I ..:

.. a .... . .... .

47th, Annual Report.

of the Securities and

Exchange Commission

for the fiscal year

ended September 30, 1981
For sale by the Superintendent of Documents, U.S. Government Printing OfBce

Washln!rton. D.C. 20402
Chairman's Letter of Transmittal

The Honorable George Bush

President, U.S. Senate

Washington, D.C. 20510

The Honorable Thomas P. O'Neill, Jr.

Speaker, U.S. House of Representatives

Washington, D.C. 20515

Gentlemen:

On behalf of the Securities and Exchange Commission, I have the honor to transrrut

to you the Forty-Seventh Annual Report of the Commission covering the fiscal year

October I, 19~0 to September 30, 1981, 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 l1(b) of the

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

Bank Act.

iii

Commissioners and Principal Staff Officers

(As of December 31, 1981)

Commissioners

JOHN S.R. SHAD, Chairman

PHIUP A. LOOMIS. JR.

JOHN R. EVANS

BARBARA S. THOMAS

BEVIS LONGSTRETH

Secretary: George A. Fitzsimmons

Executive Assistant to the Chairman: Daniel L. Goetzer

Term expires

June 5

1986

1984

1983

1985

1982

Principal Staff Officers

George G. Kundahl, Executive Director

Lee B. Spencer, Director, Division of Corporation Anance

John J. Huber, Deputy Director

William C. Wood, Associate Director

Mary E. T. Beach, Associate Director

John M. Fedders, DIrector, Ditnsion of Enforcement

David P. Doherty. Associate Director

Theodore A. Levine, Associate Director

Douglas Scarff, Director, Division of Market Regulation

Sheldon Rappaport, Deputy Director

Edward A. Kwalwasser, Associate Director

Joel H. Goldberg, Director, Division of Investment Management

Gerald Osheroff, Associate Director

Richard W. Grant, Associate Director

Aaron Levy, Director, Division of Corporate Regulation

Grant Guthrie, Associate Director

Edward F. Greene, General Counsel

Paul Genson, Solicitor

Michael K. WoIensky, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

John T. Shinkle, Associate General Counsel

Andrew L. Rothman, Director, Office of Public Affairs

ChDes T.A. Larson. Deputy Director

A. Clarence Sampson, Chief Accountant

leGrand C. Kirby. Deputy Chief Accountant

Jeffry L. Davis, Acting Director, Directorate of Economic and Policy Analysis

Teny M. Chuppe. Associate Director

v
WillIam S. Stem, Director, Office of Opinions and. Review

Helbert V. Efron, Associate Director

R. Moshe Simon, Associate Director

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Richard J. Kanyan, Director, Office of Admmistrative Services

Q. WillIam Richardson, Deputy Director

James C. Foster, Director, Office of Personnel

WIlson Butler, Director. Office of Applications and Reports Services

Robert R. Wolf, Director, Office of Consumer Affairs and Information Services

John D. Adkins, Director, Office of Information Systems Management

Thomas J. Whalen, Deputy Director

Matthew R. Schneider, Director of Legislative Affairs

James A Clarkson. III,Director of Reqtonel Office OperatIOns

Phillip H. Savage, Director of Equal Employment Opportunity

vi
Regional and Branch Offices

Regional Offices and Administrators

Region 1. New York, New Jersey.-Donald N. Malawsky. Room 1102,26 Federal Plaza,

New York, New York 10278.

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, MaineWillis H. Riccio. 150 Causeway Street, Boston, Massachusetts 02114.

Region 3. Tennessee, VirginIslands, Puerto Rico, North Carolina, South Carolina, Georgia,

Alabama, Mississippi, Florida, part of Louisiana.-Jule B.Greene. Suite 788, 1375 Peach.

tree Street, N.E, Atlanta, Georgia 30367.

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

Missouri, Ohio, Wisconsin.-Wdliam D. Goldsbeny. Room 1204, Everett McKinleyDirk.

sen Bldg., 219 South Dearborn Street, Chicago, Illinois 60604.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except Kansas City).-

Wayne M. Secore. 8th Floor, 411 West Seventh Street, Fort Worth, Texas 76102.

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

Utah-Robert H. Davenport, Suite 700, 410 Seventeenth Street, Denver, Colorado

80202.

Region 7. Califomia, Nevada, Arizona, Hawaii, Guam.-Michael J. Stewart, Suite 1710,

10960 Wilshire Blvd., Los Angeles, Califomia 90024.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-Jack H. Bookey. 3040 Federal

Building, 915 Second Avenue, Seattle, Washington 98174.

Region 9. Pennsylvania, Maryland,Virginia,West Virginia,Delaware, Districtof Columbia.-

Paul F. Leonard. Room 300, Ballston Center Tower No.3, 4015 Wilson Blvd.,Arlington,

Virginia 22203.

Branch Offices

Detroit, Michigan 48226.-231 Lafayette St., 1044 Federal Building.

Houston, Texas 77002. Room 5615, Federal Office f:, Courts Bldg., 515 Rusk Avenue.

Miami, Florida 33131.-Suite 1114, DuPont Plaza Center, 300 Biscayne Boulevard Way.

Philadelphia, Pennsylvania 19106.-Federal Building, Room 2204, 600 Arch Street

Salt Lake City, Utah 84111.-Suite 810, Boston Bldg., Nine Exchange Place.

San Francisco, Califomia 94102.-450 Golden Gate Ave.. Box 36042.

vii

Biographies of Commissioners

John S.R. Shad. Chainnan

John Shad was sworn in byVice President Bush as the 22nd Chairman of the SEC on May

6, 1981. He is currently serving a tenn which expires on June 5, 1986.

Mr. Shad was previously Vice Chairman of the board of Ef. Hutton Group. In 1963 he

joined Hutton and initiated their investment banking activities, which grew rapidly under his

direction into a multi-billion dollar annual principal amount of corporate financings and

mergers.

In May, 1981 he resigned from Hutton and the boards of six other New York Stock

Exchange listed corporations to join the Commission.

He was born in Utah. While attending college, he worked nights as a riveter in an aircraft

plant During World War II, he served in the Pacific and China as a naval officer.

He graduated, cum laude, from the University of Southern California in 1947, received an

M.BA from Harvard Business School in 1949, and an LLB. from New York University Law

School in 1959. He is a member of Beta Gamma Sigma and Phi Kappa Phi (academic

honoraries); the author of articles on corporate finance and mergers; and has taught

Investment Banking at the New York University Graduate School of Business

Administration.

He began his business career in New York Gty in 1949 as a security analyst He obtained

his law degree while working at Shearson, Hammill & Co., where he became a partner and

also initiated that finn's investment banking activities, prior to joining Hutton.

ix
PhDfp A. Loomis, Jr.

Philip A Loomis, Jr., took the oath of office as Commissioner on August 13, 1971. His

current five year term expires June 5, 1984. A career employee of the Securities and Ex.

change Commission, Mr. Loomis first served as a consultant to the staff in 1954. Prior to his

appointment to the Commission he was General Counsel.

After a short period as a consultant, Mr. Loomis was appointed Associate Director of the

DMsion of Trading and Exchanges in 1955, and later that year he was named Director. In

1963 he was named General Counsel to the Commission and served in that capacity until

his appointment to the Commission in 1971. During Mr. Loomis' service as a member of

the staff, he made major conbibutions towards the passage of important securities legislation, principally the 1960 amendments to the Investment Advisers Act of 1940, the Securities Act Amendments of 1964 and the Securities Protection Act of 1970.

In the course of his career at the Commission, Mr. Loomis has been cited often for distinguished service. In 1964 he received the National CIVil Service League Career Award,

followed in 1966 by the SEC Distinguished Service Award and in 1971 the Federal Bar Association's Justice Tom C. Clark Award.

Mr. Loomis was bom in Colorado Springs, Colorado, June II,1915. He received his AB.

degree with Highest Honors from Princeton University in 1938 and his LL.B. degree cum

laude from Yale Law School in 1941. While there he served on the editorial board of the Yale

Law JoumaL

Mr. Loomis was admitted to the Califomia Bar in 1941 and the Supreme Court Bar in

1955. He practiced law with the Los Angeles firm of O'Melveny [,. Myers in 1941 and from

1946 to 1954. From 1942 to 1944 he was an attomeywith the Office of Price Administration

and served as Associate Counsel for Northrop Aircraft, Inc. (now Northrop Corporation)

from 1944 to 1946.

~

John R. Evans

John R. Evans was sworn in as a member of the Commission on March 3, 1973, filling out

the unexpired term of James J. Needham. His current five year term expires June 5, 1983.

Mr. Evans was a member of the Professional Staff of the U.S. Senate Committee on Banking,

Housing and Urban Affairs from June 1971 to March 1973, and served as minonty staff

director from July 1964 to June 1971.

Mr. Evans was born in Bisbee, Arizona on June 1, 1932. He received his B.S. degree in

Economics in 1957 and his M.S. degree in Economics and his Secondary Teaching Certificate in Business in 1959 from the University of Utah.

Mr. Evans came to Washington in February 1963 as Economics Assistant to Senator

Wallace F. Bennett of Utah. Prior to that he had been a Research Assistant and later

Research Analyst at the Bureau of Economics and Business Research at the University of

Utah, where he was also an Instructor of Economics during 1962 and 1963.

x
Barbara S. Thomas

Barbara S. Thomas was swom in as a member of the Commission in a White House

ceremony held October 21,1980. The 58th person appointed to the Commission, she is

now serving for the term of office expiring June 5, 1985.

A corporate and securities lawyer, Ms. Thomas became a partner of Kaye, Scholer, Fierman, Hays [, Handler, a New York law firm, In January 1978. She had been an associate of

the firm since 1973 and an associate of the Paul, Weiss, RifkJnd,Wharton [, Garrison firm,

also of New York, from September 1969 to April ] 973.

Ms. Thomas is a member of the Securities Regulation Committee of the New York State

Bar Association, the Committee on Federal Regulation of Securities of the American Bar

Association, and the Intemational Bar Association. In addition, prior to joining the Commission, Ms. Thomas was Chairman of the Corporation Law Committee of the Association

of the Bar of the Oty of New York. She is also a member of the Board of Overseers of the

Wharton School of Finance at the University of Pennsylvania, the University of Pennsylvania

Alumni Council on Admissions, the Economic Club of New York, and the Financial

Women's Association of New York. She also serves as a Trustee for the University of

Pennsylvania Alumni Association of New York City.

Ms. Thomas was bom in New York City on December 28, 1946. She is a graduate of New

York University School of Law, J.D. 1969, cum laude, where she placed second in a class of

323, was a member of the Order of the Coif, and was an editor of the New York University

Law Review. A John Norton Pomeroy Scholar, she received the Jefferson Davis Prize in

Public Law and American Jurisprudence Prizes for Excellence in ]5 (out of 28) subjects,

and was on the Dean's List every semester. In 1966, she eamed a BA, cum laude, in history

from the University of Pennsylvania.

Bevis Longstreth

BeVIS Longstreth took the oath of office as the 60th member of the Securities and Exchange Commission on July 29,1981, filling a term which expires on June 5,1982.

Since 1962, Mr. Longstreth has practiced law WIth the New York firm of Debevoise [,

Plimpton. He was admitted to partnership in that firm in 1970. He specializes in corporate

securities and real estate finance law, bankruptcy and business work-outs and not-for-profit

law.

Mr. Longstreth was a Lecturer at Columbia Law School from 1975 until his appointment

to the Commission, teaching a seminar on the corporation In modem society. He has

lectured on vanous securities and corporate law topics at the Practising Law Institute and

other seminars and has written numerous articles on business-related subjects. Mr. Longstreth has served on the boards of a number of charitable and educational organizations

active in the New York area.

Mr. Longstreth was bom in New York Oty in 1934 and grew up in Princeton, New Jersey.

He graduated from Princeton University in 1956 (B.S.E.) and from Harvard Law School in

]961 (LLB). From ]956 to 1958 he served in the U.S. Marine Corps.

xi

Table of Contents

Regulation of the Securities Markets 1

Securities Markets, Facilities and Tradmg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The National Market System . . .. . . . .. . .. . . . . . . . . .. . . . . .. . . . . . . . . 1

Monitoring Commission Rules 3

National System for Clearance and Settlement of Securities Transactions 3

Options Trading 4

Option Transactions During UndelWritten Offering .. . . . . . . . . . . . . . . . 5

Issuer Repurchases. .. .. . .. . .. . . . . . . • . . .. . . . . . . . . .. . . .. . . . . . . . . 5

Short Tendering of Securities. .. . .. . . . . . . .. . .. . . . . . • . . .. . . . . . . . . 5

Market Manipulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Regulation of Brokers. Dealers, Municipal Securities Dealers and Transfer

Agents _.. __ _.. _. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Regulatory Burdens on Small Broker-Dealers. . . . . . . . . . . . . . . . . . . . . . 6

Broker-Dealer Reporting Requirements . . . . . • . . . . . . . . . . . . . . . . . . . . . 6

Financial Responsibility Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Registration Requirements . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . 8

Self-Underwriting by SECO Broker-Dealers . . . . . . . . . . . . . . . . . . . . . . . . 8

Broker-Dealer Examinations 8

MuniCipal Securities Brokers and Dealers . . . . . . . . . . . . . . . . . . . . . . . . . 9

Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Securities Investor Protection Corporation. . . . . . . . . . . . . . . . . . . . . . . . . 9

Transfer Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Oversight of Self.Regulatory Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Surveillance and Compliance Inspections. . . . . . . . . . . . . . . . . . . . . . . . . 9

Market Oversight Surveillance System. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

National Securities Exchanges 12

National Association of Securities Dealers, Inc. 13

Allocation of Regulatory Responsibility 14

Statutory Disqualifications . .. . .. . . . . . . .. . . . . . .. . .. . . . . . .. . . . . . . . 14

Applications for Re-Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Municipal Securities Rulemaking Board 14

Clearing Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Procedures for Filing Proposed Rule Changes . . . . . . . . . . . . . . . . . . . . . 15

The Disclosure System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

The Integration Program ........•.................................. 17

Proposed Forms S-l, S-2 and S-3 18

Revision of Regulation S-K. . .. . . . . . . . . . . .. . . . . .. . . . . . . .. . • . . . . . . 18

Revision of Regulation C and 12B . . . . . . . .. . . . . . . . .. . .. . .. . . . . . . . 19

Delayed or Continuous Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Uability Issues................................................ 19

xiii
Security Ratings. . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . 20

Coordinating Releases . . . . 20

Final Phase of Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Selective Review 20

Small Business. . . .. . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Regulation D 21

Form 5018 22

Classifying of Issuers 22

Regulation A 22

Section 4(6) 22

Rule 242 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Trust Indenture Act of 1939 23

Studies Involving Small Issuers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Other Rule-making; Continuous Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Proposed Amendments to Proxy Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Proxy Monitoring Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Shareholder Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Amendments to Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Proposed Amendments to Rule 13e-3............................ 25

Environmental Disclosure 25

International Corporation Finance 25

Real Estate GUidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Other Rule-fl'laking 26

Interpretive Advice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Employee Benefit Plans . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Going Private Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Insider Trading and Reports 27

Retail Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Other Interpretive Releases . 27

Accounting fl'latters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Oversight of the Accounting Profession 27

SEC Practice Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

FASB Activities. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

(l) Conceptual Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

(2) Financial Reporting and Changing Prices. . .. . . . . . . . . . . . . . . 30

Other Significant Financial Reporting Issues. . . . . . . . . . . . . . . . . . . . . . . 31

(1) Financial Reporting Practices for Oil and Gas Producers . . . . . 31

(2) fl'lanagement Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

(3) Supplemental Financial Information 32

Review of Accounting-Related Rules and Interpretations. . . . . . . . . . . . . 33

(l)Scope of Services by Independent Accountants. . . . . . . . . . . . . 34

(2) Regulation 50X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

(3)ASRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

(4)SABs................................................. 36

Investment Companies and Advisers 37

Disclosure Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Investment Company Act Study. . . . . .. . . . . . . . . . . . . . . .. . .. . . . . . . . .. . . 38

Legislation 39

Investment Advisers Act Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

xiv
Significant Applications and Interpretations 40

Heizer Corporation ..........•................................. 40

Investment Company Institute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • 40

Walter Untermeyer. Jr. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Institutional Disclosure Program . . .. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 41

Enforcement Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Sanctions and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Insider Trading 44

Changes in Corporate Control 46

Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Regulated Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Hot Issues "'arket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Foreign Issuers 54

Distribution Scheme. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Municipal and Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Energy and Tax Benefit Related Cases . . . 58

Related Party Transactions , . . . . . . .. 60

The Foreign Corrupt Practices Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Criminal Reference and Co-ordination with Other Authorities 63

Other Utigation and Legal Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Scope of Antifraud Provisions. . . . . . . . .. . . . .. . . . . . . . . . . . . . . .. . . . . . . . . 65

Standard of Culpability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Private Rights of Action 67

Federal Court Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Standard of Proof in Enforcement Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 69

Scope of Commission's Investigatory and Enforcement Authority . . . . . . . . 70

Scope of Commission's Authority Under The Holding Company Act...... 71

Reporting Violations. . . . . . .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 71

Exhaustion of Remedies 72

Tender Offer Utigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Regulatory Utigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Public Utility Holding Companies 75

Composition 75

Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Exemptive Rules Adopted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Reorganizations and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Colonial Gas Energy System Reorganization 76

Columbia Gas System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Northern States Power Company. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 76

Fuel Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Service Company Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

General Public Utilities Corporation/Three Mile Island. . . . . . . . . . . . . . . . . . . 77

Corporate Reorganizations , , .. . . . . . 79

Administration and Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

General "'anagement and Program Developments. . . . . . . . . . . . . . . . . . . . . 81

xv
Infonnation Systems Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Financial Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Internal Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Personnel Management .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Equal Employment Opportunity. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 86

Consumer Affairs and Infonnation Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Facilities Management............................................. 87

Footnotes 89

Appendix 97

The Securities Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Income, Expenses and Selected Balance Sheet Items 97

Table 1-Financlallnfonnation For Broker-Dealers 1975-1980....... 98

HIstorical Financiallnfonnation of Broker-Dealers With Securities Related

Revenues of $500,000 or More. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Table 2-Historical Consolidated Revenues and Expenses of BrokerDealers With Securities Related Revenues of $500,000 or More. . . . 99

Table 3-Historical Balance Sheet for Broker-Dealers With Securities

Related Revenues of $500,000 or More. . . . . . . . . .. . . . . . . . . . . . .. . 100

Securities IndustIy Dollar in 1980 For Carrying/Clearing Finns. . . . . . 100

Chart-Securities Industry Dollar in 1980 For Carrying/Clearing Finns 102

Table 4-Revenues and Expenses of Broker-Dealers Carrying/Clearing

Customer Accounts 103

Broker-Dealers, Branch Offices, Employees 104

Chart- Broker-Dealers and Branch Offices 105

Table 5- Brokers and Dealers Registered Under the Securities Exchange

Act of 1934-Effective Registrants as of September 30, 1981

Classified by Type of Organization and by Location of Principal Office 106

Table 6-Principal Business of SECO Broker-Dealers.............. 107

Table 7-Applications and Registrations of Brokers and Dealers and

Investment Advisers-Fiscal Year 1981......................... 108

Table 8-Applications and Registrations of Municipal Securities Dealers

and Transfer Agents-Fiscal Year 1981 109

Selt-Requlatory Orqarnzations: Revenues, Expenses and Balance Sheet

Structure.. . . ... . . . .. . . . . . . . . .. . . . . . . . . .. . .. . . . . . . . . . . . . . . . . 110

Table 9-Assets, Uabilities and Net Worth of Self-Regulatory Organizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Table lO-Revenues and Expenses of Self-Regulatory Organizations

1975-1980 . . . . . . . . . . . .. . . . . . . . . .. . . 113

Table II-Uses of Self-Regulatory Organization Funds 1975.1980 ... 114

Table 12-Sources of Self-Regulatory Organization Funds 1975-1980 116

Table 13-Self-Regulatory Organizations-Clearing Agencies Revenues

and Expenses-Fiscal Year 1980. . . . . . . . . . . .. . .. . . . . . .. . . . . . . . 118

Table 14-Revenue and Expenses of Municipal Securines Rulemaking

Board 119

Exemptions 119

Section 12(h) Exemptions...................................... 119

Exemptions for Foreign Private Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Section 15(a) Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

xvi
Rule 101X>Exemptions 120

Financial Institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Stock Transactions of Selected Financial Institutions . . . . . . . 120

Table 15-Common Stock Transactions and ActivityRates of Selected

Financial Institutions . .. .. . . . . . . . . . .. . . . .. . . . .. . .. . .. . . . . . . . . . 121

Stockholdings of Institutional Investors and Others . . . . . . . . . . . . . . . . . 123

Table 16-Market Value of Stockholdings of Institutional Investors and

Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Table 17-Companies Registered Under the Investment Company Act

of 1940 as of September 30, 1981 125

Table 18-Companies Registered Under the Investment Company Act of

1940 .. . . . .. . . . . . . . . . ... . .. . . . . . . . . . . .. . . . . . . . . . . . . . . . .. . . . 126

Table 19-New Investment Company Registrations................ 127

Table 20-lnvestment Company Registrations Terminated.......... 127

Private Noninsured Pension Fund Assets. . . . . . . . . . . . . . . . .. . . . .. 128

Table 21-Assets of Private Noninsured Pension Funds............ 129

Securities on Exchanges .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

Market Value and Share Volume................................. 130

Table 22-Market Value and Volume of Sales on Registered Securities

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

NASDAQ (Volume and Market Value) . . . . . . .. . . . . .. . .. . . . .. . .. . . . 132

Share and Dollar Volume by Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Chart-Market Value of Securities Traded On AllU.S. Stock Exchanges 133

Table 23-Share Volume By Exchanges.......................... 134

Table 24-Dollar Volume By Exchanges. . ... . . .. .. . . . . .. . . . . . . . . 134

Special Block Distributions . . .. . .. . . . . .. . . .. . . . . . . . .. . . . . . . . . . . . 135

Table 25-Special Block Distributions Reported By Exchanges. . . . . . 135

Value and Number of Securities Listed on Exchanges. . . . . . . . . . . . . . 136

Table 26- Securities Listed on Exchanges December 31, 1980. . . . . . 136

Table 27-Value of Stocks Listed on Exchanges................... 137

Securities on Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Table 28-Securities Traded on Exchanges. .. .. . . . . . . . . . . . . . . . . . . 138

Table 29-Unduplicated Count of Securities on Exchanges. . . . . . . . . 138

1933 Act RegIstrations. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . .. . .. . . . . . . . . . . 139

Effective Registration Statements . .. . . . . . . . .. . . . . . . . . . . . . . . .. . . . . 139

Table 3O-Effective Registrations. . . .. . . . . . .. . . . . . . . . . . . .. . . . . . . . 140

Chart-Securities Effectively Registered with S.E.c. 1935.1981 141

Purpose and Type of Registration. . . .. .. . . . .. . . . . . . .. . . . .. . . . . . . . 142

Table 31- Effective Registrations By Purpose and Type of Security: Fiscal

Year 1981. .. . . . . . . . .. .. . .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . 143

Chart-Effective Registrations Cash Sale For Account of Issuers. .. . . 144

Regulation A Offerings. . . . . . . .. . . . . . . . . .. . . . . .. . . . . . . . . . . . . . . .. . . . . 145

Table 32-Offerings Under Regulation A . . ... . . . . . . . . . . . . . . . . . . . . 145

Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Types of Proceedings '.' . . . . . . . . . . 145

Table 33- Types of Proceedings................................ 146

Table 34-lnvestigations of Possible Violations of the Acts Administered

By the Commission 150

Table 35-Administrative Proceedings Instituted During Fiscal Year

Ending September 30,1981.................................. 150

xvii
Table 36-lnjunctive Actions.. . . .. . . . . . . . . .. . .. . . . . . . . . ... . . . . .. 150

Table 37-Criminal Cases " . . . . . . . . . . . . . . 150

Trading Suspensions " . . . . . . . 151

Foreign Restricted Ust , . . . . . . . . .. . .. . . . . . . . . . . . . .. . 151

Right to Financial Privacy. . .. . . . .. . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . 153

Public UtilityHolding Companies . . .. .. . . . . . . . . . . . . . .. . . . . . .. . .. . . . . . 153

System Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Table 38- Public UtilityHolding Company Systems . . . . . . . . . . . . . . . . 154

Table 39-Key Financial Statistics of Registered Public UtilityHolding

Company Svstems 155

Table 4O-Public. Financing of Holding Company Systems Fiscal Year

1981 156

Table 41-Subsidiary Service Companies of Public Utility Holding

Company Systems.......................................... 158

Fuel Programs................................................ 158

Table 42-Regulated Fuel Program Expenditures of Holding Company

Systems: Fiscal Year 1981.................................... 159

Corporate Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Table 43-Pending Reorganization Proceedings Under Chapter Xof The

Bankruptcy Act in Which the Commission Participated: Fiscal Year

1981 :.................... 161

Table 44-Reorganization Proceedings Under Chapter 11 of the Bankruptcy Code in Which Commission Entered Appearance. . . . . . . . . . 162

SEC Operations 163

Chart-Appropriated Funds vs. Fees Collected .. , , .. . .. . .. . .. . . 164

Table 45-Budget Estimates and Appropriations. .. ... . .. . .. . .. 165

xviii
Regulation of the Securities Markets

Securities MarKets, Facilities and

Trading

The National Market System-During

the past fiscal year, continued progress was

made in the development of a national

market system. Most significantly, the

Commission had the opportunity to observe the first full year of trading pursuant to

Rule 19c-3 under the Securities Exchange

Act of 1934 (Exchange Act), which precludes the application of off-board trading

restrictions to certain securities that became exchange-listed after April 26, 1979,

and issued its first monitoring report on

trading under that rule. In addition, significant progress was made during the year

in establishing an automated trading link

between the exchange and over-the counter (aTC) markets in securities subject to

Rule 19c-3.

Rule 19c-3 became effective on July 18,

1980.1 Its effect is generally to allow brokerdealers who are members of exchanges to

deal as principal in the aTC market in

securities which became listed on an exchange after April 29, 1979. On August 25,

1981 , the Commission issued its first monitoring report on the operation and effects of

the Rule.2 Among other things, that report

examined the characteristics of trading

under Rule 19c-3, the surveillance of that

trading by the National Association of Securities Dealers, Inc. (NASD), and the impact, to date, of Rule 19c-3 on market

quality. The report indicated that there had

been limited aTC trading under Rule 19c-3,

and that, while the results of that trading

were inconclusive, the rule did not appear

to be having an adverse effect on the quality

of markets for securities subject to the rule.

The report concluded that a more significant analysis of trading under Rule 19c-3

would have to await implementation of an

automated link between the exchange and

aTC markets for trading securities subject

to Rule 19c-3.

The Cornrnission has frequently attempted, over the past two years, to encourage the industry to voluntarily develop

a linkage between the aTC and exchange

markets. On April 21, 1981, the Commission issued an order which requires establishment of an automated link between

the Intermarket Trading System (ITS), a

trading system operated jointly by certain

national securities exchanqes.' and the

NASD's Computer Assisted Execution System (CAES). The linkage, which will be

applicable to trading in securities subject

to Rule 19c-3, must be in place by March I,

1982.4In issuing the order, the Com.

mission stated that the interface will permit

market professionals trading in Rule 19c.3

securities to route orders efficiently between exchange and aTC markets, and will

therefore significantly further the goals of

a national market system. At the close of

the fiscal year, the ITS participants and the

NASD were continuing their work in preparation for the interface.

Previously, on February 10, 1981, the

Commission approved the admission of

the Gncinnati Stock Exchange (CSE) to

membership in the ITS and the establishment of a manual link between the CSE's

automated National Securities Trading

System and the ITS.5That interface, as well

as the ITS-NASD linkage, will increase the

opportunities for brokers to secure the best

execution of their customers' orders and

will enhance marketmaker competition

and efficient pricing. In particular, the Commission believes that these two interfaces

are critical to achieving the Commission's

goals of eliminating "trade-throughs"
(which are orders executed in one market

at a pnce infenor to the quotatJon bemg displayed in another market) and ensunng

nationwide price protection of limit orders

in secunties traded through ITS.

In a further effort to eliminate the adverse

effects of trade-throughs, on April 9, 1981,

the Commission approved proposed rule

changes subrmtted by the ITS participants

which addressed the problems created by

trade-throughs," Those rules require ITS

members to avoid mitiating a trade-through

in an ITS eligible security. In the event that

a trade-through with respect to an agency

order does occur, and the aggrieved party

makes a timely complaint, it is the responsibility of the party who initiated the tradethrough to take corrective action 10 accordance with the provisions of the rules.

In addition, by the close of the fiscal year,

the ITS partJcipants had reached agreement, 10 principle, on rules which would

provide price protectJon to limit orders in

securities traded through the ITS. The

Commission expects that those rules will

be Implemented 10 the forthcoming fiscal

year. The Cornrrussion believes that the

trade-through rules and the limit order

protection rules are siqnfficant steps in

achieving the national market system envisioned by Congress 10 the Securities Act

Amendments of 1975 (1975 Amendments).

The Commissron also took an initial step

toward including certain securitJes traded

solely 10 the OTC market in national market

system facilities. On February 17, 1981, the

Commrssron adopted Rule 11Aa2-1 under

the Exchange Act which provides for the

designatJon of certain secunties traded In

the OTC market as "national market system secunties",? The primary effects of

such designation at the present time are the

requirements that transactions in such

securilJes be reported in a real time system

and that quotations for such secunties be

firm as to the quoted price and size. Under

the rule, approximately 50 of the most

actively traded OTC stocks will be designated as natJonal market system securitJes

2

on March I, 1982. Approximately 650 additional OTC stocks will be eligible for such

designation, upon application of the Issuer,

beginning on August I, 1982. Following

the adoption of Rule 11Aa2-1, on July 24,

1981, the NASD filed a rulemaking petition

with the Commission, proposing a number

of amendments which, among other

things, would increase to approximately

1,450 the number of securities eligible for

designation upon issuer application. In

proposing those amendments, the NASD

indicated that it had concluded that the

designation of national market system

securities will have a substantial and long

lasting Impact on the OTC market. The

NASD also believes such designation, and

the accompanying dissemination of last

sale information, will be highly desired by

many NASDAQ companies. (After the

close of the fiscal year, on October I, 1981,

the Commission published the NASD's

proposals for public comment,"

On February 26, 1981, the Commission

adopted Rule l1Aa3-2 under the Exchange

Act, establishing procedures and requirements for jomt industry plans in connection

with planmng, developing, operating or

regulating a national market system or its

facilities," Rule l1Aa3-2 specifies procedures for filing and amending national

market system plans (including amendments initiated by the Commission) and

establishes certain minimum procedural

and substantive requirements applicable to

such plans.

On February 27, 1981, the Commission

proposed amendments to Rule 11Ac I-I

under the Exchange Act goveming the

collection and disserninanon of quotation

Information." The proposed amendments

would, under certain circumstances, perrmt regional exchange specialists and third

market makers to disseminate quotations

on a voluntary, rather than mandatory

basis. In proposmg the amendments, the

Commission stated Its preliminary belief

that the amendments would eliminate unnecessary regulatory burdens on secondary market makers and enchance the
accuracy and reliability of quotation information. At the close of the fiscal year, the

Commission was analyzing the comments

received in response to the proposed

amendments to Rule 11Ac I-I, and was

considering further action WIth respect to

it.

Monitoring Commission Rules-As

discussed earlier in this section, the Comrmssion's Directorate of Economic and

Policy Analysis has developed and implemented a program to monitor the operation and effects of Rule 19c-3 under the

Exchange Act,!' (The rule precludes application of off-board tradmg restrictions to

securities which become exchange-listed

after April 26, 1979.) The first monitonng

report prepared by the DIrectorate and the

Division of Market Regulation, published

dunng the fiscal year, focused upon major

areas of concem to the industry and the

Commission.J2 Specifically, the report dIScussed, in part, the volume trends in securities eligible for trading pursuant to the

rule, the characteristics of order flow m

those securities, and the impact of the rule

on market quality and execution quality.

In conjunction WIth the Commission's

ongoing program to monitor the national

market system facilities, the Directorate

published in February 1981, "A Monitoring

Report on the Operation of the Intermarket

Trading System," and m May 1981, "A

Monitoring Report on the Operation of the

Cmcmnati Stock Exchange National Securities Trading System." These reports

were designed to provide the Commission,

and the securities industry, with an analysis

of the impact of the Intermarket Trading

System and the National Securities Tradmg

System on, the routing of order flow, intermarket competition, and the quality of

markets.

National System for Clearance and

Settlement of Securities TransactionsDuring the fiscal year, substantial progress

was made in the Commission's effort to

foster development of a national system

for clearance and settlement of securities

transactions. The staff completed its review

of the two Issues remanded by the (Jruted

States Court of Appeals for the DIstrict of

Columbia Circuit in Bradford National

Clearing Corporation v. Securities and

Exchange Commission.13ln that decision,

the court affirmed the Commission's

decision granting the application of

National Securities Clearing Corporation

(NSCC) for registration as a clearing

agency. The Commission has Viewed that

reqistration as a key step in achieving a

national clearance and settlement system.

The two Issues remanded by the court for

further consideration by the Comrrussion

were: (a) NSCCs selection of Securities

Industry Automation Corporation (SIAC) as

the facilities manager of Its consolidated

system without competitive bidding; and

(b) NSCCs use of geographic price rnutuahzation (GPM) GPM IS the practice of

charging all participants the same fee regardless of whether the participants deal

WIth the c1eanng agency at its main facility

or through a branch office

After extensive review of comment

letters, reports and other available mformation, the Commission affirmed m substance both its decision authonzmg NSCC

to use GPM and NSCCs selection of SIAC

as facrhties manager WIthout the use of

cornpetinve biddinq 14

The Cornmission completed its review of

and approved a proposed rule change submitted by NSCC that would establish

automated comparison and clearance

systems for mumcipal securities.'> The

approved system (a) enables municipal

secunties brokers and dealers to compare

transactions through a central entity rather

than having to relate directly to each broker

and dealer with whom they execute transactions; (b) increases standardization in the

processmg of transactions in murucipal secunties; and (c) provides the settlement

and financial benefits that accrue from the

netting of transactions m the same secunty.

On the basis of a request from Bradford

Securities Processing Services, Inc.

(BSPS), the Commission also terminated

the authority of BSPS to operate an auto.

3
mated comparison and clearance system

for municipal securities." Finally, the Commission reviewed and approved a proposed rule change by the Depository Trust

Company that established depository

facilities for mumclpal bonds, including

municipal bonds in bearer form."

Progress toward an Increasingly comprehensive and efficient national system

was also evidenced in other areas. For example, during the fiscal year, the Commission completed a review of and approved a proposed rule change by The

Options Cleanng Corporation that established systems for the issuance, clearance

and settlement of options on Government

National Mortgage Association Securities

(GNMAS) 18 Also, Pacific Depository Trust

Company enhanced its institutional delivery system to provide for the dehvery and

acceptance of trade confirmations among

brokers and their institutional customers

through the depository,

Options Trading-During the fiscal

year, the Commission took several actions

designed to reduce the regulation of standardized options and permit the orderly

expansion of options trading. As previously

reported, on March 26, 1980, the Cornrrussion terminated the moratorium on expansion of the standardized options markets, which had been In effect since July

15, 1977. Simultaneously, the Commission

announced Its determination to begin to

consider on a case-by-ease basis expansionary self-regulatory organization

rule proposals relating to options.'? In this

connection, on October 22, 1980, the

Commission approved three sets of proposed rule changes submitted by the options exchanges and the NASD to modify

or eliminate certain regulations pertaining

to options trading. First, the Commission

approved proposals by the options exchanges and NASD to rescind their "restricted options" rules, which, subject to

certain enumerated exceptions, generally

prohibited opening transactions in deepout-of-the-money options (r.e., options

whose exercise pnces are substantially

4

away from the current market price of the

underlying security)." Second, the Commission approved proposals by the options

exchange to increase position and exercise

hmits from 1,000 to 2,000 contracts."

Finally, the Commission approved modifications of options exchange policies

which enabled the exchanges to reduce the

intervals between options exercise prices

and which gave the exchanges additional

flexibility with respect to the introduction

of new options series.P

Rule changes proposed by certain of the

options exchanges providing stili further

flexibility in the Introduction of new options

senes were approved by the Commission

on September 15, 198 J.23 During the fiscal

year the Commission also approved rule

changes eliminating the requirement

that exchange member firms automatically

submit monthly reports of uncovered short

options positions, requiring instead that

such reports be submitted only upon

request."

The Commission has approved, or is

actively considering, exchange proposals

to trade a variety of new options products.

On February 26, 1981 ,the Commission approved a proposed rule change of the

Chicago Board Options Exchange, Inc.

(CBOE) to trade standardized options on

mortgage pass-through certificates guaranteed by the Govemment National Mortgage Associatron (GNMAs).25The proposal

was approved after the Commission sohcited comrnents-" and received the VIewsof

more than 80 persons, including GNMA,

the Treasury Department, the Federal Reserve Board and other interested government agencies. Commentators generally

were strongly supportive of the proposal,

many stating that the availability of GNMA

options would facihtate capital formation in

the housing and related financial markets."

The Comrnission's approval order, however, has been challenged in court by the

Chicago Board of Trade, which contends

that the Commission lacked the authority

to approve the CBOE proposal-" At the

end of the fiscal year, no decision had been
reached on the petition for review of the

Commission order.

In addition to the CBOE proposal, the

Commission has received a proposal from

the New York Stock Exchange (NYSE) to

trade options on GNMAs.29 The Commission also has received proposal from the

American Stock Exchange (Amex), CBOE

and NYSE to trade options on various

United States Treasury securities," and

from the Philadelphia Stock Exchange

(Phlx) to trade options on certain foreign

currencies.F These proposals have been

published for public comment's and at the

close of the fiscal year were under review. In

addition, the Commission has received proposals from the Pacific Stock Exchange

(PSE) and Amex to trade options on gold

currency and on gold and silver bullion

value demand promissory notes, respectIvely.33

Finally, Trans Canada Options, Inc.

(TCO), which issues and performs clearing

and related functions with respect to standardized options traded on the Montreal

and Toronto Stock Exchanges, is seeking

to register those options with the Commission for sale in the United States." At the

end of the fiscal year, the Commission was

reviewing the TCO registration statement

to assure that it adequately disclosed the

terms, risks and other characteristics of

TCO options and the trading of TCO options. (On November 2, 1981, the Commission declared the registration statement

effective).

Option Transactions During Underwritten Offerings-On March 6, 1981, the

Commission authorized Issuance of two

staff letters setting forth the Interpretative

and enforcement positions of the Dlvislons

of Market RegulatIon and Corporation Anance regarding the application of certain

provisions of the Federal securities laws to

transactions involving exchange-traded options by participants in an underwriting of

the security underlying such options." The

letters addressed the application to these

transactions of Sections 2( 11) and 5 of the

Securities Act of 1933 (Securities Act) and

Section 1O(b) of the Exchange Act, and

Rule ross thereunder.

