1969

For the Fiscal Year

Ended June 30th
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

HAMER H. BUDGE, Ohairman

HUGH F. OWENS

RIOHARD B. SMITH

JAJrIES J. NEEDHAM

A. SYDNEY IlERLoNG, JR.

ORVAL L. DuBOIS, Secretary;

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

Washington, D.O. 20402 - Price $1.00 (paper cover)
LEITER OF TRANSMIITAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.O.

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

the honor to transmit to you the Thirty-Fifth Annual Report of the

Commission covering the fiscal year July 1, 1968 to June 30, 1969, in

accordance with the provisions of Section 23(b) of the Securities

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

Holding Company Act of 1935; Section 46 (a) of the Investment Company Act of 1940; Section 216 of the Investment Advisers Act of

1940; Section 3 of the Act of June 29, 1949, amending the Bretton

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

Act.

Respectfully,

HAMER H. BUDGE,

Ohair man.

THE PRESIDENT OF THE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.O.

ill

COMMISSIONERS AND PRINCIPAL STAFF OFFICERS

(A8 01 December 1, 1969)

Term

Commissioners expires

June 5

HAMER H. BUDGEof Idaho, Ohairman 1974

HUGH F. OWENS of Oklahoma 1970

RICHARD B. SMITH of New York 1972

JAMES J. NEEDHAMof New York 1973

A. SYDNEYHERLONG,Jr. of Florida 1971

Secretary: ORVALL. DuBOIS

Executive Assistant to the Chairman: TIMOTHY G. GREENE

Principal Staff Officers

CHARLESE. SHREVE,Director, Division of Corporation Finance.

THOMAS N. HOLLOWAY,Associate Director.

RALPH C. HOCKER,Associate Director.

SOLOMONFREEDMAN,Director, Division of Corporate Regulation.

AARONLEVY,Associate Director.

ALLAN S. MOSTOFF,Associate Director.

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

SHELDONRAPPAPORT,Associate Director.

STANLEYSPORKIN,Associate Director.

PHILIP A. LoOMIS, JR., General Counsel.

DAVID FERBER, Solicitor.

WALTERP. NORTH,Associate General Counsel.

MEYEREISENBERG,Associate General Counsel.

ANDREWBARR,Chief Accountant.

A. CLARENOESAMPBON,JR., Associate Chief Accountant.

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

LEONARDI1ELFENBTEIN,Director, Office of Opinions and Review.

W. VICTORRODIN, Associate Director.

ALFREDLETZLER,Associate Director.

WILLIAM E. BECKER,Chief Management Analyst.

FRANK J. DONATY,Comptroller.

ERNESTL. DESSEOKER,Records and Service Officer.

HARRYPOLLACK,Director of Personnel.

RALPH L. BELL, EDP Manager.

V
REGIONAL AND BRANm OFFICES

Regional Offices and Regional Administrators

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

New York, New York 10001

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine.-Edward P. Delaney, Acting, Suite 2203, John F. Kennedy

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

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

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

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

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

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

U.S. Courthouse and Federal Office Bldg., 219 South Dearborn Street,

Chicago, nlinois 60604.

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

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

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

76102

Region 6. Wyoming, Colorado, New Mexico, Nebraska, North Dakota, South

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

Denver, Colorado 80202

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

94102

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

900 Hoge Bldg., Seattle, Washington 98104.

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of Columbia.-Alexander J. Brown, Jr., Room 532, Crystal Mall No.2

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

Branch Offiees

Cleveland, Ohio, 44199.-Room 779, Federal Office Bldg., 1240 E. 9th Street.

Detroit, Michigan 48226.-230 Federal Bldg.

Houston, Texas 77022.-Room 2606 Federal Office & Courts Bldg., 515 Rusk

Ave.

Los Angeles, California 9OO12.-Room 1043, U.S. Courthouse, 312 North

Spring Street.

Miami, Florida 33130.-Room 1504, Federal Office Bldg., 51 S.W., First Ave.

St. Louis, Missouri 63102.-Room 916, Federal Bldg., 208 North Broadway.

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

Street.

VI
COMMISSIONERS

Hamer H. Budge, Chairman

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

1910. He attended the College of Idaho, Caldwell, Idaho, and received

an A.B. degree from Stanford University, Palo Alto, California,

majoring in political science, and an LL.B. degree from the University

of Idaho in Moscow, Idaho. He is admitted to practice before the Supreme Court of Idaho and the Supreme Court of the United States and

practiced law inthe city of Boise, Idaho, from 1936 to 1951, except for

3% years in the United States Navy (1942-1945), with final discharge

as Lieutenant Commander. Elected to the Idaho State Legislature,

he served three sessions, two as assistant Republican floor leader and

one as majority floor leader. First elected to Congress in November

1950, he represented Idaho's Second Congressional District in the

U.S. House of Representatives during the 82d, 83d, 84th, 85th, and

86th Congresses. In the House he was a member of the Rules Committee, Appropriations Committee, and Interior Committee. During the

period from 1961 until his appointment to the Commission he was

District Judge in Boise. He took office as a member of the Commission

on July 8, 1964, for the term expiring June 5, 1969, and was reappointed for the term expiring June 5, 1974. He was designated Chairman of the Commission on February 22,1969.

Hugh F. Owens

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

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

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

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

specializing in securities law. He returned to Oklahoma City in January 1936, to become associated with the firm of Rainey, Flynn,

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

United States Junior Chamber of Commerce. During World War II

he attained the rank of Lieutenant Commander, U.S.N.R., and served

as Executive Officer of a Pacific Fleet destroyer. In 1948, he became

a partner in the firm. of Hervey, May and Owens. From 1951 to 1953,

he served as counsel for the Superior Oil Company in Midland, Texas,

VB
VIII SECURITIES AND EXCHANGE COMMISSION

and thereafter returned to Oklahoma City, where he engaged in the

general practice of law under his own name. He also served as a parttime faculty member of the School of Law of Oklahoma City University. In October 1959, he was appointed Administrator of the then

newly enacted Oklahoma Securities Act and was active in the work

of the North American Securities Administrators, serving as vice

president and a member of the executive committee of that Association. He took office as a member of the Securities and Exchange

Commission on March 23, 1964, for the term expiring June 5, 1965,

and was reappointed for the term expiring June 5, 1970.

Richard B. Smith

Commissioner Smith was born in Lancaster, Pennsylvania, on July

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

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

University of Pennsylvania, where he was a Law Review editor. Upon

graduation he became associated with the New York City law firm of

Reavis & McGrath (then Hodges, Reavis, McGrath, Pantaleoni &

Downey). He remained with that firm from 1953, except for a period

with the legal department of W. R. Grace & Co. in 1956-57, until his

appointment to the Commission, having become a partner of the firm

in 1963. Commissioner Smith is a member of The Association of the

Bar of the City of New York (Chairman, Committee on Aeronautics,

1963-66), the New York State Bar Association, the American Bar

Association and the American Law Institute. He took officeas a member of the Commission on May 1,1967, for the term expiring June 5,

1967, and was reappointed to a 5-year term ending June 5, 1972.

James J. Needham

Commissioner Needham was born in Woodhaven, New York, on

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

University. At the time of his appointment to the Commission, Commissioner Needham, a Certified Public Accountant, was associated

with A. M. Pullen & Company, based in Greensboro, North Carolina,

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

the firm's Executive Committee. Previously, he was associated with

Raymond T. Hyer & Company and with Price, Waterhouse & Co.

Commissioner Needham has been active in professional and business

organizations, including the American Institute of Certified Public

Accountants (as a member of Council); the New York State Society

of Certified Public Accountants (including service as Treasurer and

as a member of its Board of Directors and Executive Committee) ; the

New York Chamber of Commerce; and the Accountants Club of
COMMISSIONERS IX

America, Inc. He also has participated actively in many community

organizations. Prior to assuming officeon July 10, 1969, for the term

expiring June 5, 1973, he resided in Plainview, New York.

A. Sydney Herlong, Jr.

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

to Lake County, Florida, where he attended public schools. He received an LL. B. degree from the University of Florida, Gainesville,

Florida, in 1930, and commenced practicing law in his home town of

Leesburg, Florida. Commissioner Herlong continued practicing law

until 1937when he was elected County Judge of Lake County, Florida.

In 1948 he was elected to the U.S. House of Representatives and continually served in that body until January 1969, when he voluntarily

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

Post Office and Civil Service Committee, the Agriculture Committee

and, for the last seven terms, the Ways and Means Committee. Upon

retirement from Congress, he became a consultant to the Association

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

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

the Good Government award from the Florida Junior Chamber of

Commerce and the Distinguished Alumni Award from the University

of Florida. He took officeas a member of the Securities and Exchange

Commission on October 29, 1969, for the term of officeexpiring June

5,1971.

TABLE OF CONTENTS

Page

Commissioners and principal staff officers_____________________________ V

Regional and branch offices___ _______ _____ _______________ VI

Biographies of Commissioners_______________________________________ VII

PART I

IMPORTANT RECENT DEVELOPMENTS_______________________ 1

"Back office" problems_________________________________________ 1

Automated trading information systems__________________________ 4

Structure and level of commission rates__________________________ 6

Public ownership of securities of exchange members________________ 8

Institutional investor study_____________________________________ 9

Reform of laws relating to investment companies__________________ 12

Study of "hedge funds" 18

Report of the disclosure policy study_____________________________ 18

Additional financial disclosure by diversified eompanies.c,., __________ 22

Organized crime progr8m______________________________________ 24

PART II

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURITIES____________________________ ____ _ 25

A. Disclosure in connection with public offerings__________________ 26

Type of information included in registration statement_________ 26

Prior delivery of preliminary prospectus______________________ 27

Proposed summary sheet for registration statements___________ 28

Guides for preparation and filing of registration statements_____ 28

Amendment of Rule 429____________________________________ 29

Spin offs of securities and trading in the securities of inactive or shellcorporations________________________________________ 30

Staff examination of registration statements___________________ 31

Time required to complete registration_______________________ 31

Statistics regarding registration statements filed_______________ 33

Statistics regarding securities reglstered; _____________________ 34

Stop order proceedings_____________________________________ 36

Examinations and investigations_____________________________ 36

Exemption from registration of small issues___________________ 37

Exempt offerings under Regulation A______________________ 38

Reports of sales_______________________________________ 38

Suspension of exemption________ ______________ _ 39

Exempt offerings under Regulation B______________________ 39

Reports of sales_______________________________________ 39

Exempt offerings under Regulation E______________________ 40

Exempt offerings under Regulation F ______________________ 40

XI

_
XII TABLE OF CONTENTS

FULL DISCLOSURE OF INFORMATION ABOUT THE ISSUERS

OF SECURITIES-Continued Page

B. Continuing disclosure requirements___________________________ 41

Registration of securities on exchanges_______________________ 41

Registration of over-the-counter securitles , __ 42

Adoption of Rule 12g-2________________________________ 42

Exemptions from registration___________________________ 43

Periodic reports ._ 43

Administrative proceedings to obtain compliance with Exchange

Act registration or reporting requirements__________________ 44

Proxy solleltations..c , ____ ___________________________ 45

Scope and nature of proxy regulation; __ _ ________________ 45

Amendment of Item 7(f) of the proxy rules , __ _ 45

Amendment of Rule 140-2______________________________ 46

Statistics relating to proxy and information statements_____ 46

Stockholders' proposals________ ___ _ __ ___ 47

Ratio of soliciting to non-soliciting companies _ ___________ 47

Proxy contests________________________________________ 48

Disclosure in connection with takeover bids and other large acquisitions 4___________________________ 48

Insiders' security holdings and transactions___________________ 49

Ownershipreports_____________________________________ 49

Recovery of short-swing trading profits___________________ 50

Proposed amendment of Rule 16a-L____________________ 50

Changes in Rule 16b-3_________________________________ 51

Investigations with respect to reporting and proxy provisiona, _ _ 51

Summary suspension of trading_____________________________ 52

C. Accounting and auditing matters_____________________________ 54

Relations with the accounting profession and the public; _______ 55

The work of the Accounting Principles Board_________________ 57

Other current developments_________________________________ 58

D. Civillit~ation involving disclosure matters____________________ 59

E. Criminal prosecutions involving disclosure violatlons., ___________ 61

F. Exemption for securities of international banks_________________ 62

International Bank for Reconstruction and Development_______ 62

Inter-American Development Bank__________________________ 64

Asian Development Bank___________________________________ 65

G. Trust Indenture Act of 1939_________________________________ 66

PART III

REGULATION OF SECURITIES MARKETS_____________________ 68

Regulation of exchangea., ____ _____ ________ 68

Registration and exemption of exchanges_____________________ 68

Review of exchange rules and procedures_____________________ 69

Delisting of securities from exchanges_______________________ 71

Inspections of exohanges , __ _ _ _ _____ ____ __ __ 72

Statistics relating to securities traded on exchanges________________ 72

Number of issuers and seeurities., , _ _ _ _ 72

Market value of securities available for trading_______________ 72

Volume of securities traded_________________________________ 74

_
TABLE OF CONTENTS XIII

REGULATION OF SECURITIES MARKETS-Continued

Statistics relating to securities traded on exchanges-Continued Page

Foreign stocks on exchanges , _ _ _ 74

Comparative exchange statistles., __ _ 75

Block distributions reported by exchanges____________________ 77

Unlisted trading privileges on exchanges_____________________ 78

Over-the-counter trading in common stocks traded on national

securities exchanges_________ ___ ____ __________ _ 79

Statistical studies; _ _ __ ______________ 79

Issues registered under the Securities Act of 1933_ _____________ 80

New securities offerings , _ __ __________________ 80

Individuals' saving _ __ _ ____________________________________ 80

Private noninsured pension funds____________________________ 80

Stock transactions of financial insti tu tions ____________________ 81

Financial position of corporationa.; , _________________________ 81

Plant and equipment expenditures___________________________ 81

Directory of registered companies; _ _ _ _ ______________________ 81

Stock market data; __ _ __ _ _______ 81

Cost of flotation of security issues___________________________ 82

PART IV

CONTROL OF IMPROPER PRACTICES IN SECURITIES

MARKETS______ _ ____ _ ______________ _____ 84

Regulation of broker-dealers and investment advisers______________ 84

Registration, financial responsibility and financial reporting

requrrements____________________________________________ 84

Reglstration , __ ___ ___ _________ 84

Capital requirements with respect to broker-dealers; _____ 85

Financial reports of broker-dealers; ______________________ 86

Regulation of broker-dealers who are not members of registered

securities association______ _____ _______________________ 86

Detection of improper practices_____________________________ 88

Public complaints; __ ___ _______________________________ 88

Inspections___________________________________________ 88

Marketsurveillance___________________________________ 89

Section of securities violatlons., __ __ _____________________ 90

Use of computer for name searches., _ ____ 90

InvesMgationB_____________________________________________ 91

Enforcement of investigative subpoenas__________________ 92

Imposition of sanctions., ______ _____________________ 93

Administrative proeeedings., ___ ____________ _________ 94

Civilproceedings______________________________________ 103

Criminal proseeution , __ _ __ ____ ___________ 103

Supervision of activities of National Association of Securities

Dealers, Inc____________________________________________ 104

NASD disciplinary aetions , __ __ ___ __ ______ 105

Commission review of NASD disciplinary action__________ 106

Commission review of NASD action on membership_______ 107

Commission inspections of the NASD____________________ 108

Disciplinary actions byexchanges___________________________ 108
XIV TABLE OF CONTENTS

CONTROL OF IMPROPER PRACTICES IN SECURITIES

MARKETS-Continued

Violations of antifraud or related provisions-civil and criminal Page

proceedings_________________________________________________ 108

Civil Iitigatlon , _ _________________________ 109

Tender offer eases., _ ___ ____ ________ ________ ___ 114

Criminal proceedings______ _ ___ ______ ____ __ 115

Cooperative enforcement program_ 119

Enforcement problems with respect to foreign securities___________ 120

PART V

REGULATION OF INVESTMENT COMPANIES__________________ 124

Companies registered under the Act_____________________________ 124

Growth of investment company assets___________________________ 126

Investment company filings, other than applicatiollS_______________ 127

Expedited procedures and registration statement guidelines.Lc , , 127

Developments with respect to particular types of investment companies_____________________________________________________ 128

Bank-affiliated investment companies________________________ 128

Investment companies using leverage and other special investmenttechniques________________________________________ 129

Advisory fees tied to performance___________________________ 129

Study of speculative investment techniques___________________ 130

Investment companies which invest in restricted securities______ 130

Portfolio turnover diselosure , __ ____ __ ___________ __ 131

Foreign sales guidelines , _ _ __ __ ____ ____________________ 132

Applications for Commission action_____________________________ 132

Control of improper practices.L, , ________________________ 137

Inspection and investigation program; 137

Civil and administrative proeeedlngs , _ _ _ ___ __ 137

Portfolio transaotions., _ ___ __________________ ___ 137

Purchase of restricted securities_________________________ 139

Transactions with affiliated persollS______________________ 140

Failure to register _ _ _______________ ___ 141

Performance fees; _____ ________________________ 141

Status cases_ _ _ _ __ ___ ________________ 142

Changes in rules , _ _ __ _ _ ___ __________________ 142

Rule 22c-1-"Forward Pricing" of redeemable securities of

registered investment companies__________________________ 142

Rules relating to variable annuities and separate accounts., _____ 143

Start-up exemptions., ___ _____ 143

Rule 6e-1 under the Investment Company Act and amendment of Rule 156 under the Securities Act______________ 143

PART VI

REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES___ 145

Composition of registered holding-company systems_______________ 145

Section 11 matters in registered holding-company systems__________ 147

Proceedings with respect to acquisitions, sales and other matters., ___ 148

Financing of active registered public-utility holding companies and

therrsubsidiaries____________________________________________ 153

Competitive bldding , , ____ __ ____ ____ ___ 154

Policy a.s to refuuda.bility of debt issues__________________________ 155

_
TABLE OF CONTENTS

PART VII

xv

Page

PARTICIPATION IN CORPORATE REORGANIZATIONS_______ 157

Summary of activities_________________________________________ 158

Jurisdictional, procedural and administrative matters______________ 158

Trustee's investigation 162

Reports on plans of reorganisatlon., __ __ 163

Activities with regard to allowances_____________________________ 167

Intervention in Chapter XI proceedings__________________________ 170

PART VIII

SUPPORTING ACTIVITIES_____________________________________ 174

Public information services_____________________________________ 174

Dissemination of information_______________________________ 174

Publications__________________________________________ 175

Availability of information for publio inspeotion______________ 176

Eleotronio data processing, _____________________________________ 178

Extension of application of automation teohniques_____________ 178

InoreaseinEDPoapability_________________________________ 179

Assistanoe to state and federal agenoies_______________________ 179

Sharing of EDP faoilities___________________________________ 179

EDPtraining_____________________________________________ 179

Personnel and finanoial management_____________________________ 180

Personne1program_________________________________________ 180

Personnel strength; financial management____________________ 181

PART IX

APPENDIX-STATISTICAL TABLES

Table 1. A 35-year reoord of registrations effective under the Seourities

Act of 1933-&cal years 1935-1969

Table 2. Registrations effective under the Seourities Aot of 1933, fiscal

year ended June 30, 1969

Part 1. Distribution by months

Part 2. Purpose of registration and type of security

Table 3. Brokers and dealers registered under the Securities Exchange

Aot of 1934-effective registrations as of June 30, 1969, classified by type of organization and by location of principal office __

Table 4. Number of security issues and issuers on exchanges

Part 1. Unduplieated oount as of June 30, 1969 of the number of stook

and bond issues admitted to trading on exchanges, and the

number of issuers involved

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

June 30, 1969, classified by trading status, and number of issuersinvolved

Table 5. Value of stooks on exchanges

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

exchanges in the calendar year 1968 and the 6-month period ended June 30, 1969

Part 1. 12 months ended December 31, 1968

Part 2. 6 months ended June 30, 1969

Table 7. Comparative share sales and dollar volumes on exchanges

Table 8. Block distributions of stocks reported by exchanges

187

188

188

188

189

190

190

190

191

192

192

192

193

194

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_

_

_

_

_

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_

_

_

_

_

_

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XVI 'fABLE OF CONTENTS

Page

Table 9. Unlisted stocks on exchanges_______________________________ 195

Part 1. Number of stocks on the exchanges as of June 30, 1969_____ 195

Part 2. Unlisted share volume on the exchanges-calendar year 1968_ 195

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

under the Securities Act of 1933, the Securities Exchange Act

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

the Investment Company Act of 1940, and the Investment

Advisers Act of 1940____________________________________ 196

Table 11. A 36-year summary of all injunction cases instituted by the

Commission-1934 to June 30, 1969, by calendar year______ 197

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

for review of Commission orders, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases on appeal under Ch. X in which the

Commission participated . 198

Table 13. A 36-year summary of criminal cases developed by the Commission-1934 through 1969, by fiscal year________________ 199

Table 14. A 36-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1969______ 200

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

were pending at June 30, 1969___________________________ 200
PART I

IMPORTANT RECENT DEVELOPMENTS

"Back Office" Problems

One of the most serious problems facing the securities industry, the

investing public and the Commission today is the "back office" or

"paper work" problem. Its chief cause was the unprecedented rise in

share trading volume. Since 1965 the combined annual volume of the

New York Stock Exchange and American Stock Exchange has increased from 2.1 to 4.4:billion shares. The increase with respect to peak

periods is even more dramatic. In 1962 the New York Stock Exchange

was experiencing an average daily volume of 3.8 million shares, and it

was projected that volume would double by 1975. Instead, volume

almost quadrupled by December of 1968, during which month the Exchange averaged 14.9 million shares daily. By hindsight, it seems that

the industry took longer than it should have to regard the progressively higher levels of activity as a new norm and to recognize that

such levels of activity would require fundamental changes. Because of

the prevalent tendency to view the increased trading as a temporary

phenomenon, for a long time the reaction of many firms was to attempt

to meet the new demand by more intensive use of their existing facilities. And, of the firms which attempted to meet the challenge by automating, some selected computer systems which had not been adequately

tested and which they did not have the personnel to utilize effectively.

Some firms survived the crisis only by reducing their operations to

manageable size, while others remain only as parts of larger firms

which acquired them.

One method of measuring the magnitude of the operational difficulties encountered throughout the securities industry is by statistics

regarding the number of complaints against broker-dealers received

by the Commission from members of the public. The Commission

has always paid close attention to letters from individual investors,

both because it feels a responsibility to protect public stockholders and

because an analysis of complaints may give the Commission insight

into previously unnoticed problems being experienced by a particular

firm or by the industry in general. In fiscal year 1969, however, the

Commission was so inundated with complaints that at times it was

unable to make a prompt reply to a complainant, much less an investigation of his charges.

873-754-70--.-2 1
2 SECURITIES AND EXCHANGE COMMISSION

Total complaints to the Commission against broker-dealers jumped

from 3,991 in fiscal 1968 to 12,494:in fiscal 1969. This increase is all the

more significant in light of the fact, which the Commission has learned

from inspections of broker-dealer records, that for every letter of complaint sent to the Commission, 20 others are handled directly by the

broker-dealer. Nine out of every 10 complaints currently filed relate

to back office matters, particularly the failure to deliver customers'

funds and securities, and virtually the entire increase in complaints

this past year can be attributed to such matters. Although many firms

with a large number of public customers came in for criticism, one

firm alone accounted for a 10th of the complaints. The Commission

has instituted proceedings against that firm and has cautioned many

other firms about their duty to handle customers' accounts properly

and service their complaints. The Commission is also encouraging the

self-regulatory bodies to exercise closer supervision of their members with regard to the handling of customer complaints. Itis a cause

for concern that the number of complaints shows no signs of declining in fiscal 1970, but rather seems to be stabilizing at the rate of about

14,000 complaints a year.

Accompanying the trading volume peak in December 1968 was a

record number of "fails to deliver" (securities contracts which a

broker has not consummated by delivery of securities on settlement date). In that month, overdue contracts reached a total

of $4.1 billion, an amount which presented serious risks both to brokerage firms and their customers. With an improvement in operational

capabilities and a decline in trading volume during the last half of

fiscal year 1969 came a decrease in fails to $2.2 billion. The improvement in this key statistic issomewhat encouraging, and the restrictions

on trading hours have been eased so that at present trading on the

exchanges and in 'the over-the-counter market is taking place 5 hours

a day, 5 days a week. The Commission believes that through the joint

efforts of the Commission and the industry more progress can be made

in reducing the level of fails and in preventing fails from soaring with

an increase in share volume. One measure taken by the Commission to

assist in providing additional protections for the investing public was

to amend its net capital rule to impose a graduated percentage deduction from market value of securities in the "failed to deliver" accounts

of broker-dealers. By limiting the credit which firms can take for such

securities as assets, the rule requires the firms either to make delivery

of the securities or to reduce their aggregate indebtedness.

In dealing with the back-office problem, a nation-wide program of

inspecting broker-dealers on an emergency basis was implemented

by the Commission, the National Association of Securities Dealers,
THIRTY-FIFTH ANNUAL REPORT 3

Inc. and the stock exchanges. This program singled out those firms

experiencing the greatest difficulties. Various measures were taken

during fiscal 1969 with respect to such firms, including warning letters,

office conferences, restrictions on operations and the institution of 36

administrative proceedings and 14 injunctive actions. Because of the

strain that back-office problems create on a firm's capital, in seven of

the injunctive actions brought by the Commission receivers were appointed. The Commission has worked very closely with the self-regulatory organizations in this area to encourage and assist them in identifying troubled firms and taking appropriate corrective action. Where

practicable the Commission coordinated its measures with those of the

self-regulatory organisations,'

The Commission has also encouraged and worked closely with the

self-regulatory organizations and private groups in studying the problems and devising means to process efficiently the present and projected

high levels of trading. The staff has met with groups to establish systems for the gathering and exchange of information on the financial

and operating conditions of the brokerage industry. Several studies

have been and are being conducted by private consultants retained by

stock exchanges or other organizations to solve the back -officeproblem

by modernizing the industry's operations through the use of systems

logic and modern technology in the processing of securities transactions. The Commission and its staff have actively encouraged these

studies and given of their time and effort to the extent possible, For

example, one major recommendation has been to adopt a nation-wide

system of clearing over-the-counter securities transactions so as to

reduce the movement of the various papers and stock certifioates. In

furtherance of this proposal, the Commission sponsored. a meeting in

February 1969 at which representatives of the self-regulatory organizations, the banking industry, broker-dealers, the Commission and

other government agencies discussed the proposal and reached certain

basic agreements as to the nature and operation of such a system.ll

Subsequent meetings on this matter have been held.

The Commission and its staff have also worked closely with the

American Bankers Association, with regard to its attempts to utilize

the capabilities of the computer with respect to the various forms

used to process securities transactions. The ABA Committee on Uniform Security Identification Procedures has developed a uniform num1See F6fTU cf Oompany, Securities Exchange Act Release No. 8689 (August 29, 1969) ; D. H. Blair cf 00., Securities Exchange Act Release No. 8688

(August 29,1969) ; J.R. Timmins cE 00., Securities Exchange Act Release No. 8600

(August 29, 1969).

• Securities Exchange Act Release No. 8543 (February 28,1969).
4 SECURITIES AND EXCHANGE COMMISSION

bering system for the identification of all securities, and has also issued

a report recommending the adoption of a man-machine-readable punch

card size stock certificate. The Commission and its staff assisted in the

studies that went into this report. A very auspicious development occurred in November 1969, when the New York and American Stock

Exchanges endorsed in principle the machine-readable stock certificate

and requested public comment on the Committee's report.

Despite the many unresolved operational problems which remained

as fiscal year 1969 drew to a close, there were signs that the crisis was

shifting from the operational to the financial area. Firms were increasingly experiencing difficulties in maintaining the required degree

of liquidity, in part because of the additional expenditures necessary to reduce the paperwork logjam, and in part because of

undercapitalization.

Automated Trading Information Systems

Advances in electronic data processing during the last few years

have made possible the development of automated trading information

systems for securities. These systems generally involve the use of

time-shared computers to transmit, among persons having access to

them, indications of interest and, in some cases, firm offers and acceptances to purchase or sell securities. Consequently, such systems can

be programmed to facilitate various steps in the process of trading

securities, up to and including the actual execution of transactions.

During the 1969 fiscal year, plans for three automated systems

for the trading of blocks of securities, two of them under private sponsorship and the third to be sponsored by the New York Stock Exchange, were announced to the industry. The systems are all designed

to facilitate the bringing together of institutional buyers and sellers.

There are, however, substantial differences between them. The proposed "Instinet" system is designed to permit direct dealing on an

anonymous basis between institutions, without the -intervention of

brokers. The "AutEx" system, on the other hand, is geared more

toward the use of brokers and existing exchanges. Only brokers would

be allowed to enter into the system messages which disclose an interest to buy or sell, although institutional subscribers could enter general buying or selling preferences for particular securities. All negotiations would take place outside the system, and all executions would

be effected either on an exchange or over-the-counter. The third system, known as the Block Automation System ("BAS"), is being developed by the New York Stock Exchange. As proposed, this system

would be owned and controlled by the Exchange, only members of

the Exchange would be allowed to subscribe for broker terminals, and

entries would be limited to stocks listed on the Exchange. Institutions
THIRTY-FIFTH ANNUAL REPORT 5

would also be able to enter indications of interest, but all negotiations

would take place between member firms designated by the institutions.

In August 1969, the Commission released for comment proposed

Rule 15c2-10 under the Securities Exchange Act of 1934, which

would provide a regulatory framework for automated trading information systems that are not within the existing scope of regulation of

exchanges and national securities associations," Any system for transmitting, among participants, subscribers or customers, indications of

interest or offers to purchase or sell securities through the use of a computer would be covered by the rule unless specifically exempted. The

rule would provide, among other things, that no broker or dealer may

operate or participate in such an automated trading information system unless a plan describing the system, detailing specific rules of

operation designed to prevent abuse of the system and providing for

adequate recordkeeping, has been submitted to and declared effective

by the Commission. The Commission could impose appropriate terms

and conditions. The proposed rule would thus permit operators of the

systems to develop flexible plans consistent with their own particular

technologies and at the same time permit the Commission to make

certain that such plans are consistent with its regulatory responsibilities. The Commission invited comments on both the regulatory status

of the various systems and the specific terms of the proposed rule.

During the past fiscal year further progress was made in the development of an automated quotations system for the over-the-counter

market to be known as the "NASDAQ System." 4 On December 11,

1968, following adoption by the NASD of by-law amendments authorizing establishment of the NASDAQ System and of rules governing the operation of and access to the system, the NASD signed a

1-year contract with the Bunker-Ramo Corporation to build and

operate the system. Presently scheduled to become operational in late

1910, the system envisions three levels of services capable of handling

as many as 20,000 different over-the-counter issues. Initially it will

provide instantaneous quotations on approximately 1,500 securities to

offices of brokers, retail traders and market makers throughout the

country.

Level I service will supply registered representatives of retail securities firms with immediate access to current representative bid and ask

quotations on over-the-counter securities. Level II service will supply

trading departments of securities firms and such other persons as the

NASD's Board of Governors may authorize with actual current quotaI Securities Exchange Act Release No. 8661 (August 4, 1969).

For a discussion of earlier stages in the development of this system, see 34th

Annual Report, pp. 15-16.

•
6 SECURITIES AND EXCHANGE COMMISSION

tions of over-the-counter market makers for securities included in

the system. Level ill service is similar to that of Level IT except that

it will be available only to market makers registered with the NASD

and will include input devices to enable market makers to insert their

current quotations into the system.

The NASDAQ System will also furnish end-of-day reports to newspapers and wire services for publication in the daily stock tables. These

reports will include volume figures and representative bid and ask

quotations and net price changes for the securities in the system. The

system will aid the NASD in its regulatory responsibilities by providing daily and other periodic summary reports of over-the-counter

activity.

After it became apparent that the NASD would shortly enter into

an operating contract, the Commission, in late 1968, adopted Rule

15Aj-2 under the Exchange Act which prescribes certain requirements applicable to a national association of securities dealers which

establishes a system of quotations," These include the requirement that

the applicable rules of the association incorporate as guides to interpretation and application certain public interest standards set forth

in the Act, and also that such rules provide a fair procedure with

respect to any refusal or limitation of access to such system by a customer, issuer, broker or dealer. The rule also provides for Commission

review of adverse action by the association with respect to such matters. The Commission determined that the rules adopted by the NASD

were consistent with Rule 15Aj-2 and other applicable requirements

of the Act.

Structure and Level of Commission Rates

Under Section 19(b) of the Securities Exchange Act of 1934, the

Commission is responsible for determining the reasonableness of commission rates established by the exchanges for their members. Where

necessary or appropriate for the protection of investors or to insure

fair dealing in securities, the Commission, after notice and opportunity

for hearing, may order an adjustment of such rates. In May 1968, the

Commission moved to correct some of the inequities produced under

the then existing rate schedule by requesting the New York Stock

Exchange to adopt an interim rate structure incorporating a volume

discount or, in the alternative, to eliminate fixed rates of commission

for large transactions, and by announcing that it would institute public

hearings to give more extensive consideration to various aspects of the

commission rate structures of the exchanges,"

a Securities Exchange Act Release No. 8470 (December 16, 1968).

• See 34th Annual Report, pp, 1-2.
THIRTY-FlF1'H ANNUAL REPORT 7

These hearings commenced in July 1968. Testimony and statements

have been received from numerous interested persons and organizations including the New York, American, Midwest, Pacific Coast,

and Philadelphia-Baltimore-Washington Stock Exchanges; the National Association of Securities Dealers; broker-dealers, including

both exchange members and nonmembers; third market-makers; representatives of trade associations; and the Anti-Trust Division of the

Department of Justice which, in addition to presenting its own comments, invited a number of independent economists to present their

VIews.

In August 1968 the New York Stock Exchange submitted a proposal to amend its constitu.tion and rules to provide for a reduction

in intra-member commission rates and minimum commissions on trades

involving more than 1,000 shares, and to prohibit the customer-directed

"give-up." The Commission approved this proposal with the understanding that the changes were only acceptable on an interim basis

pending the completion of the hearings and the development of longterm solutions to the various problems under consideration. The new

schedules and prohibitions became effective December 5, 1968. The

American Stock Exchange and all major regional exchanges effected

similar interim adjustments of their rates coupled with prohibitions

of customer-directed give-ups. Ithas been estimated by the New York

Stock Exchange that, on the basis of 1967 trading volume, the new

schedule will result in a yearly commission savings of approximately

$150 million, or over $600,000 per trading day.

As a result of the Commission's inquiry, the New York Stock Exchange retained an economic consulting firm, National Economic

Research Associates, Inc., to make a detailed economic analysis of the

commission rate structure and to assist it in developing a new rate

structure. NERA has indicated that it considers it necessary first to

determine the proper level of commission income which member firms

should receive for carrying out the brokerage function, and secondly

to develop a rate structure which will yield that level and at the same

time not discriminate unfairly among customers. It expects to make

the necessary determinations through: (1) a conceptual study of

profit rates to determine the appropriate criteria for evaluating profit

levels; (2) a measurement of the capital invested in the industry;

(3) a comparison with profitability rates in other industries; and

(4) a measurement of profit earned in the securities commission

business. The rate structure itself will be based on the costs associated

with the execution of orders and the appropriate income level; an

extensive transactions revenue study is being undertaken in order to
8 SECURITIES AND EXCHANGE COMMISSION

determine such costs. Itis anticipated that the entire study, including

recommendations to the Exchange, will be completed by January 1970.

The American Stock Exchange has engaged the services of the

Cambridge Research Institute to study and further develop the various approaches to commission rates which have been suggested during

the hearings and to ascertain the impact of these approaches on those

who will be affected. A report based on this study is expected to be

ready for the Exchange in January 1970.

The Commission has not yet reached definite conclusions as to the

many matters under inquiry in the hearings. The results of the studies

described above will contribute to the body of information on which

its determinations can be based.

Public Ownership of Securities of Exchange Members

The question of whether members of securities exchanges should be

allowed to issue debt and equity securities to public investors has been

studied by the Commission and the major exchanges for many years.

Certain member firms have argued that in view of the need for capital

of a permanent nature, the continuity of the firm, tax benefits which

may be obtained, and the advantage of being able to attract outstanding management through stock option plans, they Should be permitted

to issue freely transferable subordinated debt securities and equity

securities. Until recently, however, the rules of the New York and

American Stock Exchanges have in effect prevented such public

ownership.

As early as 1961, Merrill Lynch, Pierce, Fenner and Smith had proposed to the New York Stock Exchange that member firms be permitted to issue equity securities to the public. At that time, the

Exchange objected on the grounds that it might lose regulatory control over its members and that public ownership might be used by

institutional and other investors to undermine the minimum commission rate structure. However, the proposal, though never actually acted

upon by the Exchange, led to the appointment by the Board of Governors of a Public Ownership Committee in 1964 to study the entire

question.

In November 1967, the Committee issued a final report recommending that members be permitted to issue debt securities to the public.

The Exchange subsequently submitted this report to the Commission

together with its endorsement of the Committee's position. The Commission raised. certain questions concerning, among other things, the

ratio of allowable debt to equity capital, the making of markets in

these debt securities and applicable provisions of the Trust Indenture

Act of 1939. The proposal was tabled by the Exchange until June 1969
THIRTY-FIFTH ANNUAL REPORT 9

at which time it was re-submitted in revised form. Though aware of

the fact that for the most part the questions previously raised remained unanswered, the Board of Governors approved the necessary

rule changes with the stipulation that the changes would not take effect

until the details had been worked out with the Commission.

In May 1969, the New York Stock Exchange member firm of

Donaldson, Lufkin and J eurette, Inc., notified the Exchange's Board

of Governors of its intention to issue its equity securities to the public,

and it filed a registration statement covering a proposed offering of

its common stock with the Commission. At the same time, it proposed

changes in the Constitution and Rules of the Exchange which would

permit the firm to retain its membership. In July the Exchange's

Board of Governors endorsed the "concept" of public ownership of

member firms. Prior to a vote by its members on the issue of public

ownership, the Exchange submitted for Commission comment proposed amendments to its Constitution which would allow member

firms to issue equity securities to the public. The Exchange also set

forth 20 conditions which it intends, through these amendments and

later' rule changes, to impose on public ownership of member firms.

The fact that the New York Stock Exchange accounts for approximately four-fifths of stock exchange trading volume underscores the

importance of the policy considerations associated with its proposals

to permit public ownership of member firms.

Since the Exchange proposals would have a significant impact not

only on member firms, but on all broker-dealers, institutional investors, other exchanges and the public, the Commission considered that

all interested persons should have an opportunity to comment on the

proposed conditions, and it therefore invited the submission of views

and comments," The Exchange has postponed its planned membership vote until such time as the Commission can comment on the Exchange's proposals.

Institutional Investor Stud,.

Against the background of a very significant increase in recent years

in the amount of securities held and traded by institutional investors,"

the Congress, by a joint resolution approved on July 29,1968 (Public

Law 90-438), authorized and directed the Commission to make a study

and investigation of the purchase, sale, and holding of securities by

institutions such as banks, insurance companies, mutual funds, employee pension and welfare funds, and foundation and college endowments in order to determine the effect of such purchases, sales, and

1 Securities Exchange Act Release Nos. 8717 (October 8,1969) and 8737 (October 31,1969).

• See 34th Annual Report. pp. XVII-XIX, 3-4.
10 SECURITIES AND EXCHANGE COMMISSION

holdings upon the maintenance of fair and orderly securities markets,

the stability of such markets, the interests of the issuers of such

securities, and the interests of the public. The Commission was directed

to report to the Congress the results of its study and investigation,

together with its recommendations. To fulfill these directives, the Commission constituted a study group of economists and lawyers, designated the Institutional Investor Study ("Study").

The Study's design has been divided into five sections. Three major

sections deal with (1) the impacts of institutional investors on the

securities markets and securities industry, (2) relationships between

institutional investors and the companies whose securities are held in

their portfolios and (3) the structures and investment operations of

the institutions themselves. Two other sections deal with (4) savings

flows to institutions and their aggregate asset holdings and (5) continuing needs for the regular reporting of data about institutional

investing.

1. Markel8

As indicated in the authorizing legislation the Congress' first concern

was with the impacts of institutional investors on the nation's securities

markets. One major project will ascertain the extent and market impact of parallel trading by institutions (the buying or selling of the

same security at the same time). In another project a number of individual position changes by institutions will receive detailed analysis

to discover relationships between the size of the position change, characteristics of the security traded, the manner in which the position

change is effected and the resulting market impact of that position

change.

Institutionalization may affect not only the market prices of securities but also the structure of the securities markets and the securities

industry that services them. Therefore, the extent to which and reasons

why institutions use particular markets and services offered by the

securities industry will be examined. Policy implications of the information developed inthe markets section are among the most important

of the entire Study.

2. Portfolio Companies

Public Law 90-438 expressly directs the Commission to assess relationships between institutional investors and the corporations whose

securities they hold. Data will be compiled regarding concentrations

of aggregate and individual stockholdings in particular portfolio com-
THIRTY-FIFTH ANNUAL REPORT 11

panies, types of companies and industry groups. Institutional purchases and sales of portfolio companies' securities, the manner in which

they vote or refrain from voting their holdings and their contacts with

portfolio company managements will be examined. Representative

transfers of corporate control will be analyzed, as they appear to constitute an avenue through which institutional investors may have a

potentially important impact on the national economy. Data also will

be gathered about institutional involvement with portfolio companies

in less dramatic questions concerning dividend policy, financial structure and management compensation.

In response to Congressional interest the effects of institutional investment upon the financing of American business will be examined in

this portion of the Study. Institutional preferences for different types

of securities, particularly debt versus equity, and the effects of these

preferences upon both the ability of portfolio companies to obtain

financing and the manner in which they do so, will be analyzed. In

addition, the Study will analyze institutional participation in new

issues of securities.

3. Institutions

The principal purpose of the institutions part of the Study is to

understand the interior of the existing phenomenon of institutionalization. Inthis section of the Study, data are being gathered over various

time periods about the internal organization of the different classes of

investment management entities: the sizes and structures of the funds

they manage, the existing legal environments within which they operate, the characteristics of the securities held in their portfolios (including their riskiness), their investment policies, trading activities and

other determinants of either the growth or behavior of institutional

investors.

The institutional part of the Study will look primarily at each of

the various classes of institutional managers. Increasingly, however,

lines between these classes have become blurred as institutions in one

class expand into or become affiliated with institutions in another, and

as institutional managers similarly expand into or are acquired by

various portions of the securities industry. A special project will be

devoted to analyzing the various forms these integrating trends appear to be taking and their effects on both market organizations and

the provision of various financial services.

4. Flow of Funds

The Congress also has directed the Study to evaluate the impact of

institutionalization on the amount and nature of savings in our econ-
12 SECURITIES AND EXCHANGE COMMISSION

omy and the allocation of the capital so generated," To ascertain savings flows to financial institutions and the net holdings into which

they have been put, existing national balance sheet, income statement

and flow of funds accounts are being extended to cover more detailed

and meaningful institutional groups. An attempt also will be made

to segregate asset growth into new money flows and investment return

components.

5. Continuous Reporting

An objective of the Study will be recommendations for the reporting

of information about institutional investing on a continuing basis. This

is to prevent gaps in information, which in part led to the present

Study, from necessitating one-shot data collection efforts in support

of future studies," This portion of the Study surveys existing reporting patterns by institutional investors and securities firms with an eye

toward determining how this information might better serve the needs

of government statistical programs, regulatory bodies and public

investors.

Public Law 90-438 specified September 1, 1969, as the Study's

reporting date and authorized an appropriation of up to $875,000.As

a result of delays in obtaining funds for operations in fiscal year 1969,

and in forming a special staff drawn largely from outside the Commission, the Commission requested and was granted an extension of

time until September 1, 1970, and permission to spend in fiscal year

1971 $70,000 which had not been expended in fiscal year 1969Y

Reform of Laws Relating to Investment Companies

Efforts to obtain much-needed reform of the Investment Company

Act of 1940 have continued in the 91st Congress. As described in the

34th Annual Report, legislation which would have implemented proposals of the Commission originally had been introduced in May

1967.12 The principal Commission proposals involved the reduction

of sales loads imposed on the acquisition of fund shares where these

loads are excessive, the elimination of the so-called "front-end load,"

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

H.R. Rep. No. 1665, 90th Cong., 2nd Sess. (1968) PI). 3-4; S. Rep. No. 1237.

90th Cong., 2nd Sess. (1968) pp.2-3.

1. Hearing Before the Subcommittee on Commerce and Finance of the House

Committee on Interstate and Foreign Commerce on H.R. 7696 and H.J. Res. 946,

90th Cong., 2nd Sess. (1968), pp, 18-19; Hearing Before the Senate Committee on

Banking and Currency on S. 1299 and S.J. Res. 160, 90th Cong., 2nd Sess. (1968),

p.15.

11 Public Law 91-94 (October 20,1969).

13 See 34th Annual Report, pp. 4-6. See also 33rd Annual Report, pp. 1-6.

•
TF.URTY-FIFTH~AL REPORT 13

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

Commission's opinion required legislative action.

The Commission's proposals represented 10 years of effort by and on

behalf of the Commission. In December 1966, the Commission had

submitted a report, entitled "Public Policy Implications of Investment

Company Growth," to the Congress. Two other reports which analyzed

various problems associated with the investment company industry and

its growth-the Wharton Report, commenced in 1958 and submitted

to Congress in August 1962, and the Report of the Special Study of

Securities Markets, published in 1963-1964-had preceded the Commission's Report.

Hearings were conducted before the Senate Committee on Banking

and Currency during July and August 1961 and before the Subcommittee on Commerce and Finance of the Committee on Interstate and

Foreign Commerce of the House of Representatives during October

1961 and March 1968. The Senate Committee reported a bill, S. 3124

(90th Cong.), on July 1, 1968 which, as amended, was passed by the

Senate on July 26,1968. However, no action was taken by the House

Committee on Interstate and Foreign Commerce.

Early in the 91st Congress, Senator Sparkman introduced S. 34,

which was the same as S. 3124, and hearings were held before the

Senate Committee on Banking and Currency in April 1969. In May

1969, the Committee reported out, and the Senate passed, S. 2224

which was similar to S. 3124 in most major respects. This bill includes

provisions reflecting Commission proposals with regard to so-called

"performance fees" and oil and gas drilling funds. On June 10, 1969,

Chairman Moss of the House Subcommittee on Commerce and Finance

introduced an identical bill, H.R. 11995. That Subcommittee held

hearings on this and related bills in November and December 1969.

In proposing mutual fund legislation in 1961, the Commission

recognized that most of the specific abuses aimed at in the Investment

Company Act had been substantially eliminated. However, the dramatic growth of the industry and accompanying changes have created

new situations which were not anticipated in 1940. While many of the

changes proposed by the Commission were accepted or even welcomed

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

in the pending legislation, as described below.

Investment Advisory Fees.- The Commission had recommended

that the Act be amended to provide expressly that compensation

received by investment advisers and other persons affiliated with investment companies shall be "reasonable" and that there be opportunity

for judicial enforcement of this standard. This recommendation
14 SECURITIES AND EXCHANGE COMMISSION

reflected the Commission's view that a requirement that compensation

not be unreasonable was inherent in the fiduciary relationship existing between an investment company and its manager or adviser. The

Commission also considered that the Federal courts would provide

an appropriate forum in which the reasonableness of compensation

could be tested.

The bill passed by the Senate in July 1968 substantially adopted

these recommendations, with certain changes designed to meet some

of the industry's objections. However, the industry, while not objecting to the concept that compensation should be reasonable, continued

to oppose the form of the amendments. Following the April 1969

Senate hearings, the Commission and industry representatives resumed

their discussions of this matter and in May 1969, agreed on and jointly

submitted to the Senate Committee a substitute provision which specified that an investment adviser has a fiduciary duty with respect to

such compensation. This is in accord with the Commission's recommendation that the presently applicable standards of "waste" and "gross

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

meaningful standard. The Senate Committee and the Senate adopted

the management fee proposal in substantially the language proposed

by the Commission and the industry representatives.

Thus, H.R. 11995 and S. 2224 add a new Section 36 (b) to the Investment Company Act to specify that the adviser has a fiduciary duty

with respect to compensation for services or other payments paid by

the fund or its shareholders to the adviser or to affiliated persons of

the adviser. Other persons enumerated in Section 36(a) who may

have a similar fiduciary duty with respect to compensation or payments received by them from the fund or its shareholders may also

be sued for breach of such duty in addition to liability imposed by

Section 36 (a). Subsection (b) also provides that payments by the

fund to affiliated persons of the adviser are subject to challenge under

this section. Approval of the management fee by the directors, and

shareholder ratification are to be given such consideration as the court

deems appropriate in the circumstances.

Performance Fees.-Performance-based fees are a specialized type

of advisory compensation which has been used increasingly in recent

years.18 The proposed legislation, in addition to subjecting such arrangements to the fiduciary standards of Section 36(b), includes provisions specifically directed to performance-based fees. The CommisUFor a discussion of this type of compensation arrangement, which generallY

relates the adviser's compensation either to the realized or unrealized appreciation of the client's portfolio or to the performance of a specified securities index,

see pp. 129-130.
THIRTY-FIFTH ANNUAL REPORT 15

sion originally proposed that the prohibition of performance-based

fees now applicable to advisers of private clients be extended to advisers of registered investment companies. However, after discussion

with industry representwtives, a modified provision, permitting a limited type of performance fee, was incorporated into the pending legislation. Under that provision, contracts which base any part of the

adviser's fee on a specified percentage of the company's capital appreciation would be prohibited. On the other hand, fees which increase

and decrease proportionately on the basis of investment performance

measured against an appropriate index of securities prices or other

appropriate measure of performance would be permissible. The "base"

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

performance equaled the index.

H.R. 11995 would also give the Commission authority to permit

other performance fee arrangements by adding new Section 206A to

the Investment Advisers Act, which would give the Commission

authority to exempt any person or transaction from any provision

of that Act to the extent necessary or appropriate in the public interest

and consistent with the protection of investors.

Level of Sales Charges.-The Commission proposed that a 5-percent ceiling be placed on the charge for mutual fund sales subject

to a power in the Commission to approve appropriate higher ceilings.

The pending legislation would give authority to the National Association of Securities Dealers, Inc., a self-regulatory organization of

brokers and dealers, to eliminate excessive sales charges, subject to

Commission oversight.

The Front-End Load on Contractual Plans.-The Commission had

recommended the abolition of the so-called "front-end load" on periodic payment plan certificates (i,e., certificates issued in connection

with contractual plans for the accumulation of fund shares on an

installment basis), under which as much as 50 percent of the payments

made by the investor during the first year may now be deducted for

sales charges. The bill, as passed by the Senate, permits a front-end

load, if either of two alternative conditions are met. Under the first

alternative periodic payment plan certificates could be sold with the

presently authorized front-end load, provided that if the investor

elects for any reason to redeem his certificate for cash during the first

3 years after its issuance he would be entitled to receive a refund of

the difference between the total sales charges paid and 15 percent of

such payments. The Commission would be authorized to adopt rules

and regulations specifying the form of refund notice and setting forth

reserve requirements so that sellers could meet their refund obligations. The other alternative would permit sellers Qf periodic payment
16 SECURITIES AND EXCHANGE COMMISSION

plan certificates to charge a sales load which does not exceed 20 percent of any payment nor average more than 16 percent over the first

4 years.

The Front-End Load on Face-Amount Certificates.-On August 27,

1969, the Commission submitted to the Senate Committee on Banking

and Currency a "Report on Face-Amount Certificate Companies," the

result of an in-depth study conducted at the request of the Committee.

In this Report, the Commission reasserted the position taken in its

1966 report that the imposition of the front-end load on installment

face-amount certificates (i.e., certificates which have a fixed ultimate

value and a reduced rate of return if redeemed prior to maturity), is

contrary to the public interest and the interest of investors, 'and recommended that such practice as well as the practice of imposing

equivalent surrender charges be discontinued. A bill, H.R. 13754,

which would implement the Commission's recommendation, was introduced in the House of Representatives on September 11, 1969.

The Commission's Report pointed out that during 1968 only four

companies were issuing face-amount certificates and that one of those

companies accounted for over 94 percent of the assets of all such

companies. However, approximately 20,000 installment face-amount

certificates were sold in the United States in that year, and investors

made payments of over $5.7 million. At June 30, 1969, more than

370,000 such certificates were in force. The Report observed that a substantial percentage of investors lose money on their investment in

race-amount certificates because of the deduction of a front-end load

from early years' payments. On most of the certificates currently being

sold, the investor does not break even on his investment until after

the payments required in the first 8 years have been made. Of those

persons who purchased the most popular face-amount certificate (a

20-year certificate sold by the dominant company) from 1945-1948,

more than 55 percent surrendered their certificates prior to the breakeven point and therefore lost money. In October 1965, this company

began issuing new series of certificates which had lower front-end

loads, improved yields to maturity, and improved first-year and immediate minimum cash values; however, its new certificates have been

surrendered at a loss by investors at approximately the same rate as

the certificates previously sold.

The losses to investors are particularly significant since the median

annual family income of purchasers of the leading company's certificates in 1968 was only $9,750. On the other hand, the total 1968 payments of $5.7 million represent only .0002 percent of the total volume

of securities traded that year on the registered securities exchanges in

the United States. On the basis of these and other comparative figures,
THIRTY-FIFTH ANNUAL REPORT 17

the Commission concluded that the economic impact of its recommendation on the securities industry, if any, would be negligible.

The Commission found that the front-end load also tended to support a highly structured personal selling effort, with salesmen generally receiving the same commission for selling a face-amount

certificate as for selling an equity investment in a mutual fund contractual plan requiring the same monthly payments. In addition, the

investment yield on face-amount certificates, if held to maturity, was

found to be lessthan that realized from comparable alternative savings

programs. For investors who were in a constant 20, 30 or 40-percent

tax bracket through the life of a 20-year certificate, the after-tax

yield on the highest-yield certificate offered by the dominant company

was no better than the median annual yield on U.S. Series E Savings

Bonds, or on deposits in savings associations, mutual savings banks

and commercial banks. Thus, if discontinuance of the front-end load

should result in a less intensive sale of face-amount certificates, alternative accumulation programs with comparable after-tax benefits

would still be available.

Oil and GasDrilling Funds.- The pending legislation would amend

Section 3(c) (11) of the Act to terminate the exclusion from the Act

of those oil and gas funds which issue redeemable securities, or sell

their securities on the installment plan. Oil and gas funds in which

investors make only a single payment and do not receive a redeemable

security would still be excluded from the definition of investment

company.

The new provision would not become effective until 18 months

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

8. 2224 makes it clear that it is intended that the Commission and

oil and gas industry representatives confer during that interval to

work out an equitable arrangement for regulation which would protect

and safeguard investors and not impose an unreasonable burden on

the industry.

Subsequent to the passage of S. 2224,the Commission staff conferred

with representatives of the oil and gas industry. During hearings on

S. 2224 before the House Subcommittee in December 1969, the Commission confirmed its original view that there is a need for regulation

to some degree of the type provided in the Investment Company Act

for this industry but that such regulation would appear to present

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

Investment Company Act with the structure in fact adopted by this

industry in order to provide favorable treatment for its investors

under the Internal Revenue Code.

373-754-70-3
18 SECURITIES AND EXCHANGE COMMISSION

Therefore, the Commission stated to the House Subcommittee that

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

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

that it made this suggestion on the assumption that representatives

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

working out a reasonable regulatory statute consistent with the protection of investors, for submission to Congress within 18 month after

passage of the mutual fund legislation.

Study of "Hedge Funds"

In January 1969the Commission commenced an investigatory study

of so-called "hedge funds." These are generally private investment

partnerships which employ speculative investment techniques with a

view to rapid capital appreciation. The study also encompasses the

activities of some 50 registered investment companies which engage

in similar investment techniques.

During the last few years, there has been a rapid increase in the

number and assets of hedge funds. Itis estimated that the number of

such funds is now approaching 200, with estimated total assets of

about $1.5 billion. Most hedge funds are structured to avoid the need

for registration as investment companies, relying on an exception

provided by the Investment Company Act for an issuer whose outstanding securities are owned by not more than 100 persons and which

is not making and does not presently propose to make a public offering of its securities.

