2-12;

• issues pertaining to individual investors and municipal securities price

transparency; and

• municipal bankruptcy and other municipal securities matters.

96
Economic Research and Analysis

The SEC's economtc analysis program provides the techmcal and analytical

support necessary to understand and evaluate the economic effects of

Commission regulatory policy, including the costs and benefits of

rulemaking initiatives. The staff reviews all rule proposals to assess their

potential effects on:

• small businesses as required by the Regulatory Flexibility Act and

Section 502 of the Small Business Investment Incentives Act, both enacted

in 1980;

• competition within the securities industry and competing securiues

markets as required by the 1975 amendments to the Securities Exchange

Act of 1934;

• efficiency, competition, and capital formation pursuant to Section 106 of

the National Securities Markets Improvement Act; and

• costs, prices, investment, innovation, and the economy as required by the

Small Business Regulatory Enforcement Fairness Act.

Key 1998 Results

Our economic analysis staff analyzed the performance of the two circuit

breakers triggered by the sharp decline in stock prices on October 27,

1997. The staff also provided economic advice, empirical data, and

analytical support in connection with important policy initiatives, such as

the Securities Act Reform Release, the Exchange Concept Release, and

Regulation ATS. These initiatives are designed to modernize and

streamline securities regulations.

97
Economic Analysis and Technical Assistance

Securities Offerings and Capital Formation

Our economic analysis staff provided substantial quantitative economic

evidence on a number of rulemaking projects.

• Securities Act Reform Release. Provided economic advice and

analysis focusing on how various aspects of the proposal designed to

streamline the securities offering process could lower capital-raising

costs and enhance the availability of information to investors.

• Shareholder Proposals. Provided extensive empirical data and

analyses in connection with proposed changes to the proxy rules,

concentrating on how the rule change could affect the number of

shareholder proposals submitted and shareholder wealth.

• Regulation S. Analyzed the impact of new disclosure requirements

governing offshore distributions of securities, focusing on the timing

and amount of sales and the cost of raising capital under the amended

regulation.

• Securities Act Rule 701. Analyzed 1,300 filings of Form 701 for a

five-year period and provided data on the number of companies using

the rule to issue securities to employees, consultants, and advisers

under compensatory plans or contracts, such as profit sharing and

savings plans.

Mutual Funds

Our staff provided advice and analytical support to the Division of

Investment Management in connection with the development of the

profile prospectus and methods of displaying the riskiness of funds. The

advice and technical assistance focused on ways to improve mutual fund

disclosures to help investors evaluate and compare funds.

98
Market Structure and Trading Practices

Our economic analysis staff provided data, analyses, and economic advice

to help craft policy initiatives.

• The Exchange Concept Release and Regulation ATS. The staff

provided data, analyses, and economic advice to help the Division of

Market Regulation craft the Exchange Concept Release and

Regulation ATS. These address the need to update the regulatory

framework for exchanges and alternative trading systems (ATSs) in

response to rapid technological developments affecting the securities

markets. The advice and analysis focused on how the new display

and access requirements of Regulation ATS could enhance market

transparency, narrow bid-ask spreads, and provide investors with

opportunities for better transaction prices.

• Report to the President's Working Group on Financial Markets. The

staff provided extensive empirical data and analytical support,

including an analysis of the performance of the two circuit breakers

triggered by the sharp decline in stock prices on October 27, 1997.

The analyses was incorporated into a report issued by the Division of

Market Regulation in September of 1998.

• Nasdaq's Fixed Income Pricing System. The staff conducted the firstever empirical analysis of this system's bond trading data. The

analysis assessed the transparency and trading patterns of

approximately 1,350 below-investment-grade corporate bonds.

• Regulation M. This rule, which went into effect in April 1997,

replaces the Commission's trading practice rules governing potentially

manipulative trading during a securities distribution. The staff

conducted a study of the aftermarket activities of underwriting

syndicates and provided a comprehensive review and analysis of

empirical data on underwriters' use of penalty bids and short -covering

following the completion of securities distributions.

99
• Order Handling and Tick Size Rules. The staff analyzed the effect of

the Commission's new order handling rules and reductions in the

minimum tick size from eighths to sixteenths. The analyses examined

the impact of these events on bid-ask spreads, quotation depth, and

transaction prices relative to contemporaneous price quotations. The

analyses indicated these changes narrowed bid-ask spreads and that

investors have benefited from their ability to trade at the improved

price quotations.

Enforcement Issues

Our economic analysis staff provided assistance in investigations and

enforcement actions involving the Nasdaq market, yield burning, insider

trading, mutual fund trade allocation, market manipulation, fraudulent

financial reporting, and other violations of securities laws. The staff

applied financial economics and statistical techniques to determine

whether the elements of fraud were present and to estimate the amount of

disgorgement to be sought. They also assisted in evaluating the

testimony of experts hired by opposing parties.

Inspections and Examinations

Our economic analysis staff worked closely with the SEC's Office of

Inspections and Examinations (OCIE) to:

• apply large sample and statistical techniques to improve the efficiency

and effectiveness of OCIE' s examinations and inspections;

• assist in developing a system to prioritize broker-dealer examinations

based on empirical data from regulatory reports; and

• assist OCIE in a number of its inspections involving securities

exchanges, Nasdaq market makers, electronic communications

networks, and mutual fund complexes.

100
Special Projects

In addition to working with the SEC divisions and offices, the economic

analysis staff:

• analyzed the extent oftrading in ATSs and the accuracy of transaction

fees collected by the Commission;

• provided assistance in connection with applications by exchanges to

trade options and swaps contracts and in conjunction with

applications for exemptions filed by public utilities; and

• provided several offices and divisions with assistance in understanding

the economic value of complex financial instruments and transactions,

such as collateralized mortgage obligations and wrapper agreements.

101
Policy Management and Administrative Support

Our policy management and administrative support staff provide the

Commission and operating divisions with the necessary services to

accomplish the agency's mission. The responsibilities and activities

include developing and executing management policies, formulating and

communicating program policy, overseeing the allocation and

expenditure of agency funds, maintaining liaison with the Congress,

disseminating information to the press, and facilitating Commission

meetings. Administrative support services include information

technology, financial, space and facilities, and human resources

management.

Key 1998 Results

The Commission held 50 meetings in 1998, during which it considered

186 matters The Commission acted on 1,051 staff recommendations by

seriatim vote. The agency collected $1.78 billion in fees, of which $250

million was used to directly fund the agency in 1998.

Policy Management

Commission Activities

During the 50 Commission meetings held in 1998, the Commission

considered 186 matters, including the proposal and adoption of

Commission rules, enforcement actions, and other items that affect the

nation's capital markets and the economy. The Commission also acted on

1,051 staff recommendations by seriatim vote.

102
Significant Regulatory Actions

• Adoption of requirements for plain English disclosure.

• Adoption of measures intended to deter microcap fraud

• Adoption of a new mutual fund disclosure document, the profile

prospectus.

• Interpretations and rules for issuers, broker-dealers, investment

advisers, and transfer agents concerning year 2000 computer

problems.

• Proposal on regulation of exchanges and alternative trading systems.

• Adoption of reforms to address concerns about the shareholder

proposal process.

Management Activities

Our staff continued to promote management controls and financial

integrity and to manage the agency's audit follow-up system. In addition,

we analyzed the efficiency and effectiveness of operating divisions and

support offices and coordinated and implemented the agency's

compliance with and response to actions under the Government

Performance and Results Act of 1993, including development of the

agency's strategic plan. Working closely with other senior officials, the

office formulated the agency's budget submissions to the Office of

Management and Budget and the Congress.

Public Affairs

Our Public Affairs, Policy Evaluation and Research staff:

• informed those interested in or affected by Commission actions of

SEC activities;

103
• published the SEC News Digest, which provides information on rule

changes, enforcement actions against individuals or corporate entities,

administrative actions, decisions on requests for exemptions,

upcoming Commission meetings, and other events of interest;

• provided support for the Chairman's investor education initiatives, the

SEC's Internet Web site, the agency's foreign visitors program, and

the SEC International Institute for Securities Market Development;

and

• responded to over 50,000 requests for specific information on the

SEC or its activities and coordinated programs for 878 foreign

visitors.

Equal Employment Opportunity

Our Equal Employment Opportunity (EEO) staff monitored the SEC's

compliance with EEO laws and regulations. In an effort to establish and

maintain a discrimination-free workplace, our staff counseled employees,

mediated complaints of discrimination, and investigated complaints not

resolved through mediation. We trained managers and supervisors on

prevention of sexual harassment and upholding the EEO responsibilities

of the Commission. The SEC sponsored minority recruitment events and

programs to promote diversity and cultural awareness within the SEC and

the industry.

Freedom ofInformation Act and Privacy Act

Our Freedom of Information Act (FOIA) and Privacy Act staff responded

to requests for access to information under FOIA, the Privacy Act, and

the Government in the Sunshine Act, and processed requests under the

agency's confidential treatment rules. In 1998, we received 3,155 FOIA

requests and appeals, 12 Privacy Act requests and appeals, 21

Government in the Sunshine Act requests, 12 government referrals, and

8,733 requests and appeals for confidential treatment.

104
Administrative Support

Financial Operations

The SEC deposited $1.78 billion in fees in the U.S. Treasury in fiscal

1998, of which $250 million was used to directly fund the agency in 1998.

Of the $1.78 billion in total fees collected, 58% were from securities

registrations; 36% were from securities transactions, and 6% were from

tender offer, merger, and other filings.

Offsetting fee collections were affected by the enactment of Title IV of

the National Securities Markets Improvement Act of 1996 (NSMIA).

Specifically, NSMIA extended the collection of existing transaction fees

to the over-the-counter market at the rate of 1/300 of 1% starting in

1997. It also increased the frequency of transaction fee collections on the

exchanges, which resulted in the collection of 20 months of transaction

fees from the exchanges in 1998 as the shift to the new schedule

occurred. Starting in 1999, all transaction fee collections will be based on

a 12-month cycle

In addition, NSMIA reduced the registration fee rate from roughly $303

per million (1/33 of 1%) in 1997 to $295 per million (1/34 of 1%) in

1998 NSMIA further reduces the registration fee rate to $278 per

million (1/36 of 1%) in 1999

Year 2000

In 1998, preparations for year 2000 compliance of our internal systems

remained our highest management priority. We completed an assessment

of all mainframe, client/server, and PC-based applications, and developed

our strategy for repairing, replacing or retiring these applications. We

continued assessing and upgrading the agency's infrastructure (including

hardware, software, and PC's) to achieve year 2000 compliance Test

plans, including independent verification and validation, were prepared

On July 1, 1998, the SEC awarded a contract to TRW for the

modernization and ongoing maintenance of the EDGAR system. The first

105
release of the three-year modernization effort was implemented in

November with major components affecting text management and the

dissemination of EDGAR filing data. The text management subsystem

allows SEC and public reference room users to retrieve and print

EDGAR filings using a new browse-based interface and Internet

technology. The new privatized dissemination system significantly

reduced the cost for subscribers who purchase and reformat the EDGAR

data.

The agency's Internet Web site provides the public with electronic access

to the EDGAR database and a wide range of other information of interest

to the investing public. The site averaged 650,000 connections and over

25 gigabytes of data downloaded each day.

Administrative and Personnel Management

This year, our staff:

• continued efforts to migrate our in-house personnel/payroll system

and operations to the Department of the Interior;

• met our goal of hiring 10 employees under the Welfare to Work

Program;

• consolidated our desktop publishing, printing, publications, and mail

room operations to improve efficiency, increase automation, and

dispose of outdated equipment; and

• conducted special recruitment efforts through organizations and

educational institutions involving minorities and persons with disabilities,

resulting in 210./0 of new hires in 1998 being minorities or persons with

disabilities.

106
ENDNOTES

1 SEC v. Steven Samblis, et al., Litigation ReI. No. 15609 (Jan. 6, 1998),

M.D. Fla.

2 SEC v. Jerome M Wenger, Litigation Release No. 15707 (Apr. 15,

1998), S.D.N.Y.

3 SEC v. Michael R. Milken and MC Group, Litigation ReI. No. 15654

(Feb. 26, 1998), S.D.N.Y.

4 In the Matter of Olde Discount Corp,. et al., Securities Act ReI. No.

7577 (Sept. 10, 1998).

5 SECv. Szur, etal., Litigation ReI. No. 15595 (Dec. 18, 1997),

S.D.N.Y.

6 SEC v. Thomas Edward Cavanagh, et al., Litigation ReI. No. 15669

(March 13, 1998), S.D.N.Y

7 In the Matter of Monetta Financial Services, Inc., et aI., Securities Act

ReI. No. 7510 (Feb. 26, 1998).

8 SEC v. Sweeney Capital Management Inc., et al., Litigation ReI. No.

15664 (March 10,1998), N.D. Cal.

9 SEC v. International Heritage, Inc., et al., Litigation ReI. No. 15672

(March 17, 1998), N.D Ga.

10 SEC v. American Automation, Inc., et al., Litigation ReI. No. 15872

(Sept. 4, 1998), N.D. Tex.

11 In The Matter of KPMG Peat Marwick LLP, Exchange Act ReI. No

39400 (Dec. 4, 1997).

12 In the Matter of Sony Corp. and Sumio Sano, Exchange Act ReI. No.

40305 (Aug. 5, 1998).

13 SEC v. Sony Corp., Litigation ReI. No. 15832 (Aug 5, 1998), D D.C.

14 SEC v. One or More Unknown Purchasers of Call Options and

Common Stock of USCS International, Inc.), Litigation ReI. No 15875

(Sept. 9, 1998), S.D.N.Y.

15 SEC v. Rauscher Pierce Refsnes, Inc. and James R. Feltham,

Litigation Release No. 15613 (Jan. 8, 1998), D. Ariz.

107
16 In the Matter of Meridian Securities, Inc., et al., Securities Act ReI

No. 7525 (Apr. 23, 1998).

17 The SEC, Department ofthe Treasury, and the Federal Reserve Board

issued a "Joint Study of the Regulatory System for Government

Securities" in March 1998

III The Importance 0/ Transparency in America's Debt Market, Remarks

by SEC Chairman Arthur Levitt at the Media Studies Center, New York,

New York (Sept. 9,1998)

19 Letters regarding Instinet Real-Time Trading Service (Jan. 17, 1997),

the Island System (Jan. 17, 1997), the Bloomberg Tradebook System

(Jan. 17,1997), the TONTO System (Jan. 17, 1997), the Routing and

Execution DOT Interface Electronic Communications Network (Oct. 6,

1997), the ATTAIN System (Feb. 4, 1998), the Brass Utility System

(Apr. 21, 1998), the Strike System (Nov 13,1998), and the PIM Global

Equities Trading System (Nov. 13, 1998).

20 Release No. 39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998).

21 Release No. 34-40357 (Aug. 24, 1998),63 FR 46261 (Aug. 31, 1998).

22 Release No. 34-40361 (Aug. 25,1998),63 FR 46262 (Aug. 31,1998).

23 Release No. 34-39445 (Dec. 11, 1997), 62FR66709(Dec. 19, 1997).

24 Release No. 34-39846 (Apr. 9, 1998),63 FR 18477 (Apr. 15, 1998)

(regarding AMEX-98-09, BSE-98-06, CHX-98-08, NASD-98-27,

NYSE-98-06, and PHLX-98-15)

25 Staff Legal Bulletin NO.8 (MR) (Sept. 9, 1998).

26 Release No. 34-40377 (Aug. 27,1998),63 FR47051 (Sept. 3,1998).

27 Release Nos. 34-40162 (July 2, 1998),63 FR 37668 (July 13, 1998)

(regarding broker-dealers); 34-40163 (July 2, 1998),63 FR 37688 (July

13, 1998) (regarding transfer agents).

28 Release Nos. 34-40608 (Oct. 28, 1998), 63 FR 59208 (Nov. 3, 1998)

(regarding broker-dealers); 34-40587 (Oct. 22, 1998), 63 FR 58630

(Nov. 2, 1998) (regarding transfer agents).

29 Release No. 34-40622 (Oct. 30, 1998), 63 FR 59819 (Nov. 5, 1998)

(regarding AMEX-98-32, NASD-98-56, and NASD-98-67).

30 Press Conference by David Krell, President & CEO, ISE, Nov. 10,

1998, New York City.

31 Release No. 34-40204 ( July 15, 1998), 63 FR 39306 (July 22, 1998).

108
32 Release No. 34-40260 (July 21,1998),63 FR40748 (July 30,1998).

33 Release No. 34-40077 (June 8, 1998), 63 FR 32628 (June 15, 1998).

34 See Testimony of Richard R. Lindsey, Director, Division of Market

Regulation, SEC, before the House Committee on Banking and Financial

Services, dated Oct. 1, 1998.

35 Release No. 34-39670 (Feb. 25, 1998), 63 FR 9661 (Feb. 25, 1998)

36 Letter regarding Rule 15c2-11: OTC Bulletin Board: Removal ofF oreign

Equities and ADRs, dated Mar. 13, 1998.

37 Release No 34-38456 (Mar. 31, 1997) 63 FR16635 (Apr. 7, 1998).

38 Letter regarding Principal Trading and Market Making Activities in

Certain Securities on the London Stock Exchange, dated June 29, 1998

and Letter regarding Application of Rule 10b-13 During Return of

Capital Share Redemptions, dated July 22, 1998.