Issuer Repurchases-On October 17,

1980, the Commission published a release

asking for public comment on a revised version of proposed Rule 13e-2.36 If adopted,

proposed Rule 13e.2 would regulate purchases of an issuer's securities by or on behalf of an issuer and certain other persons.

As proposed, the rule would generally limit

the time, price and volume of such pur.

chases. It also would impose disclosure requirements that would pertain to repurchase programs of substantial size. In addition, the rule subjects issuers and certain

other persons to a general antifraud provision in connection with their purchases of an

issuer's common or preferred stock. The

proposed rule is designed to assure that the

trading rnarkets are free from control and

domination by the issuer and certain other

persons. It had previously been published

for comment in 1970 and 1973.

Short Tendering of Securities-On Au.

gust 21, 1981, the Commission withdrew

its previously proposed amendments to

Rule 10b4 under the Exchange Act The

rule was adopted in 1968 for the purpose of

prohibiting a practice known as "short tendering" (i.e., tendering more shares than a

person owns in order to avoid or reduce the

risk of pro rata acceptance in tender offers

for less than all the outstanding securities of

a class or series)." The Commission also

announced that it was requesting com.

ment on two alternative proposals. The first

would amend the rule to (a) impose additional ownership requirements for persons

tendering securities in response to tender

offers; (b) clarify the application of existing

provisions of the Rule; and (c) limit the type

of offers to which the Rule applies. The alternative proposal would dereg ulate " short.

tendering" entirely.

Markel Manipulallon-On February

17, 1981, the Commission announced that

it had adopted amendments to Rule 10b-6

under the Exchange Act, 38 which generally

prohibits trading by persons interested in a

distribution of securities. These amend.

5
ments except from the application of the

rule, distributions of securities pursuant to

employee or shareholder plans sponsored

by an issuer or its subsidiaries. These distributions generally do not present the potential for manipulative abuse that the rule was

designed to prohibit

Regulation of Brokers, Dealers.

Municipal Securities Dealers and

Transfer Agents

Regulatory Burdens on Small Broker.

Dealers-The Commission is aware of

the need to assess and balance the costs

and competitive impact of its regulations

on small brokers and dealers. Accordingly,

in adopting new rules and amending

others, the Commission carefully weighs

the investor protection benefits and other

statutory goals against the burdens which

will be imposed upon competition. More.

over, the Commission strives to tailor its

regulatory requirements to particular business practices so as to avoid imposing unnecessary regulatory burdens. These efforts are particularly beneficial to the small,

more specialized firms.

In addition, on September 19, 1980, the

Regulatory Flexibility Act (RFA) was

adopted by Conqress." The RFAamended

the Administrative Procedure Act to require

that agencies examine the impact of pro'

posed rules on small entities, as defined in

the RFA, and consider altemative require'

ments that could accomplish the stated objectives of the applicable statutes. Although

the RFA defines the term "small entity" by

reference to industry size standards established by the Small Business Adrninistration (SBA), Congress recognized that those

size standards may be inappropriate in dfferent regulatory contexts. It authorized

agencies to adopt, after public comment

and consultation with the SBA, different

definitions for affected industries. In that regard, the Commission, on March 30, 198] ,

proposed for comment definitions of the

terms "small business" and "small busi6

ness organization" as those terms relate to

organizations and entities that are subject

to regulation by the Cornmission,"

Broker-Deeter Reporting Requirements-On February 11, 1981, the Com.

mission adopted amendments to Part I of

Form X.] 7A.S, the Financial and Opera.

tional Combined Uniform Single Report

(FOCUS Report) required to be filed by

brokers and dealers, and related Rule 17a'S

under the Exchange Act 41 The amend.

ments to Part I of the FOCUS Report are de.

signed to reorganize the form so that it follows a more logical progression from an accounting and operational standpoint In ad.

dition, the Commission has issued instructions useful to completion of Part I. These

changes should enable the Commission to

more effectively and efficiently monitor the

financial condition of brokers and dealers

and also to reduce the overall reporting bur.

den on the brokerage community.

Using FOCUS data submitted by brokers

and dealers, the Directorate of Economic

and Pohcy Analysis produced last year its

third annual Staff Report on the Securities

Industry in 1980. The report's purpose is

to provide the Commission with a cornprehensive factual basis on which to ascertain

the effects of regulatory changes on the in.

dustry and investors. This report analyzes

the financial results of the securities indus.

try, and centers on the performance and financial structure of various industry seg.

ments. An examination of changes in the

macro economy and their impact on the

securities industry in 1980 is presented

along with a comprehensive analysis of the

securities industry as a whole. Discussions

of discount broker-dealers are included in

addition to analyses of securities firms classified according to type of business con.

ducted and exchange membership. Also

presented is a section on recent industry

trends and developments which contains

information on concentration, diversification and commission rate trends.

On August 31, 1981, the Commission

proposed for comment a new rule under

the Exchange Act, Rule 17a-8,42that would
incorporate by reference existing Treasury

regulations promulgated under the Currency and Foreign Transactions Act of

1970. These regulations, among other

things, require brokers and dealers to make

reports and maintain records on domestic

currency transactions of more than

$10,000 and the import and export of currency and monetary instruments of $5,000

or more. The Currency Act and the Treasury regulations are designed to assist in

discovering violations of Federal laws that

are difficult to detect because of vanous

practices, including the use of foreign bank

accounts and the "laundering" of funds

through domestic businesses. The Treasury regulations delegate to the Commission, with respect to brokers and dealers,

the responsibility for assuring compliance.

The proposed rule is the most appropriate

means of enabling the Commission and

the self-regulatory organizations (SROs) to

enforce these regulations. Since. brokers

and dealers already must comply with the

Treasury regulations, it would not impose

any new regulatory burdens.

Financial Responsibility Require'

ments- The uniform net capital rule43is an

integral part of the Commission's financial

responsibility program designed to ensure

that brokers and dealers have on hand at all

times sufficient amounts of liquid assets to

promptly satisfy the claims of customers.

The rule, in essence, requires brokers and

dealers to rnaintain specified levels of net

capital in relation to their aggregate indebtedness. In the case of brokers or dealers

electing an alternative method of computing net capital, it would be in relation to ago

gregate debit items computed in accordance with the reserve formula under the

Commission's customer protection rule.

Since its inception in 1975,44the uniform

net capital rule has continually been modified in response to changing industry con.

ditions and the regulatory environment In

this regard, the Commission, on October 9,

1980, proposed for comment revisions to

the rule which will substantially reduce capltal requirements for those brokers and dealers electing the altemative method of computing net capital.45 These proposed revisions include a lowering of the ratio of required net capital to aggregate debit items

computed in accordance with the reserve

formula under the Commission's customer

protection rule, as well as a reduction in the

minimum net capital requirement under

the altemative method.

The Commission also proposed to eliminate certain items from the reserve for'

mula which would serve to further reduce

the amount of net capital required under

the altematJve method. In addition, the

Commission solicited comment on a

broad range of questions in an effort to initiate a dialogue with the securities industry

which might lead to a refashioning or eventual elimination of certain of the financial

responsibility rules.

Also, on October 9, 1980, the Com.

mission proposed for comment revisions

to the uniform net capital rule which would

increase the percentage deductions from

net worth ("haircuts") for certain debt

securities held in the proprietary or other

accounts of the broker or dealer.46 This proposal is in response to the recent sharp fluctuation in the market value of these securities which consistently have exceeded the

"haircuts" prescribed under the rule. The

Commission, however, also is soliciting

comments on whether and to what extent

these deductions should be reduced by

hedging positions in financial futures or securities of a different issuer.

In an attempt to reduce the burden of

computing net capital on brokers and dealers who also are registered with the Commodity Futures Trading Commission

(CFTC), as futures comrnissrons merchants, on July 9, 1981 the Commission

adopted amendments to Appendix B of the

uniform net capital rule relating to capital

charges taken in connection with comrnodity transactions." The amendments to

Appendix B were adopted In response to

the "silver crisis" of 1980, and conform the

Commission's rule to certain recent

7
amendments adopted by the CFTC to its

net rule. Basically, the amendments require

brokers and dealers to take capital charges

for undermargined customer commodity

accounts or debit/deficit commodity accounts sooner than under the old provision.

In addition, the amendments require that

non-cash items used to collateralize a com.

modity related receivable or used to margin, guarantee or secure a commodity futures account be valued at a substantial dis.

count from their market value.

Registration Requirements-Form U4,

the Uniform Application for Securities and

Commodities Industry Registration, is the

personnel form that the Commission requires a registered broker or dealer who

is not a member of a registered national

secunties association to file on behalf of its

associated persons. Form U4 IS also

accepted as a uniform application form

for associated persons by 46 states, all

of the national securities exchanges and

the NASD. On December 17, 1980. the

Comrrussion adopted previously proposed

revisions to Form U448• The revisions

included changes in format to improve

clarity and to eliminate duplicative information. In addition, new questions have

been added in order to include information

required by the 1975 Amendments and

Item lO(a) of Form BD.

Sell-Underumunq by SECO BrokerDealers--On August 20, 1981 the Commission proposed to amend Rule 15b 10-9,

the so-called "self-underwriting" rule, which

prohibits a broker-dealer that is not a memo

ber of a registered securities association

(SECO broker-dealer) from underwriting or

otherwise participating in any public offering of its own securities or the securities of

an affiliate unless several conditions are

met 49 The proposed amendment would

create a conditional exception to that rule

for SECO broker-dealers that limit their

business to participation in the offer and

sale of securities issued by an affiliate that

is not a broker-dealer. The proposed

amendment would essentially codfy the

disclosure conditions imposed by the Com8

mission in granting exemptive requests to

certain SECO broker-dealers.

Broker-Dealer Examinations-The Division of Market Regulation's Branch of

Broker-Dealer Examinations has primary

responsibility for planning and coordinating the Commission's broker-dealer examination programs. During the fiscal year,

the Commission's regional offices, under

the direction of the branch, conducted 202

routine SECO broker-dealer examinations,

716 oversight or cause examinations of

broker-dealers, and 457 post-effective conferences with newly registered broker-dealers. The reqional offices also reviewed, within 15 days of receipt, approximately 7,800

financial reports filed by broker-dealers with

the regional offices.

During the fiscal year, the branch initiated formal periodic reviews of each regional

office's broker-dealer examinations program. These reviews resulted in improved

program planning and effectiveness, and

made it possible to identify potential regulatory problems quickly and respond accordingly. In addition, the branch directed

and participated in an examination of a mao

jor wirehouse which was conducted by the

staff of several reqional offices. This exammation established the feasibility of such

interregional examinations of broker-dealers. The branch also initiated a joint regional office and Division pilot project whereby

examiners can be provided on-line access

to historical price and volume data on all

NASDAQ listed and several thousand over.

the-counter securities.

In addition, two conferences were conducted for senior regional office regulatory

staffs in order to discuss various regulatory

developments and problems. These conferences resulted in a number of improve.

ments in the Commission's examination

program.

Two, two-week training programs for

new and senior securities compliance

examiners were also held. The program for

new examiners covered an overview of the

Exchange Act, methods for examining a

broker-dealer's records (particularly for
compliance with net capital customer protection and sales practice rules). The program for senior examiners concentrated on

examination techniques for the in-depth review of broker-dealer sales practices.

Municipal Securities Brokers and

Dealers-Although the Comrmssion did

not adopt any rules or regulations with respect to municipal securities dealers,

amendments to Form MSD, the form used

by mumclpal securities dealers that are

banks or separately identifiable departments or divisions of banks, became effective during the year. These amendments

conform a definition In Form MSD to a definition in a rule of the MuniCIpal Securities Rulemaking Board (MSRB), and allow,

under certain circumstances, a reduction In

the number of different forms required to

be filed by bank municipal securities

dealers.

The Cornmission also continued to consult with the bank regulatory agencies with

respect to bank municipal secunties activities, and in addition, the Commission staff

issued several no-action and interpretative

letters with respect to securities activities

by municipal securitres brokers and dealers.

Lost and Stolen Securities-The Lost

and Stolen Securities Program, wmch Includes nearly 18,000 securities organizations, Federally-Insured banks, and nonbank transfer agents as participants, uses

a data bank to monitor missing securities.

Participants use the system to validate the

authenticity and ownership of the certificates coming into their possession. On

April 7, 1981, the Comrnission released a

staff report containing comprehensive general statistical information reqardmq the

operation of the Program for calendar year

1980_ As stated in that report, the Securities Information Center, the Commission's

designee to operate and maintain the computerized data base of missing, lost, counterfeit and stolen secunties, received reports

of loss, theft or counterfeitinq conceming

approximately 290,000 certificates valued

at approximately $1 2 billion. As of December 31, 1980, the aggregate net value of the

data base since the inception of the program was approximately $3.6 bilhon.

Securities Investor Protection Corporation- The Secunties Investor Protection

Act of 1970 (SIPA)50provides certain protections to customers of brokers and dealers that fail to meet their obligations to their

customers. SIPA is administered principally

by the Securities Investor Protection Corporation (SIPC), a non-profit membership

corporation, the members of which are,

with lirruted exceptions, registered brokers

and dealers. SIPC is funded through assessments on Its members, although it may borrow up to $1 bilhon from the United States

Treasury under certain emergency conditions.

Dunng fiscal year 1981, Congress

adopted amendments to SIPA51 that increased the level of customer protection

provided by SIPA to $500,000 (from the

previous level of $100,000), not more than

$100,000 (previously $40,000) of which

may be for cash claims.

Transfer Agents-On December 30,

1980, the Cornrrussion announced the

adoption of amendments to Rule 17Ac2-1

under the Exchange Act and Form TA-1,

the uniform transfer agent form.52 These

amendments eliminated the requirement

that a transfer agent registered with the

Commission file annual updates to the Information contained in Schedule B of

Form TA-1. Schedule B requires registered

transfer agents to list, among other things,

securities forwhich they performed transfer

agent functions and the capacities in which

they acted for those securities. The Commission determined that the cost to collect

and update that information by transfer

agents and the cost to process it by the

Comrrussion outweighed the regulatory

benefit of that information to the Commission.

Oversight of Self-Regulatory

Orgunizations

Suroeil/ance and Compliance Inspections-During the fiscal year, the Comrnis9
sion staff continued its comprehensive inspection program of the Nation's securities

markets, The purpose of this program is to

evaluate, on an ongoing basis, the adequacy of market surveillance, compliance, disciplinary and operational programs of all

the national securities exchanges and the

NASD.

A total of 12 inspections focusing on

market surveillance were conducted during

the fiscal year. These inspections included

an overall review of the equity trading programs of the SSE, MSE, the NASDAQ tradmg program of the NASD, the PSE and the

Phlx. The staff also inspected the NYSE and

Amex programs for evaluation of specialist

performance and the disciplinary programs of these exchanges. In addition, the

staff continued to monitor the programs of

the NYSE in developing a complete audit

trail for stock tradmg on its floor. Finally, the

staff conducted a complete review of options tradmg programs at the PSE and the

Phlx.

A total of seven inspections focusing on

SRO compliance programs were conducted in the fiscal year. These inspections

encompassed reviews of such program

areas as routine and cause examinations,

financial surveillance, and discipline of

broker-dealers by SROs.

The Commission's inspection program

disclosed progress at several of the SROs

in addressing surveillance deficiencies

found during earlier Inspections. Factors

which contributed to enhanced market surveillance programs included additional

staffing, upgraded or refined computerized

surveillance capacity, and better procedures among the SROs for exchanging

surveillance mformation. Nevertheless, the

inspection program disclosed some significant surveillance deficiencies at certain of

the SROs. These deficiencies were attributable to such factors as inadequate

trading information and data gathering

systems to detect specific types of trading

violations and, in some instances, the

failure to optimize the use of existing

trading information for surveillance purposes. Finally, the inspection program

10

disclosed laxity in the prosecution of some

categories of trading violations at certain of

the SROs. The SROs were asked to address

these problems and throughout the fiscal

year significant corrective actions were

taken by several of them.

In February 1981, the staff completed

inspections of the stock and options

trading programs of the Phlx.These inspections disclosed various deficiencies in the

administration and conduct of surveillance

activities for both stock and options trading.

In July 1981, the Phlx submitted a detailed

plan to remedy each of the concems raised

by these inspections. The Commission

staff has planned a series of inspections in

fiscal year 1982 to monitor the enhancement of surveillance programs at the Phlx.

In August 1981, the staff completed a

comprehensive inspection of the NASD's

market surveillance and disciplinary programs respecting OTC trading in stocks

quoted in the NASDAQ system. This inspection disclosed certain systemic weaknesses that exist because OTC trading in

NASDAQ securities takes place without the

reporting of Individual trades in such securities. This situation will change somewhat

during the next fiscal year with the

commencement of last-sale transaction

reporting for approximately the 50 most

active NASDAQ stocks. The staffs of the

Commission and the NASD will be meeting

to discuss implementation of improved

surveillance procedures as a result of lastsale reporting and other automated en.

hancements proposed by the NASD that

will expand the scope of trading information readily available for surveillance

programs.

Inspections conducted during the

previous fiscal year disclosed that a complete transaction audit trail was essential for

the NYSE to conduct adequate surveillance

of stock trading on its floor. During fiscal

year 1981, the Commission staff conducted a series of inspections to monitor

the NYSE's efforts to develop data gathering systems needed to create an acceptable transaction audit trail. The NYSE
expects to implement a pilot program providing a complete audit trail In a limited

number of stocks by December 1981.

During fiscal year 1982, the Commission

staff will monitor expansion of the pilot

program to additional stocks as well as the

refinement of surveillance procedures

made possible by the capture of additional

trading information through the pilot

program.

In fiscal year 1980, the Commission

instituted an administrative proceeding

against the SSE for failure to develop and

employ adequate surveillance procedures

to detect certain trading VIolations by SSE

specialists. That matter was settled with the

SSE undertaking to Implement corrective

procedures. An inspection conducted in

March 1981 verified the implementation of

those procedures.

At the end of the fiscal year, inspections

that were in progress included the disciplinary programs of the Amex and NYSE as

well as an inspection of the CBOE's market

surveillance and disciplinary programs.

Since September 1980, the staff has conducted inspections of the operations of

NASD Distnct Offices located in New York

City, New Orleans and Denver. The focus of

these inspections was the overall quality of

the NASD's programs to insure compliance by its member firms with the secunties laws. Specifically, the staff reviewed all

NASD District programs, including not

only the District Offices' routine examination programs, but also their programs for

(a) Investigating customer complaints and

terminations of registered representives

from employment for cause; (b) monitoring the financial condition of member

firms; (c) processing Regulation T extension requests; and (d) disciplining member

firms. In these inspections, the Cornrnission's staff found that those offices generally appeared to be executing their routine

examination programs with reasonable

thoroughness. However, the staff identified

several areas in which remedial attention

was needed to cure problems in the examination program.

The staff also conducted an inspection of

the CBOE, which was similar in scope to

the NASD District Office inspections. The

staff found that the CBOE had made a

commendable commitment of its resources to Its compliance programs,

although some areas In need of improvement were noted.

During the fiscal year, the staff conducted an Inspection in which it reviewed

the NASD's examination procedures for

enforcing compliance with its selfunderwriting rule proposal. The staff also

conducted an inspection of the NYSE's

financial surveillance program for the

purpose of assessmq the impact of certain

proposed amendments to the net capital

rule.

Finally, in fiscal year 1981, the staff concluded a comprehensive compliance

inspectIon of the Phlx. In that inspection,

the staff found substantial deficiencies in

the Phlx's financial surveillance, disciplinary

and routine and cause examination programs. Followmq extensive consultation

with the Commission, the Phlx determined

to reallocate its upstairs member firm compliance responsibilities to the NASD, as

have the other regional stock exchanges, in

order to concentrate resources on its rernairunq regulatory responsibilities, particularly market surveillance

At the end of the fiscal year, an inspectIon

of the NYSE's cause examination program

was still In progress.

Market Oversight Surveillance System

- The Market Oversiqht Surveillance

System (MOSS) ISan automated mforrnation system designed to enhance Commission oversight of the Nation's secunties

markets.

The Moss project was initiated In August

1978 as a two-part study and design effort.

The study examined the market surveillance capabilities of the Commission and

the SROs. It concluded that, in VIew of sigmficent developments in the complexity,

structure and trading volume in the securities markets, and in VIewof the increasingly

sophisticated product mix of the securities

11
markets resulting from the introduction of

standardized options trading, the Commission must improve its oversight and surveil.

lance capabilities. In its review of the project

In 1980, Congress reached a similar

concluslon.P

In order to evaluate the feasibility of building a system such as MOSS, the Commission initiated a pilot project of portions of

the proposed system in New York City

in early 1980. Throughout 1980 and the

early part of 1981, a series of computer

algorithms was designed to detect unusual

trading activity. These algorithms were

tested and refined by monitoring actual

trading in a small number of stocks and

options.

In early 198 I , the staff began the process

of converting the computer programs of

the pilot project in order to transfer the system to a computer at the Commission's

headquarters in Washington, D.C. The

transfer was completed in July.

Consistent with its commitment to work

closely with the SROs in the development

of MOSS, Chairman Shad invited the presidents and senior staff members of the three

largest exchanges involved in the MOSS

pilot project (the Amex, C8OE, and NYSE)

to attend a series of meetings with Commission staff members in August to discuss

the possibility of the SROs developing an

altemative to MOSS for the surveillance of

inter-rnarket trading activity. As an outcome of these meetings, the SROs submit.

ted a proposal to the Commission for the

establishment of such a program to be

operated by the SROs and the implementation of a complete audit trail of securities

transactions on the NYSE, a keystone of

any effective surveillance effort. The SROs

have begun to implement their proposal

and the Commission is closely monitoring

the progress of the project in order to reach

decisions on the future direction of MOSS.

Pursuant to the requirement in the Con.

gressional budget authorization for MOSS,

the Commission has submitted two reports

to Congress on the project. These reports,

submitted on April I and October I, 198 I ,

12

provide greater detail about developments

in the MOSS project and the proposal from

the SROs to develop a program for surveillance of inter-market trading activity.

National Securities Exchanges-As of

September 30, 1981, ten exchanges were

registered with the Commission as national

securities exchanges pursuant to Section 6

of the Exchange Act: American Stock

Exchange (Amex); Boston Stock Exchange (BSE); Chicago Board Options

Exchange (C8OE); Cincinnati Stock Exchange (CSE); Intermountain Stock

Exchange (lSE); Midwest Stock Exchange

(MSE); New York Stock Exchange (NYSE);

Pacific Stock Exchange (PSE); Philadelphia Stock Exchange (Phlx); and Spokane

Stock Exchange (SSE). No exchange is

currently operating under an exemption

from registration as a national securities

exchange.

In connection with the Commission's

oversight of the deli sting of securities

traded on national securities exchanges

pursuant to Section 12(d) of the Exchange

Act, during the fiscal year the Commission

granted applications by exchanges to strike

57 equity issues and 18 debt issues from

listing and registration. The Cornmissron

also granted applications by issuers requesting withdrawal from listing and registratJon for 25 equity issues and 4 debt

Issues.

Pursuant to the Commission's responsibility under Section 12(f) of the Exchange

Act, during the fiscal year, the Commission

granted 248 applications by exchanges for

unlisted trading privileges in listed securities. The Commission also revised its policy

conceming applications for unlisted trading pnvileges In listed securities. The Commission had previously limited unlisted

trading privileges for listed securities to

securities reported in the consolidated quotation and transaction reporting system (reported securities). However, it determined

to grant unlisted trading privileges in non.

reported securities provided the applicant

exchange certifies that it will provide to vendors last sale reports and quotation infor-
mation for the security, and that such in.

formation will be available on the floor of

the applicant exchange.

During the fiscal year, the Commission

also created a Iirnited exception to its gen.

eral policy to defer any decision regarding

the granting of unlisted trading privileges

in OTC securities pending further developments in the national market system. The

Commission concluded that it would grant

unlisted trading privileges in OTC securities

in the narrow situation involving a solely

listed reported security subject to an issuer

delisting application where the applicant

exchange has exempted such security

from any applicable off-board trading reo

strictions. In such instances, third markets

makers would be subject to the last sale

reporting requirements of Rule 11Aa3.1

under the Exchange Act54

The national securities exchanges reo

ported to the Commission, pursuant to

Section 19(d)(l) of the Exchange Act and

Rule 19d.l thereunder, 309 final disci.

plinary actions imposing a variety of

sanctions upon member firms and their

employees.

During the fiscal year, the Commission

received from the national exchanges 154

filings of proposed rule changes, pursuant

to Rule 19b4 under the Exchange Act.

Among the significant exchange rule fllings approved by the Commission during

the fiscal year were (a) revisions to Phlx

disciplinary procedures's (b) a one-year

pilot program by the PSE relating to the

appointment and evaluation of specialists

and the creation of new specialist posts56

and (c) rule changes by seven national

securities exchanges regarding trade.

throughs and locked-markets on the ITS.57

During the fiscal year, the Commission

concluded proceedings initiated the pre.

vious year to determine whether to disapprove proposed rule changes of the NYSE

and Amex to make permanent their rules

governing registered competitive market

makers (RCMMs) and registered equity

market makers (REMMs), respectively.58

The Commission found that RCMM and

REMM trading activity did not qualify for the

market maker exemption from the general

exchange member proprietary trading pro.

hibitions of Section l1(a)(1) of the Ex.

change Act Nevertheless, the Commission

determined that, on balance, RCMMs and

REMMs provide the potential for benefits

to their markets. Accordingly, the Com.

mission approved the RCMM and REMM

rules and adopted a rule under Section

II(a)(I)(H) of the Exchange Act exempting RCMM and REMM transactions from

the proprietary trading prohibitions of

Section l1(a)(1) of the Exchange Act59

During the fiscal year, the Commission

approved proposed rule changes filed by

the NYSE60 and the Amex61 conceming

their regulatory authority over corporate

affiliates, mcluding foreign affiliates, of their

members. In particular, the rules provide

for third party examination procedures for

certain foreign-domiciled persons. The

Cornrnissron found that the examination

procedures reflected good faith efforts to

balance the need for effective surveillance

against what today seems to be appropriate

deference to the laws and customs of

foreign nations.

National Assocuuion of Securities

Dealers, Inc.-The NASD is the only national securities association registered with

the Commission. At the close of the fiscal

year, 3,132 brokers and dealers were

NASD members.

During the last nine months of the fiscal

year, the NASD reported to the Commission the final disposition of 393 disciplinary

actions.

During the fiscal year, the Commission

received also from the NASD 29 filings of

proposed rule changes. One of the signifi.

cant NASD rules aproved by the Comrnission during the fiscal year-onginally sub.

mitted in 1978-prohibits NASD members

from giving discounts to customers m dis.

tributions of securities offered at a fixed

price.62 The rule change amended the

NASD's Rules of Fair Practice to impose a

more explicit prohibition on an NASD

member's taking securities in trade

13
(swapping) at more than their fair market

price and to limit the ability of members to

grant or receive discounts in connection

with fixed price offerings. In addition, the

Commission approved amendments to the

NASD's Anti-Reciprocal Rule to permit,

subject to certain restrictions, NASD

members to seek or grant brokerage commissions in connection with the sale of

investment company securities.P

The Commission reviewed a number of

proposed NASD rules to revise qualiflcations for securities included on NASDAQ.

One rule approved by the Commission increased the minimum standards for total

assets and total capital and surplus for

companies included on NASDAQ. 64 The

Commission also approved the NASD's

request to use financial criteria, as well as

dollar volume data, in determining which

NASDAQ companies will have their securities included on the NASDAQ National

and Additional Iists,65which are distributed

to the news media for publication. The

NASD was also authorized to make future

revisions in the size or number of lists as

market conditions, or the needs of issuers,

investors, the news media or the securities

industry require.

During the year, the Commission also

authorized the NASDAQ market makers

to display, on a voluntary basis, a quotation

for an amount of securities in excess of the

normal unit of trading.66 This information

will appear on NASDAQ six months after

the installation of new NASDAQ terminal

equipment is completed.

Allocation of Regulatory Responsibility- During the fiscal year 1981, the

Commission continued its efforts to

eliminate duplication in the self-regulatory

system for brokers and dealers. The Commission began reviewing plans proposed

by the SROs for allocating their responsibility to perform various regulatory funcnons for brokers and dealers which belong

to more than one SRO. One set of plans

represents agreements among the Arnex,

MSE, PSE, Phlx, CBOE and NASD to reduce regulatory duplication relative to

14

options-related sales practice matters for

firms currently members of two or more of

the organizations. The second set of plans

- represents agreements between the NYSE

and the Amex, SSE, Phlx, MSE, PSE and

CSE, which reflect progress toward reducing unnecessary regulatory duplication by

assigning to one SRO much of the responsibility for conducting on-site examinations

of dual members and for processing various applications.

Statutory Disqualifications-On March

10, 1981, the Commission proposed

amendments to Rule 19h-l under the Exchange Act conceming admissions to, or

continuances in, membership in SROs or

participation in the securities business of

persons subject to statutory dlsqualitlcations/" The revisions are designed

primarily to reduce the burdens that have

been encountered by SROs and the Commission in the administration of the rule.

Under the proposed amendments: (a) detailed fIlings would be required to be made

with the Commission on behalf of statutorily disquahfled persons in fewer situations;

(b) certain additional information would

have to be included in those detailed fIlings

that are required, in order to facilitate their

review and processing by the Commission;

and (c) certain provisions of the rule would

be clanfled.

Applications for ReEntry- During the

fiscal year, the Division of Market Regulation processed 54 applications, pursuant to

Section 6(c)(2) and 15A(g)(2) of the Exchange Act and Rule 19h-l thereunder, to

permit persons subject to statutory disqualifications, as defined in Section 3(a)

(39) of the Exchange Act, to become

associated with broker-dealers. The following SROs filed such applications:

(a) NASD- 35 applications; (b) NYSE-18

applications; and (c) Arnex-one application. Five of the 54 applications filed were

subsequently withdrawn.

Municipal Securities Rulemaking

Board-As in the case of national securities exchanges and the NASD, the Commission reviews proposed rule changes of
the MSRB. During the fiscal year, the MSRB

filed 14 rule proposals; the Commission

considered a number of these proposals

plus others that were pending from previous years.

The Commission approved amendments to the MSRB rule on syndicate

practices in connection with the sale of new

issue municipal securities. These revisrons:

(a) ehminated the requirement that a municipal securities dealer that ISnot a member of the syndicate disclose the fact that

secunties which it is purchasing from the

syndicate are for a related portfoho; and

(b) require that the syndicate manager

disclose In writing to members of the syndicate the securities that had been allocated

on a "priority" baSIS,and the customers to

whom such securities had been allocated."

In addition, the cornrmssion approved a

rule filing to consolidate the MSRB's advertising rules into a single rule69 and to require

the disclosure of certain Information by

municipal securities professionals In con.

nection WIth the sale of new issue municipal secunties. Specifically, the advertisements must disclose, If applicable, the fact

that certain securities may not be available

from the syndicate or may be available at a

different pnce or yield than those hsted in

the advertisement.

Finally, the Commission approved

amendments to the MSRB rule on umform

industry practice. These amendments altered the procedure by which murncipal

securities professions may close-out open

transactions in municipal securities."

Cleanng Agencies- During the fiscal

year, the Commission received and began

reviewing applications from 12 clearing

agencies for full registration under

standards adopted by the Division of

Market Regulation dunng the 1980 fiscal

year," These standards represent the views

of the Division regarding the manner In

which clearing agencies should comply

with the clearing agency registration provisions of Section 17A(b )(3) of the Exchange Act. The Division standards deal

with, among other things, requirements

regarding participation in c1eanng agencies, fair representation of partrcipants,

disciplinary procedures, the safeguarding

of securities and funds and the clearing

agency's obligation to participants. The

DIvision WIllapply the standards In making

recommendations to the Cornrrussion regarding the granting or denial of registration to clearing aqecies. At present, 13

clearing agencies are temporanly registered WIth the Cornmissron.

Dunng the fiscal year, the Commission

staff conducted oversight inspections of

Midwest Clearing Corporation and Boston

Stock Exchange Clearing Corporation. The

staff also conducted jornt inspections of

MIdwest Securities Trust Company (MSTC)

and New England Securities Depository

Trust Company (NESDTC) with the Board

Govemors of the Federal Reserve System

(FRS). The FRS IS the appropriate regulatory authority for MSTC and NESDTC, and

the joint conduct of these examinations

furthered the statutory goal of avoidmq

unnecessary regulatory duplication and regulatory burdens on clearing agencies that

are subject to inspection by both the Comrnissron and the Federal bank regulators.

The findings of these Inspections were

discussed with the respective c1eanng

agencies, and they either have been or are

being addressed by those clearing agencres,

Procedures for Filing Proposed Rule

Changes-SectIon 19(b) of the Exchange

Act, as amended by the 1975 Amendments, requires self-regulatory organizations to file all proposed rule changes WIth

the Commission for approval. Shortly after

Section 19(b) became effective, the Commission adopted Rule 19b-4 and related

Form 19b-4A establishing procedures for

SROs to file proposed rule changes, and

deSIgnating the types of proposed rule

changes that may become effective upon

filing_

On October 3D, 1980, the Commission

adopted amendments to Rule 19b-4 and

Form 19b4N2 winch were designed to improve and SImplify the rule filing process,

15
thus expediting Commission review of proposed rule changes. The amendments,

which became effective on .January 1,

1981, include: (a) an amendment to Rule

19b4 clarifying which actions of SROs require proposed rule changes; (b) an

16

amendment to Rule 19b4 designating certain clearing agency rules as eligible for

summary effectiveness; and (c) amendments to Form 19b4A, redesignated as

Form 19b4, to specify, in greater detail, the

information required by that form.
The Disclosure System

The purpose of the "full disclosure" system administered by the Commission ISto

assure that the securities markets operate

in an environment in which full and accurate material information about publicly

traded companies ISavailable to investors,

securities analysts and other interested

persons. By fostenng investor confidence

and Implementing the Congressional mandate of investor protection, the full dISclosure system contnbutes to the maintenance of fair and orderly markets and

facilitates the capital formation process. In 1980, over $600 billion in equity

securities was traded on exchanges and in

the over-the-counter (OTC) market, and

there were public offenngs of over $100

billion in equity and debt securities.

During the fiscal year, the Commission's

continuing efforts to Improve the disclosure system centered on major initiatives In implementing its integration program and responding to the particular

needs of small business. The integration

program will be implemented through

changes in the operations of the Commission's DIvision of Corporation Finance,

particularly the selective review system

which was initiated dunng the year. Also

in fiscal year 1981, the Commission undertook several other rule-making projects

in the area of full disclosure and continued its program of providing interpretive

advice on disclosure matters. Certain of

these initiatives were cooperative efforts

with representatives of the state securities

administrators. The Commission VIews

such cooperative efforts as a means of enhancing the longstanding beneficial relationship between the Federal government and the states, in addition to reducing

the burdens Imposed by multiple levels of

regulation while maintaining a high degree

of investor protection.

The Integration Program

The aim of the integration program is

to enhance Investor protection through

disclosure documents which provide

meamngful information in a clear, concise and understandable format. At the

same time, the program responds to the

need to reduce the burdens of compliance

caused by duplicative, outmoded or unnecessary requirements. The Securities

Act of 1933 (Securities Act) established a

system of transaction-oriented disclosure

WIth a focus on particular offerings of securities. The Secunties Exchange Act of

1934 (Exchange Act) established a system

of continuous disclosure WIth a focus on

public companies and their ongoing reporting obligations to the Cornrnissron

and to their shareholders. Because the two

disclosure systems have developed and

operated Independently for more than 40

years, the same information is frequently

required to be disclosed in different formats

under the separate systems.

The integrated disclosure system

harmonizes the two disclosure systems

Into a comprehensive whole. It will perform the role envisioned by both the

Secunnes Act and the Exchange Act, will

eliminate or reduce overlapping or duplicative corporate reporting, and WIllstreamline corporate reporting generally. The

system Simplifies corporate reporting In

three ways: ( 1) disclosure requirements are

made uniform under the Secunties Act and

the Exchange Act, (2) Exchange Act penodic reporting IS used to satisfy much of

the disclosure necessary In Securities

Act registration statements; and (3) the

use of Informal shareholder cornrnuruca17
tions is encouraged, but not required, to

satisfy formal statutory requirements under

both Acts.

Development of the integrated disclosure system is an on-going process

which is scheduled to be completed during

fiscal year 1982. Dunng fiscal 1981, the

Commission made substantial progress

toward full Implementation of the system.

In December 1980, the Commission pubhshed proposals resulting from the "sunset" review of the GUIdes for the Preparation and Filing of Registration Statements

and Reports (GUIdes) and from the en.

hanced role of Regulation S.K in an Integrated disclosure system." In February

1981, the Commission adopted revisions

to Form 1O-Qand Regulations S.X and S-K

to streamline intenm financial and other

reporting and to make quarterly and interim disclosure requirements uniform

under both Acts.74 In August 1981, eight

releases compnsing the latest phase of the

program were published as proposed rulemaking actions.

Each of these eight releases was in.

tegrally related to the others and to the

rulemaking actions taken in 1980. In the

integrated disclosure system, a Securities

Act registrant would look (1 ) to the appro'

pnate form for a deterrnination of the type

and amount of disclosure which must be

fumished to Investors; (2) to Regulation

S.K for substantive disclosure require'

ments; and (3) to Regulation C for pro.

cedural instructions. Separate releases

addressed the role in the integrated system

of security ratings, delayed or continuous

offerings and Securities Act liabilities In

connection with Exchange Act periodic

reports incorporated by reference into

Securities Act registration statements

Finally, the Commission's integration of the

two existing corporate disclosure systems

Included a wide ranging "sunset" review,

resultIng in revisions to Regulation C and in

proposed coordinating changes to rules

and forms under the two systems. The republished outstanding proposals and the

five newly developed coordinating projects

18

are summarized in the following discus.

sion.

Proposed Forms 5.], 5-2 and 5.]75-

These three proposed forms would con.

stitute the baSIC framework for the registration of securities under the Securities

Act. DIfferences among the forms take into

account differences in information regarding companies already publicly avail.

able and the WIdevariety of public offerings.

Thus, Form S-3 requires minimal disclosure in the prospectus and relies upon in.

corporation by reference of material already presented in Exchange Act reports. It

would be used by the most widely followed

corporations for equity offerings and by

most other companies reporting under the

Exchange Act for registenng investment

grade debt, dividend reinvestment plans,

and certain other offerings. Form S.2 would

be available to companies which are not as

widely followed as Form S.3 companies,

but which have reported under the Exchange Act for at least three years. Under

Form S-2, registrants would either In'

corporate by reference into the prospectus

the information in their annual reports to

shareholders or provide similar information

In the prospectus. Companies which have

reported under the Exchange Act for less

than three years would generally use Form

S.l. It requires complete disclosure of relevant information to investors in the prospectus and permits no incorporation by reo

ference.