Typically, hedge funds trade on margin, sell short and write or

buy put and call options. The general partner of the fund, who is

frequently an officer, partner or registered representative of a brokerdealer, or an investment adviser, is given the power to make portfolio

decisions and effect transactions for the partnership. Because hedge

funds are so strongly performance-oriented, they may have a greater

impact on the securities markets than their asset size would indicate.

In order to obtain meaningful information concerning the organization and activities of hedge funds, about 200 nonregistered investment

partnerships and 50 registered investment companies which engage

in hedge fund trading techniques were requested to file comprehensi ve

statements with the Commission. Analysis of the submissions should

permit the Commission to determine what, if any, additional measures

are necessary or appropriate for investor protection.

Report of the Disclosure Policy Study

At the end of 1967, a small group of Commission staff members began an over-all study of the disclosure process.> Under the direction

1< See 34th Annual Report, pp. 12-13; Securities Act Release No. 4885 (November 29,1967).
THIRTY-FIFI'H ANNUAL REPORT 19

of former Commissioner Francis M. Wheat and working with representatives of the legal and accounting professions, the securities industry, and the general business community, the Study Group devoted

about 15 months to the study which culminated in the submission to

the Commission in March 1969 of a report entitled Disclosure to I noestors-s-A Reapprai8al of Federal Admini8trative Policies Under the

'33 and '34- ActS.15 That report constitutes an attempt to discover what

could be done within the existing statutory framework to :

(a) enhance the degree of coordination between the disclosures

required under the Securities Act of 1933 and the Securities Exchange Act of 1934;

(b) clarify the law of disclosure and make its application more

certain;

(c) assure that appropriate disclosures are made prior to the

creation of interstate trading markets in securities; and

(d) enhance the utility to investors and to those who advise them

of the documents generated under the Federal securities statutes

without imposing undue burdens on those who must prepare these

documents.

The Report notes that disclosure is and has from the outset been

central to national policy in the securities field. This emphasis on

disclosure stems from two considerations. One relates to the proper

function of the Federal Government in investment matters. Apart

from the prevention of fraud and manipulation, this responsibility was

viewed by the draftsmen of the statutes as being primarily one of seeing to it that investors and speculators have access to enough information to enable them to arrive at their own informed decisions. The

other, less direct, rests on the belief that appropriate publicity tends to

deter questionable practices and to elevate standards of business

conduct.

The Report pointed out that the trading markets in outstanding securities involve much more money and far more people than does the

distribution of securities being offered to the public for the first time.

Thus the Report's emphasis is on continuous disclosure under the

Securities Exchange Act.

Space limitations preclude any attempt to discuss or even to list the

61 specific recommendations made in the Report. However, a capsule

,. See Securities Act Release No. 4963 (April 14, 1969).

Budgetary limitations precluded the Commission from disseminating copies of

the full Report; it was, however, distributed by several private concerns and attained wide circulation. The Commission distributed copies of Chapter I of the

Report, which contains a comprehensive summary of the entire document.
20 SECURITIES AND EXCHANGE COMMISSION

summary of some of the Report's most significant conclusions and

recommendations is set forth below:

(1.) Steps should be taken to assure that prospectuses are more

readable. These should include:

(a) denying acceleration to registration statements the prospectus portions of which are unnecessarily long or complex; and

(b) requiring a "guide" to any prospectus whose text portion

exceeds 10 pages.

(2.) Short-form prospectuses should be permitted in certain

situations (e.g., secondary offerings on exchanges and offerings

of stock to be issued on the exercise of publicly held warrants) in

which conventional prospectuses are now required. However, the

proposed short-form prospectus would be available only to issuers

that make adequate continuous disclosures under the Securities

Exchange Act.

(3.) The group of issuers permitted to make condensed Securities

Act disclosures on the Commission's Form S-7 should be enlarged.

(4.) In first public offerings, preliminary prospectuses should be

delivered to investors before the registration statement becomes

effective. The Commission should use its discretionary power to

accelerate (or refuse to accelerate) the effective date of Securities

Act registration statements in order to achieve this objective.

(5.) The lines of demarcation between those offerings that must

be registered under the Securities Act and those as to which such

registration is not required should be made more precise. Present

uncertainties stem largely from the traditional subjective criteria

of investment intent and change of circumstances.

(6.) A distinction should be drawn between companies that file

regular, informative reports on their affairs with the Commission

("reporting companies"), on the one hand, and those that do not

file such reports ("nonreporting companies"), on the other.

(7.) The area in which this distinction would be most significant

is that of the so-called "secondary" sale, i.e., a sale by a person who

is not himself the issuer of the securities in question, but who is

treated as though he were their issuer for purposes of the Securities Act's registration requirements. He may be so treated because

he is a controlling person of the issuer or because he acts as a link

in a chain of nonpublic transactions by which securities move

from an issuer to the public. Present distinctions in the rules

applicable to the two types of secondary sellers should be largely

abandoned.

(8.) In the case of a reporting company, both the controlling

person and the nonpublic purchaser should be permitted to resell-
THIRTY-FIFTH ANNUAL REPORT 21

without Securities Act registration-in normal trading transactions. A valid general framework for differentiating normal trading transactions from those that do not fall within that

category can be found in the Commission's present Rule 154.16

(9.) However, the use of ostensible private purchasers as conduits for the sale of securities to the public must be prevented.

To achieve this objective, a short mandatory holding period

during which the private purchaser is at risk and precluded from

reselling to the public is essential. The Report recommends one

year for this purpose.

(10.) In the case of the nonreporting company, on the other

hand, adequate investor protection requires that unregistered secondary sales be inhibited. Accordingly, registration (or in appropriate cases qualification under Regulation A) should be required

whenever a controlling person of a nonreporting company makes

an interstate public offering of its securities. The Report suggests

that the holder of any security acquired "in a transaction or chain

of transactions none of which was a public offering or other

public disposition" be free to reoffer or resell it publicly after

5 years have elapsed from the date of its sale by the issuer or by

a person in control of the issuer.

(11.) At present some-but only some-business combinations in

which the acquiring corporation issues its own securities in payment are deemed to involve "offers" and "sales" for Securities

Act purposes. When a combination is effected by means of a

statutory merger or consolidation, the Securities Act's disclosure

requirements are inapplicable because, under a long-standing

Commission rule (Rule 133 under the Securities Act), the submission of an acquisition transaction to shareholders is deemed to

involve neither a "sale" nor an "offer to sell." On the other hand,

an offer of its securities by one company to the security holders

of a second company which it wishes to acquire has always been

regarded as involving both an "offer to sell" and a "sale." The

Report would remove this distinction and provide a specialized

registration form for those business combinations now covered

by Rule 133.

(12.) Regulation A under the Securities Act should be amended

so as to increase the quantities of securities salable thereunder by

persons other than issuers.

(13.) The present Regulation A rule obviating any need to deliver

an offering circular to public investors so long as the amount of

16 Although the Report recommended retention of the basic quantity limitations

of present Rule 154, it recommended a number of significant changes in the rule.
22 SECURITIES AND EXCHANGE COMMISSION

securities sold in anyone year does not exceed $50,000 should be

abandoned.

(14.) In its present form continuous disclosure under the Securities Exchange Act is an inadequate substitute for the occasional

but comprehensive disclosures produced under traditional Securities Act practice. This disparity should be narrowed by :

(a) rearranging the items in the initial disclosure document

under the Exchange Act (Form 10) in the order of their

importance.

(b) converting the issuer's annual report to the Commission

(Form 10-K) into an annual updating of the material in the

Form 10; and

(c) substituting a new quarterly report to the Commission (to

be designated Form 10-Q) for present Forms 8-K and 9-K.

The proposed quarterly report would be due 45 days after

the close of each fiscal quarter (except that a report of a significant acquisition or disposition of assets would be due 10 days

after the execution of a written agreement for such acquisition

or disposition). This quarterly report would consist of two

parts. The first would coyer the substance of the present 8-K

with a number of changes. The second would consist of condensed, comparative financial information.

In September and October 1969,the Commission invited public comments on a number of proposed new or revised rules and forms designed to implement or put into effect most of the recommendations of

the Report."

Additional Financial Disclosure by Diversified Companies

The increase in acquisitions and mergers in recent years has caused

the Commission to consider the need for more detailed reporting on

the operations of registrants which are broadly diversified and to study

the problems involved in any extension of the requirements in this area

of financial reporting. Staff surveys have indicated that there has been

an increase in voluntary disclosures by diversified companies in recent

annual reports to stockholders. During 1968important studies by professional organizations and by individuals on the topic of financial

reporting by diversified companies were completed. The Commission

had authorized its Chief Accountant to serve on an Advisory Committee, representing various sectors of the accounting, financial and

17 Securities Act Release Nos. 4996 and 4997 (September 15, 1969), 5010 and

5011 (October 7. 1969) and 5012 (October 9, 1969); Securities Exchange Act

Release Nos. 8680, 8681, 8682, 8683, 8684 and 8686 (September 15, 1969).
THIRTY-FIFTH ANNUAL REPORT 23

industrial communities, in connection with a comprehensive study and

survey conducted under the sponsorship of the Financial Executives

Institute.

The studies and surveys indicated that an extension of the Commission's requirements was feasible. As a result, the staff undertook

to develop amendments of the rules to elicit additional information

from all companies affected which will be meaningful to investors but

not unduly burdensome to registrants. In September 1968, a proposal

to revise the disclosure requirements in certain registration forms

under the securities acts was issued for public comment."

The comments received on the proposals were considered in the formulation of revised proposals which were published for comment in

February 1969.19Definitive amendments to the registration forms were

adopted by the Commission in July 1969.20

The items of the forms to which the amendments relate call for a

brief description of the business done and intended to be done by the

registrant and its subsidiaries. The amendments require, where a

registrant and its subsidiaries are engaged in more than one line of

business, the disclosure for each of a maximum of the last 5 years

subsequent to December 31, 1966, of the approximate amount or percentage of total sales and operating revenues and of contribution to

income before income taxes and extraordinary items attributable to

each line of business which contributed, during either of the last 2

fiscal years, a certain proportion to the total of sales and revenues, or

to income before income taxes and extraordinary items. For companies

with total sales and revenues of over $50 million the proportion is

10 percent and for smaller companies it is 15 percent. Similar disclosure is also required with respect to any line of business which resulted in a loss of 10 percent or more, or 15 percent or more for the

smaller companies, of such income before deduction of losses. Where

the percentage test as applied to both sales and earnings contributions

results in more than 10 lines of business, the disclosure may be limited

to the 10 most important lines of business. Where it is not practicable

to state the contribution to income before income taxes and extraordinary items for any line of business, the contribution to the results of

operations most closely approaching such income is to be disclosed.

The amendments continue the existing requirements on breakdown

of total volume of sales and revenues by principal classes of similar

products or services, except that the percentage test has been reduced

Securities Act Release Nos. 4922 (September 4, 1968) and 4927 (September23,l968).

,. Securities Act Release No.4!),!!}(Pebrunrv 1R. 1oo!)

.. Securities Act Release No, 498S (July 14,1009).

"
24 SECURITIES AND EXCHANGE COMMISSION

from 15 to 10 percent in the case of companies having total sales and

revenues in excess of $50 million during either of their last 2 fiscal

years. Under this provision, repetition of the disclosure is not required

when a company uses classes of similar products or services as its basis

for determining lines of business.

In September 1969,the Commission issued a proposal for comment,

based on a recommendation of the Disclosure Study, which would

amend the annual reporting form under the Securities Exchange Act

to require disclosure of comparable data."

Organized Crime Program

The Commission has always gi,'en priority to the investigation of

cases where there is an indication that organized crime may be involved. The Commission maintains a close liaison with the Organized

Crime and Racketeering Section of the Department of Justice and

submits quarterly reports relating to organized crime investigations.

At the request of the Attorney General, the Commission requested that

its appropriation for fiscal year 1970 include funds which would

enable it to mount an increased drive against organized crime within

the Commission's over-all enforcement program. During the 1969fiscal

year, the Commission placed four enforcement staff members on the

Department of Justice's New York Strike Force against organized

crime, and designated enforcement staff members in its headquarters

office to investigate certain organized crime cases. It is anticipated

that additional enforcement personnel will be assigned to Department

of Justice Strike Forces in other major cities, and that a "back-up"

unit will be created in the Commission's headquarters officeto assist in

establishing an effective program to keep organized crime out of the

securities markets .

.. Securities Exchange Act Release No. 8682 (September 15, 1969).
PART n

FUlL DISCLOSURE OF INFORMATION ABOUT THE

ISSUERS OF SECURITIES

One basic purpose of the Federal securities laws administered by

the Commission, in particular the Securities Act of 1933 and the

Securities Exchange Act of 1934,is to provide disclosure of financial

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

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

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

Securities Act, generally speaking, requires a company proposing to

offer its securities to the public to file a registration statement with

the Commission disclosing prescribed categories of financial and other

information and further requires that in the offer and sale of the

securities investors be furnished a prospectus containing the most

significant information set forth in the registration statement. The

Securities Exchange Act, which deals in large part with trading in

securities already outstanding, requires the registration of securities

listed on a national securities exchange as well as of over-the-counter

securities in which there is a substantial public interest. It also requires

the issuers of such securities to file annual and other periodic reports

which are designed to keep the information in the Exchange Act

registration statement current. That Act also requires disclosure of

material information to holders of registered securities in connection

with the solicitation of proxies for the election of directors or the

approval of corporate action at a stockholders' meeting, and requires

"insiders" of companies whose equity securities are registered to report

their holdings of and transactions in all equity securities of the company with which they are affiliated.

The scope of disclosure was further extended early in the 1969

fiscal year by the "take-over-bid" amendments to the Securities Exchange Act,' which, as implemented by Commission rules, afford disclosure to investors in connection with purchases of substantial blocks

of stock of publicly held corporations either through cash tender offers

1Public Law 90-439 (July 29,1968).

25
26 SECURITIES AND EXCHANGE COMMISSION

or private or open market purchases and in connection with repurchases by corporations of their own stock,"

The program for revision of the Commission's disclosure requirements recommended by the Disclosure Study Report, which was submitted to the Commission in March 1969, and the steps which have

been taken to implement the recommendations, are discussed in Part I

of this report.

A. DISCLOSURE IN CONNECTION WITH PUBLIC OFFERINGS

In order to provide disclosure with respect to securities to be offered

for public sale, either by an issuing company or a person in a control

relationship to such company, the Securities Act requires that (1) a

registration statement containing certain required financial and other

information be filed with the Commission, and (2) a prospectus which

is a part of the registration statement and contains the more significant data set forth in that statement, be furnished to investors so as

to enable them to evaluate the securities and make an informed investment decision.

The registration statement is available for public inspection as soon

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

of the statement under prescribed limitations, actual sales may not

be made until the statement has become effective. The Commission has

no authority to pass on the merits of the securities to be offered or

the fairness of the terms of distribution. In fact, the Act makes it

unlawful to represent to investors that the Commission has approved

or otherwise passed on the merits of registered securities.

Type of Information Included in Registration Statement

Generally speaking, a registration statement relating to securities

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

to securities issued by a foreign government must include the information specified in Schedule B. The Act empowers the Commission to classify issues, issuers and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or diminish,

the particular items of information required to be disclosed as the

Commission deems appropriate in the public interest or for the protection of investors. To facilitate the registration of securities by different types of issuing companies, the Commission has prepared

special registration forms which vary in their disclosure requirements

so as to provide maximum disclosure of the essential facts pertinent

1 See pp. 48-!l) intra.
TF.URTY-F~ ~AL REPORT 27

in a given type of case while at the same time reducing the burden and

expense of compliance with the law.

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

foreign government must disclose such matters as the names of persons

who participate in the management or control of the issuer's business;

the security holdings and remuneration of such persons; the general

character of the business, its capital structure, past history and earnings; underwriters' commissions; payments to promoters made within

2 years or intended to be made; the interest of directors, officers and

principal stockholders in material transactions with the issuer; pending legal proceedings; and the purposes to which the proceeds of the

offering are to be applied, and must include financial statements certified by an independent accountant. The registration statement of a

foreign government must contain information concerning the purposes for which the proceeds of the offering are to be used, the natural

and industrial resources of the issuer, its revenues, obligations and expenses, the underwriting and distribution of the securities being registered, and other material matters, but need not contain certified

financial statements.

Prior Delivery of Preliminary Prospectus

The Act provides that a registration statement shall become effective on the 20th day after filing, or the 20th day after the last amendment is filed. The Commission can, however, set an earlier effective

date ("accelerate" the effective date), taking into account among other

things the adequacy of the information theretofore publicly available.

During the fiscal year, the Commission announced a new acceleration

policy, relating to the distribution of prospectuses to prospective investors," In doing so, it called attention to the continued high volume

of filings and the fact that well over half of the filings were being

made by companies filing for the first time, and it emphasized that

the investing public should be aware that many such offerings of

securities are of a highly speculative character and that the prospectus

should be carefully examined before an investment decision is reached.

The Commission had previously declared its policy in Rule 460 that

it will not accelerate the effective date of a registration statement unless

the preliminary prospectus contained in the registration statement is

distributed to underwriters and dealers who it is reasonably anticipated will be invited to participate in the distribution of the security

to be offered or sold. The purpose of this requirement is to afford all

persons effecting the distribution a means of being informed with

• Securities Act Release No. 4968 (April 24, 1969).
28 SECURITIES AND EXCHANGE COMMISSION

respect to the offering so that they can advise their customers of the

investment merits of the security.

The Commission announced that it would henceforth consider

whether persons making an offering of securities of an issuer which is

not subject to the reporting requirements of the Securities Exchange

Act of 1934 had taken reasonable steps to furnish preliminary prospectuses to those persons who may reasonably be expected to be purchasers of the securities. The Commission will ordinarily be satisfied

by a written statement from the managing underwriter to the effect

that it has been informed by participating underwriters and dealers

that copies of the preliminary prospectus have been or are being distributed to all persons to whom it is then expected to mail confirmations of sale, not less than 48 hours prior to the time it is expected to

mail such confirmations.

Proposed Summary Sheet For Registration Statements

During the fiscal year, the Commission invited public comments

on proposed amendments to its forms and rules under the Securities

Act to require companies filing registration statements to file a summary sheet as an exhibit to each statement or amendment.' The sheets

would summarize essential information relating to the registrant and

the registration statement and are designed to facilitate the automated

processing of data through the use of the Commission's computer; the

Commission's recordkeeping, including its internal workload control;

and the dissemination of information to the Commission's regional

officesfor public information purposes. The information in the summary sheets would be confined substantially to information which is

presently required by the registration forms.

Some copies of each summary sheet would be kept in the Commission's principal officefor the use of the staff and for public inspection while other copies would be placed in the regional offices of the

Commission so that the information would be more readily available

to interested persons.

Guides for Preparation and Filing of Registration Statements

During the fiscal year the Commisison published certain guides for

the preparation and filing of registration statements under the Securities Act," These guides represented a revision and expansion of guides

previously published.

The guides are subject to review and modification from time to time

as circumstances may require and interested persons are invited to

submit, at any time, suggestions for such modifications or for the

Securities Act Release No. 4960 (Apri110, 1969).

Securities Act Release No. 4936 (December 9,1968).

•

•
THIRTY-FIFTH A}'''NUAL REPORT 29

publication of guides covering additional matters. They are not rules

of the Commission nor are they published as bearing the Commission's

official approval. The guides represent policies and practices followed

by the Commission's Division of Corporation Finance in the administration of the registration requirements of the Act, but they do not

purport to furnish complete criteria for the preparation of registration statements.

In April 1969, a proposed guide of the Division, relating to the misleading character of certain registrants' names, was published." It

stated that the Division had observed that an increasing number of

registrants proposed to adopt names which could create a misleading

impression as to the nature of their business. For examples, registrants

proposed to use words such as "nuclear," "missile," "space," "nucleonics" or "electronics" in their names where they were not engaged, or

engaged only to a very limited extent, in activity normally associated

with those words.

The release further stated that the Division also may deem a registrant's name to be misleading if it is so similar to the name of another

company, particularly a well-known and established company, that it

is likely to be confused with the name of that company.

Following the close of the fiscal year, the proposed guide was

adopted."

Amendment of Rule 429

Rule 429 under the Securities Act previously provided that where

two or more registration statements were effective for different blocks

of securities of the same class, a combined prospectus could be used

in connection with the offering and sale of the securities covered by

such registration statements provided the prospectus contained the

information with respect to the underwriting and distribution of the

securities and the use of the proceeds therefrom which would be required in each prospectus if separate prospectuses were used.

During the fiscal year the rule was amended to provide that such a

combined prospectus may be used even though the securities covered

by the several registration statements are not all of the same class,"

Use of the combined prospectus is not permitted, however, where the

latest registration statement is filed on Form S-14. The reason for

this is that a prospectus for securities registered on Form S-14 consists

of a proxy statement supplemented by certain additional information.

Such a prospectus is not deemed suitable for securities other than those

for which that form may be used.

Securities Act Release No. 4959 (April 7, 1969).

7 Securities Act Release No. 5005 (September 17, 1969).

8 Securities Act Release No. 4925 (September 23, 1968).

•
30 SECURITIES AND EXCHANGE COMMISSION

Spin oft's of Securities and Trading in the Securities of Inactive or Shell

Corporations

Shortly after the end of the fiscal year, the Commission issued a

release expressing its concern with the methods being employed by a

growing number of companies and persons to effect distributions to the

public of unregistered securities in possible violation of the registration

requirements of the Securities Act and the anti-fraud and anti-manipulative provisions of that Act and the Securities Exchange Act,"

The Commission pointed out that the methods employed can take

and in fact have taken a variety of patterns. Frequently, the pattern

involves the issuance of its shares by a company with little, if any,

business activity to a publicly-owned company in exchange for what

mayor may not be nominal consideration. The publicly-owned company subsequently "spins off" the shares to its shareholders and active

trading in the shares begins although no information on the issuer is

available to the investing public. The potential for fraud and deceit

in these situations is manifest. The Commission stated that it takes the

position that the shares distributed in certain spin offs are subject

to the registration requirements of the Securities Act and subsequent

transactions in the shares by dealers, unless otherwise exempt, are subject to the provisions of the Act requiring the delivery of a prospectus.

The Commission pointed out that it was not, in this release, addressing itself to problems attributable to more conventional spin offs,

which do not involve a process of purchase of securities by a publiclyowned company followed by their spin off and redistribution in the

trading markets.

Another pattern discussed in the release involves the acquisition by

certain promoters of corporations which have ceased active operations,

or which have little or no assets ("shell corporations"), and which

have a substantial number of shares outstanding, generally in the

hands of the public. Following such acquisition, the promoters have

engaged in activities designed to increase quickly the market value

of their shareholdings. For example, in some cases promoters have

initiated a program of acquisitions, transferring assets of dubious

value to the "shell corporations" in exchange for substantial amounts

of newly issued shares. This activity is frequently accompanied by

publicity containing exaggerated or misleading statements and

designed to stimulate interest of public investors in the company's

shares in violation of the anti-fraud provisions of the Securities

Exchange Act. Thereafter the market prices of these securities have

risen sharply under circumstances which bear no relationship to the

underlying financial condition and business activities of the company.

• Securities Act Release No. 4982 (July 2, 1969).
THIRTY-FIFTH ANNUAL REPORT 31

In some of these cases the promoters or other corporate insiders, taking

advantage of the market activity and the price rise which they have

generated, have sold their shares at the inflated prices to the public

in violation of the registration and anti-fraud provisions of the Federal securities laws.

The Commission stressed that activity of the type described in the

release generally can be accomplished successfully only through the

efforts of brokers and dealers, and it cautioned brokers and dealers

to be mindful of their obligations under the securities laws in effecting

transactions in securities of little-known, inactive issuers, or issuers

as to which there is no reliable current information available.

Staff Examination of Registration Statements

Registration statements filed with the Commission are examined by

its staff for compliance with the standards of adequate and accurate

disclosure. This examination is primarily the responsibility of the

Division of Corporation Finance,'? Expedited review procedures

adopted in November 1DGSto cope with the tremendous volume of

registration statements filed were described on pages 11-12 of the 34th

Annual Report. Generally speaking, if it appears that a statement

fails to conform, in material respects, with the applicable requirements, the issuing company is notified by a letter of comment and is

afforded an opportunity to file correcting or clarifying amendments.

The Commission also has the power, after notice and opportunity for

hearing, to issue a "stop-order" suspending the effectiveness of a registration statement if it finds that material representations are misleading, inaccurate or incomplete. In certain instances, such as where the

deficiencies in a registration statement appear to stem from careless

disregard of applicable requirements or from a deliberate attempt

to conceal or mislead, a letter of comment is not sent and the Commission either conducts an investigation to determine whether "stop-order"

proceedings should be instituted or immediately institutes such proceedings. The exercise of the "stop-order" power during fiscal year

1969 is discussed on page 36.

Time Required to Complete Registration

The Commission's staff endeavors to complete its examination of

registration statements in as short a time as possible. The Act provides

that a registration statement shall become effective on the 20th day

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

10 Statements filed by investment companies reglstered under the Investment

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

~ee Part V for further discussion of the processlng of Investment company

registration statements.
32 SECURITIES AND EXCHANGE COMMISSION

thereto). Since most registration statements require one or more

amendments, they usually do not become effective until some time

after the original20-day period. The period between filing and effective

date is intended to afford investors an opportunity to become familiar

with the proposed offering through the dissemination of the preliminary form of prospectus. The Commission can accelerate the effective date so as to shorten the 20-day waiting period, taking into

account, among other things, the adequacy of the information respecting the issuer theretofore available to the public and the facility with

which the facts about the offering can be understood. The note to Rule

460 under the Act lists some of the more common situations in which

the Commision considers that the statute generally requires it to deny

acoeleration.!"

During the fiscal year, a record number of 3,316 registration statements became effectiveY As a result of the enormous number of

filings 18 and the resulting backlog, the median time from the date

of original filing to effective date rose to 65 calendar days. This

compares with 44 days for 2,131 registration statements in fiscal year

1968 and 36 days for 1,460 registration statements in fiscal year 1967.

The following table shows by months during the 1969 fiscal year the

number of registration statements which became effective, and the

number of calendar days elapsed during the registration process for

the median registration statement.

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

Year Ended June 30,1969

NUMBER OF CALENDAR DAYS

Number Total Number Total of regis- number of regis- number Months tmtion of days Months tratron of days statements in regis- statements ill regis- effective' tmtlOn effective' tmtlOn

1968 1969-Continued July ______________________ 233 59 March., __________________ 273 76 August ___________________ 219 65 AprIL ____________________ 381 50 Septem ber ________________ 2m 67 May ______________________ 360 47 October __________________ 272 65 June ______________________ 341 66 November _______________ 244 66 December ________________ 278 77

1969 Fiscal 1969 for median

effect! ve registration January __________________ 251 65 statement ______________ 3,316 65 February _________________ 257 75

See n. 12to text, supra.

11 For discussion of the Commission's new acceleration policy relating to prior

delivery of the preliminary prospectus, see pp. 27-28.

12 This figure excludes 332 amendments filed by investment companies pursuant

to Section 24(e) of the Investment Company Act of 1940. which provides for the

registration of additional securities through amendment to an effective registration statement rather than the filing of a new registration statement.

13 See figures on p. 33.

•
THIRTY-FIFTH ANNUAL REPORT 33

Statistics Regarding Registration Statements Filed

During the 1969 fiscal year, 4,706 registration statements were filed

for offerings of securities aggregating $86.9 billion. These record

figures compare with 2,906 registration statements filed during the

1968 fiscal year for offerings amounting to $5-1.0billion and represent

an increase of 61.9 percent in the number of statements filed and 60,9

percent in the dollar amount involved.

Of the 4,706 registration statements filed in the 1969 fiscal year,

2,350,or 49.9 percent, were filed by companies that had not previously

filed registration statements under the Securities Act of 1933. Comparable figures for the 1968 and 1967 fiscal years were 893, or 30.7

percent, and 440,or 24 percent, respectively.

From the effective date of the Securities Act to June 30, 1969, a

total of 36,567 registration statements, covering proposed offerings

of securities aggregating over $485.9 billion, was filed by 15,748different issuers. The following table contains further particulars concerning these statements:

Number and Disposition of Registration Statements Flied

$485 q

472.1 $86.81 86.8 $399.1 I 38.1.3

Prior to July 1, 1968 Total

July 1, 1968 to Juue 30. June 30. 1009 1009

Registration statements,

(a) 4,706 36,567 FIled ________. _____. ___. ____.. __________.. ___________... ____ 31,861

Disposition: Effective 'n,540 (b) 3,641 (e) 31,171 (net) ... -.. .. Under stop Orrefusal Older. _______. ___________._. __________ 229 2 (d) 229 Withdrawn. ____________._______________ .. ____________.. ___ 3,268 202 3,470

Pending at June 30, 1968 .. . ... 824 ..._----------- Pending at June 30. 1009. . .. .. . .. -------------. 1.697

Total. ____. ___. _______. __. _____... __. _._____.. _._.______ 31,R61 1.. ------------1 31,56i

Aggregate dollar amount: \ As filed (in billions>.. . As effective (m billIons). . __

(a) Includes 340 registratron statements covenng proposed offermgs totalling $15,312,630,628 filed by Illvestment companies under Section 24(e)(l) ofthe Investment Company Act of 1940which permits registra- tion by amendment to a previously effective registration statement.

(b) Excludes 7 regtstration statements that became effective dunng the year but were subsequently Withdrawn; these 7 statements are counted m the 202 statements Withdrawn during the year. (e) Excludes 10 registration statements effectIve pnor to July 1. 1968, which were WIthdrawn during thc

year; these 10 statements are reflected under withdrawn.

(d) Excludes one registration statement as to which a stop order was entered but was later lIfted and the statement made effective and one registration statement previously effective on which astop order was placcn and then Iilted. These two statements are reflected m effectrves

373-754--70----4

___" ________________________ ___ _____•

__ ________ ___________ _________ ------------- ______ ______ _____ _____ __ ___ --------------

__• __
34 SECURITIES AND EXCHANGE COMMISSION

As the above table shows, 202 registration statements were withdrawn during the 1969fiscal year. The reasons given by registrants for

requesting withdrawal were as follows:

Reason for registrant's Withdrawal request

1. Withdrawal requested after receipt of the staff's letter of comment •.... __'_

2. Registrant was advised that statement should he Withdrawn or stop order proceedings would be necessary_ .

3. Change in flnancmg plans _ __ _'. __._ _ , __,,_,

4. Change in market conditions •...... _ ._ ...• _ _....•... _ .

5. Registrant was unable to negotiate acceptable agreement With under- writer ._ _' ..

6. Will file au proper form .. . ..

7. Will file new regtstration statement. .. ." '. 8. Exemptionsavailable......... .' . _.

Tota!._ _•. _._ _ .. __.,. _.. _" _"_' __. _. ..

Number of Percent statements of total Withdrawn withdrawn

36 17.8

1 .5

lI8 58.4

23 11. 4

3 1 5

1 .5

15 7.4

5 2.5

202 100.0

Stalislics Regarding Securities Registered

During the fiscal year 1969 a record 3,645 registrations of securities

in the amount of $86.8 billion became effective under the Securities

Act.14 Both the number of statements and the dollar amount of registrations were the largest on record. The chart on page 201 shows the

number and dollar amounts of registrations for the past 35 years.

The figures for 1969 include all registrations which became effective

including secondary distributions, i.e., distributions of already outstanding securities, and securities registered for other than cash sale,

such as issues exchanged for other securities and securities reserved for

conversion. Of the dollar 'amount of securities registered in 1969, 60

percent was for the account of the issuer for cash sale, 34 percent for

the account of the issuer for other than cash sale, and 6 percent for the

account of others.

The following table compares the volume of securities registered for

the account of the issuer and for the account of others for the past 3

fiscal years.

(Mill107la of dollara)

1969 1968 1967

For account of issuer for cash sale ... __.,. .. 52,039 37.269 27.950 For account of Issuer. other than cash sale ." 29.577 13,530 4.576 For account of other than Issuer ........... ----------- ---- -.-- 4,841 3.137 1.692

TotaL ........... __............. _...... _.. _."" __.... _....... <86.456 53.936 34,218

< This figure excludes lease obligations relating to Industrial revenue bonds of $354 rnIIIIon which were registered during the 1969 fiscal year.

,. Tbe figure of 8,645 excludes 5 registration statements whicb became effective

during the year but before competitive bids were received, and as to which amendments disclosing the accepted terms, including the offering price, were not filed

during the year or no bids were received. It includes two statements effective in

fiscal year 1968, as to which such amendments were not filed until fiscal year 1969.

_

__ _ __ __ '" _

_ __ "

"

- + - - - - - - - - - - ~ -. ----

---------- - - - -~--
THIRTY-FIFTH ANNUAL REPORT 35

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

sale for the account of the issuer approximated $52 billion, an increase

of $15 billion over the previous year. Registration of securities for the

account of the issuer for other than cash sale totaled $29.6 billion, more

than double the amount during the preceding fiscal year. These securities included $17.8 billion of securities registered. for exchange transactions and $11 billion of securities reserved for conversion. Registrations of secondary offerings totaled $4.8 billion, $1.7 billion more than

in the preceding fiscal year. Appendix Table 1 shows the number of

statements which became effective and total amounts registered for

each of the fiscal years 1935 through 1969, and contains a classification

by type of security of issues to be offered for cash sale on behalf of the

issuer during those years. More detailed information for 1969 is given

in Appendix Table 2.

Corporate issues intended for immediate cash sale totaled $17.3 billion, an increase of $900 million over the preceding year. Common stock

totaled $5.9 billion, or 34 percent of the total, as compared. to $2.9 billion, or 17 percent, in the preceding fiscal year. Preferred stock:totaled

$500 million, 3 percent of the total, while bonds, notes and debentures

aggregated $10.8 billion, or three-fifths of the total. A breakdown of

registered corporate issues for cash sale by industry of issuer and data

on the intended use of proceeds will not be available until programs to

adapt these statistics to the Commission's computer are completed.

The following table shows the distribution of issues registered during

the last 3 fiscal years for the account of issuers to be offered for cash

sale:

(MIUlona of dollars)

1969 1968 1967

--- --- Issues offered for immediate sale" Bonds. notes and debentures . , _______________________________________ 10,818 12,603 11,462 Preferred stock _______________________________________________________ 515 906 494 Common stock _______________________________________________________ 5,949 2.854 1.484

Total _______________________________________________________________ --- --- --- 17,282 16,363 13,441 Foreign governmenL _____________________________________________________ 711 1,157 684 --- --- --- Total for immediate sale ____________________________________________ 17,993 17,520 14,124 Issues offered over an extended perlod ____________________________________34,046 19,749 13,826

--- --- --- Total for cash sale for account otjssuers _____________________________52,039 37,260 27,950

Registration of issues to be offered over an extended period

amounted to $34 billion, an increase of over $14 billion as compared

to 1968 and the largest amount on record. These issues are classified

below:
36 SECURITIES AND EXCHANGE COMMISSION

(lI!llhons of dollars)

1969 1968 I 1967

Investment company issues: Management open-end ____________________________________________16,129 11,851 7,014 Management closed-end___________________________________________ 594 119 498 Unit investment trust; ___________________________________________2,279 1,562 1,768 Face-amonnt certtneates __________________________________________ 126 273 158

Total investment companies __________________________________19,128 13,804 9,438 Employee savmg plan certlficates ___________________________________ 1,850 1,461 1,357 Secnritles for employees stock option plans _________________________ 5,610 3,361 2,609 Other,lncludmg stock for warrants and options _____________________ 7,458 1,122 422

TotaL ________________________ 34,046 19,749 13,826

I

Stop Order Proceedings

Section 8(d) of the Securities Act gives the Commission the power,

after notice and opportunity for hearing, to issue a stop order "suspending" the effectiveness of a registration statement which includes

an untrue statement of a material fact or omits to state any material

fact required to be stated therein or necessary to make the statements

therein not misleading. The effect of a stop order, which may be issued

even after the sale of securities has begun, is to bar distribution of the

securities so long as the order remains in effect. Although losses which

may have been suffered by investors before issuance of the order are

not restored to them by a stop order, the Commission's decision and

the evidence on which it is based may serve to put them on notice of

their rights and aid in their own recovery suits. As provided by the

Act, a stop order is lifted when the registration statement has been

amended to correct the deficiencies.

As of the beginning of the fiscal year, one stop order proceeding was

pending. During the year five additional proceedings were instituted

and three were terminated through the issuance of stop orders."

Examinations and Investigations

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

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

order proceeding should be instituted under Section 8(d) and in connection therewith is empowered to examine witnesses and require the

production of pertinent documents. The Commission is also authorized

by Section 20(a) of the Act to conduct an investigation to determine

whether any provision of the Act or any rule or regulation prescribed

thereunder has been or is about to be violated. In appropriate cases,

Greater Northern Management Go" Inc., Seeurities Act Release No. 4941

(December 23, 1968) ; Bally Manufacturing Oorp., Securities Act Release No.

4952 (March 3, 1969) ; and White Btectronuumetie«, Inc., Securities Act Release

No. 4979 (June 11, 1969).

_____________________ • •_________

'"
THIRTY-FIFTH ANNUAL REPORT 37

investigations are instituted under this section as an expeditious means

of determining whether a registration statement is false or misleading

or omits to state any material fact. The following tabulation shows

the number of such examinations and investigations which were in

progress during the year:

Pending at beginning of fiscal year______________________________ 28

Initiated during fiscal year_____________________________________ 36

64

Closed during fiscal year________________________________________ 15

Pending at close of fiscal year___________________________________ 49

EXEMPTION FROM REGISTRATION OF SMAIL ISSUES

The Commission is authorized under Section 3(b) of the Securities

Act to exempt, by its rules and regulations and subject to such terms

and conditions as it may prescribe therein, any class of securities from

registration under the Act, if it finds that the enforcement of the

registration provisions of the Act with respect to such securities is not

necessary in the public interest and for the protection of investors by

reason of the small amount involved or the limited character of the

public offering. The statute imposes a maximum limitation of $300,-

000 upon the size of the issues which may be exempted by the

Commission in the exercise of this power.

Acting under this authority, the Commission has adopted the

following exemptive rules and regulations:

Rule 234: Exemption of first lien notes

Rule 235: Exemption of securities of cooperative housing corporations.

Rule 236: Exemption of shares offered in connection with certain transactions.

Regulation A: General exemption for U.S. and Canadian issues up to

$300,000.

Regulation B: Exemption for fractional undivided interests in oil or gas

rights up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of

assessment thereon.

Under Section 3(c) of the Securities Act, which was added by Section 307(a) of the Small Business Investment Act of 1958, the Commission is authorized to adopt rules and regulations exempting

securities issued by a small business investment company under the

Small Business Investment Act. Acting pursuant to this authority the

Commission has adopted Regulation E, which is described below.

Exemption from registration under Section 3 (b) or (c) of the Act

does not carry any exemption from the provisions of the Act prohibit-
-- 

38 SECURITIES AND EXCHANGE COM3dISSION 


ing fraudulent conduct in the offer or sale of wuritias and imposing 

civil liability or criminal responsibility for such conduct. 

Exempt Offerings Under Regulation A 

Regulation A permits a company to obtain needed capital not in 

excess of $300,000 (including underwriting commissions) in any one 

year from a public offering of its securities mithout registration, provided specified conditions are met. These include the filing of a notification supplying basic information about the company with the 

Regional Office of the Commission in the region in which the company 

has its principal place of business, and the filing and use in the offering 

of an offering circular. However, an offering circular need not be filed 

or used in connection with an offering not in excess of $50,000 by a 

company with earnings in one of the last 2 years. 

During the 1969 fiscal year, 1,043 notifications were filed under Rwlation A, covering proposed offerings of $267,074,784, compared with 

515 notifications covering propobd offerings of $112,318,744 in the 

1968 fiscal year. 

The following table sets forth various featurw of the Regulation B 

offerings during the past 3 Sscal years: 

Offerings Under Regulntion A 

Fiscal year 

1966 1 19fi9 1 1967

8lze: 

%1MWO or less........ ~ SQ o~&$l~WObutnoto~er$2~,~0..~ -...~~.~ .... ~~~~...~~~ 114 97 over S~W:WObut not over $3m,WO...... ~~~~ .... ~~ .......~.. 839 316 193 

TO~SI.~...~...... ~~ -... ~~~ ..... ~..~.~~...~~~ --- I,M sn j7


Reports of Sales.-Regulation A provides that within 30 days after 

the end of each 6-month period following the date of the original offering circular required by Rule 256, or the statement required by Rule 

257, the issuer or other person for whosn account the securities are 

offered must file a report of sale8 containing specified information. A 

final report must be filed upon completion or termination of the 

off wing. 
THIRTY-FIFTH ANNUAL REPORT 39 

During thefiscal year 1969,1,897 rcl~ortsof sales were filed reporting 

aggregatesales of $157,903,374. 

Suspension of Exemption.-The Commissihn may suspend an exemption under Regulation A where, in general, th'eexemption is sought 

for securities for which the regulation provides no exemption or where 

the offering is not made in accordance with the terns and conditions 

of the regulation or with prescribed disclosure standards. Following 

the issuance of a temporary suspension order by the Commission, the 

respondents may request a hearing to determine whether the temporary 

suspension should be vacated or made permanent. If no hearing is 

requested within 30 days after the entry of the temporary suspension 

order and none is ordered by the Commission on its own motion, the 

temporary suspension order becomes permanent. 

During the 1969 fiscal year, temporary suspension orders mere issued 

in 15 cases, which, added to the 2 cases pending, at the beginning of the 

fiscal year, resulted in a total of 17 cases for disposition. Of these, the 

temporary suspension order was vacated in one case and became 

permanent in eight cases: in two by lapse of time, in four by withdrawal of the request for hearing, and in two by acceptance of an offer 

of settlement. Eight cases were pending at the end of the fiscal year. 

Exempt Merings Under Regulation B 

During the fiscal year ended June 30, 1969, 613 offering sheet$ and 

447 amendments thereto were filed pursuant to Regulation B and werc 

examined by the Oil and Gas Section of the Commission's Divisiorl of 

Corporation Finance. During the 1968 and 1967 fiscal years, 453 and 

353 offering sheets, respectively, were filed. The following table indicate, the nature and number of Commission orders issued in connection 

with such filings during the fiscal years 196749. The balance of the 

offering sheets filed became effective without order. 

Action Taken on Offering lCjheets Filed Under Regulatima B 

I F18081yem 

Reports of sales.-The Commission requires persons who make 

offerings under Regulation B to file reports of the actual sales made 

pursuant to that regulation. The purpose of these reports is to aid 
40 SECURITIES AND EXCHANGE COMMISSION

3,978

$3, 986, 187 43

the Commission in determining whether violations of laws have occurred in the marketing of such securities. The following table shows

the number of sales reports filed under Regulation B during the past

3 fiscal years and the aggregate dollar amount of sales during each of

such fiscal years.

Reports of Sales Under Regulation B

I 1969 1968 1967

,--------

Number of sales reports flled , --------------------------1 9, 012 Aggregate dollar 1 5'863j amount of sales reported $11,221,563.80 $7,034,723 31

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies which are licensed under the Small Business Investment

Act of 1958 or which have received the preliminary approval of the

Small Business Administration and have been notified by the Administration that they may submit an application for such a license.

The regulation, which is similar in many respects to the general

exemption provided by Regulation A, requires the filing of a notification with the Commission and, except in the case of offerings not in

excess of $50,000,the filing and use of an offering circular containing

certain specified information.

Regulation E also authorizes the Commission to suspend an

exemption, substantially on the same grounds as those specified in

Regulation AOne notification was filed under Regulation E during 1969 fiscal

'year for an offering totalling $160,000.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000in anyone year. It requires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the

purposes for which the proceeds of the assessment are proposed to be

used. Copies of any other sales literature used in connection with the

assessment must be filed. Like Regulation A, Regulation F provides for

the suspension of an exemption thereunder where the regulation provides no exemption or where the Offering is not made in accordance

j
THIRTY-FIFTH ANNUAL REPORT 41

with the terms and conditions of the regulation or in accordance with

prescribed disclosure standards.

During the 1969 fiscal year, 18 notifications were filed under Regulation F, covering assessments of $492,076,compared with 20 notifications covering assessments of $835,274 in the 1968 fiscal year. These

notifications were filed in three of the nine regional officesof the

Commission: Denver, San Francisco and Seattle. Underwriters were

not employed in any of the Regulation F assessments. One Regulation F exemption was suspended during the fiscal year.

B. CONTINUING DISCLOSURE REQUIREMENTS

The Securities Exchange Act of 1934, as amended, contains a number of significant disclosure provisions with respect to securities

traded in the securities markets. These provisions, applicable in general to issuers of securities listed on exchanges and issuers of securities

traded over-the-counter which meet minimum asset and number of

stockholder tests, include requirements for the registration of securities with the Commission and for periodic reports, as well as for

appropriate disclosure in connection with the exercise of stockholders'

voting rights, takeover bids and insiders' securities transactions.

Registration of Securities on Exchanges

Unless a security is registered on a national securities exchange

under Section 12(b) of the Exchange Act or is exempt from registration, it is unlawful for a member of such exchange or any broker or

dealer to effect any transaction in the security on the exchange. In

general, the Act exempts from registration obligations issued or guaranteed by a State or the Federal Government or by certain subdivisions or agenciesthereof and authorizes the Commission to adopt rules

and regulations exempting such other securities as the Commission

may find necessary or appropriate to exempt in the public interest or

for the protection of investors. Under this authority the Commission

has exempted securities of certain banks, certain securities secured by

property or leasehold interests, certain warrants and, on a temporary

basis, certain securities issued in substitution for or in addition to

listed securities.

Pursuant to Section 12(b) of the Exchange Act, an issuer may register a class of securities on an exchange by filing with the Commission and the exchange an application which discloses pertinent

information concerning the issuer and its affairs. Information must

be furnished regarding the issuer's business, its capital structure, the

terms of its securities, the persons who manage or control its affairs,

the remuneration paid to its officersand directors, and the allotment
42 SECURITIES AND EXCHANGE COMMISSION

of options, bonuses and profit-sharing plans. Financial statements

certified by an independent accountant must be filed as part of the

application.

Form 10 is the form used for registration by most commercial and

industrial companies. There are specialized forms for certain types of

securities, such as voting trust certificates, certificates of deposit and

securities of foreign governments.

Statistics regarding securities traded on exchanges may be found

in Part III of this report, as well as in certain of the appendix tables.

Registration of Over-the-Counter Securities

Section 12(g) of the Exchange Act requires a company with total

assets exceeding $1 million and a class of equity securities held of

record by 500 or more persons to register those securities with the

Commission, unless one of the exemptions set forth in that section is

available," or the Commission issues an exemptive order under Section 12(h).

During the fiscal year, 651 registration statements were filed under

Section 12(g). This makes a total, from the enactment of Section 12(g)

in 1964, through June 30, 1969, of 3,819 registration statements filed.

Eight of these statements were withdrawn before they had become

effective upon determination that they were not required to be filed

under the Act.

Of the 651registration statements filed under Section 12(g) in fiscal

year 1969, 353 were filed by issuers already subject to the reporting

requirements of Section 13 or 15(d) of the Act. The latter figure ineludes 22 registration statements filed by issuers with another security

registered on a national securities exchange, and 331 filed by issuers

subject to the reporting requirements of Section 15(d) because they had

registered securities under the Securities Act. These latter companies,

however, had not been subject to the proxy solicitation and other disclosure and insider trading provisions of Sections 14 and 16 of the

Exchange Act. The remaining 2D8 issuers which filed registration statements had not been subject to any of the disclosure or insider trading

provisions and became subject to them through registration.

Adoption of Rule 12g-2.-During the fiscal year the Commission

adopted a rule relating to the registration of securities under Section

12(g) of the Exchange Act.17 That section exempts from registration

'8 Section 12(g) contains various exemptive provisions with respect to certain

types of securities. Of par-ticular significance are the provisions relating to securities issued by insurance companies and securities of foreign issuers. See discussions in 32nd Annual Report, p. 13 and 33rd Annual Report, pp. 13-14,

respectively,

17 Securities Exchange Act Release Xo, 8573 (April 17, 19G9).
THIRTY-FIFTH ANNUAL REPORT 43

securities listed and registered on a national securities exchange and

securities issued by an investment company registered under the

Investment Company Act of 1940. The new rule provides that where

a class of securities would have been required to be registered except

for the fact that it was so exempt, when the exemption terminates such class shall be deemed to be registered under Section 12(g)

if at that time securities of the class are held of record by 300 or more

persons. Thus, the rule accomplishes the transition from registration

under Section 12(b) or under the Investment Company Act to registration under Section 12(g) without the necessity of filing an additional registration statement.

Exemptions From Registration.-Section 12(h) of the Act authorizes the Commission, either by rules and regulations or by order upon

application of an interested person, to grant a complete or partial

exemption from the provisions of Sections 12(g), 13, 14, 15(d), or 16

if the Commission finds that because of the number of public investors,

the amount of trading interest in the securities, the nature and extent

of the activities of the issuer, the income or assets of the issuer, or

otherwise, the exemption is not inconsistent with the public interest

or the protection of investors.

At the beginning of the fiscal year 17 applications were pending

and 10 were filed during the year. Of these 27 applications, 6 were

withdrawn, 12 were granted and 1 was denied. The remaining 8 applications were pending at the end of the fiscal year.

Periodic Reports

Section 13 of the Exchange Act requires issuers of securities registered pursuant to Section 12(b) or 12(g) to file periodic reports

keeping current the information contained in the application for registration or registration statement. These periodic reports include

annual, semi-annual, and current reports. The principal annual report

form is Form 10-K, which is designed to give current information

regarding the matters covered in the original filing. Semi-annual reports required to be filed on Form 9-K are devoted chiefly to furnishing mid-year financial data. Current reports on Form 8-K are required

to be filed for each month in which any of certain specified events of

immediate interest to investors has occurred. A report on this form

deals with matters such as changes in control of the registrant, important acquisitions or dispositions of assets, the institution or termination of important legal proceedings and important changes in the

issuer's securities. Certain real estate companies are required to file

quarterly reports on Form 7-K. Section 15(d) of the Exchange Act,

generally speaking, requires issuers which have registered securities
44 SECURITIES AND EXCHANGE COMMISSION

under the Securities Act of 1933 and which have no securities registered under Section 12 to file the reports described above.

The following table shows the number of reports filed during the

fiscal year pursuant to Sections 13 and 15(d) of the Exchange Act.

As of June 30, 1969, there were 2,764 issuers having securities listed

on a national securities exchange and registered under Section 12(b)

of the Act, 3,331 issuers having securities registered under Section

12(g), and 2,359additional issuers which were subject to the reporting

requirements of Section 15(d) of the Act.

Number of annuaZ antI other periotIit: reports tiletI by issuers under the Securities

Eecluuure Act of 1934 during the fiscal year etuied June 30,1969

Type oC reports

Annual reports

Semi-annual reports

Current reports Quarterly reports

Total reports filed ,

NumberoC

reports filed

under Sections 13 & 15(d)

6,064

4,812

1O,9i2

381

22,229

Administrative Proceedings to Obtain Compliance with Exchange Act Registration or Reporting Requirements

Section 15(c) (4) of the Exchang-e Act empowers the Commission

to find, after notice and opportunity for hearing, that any person

subject to the provisions of Section 12, 13 or 15(d) of the Act or the

rules thereunder has failed in any material respect to comply with

any of those provisions. This establishes an administrative procedure,

similar to that provided in proceedings to delist securities under

Section 19(a) (2) of the Exchange Act, for apprising investors of

materially mi.sleading filings and for the resolution of accounting

and other complex and technical questions involving the disclosure

provisions of the Act. Under Section 15(c) (4) the Commission can

publish its findi.ngsand issue an order requiring compliance and, when

the circumstances of a particular case so warrant, apply to a U.S.

district court for enforcement of its order.

Two proceedings under Section 15(c) (4) were pending as of the

end of the fiscal year, in one of which 18 it is alleged that a schedule

filed in connection with a tender offer was misleading. This is the first

administrative proceeding arising out of the "Takeover Bid Bill"

enacted in July 1968.19

,. The Susquehanna Oorporation.

1. See pp. 48-49.

_

_

_

_
THIRTY-FIFTH ANNUAL REPORT 45

Proxy Solicitations

Scope and Nature of Proxy Regulation.-Regulation 14A under

the Exchange Act, implementing Section 14(a) of that Act, governs

the manner in which proxies or other authorizations may be solicited

from the holders of securities registered under Section 12 of that Act,

whether for the election of directors, approval of other corporate

action, or some other purpose." It requires that in any such solicitation, whether by the management or minority groups, disclosure must

be made of all material facts concerning the matters on which security

holders are asked to vote, and they must be afforded an opportunity to

vote "yes" or "no" on each matter other than elections. The regulation

also provides, among other things, that where the management is

soliciting proxies, any security holder desiring to communicate with

other security holders for a proper purpose may require the management to furnish him with a list of all security holders or to mail his

communication to security holders for him. A security holder may also,

subject to certain limitations, require the management to include in its

proxy material any appropriate proposal which he wants to submit to

a vote of security holders. Any security holder or group of security

holders may at any time make an independent proxy solicitation upon

compliance with the proxy rules, whether or not the management is

making a solicitation. Certain additional provisions of the regulation

apply where a contest for control of the management of an issuer or

representation on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

Where preliminary material fails to meet the prescribed disclosure

standards, the management or other group responsible for its preparation is notified informally and given an opportunity to correct the

deficiencies in the preparation of the definitive proxy material to be

furnished to security holders.

Under Section 14(c) of the Act, issuers of securities registered

under Section 12 must, in accordance with rules and regulations prescribed by the Commission, transmit information comparable to proxy

material to security holders from whom proxies are not solicited with

respect to a stockholders' meeting. Regulation 14C implements this

provision by setting forth the requirements for "information

statements."

Amendment of Item 7(f) of the Proxy Rules.-During the fiscal

year, the Commission adopted a clarifying amendment to its proxy

.. This regulation also applies to securities holders of registered public-utility

holding companies, their subsidiaries and registered investment companies.
46 SECURITIES AND EXCHANGE COMMISSION

rules to codify a long-standing interpretation of Item 7(f) of Schedule

14A, which specifies the information to be included in proxy statements.v Item 7(f) calls for information with respect to the interests

of insiders in transactions to which the issuer or any of its subsidiaries

was or is to be a party. Instruction 3 to that item permitted the omission of information as to certain indirect interests, including those

which arise from the ownership of a limited equity interest in another

party to the transaction. The amendment makes it clear that a general

partnership interest is regarded as being more than an "equity interest"; it is regarded as the equivalent of the interest of a corporate

officer who has an equity interest in the corporation.

Amendment of Rule 14e-2.--'During the fiscal year the Commission amended Rule 14c-2 of Regulation 14C.22That rule previously

required the transmission of an information statement only where

action was to be taken at an annual or other meeting of the holders of

a class of registered securities. The rule was amended so that it would

apply, not only where action is to be taken at a meeting of security

holders, but also where corporate action is to be taken with the written authorization or consent of the holders of a class of registered

securities.

Recent changes in the corporate codes of certain states (notably

Delaware and Pennsylvania) permit the taking of certain corporate

action, which would normally be voted upon at a meeting of security

holders, by securing the written authorization or consent of the requisite percentage of the holders of securities of the class entitled to vote.

Thus, the rule amendment was necessary to prevent important corporate action being taken under the above-mentioned statutory provisions by a relatively few large stockholders without the prior knowledge or consent of the other stockholders.

Statistics Relating to Proxy and Information Statements.-During

the 1969 fiscal year, 5,316 proxy statements in definitive form were

filed, 5,284 by management and 32 by nonmanagement groups or

individual stockholders. In addition, 115 information statements were

filed. The proxy and information statements related to 4,940 companies, some 491 of which had a second solicitation during the year, generally for a special meeting not involving the election of directors.

There were 4,548 solicitations of proxies for the election of directors,

742 for special meetings not involving the election of directors, and 26

for assents and authorizations.

21Securities Exchange Act Release :\0. 8586 (April 28, 196!l).