39 Letter regarding Exchange DistributionslBlock Crossing Transactions,

dated Aug. 7, 1998.

40 Release No. 34-40594 (Oct 23, 1998), 63 FR 59362 (Nov. 3, 1998).

41 Letter regarding StockPower Inc., dated Mar. 26, 1998.

42 Letter regarding StockPower Inc., dated July 13, 1998

43 Letter regarding Hili Winterthur International Holdings Limited, dated

July 8, 1998.

44 Letter regarding Telecom Corporation of New Zealand Limited, dated

Feb. 20, 1998.

45 Letter regarding Technology Funding Securities Corporation, dated

May 20, 1998.

46 Letter regarding Wrap Fee Programs of Prudential Securities, Inc. and

Wexford Clearing Services Corp., dated Aug. 3, 1998.

47 Letter regarding Rule 1Ob-l O/Calculation of Yield to Maturity, dated

Aug. 24, 1998.

48 Letter regarding Intermarket Surveillance Group, dated Aug. 21, 1998.

49 Letter regarding Net Capital Treatment of Proprietary Accounts of

Introducing Brokers, dated Nov. 3, 1998.

50 Letter regarding Deficit Charges for Repurchase Transactions, dated

Apr. 1, 1998.

51 Release No. 34-40518 (Oct. 2, 1998), 63 FR 54404 (Oct. 9, 1998).

52 Release No 34-40109 (June 22,1998),63 FR 35299 (June 29, 1998).

109
53 Release No. 34-40479 (Sept. 24, 1998),63 FR 52782 (Oct. 1, 1998).

54 Release Nos. 34-40555 (Oct. 14, 1998), 63 FR 56670 (Oct. 22,

1998), and 34-40556 (Oct. 14, 1998), 63 FR 56957 (Oct. 23, 1998).

55 Release No. 34-39846 (Apr. 9,1998),63 FR 18477 (Apr. 15, 1998)

(regarding AMEX-98-09, BSE-98-06, CHX-98-08, NASD-98-27,

NYSE-98-06, and PHLX-98-15).

23 Release No. 34-40529 (Oct. 7,1998) 63 FR 55667 (Oct. 16, 1998)

(regarding NYSE-98-16).

57 Release No. 34-39729 (Mar 6, 1998),63 FR 12559 (Mar. 13, 1998)

(regarding NASD-97-56).

58 Release No. 34-39516 (Jan. 2, 1998),63 FR 1520 (Jan. 9, 1998)

regarding NASD-97-21).

59 Release No. 34-39883 (Apr. 17, 1998), 63 FR 20232 (Apr. 23, 1998)

(regarding NASD-97-69).

60 Release No. 34-39712 (Mar. 3, 1998),63 FR 1193 (Mar. 11, 1998)

(regarding NASD-98-03, CBOE-97-68, MSRB-98-02, and NYSE-97-

33). Note that the Commission approved at the same time similar

amendments to the rules ofthe CBOE, the Municipal Securities

Rulemaking Board, and the NYSE.

61 Letter from Jonathan G. Katz, Secretary, SEC, to Jean A. Webb,

Secretary, CFTC, dated Dec. 4, 1997.

62 Release No. 34-40216 (July 16, 1998).

63 7 U.S.c. S 2a(ii)(III).

64 Release Nos. 34-39326 (Nov. 14, 1997),62 FR 62385 (Nov. 21, 1997)

(regarding NASD -97-71, NASD-96-20, and NASD-96-29); 34-39759

(Mar. 6, 1998),63 FR 14153 (Mar. 24, 1998) (regarding CHX-97-36);

34-38960 (Aug. 22, 1997), 62 FR 45904 (Aug. 29, 1997) (regarding

PHLX-97-31).

65Id (Discussing committee changes in context of general corporate

governance reorganization.)

66 Release Nos. 34-40499 (Sept. 29, 1998), 63 FR 53739 (Oct. 6, 1998)

(regarding MSRB 97-9); 34-39495 (Dec. 29, 1997), 63 FR 585 (Jan. 6,

1998) (regarding MSRB 97-18); 34-40167 (July 2, 1998),63 FR 37434

(July 10, 1998) (regarding MSRB 98-10); 34-39712 (Mar. 3, 1998); 63

110
FR 11939 (Mar. 11, 1998) (regarding CBOE-97-68, MSRB-98-02,

NASD-98-03, and NYSE-97-33).

67 Release No. 34-40230 (July 17, 1998), 63 FR 40148 (July 27, 1998)

(regarding MSRB 97-14).

68 Release No. 34-40014 (May 20, 1998), 63 FR 29282 (May 28, 1998)

(regarding MSRB 98-1).

69 Release Nos. 34-40337 (Aug. 19, 1998), 63 FR 45544 (Aug. 26, 1998)

(regarding MSRB-98-9); 34-40349 (Aug. 20, 1998), 63 FR 45545 (Aug.

26, 1998) (regarding MSRB-98-11 ) (establishing an effective date of

Aug. 24, 1998, for the MSRB to begin operation of the Service).

70 Release No. 34-40161 (July 2, 1998),63 FR 37146 (July 9,1998).

71 Brady bonds are named after former U.S. Treasury Secretary Nicolas

Brady who developed a plan that allowed certain countries to issue

collaterized debt securities in exchange for outstanding bank loans as part

of an internationally supported debt restructuring. Typically, the

collateral would be U.S. Treasury securities; more recently, however,

some bonds have been issued without collateral.

72 Release No. IC-23064 (Mar. 13, 1998),63 FR 13916 (Mar. 23, 1998).

73 Release No. IC-23065 (Mar. 13, 1998), 63 FR 13968 (Mar. 23, 1998).

74 Release No IC-22921 (Dec. 2, 1997),62 FR 64968 (Dec. 9, 1997).

75 Release No. IC-22884 (Nov. 13, 1997),62 FR 61933 (Nov. 20, 1997)

76 Release No. IC-23325 (July 22, 1998), 63 FR 40231 (July 28, 1998).

77 Emerging Markets Growth Fund, Inc., Release Nos. IC-23433 (Sept.

11, 1998),63 FR 49717 (Sep. 17, 1998) (notice); and 23481 (Oct. 7,

1998) (order).

78 Daily Money Fund, et al., Release Nos. IC-23004 (Jan. 20, 1998), 63

FR 3933 (Jan. 27, 1998) (notice); and 23030 (Feb. 18, 1998) (order).

79 In the Matter of the Chase Manhattan Bank, NA. and Chemical Bank,

Release No. IC-23186 (May 14, 1998).

80 Europacijic Growth Fund, et al., Release Nos. IC-23307 (July 9,

1998),63 FR 38219 (July 15,1998) (notice); and 23374 (Aug. 4,1998)

(order).

81 The New Germany Fund, Inc. (pub. avail. May 8, 1998).

82 Investment Company Institute (pub. avail. Oct. 30, 1998).

83 Zurich Insurance Company (pub. avail. Aug. 31, 1998).

111
84 American Century Companies, Inc'!1.P. Morgan & Co. Incorporated

(pub. avail. Dec. 23, 1997).

85 Pilgrim America Prime Rate Trust (pub. avail. May 1, 1998).

86 Letter to Confidential Treatment Filers (pub. avail. June 17, 1998).

87 Investment Company Institute (pub. avail. May 14, 1998).

88 DALBAR, Inc. (pub. avail. Mar. 24, 1998).

89 Paragon Advisers, Inc. (pub. avail. Oct. 1, 1998).

90 Goodwin Procter & Hoar (pub. avail. Oct. 5, 1998).

91 Wilmer, Cutler & Pickering and Davis Polk and Wardwell (pub. avail.

Oct. 5, 1998).

92 Statement of the Commission Regarding the Use of Internet Web Sites

to Offer Securities, Solicit Securities Transactions or Advertise

Investment Services Offshore, Release Nos. IC-23071 and IA-I710 (Mar.

23, 1998),63 FR 14806 (Mar. 27, 1998).

93 Release No. IA-1732 (July 17, 1998), 63 FR 39505 (July 23, 1998).

94 Release Nos 33-7514 and IC-23066 (Mar. 13, 1998),63 FR 13988

(Mar. 23, 1998).

95 Rydex Advisor Variable Annuity Account (pub. avail. Sept. 29, 1998).

96 State Street Bank and Trust Company (pub. avail. Aug. I, 1996).

97 Massachusetts Mutual Life Insurance Company (pub. avail. Aug. 10,

1998).

98 Release No. IA-1733 (July 17, 1998), 63 FR 39708 (July 24, 1998).

991d.

100 Release No. IA-173I (July 15, 1998), 63 FR 39022 (July 21, 1998).

101 Staff Legal Bulletin NO.5 (CF/IM) (Jan. 12, 1998).

102 Release No. IA-1769 (Oct. 1, 1998),63 FR 54307 (Oct. 8, 1998).

103 Sempra Energy, Release Nos. 35-26711 (Apr. 25, 1997),62 FR

24141 (May 2, 1997) (notice); and 35-26890 (June 26, 1998) (order).

104 WPL Holdings, Inc., Release Nos. 35-26593 (Oct. 11, 1996),61 FR

54687 (Oct. 21, 1996) (notice); and 35-6856 (Apr. 14, 1998) (order).

105 American Electric Power Company, Release Nos. 35-26708 (Apr. 18,

1997),62 FR20024 (Apr. 24,1997) (notice); and 35-26864 (Apr. 27,

1998) (order). Cinergy Corporation, Release Nos. 35-26698 (Mar. 28,

1997),62 FR 16206 (Apr. 4, 1997) (notice); and 35-26848 (Mar. 23,

I 998) (order).

112
106 Release No. 33-7606A (Nov. 13, 1998), 63 FR 233 (Dec. 4, 1998).

107 Release No. 33-7607 (Nov. 3, 1998), 63 FR 233 (Dec. 4, 1998).

108 Release No. 33-7497 (Jan. 22, 1998), 66 SEC Docket 8.

109 Release No. 33-7380 (Jan. 14, 1997),63 SEC Docket 14.

110 Release No. 34-40678 (Nov. 13, 1998), 68 SEC Docket 10.

III Release No. 34-39538 (Jan. 12, 1998),66 SEC Docket 6.

112 Release No. 33-7516 (Mar. 23, 1998),66 SEC Docket 16.

113 Release No. 33-7505 (Feb. 17, 1998), 66 SEC Docket 11.

114 Release No. 33-7511 (Feb. 27, 1998), 66 SEC Docket 11.

115 Release No. 33-7541 (May 1, 1998),67 SEC Docket 4.

ll6 Release No. 34-40018 (May 21, 1998),67 SEC Docket 4.

117 Release No. 33-7558 (July 29, 1998),67 SEC Docket 14.

118 Release No. 33-7609 (Nov. 9, 1998),68 SEC Docket 9.

119 Release No. 33-7506 (Feb. 17, 1998), 66 SEC Docket 11.

120 Release No. 33-7472 (Oct. 24, 1997),65 SEC Docket 15.

121 Release No. 33-7550 (June 25, 1998), 67 SEC Docket 9.

122 Release No. 33-7549 (June 24, 1998),67 SEC Docket 9.

123 Release No. 33-7386 (Jan. 31,1997),63 SEC Docket 2182.

124 Financial Reporting Release No. 54 (Jan. 5, 1999), 68 SEC Docket

17.

125 Statement of Financial Accounting Standards No. 131, Disclosure

about Segments of an Enterprise and Related Information (June 1997).

126 Staff Accounting Bulletin No. 98 (Feb. 3, 1998), 66 SEC Docket

1422.

127 Statement of Financial Accounting Standards No. 128, Earnings Per

Share, (Feb. 1997).

128 Statement of Financial Accounting Standards No. 133, Accountingfor

Derivative and Similar Financial Instruments andfor Hedging Activities,

(June 1998).

129 Special Report, A Guide to Implementation of Statement 125 on

Accounting for Transfers and Servicing of Financtal Assets and

Extinguishments of Liabilities, Questions and Answers (Sept. 1998).

130 Invitation to Comment, Methods of Accounting for Business

Combinations: Recommendations of the G4+ 1 for Achieving

Convergence (Dec. 15, 1998). The G4+ 1 includes representatives from

113
the accounting standards boards of Australia, Canada, New Zealand, the

United Kingdom, and the U.S. Repesentatives of the International

Accounting Standards Committee participate as observers.

131 Statement on Standards for Attestation Engagements No.8,

Management's Discussion and Analysis (June 1998).

132 Statement of Position 98-8, Engagements to Perform Year 2000

Agreed-Upon Procedures Attestation Requirements Pursuant to [Various

Securities Exchange Act Rules] (Sept. 30, 1998).

133 Statement of Position 98-8, Engagements to Perform Year 2000

Agreed-Upon Procedures Attestation Requirements Pursuant to [Various

Securities Exchange Act Rules] (Sept. 30, 1998).

134Statement of Position 98-1, Accountingfor the Costs of Computer

Software Developed or Obtained for Internal Use (May 4, 1998).

135 Statement of Position 98-5, Reporting on the Costs of Start-up

Activities (Apr. 3, 1998).

136 Financial Reporting Release No. 50 (Feb. 18, 1998), 66 SEC Docket

1657.

137155F.3d 107 (2d Cir. 1998).

13!Nos. 97-1143, 97-1261 (3d Cir.) (en bane).

139137 F.3d 1325 (11th Cir. 1998).

14°155F.3d 1051 (9th Cir. 1998).

141132F.3d 1017 (4th Cir. 1997).

142147F.3d 184 (2d Cir. 1998).

143No.98-7123 (2d Cir.).

144150F.3d 675 (7th Cir. 1998).

14~0. 97-2098 (6th Cir.).

14~0. 97-16240 (9th Cir.).

147151F.3d 810 (8th Cir. 1998).

148135 F.3d 860 (2d Cir. 1998).

149MorganStanley & Co., Inc., Exchange Act ReI. No. 34-39459 (Dec.

17, 1997),66 SEC Dcoket 351.

150Victor Teicher, Victor Teicher & Co., L.P., & Ross S. Frankel,

Exchange Act ReI. No. 34-40010 (May 20, 1998),67 SEC Docket 542,

appealfiled, No. 98-1287 (D.C. Cir. June 24, 1998).

114
151MeyerBlinder, Exchange Act ReI. No. 34-39180 (Oct. 1, 1997),65

SEC Docket 1970.

152L.C. Wegard & Co., Inc. & Leonard B. Greer, Exchange Act ReI.

No. 34-40046 (May 29, 1998), 67 SEC Docket 814.

153Steven P. Sanders and Daniel M. Porush, Exchange Act ReI. No.

34-40600 (Oct. 26, 1998), 68 SEC Docket 982.

154D.E. Wine Investments, Inc., W. Randal Miller, Kenneth Karpf, and

Duncan Wine, Exchange Act ReI. No. 34-39517 (Jan. 6, 1998), 66

SEC Docket 763.

155Interactive Brokers UC, Exchange Act ReI. No. 34-39765 (Mar.

17, 1998), 66 SEC Docket 2346.

156FirstColorado Financial Services and Mark P. Augustine, Exchange

Act ReI. No. 34-40436 (Sept. 14, 1998), 68 SEC Docket 24.

157The Chicago Board of Trade, Exchange Act ReI. No. 34-40216 (July

16, 1998), 67 SEC Docket 1640, appeal filed, No. 98-2923 (7th Cir.

July 31, 1998).

158Inre Bilzerian, Case No. 91-10466-8P7 (Bankr. M.D. Fla.).

159SECv. Bilzerian, 153 F. 3d 1278 (l1th Cir. 1998).

160Inre Cross, Case No. SA-95-15228-JB (Bankr. C.D. Cal.).

161SECv. Cross, 203 B.R. 456 (Bankr. C.D. Cal. 1996).

162SECv. Cross, 218 B. R. 76 (Bankr. 9th Cir. 1998).

163Inre Hibbard Brown & Co., Inc., Case No. 94 B 44809 (CB) (Bankr.

S.D. N.Y.).

164 Case No. CV-98-0027 PHX ROS (Ariz., Jan. 8, 1998) (amended

complaint, filed March 6, 1998); Amended Order Denying Motion to

Dismiss, 1998 V.S. Dist. LEXIS 13164 (Aug. 24, 1998).

165 Release No. 33-7525, Admin Proc. File No. 3-9582 (Apr. 23, 1998)

115

117
Table 1

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1998 IN VARIOUS PROGRAM AREAS

(Each case initiated has been included in only one category listed below, even though

many cases involve multiple allegations and may fall under more than one category.

The number of defendants and respondents is noted parenthetically.)