Revision of Regulation 5-K76- The proposed revision of Regulation S.K represents the evolution of that regulation Into

a repository of uniform disclosure pro.

visions relating to substantially all of the

informatIon required to be set forth in registration statements under the Securities

Act and In annual and other periodic

reports required under the Exchange Act.

Disclosure requirements would be centralized in Regulation S-K in order to aVOId

the need to refer to multiple sources for

document content requirements. Thus,

certain disclosure requirements currently

included in the GUIdes, in Regulation C and
10 various Securities Act registration forms

and Exchange Act forms would now be

moved to Regulation S-K

The Regulatlon S-K release also represented the completion of the "sunset"

review of the Guides. In addition to moving

certain substantive GUIde provisions to

Regulation S-K, the "sunset" review of the

Guides resulted in the inclusion of certain

procedural provisions in Regulation C and

the deletion of 50 percent of the Guides

as obsolete. The only remaining Guides

would be those relating to specific 10-

dustries, where greater flexibility than that

provided by formal Cornmission rules is

desirable.

Recision of Requleiion C and 12£317

The rules comprismg Regulation C and

Regulation 126 were adopted 10 order to

standardize the mechanics of secunties registration under the Securities Act and Exchange Act, respectively. The rules implement the statutes and provide more specific instructions for registrants than are contained in the statutes. Although these regulations developed over a long period, no

overall review of their provisions had been

undertaken for some time. The Cornrrussion believed a comprehensive review of

Regulation C and Regulation 126 was appropriate at this time in order to implement fully the integrated disclosure system

and to continue the Commission's ongoing

"sunset" review of its regulations.

The proposed amendments are designed to simplify and clarify procedural requirements and to conform the provisions of Regulation C and Regulation 126

to the procedures established 10 the integrated disclosure system. These amendments involve revising existing provisions, incorporatinq certain procedural requirements from the Guides and

the current registration forms into Regulation C, and rnovmq certain Regulation C

provisions relating to substantive disclosure and document content into Regulation S-K, The "sunset" amendments, which

would revise, up-date or delete provisions

where appropriate, include the proposed

rescission of approximately 25 percent of

the rules now contained in Regulation C.

Delayed or Continuous Offenngs78-

Proposed Rule 462A, which was first published in the December 1980 GUIdes release. would facihtate new methods of flnancing. For the first time, the Commission

would speofy by rulemakmg the conditions

under which registrants could register se.

cunties to be offered on a delayed or con.

tinuous basis at the market (so-called" shelf

registration"). The proposal would codify

staff practice concemmg "traditronal"

shelf offenngs, such as securities to be offered in a contmumq acquisition program.

It would also permit, for the first tirne, the

reqrstratron of secunties that the Issuer did

not intend to offer immediately to the public

or that it intended to sell gradually on a nonfixed price basis over time depending on

market conditions. The proposed rule

would permit an issuer to sell the secunties so reqistered in a succession of different kinds of offerings. The proposed shelf

rule is designed to reheve processmg pressures upon the Cornrmssion staff and to

facilitate capital formation by granting issuers ready access to the markets.

Llabtllty lssuesv-« Because the secunties markets absorb previously filed information about seasoned issuers, the

Cornrrussion has determined, as part of the

mtegrated disclosure system, to permit

such Issuers to satisfy certarn disclosure

requirements of the Securities Act by 10-

corporatlng by reference into the reqistration statement pertinent information, up.

dated where necessary, from previously

filed Exchange Act reports (See discussron of Forms 5-1, 5-2 and 5-3 above)

Nevertheless, persons subject to Section

11 of the Secuntres Act will continue to be

responsible for confirming the accuracy of

mforrnation 10 the reqistration statement,

including information incorporated by reference. The Cornrrnssion pubhshed for

comment several proposals addressing the

questions of liability which anse 10 the

context of the integrated disclosure system.

Proposed Rule 176 would codity Section

19
1704(g) of the draft Federal Securites

Code as modified and approved by the

Commission in 1980. The proposed rule

would Identify certain Circumstances, including Incorporation by reference, which

may bear upon the determination of what

constitutes reasonable Investigation and

reasonable ground for belief as those terms

are used in Section 11. The Commission

also proposed to codify in Regulation C

certain previously proposed provisions reo

garding the effective date of documents incorporated by reference and the making

of statements modifying or superseding

such incorporated documents.

Security Ratings-The rating assigned

to a class of debt securities or preferred

stock by a professional rating organization

represents, along with the interest or dividend rate, one of the most significant con.

siderations in an investor's decision to pur'

chase such secunties. In recognition of this

fact, the Commission proposed to permit

the voluntary disclosure of such ratings in

filings with the Commission. The security

rating release contained two proposals to

facilitate this change In policy: an exernptive rule conceming the issues of expert's

consent and Securities Act liability (Rule

436(g); and an amendment to Rule 134

permitting the disclosure of ratings in

"tombstone" advertisements. The release

also set forth the Commission's views reo

garding other mformation which should be

included WIth disclosure of the security

rating.

Coordinating ReLeases-As part of Its

efforts to implement a comprehensive integrated disclosure system, the Commission

proposed to amend existing Securities Act

registration forms," These proposed

amendments were the result of a review of

existing forms that was designed: (1) to

identify portions of such forms where the

Regulation S-K uniform disclosure items

could be substituted for individual form

items containing substantially similar requirements; (2) to conform existing references to Regulation S.K with the proposed

revisions thereto; and (3) to conform other

20

Securities Act forms, wherever possible, to

the instructions, format and requirements

of proposed Forms S-l, S.2 and S.3. In addition, the Commission proposed to rescind five rarely used registration forms.

The Commission also proposed amend.

ments resulting from an examination of Exchange Act continuous disclosure and

proxy-related rules, forms and schedules.v

This review was undertaken with a view to

coordination with other aspects of the integration rulemaking program, particularly

the revision of Regulation S.K, as well as

WIth a view to streamlining and improving

the quality of Exchange Act disclosure,

which is critical to the functioning of the integrated disclosure system. As in the Securities Act context, the Commission pro.

posed to rescind six rarely used forms,

three for registration and three for annual

reporting.

The Exchange Act coordinating release

also proposed amendments to broaden

and clarify the scope of safe harbor protection available under the various secunties

laws for disclosure of forward looking statements. The release proposed correcting an

inconsistency in the scope of the rules, as

currently in effect, to permit projections in

first-time Exchange Act registrations as well

as Securities Act registrations.

FinaLPhase of Program-The period for

public comment upon the eight outstanding proposals descnbed above closed on

October 30, 1981. The Commission intended to take final action with respect to

these proposals as soon as possible in order to set in place the completed integrated

disclosure system.

Selective Review

In anticipation of the final phase of irnplementation of the Commission's integrated

disclosure program and m response to

budgetary constraints, the Division of Corporation Finance during the course of fiscal

1981 significantly revised its program for

the examination of filings under the Securities Act and the Exchange Act by implementing a system of" selective review". The
purpose of this system is to allocate more

staff resources to the examination of Exchange Act reports, which fonn the basis

for the integrated disclosure system. Selective review is also designed to make optimal

use of the Division's staff by focusing staff

review attention upon filings which are

most likely to present problems in the area

of full disclosure. To those ends, only filings

for certain types of transactions, such as

"new issues," non-issuer tender offers, and

contested director elections, are generally

examined without regard to the company

involved. This will free staff resources to

pennit more comprehensive examinations

of the entire scope of certain companies'

disclosure. Staff examination of other filings reflects the economic conditions prevailing at the time, areas of particular concem to the Division, and existing staff levels.

Selective review follows the Division's reorganization in 1980 which focused the activities of staff groups on particular industries. By making the staff more familiar with

the disclosure problems of companies in

particular industries, "industry centralization" laid the groundwork for implementation of the selective review system.

Sman Business

The Office of Small Business Policy m

the Division of Corporation Finance was established in June 1979, to coordinate the

Commission's small business rulemaking

and legislative initiatives, to review and

comment upon the impact of rule proposals on small business, and to serve as liaison with Congressional committees, government agencies and other groups concerned with small business. Since its inception, the Office has initiated several comprehensive projects designed to address

and alleviate, to a degree consistent with

the public interest and the protection of investors, the problems confronted by small

business in raising capital.

Regulation D-During fiscal 1981, the

Commission detennined to evaluate the

Securities Act exemptive scheme in light of

recent amendments to the Securities Act

occasioned by the Small Business Investment Incentive Act of 198()83 (the Incentive

Act), and the VIews expressed by commentators at the Commission's Small

Business Hearings held m 1978. Specifically, the Incentive Act significantly increased

the Section 3(b) dollar ceiling and authonzed the Commission, pursuant to newly

created Section 19(c), to work with the

states to develop a umform exemption

Thus, on December 23, 1980, the Commission announced that It was considering

the Interrelationship among certain exemptions from the registration provisions of the

Securities Act and the utihty of such exemptions as they relate to the capital formatron

needs of small business.s"

As a result of the public hearings, the

comments received In response to the December 23, 1980 release, and discussions

with the North American Securities Administrators Associanon (NASM), in August

1981 , the Commission proposed for comment a new regulation, proposed Regulation [)85, governing the offers and sales of

certain seeurities without registration under

the Securities Act. This action represents a

major effort by the Commission to make

the various limited offering provisions and

the requirements for private offers and

sales of seeunties more unifonn and to

coordinate the small offenng requirements under the Federal and state secunties laws to alleviate the burden of those regulations upon capital formation by small

business. The regulation, If adopted, would

replace and significantly revise the existing

limited offering exemptions contained In

Securities Act Rules 146,240 and 242.

In conjunction with its examination of the

Securities Act exemptive rules, and as provided for In newly created Section 19(c) of

the Securities Act, the Division of Corpora.

tion Finance has had discussions with

NASM to develop the proposed regulation, which is Intended to be adopted, in

part, as a uniform Federal-state exemption.

As a result of this cooperative effort, the

NASM Board of Directors has solicited

21
comment on the proposed exemptions

from the NASM membership and approved a uniform state limited offering

exemption closely paralleling the relevant

portion of Regulaoon D. The Commission

and NASM believe the uniform limited offering exemptive scheme WIll reduce the

burdens on small Issuers by eliminating, in

most instances, the multiplicity of regulations imposed at both the state and Federal

levels.

Form S-18- The Office of Small Bustness Policy is responsible for monitonng

the content and quality of disclosure in offerings made on Form S-18 (which was

adopted in April, 197986) as the simplified

Securities Act reqistration procedure for

small business. Form S-18 calls for substantially less narrative and financial disclosure than Form S'l , which is the form

such Issuers would otherwise use for registration of their securities. However, In view

of the experimental nature of Form S-18

and the initiation of regional processing, its

availability was limited to certain domestic

and Canadian corporate issuers for the registration of securities up to $5 million. In

f.'\arch 1981, on the basis of relatively widespread acceptance of the form and the absence of any significant disclosure problems, the Commission adopted amendments to Form S-18 to expand the availability of the form to certain companies engaged In the mining business." Additionally, at the end of the year, the Commission

was considering proposing certain amendments to Form S-18, which, If adopted,

would further expand the availability of

Form S-18 to non-corporate issuers and to

those issuers who engage or intend to engage In oil and gas related operations. In

this regard, disclosure provisions applicable to these types of issuers will also be proposed.

Classifymg of Issuers-On June 2,

1980, the Commission announced that it

was considerinq the advisability of classifying issuers under the Exchange Act so that

defined classes of smaller issuers might

have modified reporting and other require22

ments.88 This effort was undertaken in order to determine whether the burden of

compliance with Exchange Act reporting

requirements, which is relatively greater for

smaller companies, might be alleviated

without detriment to Investor protection.

The Commission, mindful of the Report

of the Advisory Committee on Corporate

Disclosure, the views expressed by witnesses at the public hearings held by the Commission in Apnl and f.'\ay of 1978, and the

comments received regarding the June

1980 advance notice release, intended to

propose in October 1981 a system of classifying small issuers for purposes of

exempting them from certain obligations

under the Exchange Act. Generally speaking, the classification system would represent an inflationary adjustment to the $1

million asset figure of Section 12(g) established by Congress in 1964. (After the close

of the fiscal year on October 20, 1981, the

Commission issued a release proposing for

comment rule and form amendments

which would implement this system of classification of smaller issuers.")

Regulation A- The Commission's

small business hearings of April and f.'\ay

1978 also addressed the continued viability

of Regulaoon A as an altemative to full

registration. Commentators at the hearings

consistently indicated the need to revise

and update the requirements of Regulation

A to make it a more practical means for

small business to raise capital.

In response to these comments, on December 23, 1980, the Commission proposed a comprehensive revision and reformatting of the Regulation A disclosure provisions designed to codify disclosure standards which were being applied to Regulation A offenngs, to provide specific disclosure requirements for different types of issuers and different types of offerings, and to

assist the administration of uniform disclosure policies.90 The proposed revisions were

adopted in final form on August 7, 1981. 91

Section 4(6)-The Incentive Act provided several statutory changes in the Securities Act which have an impact on small
business capital formation, one of which

was the adoption of new Section 4(6). That

section provides an exemption from the

registration requirements of the Securities

Act for offers and sales of securities by an

issuer solely to accredited investors, without any public solicitation, if the aggregate

amount of securities offered IS$5 million or

less. In connection therewith the issuer ISrequired to file a notice of sales with the Commission on such forms as the Commission

shall prescribe.

In order to permit issuers to utilize Section 4(6) promptly after the enactment of

the Incentive Act, the Commission adopted, on an interim basis, a notice-of-sales

form to be used by issuers relying on the

new statutory exernptlon." The final form,

Form 4(6), was adopted on March 19,

1981.93

In an effort to further the utihty of Section

4(6), the Commission, in conjunction with

proposed Regulation 0and pursuant to the

statutory language of Section 2(15 )(ii), has

proposed new Rule 215 which would, if

adopted, define "accredited investor" for

purposes of that exemption.

Rule 242-Rule 242, adopted under

Section 3(b) of the Securities Act, provides

an exemption from registration for sales of

securities by domestic or Canadian corporate issuers to an unlimited number of accredited persons, as defined in the rule, and

to 35 non-accredited persons.

In the release adopting Rule 24294, the

Commission stated that the rule was in the

nature of an experiment, and that after an

appropriate period, consideration would be

given to determining whether the availability of the rule should be expanded. Since

Rule 242 requires that non-accredited investors receive the same kind of information as that specified in Part I of Form 5-18,

the restrictions on the issuers ehgible to

use the rule were consistent with similar restrictions as to the availability of Form 5-18.

The Commission went on to indicate that if

revisions as to eligibility for registration on

Form 5-18 were effected, it was possible

that changes in the Rule 242 definition of

"qualified Issuer" would be marie. When

the Commission adopted amendments to

Form 5-18 in order to permit certain Issuers

engaged In mining operations to register

their securities on that form and to include

a new disclosure item apphcable to such ISsuers, In accordance WIth its stated pohcy

regarding Rule 242, the Commission authorized the publication of a release proposing to expand the availablhty of Rule

242 by deleting the exclusion relating to

mining companies appeanng In Rule

242(a)(5)(iii) and the Note thereto." The reVIsions were adopted In final form on June

11,1981.96

Trust Indenture Act of 1939- The Incentive Act included, among other measures, amendments to Sections 304(a)(8)

and 304(a)(9) of the Trust Indenture Act of

1939, the substance of which was submitted by the Commission as a legislative proposal. These amendments provided an increase to the aggregate amount of debt securities that could be offered and remain

partially or totally exempt from the provisions of that Act. On October 23, 1980, the

Commission adopted rules, on an interim

basis and pursuant to the above enumerated sections, which established $2 milhon

and $5 million, respectively, as the dollar

hmitation on the amount of debt secunties

that could be offered without qualification

under that Act.97 These interim rules were

adopted to remain in effect until December

31, 1981. The Commission adopted the fi.

nal rules prior to that expiration date.

Studies Involving Small Issuers-Two

joint small business projects were completed by the Commission's Directorate of

Economic and Pohcy Analysis (the Directorate) in 1981. A project with the Department of Commerce's Experimental

Technology Incentives Program (ETIP),

that was begun in 1977, examined the capital market environment for small issuers,

particularly the high technology issuers

which often have venture capital financing.

Several of the Commission's regulatory initiatives regarding these firms were examined, Including usage of Form S-18. The

23
project also encompassed a variety of other

studies related to small issuers which have

been published as Capital Market Working

Papers by the Directorate.

As part of the ETIP project the Commission released the results of another study of

the use of form 5-18,98prepared by the Directorate. The report updated the Directorate's initial study covering the first nine

months of the registration form's use.

Since its April 3, 1979, adoption, form

S-18 has become the predominant reqistration statement used for smaller initial public offerings of common stock and has

been especially popular for use by l'startup" firms. The report also examined the financial characteristics of Issuers utihzing

form S-18, the distribution arrangements

and costs associated with its use, and the

post-offering price performance of secunues sold in offenngs reqistered using the

form.

A second joint project WIth the Small

Business Administration examined the role

of regional brokers as underwriters of the

imtial public offerings of small businesses.

This project broke new ground in examining the market-making and securities reo

search support activities of the securities industry for these stocks.99 The final segment

of this project, which is examining the experience of small issuers with several of the

Commission's small offerings exemptions

from registration, was bemg completed as

the fiscal year ended.

The Directorate has also published the

results of its monitonng of the first six

months of the availability of Rule 242,100

and is completIng a study of the use of Regulation A. The Regulation A study is focus.

ing on the effects of the 1978 increase from

$500,000 in the aggregate dollar amount

ceihng constraining the size of Regulation A

offerings. The study also analyzes issuer

and offenng characteristics, issuance costs

and after-offering price performance of se.

curities sold in Regulation A offerings.

Another study being undertaken by the

Directorate is of the use of Rule 146 by is.

suers during 1980. Rule 146, which is used

24

primarily by small business, was adopted

by the Commission as a "safe harbor" rule

to provide objective standards upon which

businessmen may rely in raising capital under the private placement exemption provided in Section 4(2) of the Securities Act

Other Rule-making;

Continuing Projects

Proposed Amendments to Proxy

RuLes-On february 5, 1981, the Commission proposed for public comment'?'

amendments to the disclosure require.

ments for proxy statements contained in

Schedule 14A under the Exchange Act and

Regulation S-K, relating to: (1) business

and other relationships between directors

and companies; (2) full board consideration of shareholder nominations; (3) the

vote needed for election to office; (4) management indebtedness and remuneration;

and (5) beneficial ownership. In addition,

the Commission proposed amendments to

Exchange Act Rule 14a-8 conceming proposals of security holders. The proposals,

which were based. in large part, on recommendations contained in the Staff Report

on Corporate Accountability issued by the

Division of Corporation FInance in 1980

(the Accountability Report)102, were designed to improve disclosure and to reduce

compliance burdens on registrants.

The amendments to Schedule 14A were

reproposed without change as part of, the

integration proposals in order to give commentators the opportunity to view them in

the context of those other proposed actions.103 The comment period was thus ex.

tended to October 3D, 1981.

Proxy Monitonng Program-In February 1981, the Division of Corporation FInance was authorized to publish a release

announcing the results of its 1980 proxy

disclosure monitoring program.t?' The

analysis of disclosures conceming corporate boards of directors indicated that since

1979. there have been increases In the

number of boards with nominating com.

mittees, the average number of board
meetings per year, and the average amount

of compensation paid to directors by the

1,100 Issuers surveyed. The release also reported a substantial decrease in the number of Issuers which had their investment

banker or outside counsel serving as a

director.

Shareholder Communications-In

April 1981 , on the baSISof a recommendation contained in the Accountability Report,

the Commission established an Advisory

Committee on Shareholder Comrnurucations.IOS This Committee, composed of professionals from business, banking and the

securities industry, was created for the purpose of advising the Director of the Division

of Corporation Finance on questions relating to the development of better procedures for Issuers to communicate WIth the

beneficial owners of securities registered m

the name of a broker-dealer, bank or other

nominee.

Amendments to Rule 144-ln October

of 1980, the Commission proposed.l'" and

in February 1981 adopted.l'" amendments

to Rule 144 under the Securities Act, which

provides a method for resales of unregistered securities and securities held byaffilrates of an issuer. The amendments relieve

nonaffiliates, who have held their securities

for three years or more, from certain provisions of the rule which limit the amount of

securities which they can sell, restrict the

manner in which they can dispose of the securities and require a Form 144 to be filed

in connection with such sales. Because of

the successful operation of Rule 144 since

its onginal adoption in 1972, the Commission believed that It was appropnate to lessen the burdens of the rule on non-affiliates.

Proposed Amendments to Rule

13e-3-Rule 13e-3 under the Exchange

Act applies to certain transactions by public

issuers or their affiliates which result in one

or more classes of equity securities of the issuer no longer having the attributes of public ownership. As a result of its experience in

administering Rule 13e-3 under the Exchange Act relating to so-called "going pnvate" transactions, in April 1981 the Commission published for comment proposed

amendments to the rule and related Schedule 13E-3.1081f adopted, certain of the.proposals would codify staff interpretations

and practice respecting existing exceptions

for (1 ) transactions pursuant to a multi-step

plan for the acquisition of a class of equity

securities of an Issuer by or on behalf of a

person who becomes an affiliate of such issuer prior to the consummation of the last

step; and (2) the use of a cash election in

connection with certam transactions otherwise excepted from the operation of the

rule. Other proposals would make clarifyIng and technical changes to Improve the

operation of the rule.

Eninronmentsl Dtsclosure-Dtv May 4,

198 I, the Commission proposed for public

comment amendments to its regulations

regarding disclosure of environmental

proceedings 109 The proposals would: (I)

establish a threshold for companies'

omission of disclosure about certain environrnental proceedings to which a

governmental authority IS a party and (2)

require that registrants provide Interested

investors with the names and addresses of

the governmental authorities from which

compliance related reports about disclosable environmental proceedings can be obtamed. Because the current requirements

have resulted in the disclosure of environmental proceedings which are not siqnif

cant, the Commission believes that the

amendments will improve the quality and

unhty of environmental disclosure to shareholders while reducing burdens on corporanons drsclosmq environmental proceedmcs,

International Corporation FinanceThe Commission proposed'!" and adopted'!' amendments to the exemptive regulations for primary distributions of securities

Issued by the Intemational Bank for Reconstruction and Development, the Inter-American Development Bank, and the Asian Development Bank (the Banks). The amendments permit the Banks to sell their securities immediately upon filing certain information with the Commission instead of

25
waiting a penod of seven days. The purpose

of the amendments was to give the Banks

the same flexibility in reaching the financial

markets as Issuers of registered securities

are developing under the integrated disclosure program.

Real Estate Guidelines-Dunng 1981,

the staff of the Division of Corporation Finance continued Its cooperation with the

Subcommittee on Financial Statement and

Track Record Disclosure of the NASAA in

developing revised disclosure require.

ments for public real estate programs. This

cooperative effort resulted in proposals that

would revise the track record disclosure

guidelines of the Commission's Guide 60

for" Preparation of Registration Statements

Relating to Interests in Real Estate Lirmted

Partnerships" and would amend the financial statement requirements of Item 3.14 of

Regulation SOX concermnq "Special In.

structions for Real Estate Operations to be

Acquired." The proposals would standardize and streamline prospectus presentation of the pnor expenence of sponsors of

public real estate programs by setting forth

specific gUidelines as to the type and quantity of disclosure required. The proposed

amendment to Item 3.14 of Regulation SOX

would reduce the requirement for financial

statements of significant properties acquired by a real estate program from three

years to one year If certain conditions are

met by the issuer. (Mer the close of the fiscal year, on October 7, 1981, the proposals

were published for public cornment.UOther Rule-Making-On September I,

1981, the Commission adopted amend.

ments to Rule 463 and related Form SR under the Securities Act, which require filings

by Issuers with respect to their first reqistranon statement disclosmq their sales of securines and uses of proceeds. I13The major

changes consisted of: standardization of

Form SR to a short-answer format; Inclusion of a matenality standard for disclosure

of differences between actual uses of proceeds and the uses stated in the prospectus; clanfication of the time for filing reports

and the filing requirement for certain sue26

cessor issuers; and addition of several

exemptions from the filing requirement.

Interpretive Advice

Concomitant to the Commission's rule.

makIng function is the role which its staff

plays in providinq interpretive advice con.

cernmq the Federal secunties laws and the

rules thereunder. In the area of full disclosure, the staff provides such advice through

responses to telephone Inquiries (an estimated 45,000 in fiscal 1981 ) and written reo

sponses to formal requests for advice (an

estimated 1,600 through the year). During

fiscal 1981, the Commission also pub.

Iished several interpretive releases in the

area of full disclosure with the aim of providIng reference sources for the public in areas

of general concem.lt is hoped that these reo

leases will also reduce the need for individualized staff responses, thus making bet.

ter use of the staff s resources.

Employee Benefit Plans-On January

15, 1981,114the Commission authorized

the publication of staff Interpretive advice

conceming several aspects of employee

benefit plans This release supplemented

an earlier, extensive release discussing reg.

istration of Interests In employee benefit

plans and related tOPICS.1I5 The supple.

mental release discussed four major

topics: (1) applicability of the Securities

Act registration provisions to specific types

of plans, such as Tax Reduction Act Stock

Option Plans and open-market stock pur.

chase plans; (2) aspects of the exemption

from Securities Act registration provided by

Section 3(a)(2) of that Act; (3) plan sales

and participant resales of stock; and (4)

simplification of procedures connected

With reqistranons on Form S-8.

Going Private Transactions-On April

17, 1981, concurrent with its publication of

proposed amendments to Rule 13e-3 (see

above), the Commission published the

views of the Division of Corporation Flnance on various interpretive questions reo

gardlng the rule and related Schedule

13E-3 under the Exchange Act.116The principal matters discussed in the release were:
(1 ) the kinds of transactions which are subject to the rule; (2) the persons subject to

the filing, disclosure and disserrunation provisions of the rule; (3) the scope of the Rule

13e-3 exceptions; and (4) the nature and

tirrunq of the Schedule 13e-3 disclosure requirements.

Insider Tradmg and Reports-On September 23, 1981, the Commission authorized the publication of a comprehensive interpretative release treating various aspects

of Section 16 of the Exchange Act and the

rules thereunder.'!" Section 16 requires

corporate "insiders" to disclose transactions in their companies' securities and for

the recovery by the corporation of "shortswing" profits made by insiders through

such transactions. While the release addressed a wide variety of issues arising In

this area of the Federal securities laws, it devoted particular attention to Rule 16b-3 under the Exchange Act, which regulates the

applicability of Section 16 to employee

stock purchase plans, bonus and option

plans and other similar arrangements.

Retail Repurchase Agreements-During September 1981, the Cornrmssron authorized the publication of staff positIons

concerning the applicability of the Secunties Act registration provisions to so-called

"retail repurchase agreements" issued by

banks and savings and loan associations.I'" The Commission determined to

address this area in light of the volume of inquiries from financial institutions, prompted by the increase in the use of "retail repos'' as a means of raismq short-term capital. While the staff took the position that the

Securities Act registration requirements

would not apply to the offer and sale of retail

repos, it emphasized the applicability of the

antifraud provisions of the Federal secunties laws to such transactions.

Other Interpretive Releases-During

the course of fiscal 1981, the Commission

authorized the Issuance of other interpretive releases in the area of full disclosure on

a variety of specific topics. These included:

(1 ) procedures for requesting specific interpretations or "no action" positions'P; (2) a

simplified form of trust indenture'>, (3) the

distnbution of proxy materials to beneficial

shareownersv': and (4) option and optionrelated transactions during underwritten

offerings.122

Accounting Matters

Oversight of the Accountmg Profession-The Commission has continued to

actively monitor and encourage private sector initiatives to Implement meaningful selfregulation of accountants practicmq before

the Comrrussron, to mamtam the independ

ence of auditors, and to establish and improve accounting and auditing standards.

The objective of the Commission's oversight activities is to assure that the accounting profession continues to make progress

In lrnprovmq the integnty and credibility of

financial reporting by public entities.

For the past three years,the Commission

has submitted to Congress separate comprehensive reports on the accounting profession and the Commission's oversight

role. These reports commented on the accounting profession's response to the various challenges which Congress and others

had placed before it and on the Commission's own Initiatives in this area. Dunng the

current fiscal year, the Cornrrussion deterrmned that it was not necessary to issue a

separate report on the accounting profession, Rather, It believes that this annual report ISthe appropnate forum in which to

comment on the developments withm the

accounting profession, and to assess the

degree to which the profession ISmeeting

the challenges it faces.

During the past year, the accounting profession continued to make progress in implementing a meaningful system of self-regulation. This effort represents a major

commitment on the part of the professron,

and the Commission continues to actively

support and encourage its continuing

evolution. Although additional expenence

is necessary In order to form a conclusion

as to the ultimate success of the profession's self-regulatory irutiatives, the Comrrussion believes that they have great poten27
tial for achieving improvements in the quality of audit practice, and thus, sigmficantly

adding to the credibility of financial

reportinq.

With respect to the standard-settIng processes of the pnvate sector, the Commission continues to believe that the initiatIve

for establishing and improving accounting

and auditIng standards should remain in

the private sector, subject to Commission

oversight. The Commission reaffirms its

strong support of the Financial Accounting

Standards Board (FASB). The Commission believes that the FASB must continue

its efforts to provide leadership and take

timely action in controversial areas, and

that members of the accountIng profession

and the business community must continue to support the FASB' s decisions and

partIcipate In the standard-setting process.

The Commission also continues to believe

that the Auditing Standards Board (ASB)

has generally performed In a satIsfactory

manner.

Although the Commission acknowledges that significant progress has been

made by the private sector self-regulatory

organizations, the Commission's statutory

responsibilIty for the integnty of the financial information disseminated by public

companies requires that It be concerned

with the accounting principles underlying

that informatIon, the auditIng standards by

which it is reviewed, and the independence

and competency of the profession which

performs that review. The Commission will

continue to seek to fulfill its responsibilIty by

close oversight of the various private sector

initiatives, but will not hesrtate to take appropriate action if necessary.

SEC Practice Section-In 1977, the

American Institute of CertIfied Public Accountants (A1CPA) established the Division

for CPA Firms. The Division is a voluntary

organization for accounting firms and consists of two sections-the Private Companies Practice Section and the SEC Practice

Section (SECPS). The SECPS has membership requirements that are designed to

improve the qualIty of practice by account28

ing firms that audit the financial statements

of companies which file registration statements and reports with the Commission.

The SECPS's member firms collectIvely

audit the financial statements of approximately 9,000 registrants, including virtually

all companies listed on the national stock

exchanges.

The Commission believes that the peer

review program is the most important element In this self-regulatory initiative. The

periodic peer reviews test for compliance

with the SECPS's membership requirements, including a determination as to

whether or not the firm is maintaining and

applying an appropriate system of quality

control. During the fiscal year, approximately 150 peer reviews were conducted

pursuant to SECPS requirements. This

compares with a total of about 50 reviews

during the previous two years. The Commission's staff has reviewed a sample of the

public reports and comment letters reflecting the results of the peer reviews, as well as

the oversight files of the Public Oversight

Board (POB). The POB is an independent

body responsible for monitoring and evaluatIng the activities of the SECPS. The

Commission's staff is encouraged by the

results of its review because they suggest

that: (a) the standards for performing and

reportIng on peer reviews are appropriate;

(b) the standards are being meaningfully

applied; and (c) the POB is actively monitoring the peer review process.

Starting with the approximately 250 peer

reviews scheduled to be completed during

fiscal year 1982, the Commission's staff will

have the opportunity-under an access arrangement which has been agreed to by

the SECPS and the Comrnissron-e-to

review a sample of certain working papers

prepared by the reviewers in support of the

results of their review. The objective of the

staff s access to peer review working papers

is to enable the Comrnission to reach an informed judgment as to the adequacy and

application of the peer review standards,

and the extent of reliance which can be

placed on the work of the POB consistent
with the Commission's oversight responsibilities. Based on its experience to date, the

Commission's staff expects that the Commission will be able to place substantial reliance on the POS's oversight function.

The SECPS is empowered to impose

sanctions on member firms for failure to

comply with membership requirements.

Sanctions may be imposed as a result of

monitoring specific alleged or possible

audit failures, or as a result of serious quality control deficiencies uncovered during

peer reviews. The POS has reported that

while the SECPS has made significant

progress in establishing operational procedures for monitoring audit failures, it is too

early to draw any conclusions regarding the

effectiveness of this aspect of the SECPS's

disciplinary program.l23 With respect to

deficiencies noted dunnq peer reviews, the

SECPS's emphasis to date has largely been

on remedial steps- such as voluntary

agreements to correct deficiencies and

undergo additional professional education

or follow-up peer reviews. While such a

remedial approach appears to make sense,

the SECPS must be prepared to take more

stringent actions if warranted in order to

ensure the credibility of its disciplinary procedures.

The Commission continues to agree

with the POS that all accounting firms

which audit publicly-held companies

should participate in the accounting profession's self-regulatory proqrarn.P' In this

connection, the Commission encourages

the SECPS to continue to explore ways in

which to facilitate membership. Membership in an organization such as the

SECPS-with attendant peer review and

other meaningful membership requirements-should provide investors and

clients with the requisite degree of assurance that member firms consistently

conduct their accounting and auditing

practice in accordance with professional

standards. While membership cannot

guarantee that there will be no future audit

failures, it should reduce the likelihood of

such failures. If and when audit failures

occur, the Commission expects they will be

due to isolated breakdowns or "people

problems," and not to inherent deficiencies

in firms' systems of quality control.

The POS has stated its belief that since

the principle objectives of the Division for

CPA Arms are improvement of the profession and protection of the public, the public

is entitled to know the identity of firms that

are members of the Division and the type of

standards with which they must comply.125

The Commission agrees that it may be important that investors know whether a registrant's auditor is a member of a recognized and effective self-regulatory organization. Therefore, the Commission endorses

the decision of the A1CPACouncil to pub.

lish a directory of accounting firms that are

members of the Division for CPA Arms.

FASB Activities-The FASS has continued its efforts to develop and improve

the financial accounting and reporting

standards upon which financial reporting

is based. A number of statements and

interpretations were issued during the past

year, and the FASS's agenda currently

includes various significant projects such

as: (a) development of a conceptual framework for financial accounting and reporting

by business enterprises; (b) reconsideration of a standard on accounting for foreign

currency translation; (c) consideration of

employers' accounting for pensions and

other post-employment benefits; (d) consideration of the extent to which the ratemaking process should affect the application of financial accounting standards to

companies in certain regulated industries;

(e) development of a cohesive and comprehensive set of disclosures about oil and gas

exploration and producing activities; and

(f) extraction of specialized accounting and

reporting practices in the A1CPA statements of position and guides on accounting and auditing matters. The FASS is also

continuing its efforts to provide timely

guidance on various implementation and

practice problems.

The Commission's staff has closely

monitored the FASS's activities during the

29
year. A description of certain FASB

projects follows.

(J) Conceptual Framework-Shortly

following its creation in 1973, the FASB

began the task of developing a conceptual

framework for business enterprises. This

project was not an entirely new effort, but It

was the first time that significant resources

were dedicated to the planned development of a comprehensive body of concepts

intended to undergrid financial accounting

and reportmq,

A unified body of concepts that support

financial accounting and reporting and

facilitate the process of finding solutions

to emerging problems would provide logical order and uniformity to the process of

standard-setting. Ideally, a conceptual

framework would lead to the elimination of

alternative pnnciples and practices and

contribute to increased comparability of

financial Information among diverse

business enterpnses.

Although, as In prior years, deadlines In

the project's timetable were missed, some

progress was made. During the year, two

statements In the concepts series were

issued which identified and defined the ten

Interrelated elements that comprise

flnencial statements, and the objectives of

financial reporting by nonbusiness organizations. Additionally, the FASB published

two research studies related to the recoqrubon phase of the project, and held public

heanngs on the funds flows, liquidity and

financial flexibility phase.

In the coming year, the FASB expects to

Issue a statement of financial accounting

concepts which will combine in a single

pronouncement the interrelated phases

of reporting eamings and funds flows,

liquidity and financial flexibility. The display

of eamings and funds flows data IS also

under active consideration. At least one

discussion memorandum regarding the

issues to be considered in the recognitIon

phase is also expected dunng 1982. Work

on the measurement-of-elements phase of

the conceptual framework project should

extend beyond 1982.

30

The FASB's work on a conceptual framework is now at a critical stage. The fundamental conceptual issues identified WIth

reporting earrunqs and funds flows, including the display of this information,

have been under active consideration for

several years. Work on the difficult areas of

accounting recognition and measurement

of the elements of financial statements has

been started, but delays persist and meaninqful solutions continue to be elusive. It

is possible that the FASB's success in

resolving the conceptual issues related to

recognition and measurement may determine the ultimate success or failure of the

conceptual framework project.

The FASB believes that the progress

made to date on the framework does assist

In its deliberations on specific standards.

Substantial completion of the project-that

is, the point where it becomes a visible aid

in the reporting process-does not, however, appear to be a near-term prospect.

Thus, the FASB should continually assess

Its resource allocations to ensure that work

on specific accounting issues which have

been Identified as needing the board's

attention-such as accounting for income

taxes and consolidation accounting- is not

being mappropnately postponed. While the

Commission continues to believe that the

development of a conceptual framework is

worthwhile, the FASB's major objective

should be to provide timely guidance on

major Issues and emerging accounting

problems which constantly arise in a

dynamic financial reporting environment.

In addition, work on some of the major

accounting Issues currently facing the

financial community, including the FASB's

project on accounting for pensions by

employers, may aid in the future development of recognition and measurement

concepts

The Commission will continue to work

with the FASB by offenng its comments

and observations as this process continues

to evolve.

(2) Financial Reportmg and Changing
Prices- During the past two years, certain

large, publicly-held enterprises have disclosed supplementary information regarding the effects of changing prices

under the FASS's Statement of Financial

Accounting Standards No. 33 (FAS 33).

FAS 33 requires information regarding

both operations and financial position on

two bases-constant dollar accounting

and current cost accounting. This year, the

Commission revised its rules to specifically require disclosure pursuant to FAS 33

10 certain registration statements, annual

reports on Form lO-K and annual reports

subject to the proxy rules and certain proxy

statements.

FAS 33 does not require current cost

Information for specialized assets associated with unprocessed natural resources

and income-producing real estate. However, it was supplemented dunng the past

year by three new statements which cover

the specialized assets in those industries.