22 SeetrrItles Exchange Act Release 1'0. 8521 (February 7, 1969).
TIilRTY-FIFTH ANNUAL REPORT 47

The votes of security holders were solicited with respect to the following types of matters, other than the election of directors:

Mergers, consolidations, acquisitions of businesses, purchases and

sales of property, and dissolution of companies 682

Authorizations of new or additional securities. modifications of existing securtttes, and recapitalization plans (other than mergers, con- solidations, ete.) 1,528

Employee pension and retirement plans (including amendments to

existing plans) 86

Bonus or profit-sharing and deferred compeu-atlon arrangements

(including amendments to existing plans and arrangements) 143

Stock option plans (including amendments to existing plans) 943

Stockholder approval of the selection by management of independent auditors 1,813

Miscellaneous amendments to charters and by-laws, and miscellaneous

other matters (excluding those listed above) 2,131

Stockholders' Proposals.-During the 1969 fiscal year, 173 proposals submitted by 27 stockholders were included in the proxy statements of 118 companies under Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of security

holders were resolutions relating to amendments to charters or by-laws

to provide for cumulative voting :for the election of directors, preemptive rights, limitations on the grant of stock options to and their

exercise by key employees and management groups, the sending of a

post-meeting report to all stockholders, and limitations on charitable

contributions.

A total of 48 additional proposals submitted by 21 stockholders was

omitted from the proxy statements of 19 companies inaccordance with

Rule 14a-8. The principal reasons for such omissions and the number

of times each such reason was involved (counting only one reason for

omission for each proposal even though it may have been omitted

under more than one provision of Rule 14a-8) were as follows:

Reason for Omission of Proposals Number

Concerned a personal grievance against the company 21

VVithdrawn by proponent 16

Not a proper subject matter under State law 4

Related to the ordinary conduct of the company's business 2

Converse of management's proposal 2

Outside scope of rules 1

Not timely submitted 1

Insufficient vote at prior meetings 1

Ratio of Soliciting to Nonsoliciting Companies.-Of the 2,764

issuers that had securities listed and registered on national securities

exchanges as of June 30, 1969,2,538 had voting securities so listed and

registered. Of these 2,538 issuers, 2,354, or 90.6 percent, solicited
48 SECURITIES AND EXCHANGE COMMISSION

proxies under the Commission's proxy rules during the 1969 fiscal

year for the election of directors.

Proxy Contests.-During the 1969 fiscal year, 25 companies were

involved in proxy contests for the election of directors. A total of 549

persons, both management and nonmanagement, filed detailed statements as participants under the requirements of Rule 14a-l1. Proxy

statements in 20 cases involved contests for control of the board of

directors and those in 5 cases involved contests for representation on

the board.

Management retained control in 8 of the 20 contests for control of

the board of directors, 2 were settled by negotiation, nonmanagement

persons won 3, 1 resulted in a tie and 6 were pending as of June 30,

1969. Of the five cases where representation on the board of directors

was involved, management retained all places on the board in three

contests, opposition won places on the board in one case and one was

settled by negotiation.

Disclosure in Connection with Takeover Bids and Other Large Acquisitions

Amendments to Sections 13 and 14 of the Exchange Act relating to

full disclosure in connection with cash tender offers and other stock

acquisitions which may cause a shift in control became effective on

July 29, 1968.23 This legislation, which is more fully described in the

previous annual report," was designed to close gaps in the full disclosure provisions of the securities laws and to put cash tender offers

and other block acquisitions on the same footing as proxy contests for

control.

During the fiscal year, the Commission adopted temporary rules

and regulations to make the provisions of the legislation operative."

Rule 13d-l under the Act among other things requires the filing with

the Commission of a Schedule 13D report by a person or group which

acquires any of a class of equity securities registered pursuant to Section 12 of the Act or issued by a closed-end investment company registered under the Investment Company Act, if such acquisition results in

the ownership by such person or group of more than 10 percent of such

class of securities, During the 1969 fiscal year 251 Schedule 13D acquisition reports were filed. Rule 14d-l requires the filing of a Schedule

13D report by a person or group making a tender offer (other than an

exchange offer by means of a registration statement under the Securities Act of 1933) which, if successful, would result in such person or

group owning more than 10 percent of any class of equity securities of

23 Public Law 9Q-439.

,. See pp. 9-10.

Securities Exchange Act Releases Nos. 8870 (July 30, 1968), 8892 (August 30,

1968),8510 (January 31,1969) and 8556 (March 24, 1969).

'"
THIRTY-FIFTH AN1'.TUALREPORT 49

the type described above. Seventy Schedule 13D tender offer reports

were filed during the fiscal year.

In addition, 56 Schedule 14D reports were filed pursuant to Rule

14d--4which relates to solicitations or recommendations in connection

with a tender offer by one other than the maker of the offer, and 12

statements were filed pursuant to Rule 14:f-1 relating to the replacement of a majority of the board of directors otherwise than by stockholder vote pursuant to an arranagement or understanding with the

person or persons acquiring securities in a transaction subject to Sections 13(d) or 14(d) of the Act. No statements were filed pursuant to

Rule 13e-1 relating to the reacquisition of its securities by an issuer

while it is the target of a cash tender offer.

Civil litigation based on the tender offer Legislation is discussed at

pp. 114-115, infra.

Insiders' Security Holdings and Transactions

Section 16 of the Securities Exchange Act and corresponding provisions in Section 17 of the Public Utility Holding Company Act of

1935 and Section 30(f) of the Investment Company Act of 1940 are

designed to provide other stockholders and investors generally with

information as to insiders' securities transactions and holdings, and

to prevent the unfair use of confidential information by insiders to

profit from short-term trading in a company's securities.

Ownership Reports.-Section 16(a) of the Exchange Act requires

every person who beneficially owns, directly or indirectly, more than

10 percent of any class of equity security which is registered under Section 12, or who is a director or an officerof the issuer of any such security, to file statements with the Commission disclosing the amount

of all equity securities of the issuer of which he is the beneficial owner

and changes in such ownership. Copies of such statements must also

be filed with exchanges on which securities are listed. Similar provisions applicable to insiders of registered public-utility holding companies and registered closed-end investment companies are contained

in Section 17(a) of the Public Utility Holding Company Act and

Section 30(f) of the Investment Company Act.

During the fiscal year, 93~708ownership reports (16,036 initial

statements of ownership on Form 3 and 77,672 statements of changes

in ownership on Form 4) were filed with the Commission. By comparison, during fiscal year 1968, 93,823 such reports were filed (14,893

initial statements and 78,930statements of changes) .

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's officein Washington and

at the exchanges where copies are filed. In addition, the information

contained in reports filed with the Commission is summarized and

373-754--70----5
50 SECURITIES AND EXCHANGE COMMISSION

published in the monthly "Official Summary of Security Transactions

and Holdings," which is distributed by the Government Printing Office

to more than 24,000 subscribers.

Recovery of Short-Swing Trading Profits.- In order to prevent

insiders from making unfair use of information which they may have

obtained by reason of their relationship with a company, Section 16(b)

of the Exchange Act, Section 17(b) of the Holding Company Act, and

Section 30(f) of the Investment Company Act provide for the recovery

by or on behalf of the issuer of any profit realized by insiders (in the

categories listed above) from certain purchases and sales, or sales and

purchases, of securities of the company within any period of less than

6 months. The Commission at time participates as amicue curiae in actions to recover such profits when it deems it important to present its

views regarding the interpretation of the statutory provisions or of

the exemptive rules adopted by the Commission thereunder.

Proposed Amendment of Rule 16a-I.-During the fiscal year the

Commission invited public comments on certain proposed amendments

to Rule 16a-1 which relates to the filing of statements of beneficial

ownership of equity securities, and changes in such ownership, pursuant to Section 16(a) of the Act, and, after the close of the fiscal year,

it adopted the amendments in modified form.26

One of the amendments requires a person who has become a director

or officer of a company whose equity securities are registered pursuant

to Section 12 of the Act, or who is a director or officer of a company

whose securities have become so registered, to furnish with any statement regarding changes in his beneficial ownership of equity securities

occurring within 6 months after he became subject to Section 16(a)

information as to any changes in such beneficial ownership which

occurred during the preceding 6 months. The other amendment requires any person who has ceased to be a director or officer of such a

company, or who was a director or officer at the time the company

ceased to have any equity securities registered pursuant to Section 12,

to file a report with respect to any change in beneficial ownership

which occurs within 6 months after any change in beneficial ownership

prior to such cessation.

The purpose of the amendments is to provide disclosure under

Section 16(a) of the Act with respect to all transactions which may

be subject to Section 16(b) of the Act. The courts have held that

for the purpose of Section 16(b) a purchase of an equity security made

before a person becomes a director or officerof a company having such

securities registered pursuant to Section 12 of the Act may be matched

with a sale within 6 months thereafter at a time when such person has

.. Securities Exchange Act Release No. 8697 (September 18, 1969).
THIRTY-FIFTH ANNUAL REPORT 51

become a director or officer of the company. Similarly, it has been

held that for the purpose of Section 16(b), a purchase of an equity

security of such a company by another company having a representative on the first company's board of directors may be matched with a

sale of such security, within 6 months, after the representative ceased

to be a director of the company. The same principles would seem to

apply where equity securities become registered, or cease to be registered, between the dates of purchases and sales, or sales and purchases,

made within a period of 6 months.

Changes in Rule 16h-3.-The Commission is authorized to exempt

from the operation of Section 16(b) of the Exchange Act any transaction not comprehended within the purpose of that Section. Rule

16b-3 exempts from Section 16(b) of the Act the acquisition of certain

securities pursuant to stock bonus, profit sharing, retirement and

similar plans which meet certain specified conditions, The rule exempts

the acquisition of shares of stock other than stock acquired upon the

exercise of options, warrants or rights and also exempts the acquisition of restricted, qualified and employee stock purchase plan stock

options, but not the acquisition of stock upon the exercise of such

options.

Paragraph (d) (3) of Rule 16b-3 previously provided that the

term "exercise of an option, warrant or right," as used in the rule, did

not include the making of an election to receive under any plan an

award of compensation in the form of stock or credits therefor, provided the election is made prior to the award and subject to certain

other conditions. However, in some instances the election to receive

stock under a plan is made annually with respect to the portion of the

award relating to the particular year. For this reason paragraph (d)

(3) of the rule was amended during the fiscal year to provide that an

election made on an annual basis is not deemed to be the "exercise of

an option, warrant or right," within the meaning of the rule, provided it is made either prior to the award or prior to the fulfillment of

all conditions to the receipt of the compensation,"

Investigations With Respect to Reporting and Proxy Provisions

Section 21(a) of the Exchange Act authorizes the Commission to

make such investigations as it deems necessary to determine whether

any person has violated or is about to violate any provision of the Act

or any rule or regulation thereunder. The Commission is authorized,

for this purpose, to administer oaths, subpoena witnesses, compel their

attendance, take evidence and require the production of records. The

following investigations were undertaken pursuant to Section 21(a)

in connection with the enforcement of the reporting provisions of Sec-
52 SECURITIES AND EXCHANGE COMMISSION

tions 12,13,14 and 15(d) of the Act and the rules thereunder, particularly those provisions relating to the filing of annual and other

periodic reports and proxy material:

Investigations pendings at beginning of fiscal year____________________ 33

Investigations initiated during fiscal year___________________________ 22

55

Investigations closed during fiscal year_____________________________ 13

Investigations pending at close of fiscal year________________________ 42

Summary Suspension of Trading

Section 19(a) (4) of the Exchange Act authorizes the Commission

summarily to suspend exchange trading in a security listed on a national securities exchange for up to 10 days if in its opinion the public

interest so requires. Under Section 15(c) (5) of that Act the Commission may summarily suspend over-the-counter :trading in any nonexempt security for up to 10 days if it believes that such action is

required in the public interest and for the protection of investors.

During the 1969 fiscal year, the Commission temporarily suspended

trading in 33 securities, compared to 39 in fiscal 1968 and 22 in fiscal

1967. In seven instances exchange-listed securities were involved and

the Commission acted under both Section 19(a) (4) and Section 15(c)

(5).28 In each of these cases, the exchange on which the securities were

listed had previously halted trading.

The principal grounds on which the Commission ordered suspension

of trading were that adequate or accurate information concerning the

issuer was not available; it appeared that misleading information was

being circulated; there was a need for clarification of information

published about the company; or the Commission learned of information not generally known to the securities community and investors

which indicated the existence of substantial questions concerning the

financial condition or business operations of the company or the purchase or sale of its securities. For example, suspensions were ordered

pending clarification and/or adequate public dissemination of information concerning: the market activity in a company's shares despite a

corporate by-law restricting their transferability; 29 the company's

principal product and its future prospects; 30 the apparent absence of

21 Securities Exchange Act Release No. 8592 (May 1, 1969).

os Securities Exchange Act Release Nos. 8358 (July 19, 1968), 8371 (JUly 31,

1968), 8396 (August 28, 1968), 843:; (October 25, 1968), 8526 (February 12,

1969),8600 (:\Iay 6, 196!!) and 8640 (June 26, 1969).

29 Securities Exchange Act Release No. 8431 (October 18, 1968).

soSecurities Exchange Act Release No. 8473 (December 18, 1968).
THIRTY-FIFTH~~AL REPORT 53

any known properties 01' operations; 31 the extent of losses discovered

by the company; 32 financial statements of the company and of companies acquired; 33 the existence of a genuine market for the company's

stock at the prices at which it had recently been quoted; 34 circumstances surrounding a change of control, the company's acquisition

program, accuracy and completeness of filings made with the Commission by the company and certain transactions in the company's securities by insiders and others; 35 and the offer and sale of stock allegedly sold as "lettered stock" (i.e., stock purportedly issued pursuant

to an exemption from registration) .36

In 13 cases, the Commission instituted enforcement action subsequent to or concurrently with the trading suspension where violations

of law were indicated." For example, the Commission had suspended

over-the-counter trading in the common stock of O'TlU3gaEquities Corporation following a spectacular increase in the market price of such

stock within a few months." The Commission noted that it had received information indicating that the securities of Omega, a so-called

"emerging conglomerate," were being sold on the basis of incomplete

and inaccurate information relating to the company's financial condition, product lines and acquisition program. It also noted that serious

questions had been raised as to whether so-called "lettered stock" reportedly issued at prices substantially below the prices then being

publicly quoted was being issued without compliance with the registration and anti-fraud provisions of the Federal securities laws. Thereafter, the Commission filed a complaint in the U.S. District Court for

the Central District of California, alleging, among other things, that

Omega, its officers and directors, and others had violated those provisions in the course of a program which involved reconstituting

Umega (which had an operating deficit of over $14 million) as a

conglomerate through the acquisition of a number of businesses and

obtaining the necessary cash through the sale of unregistered "letter"

secmities at prices far below current market prices. Omega and nine

other defendants, while denying the allegations, consented to a final

31 Securities Exchange Act Release No. 8504 (January 27,1(69).

32 Securities Exchange Act Release No. 8526 (B'ebruary 12,19(9).

33 Securities Exchange Act Release No. 8533 (February 19, 1(69).

31 Securities Exchange Act Release No. 8553 (:\Iarch 12,1969).

33 Securities Exchange Act Release No. 8600 (May 6,1969).

Securities Exchange Act Release No. 8570 (Aprilll,1969).

37 See Litigation Release Nos. 4095 (August 15, 1!J681.4149 (October 31, 1968),

4203 (January 9, 1969), 4204 (January 9, 1969), 423:; (March 5, 1969), 4272

(April 1, 1969),4283 (April 10, 1969),4284 (April 10, 1969),4301 (April 23,

1969),4306 (April 28, 1969), 4310 (May 7, 1969), 4315 (:lIay 12, 19(9) and 4362

(J une 30, 1969).

38 Securities Exchange Act Release No. 8474 (December 20,1(69).

""
54 SECURITIES AND EXCHANGE COMMISSION

decree permanently enjoining them from engaging in conduct in violation of the Federal securities laws, as alleged in the complaint." The

suspension of trading was then terminated by the Commission.

In another case, involving United Australian Oil, Inc., the Commission suspended trading in the company's stock on the basis of information that the price had risen sharply and the fact that there appeared

to be no financial information currently available about the company

and information currently being circulated about the company's assets

and operations appeared to be inaccurate and incomplete." The company and its president had previously been enjoined from further

violations of the registration provisions of the Securities Act. Company representatives had refused to provide pertinent information and

documents and the Commission had obtained an order directing the

president to comply with a subpoena requiring the production of corporate records. Upon his failure to comply with that order, the

president was found guilty of civil contempt and was sentenced to 6

months in jailor until he purged himself by producing the records or

giving a satisfactory explanation of his failure to do SO.41 United

previously had pled guilty and its president nolo contendere to a

charge of criminal contempt of the injunctive order." The Commission

terminated the trading suspension in August 1969.42& In its release

announcing such action, the Commission pointed out, among other

things, that the company was apparently insolvent and had no current

operations, and it cautioned investors to consider this and other adverse

information recited in the release, including the matters referred to

above.

C. ACCOUNTING AND AUDITING MATTERS

The several Acts administered by the Commission reflect a recognition by Congress that dependable financial statements of a company

are indispensable to an informed investment decision regarding its

securities. The value of such statements is directly dependent on the

soundness of the judgment exercised in applying accounting principles

and practices in their preparation, and on the adequacy and reliability

of the work done by public accountants who certify the statements.

A major objective of the Commission has been to improve accounting

and auditing standards and to assist in the establishment and maintenance of high standards of professional conduct by certifying account-

.. See Litigation Release No. 4283 (April 10,1969).

40 Securities Exchange Act Release No. 8498 (January 16,1969) .

.. See Ldtlgatlon Release No. 4374 (July 9,1969) .

...See Litigation Release No. 4349 (June 9,1969) .

.... Securities Exchange Act Release No. 8666 (August 15,1969).
THIRTY-FIFTH ANNUAL REPORT 55

ants. The primary responsibility for this program rests with the Chief

Accountant of the Commission.

Pursuant to the Commission's broad rulemaking power regarding

the preparation and presentation of financial information, it has

adopted a basic accounting regulation (Regulation S-X) which, together with opinions on accounting principles published as "Accounting Series Releases," governs the form and content of financial

statements filed under the statutes administered by the Commission.

The Commission has also formulated rules wit:h respect to accounting

for and auditing of brokers and dealers and has prescribed uniform

systems of accounts for companies subj ect to the Public Utility Holding

Company Act of 1935. The accounting rules and the opinions of the

Commission 'and its decisions in particular cases have contributed to

clarification and wider acceptance of the accounting principles and

practices and auditing standards developed by the profession and generally followed in the preparation of financial statements.

The rules 'and regulations thus established, except for the uniform

systems of accounts which are regulatory reports, prescribe accounting

principles to be followed only in certain limited areas. In the large

area of financial reporting not covered by its rules, the Commission's

principal means of protecting investors from inadequate or improper

financial reporting is by requiring a certificate of an independent public

accountant, based on an audit performed in accordance with generally

accepted auditing standards, which expresses an opinion as to whether

the financial statements are presented fairly in conformity with accounting principles 'and practices which are recognized as sound and

which have attained general acceptance. The requirement of the opinion

of an independent accountant is designed to secure for the benefit of

public investors the detached objectivity of a knowledgeable professional person not connected with the management.

The accounting staff examines the financial statements filed with

the Commission to insure that the required standards are observed and

that accounting and auditing procedures do not remain static in

the face of changes 'and new developments in financial and economic

conditions. New methods of doing business, the formation of new types

of business, the increasing number of combinations of old businesses,

the use of more sophisticated securities, and other innovations, create

accounting problems which require a constant reappraisal of the

procedures.

Relations with the Accounting ProCession and the Public

In order to keep abreast of such changes and new developments and

in recognition of the need for a continuous exchange of views and information between the Commission's staff and outside accountants
56 SECURITIES AND EXCHANGE COMMISSION

regarding appropriate accounting and auditing policies, procedures

and practices for the protection of investors, the staff maintains continuing contact with individual accountants, other government agencies, and various professional organizations. These include the

American Accounting Association, the American Institute of Certified

Public Accountants, the American Petroleum Institute, the Financial

Analysts Federation, the Financial Executives Institute, the National

Association of Accountants, and the National Association of Railroad

and Utilities Commissioners. Since the American Institute of Certified

Public Accountants is the principal organization involved in the development and improvement of accounting and auditing standards and

practices in the profession, regular liaison is maintained with it through

its Committee on Relations with Securities and Exchange Commission and Stock Exchanges. Conferences are held from time to time

at which the staff is briefed on the work being done by the Institute,

including its Committees on Ethics and Auditing Procedures and the

Accounting Principle Board, and problems of mutual interest are discussed. A similar program of meetings is being instituted with the

Committee on Corporate Reporting of the Financial Executives

Institute.

As part of the Commission's effort to maintain a continuing exchange of views with the accounting profession, the Chairman, other

Commissioners, the Chief Accountant and other members of the accounting staff accept speaking engagements and participate in pane]

discussions at professional society meetings. In this way the Commission can indicate problem areas in accounting as to which it believes

the profession can aid in developing solutions. As an example, both

the Chairman and the Chief Accountant have urged the profession

to restudy the accounting principles applicable to business acquisitions

or combinations in order to develop criteria which will prevent abuses

arising from inadequate restrictions on the choice between the alternatives of purchase or pooling-of-interests accounting to be accorded

such transactions. The Chairman included a statement expressing his

concern on this matter in testimony before the Subcommittee on

Commerce and Finance of the House Committee on Interstate and

Foreign Commerce in February 1969.The Chief Accountant also accepts engagements to explain the work of the Commission at colleges

and universities throughout the country.

Because of its many foreign registrants and the vast and increasing

foreign operations of American companies, the Commission has an

interest in the improvement of accounting and auditing principles and

procedures on an international basis. To promote such improvement

the Chief Accountant corresponds with foreign accountants, inter-
THIRTY-FIFTH ANNUAL REPORT 57

views many who visit this country. and, on occasion, participates in

foreign accounting conferences 01' writes for foreign professional

journals. During the fiscal year, he presented a paper at the Annual

Conference of the Institute of Chartered Accountants of Ontario at

Ottawa, Canada, and contributed an article for publication in The

Accountant's Mngazine, the journal of the Institute of Chartered

Accountants of Scotland.

The Work of the Accounting Principles Board

The Accounting Principles Board sponsors research studies of

problem areas in accounting and formulates formal opinions and advisory statements for the improvement of accounting standards and

practices. The advisory statements contain recommendations of the

Board which companies may adopt voluntarily. In furtherance of the

policy of cooperation between professional organizations and the

Commission, the Board submits drafts of these studies, opinions and

statements to the Chief Accountant for review and comment prior to

publication, and representatives of the Board confer with him on

projects in progress or under consideration.

During the fiscal year the Board issued three opinions, one of which,

entitled "Earnings per Share," was an extensive revision and clarification of a prior opinion which became necessary because of the proliferation of increasingly complex securities. Another opinion

presented the results of a restudy of the accounting for convertible

debt and debt issued with stock purchase warrants. The third opinion

removed an exemption, which had applied to the financial statements

of commercial banks, from the requirements of an opinion that specified the format of the income statement in regard to the determination

of net income. In July 1969,representatives of the banks, the Federal

regulatory agencies and the American Institute of Certified Public

Accountants agreed upon specificstandards to be followed by the banks

in previously unsettled areas which are to be incorporated into the uniform reporting requirements of the three bank regulatory agencies and

the AICPA guide "Audits of Banks." Also in July the Board issued a

statement, "Financial Statements Restated for General Price-Level

Changes," in which the benefits of such statements when presented

on a supplemental basis are discussed, but which recommends against

their substitution for the basic historical-dollar financial statements.

This statement deals with a long-standing problem.

The Board has indicated that it has given top priority to a reexamination of the problems of accounting for business combinations and

it expects to issue an opinion on this subject by June 1970. Also

scheduled for issuance in the early part of 1970 are opinions on the

equity method of accounting for intercorporate investments, and on
58 SECURITIES AND EXCHANGE COMMISSION

the effects of changes in accounting methods, and a statement urging

that companies include a statement of their accounting principles in

their annual reports. Other topics on which the Board or its subcommittees are working with a view to issuing opinions are: segmented data in the financial statements of diversified companies (for

the Commission's recently adopted rules in this area, see pages

22-24, 8upra.), capitalization of leases, preparation of interim financial statements, valuation of marketable securities, and components

of a business enterprise. A subcommittee is also developing a document

pertaining to basic concepts and accounting principles underlying

financial statements of business enterprises.

Research studies are being conducted on the subjects of extractive

industries (completed in December 1969), materiality, research and

development, foreign operations, stockholder equities, and asset and

liability valuation in income determination. Two other research projects are being prepared on inventory pricing and depreciation

methods.

In connection with the development of opinions in four problem

areas, earnings per share, business combinations, the equity method

of accounting and the valuation of marketable securities, the Board

sponsored symposiums attended by representatives of all professional

groups concerned with the particular accounting problems, including

the Commission, in order to foster a better understanding of the problems and agreement on the proposed solutions.

Oilier Current Developments

The Chief Accountant's Office is continuing its work on the project

of revising the accounting rules in Regulation S-X, the first general

revision since 1950, in order to make changes, additions or eliminations

that have become necessary as a result of changing conditions over the

years. A committee of the AICPA has submitted many helpful suggestions for revisions. More recently recommendations for revisions,

particularly with respect to the schedules specified in Regulation S-X,

were made by the Commission's Disclosure Study Group. The Commission issued a proposal in September 1969,43 to include in Regulation S-X a section which would specify the content of a statement of

source and application of funds. This proposal reflected recommendations by the Study Group, as well as by the AICP A and other professional groups, that such statements be required in certain filings

made by registrants. At that time the Commission also issued proposals 44 to require such statements in registration statements and annual reports filed under the Exchange Act .

.. Securities Act Release No. 4998 (September 15, 1969) .

.. Securities ExchAnge Act Release Nos. 8681 and 8682 (September 15, 1(69).
TEIRTY-F~ ~AL REPORT 59

During the fiscal year a compilation of all the Accounting Series

Releases was completed for printing in one volume. In this compilation

each release number is retained together with a brief statement of

circumstances or problems which made the release necessary at the

time it was issued, but only those releases which appear to be of value

currently were included intheir entirety.

During the prior fiscal year the Chief Accountant's Office studied

questions relating to the independence of accountants who examine a

nonmaterial foreign segment of an international business, in lieu of

the independent accountants of the parent company in the United

States. In August 1968, the Commission issued an interpretative

release 45 which stated that, insofar as ownership of securities by partners is concerned, the accounting firm performing the audit of the

division or subsidiary in these circumstances would be held to be not

independent only if securities of the parent company or the subsidiary

are owned by any of the partners of that accounting firm or of its

affiliated firms who are located in the officewhich makes the examination or who are otherwise engaged in such examination.

D. CIVIL LITIGATION INVOLVING DISCLOSURE MAITERS

As more fully discussed below," the Commission in its enforcement program frequently institutes injunctive actions in the Federal

district courts in order to halt or prevent violations of the statutes

administered by it and of its rules adopted thereunder. Many of these

actions relate in whole or in part to noncompliance with the various

disclosure requirements. In many other cases the Commission participates as amicus curiae in litigation between private parties where it

is requested to do so by the court or where it deems it important to

furnish to the court its views regarding the interpretation of statutory

provisions or of its rules. Two such cases relating to disclosure matters

are discussed below. Civil litigation relating to other phases of the

Commission's work is discussed in Parts IV-VII of this report."

The Commission sought the aid of the courts on several occasions

during the fiscal year in order to insure compliance with the reporting requirements of the Exchange Act. Thus, for example, in S.E.O.

v. Golconda Mining 00.,48 summary judgment was entered in the Commission's favor on its allegation that, in violation of Section 16(a)

of that Act, Harry F. Magnuson, a director of Hecla Mining Company,

.. Accounting Series Release No. 112 (August 12, 1968).

.. See p. 103.

fT See Appendix tables 10-12 for statistical data regarding the Commission's

civil litigation activities .

.. CCH Fed. Sec. L. Rep. ,r92.287 (S.D. N.Y., 1968) affirmed without opinion,

C.A. 2, No. 32979, March 27, 1969.
60 SECURITIES AND EXCHANGE COMMISSION

had failed to file timely ownership reports and had :filedfalse reports

regarding numerous transactions in that company's stock. The court

found that a similar pattern obtained as to the stock of seven other

corporations of which Magnuson was also a director, and it therefore

enjoined Magnuson from future violations of Section 16(a) with

respect to any securities registered on a national securities exchange.

In Gerstle v. Gamble-Skogmo, Inc.,49 an action in which shareholders of a company merged into Gamble alleged that a proxy

statement for the merger was materially misleading, the District

Court for the Eastern District of New York made several significant

rulings relating to disclosure of the value of assets in such a proxy

statement. The court adopted the views expressed by the Commission,

amicus curiae, that

(1) good faith offers from third parties to buy corporate assets for more than

their book value must be disclosed in the proxy statement if their

omission would render the statement materially misleading, but the

corporation's own asking price for the properties may not be disclosed;

(2) except when expressly authorized by statute or Commission rule, assets

may not ordinarily be written up above cost in either the body or the

footnotes of financial statements filed with the Commission; and

(3) existing asset appraisals of current liquidating value made by qualified

experts and having a sufficient basis in fact must be disclosed in the

text or narrative portion of a proxy statement for a merger or sale

of assets, along with a summary statement of (a) the factual basis for

the appraisal, (b) the relationship-if any-between the appraiser and

interested persons and (c) the terms of the appraiser's engagement,

Including the Instructton given to the appraiser as to the purpose and

method of appraisal, if the failure to disclose such appraisals would

render the proxy statement materially misleading.

The court also held that in an action brought under the proxy

provisions of the Exchange Act proof of an intent to deceive is not required, stating that "[n]egligence alone either in making a misrepresentation or in failing to disclose a material fact in connection with

proxy solicitation is sufficient to warrant recovery." 50 It further held

that in actions under the proxy provisions, the plaintiffs are not

required to establish "causation" by direct proof that with proper

disclosure enough shareholders would have voted against the merger

to defeat it, but that causation would be inferred if the" 'reasonable

man' test" 51 had been satisfied.

In Ohapman v, Dunn,52 an action for rescission by purchasers of

unregistered fractional interests in oil and gas leases, the Commission

'.298 F. Supp. 66 (E.D. N.Y., 1969) .

.. 298 F. Supp. at 98.

, The court defined the test as whether a reasonable man would have relied

upon the misrepresentation or failure to disclose .

.. 414 F. 2d 153 (C.A. 6, 1969).

•
THIRTY-FIFTH ANNUAL REPORT 61

filed a brief, amicus curiae, in which it argued that the intrastate

exemption from the registration provisions of the Securities Act provided by Section 3(a) (11) was not available for the sale of such

interests to residents of the same State of which the individual issuer

was a resident and in which he maintained his office,where the land

covered by the leases was located in another State. The Commission

urged that in such cases Federal regulation is necessary because State

securities commissions cannot investigate the out-of-State activities

in order to determine whether the issuers' public disclosures of their

financial affairs are fair and adequate for the protection of investors,

The court adopted the Commission's reasoning that the issuer was

not "doing business" in his home State, as required by Section

3(a) (11).

E. CRIMINAL PROSECUTIONS INVOLVING DISCLOSURE VIOLATIONS

During the fiscal year a significant appellate decision was handed

down in a case involving noncompliance with the Securities Act

registration provisions, which had been referred by the Commission

to the Department of Justice for criminal prosecution.

In United States v, Wolfson,53 the court of appeals for the second

circuit affirmed the convictions of Louis Wolfson and Elkin Gerbert

for violating Section 5 of the Securities Act in selling unregistered

"control" stock of Continental Enterprises, Inc. The court held among

other things that: (1) neither Section 4 nor Section 5 of the Securities

Act, nor the concept of "control" stock, are unconstitutionally vague

or indefinite; (2) a person need not be an officeror director of an issuer

to be deemed a "control" person for the purposes of Section 5; (3)

the exemption from the registration provisions of Section 5 provided

by Section 4(1) for "transactions by any person other than an issuer,

underwriter or dealer" is not available for the sale of stock of a "control" person since a person taking the stock from a "control" person

becomes a statutory "underwriter"; and (4) a "control" person cannot claim the exemption under Section 4(4) for unsolicited brokers'

transactions, even though a broker selling stock for him may be

entitled to that exemption where the broker is not aware of circumstances indicating that the "control" person is engaged in a

distribution.

Also during the fiscal year, the former treasurer and a director of

General Development Corporation was convicted of wilfully violating

Section 16(a) of the Exchange Act by failing to file with the Commission and the American Stock Exchange a Form 4 Statement re63405 F. 2d 779 (C.A. 2,1968), cert. denied 394 U.S. 946.
62 SECURITIES AND EXCHANGE COMMISSION

fleeting "insider" sales of securities of General Development on his

behalf."

Additional information regarding the Commission's criminal reference activities and summaries of other significant cases, some of which

also involved violations of the registration provisions together with

other violations, may be found in Part IV of this report. 55

F. EXEMPTION FOR SECURITIES OF INTERNATIONAL BANKS

International Bank for Reconstruction and Development

Section 15 of the Bretton Woods Agreements Act, as amended,

exempts from registration under both the Securities Act of 1933 and

the Securities Exchange Act of 1934 securities issued, or guaranteed as

to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such securities as the Commission determines to be appropriate in view of the

special character of the Bank and its operations, and necessary in the

public interest or for the protection of investors. Pursuant to this

authority, the Commission has adopted rules requiring the Bank to file

quarterly reports and also to file copies of each annual report of the

Bank to its board of governors. The Bank is also required to file reports with the Commission in advance of any distribution in the

United States of its primary obligations. The Commission, acting in

consultation with the National Advisory Council on International

Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed by

the Bank during the period of such suspension. The following summary

of the Bank's activities reflects information obtained from the Bank.

Gross income of the Bank for the fiscal year ended June 30, 1969,

was $410million, compared with $356million in 1968.Expenses, which

included $197 million for interest on Bank borrowing, bond issuance

and other financial expenses, totaled $239million, compared with $187

million last year. Net income in 1969 amounted to $171.4 million

compared with net earnings of $169.1million in 1968.

The Executive Directors have recommended to the Board of Governors, for action at its meeting in Washington beginning September 29, that $100 million of the year's net income be transferred as a

grant to the Bank's affiliate, the International Development Association. The remaining portion of the year's earnings, $71.4 million, will

be transferred to the Bank's Supplemental Reserve, increasing this

.. See Litigation Release No. 4148 (October 25,1968) .

.. See Appendix tables 13-15 for statistical da!ta regarding criminal cases

developed by the Commission.
THIRTY-FIFTH ANNUAL REPORT 63

Reserve to $1,034.3 million. Total reserves, including the Special R~-

serve, will amount to $1,326 million.

During the year, the Bank made 84 loans in 44 countries totaling

$1,399 million, compared with a total of $847 million last year. The

loans were made in Argentina (2 loans), Brazil (3), Cameroon (2),

Ceylon, Chile, Republic of China (2), Colombia (6), Cyprus, Ecuador,

EI Salvador, Ethiopia (2), Finland, Gabon, Ghana, Guatemala,

Guinea, Guyana (2), India (2), Iran (2), Ireland, Ivory Coast (3),

Jamaica, Korea (2), Liberia, Malagasy Republic (2), Malaysia (4),

Mexico, Morocco, Nigeria (2), Pakistan (6), Paraguay, Philippines,

Senegal, Sierra Leone, Singapore (2), Sudan, Tanzania, Thailand,

Trinidad and Tobago (2), Tunisia (4), Turkey (4), Venezuela (2),

Yugoslavia (2) and Zambia (4). This brought the total number of

loans to 636 (including $100 million to the International Finance

Corporation) in 86 countries and territories and raised the gross total

of commitments to $12,917 million. By June 30, as a result of cancellations, exchange adjustments, repayments and sales of loans, the portion

of loans signed still retained by the Bank had been reduced to $8,621

million.

Disbursements on loans were $762 million, compared with $772

million in the preceding year. Cumulative disbursements amounted to

$9,583 million on June 30,1969.

During the year the Bank sold or agreed to sell $35 million principal

amounts of loans, compared with sales of $107 million last year.

On June 30, the total of such sales was $2,177 million, of which all

except $69 million had been made without the Bank's guarantee,

Repayments of principal received by the Bank during the year

amounted to $298 million, and repayments to purchasers of parts of

loans amounted to $105 million. Total principal repayments amounted

to $3,321 million on June 30, consisting of $1,798 million repaid to

the Bank and $1,523 million repaid to purchasers of borrowers' obligations sold by the Bank.

On June 30, the outstanding funded debt of the Bank was $4,081

million, reflecting a net increase of $791.6 million in the past year.

During the year the funded debt was increased through the public

sale of $250 million of U.S. dollar bonds of which $70.9 million were

sold under delayed delivery arrangements, SwF80 million (US$18.6

million) of Swiss franc bonds, DM650 million (US$162.5 million)

of Deutsche mark bonds, KD15 million (US$42 million) of Kuwaiti

dinar bonds; the private placement of bonds and notes of $352.2million

of which $15 million was sold under delayed delivery arrangements,

and DM1,594 million (US$398.5 million) ; and the issuance of $179.5

million of bonds under delayed delivery arrangements. The debt was
64 SECURITIES AND EXCHANGE COMMISSION

decreased through the retirement of bonds and notes of $330 million,

DM324 million (US$81 million), BF 500 million (US$10 million),

Can$16.7 million (US$15.4 million) and SwF150.6 million

(US$35.1 million), and by purchase and sinking fund transactions

amounting to $54.3 million.

During the year Botswana, Lesotho and Mauritius became members of the Bank and the following five countries increased their

subscriptions to the Bank's capital: Trinidad and Tobago, Cyprus,

Tunisia, Ghana and Burma. Thus on June 30, 1969, there were 110

member countries and the subscribed capital of the Bank amounted

to $93,036.4million.

Inter-American Development Bank

The Inter-American Development Bank Act, which authorizes the

United States to participate in the Inter-American Development Bank,

provides an exemption for certain securities which may be issued or

guaranteed by the Bank similar to that provided for securities of the

International Bank for Reconstruction and Development. Acting pursuant to this authority, the Commission adopted Regulation lA, which

requires the Bank to file with the Commission substantially the same

information, documents and reports as are required from the International Bank for Reconstruction and Development. The following summary of the Bank's activities reflects information submitted by the

Bank to the Commission.

During the year ended June 30, 1969, the Bank made 16 loans

totaling the equivalent of $178,840,000 from its ordinary capital resources, bringing the net total of loan commitments outstanding, after

cancellations, to 172, aggregating $1,098,575,000.During the year, the

Bank sold or agreed to sell $8,398,078 in participations in the aforesaid loans, all of such participations being without the guarantee of

the Bank. The loans from the Bank's ordinary capital resources were

made in Argentina, Brazil, Colombia, Mexico, Nicaragua, Uruguay

and Venezuela.

During the year the Bank also made 42 loans totaling the equivalent

of $324,850,000 from its Fund for Special Operations, bringing the

gross total of loan commitments outstanding to 219, aggregating

$1,358,513,000. The Bank made no loans during the year from the

Social Progress Trust Fund, which it administers under an Agreement with the United States, leaving the gross total of loan commitments outstanding from that Fund at 116,aggregating $497,457,000.

On June 30, 1969, the outstanding funded debt of the ordinary

capital resources of the Bank was the equivalent of $714,071,000,

reflecting a net increase in the past year of the equivalent of $206,-

642,000. During the year the funded debt was increased through pub-
THIRTY-FIFrH ANNUAL REPORT 65

lie bond issues in Germany, the Netherlands, Switzerland, Austria and

Italy of DMI00,000,000 (US$25million), F 30,000,000 (US$8,287,-

000), SwF60,000,000 (US$13,721,000), As 150,000,000 (US$5,769,-

000) and Lit 15,000,000,000(US$24 million), respectively, as well as

a public offering in the United States of $70 million of bonds, private

placements of bonds and notes of $33,450,000, DM220,000,OOO

(US$55 million) and Swedish kronor 32,000,000 (US$6,186,000) and

drawings under loan agreements with the Export-Import Bank of

Japan of the equivalent of $1,879,000in Japanese yen. The funded debt

was decreased through the retirement of $31,650,000 of short-term

dollar bonds and $5million through sinking fund purchases.

The subscribed ordinary capital of the Bank on June 30, 1969,was

the equivalent of $2,263,735,000of which $1,878,015,000represented

oullable capital.

Asian Development Bank

The Asian Development Bank Act adopted in March 1%6 authorizes

United States participation in the Asian Development Bank and provides an exemption for certain securities which may be issued or

guaranteed by the Bank similar to the exemption accorded the International Bank for Reconstruction and Development and the InterAmerican Development Bank. Acting pursuant to this authority, the

Commission has adopted Regulation AD which requires the Bank

to file with the Commission substantially the same information, documents and reports as are required from those Banks.

During the fiscal year 1969 the Asian Development Bank approved

11 loans amounting to $71.4 million equivalent from its Ordinary

Capital resources. This brought the Bank's loans from Ordinary

Capital resources as of June 30,1969, to a total of 13 amounting to the

equivalent of $76.4million, against which disbursements of $4.37million had been made. In addition, the Bank approved its first loan

from Special Funds resources in June 1969-a loan of $990,000equivalent to Indonesia for an irrigation project in Central Java. As of

June 30, 1969,the Bank had approved 15 technical assistance projects

in eight countries at an estimated cost of $2.1million.

On March 27, 1969, Hong Kong was accepted as a member of the

Bank, subscribing to $8 million of stock. This raised the total subscriptions to $978 million and brought the total membership to 33, of

which 20 are countries of the region and 13 are nonregional developed

countries.

The third of the United States' five $20 million installments on its

paid-in capital subscription was paid during the fiscal year, and consisted of $10 million in cash and $10 million in the form of a noninter373-754-70~
66 SECURITIES AND EXCHANGE COMMISSION

est-bearing letter of credit which may be drawn on in the future when

required by the Bank for disbursement. Of the $489 million subscriptions on paid-in capital, installments totalling $291.5million had

matured as of June 30, 1969.

In September 1968 the Bank's Board of Directors formally established the "Consolidated Special Funds" of the Bank and adopted

the "Special Funds Rules and Regulations" which constitute a framework for the administration of such Special Funds. Japan, Canada,

Denmark and the Netherlands have offered to contribute a total of

$128.1 million to the Bank's Consolidated Special Funds, $33.1 million

of which had been made available to the Bank as of June 30, 1969.

In his Message on Foreign Aid of May 28, 1969, President Nixon

expressed his intention to submit to the Congress a new proposal for

a U.S. contribution to the Bank's Consolidated Special Funds.

At the Bank's Second Annual Meeting, held in Sydney, Australia,

April 10-12, 1969, the Board of Governors set aside for Special Funds

operations 10 percent of the convertible currency portion of the Bank's

paid-in capital which had been paid by the members as of that date

($14,575million).

As of June 30, 1969, Canada, Denmark, Japan and the United

States had agreed to contribute a total of $1.98 million to the Bank

for technical assistance, against which disbursements totalling $382,149

had been made. In addition, Finland, Germany and the U.K. agreed

to contribute unspecified amounts for technical assistance; as of

June 30,1969, the Bank had disbursed $60,264 from these contributions.

G. TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures, notes, and similar debt

securities offered for public sale, except as specifically exempted, be

issued under an indenture which meets the requirements of the Act

and has been duty qualified with the Commission.

The provisions of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities

Act of securities to be issued under a trust indenture subject to the

Trust Indenture Act is not permitted to become effective unless the

indenture conforms to the requirements of the latter Act designed to

safeguard the rights and interests of the purchasers. Moreover, specified information about the trustee and the indenture must be included

in the registration statement.

The Act was passed after studies by the Commission had revealed

the frequency with which trust indentures failed to provide minimum protections for security holders and absolved so-called trustees

from minimum obligations in the discharge of their trusts. It re-
THIRTY-FIFTH ANNUAL REPORT 67

quires that the indenture trustee be free of conflicting interests which

might interfere with the faithful exercise of its duties in behalf

of the purchasers of the securities. It requires also that the trustee

be a corporation with minimum combined capital and surplus; imposes high standards of conduct and responsibility on the trustee;

precludes preferential collection of certain claims owing to the

trustee by the issuer in the event of default; provides for the issuer's

supplying evidence to the trustee of compliance with indenture terms

and conditions such as those relating to the release or substitution

of mortgaged property, issuance of new securities or satisfaction of

the indenture; and provides for reports and notices by the trustee to

security holders. Other provisions of the Act prohibit impairment

of the security holders' right to sue individually for principal and

interest except under certain circumstances, and require the maintenance of a list of security holders which may be used by them to

communicate with each other regarding their rights.

Number of Indentures Filed Under the Trust Indenture Act of 1939

Nwnber Aggregate

filed amount

Indentures pending June 30,1968 __________________________________________ 73 $2, 211, 031, 100 Indentures filed during fiscal year . 535 19,543,864, 153

Total for disposaL _________________________________________ --------- 608 21,754,895,253

DIsposition during fiscal year. Indentures qualIfied _____________________________________________________ 479 18, 044, 135, 006 Indentures deleted by amendment or withdrawn ________________________ 29 1, 978, 392, 362 Indentures pending June 30, 1969________________________________________ 100 1,732,367,885

TotaL _______________________________________________________________ 608 21,754,895,253

___________________________ - - - - - - - - - ~-
PART TIl

REGULATION OF SECURITIES MARKETS

In addition to the disclosure provisions discussed in Part II of

this report, the Securities Exchange Act of 1934 gives the Commission significant responsibilities with respect to the securities markets

and persons engaged in the securities business. Among other things,

it requires securities exchanges to register with the Commission and

provides for Commission supervision of the self-regulatory responsibilities conferred on registered exchanges. The Act also provides for

the registration and regulation of brokers and dealers doing business

in the over-the-counter markets, and grants to registered associations of brokers or dealers self-regulatory functions under Commission supervision. In addition, it contains provisions designed to

prevent fraudulent, deceptive, and manipulative acts and practices

on the exchanges and in the over-the-counter markets.

This and the next part of the report deal with developments and

actions taken in these areas during the 1969 fiscal year. Statistical

information concerning the securities markets is presented in this part.

Certain recent developments of particular significance are discussed

in Part T.

REGULATION OF EXCHANGES

Registration and Exemption of Exchanges

The Securities Exchange Act requires an exchange to be registered

with the Commission as a national securities exchange unless the

Commission exempts it from registration because of the limited volume of transactions effected. As of June 30, 1969, the following 13

stock exchanges were registered:

Amertcan Stock Exchange

Boston Stock Exchange

Chicago Board of Trade

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange

National Stock Exchange

New York Stock Exchange

Pacific Coast Stock Exchange

Philadelphia- Baltimore-Washington

Stock Exchange

Pittsburgh Stock Exchange

Salt Lake Stock Exchange

Spokane Stock Exchange

The Commission's staff has under consideration the details of a

proposed acquisition of the Pittsburgh Stock Exchange by the

Philadelphia-Baltimore-Washington Stock Exchange. Under the Act,

68
THIRTY-FIFTH ANNUAL REPORT 69

the former exchange will be required to withdraw its registration as a

national securities exchange and the latter will have to amend its registration statement to reflect the acquisition. In addition, particular

attention is being given to the numerous rule changes which must necessarily accompany such a reorganization.'

The Philadelphia-Baltimore-Washington Stock Exchange has entered into an associate membership agreement with the Cincinnati

Stock Exchange. This agreement, which became operative on October 15, 1969,enables a member of either exchange to obtain associate

membership on the other exchange and thereupon to have orders

executed at preferred commission rates. The Philadelphia-Baltimore-

'Vashington Stock Exchange has similar trading arrangements with

the Pittsburgh, Boston and Montreal Stock Exchanges.

As of the end of the fiscal year, two exchanges, the Honolulu Stock

Exchange and the Richmond Stock Exchange, were exempted from

registration. InJune 1969,the Commission issued an order withdrawing its exemption from registration of the International Stock Exchange (formerly the Colorado Springs Stock Exchange)." The

exemption order, which had been granted in 1936, provided that after

appropriate notice and opportunity for hearing, the exemption might

be withdrawn if the Commission subsequently found registration to

be necessary or appropriate in the public interest. By 1967 the Exchange had become defunct, and the Commission was thereafter

advised that new management had been appointed and that a reorganization was planned, including marked changes in operations, membership, securities to be listed and location. In the course of discussions

between the Exchange's new management and the Commission's staff

regarding these developments, the Exchange consented to the issuance

of an order vacating the exemption.

Review of Exchange Rules and Procedures

A major aspect of the Commission's supervisory function with respect to national securities exchanges is the continuous review by its

Division of Trading and Markets of the existing rules, regulations,

procedures, forms, and practices of all exchanges. Such review is

necessary in order to: (1) ascertain the effectiveness of the application

and enforcement by the exchanges of their rules; (2) determine the

"On December 24,1969, the Commission issued an order granting the application

of the Pittsburgh Stock Exchange for withdrawal of its registration by reason

of its being merged into the Philadelphia-Baltimore-Washington Stock Exchange,

and declaring the latter's acquisition of the Pittsburgh Exchange effective December 30, 1969. Securities Exchange Act Release No. 8789.

• Securities Exchange Act Release No. 8622 (June 10, 1969).
70 SECURITIES AND EXCHANGE COMMISSION

adequacy of exchange rules and of related statutory provisions and

rules administered by the Commission in light of changing market

conditions; and (3) anticipate and define problem areas so that members of the Commission's staff can meet with exchange representatives

to work out salutary procedures within the framework of cooperative

regulation. In addition, Rule 17a-8 under the Exchange Act provides

that each national securities exchange must file with the Commission

a report of any proposed amendment or repeal of, or addition to, its

rules and practices not less than 3 weeks (or such shorter period as

the Commission may authorize) before taking any action to effectuate

the change. These proposals are submitted for review and comment to

the Branch of Regulation and Inspections of the Division of Trading

and Markets.

During the 1969 fiscal year, 96 changes in exchange rules and practices were submitted to the Commission pursuant to Rule 178.-8.3

Among the more significant were:

1. Amendments of the New York Stock Exchange Constitution and

Rules providing for greater disciplinary jurisdiction and increasing

the maximum fine which can be imposed by the Exchange against a

member, allied member, member firm, or member corporation.

2. Revisions in the New York Stock Exchange's delisting criteria

under which the common stock of a company may be delisted when that

company or a parent or subsidiary thereof issues a debt security without sufficient earnings to cover the interest charges on all outstanding

debt and when, on a pTO forma basis, common stock equity is less than

25 percent of the capitalization. The criteria with regard to preferred

stock and guaranteed railroad stock or similar issues were also revised.

3. Amendments to the American Stock Exchange Constitution establishing a special trust fund to provide assistance to customers

threatened with loss of money or securities due to the insolvency of

a member, member firm, or member corporation.

4. Changes in the policies of the Midwest Stock Exchange to require

greater disclosure of certain information to the public where a stock is

to be listed, and to require delisting when the volume of trading in a

particular stock declines to a specified level.

5. A new rule of the Boston Stock Exchange requiring each member,

member firm, and member corporation doing business with the public

to carry fidelity bonds.

I Proposed amendments to the Constitution of the New York Stock Exchange

to permit member firms to issue securities to the public, which were submitted

to the Commission after the end of the fiscal year, are discussed at pp. 8-9.
THIRTY-FIFTH ANNUAL REPORT 71

Delisting of Securities From Exchanges

Under Section 12(d) of the Securities Exchange Act and the Commission's Rule 12<12-2thereunder, securities may be stricken from

listing and registration upon application by an exchange, or withdrawn

:from listing and registration upon applicaton by an issuer, in accordance with the rules of the exchange and upon such terms as the Commission may impose for the protection of investors. During the fiscal

year ended June 30, 1969, the Commission granted applications for

the removal of 109 stock issues, representing 95 issuers, and 5 bond

issues from listing and registration. Since 6 stocks were each delisted

by two exchanges and 1 stock by three exchanges, the total of stock

removals was 117.The distribution of these removals among exchanges

was as follows:

Application filed by :

Stocks Bonds

American Stock Exchange______________________________ 1(; 1

Cincinnati Stock Exchange_____________________________ 1

Detroit Stock Exchange_________________________________ 1

Honolulu Stock Exchange_______________________________ 1

Midwest Stock Exchange________________________________ 9

National Stock Exchange_______________________________ 2

New York Stock Exchange______________________________ 77 3

Pacific Coast Stock Exchange___________________________ 3

Philadelphia-Baltimore-Washington Stock Exchange______ 2 1

Salt Lake Stock Exchange______________________________ 3

Issuer 3

Total 117 5

Delisting applications by exchanges are generally based on the

ground that continued listing is no longer appropriate because of a reduced number of shares of the issue in public hands or an insufficient

number of shareholders; the low market value of outstanding shares;

insufficient trading volume on the exchange; failure to meet the exchange's requirements as to earnings or financial condition; failure to

file required reports with the exchange; cessation of operations by the

issuer; or a combination of these factors.

The great increase in the number of delistings by the New York

Stock Exchange over the previous year, when it delisted 22 stock

issues, is largely attributable to the revision in the Exchange's criteria

under which preferred stock may now be delisted when there are less

than 50,000 publicly held shares, or when the aggregate market value

of publicly held preferred shares is less than $1 million.

The three applications by issuers which were granted during the

year resulted in the removal of one security from the American Stock

Exchange and two securities from the Richmond Stock Exchange.
72 SECURITIES AND EXCHANGE COMMISSION

Inspections of Exchanges

Pursuant to the regulatory scheme of the Exchange Act, the Commission actively oversees the discharge by the national securities

exchanges of their self-regulatory responsibilities. As part of the

program, the Branch of Regulation and Inspections in the Division

of Trading and Markets conducts regular inspections of various

phases of exchange activity. This inspection program provides a

means of ensuring exchange compliance with regulatory responsibilities and enables the Commission to recommend, where appropriate,

improvements and refinements designed to increase the effectiveness

of self-regulation.

In cases where it appears that revisions in internal policies are

desirable in order to improve an exchange's performance, the Commission's staff communicates its views to the particular exchange

and discusses the matters with exchange personnel to arrive at appropriate solutions.

STATISTICS RELATING TO SECURITIES TRADED ON EXCHANGES

Number of Issuers and Securities

As of June 30, 1969, 5,047 stock and bond issues, representing

2,880 issuers, were admitted to trading on securities exchanges in the

United States. Of these, 4,880 securities issues (3,238 stock issues and

1,642 bond issues), representing 2,764 issuers, were listed and registered on national securities exchanges, the balance consisting primarily of securities admitted to unlisted trading privileges and

securities listed on exempted exchanges. The listed and registered

issues included 1,773 stock issues and 1,450 bond issues, representing

1,528 issuers, listed and registered on the New York Stock Exchange.

Thus, with reference to listed and registered securities, 53.1 percent

of the issuers, 54.8 percent of the stock issues and 88.3 percent of

the bond issues were on the New York Stock Exchange. Table 4 in

the appendix to this report contains comprehensive statistics as to

the number of securities issues admitted to exchange trading and the

number of issuers involved.

During the 1969 fiscal year, 337 issuers listed and registered securities on a national securities exchange for the first time, while the

registration of all securities of 207 issuers was terminated. A total

of 765 applications for registration of securities on exchanges was

filed.

Market Value of Securities Available for Trading

As of December 31, 1968, the market value of stocks and bonds

admitted to trading on U.S. stock exchanges was approximately $883

billion. The tables below show various components of this figure.

1V"ithreference to the tables, it should be noted that issues traded
THIRTY-FIFTH ANNUAL REPORT 73

on either the New York or American Stock Exchange are not traded

on the other of those exchanges. Many of these issues are also traded on

the so-called regional exchanges. The figures below for "other exchanges," however, show only the number of issues traded solely on

the regional exchanges. The figures in the table exclude issues suspended from trading and a few inactively traded issues for which

quotations were not available.

Number Market value

of ISSUes Dec 31, lUllS

(nllI11011")

Stocks: New York Stock E~chall~e--.------------ _.- -------------------------- 1,767 hl

ll,3Ji American Stock Exchange ______________________________________________ l,lIS4 01,214 Exclusively 011other exchanges __________________________________________ 37n 5,954

Total stocks, .. __.... _.... ________. ________________ ----------------- 3, ~30 75q, 505

BondsNew York Stock Exchange _________________________. ____________________ 1,455 IW,4117 American Stock Exchange, _______. ____________. ____ ----------------.--- 167 :!,7:"><)

Exclusrvely on other exchanges _____________________ ----- -------------- 21 Ii

Total bonds_. _________________________________________________________ 1,643 1~,I53

Total stocks and bonds ________________________________________________ 4,873 88~, 658

The number and market value as of December 31, 1968,of preferred

and common stocks separately were as follows:

Prererr ed stocks I Common stocks

Market IMarket

value I value

Numbet (rmllrons) Number (rmllions)

New York Stock Exchange ____________________________ 514 ~4, 531 I, ~53 667,80h AmeIiean Stock Exchange _____________________________ 90 2,001 994 59,~I:l Exclusively on other exchanges ________________________ 105 223 274 5,731

Total. ___________________________________________ 709 26,755 I 2,521 732, 7~O

I

The 3,230 common and preferred stock issues represented over 15.4

billion shares.