Program Area In Which a % of

Civil Action or Admlnistrabve CIVil Admlnistrabve Total

Proceeding Was InrtJated Acbons Proceedings Total Cases

Secunbes Offenng Cases 82 (335) 61 (129) 143 ( 464) 30%

Broker-dealer Cases

(a) Fraud Against Customer 10 ( 20) 28 ( 44) 38( 64)

(b) Failure to sopervse o ( 0) 8 ( 10) 8 ( 10)

(c) GovemmenVMumclpal

secumes 5 ( 11) 15 ( 27) 2O( 38)

(d) Books & Records 1 ( 1) 3 ( 10) 4 ( 11)

(e) Other 4 ( 28) 5 ( 7) 9 ( 35)

Total Broker-dealer Cases 20 ( 60) 59 ( 98) 79 ( 158) 17%

Issuer Financial Statement

and Reporbng Cases

(a) Issuer Financial

Disclosure 29 ( 70) 46 ( 70) 75 ( 140)

(b) Issuer Repornng Other 2 ( 7) 2 ( 4) 4 ( 11)

Total Issuer Rnanclal Statement

and Reporbng Cases 31 ( 77) 48 ( 74) 79 ( 151) 17%

other Regulated Errtrty Cases

(a) Investment AdVisers 7 ( 21) 41 ( 75) 48 ( 96)

(b) Investment Compames o ( 0) 6 ( 10) 6 ( 10)

(c) Transfer Agent o ( 0) 3 ( 5) 3 ( 5)

Total Other Regulated Errtrty Cases 7 ( 21) 50 ( 90) 57 ( 111) 12%

lnsider Trading Cases 38 ( 90) 3 ( 03) 41 ( 93) 9%

Market ManipulabOn Cases 18 (138) 12 ( 17) 30 ( 155) 6%

Delinquent Filings

(a) Issuer Repornng 10 ( 10) 1 ( 3) 11 ( 13)

(b) Forms 3/4/5 3 ( 5) 6 ( 6) 9 ( 11)

Total Delinquent FIlings Cases 13 ( 15) 7 ( 9) 2O( 24) 4%

Contempt Proceedings 15 ( 31) o ( 0) 15 ( 31) 3%

Fraud Against Regulated Errtrty o ( 0) 2 ( 6) 2 ( 6) .5%

Related Party Transacbon Cases 1 ( 1) 1 ( 1) 2 ( 2) .5%

Miscellaneous 4 ( 8) 3 ( 5) 7 ( 13) .5%

Corporate Control Cases o ( 0) 2 ( 2) 2 ( 2) .5%

GRAND TOTAl 229 (776) 248 (434) 477 (1210) 100%

118
Table 2

FISCAL 1998 ENFORCEMENT CASES

LISTED BY PROGRAM AREA

Name of Case Release No. Date Filed

Broker-Dealer: Books & Records

In the Matter of Russo Securities, Inc., et aI. 34-39312 11/7/97

In the Matter of 1.W. Korth & Co., et aI. 34-40173 7/7/98

SEC v. The Nikko Securities Co. International, Inc. LR-15861 8/17/98

In the Matter of Nikko Securities, Co., et aI. 34-40375 8/27/98

Broker-Dealer: Failure to Supervise

In the Matter of George 1. Kolar 34-39812 3/27/98

In the Matter of Anthony S. Battaglia, Jr. 34-39360 11/26/97

In the Matter of 1. David Glover, Jr. 34-40508 9/30/98

In the Matter of Dean Witter Reynolds, Inc., et aI. 34-40366 8/26/98

In the Matter of Joseph W. Pellechia 34-40468 9/24/98

In the Matter ofPFS Investments, Inc. 34-40269 7/28/98

In the Matter of NYLIFE Securities 34-40459 9/23/98

In the Matter of Cesar A. Montilla 34-40309 8/7/98

Broker-Dealer: Fraud Against Customer

SEC v. David Scott Heredia LR-15542 10/24/97

In the Matter of John W. Gillette, Jr. 34-40484 9/25/98

In the Matter of Heman Jose Perez 34-40174 7/7/98

SEC v. Rita K. Savla LR-15915 9/30/98

In the Matter of Timothy B. Daley 34-40486 9/28/98

In the Matter of Charles Meizoso 34-40068 6/4/98

In the Matter of Michael Cardascia 34-40076 6/5/98

Inthe Matter of Craig Leibold, et aI. 34-40507 9/30/98

SEC v. Robert Tommassello, et aI. LR-15655 2/26/98

Inthe Matter of Brent Duane Green 34-39210 10/7/97

SEC v. Luis Bulas, If. LR-15917 9/23/98

Inthe Matter of Jamie Charles Spangler 34-39848 4/10/98

119
Name of Case Release No. Date Filed

In the Matter of David W. D'Andrea 34-40060 6/3/98

SEC v. Chimneyvile Investments Group, et al. LR-15867 8/31/98

In the Matter of Thomas Anthony Calise 34-39795 3/25/98

In the Matter of Jeoffrey A. Egan 34-40322 8/13/98

In the Matter of John T. Fortier 34-40460 9/23/98

In the Matter of Joseph Miceh, Jr. 34-40061 6/3/98

In the Matter of Robert 1. Meledandria, Jr. 34-40477 9/24/98

In the Matter of Ted C. Beattie, et al. 34-40480 9/25/98

In the Matter of Mark David Anderson 34-39399 12/4/97

In the Matter of Dean McDermott, et al. 33-7502 1/30/98

In the Matter of Thomas F. Ferris 34-39918 4/27/98

SEC v. James Frith, et al. LR-15581 12/5/97

In the Matter of John von der Lieth, ill, et al. 34-40471 9/24/98

In the Matter of Eugene McCloskey 34-40067 6/4/98

In the Matter of David Walter Connochie 34-39993 5/14/98

In the Matter of Eric S. Blumen, et al. 34-39375 12/1/97

In the Matter ofH.1. Meyers & Co., Inc., et aI. 34-40510 9/30/98

SEC v. Edward 1. Paradis, Jr., et al. LR-15706 4/14/98

In the Matter of Robert Putnam 34-39986 5/13/98

In the Matter of Kerrigan Sean Weber 34-39508 12/31/97

SEC v. Bing Sung LR-15916 9/30/98

SEC v. Larry K. O'Dell LR-15858 8/24/98

In the Matter of Olde Discount Corp., et al. 34-40423 9/10/98

In the Matter of Jean M. Yawn 34-39961 5/6/98

SEC v. Heman Jose Perez LR-15544 10/10/97

In the Matter of Ted E. Mong 34-40093 6/15/98

Broker-Dealer: Government Securities

In the Matter of Brian M. Cohen 34-40450 9/18/98

Broker-Dealer: Municipal Securities

SEC v. Richard P. Poirier, Jr., et al. LR-15565 11/20/97

In the Matter of Lazard Freres & Co. LLC 34-39388 12/3/97

In the Matter of Steven T. Snyder 34-39912 4/23/98

In the Matter of Wheat, First Securities, Inc. 34-40376 8/27/98

SEC v. Steven Strauss LR-15569 11/21/97

120
Name of Case Release No. Date Filed

In the Matter of City of Moorehead Mississippi 34-40478 9/24/98

In the Matter of James E. Eaton 34-39515 1/2/98

SEC v. Dain Rauscher, Inc., et al. LR-15829 8/3/98

In the Matter of Oliver Williams 34-40347 8/20/98

In the Matter of Merrill Lynch Pierce

Fenner & Smith Inc. 34-40352 8/24/98

In the Matter of County of Nevada, et al. 34-39612 2/2/98

In the Matter of Armscott Securities, LTD 34-39398 12/4/97

SEC v. James Pannone and Sakura Global CapitaI LR-15630 2/4/98

In the Matter of Freeman B. Irby, III 34-39362 11/26/97

SEC v. Rauscher Pierce Refsnes, Inc., et al LR-15613 1/8/98

In the Matter of Pacific Matrix Financial Group, Inc. 34-39600 1/30/98

In the Matter of Credit Suisse First Boston

Corp., et al. 34-39595 1/29/98

In the Matter of Meridian Securities, Inc., et al 34-39905 4/23/98

In the Matter of Howe Solomon and Hall, et aI. 34-40038 5/28/98

Broker-Dealer: Other

SEC v. The Oakford Corporation, et al LR-15653 2/25/98

SEC v. Nicholas A. Zahareas, et al. LR-15638 12/19/97

SEC v. Michael R. Milken, et aI. LR-15654 2/26/98

SEC v. Steven Samblis, et al. LR-15609 1/6/98

In the Matter of Richard G. Strauss 34-39277 10/24/97

In the Matter of Allen Weinstein 34-40501 9/30/98

In the Matter of Jerry G. Allison 34-39807 3/26/98

In the Matter of Paul I. Comi 34-39968 5/8/98

In the Matter of Nations Securities, et al. 34-39947 5/4/98

Contempt-Civil

SEC v. David A. Colvin NONE 3/30/98

SEC v. Michael Carnicle, et al. NONE 2/9/98

SEC v. David A. Colvin NONE 8/6/98

SEC v. Club Atlanta Travel, et aI. NONE 5/14/98

121
Name of Case Release No. Date Filed

SEC v. Dimples Group, Inc. NONE 1/13/98

SEC v. Jamie Edelkind NONE 9/30/98

SEC v. Gilboa Peretz, et al. NONE 9/2/98

SEC v. Robert D. Wyatt NONE 3/31/98

SEC v. First Zurich National USA, LLC, et al. NONE 2/13/98

SEC v. Maureen Schouman NONE 12/18/97

SEC v. Environmental Chemicals Group, Inc., et al. LR-15643 2/18/98

SEC v. Edelkind NONE 9/30/98

SEC v. Sidney W. Sers LR-15582 1/16/98

SEC v. John M. Toal LR-15930 8/28/98

SEC v. The Barr Financial Group, Inc., et al. NONE 9/17/98

Corporate Control: Tender Offers

In the Matter of WHX Corporation 34-40130 6/25/98

Inthe Matter of Bisco Industries, Inc. NONE 5/18/98

,,

" Delinquent Filings: Forms 3/4/5 :

,

In the Matter of Jacqueline Badger Mars 34-40362 8/25/98

In the Matter of Jayne Kathryn Rand 34-40127 6/25/98

Inthe Matter of James D. Scott 34-40128 6/25/98

SEC v. Robert Foisie LR-15642 2/17/98

Inthe Matter of David L. Chandler 34-40346 8/20/98

In the Matter of Graham F. Lacey 34-39464 12/18/97

SEC v. David L. Chandler LR-15854 8/19/98

Inthe Matter of Alan R. Mishkin 34-39463 12/18/97

SEC v. Kuslima Shogen, et al. LR-15658 3/3/98

Delinquent Filings: Issuer Reporting

SEC v. Xavier Corp. LR-15575 11/28/97

SEC v. Equisure, Inc. NONE 5/26/98

SEC v. Chancellor Group, Inc. LR-15831 8/4/98

122
Name of Case Release No. Date Filed

SEC v. Quadratech, Inc. LR-15745 5/15/98

SEC v. LRG Restaurant Group, Inc. LR-15744 5/15/98

SEC v. Inamed Corp. LR-15647 2/18/98

SEC v. Viking Resources LR-15584 12/9/97

SEC v. Holly Holdings, Inc. LR-15593 12/17/97

SEC v. Integrated Waste Services, Inc. LR-15570 11/20/97

SEC v. Safetech Industries, Inc. LR-15887 9/18/98

In the Matter of Kuslima Shogen, et aI. 34-39710 3/3/98

Fraud Against Regulated Entity

Inthe Matter of Sean P. Brennan, et aI. 34-40466 9/23/98

Inthe Matter of Stanley Berk, et aI. 34-40444 9/16/98

Insider Trading

SEC v. Hamilton Richardson Duncan, Jr. LR-15928 9/24/98

SEC v. Roger H. Licht, et aI. LR-15666 3/11/98

SEC v. S. Jim Farha LR-15641 1/13/98

SEC v. Changnian Liu LR-15783 6/17/98

SEC v. Frank 1. Papson LR-15799 7/6/98

SEC v. Terry Shilling LR-15788 5/21/98

SEC v. Robert G. Scott, Jr. LR-15708 4/16/98

SEC v. My Dang LR-15785 6/17/98

SEC v. Greg E. Skudlarick LR-15721 4/24/98

SEC v. Andrew S. Lane, et aI. LR-15549 11/4/97

SEC v. Herbert Lawson LR-15756 5/26/98

SEC v. William M. Fromm LR-15625 1/22/98

SEC v. Arjun Sekhri, et aI. LR-15965 4/1/98

SEC v. William Lockwood LR-15754 5/29/98

SEC v. One or More Unkown Purchasers LR-15875 9/8/98

SEC v. Craig Ryan Spradling LR-15779 6/11/98

SEC v. Guoping Wu, et aI. LR-15697 4/7/98

In the Matter of My Dang 34-40168 7/6/98

In the Matter of Andrew Paul Tomasko 34-40425 9/10/98

123
Name of Case Release No. Date Filed

SEC v. Lloyd Myers, et aI. LR-1591O 9/28/98

SEC v. James R. Beers LR-15823 7/30/98

SEC v. Cosmos Anastassiou, et aI. LR-15840 8/11/98

In the Matter of Mark Muenster 34-40078 6/8/98

SEC v. James Bowman, et aI. LR-15914 9/30/98

SEC v. HaIton Technologies, LTD LR-15893 9/18/98

SEC v. Ellison C. Morgan, et aI. LR-15920 9/30/98

SEC v. Alejandro C Zaffaroni, et aI. LR-15843 8/12/98

SEC v. Alan M. Stricoff, et aI. LR-15551 1115/97

SEC v. Daniel Lambert, et aI. LR-15924 9/29/98

SEC v. Scott Evans, et aI. LR-15648 2/19/98

SEC v. Bharat Koetcha, et aI. LR-15765 6/3/98

SEC v. Terri R. Scott LR-15913 9/29/98

SEC v. Heidi Flannery LR-15768 6/4/98

SEC v. Mitchell Sher LR-15741 5/15/98

SEC v. Roger D. Wyatt, et aI. LR-15676 5/27/98

SEC v. Anindya N. Bakrie LR-15834 8/6/98

SEC v. Benjamin Goldfield, et aI. LR-15678 3/19/98

SEC v. Brad E. Hollinger LR-15736 5/12/98

SEC v Miko Leung, et aI. LR-15631 1/29/98

SEC v. Myles R. Wren LR-15860 8/27/98

SEC v. Brent Gale, et aI. LR-15769 6/4/98

Investment Adviser

In the Matter of Pankowski Assoc., et aI. IA-1758 9/25/98

In the Matter of Mark E. Gatch IA-1677 10/7/97

In the Matter of Charles E. Duquette IA-1744 8/13/98

In the Matter of CS First Boston

Investment Mgmt. Corp. IA-1754 9/23/98

In the Matter of William 1. Ferry IA-1747 8/19/98

In the Matter of Feeley & Wilcox Asset

Management Corp., et aI. IA-l711 3/27/98

In the Matter of Cowan Asset Management,

Inc., et aI. IA-1724 5/28/98

In the Matter ofProfitek, Inc., et al. IA-1764 9/29/98

124
Name of Case Release No. Date Filed

In the Matter of Eugene Bilotti IA-1689 12/23/97

In the Matter of Robert Hardy lA-I 703 2/27/98

In the Matter of Finarc, LLC, et al. lA-I 763 9/29/98

In the Matter of John 1. Kenny, et al. 1A-1723 5/28/98

In the Matter of Donna L. Snyder lA-I 745 8/13/98

In the Matter of Rothschild Investment Corp. 1A-1714 4/13/98

In the Matter of Nicholas-Applegate

Capital Management lA-I 741 8/12/98

In the Matter of Renaissance Capital

Advisors, Inc., et al. 1A-1688 12/22/97

In the Matter of Steven L. Down 1A-17l5 4/13/98

In the Matter of Terry O. Clifford 1A-1676 10/6/97

SEC v. Timothy 1. Lyons LR-15842 8/12/98

In the Matter of Brian D. Schrauger, et al. 1A-1695 1/20/98

In the Matter of American Growth Capital Corp. IA-1743 8/13/98

In the Matter of Brack Stanford, et al. IA-1734 7/17/98

In the Matter of Scott S. Bell, et al. 1A-1707 3/13/98

In the Matter of Reservoir Capital

Management Inc., et al. 1A-17l7 4/24/98

In the Matter of John Gardner Black, et al. 1A-1720 5/4/98

In the Matter of Paul 1. Jackson 1A-1762 9/29/98

In the Matter of Emanual Lagpacan 1A-1725 6/12/98

SEC v. RCS Financial Services, et al. NONE 5/5/98

SEC v. John W. Gillette, Jr. LR-15812 7/10/98

SEC v. Steven Schaefer, et al. LR-15886 3/27/98

In the Matter of Piper Capital Mngmt., et al. 1A-1737 7/28/98

In the Matter ofRupay-Barrington

Services, Inc., et al. lA-I 761 9/28/98

SEC v. Sanjay Saxena & Mumtaz Saxena LR-15889 9/18/98

In the Matter of Monetta Financial Services,

Inc., et al. lA-I 702 2/26/98

In the Matter of Hugh P. Gee lA-I 698 1/29/98

In the Matter of A. Morgan Maree, Jr., et al. 1A-17l8 12/4/97

SEC v. Barr Financial Group, Inc., et al. LR-15932 9/3/98

SEC v. Sweeney Capital Managaement, Inc., et al. LR-15664 3/10/98

Inthe Matter of Seaboard Investment Adviser,

Inc., et al. 1A-1757 9/25/98

125
Name of Case Release No. Date Filed

In the Matter of Nicholas C. Bogard IA-1756 9/23/98

In the Matter of Thomas O'Connell IA-1770 4/8/98

In the Matter of Geoffrey Paul Adams IA-l708 3/16/98

In the Matter of George E. Brooks, et al. IA-1719 4/27/98

In the Matter of Bell Capital Management, et al. IA-1768 9/30/98

In the Matter of ABN AMRO-NSM International

Funds Management IA-1767 9/30/98

In the Matter of Rhumbline Advisers, et al. IA-1765 9/29/98

In the Matter of Ellen Griggs IA-1750 9/14/98

In the Matter of Bradbury Financial

Group, Inc., et al. IA-1680 10/27/97

Investment Company

In the Matter of Stephen G. Calandrella, et al. IC-23229 6/1/98

In the Matter of Bryon G. Borgardt, et al. IC-23468 9/28/98

In the Matter of Concord Growth Corp. IC-23470 9/28/98

In the Matter of Reid Rutherford IC-23469 9/28/98

In the Matter ofR. James Brower IC-23131 4/28/98

In the Matter of Stephen H. Brown IC-23434 9/14/98

Issuer Financial Disclosure

In the Matter of Richard Valade AAER-I037 5/18/98

In the Matter of Leslie Danish, CPA AAER-I030 4/30/98

In the Matter of Frank Palumbo, CPA AAER-I067 8/19/98

In the Matter of Albert Glenn Yesner, CPA AAER-I027 4/27/98

In the Matter of Joy Lynn Schneider Green AAER-I018 3/25/98

SEC v. Global Timber Corp. AAER-I043 6/8/98

SEC v. Paul R. Safronchik, et al. AAER-I063 5/13/98

SEC v. Latin American Resources, Inc., et al. LR-15802 7/8/98

In the Matter of Donna Laubscher, CPA, et al. AAER-I082 9/29/98

Inthe Matter of Paul E. Niezel, CPA AAER-I064 8/12/98

Inthe Matter of Maria Mei Wenner, CPA AAER-I059 7/31/98

SEC v. Peter T. Caserta, et al. AAER-993 12/4/97

In the Matter of Charles T. Young, CPA AAER-I052 7/8/98

Inthe Matter of Jerry Stone AAER-I015 3/10/98

126
Name of Case

Inthe Matter of Vena tor Group, Inc., et al.