Two of the new statements merely extended the interim provisions of FAS

33 for certain specialized assets- incomeproducing real estate and timberlands and

growing timber- so that current-cost

based data remains optional for these

assets and related depreciation, depletion

and amortization. The remaining statement

Imposes a requirement for current-cost

information for the specialized assets 10 the

oil and gas and hard mmerals industries.

Accounting for the effects of changing

prices is not a settled area 10 accounting

theory or practlce. Consequently, the FASS

issued FAS 33 before the definitional,

conceptual and display issues were fully

settled, and decided to reexamine the

issues after a five-year period of experimentation. In June 1981, the FASS issued

an invitation to comment regardmg research needed on reporting the effects of

changing prices in order to provide information about cost/benefit assessments,

use of the data, behavioral effects, and

indicated needs for change in the manner

in which the data are derived and communicated.

High rates of mflation seriously impair

the ability of financial statements, which are

predicated on historical cost/ nominal

dollars, to indicate eamings available for

expansion or distribution to owners. The

FASS made a significant breakthrough in

private sector standard-setting process

10 issuing FAS 33. The Commission recogruzes the importance of coordinated

research 10 this important area of financial

reporting. Preparers and users of financial

Information should be joined by auditors,

academics and others 10 providing useful

empirical data and opmions on the issues

identified in the FASS's invitation to comment. The ultimate success in achieving

disclosure of useful information concerning the effects of changing prices should

not be dependent entirely on the efforts of

the FASS. The business community and

the accounting profession should be partners WIth the FASS in this effort through

their contributions of time and talent to

relevant research and experimentation.

Other Siqnuicsni Financial Reporting

Issues- During the past year, the Commission continued to be actIvely involved with

several important financial reporting

issues. These include' (l) the efforts to

achieve more useful financial reporting for

oil and gas producing companies; (2) the

private sector's initiatives regardmg voluntary reporting on internal accounting

control; and (3) the evolving area of

supplemental financial Information and the

question of appropriate auditor association

with that data. A brief discussion of each

of these issues follows.

(1) Financial Reporting Practices for

Oil and Gas Producers-During the fiscal year, the Commission and its staff

continued to review the various sup.

plemental disclosures made as a part of

the Commission's experiment to develop a

new method of accounting for oil and gas

producers- reserve recognition account109 (RRA). Companies are required to

disclose supplementary mformation about

the value of their reserves, changes in

those values and an altemative measure

31
of performance, all based on RRA. The

Commission noted significant revisions to

estimated proved reserves quantities in the

supplemental disclosures included in various required filings, and received comments from oil and gas reservoir engineers

that a sigmficant range of reserve estimates

is considered reasonable by that profession. Also, the published results of several

studies suggested a substantial degree of

uncertainty of oil and gas reserve estimates.

After assessing the development of RRA

since September 1978, the Commission

determined that, because of the inherent

uncertainty of recoverable quantities of

proved oil and gas reserves, RRA does not

presently possess the requisite degree

of certainty to be useful as a primary

method of accounting. Therefore, in

February 1981, the Commission announced that it no longer considered RRA

to be a potential method of accounting for

use in the primary financial statements.

At that time, the Commission also

announced its support for an FASB project

to develop a comprehensive set of disclosures for oil and gas producers. This

project comprehends all aspects of financial reporbng by oil and gas producers

except the issue of a uniform method of

accounting. The Cornrnissron presently

has no plans to attempt to address the issue

of a uniform method of accounting since it

believes that concepts developed by the

FASB in its standard-setting role may

have an impact on the ultimate resolution

of the uniform method question.

In connection with its disclosure project,

the FASB issued an invitation to comment

In May 1981 and held public hearings on

the subject in August 1981. It expects to

issue an exposure draft of a reporting

standard in early 1982, with a final standard to be adopted in the summer of 1982.

The Commission's staff has followed and

will continue to closely follow the FASB's

progress on this disclosure project, and

expects that the Commission's rules will be

amended to be consistent with the dis.

closure standards adopted by the FASS.

32

Since the Commission is no longer

working to develop RRA as a method of

accounting for use in the primal}' financial

statements and there are no immediate

plans for adopting a single uniform method

of accounting, the staff has recommended

the rescission of Accounting Series Re.

lease No. 261 (February 23, 1979) which

expressed the Commission's view that

changes from either the full cost or the

successful efforts method of accounting

would not be in the interest of investors.

This view was espoused because of the

potential for another change in accounting

method in the near future. Since RRA is no

longer being developed, the Commission's

staff believes that it IS no longer necessary to discourage accounting changes.

Therefore, the staff has recommended

rescission of the subject release. If this

recommendation is adopted, in the future

the Commission will accept accounting

changes from either the full cost or the

successful efforts method when such

changes are in accordance with generally

accepted accounting principles (GMP).

(After the close of the fiscal year, on

October 7,1981, the Commission authorized the publication of the recommended

release.I26)

(2) Management Reports-The

Commission's staff continued to monitor

the private sector initiatives for manage.

ment reports on intemal accounting

controls. Significantly more annual reports

issued this year included such reports than

those issued last year. The staff is encouraged by the Increasing number of reports

submitted and by the broad range of topics

covered by these reports. The strong positive response by the private sector suggests

that regulatory action in this area is not

warranted at this time.

(3) Supplemental Financial lniormetion-In 1978, in connection with its

project to develop a conceptual framework,

the FASB concluded that some financial

information should be reported outside the

financial statements, notwithstanding its

relevance to an understanding of an
entity's financial position and results of

operation. Accordingly, the FASB determined to develop standards for disclosure

of supplementary financial information

where appropnate. The Commission has

previously expressed support for the

FASB's decision to look beyond the reporting of financial information in financial

statements to a broader concept of financial reporting. The Commission continues

to concur in this broadened objective of

the FASB.

At the present time, the only FASB

standards that address supplementary

financial informatJon concem inflation

accountJng and, to a limited extent, information about oil and gas reserves. The

new FASB initiative in the area of disclosures about oil and gas exploration and

producing activities is expected to result

in additJonal specific standards for supplementary disclosures.

Independent accountants are required,

by generally accepted auditing standards,

to review the supplementary financial information presented under FASB pronouncements and the oil and gas reserve disclosures required by the Commission. The

required review of supplementary financial

information is less extensive than an audit

However, independent accountants are not

required to report on the supplementary

financial Information. They are only required to expand their reports on the

audited financial statements when they

have been unable to complete the prescribed review procedures, or when the

disclosure is incomplete or materially

different from the reporting standards.

The Commission has stated that an

accountant's report on supplementary

information would provide an Important

channel of communication between the

profession and users of financial reports.

Such a report would describe the nature

of the accountant's review and state

whether he is aware of any material modifications that should be made to the

information for it to conform with the

FASB's gUidelines.

The Commission understood that

consideration of explicit reporting had been

hindered by uncertainty over the applicability of Section 11 of the Securities Act to

accountants' reports on supplementary

mformation which are included in reqistration statements. Accordingly, it proposed rules which would clarify that

accountants would not be liable under

Section 11 for their reports on supplementary financial information as to the

effects of changing prices and as to oil

and gas reserves. Final action on these

rules has been deferred because of questions relating to the most appropnate way

for the Commission to express Its view

that accountants' exposure to liability

must be consistent Withthe responsibilities

they assume.

Review ot Accaunting-ReLated RuLes

and Interpretatians- The Commission.

relies to a great extent on GAAP, as established by the private sector, to provide

gUidance to registrants and accountants 10

preparing financial statements required

to be included in various registration statements and reports filed with the Commission. The Commission's accountingrelated rules and interpretations serve

primarily to supplement GAAP, by

addressing those areas which are unique

to Commission filings or where GAAP is

not explicit.

The Commission's principal accounting

requirements are embodied in Regulation SoX(S-X) which govems the form and

content of, and requirements for, most

financial statements filed under the Federal

securities laws. The Commission also

publicizes its views on various accounting

and financial reporting matters in Account109 Series Releases (ASRs). In addition,

the Commission's staff periodically issues

Staff Accounting BulletJns (SASs) as a

means of informing the financial community of its views on accounting and disclosure practices.

The Comrnissron continually evaluates

Its requirements as the private sector

effectuates changes in financial reporting

33
standards, and modifies or eliminates

those requirements which become

unnecessary. To the extent that the

FASB and the NCPA accelerate their

efforts to enhance financial report109, the Commission should be able

to place more rehance on pnvate sector

standards.

In addition, the Commission updates its

rules and issues mterpretations where

necessary and appropriate For example, in

July 1981, the Cornrrussron announced Its

concems about certain apphcation and

disclosure practices relatlOg to the last-in,

first-out (LIFO) method of accoununq for 10-

ventones. The Cornrmssion encouraged

reqistrants and accountants to carefully

reexamine LIFO accounting and disclosure

practices to ensure that those practices

result in accurate and meaningful flnancial

reporting.

Dunng the past year, the Commission

has devoted substantial resources to a

comprehensive review of its existing accounting-related rules and mterpretations.

The objective of this review is to ensure that

the Cornrmssion's requirements remain

necessary and cost-effective in today's

environment and that they contnbute to the

usefulness of financial reporting WIthout

imposing unjustified burdens on registrants. As a result of this effort, the Commission has made progress in reducinq and

sirnphtyinq its rules WIthout sacrificmq the

integnty of financial disclosure documents.

Some specific initiatives 10 this area are

discussed below.

(I) Scope of Services by Independent

Accountants-In 1978 and 1979, the

Commission issued two releases relating

to the scope of services performed by rndependent accountants for their audit clients.

ASR No. 250 (June 29, 1978) announced

the adoption of a rule requrrinq disclosure

10 proxy statements about nonaudrt services performed by accountants. In ASR No.

264 (June 14, 1979), the Commission dIScussed factors relevant to an evaluation of

the Impact of the performance of nonaudit services on auditor independence.

34

These releases were issued by the

Cornrmssion as a part of its response to

concems raised by members of Congress

and the public during the mid-1970's that

the performance by accountants of nonaudit services could or could appear to

create a conflict of interest which would

Impair the accountant's independence.

The disclosure about nonaudit services

was intended to permit security holders to

better evaluate registrants' relationships

with their independent accountants. In

addition, the Commission intended to

rnorntor the disclosures to assist 10 developing an emprrtcal baSIS from which to

determine the need for any further action 10

this area.

Based on the review of the proxy dISclosures conducted by the Commission's

staff, the Commissron obtained a better

understandmq of the nature and extent of

nonaudit services performed by accountants. Nthough the Commission believes

that information about nonaudit services

performed by independent accountants

IS important for monitoring the relationships between accountants and their

clients, in August 1981, it proposed to

rescind the proxy rule because It believed

that the detailed nonaudit services disclosure may not be of sufficient utility to

investors to justify continuation of the

disclosure requirernent.P? In addition, the

Commission thought that the SECPS

could generate sufficient information to

enable the Cornrnission, the POB, and

others to appropriately monitor the services

performed by accountants. In this connection, subsequent to the Issuance of

the above proposal, the Executive Committee of the SECPS agreed to require

member firms to provide additional dISclosure about nonaudit services in annual

reports filed with the SECPS and available

for public inspection

In a related action, the Commission withdrew ASR No. 264.128 Although registrants

and accountants must contmueto carefully

evaluate their relationships to ensure that

the public maintains confidence in the
integrity of financial reporting, the Commission took this action because ASR

No. 264 might have confused persons

trying to evaluate services performed or to

be performed by accountants. Moreover,

the Commission believes It has achieved

its objective In issurnq that policy statement. Accountants and their self-regulatory

structure, audit committees, boards of

directors and managements are aware of

the Commission's views on accountants'

independence and should be sensitive to

possible impact on Independence of nonaudit services performed by accountants.

The Commission believes It should be able

to rely on these persons to ensure adequate

consideration of the Impact on accountants' independence of nonaudit services

because they share the responsibility to

assure that the public maintains confidence in the independence of accountants.

In its release proposing withdrawal of the

proxy rules, the Commission emphasized

that the independence of auditors- both in

fact and in appearance-is critical to their

role under the Federal securities laws.

Because of its responsibility and authonty

under the securities laws to assure that

accountants who practice before it are

independent, the Cornrrussion is prepared

to take further action if either the fact or

appearance of accountants' Independence

is questioned seriously in the future.

(2) Requleuon SoX-As part of the

continuing efforts to streamline the Commission's regulations, the Commission

and its staff have: (a) standardized and

centralized in SoX the Instructions for

interim financial statements in registration statements and quarterly reports to

further Simplify disclosure requirements;

(b) proposed to significantly reduce the

requirements for financial statements, such

as parent company, unconsolidated subsidiaries, etc., which supplement consolidated financial statements (The

Commission adopted final rules to reduce

the number of instances where separate

financial statements are required on

November 6, 1981.); (c) revised the rules

relatIng to the detailed property, plant and

equipment schedules to require the filing

of such schedules only by capital Intensive

companies; (d) reviewed the financial statement requirements for companies In

specialized industries-insurance companies, bank holding companies and

investment companies-and either issued,

or will soon Issue, proposals to revise those

requirements (The Commission adopted

final rules relatIng to Insurance companies

on October 21, 1981.); (e) Issued a proposal to simplify and standardize requirements for disclosure of a ratio of eamings

to fixed charges; and (f) Issued a proposal

to simplify and Improve the registratIon

and reporting process by codifying administrative policies regarding the

presentatIon of pro forma financial information

The Commission's staff believes that

these miuanves will result in substantlal improvement In S-X while reducmq

reporting burdens on registrants The staff

WIll continue to explore ways in which SOX

can be refined.

(3) ASRs- The Commission's staff has

commenced a review of the approximately

300 ASRs which have been issued by the

Commission since 1937. The objective of

this review ISto identify unnecessary, outdated or otherwise extraneous material

and to publish a codification of those

portions of the ASRs which remain relevant

to financial reporting today. This project is

expected to result in a substantial reduction

In the material that the financial community need be concerned with, and the

Inclusion of the remaining material in a

more concise and useful format which is

expected to vastly Increase its utIlity. The

staff expects to recommend that the

Commission consider the final document

during fiscal year 1982.

Although this project is in Its Initial

stages, the staff has already identified a

number of ASRs which have been rescmded recently because the policies

stated therein no longer have current

35
application or have been superseded by

other pronouncements.

(4) SASs-In January 1981, the

Commission staff published a codification

of the material included in 38 earlier SASs.

The codification represents an integrated

package of updated and indexed SASs to

36

make those staff interpretations more

useful to issuers, accountants and others.

The principal revision to the material in the

previous SASs related to deletion of

material no longer necessary because of

pnvate sector developments and Commission actions.
Investment Companies and Advisers

Disclosure Study

The Division of Investment Management

established a study group at the end of

fiscal 1979, to undertake a thorough

review of investment company disclosure

requirements under the Securities Act of

1933 (Securities Act) and the Investment

Company Act of 1940 (Investment

Company Act). The objective of the study is

to reduce unnecessary burdens on both

the industry and the staff which may result

from present disclosure requirements.

During the 1981 fiscal year, the study

group reviewed changes In reporting

requirements for management investment

companies. On November 17, 1980, the

Commission proposed three revisions to

Form N.IQ, the quarterly reporting form

for management investment companies.F?

The major revision would shift the require'

ments for reporting changes in an invest.

ment company's portfolio securities from

a quarterly to an annual basis. The Com'

mission proposed the revisions because

(1) the staff makes little intemal use of

the quarterly information; and (2) the institutional disclosure program established

under Section 13(f) of the Securities

Exchange Act of 1934 (Exchange Act)

sets appropriate disclosure requirements

for all institutions, including investment

companies.

The study group also continued its effort

to eliminate duplicative reporting requirements in documents sent to existing shareholders and potential investors. On July 8,

1981, the Commission adopted uniform

requirements for the contents of and

periods to be covered by financial state.

ments included in shareholder reports

and prospectuses in (or annual updates of)

management investment company registration staternents.P'

As a result, management investment

companies can prepare a single set of

uniform updated financial statements that

can be used in both the prospectus and the

annual report to shareholders. In addition.

open-end management investment

cornparues, at their option, can either

incorporate financial statements included

in any shareholder report by reference

into the prospectus, or transmit a currently

effective prospectus as the equivalent of

a shareholder report. The Commission

adopted these changes to: (1) reduce the

costs incurred In preparing and trans'

mitting essentially duplicative financial

information; and (2) provide an opportunity

for open-end management investment

companies to reduce the length of their

prospectuses or eliminate separate preparation of periodic reports.

Rule 465 under the Securities Act

became effective in October 1980. This

rule permits most post-effective amendments filed by open-end management

Investment companies and unit investment trusts, other than insurance company

separate accounts, to become effective

automatically, without affirmative action on

the part of the Comrnissron or its staff.

Amendments that merely register additional shares, or that are filed to update the

issuer's prospectus and do not discuss any

material events in its operations, can

become effective either immediately or on

a date chosen by the registrant within 20

days of the date of filing. NI other amend.

ments become effective on the 60th day

after filing, Including those that discuss

matenal events in investment company

operations. The rule was adopted to accomplish two goals. First, it should elirninate staff review of purely routine filings.

thereby enabling the Division to concentrate its resources on those filings which

need the review process in order to Insure

37
complete disclosure. Second, and perhaps

more importantly, it should permit registrants to assume greater responsibility for

their compliance with the disclosure

requirements of the Federal securities

laws. In this regard, since the rule was

adopted, over half of the post-effective

amendments subject to its provisions have

been filed under the provision permitting

immediate effectiveness.

The study group is considering a

number of other proposals including the

possibility of simphfying the disclosure

contained in Investment company pro'

spectuses. The goals of such simplificabon

would be to make disclosures easier for

investors to understand and to reduce the

costs and burdens of preparing and

distributing prospectuses.

Investment Company Act Study

In 1978, the Division established the

Investment Company Act Study (the

Study) to review the Investment Company

Act and the rules, regulations and administrative practices under it, with a view

towards Simplifying and reducing the

burden of regulation upon the investment

company industry, to the extent practicable, consistent with the protection of

investors. Through its rule making proposals to the Commission, the Study has

advocated a more efficient regulatory

system which enhances the everslght

responsibilities of investment company

directors and concomitantly minimizes

Commission involvement in investment

company operation. The recommendations of the Study have generally taken two

forms: (1) replacing administrative

review by the Commission's staff of

proposed investment company activities

with rules establishing general critena

under which certain activities are permissible; and (2) refining the Investment

Company Act's broad statutory prohibitions by interpretation so as to permit

activities otherwise prohibited under conditions which preserve the underlying

38

purpose of the regulatory provision.

Consistent with the purposes stated

above, during the fiscal year the Commission adopted rules which:

(1 ) exclude from the defimtion of investment company and hence from regulation

under the Investment Company Act,

certain prima facie investment companies

which are primarily engaged in a non.

investment company business.P'

(2) temporarily deem certain transient

investment companies not to be investment companies for purposes of the

Investment Company Act;l32

(3) deem certain subsidiaries of operating corporations not to be investment

companies for purposes of the Investment

Company Act;133

(4) exempt the purchase or sale of

certain securities between an investment

company and an affiliated person which

is so affiliated solely because of having

a common investment adviser, common

officers and/or common directors;l34

(5) permit use of fund assets to finance

distribution of fund shares;135and

(6) require that investment companies

develop codes of ethics goveming

purchases or sales by investment

company insiders of the same securities

held or to be acquired by the investment

cornpany.P"

The Commission also proposed rules

developed by the Study to resolve several

longstanding issues. First, the Commission

proposed Rule 3a4 which would provide

a ..safe harbor" for certain" mini-account"

services. These accounts are offered by investment advisers in the form of individual

accounts, but may be operated, in practice,

more like investment companies. The

proposed rule would deem investment

management services providing their

clients with individualized treatment not to

be investment companies for purposes of

the Investment Company Act137

The Commission also proposed Rule

180 which would exempt from the

registration requirements of the Securities

Act, interests and participations issued in
connection Withthe tax-qualified retirement

plans commonly know as "H.R. 10" plans.

Because H.R. 10 plans are not entitled to

the exemption from registration available

to the tax-qualified retirement plans of

certain employers, many such plans have

applied for and received exemptions from

such registration requirements. The

proposed rule would obviate the filing of

many such applications.l38

Legislation

The Commission, consistent with its

deregulatory objectives, participated in

the development of the legislation which

resulted in the enactment of the Small

Business Investment Incentive Act of 1980.

That legislation, through the addition of

Sections 2(a)(46) through 2(a)(48) and 54

through 65 of the Investment Company Act

and the addition of Section 202(a)(2) and

amendment of Sections 203(b )(3) and 205

of the Investment Advisers Act of 1940

(Investment Advisers Act), was designed to

accommodate the special characteristics

of business development companies

(also known as venture capital companies

and small business investment companies). Special regulation was created to:

(1) permit public business development

companies increased flexibility to issue

debt and other senior securities; (2) provide

incentive compensation to internal

management or external advisers;

(3) narrow prohibitions regarding transactions which involve indirectly affiliated

persons of the business development

company; and (4) clarify or change certain

other regulations which would otherwise

apply to business development companies

as closed-end investment companies.

In order to implement this legislation,

the Commission undertook several regulatory initiatives. The Commission adopted

rules that would:

(1) permit certain transactions between

a business development company, as

newly defined in the Investment Company

Act, and a company controlled by it or

certain affiliated persons of such controlled

company;I39 and

(2) permit a business development

company to acquire the securities of and

operate a wholly-owned small business

investment company.v'?

The Commission also adopted, on an

interim basis, three forms to be used

by business development companies to

notify the Commission of their status under

the Investment Company Act Form N-6F,

the notice of intent to file a notification

of election; Form N.54A, the notification

of election of business development

company status; and Form N-54C, the

notification of withdrawal of election.':" As

a part of the same-release, the Cornrmssion

also made public the views of the Division

as to: (1) the existing forms that should

be used by business development

companies to register their securities under

the Securities Act and the Exchange Act;

(2) the disclosure that would be appropriate

to inform investors about the special characteristics of business development

companies. Finally, the Commission with.

drew two outstanding rule proposals

(Rule 3c-2 under the Investment Company

Act142 and Rule 205-3 under the Investment AdviSers Act143) because the subject

matters of those rules were comprehensively addressed by the legislation.

Investment Advisers Act Study

The Division continued its cornprehensive review of the Investment Advisers

Act and the rules, regulations and administrative practices under It, with an aim

towards determining whether the existing

regulatory structure is adequate in light

of the dramatic growth of the advisory

industry in recent years.

As a foundation for this review, the investment adviser study group is compiling a

comprehensive profile of the investment

advisory industry based upon analysis of

information filed with the Commission in

investment adviser registration applications.

39
In July 1981, the Commission published,

in question and answer format, certain

interpretive positions of the Division

regarding the revised integrated disclosure and reporting requirements for

investment advisers.l'" On the same date,

the Commission proposed certain amendments to these requlrernents.!" The

revised disclosure and reporting requirements, which became effective on July

31, 1979, and the interpretive release and

proposed amendments were based on

experience with the revised requirements.

The proposed revisions would substantially

reduce the burden of compliance with

these requirements for a significant

number of investment advisers byeliminating the requirement that these advisers file

an unaudited balance sheet with the

Cornrnissron with their registration

application.

In August 1981, the Commission

published the views of the staff regarding

the applicabihty of the Investment Advisers

Act to financial planners, pension consultants, and other persons who, as an

integral component of other financially

related services, provide investment

advisory services to others for cornpensation.l46 The statement of staff VIews

generally sets forth long-standing inter.

pretive positions of the staff as to the circumstances under which persons providing such services would be investment

advisers under the Investment Advisers Act

and thus subject to the registration requirements of the Act.

Significant Applications and

Interpretations

Heizer Corporation-On July 7, 1981,

the Commission granted an application,

under Section 57 (aX4) of the Investment

Company Act and Rule 17d-1 thereunder,

to Heizer Corporation, a business development company. This order was the first to

be granted by the Commission pursuant to

the Small Business Investment Incentive

Act. The order granted to Heizer Corpora40

tion permitted it to provide for its officers

and employees a Simplified Employee

Pension Plan, qualified under Section

408(k) of the Internal Revenue Code. The

Commission granted the application

noting that the pension plan is subject

to the fiduciary requirements and selfdealing prohibitions of the Employee

Retirement Income Security Act of 1974

and the reporting and disclosure requirements of the Internal Revenue Code. The

Commission also placed weight on the fact

that Section 408(k) of the Internal Revenue

Code was enacted by Congress to provide

small businesses with a less burdensome

and expensive alternative to the establishment of a pension plan qualified under

Section 401 of the Internal Revenue Code.

Investment Company Institute-On

January 23, 1981, the staff advised the

Investment Company Institute that it would

not recommend that the Commission take

any enforcement action if an investment

company purchased certificates of deposit

issued by members of the Federal Deposit

Insurance Corporation or the Federal

Savings and Loan Insurance Corporation

having a level of assets less than the

specified minimum amount of assets

required by the investment company's

investment policy. The staff recommended

this no-action position, subject to certain

conditions, in order to remove impediments preventing investment companies

from investing in certificates of deposit

of small banks and savings and loan

associations.

Walter Untermeyer, Jr.-On January

14, 1981, Walter Untermeyer, Jr.

(Untermeyer), a shareholder of Fidelity

Daily Income Trust (the Fund), filed an

application requesting an order of the

Commission determining that two of the

disinterested trustees of the Fund are

controlled by and interested persons of the

Fund's investment adviser. The named

trustees, the Fund, and the investment

adviser opposed the Commission's

exercise of jurisdiction over the application,

contending that essentially the same issue
was raised in a shareholder derivative suit

that Untermeyer had filed against the Fund

in the United States DIstrict Court of

Massachusetts alleging that the Fund had

paid excessive fees to the adviser.

After considering briefs subrrutted by

Untermeyer, the Trustees, the Fund, the

investment adviser, and the Division In

this matter, the Cornrrussion decided to

accept jurisdiction over the application.

The Commission held that, since the deter.

mmation sought in Untermeyer's apphcation would not necessanly be decided in

the course of the district court's disposition of the issues raised in Gnterrneyer's

lawsuit, the doctrine of comity did not require the Commission to defer to the court,

Institutional Disclosure Program

The Commission's institutJonal dis.

closure program, adopted pursuant to

Section 13(f) of the Exchange Act, has

been in operation for over two years, Under

the program, money managers that fall

within the definition of an "Institutional

investment manager" contained in Section

13(f) (5) of the Exchange Act, and that

meet certain critena set out In Rule 13f.1

under the Exchange Act, file reports on a

quarterly calendar basis on Form 13F.

Among the institutional investment man.

agers that typically meet the requirements

of Section 13(f) and file Form 13F reports

are investment advisers, banks, and In'

surance companies. Those managers reo

quired to file Form 13F reports disclose

certain equity holdings of the accounts

over which those managers exercise investment discretion. This year over 900 institutional investment managers have reported

on Form 13F secunty holdmqs which total

almost $500 billion dollars.

Form 13F reports are made available to

the public at the Commission's Public Reference Room promptly after filing. Also

available for public inspection at the Public

Reference Room are two tabulations of the

information contained In Form 13F reports

filed with the Commission. The first of the

tabulations includes a listing, arranged

according to the individual security held,

showing the number of shares of that security held and the name of the money manager reporting the holding. The second

tabulation is a summary listing, also

arranged according to the individual security, showing the number of shares of that

security reported by all institutional investment managers filing reports. The tabulations are normally available between ten

days to two weeks after the end of the 45-

day period for filing Form 13F reports for a

particular calendar quarter.

Both tabulations are produced by an independent contractor selected through the

competitive bidding process. The contractor provides its services to the Com'

mission without charge, and is required to

make a variety of specified tabulations available to the public at reasonable prices within 10 days after receipt of the reports. The

Independent contractor also produces and

offers for sale to the public a magnetic

tape containing the Information included in

the two tabulations.

Form 13F reports are not required to be

filed in machine readable form. The Com.

mission decided not to adopt such a form

of reporting after receiving public com.

ments in 1979 and determining that managers would find it unduly burdensome to

employ uniform computer systems for the

purpose of filing Form 13F in machine

language.

41

The disclosure requirements of the

Federal secunties laws, includinq the issuer

registration and reporting requirements,

are aimed at maintaining high standards of

integrity In United States secunties trading markets. Stnct requirements imposed

on market professionals, such as brokerdealers and Investment advisers, are likewise designed to assure that Investors may

rely on the integrity of securities transactions. It is the task of the Cornrmssion's

enforcement program to assure that these

high standards of integrity are in fact adhered to. To do this, the Cornrrussion

maintains a surveillance of the secunties

markets. Its pursuit of violations of the

Federal securities laws is intended both

to provide remedial relief in particular

situations and to deter others who rmqht

otherwise be tempted to engage In similar

violations.

The Commission's enforcement program aims at maximizing the lirruted resources available to It in maintaining a

strong and effective presence in those

areas WIthin its jurisdiction, Substantial

efforts are devoted to co-ordinating enforcement activities with self-regulatory

organizations and state and other Federal

agencies. In addition, civil damage actions,

which have the effect of supplementing the

Commission's enforcement efforts, are

brought by private parties based upon VIolations of the Federal securities laws.

The enforcement actions described In

this section are illustrative of trends in

enforcement activities encountered In the

past year. They also indicate the rnaqrutude

of the Commission's enforcement reponsibilities and the variety of Cornrrussion

responses adapted to the needs of particular situations.

Set forth below is, first, a summary of the

sanctions and remedies available to the

Enforcement Program

Commission in dealing WIth enforcement

matters. (Table 33, "Types of Proceedmqs", outlines In detarl vanous types of proceedings which the Comrnissron may

pursue.) Following this is a summary of

some of the SIgnificant enforcement

actions brought in the 1981 fiscal year.

Sanctions and Remedies

The Federal secunties laws provide

adrrunistrative, civil and cnrrunal remedies

for violatlons of those laws. Sanctions In

administrative proceedings for mdlviduals

subject to the Cornrmssion's regulatory

jurisdiction may range from the irnposinon of a censure to the barring of a secunties professional from engaging In

business In the industry. Issuers of secuntres subject to the penodic reporting

provisions of the Federal secunties laws

may be subject to proceedings under

which the Comrrnsslon may find that they

have failed to comply WIththose provisions

In this type of proceeding the Commission

may order such issuers to comply with

those provistons upon such terms and

conditions as it may specify. The CIvil

remedy usually available to the Com.

mission IS the entry of a Federal court

ordered injunction barring future VIolations.

In addition, courts often enter orders pro.

vidIng for other equitable relief, such as

disgorgement of profits qained from VIolative actrvmes, restitution, or the appointment of special agents or trustees to

manage or monitor the use of corporate

assets. Criminal sanctions Include fines

and Imprisonment

The enforcement provisions of the Federal securities laws are primarily remedial

in nature, and In litigating and settling

proceedinqs the Cornrmssion makes every

attempt to prevent a recurrence of VIolative activity and to rectify the result of past

43
violations. Examples of some types of relief

obtained are discussed in the summaries of

selected cases which follow. In fiscal 1981 ,

Commission actions resulted in the dis.

gorgement or restitution of over $30

million.

In the majority of its cases, the Com.

mission is able to settle with respondents or

defendants on terms which secure neeessary and appropriate remedial relief.

Generally, respondents or defendants who

consent to such settlements do so without

admitting or denying the factual allegations

contained in the Commission's complaint

or order for proceedings. Unless otherwise

noted, in the discussion of the illustrative

cases which follows, it should be assumed

that settlements achieved were upon that

basis. In addition use of the phrase, violations of the Federal securities laws, includes allegations of both direct violations

and the aidmg and abetting of such viola.

tions.

Insider Trading

The Commission monitors, investigates,

and, where appropriate, brings enforcement actions in cases involving the purchase or sale of securities by persons in

possession of material, non-public informabon. The Commission works closely with

the reqrstered securities exchanges and the

National Association of Securities Dealers

(NASD) in uncovering and developing

such cases.

During the past year, many of the insider

trading cases initiated by the Commission

involved trading in non-public mformation

conceming tender offers or other potential

changes in control of an issuer. Several

actions also involved the misuse by professionals of non-public information.

SEC v. FinAmerica Corporation and

Jorge E. Csrniceror" - This action, alleging violations of the antifraud provisions of

the Securities Exchange Act of 1934 (Exchange Act), was filed against FinAmerica

Corporation, the then largest shareholder

of Riggs National Bank of Washington,

D.C., and Jorge E. Camicero, president of

44

FinAmerica, who was at that time also a

director of the bank. The complaint alleged

that while nonpublic negotiations were

being held conceming the sale (at a substantial premium) of Riggs stock held by

FinAmerica and others, the director pur.

chased Riggs stock, recommended the

purchase of Riggs stock to others, and

attempted to include the stock purchased

by himself and others in the negotiated

sale. The court enjoined the defendants

and ordered disgorgement of profits

amounting to $150,000.

SEC v. Banca Della Svizzera ltaliana,

et al.l48-On March 27, 1981, the Commission filed a complaint against Banca

Della Svizzera ltaliana (Banca), Irving Trust

Company and "certain purchasers of call

options for the common stock of St. Joe

Minerals Corporation" (Purchasers). The

complaint alleged that defendant Pur.

chasers had violated the antifraud and

tender offer provisions of the Exchange Act

by purchases of call options for the common stock of St. Joe Minerals Corporation

(SJO) based on material nonpublic information conceming a tender offer for

SJO by a subsidiary of Joseph E. Seagram

& Sons, Inc. The alleged purchases were

made by defendant Banca, a banking institution located in Switzerland. The complaint alleged that over 1,000 option con.

tracts for over 100,000 shares of SJO stock

were purchased, and that the increase in

price of SJO stock upon the announcement of Seagram's tender offer resulted

in a profit to the purchasers of over $1

million.

The court imposed a Temporary Restraining Order freezing $2 million of the

assets of Banca and Purchasers. At the end

of the fiscal year, litigation was continuing.

SEC v. Daniel H. O'Connell, Arthur D.

Tenners'-« The Commission filed a complaint against Daniel H. O'Connell and

Arthur D. Tanner,allegmgthattheyviolated

the antifraud provisions of the Exchange

Act by purchasing the common stock of

Catalina Savings and Loan Association on

the basis of material non-public informa-
tion concerning a proposed tender offer for

all of the outstanding shares of Catalina

common stock by D. W. Ludwig. O'Connell, a practicing attorney, and Tanner, a

business executive, reside in Tucson,

Arizona.

The Commission's complaint alleged

that O'Connell and Tanner learned from a

director of Catalina that Catalina's board

of directors had voted unanimously to reo

commend that Catalina's shareholders

accept a tender offer for all of the out.

standing shares of Catalina common stock.

The complaint further alleged that O'Connell and Tanner traded in the common

stock of Catalina while in possession of

material, non.public information without

disclosing such information.

The court entered final judgments of per.

manent injunction against O'Connell and

Tanner and ordered them to disgorge profits of $17,800 and $32,375, respectively,

which were derived from the purchase of

Catalina common stock. This matter was

referred to the Commission by the market

surveillance staff of the NASD.

SEC v. Howard L. Davidowitzl50- The

Commission filed this complaint against

Howard L. Davidowitz, a former principal

in the accounting firm of Ernst &Whinney,

Chairman of the firm's Retail Industry Com.

mittee and National Director of its Retail

Consulting Group. The complaint alleged

that Davidowitz violated the antifraud pro.

visions of the Exchange Act by the pur.

chase and sale of common stock of Drug

Fair, Inc. based on non-public information

concerning the proposed merger of Drug

Fair and Gray Drug Stores, Inc. This in.

formation was allegedly obtained in connection with services performed by Ernst &

Whinney for Gray Drug Stores, Inc., relating to the planned merger.

Davidowitz's purchase and sale of stock

of Drug Fair, Inc. resulted in a net profit of

over $45,000. He was enjoined by the court

and ordered to disgorge that profit.

SEC v. Frank H. Wyman; SEC v. Frederick Wyman, JP51-ln this case the Commission filed two separate complaints

alleging violations of the antifraud pro'

visions of the Exchange Act based on trading on non-public information obtained,

directly or indirectly, from a paralegal

employee of a New York law firm. In each

instance, the non-public information concemed proposed tender offers by clients

of the firm. The defendant in the first action

was a pnvate investor. In the second action

the defendant was a former registered representative of a broker-dealer firm.

In the first action, the Commission

alleged that the defendant traded on

material non-public Information relating

to the interest of Blue Bell, Inc. In making

a tender offer for Jantzen, Inc. In that case

the court entered an order of permanent

injunction, and ordered disgorgement of

over $99,000.

In the second action, the Commission

alleged that the defendant traded on

material non-public information relating to

the interest of Phillips Petroleum Co. in

making a tender offer for the stock of

Crown Zellerbach Corporation. The Commission also alleged that, by disclosing

such Information to the defendant, the

paralegal had breached a duty to her em.

ployer law firm and its client, Phillips

Petroleum Co., to keep such information

confidential. The court entered an order

of permanent injunction against the defendant.

In announcing each action, the Commission acknowledged the assistance provided to the Commission staff by the Stock

Watch Division of the New York Stock

Exchange (NYSE) during each investigation.

SEC v. Carlo M. F1orentino152-On

September 23, 1981, the Commission

filed a complaint against Carlo M. Florentino, alleging violations of the antifraud

provisions of the Exchange Act. Florentino

is a former partner of a New York law firm,

and a former associate of two other New

York law firms.

The Commission's complaint alleged

that commencing on or about October II,

1977, Florentino effected transactions in

45
the securities of certain publicly held com.

panies while in possession of material non.

public information which he had obtained

in confidence relating to, among other

things, the possible acquisition of these

companies through tender offer or merger

transactions. The Commission alleged that

as a result of such transactions, Florentino

realized a net profit of approximately

$450,000, that Florentino effected these

transactions while associated with two law

firms, and without following various polIcies and procedures of those law firms.

At the end of the fiscal year, litigation was

conbnuing.

Changes in Corporate Control

In recent years there has been a signifi.

cant increase in corporate mergers and

acquisitions, and in the novelty of techniques used to accomplish these trans.

actions. Maintenance of the confidence of

investors in making decisions conceming

investments in companies engaged in

such transactions depends upon assuring

full, fair and timely disclosure of such transactions. Commission actions in this area

are aimed at assuring investor protection as

mandated by the Federal securities laws.

DISCUSsedbelow are examples of Commission actions seeking sanctions against

false and misleading disclosure in Com.

mission filings relating to tender offers,

proxy contests, and "going private" trans.

actions.

SEC v. El Dorado International, Inc.,

Dei/ O. Gustafson, et al.153- The Com.

mission filed a complaint against EI

Dorado Intemational, Inc., Deil O. Gustafson, Roger F. Newstrum, InnTemational,

lnc., Hotel Conquistador, Inc., doing

business as the Tropicana Hotel and

Country Club and Consolidated Financial

Corporation (CFC) alleging violations of

the antifraud provisions of the Federal

securities laws. In addition, the Commission alleged that EI Dorado and certain

other defendants violated the reporting

and recordkeeping provisions of the Ex.

change Act.