The New York Stock Exchange has reported aggregate market

value of all stocks listed thereon monthly since December 31, 1024,

when the figure was $27.1 billion. The American Stock Exchange has

reported totals as of December 31, annually since 1936.Aggregates for

stocks exclusively on the remaining exchanges have been compiled as

of Decem:ber 31, annually since 1948. The available data since 1936

appear in Table 5 in the appendix of this report. Itshould be noted

that changes in aggregate market value over the years reflect not only

changes in prices of stocks but also such factors as new listings, mergers

into listed companies, removals from listing and issuance of additional

shares of a listed security.
74 SP>CURITIES AND EXCHANGE COMMISSION 

Volume of Securities Traded 

The total volume of securities traded on all excha~~ges in calendar 

year 1068 was 5.4 billion shares, including stocks, rights and warrants, 

and $5.5 billion princi~al amount of bonds. The 1968 total dollar 

volume of all issues trn.ded vas $203 billion. Tmding in stocks increased 18 percent in share volume and 2S percent in dollar volume 

over 1067. During the first 6 months of 1069, l~owever, volume declined to some extent from the 1968 pm. 

The figures beloxv show the volume and value of securities traded 

on all stock exchanges (registered and exempted) during the calendar 

year 1968, and the first (i montlis of 1969. Tables 6 and 7 in the 

appendix of tl~is rcport contain moro comprollensive statistics on 

rolame, by exchanges. 

Volume and Value of Trading on All Ezchenges 

(Amounts in thousand?) 

volume: 

5,312,676 2,688,751 

Bonds (prinu~siacooont 06,061 

6.458,545 93,868 2. 647.251 

196,373,541 744 416 $669,521 S,FS,am 

,31.460 

2,485,733 

-1 787, 410 98. 6E3, W 

Does not inelude U.S.ao~smn~ont Donds. 

Foreign Stodts on Exchanges 

The estimated market value on December 31, 1968, of all shares and 

certificates representing foreign stocks on U.S. stock exchanges was 

$24.7 billion, of which $19.8 billion represented Canadian and $4.9 

billion represented other foreign stocks. 

Foreign Stocks on Ezchanges 

total.^^..^^^..^ ... 72 19,8", 172,863 

Tho num'br of foreign stocl<s on tl 

endar gear 1968 from 128 to 115, con 

began in 1960 when there were 17 
TmRTY-FIFTH ANNUAL REPORT 75

year-end. Trading in foreign stocks on the American Stock Exchange

fell from 11.59percent of aggregate share volume on that exchange in

1967 to 10.02 percent in 1968. Similarly, on the New York Stock Exchange, trading in foreign stocks declined from 2.6 percent of share

volume in 1967 to 2.4 percent in 1968. The New York Stock Exchange

has indicated that this continuing drop is due in part to the Interest

Equalization Tax.

Comparative Exchange Statistics

During fiscal year 1969, there was a moderate increase in the total

number of stocks listed on exchanges. Although the increase in listings

on the New York and American Stock Exchanges was consistent with

the trend of recent years, the increase in stocks listed exclusively on

other exchanges was a reversal of the downward trend that had prevailed for many years.

Net Number of Stocks on Exchanges

I

New York

I

Amencan I Exclusively Total stocks June 30 Stock Stock

I on other on exchanges

Exchange Exchange exchanges

1940____________________________________________1 1,242 1,079 1,289 3,610 !m~~~~~~~~~~~~~~ ~~~~ ~~~~~~~~~~~~ ~~~~~~~ I

1,293 895 951 3,139

1,484 779 775 3,038

1,543 815 686 3,044

1,532 931 555 3,018 196L 1,546 977 519 3,042

ti~~~~~ .~~~ ~~~~~~~~~ ~:~~~ ~~~~~~ ~~~~~~~ ~:~I

1,565 1,033 493 3,091

1,579 1,025 476 3,080

1,613 1,023 463 3,099

1,6n 1,044 440 3,111 1966____________________________________________ 1,656 1,054 429 3,139 1967____________________________________________ 1,693 1,072 415 3,180 1968____________________________________________ 1,764 1,097 405 3,266 1969____________________________________________ 1,781 1,168 435 3,384

The aggregate value of shares listed on the New York Stock Exchange relative to the total share value on all exchanges declined for the

second consecutive year in 1968.The percentage of the total share value

accounted for by American Stock Exchange stocks rose for the second

consecutive year, while the percentage for stocks traded exclusively

on other exchanges increased for the first time since 1961.

Value of Shares Listed on Exchanges, in Percentages

New York Amencan Exclusively

December 31 Stock Stock on other

Exchange Exchange exchanges

1950. -.-. -._.-. ---.- 84- 50 12. 52 2. 98

1955. 86.98 11 35 1.67

1960_:: ::::::::::: ::::: :::::::::::::::::: ::::::::::::::::::::: 91. 56 7.22 1. 22

196L --.-----.------------------- ----------------------------- 91 02 7.74 1.24 1962_ ------------------------------------.-.------- ---- --- -- 92.41 6. 62 !.lY7 1963_ . . _. 93 12 5.91 0.97

1964. -. 93. 59 5. 56 0 86 1965_ --------------------------------------------------------- 93.77 5.41 0.82 1966_ --------------------------------------------------------- 93.81 5.41 0.77

1967 92.82 6. 58 0.67

1968. .:': .:': .:':': .: .: ~:::::::::::::: .: 91. 15 I 8.06 0.90

___________________________________________'

--~------- - - -- -- -- ---- -- -------- - -- - - --- --

-- --- - - - -- - - - - - - - -- - - ---------- - ----- - - --- - -~-~- -- - -- ~- -- -- --~---- -- - - -- - - -- -- ---------~---~-- -- - ----- - --- --

•

~~~~~ ~~~~~~~~~~
76 SECURITIES AND EXCHANGE COMMISSION

The figures below show the annual volume of shares traded, including rights and warrants, on all exchanges during selected :rears since

1940. In 1968, both share and dollar volume continued their steady

climb of the preceding 5 years and reached new peaks. Trading was

particularly active on the American Stock Exchange with share and

dollar volume on that Exchange increasing 22 and 51 percent, respectively, over the previous year. "Whilevolume on both the New York and

American Stock Exchanges receded to some extent from the record

1968 rate during the first 6 months of 1969, volume on the regional

exchanges was moderately larger.

Share and Dollar Volume on Exchanges

New York

I

American

I I Stock Stock All Other Total

Calendar year Exchange Exchange exchanges

Share volume (thou8and8)

1940____________________________________________ 285,059 49,882 42,957 377,898 1945____________________________________________ 506,564 163,860 98,595 769,019 1950____________________________________________ 681,806 120,908 90,606 893,320 1955_______________________________ ------------ 909,785 253,531 158,084 1,321,401 1960____________________________________________ 986,878 320,906 133,263 1,441,048 196L ___________________________________________ 1,392,573 548,161 201,790 2,142,523 1'162____________________________________________ 1,220,854 344,347 146,744 1,711,945 1963____________________________________________ 1,371,808 354,305 154,686 1,880,798 1964____________________________________________ 1,542,373 411,450 172,551 2,126,374 1965____________________________________________ 1,867,223 601,844 201,944 2,671,012 1966_______________________ --._---------------- 2,297,884 756,942 257,558 3,312,383 1967____________________________________________ 2,992,805 1,320,462 333,258 4,646,525 1968____________________________________________ 3,352,169 1,608,325 448,244 5,408,737 1969 (Fubt r, Months) __________________________ 1,636,948 802,584 243,089 2,682,621

Dollar volume (thou8ands)

1!l40____________________________________________ 7,170,572 646,146 603,065 8,419,783 1945____________________________________________ 13,474,271 1,759,899 1,020,382 16,254,552 1'150 18,734,723 1,493,706 1,579,855 21,808,284 1955____________________________________________ 32,830,838 2,657,016 2,551,253 38,039,107 1960____________________________________________ 37,972,433 4,235,686 3,098,484 45,306,603 1'16L ___________________________________________ 52,820,306 6,863,110 4,388,207 64,071,623 1962____________________________________________ 47,353,334 3,736,619 3,765,941 54,855,894 1'163____________________________________ 54,897,096 4,844,912 4,696,065 64,438,073 1964_____________________________________::::::: 60,501,229 6,127,236 5,833,285 72,461,750 1965____________________________________________ 73,234,393 8,874,875 7,439,825 89,549,093 1'166____________________________________________ 98,653,005 14,647,166 10,366,272 123, 666, 443 1967____________________________________________ 125,362,700 23,491,312 13,335,199 162, 189,211 1966____________________________________________ 144, 992, 721 35,479,186 16,646,050 197,117,957 1'169 (First G Months) __________________________ 67,853,091 17,841,168 8,383,094 94,077,352

The ratio of share volume on the New York Stock Exchange to the

total on all exchanges again declined in 1968, but its dollar volume

ratio experienced an even steeper decline. The share volume ratio of

the American Stock Exchange increased moderately last year, while its

dollar volume ratio rose markedly. The American Stock Exchange

percentage of share and dollar volume has risen steadily since 1963,

while the percentage of the New York Stock Exchange has decreased.

The regional exchange percentage of both share and dollar volume

increased moderately in 1968.In the first 6 months of 1969, both the

share volume and dollar volume ratios for the New York Stock Exchange declined slightly further, while these ratios for the American

___________________________ - -- -- -- -~- - - - ---
THIRTY-FIFTH ANNUAL REPORT 77

and regional stock exchanges rose. Stocks, rights and warrants are

included in the following presentation. Annual data in more detail are

shown in Appendix Table 7 in this report.

Annual Sales of Stock on Exchanges, in Percentages

Percent of share volume Percent of dollar volume

All other I New York American All other

11.36 85.17 7.68 7.15

1282 82.75 10.81 6.44 10.14 8591 6.85 7.24 n.se 86.31 698 6.71 9.25 R3 81 9.35 6. 84 9.43 82. 44 1071 6.85 856 8632 6.81 687 8.22 85.19 7 52 7.29 8ll 83.49 8. 46 8.05 7.56 81.78 9.91 8.31 7.78 79.78 ll.84 8.38 7.17 77.30 14.48 8.22

8.28 73.56 18.00 8 44

9. 06 72 13 18.96 891

13 20

21 31

13 54 19 19

22 27

2558

20 12

18.84

19.35

22.53

22.85

28.42

29.74

29.92

Amencan

7544

65.87

7632

68.85

ss 48

64 99

71 32

72.94

72 54

6991

m 37

64 41

6198

61.02

I

I

I New York

Calendar year

1940 J 1945 :

~~~= ======:===:==:::::::=::=:! 1960

196L

1962

~~~::::::::::::::::::::::::::/! 1965

~~~=: ==:===:=:=:=:=:::===:===

-(iiimt -6mont-hs)- ===:=:=: I

Block Distributions Reported by Exchanges

The usual method of distributing blocks of listed securities considered too large for the auction market on the floor of an exchange is to

resort to "secondary distributions" over the counter after the close of

exchange trading. There were 174 secondary distributions in 1968

compared to 143 in the preceding year. The dollar value of the shares

sold in this manner increased 36 percent to $1,571.6million. During

the first 6 months of 1969, there were 88 secondary distributions with

a total value of $718.7million.

Special Offering Plans were adopted by many of the exchanges in

1942, and Exchange Distribution Plans in 1953,in an effort to keep as

much trading as possible on their floors. There was one special offering

in 1968, the first one since 1962. Exchange distributions continued to

decline from the record of 72 in 1963 to 35 in 1968. The value of the

1968 exchange distributions fell one-fourth to $93.5 million.

Block Distributions of Stocks Reported by Exchanges

Number I Shares III I Shares sold offer

Value

(dollars)

Special offermgs

Exchange distnbutrons

Secondary distnbutions

1e m0nth8 ended December 81, 1968'

1 I 3, 352/ 3, 3521 62, 867 35 2,959,981 2,669,938 93,527, 888

174 34,550,374 36,110,489 1,571,599,598

6 months ended June 80, 1969

Speeral olIermgs ,

Exchange drstrrbutrons 1

Secondary dlstnbutions i

oJ 0\ 0) 15 976,9871 927,233 88 2"2,829,636 23,508,304

o 31,989,921

718,680, 835

Details of these distrrbutrons appear in the Oommrssion's monthly StatIstical Bulletin. Data for prior

years are shown In Appendix Table 8 in this report.

_

_

_

_

~~~ =

_

_

_

•
78 SECURITIES AND EXCHANGE COMMISSION

Unlisted Trading Privileges on Exchanges

The number of stocks with unlisted trading privileges which are not

listed and registered on other exchanges further declined during the

fiscal year, from 97 to 89. The decline was accounted for by five American Stock Exchange stocks, two stocks traded on the Honolulu Stock

Exchange and one on the Salt Lake Stock Exchange. During the

calendar year 1968, the reported volume of trading on the exchanges

in stocks with only unlisted trading privileges increased to about

52,321,064shares, or about 0.98 percent of the total share volume on all

exchanges, from about 38,065,577shares, or about 0.85 percent of share

volume during calendar year 1967.About 96percent of the 1968 volume

was on the American Stock Exchange, while three other exchanges

contributed the remaining 4 percent. The share volume in these stocks

on the American Stock Exchange represented 3.2 percent of the total

share volume on that exchange.

Dnlisted trading privileges on exchanges in stocks listed and registered on other exchanges numbered 2,018 as of June 30, 1969. The

volume of trading in these stocks for the calendar year 1968 was reported at about 178,172,008shares. About 78.6 percent of this volume

was on regional exchanges in stocks listed on the New York or American Stock Exchanges. The remaining 21.4 percent represented unlisted

trading on the American Stock Exchange in issues which were listed

on regional exchanges but as to which the primary market was the

American Stock Exchange. While the 178,172,008shares amounted to

only 3.4 percent of the total share volume on all exchanges, they constituted major portions of the share volume of most regional exchanges, as reflected in the following approximate percentages:

Cincinnati 61.4 percent; Boston 82.8 percent; Detroit 65.6 percent;

Philadelphia- Baltimore-Washington 79.4 percent; Pittsburgh 55.4

percent; Midwest 29.3 percent; and Pacific Coast 29.9 percent!

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, filed pursuant to Rule 12f-1 under Section

12(f) (1) (B) of the Securities Exchange Act, were granted by the

Commission during the fiscal year ended June 30, 1969,as follows:

Stock exchanges: Number o! Stocks

Boston ---------------------------------------------------------- 58

Cincinnati --------------------------------------------------____ 2

J)etroit ------------------------------------------------------___ 7 ~idvvest -_ 29

Pacific Coast -------------------------------------------------___ 8

Philadelphia -Baltimore-Washington --- ---- ----------- -------______ 91

Pittsburgh - --- -- --- --- ----- --------------- --- --------- --- ---____ 14 Spokane -_ 1

Total 210

The distribution of unlisted stocks among the exchanges and share volume

therein are shown in Appendix Table 9.

•
THIRTY-FIFTH ANNUAL REPORT 79 

0vER.THE-COUNTElI TRADING IN COMRlON STOCKS TRADED ON 

NATIONAL SECUlllTIES EXCHANGES 

accordance with Rule l7a-9, since January 1065 brokers and 

dealers who niako markets in corninoil stocks traded on national securities exchanges (sometimes referred to as the "third market") have 

been reporting their trading over the counter and on exchanges in the 

mmmon stocks in which they make markets. They also report certain 

oif-board trading in other coinnloil stocks .tri~ded on excl~anges. 

~roker-dealers who are not market makers report their large third 

market transactions. Tlre reporting system is designed to reflect all sales 

to persons other than hroker-dealers, i.e., to individuals and institutions. Since the beginning of 1967, reports have been required only for 

common stocks listed on the Kew York Stock Exchange. About 98 percent of over-the-counter volume in listed common stocks is in New York 

Stock Exchange issues. 

During the calendar year 1068, total over-the-counter sales of common stocks listed on tho New York Stock Exchaiigc rose to 119.7 

million shares valued at $5,983 million. This dollar volume amounted 

to 1.2 percent of the dollar volume in common and preferred issues on 

the Excl~ange, the highest ratio since figures first became available. . In the first ltalf of 1969, third market volamc continued to increase 

st a greater rate than Exchange r~olume. Consequently, the over-thecounter dollar volume in Ken7 York Stack Exchange common stocks 

rose to a record high of 4.9 percent of the dollar volume on the 

Exchange. 

Ouer-the-CounlerVolume in Common Stocks Listed on the New York Stock Ezehange 

Hatlo 01 over^ 

Stock Erc11mgc 

7alme (pcrcentl 

19 45,361 ( 1,6M,351 1 2. 7 19 58,188 2,204,761 2. 0 lY €5,Odl 2, 685,748 2 0 l!i 119 730 3. ZO8,065 19 67: 826 I 1,587,018 4. 3 26 

STATISTICAL STUDIES 

The regular statistical activities of the Commission and its particil~ation in tlre ovcrall Government stat,istical program under the direction oE tl~cOfice of St,atistical Stand:~rds, n11rc:111of the Budget, were 
80 SECURITIES AND EXCHANGE COMMISSION

continued during fiscal year 1969 in the Commission's Officeof Policy

Research. The statistical series described below are published in the

Commission's monthly Statistical Bulletin. In addition, current figures

and analyses of the data are published quarterly on new securities

offerings, individuals' saving, stock transactions of financial institutions, financial position of corporations, and plant and equipment

expenditures.

Issues Registered Under the Securities Act of 1933

Monthly statistics are compiled on the number and volume of registered securities. Summary statistics for the years 1935-69 are given in

Appendix Table 1 and detailed statistics for the fiscal year 1969appear

in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate

and noncorporate issues offered for cash sale in the United States. The

series includes not only issues publicly offered but 'also issues privately

placed, as well as other issues exempt from registration under the

Securities Act, such as intrastate offerings and offerings of railroad

securities. The offerings series includes only securities actually offered

for cash sale, and only issues offered for the account of issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting, from the amount of

estimated gross proceeds received by corporations through the sale of

securities, the amount of estimated gross payments by corporations to

investors for securities retired. Data on gross issues, retirements and

net change in securities outstanding are presented for all corporations

and for the principal industry groups.

Individuals' Saving

The Commission compiles quarterly estimates of the volume and

composition of individuals' saving in the United States. The series

represents net increases in individuals' financial assets and net investment in tangible assets less net increases in debt. The study shows the

aggregate amount of savings and the form in which they occurred,

such as investment in securities, expansion of bank deposits, increases

in insurance and pension reserves, etc. A reconciliation of the Commission's estimates with the personal saving estimates of the Department of Commerce, derived in connection with its national income

series, is published annually by the Department of Commerce as well

as in the Securities and Exchange Commission Statistical Bulletin.

Private Noninsured Pension Funds

An annual survey is published of private pension funds other than

those administered by insurance companies, showing the flowof money
TIllRTY-FIFl'H ANNUAL REPORT 81

into these funds, the types of assets in which the funds are invested

and the principal items of income and expenditures, Quarterly data

on assets of these funds are published in the Statistical Bulletin.

Stock Transactions of Financial Institutions

A statistical series containing data on stock trading of four principal

types of financial institutions is published quarterly. Information on

purchases and sales of common stock by private non insured pension

funds and nonlife insurance companies has been collected on a quarterly basis by the Commission since 1964; these data are combined

with similar statistics prepared for mutual funds by the Investment

Company Institute and for life insurance companies by the Institute

of Life Insurance.

Financial Position of Corporations

The series on the working capital position of all U.S. corporations,

excluding banks, insurance companies, investment companies and

savings and loan associations, shows the principal components of current assets and liabilities, and also contains an abbreviated analysis

of the sources and uses of corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all U.S. manufacturing concerns.

This report gives complete balance sheet data and an abbreviated income account, data being classified by industry and size of company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant and

equipment expenditures of all U.S. business, exclusive of agriculture.

After the close of each quarter, data are released on actual capital expenditures of that quarter and anticipated expenditures for the next

two quarters. In addition, a survey is made at the beginning of each

year of the plans for business expansion during that year.

Directory of Registered Companies

The Commission annually publishes a list of companies required to

file annual reports under the Securities Exchange Act of 1934.In addition to an alphabetical listing, there is a listing of companies by

industry group classified according to The Standard Industrial

Classification Manual.

Stock Market Data

The Commission regularly compiles statistics on the market value

and volume of sales on registered and exempted securities exchanges,

round-lot stock transactions on the New York and American Stock

373-754-70-7
82 SECURITIES AND EXCHANGE COMMISSION

Exchanges for account of members and nonmembers, odd-lot stock

transactions on the New York and American Stock Exchanges, oddlot transactions in 100 selected stocks on the New York Stock Exchange

and block distributions of exchange stocks. Since January 1965, the

Commission has been compiling statistics on volume of over-the-counter trading in common stocks listed on national securities exchanges

(the so-called "third market"), based on reports.filed under Rule 17a-9

of the Securities Exchange Act.

Data on round-lot and odd-lot trading on the New York and American Stock Exchanges are released weekly. The other stock market data

mentioned above, as well as these weekly series, are published regularly

in the Commission's Statistical Bulletin.

Cost of Flotation of Security Issues

The Commission has completed a study of the cost of flotation of

registered equity issues offered by issuing corporations as well as selling shareholders for the years 1963-65.

Costs of flotation measure the initial costs of marketing securities,

i.e., the costs entailed in transmitting funds from the investor to the

issuing corporation. These costs are measured as the difference between

the price paid by the investor (gross proceeds) and the net amount

available to the issuer. They include compensation paid to underwriters, securities dealers, finders or agents, fees for lawyers and accountants, printing and engraving costs, Federal and State fees and

other expenses connected with the issuance of securities. The current

study covers initial costs of flotation only and does not attempt to

measure or compare the net cost of raising capital. Consequently, insofar as possible, costs not pertinent to the initial flotation, such as

advertising charges for redemption notices or trustees' charges for

continuing services, are excluded from the study. Moreover, this study

only attempts to cover cash compensation; noncash compensation such

as options-an important cost in the distribution of some smaller, more

speculative securities--is omitted because of problems of valuation.

Costs of flotation studies have been prepared by the Commission at

various ,times with the last previous study covering the years 1951,

1953 and 1955. The current study, however, is broader in coverage and

more comprehensive in its analysis. For example, the study covers all

types of securities which represent ownership interests in a business

or which are convertible into or represent a call on such securities.

Costs were analyzed for each type of equity securities to show differences or similarities between limited partnership interests and common

stock as well as for preferred stocks and convertible bonds. Moreover,
TEURTY-F~ ~AL REPORT 83

the study covers issues offered through securities dealers-either as

an offering to the general public or to stockholders-as well as those

sold directly by the issuer. Also, the current study incorporates into

the analyses factors influencing costs not covered in past studies.

Among these factors are the market place for outstanding securities of

the issuer and the offering price of the issues in the case of common

stocks.
PART IV

CONTROL OF IMPROPER PRACTICES IN

SECURITIES MARKETS

REGULATION OF BROKER.DEALERS AND INVESTMENT ADVISERS

Registration, Financial Responsibility and Financial Reporting Requirements

Registration.-Subject to limited exemptions, the Securities Exchange Act of 1934 requires all brokers and dealers who use the mails

or the means of interstate commerce in the conduct of an over-thecounter securities business to register with the Commission. Similarly,

investment advisers (with certain exceptions) must register under the

Investment Advisers Act of Hl40, which establishes a pattern of regulation comparable to that established by the Exchange Act with respect

to brokers and dealers.

As of June 30, 1969, 4,793 broker-dealers and 2,476 investment

advisers were registered, reflecting substantial increases in both categories during the year.

The following tabulation reflects various data with respect to

registrations of brokers and dealers and investment advisers during the

1969fiscal year:

Broker-Dealere

Effective registrations at close of preceding year 4,397

Applications pending at close of preceding year___________________ 42

Applications filed during year_____________________________________ 830

Total 5,269

Applica tions denied________ 0

Applications wi'thdra wn__ _ _ __ 3

Registra tions withdra wn;., 348

Registrations cancelled__________ 29

Registrations revoked__________________ 12

Registrations suspended__________________________________________ 2

Registrations effective at end of year______________________________ 4,793

Applications pending at end of year________________________________ 82

Total 5.269

84

_
THIRTY-FIFTH ANNUAL REPORT

Invcstmcnt Adl,iscrs

85

Effective reglstrut.lons at close of preceding ~'('ar :!,007

Applications pending at close of preceding )car____________________ 37

Applications filed during year___________________________________ 767

~'otal 2,811

Registrations cancelled or withdrawn____________________________ 256

Registrations denied or revoked__________________________________ 4

Applications wi thdra wn__________________________________________ 8

Registrations effective at end of year 2,476

Applications pending at end of year_______________________________ 67

Total 2,811

During the fiscal year, the Commission amended Forms BD and

ADV, the forms of application for registration as a broker-dealer and

investment adviser, respectively, or for amending such application.'

These forms required, among other things, that corporate applicants

and registrants submit certain descriptive data about their officers,

directors, and any other person who owned shares of any class of

equity security of the applicant or registrant, no matter how small

his holding. The Commission was advised of the difficulty being encountered by publicly held broker-dealers and investment advisers in

attempting to comply with this requirement. Accordingly, the Commission amended the forms so as to require the listing only of those

persons who own at least 1 percent of the authorized shares of any

class of equity security of the applicant or registrant, and the furnishing of information as to business, background, education, and

other pertinent facts only as to those stockholders who own at least

10percent of any class of equity security.

Capital Requirements with Respect to Broker-Dealers.-Rule

15c3-1 under the Exchange Act, commonly known as the net capital

rule, imposes minimum net capital requirements on brokers and dealers. It also limits the amount of indebtedness which may be incurred

by a broker-dealer in relation to its capital, by providing that the

"aggregate indebtedness" of a broker-dealer may not exceed 20 times

the amount of its "net capital" as computed under the rule.

During the fiscal year, the Commission, as a consequence of the

acute delivery backlogs confronting the securities industry and the

attendant strain on the financial condition of many broker-dealers,

amended the net capital rule to require, in the computation of net

1Securities Exchange Act Release No. 852.3, Investment Advisers Act Releasc

No. 244 (February 12, 19(9).
86 SECURITIES AND EXCHANGE COMMISSION

capital, certain deductions for "failed to deliver" securities," The Commission noted that delays in deliveries of securities to customers by

selling broker-dealers were in large part a reflection of the failure of

other brokers and dealers to deliver those securities to the selling

broker-dealers. Itfurther noted that the great length of time in which

amounts due are carried in the "failed to deliver" accounts of brokerdealers exposes them to undue risk of market fluctuations in the securities as well as to the possibility of financial difficulties of the broker on

the other side of the transaction. Under the amendment a broker or

dealer, in computing his net capital, must deduct amounts equal to

specified percentages of the contract prices of securities in the "failed

to deliver" account, in accordance with a formula based on the age

of the items in the account.

Financial Reports of Broker-Dealers.-Rule 17a-5 under the Exchange Act requires registered broker-dealers to file annual reports of

financial condition with the Commission. These reports must be certified by a certified public accountant or public accountant who is in

fact independent, with certain limited exemptions applicable to situations where certification does not appear necessary for customer protection. During the fiscal year 4,369 reports were filed with the

Commission.

These reports enable the Commission and the public to determine the

financial position of broker-dealers. They provide one means by which

the staff of the Commission can determine whether a broker-dealer is

in compliance with the net capital rule. Failure to file required reports

may result in the institution of administrative proceedings to determine whether the public interest requires remedial action against the

registrant.

Regulation of Broker-Dealers Who Are Not Members of Registered Securities

Association

Under the Exchange Act, as amended in 1964, the Commission has

the responsibility of establishing and administering rules relating to

qualification standards and business conduct of broker-dealers who are

not members of the National Association of Securities Dealers, Inc.

(NASD) 3 and persons associated with them, so as to provide regulation for these "nonmember" broker-dealers (sometimes also referred

to as SECO broker-dealers) comparable to that provided by the

NASD for its members,' Prior annual reports have described the

Securities Exchange Act Release No. 8508 (January 80, 1969).

3 The Act does not specifically refer to the NASD, but to broker-dealers who

are not members of a registered "securities association." However, the NASD is

the only such association.

See pp. 104-108for the discussion of NASD regulation.

•

•
THIRTY-FIFTH ANNUAL REPORT 87

various rules adopted by the Commission since 1964in the development

of its regulatory program for nonmember broker-dealers,"

During the fiscal year, the number of nonmember broker-dealers

decreased from 495 to 455, and the number of associated persons

(which includes principally partners, officers,directors, and employees

not engaged in merely clerical or ministerial functions) decreased

from about 20,000 to about 19,750.6

The following table categorizes nonmember broker-dealers by type

of business:

Number of Nonmember Broker-Dealers by Principal Type of Business as of June 30,

1989

Principal type of business Number

Exchange member pnmanIy engaged in f100(activltles_________________________________________ .37

Exchange member pnmanly engaged Inexchange oommlssion business__________ .19 Broker or dealer in general secunties business____________________________________ _ ______ 83

Mutual fund underwnter and distrlbutor__________________________ __ ___ 35

Broker or dealer sellmg variable annuitles_______________________ ___ ________ ___ 134

Solleitor of savings and loan accounts__________________________ ___ _____ ____ 19

Real estate syndicator and mortgage broker and banker_____ ____________ ____ _ 13 Broker 01 dealer seiling 011 and gas mterests_________________ _ _ _________ __ ______ 6 Put and call broker or dealer or option writer., _ ___ __ _ __ _____ _ 29

Broker or dealer selling seeurlties of only one issuer or associated lSSuers_ _______________________ 18

~~~~~e~~~e~~dlld':I~~~~~~~~:~~':'.-_~~~~~:~::::~~~:~~ ~~~~~~~~~~~~~~~::::::~: _::::::::::::~ l~ Broker or dealer in other securities business ,_________ ________ ________ 33

Inactive m securities buslness________________________ 10

TotaL________________________________ I~

.Includes 17 New York Stock Exchange members and 16 American Stock Exchange members . Includes three New York Stock Exchange members and four American Stock Exchange members. 'Includes, among others, finders m mergers and aequisltinns, sellers of theatrical partlcipattons, a private banker and appraisers of estates.

One of the requirements applicable to nonmember broker-dealers is

that each associated person engaged in specified securities activities

successfully complete the Commission's General Securities Examination or an examination deemed by the Commission to be a satisfactory

alternative. Such alternative examinations include, thus far, those

given by the NASD, by certain of the national securities exchanges, by

many States, and by the National Association of Insurance Commissioners (NAIC). However, successful completion of the NAIC examination by an associated person qualifies him to sell variable annuities

only. During the fiscal year 1969, 1,924 associated persons successfully

completed the Commission's examination and 5,807 others an acceptable alternative examination.

Rule 15b9-2 provides for the annual fees to be paid by nonmember

broker-dealers to defray the costs of regulation. These include a base

See 31st Annual Report, pp. 11-13; 32nd Annual Report, pp. 16-18; 33rd

Annual Report, pp. 15-18; and 34th Annual Report, PP. 83-85.

Nonmember broker-dealers must file a specified form with the Commission for

each associated person.

_

_

_

•

•

•
88 SECURITIES AND EXCHANGE COMMISSION

fee, a fee for each associated person and a fee for each officemaintained.

During the fiscal year, the Commission amended the rule by deleting

the $15,000maximum fee previously specified, and providing that the

maximum would be set each year on the form which must be filed/ In

addition, the 'amended rule provides that the maximum will include

the office :feesas well as the other fees. The maximum for fiscal year

1969 was set at $20,000.

Pursuant to the inspection program for nonmember broker-dealers,

25 inspections were conducted during the fiscal year. These inspections were designed to determine compliance with applicable Commission rules and to obtain information which will prove helpful in the

further development of the SECO program.

Detection of Improper Practices

Public Complaints.- The Commission has various sources of information concerning possible violations of the Federal securities laws.

A primary source is complaints by members of the general public concerning the activities of certain persons in securities transactions.

During fiscal 1969 the Commission received some 12,495 complaints

from investors 'and others relating to broker-dealers. The Commission's

staff gives careful consideration to such complaints and, if violations

are indicated, an investigation may he commenced. Other outside

sources of information include the stock exchanges, the National Association of Securities Dealers, Inc., brokerage firms, State and Canadian

securities authorities, better business bureaus, and various law enforcement agencies.

Inspections.-The program of surprise inspections of brokerdealers and investment advisers by the Commission's staff is another

important device for the detection of improper practices. During fiscal

1969,732 broker-dealer inspections and 128 investment adviser inspections were carried out. These inspections produced indications of

various types of infractions, as shown below:

Broker-Dealers

Type

Number

Financial difficulties -__ 39

Improper hypotheca tion________________ ___ _____ _ 4

Unreasonable prices in securities purchases and sales________________ 18

Noncompliance with Regulation T_________________________________ 46

"Secret Profits" ___ _ 8

Noncompliance with confirmation and bookkeeping rul('s_____________ 1(i8 ()th('r ]12

Total indicat('d vioJations_______________________________________ 305

7 Securities Exchange Act Release No. 8608 (May 15, 1969).

- _________________ _ _______
THIRTY-FIFTH ANNUAL REPORT

Investment Advisers

89

Number

Books and records deficienL_______________________________________ 19

Registration application inaccurate________________________________ 17

False, misleading, or otherwise prohibited advertising_______________ 13

Improper "hedge clause"" G

Failure to provide for nonasstgnabtlttv in investment advisory con- tract 10

Others 5

Total indicated violations_______________________________________ 70

'''Hedge clauses" used in literature distrlbuted by investment advisers generally state

in substance that the information furnished is obtained from sources believed to be reliable, but that no assurance can be given as to its accuracy. A clause of this nature may

be improper where the recipient may be led to believe that he has waived any right of action

against the investment adviser.

Market Surveillance.- In order to enable the Commission to meet

its responsibilities for the surveillance of the securities markets, the

market surveillance staff has devised a number of procedures to identify

possible manipulative activities. A program has been adopted with

respect to surveillance over listed securities, in which the staff's activities are closely coordinated with the stock watching operations of the

New York and American Stock Exchanges. Within this framework,

the staff reviews the daily and periodic stock watch reports prepared

by these exchanges and, on the basis of its analysis of the information

developed by the exchanges and other sources, determines matters of

interest, possible violations of applicable law, and the appropriate

action to be taken.

In addition, the market surveillance staff maintains a continuous

ticker tape watch of transactions on the New York and American

Stock Exchanges and the sales and quotation sheets of regional exchanges to observe any unusual or unexplained price variations or market activity. The financial news ticker, leading newspapers and various

financial publications and statistical services are also closely followed.

If any of these sources reveals possible violations, the market surveillance staff conducts a preliminary inquiry into the matter. These

inquiries, some of which are conducted with the cooperation of the

exchange concerned, generally begin with the identification of the

brokerage firms which were active in the security. The staff may communicate with partners, officers or registered representatives of the

firm, with customers, or with officials of the company in question to

determine the reasons for the activity or price change in the securities

involved and whether violations may have occurred.

The Commission has also developed an over-the-counter surveillance

program involving the use of automated equipment to provide more
90 SECURITIES AND EXCHANGE COMMISSION

efficient and comprehensive surveillance. That equipment is programmed to identify, among other things, unlisted securities whose

price movement or dealer interest varies beyond specified limits in a

pre-established time period. When a security is so identified, the automated system prints out current and historic market information concerning it. This data, combined with other available information, is

collated and analyzed to select those securities whose activity indicates

the need for further inquiry or referral to the Commission's enforcementstaff.

Section of Securities Violations.-A Section of Securities Violations is maintained by the Commission as a part of its enforcement

program to provide a further means of detecting and preventing fraud

in securities transactions. This Section maintains files which contain

information concerning persons who have been charged with, or found

in violation of, various Federal and State securities statutes, as well as

considerable information concerning Canadian violators. These files

play a valuable role in the Commission's enforcement program and

provide a clearinghouse for other enforcement agencies. The information in the files is kept current through the cooperation of various governmental and nongovernmental agencies.

During the fiscal year, the Section received 3,841 "securities violations" letters either providing or requesting information and dispatched 1,852 communications to cooperating agencies. Among other

matters, information was received from several States and Canada

respecting 104 criminal actions, 49 injunctive actions, 169 actions in

the nature of cease and desist orders and 104 other administrative

orders, such as denials, suspensions and revocations of registrations of

issuers, broker-dealers and salesmen. Information was also received

from the U.S. Department of Agriculture, Commodity Exchange Authority, regarding administrative actions taken against futures commission merchants and floor brokers under the Commodity Exchange

Act. Action'Staken during the last 10 years under that Act include 71

decisions and orders and 68 stipulations and compliances. The information received was incorporated into the Commission's records.

All in all, information with respect to 5,385persons or firms was added

to the files, including information regarding 2,094 persons and firms

not previously identified, and information regarding 1,161 persons

and firms was removed from the files as obsolete or for other reasons.

As of the end of the fiscal year, the files contained information concerning 78,256persons and firms.

Use of Computer for Name Searches.- The use of the Commission's computer for "name searches" in the enforcement program has

resulted in a substantial increase in the amount of information avail-
THIRTY-FIFTH ANNUAL REPORT 91

able and the speed with which it can be obtained. The names of suspected securities law violators are checked against the more than 1

million entries presently stored in the computer. Upon request, the

Commission also performs "name searches" on prospective securities

salesmen and others whose names are submitted by the exchanges, the

NASD and the State securities commissions. Ifthe subject checked has

been named in formal filings with the Commission, has been a party to

a proceeding, or has been involved in an investigation, such information, together with pertinent dates, relationships and cross references,

is available immediately on a printout. Formerly a time-consuming

manual search of indices and files was required.

Investigations

Each of the Acts administered by the Commission specifically authorizes it to conduct investigations to determine whether violations

of the Federal securities laws have occurred.

The nine regional offices of the Commission are chiefly responsible

for the conduct of investigations. In addition, the Office of Enforcement of the Division of Trading and Markets at the Commission's

headquarters office conducts investigations dealing with matters of

particular interest or urgency, either independently or with the assistance of the regional offices. The Office of Enforcement also exercises

general supervision over and coordinates the investigative activities

of the regional offices and recommends appropriate action to the Commission.

It is the Commission's general policy to conduct its investigations

on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities involved, resulting in injury to investors with no countervailing public benefits. Moreover, members of

the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be made

public. Another advantage of confidential investigations is that persons suspected of violations are not made aware that their activities

are under surveillance, since such awareness might result in frustration or obstruction of the investigation. Accordingly, the Commission

does not generally divulge the results of a non public investigation unless it is made a matter of public record in proceedings brought before

the Commission or in the courts.
92 SECURITIES AND EXCHANGE COMMISSION

When it appears that a serious violation of the Federal securities

laws has occurred or is occurring, a full investigation is conducted.

Under certain circumstances it becomes necessary for the Commission

to issue a formal order of investigation which designates members of

its staff as officersto issue subpoenas, take testimony under oath and

require the production of documents. During the fiscal year ended

June 30, 1969,the Commission issued 194 such formal orders.

The following table reflects in summarized form the investigative

activities of the Commission during fiscal 1969:

Inoestipotion» ot possible ctotattons ot the Acts administered by the Commission

Pending June 30, 1968____________________________________________ 818

Ne~ Cases______________________________________________________ 361

~otal 1,179

Closed 379

Pending June 30, 1969____________________________________________ 800

In Dosek v. United States,S the Court of Appeals for the Eighth

Circuit, in affirming Dosek's conviction for mail and securities fraud,

addressed itself to the applicability of the doctrine of Miranda v.

Arizona 9 to Commission investigations. Dosek had claimed that information obtained from him during an investigation conducted pursuant to a formal order of investigation entered by the Commission

had been obtained in violation of his constitutional rights established

by the Supreme Court in the Miranda case. He urged that he was entitled to be informed, in the terms specified by the Supreme Court, that

he had a "right to silence," that he could refuse to surrender documents and records which had been subpoenaed, and that counsel would

be appointed for him if he so desired. The court rejected these contentions, primarily on the grounds that the defendant was not "in

custody" when his investigative testimony was taken and that no

coercion was practiced on him. The court pointed out that Dosek was

advised prior to giving any testimony that he had a right to be represented by counsel and to refuse to give testimony which might tend

to incriminate him.

Enforcement of Investigative Suhpoenas.-In S.E.O. v. Wall Street

Transcript Oorp./o the district court denied enforcement of an administrative subpoena duces tecum issued in the course of an investigation under the Investment Advisers Act into the question whether

the 'Wall Street Transcript Corporation, by publishing the Wall Street

Transcript, was an unregistered investment adviser. The court dis405 F. 2d 405 (C.A. 8,1968).

'384 U.S. 436 (1966). 10294 F. Supp. 298 (S.D. N.Y., 1968).

•
TEURTY-FIFTH A~UAL REPORT 93

tinguished a long line of cases holding that a court in a subpoena

enforcement action is not to determine whether the subject of the investigation is covered by the statute, on the ground that the First

Amendment was not in issue in those cases. Reasoning that "the Commission's broad inquiry under the Act can end only in restraint of

expression by the 'Vall Street Transcript," 11 the court concluded that

it was empowered in these unusual circumstances to decide whether

the subject of the Commission's investigation was covered by the

Investment Advisers Act. The Commission had argued that a determination whether the Transcript was a bona fidenewspaper or financial

publication, and thus excluded from the coverage of the Act, must

neccessarily await the results of an investigation and that the question

was to be determined in the first instance by the Commission rather

than by the court.

Having concluded that it had jurisdiction to decide the issue, the

court reviewed the publication and its advertisements and concluded

that it was a bona fide financial publication of general and regular

circulation which was excluded from the coverage of the Act by Section 202(d). The court, however, specifically indicated that

"[a]n entirely different question would be presented if the SEC had COlliplaints or other evidence of conduct by the publisher outside the normal

functions of compiling and distributing an excluded publication. In ...

[that] situation, I believe that the Commission should be entitled to proceed

with court assistance under Section 209 if necessary, provided, of course, that

the scope and particulars of the subpoena were not unreasonable or

oppressive." 12

A motion by the Commission for reargument or clarification was

denied by the court and the Commission filed an appeal which is

presently pending."

In another subpoena enforcement action, a Florida attorney was

convicted of criminally violating Section 21(c) of the Exchange Act

by failing and refusing to testify and produce records in obedience to

a Commission investigative subpoena."

Imposition of Sanctions

Where enforcement action appears appropriate, the Commission

may proceed in one of several ways, although the use of one procedure

does not necessarily preclude the USeof another with respect to the

same conduct. The Commission may: (1) institute administrative

proceedings, (2) institute civil proceedings in the appropriate U.S.

11 204 F. Supp. at 304.

12 294 F. SuPP. at 307.

13 Securities and Emcllange Commission v. Wall Street Transcript Corp., C.A. 2,

Docket No. 33350.

U See Litigation Release No. 4379 (July 22,19(9).
94 SECURITIES AND EXCHANGE COMMISSION

district court to enjoin further violations of law, or (3) refer the case

to the Department of Justice or appropriate local enforcement authorities for criminal prosecution.

Administrative Proceedings.-Under the Securities Exchange Act,

as amended in 1964,the Commission has available to it a wide range of

administrative sanctions which it may impose against brokers and

dealers and persons associated with them. The Commission may deny

a broker-dealer's application for registration. With respect to a brokerdealer already registered, it may impose sanctions ranging from

censure through suspension of registration to revocation of registration. It may also suspend or terminate a broker-dealer's membership

in a stock exchange or registered securities association. Associated

persons of broker-dealers may be censured, or suspended or barred

from association with any broker-dealer. Under the Investment Advisers Act, the Commission may impose comparable sanctions against

investment advisers, but has no authority to take direct disciplinary

action against persons associated with investment advisers.

Generally speaking, the Commission may impose a sanction only if,

after notice and opportunity for hearing, it finds that (1) the respondent wilfully violated any provision of the securities acts or the rules

thereunder; aided and abetted such violations by others; (in the case of

Exchange Act proceedings) failed reasonably to supervise another

person who committed such violations; or is subject to certain disqualifications, such as a conviction or injunction relating to specified

types of misconduct, and (2) a particular sanction is in the public

interest.

While all respondents in broker-dealer and investment adviser proceedings are entitled to a hearing, such proceedings are frequently

disposed of without hearings where respondents waive a hearing and

consent to the imposition of certain sanctions or submit offers of settlement which the Commission accepts as an appropriate disposition of

the proceedings. In those instances where hearings are held, the hearing

officer who presides normally makes an initial decision, including an

appropriate order, unless such decision is waived by the parties. If

Commission review is not sought, and if the case is not called up for

review on the Commission's own initiative, the initial decision becomes

the final decision of the Commission and the examiner's order becomes

effective.

In those instances where it prepares its own decision upon review or

'waiver of an initial decision, the Commission or the individual Commissioner to whom a case may be assigned for the preparation of an

opinion is generally assisted by the Office of Opinions and Review.

This Officeis directly responsible to the Commission and is completely

independent of the operating divisions of the Commission, consistent
TEITRTY-FIFTH~~AL REPORT 95

with the principle of separation of functions embodied in the Administrative Procedure Act. 'Where the parties to a proceeding waive

their right to such separation, the operating division which participated in the proceeding may assist in the drafting of the Commission's

decision.

The Commission's opinions are publicly released and are distributed

to the press and to persons on the Commission's mailing list. In addition, they are printed and published periodically by the Government

Printing Office in bound volumes entitled "Securities and Exchange

Commission Decisions and Reports."

Set forth below are statistics regarding administrative proceedings

pending during fiscal 1969 with respect to brokers and dealers and

investment advisers.

Broker-Dealers

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants a 41

Against nonregistered broker-dealer__________________________________ 1

Against individuals only 7

Total 49

Proceedings instituted during fiscal year:

Against broker-dealer registrants a__________________________________ 88

Against broker-dealer applicants a__________________________________ 4

Against nonregistered broker-dealers u_______________________________ 2

Against individuals only____________________________________________ 9

Total 103

Total proceedings current during fiscal year 152

Disposition of proceedings: b

Registration revoked______ _____ _ 10

Registration revoked and firm expelled from l\ASD__________________ 2

Registration revoked and firm expelled from NASD and exehungec..c., 1

Registration revoked and sole proprietor expelled from NASD and

barred 1

Registration suspended for period of timc__________________________ 2

Registrant suspended from certain activities for periods of time_______ 12

Activities of registrant's branch offices suspended for period of tlme.Lc ; 2

Registrant suspended from NASD for period of time__________________ 1

Registrant censured________________________________________________ 10

Proceedings dismissed on withdrawal of regbtration________________ 1

Proceedings discontinued and registration continued in effecL_______ 1

Denial proceedings dismissed as mooL_____________________________ 2

Individuals barred, suspended or censured__________________________ 14

Total 59

In most of these proceedings one or more individuals associated with the broker-dealer

respondents, or other individuals or firms, were also named as respondents.

For action taken in these cases as to respondents other than broker-dealers, where the

only action indicated is against broker-dealers, see the table below.

•

•
96 SECURITIES AND EXCHANGE COMMISSION

Proceedings pending at end of fiscal year:

Against broker-dealer registrants____________________________________ 81

Against broker-dealer applicants____________________________________ 2

Against nonregistered broker-dealers________________________________ 2

Against individuals only 8

Total proceedings pending at end of year_______________________ 93

Total proceedings accounted for 152

Action taken against individuals associated with broker-dealers included above

or with broker-dealers previously sanctioned:

Barred 29

Suspended 39

Censured 22

Dissociated from registrant for periods of time_______________________ [)

Censured and dissociated from registrant for periods of time__________ 7

Total 102

Investment A.dvisers

Proceedings pending at beginning of fiscal year:

Against investment adviser registrants_______________ 4

Proceedings instituted during fiscal year:

Against investment adviser registrants______________________________ 8

Against investment adviser applicants_______________________________ 2

Total 10

Total proceedings current during fiscal year________________________ 14

Disposition of proceedings:

Registration revoked_____ ___ ___ _ _____ 3

Registration denied_________________________________________________ 1

Registration suspended_____________________________________________ 1

Registrant censured________________________________________________ 3

Total 8

Proceedings pending at end of fiscal year:

Against investment adviser registrants______________________________ 5

Against investment adviser applicants_______________________________ 1

Total proceedings pending at end of year__________________________ G

Total proceedings accounted for___________________________________ 14

A few of the more significant decisions of the Commission in

administrative proceedings with respect to broker-dealers and investment advisers are summarized in the following paragraphs:
THIRTY-FIFTH ANNUAL REPORT 97

In Armstrong, Jones and Oompany,15 the Commission, among

other things, held that the Securities Act registration provisions had

been violated. It found that a claimed intrastate exemption from

registration was not available for a particular offering of securities

because certain purchasers were in fact nominees for nonresidents

and an out-of-state distribution occurred when a part of the original

offering was resold by resident subscribers shortly after the Armstrong firm commenced trading in the stock. 'Vith respect to the latter

point, the Commission stated that, in considering whether the firm

and its principals had acted properly to limit the distribution to

residents, it deemed significant the facts that the firm's president had

solicited orders and indications of interest from nonresidents during

the initial offering and that, at the commencement of trading, the

firm's opening bid was substantially higher than the offering price,

thus tending to induce residents to sell their stock and enabling the

firm to resell to nonresidents.

On the basis of these violations and other serious misconduct,

including the making of extravagant and unwarranted representations and price predictions to customers, failure to disclose to customers common control of the firm and the issuer whose securities

were being sold, and the sending of confirmations to persons who had

not agreed to purchase stock, the Commission revoked the firm's

broker-dealer registration and expelled it from the Detroit Stock

Exchange, barred its president from association with any brokerdealer (subject to the proviso that after a year he could, upon an

appropriate showing, work for a broker-dealer in a nonsupervisory

capacity), and imposed sanctions of bar and censure, respectively,

against two other respondents.

In Paine, Webber, Jackson & Ourtis/6 the Commission found that

Ralph M. Klopp, a salesman for Paine, Webber, induced excessive

trading in the accounts of two customers by means of false representations concerning the securities activities of another customer and that

Paine, Webber and the manager of the branch office where Klopp

worked had failed reasonably to supervise Klopp 'with a view to

preventing his misconduct. Klopp falsely told the customers that

another customer, a doctor, had a large account, used the services of a

"Chinese chartist" and an investment adviser, and had made large

profits. He offered to apprise the customers of the purported doctor's

,. Securities Exchange Act Release No. 8420 (October 3. 1968), rehearing

tlcnlctl, Socurtttes Exchange Act Release No. 8478 (December 27, 19(8), appeal

pending.

ie f\ecurities Exchange Act Release No. 8500 (Jununry 22, 19(9), appeal bV

Ralph M. Klopp pending.

373-754--70----8
98 SECURITIES AND EXCHANGE COMMISSION

transactions so that they could duplicate them. The customers thereafter effected transactions on the basis of Klopp's statements regarding

transactions by the doctor, and their trading activity increased significantly. The Commission further found that the firm's procedures

were not adequate to detect excessive trading and that the firm and

the branch manager did not reasonably discharge their supervisory

duties.

The Commission concluded that in view of the serious nature of

Klopp's violations, which persisted for over 1 year, and its finding that

Klopp deceived his employer through the use of a secret account for

transactions by himself and his wife, it was appropriate in the public

interest to bar him from association with any broker or dealer, with

the proviso that such bar would not preclude his association, after

a period of 1 year, with a broker or dealer in a nonsupervisory capacity

upon a showing that he would be adequately supervised. The Commission censured Paine, Webber and the branch manager, noting

the improvements in supervisory procedures which had been effected

since the time of the violations.

In a case involving the improper use of inside information, Van

Alsty1U3, Noel &: 00.,17 the Commission found, on the basis of offers

of settlement, that the firm and certain of its partners and employees,

in connection with a prospective underwriting of the stock of Spiral

Metal Company, Inc. and a private placement of that company's debentures, received nonpublic information from Spiral with respect to

improved sales, earnings, productive capacity and future prospects.

Thereafter they purchased Spiral stock for themselves and for customers to whom they recommended the stock, prior to the public release

of the information. The Commission held that respondents' advance

use in market purchases of the favorable information, which they had

obtained by virtue of their special relationship with Spiral, for their

own or their customers' benefit and to the detriment of public investors

to whom the information was not known violated anti-fraud provisions

of the Exchange Act.18 Pursuant to the settlement offers, the Commission suspended the firm's retail sales and over-the-counter marketmaking activities for a period of 20 business days and its underwriting

activities for a period of 15business days, and ordered the dissociation

from the firm of its senior partner for 90 days and of the other individual respondents for 20 business days.

In another decision also involving the improper use of inside in17 Securities Exchange Act Release No, 8511 (January 31, 1969). 1. For a recent case involving a similar factual situation, see Merrill Lynch,

Pierce, Fenner c£ Smith, Inc., Securities Exchange Act Release No. 8459 (November 25, 1968), discussed in the 34th Annual Report, pp. 8--9.
THIRTY-FIFTH ANNUAL REPORT 99

formation, the Commission, pursuant to an offer of settlement, suspended the activities of the government bond department of Blyth &:

Oompany, Ino., for 15 business days and suspended the former manager of that department from association with a broker-dealer for 5

business days.19Certain traders in the firm's government bond department obtained from an employee of a Federal Reserve Bank nonpublic

information regarding the terms of prospective new issues of government securities and effected transactions for the firm's account in

outstanding government securities before the terms of the new financing were made public. When that information was made public, it

affected the market price of the outstanding securities. The Commission stated that transactions in government securities are subject to

the anti-fraud provisions of Section 10(b) of the Exchange Act and

Rule 10b-5 thereunder, even though such securities are exempt from

certain other requirements under the securities acts, and that the

legal principles enunciated in prior court and Commission decisions

relating to the improper use of inside information are no less applicable

to transactions in government securities than they are to transactions

in "nonexempt" securities. Itfurther stated that

"[u]nder those principles, since it was clear to participants in the government securities markets that the material information involved here was

intended to be kept nonpublic until a predetermined time and then disseminated pursuant to established official procedures, it was the duty of

registrant when it obtained advance possession of such information to

refrain from trading in government securities until the information had

been duly made public under those procedures."

In Oonsumer-Iruoestor Planning Oorporation,20 the Commission

found, pursuant to offers of settlement, that Consumer-Investor Planning Corporation (CIPCO), a registered broker-dealer and investment

adviser and manager of Associated Fund Trust, a registered investment company, and two of its officers and directors violated the antifraud provisions of the securities laws in connection with the Fund's

portfolio transactions whose execution they directed. The respondents

selected brokers to execute such transactions who would "give-up" a

part of their brokerage commission or confer other benefits on the

respondents. The Commission, pointing out that the respondents

occupied a fiduciary relationship to the Fund, held that they were

required to direct the execution of portfolio transactions so as to

achieve the most favorable results for the Fund and not to prefer

their own interest. Instead, the Commission found, respondents engaged in "blatant trafficking of the Fund's business" and "committed

,. Securities Exchange Act Release No. 8499 (January 17,1969).

""Securities Exchange Act Release No. 8542 (February 20, 1969).
100 SECURITIES ANn EXCHANGE COMMtSSION

themselves and the Fund to relationships that did not permit them to

n.tnin the freedom of judgment and action that as managers they owed

to the Fund." The Commission had previously issued an order accepting the settlement offers which provided for various remedial action,

including suspension of CIPCO's broker-dealer registration for 45

days.