SEC v. Arthur Toll, et al.

In the Matter of Jeffrey M. Steinberg and John Geron

SEC v. Guy Marcel De Vreese

Inthe Matter of Joseph Sanfellipo

Inthe Matter of Sensormatic Electronics Corp.

Inthe Matter of Thomas H. Pike

SEC v. James Patrick Kittler

SEC v. Raymond E. Simmons

Inthe Matter of Frank 1. Cooney

SEC v. Robert B. Peltz

Inthe Matter of Paul Safronchick, CPA

SEC v. Sol Greenbaum, et al.

Inthe Matter of William D. Tetsworth, Jr.

In the Matter ofKPMG Peat Marwick LLP

Inthe Matter of Robert Gossett, et al.

SEC v. John Logan

Inthe Matter of Oliver G. Richard III, et al.

SEC v. Healthtec International, Inc.

SEC v. Paul Jain

SEC v. Ronald G. Assaf, et al.

SEC v. Thomas F. Casey

SEC v. Robert Howard, et al.

Inthe Matter of Pepsi Cola Puerto Rico Bottling Co.

In the Matter of Presstek, Inc.

SEC v. Bond Dellapp Fletcher, et al.

Inthe Matter of Steven M. Scarano, CPA

In the Matter of Charles Lipton, CPA

Inthe Matter of Sony Corp., et al.

In the Matter of Thomas D. Leaper, CPA, et al.

Inthe Matter of Barbara 1. Cavallo

SEC v. Charles T. Young, et al.

SEC v. Ronald 1. Hottovy, et al.

SEC v. Jui-Teng Lin, et al.

In the Matter of Audre Recognition Systems,

Inc., et al.

SEC v. Sony Corporation & Sumio Sano

SEC v. James G. Hanley

Release No.

AAER-I049

AAER-I033

AAER-I038

AAER-1045

AAER-I028

AAER-I017

AAER-I019

AAER-I0l1

AAER-I016

AAER-I050

AAER-I013

AAER-I047

AAER-I013

AAER-I031

AAER-994

AAER-992

AAER-988

AAER-I003

AAER-990

AAER-I053

AAER-I020

AAER-I077

AAER-I00l

AAER-I034

AAER-997

AAER-981

AAER-I072

AAER-I073

AAER-I062

AAER-I044

AAER-I057

AAER-I048

AAER-I058

AAER-I071

AAER-I076

AAER-I061

AAER-977

Date Filed

6/29/98

5/4/98

5/22/98

6/17/98

4/27/98

3/25/98

3/25/98

1/30/98

3/19/98

7/6/98

3/4/98

6/22/98

3/4/98

5/4/98

12/4/97

12/1/97

11/17/97

12/31/97

11/25/97

7/8/98

3/25/98

9/17/98

12/22/97

5/12/98

12/22/97

10/30/97

9/9/98

9/9/98

8/5/98

6/17/98

7/30/98

6/29/98

7/30/98

9/3/98

9/17/98

8/5/98

10/6/97

127
Name of Case Release No. Date Filed

In the Matter of James Bogner AAER-978 10/10/97

SEC v. Joseph Dimauro, et aI. AAER-1075 9/9/98

In the Matter of Corrpro Companies, Inc., et aI. AAER-1080 9/24/98

In the Matter of Erick A. Gray AAER-1050 7/6/98

In the Matter of Gaston E. Oxman AAER-1050 7/6/98

In the Matter of Ivor R. Ellul, et aI. AAER-1056 7/30/98

In the Matter of Pinnacle Micro Inc., et aI. AAER-975 10/3/97

SEC v. Eugene McCloskey, et aI. AAER-1040 6/4/98

In the Matter of Kenneth O'NeaI, et aI. AAER-983 11/7/97

In the Matter of Ermin Ianacone, et aI AAER-987 11/17/97

In the Matter of New Jersey Resources Corp., et aI. AAER-1002 12/31/97

SEC v. William P. Trainor, et aI. AAER-1065 8/21/98

In the Matter of Paul Mount AAER-1010 1/30/98

In the Matter of Warren 1. Christensen, et aI. AAER-1039 5/27/98

In the Matter of Michael W. Crow AAER-I025 4/22/98

In the Matter of Lee PharmaceuticaIs, et aI. AAER-1023 4/9/98

SEC v. Steven 1. Henke, et aI. AAER-1083 9/30/98

SEC v. Sanjeev "Tony" Sachdeva, et aI. AAER-996 12/18/97

In the Matter of James A. Terrano, et aI. AAER-999 12/23/97

SEC v. Russell C. Faust AAER-1006 1120/98

Inthe Matter of Lawrence 1. Simmons, CPA AAER-1024 4/20/98

In the Matter of Stephen P. Morrin, CPA AAER-991 12/1/97

SEC v. DonaId Ferrarini, et aI. AAER-1008 1129/98

In the Matter of Peter F. Kuebler, CPA AAER-1060 3/25/98

Issuer Reporting: Other

In the Matter of Thomas Fehn 34-40697 12/23/97

SEC v. Solv-Ex Corp., et aI. LR-15817 7/20/98

SEC v. Sam D. Schwartz, et aI. LR-15826 7/30/98

In the Matter ofIncomnet, Inc. 34-40281 7/30/98

Market Manipulation

In the Matter of Mike Zaman 34-40494 9/29/98

In the Matter of Ronald W. Driol 34-39596 1/29/98

SEC v. Joseph Pignatiello, et aI., 97-9303 LR-15595 12118/97

128
Name of Case

SEC v. Douglas G. McCaskey, et aI.

SEC v. Bio-Tech Industries, Inc., et aI.

SEC v. Jerome M. Wenger

SEC v. Barclay Davis & World Syndicators, Inc.

SEC v. Thomas Edward Cavanagh, et aI.

In the Matter ofIan Fishman, et aI.

SEC v. Sheldon Kraft

SEC v. Mohamed Khairy Mohamed Zayed IT, et aI.

SEC v. Jeffrey Szur, et aI.

SEC v. International Automated Systems, Inc., et aI.

In the Matter of Texas Vanguard Oil, et aI.

SEC v.Leonard Alexander Ruge, et aI.

SEC v. Andrew Scudiero, et aI.

In the Matter of Sheldon Kraft

In the Matter of Douglas 1. Elliott

In the Matter ofIrwin Frankel

SEC v. Technigen Corp., et aI.

SEC v. Michelle Sotnikow

In the Matter of Rosario Russell Ruggiero

SEC v. Waldron & Co., Inc., et aI.

In the Matter of John Marsala

In the Matter of Eugene Laff, et aI.

In the Matter of Raymond R. Newberg

SEC v. Rafi M. Khan, et aI.

SEC v. Paul Montie, et aI.

SEC v. George Badger, et aI.

In the Matter of Douglas C. Selander

Miscellaneous

SEC v. New Era Technologies International, Inc.

In the Matter of Spacedev, Inc., et aI.

In the Matter of James W. Nearen

SEC v. Intercontinental Resources, et aI.

SEC v. David Bednarsh

Inthe Matter of Frank Berger, et aI.

SEC v. Michael Cardascia, et aI.

Release No

LR-15865

LR-15900

LR-15707

LR-15600

LR-15669

34-40115

LR-15617

LR-15907

LR-15595

LR-15898

34-39757

LR-15595

LR-15595

34-39579

34-40043

34-40504

LR-15723

LR-15888

34-40259

LR-15897

34-40503

34-40256

34-40464

LR-15827

LR-15739

LR-15595

34-40502

LR-15718

34-40307

34-40505

LR-15921

LR-15859

34-40125

LR-15674

Date Filed

9/1/98

9/24/98

4/15/98

12/22/97

3/13/98

6/24/98

1/14/98

9/23/98

12/18/97

9/23/98

3/16/98

12/18/97

12/18/97

1/26/98

5/29/98

9/30/98

4/27/98

9/18/98

7/23/98

9/23/98

9/30/98

7/23/98

9/23/98

7/30/98

5/14/98

12/18/97

9/30/98

4/21/98

8/6/98

9/30/98

9/30/98

8/3/98

6/25/98

3/17/98

129
Name of Case

Offering Violations

Release No Date Filed

SEC v. Grady A. Sanders, et al.

SEC v. Accelerated Funding Mortgage Corp., et al.

In the Matter of James Ray Ross

SEC v. Internet Casino Sports Gaming LLC, et al.

SEC v. Uniglobe Trading Company, Inc., et al.

SEC v. Green Oasis Environmental, et al.

In the Matter of Jon Mark Stewart

SEC v. Hollywood Trenz, Inc., et al.

SEC v. Patrick Antrim, et al.

SEC v. Mark A. Osheroff, et al.

SEC v. Bruce Baumann

SEC v. Scott L. Klion, et al.

SEC v. Association of Individual Ministries, et al.

SEC v. Austria Trust Company, Ltd., et al.

SEC v. Michael D. Richmond, et al.

In the Matter of Timothy 1. Brannon

In the Matter of Robert M. Marcus

In the Matter of Joseph P. Medsker, et al.

SEC v. Daniel T. Todt, et ak

SEC v. Teddy Wayne Solomon, et al.

SEC v. Golden Eagle International, et al.

SEC v. George Wallace Stewart, et al.

In the Matter of Michael Graber

In the Matter of Craig Curtis Peterson

SEC v. American Internet Partners, Inc.

In the Matter of AmeriVision Communications,

Inc., et al.

In the Matter of Robert G. Bettiga

In the Matter of Susan L. Henry

SEC v. David Morgenstern, et al.

In the Matter of Coahoma County, et al.

In the Matter of Frank P. Zitkevitz

SEC v. vn Visionary Investments, Inc., et al.

SEC v. First Zurich National, LLC, et al.

In the Matter of Betty Ann Rubin

130

NONE

LR-15751

34-40134

LR-15845

LR-15568

LR-15864

34-40296

LR-15730

NONE

LR-15719

LR-15755

LR-15766

LR-15805

LR-15728

LR-15813

34-39949

34-40056

NONE

LR-15775

LR-15880

LR-15733

LR-15705

34-39425

34-39427

LR-15640

34-40282

34-40184

34-40183

LR-15902

34-40194

34-40313

LR-15904

LR-15639

34-40116

9/30/98

5/19/98

6/26/98

8/10/98

11/21/97

711/98

8/3/98

5/4/98

6/23/98

4/23/98

5/21/98

6/3/98

7/9/98

4/23/98

7/15/98

5/4/98

6/2/98

12/18/97

6/5/98

1115/97

5/7/98

4/14/98

12/11/97

12/11/97

2/11/98

7/30/98

7/9/98

7/9/98

9/23/98

7/13/98

8/10/98

9/23/98

2/2/98

6/24/98
Name of Case

SEC v. Trinity Gas Corp., et al.

SEC v. Michael D. Jenkins, et al.

SEC v. International Capital Management, Inc., et al.

SEC v. Derryl W. Peden

In the Matter of Global Casinos, Inc., et al.

SEC v. Omnigene Development, Inc., et al.

SEC v. Christian Schindler, et al.

SEC v. Jerald F. Albin, et al.

SEC v. Medco, Inc., et al.

In the Matter of Anthony Lollis

In the Matter of Kenneth Alan Larson

In the Matter of Innovative Consulting Services,

Inc., et al.

In the Matter of David Freitag

SEC v. Scott B. Walker, et al.

In the Matter ofBret L. Boteler

SEC v. Larry C. Talley, SR

SEC v. Paramount Capital Management, Inc.

SEC v. Kellin Investment Corp., et al.

SEC v. Shane T. Vaessen, et al.

SEC v. City Services Corp., et al.

SEC v. Appalachian Investment Corp., et al.

In the Matter of Meda Belle McKinney

In the Matter of Lawrence A. Krause, et al.

SEC v. Mamie Tang, et al.

Inthe Matter of Gilbert Mintz, et al.

In the Matter of Erik W. Chan

Inthe Matter of City of Anaheim, et al.

In the Matter of Newport-Mesa

Unified School District

Inthe Matter of Christopher M. Pedersen

Inthe Matter of Rudy Crosswell, et al.

Inthe Matter ofPrirne Advisors, Inc., et al.

Release No.

LR-15588

LR-15841

LR-15922

LR-15807

34-40469

LR-15899

LR-15684

LR-15881

LR-15539

34-39428

34-39426

34-40452

34-40462

LR-15869

34-39533

LR-15925

NONE

LR-15866

LR-15911

LR-15687

LR-15879

34-40453

34-39226

LR-15912

34-40417

34-40416

33-7590

33-7589

34-40131

34-40265

34-40292

Date Filed

12/l 0/97

8/12/98

9/30/98

7/13/98

9/24/98

9/23/98

2/26/98

9/ll/98

10/8/97

12/1l/97

12/ll/97

9/22/98

9/23/98

9/2/98

l/9/98

9/30/98

11/l8/97

9/l/98

9/24/98

3/l6/98

9/l0/98

9/22/98

10/9/97

9/28/98

9/9/98

9/9/98

9/29/98

9/29/98

6/25/98

7/27/98

7/3l/98

131
Name of Case

In the Matter of Brent W. Berry

In the Matter of Ronald G. Bajorek

SEC v. United Energy Partners, Inc., et al

In the Matter of Paul L. Nieto

In the Matter of James D. Rocco

SEC v. Autocorp Equities, Inc., et al.

SEC v. Marshall Neil Craig Ronald, et al.

SEC v Certain United Investment Trusts, et al

SEC v. Michael A. Todd, et al.

SEC v. Commercial Express, et al.

In the Matter of Charles O. Huttoe

In the Matter of David T. Barr

SEC v. Titan Petroleum Corp., et al.

SEC v. Steven M. Scarano

In the Matter of Schneider Securities Inc., et aI.

SEC v. Rynell & Assoc , Inc., et al.

SEC v CaIvin Douglas Brace, et al.

In the Matter of James B. Boswell

SEC v. Daniel Schneider, et al.

SEC v. William Madon

SEC v. Terry V. Koontz, et al.

SEC v. Nichi Capital, Ltd., et aI.

SEC v Michael Hall, et al.

In the Matter of Phillip Pepe

In the Matter of Brian Patrick Cork

In the Matter of Michelle Sotnikow

SEC v. Clarence Wayne Cook

SEC v. Environmental Energy, Inc., et al.

SEC v. Vladislav Zubkis, et al.

In the Matter of Randy Depoister

SEC v. Calman H. Rifkin, et al.

SEC v. Edward Snyder, et al.

In the Matter of Donald E. Whorl

SEC v. Thomas A. Nelson, et al.

In the Matter of Orlando R. Landa

In the Matter of Jeffrey A. Lobel

SEC v. First Americans Bank, et al.

132

Release No.

34-39396

34-40470

LR-1571l

34-39714

34-39752

LR-15839

LR-15882

LR-15850

LR-15837

LR-15890

34-39431

34-39918

LR-15764

LR-15873

34-39929

LR-15838

LR-15828

34-39535

LR-15670

LR-15598

LR-15892

LR-15688

LR-15901

34-39429

34-39424

34-40509

LR-15853

LR-15822

LR-15552

34-40483

LR-15594

LR-15835

34-40415

LR-15936

IA-1753

34-39901

LR-15734

Date Filed

12/3/97

9/24/98

1/30/98

3/4/98

3/13/98

8/10/98

9/16/98

8/11/98

8/10/98

9/17/98

12/11/97

4/24/98

5/19/98

9/9/98

4/29/98

8/10/98

7/31/98

1/9/98

1/20/98

12/16/97

9/17/98

3/27/98

9/23/98

12/11/97

12/11/97

9/30/98

8/6/98

7/28/98

10/31/97

9/25/98

12/17/97

5/22/98

9/9/98

9/22/98

9/22/98

4/22/98

5/7/98
Name of Case

SEC v. James Michael Cogley, et aI.