46

The Commission alleged that, from

September 1978 to June 1979, the de.

fendants engaged in a scheme under to

which InnTemational attempted to merge

with EI Dorado through an exchange of

InnTemational stock for EI Dorado stock,

resulting in the control of EI Dorado passing to Gustafson; that Gustafson diverted

$1,960,000 of EI Dorado's funds by causing the advance of such funds to Gustaf.

son, CFC, InnTemational and Conquistador for the benefit of Gustafson and hIS

related corporations; that advances of

certain funds from EI Dorado to InnTemational and Conquistador, and certain ections taken toward effecting the attempted

merger of InnTemational and EI Dorado,

occurred without prior approval from the

Nevada gaming authorities and in violation

of the Nevada gaming laws; and that the de.

fendants made, or facilitated the making of,

numerous false and misleading representations and disclosures In filings WIth the

Commission, to EI Dorado's board of

directors and shareholders, to the public

and others in furtherance of such scheme.

The court entered final judgments of

permanent injunction against the defendants. The court ordered Conquistador, or

Gustafson, if Conquistador was unable, to

reimburse EI Dorado the sum of $83,781

for expenses incurred in connection with

matters alleged in the Commission's com.

plaint. (It was represented that over $2

million had already been repaid to EI

Dorado.) The court also, among other

things, ordered Gustafson and Newstrum

not to become associated in certain specified capacities with public companies for

four years and two years, respectively. The

action remains pending against Jay Brown,

Esq., another named defendant alleged to

have VIolated the antifraud provisions of

the Federal securities laws.

SEC v. CuR Clothiers, Inc.I54- The

Commission filed a complaint against C&R

Clothiers (C&R) alleging violations of the

antifraud and reportIng provisions of the

Exchange Act. The complaint alleged that

C&R distributed tender offer materials to its
shareholders which failed to disclose,

among other things, that the tender offer

was designed to benefit the two largest

shareholders of C&R, and that a principal

purpose of the tender offer was to allow

these shareholders to dispose of at least

70,000 shares of C&R stock at a price

above the prevailing market price. It was

also alleged that C&R did not disclose that,

in connection with the tender offer, bonuses were to be paid to these two shareholders, and that these bonuses totalling

$198,000 siqruflcantly affected the earnings per share and book value of C&R

stock. The complaint also alleged that on

three occasions the prior counsel for C&R

had advised the company that the proposed transaction raised issues of corporate waste and possible breach of fiduciary

duties.

The court ordered entry of a final judgment of permanent mjunction against

C&R and ordered it to comply WIth its

undertaking to: provide C&R shareholders

with tender offer materials contaming

all of the mforrnatron required under the

tender offer provisions of the Federal

securities laws; retum shares previously

tendered unless shareholders indicated

that they still desired to tender their shares;

and institute procedures reasonably

designed to ensure C&R's future com.

pliance with the tender offer provisions of

the Federal securities laws.

SEC u. Cooper Industnes, Inc.155- The

Commission filed a cornplamt against

Cooper lndustnes, Inc. (Cooper) alleging

violations of the antifraud provisions of

the Exchange Act in connection with a tender offer for the securities of CrouseHinds Company.

The Commission's complaint alleged

that, prior to the public announcement

of Cooper's exchange offer-merger proposal for Crouse-Hinds, eight arbitrageurs,

two trusts, one individual shareholder,

and a group of officers and directors,

holding in the aggregate approximately

3.6 million of Crouse-Hinds shares, had

entered into agreements and understandings with, and made commitments to,

Cooper with respect to their Crouse-Hinds

stock, that in connection therewith,

Cooper made false and misleading disclosures conceming the facts and circumstances pertaining to and the nature

of such agreements, understand mqs and

commitments; and that false and misleading statements were made to representatives of the New York Stock Exchange.

In addition to entenng a final judgment

of permanent injunction, the court ordered Cooper to comply with Its undertakmg

to release shareholder commitments to

Cooper WIth respect to Crouse-Hinds, not

to seek similar future commitments otherwise than pursuant to a registered cash

tender offer or exchange offer, and to make

public disclosure of all material facts concerning the judgment

SEC u. Diagnostic Data, lnc., et al.I56-

The Commission filed a complaint against

Diagnostic Data, Inc. (DOl), "DOl Shareholders for Action" (Dissidents), Gerry

L. Dagess, an officer of 001, and Robert C.

Bartels, DOl's largest shareholder, alleg109 VIolations of the proxy provisions of the

Exchange Act. The Commission also

alleged that 001 and Bartels violated the

reporting provisions of that Act.

The Commission's complaint alleged

that 001 failed to disclose in its annual

reports and proxy statements that at least

three of its former officers and directors

had substantial amounts of 001 common

stock pledged with or for the benefit of

Bartels, and were receiving substantial

fees for the arrangements. Bartels was

charged with failing to report, on Schedule

130, beneficial ownership of over five

percent of the common stock of 001. The

complaint also charged that 001 failed to

adequately and accurately make disclosure

concermng a large loan made by 001 in

December 1979. In addition, the complaint alleged that Dissidents and Dagess

filed or caused to be filed false proxy

matenals 10 connection with a recent proxy

contest for control of 001.

47
In addition to the entry of injunctions

against all defendants, the court ordered

001 to comply with its undertaking to

maintain certain procedures designed to

assure compliance WIth Section 14(a) of

the Exchange Act, including adoption,

implementatJon and maintenance of an

independent audit committee. Bartels

also undertook to file a Schedule 130.

In the Matter of Tidelands CapitaL

Corporetion't'>- The Cornrnissron in.

sbtuted proceedings against Tidelands

Capital Corporation (TCC) under Sec.

tion 15(c) (4) of the Exchange Act to de.

termine whether TCC failed to comply with

Section 13(e) of the Exchange Act with

respect to the acquisition of an affiliated

life insurance company, Westem Resources Life Insurance Company (WRL),

by one of TCe s wholly-owned subsidiaries.

Among other things, the Commission

found that TCC failed to make the required

filings and disclosures conceming the

acquisition of WRC, a transaction in which

cash was paid to affihated shareholders of

WRL and common stock to unaffiliated in.

vestors. The Commission determined that,

as a result, the investing public and

the unaffihated shareholders of WRL were

not provided information conceming,

among other things, a requested valuation

and a discussion in reasonable detail of

the matenal factors upon which TCC deter.

mined that the transaction was fair to unaffiliated security holders of WRL and the

weight assigned to each such factor.

The Commission ordered TCC to: comply with the requirements of Section 13(e)

of the Exchange Act; comply with its

undertakings to establish procedures to

ensure future compliance with Section

13(e); and comply with its undertaking to

provide unaffiliated WRL shareholders

with full disclosure conceming the pro.

posed acquisition and an offer of $3.10 per

former share of WRL common stock in exchange for the shares into which the WRL

shares were converted. If all such former

WRL shareholders elected to exchange

their shares, TCC would expend an aggre.

48

gate of approximately $906,000 plus

expenses.

Financial Reporting

The reporting of meaningful financial

information by secunties issuers is fundamental to the concept of full and fair dis.

closure to investors. Much of the Commission's enforcement effort has historical.

Iy been devoted to the detection and suppression of fraud, or failure to comply with

the reporting requirements, in the financial

reportJng area.

SEC v. World-Wide Coin Investments,

Ud.l58- The Commission filed a com.

plaint against World-Wide Investments, Ltd.

(WWC), Joseph H. Hale, chairman of the

board, chief executive officer and president of WWC, Floyd W. Seibert, a director

of WWC, and Joe Gregory Jones, a former

vlce-president and director of WWC, alleging violatJons of the antifraud, report109, recordkeeping, internal controls,

tender offer and proxy solicitation requirements of the Federal secunties laws.

The complaint alleged that defendants

conduct related to the July 1979 takeover of WWC, a business engaged in buying and selling precious coins, metals and

bullion. The complamt also alleged, inter

alia, that defendants perpetrated a twoyear fraudulent course of business related

to the operation of WWC by the individual

defendants, and numerous transactions

between WWC and the individual defendants.

A final judgment of permanent injunction was entered against Jones. The court

ordered remaining defendants to abide

by their undertakmgs to comply with the

Federal securities laws pending the out.

come of the htigation, to cause an accounting firm to conduct an audit of all loans and

repayments of same between defendants

World-Wide and Hale, and for Hale to

deliver 65,000 shares of WorldWide

common stock to be held in escrow pend.

ing further order of the COUrt.159

At the close of the fiscal year, litigation

was continuing.
SEC v. Tesoro Petroleum Corporeiiori'"

- The Commission filed a complaint

against Tesoro Petroleum Corporation

(Tesoro) alleging VIolations of the reporting and proxy provisions of the Exchange

Act.

The Commission's complaint alleged,

among other things, that Tesoro and others

had engaged in a course of business In connection with acquirinq matenal foreign

assets, attempting to acquire matenal

foreign assets, or conducting foreign business, whereby they made or caused to be

made substantial payments to "finders"

and "consultants". These payments, WIth

respect to multi-million dollar contracts,

were disproportionate to the busmess

obtained or the services rendered, were

not usual or customary and were made

under circumstances such that Tesoro was

unable to account for or satisfy Itself as

to the final drsposition of such corporate

funds. It was alleged that, in certain 10-

stances Involving payments made 10 connection with foreign business activities,

the circumstances of the payments mdicated that the funds, m whole or In part, may

have been directly or indirectly transferred

to foreign government officials or pohtical leaders, and that, in another instance, a

significant sum was retumed by such a

recipient to Tesoro during the pendency of

an internal Tesoro investigation of questionable or Improper payments. It was

further alleged that, knowinq that such a

course of business exposed matenal

assets of the company to a sigmficant and

continuing nsk of loss, Tesoro failed to

make timely and adequte disclosure of this

course of busrness, the unaccountabrhty

of such payments, and the particular nsk

that such course of business posed to

matenal assets and revenues of the com.

pany.

The court entered a final judgment of

permanent injunction against Tesoro, and

ordered Tesoro to comply WIth undertaklOgs to, among other things: appoint a

new director, satisfactory to the Commission, to chair the audit committee of

the board of directors; direct the audit

committee to formulate and implement

policies and procedures designed to prevent occurrence of matters of the nature

alleged In the complaint and satisfy itself as to whether any fees hereafter paid

In connection with conducting foreign

business were paid directly or indirectly

to any govemment official or employee;

not make payments, or offers of payments,

directly or mdrrectly, to any foreign offiCial

or any foreign pohtical party or leader

thereof for purposes of influencmq an

act of such officials or parties or inducmq

them to use their mfluence to affect a

foreign government act or decision: and

keep accurate books and records and file

WIth the Commission a current report on

Form 8-K attachmg a copy of the executed

consent, final judgment and complaint In

this matter.

In the Matter of CGA Computer AssOCI'

ates, Inc. 161_ The Cornrrussion instituted

administrative proceedings, under Section

8(d) of the Securities Act of 1933 (Securrties Act), to determine whether a stop

order should be ISSUedto suspend the

effectiveness of a registration statement

filed WIth respect to CGA Computer

Associates, lnc., a Delaware corporation

engaged In the computer consulting and

software marketing business.

It was alleged that the registration statement contained matenally false and misleading information concermng the

accounting treatment of a business combination, because it treated the combinetion as a pooling of interests under circumstances where such accounting treat.

ment was contrary to generally accepted

accounting principles,

These proceedings were pending at the

close of the fiscal year.

SEC v McLouth Steel Corp. 162_ The

Commission filed a complaint against McLouth Steel Corp. allegmg violations of the

antifraud and reporting provisions of the

Federal securities laws.

The Cornrnissron's complaint alleged

that McLouth filed certain periodic reports

49
with the Commission which contained false

and misleading statements of material

facts regarding its financial condition and

omitted information which is required by

Commission rules and regulabons to be

included in such reports. The Com .

.mission's complaint specifically alleged:

improprieties in connection with McLouth's

improper use of the equity method of

accounting; failure to disclose certain significant litigation; and improper recognition

and reporting of profits resulting from

certain inventory transactions and valuations.

The court entered a final judgment of

permanent injuncbon and ordered Mc.

Louth to comply, among other thmgs, With

Its undertaking to. direct its audit com.

rruttee to review McLouth's financial controls and accounting practices and all

future reports containing financial statements filed with the Commission; and send

to its shareholders certain mformabon regarding Its use of the equity method of

accountmg and its effect on McLouth's pre.

tax earnings in the years m question.

SEC v. Litton Industries, Inc. 163_ The

Commission filed a complaint against

Litton Industries, Inc. allegmg violations

of the reporting provrsions of the Exchange

Act in connection With Litton's accounting

for costs in excess of contract values on

commercial and military shipbuildinq contracts between 1971 and 1978, and drsclosures relating thereto.

Among other things, the cor-iplaint

alleged that Litton did not have adequate

grounds for deferring, for financial reporting purposes, $128 million of excess costs

incurred in connection with two com.

mercial shipbuilding contracts awarded in

1968. It was alleged that such deferral was

inappropriate in light of the nature of the

excess costs, the lack of accounting

records sufficient to segregate start-up

costs from contract operating costs, and

the lack of assured revenues against which

to absorb the costs. The complamt also

alleged that losses incurred in connection

With a shipbuildmq contract for the U.S.

50

Navy, which rose from approximately $75

million in 1973 to approximately $500

million in 1978, should have been recognized prior to 1978. At that time, Litton provided for a pretax loss of $200 million as a

result of a settlement with the Navy, which

settlement, according to Litton, contained

incentive provisions which significantly reduced the loss.

The court entered a final judgment of

permanent mjunction and also ordered

Litton to comply with certain undertakings

made by the company. The first undertaking provided for audit committee review,

for a penod of three years, of cost deferral

and revenue recogmtion determinations

relating to certain military procurement

contracts where substantial overruns and

disputes are mvolved. The second undertaking provided for LItton to retam an independent consultant to examine and

report on the procedures by which the company estimates and accounts for costs in

excess of contract values with respect to

military procurement contracts of its ship.

building divisron, and to make recornmendabons to be implemented by Litton

With respect to such procedures.

Regulated Entities

Ensuring compliance with the Federal

securities laws by regulated entities is one

of the most important objectives of the

Commission's enforcement program. The

major regulated entities include brokerdealers, investment advisers and investment companies, as well as self-regulatory

organizations such as the registered

national securities exchanges and the

NASD.

In fiscal 1981, cases involving brokerdealers constituted almost half of the 68

administrative proceedings brought by the

Commission, These proceedings the great

majority of which are conducted by the

Commission's regional offices, are effective in obtaimng compliance with applicable statutory provisions or Commission

rules and in establishing high standards

of conduct on the part of broker-dealers.
SEC v. WACO Financial, Inc. and J.

Jerome Prevatte 164_ The Commission

filed a complaint against WACO FInancial,

Inc., a Michigan broker-dealer reqistered

with the Commission, and J. Jerome

Prevatte, WACO's president, treasurer and

majonty shareholder, alleging violations of

the broker-dealer reqistratlon and regulation provisions of the Exchange Act. The

complaint alleged, among other things,

that WACO was not quahfied to do bUSIness pursuant to the Cornrnission's rules

because it had been expelled from membership in the NASD. The NASD expulsion

was based on WACO's VIolations of the

NASD Rules of Fair Practice in 1979 and

1980. The district court entered an order

of preliminary injunction against the defendants.

In a separate action, defendants were

permanently enjoined earher in the fiscal

year from further VIolations of the net

capital, recordkeeping, customer protection and reporting provisions of the Exchange Act. 165

In the Matter of Paine, Webber, Jackson

& Curtis, Inc.l66- The Commission instituted proceedings, pursuant to Sections

15(b), 19(h) and 15(c)(4) of the Exchange

Act, against Paine, Webber, Jackson &

Curtis, Inc. (Paine, Webber), a registered

broker dealer, and Paine Webber, Inc.

(PWO, parent corporation of Paine,Webber.

The Order for Proceedings alleged violations of the reporting and broker-dealer

recordkeeping provisions of the Exchange

Act. It was alleged that the violations were

a consequence of operational comphcations that occurred in connection WIth the

integration into Paine Webber's operating

system of approximately 100,000 customer accounts of Blyth Eastman Dillion & Co.,

Inc., pursuant to the December 31, 1979

merger of Blyth, Eastman Dillon into PWI,

and that the VIolations were compounded

by a sustained high level of securities trading activity.

The Commission censured Paine,

Webber and ordered various remedial relief

against Paine, Webber and PWI,Including a

\

drrective that, through ,December 31, 1981,

Paine Webber was to re,.,ew and report on

Its operational perform ance and comphance with specific regu. atory provisions

and customer complaints, a',ndsubmit certain quarterly reports for re,lIew by its independent auditors. Another directive provided for PWI's audit committee to review

and report In writing on whether all reports

required to be filed with the staff by Paine,

Webber and Its independent auditors pursuant to the Cornrnission's order, indicated

that Paine, Webber was in compliance WIth

the terms, condmons and undertakings

agreed to by Paine, Webber under these

proceedings.

SEC v_Barclay Financial Corp 167 - The

Commision filed a complaint against Barclay FInancial Corp., a reqistered brokerdealer, and Dennis E. Greenman, Its senior

VIce-president, alleging VIolations of the

antifraud provisions of the Federal securities laws in connection WIth the offer and

sale of nationally traded common stock,

stock options or limited partnership interests in entities formed for the purpose of

such secunnes.

The complaint alleged that misstatements and orrussions were made concerning, among other matters, the risks of the

Investment, the return on the investment,

profits and losses, and the nature of the

positions of securities and free credit cash

balances in the accounts. The complaint

also alleged that it was falsely stated that

securities positions In accounts were liquidated each day, leaving a cash balance.

The complaint alleged that, in fact, the accounts, which totalled about $40 million,

were in the names of limited partnerships

and corporations whose beneficial Interests

were held for an undetermined number of

investors

The distnct court entered temporary restraining orders against the defendants.

The court also appointed a trustee over the

assets of Barclay, and prohibited Green.

man from transferring or disposing of any

personal assets or assets of customers of

Barclay In hIS possession or control. with

51
the exception of cust, ornery and necessary

liVIng and medical e~nses and certain expenses necessary .to preserve assets.

SEC v. Gslie; Jher, Boyle & Cook, lnc.,

and Michael Jl Boylanl68- The Commission filed a C(Jmplalnt against Gallagher,

Boylan & COok, Inc., a registered brokerdealer, and, Michael J_ Boylan, alleging

VIolations '.:If the broker-dealer financial

responsibihty and record keeping provisions of the Exchange Act.

The court entered a Judgment of preliminary injunction. Pursuant to an apphcation filed concurrently by the Securities

Investor Protection Corporation, the court

also entered an order appointing a trustee

for the liquidation of the business of Gallagher, Boylan & Cook, Inc., under the

Secunties Investor Protection Act of 1970.

In the Matter of Reserve Management

Cotporetiorr'i-« The Commission Institued administrative proceedings pursuant to Section 9(b) of the Investment

Company Act) of 1940 (Investment Company Act) and Sections 203( e) and (f) of the

Investment Advisers Act of 1940 (Investment Advisers Act) against Reserve

Management Corporation, and Reserve

Management Company, both registered investment advisers, and two individuals. The

Order for Proceedmgs alleged that respondents violated the antifraud provisions

of the Securities Act, the Exchange Act and

the Investment Company Act in connection

with disclosures made by The Reserve

Fund, Inc., a registered investment

company, which did not specifically disclose problems conceming computer and

telephone malfunctions affecting the ability

of Reserve to consistently make same day

payments upon redemption of Its shares.

The Commission censured the respondents. It also suspended the registrations of

the two investment advisers and suspended respondents from association with

an investment adviser or investment company for a period of 12 months if, prior to

December 31, 1981, they wilfully fail or

cease to comply with certain undertaktngs.

Respondents undertakings provided

52

that they will not violate or aid and abet any

violation of the Federal securities laws. Respondents also undertook to use their best

efforts to cause Reserve to employ an inhouse legal counsel acceptable to the

Commission's New York Regional Office

(NYRO); to file periodic reports containing

certain information with the NYRO; and to

provide equipment and/or services to

Reserve in an amount not less than all investment advisory fees earned by the investment advisorys from Reserve during a

20-day period.

SEC v. First Independent Stock Transfer Agent Inc., and Terry E. Kirchner70

-

The Commission filed a complaint against

First Independent Stock Transfer Agent,

Inc. (FISTA), a Denver, Colorado securities

transfer agent, and Terry E. Kirchner,

president of FISTA, alleging violations of

the recordkeeping and reporting provisions

of the Exchange Act in connection with the

tumaround requirements imposed on

transfer agents for all secunties classified

as routine items. The complaint also alleged violations of the antifraud provisions of

the Federal securities laws in connection

with the purchase and sale of the securities

of various Issuers for which FISTA was the

transfer agent.

Among other things, the complaint

alleged that FISTA and KIrchner failed

to disclose to shareholders, prospective

shareholders and issuers of such securities,

among others, that FISTA was insolvent,

had over-issued securities, and failed to

cancel securities.

At the motion of the Commission, the

court appointed a temporary receiver to

take charge of the assets of FISTA and to

operate the business. At the close of the

fiscal year, litigation was proceeding.

SEC v American Birthright Trust

Management Coo, Inc; et al_l7I- The

Commission filed a complaint against

American Birthright Trust Management

Co., Inc. (ABTM), a Florida investment

adviser, Richard J. Sluggett, ABTM's

founder, president and principal shareholder, Richard S. Freedman, ABTM's ex-
ecutive vice-president, and various other

defendants, some of whom served as

directors or trustees of two investment

companies for which ABTM acted as investment adviser.

The Commission alleged that all defendants violated the requirements imposed on directors by the Investment Company Act, that ABTM breached the fiduciary

duties imposed on fund advisers by that

Act; and thatABTM, Sluggett and one other

defendant violated the antifraud provisions

of the Securities Act and the disclosure provisions of the Investment Company Act.

The Commission's complaint principally

involved the compensation paid to ABTM

by the funds for advisory and related services. It was alleged that the compensation

paid to ABTM by the funds was excessive in

light of the services actually performed by

ABTM, and that most of the advisory

services provided to the funds had been

provided by a "sub-adviser" retained by

ABTM, rather than by ABTM itself. For

1978 and 1979, the aggregate fees paid

to ABTM pursuant to the advisory and service contract, based upon one percent of the

average net asset value of each fund, exceeded $2 million. Dunng the same period,

ABTM paid the "sub-adviser" approximately $125,000.

The complaint also alleged, among

other things, that the defendant director/

trustees approved the advisory contracts

with ABTM without requesting information

which was reasonably necessary to

evaluate such contracts.

The court entered judgments of permanent injunction against all defendants.

Among other things, it also ordered ABTM

to pay $465,000 to the two investment

companies, and it ordered ABTM, Sluggett

and Freedman to make all efforts to ensure

that the boards of the funds include a

majority of disinterested director/trustees

with no previous affiliation with any of the

defendants; an independent counsel will be

appointed to assist the disinterested

director/trustees in their duties and responsibilities; the disinterested director/

trustees, with the assistance of the independent counsel,v 1y' review the advisory

and service contract, ~ with ABTM and

thereafter renew, tern 'inate, or seek to

renegotiate such contracts to the extent

they deem appropriate; ;ABTM, Sluggett

and Freedman will maintah'i documents reflecting investment recornrnendatrons,

research and analysrs, and t)le independent counsel reviews of the recordkeeplnq

systems of ABTM.

In the Matter of Government Securities

Management Co.172; In the Matter of

Fundlink Information Services-The

Commission instituted proceedings

against Government Securities Management Company (GSMC), pursuant to Section 9(b) of the Investment Company Act,

and aqamst Fundlink Information Services

(Fundlink), pursuant to Section 203(e) of

the Investment Advisers Act. GSMC was the

investment adviser to First Variable Rate

Fund for Government Income, Inc., a registered Investment company, and Fundlink was the transfer dividend disbursing

and shareholder servicmq agent for the

fund.

The Order for Proceedings alleged that

GSMC and Fundlink violated the recordkeepmg provisions of the Investment Company Act and that GSMC VIolated the antifraud provisions of the Investment Advisers

and the Secunties Acts. Speofically, the

Order alleged that the books and records of

the fund were maintained In an Inaccurate

and untimely manner, and that GSMC

failed to disclose to the board of directors

and shareholders of the fund that the fund

was not accurate and timely in maintaining

its books and records.

The Commission censured GSMC and

Fundlink, and ordered them to comply

WIth vanous undertakings, including dally

reconciliations of the shares outstanding

according to Fundlink and records. and

submissions of reports on such reconciliations to the fund's audit committee on

at least a quarterly baSIS

Hot Issues Market

During the past two years. the Com53
rrussion has becon ~ concemed with a hot

issues market 10 cated primanly in the

Denver, Colorad<jJ region. ThIs hot issues

market has beerj charactenzed by the promotion and ~,ale of highly speculative

stocks in mitital offerings for a rnlrurnal

pnce, followed by extremely active trading

and rapid I,:>rice increases in the aftermarket. The securities, which are usually

traded over-the-counter, have been primarily securities of companies involved in

energy development and production.

In the Matter of SynthetIC Fuels, Inc.173

- The Commission Initiated a proceeding

pursuant to Section B(d) of the Securities

Act, to determine whether a stop order

should be issued suspendmg the effectiveness of the registration statement of an

offenng of securities of Synthetic Fuels,

Inc. The registration statement represented

that 42 percent of the $4.12 million of

net proceeds of the offering was to be

used to construct a plant in Rupert, Idaho,

to produce denatured ethanol for use in

making gasohol. The Commission found,

among other things, that the reqistration

statement, which contained numerous ref.

erences to the proposed construction

of the plant, farled to disclose: the fact

that studies were still underway, the results

of which would help determine whether the

proposed plant would be built; the plans

for use of the net proceeds earmarked

for the plant If that plant were not constructed; and the fact that this portion of the offermg was in effect a "blind pool."

The Commission entered and irnmediately withdrew its stop order against

the registration statement based on the

undertaking of Synthetic Fuels, lnc., which

the Cornrmssion accepted, to deliver a

copy of the corrected prospectus to all

persons who, to its knowledge, received

copies of the previous misleading prospectus, as well as to any purchaser, 72

hours prior to sendmg a confirmation to

such purchaser.

SEC v. The Investment Bankers, lnc., et

al.I~4-The Cornrmssion filed a complaint

against Investment Bankers, Inc. (lBI) a

54

Denver, Colorado broker-dealer, its

president and a director and office manager alleging violations of the registration,

antifraud and broker-dealer recordkeeping

provisions of the Federal securities laws.

The complaint alleged, among other

things, that IBI, which underwrote a public

offering of 20 million shares of Chipola Oil

Corporation common stock at 10 cents per

share, dominated, controlled and artifically

inflated the price of Chipola Oil in the

trading market. The complaint also alleged

that, as a result of its violative activities, IBI

was insolvent, owed over $5 million to

public investors, and had a net capital

deficiency of over $6 million.

Upon the filing of the complaint, the

court approved a Stipulation and Order

which provided that IBI would not engage

in further business. The Commission also

suspended over-the-counter trading in

Chipola stock for a ten day period.

Foreign Issuers

Over the past 1B months a dramatic increase has been noted in the number of

foreign issuers whose securities are traded

in the United States. Most of these issuers

are natural resource companies located in

Australia and the westem provinces of

Canada, and the trading market in their

securities closely resembles that of the

domestic hot issues market. This trading

activity is marked by dramatic upward price

and volume movements shortly after trading commences and in the absence of

accurate and adequate corporate disclosure.

Along with participating in a review of the

regulatory framework applicable to securities of foreign issuers and related tradmg markets, the Commission staff has con.

suited and cooperated with officials of

vanous foreign govemments, as well as

domestic self-requletory organizations, in

order to attempt to provide co-ordinated

remedial action in appropriate cases. In

addition, the Commission has pursued

several enforcement actions in this area,

one of which is discussed below.
In the Matter of Ferrovanadium Corporation, N.L175- The Commission instituted administrative proceedings against

Ferrovanadium Corporation, N.L., pursuant to Section 12(j) of the Exchange Act.

Simultaneous with the Institution of the proceedings, the Commission announced a

I Oday suspension in the over-the-counter

trading of the securities of, and the American Depositary Receipts issued against the

securities of, Ferrovanadiurn pursuant to

Section 12(k) of the Exchange Act,

The Commission took these actions

based upon allegations that Ferrovanadium had failed to comply with the registration and reporting provisions of the

Exchange Act. The Commission found,

among other things, that Ferrovanadium

had: stated that it owned mineral deposits

which contained "proven reserves" of 27

million tons when Ferrovanadium had insufficient basis for such claim; stated that

it owned mineral deposits which contained

60 million tons of "inferred reserves" when

Ferrovanadium had Insufficient basis for

such claim; and presented financial statements which did not Include sufficient

detail conceming deferred mining exploration costs, and the company's pohcy

regarding future amortization of such

costs, and otherwise failed to meet applicable requirements.

The Commission ordered Ferrovanadium to comply with its undertakings to,

among other things: comply with the registration and reporting provisions of the

Exchange Act; use its best efforts to distribute copies of this Order to all beneflcial

and record owners of the secunties of, or

American Depository Receipts issued

against the securities of, Ferrovanadium

who are either residents or citizens of the

United States; appoint an agent for service

of process in the United States for Ferrovanadium; retain and maintain independent counsel in the United States not

unsatisfactory to the Commission's staff to

advise Ferrovanadium with respect to its

future filings with the Commission and to

advise the company with respect to compliance WIththe Federal securities laws; and

cause any future geologic, feasibility and

mining studies, prepared with respect to

any properties In which Ferrovanadium has

an interest, to Include findings In accordance with applicable Cornrnission standards.

Distribution Schemes

A variety of schemes have been used to

avoid registering public offerings of

securities with the Commission, and such

schemes often involve purported claims of

exemptions under the securities laws.

Discussed below is an example of a

scheme to use the bankruptcy laws to sell

stock Into the market which was restncted

from being sold to the pubhc without compliance with the registration and disclosure

requirements of the Federal secunties laws.

SEC v. Sam S. Brown, Jr., and Hentage

Investment Group, Inc.J76- The Commission filed a complaint seeking to enjoin Sam S. Brown, Jr., of Atlanta, Georgia,

and Heritage Investment Group, Inc.,

located In Atlanta, Georgia, which IS

wholly owned by Brown, from further violations of the registration, antifraud, and

broker-dealer registratJon provislons of the

Federal secunties laws.

The complaint alleged that Brown and

Heritage had embarked upon a scheme to

purchase a financially troubled business,

acquire options to purchase unregistered

stock issued by public companies, transfer

the options to the financially troubled company, cause the troubled company to file

for bankruptcy and petition the bankrputcy

court for permission, pursuant to Federal

bankruptcy law, to sell the stock underlying the options without registration

under the Securities Act. If the court had

approved the petition, the bankrupt entity

would have exercised the options and sold

the underlying stock to the general public,

using the proceeds from the sale of the

stock to pay for the stock. The Commission

alleged that the principal purpose of this

55
scheme was to evade the registratIon

requirements of the Securities Act and

thereby realize a profit equal to the differ'

ence between the pnce of restricted stock

and registered stock of the same issuer and

class.

Brown and Hentage attempted to

accomplish this scheme through a bankruptcy proceeding initIated and pursued

by a subsidiary of Heritage. After the Com'

mission intervened in the bankruptcy pro'

ceeding and opposed the petition to sell

unregistered securities, the petition was

Withdrawn and the bankruptcy proceedmq

was terrrunated.

The complaint also alleged that, in the

process of acquiring the options to purchase restricted stock, Brown and Heritage

made false and misleading statements to

the option sellers concerning the purpose

of the purchases and the means by which

the purchase would be financed. Finally,

the complaint alleged that Brown and

Heritage engaged in the business of buying

and selling securities for their own

accounts as a part of a regular business

without registration as a securities dealer

under the Exchange Act

Final judgments of permanent injunction were entered against the defendants.

The Commission acknowledged the co.

operation of the Director of the Alabama

Securities Commission in promptly bring'

Ing this matter to the Commissron's ettention and in providing valuable assistance.

Municipal and Government

Securities

Municipal securities Include bonds

issued by state and municipal governments

as well as industrial development bonds

issued by authorities which do not have

taxing powers. Over 38,000 entities may

Issue bonds which are tax-tree and exempt

from the registration provisions of the

Securities Act Government securities

trading includes government and govern.

ment guaranteed securities, such as for'

56

ward contracts for securities guaranteed

by the Government National Mortgage

Association (GNMA).

Trading in these securities has increased

significantly in recent years. While the

Securities Acts Amendments of 1975

added registration requirements for

municipal broker-dealers and created

the Municipal Securities Rulemaking

Board, the trading markets for these

securities have historically been unrequlated markets, and subject to potential trading abuses. Due to the continuation of

questIonable issuance and trading practices in this area, the Commission's en.

forcement interest has also continued.

Sec v. Calhoun County Medical Fecitity, Inc, et al. 117_ The Commission

filed a complaint against Calhoun County

Medical Facility, Inc., Bullington-Schas &

Co., lnc., a broker-dealer registered with the

Commission, and certain other defendants

alleging violations of the antifraud pro.

visions of the Securities Act in connection

with the offer and sale of $1.8 million of

first mortgage revenue bonds to finance

the acquisition of the Calhoun County

Hospital in Calhoun County, Mississippi.

The complaint alleged, among other

things, that annual financial statements

concerning the past operations of the

hospital, which indicated an inability to

service the bond offering, were not in.

cluded in the offering circular. Rather, pro

forma financials were included without

discussion of the significantly divergent

prior financial history.

The court entered final judgments of per.

manent injunction against the defendants.

One defendant, a practicing attorney who

served as bond counsel to the offering, was

also ordered to comply with his under.

takings concerning procedures to be

followed in connection with future bond

issues.

In a related proceeding, the Commission

ordered administrative proceedings, pur.

suant to Sections 15(b) and 19(h) of the Ex.

change Act, against Bullinqton-Schas Co.,

Inc., its president and an employee, all of
whom were defendants in the injunctive

proceeding. The Order for Proceedings

alleged violations of the antifraud provisions of the Securities Act, and the

failure by the president of Bullington-Schas

& Co., Inc. to reasonably supervise other

employees In connection with the offer and

sale of Calhoun County Medical Facility,

Inc. revenue bonds. The firm was censured

and ordered to comply WIthits undertaking

to institute and maintain adequate due

diligence and compliance procedures. The

individual respondents were suspended

from association WIth any broker-dealer,

and were ordered to comply with their

undertakIngs to engage in a course of

study for municipal bond princtpals.'?"

The Commission also ISSUeda report,

pursuant to Section 2I(a) of the Exchange

Act, in which it discussed the role of the

attomey who, acting as bond counsel to the

underwriter of the Calhoun County Medical

Facility, Inc. bond offering, rendered an

opinion on the offering circular for that

offering. The Cornrrussion concluded that

the attorney's conduct, without havmq conducted any inquiry of his client as to the

underlying facts on which his opinion was

predicated, failed to satisfy applicable

standards.l'"

In the Matter of Bevill, Bresler [;

Schulman, lnc., et allBO-On December

12, 1980, the Commission ordered the institution of public admimstrative proceedings, pursuant to Sections 15(b) and

19(h) of the Exchange Act, against Bevill,

Bresler & Schulman, Inc., a registered

broker-dealer located in Newark, New

Jersey, two unregistered corporate affiliates, the firm's president, two former

supervisors, a trader, and twelve former

salesmen. The Order for Public Proceedings alleged VIolations of the antifraud and

broker-dealer bookkeepmq provisions of

the Federal securities laws.The Order alleged that in addition to makIng misleading

statements concerrnnq, among other

things, the nature and risks of trading In

forward transactions In govemment securities, certain of the respondents caused

unauthorized trades, engaged In so-called

adjusted trading, induced and approved

unsuitable transactions in U.S. Government issues and guaranteed securities. The

Order also alleged failures to supervise on

the part of certain respondents.

The Commission, upon entering findings of the alleged VIolations, censured the

firm and its affiliates and ordered varying

sactions against the individual respondents, including suspensions and bars

trom serving in a supervisory capacity. The

Comrnission ordered the firm and its

affiliates to comply with their undertakings

to refrain from engaging In foward transactions in government securities for 60

days; refrain from opemng any new branch

offices for SIX months; and undertake a

thorough review of compliance procedures

and the implementation thereof.

SEC v.Cantor Fitzgerald Agency Corp ,

et al.181-On October 29,1980, the Commission filed a complaint alleging that

Cantor Fitzgerald Agency Corp. and certain

present or former officers and directors

VIolated the antifraud provisions of the

Federal securities laws in connection with

transactions in U.S Govemment guaranteed securities, including GNMA and

Federal Home Loan Mortgate Corporation

(FHLMC) securities.

The Commission alleged, among other

things, that certain defendants caused

Cantor to enter into numerous adjusted

trades with several thrift Institutions, including savings and loan associations and

at least one credit union, and that Cantor

falsely confirmed purchases of GNMA and

FHLMC securities from customers at

above-market prices without disclosing

that such purchases were conditioned

upon contemporaneous sales to such

customers of like securities at abovemarket prices. These transactions were

allegedly used to defer recognition of

losses which occurred when the market

prices of the securities held by or committed to be purchased by customers declined, in the hope that such market prices

would rise and eliminate or reduce cus57
torners' losses, The Commission further

alleged that in many instances Cantor also

required customers to pay fees to cover

any loss to Cantor on such transactions,

and that such fees were falsely stated to be

refundable,

Anal judgments of permanent mjunc.

non were entered against defendants.

Cantor was also ordered to submit for the

approval of the Commission staff a plan

to distribute any remaming net assets

and to make a full and complete account.

ing to the Cornrnission staff when the

staff deemed appropriate.

Energy and Tax Benefit Related

Cases

Due to the tax consequences of certain

investments such as those In energy-reo

lated products or real estate, a multi-billion

dollar market exists for tax shelter securities. This market provides many opportumties for abuses which threaten the Integnty of the securities markets. These

abuses may take the form of misappropriation and misuse of assets by insiders and

promoters and rmsrepresentatron of

material facts to investors.

The Commission has uncovered significant abuses, including the sale of unregistered secunties masquerading as taxshelter programs, which have resulted in

the commencement of enforcement actions.

Investors In these offerings may be con.

tacted initially in connection with nationWide, long-distance telephone solicitation

campaigns. The offerings often are the

subject of fraudulent solicitation state'

ments. Individuals are often persuaded to

make an Investment on the basis of false

statements or omissions conceming,

among other things: the amount of bUSIness to be conducted by the Issuer; the

risks associated with the investment; the

experience of the issuers' principals; and

the use of investors'funds. One of the major

inducements to investors is the purported

availability of special tax benefits.