In two decisions under the Investment Advisers Act, the Commission

took action with respect to misleading or deceptive advertising by

investment advisers. Thus, in Dow Theory Forecasts, Inc.,21 it found,

pursuant to an offer of settlement, that Dow Theory Forecasts, Inc., a

registered investment adviser, and Le Roy B. Evans, its president,

published and distributed false and misleading advertisements soliciting subscriptions to registrant's advisory service. Among other things,

the advertisements implied that the advisory service would provide

information enabling a subscriber to obtain immediate profits or to be

protected against losses; implied that the Dow Theory, which is a

method for ascertaining market trends, was the principal basis for

registrant's selection of individual securities to be bought, sold or held;

and made misleading comparisons between the methods used by

registrant and by other advisers. In summing up, the Commission

stated that investment advisory advertisements

"should fairly present the services that are being offered and should not be

couched in terms that appeal to the investor's quest for instant riches or fear

of impoverishment. Registrant's advertisements were deceptive in content

and dramatic in their tone and form of presentation, particularly in the

wording, size, and color of their headlines. They were obviously of a character to whet the appetite of the gullible and the unsophisticated and disregarded the restraint and qualification that the intricate and complicated

nature of securities requires."

In an order previously issued, the Commission, as provided in the

settlement offer,suspended all advertising and solicitation for new subscribers by the registrant for 120 days.

In Stanford Investment Management, Inc.,22 advertising material

published by an adviser whose business included the management of

accounts in which clients wrote put and call options was found to be

misleading. The Commission held that a brochure soliciting persons to

use the adviser's management service gave a misleading impression of

the probability of gains to be achieved in the sale of puts and calls

under the adviser's guidance and of the unlikelihood of losses. The

Commission emphasized, as it had on prior occasions, that

21 Investment Advisers Act Release No. 223 (July 22,1968).

ee Investment Advisers Act Release No, 228 (August 30,1968).
THIRTY-FIFTH ANNUAL REPORT 101

"advertising and sales practices which mayor may not be suitable for products which are subject to actual inspection and testing in use clearly have

no place in the sale of securities which are goods of an intricate, complicated

and intangible nature. And put and call option contracts are securities of a

most complicated and technical kind whose many intricacies and complex

nature are not fully understood even by many persons engaged in the securities business itself, much less by the average or unsophisticated investor.

Transactions involving puts and calls have substantial speculative aspects

and entail significant risks of loss, and dealings in them are highly specialized

and difficult. In such a field adherence to high standards of fair and accurate

advertising is particularly important ... [Footnote omitted]

Under all the circumstances, however, including the facts that the

advertisement followed the general pattern of other publications relating to put and call options and had been discontinued prior to the

institution of proceedings, and that this was the first occasion on which

the Commission had addressed itself to advertising literature relating

to puts and calls, the Commission concluded that censure of the adviser

and its president (who is also a registered adviser) was an adequate

sanction.

Among the court decisions reviewing Commission orders in brokerdealer proceedings the following are noteworthy:

In Nees v. S.E.O.,23 the Court of Appeals for the Ninth Circuit

affirmed an order barring the two petitioners, who were securities

salesmen for Century Securities Company, from association with any

broker or dealer.24 One of the petitioners had not actually received

notice of the hearings originally held, and he claimed a denial of due

process. However, the court sustained the procedure adopted by the

hearing examiner by which the hearings were reopened to afford him

an opportunity to confront witnesses and otherwise to respond to the

evidence previously introduced against him. The court also affirmed

the right of the Commission to take action against one who aids another

in securities law violations, and to impose a more severe sanction than

that imposed by the examiner.

In Beck v, S.E.O.,25 the Court of Appeals for the Sixth Circuit summarily rejected the challenge of Beck, a former salesman for Commonwealth Securities Corporation, to the sufficiency of the evidence of willful violations of the anti-fraud provisions of the Securities Act and

the Exchange Act found by the Commission." It also rejected his

.. 414 F. 2d 211 (1969) .

.. Oentury Securities Oompany, Securities Exchange Act Release No. 8123 (July

14,1967).

""413 F.2d 832 (1969).

,. Oommonwealth Securities Oorporation, Securities Exchange Act Release

No. 8360 (JUly 23,1968).

"
102 SECURITIES AND EXCHA..~GE COMMISSION

claim that he had been denied procedural due process-a claim which

included an argument that the commencement of the hearing had been

unreasonably delayed. The court stated, however, that it was unable to

determine whether the sanction imposed on Beck (a four-month exclusion from the securities business with a requirement that his subsequent employment be in a nonsupervisory capacity) constituted

an abuse of the Commission's discretion, because the Commission had

failed to "articulate the reasons for the proposed sanction." Accordingly, the court remanded the case to the Commission for a disclosure

of the reasons for the imposition of that sanction."

In Hanly v. S.E.0.,28 the Court of Appeals for the Second Circuit

affirmed a Commission order barring five securities salesmen from

further association with a broker or dealer." The court held that there

was substantial evidence to support the Commission's finding that the

salesmen made affirmative misrepresentations and made recommendations without disclosing material adverse facts of which they were or

should have been aware. The court emphasized that a salesman

"cannot recommend a security unless there is an adequate and reasonable

basis for such recommendation. He must disclose facts which he knows and

those which are reasonably ascertainable. By his recommendation he implies

that a reasonable investigation has been made and that his recommendation rests on the conclusions based on such Investigation. Where the salesman

lacks essential information about a security, he should disclose this as well

as the risks which arise from his lack of information."

Concerning the sanctions, the court stated that the Commission "clearly

has the authority to increase sanctions ordered by a hearing examiner

in his initial decision."

In Penmaluna db00., Inc. v, S.E.0.,30 the Court of Appeals for the

Ninth Circuit reviewed a decision in which the Commission found

violations of the registration provisions of the Securities Act and the

anti-fraud and anti-manipulation provisions of that Act and of the

Exchange Act.31 The court affirmed as to a majority of the violations,

but reversed certain of the Commission's findings of violations based

on the registration provisions. In light of its reversal, the court remanded the matter to the Commission for a reexamination of sane27 The Commission subsequently issued an Opinion Pursuant to Remand setting

forth the reasons for the sanction and reaffirming its prior order. Securities Exchange Act Release No. 8720 (October 16,1969) .

.. 415 F.2d 589 (1969) .

.. Richard J. Buck d: Co., Securities Exchange Act Release No. 8482 (December 31, 1968). One salesman was barred for only 60 days, after which time he

could be associated with a broker or dealer in a nonsupervisory capacity if adequately supervised.

"410 F.2d 861 (1969), cert. denied 38 U.S.L.W. 3254 (U.S., Jan. 13,1970).

S1 Securities Exchange Act Release No. 8063 (April 27, 1967).
TEIRTY-F~ ~AL REPORT 103

tions in the light of its ruling "and, should it so desire, for clarification

of its opinion with respect to the determination upon which we

reverse." The court rejected the petitioners' request for a rehearing,

and a petition for a writ of certiorari has been denied by the Supreme

Court.

Civil Proceedings.-Each of the several statutes administered by

the Commission authorizes the Commission to seek injunctions in the

Federal district courts against continuing or threatened violations of

those statutes or the Commission's rules thereunder. Injunctive actions

frequently are directed against broker-dealers and persons associated

with them, and in such cases the complaint may allege noncompliance

with various regulatory provisions such as the net capital or books

and records requirements, as well as violations which may be committed

by any person such as securities sales or purchases in violation of the

anti-fraud or registration provisions of the securities acts."

For a discussion of civil litigation of particular interest, see pp. 109-

115, infra.

CriminalProsecution.- The statutes administered by the Commission provide that the Commission may transmit evidence of violations

of any provisions of these statutes to the Attorney General, who in

turn may institute criminal proceedings. Where an investigation by

the Commission's staff indicates that criminal prosecution is warranted, a detailed report is prepared. After careful review by the Office

of Criminal Reference and Special Proceedings and the General Counsel's Office,the report and the General Counsel's recommendations are

considered by the Commission. If the Commission believes criminal

proceedings are warranted the case is referred to the Attorney General and to the appropriate U.S. attorney. Commission employees

familiar with the case generally assist the U.S. attorney in the presentation of the facts to the grand jury, the preparation of legal

memoranda for use in the trial, the conduct of the trial, and the

preparation of briefs on appeal.

During the past fiscal year 37 cases were referred to the Department

of Justice for prosecution. As a result of these and prior referrals, 64

indictments were returned against 213 defendants, including 17brokerdealers and broker-dealer principals and 9 broker-dealer employees.

Convictions were obtained against 83 defendants in 47 cases, including 15 broker-dealers and broker-dealer principals and 3 broker-dealer

employees. Convictions were affirmed in 9 cases, and appeals were still

pending in 15 other criminal cases at the close of the period."

.. Statistics regarding the Commission's civil litigation activities are contained

in Appendix tables 10-12.

13 Other statistics regarding criminal cases developed by the Commission are

contained in Appendix tables 13-15.
104 SECURITIES AND EXCHANGE COMMISSION

For a discussion of criminal matters of particular interest, see

pp. 115-11\), nfra.

Supervision of Activities of National Association of Securities Dealers, Inc.

Section 15A of the Exchange Act provides for registration with

the Commission of national securities associations and establishes

standards and requirements for such associations. The National Association of Securities Dealers, Inc. (NASD), which is the only association registered under the Act, includes as members most of the brokerdealers who do business in the over-the-counter market or who underwrite new issues. The Act contemplates that such associations will

serve as a medium for self-regulation by over-the-counter brokers

and dealers. Their rules must be designed to protect investors and the

public interest, to promote just and equitable principles of trade, and

to meet other statutory requirements. They are to operate under the

general supervision of the Commission, which is authorized to review

disciplinary actions taken by them, to disapprove changes in their

rules, and to alter or supplement their rules relating to specified

matters.

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive

to membership by permitting such associations to adopt rules which

preclude a member from dealing with a nonmember broker or dealer

except on the same terms and conditions as the member affords the

general public. The NASD has adopted such rules. As a result, membership is necessary to profitable participation in underwritings since

members may properly grant price concessions, discounts and similar

allowances only to other members.

At the close of the fiscal year the NASD had 4,102 members, reflecting a net increase of 332 members during the year. This increase

was the net result of 543 admissions to and 211 terminations of membership. As of the end of the year NASD member firms had 7,099

branch offices.This figure reflects a net increase of 1,154 officesduring

the year, resulting from the opening of 1,712 new offices and the

closing of 558 offices.During the year the number of registered representatives and principals, categories which include all partners,

officers,traders, salesmen and other persons employed by or affiliated

with member firms in capacities which involve their doing business

directly with the public, increased by 50,146to stand at a record level

of 159,029 as of June 30, 1969. This increase, which was the net

result of 57,683 initial registrations, 22,355 re-registrations and

29,892 terminations of registrations, was attributable to the entry

of an increased number of insurance companies into the securities
THIRTY-FIFTH ANNUAL REPORT 105

business for the purpose of offering mutual funds and/or variable

annuities to the investing public and to the increase in activity in

the securities markets generally.

During the fiscal year the NASD administered 103,351 qualification examinations, of which approximately 71,408 were for NASD

qualification and the balance to meet the requirements of other organizations or authorities, including major exchanges, the Commission 34

and various States.

In Harwell v. Growth Programs, Inc., which principally involved

the power of the NASD to act by interpretation of one of its Rules

of Fair Practice, the Commission filed a brief as amicus curiae in the

District Court for the Western District of Texas supporting the

NASD's action. An interpretation promulgated by the Board of

Governors of the NASD in 1966 stated that the speculative use of

the withdrawal-and-reinstatement privilege contained in certain contractual plans for the accumulation of mutual fund shares was contrary to the public interest and inconsistent with Article III, Section

1 of the NASD Rules of Fair Practice, which requires NASD members to conduct their business in accordance with "high standards

of commercial honor and just and equitable principles of trade." The

plaintiffs, who were purchasers of single-payment contractual plans

containing the withdrawal-and-reinstatement privilege, sued the

NASD, among others, seeking damages and the resumption of the

right to unlimited exercise of that privilege, alleging both breach of

contract and violations of the Federal anti-trust laws. The Commission, in its brief, took the position that contracts entered into by

others with members of a registered securities association, such as

the NASD, must be deemed subject to the rules of such associationand to any duly adopted interpretations thereof-in order to achieve

the effective self-regulation of broker-dealers intended by the Securities Exchange Act. The Commission also urged that collective action

under Commission supervision by the NASD and its members in

promulgating new rules or new interpretations of existing rules and

in enforcing those rulings is clearly contemplated under that Act

and cannot without more constitute a violation of the anti-trust laws.

NASD Disciplinary Actions.-The Commission receives from the

NASD copies of its decisionsin all disciplinary actions against members and registered representatives. In general, such actions are based

on allegations that the respondents violated specified provisions of

the NASD's Rules of Fair Practice ..Where violations are found the

••See pp. 8G-88 supra, for a discussion of the regulation of broker-dealer-s

who are not members of a registered securities association.
106 SECURITIES AND EXCHANGE COMMISSION

NASD may impose one or more sanctions upon a member, including

expulsion, suspension, fine or censure. If the violator is an individual,

his registration as a representative may be suspended or revoked, he

may be suspended or barred from being associated with any member,

and he may be fined and/or censured. Under Section 15A(b) (4) of the

Exchange Act and the NASD's by-laws, no broker-dealer may be admitted to or continued in NASD membership without Commission

approval if he has been suspended or expelled from membership in

the NASD or a national securities exchange; he is barred or suspended

from association with a broker or dealer or with members of the NASD

or an exchange; his registration as a broker-dealer has been denied,

suspended, or revoked; he has been found to be a cause of certain

sanctions imposed upon a broker-dealer by the Commission, the NASD

or an exchange; or he has associated with him any person subject to

one of the above disqualifications.

During the past fiscal year the NASD reported to the Commission its final disposition of disciplinary complaints against 123 member firms and 69 individuals associated with them. With respect to 12

members and 6 associated persons, complaints were dismissed because

the alleged violations had not been established. In the remaining

cases, violations were found and penalties were imposed on 111 members and 63 registered representatives or other individuals. The maximum penalty of expulsion from membership was imposed against 7

members, and 13 members were suspended from membership for periods ranging from 5 days to 6 months. In many of these cases, substantial fines were also imposed. In another 87 cases, members were

fined amounts ranging from $100 to $15,000. In four cases, the only

sanction imposed was censure, although censure was usually a secondary penalty where a more severe penalty was also imposed.

Various penalties were also imposed on associated individuals found

in violation of NASD rules. The registrations of 24 registered representatives were revoked, and 17 representatives had their registrations

suspended for periods ranging from 5 days to 60 days. Fines in various

amounts were also imposed against many revoked or suspended representatives. In addition, 19 other representatives were censured and/or

fined amounts ranging from $250 to $10,000. Three individuals were

barred from association with any NASD member.

Commission Review of NASD Disciplinary Action.-Section

15A(g) of the Exchange Act provides that disciplinary actions by the

NASD are subject to review by the Commission on its own motion or

on the timely application of any aggrieved person. This Section also

provides that upon application for or institution of review by the

Commission the effectiveness of any penalty imposed by the NASD is
TmRTY-FIFTH ANNUAL REPORT 107

automatically stayed pending Commission review, unless the Commission otherwise orders after notice and opportunity for hearing.

Section 15A(h) of the Act defines the scope of the Commission's review. If the Commission finds that the disciplined party committed

the acts found by the NASD and thereby violated the rules specified

in the determination, and that such conduct was inconsistent with just

and equitable principles of trade, the Commission must sustain the

NASD's action unless it finds that the penalties imposed are excessive

or oppressive, in which case it must cancel or reduce them.

At the start of the fiscal year, five NASD disciplinary decisions were

pending before the Commission on review. During the year five additional cases were brought up for review. Seven cases were disposed of

by the Commission. In five of these cases, the Commission sustained

in full the disciplinary action taken by the NASD.35 In one case the

Commission modified the penalties 36and in the seventh case the review

proceedings were discontinued upon request of the applicants. Three

cases were pending at the end of the year.

Commission Review of NASD Action on Memhership.-As previously noted, Section 15A(b) (4:) of the Act and the by-laws of the

NASD provide that, except where the Commission finds it appropriate

in the public interest to approve or direct to the contrary, no broker

or dealer may be admitted to or continued in membership, if he, or any

person associated with him, is under any of the several disabilities

specified in the statute or the NASD by-laws. A Commission order

approving or directing admission to or continuance in Association

membership, notwithstanding a disqualification under Section 15A(b)

(4:) of the Act or under an effective Association rule adopted under

that Section or Section 15A(b) (3), is generally entered only after the

matter has been submitted initially to the Association by the member

or applicant for membership. The Association in its discretion may

then file an application with the Commission on behalf of the petitioner. If the Association refuses to sponsor such an application the

broker or dealer may apply directly to the Commission for an order

directing the Association to admit or continue him in membership.

At the beginning of the fiscal year, five applications Tor approval of

admission to or continuance in membership were pending. During the

year, four additional applications were filed, six were approved, one

was remanded to the NASD and one was withdrawn, leaving one

application pending at the year's end.

.. Securities Exchange Act Release Nos. 8477 (December 26, 1968); 8506

(January zt, 19(9) ; 8531 (February 20, 1969) ; 8625 (June 13, 1969) ; and 8630

(June 20,1969) .

.. Securities Exchange Act Release No. 8486 (January 6,1969).
108 SECURITIES AND EXCltANGE COM:M:rSSION

Commission Inspections of the NASD.-Under the regulatory

scheme of the Exchange Act the Commission, as noted, is charged with

general oversight of national securities associations in the performance

of their self-regulatory activities .. With a view to insuring that the

NASD is meeting its responsibilities, the Commission's staff conducts

periodic inspections of various phases of NASD activity. During the

past fiscal year, the staff inspected the entire operation of the Association's district office in New York City. This is the largest NASD

district from the standpoint of number of members (1,463) and

associated personnel (35,069).

Disciplinary Actions by Exchanges

Although the Exchange Act does not provide for Commission review of disciplinary action taken by exchanges, each national securities

exchange reports to the Commission actions taken against members

and member firms and their associated persons for violation of any

rule of the exchange or of the Exchange Act or of any rule or

regulation thereunder.

During the fiscal year, nine exchanges reported approximately 136

separate actions, including impositions of fines in 72 cases ranging

from $50to $100,000,with total fines aggregating $6093,510;the suspension from membership of 31 individuals; and the censure of 26member

firms. These exchanges also reported the imposition of various sanctions against 58 registered representatives and employees of member

firms. In addition the American Stock Exchange reported a number

of informal staff actions of a cautionary nature. Many of the actions

against members and member firms resulted from back-officeand other

operational difficulties.

VIOLATIONS OF ANTI-FRAUD OR RELATED PROVISIONS-CIVIL AND

CRIMINAL PROCEEDINGS

A substantial proportion of the Commission's enforcement actions

is concerned with the use of false or misleading representations in connection with the sale or purchase of securities or other conduct violative of the anti-fraud or anti-manipulative provisions of the Securities

Act or Securities Exchange Act. Action designed to deal with such

practices often takes the form of injunctive suits or referral to the

Department of Justice for criminal prosecution," The Commission also

frequently participates as amicus curiae in litigation between private

parties under the anti-fraud provisions of the securities laws, where it

considers it important to present its views regarding the interpretation

of those provisions. For the most part, such participation is in the

37 See pp. 88-93, supra, for a discussion of some of the means of detecting

improper practices, and of investigations.
TEITRTY-FIFTH ANNUAL REPORT 109

appellate courts. This section of the annual report summarizes some

of the more noteworthy civil and criminal proceedings involving

matters in the areas described above, as well as some involving certain

other provisions of the 1V33 and 1934acts,"

Civil Litigation

During the course of the fiscal year, the Commission participated

either as a party or as amicus curiae in a number of cases involving

important issues under the anti-fraud provisions.

In S.E.O. v. Texas Gulf Sulphur 00.,39 as previously reported,"

the Court of Appeals for the Second Circuit reversed a decision of

the district court and held that certain corporate "insiders" had violated Section 10(b) of the Exchange Act and Rule 10b-5 under that

Act by purchasing stock of Texas Gulf on the basis of material

inside information not known to the general public. On April 21,

1969, the United States Supreme Court denied petitions for writs of

certiorari filed by two of the defendants, Frances G. Coates and

Harold B. Kline. Mr. Coates was a director of Texas Gulf who

purchased Texas Gulf stock after the company, at a specially called

press conference, had announced a major ore discovery near Timmins,

Ontario, Canada, but before that announcement had appeared in any

news medium of widespread circulation. Mr. Kline was an officer

of Texas Gulf who accepted a stock option from the company without

disclosing to the directors who granted the option information he

knew concerning the company's mining activities near Timmins. The

case has been returned to the trial court for further findings with

respect to a press release issued by Texas Gulf which the Commission

charges was misleading, and for a determination of the remedies to

which the Commission is entitled as against all the defendants.

After the close of the fiscal year, Mr. Coates and the Commission

settled their litigation. By the terms of the settlement, which was

approved by the district court, Mr. Coates has paid to Texas Gulf

$26,250, which represents the difference between the price of Texas

Gulf common stock purchased by Mr. Coates and his "tippees" on

April 16, 1964, and the mean price of that stock on the New York

Stock Exchange on April 17, 1964.Pursuant to the terms of the settlement, the company is to hold the money until the court orders its

disposition; in the absence of such an order, the money is to become

the property of the company.

38 See also pp. 59-61 and 61-62, supra.

"401 F. 2d 833 (e.A.. 2, 1968), cert, denied 394 U.S. 976 (1069).

<0 See 34th Annual Report, pp. 6-8.
110 SECURITIES AND EXCHANGE COMMISSION

In an amicus curiae brief filed at the behest of the court in Oammon

v. Texas Gulf Sulphur 00.,41 the Commission supported a broad remedial construction of the class-action provisions of Federal Rule of

Civil Procedure 23, as amended effective July 1, 1966,to permit private

actions arising under the Federal securities laws to be maintained

on behalf of a class of investors to the fullest possible extent. The

Commission's views were similar to those expressed in Hohmann v.

Packard Instrument 00. and Doqloui v. Anderson, reported in the

34th Annual Report at pages 103-104. The court's decision in the

Cannon. case was consistent with the views expressed by the

Commission.

In Heit 'V. Weitzen,-42 as previously reported," the Court of Appeals

for the Second Circuit agreed with a position taken by the Commission, amicus curiae, concerning the scope of the "in connection with"

clause of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The court found that language sufficiently broad to be applicable to statements made by a corporation whose securities are publicly

held whenever those statements are likely to affect the market for

those securities irrespective of actual trading by the corporation or

those connected with the issuance of the statement and irrespective of

the absence of motive to affect the market. After the filing of a petition for a writ of certiorari, and the filing of a brief in opposition,

the Supreme Court invited the United States to express its views. The

Commission and the Department of Justice filed a brief in response

to this invitation, expressing the view that the decision of the court

of appeals was correct and that review by the Supreme Court was

not required. On May 19,1969, the Supreme Court denied the petition.

In Sohoenbauoi v. Firstbroolc,44 the Court of Appeals for the Second

Circuit sitting en bane followed the ultimate recommendations of the

Commission, contained in its brief amious curiae, in an action under

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The

suit was a derivative action brought by an American shareholder of

Banff Oil Ltd., a Canadian corporation that conducts all of its business operations in Canada although its common stock is registered

with the Commission and traded on the American Stock Exchange

as well as the Toronto Stock Exchange. The complaint alleged violations of Section 10(b) and Rule 10b-5 based on sales of Banff treasury

stock to Aquitaine Company of Canada, Ltd., a Canadian corporation

which controlled Banff, and to another corporation. These sales were

.n 47 F.R.D. 60 (S.D. N.Y.,l969) .

.. 402 F. 2d 909 (C.A. 2, 1968), eert, denied 395 U.S. 903 (1969) .

....See 34th Annual Report, pp, 102-] 03.

"405 F. 2d215 (C.A. 2,1968), cere. denied 395 U.S. 906 (1969).
TmRTY-FIFTH ANNUAL REPORT 111

at the current market price, but it was alleged that they were far below

actual value since they did not reflect the value of a rich oil strike in

which Banff had an interest. All of the directors of Banff were aware

of the oil discovery but the news had not yet been disclosed to the

public. Defendants were Aquitaine, the other corporations and all

directors of Banff.

As to the Aquitaine transaction the court held that the complaint

stated a cause of action under Section lO(b) and Rule 10b-5 because:

"It is alleged that Aquitaine exercised a controlling influence over the

issuance to it of treasury stock of Banff for a wholly inadequate consideration. If it is established that the transaction took place as alleged it constituted a violation of Rule 10b-5, subdivision (3) because Aquitaine engaged

in an 'act, practice or course of business which operates or would operate

as a fraud or deceit upon any person, in connection with the purchase or

sale of any security.' Moreover, Aquitaine and the directors of Banff were

guilty of deceiving the stockholders of Banff (other than Aquitaine)."

This holding required a reversal of the district court 45 which had

been affirmed by a panel of the court of appeals." The reasoning below

was that there was no violation of the anti-fraud provisions because

all of the Banff directors knew the relevant facts at the time of the

transaction, those who were directors of both Aquitaine and Banff, and

were thus subject to a conflict of interest, had refrained from voting,

and there was no showing why the knowledge of its directors should

not be imputed to Banff. The :full court also held that the allegations

of the complaint were sufficient to withstand a motion for summary

Judgment when supported by affidavits demonstrating little more than

Aquitaine's controlling shareholdings in Banff, its possession of material inside information about an oil discovery and the difference

between the price at which the stock was sold and its market price

after the news had been released.

Three judges dissented, adhering to the views expressed in the

majority opinion of the panel. In their view, the majority opinion of

the :full court "does indeed open the floodgates" and is "nothing short

of a standing invitation to blackmail and extortion."

No review had been sought of the panel's decision that the fact

that the sales in question took place in Canada between foreign buyers

and sellers did not deprive the court of subject matter jurisdiction

under Section 30(b) of the Exchange Act.

The past two annual reports 47 discussed the amicus curiae brief

filed by the Commission and the decision by the court of appeals in

.. 268 F. Supp. 385 (S.D. N.Y., 1967).

'6405 F. 2d 200 (C.A. 2, 1968) .

.. See 33rd Annual Report, p, 95, and 34th Annual Report, p. 102.
112 SECURITIES AND EXCHANGE CO:MMISSION

Pappas v, J.l!088,J,8 where the court held, in accordance with the views

of the Commission, that a corporation may be the victim of a violation

of Rule lOb-5 even though all directors know all the true facts. The

case involved the issuance of common stock of the corporation to certain outsiders and to the defendant directors at a price which the

court found was not fair and reasonable. The directors, who approved

the transaction, were aware of the pertinent facts, and shareholder

approval was not required under State law. Nevertheless, approval

was sought so that the newly issued stock could be listed on the American Stock Exchange. The defendant directors owned a majority of

the outstanding shares and voted them in favor of the transaction.

Following remand by the court of appeals, the district court filed a

supplemental opinion awarding judgment of $344,446in favor of the

corporation, against all of the defendants jointly and severally." The

defendants included all of the directors of the corporation and most of

its corporate officers at the time of the transaction in question. The

district court found under State law that the defendants had failed to

sustain their burden of proving that the entire transaction was "honest,

fair and reasonable." In this connection the court found that the

defendants caused the corporation to execute certain documents which

were admittedly untrue and that they had misrepresented certain

facts to the corporation and its shareholders. In connection with its

finding of a violation of Rule lOb-5, the court stated:

"Without regard to the other misrepresentations and failures to reveal,

heretofore found, the defendants caused . . . [the corporation] to sell its

investment letter shares to themselves and to the outsiders at prices substantially below the fair value thereof on the dates of sale. These transactions constituted material acts, practices and a course of conduct which

would operate as a fraud or deceit on the corporation (assuming the independent stockholders were standing in the place of the defrauded corporate

entity as suggested by the court of appeals) in violation of subdivision (3)

of Rule 10b--5."

Last year's annual report 50 discussed the reasons for the Commission's disagreement with the decision by the Court of Appeals for the

Ninth Circuit in S.E.C. v. National Securities, Inc.51 During the fiscal

year the Supreme Court reversed the decision of the court of appeals

and held," in accordance with the views expressed by the Commission, that the McCarran-Ferguson Act 53 does not preclude the applica-

.. 393 F. 2d 865 (C.A. 3, 1968) .

.. Civil Action No. 96--92,D. N.J. (June 25, 1969).

r.o See 34th Annual Report, p. 105.

61 387 F. 2d 25 (Hl67).

""393 U.S. 453 (1969).

"15 U.S.C. 1011-1015.
THIRTY-FIFTH ANNUAL REPORT 113

tion of the anti-fraud provisions of the Securities Exchange Act to

false and misleading statements made in soliciting stockholder consents w a merger of insurance companies. While recognizing that

approval of insurance company mergers is a matter governed by State

law, "the paramount Federal interest in protecting shareholders [was

held] in this situation [to be] perfectly compatible with the paramount State interest in protecting policyholders." Since the McCarran-Ferguson Act purports to make the States supreme only with

respect to laws "regulating the business of insurance," the court

observed that State activity focusing upon the relationship between

a stockholder and the company in which he owns stock "is not insurance regulation, but securities regulation" and thus not within the

scope of the McCarran-Ferguson Act. The court also stated that,

although securities regulation by the States "may co-exist" with

securities regulation under the Federal securities laws, "it has never

been held that State regulation of insurance securities preempts Federal regulation."

The court rejected an argument, based on the so-called "no-sale

doctrine," that the complaint failed to allege misstatements "in connection with the purchase or sale of any security," as required by Section 10(b) of the Securities Exchange Act and Rule 1Ob-5thereunder.

Itpointed out that the "no-sale doctrine" is specifically applicable only

to casesinvolving the registration provisions of the Securities Act, and

that, where an exchange of shares is involved, as in some merger situations, stockholders of a nonsurviving company are deemed to have

" 'purchased' shares in the new company by exchanging them for their

old stock." The court also held that there was no bar to the application

of Rule 10b-5 to misstatements in proxy soliciting materials, stating:

"Section 10(b) applies to all proscribed conduct in connection with a purchase or sale of any security; Section 14 applies to all proxy solicitations,

whether or not in connection with a purchase or sale. The fact that there

may well be some overlap is neither nnusual nor unfortunate."

In Mader v: Armel,54 the court, following the position advocated by

the Commission in a brief, amicus curiae, held that an exchange of

shares by minority shareholders pursuant to a merger agreement

constitutes a "purchase" and "sale" of securities and affords those

shareholders standing to maintain a suit under Section 10(b) of the

Securities Exchange Act and Rule 10b-5 thereunder.

In OaTTollv. First National Bank of Lirwolnwood,55 the court agreed

with the position taken by the Commission, amicus curiae, that the

.. 402 F. 2d 158 (C.A. 6,1968), cert. denied, 394 U.S. 930 (1969).

"413 F. 2d 353 (C.A. 7, 1969), cert. denied 38 U.S.L.W. 3254 (U.S., Jan. 13,

1970).

373-754--70----9
114 SECURITIES AND EXCHANGE COMMISSION

amended complaint stated a claim against the defendant bank for

violations of Section 10(b) of the Exchange Act and Rule 10b-5.

The complaint alleged a scheme whereby the bank would delay the

payment of sight drafts for securities purchased by certain of its

customers, in the hope that the price of the purchased securities would

rise, and the purchase could be financed by the proceeds of the sales or

pledges of the securities purchased. The court agreed that the Securities

Exchange Act is not intended to provide protection only for unsophisticated investors; ruled that the bank's participation in the scheme

was a sufficient connection with the fraud to satisfy the "in connection

with" clause even though the bank itself neither bought nor sold securities; ruled that the bank was "any person" within the purview of

Section 10(b) 'and Rule 10b-5; and refused to read into Section 10(b)

and Rule 10b-5 a contributory negligence standard as the bank had

urged.

Tender Offer Cases.- The Commission during the fiscal year participated as amicus curiae in three cases invol vil1g tender offer

situations.

In Eleotronic Specialty v, International Oontrols,56 the Commission

took the position that a company that is the target of a cash tender offer

has standing to sue for alleged violations of Sections 14(d) (1) and (e)

of the Exchange Act which were part of the recently enacted tender

offer legislation." Its memorandum, which dealt only with the issue of

standing, was submitted at the request of the district court in connection with the defendants' motion for summary judgment. The district

court held, as the Commission had urged, that the target corporation

did have standing to seek injunctive relief. On appeal, the Court of

Appeals for the Second Circuit disagreed with the district court's

finding that the complaint stated a violation of the tender offer provisions involved but agreed that the target corporation had standing. It

reasoned that the purposes of the tender offer legislation would best

be accomplished by allowing the target corporation to have standing

since, among other things, "the superior resources of the corporation

. . . can be vital in . . . [the context of violations of the securities

laws in the course of a tender offer] where remedial action must be

speedy and forceful"

Subsequently, the Commission, in Pan American Sulphur Oompany

v, The Susquehanna Corporations» had occasion to take exception to

certain language in the court of appeals' decision in Eleotronic Spedalty which suggested that the remedies of divestiture or disfranchise58 409 F. 2d 937 (C.A. 2,1969) .

, See 34th Annual Report, pp. 9-10 .

.. COR Fed. sec. Rep. 192,473 (W.D.Tex., May 28,1969).

•
THIRTY-FIFTH ANNUAL REPORT 115

ment are inappropriate for violations of the tender offer provisions.

In a memorandum dealing solely with the question of appropriate

remedies, the Commission stated that the opinion in that case "failed to

give sufficient recognition to the principles, ... establishing the importance of effective remedies as an enforcement weapon to deter further violations. In this connection, the court attached undue significance to the possible monetary loss to the defendant from an order of

divestiture or disfranchisement." The Commission further urged that

the remedy of precluding (either by injunction or divestiture) the

tender offeror from exercising control over the target company through

the use of the unlawfully acquired shares affords "some redress to the

nontendering shareholder by preventing what may be a change in the

nature of his investment that he did not desire; it also serves as a

deterrent to future violations by depriving the wrongdoer of the fruits

of his misconduct." The district court opinion, which enjoined the

defendants from voting the shares acquired in connection with violations of the securities laws, is consistent with the views expressed by

the Commission."

In a related case, Iroquois Industries, Inc. v, Syracu.se Ohina Oorporation, where the alleged violations of the securities laws occurred

prior to the passage of the tender offer bill, the Commission took the

position in a brief submitted amicus curiae to the Court of Appeals

for the Second Circuit that the corporation making a tender offer had

standing to sue the target corporation for its alleged violations of

Section 10(b) of the Exchange Act and Rule 10b-5. Subsequent to the

end of the fiscal year, the court affirmed the district court's dismissal

of the action for lack of standing."

Criminal Proceedings

Among the important criminal prosecutions initiated during the

year were several involving attempts to evade provisions of the securities laws by channelling activities through various foreign countries

that have strict secrecy laws regarding financial activities. The Arzi

Bank A. G. of Zurich, Switzerland, was indicted and pleaded guilty

to a charge that it violated the margin rules established by the Federal Reserve Board and enforced by the Commission." The indictment charged that since 1964 the Bank had been assisting certain

American investors to circumvent these requirements by permitting

50 This case is being appealed to the Court of Appeals for the Fifth Circuit. In

a memorandum submitted to that court, the Commission stated that it adheres

to its position in the court below .

.. 417 F.2d 963 (C.A. 2,1969).

m. See Litigation Release Nos. 4185 and 4186 (December 18, 1968).
116 SECURITIES AND EXCHANGE COMMISSION

such investors to trade on as little as 10 percent margin through

omnibus accounts maintained by the Bank at various New York

Stock Exchange member firms. In a related case, Coggeshall & Hicks,

a New York Stock Exchange member firm, and five of its partners and

employees were indicted on charges of conspiring with the Bank to

arrange illegal extensions of credit, in connection with purchases and

sales of securities channelled through an omnibus account maintained

with the firm by the Bank." Three of the individual defendants

pleaded guilty to the charge.

Inanother case involving the use of Swiss and other foreign banks

to circumvent provisions of the Federal securities laws, two indictments were returned against Jerome Deutsch, executive vice-president

of Realty Equities Corporation, a diversified New York concern."

The first indictment among other things charged Deutsch and Nate

Dolin, an officerand director of an affiliated company, with violations

of the mail fraud statute and anti-fraud provisions of the Exchange

Act in connection with the sale by Realty Equities and others of

promissory notes with warrants attached to Swiss banks, with undisclosed personal profits being realized by Dolin when the Swiss

banks in turn resold the notes and warrants to Equity Growth Fund

of America, Inc., a mutual fund. The second indictment charged

Deutsch and Frank D. Mills, a former vice president of the Puritan

Fund of Boston, Massachusetts, and an officerof the Fidelity Trend

Fund of Boston, Massachusetts, with violations of anti-fraud provisions of the Exchange Act and the provisions of Section 11 of the

Investment Company Act of 1940, which prohibit joint ventures between investment companies and their affiliates without prior Commission approval and prohibit investment company officers from

receiving undisclosed compensation in transactions entered into by

the investment company. The charges centered around Mills' purchase from Deutsch, for Puritan Fund and Fidelity Trend Fund, of

Realty Equities promissory notes with warrants attached without

prior Commission approval, and the payment of undisclosed compensation to Mills by Realty Equities and one of its officersin connection with these transactions.

The former president and chairman of the board of directors of

VTR, Incorporated, whose shares are listed on the American Stock

Exchange, was indicted together with a former broker-dealer, three

promoters, another person associated with VTR, and a Liechtenstein

trust, for conspiracy to violate, and substantive violations of, the

.. See Litigation Release No. 4333 (May 19,1969) .

.. See Litigation Release No. 4297 (April 11, 1969).
THIRTY-FIFTH ANNUAL REPORT 117

registration and anti-fraud and antimanipulative provisions of the

Securities Act and the Exchange Act in connection with a scheme to

distribute unregistered VTR shares at manipulated prices, and to

conceal the identity of the sellers by utilizing Swiss and German

banks and a Liechtenstein trust, all operating under cover of strict

secrecy laws in their respective countries. The indictment charged

that simultaneously with the illegal distribution, the defendants made

a world-wide effort to manipulate upward the price of VTR stock on

the American Stock Exchange." One promoter and the Liechtenstein

trust have pleaded guilty to the charges, and the remaining defendants are awaiting trial.

Two Canadian promoters and one English promoter, along with a

Panamanian bank, and a Bahamian bank operating out of Switzerland, were indicted for conspiring to violate and substantive violations of the registration and anti-fraud provisions of the Securities Act

and the Exchange Act, and the Federal mail fraud statute." The

indictment charged a schemewhereby American investors were enticed

by the defendants to exchange securities held in dormant or defunct

Canadian mining companies for allegedly valuable new securities of a

complex of companies operated by the defendants in Panama and the

Bahamas. To effect such exchanges, investors were required to pay

transfer fees, transfer taxes, and a supposedly due United States interest equalization tax to a bank controlled by the defendants in Panama.

All of such funds were converted to the defendants' own use and benefit. This case has not been tried, since the defendants are currently

either fugitives or incarcerated in other countries. Canadian Provincial

authorities in Toronto, Ontario, rendered material assistance to the

Commission in the development of this international securities fraud

case.

Shortly after the end of the fiscal year, First Hanover Corporation,

a New York Stock Exchange member firm, Alfred M. Lerner, its

president, and three other defendants were indicted for conspiracy

to violate, and substantive violations of, the margin requirements of

Regulation T of the Federal Reserve Board and the Federal false

statements statute." The indictment charged that in connection with

an attempted takeover of Holly Sugar Corporation the defendants

permitted another company to purchase Holly Sugar securities in an

omnibus account maintained at First Hanover by a brokerage firm

located in Montevideo, Uruguay, without complying with applicable

margin requirements. In a second indictment, Lerner was charged

with violations of the anti-fraud provisions of the Exchange Act

.. See Litigation Release No. 4265 (March 21. 1969).

.. See Litigation Release No. 4325 (May 23,1969) .

.. See Litigation Release No. 4383 (July 30,1969).
118 SECURITIES AND EXCHANGE COMMISSION

for failure to disclose in registration statements filed with the Commission on behalf of three corporate issuers that material amounts of

each issue were to be sold to a Panamanian company controlled by

Lerner, and that such purchases were to be channelled through several

Swiss banks and a broker-dealer located in Montevideo.

Significant indictments returned during the year in other cases included indictments charging violation of Federal Reserve Board Regulation U which regulates the amount of credit that banks can extend to

finance the purchase of listed securities; 67 violation of anti-fraud provisions by officers of a broker-dealer who allegedly failed to disclose

that the firm could not promptly deliver securities being sold, because

of the precarious financial condition of the firm; 68 manipulation of

the price of Rand Development Corporation stock through misleading

press releases relating to an alleged "cancer cure," in an attempt to

forestall a bank from calling substantial loans secured by Rand Development stock; 69 and violations of the registration and anti-fraud

provisions of the Securities Act and the mail fraud and conspiracy

statutes in connection with the sale of "bond investment certificates"

and other securities of Louisiana Loan and Thrift Corporation 70 and

Arkansas Loan & Thrift Corporation."

In disposing of pretrial motions in a case that has not yet been

tried, the Federal district court in the Southern District of New York

held that the "short selling" provisions of Section lO(a) of the Exchange Act and Rule lOa-l thereunder were not unconstitutionally

vague, since on their face they define a crime with sufficient precision

to enable a person of common intelligence to understand the type of

activity proscribed and to conduct himself within the confines of the

law.? In the same case, the court upheld the constitutionality of the

penalty provision of Section 32 of the Exchange Act which makes the

wilful violation of a rule under the Act a felony unless the defendant

can prove that he had no knowledge of the rule, in which case the

crime is reduced to a misdemeanor. Another district court, interpreting Section 32, held that two defendants who had pleaded guilty to

violations of Rule lOh-5 in the case involving the collapse of Westec

Corporation, the Texas-based conglomerate, were guilty of felonies,

rejecting their claim that they were guilty only of misdemeanors

.7 See Litigation Release No. 4352 (June 13, 1969) .

.. See Litigation Release No. 4292 (April 14, 1969) .

•• See Litigation Release No. 4189 (December 20, 19GB).

70 See Litigation Release No. 4244 (February 19, 1969).

71 See Litigation Release No. 4224 (February 4,1969).

7J United States v. Mandel, 296 F. Supp. 1038 (S.D. N.Y. 1969).
THIRTY-FIFTH ANNUAL REPORT 119

since they allegedly had no actual knowledge of the specific language

of Rule 10b-5.73 The court found that they knew that the Act proscribed fraud and manipulation, and held that, notwithstanding their

claimed ignorance of the specific language of Rule 10b-5, such knowledge constituted sufficient criminal intent to make their activities

felonious.

In United States v. Frank,74 involving a charge of criminal contempt based on violation of an injunction issued at the Commission's

request, the U.S. Supreme Court held that it was not error for the

trial court to place the defendant on probation for 3 years even though

he had requested and been denied a jury trial. The Court applied

the principle of Ohelf v. Schmaokenberq 75 to criminal contempt cases

arising out of violations of civil injunctions obtained by Commission;

i.e., that the defendant is not entitled to a jury trial as long as

the sentence imposed upon conviction does not exceed 6 months

imprisonment.

COOPERATIVE ENFORCEMENT PROGRAM

In recent years the Commission has given increased emphasis to the

coordination of its enforcement activities with those of the various

State and local authorities, the self-regulatory agencies and foreign

securities agencies. This program encompasses the referral to State

and local authorities for investigation and criminal or other action of

those violations where the amounts of money or the number of investors involved do not appear to be substantial enough to warrant development of the case at the Federal level. The Commission frequently

provides manpower assistance to these authorities in the development

of such cases."

During the fiscal year, the Commission continued its program of

cooperative regional enforcement conferences at each of its regional

offices. These conferences, during which Commission personnel meet

with personnel from State securities commissions, post officeinspectors,

Federal, State and local prosecutors and local representatives of 001£-

regulatory agencies such as the NASD, are designed to promote the

exchange of information concerning regional enforcement problems,

the development of methods of increasing cooperation and communication, and the elimination of needless effort and waste of manpower

73 United, States v. Lilley and Baker, 291 F. Supp. 989 (S.D. 'I'ex., 1968).

395 U.S. 147 (1969) .

.. 384 U.S. 373 (1966)

••See, e.u., Litigation Releases Nos, 4123 (October 4,1968), 41:l3 (October 11,

1968),4179 (December 10,1968),4246 (February 24,1969),4319 (May 8, 11)69)

and 4357 (June 25,1969).

"

•
120 SECURITIES AND EXCHANGE COMMISSION

and other resources in the regulation of the securities markets. Although the Commission served as the primary agency in establishing

these cooperative enforcement conferences, they have progressed to

the point where State securities commissions are now often the hosts

or co-hosts of the programs. In addition, the Commission's regional

officeshave taken steps to improve the coordination of inspections and

other activities with State securities administrators and with the

NASD in those areas where their respective jurisdictions overlap. Staff

members of the Commission and of certain State authorities have

conducted joint inspections which have made the entire inspection

program more effective.

For the past 3 years the Commission has held one or two-week

nation-wide enforcement training sessions at its headquarters officein

"'\Vashington,D.C. to which it has invited staff members of State and

foreign securities commissions. The 1969 session was attended by government officialsfrom France, Canada, Brazil, Puerto Rico and practically every State, as well as by staff members from each of the

Commission's officesthroughout the country.

In September 1968, representatives of various regulatory agencies

met in Philadelphia to consider problems of supervision of the operations of broker-dealers in light of the serious problems raised by the

high volume of securities transactions. It was concluded that many

broker-dealer managements had not used adequate supervisory procedures to cope with current selling and back officeproblems in any

meaningful manner. As a result, a joint release was issued by the

participating agencies-the Commission, the NASD, the PhiladelphiaBaltimore-Washington Stock Exchange, and the securities administrators of Maryland, Pennsylvania, Virginia and the District of

Columbia-emphasizing the responsibility of broker-dealer managements for adequate supervision so as to safeguard against improper

sales practices and deficienciesin back officeprocedures, listing certain

supervisory functions of vital concern and pointing out that noncompliance with supervisory responsibilities may lead to disciplinary

action."

ENFORCEMENT PROBLEMS WITH RESPECT TO FOREIGN SECURITIES

During fiscal year 1969 the staff of the Commission, working in

many instances in cooperation with foreign authorities, intensified its

efforts to curb sales within the United States of foreign securities

not registered under the Securities Act of 1933. Attempts to sell foreign securities in violation of the registration provisions included

campaigns by mail sent from outside the United States to prospective

77 Securities Exchange Act Release No. 8404 (September 11, 1068).
THIRTY-FIFTH ANNUAL REPORT 121

purchasers in the United States soliciting the purchase of securities of

worthless or nonexistent companies, and distributions of shares by controlling stockholders of a foreign company whose stock is listed on the

American Stock Exchange. In these and other cases shares were purchased by investors in the United States without the benefit of the

extensive disclosures provided by the registration and prospectus provisions of the Securities Act.

An example of the former type of operation was the mailing of a

purported market letter bearing a Jamaica, West Indies, address but

printed in and mailed from Toronto, Ontario, Canada, recommending

shares of stock of a company called California and Caracas. This letter was sent to a list of United States shareholders of a well-known

Canadian company having substantial assets. The mailing was followed by long distance telephone calls from New York City urging

these shareholders to send in their shares of the Canadian company in

order to exchange them for shares of California and Caracas. As a

result of these activities, the Commission added California and Caracas to its Foreign Restricted List," which consists of foreign companies whose securities the Commission has reason to believe are being,

or recently have been, offered for public sale and distribution in the

United States in violation of the registration requirements of the

Securities Act,79

Another unlawful distribution involved sales of the shares of Revenue Properties Company Limited, a Canadian real estate company. As

a result of the large volume of trading in Revenue Properties' stock on

the American Stock Exchange and a rapid and substantial price increase, the American Stock Exchange halted trading in April 1969.

The Commission subsequently instituted an action in the U.S. District

Court for the Southern District of New York against the company,

its controlling persons and others to enjoin further offers and sales

of such stock in violation of the Securities Act. The complaint alleged

among other things that controlling persons of the company had sold

a large number of shares of its common stock, including some to U.S.

residents, at a time when a registration statement covering other shares

of the controlling persons was pending before the Commission and

that the registration statement, when it became effective, failed to disclose such sales. With the defendants' consent, the court permanently

enjoined them against further violations of the Securities Act's registration provisions in connection with the offer and sale of Revenue

.. Securities Act Release No. 4981 (June 26, 1969).

'9 See p. 123, intra, for the names of companies on the List as of the end of

the fiscal year.
122 SECURITIES AND EXCHANGE COMMISSION

Properties shares,"? The Ontario Securities Commission concurrently

conducted an investigation that resulted in the filing of criminal

charges against the controlling persons for false statements or misleading omissions in registration statements and financial statements

filed with that Commission.

In February 1969, the Commission obtained an injunction in the

U.S. District Court for the Southern District. of Illinois against a

number of Panamanian, Bahamian and European companies, including DeVeers Consolidated Mining Corporation S.A., and their principal promoters who were engaged in the offer and sale to American

investors of unregistered securities of those companies by fraudulent

means." Simultaneously with the filing of its complaint seeking an injunction, the Commission had also added to its Foreign Restricted

List several of the defendant companies which were not already on

the list.

At the Commission's request, the U.S. Post Office Department at

various times during the past few years has issued foreign postal

fraud orders against several of the companies referred to above in an

effort to combat fraudulent promotions emanating from Panama and

the Bahamas Islands. While such orders do not halt mail sent into the

United States by foreign-based promoters, return mail from United

States residents to the promoters' foreign addresses is returned to the

senders stamped "Fraudulent." In this manner, the promoters are

denied the fruits of their illegal schemes.

At June 30, 1969, the following 39 companies were on the Commission's Foreign Restricted List:

80 See Litigation Release No. 4312 (May 8, 1969).

81 See Litigation Release No. 4228 (February 6,1969). For a discussion of criminnl proceedings involving some of these companies and promoters, see P. 117.

supra.
BAHAMIAN

American International Mining Compressed Air Corporation Limited

Durman, Ltd., formerly known us

Bankers International Investment

Corporation

United Mining and Milling Corporation

BRITISH HONDURAN

Caribbean Empire Company, Ltd.

oAN AD IAN

Allegheny Mining and Exploration

Company Ltd.

Amalgamated Rare Earth Mines, Ltd.

Antoine Silver Mines, Ltd.

Briar Court Mines, Ltd.

Claw Lake Molybdenum :'.:Iines,Ltd.

Crest Ventures, Ltd.

Ethel Copper Mines, Ltd.

Golden Age Mines, Ltd.

Ironco Mining & Smelting Company,

Ltd.

Kenilworth Mines, Ltd.

Klondike Yukon Mining Company

Kokanee Moly Mines, Ltd.

Lynbar Mining Corp., Ltd.

Norart Minerals Limited

Obsco Corporation, Ltd.

Pacific Northwest Developments, LIIl.

Pascar Oils, Ltd.

Pyrotex Mining and Exploration Company, Ltd.

Yukon Wolverine ~Iining Company

Trihope Resources, Limited

Wee Gee Uranium Mines, Ltd.

PANAMANIAN

British Overseas Mutual Fund Corporation

Cerro Azul Coffee Plantation

Continental and Southern Industries,

S.A.

Crossroads Corporation, S.A..

Darien Exploration Company, S.A.

DeVeers Consolidated Mining Corporation, S.A.

Euroforeign Banking Corporation,

Ltd.

Global Explorations Inc.

Panamerican Bank & Trust Company

Security Capital Fiscal & Guaranty

Corporation, S.A.

Victoria Oriente, Inc.

EUROPEAN

Central and Southern Industries Corp.

WEST INDIES

California and Caracas

123
PART V

REGULATION OF INVESTMENT COMPANIES

In broad terms, an investment company is any arrangement by which

a group of persons invests funds in an entity that is itself engaged in

investing in securities. Investment companies are an important vehicle

for public participation in the securities markets. They enable small, as

well as large, investors to participate in a professionally managed and

diversified portfolio of securities.

The Investment Company Act of 1940 sets forth the Commission's

responsibilities in protecting investors in such companies. Itprovides

a comprehensive framework of regulation which, among other things,

prohibits changes in the nature of an investment company's business

or its investment policies without shareholder approval, protects

against loss, outright theft or abuse of trust, and provides specific

controls to eliminate or to mitigate inequitable capital structures.

The Act also requires that an investment company disclose its financial

condition and investment policies; requires management contracts

to be submitted to shareholders for approval; prohibits underwriters,

investment bankers, or brokers from constituting more than a minority of the investment company's board of directors; regulates the

custody of its assets; and provides specific controls designed to protect

against unfair transactions between investment companies and their

affiliates.

In addition to the requirements of the Investment Company Act,

an investment company must comply with the Securities Act of 1933

when it makes an offering of its securities and it is subject to the applicable provisions of the Securities Exchange Act of 1934, including

those relating to proxy and tender offer solicitations and insider

trading and reporting rules.

COMPANIES REGISTERED UNDER THE ACT

As of June 30, 1969, there were 1,167 investment companies registered under the Act, whose assets had an aggregate market value

of approximately $72.5 billion. Compared with corresponding totals

at June 30, 1968, these figures represent an over-all increase of approximately $2.7 billion, or about 4 percent, in the market value of

assets and an increase of 200, or almost 20 percent, in the number

of registered companies.

The following table shows the numbers and categories of registered

companies and the approximate market value of the assets in each

category as of June 30,1969.

124
THIRTY-F~ ~AL REPORT 125

Companies Registered Under the Investment Company Act of 1940 as of June so, 1960

I Apjn oxunate

Number of registered companies market value of assets of active compames

Aetrve Inaetrve Total (rrnlhons)

Management open-end ("Mutual Funds") ___________ 679 36 715 $54,452

Funds having no load or load not exceeding 3 percent of net asset value ________________________ 146 4,372 Variable annuity-separate accounts ________________ 39 261 Capital leverage compauies ________________________ 1 42 All other load funds ________________________________ 493 49,777

Management closed-end ______________________________ 194 49 243 8,587

Small husiness investment compames ______________ 49

1

245 Capital leverage companies _________________________ 8 373 All other closed-end companies _____________________ 137 7,969

Unit investment trusts ______________________________ 170 31 201 I 8,439

Variable annuity-separate accounts _________________ 10

8/

3 All other unit mvestment trusts 160 8,436

Face-amount certificate companies ___________________ 6 2 987

TotaL _________________________________________ 1,049 118 1,1671 72,465

"Jnaetrve" refers to registered comparues which as of June 3D,1969, were in the process of being liquidated

or merged, or have filed an application pursuant to Section 8(t) of the Act for deregrstrauon, or WhICh have

otherwise gone out of existence and remain registered only until such tune as the Cornrmssion issues orders

under Section 8(t) termmatmg their regtstratron.

The approximately $8.4billion of assets of the registered unit investment trusts includes approximately $7.9 billion of assets of unit investment trusts which invest in securities of other registered investment

companies, substantially all of them mutual funds.

A total of 222 companies registered under the Investment Company

Act during the fiscal year, a greater number than registered. in any

year since the adoption of the Act. The following table shows the

various categories of companies registered during the fiscal year and

those which terminated their registrations.

New Registrations, and Terminations of Registration, During the Fiscal Year Ended

June 30, 1969

Registered

during the

fiscal year

I Regtstration

terminated

during the

fiscal year

441 16

1~ I 0

2

221 2

~l 1

22

o

16

o

U

3

3

Management open-end ("Mutual Funds") Funds havmg no load or load not exceeding 3 percent of net asset value Variable annuity-separate accounts All other load funds

Sub-totaL -- -- -- -- -- ---- -- -- -- -- -- ---- - --- - --- ---i

Mii~~~~~=:~Jf~~~:_~~~~~~_l~~_-_:::: :::::::::::::::::::::::::::\

sub-total,

Umt Investment trusts Variable annuity-separate accounts All other unit investment trusts

Bub-total,

Face-amount certificate compames

Total

33

14

100J

106 I

4~ I

-

_____ • _____________

•

_

_ -- -- _

=====

_

_

_

_

_

_
126 SECURITIES AND EXCHANGE COMMISSION

As the table shows, 20, or approximately 9 percent, of the newly

registered companies were variable annuity separate accounts of insurance companies.' Including these companies, there were 49 active

variable annuity separate accounts registered at June 30, 1969, consisting of 10 unit investment trusts and 39 management open-end investment companies. A significant part of the Commission's regulatory

effort with respect to variable annuities has involved the application of

the requirements of the Investment Company Act to the patterns and

procedures which have grown up in the insurance industry.