In the Matter of James D. Stoeger

SEC v. David A. Colvin, et aI

In the Matter of Kuo-Chang Wong

In the Matter of Cecil R. Glass, ill

SEC v. Lennox Investment Group, Inc., et aI.

In the Matter of Daniel E. Goodman

In the Matter of Patricia S. Gale

In the Matter of Robert Francis Bucheit, Sf.

In the Matter of Roger D. Byrd

SEC v. Richard C. Powelson, et aI.

In the Matter of Richard E. Tobin

SEC v. Louis G. Karabochos, et aI.

SEC v. Phebe W. Erdman

SEC v. Stephen Desimone, et aI.

SEC v. Innovative Consulting Services, Inc., et aI.

SEC v. Albert E. Carter, et aI.

SEC v. GeraId A. Dobbins, et aI.

SEC v. Millennium Software Solutions

Inthe Matter of Joseph P. Tufo

SEC v. Nolan W. Wade, et aI.

In the Matter of Kevin C. Speranzi, et aI.

Inthe Matter of Raymond A. Basile

In the Matter of Emanuel B. Nedwick

Inthe Matter of Jeffrey Price and Michael Ostrach

Inthe Matter of Norman G. Cornelius

SEC v. Hugh F. Rollins

In the Matter of Charles F. Kirby, et aI.

SEC v. DaVId W. Laing, et aI.

SEC v. Interactive Products & Services, Inc., et aI.

SEC v, Vincent Setteducate

In the Matter of Nancy A. Swoffer

In the Matter of Bradford A. Orosey, et aI.

SEC v. Joel & Leslie Steinger

SEC v. James Staples, et aI.

SEC v. American Automation, Inc., et al.

SEC v. Friendly Power Co. LLC, et aI.

Release No

LR-15851

34-39599

LR-15683

34-40394

34-39536

LR-15789

34-39703

34-40489

34-39932

34-39715

NONE

34-40023

LR-15908

LR-15742

LR-15597

LR-15891

LR-15787

LR-15665

LR-15583

34-40388

LR-15923

34-40396

34-39930

34-40248

34-39844

34-39756

LR-15857

34-39971

LR-15558

LR-15700

LR-15561

34-40488

34-40429

LR-15729

LR-15903

LR-15804

LR-15927

Date FIled

8/11/98

1/29/98

2/19/98

9/3/98

1/9/98

6/22/98

2/27/98

9/28/98

4/30/98

3/4/98

5/5/98

2/23/98

9/28/98

5/15/98

12/19/97

9/18/98

6/18/98

3/10/98

12/8/97

9/1/98

9/25/98

9/3/98

4/29/98

7/22/98

4/9/98

3/16/98

8/21/98

5/7/98

11/13/97

4/8/98

11/14/97

9/28/98

9/10/98

5/1/98

9/24/98

7/10/98

7/17/98

133
Name of Case Release No. Date Filed

SEC v. International Heritage, Inc., et al. LR-15672 3/16/98

In the Matter of Dyke Ferrell 34-39534 1/9/98

SEC v. Hurst Capital Corp., et al. LR-15656 2/18/98

SEC v. Capital Acquisitions, Inc., et al. LR-15868 12/19/97

Related Party Transactions

In the Matter of DeGeorge Financial Corporation 34-39319 11/12/97

SEC v. Peter R. DeGeorge LR-15556 11/12/97

Transfer Agent

In the Matter of Interstate Transfer Co., et al. 34-40389 9/1/98

In the Matter of Holladay Stock Transfer, Inc., et al. 34-39797 3/25198

In the Matter of Robert Bogutski 34-39559 1/20/98

134
Table 3

INVESTIGATIONS OF POSSIBLE VIOLATIONS OFTHEACTS

ADMINISTERED BYTHE COMMISSION

Pending as of October 1, 1997 1,733

Opened in Fiscal Year 1998 536

Total 2,269

Closed in Fiscal Year 1998 430

Pending as of September 30, 1998 1,839

Formal Orders of Investigation

Issued in Fiscal Year 1998 275

Table 4

ADMINISTRATIVE PROCEEDINGS INSTITUTED

DURING FISCAL YEAR ENDING SEPTEMBER 30, 1998

Broker-dealer Proceedings 126

Investment Adviser, Investment Company and Transfer Agent Proceedings 58

'Rule 102 Proceedings 25

Suspensions ofTrading in Securities in Fiscal Year 1998 11

135
Table 5

INJUNCTIVE ACTIONS

Fiscal Year

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Actions Initiated

140

186

171

156

172

197

171

180

189

214

Defendants Named

422

557

503

487

571

620

549

588

597

745

Right to Financial Privacy

Section 21(h) ofthe Securities Exchange Act of 1934 [15U.S.c. 78u(h)(6)] requires

that the Commission" compile an annual tabulation of the occasions on which the

Commission used each separate subparagraph or clause of [Section 21(h)(2)] or the

provisions of the Right to Financial Privacy Act of 1978 [12 U.S.C. 3401-22 (the

RFPA)] to obtain access to financial records of a customer and include itin its

annual report to the Congress." During the fiscal year, the Commission made no

applications for judicial orders pursuant to Section 21(h)(2). Set forth below are

the number of occasions on which the Commission obtained customer records

pursuant to the provisions of the RFPA:

136

Section 1104 (Customer Authorizations)

Section 1105 (Administrative Subpoenas)

Section 1107 (Judicial Subpoenas)

10

370

32
Table 6

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons SUbject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Violation of the federal securities laws.

Broker-dealer, municipal securities

dealer, government securities dealer,

transfer agent, investment adviser or

associated person

Willful violation of securities laws or rules;

aiding or abetting such violation; failure

reasonably to supervise others; willful

misstatement or omission in filing with the

Commission; conviction of or Injunction

against certain crimes or conduct.

Registered securities association

Violation of or Inability to comply with the

Exchange Act, rules thereunder, or its own

rules; unjustified failure to enforce

compliance with the foregoing or with rules of

the Municipal Securities Rulemaking Board

by a member or person associated with a

member.

Sanction

Cease-and-desist order, which may also

require a person to comply or take steps to

effect compliance with federal securities

laws; accounting and disgorgement of illegal

profits. (Securities Act, Section 8A;

Exchange Act, Section 21C(a); Investment

Company Act, Section 9(f); Investment

Advisers Act, Section 203(k».

Censure or limitation on activities;

revocation, suspension or denial of

registration; bar or suspension from

association (Exchange Act, Sections

15(b)(4)-(6), 15B(c)(2)-(5),15(C)(c)(1 )-(2),

17A(c)(3)-(4); Investment Advisers Act,

Section 203(e)-(f).

Civil penalty up to $110,000* for a natural

person or $550,000* for any other person;

accounting and disgorgement of illegal

profits. Penalties are subject to other

limitations depending on the nature of the

violation. (Exchange Act, Section 21 B;

Investment Company Act, Section 9;

Investment Advisers Act, Section 203).

Temporary cease-and-desist order, which

may, in appropriate cases, be issued ex

parte. (Exchange Act, Section 21C).

Suspension or revocation of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section

19(h)(1 )).

*Adjusted for inflation under Debt Collection Improvement Act.

137
Member of registered securities

association, or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of securities laws or rules

thereunder or rules of Municipal Securities

Rulemaking Board; effecting transaction for

other person with reason to believe that

person was committing violations of

securities laws.

National securities exchange

Violation of or inability to comply with

Exchange Act, rules thereunder or its own

rules; unjustified failure to enforce

compliance with the foregoing by a member

or person associated with a member.

Member of national securities exchange,

or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of securities laws or rules

thereunder, effecting transaction for other

person with reason to believe that person

was committing violation of securities laws.

Registered clearing agency

Violation of or inability to comply with

Exchange Act, rules thereunder, or its own

rules; failure to enforce compliance with its

own rules by participants.

Participant in registered clearing agency

Entry of Commission order against

participant pursuant to Exchange Act,

Section 15(b)(4); willful violation of clearing

agency rules; effecting transaction for other

person with reason to believe that person

was committing violations of securities laws.

securities Information processor

Violation of or inability to comply with

provisions of Exchange Act or rules

thereunder.

138

Suspension or expulsion from the

association; bar or suspension from

association with member of association

(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section 19(h)

(1».

Suspension or expulsion from exchange; bar

or suspension from association with member

(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section

19(h)(1».

Suspension or expulsion from clearing

agency (Exchange Act, Section 19(h)(2».

censure or limitation of activities; suspension

or revocation of registration (Exchange Act,

Section 11A(b)(6».
Any person

Willful violation of Securities Act, Exchange

Act, Investment Company Act or rules

thereunder; aiding or abetting such violation;

willful misstatement in filing with

Commission.

Officer or director of self-regulatory

organization

Willful violation of Exchange Act, rules

thereunder or the organization's own rules;

willful abuse of authority or unjustified failure

to enforce compliance.

Principal of broker~ealer

Officer, director, general partner, ten-percent

owner or controlling person of a brokerdealer for which a SIPC trustee has been

appointed.

securities Act registration statement

Statement materially inaccurate or

incomplete.

Person SUbject to SectIons 12, 13, 14 or

15(d) of the Exchange Act or associated

person

Failure to comply with such provisions or

having caused such failure by an act or

omission that person knew or should have

known would contribute thereto.

Securities registered pursuant to Section

12 of the Exchange Act

Noncompliance by issuer ~ Exchange Act

or rules thereunder.

Public interest requires trading suspension.

Registered Investment company

Failure to file Investment Company Act

registration statement or required report;

filing materially incomplete or misleading

statement or report.

Company has not attained $100,000 net

worth 90 days after Securities Act registration

statement became effective.

Temporary or permanent prohibition against

serving in certain capacities with registered

investment company (Investment Company

Act, Section 9(b».

Removal from office or censure (Exchange

Act, Section 19(h)(4».

Bar or suspension from being or becoming

associated with a broker-dealer (SIPA,

Section 14(b».

Stop order refuSing to permit or suspending

effectiveness (Securities Act, Section 8(d».

Order directing compliance or steps

effecting compliance (Exchange Act, Section

15(c)(4».

Denial, suspension of effective date,

suspension or revocation of registration

(Exchange Act, Section 120».

Summary suspension of over-the-counter or

exchange trading (Exchange Act, Section

12(k».

Suspension or revocation of registration

(Investment Company Act, Section 8(e».

Stop order under Securities Act; suspension

or revocation of registration (Investment

Company Act, Section 14(a».

139
Attorney, accountant, or other

professional or expert

Lack of requisite qualifications to represent

others; lacking in character or integrity;

unethical or improper professional conduct;

willful violation of securities laws or rules, or

aiding and abetting such violation.

Attorney suspended or disbarred by court;

expert's license revoked or suspended;

conviction of a felony or of a misdemeanor

involVing moral turpitude.

Securities Violation in Commission-instituted

action; finding of securities violation by

Commission in administrative proceedings.

Member or employee of Municipal

Securities Rulemaking Board

Willful violation of Exchange Act, rules

thereunder, or rules of the Board; abuse of

authority.

Permanent or temporary denial of privilege of

appearing or practicing before the Commission

(17 CFR Section 201.1 02(e)(1».

Automatic suspension from appearance or

practice before the Commission (17 CFR

Section 201.1 02(e)(2».

Temporary suspension from practicing before

the Commission; censure; permanent or

temporary disqualification from practicing

before the Commission (17 CFR Section

201.102(e)(3».

Censure or removal from office (Exchange

Act, Section 15B(c)(8».

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Engaging in or about to engage in acts or

practices Violating securities laws, rules or

orders thereunder Qncluding rules of a

registered self-regulatory organization).

Noncompliance with provisions of the laws,

rules, or regulations under Securities Act,

Exchange Act, or Holding Company Act,

orders issued by Commission, rules of a

registered self-regulatory organization, or

undertaking in a registration statement.

140

Sanction

Injunction against acts or practices

constituting violations (plus other equitable

relief under court's general equity powers)

(Securities Act, Section 20(b); Exchange Act,

Section 21 (d); Holding Company Act, Section

18(e); Investment Company Act, Section

42(d); Investment Advisers Act, Section

209(d); Trust Indenture Act, Section 321).

Writ of mandamus, injunction, or order

directing compliance (Securities Act, Section

20(c); Exchange Act, Section 21 (e); Holding

Company Act, Section 18(f».
II

II

I

1

I

i

Violating the securities laws or a cease-anddesist order (other than through insider

trading).

Trading while in possession of material nonpuolic information in a transaction on an

exchange or from or through a broker-dealer

(and transaction not part of a public offering);

aIding and abetting or directly or indirectly

controlling the person who engages in such

trading.

Violating Securities Act Section 17(a)(1) or

Exchange Act section 1O(b). when conduct

demonstrates substantial unfitness to serve

as an officer or director.

Issuer subject to Section 12 or 15(d) of

the Exchange Act; officer, director,

employee or agent of Issuer; stockholder

acting on behalf of Issuer

Payment to foreign official. foreign political

party or official. or candidate for foreign

political office. for purposes of seeking the

use of influence in order to assist issuer in

obtaining or retaining business for or with. or

directing business to. any person.

Securities Investor Protection Corporation

Refusal to commit funds or act for the

protection of customers.

National securities exchange or

registered securities association

Failure to enforce compliance by members or

persons associated with its members with the

Exchange Act, rules or orders thereunder. or

rules of the exchange or association.

Registered clearing agency

Failure to enforce compliance by its

participants with its own rules.

Civil penalty up to $110.000* for a natural

person or $550,000* for any other person Q[,

if greater, the gross gain to the defendant.

Penalties are subject to other limitations

dependent on nature of violation. (Securities

Act. Section 20(d); Exchange Act, Section

21 (d) (3); Investment Company Act, Section

42(e); Investment Advisers Act, Section

209(e».

Maximum civil penalty: three times profit

gained or loss avoided as a result of

transaction (Exchange Act, Section 21A(a)-

(b».

Prohibition from acting as an officer or

director of any public company. (Securities

Act, Section 20(e); Exchange Act. Section

21 (d)(2».

Maximum civil penalty: $11.000* (Exchange

Act, Section 32(c».

Order directing discharge of obligations and

other appropriate relief (SIPA, Section 11 (b».

Writ of mandamus, injunction or order

directing such exchange or association to

enforce compliance (Exchange Act, Section

21 (e».

Writ of mandamus, injunction or order

directing clearing agency to enforce

compliance (Exchange Act. Section 21 (e)).

*Adjusted for inflation under Debt Collection Improvement Act.

141
Issuer sUbject to Section 15(d) of 1934

Act

Failure to file required information,

documents or reports.

Registered Investment company

Name of company or of security issued by it

deceptive or misleading.

Officer, director, member of advisory

board, adviser, depositor, or underwriter

of investment company

Engage in act or practice constituting breach

of fiduciary duty involving personal

misconduct

Forfeiture of $110* per day (Exchange Act,

Section 32(b».

Injunction against use of name (Investment

Company Act, Section 35(d».

Injunction against acting in certain capacities

for investment company and other

appropriate relief (Investment Company Act,

Section 36(a».

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons SUbject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Willful violation of securities laws or rules

thereunder; willful misstatement in any

document required to be filed by securities

laws or rules; willful misstatement in any

document required to be filed by selfregulatory organization in connection with an

application for membership or association

with member.

Issuer subject to Section 12 or 15(d) of

the Exchange Act; officer or director of

issuer; stockholder acting on behalf of

issuer; employee or agent subject to the

jurisdiction of the United States

Payment to foreign official, foreign political

party or official, or candidate for foreign

political office for purposes of seeking the

use of influence in order to assist issuer in

obtaining or retaining business for or with, or

directing business to, any person.

Sanction

Maximum penalties: $1,000,000 fine and ten

years imprisonment for individuals,

$2,500,000 fine for non-natural persons

(Exchange Act, Sections 21 (d), 32(a»;

$10,000 fine and five years imprisonment (or

$200,000 if a public utility holding company

for violations of the Holding Company Act)

(Securities Act, Sections 20(b), 24;

Investment Company Act, Sections 42(e), 49;

Investment Advisers Act, Sections 209(e),

217; Trust Indenture Act, Sections 321, 325;

Holding Company Act, Sections 18(1), 29).

Issuer. $2,000,000; officer, director,

employee, agent or stockholder - $100,000

and five years imprisonment Qssuer may not

pay fine for others) (Exchange Act, Section

32(c».

*Adjusted for inflation under Debt Collection Improvement Act.

142
Self-Regulatory Organizations: Expenses, Pre-Tax Income, and

Balance Sheet Structure

In 1997, the total revenues of all self-regulatory organizations (SROs)

with marketplace jurisdiction rose approximately $262.7 million, an

increase of approximately 17% from 1996. The New York Stock

Exchange (NYSE), the National Association of Securities Dealers

(NASD), the American Stock Exchange (AMEX), and the Chicago

Board Options Exchange (CBOE) accounted for 89% of total SRO

revenues, unchanged from 1996. Revenues were earned primarily from

listing or issuer fees, trading fees, and market data fees. For example:

• The NYSE reported total revenue of$639 million, an increase of 14%

from 1996, of which 41% consisted of listing fees, 18% consisted of

trading fees, and 15% consisted of market data fees.