58

SEC V. Bishop Investment Corporation,

et aL.J 82_ The Commission filed a complaint against Bishop Investment Corporation, SIXother corporate defendants and

two Individuals, alleging violatrons of the

registratIon and antifraud provisions of the

Federal secunnes laws.

The complaint alleged that, since

Apnl 1976, the defendants offered and

sold to over 2,000 investors more than $80

million of unregistered secunties In the

form of tax sheltered limited partnership

interests. Accordmg to the complaint,

the defendants formed over 150 limited

partnerships in which interests were sold

to the public. The seven affiliated defendant

companies, owned and controlled by the

two Individual defendants, acted as general

partners of the limited partnerships. Funds

raised through the sale of interests in the

limited partnerships were then invested in

other limited partnerships which purported.

Iy owned or were purchasing real property

in the form of hotels, apartment houses, or

other busmess properties.

The complaint further alleged that the

defendants made omissions and misrepresentatIons conceming, among other

thmgs: the use of investor proceeds; the

amount and nature of fees to be paid to the

general partners; the financial status of

each issuer of limited partnership interests; the availability of promised tax

benefits; the properties in which funds were

invested; and the commmgling of investor

funds.

The court entered a final judgment of

permanent injunction against each of the

defendants.

SEC v. Gerald L. Rogers. et a1.183- The

Commission filed a complaint against Internanonal Monetary Exchange; SA (!ME)

of Panama and Woodland Hills, California,

Gerald L. Rogers and 18 others alleging

violations of the registration and antifraud

provisions of the Federal secunties laws.

The charges were brought In connection

with the offer and sale of unregistered

secunties, labelled "Gold for Tax Dollars",

Involving interests in purported placer gold-
mining "claims" in Panama and French

Guiana and related financial and mining

services,

The complaint alleged, among other

things, that, In connection with the offer and

sale of" Gold for Tax Dollars" securities. defendants falsely represented material facts

to investors including, Inter alia. that investors would obtain 400 or 500 percent

Federal income tax "write-offs'' and substantial; "gold profits." The complaint also

alleged that defendants failed to disclose

to investors, inter alia, that: the prorrused

development expenditures upon which the

tax "write-offs'' were based had not and did

not need to be made; the amount of

rnorues Invested for development was far

in excess of necessary expenditures; explorations and imtial operations found

and produced gold in materially lower

quantities than represented; and WIth respect to investments In Panama, the lessor

of the "claims," had not acquired an In'

terest in the properties at the time they were

leased to Investors in 1978.

The complaint also alleged that defendants failed to disclose to Investors that

Rogers, who controlled the "Gold for Tax

Dollars" offering, had been permanently

enjoined from violating the Federal securities laws, and that IME had been held in

civil contempt of a Federal District Court

for failure to obey the court's order to comply with a subpoena duces tecum issued by

the Cornrmssion seeking Information con.

ceming investments in "Gold for Tax

Dollars" securities.

On November 12, 1980, the court entered a preliminary injunction against !ME by

default. A contested preliminary injunction

was entered against Gerald Rogers on

April 6, 1981. As of ti close of the fiscal

year, the matter reman led in litigation.

SEC u. Cable/Tel Cotporeuon, et al.

184_0n December 17. 1980. the Commission filed a complaint against 22 affiliated companies (Cable/Tel companies) and

various other defendants alleging violations

of the registration and antifraud provisions

of the Federal securities laws. The Cable/

Tel companies provide services relating to

the operation of cable television (CATV)

systems located in 17 communities situated in four states.

The complaint alleged that defendants

offered and sold to over 700 investors

approximately $88,100.000 worth of unregistered securities in the form of tax

sheltered investment interest in cable

television systems. The complaint further

alleged that the defendants made misrepresentations and omitted to state

material facts In connection with the offer

and sale of the Investment Interests concerrunq, among other things: the use of

Investor morues: the cost of constructing

the investors' CAlV systems; the payment

of commissions, the timing of the completion of construction of the CAlV systems; the availabrhty of promised tax benefits; projections of subscriber saturation

and potential profits; the ownership by the

Cable/Tel companies of CAlV franchises;

restnctions against investor ownership of

their CAlV systems, the abihty of the In'

vestors to independently operate the CA1V

systems; and the financial condition of the

Cable/Tel cornparues,

The court entered a final Judgment of

permanent injunction against the Cable/

Tel cornparnes and eight other defendants.

The court also ordered the Cable/Tel companies to, among other things: retain an independent accountant to determine and

report on the use of proceeds obtained

from Investors; pay to Investors an "adjustment" of rnornes, If any, determined by

the accountant to have been used for purposes unrelated to the investment Interests

in CA1V systems. and appoint an "Advisory

Committee" composed of five Investors to,

among other things, examine and review

the accounting, financial and operating

controls with respect to the operation of

their CA1V systems At the close of the

fiscal year, hnqation against remaining

defendants was contmumq.

SEC u. Herman B. Rothbard, et a1.'85-

The Commission filed a complaint against

Hawaii Nevada Investment Corporation

59
(Hawaii Nevada) and five other defendants

alleging violations of the registration and

antifraud provisions of the Federal securities laws. Certain defendants were also

charged with violations of the broker-dealer

registration provisions of the Exchange

Act.

The complaint alleged that in connection

with the offer and sale, primarily to residents of Hawaii, of units in "general partnerships" relating to real estate in Las

Vegas, Nevada, the defendants made misstatements and omissions conceming,

among other things: the risk and rewards of

the ventures; the value of the real estate;

the fees that would be paid the promoters;

and the use that would be made of investors' funds. It was also alleged that

defendants, who obtained approximately

$15 million from about 1,200 investors, improperly commingled investors' funds and

misappropriated in excess of $2 million

of these funds.

On August 17, 1981, the cour t entered

final judgments of permanent injunction

against four defendants, including Hawaii

Nevada, and prehrninary injunctions were

issued against the two remaining defendants. Utigation was pending at the close of

the fiscal year.

SEC v. Edward G. Heller et aUB6- The

Commission filed a civil injunctive action

against Edward Heller and affiliated companies of certain partnerships controlled by

him alleging violations of the registration

and antifraud provisions of the Federal

securities laws. In Its complaint the Commission alleged that, in connection with the

sale of interests in limited partnerships,

Heller, personally and through corporations under his control, misappropriated

substantial amounts of investors' funds.

The complaint also alleged that false and

misleading statements were made conceming, among other things: the commingling of the assets of the different partnerships; the amount of the tax deductions

to which the investors would be entitled;

the economic viability of the partnerships'

operations; and the use of assets of partner60

ships created in earlier years. On October

15, 1980, a Temporary Restraining Order

was entered freezing defendants' assets,

and appomting a special agent to take control and manage corporate assets, and

perform an accounting.

On November 10, 1980, the court entered a final judgment of permanent injunction against the defendants, and imposed other equitable relief. A special agent

was appointed to manage the defendant

companies. Heller was barred from

association with a broker, dealer or investment adviser, and ordered, among other

things, to provide the Commission with 20

days notice before participatIng in any

offer or sale of tax shelter securities to

which the Federal securities laws would

apply,

In addition, the Commission brought an

action on November 5, 1980, against

Robert M. Adler, who acted as tax counsel

for the various limited partnerships syndicated by Heller. This action alleged that

in his tax opinions, which were contained in

the offering circulars, Adler violated the

registration and antifraud provisions of the

Federal securities laws The court entered a

final judgment of permanent injunction

barring him from rendering opinions on

securities and tax issues, and from practicing before the Commission, with a right to

apply for relief after five years, The court's

order further required Adler, on receiving

inquiries from investors, to fumish them

with all court papers filed in the action and

to inform the investors that his tax opinions

cannot be relied upon.t'"

Related Party Transactions

Adequate disclosure to investors requires that investors be fully apprised of the

use of corporate funds. Fundamental to

the relationship between an investor and

management is the expectation that an

issuer's assets will be used for the benefit

of the Issuer and not for the personal enrichment of the manager.

Use of the issuer's assets in transactions

with management or other related parties,
however reasonable and appropriate, must

be fully disclosed. Though issuers are

generally aware of the requirements to

fully disclose related-party matters, problems have arisen in instances in which

members of management have attempted

to conceal their personal enrichment resulting from such transactions.

SEC v. Crown Cork [; Seal Co., Inc.I88-

The Commission filed a complaint against

Crown Cork & Seal Co., Inc. alleging viola.

tions of the antifraud, reporting and recordkeeping provisions of the Exchange Act in

connection with payments of cash and

loans to and for the benefit of Herbert G.

Paige, an officer of General Cinema Corporation, responsible for can and bottle

cap purchases from Crown Cork and

other suppliers. The alleged transactions

included payments totalling about $5.9

million, loans totalhng $1.75 million, and

the financing of the purchase of an airplane. The Commission alleged, among

other things, that Crown Cork, which recorded certain payments as payments

to General Cinema for competitive allowances, should have known, and was reck.

less in not knowing, that the payments

were for the benefit and use of Paige.

The court entered a final judgment of

permanent injunction, and ordered Crown

Cork to comply with undertakings regarding the maintenance of certain procedures

relating to: verification of the status of recipients of competitive allowances or

similar payments; authority of the recipient

to receive the payments; receipt and form

of delivery of the payments; and customer

approval of loans or extensions of credit

to officers, directors, employees or agents

of the customer. Crown Cork also made

undertakings conceming, among other

things, the composition of the audit committee of its board of directors, and a

review and investigation to be conducted

by the audit committee of matters alleged

in the complaint

In a separate action, the Commission

filed a complaint against Paige and Pasha

Service Corporation, which was allegedIy formed and controlled by Paige, alleging

violations of the antifraud reporting and reo

porting provisions of the Exchange Act in

connection with these transactions. As of

the close of the fiscal year, this action remained in Iitigation.189

SEC v. Herbert F. Hewettl90- The Commission filed a complaint against Herbert F.

Hewett of Oklahoma City, Oklahoma,

alleging violations of the antifraud proVIsionsof the Federal securities laws.Specifically, the complaint alleged that Hewett, In

his IRAand Keogh accounts, owned certain

certificates of deposit ISSUedby Guaranty

Trust Company, Ponca City, Oklahoma,

and that he sold those certificates of de.

posit to Guaranty with knowledge of

Guaranty's precarious financial condition

and prior to the disclosure of such information to Guaranty's other investors. The

court ordered Hewett to comply with his

undertaking not to violate the antifraud

provisions of the Securities Act and to pay

to Guaranty's court-appointed trustee the

sum of $12,155.84, representing the pro.

ceeds that he received from the sales of the

certificates of deposit

In the Matter of Michigan ttetione! Corporationl91

- The Commission instituted a

public administrative proceeding, pursuant

to Section 15(c)(4) of the Exchange Act,

to determine whether MIchigan National

Corporation (MNC) had violated the reo

porting provisions of the Exchange Act in

connection with the disclosure of sale and

leaseback transactions with related parties

since MNC became a public company In

1972. The Commission found, among

other things, that MNC had failed adequately to disclose all of the circumstances under

which its subsidiaries engaged in the practice of selling bank premises to, and leasing

them back from, certain officers and

directors of MNC including its president

and chief executive officer and MNC subsidiary banks and their affihates.

The Commission found that none of the

disclosures over the years conveyed

adequate information conceming the

circumstances involved in the transactions.

61
The Commission also found that in certain

years MNC failed adequately to disclose:

the terms of the purchases and leases; that

certain properties were bought from the

MNC banks; that almost all were sold either

to related parties or persons who had prior

business relationships with MNC subsidiary

banks; and that other MNC banks financed

several of the purchases. MNCs dis.

closures did not adequately discuss the

benefits to the related parties in these

transactions, including the customary con.

sequences of sale-leaseback transactions

to the MNC banks or to the related parties.

Further, the Commission found that MNC

indicated that the terms of the transactions

were comparable to arm's-length transactions when, in fact, there was no evidence

that the MNC banks made any attempt to

determine whether the related parties received terms more favorable to them than

the MNC banks would have had to give had

they made an effort to market the sale.

leaseback packages to unaffiliated persons. Also, while MNC disclosed that the

banks engaged in leasebacks to avoid fixed

assets limitations, it did not disclose that

other options were available to the banks

to avoid the limitations but were not pursued.

The Commission ordered MNC to comply with various undertakings, includmg

the establishment of a committee of the

board of directors to review these transactions and to direct an independent consultant to prepare a report concerrung

them; to publish a summary of the report

and the review committee's recommendations in MNCs next proxy statement; and

to review disclosures conceming related

party transactions over the next five years.

The Foreign Conupt

Practices Act

The Foreign Corrupt Practices Act of

1977 [Sections 13(b)(2), 30A and 32(c)

of the Exchange Act) was signed into law in

December 1977. That Act prohibits issuers

from, among other things, corruptly mak62

ing payments or gifts to officials of foreign

govemments in order to induce such

officials to use either their authority or influence in order to assist the Issuer in

obtaining or retaining business. The Act

also requires issuers to make and keep

accurate books and records and to devise

and maintain systems of internal accounting controls which provide reasonable

assurance that certain statutory objectives

are met.

In fiscal 1981, five injunctive actions

brought by the Commission included

allegations of violations of Section 13(b)

(2) of the Exchange Act (the recordkeep109 and intemal controls provisions) in

addition to violations of the antifraud

provisions of that Act. Three of these actions (SEC v. Crown Cork and Seal, SEC v.

El Dorado tnternetionel, lnc., and SEC v.

World-Wide Coin Investments, Ltd.) are

discussed elsewhere in this report. Summarized below is an action brought by the

Commission alleging violations of the antibribery provisions.

SEC v. Sam P. Wallace Company, lnc.,

et a[.192-The Commission filed a complaint against Sam P. Wallace Company,

Inc., Robert D. Buckner, Chairman of the

Board and Chief Executive Officer of

Wallace, Alfonso A. Rodriguez, Executive

Vice President and a director of Wallace,

allegmg violations of the antifraud, reporting, proxy and antibribery provisions of the

Exchange Act. The complaint alleged that,

for a penod from about April 1980 to April

1981, Wallace, Buckner and Rodriguez

made payments from corporate funds of

at least $1391 million to a foreign official

to aid Wallace in procuring and maintaining a contract m a foreign country. The

court entered judgments of permanent

injunction against Wallace and Rodriguez.

The court also ordered certain ancillary

relief, including the appointment of a

special committee to investigate and report

on matters alleged in the complaint and

other matters. As of the close of the fiscal

year, the action was pending against Buckner.
Criminal Reference and Co-ordinatlon

with Other Authorities

As demonstrated in various actions discussed above, the Commission both

maintains its own intellIgence capabilitIes

and works closely with other Federal

agencies and foreign and local authorities

In order to share informatIon and coordinate activities of mutual concern.

The Commission maintains particularly

close liaison with the Department of

Justice, the various U.S. Attorney's offices

throughout the country, other law enforcement authorities, as well as certain state

regulatory agencies such as the Gaming

Commissions for the States of Nevada

and New Jersey in dealings with organized

crime, a major focus of the Commission's

enforcement activities. Such matters involve entities and areas in which persons

reputed to be associated with organized

crime are believed to be involved, and may

involve persons who have committed

prior violations of the Federal securities

laws or situations in which the suspected

violative conduct is particularly egregious.

An example of this co-ordination was the

conviction, this past year, of a witness In

a private Commission investigation for givIng perjured testimony to the Commission

staff.193 Subsequent to his testimony, but

pnor to the indictment, the Commission

had instituted a CIvil injunctive action

alleging that this witness and others had

manipulated the market price of the stock

of Micro-Therapeutics, Inc. As of the close

of the fiscal year, the injunctive action remained in Iitigation.l94

In fiscal 1981, the Commission referred investigative files, or granted access

to them, to the Department of Justice and

other agencies in over 80 cases.

In the area of civil cooperation, along

with numerous other actions resulting

from the co-operative efforts of various CIvil

law enforcement officials and the self-regulatory organizations, in fiscal 1981, the

Commission brought its first injunctIve

action jointly with the Commodities Futures Trading Commission (CFTC). This

case is discussed further below.

SEC & CF7C v. T&D Management

Company, et a1195- The Commission,

acting jointly WIth the CFTC, filed a complaint against T&D Management Company, a registered commodity trading

advisor and commodity pool operator in

Provo, Utah, and the pnncipals and sales

manager of T&D.

The Cornrnissron's complaint alleged

that the defendants violated the registration and antifraud provisions of the Federal

securities laws In connection with the

issuance of notes and investment contracts of T&D to raise funds for T&D's

trading in comrnodmes futures contracts.

The CFTC alleged that defendants engaged in a course of business in violation

of the antifraud provisions of the Commodity Exchange Act applicable to commodity pool operators and commodity

trading advisors.

The complaint alleged that the defenddants made/numerous rrusrepresentations to investors, including: false statements of the combined assets of T&D and

its principals, and false statements that

one T&D principal had experienced profits

averaging 65 to 70 percent for each of the

last eight years; that a portion of investor

funds would be held separately in money

market funds; that investments in T&D did

not Involve a high degree of risk and were

guaranteed against loss; and that the investors' retums would be paid from tradIng profits, when in fact there were no profits and Interest payments to investors

came from, money currently being invested.

Final judgments of permanent injunction were entered against the defendants.

63

Other Utigation and Legal Work

The Commission, through Its Office of

the General Counsel, participates m a sub.

stantial amount of litigation m addition to Its

enforcement actions. This litigatIon includes appellate cases before the Supreme

Court and Federal courts of appeals, where

the Commission appears as a party or as

amicus curiae, and district court litigation

where the Commission, its Commissioners, or its employees are party defendants.

Commission litigation, whether as a party

or as amicus, often involves questions of

great significance conceming the proper

interpretation and scope of the Federal

securities laws. The Commission's pettierpation in this litigation has served to

strengthen the investor protectIons afford.

ed by the securities laws and the enforce'

ment and regulatory programs Ithas under.

taken to achieve that goal. The Office of

the General Counsel is also involved in important legislative and regulatory work. The

following is a summary of some of the important actions which were litigated in the

past year.

Scope of the Antifraud Provisions

The antifraud provisions of the Federal

securities laws are the principle statutory

basis through which the Commission

seeks to protect the public against de.

ception in securitIes transactIons. The

proper scope of these statutory provisions

is a matter of continuing importance to the

Commission's litigation efforts.

During the past year, the Supreme Court

decided Rubin v. United States, a criminal

case in which the Commission worked

closely with the Department of JustIce. In

Rubin, the Court held that a pledge of

securities is a sale under Section 17(a) of

the Securities Act of 1933 (Securities Act),

which is the general antifraud provision of

the Act. Thus, the Court held that Section

17(a) affords protectIon against deceptIon

which occurs in the pledge of securities.

The Court noted that this result is consistent With the purpose of SectIon 17(a)-

to protect agamst fraud and aid the flow of

information in the public dissemination of

securities.

The question of what instruments are

securities withm the meaning of the Federal

securities laws is critical to the Cornrnission's enforcement and regulatory pro.

grams because the existence of a security

is an essential predicate to the Com.

rnission's junsdictIon. Accordmgly, during

the past year, the Commission participated

as amicus curiae in several private actions

mvolving issues with respect to the scope

of the definition of a security. Two of these

cases, Weaver v. Marine Bank, and

Schutte v. Bank of Miami, raised the issue

of whether a certificate of deposit may be a

security subject to the antifraud provisions

of the Federal securities laws.

Schutte involved certificates of deposit

issued by an off-shore bank that was operating Illegally in the United States.The district

court had ruled that they were not securities

Withinthe meaning of the Federal securities

laws because they offered only a fixed reo

tum. In its bnef before the Umted States

Court of Appeals for the Fifth Circuit, the

Commission urged that the district court

erred m focusmg on the presence of a

fixed versus variable retum, and that debttype instruments like those in Schutte are

subject to the Federal securitIes laws if

they are offered to the public as invest.

ments. The Fifth Circuit, accepting the

Commission's position, reversed the decision of the district court and remanded for

a determination of whether the certificates

of deposit were issued in an investment

context.

65
Unlike the situation in Schutte, where

Federal bankmq regulation was not present, the certificate of deposit at issue in

Weaver was Issued by a State chartered

bank that was insured by the Federal DePOSIt Insurance Corporation. The Umted

States Court of Appeals for the Third Circuit had ruled that the certificate of dePOSItwas a security because It was the functional equivalent of a long-term bond or

note issued by the bank. The Cornmission

participated m a joint amicus brief before

the Supreme Court with Federal bank regulatory agencies urgmg that, where a

certificate of deposit ISissued by a federally regulated and insured bank, the context

of the transaction requires that the anti.

fraud provisions of the Federal securities

laws not apply. At the close of the fiscal

year, this case was awaitinq oral argument

before the Supreme Court.

Securities and Exchange Commission

v. The International Mining Exchange, a

Commission enforcement action brought

in the Umted States Distnct Court for the

Distnct of Colorado, also involved the

scope of the definition of security. The

Comrrussion alleged that the defendants

were VIolating the reqistratron and anti.

fraud provisions of the Federal secunties

laws in connection WIth the sale of gold

investment programs, which the complaint

alleged were secunties m the form of in.

vestment contracts The programs, which

purportedly involved the sale of interests in

Alaskan gold mming claims In conjunction

WIth contracts to arrange for the flnancinq

and development of those claims, were represented as providinq profits both from

gold mming and from related tax deductions amounting to 500 percent of the in.

vestor's out-of-pocket investment. The

district court granted the Commrssion's

motion for summary judgment, concludmg

that the interests involved are securities and

that the promised tax benefits may be

VIewed as gIving rise to an expectation of

profits where they result from the pro.

rnoter's managenal efforts.

In another case lnvolvmq the defimtion

66

of a security, the Commission filed a brief

amicus curiae in Newkirk v. General

Electric Corporation. The district court

had ruled that an employee's interest in a

voluntary, contributory, defined benefit

pension plan was not a security. The Commission on appeal urged that such an interest was a security subject to the antifraud provisions. The case was settled,

however, prior to oral argument before the

United States Court of Appeals for the

Ninth Circuit.

In Pittsburg Terminal Corp. v. Baltimore

& Ohio R.R., the Commission submitted a

brief as amicus curiae to the United

States Court of Appeals for the Third Circuit, addressing several significant legal

issues under the antifraud provisions. The

Commission took the position that a holder

of a convertible debenture, although not

actually selling or purchasing that debenture during the relevant time period, never.

theless had standing to bnng a damage action for violations of Section lO(b) of the

Securities Exchange Act of 1934 (Ex.

change Act), which prohibits the use of

manipulative or deceptive devices in con.

nection with the purchase or sale of a

security. The Commission based its position on the ground that a convertible

debentureholders' right to convert into another security is a contract to purchase a

security subject to the protections of Section 10(b).

The Commission also took the position

in Pittsburgh Terminal that a company

with publicly traded convertible debentures

has a duty under its listing agreement

with the New York Stock Exchange to give

holders of those debentures advance

notice that a dividend will be paid on its

common stock, even though the common

stock is privately held, because the convertible debentureholders would share in

the dividend if they converted their debentures to stock prior to the time the dividend

IS declared. Finally, the Commission took

the position that, while a defendant's reliance on advice of counsel may, under

some circumstances, be a relevant factor in
determimng whether a defendant acted

with the requisite SCienter or constitute a

mitIgating factor which the court may consider in determining the appropnate

remedy for a violation of Section 10(b),

such reliance does not negate the violation or preclude a finding that the defendant acted with scienter where the evidence shows that the defendant knew that

his deceptive conduct would mislead investors. At the close of the fiscal year, this

case was pending before the Third Circuit.

Finally, In SEC v. Sheldon Moss, the

United States Court of Appeals for the

Fourth Circuit affirmed the Middle District

of North Carolina's order holding Sheldon

Moss in Civil contempt for failure to comply with a consent decree entered in a

Commission injunctive action alleging that

Moss and others had violated the anufraud and registratIon provisions of the

Federal securities laws, and requinng disgorgement of $4,500,000 of Moss' 111-

gotten gains. Moss failed to deposit the

$4,500,000 In the registry of the district

court for distribution to those who invested

In his schemes, and sold assets WIthout

prior court approval, contrary to the terms

of the consent judgment. The distnct court,

not believing Moss' claim that he was indigent at the time, held him in crvrlcontempt

and ordered him committed until he complied with the disgorgement order. The

Fourth Circurt affirmed the contempt order,

agreeing with the Commission that there

was no ment to Moss' claim of mdiqency,

and that the district court did not abuse its

discretion In ordering that Moss be committed until he purges himself of contempt

by complying with the terms of the judgment. When Moss completes his present

criminal sentence, he will be entitled to a

fresh review of the issue of hrs ability to

comply with the consent order

Standard of Culpability

Gnder the Antifraud Provisions

In a related area, the issue of scienter

continued to play an important role in the

Commission's litIgatIon during the past

year. This issue was presented In the

proceedings on remand In Aaron v. SEC,

in which the Supreme Court had ruled In

1980 that the Commission must prove

scienter under Section 17(a)(l) of the

Secunties Act, and Section 10(b) of the

Exchange Act and Rule 10b-5 thereunder,

but not under Sections 17(a)(2) and 17

(a)(3) of the SecuntJes Act. The Supreme

Court, while reservmq a decision on the

question of whether scienter encornpasses reckless behavior, remanded the

case to the United States Court of Appeals

for the Second Circuit for a determination

of whether an injunction was properly

entered by the distnct court.

On remand, the Commission urged that

the scienter standard should be construed to include reckless conduct, but that

the district court's finding of scienter was

fully supported by the record even under a

knowledge or Intent standard The Second

Circuit did not decide whether recklessness sufficed to establish scienter; holding

that there was no baSISfor disturbing the

finding of the district court that Mr. Aaron's

misconduct was intentional.

Private Rights of Action

An Important aspect of the Commission's amicus cunae parucipation IS

that of assuring availability to Injured parties

of pnvate causes of action under venous

provisions of the Federal secunties laws.

Such actions provide a vehicle through

which Injured Investors can obtain redress for violations of the secunties laws.

Moreover, Since the Commission can bring

only a limited number of enforcement

actions, and normally does not recoup Investor losses in those actions, pnvate

actions must serve as a necessary supplement to Commission enforcement actions.

The Commission has long recogmzed

that denvative actIons-the pnvate actions

brought on behalf of a corporation by one

of Its shareholders-are an Important

means by which investors protect them67
selves from violations of the Federal

securities laws. Accordingly, the Com'

rrussion participated arrucus curiae in

three cases last year in which derivative

actions had been terminated as a result of determinations by a corporation's

directors that It was not in the best interest

of the corporation for the shareholder

suit to be maintained. In each case the

district court deferred to the business judgment of the directors and dismissed the

suit

In Grossman v. Johnson, the plaintiff, an

investment company shareholder, brought

suit under Section 36(b) of the Investment Company Act of 1940 (Investment

Company Act), which provides an express

cause of action against an investment company's investment adviser and others for

breaches of fiduciary duty that result from

the charging of excessive advisory fees.

The plaintiff also alleged that the adviser

and the company's directors had violated

other provrsions of the Act by failing to

recapture excessive underwriting comrnissrons, discounts and spreads paid by

the company.

Based on the language of the statute, the

purposes underlymg Section 36(b), the

legIslative history of the provision, the

structure of the Investment Company Act,

and pnor cases which had considered the

Issue, the Commission urged the United

States Court of Appeals for the First Circuit

to hold that an action brought under Section 36(b) may not be terminated by a

business judgment determination made by

the investment company's board of directors, The Cornrmssion argued that a contrary result would destroy the mechanism

which Section 36(b) provides for shareholders to challenge the determination

made by these same directors as to

whether the advisory fee is appropnate.

With respect to the plaintiffs allegations

of VIolations of other provisions of the Act,

the Commission argued that, under the

Supreme Court's decision m Burks v.

Lasker, a court may give effect to the

directors' business Judgment decision to

68

terminate the action only if such a result

would not be inconsistent with the purposes of the Investment Company Act.

Accordingly, the Commission urged that

the Court should not defer to the directors'

business judgment unless the corporation

meets the burden of showing that: the

directors were truly independent and

capable of rendering an unbiased decrsion on behalf of the corporation; they

were fully informed of the facts relevant

to their decision: and their decision was

objectively reasonable. At the close of the

fiscal year, this case was pending before the

FIrst Circuit.

In Abramowitz v. Posner and Maldonado v. Flynn, the Commission urged that

the same three tests (independence, fully

Informed and objectively reasonable)

should be applied in evaluating business

judgment decisions by directors to terminate denvative actions alleging VIolations

by directors of Sections lO(b) and 14(a)

of the Exchange Act, and Rules 10b-5 and

14a-g thereunder. Both cases were pendIng before the United States Court of Appeals for the Second Circuit at the close of

the fiscal year.

Secondary hability under the antifraud

provisions of the Federal secunties laws is

another important area which the Commission addressed as amicus curiae during the past year. In Sharp v. Coopers &

Lybrand, an action under Section 1O(b) of

the Exchange Act, the Cornrnissron filed a

bnef In the United States Court of Appeals

for the Third Circuit urging that an accounting firm may be held liable in a private

action for damages, pursuant to the common law pnnciple of respondeat superior;

for the fraudulent conduct of an employee.

The Third Circuit had previously indicated

that this common law principle of secondary liability would generally be inapphcable

In secunties fraud actions, but had held

that the pnnciple was appiicable in cases

mvolvmq broker-dealer firms in view of the

stnct duty of supervision Imposed on those

firms. The Thrrd Circuit in Sharp extended

its broker-dealer exception to accounting
firms on the ground that accounting

firms, like broker-dealers, are under a

duty to supervise their employees.

Another area addressed by the Commission as amicus curiae involved the

issue of whether remedies available under

Sections lO(b) and 18(a) of the Exchange

Act are mutually exclusive. In Wachovla

Bank & Trust Co. v. tieuonet Student

Marketing Corporeuon; the United States

Court of Appeals for the Distnct of

Columbia Circuit agreed with the Commission's position that these remedies

are not mutually exclusive. The Court

rejected defendants' arguments that

the Implied remedy under Section lO(b) is

not available to purchasers of securities

and that this remedy does not apply to

Initial offerings of securities The Court

relied on a decision in Rossv. A. H. Robins

Co., In which the Cornrrussion previously

participated amicus cunee; arguing that

Congress could not have intended that

express remedies for particular misconduct would have such a broad pre.

elusive effect.

Federal Court Jurisdiction

Over Foreign Defendants

The Commission participated amicus

curiae in Lebman v. ASEA, which involved the circumstances under whrch a

foreign individual or entity may be sub.

ject to SUit under the securities laws In a

Federal district court. This issue IS of

significance to private parties and the Com'

mission's own enforcement program

where securities transactions involve both

foreign and domestic elements,

In Lebman, a United States Magistrate

had ruled that a foreign corporation was

not subject to suit unless the corporation

had certain minimum contacts With the

state in which the district court ISlocated.

The Commission filed a brief in the United

States District Court for the Western District

of Texas urging that a Federal court has

jurisdiction over alien defendants In a

securities law action if the defendant has

the requisite contacts Withthe United States

as a whole, regardless of the defendant's

contacts with a particular state. The district

court adopted the Commission's position

Standard of Proof in

Enforcement Proceedings

The question of which standard of

proof should be utilized In Comrrnssion

Injunctive actions and administrative pro.

ceedings-the higher "clear and convmcmq evidence" standard or the "preponderance of the evidence" standardwas another Important subject of litigation

dunng the last year. In February 1981, the

Supreme Court handed down its decrsion

In Steadman v SEC, in which It held,

in accordance with the Commission's

argument, that the standard of proof for

adjudicating administrative proceedings

before the Commission is prescribed

by Section 7(c) of the Administrative

Procedure Act (APA), and that that standard is the one traditionally utilized in CIVIl

court cases-a preponderance of the

evidence. Because the Court based ItSdecision upon the language and legislative

history of the APA, which governs adrrunistrative proceedings before all Federal

agencies, ItS reasoning should apply with

equal force to a Widevanety of adjudicatory

proceedings before the Commission and

other aqencies. In support of Its decisron,

the Supreme Court m Steadman also Cited

the Commission's long-standmg practice

of imposing sanctions m administrative

proceedings on the basis of the preponderance of the evidence standard.

In addition, the Court stated that, In

prescribmg standards for adjudicatory

proceedmgs In Section 7(c) of the APA, as

in prescribing standards for rulemakmg

proceedmgs In Section 4 of the APA, Con.

gress had established the "rnaxrmurn pro.

cedural requirements" that it was willing

to have courts impose upon agencies,

citing Its earlier decision In Vermont

Yankee Nuclear Power Corp. v. Natural

Resources Defense Council. Inc. The

Court's explicit extension of the Vermont

69
Yankee principle is likely to have a significant impact on court review of administrative adjudications made by the Commission and other agencies.

Subsequent to the Supreme Court's

decision in Steadman, the United States

Court of Ar-peals for the Fifth Circuit, In

Huddleston v. Herman [;. MacLean, held.

among other things, that the standard of

proof In private damage actions for violations of Section 1O(b) of the Exchange Act

and Rule 10b-5 should be that of clear and

convincing evidence rather than the preponderance of the evidence. The Commission, concerned that the ruhng might

be extended to Commission injunctive

actions. filed a brief amicus cunae in the

Huddleston case urging rehearing on that

issue. as well as certain other Issues. Subsequent to the filing of the Commission's

bnef in Huddleston, the Fifth Circuit

decided SEC v. First Financial Group of

Texas, lnc., holding that the Commission

need prove an Injunctive case under Section l Otb) and Rule lOb-5 only by the preponderance of the evidence. Also of note in

this case, although not related to the issue

of the proper standard of proof, was the

Fifth Circuit's rejection of First Financial's

arguments concerning the lack of jurisdiction of the district court to appoint a receiver because of the prior filing of a petition in bankruptcy. The court held that

appointment of a receiver was necessary

ancillary relief to the Commission's Injunctive action to enforce its regulatory

powers and thus was exempted from the

automatic stay provisions of the Bankruptcy Reform Act.

Scope of Commission's

Investigatory and

Enforcement Authority

The proper scope of the Commission's

investigative and enforcement authority

has been litigated in the past year. For

example, in SECv. McGoffcertain persons

engaged in the publishing business

challenged the Commission's authority to

70

enforce a subpoena issued in a Commission investigation. The district court

had upheld the subpoena, but permitted

the defendants to withhold documents relating solely to editorial policy or news

gathenng.

The Court of Appeals for the District of

Columbia Circuit rejected the respondents'

contention that the Commission's subpoenas impinged on their First Amend.

ment freedoms as newspaper publishers

and should therefore be judged under the

strict scrutiny standard. Instead, the Court

noted that newspaper publishers. like

other business enterprises. are subject to

laws of general applicability such as the

Federal securities laws. The Court cited

the traditional standard that administrative

subpoenas should be enforced where the

subpoena demands are reasonably relevant to an inquiry within the lawfully

authorized powers of the agency, point.

ing out that the Commission had shown

a "substantial relationship" between the

information it sought and a significant

govemmental interest. The Court concluded that appropriate accommodation of the

respondents' First Amendment interests

was achieved by the district court's order.

The Court also ruled that the respondents were not entitled to discovery into

the Commission's deliberative process in

conducting the investigation because they

had failed to demonstrate extraordinary circumstances which would justify a departure from the usual rule that subpoena enforcement proceedings are summary in

nature. The decision of the Court was left

standing by the Supreme Court, which

denied a petition for a writ of certiorari.

In SEC v. Zale Corporation, the United

States Circuit Court of Appeals for the Fifth

Circuit ruled, in accordance with the position urged by the Commission, that the

district court erred in granting the defendants' motion for summary judgment in

a Commission injunctive action on the

ground that there was no reasonable likelihood of future violations by those in'

dividuals. The district court had assumed.
for the purposes of its ruhnq, that the defendants had committed the alleged VIolations, and only a change in employment by

one of the defendants and an outstanding

consent decree against a corporation had

been offered to demonstrate that it was

unlikely that the defendants would commit

further violations of the securities laws.

In reversing the distnct court, the FIfth

Circuit stated that these factors did not

entitle the defendants "to judgment as a

matter of law given the court's assumption that both engaged in serious, recurrent wrongdoing and that triable issues

of fact remainl ed J .... " Moreover, the Court

pointed out that "the Comrrussion is entitled to prevail when the inferences flowing

from the defendants' prior illegal conduct, viewed in light of present circumstances betoken a 'reasonable likelihood'

of future transqresslons," Accordingly, the

Court reversed and remanded the case

to the district court for further proceedings.

In SEC v. Wheeling-Pittsburg Steel

Corp; a divided en bane Court of Appeals

for the Third Circuit, overtuming a decision

by a three-judge panel of that Court,

determined that the district court had made

inconsistent findings when it held that the

Commission was acting in good faith in investigating Wheeling-Pittsburg, but declined to enforce the Commission's subpoena on other grounds. The case was remanded for further factual findmgs conceming the events surrounding the commencement of the investigation and

whether it was initiated at the request of

a politically motivated United States

Senator or based upon an independent

evaluation of the facts by the CommissionAfter the case was retumed to the district

court, the Commission advised the court

that it was withdrawing the subpoena, and

the action was dismissed as moot

Scope of Commission's Authority

Onder The Holding Company Act

Two similar cases, both entitled Herring

v. SEC, challenged the Commission's

authorization of the sale of securities by a

holding company or its subsidianes. The

cases were brought by the same persons in

the United States Courts of Appeals for

the DIstrict of Columbia Circuit and the

Eleventh Circuit, seeking to overtum the

Cornrnissron orders involved on the basis

of challenges to certain aspects of a holding company's construction program. In its

briefs, the Cornrrussion urged that the

Holdmg Company Act does not confer

upon the Cornmissron authority to prevent

a holding company or Its subsidraries from

selling their securities because the company's construction program ISalleged to

be excessive in light of the anticipated

consumer demand for electric power. In

addition, the Cornrnission urged that It had

no obligation under the National Environmental Policy Act to prepare an environmental impact statement before permitting a holding company or Its subsidianes to

sell securities. At the close of the fiscal

year, these cases were pending.

Reporting Violations

In Hinkle Northwest, Inc. v. SEC, a

broker-dealer contested sanctions imposed by the Commission upon findmgs of

violations of the recordkeeping, net capital

and reportIng provisions of the Federal

securities laws. HInkle was the purchaser in

two reverse repurchase agreements in

which it used the credit of one of its clients,

a bank On appeal, Hinkle claimed that it

did not own the securities, but rather that

the bank did. Thus, it would not have been

under any recordkeeping, net capital or

reporting obligations related to these

secunties. The Umted States Court of

Appeals for the Nmth Circuit affirmed the

Cornrnissron's order, holdmg that Hinkle

had the right to sell the securities and that

it took the nsk for profit or loss; this,

it found, constituted ownership, The Ninth

Circuit also held that it was not necessary

to demonstrate evil intent to prove willful,

ness (a prerequisite to the imposition by

the Commission of a sanction m an adrrun71
istrative proceeding), but that such

standard would be satisfied by a showing of

conscious, intentional action.