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of assets of investment companies over the years since the enactment of the Investment

Company Act.

Number of investment companies registered under the Investment Company Act

and their estimated aggregate assets, m round amounts, at the end of each fiscal

year, 1941 through 1969

Number of companies Estimated

aggregate

FISC81 year ended June 30 market value

Registered I Registered Regtstratron I Registered of assets at at beginning dunngycar terminated at end of end of year

of year during year year (Inmilhons)

194L ____________________________ 0 450 14 436 $2,500 1942_____________________________ 436 17 46 407 2,400 1943_____________________________ 407 14 31 390 2,300 1944_______ -----.--------------- 390 8 27 371 2,200 1945_____________________________ 371 14 19 366 3,250 1946_____________________________ 366 13 18 361 3,750 1947_____________________________ 361 12 21 352 3,600 1948_____________________________ 352 18 11 359 3,825 1949 359 12 13 358 3,700 1950_____________________________ 358 26 18 366 4,700 1951_____________________________ 366 12 10 368 5,600 1952_____________________________ 368 13 14 367 6,800 1953_____________________________ 367 17 15 369 7,000 1954 _____________________________ 369 20 5 384 8,700 1955_____________________________ 384 37 34 387 12, 000 1955_____________________________ 387 46 34 399 14, 000 1957 _____________________________ 399 49 16 432 15,000 1958 _____________________________ 432 42 21 453 17,000 1959_____________________________ 453 70 11 512 20,000 1960_____________________________ 512 67 9 570 23,500 196L ____________________________ 570 118 25 663 29,000 1962 _____________________________ 663 97 33 727 27,300 1963 _____________________________ 727 48 48 727 36,000 1964_____________________________ 727 52 48 731 41,600 1965 _____________________________ 731 50 54 727 44,600 1966 _____________________________ 727 78 30 775 49,800 1967 _____________________________ 775 108 41 842 58, 197 1968 _____________________________ 842 167 42 967 69,732 1969____________________________ 967 222 22 1, 167 72, 465

The increase in aggregate assets reflects the sale of new secunties as well as capital appreclatron.

1The applicability of the requirements of the Investment Company Act to variable annuity contracts was discussed in prior annual reports. Typically, a variable

annuity contract provides payments for life commencing on a selected date with

the amounts of the payments varying with the investment performance of equity

securities which are set apart by the insurance company in a separate account

which is registered with the Commission as an investment company. The separate

accounts now registered are either open-end management companies or unit

investment trusts,

•

_______ ---------------------

•
THIRTY-FIFTH AJ\TNUAL REPORT 127

INVESTMENT COMPANY FILINGS, OTHER THAN APPLICATIONS

As previously noted, investment companies offering their shares for

sale to the public must register them under the Securities Act of 1933.

The registration statements filed by such companies are reviewed for

compliance with that Act as well as the Investment Company Act.

Proxy soliciting material filed by investment companies is reviewed

for compliance with the Commission's proxy rules. Periodic and other

reports must also be filed by investment companies. The number of

registration statements and proxy soliciting materials filed or processed

during the fiscal year was as follows:

Pending Pendmg

Type of material June 30, Filed Processed June 30, 1968 1969

Registration statements and post-effcctrve amendments under the Securities Act of 1933______________________ 165 1,299 1,216 248

Registration statements under the Investment

Pr~~~ro'W';;t~~t~~: .; :::::::: ::::::::::::::::::: 112 194 146 160 85 630 542 173

Investment companies also filed 681 annual reports, 2,176 quarterly

reports, 1,752 periodic reports to shareholders containing financial

statements and 2,269 copies of sales literature. In each category of filings (except copies of sales literature) , there was a substantial increase

as compared to the preceding year.

Moreover, 22.5 percent more Securities Act registration statements

and post-effective amendments and 66 percent more registration statements under the Investment Company Act were processed in fiscal

1969than in the previous year,"

Expedited Procedures and Registration Statement Guidelines

The increase in the number of registration statements processed, with

no increase in staff personnel, may be attributed in part to the institution of certain expediting procedures and the publication of proposed

guidelines on the preparation of registration statements.

On March 12, 1969, the staff announced that certain procedures designed to expedite investment company filings would be introduced."

One of the major features of the expediting procedures is a check list

that serves as an aid both to counsel in the preparation of registration

statements and to the staff in its analysis of registration statements to

determine whether only a cursory or a detailed review is necessary. The

, The 222 newly registered companies represent the largest number of companies ever registered in one year, exceeding by 323 percent the nnmber registered in fiscal 1968,the next largest number.

S Investment Company Act Release No. 5632.
128 SECURITIES AND EXCHANGE COMMISSION

check list provides an opportunity for investment company counsel

to consider in advance questions which the staff otherwise routinely

raises. It also enables the staff to grunt expedited treatment to those

registration statements which do not raise novel or complex questions

and for which clear disclosure procedures have been established. In

addition, the check list may indicate to the staff that the registrant

has not complied with particular regulatory provisions and that

amendments are required.

In another effort to facilitate and expedite processing of filings,

the staff proposed guidelines for the preparation of registration statements on Forms S-4 and S-54 and Form N-8B-1.5 They represent

tentative views on matters which present recurring problems to the

securities bar and the investment company industry in the preparation of registration statements; public comment on the proposed guidelines has been invited.

DEVEWPMENTS WITH RESPECT TO PARTICULAR TYPES

OF INVESTMENT COMPANIES

The increase in filings under the Act has been accompanied by an

increase in the variety of forms of investment companies and in the

problems presented by developments in the industry.

Bank-Affiliated Investment Companies

Among the new types of companies which have filed registration

statements under the Investment Company Act during the past fiscal

year are various bank-affiliated investment companies.

The National Association of Mutual Savings Banks, an organization

of 529 member banks in 18 States, was instrumental in the organization of one of these affiliated funds. Shares of the fund will be offered

only to the depositors of mutual savings banks which have advised the

Association that they wish to participate in the program, to mutual

savings banks themselves or organizations controlled by such banks

and to trusts of which banking organizations are trustees, Unlike the

Commingled Managing Agency Account of the First National City

Bank of New York," this fund has not been organized as a department

of a bank and it will have an outside investment adviser which is not

a bank.

Also registered during the fiscal year were two investment companies

whose shares were to be offered exclusively to Ohio banks and trust

Investment Company Act Release No. 5G34, Securities Act Release No. 4953

(:March 11, 19G9).

Investment Company Act Rolense No. riG33(March 11,1969).

See p 13G.

•

•

•
THIRTY-FIFTH ANNUAL REPORT 129

companies. These companies were designed as investment vehicles for

the trust accounts of those banks and trust companies whose size did

not warrant the employment of a large staff of investment advisory

personnel.

Investment Companies Using Leverage and Other Special Investment Techniques

During the year, an open-end investment company registered which

proposes to invest in all types of registered investment companies and

in private limited partnerships, both foreign and domestic, and also to

establish private limited partnerships in which it may be the only

limited partner or major investor. Among other proposed investment

techniques, the fund contemplates utilizing leverage, effecting short

sales of mutual fund shares, making loans of portfolio stocks to mutual

funds, writing put and call options on mutual fund shares held in the

fund's portfolio, buying and selling put and call options written by

others and making loans to private limited partnerships.

Another new fund will invest in "conglomerate" companies, i.e.,

those companies which assemble subsidiary companies or operating

divisions in diverse industries under a central management, often

through programs of acquisition, merger and tender offer, and which

make extensive use of leverage in acquiring new companies.

One registrant proposed, as its main business activity, to invest in

special situations by acquiring at least a controlling interest in a number of relatively small companies and supplying those companies with

management and financial assistance. The securities of the portfolio

companies would not be retained but sold and the proceeds used for

further similar acquisitions.

Advisory Fees Tied to Performance

In recent years there has been a substantial increase in the number

of investment advisory contracts providing for compensation to the

investment adviser based on the performance of the investment company. At the end of fiscal 1968, some 54 investment companies with

performance fees had registered; in fiscal 1969, 66 more companies

with this type of fee arrangement registered. Performance fees are

essentially of two types. In one type the investment adviser receives a

fee (which mayor may not be in addition to a basic management fee)

based on a certain percentage of the investment company's net realized

capital gains and net unrealized capital appreciation. The other, and

more common, arrangement provides for payment of a basic fee of a

percentage of the company's net assets if the company's performance

is the same as that of a specified securities index or, in some cases, even

if such performance is below that of the index. An additional percentage of the company's net asset value, a so-called performance

373-754-70--10
130 SECURITIES AND EXCHANGE COMMISSION

bonus, is added if it out-performs the index by a certain percentage.

Under such formulas, the total annual advisory fee may be as high as

6 percent of the company's net assets.

Recently, a number of investment companies have adopted arrangements which provide for decreases in compensation in the event the

company under-performs the index. However, in many cases the percentage decrease is disproportionately less than the corresponding

percentage increase. With few exceptions, both types of performance

fees have been adopted by companies having capital appreciation as

their objective. Frequently the companies adopting such arrangements

are trading companies which engage in various speculative and highrisk investment activities. In light of these developments, the Commission proposed certain changes in the laws applicable to the receipt of

performance-based fees by investment advisers of investment companies. For a discussion of these proposals, see pages 14-15, supra.

Study of Speculative Investment Techniques

Prompted by the increase in the number and size of registered investment companies and private investment limited partnerships

("hedge funds") engaging in speculative investment techniques such

as those used by several of the funds discussed above, the Commission

directed its staff to conduct a detailed evaluation of the organization

and activities of such investment vehicles," The study involves an

analysis of the activities of some 50 registered companies and about 200

private limited partnerships. An analysis is being made of brokerage

practices; affiliations among broker-dealers, portfolio companies, and

other investment companies; the composition of portfolios; and the

mechanics of investment and trading operations. The staff study is

designed to 'aid the Commission in determining what effects the high

portfolio turnover and speculative investment practices and other

activities of such companies have on the securities markets and the

appropriateness of such practices for registered investment companies.

Investment Companies Which Invest in Restricted Securities

Many investment companies, both open and closed-end, have included some restricted securities in their portfolios. During the fiscal

year for the first time two closed-end companies registered which had

been formed for the specific purpose of investing primarily in restricted

securities. Restricted securities, sometimes referred to 'as "letter stock,"

are securities acquired in private placements and other transactions

exempted from registration under the Securities Act of 1933. The

transferability of such securities is limited because they may not he

1For further discussion of the hedge fund study, see p, 18, supra.
THIRTY-FIFTH ANNUAL REPORT 131

publicly sold absent registration and purchasers generally provide letters stating that they are acquiring the securities for investment and

not with a view to public distribution.

Because of the restrictions on transferability, restricted securities

are different from unrestricted securities of the same class. Under the

Investment Company Act, securities for which market quotations are

readily available are required to be valued at such quotations. Other

securities are required to be valued at fair value as determined in good

faith by the board of directors. Various approaches to the valuation

of restricted securities have been tried by investment companies: (1)

where there is a market quotation for unrestricted securities of the

same class that quotation has been used even though restricted securities were acquired at a discount from the market quotation for the

unrestricted securities; (2) such discount has been maintained; (3)

the discount has been amortized; or (4) a discount otherwise determined has been applied.

Valuation of an investment company's portfolio affects the price

that purchasers pay for shares of the company and the amount which

shareholders who redeem their shares receive. It also affects the compensation of management where such compensation is based either on

performance of the company or on net asset value. Finally, since valuation affects the reported performance of the company, it has an effect

upon the attitudes of investors toward the company.

For these reasons the Commission studied the valuation of restricted

securities by investment companies, giving attention also to the related

problems of liquidity and circumscription of investment judgment

which may arise when open-end companies acquire restricted securities. Subsequent to the end of the fiscal year, the Commission

issued a release setting forth its views regarding the problems inherent

in the acquisition of restricted securities by investment companies."

Portfolio Turnover Disclosure

In the past, the prospectuses of new funds often expressed portfolio

turnover policy in terms of reservation of freedom of action. During

the fiscal year, the Commission further refined the disclosure requirements in this area. Thus, a registrant which indicated that its annual

portfolio turnover rate could generally be expected to be greater than

100percent was required to make additional related disclosures, including an explanation that. such a rate means that on the average the

entire portfolio would be turned over within a year and that the :fund's

portfolio operations would be based on short-term market considerations as distinct from long-term investment. The company was also

• Investment Company Act Release No. 5847 (October 21,1969).
132 SECURIT!ES AND EXCHANGE COMMISSION

required to disclose that such trading entailed heavier brokerage expenses and might increase Federal taxes payable. New registrants

are now required to estimate their portfolio turnover rate in terms of a

percentage.

FOREIGN SALES GUIDEUNES

Inresponse to the rapid expansion of many domestic registered investment companies into overseas markets and the concern that some

'fo,reign governments have exhibited about the activities of such

companies in their countries, the Commission, in February 1969, published proposed guidelines on the applicability of the Federal securities laws to the offer and sale outside the United States of shares

of registered open-end investment companies," The proposed guidelines call for Securities Act registration of open-end investment company shares sold abroad and for the use of a prospectus in foreign

sales substantially similar to the one used domestically. In addition,

the regulatory requirements of the Investment Company Act would

generally be applicable. For example, the guidelines would make clear

that applications under the Investment Company Act must be filed

and granted to permit the foreign sale of shares at a price other than

the public offering price in effect in this country. Registration requirements under the Securities Exchange Act of 1934 for foreign

broker-dealers who offer and sell shares of open-end companies outside

the United States were also set forth. In response to comments received, revision of certain provisions of the guidelines is currently

under consideration.

APPLICATIONS FOR COMMISSION ACTION

Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt

any person, security, or transaction from any provision of the Act

if and to the extent such exemption is necessary or appropriate in

the public interest and consistent with the protection of investors

and the purposes fairly intended by the policy and provisions of the

Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), 17(d), and

23(c), contain specific provisions and standards pursuant to which

the Commission may grant exemptions from particular sections of

the Act or may approve certain types of transactions. Also, under

certain provisions of Sections 2, 3, and 8, the Commission may determine the status of persons and companies under the Act. One of

Securities .Act Release No. 4951, Securities Exchange .Act Release No. 8537,

and Investment Company .Act Release No. 5618 (February 25, 1969).

•
THIRTY-FIFTH ANNUAL REPORT 133

the principal activities of the Commission in its regulation of investment companies is the consideration of applications for orders

under these sections.

During the fiscal year, 249 applications were filed under these and

other sections of the Act, and final action was taken as to 156 applications. As of the end of the year, 244 applications were pending.

The following table presents a breakdown, by sections involved, of

the number of applications filed and disposed of during the year and

the number pending at the beginning and close of the year.

Applications Filed With or Acted Upon by Commission Under the Investment

Company Act During the Fiscal Year Ended June SO, 1969

Pendmg

Sections Subject July I, FIled Closed

1968

-- -- 3, 6______________ Status and exemption _______________________________ 45 57 38 5 ________________ Subclassiflcatton of Investment companies ___________ 0 1 0 7 ________________ Registration of mvestrnent compames _______________ 1 2 1 8(0 ______________'I'ermination of registratlon __________________________ 40 29 23 9, 10, 16__________ Regulation of affiliation of directors, officers, employ- 6 5 4

ees, mvestment advisers, underwriters and others. 11,25 ____________ Regulation of secunties exchange offers and reorga- 2 1 1

rnzatlon matters. 12, 14(a), 15______ Regulation of Iunctlons and actlvrties of investment 12 25 17

companies. 17_______________ Regulation of transactions with affiliated persons ____ 25 50 35 18, 22, 23_________ Reqmrements as to capital strueture.Joans, distribu- 15 74 33

tions and redemptions and related matters. 20_______________ Proxies, voting trusts, CIrcular owncrslup ____________ 100 27 _______________ Perlodic payment plans _____________________________ 28 _______________ Regulation 1 I 0 0 of face amount certIficate compames _____ 100 30_______________ Other periodic reports _______________________________ 2 5 4

TotaL 1 l5lIUUr1561

Pend109

June

30,

1969

64

1

2

46

7

2

20

40

56

1

1

1

3

244

Some of the more significant matters in which applications were

considered are summarized below:

The Slick Oorporatioti made an offer in January 1969, to the

common stockholders of Filtrol Corporation to exchange their shares

of Filtrol for shares of Slick. Because of the relative sizes of the two

companies Slick could acquire only about 10 percent of Filtrol's outstanding stock before exceeding the test set forth in Section 3(a) (3)

of the Investment Company Act that if 40 percent or more of a

company's assets are investment securities it is an investment company. However, the term "investment securities," as defined in the

Act, excludes securities issued by majority-owned subsidiaries of the

owner which are not investment companies. After discussions with the

staff, Slick agreed to file an application for exemption under Section

3(b) (2), which exempts companies primarily engaged in a business

other than that of investing in securities, as soon as it acquired 30

____ __ -- -- ---- -- ----- - - -- -- - - - - - - -- -- -- - - ---- -- - --- - - - - ---
134 SECURITIES AND EXCHANGE COMMISSION

percent of Filtrol's outstanding common stock and, if at the end of

the automatic exemption period of 60 days Slick had not acquired 50

percent or more of such stock and had not in that period obtained

an order pursuant to Section 3 (b) (2), to dispose of sufficient Filtrol

shares so that its remaining holdings of Filtrol stock would be no

more than 35 percent of its assets. Within the 60-day exemption period,

more than 50 percent of Filtrol's stock was acquired by Slick, and

Slick's Section 3(b) (2) application was withdrawn as moot.

Builders Resources (lorporation. applied pursuant to Section 6(c)

of the Investment Company Act for an exemption from all provisions

of the Act. The company was organized by Property Research Corporation and Donaldson, Lufkin & Jenrette, Inc. to provide equity

financing for residential construction through the formation of limited partnerships or joint ventures with small and medium sized

builders. All the shares of Builders Resources were held by the two

organizing corporations and six large publicly held corporations.

Because the definition of "security" in Section 2(a) (35) of the Act

includes a "participation in any profit-sharing agreement," Builders

Resources' participation in the joint ventures and limited partnerships could have been viewed as ownership of securities and the company might have been deemed an investment company subject to

regulation. Since the six publicly held corporations each owned more

than 10 percent of the voting securities of Builders Resources, the

company did not come within the exception from the definition of an

investment company which is provided by Section 3 (c) (1) of the Act

for a company which is beneficially owned by not more than 100

persons and which is not making and does not presently propose to

make a public offering of its securities. Builders Resources urged

that since none of the publicly held corporations had more than 1

percent of their assets invested in the company and all the eight

shareholders were financially sophisticated, regulation of the company under the Act was not necessary in the public interest.

The Commission granted the requested exemption with the conditions, to which Builders Resources consented, that (1) shareholders

shall be limited to the eight present corporate shareholders and a

limited number of employees who may receive options to purchase

shares and (2) none of the publicly held corporations owning stock

of Builders Resources shall invest more than 5 percent of their assets

in Builders Resources.t?

The General Electric Oompany filed an application 11 on behalf of

the General Electric S&S Program Mutual Fund for a number of

10 Investment Company Act Release No. 5654 (April 17, 1969).

11 See Investment Company Act Release No. 4973 (May 31, 1967).
TIDRTY-FIFTH ANNUAL REPORT 135

exemptions from the Act. The Fund is an "employees' security company," and as such is subject to Section 6(b) of the Act, which provides that the Commission shall exempt such companies "to the extent ... consistent with the protection of investors." The Fund is a part

of the General Electric Savings and Security Program under which

participating employees may purchase, in addition to Fund shares,

life insurance, U.S. Savings Bonds and General Electric common stock.

Several unions, whose membership includes employees of General

Electric, opposed a majority of the requested exemptions. After a

hearing was held and the staff in its brief to the hearing examiner

opposed a number of the requested exemptions, General Electric modified its application so as to request only those exemptions which the

staff considered appropriate.

The hearing examiner's initial decision granted these exemptions,

with two important exceptions. General Electric had requested an

exemption from Section 16(a) to permit it to appoint the five Fund

trustees, rather than have employees participating in the Fund elect

them. The hearing examiner decided that General Electric could appoint only two trustees, and that the employees were to elect the other

three. In addition, he denied an exemption from the requirement of

Section 32(a) that the Fund participants ratify the selection of the

Fund's auditor.

At General Electric's request, the Commission reviewed the hearing

examiner's decision relating to Sections 16(a) and 32(a). In a decision

rendered subsequent to the end of the fiscal year, the Commission

granted exemptions from these two Sections, concluding that the exemptions were consistent with the protection of investors in view of the

special character of an employees' securities company and the safeguards provided under the terms of the Fund and other applicable

statutory provisions."

The National Association of Small Business Investment Oompanies,

("NASBIC") filed an application pursuant to Section 6(c). NASBIC

is a trade association whose active membership consists of 230 small

business investment companies licensed by the Small Business Administration ("SBA") pursuant to the Small Business Investment Act of

1958. As of June 30, 1969, 49 of these SBIC's were also registered

under the Investment Company Act as management, closed-end, nondiversified investment companies. The application, on behalf of

those of NASBIC's members which are so registered, essentially seeks

an order exempting them from all the provisions of the Act except

those relating to registration, and transferring to the SBA the admin-

.. Investment Company Act Release No. 5830 (September 29, 1969).
136 SECURITIES AND EXCHANGE COMMISSION

istratiou of those provisions of the Investment Company Act deemed

applicable to SBIC's. The applicant contends that dual regulation by

the SBA and this Commission has resulted in conflicts which impede

the ability of small business investment companies to accomplish their

statutory mission of stimulating and supplementing the flow of private

equity capital and long-term loan funds to small business concerns.

Hearings were held on the application, in which the SBA participated;

as of the close of the fiscal year, no determination had been made.

Shortly after the close of the fiscal year, the Commission granted

applications by three open-end investment companies for exemption

from the retail price maintenance provision contained in Section 22(d)

of the Investment Company Act so as to permit sales of fund shares

to certain groups of persons without a sales load.

Thus, Transamerica Capital Fund, Inc. was authorized to sell its

shares without the usual 8l!z percent sales load to persons connected

with Transamerica Corporation, the parent of both the distributor of

the Fund's shares and its investment adviser, or to anyone of the more

than 100 subsidiaries or Transamerica Corporation, a total group of

over 22,000persons." FML Fund, Inc. was permitted to sell its shares

without a sales load to persons who are officers,directors or full-time

employees of the Fidelity Mutual Life Insurance Company, the parent

of both the distributor of the shares of FHL Fund and of its investment adviser.> And Hartwell & Campbell Fund, Inc., was permitted

to continue to sell its shares without a sales charge to those persons

who had been shareholders at the time that Hartwell & Campbell

changed from a no-load fund to a load fund."

In N .A.S.D. v. S.E.O.16 the Commission's order granting First National City Bank of New York exemptions from certain provisions

of the Investment Company Act with respect to a Commingled Investment Account which the Bank established and registered under

the Act was affirmed by the Court of Appeals for the District of

Columbia Circuit. In the same opinion, the court reversed the judgment of the district court in Investment Oompany Institute v. Oamp,

which had invalidated Regulations of the Comptroller of the Currency relied on by the Bank in establishing its Commingled Account.

The NASD and the I.C.I. have each filed a petition for certiorari in

the Supreme Court.

11 Investment Company Act Release No. 5751 (July 25,1969) .

.. Investment Company Act Release No. 5752 (July 25,1969).

]Ii Investment Company Act Release No. 5750 (July 25,1969) .

.. C.A.D.C., July 1, 1969. The Commission's order is discussed in its 32nd Annual

Report at pp. 104-105.
THIRTY-FIFTH ANNUAL REPORT

CONTROL OF IMPROPER PRACTICES

137

Inspection and Investigation Program

During the fiscal year, the Commission's staff conducted 72 inspections pursuant to Section 31(b) of the Investment Company Act.

Many of these inspections disclosed violations of the Investment Company Act and of other statutes administered by the Commission.

Among the violations were inadequate arrangements for safekeeping

of the investment company's portfolio securities, inadequate disclosures

concerning the activities of the investment company, failure to maintain adequate fidelity bond coverage for persons dealing with investment company assets and self-dealing transactions which included

arrangements by affiliates of investment companies to recapture fund

brokerage for their own benefit.

The tremendous influx of money into the mutual fund industry and

the proliferation of new funds have resulted in serious accounting and

bookkeeping problems. Some funds have priced shares inaccurately

because their books did not enable them to compute their net asset

value correctly. As a result of back officeproblems, several funds voluntarily suspended sales of shares until they were able to develop new

procedures for handling the increased volume of orders.

Largely as an outgrowth of information obtained during inspections,

11 private investigations were commenced during the fiscal year to

develop facts concerning what appeared to be serious violations. As a

result of the Commission's inspection and investigation program, approximately $1.1 million was returned to investors either directly or

indirectly during fiscal 1969.This brings to $6.8 million the sums returned to investors since the inception of the inspection program in

1963.

Civil and Administrative Proccedings

During the fiscal year, the Commission instituted two civil actions

and three administrative proceedings involving investment companies,

and continued prosecution of other investment company proceedings.

Portfolio Transactions.-Several proceedings involved alleged improprieties by investment advisers and principal underwriters of

mutual funds in the execution of portfolio transactions for the funds

and misrepresentations related to these transactions in the sales of the

funds' securities.

Brokerage commissions paid by Hubshman Fund, Inc. were being

recaptured by the Hubshman Management Corporation, the fund's

adviser-underwriter, in return for allocations of fund portfolio transactions. The Commission accepted an offer of settlement which provided, among other things, for the repayment to the Fund by the
138 SECURITIES AND EXCHANGE COMMISSION

adviser-underwriter of all amounts it had received or which had

been applied to obligations of the adviser as a result of such

"give-ups." 11

Consumer-Investor Planning Corporation, the manager-underwriter of Associated Fund Trust, and certain of the latter's affiliates,

allegedly received money and other benefits in connection with investment company portfolio transactions. Two affiliated persons were

directly compensated by certain broker-dealer firms in return for placing the Fund's portfolio business with those firms. In addition, compensation was received at a time when there was no valid management

or underwriting contract, since the management and underwriting

contracts with the Fund had been automatically terminated by the

hypothecation of outstanding voting securities of the Fund's managerunderwriter. No adequate disclosure of these matters had been made

in the Fund's prospectus. The Commission accepted an offer of settlement resulting in the suspension of the manager-underwriter and

respondent affiliates from certain brokerage activities. In doing so it

took into account that the practices had ceased and that certain payments were to be made to the Fund by the respondents. IS

In Provident Fund for Income, I'lUJ. the staff alleged, among other

things, that the Fund's registration statement failed to disclose that

(1) the president of the Fund, who was also president of a registered

broker-dealer, had made arrangements with other broker-dealers to

direct commissions to his brokerage firm in return for Fund brokerage

and (2) that the president's brokerage firm had received tender fees

when the Fund tendered certain of its securities in tender offers. In

April 1969, the Commission issued a stop order suspending the effectiveness of the Fund's registration statement; 19 the Fund thereafter

amended its registration statement, which, as amended, was declared

effective.

In S.E.O. v, Salik, which involved the receipt, by affiliated persons

of Republic Technology Fund, Inc., of brokerage commissions resulting from the Fund's portfolio transactions, the Commission sought an

injunction against Charles E. Salik, the Fund's chairman and president, alleging, among other things, that he had accepted compensation

for the purchase or sale of securities to or for the Fund, other than in

the course of business as an underwriter or broker, in violation of Section 17(e) of the Investment Company Act. On September 19, 1968,

the district court entered an order, with Sulik's consent, permanently

enjoining him from further violating certain provisions of the Invest17 Securities Exchange Act Release No. 8557 (March 20, 1969).

18 Securities Exchange Act Release No. 8542 (February 20, 1969).

" Securities Act Release No. 4965 (April 15, 1969).
THIRTY-FIFTH ANNUAL REPORT 139

ment Company Act and the Securities Act,20and the affiliates agreed

to return $140,224to the Fund, this sum representing the total amount

of "give-ups" received by the affiliates on Fund transactions.

Purchase of Restricted Securities.-Portfolio transactions by the

Mates Investment Fund, Inc., involving large purchases of restricted

securities, gave rise to a series of administrative proceedings. An in,"estigation wasinitiated after the Mates Fund voluntarily suspended sales

of its shares in June 1968because of the chaotic condition of its books

and records.

On December 20,1968, pursuant to Section 22(e) (3) of the Investment Company Act, the Commission issued an order suspending the

right of redemption of the Fund's outstanding redeemable securities.

The Fund had applied for the order after the Commission had suspended trading in the securities of Omega Equities Corporation, a

company whose securities represented almost 20 percent of the Fund's

portfolio.

In June 1969,the Commission instituted an administrative proceeding against Frederic S. Mates ("Mates"), Mates Financial Services,

a registered investment adviser owned by Mates, and Mates Management Company, investment adviser to the Mates Fund. Among other

matters, it was alleged that, contrary to representations to Fund

shareholders, Mates caused the Fund (a) to acquire substantial

amounts of restricted securities, (b) to impair its shareholders' right

to redemption, and (c) to obtain from banks loans of more than $7

million secured by a lien on the Fund's entire portfolio. Itwas further

alleged that Mates improperly valued the restricted securities and misrepresented to Fund shareholders and clients and prospective clients of

Mates Financial Services that the resulting increase in the Fund's net

assets and net asset value per share was due to his investment advice.

On June 12, 1969, the Commission issued an Order accepting an

offer of settlement." As a part of the settlement, Mates undertook that

he would not become associated with a broker-dealer without the approval of the Commission,the registration of Mates Financial Services

as an investment adviser was suspended for 100 days, and certain limitations were imposed on purchases of securities by the Fund. The

Commission's Order stated that detailed findings and an opinion

would be issued at a later date. At the same time, the Commission

ordered the Fund to process requests for redemption of its outstanding

shares beginning on July 22,1969.22

llIl See Litigation Release No. 4118 (September 30, 1968).

n Securities Exchange Act Release No. 8626, Investment Advisers Act Release

No. 247.

22 Investment Company Act Release No. 5706 (June 12,1969).
140 SECURITIES AND EXCHANGE COMMISSION

Transactions with Affiliated Persons.-In S.E.O. v. W011g,23 involving Puerto Rico Capital Corporation, a registered investment

company, the Commission, in June 1969, agreed to a settlement with

defendants Quing N. Wong and Josiah M. Scott which was thereafter

approved by the U.S. District Court for the District of Puerto Rico.

The Commission had asserted that \V"ong and Scott caused the investment company, of which they were officers and directors, to employ

its assets for their use and benefit.

Under the settlement, judgments in favor of the company were

entered against Wong for $350,000and against Scott for $150,000,to

be paid in designated installments; and Wong and Scott were enjoined

(Wong permanently and Scott until 1977) from further violations of

Section 17 (the anti-selfdealing Section) of the Investment Company

Act and Section 10(b) (anti-fraud provision) of the Securities Exchange Act of 1934 and Rule 10lr-5 thereunder, and from serving as

officers, directors or investment advisers of registered investment

compames.

In June 1969,the Commission filed a complaint in the U.S. District

Court for the Northern District of Illinois seeking the appointment of

a receiver for Advance Growth Oapital Oorporation; a registered investment company and small business investment company licensed by

the Small Business Administration." The Commission's complaint

also seeks an injunction against violations of the Investment Company

Act by Peter D. Giachini, chairman of Advance's board of directors,

and John J. Murphy, president of the company. An order is also requested, under Section 36 of the Act, barring these two persons from

serving or acting as officersor directors (or in other designated capacities) of any registered investment company.

The complaint alleges that during the years since 1965Giachini and

Murphy caused companies affiliated with Giachini to sell to, and to

purchase from, Advance and companies controlled by Advance, securities and other assets in violation of the prohibitions of Section

17(a) of the Investment Company Act. The complaint also alleges

that since July 1964 Giachini and Murphy caused Advance to effect

numerous loan or investment transactions in which Advance and

companies affiliated with Giachini were joint participants, in contravention of Section 17(d) of the Investment Company Act and Rule

17d-1 thereunder. Itis alleged that such loans and investments by Advance exceeded $2,200,000and constituted by far the major part of

Advance's business during the period in question.

.. Civ. .Action No. 65-375, U.S.D. C. for Puerto Rico. For earlier discussions of

this case see the 32nd .Annual Report, p. 118, and 33rd .Annual Report, pp. 111-112.

.. N.D. Ill., Civ•.Action No. 69 C 1266 (1969).
THIRTY-FIFTH ANNUAL REPORT 141

Failure to Register.- The American College Foundation, Inc.

("ACF") registered as an investment company by filing a Notification

of Registration on December 26,1967. Approximately 5 months later,

on May 24, 1968, it filed suit against the Commission in the U.S. District Court for the Southern District of Florida, Miami Division,

requesting the court to declare that ACF does not "fall within the

purview of the Investment Company Act or the Securities Act" and to

issue an order enjoining the Commission from interfering in the business of ACF. The Commission moved to dismiss ACF's suit for lack of

jurisdiction over the subject matter and failure to state a claim upon

which relief could be granted due to the fact that ACF had failed to

exhaust its administrative remedies. On September 11, 1968, the

court granted the Commission's motion.

Subsequently, the Commission brought suit against ACF and a

related corporation, International University Foundation, Ltd., and

certain of their associated persons. The complaint charged ACF with

failure to comply with the registration and reporting requirements

of the Investment Company Act. It charged that International was

operating an unregistered investment company; was offering and selling unregistered securities in violation of the Securities Act; and was

violating the anti-fraud provisions of that Act and the Securities

Exchange Act in connection with such sales. On October 2, 1969, a

judgment was entered in the case enjoining International, Gardner T.

Mulloy and Robert Downs from further violations of Sections 5(a)

and 5(c) of the Securities Act and Section 8(d) of the Investment

Company Act and ordering ACF, Mulloy and Downs to file registration statements for ACF. The charges of fraud were dismissed by

consent.

Performance Fees.-In De Reneis v. Levy/5 involving Oppenheimer Fund, Inc., the court found that Congress exempted investment

advisory contracts with investment companies from Rule 440A.11 of

the New York Stock Exchange, which prohibits fees for investment

advisory services "based on the profits realized." It had been claimed,

among other things, that the investment advisory contract between

Oppenheimer Fund, Inc., and its investment adviser from 1960 to 1967

was in violation of that rule. The Commission, at the request of the

court, had filed a memorandum, amicus curiae, in which it expressed

the view that the contract in question violated the rule. The court disagreed with that view, holding that the rule could not be applied to a

contract with an investment company. The court did not reach the

question of whether a private right of action exists, as the Commission

.. 297 F. Supp. 998 (S.D.N. Y., 1969).
142 SECURITIES AND EXCHANGE COMMISSION

had urged in its memorandum, for violation of a New York Stock

Exchange rule.26

Status Cases.-Last year's annual report 27 discussed H.E.O. v,Fifth

Avenue Ooaoh.Lines, Inc.,28 in which certain individuals affiliated with

Fifth Avenue were enjoined from violating the securities laws and a

trustee-receiver was appointed to conduct the affairs of Fifth Avenue,

register the company as an investment company, prosecute damage

suits against certain individuals and investigate and determine

whether other actions should be maintained. Appeals from that order

are pending. Subsequently, the trustee-receiver, among other things,

registered Fifth Avenue as an investment company and filed suit on

behalf of the company against the defendants in the Commission's

action and certain other individuals and corporations, 29 alleging that

certain of the defendants had systematically looted Fifth Avenue and

diverted its funds to the extent of approximately $7 million. In addition, he seeks an accounting and $20 million in punitive damages.

In Tanzer v. Huffines,so the Commission filed a brief, amicus curiae,

urging affirmance of the district court's appointment of a receiver

pendente lite for B.S.F. Company, a registered investment company,

in a stockholder's derivative action. B.S.F. is one of the companies that

had been under the control of several individuals who were also

defendants in the Commission's action against Fifth Avenue Coach

Lines, Inc. The Court of Appeals for the Third Circuit, adopting the

position urged by the Commission, affirmed the receiver's appointment.

CHANGES IN RULES

Rule 22c-I-"Forward Pricing" of Redeemable Securities of Registered Investment Companies

Rule 22c-1, adopted October 16, 1968,prohibits any registered investment company which issues any redeemable security; or any person

designated in such issuer's prospectus as authorized to consummate

transactions in any such security; or any principal underwriter of, or

dealer in, any such security, from selling, redeeming, or repurchasing

.. Shortly after the decision in DeRenzis, the Court of Appeals for the Seventh

Circuit, in Buttrey v. Merrill Lynch, Pierce, Fenner d Smith, Inc., 410 F. 2d 135,

certiorari denied 396 U.S. 838 (1969), held that a private right of action exists for

violation of New York Stock Exchange Rule 405, the so-called "know your customer" rule. The court of appeals cited with approval Judge Friendly's opinion

in ootonsa; Realtv Oorp. v. Bache d 00., 358 F. 2d 178 (C.A. 2), certiorari denied

305 U.S. 817 (1966).

07 See 34th Annual Report, pp. 117-118.

.. 289 F. Supp. 3 (S.D.N.Y., 1968) .

.. Gillespie v. Oohn, et al., S.D.N.Y.

so 408 F. 2d 42 (C.A. 3, 1969).
THIRTY-FIFTH ANNUAL REPORT 143

any such securities except at a price determined in accordance with the

provisions of the rule." The rule requires that the price be based on the

current net asset value of such security which is next computed after

receipt of a tender of such security for redemption or of an order to

purchase or sell such security. Current net asset value is defined by the

rule to be that computed on each day during which the New York

Stock Exchange is open for trading, not less frequently than once

daily as of the time of the close of trading on such Exchange. The effect

of the rule is to prohibit the former practice, deemed by the Commission to result in dilution of the value of the outstanding securities of the

issuer and to be unfair to security holders, of selling securities for a

certain period of time at a price based on a previously established net

asset value.

Rules Relating to Variable Annuities and Separate Accounts

Start-Up Exemptions.-During the past several years, a number

of insurance companies have established separate accounts for, and

engaged in the sale to the public of, variable annuity contracts. Such

separate accounts are investment companies within the meaning of the

Investment Company Act, and many have registered as such under the

Act. The securities issued by these separate accounts and the circumstances surrounding and conditions attached to their issuance have

created unique problems requiring the filing of applications on behalf

of such accounts for exemptions from various provisions of the Act.

As a result of experience gained in processing a number of such

applications for exemptions, the Commission concluded that it would

be appropriate to provide, through the promulgation of rules under

the Investment Company Act, certain limited exemptions which had

been previously granted by individual exemptive orders. Accordingly,

on January 24, 1969, the Commission published for comment 10 proposed rules for the purpose of eliminating the need for preparing,

filing, and processing applications of a routine nature in connection

with the organization and operation of separate accounts.

Shortly after the close of the fiscal year, the Commission adopted

new rules 14a-2, 15a-3, 16a-1, 32a-2, 228-1, 27c-1, 27a-1, 27a-2, 27a-3

and 0-1 (e) .32 Additional proposed rules relating to separate accounts

are presently under consideration which, if adopted, will eliminate the

need to file individual exemptive requests in other situations.

Rule 6e-l under the Investment Company Act and Amendment of

Rnle 156 under the Securities Act.-After the close of the fiscal year

the Commission adopted Rule 6e-1 under the Investment Company

.. Investment Company Act Release No. 5519.

12 Investment Company Act Release No. 5738 (July 10, 1969).
144 SECURITIES AND EXCHANGE COMMISSION

Act and an amendment to Rule 156 under the Securities Act,33which

deal with another type of insurance company separate account. Rule

6e-1 exempts from the registration requirements of the Investment

Company Act certain separate accounts established by life insurance

companies which hold assets attributable only to pension and profitsharing plans meeting the requirements for qualification under either

Section 401 or 404(a) (2) of the Internal Revenue Code. These are

commonly referred to as "qualified plans." They include plans established for self-employed persons pursuant to the provisions of the

Self-Employed Individuals Tax Retirement Act of 1962 ("SmathersKeogh plans"), as amended, since those plans also meet the requirements of Section 401 or 404(a) (2). The exemption is conditioned upon

compliance by such accounts with all but certain designated provisions

of the Investment Company Act and other requirements set forth in

the rule. Unlike Rule 3c-3 under the Investment Company Act, Rule

Ge-1 does not contain a prohibition against the allocation of employee

contributions to the separate account. Thus, separate accounts which

meet the more restrictive conditions for exemption under Rule 3c-3

will continue to enjoy the much more extensive exemption from the

Investment Company Act provided by that rule; on the other hand,

a wider variety of pension and profit-sharing plans will be a:ble

to be funded through contracts participating in separate accounts

which qualify for the narrower exemption under Rule 6e-1. In connection with its Rule 6e-1 the Commission also adopted Temporary

Form N-6E-l(T) and an amendment of Rule 156 under the Securities

Act of 1933to exclude transactions exempted under Rule 6e-1 as well

as those exempted under Rule 3c-3 of the Investment Company Act.

sa Investment Company A.ctRelease No. 5741 (July 15, 1969).
PART VI

REGULATION OF PUBUC-UTIUTY HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935, the Commission regulates interstate public-utility holding-company systems

engaged in the electric utility business and/or in the retail distribution

of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are subsidiary

companies of registered holding companies. There are three principal

areas of regulation under the Act. The first includes those provisions

of the Act which require the physical integration of public-utility

companies and functionally related properties of holding-company

systems and the simplification of intercorporate relationships and

financial structures of such systems. The second covers the financing

operations of registered holding companies and their subsidiary companies, the acquisition and disposition of securities and properties, and

certain accounting practices, servicing arrangements, and intercompany transactions. The third area of regulation includes the exemptive

provisions of the Act, provisions relating to the status under the Act

of persons and companies, and provisions regulating the right of

persons affiliated with a public-utility company to become affiliated

with a second such company through the acquisition of securities.

COMPOSITION OF REGISTERED HOLDING.COMPANY SYSTEMS

At the close of the 1969 fiscal year, there were 23 holding companies

registered under the Act. Of these, 20 are included in the 17 "active"

registered holding-company systems, 3 of the 20 being subholding

utility operating companies in these systems.' The remaining 3 registered holding companies, which are relatively small, are not considered

part of "active" systems," In the 17 active systems, there are 94 electric

1The three subholding companies are The Potomac Edison Company and Monongahela Power Company, public-utility subsidiary companies of Allegheny

Power System, Inc., and Southwestern Electric Power Company, a public-utility

subsidiary company of Central and South West Corporation.

These holding companies are British American Utilities Corporation; Kinzua

Oil & Gas Corporation and its subholding company, Northwestern Pennsylvania

Gas Corporation; and Standard Gas & Electric Company, which is in the process

of dissolution.

145

373-754--70----11

•
146 SECURITIES AND EXCHANGE COMMISSION

and/or gas utility subsidiaries, 45 nonutility subsidiaries, and 15 inactive companies, or a total, including the parent holding companies

and the subholding companies, of 174 system companies. The following

table shows the number of active holding companies and the number

of subsidiaries (classified as utility, nonutility, and inactive) in each

of the active systems as of June 30, 1969, and the aggregate assets of

these systems, less valuation reserves, as of December 31, 1968.

Classification of Assets as of June 30, 1969

Registered noldmg-company

systems

Name

Solely

registered

holding

comparnes

RegIStered

holding

operating

companies

Electric

and/or

gas

utility

subsidiaries

Nonutility

subsidIaries

Inactive

companies

Total

companies

Aggregate

System At::,

Valuation

Reserves,

at Dec. 31, 1968

(thousands)

I. Allegheny Power System, Inc. -----------

2. American Electric Power

3. ~~~n~a~~ai-G8S------

Company

4. Central and South West Corporation.

5. Columbta Gas System, Ine., The

6. Consoltdated Natural Gas Company

7. Delmarva Power & Light Company

8 Eastern Uttlities Associates __

9. General Public UtilitlCs Corporation_. ._

10. Middle South utilities,

Inc --- -- --- -- ---- ---

11. National Fuel Gas Company ---.-------

12. New England ElectIic System -- --------- 13. Northeast Utihties

14. OhIO Edison Company

15. Philsdelphia Electric Power Company

16. Southern Company, The

17. Utah Power & LIght Company -- -- ---

Bubtotals,

Adjustments (a) to elimrnate duplIcatIon in company count and (b) to add the net assets of nine Jointly-owned

compames not included above

Total companies and

assets in active systems,

1

1

1

1

1

1

o

1

1

1

1

1

1

o

o

1

o

13

o

13

2

o

o

1

o

o

1

o

o

o

o

o

o

1

1

o

o

7

9

14

3

4

12

4

2

4

6

6

3

16

11

3

1

5

1

104

-10

94

5

10

4

1

8

2

o

o

3

1

2

1

7

o

o

2

o

46

-1

45

1

1

o

1

o

o

o

2

o

3

o

o

6

o

1

o

o

15

o

15

18 $965,037

26 2, 385, 844

8 1,446,926

8 1,003,464

21 1, 733,963

7 1,117,206

3 324,609 7 129,067

10 1,658,723

11 I, 454, 788

6 323,115

18 939,146

25 I, 133,342

4 864,159

3 57,718

8 2,486,648

2 386,391

185 18,410,146

-11 485,011

174 18,895,157

Represents the consolidated assets, less valuatron reserves, of each system as reported to the Commission on Form U 58 for the year 1968.

These nine compames are Beechbottom Power Company, Inc. and Windsor Power House Coal Company, wmch are mdirect subsldianes of American Electric Power Company, Inc. and Allegheny Power

System, Inc; OhIO Valley Electric Corporation and its subsidiary, Indiana-Kentucky Eleetnc Corporation, which are owned 37.8 percent by American Electric Power Company, Inc., 165 percent by Ohio

EdISOn Company, 12.5 percent by Allegheny Power System, Inc, and 33.2 percent by other eompames;

The Arklahoma Corporation, which is owned 32 percent by the Central and South West Oorporatron system, 34 percent by the MIddle South Utilrties, Inc. system, and 34 percent by an electric utility company

not associated WIth a registered system; Yankee Atomic Electric Power Company, CounectIcut Yankee

Atomic Power Company, Vermont Yankee Nuclear Power Corporation, and Maine Yankee Atomic Power

Company, wluch are statutory utIlity subsidtanes of Northeast Utilities and New England Electric System.

•

_

_

• _

_

_

-

_

_

_

_

- - •

• -----------

•

•
TEURTY-FIFTH~AL REPORT 147

SECI'ION 11 MATrERS IN REGISTERED HOLDING-COMPANY SYSTEMS

To comply with Section 11(b) (1) and the Commission's divestment

order thereunder," Penmeoil United, Inc. filed a plan under Section

11 (e) providing for the transfer of its retail gas distribution properties

to United Gas Inc., a newly-created Texas company. Inexchange Pennzoil United will receive, in addition to bonds and debentures, the outstanding common stock of the Texas company, which Pennzoil United

will offer to its own stockholders through an underwritten rights

offering. The plan was approved by the Commission after the close of

the fiscal year.'

The plan filed by Northeast Utilities under Section 11(e) proposing

the elimination of the publicly-held minority interest in the common

stock of its electric utility subsidiary company, Holyoke Water Power

Company, was approved by the Commission." The plan for eliminating

the publicly-held minority interest in the common stock of Michigan

Gas and Electric Company, a subsidiary company of American Electrw PmoC1' Oompany, Ino., previously reported," was enforced by a

Federal District Court in Michigan by order of February 25, 1969.1

In Standard Gas and Electric OO'lnpany, the Commission approved,

as fair and equitable under Section 11(e), Step VI of Standard's

plan of liquidation and dissolution to comply with Section 11(b) (2) of

the Act and the Commission's orders thereunder," This Step provides

for the distribution by Standard of its remaining assets, consisting of

cash in the amount of about $3 million, to its common stockholders. This

amount includes sums distributable to stockholders whom Standard had

not been able to locate, among them stockholders with last known addresses in New York. The State of New York appeared in the enforcement proceeding in the Federal District Court in Delaware, claiming

that under its Abandoned Property Law it was entitled to receive

funds due to unlocated or missing New York stockholders. On January 17, 1969, the court approved and enforced Step VI to permit an

initial distribution to the known stockholders of Standard but reserved for later determination the claim of the State of New York.

See 34th Annual Report, p. 134.

Pcnnzoil United, Inc., Holding Company Act Release N(). 16481 (September 23, 1969).

Northeast Utilities, Holding Company Act Release No. 16246 (December 19.

1968). On September 19, 1969, the U.S. District Court for the District of Massachusetts entered an order approving and enforcing the plan, Civ. Act. No. 69-

84a-G.

See 34th Annual Report, pp. 13~36.

T American Electric Power CompmlY, Inc, S. D. Mich., Civ. Act. No. 6003.

Holding Company Act Release No, 16206 (December 3,1968).

•

•

•

•

•
148 SECURITIES AND EXCHANGE COMMISSION

Subsequently, the court, as urged by the Commission, denied that

claim, holding that it was "fair and equitable" to distribute the unclaimed funds to the other and known stockholders of Standard," It

rejected New York's argument that such distribution would represent

a windfall, noting that Standard had spent funds to locate missing

stockholders and had incurred even more substantial costs in its overall

program of liquidation and dissolution, all of which were necessarily

absorbed by its common stockholders. The court stated that liquidation

of Standard Gas was required and ordered by the Commission pursuant to Section 11(b) (2) of the Act and that to the extent that

"some unclaimed funds have become available in the course of Standard's dissolution, the distribution thereof to the participating stockholders . . . is realistically a reduction in the cost of dissolution to

them. This is a fair and equitable application of the unclaimed funds."

An appeal by the State of New York is pending.

PROCEEDINGS WITH RESPECT TO ACQUISmONS, SALES

AND OTHER MATTERS

In American Electric Power Oo'mpany, Inc.; reported previously,"

hearings were concluded on the company's application with respect

to its proposal to acquire, pursuant to an invitation for tenders, shares

of common stock of Columbus and Southern Ohio Electric Company,

a nonassociate electric utility company, in exchange for AEP stock,

on the basis of 1.3 shares of AEP common stock for each share of

Columbus common stock. The Commission's Division of Corporate

Regulation urged that the application should be denied, contending,

among other things, that the proposed acquisition would have serious

anti-competitive effects and tend towards a concentration of control

of a kind and to an extent detrimental to the public interest, in contravention of Section 10(b) (1) of the Act. The Cincinnati Gas and

Electric Company and Dayton Power and Light Company each filed

a brief, amicue curiae, also urging denial of AEP's application. Subsequently, AEP filed a motion, which the hearing examiner granted,

to reopen the hearing to present additional evidence relating to the

nature of competition in the electric utility industry. Notices of appearance in the reconvened proceedings have been filed by the U.S.

Department of Justice, the State of Ohio and the Public Utilities

Commission of Ohio, the Cities of Danville, Virginia, and Orrille,

Ohio, and the Ohio Municipal Electric Association, Inc.

Standard Gas and Electric Oompany, D.C. Del., Civ. Act. No. 1497 (July 29,

19(9).

'0 See 34th Annual Report, p. 138.

•
THIRTY-FIFTH ANNUAL REPORT 149

In New Enqlamd. Electric System, reported previously," the hearing

is continuing on the proposal for an affiliation, through the creation

of a new holding company, by New England Electric System and

Eastern Utilities .Associates, both registered holding companies, and

Boston Edison Company, a nonaffiliated electric utility company. In

Illinois P01veT Oompany, also reported previously," hearings were

concluded on an application by Illinois Power, an exempt holding

company, relating to a proposed offer to acquire, by an invitation for

tenders, the outstanding common stock of Central Illinois Public Service Company in exchange for Illinois Power common stock. Illinois

Power and Central Illinois are each combined electric and gas utility

companies operating in Illinois. The Division of Corporate Regulation has urged that approval of the application should be conditioned

on appropriate action by Illinois Power following the proposed acquisition to terminate common control of the electric utility system and the

gas utility system. Certain preferred stockholders of Central Illinois

appeared in opposition to the application insofar as it would permit the

Central preferred stock to remain outstanding. Oral argument was held

and the case was pending for decision by the Commission at the close of

the fiscal year.

In Kaneb Pipe Line Oompany, discussed previously," the Commission, subject to certain conditions, granted an application filed pursuant to Section 2(a) (7) of the .Act by Kaneb, a products pipeline

carrier, to be declared not to be a holding company notwithstanding its

acquisition and ownership of 19.48 percent of the voting securities of

Kanasas-Nebraska Natural Gas Company, Inc., a natural gas publicutility company.> The conditions, among other things, provide that

Kaneb must register as a holding company before seeking stockholder

approval of any merger with Kansas-Nebraska, prohibit service and

other contacts between them, prohibit further acquisitions of KansasNebraska shares by Kaneb without prior approval by the Commission, and require notice of any proposed divestments of KansasNebraska shares and of any intercorporate affiliations through

directors, officers or otherwise, and submission of proxy material.

In Mieldgan Oonsolidaied: (}a8 Oompamy,'5 the Commission approved an application by Michigan Consolidated, a retail distributor

of natural gas and a subsidiary of .American Natural Gas Company

n See 34th Annual Report, p. 138.

12 see 34th Annual Report, pp. 137-38.

u See 34th Annual Report, p, 138.

H Kaneb Pipe Line Oompany, Holding Company Act Release No. 16250 (December 24, 1968).

15 Holding Company Act Release No. 16331 (March 31, 1969) .
150 SECURITIES AND EXCHANGE COMMISSION

(a registered holding company), for permission to provide financing

to a newly-organized subsidiary which, pursuant to the National Housing Act, proposed to construct, a low and moderate income urban housing project in the Detroit inner city.

Inan opinion in which Commissioner Wheat joined, Commissioner

Smith held that the proposed investment met the applicable standards

of the Act, i.e., that, under Section 10 (c) (1), the acquisition would

not be "detrimental to the carrying out" of the provisions of Section

11. The latter section among other things requires the Commission to

limit the operations of a holding-company system to a single integrated

public-utility system and such other businesses as are "reasonably incidental, or economically necessary or appropriate to the operations" of

such system. Section 11(b) (1) provides that the Commission may permit, as (i) "reasonably incidental, or economically necessary or appropriate to the operations" of the system, retention of a nonutility

interest which the Commission finds is (ii) "necessary or appropriate

in the public interest or for the protection of investors or consumers"

and (iii) "not detrimental to the proper functioning" of the publicutility system.

Relying on cases involving the retainability of nonutility interests

under Section 11 (b) (1), Commissioner Smith stated that under prior

court decisions, an applicant seeking to retain or acquire such interests

must affirmatively show by "exceptional facts" that the "triple test" of

that Section has been met. He took the position that an operating or

functional relationship between the utility system and the nonutility

business proposed to be acquired was not an absolute prerequisite to

the acquisition. In concluding that the necessary showing had been

made, Commissioner Smith pointed out, among other things, that in

this case Michigan C-onsolidated was making a relatively small investment meeting a critical need. within its primary service district that

did not involve any of the real problems with which Congress was concerned when it enacted the statute. He stated that there was

"no need to give this 1935 statute an inflexible, static historical reading.

Companies subject to it 'lire now presented with the Oongressionally recognized urban problems of the 1960's and 1970's that could not have been contemplated by the original enacters. The desira:bility of private capital becoming involved in the rebuilding of our cities is widely recognized and urged,

and the posture today of the utility industry is substantlally changed, at

least in terms of the weaknesses at which the Holding Company Act was

directed. Equally relevant, there has 'been evolving since the 1930's a

broader notion of corporate responsibility to the community." [Footnotes

omitted.]

In a concurring opinion, Commissioner Owens considered that the

Commission should not depart from its prior interpretation that a nonutility business can be retained or acquired only if an operating or
THIRTY-FIFTH ANNUAL REPORT 151

functional relationship exists between it and the utility system, but

that approval of the application was warranted under the exemptive

provisions of Section 9(c) (3). Chairman Budge, dissenting, was of the

view that approval of the application could not be justified on either

of the grounds relied on by the other Commissioners.

InOonsolidated Natural Gas Oompanyr the Commission approved

the acquisition by Consolidated of the common stock of West Ohio Gas

Company, a nonassociate gas utility company, in exchange for Consolidated common stock. In Columbia Gas of Pennsylvania, Ina.,n the

Commission approved several proposals whereby Pennsylvania, a

subsdiary company of the Columbia Gas System, Inc., a registered

holding company, would acquire the net assets of York County Gas

Company, a nonassociate gas utility company, and assume all its liabilities. In return, York was to receive common stock of Columbia and to

distribute such stock as a liquidating dividend upon its dissolution.