• The NASD reported total revenue of $634 million, an increase of

21% from 1996, of which 18% consisted of listing fees, 42%

consisted of trading and market data fees.

• The AMEX reported total revenue of $198 million, an increase of

16% from 1996, of which 8% consisted of listing fees.

The remaining SROs also reported increases in revenues as follows:

• The Boston Stock Exchange (BSE) reported a $2 million increase

(14%) to $17.5 million.

• The CBOE reported a $17.9 million increase (16%) to $126.5 million.

• The Pacific Exchange (pCX) reported a $14.8 million increase (25%)

to $75.1 million.

• The Philadelphia Stock Exchange (Plfl.X) reported a $9.4 million

increase (27%) to $44.2 million.

• The Chicago Stock Exchange (CHX) reported a $4.3 million increase

(12%) to $41.2 million.

143
• The Cincinnati Stock Exchange reported a $251,000 decrease (-3%)

to $8.4 million.

Of the SROs reporting financial information for a 12-month period in

fiscal year 1997, the PHLX reported the largest percentage increase in

total revenues (27%). The NASD reported the largest dollar volume

increase in total revenues, $109.6 million.

The total expenses of all marketplace SROs were $1.5 billion in 1997, an

increase of $248 million, or 20%, over 1996. The CBOE incurred the

largest percentage increase in expenses, 37%. The largest dollar volume

increase in expenses was incurred by the NASD, $122.6 million.

Additionally, the following SROs incurred the following increases in

expenses:

• The AMEX incurred a $15.1 million increase (10%).

• The BSE incurred a $ 1.1 million increase (8%).

• The NYSE incurred a $55.3 increase (13%).

• The PCX incurred a $11.1 million increase (23%).

• The PHLX incurred a $6 million increase (18%).

• The CSE incurred a $884,000 increase (20%).

• The CBOE incurred a $34 million increase (37%).

• The CHX incurred a $1.9 million increase (5%).

Aggregate pre-tax income of the marketplace SROs rose to $271 million,

an increase of$14.7 million (6%), from the $256 million reported in

1996. The NYSE experienced the largest dollar volume increase in pretax income, $21.9 million. The remaining SROs reported positive pre-tax

income in 1997. The CBOE and NASD reported positive pre-tax income

for 1997 that dropped significantly from their 1996 levels. The CSE also

showed a positive pre-tax income for 1997 that dropped from it's 1996

144
level. The remaining SROs all experienced increased pre-tax income

above their 1996 reported levels.

The total assets of all marketplace SROs amounted to approximately $2.4

billion in 1997, an increase of$330.7 million (16%) over 1996. The

NYSE showed the largest dollar volume increase in total assets, $162

million (16%), while the NASD showed the largest percentage increase in

total assets, 27% ($149.3 million). The BSE also showed a significant

percentage increase in total assets, 25% ($6.5 million). The AMEX,

CSE, CBOE, and PCX also reported increases in total assets equaling

$25.5 million ($15%), $2.3 million (21%), $13.4 million (l1%), and

$10.8 million (l9% ) respectively.

In 1997, the total liabilities of marketplace SROs increased $168.1 million

(18%) over 1996 levels. The NASD showed the greatest percentage

increase, 61% ($113. 2 million), as well as the greatest dollar volume

increase. Increases in liabilities were also reported by the AMEX ($12

million or 20%), BSE ($5.6 million or 29%), NYSE ($76 million or

15%), and CBOE ($3 million or 13%).

The aggregate net worth of the marketplace SROs rose $162.6 million in

1997 to $1.341 billion, an increase ofl4% over 1996. The CSE incurred

the largest percentage increase in net worth, 25% ($2.2 million), while the

NYSE reported the largest dollar volume increase in net worth, $86

million (17%). Net worth increases were also reported by the other

marketplace SROs as follows: AMEX ($13 3 million or 12%), BSE

($950,000 or 13%), CBOE ($10 million or 11%), NASD ($36 million or

10%), PCX ($8.8 million or 24%), PHLX ($2.9 million or 12%) and

CHX ($1.7 million or 9%).

Clearing agency results have been presented in two tables by their

respective types: clearing corporations and depositories. In calendar year

1997, aggregate revenues from clearing agency services (both tables)

increased $41 million or 7% to $607 million from $566 million in 1996.

Interest income declined $2 million, or 4% to $53.5 million in 1997. All

clearing agencies adjust their fee structures and refunds of fees to provide

participants with attractively priced services, meet expenses, and provide

the amount of earnings which they desire to retain.

145
Serv.ce revenues at the depositories totaled $388 million, up $29 million

or 8% from 1996. In 1997, The Depository Trust Company (DTC)

increased its service revenue by 10% ($34 million). Its pre-tax earnings

decreased 38%, from $301,000 to $186,000. In addition, the

Philadelphia Depository Trust Company's 1997 service revenues

decreased 27%. Its operating pretax loss increased fourteen-fold from a

loss of $12,000 in 1996 to $1.68 million in 1997.

Depositories continue to expand their base of service revenues by

increasing both the number of equity shares and principal amount of debt

securities on deposit. This gain occurred, among other reasons, because

of the continued expansion of depository-eligible issues and the

participants' increased use of depository services. At year end 1997,

DTC alone had more than 1.3 million depository-eligible issues and a

total value of securities in its depository system of more than $17 trillion.

Service revenues of clearing corporations for 1997 increased 24% to

$219 million from $177 million for 1996, and earnings for clearing

corporations decreased to $6.2 million in 1997 from $9.5 in 1996, a

decrease of35%.

The results were mixed for individual clearing corporations' pre-tax

earnings. For example, the National Securities Clearing Corporation did

not report any earnings for 1997, which is no change from 1996. The

Government Securities Clearing Corporation reported earnings of $5. 1

million for 1997, compared with $3.9 for 1996, an increase of31%. The

Options Clearing Corporation reported earnings before taxes of$146,000

for 1997 compared with $3.3 million in 1996, a decrease of96%. The

Stock Clearing Corporation of Philadelphia reported a 1997 loss of

$511,000 compared with income of $986,000 in 1996.

The aggregate shareholders' equity of all clearing corporations and

depositories increased from $117 million to $128 million. Aggregate

participant clearing funds, which protect clearing agencies in the event of

a participants' default, increased from $5.2 billion to $6.2 billion. Ifa

participant defaults and its losses exceed its deposit at a clearing agency,

the entire participants' fund of the clearing agency may be assessed on a

pro rata basis.

146
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148
Table 9

SELF-REGULATORY ORGANIZATIONS-DEPOSITORIES

1997 REVENUES and EXPENSES 11

($ in Thousands)

Philadelphia

Depository Participants Depository

Trust Trust Trust

Company Company Company

(12/31/97) (12/31/97) (12/31/97) Total

Revenues

Depository Services $366,280 $13,290 $8,856 $388,426

Interest Income 12,850 15,635 544 29,029

Total Revenues 21 $379,130 $28,925 $9.400 $417.455

Expenses

Employee Costs $216,939 $12,905 $5,778 $235,622

Data Processing 23,709 4,669 838 29,216

Occupancy Costs 40,479 4,812 0 45,291

Depreuanon and

AmortizatIOn of

Intangibles 19,508 0 0 19,508

All Other Expenses 78,309 5,464 $4.464 88,237

Total Expense $378,944 $20,073 $11,080 $417,874

Excess of Revenues

Over Expenses 'JJ $186 $1,075 $(1,680) ($419)

Shareholders' EqUity $19,893 $20,073 $3,704 $43,670

Participant's Fund $717,475 $260,507 $2,060 $980,042

jJ Although the staff tned to make the presentations comparable, any Single revenue or expense

category may not be completely comparable between any two depositones because of (I) the

varying classlncanon methods employed by the depositories In reporting operating results and (II)

the grouping methods employed by the SEC's staff due to these varying classmcanon methods

IndiVIdual amounts are shown to the nearest thousand Totals are the rounded result of the

underlying amounts and may not be the arhhmenc sums of the parts.

21 Revenues are net of refunds which have the effect of reducmq a clearing agency's base fee rates

'JJ Ilus ISthe result of operations and before the effect of wntedowns and Income taxes, which may slgmflcantly

Impact a depoatory's net Income.

149
Certificate of Immobilization

Book entry deliveries continued to outdistance physical deliveries in the

settlement of securities transaction among depository participants of The

Depository Trust Company (DTC). This tendency is illustrated in Table

10, Certificate Immobilization Trends. The table captures the relative

significance of the mediums employed, in a ratio of book-entry deliveries

to certificates withdrawn from DTC. The figures includes Direct Mail by

Agents and municipal bearer bonds. In 1997, the total certificates

withdrawn increased by less than 1% from 1996, while the number of

book-entry deliveries increased by 11%. In 1997, the ratio was over

twice the 1993 ratio of book-entry deliveries rendered for every

certificate withdrawn.

Table 10

CERTIFICATE IMMOBILIZATION TRENDS

The Depository Trust Company

Book-entry Deliveries

at DTC (millions)

Total of all Certificates

(in thousands)

Book-entry Deliveries

per Certificates Withdrawn

150

151.0 136.0 119.0 106.0 98.3

2,858 2,769 3,270 3,899 4,140

52.7 49.0 36.4 27.1 23.7
Section 13(1)(1) Reports

Institutional investment managers file Forms 13F to report certain equity

securities holdings of accounts over which they exercise investment

discretion (accounts with a fair market value of at least $100 million).

The SEC estimates that approximately 2,000 managers are subject to this

filing requirement.

Generally, the Form 13F filings are public in the Commission's public

reference room within two days of filing; however, the public interest in

having these reports available electronically has increased. For example,

the Commission, and the Commission believes that investors, find the

information contained in the filings useful in determining institutional

investor holdings of an issuer. Issuers, too, should find detail as to these

holdings useful because much of their shareholder list may reflect

holdings in "street name" rather than beneficial ownership. Mandatory

electronic dissemination of this data would help ensure timely and

efficient dissemination of this important information. It also would result

in more uniform treatment of public filings made with the SEC by

reporting entities and third-party filers.

The Commission therefore recently adopted rule amendments to require

electronic filing of these reports through use of the SEC's EDGAR

system. (Release No. IC-23640 (Jan. 12, 1999), 64 FR 2843 (Jan. 19,

1999». The Commission's action thus affords these reports the same

degree of public availability as other electronic filings made with the SEC.

151
Exemptions

Section l2(h) Exemptions

Section l2(h) of the Exchange Act authorizes us to grant a complete or

partial exemption from the registration provisions of Section l2(g) or from

the disclosure or insider reporting/trading provisions of the Exchange Act

where such exemption is consistent with the public interest and the protection

of investors. The applicants for the three applications pending at the

beginning of 1998 did not proceed with their requests during the year.

Requested relief was granted to the one application that was :filedduring the

year.

Exemptions for Foreign Private Issuers

Rule l2g3-2 provides various exemptions from the registration provisions of

Section l2(g) of the Exchange Act for the securities of foreign private

issuers. A frequently used exemption is that contained in subparagraph (b),

which provides an exemption for certain foreign issuers that furnish specified

documents to us on a current basis. Such documents include information

material to an investment decision that the issuer has:

• made or is required to make public pursuant to the law of the country in

which it is incorporated or organized;

• :filedor is required to :filewith a stock exchange on which its securities

are traded and which was made public by such exchange; or

• distributed or is required to distribute to its security holders.

Periodically, we publish a list of those foreign issuers that appear to be

current under the exemptive provision. The current list contains over 1,500

foreign issuers.

152
Corporate Reorganizations

During 1998, the Commission entered its appearance in 36 new

reorganization cases filed under Chapter 11 of the Bankruptcy Code

involving companies with approximately $4 billion in assets and 75,000

public investors. Adding these new cases, the Commission was a party in

a total of 90 Chapter 11 cases during the year, involving companies with

approximately $23 billion in assets and 450,000 public investors. During

the year, 24 cases were concluded through confirmation of a plan,

dismissal, or liquidation, leaving 66 cases in which the Commission was a

party at year-end.

Table 11

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

1997 1998

1994

1997

1995

1998

1998

1998

1997

1997

1997 1998

1994

Debtor District

Action Auto Rental, Inc. D. OH

Advanced Promotion

Technologies, Inc.I/ S.D. FL

Aileen, Inc. S.D. NY

Alliance Entertainment Corp. D. NY

American Microtel, Inc. D. NY

American Rice, Inc. S.D. TX

Apparel America, Inc. S.D. NY

APS Holdings, Inc. D. DE

Audre Recognition Systems, Inc. S.D. CA

Autolend Group, Inc. D. NM

Barry's Jewelers, Inc. C.D. CA

B-E Holdings, Inc. E.D. WI

FY

Opened

1993

FY

Closed

153
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WInCH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Ben Franklin Retail Stores, Inc. N.D. II.. 1996

Bonneville Pacific Corp. D. UT 1992

Bradlees, Inc. S.D. NY 1996

Bruno's, Inc. D. DE 1998

Builders Transport, Inc. N.D. GA 1998

Cable & Co. Worldwide, Inc. S.D. NY 1998

Carter Hawley Hale Stores, Inc. C.D. CA 1991

Chimneyville Investments Group,

Inc. S.D. MS 1998

Cincinnati Microwave, Inc. S.D. OH 1997

Clothestime, Inc.I/ C.D. CA 1996 1998

CPT Corp.I/ D. MN 1991 1998

Craig Consumer Electronics, Inc. C.D. CA 1997

Debbie Reynolds, Hotel &

Casino Inc. D. NV 1998

Eastern Air Lines, Inc.1J S.D. NY 1989 1998

First City Bancorporation

of Texas, Inc. N.D. TX 1994

First Enterprise Financial Group,

Inc. and First Enterprise

Acceptance Company N.D. IL 1998

First Merchants Acceptance Corp.j/ D. DE 1997 1998

FPA Medical Management, Inc. D. DE 1998

154
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Fruehauf Trailer Corp.I/ D. DE 1997 1998

Future Communications, Inc. W.D. OH 1994

Gander Mountain, Inc. E.D. WI 1996

Geotek Communications, Inc. D. DE 1998

Global Environmental

Industries, Inc. W.D. TX 1998

Great American Recreation, Inc. D. NJ 1996

Grossman's Inc.j/ D. DE 1997 1998

Gulfstar Industries, Inc.j/ M.D. FL 1998 1998

Guy F. Atkinson Co. of California N.D. CA 1998

Hamburger Hamlet

Restaurants. Inc.l/ C.D. CA 1996 1998

Home Theater Products

International.Jnc.j/ C.D. CA 1996 1998

I C H Corp.I/ N.D. TX 1996 1998

International Tourist

Entertainment Corp.j/ W.D. MI 1997 1998

Jayhawk Acceptance Corp.j/ N.D. TX 1997 1998

King of Video, Inc. D. NY 1989

Lifeone,lnc. ~a

National Affiliated Corp. W.D. LA 1998

Manhattan Bagel Co., Inc. D. NJ 1998

Marvel Entertainment

Group, Inc.I/ D. DE 1997 1998

155
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

MCorp (MCorp Financial, Inc.

& MCorp Management)l! S.D. TX 1989 1998

Media Vision Technology, Inc. N.D. CA 1994

Megafoods Stores, Inc.11 D. AZ 1994 1998

Molten Metal Technology, Inc. D. MA 1998

National Gypsum Co. N.D. TX 1991

Neostar Retail Group, Inc. N.D. TX 1997

Omega Environmental, Inc. W.D. WA 1997

OTS Holdings, Inc. C.D. CA 1998

Pacific Diagnostic Technologies,

Inc. N.D. CA 1998

Pacific Northwest Housing, Inc. D. OR 1998

Packaging Research Corp.2/ D. CO 1997 1998

Payless Cashways, Inc. W.D. MO 1997

PCA Industries, Inc. E.D. WI 1997

Penn Pacific Corp. E.D. OK 1994

Physician Clinical Laboratory,

Inc.I/ C.D. CA 1997 1998

Powertel USA, Inc. D. NV 1998

RDM Sports Group, Inc. N.D. GA 1997

Reconversion

Technologies, Inc.11 N.D. OK 1997 1998

Reddie Brake Supply Co., Inc. C.D. CA 1998

156
Table II (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Reliance Acceptance Corp.

f/k/a Cole Taylor Financial

Group, Inc. D. DE 1998

Rymer Foods, Inc. N.D. IL 1993

Sierra-Rockies Corp. C.D. CA 1998

Solv-ex Corp. D. NM 1997

Southland Corp.I/ N.D. TX 1991 1998

Standard Oil and Exploration

of Delaware, Inc.j/ W.D. MI 1991 1998

Sterling Optical Corp. S.D. NY 1992

Stratosphere Corp.I/ D. NY 1997 1998

Stream Logic Corp. N.D. CA 1998

Struthers Industries, Inc. N.D. OK 1998

Substance Abuse Technologies,

Inc.lI S.D. FL 1998 1998

Tan Books & Records, Inc. N.D. IL 1998

The Sled Dogs Co. D. MN 1998

Tradetech Americas, Inc. N.D. IL 1998

United States Leather, Inc. E.D. WI 1998

Venture Stores, Inc. D. DE 1998

Westbridge Capitol Corp. D. DE 1998

Western Fidelity Funding, Inc. D. CO 1997

Western Pacific Airlines, Inc. D. CO 1998

Westmoreland Coal Co. D. CO 1997

WRT Energy Corp. W.D. LA 1996

157
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN wmca

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Wiz Technology, Inc. C.D. CA 1998

Winco Corp. C.D. CA 1998

Total Cases Opened (FY 1998) 36

Total Cases Closed (FY 1998) 24

11 Chapter 11 plan confirmed.

Y Debtor liquidated under Chapter 7.