Exhaustion of Remedies

Important policy considerations support

judicial non-interference with pending

administrative proceedings, since such in.

tervention can deny an agency the

opportunity to correct its own mistakes,

apply its expertise, prove to be unnecessary

in the long run, or delay resolution of the

question In issue. In SEC v. G.c. George

Securities, Inc; the United States Court of

Appeals for the Ninth Circuit disagreed

with these considerations and ruled that the

distnct court had erred as a matter of law

when it concluded that it had no jurisdiction

to enjoin a pending Commission administrative proceedmq. The respondents in

the adrnmistrauve proceeding had been

defendants in a concluded civil action

previously filed by the Commission, In

which the parties had entered into a stipulation providing, In part, that any stipulation and undertaking approved and ordered by the district court would not be used

as the baSIS for an administrative action

affecting any of the defendants. The Ninth

Circuit based its determinations on ItS

conclusion that: when the Commission

filed its injunctive action, it conferred

jurisdiction on the Court; in its order the

court retained jurisdiction to enforce the

stipulation; and the district court had

authority to consider the appellants' request under the All Writs Act, which allows

Federal courts to issue writs necessary or

appropriate to their jurisdiction,

Tender Offer Uligation

In 1981, the Commission has continued

a high level of participation In litigation concerning the effect of the Commission's

tender offer rules on state takeover statutes.

The Commission has participated amicus

curtae or as a party in a number of these

lawsuits, which generally arise in the con.

text of hostile takeover attempts. Some of

72

these suits focus upon the preemptive

effect of Commission Rule 14d-2(b) under

the Exchange Act (the rule conceming the

early commencement date of a tender

offer) on state law provisions requiring ex.

tended precommencement delay. Rule

14d-2(b) requires a tender offer to commence shortly after a public announcement of its material terms. It was designed

to thwart a developing practice by which

bidders would make public announce.

ments about their offers without actually

commencing these offers for purposes of

the Wilhams Act, which contains vanous

provisions designed to afford investors pro'

tection in tender offer situations.

The Commission recognized when it

adopted Rule 14d.2(b) that it might con.

fhct WIth certain state laws, and in litigation the Cornrnissron has supported the

position of tender offerors challenging

these laws as unconstitutional when they

do conflict. However, the Commission has

also recognized that states may have a valid

Interest in regulating tender offers for truly

local cornparues, and It has therefore

supported the efforts of state securities

laws administrators to harmonize the

operation of their statutes with Rule 14d.

2(b).

In actions in which the Commission has

participated and where a court has reached

the merits of the substantive preemption

issue, the results have been uniformly

favorable for the Commission. In particular,

in Canadian Pacific Enterprises (U.S.),

Inc. v. Krouse, the United States District

Court for the Southern District of Ohio held

that Rule 14d-2(b) was a valid exercise of

the Commission's broad rulemaking

power and preempted the provisions of ~e

Ohio takeover statute requiring pubhc

announcement of a takeover bid at least 20

days before it is made.

In James Edgar v. MITE Corp., the

Commission submitted a brief amicus

curiae before the United States Supreme

Court raising the question of whether state

law provisions, which require advance

disclosure of tender offers and empower a
state securities administrator to pass on

the substantive fairness of the terms of a

tender offer, VIolate the Supremacy and

Commerce Clauses of the United States

Constitution by, respectively, conflictmg

with the purposes of the Wilharns Act and

imposmg a burden on interstate commerce not outweighed by local interests.

The Commission also submitted a bnef

amicus cunae in Kennecott Corp. v.

Smith, before the United States Court of

Appeals for the Third Circuit. Kennecott

involves the issues of whether the heanng,

withdrawal, and proration provisions of the

New Jersey takeover law frustrate the

Federal scheme for tender offer regulation

and thus violate the Supremacy Clause,

and Impose imperrmssible burdens on

interstate commerce in violation of the

Commerce Clause. Noting that the New

Jersey WIthdrawal and proration provrsions

differ from those prescnbed by other states

as well as the Federal penods set by the

Cornrmssion, the Cornrrussron contended,

among other things, that exposure to

divergent state proration and withdrawal

penods encumbers the planning and ex.

ecution of tender offers, constituting a

burden on interstate commerce. The Comrrussion further argued that the existence of

differing State withdrawal and proration

periods precludes the apphcation of a

smgle national standard to transactions

that are nation-WIde m scope

Finally in Osofsky v. Zlpf, the Comrmssion participated emtcus cunae before

the United States Court of Appeals for

the Second CirCUIt. This case presented

the Issue of whether shareholders, who

ceded control of their company as a result

of alleged rrusrepresentions concernmg

the value of the consideration they would

obtain in a merger to take place after

successful completion of a tender offer,

had stated a claim for damages under the

Exchange Act The defendant m the case,

the successful tender offeror, had rep'

resented that shareholders would receive

a certain price in the merger, but the

plaintiffs alleged that the defendant mtentionally paid a lesser amount upon

consummation of the merger.

The district court held that the shareholders were precluded by the "actual

damage" hrmtations of Section 28(a) of the

Exchange Act from recovering any

damages because they had not alleged

that the shares they gave up were worth

more than the consideration they received.

It also ruled that the shareholders may not

obtam damages amounting to the difference between what It was represented they

would receive in the merger and what they

actually received,

The Commission was concerned that

the drstnct court's ruhng would insulate

from pnvate redress certain types of

proxy and tender offer VIolations, particularly m those situations where a substantial

premium ISoffered over market value. In its

bnef, the Comrrussion urged reversal of

the distnct court's decision. The Second

CirCUIt agreed with the Commission's

positlon, holding that, under the actual

damages hrmtation of Section 28(a),

shareholders may recover non-speculative

damages based upon the value of the consideranon that was represented as commg

to them m the merger, when those

damages can be estabhshed WIth reasonable certamty.

Regulatory Utigation

Chicago Board of Trade v. SEC, pendmg In the United States Court of Appeals

for the Seventh Circuit, raises Significant

Issues of junsdictional allocation between

the Commission and the Comrnodity

Futures Tradmg Cornrnission (CFTC). This

case challenges the authority of the Com'

rmssion to approve and supervise the tradmg of options on securities guaranteed

by the Government National Mortgage

AsSOCIatIon(GNMA), when such trading

takes place on a national secunties ex.

change. In its brief, the Commission

stated that a national securities exchange IS

authonzed to provide a market for trading

of all types of secuntles and that the Com'

73
mission is empowered under the Exchange

Act to oversee such trading. The Commission urged that GNMA securities, although exempted from registration reo

quirements under the Exchange Act and

the Securities Act, are nonetheless

securities, and that options on GNMA

securities are, themselves, separate

securitres. The Commission further

urged that nothing under the Com.

rnodity Exchange Act (CEA) diminishes its

authority under the securities laws

over the trading of GNMA options, even

though the CEA may permit the trading of

futures on GNMAs on boards of trade sub.

ject to the oversight of the CFTC.

The Commission explained in its brief

that options and futures are legally distinct

forms of trading, and that the lImited grant

of jurisdiction to the CFTC extends to

futures tradmq, not options trading, of

GNMA securities. The Commission con.

tended that this conclusion is reinforced

by provisions in the CEA which explicit.

Iy preserve the junsdrction of the Com'

mission over secunties trading (except to

the extent that futures trading is involved)

and which expressly remove "govemment

securities' and "security fights" from the

coverage of the CEA, except to the extent

that they are the subject of futures trading

on a board of trade

The Comrrussion also partrcipated

amIcus cunae In the Umted States DIstrict

Court for the Distnct of Columbia In A. G.

74

Becker v. Board of Governors of the

Federal Reserve System, which raised the

question of whether a bank may underwrite

"third party" (i.e. non-bank) commercial

paper, in view of the ban under the GlassSteagall Act against bank underwriting of

..securities." The Cornrnission in its

amicus memorandum urged that the

Glass-Steagall Act and the securities laws

should be viewed as complementary

pieces of legislation, and that undefined

terms in the Glass-Steagall Act should

generally be construed together with the

definitions contained in the contemporaneously enacted Securities Act. Be.

cause commercial paper is encompassed

by the defimtion of ..security" under the

latter statute, the Comrrussion asserted that

commercial paper should be deemed to

be a "security" for purposes of the GlassSteagall Act as well. If any of the restrictions

under the Glass-Steagall Act are to be revised (Including the strict prohibition

against bank underwriting of corporate

securities), the Commission urged that this

task, which raises fundamental public

policy issues, is better left to the Congress,

not the courts. The district court In A. G.

Becker found that commercial paper is

a ..security" under the Glass-Steagall Act,

and, although not decidinq what activity

would constitute "underwriting," agreed

that any easing in the stnct statutory hrmtations against bank underwriting must be

left for Congress to decide.
Public Utility Holding Companies

Composition

Under the Public Utility Holdmg Com.

pany Act of 1935 (Holding Company Act),

the Commission regulates interstate public

utility holding company systems engaged

In the electric utility business or m the

retail distribution of gas. The Commission's

junsdictron also covers the natural gas

pipeline cornparnes and non utility com.

panies which are subsidiaries of registered

holdmq companies

There are presently 13 reqrstered holding companies WIth aggregate assets, as

of June 30,1981, of $57 billion. Total holdIng company system assets increased

$4.5 billion In the twelve.month penod

ended June 30, 1981. Total operating

revenues, as of June 30, 1981, were

$26.5 billion, a $4.5 billion increase over

the previous year. In the 13 systems, there

are 58 electric and/ or gas utility sub.

sidiaries, 61 nonutihty subsidiaries and 19

inactive companies, or a total of 155

system cornparnes, including the top

parent and subholdmq companies Table

38 in the Appendix lists the systems and

Table 39 lists their aggregate assets and

operatinq revenues

Financing

During fiscal year 1981, approximately

$3.3 billion of senior secunties and common stock flnancmq of the 13 registered

systems was approved by the Cornrrussion.

Of this amount, approximately $2.3 bilhon

was lonq-term debt financmq, and over

$1 billion was for equity flnancinq, These

amounts represent a 12.4 percent de.

crease In lonq-term financmq over fiscal

year 1980, and an 11.1 percent increase

in the sale of common and preferred stock.

In addition, the Commission approved over

$7.1 bilhon of short-term debt financmg

and $278 million of pollution control

fmancmg for the registered holding

company systems. The short-term debt

amounted to approximately 45 percent

more than the $4.9 bilhon authonzed In

fiscal year 1980. Table 40 In the Appendix

presents the amount and types of securities

issued by holding company systems pursuant to the Holdmg Company Act.

Exemptive Rules Adopted

The Commission, through the exercise

of Its statutory rulemakmg power, has

attempted to allay the concerns ex.

pressed by gas and electric utihties that

their partrcrpation In certain types of JOint

ventures would make their activmes sub.

ject to the Holding Company Act. On

November 19, 1980, the Commission

adopted Rule 16196 to facihtate partrcipatron

of registered gas systems WIthcompanies

not subject to the Holding Company Act

in gas-related JOint ventures It exempts

certam non utility subsidianes of registered

holdmg companies, pnrnanly engaged In

the production, manufacture, transrrussion

or storage of gas, from those provisions of

the Holding Company Act that would

otherwise render them "subsidiary com.

parues," provided that no more than 50

percent of the votIng interests are owned by

one or more reqistered holdmg company

systems. In order to facrhtatejointly owned

generating facilities among electric com.

panies not subject to the Holding Company

Act, the Cornrnission, on January 13, 1981 ,

adopted Rules 14 and 15197 which exempt

certain acquisrtrons by electnc utihty companies from Cornrrussion regulatIon.

75
Reorganizations and Acquisitions

Colonial Gas Energy System ReorganizatIOn-Prior to September 9,

1977, for many years Colonial Gas Energy

System (Colonial) was an exempt holding

company under Section 3(a)(1) of the

Holding Company Act, pursuant to Rule 2.

The filing under Rule 2 exempted Colonial

and its subsidiaries until It was notified,

pursuant to Rule 6, that a substantial

issue existed as to its claimed exemption.

Notification was given because reports

filed with the Commission under the

Federal securities laws disclosed complexities in the financial structure of the

system which Impaired Colonial's ability to

raise needed capital and adversely affected

its operating subsidiaries, In order to bring

the Colonial system into compliance with

the financial standards of the Holding Company Act, Colonial and the Commission

entered into a stipulation under which

Colonial and Its subsidiaries agreed that

their financings would comply with Sections 6, 7 and 12(b) of the Holding Company Act until disposition of the exemption

application. Colonial's capitalization improved substantially, and on July 30,

1981 , the Commission authorized mergers

which would result In the termination of

Colonial's corporate existence, the combination of two operating subsidiaries into

one operatIng utility company and the

ehrninatron of the holding company.

Columbia Gas System, Inc.-On

November 3, 1980, The Columbia Gas

System, Inc. (Columbia), a registered holding company, filed an application seeking

authorization to merge With Commonwealth Natural Resources, Inc. (Commonwealth), a holding company exempt from

the Holding Company Act pursuant to Rule

2. Columbia will be the surviving corporation, and Commonwealth's subsidiaries Will

be retained as subsidiaries of Columbia.

The City of Richmond, Virginia, intervened

In the proceeding, essentially requesting

that merger of the transmission subsidiaries of Columbia and Common76

wealth be made a condition to merger

of the holding companies. The Commission denied the City's request.P'

Northern States Power CompanyNorthem States Power Company (Northem States), a utility company and an

exempt holding company under Section

3(a)(2) of the Holding Company Act, has

applied for authorization on behalf of itself

and its subsidiaries, pursuant to Sections

9 and 10 of the Holding Company Act,

to acquire the shares of outstanding

common stock of Lake Superior District

Power Company (Lake Superior), a Wisconsin corporation. The acquisition would

be accomplished through an offer to

shareholders of Lake Superior to exchange

0.48 shares of Northem States common

stock for each share of Lake Superior

common stock. Northern States also requested an exemption pursuant to Section

3(a)(2) of the Holding Company Act Public

hearings were ordered and have been concluded. At the close of the fiscal year, a

decision was pending.

Fuel Programs

During fiscal year 1981, the Commission

authorized approximately $1 billion for fuel

exploration and development activities for

the holding company systems. This

represents a 72 percent increase over

fiscal year 1980 fuel expenditures. Table

42 in the Appendix lists the authorization

by holding company system for each fuel

program.

Largely as a result of radical changes in

cost and availability of fuel, utilities have

embarked on major programs to acquire

control over part of their fuel supply.

Generally, the arrangements Involve the

formation of subsidiaries or entry into joint

ventures for the production, transportation

and financing of fuel supplies or the supply

of capital for the exploration and the

development of reserves with a right to

share in any discovered reserves. Since

1971, the Commission has authorized expenditures of over $4.2 billion for fuel pro-
grams of holding companies subject to the

Holding Company Act

Service Company Operations

At the end of calendar year 1980, there

were 12 subsidiary service companies providing managerial, accounting, administrative and engineering services to 11 of the

13 holding companies registered under

the Holding Company Act. The billings

for services rendered to the holding company systems amounted to $fi08.4 million

or 2.30 percent of the total revenues

qenerated by the electric and gas operating

utllities. The subsidiary service companies

are heavily labor-intensive, employing

over 13,000 people, and have assets of over

$303 million. Table 41 in the Appendix lists

the subsidiary service companies with billings, total assets, and total personnel.

General Public Otitities

Corporation/Three Mile Island

During fiscal year 1981, the Commission

continued to monitor the financial and

operational Impact to the General Public

Utilities (GPU) system of the March 28,

1979, nuclear accident at Three MIle

Island Unit No.2 (TMI.2). The GPU system

has estimated the cost to decontaminate

and restore TMI-2 at $1.6 bilhon over the

next six years. As of June 30, 1981, approximately $235 million of this amount had

been expended. The GPU system has $300

million of property insurance coverage for

TMI-2.

77

Corporate Reorganizations

Reorganization proceedings in the

United States District and Bankruptcy

Courts are not initiated by the Commission,

but are commenced by a debtor, voluntarily, or by its creditors. Federal bankruptcy

law allows a debtor in reorganization to continue to operate under the court's protection while it attempts to rehabilitate Its

business and work out a plan to pay Its

debts. Where a debtor corporation has

publicly Issued securities outstanding, the

reorganization process may raise many

issues that materially affect the rights of

public investors. In addition, the issurance

of new secunties to creditors and share.

holders pursuant to a plan are exempt from

registration under Section 5 of the Securities Act of 1933. Therefore, the Commission enters Its appearance and participates in corporate reorganization proceedmqs to protect the interests of public In.

vestors holding the debtor's secunties and

to render independent, expert assistance

to the courts and parties in a complex area

of law and finance.

The Bankruptcy Reform Act of 1978,

which became effective October I, 1979,

represents a comprehensive revision of

Federal bankruptcy law and, in particular,

of the business reorqanizauon provisions

of the prior Bankruptcy Act. The reorganization provisions of the new Bank.

ruptcy Code, set forth In Chapter 11 there.

of, will apply only to cases commenced

on or after October I, 1979. Cases commenced prior to October I, 1979, continue

under the appropriate provisions of the

pnor Bankruptcy Act

Chapter 11 of the Bankruptcy Code

authorizes the Commission to enter Its

appearance in any reorganization case and

to raise, or present its view on, any issue

in a Chapter 11 case. Although Chapter

11 applies to all types of business reo

organizations, the Commission will not

consider It necessary or appropnate to

participate in every case. Many cases will

involve only small enterpnses with uncomplicated capital structures or minimal

public investor interest. In its forty years of

participation in cases under Chapter X

of the prior Bankruptcy Act, the Comrrussion generally limited ItS perticipation to proceedings in which a substantial

public investor Interest was involved.

Dunng the past fiscal year, 65 debtors

with publicly issued securities outstanding

entered Chapter 11 reorganization pro.

ceedmqs. The Commission entered its

appearance in 18 of these cases, with ago

gregate assets of $2.5 billion and 130,000

public investors. (A list of these proceedings is set forth in Table 44 In the

Appendix to this Report) In these cases the

Commission presented its views, in court

and informally in consultation with other

participants, on a vanety of Issues IncludIng: (1) conflicts of Interests of members

of creditors' and equity security holders'

committees; (2) issues concerrunq the

debtor's operations and sales of assets; (3)

the need for appointment of a trustee or

examiner to conduct an investigation into

the debtor's affairs, and to answer quesnons concerning the validrty and effect of

the terms of the securities held by pubhc

Investors, the classjfication of their claims,

and proposed treatment in reorganization

plans; (4) the adequacy of disclosure in the

disclosure statement required to be transmitted to public investors when their votes

on a plan are being solicited: (5) the reason.

ableness of fees sought by counsel and

other professionals, and (6) interpretive questions concerrunq the Bankruptcy

Code's exemption from the secunties laws.

79
The Commission continues to play a

similar role in pending reorganization

cases under Chapter X of the prior

80

Bankruptcy Act A list of these cases is

set forth in Table 43 in the Appendix to

this report.
Administration and Management

General JV\anagement and Program

Developments

As part of a continuing effort to maximize

the use of available resources, the Office

of the Executive Director provided technical assistance to several divisions and

offices during 1981. The most significant undertaking In this area was a joint

effort WIth the Divrsion of Enforcement to

upgrade management. One track of the

project addressed the operational problems which anse in the investigation

and litigation of alleged security law

violations. The second track focused

on pohcy tools designed to enable

managers to track and analyze the progress of cases and resource allocations.

Early results of this effort have been most

evident in the increased accuracy and utility

of management reports. Weekly, monthly

and quarterly reports are now available

which analyze DIvision operations from a

number of perspectives (e.g., by orqaruzation, by case classification, changes over

time, resource utilization, etc.), Technical

assistance was also provided to the Office

of the Comptroller (in their effort to

modernize financial and cash management activines), the Office of the General

Counsel (to assist in development of a

case trackIng system), the Office of the

Secretary (in the development of an

automated system to track Cornrrussion

minutes), the Office of Administrative

Services (on plan for a new buildmq and

word processing equipment speoflcations), the DIVIsionof Corporation Finance

(in development of a capacity to automatically identify delinquent filings), the Office

of Applications and Reports Services (on

severalrecords management projects), the

regional offices (on projects involving

automated management information

systems) and to the Cornmission's princrpal program divisions In their effort to

comply WIththe Paperwork Reduction Act.

In additIon, as reported to Congress In

the first quarter of fiscal 1981, a major

support office reorganizatIon was Implemented by the Office of the ExecutIve

Director. The reorganization moved positions and functions to new offices, thus

preserving operating functions while

achievmq the primary goal of consohdaunq

like tasks in specifically dedicated orqanizations. The expanded Office of Consumer

Affairs and Information Serviceshandles all

public contacts for complaints, Freedom of

Information Act requests, forms distnbution, and public reference services. The

newly delineated Office of Apphcations and

Reports Services receives, indexes, stores,

and distributes all filings and mvestigatIve

matenals and also reviews, denies, or

makes effective all applications by brokerdealers, investment advisors, transfer

agents, and municipal securities dealers.

Usmg computers and micrographics

technology, in 1981 this group indexed

some 270,000 documents of all types,

filed approximately 200,000 archival

microfiche, and reviewed over 12,000

broker-dealer and investment advisor

filings. Finally, all adrmnistrative, mali, and

messenger services were consolidated m

the Office of Adrmrustranve Services,

and the program support and review

capabrhties of the Offices of the Executive

Director and InformatIon SystemsManagement were upgraded.

The Paperwork Reduction Act of 1980

made a significant Impact on the Commission durinq fiscal 1981. In Apnl, the

Office of the Executive Director organized

the Cornrnission's effort to comply with

the Office of Management and Budget

81
(OMB) directives issued under the Act The

Chairman, Executive Director, and Deputy

Executive Director were designated to

administer the Act for the Commission.

Dunng the last half of the year, the rulemaking and legal staffs of the program

divisions produced 200 packages of

materials for OMB, covering some 375

individual rules, forms, and records requirements.

Although the substantive work of the

Commission has significantly expanded in

the past several years with the growth of

the economy and under Congressional

impetus, the Commission has used technology and improved management

practices to cope with these changes without increased staffing. Overall, 1981

witnessed a tuming point as the Commission began to take fuller advantage of

computer and micrographics technology

in program offices beyond the support

office areas, where such resources were

Initially and most widely applied. It has

been the Commission's experience,

however, that efficiencies generated by

technology and Improved organizational

structures have been offset by the increased complexity and volume of the

Commission's workload. Accordingly,

continued great care will need to be exercised to seek, lead, and encourage the

personnel resources of the Commission,

which in the final analysis are the heart of

the agency.

Information Systems Management

Fiscal year 1981 ended the Commission's first five year plan for its automatic data processing (ADP) program. All

basic goals were met, including the acquisition of an IBf'I\ 370 computer and a

modem teleprocessmq system and the

consolidation or creation of central data

files in support of certain major agency

programs. During 1981, attention swung to

upgrading computer software to utilize

more efficiently the new IBf'I\ 370 computer reported in 1980. Specifically, SIX

82

new information systems were implemented, and qualitative enhancements and

modifications were made to five others. In

addition, certain standards and procedures

in the Office of Information Systems

Management (ISM) were consolidated, and

several Commission ADP facilities were upgraded as outlined below.

The new facilities include a new operating system for the IBf'I\ 370 computer,

faster regional office access to headquarters files, improved data file storage,

and newer keyboards and printers in user

offices. Security passwords were initiated

to gain control over the cost and usage of

the automated legal research service obtained under contract by the Commission,

as well as to restrict access to sensitive

mvestigatory and management files on the

Commission's computer. Additionally, the

Cornrrussion made an agreement with

another agency to obtain contingency

computer support if the Commission's

system should be unable to function when

it is absolutely needed, for example, to

process payroll data or to process statistical

or Investigatory information.

Finally, a new five year plan was an.

nounced to lay the groundwork for con.

tJnuing to enhance the utilization of the

new computer, including modernizing program software, upgrading user involve.

ment in the design and retrival of automated data files, and planning for future equipment needs. In recognition of the broad

role of ADP, and to encourage the ADP

staff to work more closely with program

dIVISIons in order to better meet Commission goals, during 1981 the Office of

Data Processing was renamed the Office of

Information Systems Management, a user

relations unit was created in ISM, and an

ISMsupport unit wasdedicated to the Commission's new market oversight and surveillance activity.

The five information systems enhanced

during 1981 were upgraded in response to

urgent user needs In those areas where

the new IBM 370 computer and related

data management techniques could most
rapidly make a major difference to certain

computer progams that had become

seriously unresponsive due to age. The revised systems Include several that support

the Cornrnissron's data base of company

names, addresses, and filings. The data

base tracks the availability of filings on

microfiche as well as the status of filings

reviews: It also detects companies that have

failed to file required reports. The computer programs that detect rmssinq reports

had to be completely re-written to use the

new data files and to take advantage of

other computerized Information In order to

produce complete profiles of delinquent

firms. In addition, the Cornrnission's revised filings and reqistrant files on the IBM

370 mainframe computer were designed

to be updated off-line by daily tapes containing registrant and filings Index data

captured and edited by a TI 990 minicomputer. Finally, two management

systems were upgraded with on-line capabilities to support and track preliminary

Investigations and public complaints about

reqistrants, while the Cornrrnssion's Payroll Data Entry System was gIven on-line

capabilities as well.

The new computer system so enhanced

the efficiency of the software programming staff, that six new system applications

were implemented in 1981 rn addition to

the five major revisions outlined above, The

six new applications include an on-line retrieval of Index information conceming

Cornrrussion releases published in the SEC

Docket, an analytic system to facihtate

the selective review of corporate filings

under the Securities Act of 1933 (Secunties

Act) and the Securities Exchange Act of

1934, and several systems supporting

matters such as ment pay, processing of

filing fees, corporate governance analyses,

and Invoice and voucher tracking and

payment

In early 1981, the Commission signed a

major new contract to obtain micrographics and drssernination services in a

manner that serves the needs of both

the public and the Cornrmssion. Public

reference rooms in the Office of Consumer

Affairs and Information Services and in

the three major regional offices are

supported by the contractor, as are the

Commission's archival files In the Office of

Applications and Reports Services. The

latter office also supplies all documents

filmed by the contractor and acts as the

Commission's technoloqical agent WIth

respect to the contract. As a result of the

new contract, the Commission now films all

major categories of filings, applications,

notices, and amendments through a contractor who disseminates film and paper

copies to the public for set fees while also

supplying the agency with Indexed archival

and public reference microfiche. The

public film files In headquarters and major

regional offices include 30 percent more

kinds of documents than were previously

available to the public on film, the archrval

files for staff use necessarily cover VIrtually

every type of document filed WIth the

Comrnission.

Both the rrucroqraphics program and

the Commission's document control staff

require specialized computer index update

and editinq support to maintain accurate

and timely processing of filings throughout each workday and during evenings and

weekends when necessitated by registrant

filing patterns. Accordmgly, the Office of

ApplIcations and Reports Services, after 18

months of development and independent

of the mainframe computer, Implemented

during early 1981 a document mdexmq

system built around a minicomputer

dedicated to capturing and editing filIngs

index data as part of the document receipt

and distribution process administered by

that office. The TI 990 minicomputer Inter.

faces WIth the rnicroqraphrcs contractor

through the Cornrnission's mainframe

computer, to which the minicomputer

provides off-hne dally tapes for professronal

staff use. As a result, local and remote

terminals hnked to the IBM 370 mainframe

computer can respond to quenes about

filings and can also be used to request that

rrucrofiche copies of filmed documents be

83
sent anywhere in the Cornrrusslon, including regional offices.

Finally, early In the second quarter of

fiscal 1981, a computer-indexed microfiche file of all General Counsel briefs and

selected motions from 1969 forward was

produced and furnished to the Com.

mission's legal staff. The case names of the

legal briefs and the topics they include were

made part of a special index system

resident on the agency's TI 990 minicomputer. In the future it is expected that

the index will be moved to the IBM 370

mainframe computer to facilitate regional

staff access. The computenzed Index IS

used by the legal staff to determine wmch

bnefs share any legal topic of interest.

Nternatively, of course, the staff can access

the rrucroflche directly If the identity of a

desired brief IS already known. Regional

offices, the Office of the General Counsel,

and the DIvision of Enforcement cooperated in review and extractmg topics from

approximately 900 cases to build the

Initial computerized topic file. Under the

aegis of the Office of the Executive DI'

rector, the Office of Applications and Reports Services designed the computerized

topic research Index, furrnshed the minicomputer, microfilmed the briefs, gen.

erally managed the project. The Office of

the General Counsel Wlll maintain the topic

file on the minicomputer now that the baSIC

legal brief conversion has occurred.

Financial Management

In fiscal year 1981, the Comrrussion

collected $65.3 million in fees from the

registration of securities, securities transactions on national secunties exchanges,

and miscellaneous fees for filings, reports

and apphcations. The fees collected represented approximately 81 percent of the

total funds appropriated by Congress for

Commission operations.

The Office of the Comptroller continued

the Implementation of an automated in84

tegrated financial management system.

During the year, a new system was implemented to charge commercial long

distance telephone calls to each organization. This system elirrunated the need for

each staff member to prepare a report to

the Comptroller for each individual telephone call, which in tum eliminated

thousands of reports that had to be reconciled annually with the telephone

bill. In addition, this system resulted in a

marked decrease in the cost of commercial

calls. In a separate matter, the Office of the

Comptroller and the Office of Legislattve

Affairs shared the acquisition and use of a

timeshare package called "Legislate" to

track the status of Comrrussion-related

legislation pending in Congress. Finally,

the position! employee reporting and trackIng system (pERl'S), implemented In fiscal

1980, was enhanced to produce detailed

organization charts and summary strength

reports of the Commission, thereby siqnificantly enhancing the Commission's abihty

to manage the allocation of specific staff

resources across programs and organizations.

Initiattves intended to improve or conserve resources completed in fiscal year

1981 included issumq a comprehensive

voucher audit handbook, microfiching one

million documents, establishing procedures to Implement cash management

policies for Treasury deposits and

accounts receivable and payable, and

developing new performance cntena for

employees of the Office of the Comptroller.

Finally, in an effort to reduce travel costs

and save time In obtaminq airline, train

and other common carrier tickets, the

Comrnlssion is one of five agencies participating in a test to use travel agents to pro'

cure travel arrangements at no cost to the

Government, A request for proposals from

interested travel agents was issued in

September, 1981. Work on the automated

integrated financial management system

will continue to fiscal year 1982.
Internal Audit

The Office of Intemal Audit within the

Office of the Chairman completed its first

full year of operation In fiscal 1981, during

which the Office reached its authorized

strength of a director, two auditors, and a

secretary. The audit staff provides independent feedback to the Chairman on

intemal controls and the progress of operations in achieving the Commission's longterm management goals. During the year,

the Office issued six reports covering

such diverse topics as data processing

risk assessment and a review of the irnprest fund. In addition, a major audit of the

Commission's equal employment opportunity complaint processing system was

initiated and largely completed in

fiscal 1981. The audit was intended to

identify strengths and weaknesses in the

complaint handling system and to correct

whatever deficiencies were noted. At year's

end, major reports in process include

reviews of the payroll system, telecommunications, and cash management

Personnel Management

DUring fiscal 1981, the Commission

continued to devote substantial efforts to

the implementation of the Civil Service Reform Act The new performance appraisal

system, described in last year's annual

report, was approved by the Office of Personnel Management and implemented by

the Commission. Merit pay employees,

comprising about 25 percent of the Commission's workforce, were the first to be

brought under the new system; by March

1981 all such employees were covered.

Simultaneously, work was begun on the

task of implementing performance

appraisals for the approximately 1,400

employees not covered by merit pay. The

performance appraisal system was implemented for non-merit pay employees

on July 1, and all employees are now

operating under the new system. Evaluation of the performance appraisal system

will begin upon completion of the first

rating cycle in October of 1981.

Another major undertaking concems the

merit pay program developed by the Com.

mission, approved by the Office of Per.

sonnel Management, and modified

Govemment-wide by the General Account.

ing Office. Upon becoming operational in

October 1981 , the first actual performance

ratings made under the new performance

appraisal system will be used as the

basis for pay adjustments, and will link

pay, other than cost of living allowances,

to the performance of each covered employee. Approximately 450 Commission

employees will be covered by merit pay:

specifically, 97 percent of grade GS-15

employees, 90 percent of grade GS-14

employees, and 10 percent of grade GS-13

employees.

Computer programs were developed to

calculate merit pay pools as well as Individual merit pay adjustments for each

employee covered by merit pay. Additionally, computer support will monitor the

operation of the system, evaluate Its

effectiveness as a management tool, and

ensure compliance with legal requirements.

The merit pay effort underwrote other improvements to the Commission's management of personnel resources. In particular,

ment promotion procedures and documentation were dovetailed with the Com.

mission's incentive award program so that

merit pay measures and appraisals of

employee performance and contributions

could be used to provide for greater flexibility, accuracy, and speed in recognizing

valuable employees.

The Commission's upward mobility program (INTERSECT) continued to be a very

successful program with a high degree

of management support and acceptance.

Over the past three years, twenty-two Intems have moved Into the mainstream of

their organizations in a varity of occupations, including paralegals, financial

analysts, compliance examiners, and computer programmers. There are five intems

in the 1981 INTERSECT program, all of

85
whom are scheduled to complete their

developmental assignments within the next

year.

Other mitlatrves begun in previous years

were earned foreward and expanded. An

aggressive attorney recruitment program

remains one of major significance, particularly as salary levels offered in the private

sector continue to rise more rapidly than

those in the Federal service. A Job Fair,

concentratIng on recruitment of minority

attorneys, generated substantIal interest

and resulted in 13 persons being hired

during the year. An affirmative action pro.

gram for the 87 persons at the Cornrrussron

who have idenufied themselves as having

some degree of handicap also continued to

be of major interest, The program includes

sign language classes and TDY telephones

for the deaf, braille in halls and elevators

for the blind, ramps and other aides for

wheelchairs, and orientation sessions for

managers in the Commission and other

aqencres, Fmally, similar to ItS earher

authonty for accountants and secunties

compliance examiners, the Commission

obtained from the Office of Personnel

Management (OPM) the authority to recruit

and hire flnancial analysts without screen.

ing byOPM.

Equal Employment Opportunity

The Equal Employment Opportunity

Office (EEOO), also within the Office of

the Chairman, developed an affirmative

action plan under guidelines prornulqated by the Equal Employment Opportunity

Commission's (EEOC) Management

Directive 705 and as mandated by

Section 717 of Title VlI of the Civil RIghts

Act of 1964, as amended.

In part, because of this effort, the total

number of female and minority employees

in the work force at the Commission in.

creased 6.36 percent, even though a hiring freeze existed during the greater

part of fiscal year 1981.

The DIrector of Equal Employement

Opporturuty contmues to chair the SEC.

86

Securities Industry Committee for Equal

Employment Opportunity, organized in

1976. The Committee meets quarterly

to promote equal employment opportunities for minorities and females in the

securities industry. During fiscal year 1981,

the Committee again awarded four $1,000

one-tirne scholarships and one, four year

scholarship in the amount of $6,600 to

mmonty students interested in pursuing a

career in the securities field. This is the

fifth year for the scholarship program.

Annual observations and programs with.

in the Commission were developed and

conducted for Asian and Pacific American

Hentaqe Week, National Secretaries Week,

Women's Week and Hispanic Week.

A sexual harassment training program

was also developed as part of the Com.

rrussion's prevention of sexual harassment

in the work force plan. Approximately 125

employees m the Washington, D.C. area

completed an eight hour program during

May and June. This program will be con.

tinued during fiscal year 1982, and most

reqional offices will be included.

Consumer Affairs and

Information Services

During the 1981 fiscal year, the Freedom

of Information Act (FOIA) and Privacy Act

(PA), public reference and publications

functions were merged into the Office of

Consumer Affairs, which was redesignated

as the Office of Consumer Affairs and

Information Services. The organizational

change was made to provide one-stop

service for public inquiries, investor com.

plaints, requests for publications, reproductions of filings and FOIA and PA requests. The new office spearheaded several

Important projects during 1981. Working

with the Office of Information Systems

Management, it implemented a direct input

capabilIty for the computerized complaint

handlIng system so that more accurate and

timely information can be used in the regulatory and enforcement programs of the

Commission.
Regarding the Freedom of Information

Act and the Privacy Act, in early 1981 the

Commission formalized a procedure

whereby parties submitting information

to the Commission can request confidential treatment in the event an FOIA

request for the submitted material is subsequently filed. This procedure seeks to

ensure that providers of information have

an opportunity to appeal to the Commission any determination to release such

information. While this procedure existed

informally for a number of years, the

advent of a Commission rule and attendant

publicity caused the volume of confidential

treatment requests to increase by 100

percent over prior years. The Office of

Consumer Affairs and Information Services

worked closely with the Divisions of Enforcement and Corporation Finance, the

Office of the General Counsel and the

regional offices to implement the new procedure and related innovations necessary

in managing confidential requests and

FOIA matters.

In addition to the new treatment of confidential data, and apart from a 10 percent

increase in the volume of FOIA and PA

requests received in 1981 over 1980, the

complexity of requests grew very noticably.

The increase in complexity is a serious

development resulting primarily from more

sophisticated utilization of the Acts by

parties experienced in their usage, especially law firms involved in litigation, proxy contest or other adversary situations.

Finally, the Office of Consumer Affairs

and Information Services processed

approximately 165,000 inquiries In the

Public Reference Branch in 1981, including

12,000 publications requests and 86,000

telephone requests. The office installed an

automatic phone sequencer in the Public

Reference Branch to end the loss of over

30 percent of telephone inquiries experienced in prior years.

Facilities Management

In fiscal 1981, following approval of the

House and Senate Public Works Committees, the General Services Administration (GSA) issued a solicitation for

proposals in order to acquire a consohdated heaquarters building for the Comrrussion, The new headquarters is planned

to accommodate Commission staff

currently drstributed among three buildings in Washington, D.C. The GSA received

a number of responses, selected a building

now under construction at Judiciary

Square, and signed a lease with the building owner on August 13, 1981. Fiscal

1982 appropriations for the lease and

move were pending in Congress as of the

end of fiscal 1981. Predicated on anticipated approval by the House and Senate

Appropriations Committees, determination of floor plans and building details began In the fall of 1981 with the expectation of movmq in the summer of

1982. The consolidation will enable the

Comrrussion to save considerable expenses for shuttle vehicles, drivers, and

duplicate copying and serving facilities.