Middle South Utilities, Inc., a registered holding company, filed an

application relating to a proposed. offer to acquire, through an invitation for tenders, the outstanding shares of common stock of Arkansas-Missouri Power Company, a nonassociate electric and gas utility

company, in exchange for Middle South common stock.IS Middle

South has agreed to dispose of Arkansas-Missouri's gas properties

after the acquisition. National Fuel Gas Oompany, a registered holding company, filed an application for permission to exchange shares of

its common stock for the outstanding common stock of Producers Gas

Company, a nonassociate gas utility company.> Hearings were held in

both cases, at which no one appeared in opposition. Following the close

of the fiscal year, the Commission granted the National Fuel Gas

application.w

In Municipal Eleotri<JAssociation of M assaohusette v. S.E.O./I the

Court of Appeals for the District of Columbia Circuit set aside two

orders of the Commission. As previously reported," one order had

authorized Vermont Yankee Nuclear Power Oorporation, for the

initial financing of its proposed nuclear-powered electric generating

plant, to issue 100,000 shares of common stock and approved the

acquisitions of Vermont Yankee stock by those 7 of its 10 sponsor

companies which were subject to the Act.23 The second order had au1. Holding Company Act Release No. 16343 (April 16, 1969).

17 Holding Company Act Release No. 16457 (August 20,1969).

18 Holding Company Act Release No. 16416 (June 25,1969).

10 Holding Company Act Release No. 16382 (May 21, 1969) .

.. Holding Company Act Release No. 16527 (November 20, 1969).

21.413F.2d1052 (1969) .

.. See 34th Annual Report, p. 136; 33rd Annual Report, pp. 123-24.

23 Holding Company Act Release No. 15958 (February 6, 1968).
152 SECURITIES AND EXCHANGE COMMISSION

thorized Maine Yankee Atomic Power Oompany to issue 100,000shares

of common stock and approved acquisitions of such stock by those 9 of

its 11 sponsor companies subject to the Act.24 The Commission in each

case denied a request for an evidentiary hearing and for imposition of

certain conditions sought by the Municipal Electric Association of

Massachusetts and certain Massachusetts municipalities and their

utility departments ("Municipals"), which urged that exclusion of the

Municipals from participation in the Vermont Yankee and Maine

Yankee projects was contrary to the Federal anti-trust policies and

that the applications could not be approved unless the Municipals were

afforded an opportunity to participate in these projects on the same or

an equivalent basis as the sponsor companies. The court of appeals held

that such exclusion was a relevant factor to be considered by the Commission in applying the standards of Section 10(b) (1) of the Act,

and accordingly remanded the two cases for reconsideration, including

an evidentiary hearing if necessary.

While the petitions for review were pending, the Commission

authorized Vermont Yankee to issue an additional 100,000 shares of

its common stock to its sponsors and approved the acquisition by the

seven sponsors subject to the Act.25 The Municipals petitioned for

review. Upon agreement of all parties the Commission's order was set

aside and the matter was remanded for reconsideration in the light

of the court's previous decision." During the pendency of the review

proceedings the Commission also issued two additional orders regarding the common stock financing of Vermont Yankee and Maine Yankee from which no review was sought. One order authorized Vermont

Yankee to sell to its sponsors 200,000 additional shares of its common

stock; 21 and the second order authorized Maine Yankee to issue an

additional 400,000 shares of its common stock to its sponsor companies." After the decision by the court of appeals these orders were

amended to provide for a reservation of jurisdiction "to impose, after

notice and opportunity for hearing, such conditions, if any, as may be

appropriate in light of the decision" rendered by the court." The

orders set aside by the court of appeals have been reinstated by the

Commission and amended to include an identical reservation of

jurisdiction."

.. Holding Company Act Release No. 16006 (March 15, 1968) .

.. Holding Company Act Release No. 16053 (May 1, 1968).

26 Municipal Electric Association Of Massachusetts, et at: v. S.E.O., O.A.D.O.,

No. 22078.

Holding Oompany Act Release No. 16287 (February 12, 1969) .

.. Holding Company Act Release No. 16320 (March 19, 1969) .

.. Holding Company Act Releases Nos. 16346 and 16347 (April 11, 1969) .

.. Holding Company Act Releases Nos. 16467, 16468 and 16469 (September 5.

1969).

'"
THIRTY-FIFTH ANNUAL REPORT 153

Upon the remand, Vermont Yankee and Maine Yankee and their

respective sponsor companies filed a proposal under which electric

utility companies in the six-State New England region, including

cooperatives and municipally-owned systems, would have an opportunity to purchase part of the power output of the Vermont Yankee

and Maine Yankee plants. The Commission has issued an order for

hearing on these proposals to determine whether the offers provide

an appropriate and adequate participation in the Vermont Yankee

and Maine Yankee projects and whether it is necessary that the sponsor companies amend or modify their respective proposals in light of

the decision of the court of appeals."

The Commission had also authorized Vermont Yankee 32 and Maine

Yankee 33 to issue notes to banks in the maximum aggregate amounts

of $20 million and $30 million, respectively. The Municipals raised

the same issues as in the stock financing cases and petitioned for

review in the Court of Appeals for the District of Columbia Circuit.34 On November 13, 1969, the court dismissed the petitions for

review without prejudice, stating that the anti-trust issues will be

resolved in the stock cases.

FINANCING OF ACfIVE REGISTERED PUBLIC-UTILITY HOLDING

COMPANIES AND THEIR SUBSIDIARIES

During fiscal 1969, 14 active registered holding-company systems

issued and sold for cash a total of 40 issues of long-term debt and

capital stock, aggregating $1,019million," pursuant to authorizations

granted by the Commission under Sections 6 'and 7 of the Act.36 Almost

all of these issues were sold for the purpose of raising new capital."

The following table showsthe amounts and types of securities issued

and sold by registered holding companies and their subsidiaries during

31 Holding Company Act Release No. 16470 (September 5, 1969).

32 Vermont Yankee Nuclear Power Corporation, Holding Company Act Release

Nos. 16056 (May 6, 1968), 16084 (June 10, 1968), 16172 (September 25, 1968),

16255 (December 30, 1968), 16327 (March 28, 1969), 16413 (June 27, 1969),

and 16414 (June 27,1969).

83 Maine Yankee Atomic Powcr Oompany, Holding Company Act Release No.

16057 (May 6, 1968) .

.. Municipal Electric Association of Massachusetts Y. S.E.O., (C.A.D.C., Nos.

22079 and 22080).

.. Debt securities are computed at their principal amount, preferred stock at

the offering price, and common stock at offering or subscription price .

...The active systems which did not sell stock or long-term debt securities to

the public are: Consolidated Natural Gas Company, Philadelphia Electric Power

Company. and Utah Power & Light Company.

lrl All of the proceeds of one bond issue included in these totals and part of the

proceeds of another were used to refund a total of $53.5 million principal amount

of other bonds maturing infiscal 1969.
154 SECURITES AND EXCHANGE COMMISSION 

fiscal 1969. The table does not include securities issued and sold by 

subsidiaries to their parent holding companies, short-term notes sold 

to banks, portfolio sales by any of the system companies, or securities 

issued for stock or assets of nonamiated companies. Transaotions of 

this nature also require authorization by the Commission except, as 

provided by Section 6(b) of the Act, &he issuance of notes having a 

maturity of 9 months or less where the aggregate amount does not 

exceed 5 percent of the principal amount and par value of the other 

securities of the issuer then outstanding. 

Secwities Issued and Sold for Cash to the Public and Financia? Institutions b y

Adirre Registered Holding Companies and Their Subsidiaries-Fascal Year 1969 

(In Woos) 

Holding--pen¶ systems 

Total....... ~ .................................... 751.0


mo issues. 

Competitive Bidding 

A11 but one of the 40 issues of securities sold for cash in &cal 19 

as shomn in the preceding table, were offered for competitive bidd' 

pursuant to the requirement of Rule 50 under the Act. The issue 

sold by competitive bidding mas n nonunderwritten rights offering 
THIRTY-FIFTH ANNUAL REPORT 155

its stockholders by General Public Utilities Corporation, a registered

holding company, of 1,275,000 shares of common stock with a total

value of approximately $31,981,000.38

During the period from May 7, 1941,the effective date of Rule 50,to

June 30, 1961},a total of 1,053 issues of securities with an aggregate

value of $16,908million has been sold at competitive bidding under the

rule. These totals compare with 239 issues of securities with an aggregate value of $2,668 million which have been sold pursuant to orders

granting exceptions under paragraph (a) (5) of the Rule. Of the total

amount of securities sold pursuant to such orders, 134 issues with a

total value of $2,185 million were sold by the issuers, and the balance

of 105 issues aggregating $483million were portfolio sales. Of the 134

issues sold by the issuers, 71 were in amounts of from $1 to $5 million

each, 3 debt issues were in excess of $100million each," 2 stock issues

totaling $36 million were issued in fiscal 1966to holders of convertible

debentures and employee stock options, and the remaining 58 issues

were in amounts ranging between $5 million and $100 million.

POLICY AS TO REFUNDABILITY OF DEBT ISSUES

The Commission's policy, which heretofore required that all longterm debt securities issued and sold by registered holding-company

systems be redeemable at any time at the option of the issuer upon reasonable notice and with reasonable redemption premiums, was initially

announced in 195340 and incorporated in a Statement of Policy on

February 16, 1956.41 The Statement of Policy permitted deviations

therefrom in appropriate cases, and deviations have been authorized in

cases where unusual circumstances were present, including difficult

problems affecting saleability of the securities." Informal requests

for permission to restrict refundability have also been received from

time to time, but were denied for lack of evidence that the issuer would

asGeneral Public Utilities Corporation, Holding Company Act Release No. 16116

(July 16, 1968).

.. Ohio Valley Electric Corporation, a $360 million bond issue; United Gas

Corporation, a $116 million bond issue; and Pennzoil Company, a $135 million

note issue maturing in 18 months sold to underwriters .

0 See Arkansas-Louisiana Gas Company, 35 S.E C. 313 (1953); Indiana <£

Mi{)higan Electric Company, 35 S.E.C. 321 (1953).

...Statement of Policy Regarding First Mortgage BOnds SUbject to the Public

Utility Holding Company Act of 1935,Holding Company Act Release No. 13105.

.. American Natural Gas Company, 36 S.FlC. 387 (1955) ; Yankee Atomil' Electric Oompany, et a; 39 S.E.C. 216 (1959) ; Falley Gas Company. ct 01., 40 S E.C.

790 (1961) ; and Pennzoil United, Inc., Holding Company Act Rplease No. 16089

(June 11, 1968).

•
156 SECURITIES AND EXCHANGE COMMISSION

realize sufficient savings in interest cost to justify the loss of future

refunding flexibility."

The efficacy of the redemption policy as a device for implementing

Sections 6 and 7 of the Act has been reviewed by the staff of the Commission at frequent intervals since its adoption in 1953, and until recently was found to have worked satisfactorily.v' However, in fiscal

years 1968and 1969, a number of interested persons formally requested

the Commission to relax its policies concerning the redemption provisions of long-term debt securities so as to permit, if desired by the

issuer, a 5-year refunding restriction. On November 20, 1968, the

Commission published an invitation to interested persons to submit

comments as to whether redemption provisions should be modified so

as to allow some form of call protection;"

On May 8, 1969, after consideration of comments received, the Commission authorized issuers subject to the Act to include in indentures

with respect to new issues of long-term debt securities a provision

prohibiting, for a period of not more than 5 years, the refunding of

such securities by the issuance of other debt securities at lower interest

costs." The Commission stated that this modification of its redemption

policy would not apply to the redemption of long-term debt securities

for sinking funds, or to redemptions in connection with mergers, sales

of properties or for other corporate purposes, and that, when the 5-

year period of nonrefundability expires, the general redemption price

at which the long-term debt securities may then be called for refunding purposes shall be the same as it would have been if no restriction

on refundability had been authorized. The Commission emphasized

that it will continually review the effects of its redemption policies, including specifically the foregoing modification, and based on experience

with this modification make such adjustments in these policies as may

from time to time be deemed appropriate, including a rescission of the

present modification, an extension of the 5-year nonrefunding period,

or any other change which experience would warrant.

.3 See 23rd Annual Report, pp. 142-143; 24th Annual Report, pp. 130--131; 28th

Annual Report, pp. 92-93.

.. See 23rd Annual Report, pp. 142-143; 24th Annual Report, pp. 130--131; 25th

Annual Report, pp. 140--141; 26th Annual Report, pp. 149-150; 27th Annual Report, pp. 125-126; 28th Annual Report, pp. 92-93; 29th Annual Report, pp. 85-86;

30th Annual Report, pp. 94-95; 31st Annual Report, pp. 91-93; 32nd Annual Report, pp. 82-84; and 33rd Annual Report, DP 126-127.

.. Holding Company Act Release No 16211.

••Holding Company Act Release No. 16369.
PART VII

PARTICIPATION IN CORPORATE REORGANIZATIONS

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the

U.S. district courts, differs from that under the various other statutes

which it administers. The Commission does not initiate Chapter X

proceedings or hold its own hearings, and it has no authority to

determine any of the issues in such proceedings. The Commission

participates in proceedings under Chapter X in order to provide

independent, expert assistance to the courts, the participants, and

investors in a highly complex area of corporate law 'and finance. It

pays special attention to the interests of public security holders who

may not otherwise be represented effectively.

Where the scheduled indebtedness of a debtor corporation exceeds

$3 million, Section 172 of Chapter X requires the judge, before approving any plan of reorganization, to submit it to the Commission

for its examination and report. If the indebtedness does not exceed

$3 million, the judge may, if he deems it advisable to do so, submit

the plan to the Commission before deciding whether to approve it.

When the Commission files a report, copies or a summary must be

sent to 'all security holders and creditors when they 'are asked to vote

on the plan. The Commission has no authority to veto a plan of reorganization or to require its adoption.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank

creditors and few public investors. The Commission seeks to participate principally in those proceedings in which a substantial public

investor interest is involved. However, the Commission may also

participate because an unfair plan has been or is about to be proposed, public security holders are not represented adequately, the

reorganization proceedings are being conducted in violation of important provisions of the Act, the facts indicate that the Commission

can perform a useful service, or the judge requests the Commission's

participation.

For purposes of carrying out its functions under Chapter X, the

Commission has divided the country into frye geographic areas. The

157
158 SECURITIES AND EXCHANGE COMMISSION

New York, Chicago, San Francisco and Seattle regional offices of

the Commission each have responsibility for one of these areas. Each

of these officeshas lawyers, accountants and financial analysts who

are engaged actively in Chapter X cases in which the Commission

has filed its appearance. Supervision and review of the regional offices'Chapter X work isthe responsibility of the Division of Corporate

Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field officefor the fifth area.

SUMMARY OF ACTIVITIES

In the fiscal year 1969, the Commission continued to maintain a

high level of activity under Chapter X. It entered its appearance in

eight new proceedings involving companies with aggregate stated

assets of approximately $181million and aggregate indebtedness of approximately $154million. The corporations involved in these proceedings were engaged in a variety of businesses, including, among others,

the manufacture of 00101' television tubes, telemetry equipment and

electrical devices; the operation of inter- and intra-state bus lines; gas

and oil development; commercial, industrial and personal loan financing; and the operation of a school.

Including the new proceedings, the Commission was a party in a

total of 101 reorganization proceedings during the year. The stated

assets of the companies involved in these proceedings totaled approximately $913 million and their indebtedness totaled approximately

$779 million. The proceedings were scattered among district courts

in 32 states and the District of Columbia as follows: 11 in New

York; 10 in California; 7 in Arizona; 6 in New Jersey; 5 each in

Louisiana, Pennsylvania and Washington; 4 each in Florida, Illinois,

Indiana and Texas; 3 each in Michigan, North Carolina and South

Dakota; 2 each in Arkansas, Colorado, District of Columbia, Hawaii,

Kansas, Minnesota, Nevada and Ohio; 1 each in Alabama, Connecticut, Idaho, Kentucky, Missouri, Maryland, Montana, Massachusetts,

North Dakota, Utah and West Virginia.

During the year, 14 proceedings were closed. As of the end of

the fiscal year the Commission was a party in 87 reorganization

proceedings.

JURISDICTIONAL, PROCEDURAL AND ADMINISTRATIVE MATTERS

In Chapter X proceedings in which it participates, the Commission seeks to have the courts apply the procedural 'and substantive

safeguards to which all parties are entitled. The Commission also

attempts to secure judicial uniformity in the construction of Chapter

X and the procedures thereunder.
TEURTY-FIFTH~AL REPORT 159

InBankers T1'U8t/ no Chapter X petitions were filed for those affiliates of the debtor whose business operations were not expected to continue. The trustee, in a petition supported by the Commission, alleged

that the affiliateshad been operated with funds diverted from the Chapter X debtors and, therefore, petitioned the court for turnover orders

in order to obtain possession of the affiliated assets. The court granted

the motion 'and the trustee liquidated the affiliates. The Commission

assisted the trustee and the court in the evaluation of the position

of the outsider, nonaffiliated, creditors. The trustee submitted final

accounts, and the remaining assets of those affiliates were then made

part of the Chapter X debtor estates.

In General United Corporation, Irw.,2 the Commission, as reported

previously," filed a petition for a writ of mandamus with the Court of

Appeals for the Tenth Circuit seeking to require the district judge to

hear on its merits the Commission's motion to classify certain shareholders of the debtor as creditors for the purpose of participating in

a plan of reorganization, on the ground that they had been defrauded

in violation of Section 10(b) of the Securities Exchange Act of 1934

and Rule 10b-5 thereunder. This motion had been rejected by the district judge on the ground that the Commission, although a party to the

reorganization proceeding, lacked standing to bring the motion. The

judge did note that the charge of fraud seemed "justified by the

record." The court of appeals, in denying the petition,' acknowledged

that Section 208 of Chapter X "gin~s the Commission participation

rights similar to those of other parties in a Chapter X proceeding," but

it characterized the attempt of the Commission to secure classification

of the defrauded stockholders as creditors as seeking, by indirection,

"superior rights to other parties." The court noted that no stockholder

had filed a timely claim and, since the court would not grant mandamus to a stockholder to require the district judge to consider his

claim filed out of time, it would not grant this remedy to the Commission either."

1S.D. Ind. No. IP-66-B-2375.

2 D. Kans., No. 3763--B-1.

34th Annual Report, p. 148.

S.E.O. v. T'emplar, 405 F. 2d 126 (1969).

The Commission thereafter moved the court of appeals to clarify its opinion

so that there would be no question that the court had made no determination

binding upon the district court with respect to the fairness of the reorganization plan's treatment of defrauded stockholders or with respect to the district court's power to enlarge the time within which such stockholders might

file claims. While the court of appeals denied the motion for clarification

(April 9, 1969), it stated that the district court "may well comply with all the

requests made in the motion so that such motion is premature" noting that the

district court had "not yet had an opportunity to consider those matters."

•

•

•
160 SECURITIES AND EXCHANGE COMMISSION

In TMT Trailer Ferry, Inc.,6 as previously reported,' the Supreme

Court reversed 8 the decision of the court of appeals 9 which had

affirmed an order of the district court confirming a plan of reorganization, and following remand by the court of appeals, the case was

assigned to a new judge. After a hearing on a petition of the stockholders' committee to remove the trustee, the trustee resigned and a

successor trustee was appointed by the district court. An extensive

evidentiary hearing was held before a special master on the smaller

of the two disputed claims which had been remanded for further

investigation.

In Magnolia Funds, lnc.,l° the district court appointed a receiver

pending a determination whether the Chapter X petitions were filed in

good faith under Section 146(3). At the hearing, the Commission

supported the petitions, urging that the possibility of a reorganization

'was not unreasonable in view of the receiver's operating reports and

the values that might obtain by preserving the debtor as a functioning

entity, including its tax loss carryover. The matter was pending for

decision at the close of the fiscal year.

In Oommomoealth. Financial Uorporationi" the trustees petitioned

the court to employ an attorney who was to assist the trustees in the

formulation of a plan. This attorney was not disinterested as defined

in Section 158(4) of Chapter X, but the trustees contended that under

the exception in Section 157 an attorney employed for "special purposes" need not be disinterested. The Commission argued that an

attorney who isto render services in connection with a plan of reorganization is not within the exception provided in Section 157. After a

hearing and the filing of briefs the trustees withdrew their petition.

In Riker Delaware Oorp.,12 the Commission supported, and the

court approved, a petition by the trustees for permission to sell the

remaining rental properties of the debtor at auction since these properties were being operated at a loss and were not necessary to a plan of

reorganization. The same proceeding also involved an option held by a

township to purchase all the assets of one of the debtor's subsidiaries

at their actual cost. The trustees proposed to terminate the township's

option by rejecting it as an executory contract. The Commission urged

S.D. Fla., No. 3659-M-Bk.

7 34th Annual Report, p, 153.

Protective Committee, etc. v. Anderson, 390 U.S. 414 (1968).

364 F. 2d 936 (C.A. 5, 1(66). See previous annual reports: 34th Annual Report,

p. 153; 33rd Annual Report, p, 135; 32nd Annual Report, pp. 92-93; 31st Annual

Report, p. 100; 30th Annual Report, p. 105; and 29th Annual Report, pp. 91-92.

10 E.D. La., New Orleans Div., No. 68-1917-Sec. C.

U E.D. Pa., No. 30108.

1:1 D. N.J., No. B-597-67.

•

•

•
THIRTY-FIFTH ANNUAL REPORT 161

that the option appeared to be a contract "in the public authority" and,

thus, could not be rejected pursuant to Section 116(1). Subsequently,

the township, with the approval of the district court, exercised its

option by paying a fair price to the estate.

In Federal Slwpping Way, Ine.,'a as previously reported.v an involuntary Chapter X petition alleged as the sole act of bankruptcy the

prior appointment of a receiver in an injunctive action filed by the

Commission against the debtor involving alleged fraud in the sale of

securities under the Securities Act of 1933.The Commission urged that

such appointment of a receiver satisfied the act of bankruptcy specified

in Section 131(2) of Chapter X. The district court judge agreed with

the Commission and approved the petition. Appeals to the Court of

Appeals for the Ninth Circuit from the order approving the petition

have been taken by the debtor and by the Insurance Commissioner for

the State of Washington, as statutory rehabilitator of Federal Old

Line Insurance Company, a secured creditor, and were pending at the

closeof the fiscal year.

In Gladstone M oumtaim. Mining Oompany/s as previously reported,"

a voluntary Chapter X petition was filed by a dormant mining company. The petition indicated that the object of the proceeding was to

increase the debtor's capital stock from 1.5 million shares to 5 million shares in order to acquire speculative assets unrelated to mining.

The company has several hundred stockholders and its stock is listed

on the Spokane Stock Exchange. The Commission moved to dismiss

the petition for lack of "good faith" under Section 146(3), on the

grounds that, as shown by tlm petition, the Chapter X proceeding

was instituted primarily to finance a new speculation rather than to

reorganize a going concern. Prior to argument on the Commission's

motion, the debtor, with the judge's approval, withdrew the Chapter X

petition.

Imperial 'f/JO' National, IneP involved the reorganization of a

debtor which operates over 100 motels in many states, most of which

are owned jointly through partnerships with individuals. In one such

motel, located in Michigan, the debtor had a 75 percent interest and

the other 25 percent was owned by a husband and wife who as

partners filed a petition in bankruptcy for this partnership pursuant

to Section 5b of the Bankruptcy Act. The court granted a motion by

the trustee, which the Commission supported, to enjoin the bank13 W.D. Wash., No. 61609.

14 See 34th Annual Report, p, 145.

:II E.D. Wash., No. B--68-N-47.

16 See 34th Annual Report, p, 146.

IT D.C. N.J., B-656-65.

373-754--70----12
162 SECURITIES AND EXCHANGE COMMISSION

ruptcy proceeding in Michigan and pursuant to Section 32a to transfer

such proceeding to the reorganization court. The court held that, having first acquired jurisdiction over the debtor and its assets wherever

located, the reorganization court had jurisdiction over the partnership

assets in which the debtor had a substantial interest, and that to permit

the bankruptcy proceeding in Michigan to go forward might jeopardize the reorganization proceeding by separate bankruptcies of the

many partnerships in which the debtor was a partner. The individual

partners have appealed to the Court of Appeals for the Third Circuit.

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the prior management is a requisite under Chapter X. One of the

primary duties of the trustee is to make a thorough study of the debtor

to assure the discovery and collection of all assets of the estate, including claims against officers, directors, or controlling persons who may

have mismanaged the debtor's affairs. The staff of the Commission

often aids the trustee in his investigation.

In Oommonwealth Financial Oorp./8 as previously reported;" the

former president of the debtor moved for a protective order staying

any attempts by the trustees to take his deposition in the course of

the trustees' Section 167 investigation. He alleged that the Commission was conducting a separate and independent investigation of the

affairs of the debtor, including his activities, and that any information obtained by the Commission might be later used against him in

a related criminal proceeding. The district court denied the motion

and the Court of Appeals for the Third Circuit affirmed, noting that

Section 208 of Chapter X authorizes the Commission to participate

in the trustees' investigation and that the witness was free to resist

examination by the Commission or by the trustees merely by asserting

his privilege against self-incrimination, something he had not as yet

done.20

In Los Angeles Land and Investments, Ltd.,21 as previously 1'8-

ported," the Commission assisted the trustee in opposing the claims

filed by the three principal promoters of the debtor and supported

the trustee's counterclaim for damages against the claimants. The

claims of the promoters and the objections and counterclaims of the

18 E.n. Pa., No. 30108.

,. See 34th Annual Report. p. 152.

lIIl In the Matter of COmmAmWealt1~FinanciaZ Oorp., 408 F. 2d 640, certiorari

denied sub nom. Thal v. Oommomoeatth. FinanciaZ Oorp., 395 U.S. 961 (1969).

nD. Hawaii, No. Bk-67-352.

2:l See 34th Annual Report, p.148.
THIRTY-FIFTH ANNUAL REPORT 163

trustee were based upon and arose out of the dealings between the

claimants and the debtor relating to its promotion and management

at a time when the claimants were it sole officers,directors and stockholders. The referee denied the claims of the promoters to certain assets

of the debtor and granted the trustee an affirmative judgment on his

counterclaim in the amount of $230,000.On review the district court

upheld the referee, claimants have appealed, and at the close of the

fiscalyear the appeal was pending.

In Continental Vending MMhine Corp.,23 as previously reported,"

the Supreme Court had granted certiorari on the issue of whether the

depositions of certain persons could be taken in the course of a civil

action against them by the trustee when those same persons had been

indicted for mail fraud and violations of the Federal securities laws

allegedly stemming from their relationship to the debtor." Prior to

argument in the Supreme Court the trustee obtained a $2.1 million

settlement from those of the defendants who had sought certiorari.

Accordingly, the Supreme Court granted the parties' motion for an

order vacating the judgments below and dismissing the case as moot."

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only in

a case which involves a substantial public investor interest and presents

significant problems. When no such formal report is filed, the Commission may state its view briefly by letter, or authorize its counsel

to make an oral or written presentation to amplify the Commission's

VIews.

During the fiscal year the Commission published two formal advisory reports," and supplements thereto." Its views on four other

plans were transmitted to the court by written memoranda."

In Westeo Corporations" the Commission filed an advisory report

saE.D. N.Y., No. 63-B-663 .

.. See 33rd Annual Report, p, 134, and 32nd Annual Report, p. 90.

.. U.S. v. Simon et al., 262 F.Supp. 64 (S.D. N.Y., 1966), reversed, 373 F.2d 649

(C.A. 2, 1967) .

.. SitTUYn,et «i.v. Wharton, Trustee, 389 U.S. 425 (1968).

27 In re Westeo Oorporation, S.D. Texas, No. 66-H--62, Corporate Reorganization

Release No. 282; In .re Parkwood, Inc., D. D.C., No. 39--66, Corporate Reorganization Release No. 283.

.. Westeo Corporation, supra, Corporate Reorganization Release No. 284; Park1cood,Inc., supra, Corporate Reorganization Release No. 287.

.. In re Bankers Trust, S.D. Ind., No. IP--66-B-2375; In re Realsite, Inc., S.D.

Fla., No. 63-244-Bk; In re Maryvale Oommunity Hospital, Inc., D. AriZ., No.

B-9352 Phx. ; In re Oceanside Properties, Ino., D. Hawaii, No. Bk--67-108.

.. S.D. Texas, No. 66-H-62.
164 SECURITIES AND EXCHANGE COMMISSION

and a supplement thereto on the trustee's amended plan of reorganization." The plan provided for participation by common stockholders

since the company was solvent, and for participation as a separate

class by those stockholders who had purchased their stock in the open

market in a specified period during which, as the trustee's report disclosed, major manipulations in the Westec stock had occurred. As

originally proposed, the plan provided for the issuance of stock options

to key employees and officers,the terms and conditions of which could

be determined by the board of directors without stockholder approval

unless the stock to be issued under the options should exceed 7 percent

of the outstanding stock. The Commission took the position that the

issuance of stock options pursuant to a plan of reorganization is not

in accord with the policy of Chapter X, but further stated: "Once

the reorganization is completed, and a meaure of financial success is

achieved, management, having shown its value, can submit under local

law an appropriate resolution authorizing stock options." The plan

was amended to conform with the views of the Commision. Suspension

of trading in the Westec stock was terminated and trading on the

American Stock Exchange was resumed on May 5, 1969.32

In Parksoood, lne.,33 the trustee's plan of reorganization for the

debtor and its subsidiaries, all real estate companies, provided :for

Parkwood to receive all of those properties in which there is an equity

above the first and second mortgages, and for Adams Properties, Inc.,

a subsidiary o:f Parkwood, which is to be a separate corporation, to

receive all those properties having an equity above the first mortgage

but not above the second mortgage. The Commission, in its advisory

reports, 34 concluded that the plans of reorganization were :fair and

equitable and :feasible,but recommended three amendments, which the

trustee adopted. Under the plan, one group o:fcreditors, the holders of

the second mortgage notes on properties which were turned over to

reorganized Adams, are to release their security interest and receive

in exchange shares of preferred stock in Adams. Since each series of

stock was to represent an equity in the specific property which had

secured the second mortgage notes, the Commission characterized each

series of "stock" as essentially a liquidating interest in a particular

property junior to a first mortgage. The Commission suggested that

this be reflected by issuing nonnegotiable liquidating certificates cor-

"Corporate Reorganization Release Nos. 282 (January 3, 1969) and 284

(February 4,1969) .

.. Securities Exchange Act Release No. 8591 (April 30, 1969).

.. D. D.O., No. 39-66, etc .

.. Corporate Reorganization Release Nos. 283 (January 30, 1969) and 287

(April 30, 1969).
THIRTY-FIFI'H ANNUAL REPORT 165

responding to the proposed preferred stock. Second, instead of certificates of participation in any proceeds recovered in lawsuits filed by

the trustee, the Commission recommended, as one alternative, that no

certificates be issued and that distributions of proceeds be made to

trade creditors whose names are to be recorded on a list of participants

filed with the court. The Commission also recommended that the real

properties of the reorganized companies be recorded on the balance

sheets at their historical cost, rather than at the higher valuations of

the trustee. Although such a valuation would result in Adams emerging from reorganization with a deficit in its common stock account,

the Commission stated that this was unobjectionable since reorganized

Adams was to be essentially a liquidating company. The plan as

amended was approved by the district court on August 7, 1969 and

was confirmed on November 17, 1969.

In Bankers Trust,35 the Commission recommended approval of the

trustee's plan of reorganization which provided, among other things,

for the consolidation of five debtors into one reorganized company.

Since the debtors appeared to be solvent the plan provided for the issuance of new shares of the reorganized company to certificate holders

of the five debtor trusts on the basis of the original investment of the

certificate holders, with no separate valuation of the equity in each

of the debtor trusts since the five trusts have been operated as a single

enterprise. Since the reorganized company will be subject to the reporting requirements of the Securities Exchange Act of 1934 and the

rules promulgated thereunder, the Commission recommended that as

soon as practicable after confirmation the pro forma financial statements should be submitted to the Commission for examination and

review in the light of these statutory requirements. The court approved

a plan in accordance with the Commission's recommendations.

In Maryvale 0ommunity Hospital, Irw.,36the trustees sold the physical facilities of the debtor, a nonprofit community hospital, to the

Good Samaritan Hospital, a nonprofit corporation, for cash plus the

assumption of certain contingent lia:biIities. 'Subsequently, the trustees

proposed a plan to liquidate and to dissolve the debtor after retiring

the outstanding bonds, which were publicly held, with the proceeds

of the sale. The plan proposed payment to the bondholders of the

principal amount of the bonds, simple interest as specified in the indenture, interest on interest, and a redemption premium. Payment of

interest on interest and the premium were opposed by the State of

Arizona and certain nonprofit corporations which were beneficiaries

under the provision of the debtor's corporate charter that upon dis-

.. S.D. Ind., No. IP-66-B-2375 .

.. D. Ariz., No. B-9352-Phx.
166 SECURITIES AND EXCHANGE COMMISSION

solution the assets of the debtor remaining after discharge of its valid

obligations should be turned over to certain classes of public and

private charities. The Commission supported the payment of interest

on interest as to which, the Commission stated, the bondholders had

a superior claim in equity against those who were no more than

legatees under the corporate charter. However, the Commission opposed the payment of the premium because prepayment of the bonds

was not a voluntary act but forced upon the debtor under the requirements of Chapter X. In its decision of November 3, 1969, the court

held that the bondholders were entitled both to interest on interest

and the redemption premium.

In Realeite, bW.,37 after 6 years of administration in Chapter X,

during which time the debtor was substantially liquidated, the trustee

filed a plan based on a proposal by a nonaffiliated company to transfer

to the reorganized debtor unimproved property plus some cash. The

plan provided that for this property and cash the plan proponent

would receive 820,000 shares of new common stock and 20,000 shares

of $5 par value convertible preferred stock, and the reorganized

company would assume a mortgage indebtedness of $175,000. The

presently outstanding common stock, publicly held, would be exchanged for 400,000 shares of new common stock. The Commission

opposed the plan for lack of feasibility since the debtor was substantially liquidated and liquidation was to continue by the sale of lots in

the real property to be contributed by the plan proponent. The Commission also indicated that the principal attraction of the debtor

seemed to be the possibility of utilizing its tax loss carryover and possible values generated by public trading and sharp fluctuations in prices

that often are characteristic of stock with nominal and speculative

earnings. The court denied approval of the plan, and by a subsequent

order denied a petition for reconsideration and rehearing on an

amended plan under which the proponent offered to contribute another

parcel of undeveloped land to the reorganized company. Two stockholders of the debtor as well as the plan proponent have appealed

from both orders to the Court of Appeals for the Fifth Circuit and

the appeals were pending at the close of the fiscal year.

In Oanandaigua, Enterprises Oorp.,as the court approved and confirmed, as recommended by the Commission, a plan providing for

the cancellation of all issued capital stock and the issuance of newly

authorized capital stock to be auctioned at the direction of the court.

The new stock was to be offered for sale at auction with bids to be made

as a percentage of the claims of general unsecured creditors in an

37 S.D. Fla., No. 63-244-Bk-CF.
THIRTY-FIFTH ANNUAL REPORT 167

amount not less than 80 percent of such claims as allowed. The plan

proponent agreed to submit a bid to pay general unsecured creditors,

other than debentureholders, 80 percent of their claims as allowed in

cash and to pay debentureholders 80 percent of the principal amount

of their debentures. Stockholders of the debtor were eliminated from

participation.

As previously reported," the court approval of an earlier plan of t.he

trustee was appealed by an unsuccessful plan proponent. Although

that plan had been effectively superseded by the auction plan discussed above, the appeal from the earlier plan was prosecuted, and in

affirming the district court the court of appeals affirmedthe finding of

insolvency." Thereafter the auction plan was accepted by the requisite

number of creditors and confirmed."

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem

of determining the compensation to be paid to the various parties for

services rendered and for expenses incurred in the proceeding. The

Commission, which under Section 242 of the Bankruptcy Act may not

receive any allowance for the services it renders, has sought to assist

the courts in assuring economy of administration and in allocating

compensation equitably on the basis of the claimants' contributions

to the administration of estates and the formulation of plans. During

the fiscal year 187 applications for compensation totaling about $4.3

million were received.

In A1'lington Discount 00.,42 as reported previously." the Commission's motion under Section 328 of Chapter XI was granted, whereupon the debtor amended its petition to comply with the requirements

of Chapter X. Subsequently, the attorneys for the debtor-in-possession

in the Chapter XI proceeding requested a final allowance of $40,000

for services rendered for the approximately 6-month period during

which the proceeding had been in Chapter XI. The Commission had

"'W.D. N.Y., No. Bk-63-1954 .

.. See 34th Annual Report, pp. 154-155.

...Goldman v. D'Amanaa, 412 F.2d 827 (C.A. 2, 19(9).

fi After the close of the fiscal year, confirmation of this plan was vacated by

the district court upon a finding that a new plan submitted was both superior

to the confirmed plan and feasible. The Commission opposed the vacatur on the

ground that there was an insufficient showing in support of the finding. The

indenture trnstee for the debenture holders has appealed to the Court of Appeals

for the Second Circuit from the order approving the new plan and finding it

superior to the previously confirmed plan.

.2 S.D. Ohio, No. 48421 .

.. See 34th Annual Report, p. 156; 33rd Annual Report, p. 140.
168 SECURITIES AND EXCHANGE COMMISSION 


recommended an allowance of $15,000. The district court allowed 

$7,500, finding that such an amount had been agreed to by the parties 

and stating, among other things, that the use of Clmpter XI by the nttorneys had been "in complete disregard of the standards laid down 

by the Supreme Court" in Semkties and Emlunge Cornmission v. 

American Trailer Rentals Co., 379 U.S. 594 (1965). On appeal, the 

Court of Appeals for the Sixth Circuit stated that the finding of the 

district court of an agreement limiting the allowance to $7,500 was 

not supported by substantial evidence. It further held that its review 

of the services rendered revealed that not all of them were properly 

compensable as beneficial to the estate, and it directed an allowance 

of $11,500." The court did not discuss the issue whether the district 

judge, in determining the fee to be awarded, could properly take into 

account the fact that the proceeding apparently should originally have 

been brought under Chapter X. 

In TMT Trailer Femy, I~C.;~ attorneys for the Independent Stockholders' Protective Committee applied for an interim allowance. Wliilc 

re ommending an amount less than that sought, the Commission sup- Fported the application because the committee had rendered services for 

over 10 years and the major services related to the successful opposition to the confinned plan of reorganization. A hearing was held 

and the district court found that the attorneys were entitled to an 

interim allowance but reserved the determination of the amount. 

Thereafter the court, on an ex parte motion by the successor trustee, 

vacated its order. The attorneys for the committee renewed their application, which the Commission supported, and at the close of the fiscal 

year it was still pending. 

In Manufacturers' Credit Corpo~atwn:~ as previously reported? 

the court granted the Commission's motion under Section 328, and 

subsequently approved Chapter X petitions for the parent and 18 

subsidiaries. The Chapter XI receiver and his two attorneys sought 

interim allowances totaling $150,000 from the Chapters X and XI 

estates for services rendered while the debtors were in Chapter XI. 

The referee granted interim awards of $40,000 to the receiver and 

$35,000 to each of his attorneys, allocating 70 percent to the Chapter X 

companies and 30 percent to the Chapter XI companies on the basis of 

the relative income, of the debtors involved rather than upon services 

rendered. The Commission opposed the award of interim allowances, 

urging that in Chapter X interim allowances are appropriate for 

S.D.Wa.,No.3659-M-~k. 

D. N.J..No.B-1W7. 


"See 34th Annual Report,p. 160. 

THIRTY-FIFTH ANNUAL REPORT 169 

officers of the court who are expected to render services to the estate 

over a period of time, and hence not to the Chapter XI receiver and 

his attorneys whose services have been completed. It urged further 

that no allowances should be awarded until the end of the proceeding 

since the estates were in precarious financial condition. At the close of 

the fiscal year the matter was still pending. 

In Hydrocarbon Chemicals, I~C.,'~as previously reported,18 the district court denied compensation to the two attorneys retained by the 

debtor's principal attorney, who had sought compensation for services 

rendered during the Chapter XI proceeding which preceded the 

Chapter X proceeding, on the basis that their retention had not been 

authorized as provided by General Order 44 of the Bankruptcy Act 

(requiring ~rior court authorization for the services of an attorney 

to be performed for a trustee, receiver, or debtor-in-possession). On 

appeal, the Court of Appeals for the Third Circuit held that General 

Order 44 did not bar the award of compensati~n.~~ Since a receiver 

had been appointed during the Chapter XI proceeding, the debtor 

had not been in possession and General Order 44 did not apply to 

attorneys for the debtor unless the services performed by the debtor's 

attorneys in the Chapter XI proceeding had been of a character reserved to a receiver in the Chapter XI proceeding. The court of appeals 

remanded to the district wurt for its consideration the questions of 

whether the service could have been performed only by counsel for the 

Chapter XI receiver and the amount of compensation, if any, to be 

awarded. Upon rehearing en bane, five of the eight participating 

judges voted to affirm the district While there was no opinion 

in which a majority of the court concurred, an opinion joined in by 

three of the five judges who voted for affirmance sets forth various 

grounds for concluding as a matter of law that the attorneys were not 

entitled to compensation. The Supreme Court denied certi~rari.~~ 

In Polycast Co~poration:~ the trustee sought ha1 compensation of 

$69,000, the Commission recommended about $36,000, and the district 

court awarded $41,000. In a memorandum opinion, the court agreed 

with the Commission that $69,000 was far more than the estate could 

afford, taking into consideration, among other factors, its size and 

the cash available. It also agreed with the Commission that the rate at 

'D. N.J., No. B-74343. 

"See 34th Annual Report, p. 158. See also 33rd Annual Report, p. 137; 32nd 

Annual Report. PP. 87,90. 

Nos 16787 nnd 16788 (June 10,1968). 

6L411F.2d 203 (1969). 

"396 U.S. 823 (1969). 

D.Conn., No.33718. 
170 SECURITIES AND EXCHANGE COMMISSION

which the trustee would have billed a client for professional consulting

service does not control the measure of his compensation under Chapter X. The court, further agreeing with the Commission, denied the

trustee's request for "portal-to-portal" compensation for the time

consumed in almost daily 26-mile round trips from his home to the

debtor's place of business and reimbursement for the cost of those trips.

The Commission had expressed the view that the time and money spent

for this purpose were part of the trustee's overhead and not chargeable

as an expense against the estate. The court also agreed with the Commission that the trustee was not entitled to a fee for the time that he

had devoted to preparing his application for compensation.

In Riker Delaware Corporation.» the court, as urged by the Commission, denied all reimbursement for expenses because the trustees,

their counsel, and their accountants had not kept itemized records

of disbursements. In the initial hearing before the referee as special

master on interim allowances, the Commission urged that adequate

notice was not given as required by Section 247 because the notice did

not state the name of the applicants, the capacity in which the applicants were claiming compensation, and the amounts requested. The

referee denied the Commission's request to adjourn the hearing, but

prior to the hearing before the district court on the special master's

report, proper notice was sent to creditors and stockholders.

In Webb &: Knapp, lno.,55 the counsel for the trustee, who had been

granted $120,000 as an interim allowance in the prior year, applied

for an interim allowance of $150,000 for services rendered in the current year. The Commission recommended $75,000because, among other

things, the total time spent by counsel was about 30 percent less than

in the prior year, the time spent by partners decreased from 19 percent

to approximately 16 percent, and counsel had supporting records for

only 90 percent of the total time for which compensation was sought.

The court awarded $90,000.

INTERVENTION IN CHAPfER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by which

debtors can effect arrangements with respect to their unsecured debts

under court supervision. Where a proceeding is brought under that

chapter but the facts indicate that it should have been brought under

Chapter X, Section 328 of Chapter XI authorizes the Commission or

any other party in interest to make application to the court to dismiss

the Chapter XI proceeding unless the debtor's petition is amended to

.. D. N.J., No. B-597-67.

"S.D. N.Y., xo. 65-B-365.
TF.URTY-FIFTH~AL REPORT 171

comply with the requirements of Chapter X, or a creditors' petition

under Chapter X is filed.

In Time Sales Finance OO1'JJo1'ation,56the debtor proposed an arrangement providing for full payment in cash to all unsecured

creditors, except the debentureholders who 'wereto receive 40 percent

of the principal amount of their claims in a preferred stock of an

unrelated corporation. The Commission moved pursuant to Section

328, urging that the proposed plan involved more than a minor adjustment of unsecured debt and that past financial activities of the

debtor warranted a disinterested investigation by a Chapter X

trustee. 51 The referee refused confirmation of the plan of arrangement

and adjudicated the debtor a bankrupt, and the Commission's motion

became moot.

In Peoples Loan & Investment 007npa:ny,58 the debtor, an industrial

loan institution, had issued over $7 million in debt securities to more

than 3,000public investors. The proposed arrangement under Chapter

XI provided that each investor could elect to receive 55 percent of his

claim in full settlement immediately or larger percentages within

a 5-year period. Under any alternative, however, the total payment

would be substantially less than the principal and interest of the

claim for which each public creditor had contracted with the debtor.

The arrangement also effected a compromise settlement of a large

claim of the debtor against an insurance company; as a result of the

settlement, control of the debtor would pass to the insurance company. The denial of the Commission's Section 328 motion by the

district court 59 was reversed by the Court of Appeals for the Eighth

Circuit," which held that the extensive evidence of mismanagement

and self-dealing together with the considerable reduction in the claims

of the public creditors while the interests of the equity holders of the

debtor were not affected required "... the extensive protection provided by Chapter X ... ; namely a disinterested trustee, a plan of

arrangement formulated by the trustee (rather than the debtor) with

the S.E.C.'s analysis of the plan and its informative report to the

public creditors, an investigation of past management practices and

prosecution of any legitimate claims, and the fair and equitable requirement of strict priority of creditors' claims over equity interests." 61

50 E.D. Pa., No. 30377 .

7 Six days after the filing of its Chapter XI petition, the debtor consented,

in a separate action, to the entry of a permanent injunction sought by tbe

Commission for violations of Sections 5 and 17 of the Securities .Act of 1933.

.. W.D. .Ark., No. F18-68-B-15.

"292 F. SuPP. 594 (W.D. .Ark.,1968).

"410 F. 2d 851 (1969).

81 111,. at 861.

•
172 SECURITIES AND EXCHANGE COMMISSION

In Norman Finance and Thrift Corporation." the debtor, a company engaged in the consumer finance business through its whollyowned subsidiaries, had sold to the public unsecured debt obligations

which it called "thrift savings accounts." A substantial amount of the

funds obtained from the public had been used for the personal investment purposes of the debtor's president and controlling stockholder.

Subsequently, the insurance company which had insured these accounts and which was now in control of the debtor cancelled its policy

with the debtor, claiming it had been fraudulently induced. (by the

former president of the debtor) to insure the accounts. The debtor

proposed a plan of arrangement under Chapter XI offering the 600

public investors, whose claims totaled over $1,250,000, an election between two alternatives: (1) payment of each claim in the proportion

of 40 percent in new debentures and 60 percent in new common stock

to be issued by the debtor or (2) 70 percent in debentures. Acceptance

of the arrangement was to be in complete settlement of all claims the

public investors had against the insurance company, as well as against

the debtor. After the close of the fiscal year the Court of Appeals

for the Tenth Circuit reversed 63 the order of the district court which

had denied the motion of the Commission made under Section 328.

The court of appeals stated that although courts are usually reluctant

to interfere in situations where, as here, some sort of consent has been

obtained, especially by those "whose money is at stake," it appeared

that here the consents had been solicited on a "take or leave basis,"

and with the suggestion that the alternative to acceptance would be

litigation and liquidation in bankruptcy. The court said that either

of the options presented to the investors represented 'a "drastic adjustment of their rights." The court also noted that under Chapter X

creditors were entitled to full payment of their claims before stockholders could participate and, under the arrangement, it was possible

for either the new or old management to retain control of the corporation. The court further stated: "In view of the apparent prior mismanagement of the debtor and possible claims against prior officers,

it is apparent that some independent investigation of the corporation's

financial affairs is required. This disinterested evaluation can only be

accomplished under Chapter X." 64 The cancellation of the insurance

coverage also required the need for such an independent investigation

and disinterested evaluation.

W.D. Okla., NQ.Bk-68-1007 .

.. In Re Norman Finance and Thrift Corporation, 415 F. 2d 1199 (C.A. 10,

1969) .

..ld. at 1204.

'"
THIRTY-FIFTH ANNUAL REPORT 173

In both the Peoples and Norman Finance decisions, the courts of

appeals indicated, as the Commission had urged in each case, that the

decision of the Supreme Court in Securities and Exchange Oommissiorc

v. American Trailer Rentals 00.,65 required that the attempted rehabilitations take place under Chapter X. The Supreme Court there

stated that "... as a general rule Chapter X is the appropriate proceeding for adjustment of publicly held debt," and indicated" ... the

narrow limits within which there are exceptions to this general rule

... ," as extending to situations "... where the public investors are

few in number and familiar with the operations of the debtor, or

where, although the public investors are greater in number, the adjustment of their debt is relatively minor, consisting, for example, of

a short extension of time for payment." 66

05 379 U.s. 594 (1965) .

.. I d. at 613-614.
PART VllI

SUPPORTING AcrnnTIES

PUBLIC INFORMATION SERVICES

Dissemination of Information

As the discussion in prior sections of this Report indicates, most

large corporations in which there is a substantial public investor interest have filed registration statements or registration applications

under the Securities Act or the Securities Exchange Act with the Commission and are required to file annual and other periodic reports.

Widespread public dissemination of the financial and other data

included in these documents is essential if public investors generally

are to benefit by the disclosure requirements of the securities laws. This

is accomplished in part by distribution of the prospectus or offering

circular in connection with new offerings. Much of the data is also

reprinted and receives general circulation through the medium of

securities manuals and other financial publications, thus becoming

available to broker-dealer and investment adviser firms, trust departments and other financial institutions and, through them, to public

investors generally. As indicated below, it is also available for public

inspection both at the officesof the Commission and the exchanges upon

which particular securities may be listed.

Various activities of the Commission also facilitate public dissemination of information filed as well as other information. Among these

is the issuance of a daily "News Digest" which contains (1) a resume

of each proposal for the public offering of securities for which a

Securities Act registration statement is filed; (2) a list of issuers of

securities traded over-the-counter which have filed registration statements under the Securities Exchange Act; (3) a list of companies

which have filed interim reports disclosing significant corporate developments; (4) a summary of all notices of filings of applications and

declarations, and of all orders, decisions, rules and rule proposals

issued by the Commission; (5) announcements of the Commission's

participation in corporate reorganization proceedings under Chapter X

of the Bankruptcy Act and of the filing of advisory reports of the

174
TF.URTY-F~ ~AL REPORT 175

Commission on the fairness and feasibility of reorganization plans;

(6) a brief report regarding actions of courts in litigation resulting

from the Commission's law enforcement program; and (7) a brief

reference to each statistical report issued by the Commission. During

the year, the News Digest included summary reports on the 4,366 registration statements filed with the Commission (not including investment company offering proposals filed as amendments to previously

filed statements), 998 notices of filings, orders, decisions, rules and

rule proposals issued by the Commission, 304 developments in litigation under its enforcement program, 8 releases on corporate reorganization proceedings, and 80 statistical releases.

The News Digest is made immediately available to the press, and it

is also reprinted and distributed by the Government Printing Office,

on a subscription basis, to some 4,330 investors, securities firms, practicing lawyers and others. In addition, the Commission maintains mailing lists for the distribution of the full text of its orders, decisions,

rules and rule proposals.

These informational activities are supplemented by public discussions from time to time of legal, accounting and other problems arising

in the administration of the Federal securities laws. During the year,

members of the Commission and numerous staff officersmade speeches

before various professional, business and other groups interested in the

Federal securities laws and their administration and participated in

panel discussions of like nature. Participation in these discussions not

only serves to keep attorneys, accountants, corporate executives and

others abreast of developments in the administration of those laws,

but it also is of considerable value to the Commission in learning about

the problems experienced. by those who seek to comply with those laws.

In order to facilitate such compliance the Commission also issues from

time to time general interpretive releases and policy statements explaining the operation of particular provisions of the Federal securities

laws and outlining policies and practices of the Commission.

Puhlications.-In addition to the daily News Digest, and releases

concerning Commission action under the Acts administered by it and

litigation involving securities violations, the Commission issues a

number of other publications, including the following:

Weekly:

Weekly trading data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).
176 SECURITIES AND EXCHANGE COMMISSION

Monthly:

Statistical Bulletin,"

Official Summary of Securities Transactions and Holdings of Officers, Directors and Principal Stockholders,"

Quarterly:

Financial Report, U.S. Manufacturing Corporations (jointly with the Federal Trade Commtsston) ," (Statistical Series Release summarizing this

report is available from the Publications Supply Unit.)

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities Offerings.

Volume and Composition of Individuals' Saving.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

Annually:

Annual Report of the Oommisslon."

Securities Traded on Exchanges under the Securities Exchange Act of 1934.

List of Companies Registered under the Investment Company Act of 1940.

Classification, Assets and Location of Registered Investment Companies

under the Investment Company Act of 1940.b

Private Noninsured Pension Funds (assets available quarterly in the Statistical Bulletin).

Directory of Companies Filing Annual Reports,"

Other Publications:

Decisions and Reports of the Commission (Volume 41 only),"

Securities and Exchange Commission-The Work of the Securities and

Exchange Commission.

Commission Report on Public Policy Implications of Investment Company

Growth." (Out of print, available only for reference purposes in SEC

Washington, D.C. and Regional Offices.)

a Must be ordered from the Superintendent of Documents, Government Prlnttng

Office,Washington, D.C. 20402.

b This document is available in photocopy form. Purchasers are billed by the

printing company which prepares the photocopies.

Availability of Information for Public Inspection

The many thousands of registration statements, applications, declarations, and annual and periodic reports filed with the Commission

each year are available for public inspection at the Commission's

public reference room in its principal offices in Washington, D.C.

Also available at that location are some additional documents contained in Commission files and indexes of Commission decisions.

The categories of materials which are available for public examination are specified in the Commission's rule concerning records and

information, 17 CFR 200.80, as revised to implement the provisions

of the Public Information Amendment to Section 3 of the Administrative Procedure Act which became effective July 4, 1967.

The rule also establishes a procedure to be followed in requesting

records or copies thereof, provides a method of administrative ap-
THIRTY-FIFTH ANNUAL REPORT 177

peal from the denial of access to any record, and provides for the

imposition of fees when more than one-half man-hour of work is

performed by members of the Commission's staff to locate and make

available records requested. The fee rate which has been established

is $2.50 for each one-half man-hour or fraction thereof after the first

one-half man-hour.

The Commission has special public reference facilities in the New

York and Chicago Regional Offices, and some facilities for public

use in other regional and branch offices. Each regional office has

available for public examination copies of prospectuses used in recent offerings of securities registered under the Securities Act; registration statements and recent annual reports filed pursuant to the

Securities Exchange Act by companies having their principal

office in the region; broker-dealer and investment adviser applications originating in the region; letters of notification under Regulation A filed in the region; and indexes of Commission decisions.

Additional material is available in the New York, Chicago and San

Francisco regional offices.

Members of the public may make arrangements through the public

reference room at the Commission's principal offices to purchase

copies of material in the Commission's public files. The copies are produced by a commercial copying company which supplies them to the

public at prices established under a contract with the Commission.

Current prices begin at 9 cents per page for pages not exceeding

8%" x 14" in size, with a $2 minimum charge. Under the same contract, the company also makes microfilm and microfiche copies

of Commission public documents available on a subscription or

individual order basis to persons or firms who have or can obtain viewing facilities. In microfiche services, up to 60 images

of document pages are contained on 4" x 6" pieces of film,

referred to as "fiche." Annual microfiche subscriptions are offered in a variety of packages covering all public reports filed

on Forms 10-K, 9-K, 8-K, N-1Q and N-1R under the Securities

Exchange Act of 1934or the Investment Company Act of 1940; annual

reports to stockholders; proxy statements; new issue registration

statements; and final prospectuses for new issues. The packages offered include various categories of these reports, including those of

companies whose securities are listed on the New York Stock Exchange, the American Stock Exchange, or regional stock exchanges,

or traded over-the-counter, and standard industry classifications

(S.I.C.). Arrangements also may be made to subscribe to reports of

companies of one's own selection. The subscription services system

373-754--70----13
178 SECURITIES fu'l"D EXCHANGE COMMISSION

may be extended to further groups of filings in the future if demand

warrants. The company also will supply, at reasonable prices, copies in

microfiche or microfilm form of other public records of the Commission desired by a member of the public. Microfiche readers and readerprinters will be installed in major public reference areas in the Commission's headquarters and principal regional offices,and sets of the

microfiche will be available for inspection there.