158
The Securities Industry: Revenues, Expenses, and Selected Balance

Sheet Items

Broker-dealers registered with the Securities and Exchange Commission

earned a pre-tax profit of $20. 1 billion in calendar year 1997. This was

$3.1 billion more than that earned the previous year. The pre-tax return

on equity capital of 27.1 % was better than the average results of the

previous decade.

An important factor affecting broker-dealer profits was record transaction

activity. Sales of mutual funds grew by over 40% in 1997. The dollar

value of equity trades executed on the exchanges and the Nasdaq

increased by 41%. The amount of margin debt outstanding grew by 30%.

This increase in transactions translated into revenue growth. Securities

commissions rose by $4.9 billion to $32.7 billion in 1997. Margin interest

of $10.6 billion represented an increase of $3.2 billion. Revenues from

retailing mutual funds grew by $2.3 billion to $12.4 billion.

Underwriting revenues of$14.6 billion were a $2.3 billion increase over

the previous year. While the value of new debt offerings grew by 42%,

the more profitable equity offerings were flat in 1997. Proprietary trading

gains were $36.1 billion in 1997, an increase of $5.3 billion.

"All other revenues" grew by $17.6 billion to $101.3 billion in 1997.

These revenues are comprised primarily of interest income from securities

purchased under agreements to resell and fees from handling private

placements, mergers, and acquisitions. These underlying business

segments showed substantial growth in 1997. Announced M&A deals

rose by 47%, the dollar value of private placements grew by 74%, and

the dollar value of reverse repurchase agreements rose 15%.

Expenses rose 21% to $187.7 billion in 1997, primarily due to higher

interest expenses. Interest expense, which was the largest expense item in

1997, increased by $16.2 billion (25%) to $80.9 billion. Employee

compensation rose 14.9% to $58.6 billion. Total assets grew by $332.6

billion to $2,080.2 billion. Equity capital increased by $16.5 billion to

$82.3 billion.

159
Table 12

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS

1993 - 1997 jJ

($ in Millions)

1993 1994 1995 199& 1997P

Revenues

Securities Commissions $ 19,904.8 $ 19,846.7 $ 23,214.8 s 27,865.6 $ 32,7183

Gams (Losses) In Trading and

Investment Accounts 25,427.2 20,218.6 28,962.7 30,768.2 36,067.5

Pronts (Losses) from Underwntlng

and Selling Groups 11,2487 6,843.8 8,865.2 12,6133 14,640.9

Margin Interest 3,2352 4,668.4 6,470.2 7,3860 10,632.0

Revenues from Sale of Investment

Company Shares 8,115.3 6,887.2 7,4335 10,0811 12,420.2

All Other Revenues 40,912.6 54,2934 68,467.6 83,6972 101,250.7

Total Revenues s 108,843.7 $ 112,758.1 $ 143,414.0 $ 172,411.5 $ 207,7295

Expenses

Registered Represenlallves'

Compensalion (Par111Only) 21 $ 14,696.0 $ 13,711.0 $ 15,526.5 $ 18,734.2 $ 22,194.3

Other Employee Compensation

and Benefits 20,931.3 20,552.2 22,285.4 27,901.7 31,431.2

Compensalion to Par1ners and

Voting Stockholder Officers 3,498.0 3,332.4 3,7293 4,396 7 5,018.8

Comrmssions and Clearance Paid

to Other Brokers 5,337.8 5,360.3 5.700.2 7,364.2 8,867.4

Interest Expenses 26,6156 40,2504 56,877.0 64,698.5 80,889.5

Regulatory Fees and Expenses 629.7 627.8 674.1 672 9 845.4

All Other Expenses 21 24,096.7 25,431.8 27,296.4 31,664.9 38,421.9

Tolal Expenses $ 95,805.1 $ 109,265.9 $ 132,088.9 $ 155,433.0 $ 187,668.4

Income and Profitabl lily

Pre-tax Income $ 13,038.6 $ 3,492.2 s 11,325.1 $ 16,978.5 s 20,0611

Pre-tax Proht Margin 120 3.1 7.9 9.8 9.7%

Pre-tax Return on EqUity 267 6.5 20.1 27.3 27.1%

Assets liabilities and CaPItal

Tolal Assets $1,240,159.8 $1,251,741.0 $1,493,643.9 $1,747,647.1 $2,080,206 3

Liabilities

(a) Unsubordinated liabilities 1,160,456.0 1,169,136.6 1,403,655.1 1,645,303.5 1,950,057.0

(b) Subordinated Liabilities 25,787.6 28,809.7 31,279.2 36,577.4 47,879.1

(c) TOIaI LiabllilJes 1,186,243.6 1,197,9463 1,434,934.3 1,681,880.9 1,997,936.1

Owners/up EqUity $ 53,916.2 $ 53,794.7 $ 58.709.5 $ 65,766.2 $ 82,270.3

Number of Firms 7,674 7.632 7,722 7,774 7,804

Figures may not add due to rounding.

r = reased

p = preliminary

1/ Calendar, rather than nscal, year data is reported in this table.

?I Registered representatives' compensation for firms that neither carry nor clear is Included In .other expenses"

as thiS expense Item IS not reported separately on Par1IJA of the FOCUS Report

Source' FOCUS Report

160
Table 13

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1993 - 1997 jJ

($ in Millions)

1993 1994 1995 1996' 1997'

Revenues

Securities Commissions $19.3411 $ 19.246.6 s 22.6167 s 27.2451 $ 31,915.1

Gains (Losses) in TradlOg and

Investment Accounts 24,042.5 18,918.3 27,088.1 28.322.0 31,872 5

Profits (Losses) from Underwriting

and Selling Groups 11,248.6 6,840.5 8.8650 12,6133 14,628.1

MarglO Interest 3.229.1 4,6511 6,439.4 7,3538 10,499.4

Revenues from Sale of Investment

Company Shares 8,115.3 6,876.4 7,433.4 10,081 1 12,421 8

All Other Revenues 40,0863 53,121.4 67,4931 82.689.7 99,8785

Total Revenues $106,0629 $109,654.3 $139,935.6 $168,305.0 $201,2155

Expenses

Registered Representatives'

Compensallon (Part II only) Y $ 14,671.9 $13,689.0 $ 15,5062 $ 18.646.0 22,108.8

Other Employee Compensation

and Benefits 20,5149 20,070.8 21,8606 27,416.8 30.8282

Compensallon to Partners and

Voting Stockholder Officers 3,2934 3,096.1 3,5113 4,121 9 4.731.5

cemnnssons and Clearance Paid

to Other Brokers 5,083.3 5.088.4 5,4574 7,099.3 8,426.4

Interest Expenses 26,2229 39,582.1 55,8233 63,595.3 78,915.5

Regulatory Fees and Expenses 5733 534.6 6162 622.3 7886

All Other Expenses '!J 23.548.2 24,832.5 26,670.8 30,983.6 37,527.2

Total Expenses $ 93.908.0 $106,893.5 $129,4459 $152,4852 $183,3262

Income and Profitability

Pre-tax Income $ 12,1549 $ 2,760.8 $ 10,4897 $ 15,819.8 $17,8893

Pre-tax Profit Margin 11.5 2.5 75 94 89

Pre-tax Return on EqUIty 26.5 54 197 268 257

Number of Rrms 5,139 5,237 5,310 5,395 5,471

Figures may not add due to rounding.

r = rensed

p = preliminary

y calendar. rather than hscal, year data is reported in thiS table.

'!J Registered representatives' compensation for firms that neither carry nor clear IS included 10 "other expenses"

as thiS expense item is not reported separately on Part IIA of the FOCUS Report

Source: FOCUS Report

161
Table 14

UNCONSOUDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBUC BUSINESS

YEAR-END, 1993 - 1997 11

($ in Millions)

1993 1994 1995 1996' 1997p

~

Cash s 13,128.1 $ 13,500 4 s 14,862.7 $ 16.824.7 s 23.338.5

Receivables from Other

Broker -dealers 289.168 0 342,000.1 358,556.9 477,645.9 591,094.5

Receivables from Customers 68.526.1 66.911.6 71,004.2 87.064.8 118.272.7

Receivables from Non-customers 6,412.5 7.258.1 7,421.0 7.080.4 11,857.6

long Positions In Securities

and Commodibes 363,864 3 317,625.7 422.868.7 448,069.1 496.140.4

Securities and Investments

not Readily Marketable 4.124.4 4,481.1 5,366 2 5.453.8 8,037.8

Secunties Purchased Under Agreements

to Resell (Part II only) 2J 439,431.4 437,805.6 544.832.3 624.210.7 716.089.1

Exchange Membership 323.1 353 7 424.1 460.2 545.4

Other Assets 2/ 30.615.8 33,818.8 34.206.1 36.234.1 46.826.1

Total Assets $1,215.593 8 $1.223,755.0 $1.459.542.3 $1.703.043.7 $2.012,202.1

Liabilities and Eouitv Caoital

Bank loans Payable $ 41.991.9 s 34.471.4 s 45,717.6 $ 38.165.7 s 38,323.3

Payables to Other Broker-deaJers 105.115.2 130,736.4 152,3288 207.726.7 264.231.1

Payables to Non-customers 10,836.0 11.921.5 14,943.8 18,124.7 26,493.9

Payables to Customers 90.942.9 98,534.4 111.489.9 143,517.0 187.852.9

Short Positions in Securities

and Commodities 199.509 5 196.807.9 195.149.3 236,586.2 246,897.3

Secunties Sold Under Repurchase

Agreements (Part II only) 2/ 607.827.1 591,423.1 767.676.1 852.523.9 991.885 3

Other Non-subordinated Liabilibes 2/ 83.124.4 80.846.3 85,389.4 107.867.5 132.335.3

Subordinated Liabilities 25,370.6 28,493.5 30.9313 36.2295 47,422.6

Total liabilities $1.164,717.6 $1,173.2346 $1,403,626.3 $1,640,741.1 $1,935,441.6

Equity Capital s 50,876.2 $ 50.520.4 s 55.916.0 s 62.302.5 s 76,760.4

Number of firms 5.139 5.237 5.310 5.395 5,471

Agures may not add due to rounding.

r = revised

p = preliminary

Y Calendar, rather than fiscal, year data is reported in thiS table

2/ Resale agreements and repurchase agreements for firms that neither carry nor clear are included in "other assets" and

"other non-subordinated liabilities." respectively. as these items are not reported separately on Par1I1A of the FOCUS

Report

SOIIce: FOCUS Report

162
Carrying and Clearing Firms

Data for carrying and clearing firms that do a public business is presented

in more detail. Reporting requirements for firms that neither carry nor

clear are less detailed. Carrying and clearing firms clear securities

transactions or maintain possession or control of customers' cash or

securities. These firms produced 82% of the securities industry's total

revenues in calendar year 1997.

Brokerage activity accounted for about 24 cents of each revenue dollar in

1997, about the same as the level in 1996. Securities commissions remained

the most important component, producing 14 cents of each dollar of revenue.

Margin interest generated about six cents of each dollar of revenue, while

revenues from mutual fund sales accounted for about four cents.

The dealer side produced 64 cents of each dollar of revenue in 1997, down

from 67 cents in 1996. Sixteen cents came from trading and investments, a

decline from 17 cents in 1996. Eight cents came from underwriting, about

the same as in 1996. Forty cents came from other securities-related revenues,

down about one cent since 1996. This revenue item is comprised primarily of

interest income from securities purchased under agreements to resell and fees

from handling private placements, mergers, and acquisitions.

Expenses accounted for 92 cents of each revenue dollar in 1997, resulting in a

pre-tax profit margin of eight cents per revenue dollar, about one cent less

than that in 1996. Interest expense was the most important expense item,

accounting for 45 cents of each revenue dollar in 1997 compared to 44 cents

in 1996. Employee-related expenses-compensation received by registered

representatives, partners and other employees-consumed 28 cents of each

revenue dollar in 1997, compared to 29 cents in 1996.

Total assets of broker-dealers carrying and clearing customer accounts were

$1,957 billion at year-end 1997, a 1<)0./0 increase from 1996. Relative to other

assets, the value of reverse repurchase agreements and the inventory on the

books of broker -dealers declined during 1997, while the value of receivables

from customers and other broker -dealers increased.

Total liabilities increased by about 18% to $1,897 billion in 1997. Owners'

equity rose by 21 % to $60.7 billion.

163
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Table 16

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS 11

($ in Millions)

199& 1997.

Percent Percent Percent

oITota! oITotal Change

Dollars Revenues Dollars Revenues 1996-1997

Revenues

Securities CommissIOns $ 19,560.1 13.8% $23,171.7 13.6% 18.5%

Gains (Losses) In Trading and

Investment Accounts 23,733.3 167 26,896.6 157 133

Profits (Losses) from Underwriting and Seiling Groups 11,7651 83 13,8306 8.1 17.6

Margin Interest 7,353.8 52 10,4994 61 428

Revenues from Sale of Investment Company Shares 5,901.4 4.2 7,2055 4.2 221

Miscellaneous Fees 6,375.1 45 8,351.6 4.9 310

Revenues from Research 1054 01 685 0.0 -350

Other Securities Related Revenues 58,1361 409 68,1968 399 17.3

Commodities Revenues 1,570.9 1.1 331.5 02 -789

All Other Revenues 7,644.1 5.4 12,271.2 7.2 605

Total Revenues $142,145.3 100.0% $170,823.4 1000% 20.2%

Expenses

Registered Representatives'

Compensation $ 18,6460 131% $22,1088 12.9% 186%

Other Employee Compensation

and Benefits 20,503.7 14.4 23,4251 13.7 142

Compensation to Partners and

Voting Stockholder Officers 2,368.5 1.7 2,8096 1.6 186

Commissions and Clearance Pard

to Other Brokers 3,811.0 27 4,487.5 26 17.8

Communications 3,434.5 24 3,897.6 23 135

Occupancy and Equipment Costs 4,084.4 2.9 4,551.0 27 114

Data Processing Costs 1,700.1 1.2 1,9668 12 15.7

Interest Expenses 62,338.2 438 77,317.1 453 240

RegUlatory Fees and Expenses 4684 0.3 603.2 04 288

Losses In Error Accounts and

Bad Debts 332.2 0.2 454.3 03 368

All Other Expenses 11,8505 83 15,3795 9.0 298

Total Expenses $129,537.7 911% $157,000.4 91.9% 21.2%

Income and Profitability

Pre-tax Income s 12,6076 8.9% $13,823.0 8.1% 9.6%

Pre-tax Profit Margin 8.9 8.1

Pre-tax Retum on EQUIty 26.4 25.0

Number of Rrms 756 786

Rgures may not add due to rounding.

r = revised

p = preliminary

jJ calendar, rather than fiscal, year data is reported in this table.

Note: Includes information for firms doing a public business that carry customer accounts or clear securities transactions.

Source: FOCUS Report

165
Table 17

UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING

BROKER-DEALERS 11

($ in Millions)

1996' 1997P

Percent Percent Percent

of Total oITotal Change

Dollars Assets Dollars Assets 1995-1996

~

Cash $ 15,319.8 0.9% $ 21,556.7 1.1% 407%

Receivables from Other Broker-dealers 458,383.8 27.8 577,081.9 29.5 259

(a) Securities Failed to Deliver 7,381.3 0.4 15,530.5 0.8 110.4

(b) Secuntes Borrowed 426,882.9 25.9 532,039.0 27.2 24.6

(c) Other 24,119.7 1.5 29,512.4 15 22.4

Receivables from Customers 87,064.8 53 118,272 7 6.0 35.8

Receivables from Non-customers 6,474.8 04 11,2093 0.6 73.1

Long Positions m Securities and conmemnes 422,3331 25.6 463,8701 237 9.8

(a) Bankers Acceptances, Certificates

of Deposit and Commercial Paper 20,976.8 13 23,191.6 1.2 106

(b) U.S. and Canadian Government Obligations 252,967.2 153 267,463.0 13.7 57

(c) State and MUnicipal Government Obligations 10,8296 07 13,203.2 0.7 219

(d) Corporate Obligations 83,813.7 5.1 89,235.0 4.6 65

(e) Stocks and Warrants 37,5222 23 50,667.1 2.6 35.0

(I) OplJons 6,476.7 0.4 7,458 8 0.4 15.2

(g) Arbitrage 7,089.4 0.4 8,802.8 0.4 24.2

(h) Other secenues 2,303.7 0.1 3,209.1 0.2 393

(I) Spot Commodities 3537 0.0 639.4 0.0 808

SecunlJes and Investments Not Readily Marketable 4,877.3 0.3 7,542.3 0.4 54.6

~". secunties Purchased Under Agreements

to Resell 624,210.7 37.8 716,089.1 36.6 14.7

Exchange Membership 399.9 0.0 449.3 0.0 12.4

Other Assets 31 ,885.3 1.9 41,314.9 2.1 29.6

Total Assets $1,650,949.4 100.0% $1,957,386.2 100.0% 18.6%

liabilities and Equity Caortal

Bank Loans Payable $ 37,510 ..8 2.3% $ 38,135.3 1.9% 1.7%

Payables to Other Broker -dealers 190,501.8 11.5 253,096.8 129 32.9

(a) SecurilJes Failed to Receive 9,211.4 0.6 16,879.3 0.9 83.2

(b) Securities Loaned 158,120.8 9.6 207,674.7 10.6 31.3

(c) Other 23,169.7 1.4 28,542.8 1.5 232

Payables to Non-customers 17,695.1 1.1 26,106.3 1.3 47.5

Payables to Customers 143,517.0 8.7 187,852.9 9.6 30.9

Short Posnors in secennes

and Commodities 219,186.7 13.3 224,307.8 11.5 2.3

Securities Sold Under Repurchase

Agreements (Part" Only) 852,523.9 51.6 991,885.3 50.7 16.3

Other Non-subordinated

lIabilllJes 104,853.4 6.4 128,885.9 6.6 22.9

Subordinated UabilllJes 35,130.1 2.1 46,412.5 2.4 32.1

Totai liabilities $1,600,918.7 97.0% $1,896,682.6 96.9% 18.5%

EqUity Gapitai $ 50,030.6 3.0% $ 60,703.6 3.1% 21.3%

Number of Rrms 756 786

Rgures may not add due to rounding.

r = revised

p = preliminary

11 Calendar, rather than fiscal, year data is reported in this table.

Note: Includes mfonnatioo for finns doing a public business that carry customer accounts or clear securities transactiOllS.

Source: FOCUS Report

166
Securities Traded on Exchanges

Market Value and Volume

The market value of equity and option transactions (trading in stocks,

options, warrants, and rights) on registered exchanges totaled $6.9 trillion

in 1997. Of this total, approximately $6.6 trillion, or 96%, represented

the market value of transactions in stocks, rights, and warrants; $295

billion, or 4% were options transactions (including exercises of options

on listed stocks).

The value of equity and option transactions on the New York Stock

Exchange (NYSE) was $5.8 trillion, up 45.7% from the previous year.

The market value of such transactions on the American Stock Exchange

(AMEX) increased 55.3% to $203.8 billion and increased 39.8% to

$803.8 billion on all other exchanges The volume of trading in stocks

(excluding rights and warrants) on all registered exchanges totaled 159.7

billion shares, a 27% increase from the previous year, with 86.9% of the

total accounted for by trading on the NYSE.

The volume of options contracts traded (excluding exercised contracts)

was 353.8 million contracts in 1997, 20% greater than in 1996. The

market value of these contracts increased 47.9% to $219 billion. The

volume of contracts executed on the Chicago Board Options Exchange

increased 7.6% to 187.2 million. Option trading on the AMEX and

Pacific Stock Exchange rose 43% and 37.8% respectively while option

trading on the Philadelphia Stock Exchange increased 38.4%

Nasdaq (Share Volume and Dollar Volume)

Nasdaq share volume and dollar volume information has been reported on

a daily basis since November 1, 1971. At the end of 1997, there were

6,208 issues in the Nasdaq system, as compared to 6,384 a year earlier

and 3,050 at the end of 1980.

Share volume for 1997 was 163.9 billion, compared to 138.1 billion in

1996 and 6.7 billion in 1980. The dollar volume of shares traded in the

167
Nasdaq system was $4.5 trillion during 1997, compared to $3.3 trillion in

1996 and $68.7 billion in 1980.

Share and Dollar Volume by Exchange

Share volume on all registered stock exchanges totaled 159.9 billion, an

increase of 27% from previous year. The NYSE accounted for 87% of

the 1997 share volume; the AMEX, 4%; the Chicago Stock Exchange,

4%; and the Pacific Stock Exchange, 2%.

The dollar value of stocks, rights, and warrants traded was $6.6 trillion,

45.4% higher than the previous year. Trading on the NYSE contributed

89% of the total. The Chicago Stock Exchange and Pacific Stock

Exchange contributed 3% and 2% respectively. The AMEX accounted

for 2% of dollar volume.

168
Table 18

MARKET VALUE OF EQUITY/OPTIONS SALES ON U.S. EXCHANGES 11

($ in Thousands)

Total

Market Equity Options Non-Equity

Value Stocks 2J Warrants Rights Traded Exercised Options 'JJ

All Registered Exchanges for Past Six Years

Calendar Year: 1992 2,148,790,741 2,031,942,219 658,074 83,842 26,585,937 39,172,724 45,590,003

1993 2,728,667,287 2,609,854,352 584,699 65,339 33,779,350 42,983,539 41,400,009

1994 2,956,599,170 2,816,810,031 678,024 183,095 35,883,322 44,457,669 58,587,028

1995 3,678,326,943 3,506,785,001 970,523 235,647 50,802,752 51,461,348 68,071,671

1996 4,719,336,203 4,510,874,989 869,986 34,861 67,861,575 59,451,448 80,243,345

1997 6,879,408,633 6,559,348,106 616,256 27,363 104,535,151 100,422,278 114,459,480

Breakdown of 1997 Data by Registered Exchanges

All Registered Exchanges

Exchanges: AMEX 203,786,939 139,498,701 98,090 6,425 35,008,397 22,826,973 6,348,353

BSE 80,847,329 80,847,329 0 0 0 0 0

CHX~ 212,965,835 212,965,835 0 0 0 0 0

CSE 90,534,913 90,534,913 0 0 0 0 0

NYSE 5,847,854,938 5,846,637,135 503,200 20,838 415,222 272,894 5,648

PSE 150,850,620 122,766,544 13,430 100 17,839,130 10,150,071 81,344

PHLX 89,229,253 65,974,522 1,535 0 9,531,183 9,896,540 3,825,473

CBOE 179,391,835 123,126 0 0 41,741,218 33,328,829 104,198,662

Figures may not sum due to rounding.

1/ Data on the value and volume of equity security sales is reported in connection with fees paid under Section 31 of the Securities Exchange Act of 1934 as amended by the Securities Acts Amendments of 1975.

It covers odd-lot as well as round-lot transactions.

2J Includes voting trust certificates, certificate of deposit for stocks, and American Depositary Receipts for stocks but excludes rights and warrants.

'JJ Includes all exchange trades of call and put options in stock indices, interest rates, and foreign currencies.

~ The Chicago Stock Exchange was formerly the Midwest Stock Exchange. The name change took effect on June 11, 1993.

~ Source: SEC Form R-31 and Options Clearing Corporation Statistical Report.
170

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Table 20

SHARE VOLUME BY EXCHANGES 11

(In Percentages)

Total Share

Volume

Year (in Thousands) NYSE AMEX CHIC PSE PHl.X BSE CSE Others

1945 769,018 65.87 21.31 1.77 2.98 1.06 0.66 0.05 6.30

1950 893,320 76.32 13.54 2.16 3.11 0.97 065 0.09 3.16

1955 1,321,401 68.85 19.19 2.09 3.08 0.85 0.48 0.05 5.41

1960 1,441,120 68.47 22.27 2.20 3.11 088 0.38 0.04 265

1961 2,142,523 64.99 25.58 2.22 3.41 0.79 0.30 0.04 2.67

1962 1,711,945 71.31 20.11 2.34 2.95 0.87 0.31 0.04 2.07

1963 1,880,793 72.93 18.83 2.32 2.82 0.83 029 0.04 1.94

1964 2,118,326 72.81 19.42 2.43 2.65 0.93 029 0.03 1.44

1965 2,671,012 69.90 22.53 2.63 2.33 0.81 0.26 0.05 1.49

1966 3,313,899 69.38 22.84 2.56 268 0.86 0.40 005 1.23

1967 4,646,553 64.40 28.41 2.35 246 0.87 0.43 0.02 1.06

1968 5,407,923 61.98 29.74 2.63 2.64 089 0.78 0.01 1.33

1969 5,134,856 63.16 27.61 2.84 3.47 1.22 051 0.00 1.19

1970 4,834,887 71.28 19.03 3.16 3.68 1.63 0.51 0.02 0.69

1971 6,172,668 71.34 18.42 3.52 3.72 1 91 0.43 0.03 0.63

1972 6,518,132 70.47 18.22 3.71 4.13 2.21 0.59 0.03 0.64

1973 5,899,678 74.92 13.75 4.09 3.68 219 071 0.04 0.62

1974 4,950,842 78.47 10.28 440 3.48 1.82 0.86 005 0.64

1975 6,376,094 80.99 8.97 3.97 3.26 1.54 0.85 013 0.29

1976 7,129,132 80.05 9.35 3.87 3.93 142 078 0.44 0.16

1977 7,124,640 79.71 9.56 3.96 372 1.49 066 0.64 026

1978 9,630,065 79.53 10.65 3.56 3.84 1.49 060 0.16 0.17

1979 10,960,424 79.88 10.85 3.30 3.27 1.64 0.55 028 023

1980 15,587,986 79.94 10.78 3.84 280 1.54 0.57 0.32 0.21

1981 15,969,186 80.68 9.32 4.60 287 1 55 051 0.37 010

1982 22,491,935 81.22 696 5.09 3.62 2.18 0.48 038 0.07

1983 30,316,014 80.37 7.45 5.48 3.56 2.20 0.65 019 0.10

1984 30,548,014 82.54 5.26 6.03 3.31 1 79 0.85 0.18 004

1985 37,187,567 81.52 5.78 6.12 3.66 1.47 1 27 015 0.03

1986 48,580,524 81.12 6.28 5.73 3.68 1.53 133 0.30 0.02

1987 64,082,996 83.09 5.57 5.19 3.23 1.30 1.28 0.30 0.04

1988 52,665,654 83.74 4.95 5.26 3.03 129 1.32 0.39 0.02

1989 54,416,790 81.33 6.02 5.44 3.34 1.80 1 64 0.41 0.02

1990 53,746,087 81.86 6.23 4.68 3.16 1.82 1 71 0.53 0.01

1991 58,290,641 82.01 5.52 4.66 3.59 1.60 1.77 0.86 001

1992 65,705,037 8134 5.74 4.62 3.19 1.72 1.57 1.83 0.01

1993 83,056,237 82.90 5.53 4.57 2.81 1.55 1.47 1.17 0.00

1994 90,786,603 84.55 4.96 3.88 2.37 1.42 1.39 142 0.01

1995 107,069,656 84.49 4.78 3.67 2.56 1.39 1.45 1.66 0.00

1996 125,922,577 85.95 4.29 3.37 2.40 1.28 1.29 1.42 0.00

1997 159,856,674 86.85 3.88 3.75 2.01 109 1.24 118 000

jJ Share volume for exchanges includes stocks, rights, and warrants; calendar, rather than calendar. fiScal, year data are reported

in thiS table.

2/ Includes all exchanges not listed individually.

Source. SEC Form R-31

171
Table 21

DOLLAR VOLUME BY EXCHANGES 11

(In Percentages)

Total Dollar

Volume

Year (10 Thousands) NYSE AMEX CHIC PSE PHLX SSE CSE Others ?J

1950 $ 21,808,284 8591 6.85 2.35 2.19 1.03 1.12 0.11 0.44

1955 38,039,107 86.31 698 244 1.90 1.03 0.78 009 0.47

1960 45,309,825 8380 935 272 194 1.03 060 0.07 0.49

1961 64,071,623 8243 1071 2.75 1.99 1.03 0.49 007 053

1962 54,855,293 8632 681 2.75 2.00 1.05 046 007 054

1963 64,437,900 8519 7.51 2.72 239 1.06 0.41 006 066

1964 72,461.584 8349 845 3.15 2.48 1.14 0.42 0.06 0.81

1965 89,549,093 81.78 991 3.44 2.43 112 0.42 0.08 082

1966 123,697,737 79.77 1184 3.14 2.84 110 056 007 068

1967 162,189,211 77.29 1448 3.08 2.79 1.13 066 003 054

1968 197,116,367 7355 1799 3.12 2.65 1.13 104 001 051

1969 176,389,759 7348 17.59 3.39 3.12 1.43 067 001 0.31

1970 131,707,946 78.44 11.11 3.76 3.81 199 067 0.03 0.19

1971 186,375,130 79.07 998 4.00 3.79 229 058 0.05 0.24

1972 205,956,263 7777 10.37 4.29 3.94 256 0.75 005 027

1973 178,863,622 8207 606 4.54 3.55 245 100 006 0.27

1974 118,828,270 8363 4.40 4.90 3.50 2.03 1.24 006 0.24

1975 157,256,676 85.20 367 4.64 3.26 173 119 017 0.14

1976 195,224,812 8435 388 4.76 383 1.69 0.94 0.53 002

1977 187,393,084 8396 460 4.79 353 1.62 074 0.75 001

1978 251,618,179 83.67 613 4.16 364 162 061 017 000

1979 300,475,510 83.72 694 3.83 2.78 180 056 035 0.02

1980 476,500,688 8353 7.33 4.33 227 1.61 052 0.40 001

1981 491,017,139 84.74 5.41 504 2.32 1.60 0.49 040 000

1982 603,094,266 8532 327 5.83 3.05 159 0.51 043 000

1983 958,304,168 8513 332 6.28 286 1.55 0.66 016 0.04

1984 951,318,448 85.61 2.26 6.57 2.93 158 0.85 0.19 0.00

1985 1,200,127,848 85.25 223 6.59 3.06 1.49 120 0.18 0.00

1986 1,707,117,112 85.02 256 6.00 3.00 157 1.44 0.41 0.00

1987 2,286,902,788 8679 232 532 2.53 135 133 0.35 0.00

1988 1,587,950,769 8681 196 546 2.62 1.33 1.34 0.49 0.00

1989 1,847,766,971 8549 235 546 2.84 1.77 156 0.54 0.00

1990 1,616,798,075 86.15 233 458 2.77 179 1.63 0.74 0.00

1991 1,778,154,074 8620 2.31 434 305 154 172 0.83 001

1992 2,032,684,135 8647 2.07 428 287 1.70 1.52 1.09 0.00

1993 2,610,504,390 87.21 208 4.10 238 1.52 1.35 137 000

1994 2,817,671,150 88.08 201 3.49 2.09 134 1.31 1.68 0.00

1995 3,507,991,171 87.71 210 3.26 2.24 1.27 1.43 1.99 0.00

1996 4,511,779,836 88.91 1.91 3.01 2.03 1.19 132 1.63 0.00

1997 6,559,991,725 8913 213 3.25 1.87 1.01 123 1.38 0.00

1/ Dollar volume for exchanges mcludes stocks, rights, and warrants; calendar, rather than fiScal, year data are reported 10

thiS table.

2/ Includes all exchanges not listed individually.

Source: SEC Form R-31

172
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VALUE OF STOCKS USTED ON EXCHANGES

($ in Billions)

New York American ExcluSively

As of Stock Stock On Other

Dec 31 Exchange Exchange Exchanges Total

1938 $ 47.5 $ 10.8 $ ..... $ 58.3

1941 419 8.6 50.5

1942 35.8 7.4 432

1943 47.6 9.9 57.5

1944 555 11.2 66.7

1945 738 14.4 882

1946 686 13.2 81.8

1947 683 12.1 80.4

1948 670 119 3.0 81.9

1949 76.3 12.2 31 91.6

1950 938 13.9 33 111.0

1951 109.5 16.5 3.2 129.2

1952 120.5 169 31 140.5

1953 1173 153 28 135.4

1954 169.1 22.1 36 1948

1955 207.7 27.1 40 238.8

1956 2192 310 38 254.0

1957 1956 25.5 3.1 2242

1958 2767 317 43 312.7

1959 307.7 254 42 3373

1960 307.0 24.2 4.1 3353

1961 3878 330 53 426.1

1962 3458 24.4 4.0 374.2

1963 411.3 261 4.3 441.7

1964 474.3 28.2 4.3 506 8

1965 5375 309 4.7 5731

1966 482.5 27.9 4.0 5144

1967 605.8 43.0 39 652.7

1968 692.3 612 6.0 7595

1969 6295 47.7 5.4 682.6

1970 636.4 395 4.8 680.7

1971 741.8 49.1 47 795.6

1972 871.5 55.6 5.6 9327

1973 721.0 38.7 4.1 763.8

1974 511.1 23.3 29 537.3

1975 685.1 293 43 718.7

1976 858.3 36.0 4.2 8985

1977 776.7 37.6 42 818.5

1978 822.7 392 29 864.8

1979 960.6 57.8 3.9 1,022.3

1980 1,242.8 103.5 2.9 1,3492

1981 1,143.8 89.4 50 1,238.2

1982 1,305.4 77.6 6.8 1,389.7

1983 1,522.2 80.1 6.6 1,608.8

1984 1,529.5 52.0 58 1,587.3

1985 1,882.7 63.2 5.9 1,951.8

1986 2,128.5 70.3 6.5 2,205.3

1987 2,132.2 67.0 5.9 2,205.1

1988 2,366.1 841 4.9 2,455.1

1989 2,903.5 100.9 46 3,009.0

1990 2,692.1 69.9 3.9 2,765.9

1991 3,547.5 90.3 4.3 3,6421

1992 3,877.9 86.4 5.9 3,970.2

1993 4,314.9 98.1 7.2 4,420.2

1994 4,240.8 86.5 47 4,332.0

1995 5,755.5 113.3 6.8 5,875.6

1996 6,947.7 106 2 5.7 7,059.6

1997 9,413.1 131.3 36 9,548.0

174

Source: SEC Form 1392
Table 24

APPROPRIATED FUNDS vs FEES* COLLECTED

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* Excludes disgorgemeuts from fraud ac:tious.

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