Visitors to the public reference rooms of the Commission's 1Vashington, D.C., New York and Chicago officesalso may make immediate

reproductions of material in those offices on coin-operated copying

machines at a cost of 25 cents per 8%" x 14" page. The charge for

an attestation with the Commission seal is $2. Detailed information

concerning copying services available and prices for the various types

of service 'and copies may be obtained from the Public Reference

Section of the Commission.

Each year, many thousands of requests for copies of and information from the public files of the Commission are received by the Public

Reference Section in ,Vashington, D.C. During the 1969 fiscal year,

12,345 persons examined material on file in 'Vashington and several

thousand others examined files in the New York, Chicago, and other

regional offices.More than 25,367 searches were made :for information

requested by individuals and approximately 3,400 letters were written

with respect to information requested.

ELECfRONIC DATA PROCESSING

Extension of Application of Automation Techniques

During the 1969 fiscal year the Commission continued the implementation and improvement of existing and planned uses of EDP

which were described in previous annual reports.

In further expanding the use of automation for analysis of data

related to the financial structure of business and the economics and

practices of the securities industry, two new EDP systems were developed ,and are currently being implemented. One of the systems

is designed for compilation and the analysis of working capital and

long-term debt data contained in quarterly reports of nonmanufacturing companies registered with the Commission. The other system

has been designed for the analysis of statements submitted in connection with the study of "hedge funds" discussed above at page 18.

EDP applications planned for the future include a system for compiling and analyzing plant and equipment expenditure data reported

quarterly by companies registered with the Commission.
THIRTY-FIFTH ANNUAL REPORT 179

Increase in EDP Capability

During the past year the Commission increased its EDP capability

by making certain modifications and additions to existing computer

programs and hardware.

A program package supplied by the company from which the Commission had acquired its EDP equipment was adapted to existing Commission programs in order to increase the speed of processing data

through the EDP systems. Two Model 2311disk units were leased and

the Model 40 control processing unit was modified to double its capacity. These changes have resulted in more efficient use of the Commission's EDP facilities and an opportunity to take advantage of more

advanced programming techniques. Among the advantages is the capability to process two jobs through the computer simultaneously.

Assistance to State and Federal Agencies

Through procedures developed in fiscal 19681 to promote the coordination of regulatory activities, the Commission, during the past

year, continued to supply certain information from its computer files

to State authorities and self-regulatory institutions. In addition, it

continued to furnish selected data from those files to several Federal

agencies. Among other things, over-the-counter market data was made

available to the Federal Reserve Board for use in its administration of

Regulation U under the Securities Exchange Act of 1934 (relating to

the extension of credit by banks) .

Sharing of EDP Facilities

During the past year the Commission continued its sharing arrangement with the Naval Ship Engineering Center, Department of the

Navy. Under this arrangement the Commission increased the computer time provided from about 2,000 hours to about ;3,000 hours per

year. This was done at a significant savings to the Government as

compared with the prevailing rates of outside sources. The Commission also continued its supplemental agreement with the Center for

key-punch and key-verification services. During the past fiscal year approximately 1,400,000 cards were punched and verified for the Department of the Navy.

EDP Training

During the year the Commission continued its training programs

geared to the specific needs of its computer specialists and operators.

The program is designed to enable the Commission's EDP staff to

utilize more advanced hardware and programs in the development and

implementation of new and revised computer systems.

1These procedures were described in the 34th Annual Rl"IJOrt,p. IGR
180 SECURITIES AND EXCHANGE COMMISSION

PERSONNEL AND FINANCIAL MANAGEMENT

Personnel Program

In fiscal 1969, the Commission continued its efforts to recruit outstanding college and law school students with the specialized academic

training required for its fields of work. A special recruitment brochute, entitled "Are You Unique !"was prepared jointly with 16 other

small agencies for distribution to all colleges and law schools in the

fall of 1969 through the facilities of the Interagency Board network

of the Civil Service Commission.

While the Commission is able to recruit highly qualified law school

graduates, the retention of attorneys who have progressed to middle

and higher grade levels continues to be a major problem. After 3 or

.J: years of service with the Commission, many of these lawyers resign

from the staff to accept attractive offers in private law practice or

industry at salary levels considerably in excess of the amount the Commission is able to pay under the Federal salary scale. Exit interviews

confirm the fact that the main reason for the departure of these attorneys is one of economics.

Public recognition is an essential factor in building and maintaining

the prestige of Federal careers, and awards granted by outside organizations improve the quality of public administration and the morale

and career service motivations of Federal employees. In fiscal 1969,

David Ferber, Solicitor of the Commission, and Irving M. Pollack,

Director, Division of Trading and Markets, were joint recipients of

a Rockefeller Public Service Award. This award of $10,000 is presented annually to five Federal career employees whose careers in five

broad fields of Government have brought singular honor to the Federal service. Messrs. Ferber and Pollack are the fifth and sixth members of the Commission's staff to receive Rockefeller Awards since the

awards were established in 1951. Arthur F. Mathews, former Deputy

Associate Director of the Division of Trading and Markets, received

one of six 1969 Younger Federal Lawyer Awards from the Federal

Bar Association for his outstanding contributions to criminal law

enforcement in the securities area.

Personnel officialsof the Commission actively participated in workshop committees sponsored by the Interagency Advisory Group of the

Civil Service Commission. Three such committees were the Committee

on Joint College Recruiting for Smaller Agencies, the Committee on

Federal Merit Promotion Policy and the Committee on Evaluation of

Personnel Programs.

In its report on employee training in the Federal service for the fiscal

year 1968, the Civil Service Commission commented favorably on the

Division of Trading and Markets' practice (continued during fiscal
THIRTY-FIFTH ANNUAL REPORT 181

year 1969) of sending teams of analysts and/or attorneys to New York

City for 3 days each for first-hand exposure to the problems of the

New York Stock Exchange and its member firms, as a good example

of up-dating "state of the art" training. Significant training programs conducted by the Commission during fiscal 1969 included (1)

a course in Basic English for stenographers, typists and clerks offered

free of charge after hours, (2) participation in the "From Nine to

Five" television secretarial course presented jointly by the Civil Service Commission and a local educational TV station and (3) various inhouse training courses offered by the Divisions of Trading and

Markets, Corporation Finance and Corporate Regulation.

As a part of the Commission's Fourteenth Annual Service and Mer-it

Awards Ceremony held in October 1968, Distinguished Service medals

were awarded by the Commission to David Ferber, Solicitor of the

Commission; .rames E. Newton, Regional Administrator of the Seattle

Regional Office; Harry Pollack, Director of Personnel; Eugene H.

Rotberg, former Associate Director of the Division of Trading and

Markets; and Charles E. Shreve, Director of the Division of Corporation Finance. The Supervisory Excellence Award was presented to

James C. Foster, Special Assistant to the Director of the Division of

Trading and Markets, in recognition of his excellence in fulfilling both

his "people" and "program" responsibilities, Twenty employees were

given 30-year pins for SEC service; within-grade salary increases in

recognition of high quality performance were granted to 71 employees;

and cash awards totaling $15,723 were presented to 116 employees for

superior performance or special service.

Personnel Strength; Financial Management

The following comparative table shows the personnel strength of the

Commission as of June 30,1968 and 1969.

Comrmssloners. .

June 30, 1968 I June 30, 1969

____ I 51 4

Staff:Headquarters Office . ,

Regional Offices - --- ---- -- -- - -- ----- -- --- -- -- -- -- -- -- -- ---I

Total Staff - --- -- -- -- -- -- ---- - -- -- -- -- -- --J Grand TotaL -- ---- -- ---------- ----- ----- -- -- -- -- -- -- -- ---- ---I

871

512

1,383

1,3881

911

481

1,392

1,396

The table on page 18;~shows the status of the Commission's budget

estimates for the fiscal years 1965 to 1970, from the initial submission to the Bureau of the Budget to final enactment of the annual

appropriation.

_
182 SECURITIES A..~D EXCHANGE COMMISSION

On June 30, 1968, the Commission's accounting system was approved by the Comptroller General of the United. States.

The Commission is required by law to collect fees for (1) registration of securities issued; (2) qualification of trust indentures; (3)

registration of exchanges; (4) brokers and dealers who are registered

with the Commission but who are not members of a registered national

securities association (the National Association of Securities Dealers

(NASD) is the only such organization) ; and (5) certification of documents filed with the Commission,"

The following table showsthe Commission's appropriation, total fees

collected, percentage of fees collected to total appropriation, and the

net cost to the taxpayers of Commission operations for the fiscal years

1967,1968and 1969.

Yeal I AppropuatlOn

i Percentage of

fees collected

Fees collected to total appropriation

(percent)

Net cost of

Comnnssion

operations

Principal rates are (1) 1/;)0 of 1 percent of the maximum aggregate prIce of

securities proposed to be offered, or 20 cents per $1,000, with a minimum fee of

$100 (Public Law 89-289 approved October 22, 1965, e!TectiyeJanuary 1, 1966) ;

(2) 1/500 of 1 percent of the aggregate dollar amount of the sale of securities

transacted on the exchungr-s: (:~) for flscnl 196i and 19GR: It basic reglstratlon

fee of $100 for non-Na SD broker-dealers plus $5 for each associated person, with

a maximum payment of $] 5,000; $30 for each office and $25 for each associated

person for whom a nonmernbr-r broker or dealer bas 1I0tprevlously filed a form ;

and an initial assessment fee of $150; for fiscal 1969 : the maximum payment was

raised to $20,000 for all fees payable on the annual assessment rorm,

•
THIRTY-FIFTH A1\TNUALREPORT 183

PART IX

APPENDIX

STATISTICAL TABLES

185

T.tBLE I.-A 35-Year Record of Registrations Effective Under the Securities .let of

19S3-Fiscal Years 1936-1969

[Amounts III mil hans of dollars]

C ash sale lor aCCOUll t of issuer S

Number of All regisstatements! trations Fiscal year ended June 30

iii;••••••••••••••••• :••••• 1

1945 !

Ii.::

1953 •••••••••••••••••••••••• 1! 1954 I

~~~L::::: :::::: :::::! 1957.-

1958

mi:::::::::::::::::::::::::-:I !m~~~~ ~::.:::: --~~--:::1

1965______________________

1966

1967

1968

1969.. --

284

b,tJ

840

412

344

306

313

143

U3

221

340

661

493

435

42'J

487

487

635

593

631

77U

"06

876

813

1,070

1,426

1,550

1,844

1,157

1,121

1,266

1,523

1,649

32,417

, 3,645

$913

4,835

4,851

2,101

2,57U

1,787

2,611

2,003

659

1,760

3,225

7,073

6,732

6,405

5,333

5,307

6,459

9,500

7,50i

9,174

10,960

13,O'J6

14,624

16,490

15,657

14,367

19,070

19,547

14,790

16,860

1'1,437

30,10!!

34,218

'54,076

486,810 I

Total

~6b6

3,936

3,635

1,34!!

2,020

1,43&

2,0,1

1,465

4811 1,34.

2,715

5,424

4,874

5,032

4,204

4,381

5,169

7,52!!

63'6

7;3;1

8,277

9,206

12,019

13,2<>1

12,095

11,738

16,260

16,286

11,86'1

14,784

14,656

25,723

27,950

37,26')

52,03f)

II Bonds, I debentures,

I and notes I

$490

3,153

o 426 -, 666

1,5U3

1,112

1,721

1,041

316

732

1,851

3,10'2

2, 'J37

2,817

~. 795 .) 1?7

2:838

3,346

3,093

4,240

3,951

4,123

5,68!!

6,857

5,265

4,224

6,162

4,512

4,372

4,554

3,710

7,Om

12,309

14,036

11,674

Preferred

stock

$28

252

4011

2(Jf

Ul'/

110

164

162

32

343

407

!I'll

787

5&7

&26

468

42.

851

424

531

462

539

4 .- 427

443

253

248

253

270

224

307

444

558

1,140

751

Common

stalk

:,168

531

80'2

474

318

210

196

263

137

272

456

1,331

1,150

1,678

1,083

1,786

I, !!04

3,332

2,80S

2,610

3,864

4,544

5,858

5,998

6,387

7,260

9,850

11,521

7,227

10,006

10,638

18,218

15,083

22,092

39,614

I Statements registermg American Depositary Receipts against outstandmg foreign sec unties as provided

by Form S-12 are Included,

2 For 10 months ended June 30, 1935 Includes thrcestatements registering lease obhgations relating to industrial revenue bonds of $140 million.

Includes eight statements registering lease obhgations relatmg to industrial revenue bonds of~54 rmllion.

187

_ -~ _

' _

_

_

•

•
-- 

- - 

188 SECURITIES AND EXCHANGE COMMISSION 

TABLE2.-Regi3lrations Effective Under the Securities Acl of 1933, Fiscal Year 

Ended June SO, 1969 

[Amontlts rounded to thousands of doliars and may not add to totals] 

PABT1.-Distribution by months 

I All registrations 1 ProPorod for sale far account of issuem t 

- Total 2 Corpmato I 

Year andmaoth Nunlhor Numhsr 


ofstate- Of 
 ments Issues I 


issues I 

1868 

July...................... 257 


August ................. 257 


September ............... 217 


October.................. 292 


November............... 261 


DBCernbBr................ 299 


Tdal. fiscal year 1989' ........... ~1 3,6171 


PART2.-Purpose of registration and type ofseourlty 

I I Tme or security 

Purpose ofmgiFtration Total 

and noteis 

OBered to: G~neralDUhlic...........................
I 

Cash sale ...................................... 
 Other..........................................
I 

I warrants 818 ~rcluded from the count of the number of issues ~lthough inoluded In dollar amount. 
 E Includes tsouss to be offered for sde mtinuously oscr an extended wiod of time, ruoh as inrostment 


oompny issues ?nd securities raserred lor sreroise olwarrents or options. 1 covers only ~ssueaprpposed for sale immediately fallowing effective registrauon. 
 4 The 3,637 effoctivereglstratlan statements cavered in this table diRcrfrom the 3.641 "net"effectlva state- 
 ment~shown in the text tnhie "Number and disposition of reglstmtion statements mees8c followr: 

IIncludes faca amount certificat?s. 

rInoludes oenifioates of particip&Ion, vmts and voting trust orrtaeatos 
THIRTY-FIFTH ANNUAL REPORT 189

TABLE 3.-Brokers and Dealers Registered Under the Securities Exchange Act of

1934 I-Effective Registrations as of June so, 1969, Classified by Type of Orqaruzation and by Location of Prmcipal Office

Number of registrants Number of proprietors, partners,

officers, etc.2 3

Location of prmcipal office Sole Sole I pro- p",t- Cor- pro- Part- CorTotal pne- ner- pora- Total pne- ner- porator- ships nons ! tor- shIps I tlOllS' ships ships

.Alabama 32 9 2 21 128 9 5 114 .Alaska 3 3 0 0 3 3 0 0 .Arlzona 25 5 1 19 88 5 2 81 Arkansas 22 7 3 12 93 7 6 80 Californla 517 178 55 284 2,320 178 461 1,681 Colorado 65 17 6 42 261 17 25 219 Connecueut 54 12 10 32 296 12 75 209 Delaware 16 3 2 11 148 3 19 126 Distnct of Columbia 52 10 11 31 295 10 70 215 Florida 124 25 8 91 424 25 21 378 Georgia 51 10 5 36 285 10 34 241 Hawan 29 5 2 22 124 5 5 114 Idaho 9 3 0 6 24 3 0 21 IIImolS 196 30 41 125 1,245 30 257 958 Indlana 58 17 1 40 254 17 2 235 Iowa 47 9 4 34 214 9 13 192 Kansas 32 5 3 24 158 5 11 142

f~~~~;r~ ~~~::::::::::::::::::::::: 15 2 5 8 69 2 27 40

40 14 9 17 182 14 90 78 Mame 20 6 2 12 69 6 9 54 Maryland 39 12 7 20 218 12 85 121 Massachusetts 208 72 23 113 1,064 72 141 851 Mrehigan 74 15 10 49 434 15 95 324 Minnesota 71 7 6 58 455 7 38 410 MISSISSIPPI. 21 6 5 10 60 6 16 38 Missourr, 91 19 11 61 745 19 144 582 Montana 12 5 0 7 30 5 0 25 Nebraska 23 4 0 19 135 4 0 131 Nevada 5 0 0 5 17 0 0 17 New Hampshire ._ 14 9 0 5 25 9 0 16

j;j:~:~~~~lo~:::::::::::::::::::::::: 209 77 29 103 592 77 73 442

8 3 2 3 36 3 14 19

New York (excluding New York Crty) 366 150 28 188 816 150 90 576 North Carolmu 33 9 5 19 190 9 17 164 North Dakota 11 4 0 7 34 4 0 30 Ohio 128 24 24 80 695 24 232 439 Oklahoma 33 13 3 17 83 13 6 64 Oregon 30 5 4 21 112 5 8 99

Pennsylvania :::::::::::::::: 245 45 56 144 1,252 45 336 871 Rhode Island. 24 7 4 13 65 7 13 45 South Carolma 19 4 1 14 88 4 2 82

South Dakota 3 1 0 2 8 1 0 7 Tennessee 47 10 3 34 207 10 26 171 Texas ._. .. 180 52 6 122 864 52 20 792 Utah 49 8 6 35 169 8 18 143 Vermont.. 7 4 1 2 23 4 4 15

Virguua 59 16 12 31 266 16 50 200

Washmgton_. 90 26 2 62 333 26 4 303

~:'i:o~,:r~~~~~~:::::::::::::::::::: ::

13 4 1 8 38 4 3 31

46 7 1 38 292 7 27 258

Wyommg 11 4 1 6 30 4 2 24

------ --- --- Total (excluding New York Ctty) 3,576 992 421 2,163 16,056 992 2,596 12,468

New York Crty 1,179 165 411 603 9,871 165 4,141 5,565

------ --------------- TotaL 4,755 1,157 832 2,766 25,927 1,157 6,737 18,033

I Docs not include 38 registrants whose pnncrpnl offices are located in foreign countries or other territorial

[urisdietions not hsted, , Includes directors, otllcers, trustees, and all other persons occupying SImilar status or performing similar

funetrons. 3 Allocations made on the basis of location of principal offices of registrants, not actual location of persons

Intormanon taken from latest reports filed prior to June 30,1969. , Includes all forms of orgnmzauons other than sole proprietorships and partnerships.

--- ____________________________

______________________________

_____________________________

____________________________

___________________________

____________________________

_________________________ ____________________________

________________ ______________________________

_____________________________

______________________________

_______________________________

______________________________

_____________________________ ________________________________

______________________________

_______________________________

___• ________________________

_______________________ ____________________________

___________________________

_________________________

____________________________

___________________ • ________ _________• _________• ________ _____________________________

__• ________________

__________________ •___________

______________________

_______________________ ________________________________

___________________________

_____________

__•_____ _______________________

_______• ______________ _______________________ ____________• ______________

____ _____ _________________ ________________________________

__________________________

____•______• _________• _______

________________________

____________________________

--- --- --- ---

___•____________________

_____________________

--- ________________________
190 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Number of Security Issues and Issuers on Exchanges

PART l-UNDUPLICATED COUNT AS OF JUNE 30,1969 OF THE NU:\1BER OF STOCK AND

BOND ISSUES ADMI'l'TED TO TRADING ON EXCHANGES UNDER SECTION 12 OF

THE SECURITIES EXCHANGE ACT OF 1934 AND THE NUMBER OF ISSUERS INVOLYED

Bouds 1 1 ITotal stocks Issuers

and bonds I involved

1,642 ! 4,880 i 2, i64

-I :1 , I 13

9! 64 1

51 46 29

01 wi 10

1,663 I 5,647 I 2,880

i

Status under the Act 1 Stocks

Registered pursuant to Sections 12(h), (c) and (d) 3,238 I

'r~~~~~~l~:~_~:~~~~~~~_~~~s_t~~:~~~_ ~~_~_~]~~~~l_S~ -l ie ! Admitted to unlisted trading privileges on registered 1 I

exchanges pursuant to Seetton 12(0 79 I LIsted on exempted exchanges under evem plion order s 1 1

of the Comrrussion . __.: 41 :

Admitted to unlisted trndmg pnvrleges on exempted I I

exchanges under exemption orders of the Commission, 10_'

TotaL .. 1 3,384 I

!

J Registered: ~\. secuuty may be registered 011 a national securities exchause hy the issuer filIng an application with the exchange and with the Comrrussion eontanung eertain types of specified inrounnuon

Temporarily exempted: These ale seeuntres such as short term warrants, or secunncs resulting nom

mergers, consolidations, etc., which the Comnussion has by published rules exempted from registration

under speeified condiuons and for stated pen ods

Admitted to unlisted trading privileges' Tins refers to seeuntles winch have been adrmttod to trading 011

the imtIatIve of exchanges WIthout hstmg. Smee July 1964, the effectIve date of the 1964 amendments to

Section 12(0 of the Exchange Act, additional securitres may be granted unlisted trading privileges on e~-

changes only If they are listed and registered on another exchange

Listed on exempted exchanges: Certain exchanges have been exempted from registration under Section

6 of the Act because of the lmuted volume of tl ansactions The Commission's exemption orders specify m

each case that secuntres which were listed on the exchange at the date of the order may eontmue to be hsted

thereon, and that no additional secunnes may be hsted except upon complIance with Sections 12(h), (0)

and (d).

Unlisted on exempt exchanges' The CommISSIOn's exemption orders specify that secunnes which were

admitted to unlisted trading pnvileges at the date of the older may contmue such privileges, and that no

a-lditioual secunties may he admitted to unlisted trading privileges except upon comphance with Section l~(!).

p.\I1T 2-NU:\InER OF STOCK A;\1D BO;\1D ISSl:ES ON EACH EXCHA;\1GE AS 01' JUNE 30,

1969 CLASSIFIED BY TRADI~G STATUS, AND NUMBER OF ISSUERS INYOLVED

Exchanges

1

I

I I~~~- i St~ckS I 1_ ~ondsl I R X U I XL XU i Total _R X I U XL Total

American I~105 '~. ~1--8-11--;C===!~. 1721~1~!=1~

Boston________________ 537 m, 7 483 i------'------I 549 12, '______ 12

g~~~a~~~_~f_~~~~::1 18¥ 3~ i::::::i 15~ 1::::::[::::::: 18~ -----st---i.;::::::I::::::I-----ij

Detrol!.______________ 269 82 31194 I------,------l 279 -------1------1------1------'------

~~~~~~r:::::::::::: Jl ---348-----6- --i76-1 ~~_'I---~~-I' 5~g----i3T::::I::::::, ~_ 1~

NationaL____________ 77 80 +_____ 80 4 +_____ 4

New York____________ 1.528 1 773 8 1 1,781 1.450 5 ,______ 1,455

Paciflc Coast. -------- 641 550 91 202 ------1------1 761 28 I 1------1-_____ 29 Phlla -Ball -Wash____ 727 188 71 6341______ 829 48 ! : I 48 plttsburgh____________ 115 291______ 94 j______ 123 1 1 1 1 1 Richmond"___________ 14 2 ,______ 23 2;; 1 1 1 1

Salt Lake 56 54 ------/ 3 I 57 ------'------1------1------

Spokane______________ 30 271______ 6

1

------ 1 33 -------1------1------1------1------

Symbols: R-reglstered; X-temporanly exempted, U-admltted to unlisted trading pnvileges, X~

listed on an exempted exchange; XU-admitted to unlisted trading privileges on an exempted exchange.

NOTE_-Issues exempted under Section 3(a) (12) of the Act, such as oblrganons of the U S Government,

the States and Crties, are not mcluded III tlus table "Exempted exchanges

1

~~~~_

1

1

1 _

_

1 1

1 1

~ -

1 :

1 II

__ ---------- ------ -------

1

1
THIRTY-FIFTH ANNUAL REPORT 191

T,\BLE .5.-Value of Stocks on Exchanges

[Brllions of dollars]

$74. 7 49 1 683

56ft

505

43 2

46.6

57 5 667

882

81.8

804

81 !I

'II 6

111.0

124'12

140.5

1354

1'14 8

238 8

254 0

224.2

312 7

338 4 3353

4262

374.2

441. 7

506.8

573 1 514.4

6.;2.7

759 5

*148

102

108

10.1

8.6

~~I:::::: 99 1

11.21._ 14.4 ,

g'i I::::::,: 11.9 $3 0

122 3 1 IJ!I 33

16 5 3 2

16 <I 3 1

153 28

22 1 3 6

'27 I 4 0

.J! 0 3 S

25 5 J 1 31 7 4 3

:W 4 42

24 2 4 1

330 5.3

24.4 4 0

26 1 4 3

282 4.3

309 47

27.9 401 43 0 3 'I

61. 2 , 60

Amencan I Evelusrvr-lv 1 Stock on other Total I

Exchange ('\.chang-C''3:

----_.:------

I

::--1

I

I

5-Sq (I

389

47 5 465

41 !I

358

38.8

47.6

555

738

686

683

b70

7h a <138

109 5 120 5

117.3

Iffl 1

2077

211) 2

lY5 6 2767

307.7

307.0

387.8

345.8

411 3

474.3

537.5

4825

6058

692.3

Kew York

Stock

Exchange

-I

I

!

I

1

I

..•.. ..1

--I

December 31

1936

1937

1938

1939

1!J40

I!J4L"

1942

1943

1944

1945

1'J46

1947

1948

1!J49

1950

195L

1952

1953

1954

1'155

195R

1957

19.58

195°

1960

196L

1962

1963

1964

1965

1966

1967

1968

I Total values 1'136-17l1lcluslve ale Ior the New York Stock Exchange and thc Amoucan Stock Exchange

only.

}

'

----- _

_

_

_

__ - __

_

__ \ _

_

__ _ _

_

_ _

_

_ _

_

_

_ _ _ _

_

_

_

_ _

_

_

_

_ _
192 SECURITIES AND EXCHANGE COMMISSION

TABLE 6.-Dollar Volume and Share Volume of Sales Effected on Securities Exchanges

zn the Calendar Year 1968 and the 6-Month Period Ended June 30, 1969

[Amounts In thousands]

PART 1-12 MONTHS ENDED DEC. 31, 1968

Bonds

I Stocks Rights and warrants Total

Exchanges dollar I Principal I volume Dollar Dollar Share Dollar Numvolume amonnt volume volume volume ber of units

202,772,300 I 5,669,521

---

Registered exchanges, 5,458,545 196,358,393 5,311,989 144,385 95,719 --- Amencan ________________ 36,744,235 1,265,048 1,008, ()42 34,775,385 1,570,691 703,802 37,634 Boston ___________________ 2,055,448 0 0 2,055,223 42,406 2"24 51 Chicago Board of Trade __ 0 0 0 0 0 0 0 Cmcmnatt , ______________ 34,065 60 83 34,005 625 0 0 Detroit, __________________ 693,555 0 0 696,554 17,070 . 1 Midwest; ________________ 6,152,255 321 269 6,150,607 140,798 1,326 1,475 National, ________________ 115,690 0 0 115,690 15,623 0 0 New York _______________ 149,394,657 4,401,936 4,447,679 144,978,443 3,208,664 14,278 53,504 Pacific Coast,____________ 5,242,187 137 136 5,220,983 140,546 21,067 2,730

Philade lphia- Baltimore- Washlngton ____________ 2,244,089 2,019 1,73'; 2,238,381 48,217 3,688 324 Pittsburgh _______________ 54,591 0 0 54,591 1,341 0 0 Salt Lake ________________ 22,216 0 0 22,216 23,250 0 0 Spokane _________________ 16,313 0 0 16,313 12,760 0 0

15,179 I 01 15,148 I 687 I --- Exempted exchanges. 0 31 342 --- Honolulu ________________ 13,480 I 0

gl 13,4491 643

1

31 342 Richmond _______________ 1,699 0 1,699 44 0 0

PART II -6 MONTHS ENDED JUNE 30, 1969

010

gl---g

7,9881

6,9881 1,000

7,988 I

6,9881 1,000

Exempted exchanges.]

Honolulu 1

Rlchmond

I Bonds

I Stocks I Rights and

Total warrants

Exchanges dollar I volume

I Dollar Principal \ Dollar Share I Dollar Number

volume amount volume volume volume of units

96, 555, 097 I 2, 485, 733 2, 647, 253193, 337, 904 2, 588, 340 I 731, 460

----

Registered exchanges, 93,868

American ________________ 18,413,505 572,337 540,648 17,187,008 758,041 654,159 44,544 Boston ___________________ 610,29-6 0 0 609,911 12,878 314 21

Chicago Board of Trade __ 0 0 0 0 0 0 0 Cincinnati. ______________ 14,081 65 82 14,016 228 0 0 Detroit, __________________ 124,346 0 0 124,344 3,429 2 5 Midwest. ________________ 3,125,263 47 55 3,124,843 73,484 373 121 National, ________________ 121,792 0 0 121,792 15,399 0 0 New York _______________ 69,762,579 1,909,488 2,099,851 67,839,567 1,597,018 13,523 39,930 Pacific Cosst, ____________ 3,054,767 3,652 6,451 2,989,879 82,754 61,236 9,186

Philadelphia-Baltimore- washm~on ____________ 1,282,995 144 166 1,280,999 29,035 1,852 63 Pittsburg _______________ 25,253 0 0 25,253 731 0 0 Salt Lake ________________ 13,128 0 0 13,128 8,437 0 0 Spokane _________________ 7,163 0 0 7,163 6,906 0 0

----

"Less than 500 units or $500.

Note.-Data on the value and volume of secuntles sales on the registered exchanges are reported In con- nection with fees paid under Section 31 of the Securities Exchange Act of 1934 Included are all Securities

sales, odd-lot as well as round-lot transactions, effected on exchanges except sales of bonds of the U.S. Gov- ernment winch are not subject to the fee. Comparable data are also supplied by the exempted exchanges.

Reports of most exchanges for a given month cover transactions cleared during the calendar month Clear

anees generally occurred on the 4th business day after that on which the trade was effected through

February 5, 1968, and on the 5th business day thereafter.

_

\
---- ---- 

THIRTY-FIFTH ANNUAL REPORT 193 

TABLE7.-Cmnpa~ative Share Sales and Dollar Volumes on Ezchanges 

Year Shxresalss NYS % AMS % MSE % %PC8 %PBX %BSE DSE PIT CIN Other I % % % % 

136.--. 683 070 .050 73.13 12.42 I.91 2.69 0.76 0. 96 0.85 0.34 0.03 6.91 1940........... an:sss:sn 75.44 13.20 211 278 1.02 1.19 .a .a1 .08 205
 1946........... 769 018 139 65.87 21.31 1.77 2% . .66 .78 .10 .05 5.51
 1950........... 893:320:469 76.32 1854 216 3.11 79 .65 .55 .18
 1955........... l,321,4W,?ll 6885 19.19 2.08 3.08 .75 .48 

.09 2.61 


1956........... 1,182,487,085 6631 21.01 232 3.25 

.39 .10 .05 5.02 


1957...-.......1,293,021 856 ' 70.70 18.14 

.72 .47 .49 .11 .05 b27
 2.33 2 73 .98 .40 .39 .13 .06 4.14
 1958........... 1,4W,578:512 71.31 19.14 213 299 .73 .45 .36 .I1 .05 2.74
 1959-...--....1 699 696 619 65.59 24.60 2. W 281 .00 .37 .3l .07 .O1 41
 1960..........: 1'441:017'564 69.48 2227 2.20 3.11 .89 .39 .34 .06 .06 2.21
 1061........... 2:142 523'490 64.99 a58 222 3.42 .79 .3l .31 .M ,M Z29
 1962...--......I 711(946'297 71.32 20.12 2.34 2.95 .87 .31 .36 .06 .05 1.63 1963........... 1:~0'798'423 72.81 18.84 2.33 283 .84 .29 .47 .M
 9 .... 2,126:373:821 72.54 19.35 248 264 .93 .29 

.04 1.39 


1985.....~...:: 2 671 011 810 W. 91 P.62 2 63 2 34 .82 

.54 .06 .M 1.19 


1966........... a'312'383'465 89.37 22 85 2.57 

.27 .53 .M .05 .88
 2.68 .86 .40 -46 . W .05 .72
 1967.......... 4'646'5d907 64.41 28.42 2.36 2.46 .39 .43 .33 .02 .a? .66
 Im..~........ 5:4d737,347 61.98 29.74 2.53 2.65 .90 .78 .32 .02 .01 .97
 Slx mollths to June30, 

1968......... 2,682,621,444 61.02 a.92 2.74 3.43 1.03 .48 .13 .a? .Ol 1.16 


Dollar volume 


(in thoussnd~) 


9 -........ $15,396,139 86.64 7.83 1.32 1.39 .68 1.34 .40 .20 .04 .16
 -

5 ........ .. 8,419,772 85.17 7.69 2.W 1.52 .92 1.91 .36 .19 .09 .a,
 16.284.542 82.75 10.81 2.00 1.78 .a 1.16 .35 .14 .06 .I3
 5 0-. 21,808,284 86.91 6.85 2.35 2.19 .92 1.12 .39 .I1
 985........... 38 038 107 86.31 6.98 2.44 1.90 .go .78 

.ll .05 


1956~...~ .. 35:148:115 84.95 7.77 2.75 2 .96 

.a9 .13 .a, .os 7 - - 32 214 846 85.51 7.33 2.89 .80 .42 .12 .% .07
 2.02 1.00 .76 .42 .I2 -08 .07 1958..~ ....~... u:419:560 85.42 

9 ......... 52 W1 255 

7.45 2.11 1.01 .n .37 .a, us .as
 83.66 9.53 2.67 1.94 1.01 .85 .31


1961

10Bo.~...~~ -.~~...~~~. .. 46:306:803 81.81 

82 44 9.35 2.73 

2.75 2. 

1.95 

W 04 

1.01 ..05 

.50 .37 

.34 

.06 

%. m .06
 f4 071 623 la 71
 1962.~...~. 54:855:804 RB.32 681 2.76 2.W 1.05 .46 -42 .06 .07 .05 1961~..~~ ...... 64,438,073 85. 12 7.52 2. i3 2.39 1.07 ,42 .52 .M .06 1964.~~~...~... S.49 6.46 3.16 2.43 1.15 .43 .66 .05 72,461,750 1985.~..~~...~.811 549 DSO 31.73 8. UI 3.45 2.13 1.13 -43 

.05 .06 .m 

1 9. . 123:666:443 19.78 11.84 3. 11 1.10 

.70 -05 .03 .04 

1867... 162,189,211 77.m 14.48 

2.85 .57 .57 .04 .09 .m 1969. ..~~..~~.. 73.56 

3.W 2.80 1.13 67 .44 .m .04 .04 


Six months to 197,117,957 16.00 3.12 2661 1.14 1.I 35 08 0 s 


June 30, 


9 -. 94,077,352 72 13 18.96 3.32 3.24 1.36 .65 .13 .a .02 .16 


Note.-Annual sales including stoclts, warrantsand riglits. ssreported by ell U.S. exchanges mission. Figures far mkrgea exchaezos nr: ineludod ln tiloso al the eacllangs iintowhioh they wem 0the margee. ComDetalilLs lor aii yean prior to 1956 nppoorm Tabic 7 lo tlio Anpeudix olthe32nd Annual Report. 

Symbols.-NYS New York Stock Erohnngo 4MS Amorieali Stock Exchange. MSE Midwest st& 

Erchanga; PCS, ~keificCosst Stock Exchnoga i'ns Phil;td~il~liin-~aitin~ore-~wsh~~~totobtock 
 ~~ohs

BSE, Boslon Stock Brohange; DSE. ~otroit'stue~ Exohsnsc; PIT. Pittsbulgh Stock Exchange; C~N: 

Cinoinnstx Stmk Erchsege. 
194 SECURITIES AND EXCHANGE COMMISSION

TABLE S.-Block Distributions of Stocks Reported by Exchanges

[Value In thousands of dollars]

$82,840

127,462

135,700

lUl,961

232,398

124,671

175,9'J1

104,062

88,743

146,459

14U,117

108,229

218,4'lO

344,871

520,966

339,062

361,886

822,336

424,688

926,514

6t8,780

814,984

909,821

1,603,107

1,523,373

1,154,479

1,571,600

ne 2, &17,454

81 4,270,580 94 4, (JI)7,2!)8

U5 9,457,358

100 6,481,291

73 3,961,572

95 7,302,420

86 3,737, 24U 77 4,280,681

88 5,193,756

76 4,223,258

68 6,906,017

84 5,738,35'l

U6 6, 756,767

146 11,696,174

99 9,324, 5U9 122 9,508, 505

148 17,380,941

92 11,439,065

130 l'l, 910,013 59 12,143,656

100 18,937,935 110 lU,462,343

142 , 31,153,319 126 29, 045,038

143 30,783,604

174 36,UO,489,

I Secondat y distributions

I~~'I~~~~s I~alue Shares

sold

Nurnhel Yalue

Evehange distnbutions

I Vulue

I ~22.6'J4 .. --.-.--- 1

~~:~~::::: ::::::::::1::::::::

:'>9,878 --~-f-~----.- 11,002 -.-- 1 .... .. -.- ..... -.- ..

9,133

1&~g~~:~:-:J:~::::~::: ::::~~~~~.

:~~~r s::...:::- ::::-1:::::::::. 6, 670 57 705, 781 '1124,604

7,22& 1'l 218,348 10,2ll

4,557 17 155,481 4,645

1,845 33 3'10,832 15,855

3,286 3S 61f1.871 2(1,454

3, no ~8 545,038 2b,4'Jl

,1, 4,J'l 20 I 441,1lb4 11,108

1,504 33 1,127,266 58,072 583 ~; 2.31-1,075 55,45U o 1_ 2,&J2,233 107,498 o b8 2, ,.53,237 U7,7ll

o 5; I 2,334,2;7 Rb,479

o 52 3.042, 59Y Il8,34Q

o 51, 3,4'>2,855 125,404

63 33' 2, b6'!,'138 93,528

812.3!1O

I, O'J7,338

I,053,5b7

947,231

308,134

314,270

238,879

5OO,2ll

160,308

323 013

357:8'17

380,680

18!I,772

151,850

131,755

63,408

88.152

33 500

fiJ:G63

3.>,OOn

48, ~'OO

o

o

0'

Oi

o 3,312 i

o

o

o

o

o

1

7U I 80

8"

7~

23

24

21

32

20

27

22

17

14

U

8

5

5

3

3

Special oflermgs

Num-1 Shares ber sold

Year

1'142 .

1'l43 .

1944.. .. 194"--

19'16 . 1947.. .. .

1<)48 .

194'1 ..

1950 . 1'l5L .. .. 1952... ...

1953...

1'154...... 1'l55._. .

lU55._•...

lU57

1'158 ._.1 11l59

Ifl60._. . HJ6L

1f)6:! I lU63 .. _._ .. ,

1U54.. _.1 W5o .;'

1'166_ .-

1967 .

1968._ .

Nole.-The first special otlermg plan w as made elI£ctlVe Feb, 14, 1942, the plan of exchange distnbutron

was made effectrve Aug 21, 1'153,secondary dtstributions are not made pursuant to any plan but generally

exchanges require members to obtain approval of the exchange to partrcipate III a secondary distrrbuuon and a report on such drstrrbution IS fi1t'~1with this Cornnussion

_ -- - -

_ --- --- --- ------ __ - - __ 1

_

_

_

_

_

_ )

_

__ ~ "

i

'I

I
THIRTY-FIFTH ANNUAL REPORT 195

TABLE g.-Unlisted Stocks on Exchanges

PART I-NU1\IBER OF STOCKS 0", THE EXCHA:-iGES .\S OF Jl":-iE 30, IU6JI

LIsted and regrstet ed on

another exch ..mge

Exchanges Uulisted

ouly i Admitted I Adnutted

! prior to I S1I1(,..

, l>1.11.1.1'1&43 ! Mm. 1,1'134'

711 I 10 :l

gl 102 3'11

3 0

,!I ° Ih.~

10 184 lI, 0

0 0: l~j)

0 4' 11,5 I

0 168 4lJ5

r,1 12 I 84

~I I

-I 3

8'1 I 348 I I, blO

i

~B'":T"" •••••••••••••••••••••••••••••••••••

Phl1adelpiua-Baltnnore-Washmgton i

f~J;~~~~ ~::::::::::::::::::::::::::::::::::::::::::::::: I Total 5 !------

,

P\RT 2-UNLISTED SIL\RE '-OLUME ON THE EXCIL\~UES-CALF.:-iDAR YE_U~ 1!J6S

Exchanzes

I Listed and register ed 011

..mother m,chaug:c

i Unlisted I I

I

ani) , ,Adlllltled Admitted

I puor to smce

___________________________ , , l>lm 1, IU343 l>lar 1,1\134'

American -_-_-_--_-_-_-_--_11 50,:lD.\.o34I 7.750.:lD0 I 502360 Boston__________________________________________ ° U,4~7,OO71 25,6U8, 12,';

Clucago Board ofTrade______________________ ___I ° : ° II CmcmnatL__________ __ . ( lI' ° 3~,834

~~~cll~U:::::::_______________----------- 1 'I'I.5S~ I I,004,83~ I IO,H18,UI;~

Midwest . .__ -I 10J! •.43'\,111(11) 3451'~512':'°3g Paotflc Coast , -i I ". ... J._

Phliadelphm-Baltimore-Wasillngton _ _ I 0 12,04:;, 11,6 27,03&. 81'S Plttsburgh_____________________ 01 1'10,137 544,7211

~~;k::~~~:5:~~ __~-~~~~~~~-:: __~:::~:~-::::- -~~-~~:: .:~::::~~I 5:: :~:::~: 36,8,,~~~i141,30:: :::

1 Refer to text under heading "Unlisted Trading Pn vilcges Oil Evchunzcs . III Part HI of t lus Rep»: t

Volumes are as reported by the stock exchanges or other reporting agencies and are exclusrvo of those III

short-term rights. , Includes ISSUesadmitted under Chuse 1 of Srct:on 12m as in ctIect puor to thc IUGt amendments to till' Exchange Act and two stocks on the American Stock Exchange admitted under Ionuei Sect:onI2(f), Clan ,l'

3

3 These issues were admitted under rouner Section Uff), Clause 1.

'These figures include issues admitted under former Sect:on12(f), Clauses 2 and 3 (except the two stock, on the Amonccn Stock Exchange referred to In In 2), and under new Section 12(0 (I) (B)

S Duplication of Issues among exchanges bungs the tot.il figures to more tl1.111 tho actual numh-r of ISSUP<'"

mvolvod.

'

'

1

'

' -

~ ~ ~ ~

I

I

- __ 1

" ---- •

_ 1
196 SECURITIES AND EXCHANGE COMMISSION

TABLE 1O.-Summary of Cases Instituted in the Courts by the Commission. Under

the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Uttltty

Holdmg Company Act of 1935, the Investment Company Act of 1940, and the

Investment Advzsers Act of 1940

Total Total Cases Cases Cases in- Total Cases cases In- cases pendmg pendmg statuted cases closed

stituted closed at end at end dunng pending during

Type of cases up to end uptoend of 1969 of 1968 1969 durmg 1969

of 1969 of 1969 fiscal fiscal fiscal 1969 fiscal

fiscal fiscal year year year fiscal year

year year year

------ ---- --- --- ---

Actions to enjoin vrolanons of tbe above acts ________________ 1,742 1,667 75 72 94 166 91

Actions to enforce subpoenas

under tbe Seeuritres Act and the Seeurtties Excbange Aet... 139 137 2 2 8 10 8

Actions to carry out voluntary

plans to comply witb section

l1(b) of tbe Holdmg Com- pany AcL ____________________ 154 153 1 2 1 4 3 MIscellaneous aetrons ___________ 58 58 0 0 1 1 1

TotaL __________________~~I---78-1---7-6-1-w5I-m-w3
THIRTY-FIFTH ANNUAL REPORT 197

TABLE ll-A J6-Year Summary of All Lnjunctton. Cases Instituted by the CommieslOn-1934 to June SO, 1869, by Calendar Year

Calendar year

1934-

1935

1936

1937

1938

1939

1940

194L

1942

1943

1944

1945

1946

1947

1948

1919

1%0

195L

1952

1953

1954

1955

1956

1957

1958

1959

1960

196L

1962

1963

1<)&'-

1965

1966

1967

1968

1969 (to June 30) _ _ _

TotaL

N umber of cases msti tu ted Number of cases In WhICh by the Commrssion and injuncuons wore granted the number of defendants and the number of de. involved. fcndants enjoined 1

CJ.Ses I Defendants I Cases Defendants

7 24 2 4 36 242 17 56 42 116 36 108 9b 240 91 211 70 152 73 153 57 154 61 165 40 100 42 99

40 112 36 90 21 73 20 54 19 81 18 i2 18 80 14 35 21 74 21 57 21 45 15 34 20 40 20 47 19 44 15 26 25 59 24 55 27 73 26 71 22 67 17 43 27 103 18 50

20 41 23 68 22 59 22 62 23 54 19 43 53 122 42 89 58 192 32 93 71 408 51 158 58 206 71 179 99 270 84 22'2 84 368 85 272 99 403 82 229 91 358 98 363 76 276 88 352 i2 302 68 271 56 236 50 181 89 380 79 291 94 489 97 391 49 308 57 328

1,742/ 6,351 I '1,6141 5,022

SUMMARY

Cases Defendants

Actions instituted ___________________________________________________________ I, 742 6, 351

Injunctrons obtained .• ____________________________________________________ I, 587 5,022

Actions pcndmg ___________________________________________________________ 23 3289

Other disposttions - - --- - - -- --- - - _. - -- - 132 I, 040

TotaL. ________________________________________________________________ I, 742 6,351

I These columns show dISpOSitIOn of eases by year of disposttion and do not necessanly reflect the dIS' position of the cases shown as having been Instituted III the same years

'Includes 27 eases which were counted twrce III this column hecause Injunctions against different defendants III the same eases were granted In different years.

a Includes 31 defendants III three cases III which mjuncnons have been obtained as to 13 co-defendants .

Includes (a) actions dISmISSed (as to 921 defendants), (b) actions discontmued, abated, abandoned,

stipulated or settled (as to 72 defendants), (c) actions III which Judgment was dcmed (as to 43 defendants),

(d) actions IU which prosecution was stayed on stipulation to discontinue nnsconduct chanted (as to 4

defendants).

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_

•~-~~- - - - - -~ - - - - -- - - - - - - --- - - -- -- ----

•
198 SECURITIES AND EXCHANGE COMMISSION

T \IlLE 12.-Summary of Cases Instituted Against Ihe Commission, Cases Involving

Pcuuons for Review of Commission (h ders, Cases in Which the Commrssion

Participated as Intervenor or Anncus CUriae, and Iieorqanization. Cases on Appeal

U'nder Ch. X in Which the CommisslOn Paritcrpated

o

7

o

5

o o

1<)

III

311

83

1ll

'1') pes of cases

Total i Total Cases I Cases Cases Total Cases

cases I eases pending I pending lllstltUtedl eases dosed

.mst.tuted closed at end I at end durmg pondmg during

up to end 'I up to end of 196<) of 1968 196'1 during 1969 of Hl69 of 1%<) fiscal I fiscal fiscal I 1969 fiscal fiseal fiscal year year year fiscal year

: year year . i I~ _ ----1----1----

Actions to enjoin enforcement I I of Securtties Act. Secui itres

Exchange Act or Public Utilrty Holding Company

Act with the exception of subpoenas ISSued by the Commission

Actrons to enjoin enforcement of or compliance with subpoenas ISSued by tile COnlIll1SSlOn

Pet ItlOIlS for review of Com.

11l1~SlOn'S orders by ('OUI ts

of appeals under the YaI IOUS

Acts admnustered by t he I Comrrnssion

Xltscellaneous aetrons acmnst

the Commission 01 otliccrs

of the Cornrmssion and cases

In which the Comnnssion I

pal trcipated as intervenor 01 .1mICUSCUrIae_....... i 337 J20 17 20 18 38 21

Appellate proceedings under I I Ch. X in which the Com- I nussion participated 1 226 225 1 2 I 5 7 6

TotaL I~ ---;J54 ---38-1---3-5 1---44-1---7-<) 1---4-1

---~-----

I

I

----

I

II

I

_

_

_

1 I'

_
THIRTY-FIFTH ANNUAL REPORT 199

T.\BLE 13.-A. J6-1"car Summor ij of Crimmal Cases Developed by the COltlIllISSIO/!-

19J4 Through 1969 by Fiscal Yeal 1

[See T'able 14 for classrucatron of defcud.ints .IS broker -deulers, et c.]

m

e

g'

I I

I I Num- I I ber of NnmI I

Number Num- persons ber of Num- of these Num- bN of as to such ber of Nunl- Nu-n- defendants ber of C.lSeS re- whom case'S In defend- ber of bPI of ,IS to whom these Fiscal yeal fened to prose- winch ants 111- these these proceedings defend Dept of cuuon mdict- dieted defend. defend.j have been ants as Justice was merits III such ants con-I ants ac- disnussed to who In each recom- have I cases' I victed I quitted on motion cases ar year mended been

I

of U S pendm In each obtained attorneys

I year

o

o

u

o

o

o

o

o

o

n

o

o

o

U

o

o

U

U

o

U

o

o

o

o

o

34

Z"l

fi7

U

'I

42

n

4S

:n

~I

&J

3&

I

15 I

60

1

15,

34

I

--I~-:-I-~I---

7 3" 3 I 31 I 17 0 2'1 Iii I 14 149 1>4 I 5

4& : 37V , 341 31>8I 11>4 4" 42 1"$ 30 I 144 7S I 3 )

IML . __

1\J35

1936

1937. . -- -- 1938 .

40 I m, 33/ 1341 75 13 4.) 1939__. __________ 5' 47 2H2 I Itlv 3& W l~tl __. __.. ______ 174 51 2001 IJh 1 3q tlG H141._______. ____ 150 47 ! 145 q-t I 15 31, Iv42 _____________ 50 l~tI 4h i I<I4 I 10, 2.~ 6J 1943_____________ 31 2-i 10, I tio! III 3h 1944_____________ :!7 h'l I 24 I 'it.! 4S h :!5 1945_________.. __ IV 47 18 61 36 10 15 1946_____________ 16 44 14 ~I 13 S 1'1 1947____. __. _____ 20 50i 13 9 5 2U 1948_____________ 10 32 I 15 20 3 6 1949. ____________

i~I 44 I 25 5-\ 1') 1& 25 1950_______. __... ~I 15 '1~

.1 21 1 5 1951. ____________ 29 24 4q 37 5 Ii 1952_____________ 14 I 13 I 24 17 4 3 1953_____________ I~ 15 i 33 20 , h 1954. _____._._ .. _ 19 ~I 19 I 52 :.?~J 10 13 1955__. ____.. _..• 8 Si 13 7 0

" 1956_________...• 17 43 I 16 i 44 2, 5 11 IV57_________...• 26 132

1

18 I 80 :>3 5 40 1958_____. _. ___._ 15 51 14/ 37 17 5 15 1959_____. _______ 45 : 217 39 234 117 2U 63 1960___________.. 53 I 2';1 44 207 113 11 60 1961._. ____ 42 240 : 42 270 IJJ 22 54 1962_____________ 60 191 I 51 152 85 15 5~ 1963_____________ 4~ 168 I 34 i 117 72 7 2U 1964__. __ 48 Ih4 I &71 1741 '17 I 12 23 1965_.. _________. 4lJ lui 45 HiD '17 7 21J

44 118 I 38 179 \17 1966._. ____. _____

zrz I » I za I 13 21 1967_____________ 20 104 ]9fvL ____ 40 I 1281 2'1 I IJ2 2'J , ~'O lY6j ____.. _... ___ '37 139 1& 81 4 I 0 0

TotaL ___. I:2o6I~i-;J:oooT-WS1 2,150 I 431 e 1,244 4

IThe figures given for each year reflect actions taken and the status of cases as of the end of the most

recent fiscal year With respect to cases referred to the Depai tment of JUStIce during the year specified. For example, convictions obtamed in fisca11969 WIth respect to cases referred during fiscal 1968 are Included

under fiscal 1968_While the table shows only four eonvictrons under 1'!b", the total number of convictions

for cases referred during that year and prior years was 83, as noted in the text of tlus report. There wei r

64 mdictments returned in 35 cases during fiscal year 1969. 2The number of defendants ill a case ISsometimes Increased by t he Depar tment of JU~tlCC over the nurnber agamst whom prosecution was recommended by the Comnnssion Also, more than one Indictment

may result from a single reference. 3 See 'fable 15 for breakdown of pending cases. Fourteen of these references involvmg 43 proposed defendants, and 15 prior references mvol vmg 40 pro.

posed defendants, were still being processed by the Department of Justiee as of the close of the fiscal year.

s Eight hundred and sixty-three of these cases have been completed as to one or more defendants Can.

victrons have been obtamed In 690, or 80 percent, of such cases. Only 173, or 20 percent, of such case' have resulted m acquittals or dismissals as to all defendants, this Includes numerous cases III wrueh mdictments

were disnnssed WIthout tnal because of the death of defendants or for other admuustratrve reasons. See

n. 6, infra,

Includes 87 defendants who died aflel mdtctmcnt

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200 SECURITIES AND EXCHANGE COMMISSION

TABLE 14.-A S6-Year Summary Classifying All Defendants in Criminal Cases

Developed by the Commlssion-19S4 to June 30, 1969

Number

as to whom Number Number Number Number cases were as to whom indicted convicted acquitted dismissed cases are on motion pending of U.S

attorneys

Registered broker-dealers (including principals of such firms) _________________ 679 391 1iO 163 75 Employees of registered broker-dealers ____ 391 181 22 104 84 Persons in general seeurrties busmess but

not as registered broker-dealers (includes pnneipals and employees) _______________ 872 432 76 334 30 AU others , ________________________________ 2,416 1,246 283 643 244

TotaL _______________________________ 4,358 2,21iO 4311

1,244 433

, Includes persons registered at or pnor to time of indictment, , The persons referred to m this column, while not engaged In a general business In seeuntles, were almost

without exeeption prosecuted for violatrons of law mvolvmg securities transactions

TABLE I5.-Summary of Criminal Cases Developed by the CommlsslOn Whieh Were

Pending at June 30, 1969

Number of Nnmber of such defendants as to Nnmber such de- whom cases are still pending and Pending, referred to Department of defend- fendants as reasons therefor

of Justice In the fiscal year. Cases ants m to whom

such cases

cases have been Not yet Awaitlng Awaiting

completed appre- trial appeal' hended

1958____________________________ 0 4 4 0 0 0 1959____________________________ 4 34 0 14 20 1 1960____________________________ 3 23 0 1 22 0 1961. ___________________________ 11 67 0 7 60 6 1962____________________________ 0 0 0 0 0 0 1963 ____________________________ 2 9 0 0 9 0 1964____________________________ 4 47 5 1 41 0 1965____________________________ 10 40 13 1 26 2 1966____________________________ 11 52 4 0 48 15 1967____________________________ 6 144 122 1 21 10 1968____________________________ 17 89 8 0 81 1 1969____________________________ 21 82 2 2 78 0

TotaL ____________________ 89 591 I 158 I 27 406 135

SUMMARY

Total cases pendmg s 118 ')'otal defendants' .________ 674

'I'otal defendants as to whom cases are pending , .________________________ 516

1 The figures In this column represent 35 defendants who have been convicted and whose appeals are pending, These defendants are also included in the figures m column three .

As of the close of the fiscal year, indictments had not yet been returned as to 83 proposed defendants In 29 cases referred to the Department of Justiee. These are reflected only In the recapttulatton of totals at the bottom of the table The figure for total cases pending includes 35 cases In a Suspense Category.

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THIRTY-FIFTH ANNUAL REPORT

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

201

Dollars Bdllons

90

75

60

1935-1969

1935 40 45 50

(Fiscal Years)

55 60 65

U S GOVERNMENT PRINTIH; OFFICE uno