More importantly, it IS expected that the

work of the professional staff will be significantly facilitated due to the proximity of

corporate filings records and library resources, adequate office and conference

space, centralized support services, and

greater interaction between program units

that need to work together.

87

'Securities Exchange Act Release No. 16888

(July 11, 1980),20 SEC DOCKET 334.

2Secuntles Exchange Act Release No. 18062

(August 25, 1981), 23 SEC Docket 650.

3'1he ITS was authonzed by the Commission,

on a provisional baSIS, as a national market

system facihty pursuanttoSection lIA(a)(3)(B)

of the Exchange Act

4Securitles Exchange Act Release No.

17744 (April 21, 198\),22 SEC Docket 845.

5SecuritIes Exchange Act Release No 17531

(February 10, 1981), 21 SEC Docket 1746,

Secunties Exchange Act Release No 17532

(February 10, 1981), 21 SEC Docket 1747

6Securitles Exchange Act Release No 17704

(April 9, 198\),22 SEC Docket 709.

7SecunlJeS Exchange Act Release No. 17549

(February 17, 198\),22 SEC Docket 22

8Secunties Exchange Act Release No 18131

(October 1, 198\),23 SEC Docket 1013

9SecuntJes Exchange Act Release No. 17850

(February 26, 1981), 22 SEC Docket 195

I°Secuntles Exchange Act Release No. 17583

(February 27, 1981), 22 SEC Docket 269

IISEC 1980 Annual Report at 7.

12Secuntles Exchange Act Release No. 18062

(August 25, 198\),23 SEC Docket 650

13590 F2d 1085 (D.C. Cir, 1978).

14Secunties Exchange Act Release No. 17562

(February 20, 1981), 22 SEC Docket 129

15Secuntles Exchange Act Release No. 17343

(November 26, 1980),21 Sec Docket 708

16Secuntles Exchange Act Release No. 17660

(March 27, 1981), 22 SEC Docket 649

!7Securitles Exchange Act Release No. 18034

(August 14, 198\),23 SEC Docket 579.

18Secuntles Exchange Act Release No 18015

(August 6, 1981), 23 SEC Docket 253

J9Secunties Exchange Act Release No. 16701

(March 26, 1980), 19 SEC Docket 998.

2°Secunties Exchange Act Release No.

17263 (October 22, 1980),21 SEC Docket

260

2!Secuntles Exchange Act Release No. 17237

(October 22, 1980),21 SEC Docket 262 See

also Secuntres Exchange Act Release No.1 7452

(January 15, 1981), 21 SEC Docket 1386

Footnotes

(NASD).

22Securitles Exchange Act Release No. 17238

(October 22, 1980),21 SEC Docket 265.

23SecUntJesExchange Act Release No. 18096

(September 14,1981),23 SEC Docket 795.

24Secunties Exchange Act Release No 17244

(October 24, 1980),21 SEC Docket 691 (Arnex),

Secunties Exchange Act Release No. 17382

(December 16, 1980), 21 SEC Docket 976

(PSE); Securities Exchange Act Release No.

18078 (September 3, 1981), 23 SEC Docket

761 (Phlx).

25Secuntles Exchange Act Release No 17577

(February 26, 1981), 22 SEC Docket 186

26Secuntles Exchange Act Release No. 1660 1

(May 12,1980),19 SEC Docket 756; Securities

Exchange Act Release No. 17005 (July 24,

1980),20 SEC Docket 784

27Secuntles Exchange Act Release No 17577

(February 26, 1981), 22 SEC Docket 186

(File No. SR.CBOE-80.7)

28Board of Trade of the City of Chicago u

SEC No 81.1660 (7th Or, Filed Apnl 24, 1981).

29Secunties Exchange Act Release No. 17578

(February 26, 1981), 22 SEC Docket 193.

30Secunties Exchange Act Release No 17632

(March 16, 1981), 22 SEC Docket 481 (Arnex),

Secunnes Exchange Act Release No 17325

(November 21, 1980), 21 SEC Docket 691

(CBOE), Secunues Exchange Act Release

No 17631 (March 16, 1981), 22 SEC Docket

480 (NYSE)

"Secunties Exchange Act Release No 17666

(March 27, 1981), 22 SEC Docket 655

32Secuntles Exchange Act Release No 17795

(May 11, 1981), 22 SEC Docket 1034.

33File Nos SR.PSE-81.12 and SR.Amex-81.

17

34Reglstratlon Statement No 2-69458 (filed

October 9, 1980)

35Secuntles Exchange Act Release No. 17609

(March 6, 1981), 22 SEC Docket 394

36Secunties Exchange Act Release No 17222

(October 17, 1980),21 SEC Docket 212.

37Secuntles Exchange Act Release No. 18050

(August 21, 198\), 23 SEC Docket 632;

Secunties Exchange Act Release No 14157

89
(November 9, 1977), 13 SEC Docket 663.

38SecuritIes Exchange Act Release No. 17556

(February 17, 1981), 22 SEC Docket 14.

39Pub.L. No. 96.354,94 Stat 1164 (Septernber 19, 1980)

40Secunties Exchange Act Release No

17645 (March 20,1981),22 SEC Docket 544

41Securities Exchange Act Release No

17534 (February 11, 1981), 21 SEC Docket

1750.

42Secuntles Exchange Act Release No. 18073

(August 31, 1981),23 SEC Docket 729.

43Exchange Act Rule 15c3.1.

"SecuritIes Exchange Act Release No 11497

(June 26,1975),7 SEC Docket 241

45SecuritIes Exchange Act Release No. 17208

(October 9, 1980),21 SEC Docket 139

46SecuntIes Exchange Act Release No. 17209

(October 9, 1980),21 SEC Docket 162.

"SecuritIes Exchange Act Release No 17927

(July 9, 1981), 23 SEC Docket 34

4SSecuntles Exchange Act Release No 17383

(December 17, 1980),21 SEC Docket 977.

49$ecuntIes Exchange Act Release No. 18046

(August 20, 1981),23 SEC Docket 585.

5015 U.S.C ~~78aaa.78111, as amended

by the Secunties Investor Protection Act Amend.

ments of 1978, Pub. L. No 95.283, 92 Stat 249.

51Secuntles Investor Protection Act, Pub L.

96433, ~1, 94 Stat. 1855 (1980)

52SecuntIes Exchange Act Release No. 17410

(December 30, 1980),21 SEC Docket 1166

53Report of the Senate Committee on Bank.

tnq. HOUSing, and Urban Nfau'S to Accompany

S. 2465, S. Rep No 96.752, 96th Cong., 2d Sess

(1980); Report of the House Committee on

Interstate and Foreign Commerce to Accornpany H. R 6830, H. Rep No 96.961, 96th

Congo 2d Sess (1980).

54Secunties Exchange Act Release No. 17584

(February 27, 1981), 22 SEC Docket 283.

55SecuntIes Exchange Act Release No. 17216

(October 14, 1980), 21 SEC Docket 171,

Secunues Exchange Act Release No 17227

(October 17, 1980),21 SEC Docket 254

56Secuntles Exchange Act Release No 17818

(May 27, 1981),22 SEC Docket 1162

57Securrtles Exchange Act Release No. 17704

(Apnl 9,1981), 22 SEC Docket 709.

58SecuntIes Exchange Act Release No. 17568

(February 24,1981),22 SEC Docket 167.

59Secuntles Exchange Act Release No 17569

(February 24, 1981), 22 SEC Docket 171.

60SecuntIes Exchange Act Release No. 17473

(January 21, 1981),21 Sec Docket 1396

90

61Secunties Exchange Act Release No. 17975

(July 27, 198 I), 23 SEC Docket 172.

62Securitles Exchange Act Release No 17371

(December 12, 1980),21 SEC Docket 930.

63Secuntles Exchange Act Release No. 17599

(March 4, 1981),22 SEC Docket 329.

"'SecuntIes Exchange Act Release No. 18054

(August 21,1981),23 SEC Docket 643.

65SecuntIes Exchange Act Release No 18150

(October 5,1981),23 SEC Docket 1100

66SecuntIes Exchange Act Release No. 17870

(June 16, 1981),22 SEC Docket 1286.

67SecuritIes Exchange Act Release No. 17615

(March 10, 1981),22 SEC Docket 405.

68Secuntles Exchange Act Release No. 18094

(September 11, 1981), 23 SEC Docket 793

69Secuntles Exchange Act Release No 17302

(November 14, 1980),21 SEC Docket 627.

"Secuntes Exchange Act Release No. 17994

(July 31,1981),23 SEC Docket 238.

71SecuritIes Exchange Act Release No. 16900

(June 17, 1980),20 SEC Docket 415

72Securitles Exchange Act Release No. 17258

(October 30, 1980),21 SEC Docket 347.

73SecuntIes Act Release No. 6276 (December

23, 1980),21 SEC Docket 1052.

74SecuntIesAct Release No. 6288 (February 9,

1981),21 SEC Docket 1719.

75Secuntles Act Release No. 6331 (August

6, 1981), 23 SEC Docket 288

76Secuntles Act Release No 6332 (August

6,1981), 23 SEC Docket 311.

77Secuntles Act Release No. 6333 (August 6,

1981),23 SEC Docket 357.

78Secuntles Act Release No. 6334 (August 6,

1981), 23 SEC Docket 387

79SecuritIes Act Release No 6335 (August 6,

1981), 23 SEC Docket 401.

SOSecuntlesAct Release No. 6336 (August 6,

1981), 23 SEC Docket 410.

81Secunties Act Release No. 6337 (August 6,

1981 ), 23 SEC Docket 415.

82Secuntles Act Release No 6338 (August 6,

1981 ), 23 SEC Docket 428.

83Pub. L. No. 96477 (October 21, 1980).

84SecuritIes Act Release No 6274 (December

23, 1980),21 SEC Docket 1013.

85SecuntIes Act Release No. 6339 (August 7,

1981),23 SEC Docket 446.

86Secunties Act Release No. 6049 (Apnl

3, 1979), 17 SEC Docket 153.

87SecuntIes Act Release No. 6299 (March 19,

1981), 22 SEC Docket 466.

88SecuntIes Exchange Act Release No. 16866

(June 2, 1980),20 SEC Docket 241 '
8"Secunties Exchange Act Release No. 18189

(October 20,1981),23 SEC Docket 1238.

OOSecuritJesAct Release No. 6275 (December

23, 1980),21 SEC Docket 1024.

91SecuritJesAct Release No. 6340 (August 7,

1981), 23 SEC Docket 482.

92Secunties Act Release No. 6256 (November

7, 1980), 21 SEC Docket 523.

93Secunties Act Release No. 6301 (March 19,

1981),22 SEC Docket 474.

94Secuntles Act Release No. 6180 (January

17,1980),19 SEC Docket 295.

95SecuritJesAct Release No. 6300 (March 19,

1981), 22 SEC Docket 473.

96SecuntJesAct Release No. 6321 (June II,

1981),22 SEC Docket 1234.

97SecuntJes Act Release No. 6249 (October

23, 1980),21 SEC Docket 242.

9lj"Form S.I8. A MOnJtonng Report on the

First Eighteen Months of Its Use:' Directorate

of Economic and Policy Analysis (March 1981)

99"The Role of Regional Broker-Dealers In the

Capital Formation Process. Underwnting,

Market-Making and Secunties Activmes,"

Directorate of Economic and Policy Analysis

(August 1981).

loo"Rule 242: A Monitonng Report on the First

Six Months of Its Use:' Directorate of Economic

and Policy Analysis (December 1980)

101Securities Exchange Act Release No.1 751 7

(February 5,1981),21 SEC Docket 1533

I02Division of Corporation Finance, Secunties

and Exchange Commission Staff Report on

Corporate Accountability, 96th Cong , 2d Sess.

(Comm Print 1980) (Senate Comm. on Bankmq, HOUSing and Urban Affairs).

I03Secunties Act Release No. 6338 (August 6,

1981), 23 SEC Docket 428.

I04Secunties Exchange Act Release No 17518

(February 5,1981),21 SEC Docket 1551

I05Secunties Exchange Act Release No 17707

(April 10, 1981),22 SEC Docket 770.

I06Secuntles Act Release No, 6252 (October

24, 1980),21 SEC Docket 316.

I07Secunties Act Release No 6286 (February

6,1981),21 SEC Docket 1711

I08Secuntles Act Release No 6309 (Apnl

13,1981),22 SEC Docket 757.

I09Secuntles Act Release No. 6315 (May 4,

1981) 22 SEC Docket 946.

I10000urities Act Release No 6322 (June

19, 1981),22 SEC Docket 1318.

IlISecuntles Act Release No. 6347 (September 24,1981),23 SEC Docket 846

112SecuntiesAct Release No. 6354 (October 7,

1981), 23 SEC Docket 1075.

I13Secuntles Act Release No 6346 (September 21, 1981). 23 SEC Docket 830

114SecuntlesAct Release No 6281 (January

15,1981), 21 SEC Docket 1372.

115SecunllesAct Release No 6188 (February

1,1980),19 SEC Docket 465

116SecuntlesExchange Act Release No. 17719

(Apnl 13, 1981), 22 SEC Docket 783

117SecuntlesExchange Act Release No 18114

(September 24, 1981), 23 SEC Docket 856.

118SecuntlesAct Release No. 6351 (Septernber 25,1981),23 SEC Docket 1000

119SecuntlesAct Release Nos. 6253 and 6269

(October 28 and December 5, 1980),21 SEC

Docket 320 and 839

12°Secuntles Act Release No 6279 (January

8,1981),21 SEC Docket 1244.

121Secuntres Exchange Act Release No 17424

(January 7,1981),21 SEC Docket 1266.

I22Secuntles Act Release No 6297 (March 6,

1981), 22 SEC Docket 394

123Publlc Oversight Board, Annual Report

(1980.1981) at 14

124Supraat 20.

125Supraat 19

126Accountmg Series Release No 300

(October 8,1981),23 SEC Docket 1162.

121AccountJng Senes Release No. 296 (August

20,1981)

128Accountmg Senes Release No. 297 (August

20,1981).

I29SecuntlesAct Release No 6263 (November

17, 1980),21 SEC Docket 618.

IJOSecuntles Act Release No. 6326 (July 8,

1981 ), 23 SEC Docket 6.

131Investment Company Act Release No

11551 (January 14, 1981), 21 SEC Docket

1352

I321nvestment Company Act Release No

11552 (January 14, 1981), 21 SEC Docket

1357.

I331nvestment Company Act Release No

11553 (January 14, 1981), 21 SEC Docket

1360

134lnvestment Company Act Release No

11676 (March 10, 1981),22 SEC Docket 446.

13'Investment Company Act Relase No 11414

(October 28, 1980),21 SEC Docket 324.

136lnvestment Company Act Release No.

11421 (October 31, 1980), 21 SEC Docket 488.

137lnvestment Company Act Release No.

11391 (October 10, 1980), 21 SEC Docket 183

I38SecUnlles Act Release No 6247 (October

14, 1980),22 SEC Docket 132.

91
13'lnvestment Company Act Release No.

11675 (March 9, 1981), 22 SEC Docket 444.

140lnvestment Company Act Release No.

11675 (March 9,1981),22 SEC Docket 444

14IJnvestment Company Act Release No.

11703 (March 26,1981),22 SEC Docket 602.

1421nvestment Company Act Release No

11818 (June 17, 1981),22 SEC Docket 1308

1431nvestmentAdvisers Act Release No 750

(February 20, 1981),22 SEC Docket 257.

144lnvestment Advisers Act Release No. 767

(July 21, 1981),23 SEC Docket 156.

1451nvestmentAdvisers Act Release No. 766

(July 21,1981),23 SEC Docket 145

146lnvestment Advisers Act Release No. 769

(August 7, 1981), 23 SEC Docket 556

147S£C v FmAmenca Corporeuon and

Jorge E Cerrucero, C1v. Act No. 81.0553

(D D.C ), Utlgatlon Release No. 9317 (March 8,

198 I), 22 SEC Docket 461

1411S£Cv Banca Della Sinzzere tuihene. et

aI., CJv Act. No 81-1836 (S.D.NV), Lrtrqation

Release No. 9421 (August 18, 1981), 23 SEC

Docket 628.

149S£C v Daniel H O'Connell, Arthur 0

Tanner, C1v Act. No. 80-6183 (S D.N V.),

Litiqatron Release No. 9222 (October 30, 1980),

21 SEC Docket 410.

150SEC v Howard L Deotdountz; CJv. Act

No 814857 (S D.N V ), litigation Release

No. 9413 (August 6, 1981),23 SEC Docket 284.

151S£C v Frank H Wyman, C1v. Act. No

81-1025 (S D N V), litigation Release No

9311 (March 17, 1981), 22 SEC Docket 391.

SEC v Fredenck Wyman, II, CIV. Act. No. 81-

1026 (S.D.N.V). Litrqation Release No. 9312

(March 17, 1981), 22 SEC Docket 391

152S£Cv Carlo M. Florenuno. CJv Act. No.

81-5903 (S.D N V ), litigation Release No 9456

(September 23, 1981), B SEC Docket 958

153S£Cv £1 Dorado lnterneuorusl, Inc. Deil

O. Gustafson, et ai, C1v Act No 81.0532

(DDC), Lmqatron Release No 9314 (March

5, 1981), 22 SEC Docket 392

154S£C v C&R Clothiers, Inc. CJv Act No

80-2517 (D.D.C), Lmqanon Release No. 9194

(October 2, 1980), 21 SEC Docket-65.

155S£C v Cooper Industnes. tnc., CJv Act.

No 80.7310 (S D N.V.), Lmqauon Release No.

9260 (December 22, 1980), 21 SEC Docket

1153.

I5{;S£Cv Diagnostic Data, Inc .ei ai, CIV.Act.

No 81-1627 (D.D.C), Litiqatron Release No

9394 (July 15, 1981), 23 SEC Docket 113.

1571nthe Matter of Tidelands Capital Cor92

poreuon, SecuntIes Exchange Act Release No.

1764 (March 19,1981), 22 SEC Docket 489.

158S£Cv World-Wide Com Investments, Ltd.,

et ai, CJv.Act No. 81-1642A (N D. Ga.), UtIganon Release No. 9443 (September 9, 1981),

23 SEC Docket 787.

15.S£C v World Wide Com Investment, Ltd.,

et pI., CJvAct. No. 81.1642A (N.D. Ga.), LltIga.

non Release No 9449 (September 17, 1981),

23 SEC Docket 823.

160S£Cv. Tesoro Petroleum Corporeuon; Civ.

Act. No. 80.2961 (D.D C), litIgation Release

No 9236 (November 20, 1980),21 SEC Docket

679.

161 In the Matter of CGA Computer Associetes,

Inc., SecuntIes Exchange Act Release No. 6328

(July 16, 1981),23 SEC Docket 78.

162S£Cv. McLouth Steel Corp, Civ. Act. No

81.1373 (D.D.C.), LitIgation Release No 9375

(June 17, 1981),22 SEC Docket 1314.

163S£Cv Litton Industries, Inc., Civ Act. No.

81.0589 (D.D.C.), Litiqation Release No. 9321

(March 12, 1981),22 SEC Docket 463.

I64S£C v. WACO Finenctsl, Inc and J

Jerome Prevatte, C1v. Act No. 81.152 (W.D

MJch), litigation Release No. 9409 (July 29,

1981), 23 SEC Docket 232

165S£C v. WACO Ftnenctel, Inc. and J.

Jerome Prevatte, CJv. Act No. 80-6070 (W.D

Mich.), litigation Release No 9257 (December

12, 1980),21 SEC Docket 1007

166ln the Matter of Peine, Webber, Jackson

& Curtis, lnc.. Securities Exchange Act Release No. 17384 (December 17, 1980), 21

SEC Docket 979.

167SECv Barclay Financial Corp, CJv Act.

No 81-708 (S.D. Fla.) LItIgatIOn Release No.

9374 (June 15, 1981),22 SEC Docket 1314

168S£Cv Gallagher, Boyland & Cook, Inc.,

and Michael J Roylan, C1v.Act. No 81.1287

(C D. Cal.), litigation Release No. 9329 (March

31, 1981), 22 SEC Docket 688

1691nthe Matter of Reserve Management

Corporeuon; Investment Company Act Release

No. 11394 (October 10, 1980),21 SEC Docket

190.

170S£C v Fus: Independent Stock Transfer

Agent, Inc, and Terry £ Kirchner, Civ. Act. No

81-1645 (D.C Col), Litigatron Release No.

9452 ( September 22, 198I), 23 SEC Docket

956.

171S£Cv. America Buthnqhi Trust Management Co, Inc., et ai, Civ. Act. No. 80.3306

(D.D.C.), litigation Release No. 9266 (December

30,1980),21 SEC Docket 1241.
J72ln the Matter of Government Securities

Management Co., Investment Company Act

Release No. 11583 (January 26,1981),21 SEC

Docket 1495. In the Matter of Fundlink In.

formation Services, Investment Advisers Act

Release No. 747 (January 26, 1981), 21 SEC

Docket 1495.

17lln the Matter of Synthetic Fuels. Inc,

Secunties Act Release No. 6319 (June 2, 1981),

22 SEC Docket 1198.

174SEC v. The Investment Bankers, inc; et el;

Civ. Act No. 81.1203 (D. Col.), I.Jtigation

Release No. 9402 (July 23, 1981), 23 SEC

Docket 166.

1751nthe Matter of Ferrovanadium Corpora.

tion; N.L, Securities Exchange Act Release No.

17720 (April 13, 1981),22 SEC Docket.

I76SEC v. Sam S. Brown, Jr. and Hentage

Investment Group, lnc; avo Act No.8J.()881

(D.D.C), Utigabon Release No. 9340 (April

15, 1981),22 SEC Docket 826.

I77SEC v. Calhoun County Medical Facillty,

Inc .. et el; avo Act No. 81-61 (N.D. Miss.),

Utigation Release 9366 (June I, 1981),22 SEC

Docket 1230.

178/nthe Matter of Bulllnqton-Scties 5 Co.,

tnc.. Securities Exchange Act Release No. 17832

(June I, 1981),22 SEC Docket 1204

179SecuritiesExchange Act Release No. 17831

(June I, 1981),22 SEC Docket 1200 •.

IflDln the Matter of BeviLL, Bresler 5 Schul.

man, lnc., et a/., Securities Exchange Act Release No. 17654 (March 25, 1981), 21 SEC

Docket 965.

181SEC V. Cantor Fitzgerald Agency Corp., et

al.. Civ. Act No. 80-6137 (S.D.N.Y.), I.Jtigation

Release No. 9325 (March 18, 1981),22 SEC

Docket 540.

182SECV. Bishop Investment Corporation, et

al.. CIV. Act No. 81-609 (N.D. Tex.), Utigabon

Release No. 9351 (April 27, 1981),22 SEC

Docket 942.

'8JSEC V. Gerald L Rogers, et al., avo Act

No. 804841 (C.D.CaI.), Ubgabon Release

No. 9244 (November 24, 1980),21 SEC Docket

770.

I84SEC V. Cable/Tel Cotporstion; et el ,

CIV. Act No. 80.7170 (S.D.N.Y.), Utigabon

ReleaseNo.9258(DecemberI7,198O),21 SEC

Docket 1007.

185SEC v. Herman B. Rothbard, et al., avo Act

No. 81-0176 (D Hawau), I.JbgatJon Release No.

9427 (August 26,1981),23 SEC Docket 722.

Ifl6SEC V. Edward G. HeLler et al., Civ. Act

No. 80.2608 (D.D.G.), UtJgatJon Release No.

9231 (November 10, 1980), 21 SEC Docket

586

187SECV. Robert M. Adler, Civ. Act. No. 80.

2830 (D.D.C.), I.Jbgabon Release No. 9229

(November 5, 1980),21 SEC Docket 520.

188SECV. Crown Cork 5 Seal Co., lnc; avo

Act No 81.2065, (D.D.C), I.JtigatJon Release

No. 9437 (September 2, 1981), 23 SEC Docket

757.

I89SECV. Herbert G. Petqeend Pasha Sennce

Corporation, avo Act No. 81.2066 (D DC),

Ubgation Release No. 9436 (September 2,

1981), 23 SEC Docket 756.

191JSECv Herbert F. Heusen; Civ. Act No

81.127 (D.C. Okla.), Utigabon Release No 9290

(February 10, 1981), 21 SEC Docket 1788.

191In the Matter of Michigan Nsuonsi Corporeuon; Secunties Exchange Act Release No.

17902 (June 30, 1981), 22 SEC Docket

1424.

1925EC v Sam P. Wallace Company, Inc.

et al .. Civ, Act No. 81.1915 (D.D.C.), UtJgation

Release No. 9414 (August 13, 1981),23 SEC

Docket 564.

193US. V. Steven G Well, Crim. Act No. 81.57

(S.D.N.Y.), Utigabon Release No. 9438 (Septernber 2, 1981), 23 SEC Docket 758.

1945ECv. Micro, Therapeutics, Inc; et el; CIV.

Act No. 80-6611 (D.D.C.), UbgatJon Release

No. 8072 (August 17, 1977),12 SEC Docket

1562.

I95SEC5 CFTC v. T5D Management Com'

pany, et ai, avo Act No. 81.()633 (D. Utah),

Utigation Release No 9428 (August 26, 1981),

23 SEC Docket 723.

I96Holding Company Act Release No. 21797

(November 19, 1980),21 SEC Docket 656.

197Holding Company Act Release No. 21881

(January 13, 1981),21 SEC Docket 1324.

I98Holding Company Act Release No. 22166

(August 20, 1981),23 SEC Docket 596.

93

Appendix

THE SECURITIES INDUSTRY

Income. Expenses and Selected

Balance Sheet Items

Registered broker-dealers earned total

revenues of $20,715 million in 1980, a 43

percent increase over the 1979 level.

Securities comrmssions continued to be

the industry's most important source of

revenues, accounting for 33 percent of

total revenues In 1980. Revenues from

this source increased 42 percent over

1979, rising to $6,876 million In 1980. This

reflects the 42 percent Increase In the

number of shares, rights and warrants

traded on all exchanges and the 84 percent increase in NASDAQ volume.

Trading profits rose 48 percent In 1980

and comprised 23 percent of total revenues. Revenues from underwriting

showed the most marked growth. Fueled

by the 85 percent increase in gross proceeds from primary corporate equity

offenngs and the 36 percent increase in

such for debt offerings, underwriting profits increased 72 percent in 1980 to $1,627

rnilhon, These revenues accounted for

Appendix

eight percent of total revenues in 1980.

Total expenses for registered broker.

dealers rose by 37 percent to $17,573

million in 1980. Interest expense mcreased

26 percent over the 1979 level, although

It fell as a component of total expenses to

22 percent from 24 percent In 1979. Labor

related costs rose slqruflcantly, a reflecbon of the high trading activity. "All

employee compensation and benefits" ,

which includes compensation to all employees except registered representatives,

rose 36 percent Registered representatives' compensation is included in the ..all

other expenses" category and generally

accounts for over half of the expenses in

this category. This Item, ..all other ex.

penses", rose 46 percent to $8,236 milhon

in 1980 compared to $5,655 rnilhon in

1979. As a result, pre-tax income rose 84

percent over last year's level, reaching

$3,142 million.

Total assets grew by $34,085 million in

1980, and total habillties grew from

$81,004 million to $112,952 million. During the same period aggregate equity

capital rose by $2,137 million to $8,416

million.

97
Table 1

FINANCIAL INFORMATION FOR BROKER-DEALERS

1975-1980

(Millions 01 Dollars)

A Revenues

1 Secuntias Commissions

2 Gain (Loss) on Tradong

3 Gam (Loss) on Investments

4 Profit (Loss) From Underwrltong

and Sellong Groups

5 Revenue from Sale of Investment

Company Secuntres

6 All Other Revenues

7 Total Revenues

B Expenses

8 All Employee Compensation and

Benefits (Except Registered

Representatives' Compensation)

9 Commissions and Clearance

Paid to Other Brokers

10 Interest Expense

11 Regulatory Fees and Expenses

12 Compensation to Partners and

Votong Stockholder Officers

13 All Other Expenses (Including

Registered Representatives'

Compensation)

14 Total Expenses

15 Pre-Tax Income

C Assets. Liabilities and Capital

16 Total Assets

17 Liabilities

a Total liabilities (excludong

subordonated debt)

b Subordonated debt

c Total liabilities (17a + 17b)

18 Ownership Equity

19 Total Liabilities and Ownership

EqUity

Number of Firms

R = Revised

P = Prehmrnary

Sources FORM X-17A-l0 and FOCUS Reports

1975

$ 3,378

1,202

132

930

140

1,591

7,373

1,413

524

668

76

488

3,084

$ 6.253

$ 1120

$ 31,851

26,352

836

$ 27,188

$ 4.663

$ 31,851

4,079

1976

$ 3,857

1,828

269

1,035

165

1,961

8,915

1,684

535

900

81

572

3,658

$ 7,410

$ 1505

$ 48,983

42,842

858

$ 43,700

$ 5.283

$ 48,983

4,315

1977R

$ 3,334

1,891

353

991

161

2,401

$ 8.931

$ 1,769

585

1,246

69

553

4.118

$ 8,340

$ 591

$54,670

48,794

948

$ 49,743

$ 4.927

$ 54,670

4,484

1978

$ 4,498

2,053

394

949

162

3,637

$ 11,197

$ 2,143

804

1,967

74

616

4984

$ 10587

$ 1,106

$ 69,571

62700

1,170

$ 59,884

$ 5,701

69,571

4,998

4.825

3,183

740

943

197

4,840

$ 14,528

2488

868

3,060

76

678

5,655

$ 12,825

$ 1,703

$ 87,263

79.701

1,303

$ 81,004

$ 6,279

$ 87,283

4,875

$ 6,876

4.717

797

1,627

278

6.420

$ 20,715

3,388

1,087

3,866

101

895

8,236

$ 17,573

$ 3,142

$121,368

110.776

2,176

$112,952

$ 8,416

$121.368

5,102

Historical Ananciallnfonnation of

Broker-Dealers With Securities

Related Revenues of $500.000

or More

Aggregate revenues of broker-dealers

having securities-related revenues of

$500,000 or more increased 51 percent in

1980 on a 42 percent rise in share volume.

All sources of revenues contributed to this

rise with profits from underwriting activity

increasing the greatest percentage. Revenues from securities commissions, gains

on trading accounts, revenues from invest.

98

ment company shares and commodities

activities each grew over 50 percent from

their 1979 level. Pre-tax income nearly

doubled, rising to $2,907 million in 1980.

Firms that reported securities-related

revenues of $500,000 or more comprised

24 percent of all firms, held approximately

92 percent of the industry's assets and reported 92 percent of all revenue in 1980.

Balance sheet data for the most recent four

years are not comparable with earlier years

because of changes made in the brokerdealer reporting system.
Table 2

HISTORICAL CONSOLIDATED REVENUES AND EXPENSES OF BROKER-DEALERS

WITH SECURITIES RELATED REVENUES OF $500,000 OR MORE

(Millions of Dollars)

1972 1973 1974 1975 1976 1977 1978 1979'l 1980P

Revenues

1 securities Commissions $3,404 $2,816 $2,438 $3,220 $3,516 $2,984 $3,984 $4,134 $6.362

2 Gain (Loss) on Firm securities

Trading and Investment

Accounts

a Gain (loss) In trading 994 590 722 1,143 1,757 1,512 1,773 2,795 $4,230

b Gain (loss) In Investments 209 -3 55 131 253 326 356 695 723

c Total gain (loss) 1203 587 777 1274 2010 1838 2129 3490 4953

3 Profit (Loss) from Underwriting

and Seiling Groups 914 494 496 914 1.021 929 838 845 1,526

4 Revenue from Sale of Investment Company securities 151 149 79 120 146 138 138 161 252

5 Fees for Account Supervrsron,

Investment AdVISOry and

Administrative Services 99 83 85 156 207 176 232 248 362

6 Commodity Revenue 125 178 168 187 236 266 346 409 715

7 All Other Revenues 833 943 1.022 1,142 1,441 1,901 2,476 3.376 4946

8 Total Revenues $6,729 $5,250 $5,065 $7,013 $8,577 $8,232 $10.123 $12,663 $19,116

Expenses

9 All Employee Compensation

and Benefits (Except

Registered Representatives'

Cornpensanon) $1.392 $1184 $1.097 $1,376 $1,668 $1,593 $1925 $2.168 $3.051

10 Commissions Paid to

Other Brokers' 186 188 151 209 168 530 707 746 981

11 Interest Expense 634 796 750 582 839 1.149 1,787 2,764 3.586

12 All Other Expenses (Including

Registered Representatives'

Compensation) 3.153 2.703 2.657 3,796 4,487 4,274 4,762 5.511 8.591

13 Total Expenses $5.365 $4,871 $4,655 $5.963 $7.162 $7,546 $9,181 $11,189 $16,209

Pre- Tax Income

14 Pre-Tax Income $1,365 378 $ 410 $1,050 $1,415 686 942 $1.474 $2,907

Number of Firms 817 652 609 770 932 857 962 1,030 1.214

'Includes clearance paid to others beginning In 1977

R ~ ReVised

P :; Preliminary

Sources Form X-17 A-l 0 and FOCUS Reports

99
Table 3

HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITH

SECURITIES RELATED REVENUES OF $500,000 OR MORE

(Millions of Dollars)

1972 1973 1974 1975 1976 1977' 1978 1979R 1980P

A Assets

1 Cash, clearing funds and

other deposits 1,281 $ 1,139 $ 940 $ 925 $ 1,135 $ 979 $ 1,108 $ 1,587 $ 2,868

2 Receivables from other

broker-dealers and

non-customers 4,314 3,270 3,014 3,883 5,399 5,364 6,131 7,924 13,112

3 Receivables from

customers 13,373 9,056 7,450 8,464 12,804 13,728 15,431 14,534 22,707

4 Market value or fair value

of long posinons In

secunnes and cornmodmes 11.870 9,722 10,789 12,901 21,392 28,521 33,036 47,837 65,612

5 Exchange memberships at

market value 208 123 101 118 142 117 121 172 240

6 Other assets 1,704 1879 1,493 4,535 7,203 3,038 3,488 4,384 6,742

7 Total assets $32,750 $25,189 $23,787 $30,826 $48,075 $51,747 $59,315 $76,438 $111,281

B LiabIlitIes

8 Money borrowed $14,398 $ 9,878 $10,421 $ 9,488 $11,802 $26,503 $27,565 $34,267 $ 42,969

9 Payables to other

broker-dealers and

non-eustomers 4,370 2,936 2,919 3,568 4,785 5,460 5,481 6,975 12,650

10 Payables to customers 5,228 4,978 3,986 4,696 6,174 5,158 7,691 8,326 14,486

11 Short posrnons In securines and commodities 1,525 1,158 1,038 1,165 2,555 4,834 7,097 14,344 22,007

12 Subordinated

borrowings 774 642 594 767 799 640 973 1,066 1,666

13 Other liabilities 2,505 2,550 2,099 7,203 17,178 4,837 5,849 6,355 10,302

14 Total Lrabrnties 28,802 22,142 21,056 26,887 43,293 47,632 54,656 71,333 $104,080

C Ownerstup EqUity

15 Ownership equity 3,948 3,047 2,731 3939 4,782 4115 4,659 5,105 $ 7,201

16 Total liabilities and

capital $32,750 $25,189 $23.787 $30,826 $48,075 $51,747 $59,315 $76438 $111,281

Number of Firms 817 652 609 770 932 857 962 1,030 1,214

R = Bevrsed

P = Preliminary

"The balance sheet tor 1977 IS not comparable With previous years' data because of changes In the reporting form

Sources Form X-17A-l0 and FOCUS Reports

Securities Indusby Dollar In 1980

For Canying/Clearing Fums

Data for carrying! clearing firms only are

presented here to allow for more detail, as

reporting requirements for Introducing and

carrying/clearing firms differ and data

aggregation of these two types of firms

necessarily results in loss of detail. The 86

percent of industry revenues earned by

100

carrying/ c1eanng firms in 1980 suggests

that this group is a suitable proxy for the

industry.

Securities commissions accounted for

333 cents of each revenue dollar earned in

1980. Trading gains and margin interest

contributed 21.9 cents and 12.1 cents,

respectively. Together these three items

accounted for 67.3 cents of each revenue

dollar earned, a slight decline from the
1979 level of 67.7 cents. Interms of dollars,

these three items accounted for $11,973

million of the $I7,783 million of total revenues eamed by canyingJ clearing firms,

Total expenses consumed 852 cents of

every revenue dollar generated, a decrease

from 89.0 cents in 1979, as the industry's

pre-tax profit margin increased from 11.0

cents per revenue dollar to 14.8 cents.

Interest expenses accounted for 21.1 cents

in 1980, compared to 24.0 cents in 1979.

Registered representatives' compensation

amounted to 19.7 cents, and clerical and

administrative employees' expenses consumed 15.7 cents of each revenue dollar.

These two employee-related items com.

prised 35.4 cents of the revenue dollar, a

decrease of one cent from the 1979 level.In

dollar terms, registered representatives'

compensation rose 58% to $3,506 million,

and clerical and administrative employees'

expenses rose 35 percent to $2,792 million

in 1980. Together they consumed $6,298

milhon of the $17,783 million in total revenues. The "all other expense" category,

which includes promotional costs, regulatory fees and expenses and miscellaneous items, accounted for 123 cents of

the revenue dollar, compared to 11.4 cents

in 1979.

101
~=~...

:gEE.. U

:;;

iii

Cl

M

""~ ..

< .5! ..M .. .r! . ""N "t!'" ..

.

E l;1: .... ....

..... .... ....

"c:

E .E t::.~

n

.. ...... ~! U n.

ClW I!... ..~ ii ED.

ClU E:I ... UCl

W

:)zW>W

a:

II.o

enWo

a:

:)~W

::E8~x~I W

a:

lLoz«

ffl

enzW

lLXW

o

co

Q\

.....

102
Table 4

REVENUES AND EXPENSES OF BROKER-DEALERS CARRYING/CLEARING

CUSTOMER ACCOUNTS

(MJlhons of Dollars)

1980 1979 1979-1980

Percent of Percent of Percent

Dollars Total Revenue Dollars Total Revenua Increase

Revenues

1 secunnes Commissions. $ 5,923 333 $ 4,091 329 448

2 Gain (Loss) In Trading 3,900 219 2,631 211 482

3 Gain (Loss) In Investments, 676 38 664 53 18

4 ProfIt (Loss) From Underwriting

and Seiling Groups ,

1,492 84 872 70 711

5 Revenue from Sale of Investment

Company Securities 180 10 125 10 440

6 Margin Interest Income .. ,

2,1SO 121 1,705 137 261

7 CommodIty Revenue, .

758 43 510 41 486

8 Other Revenue Related to Secunties

BUSiness 1,917 108 1,344 108 426

9 Revenue from All Other Sources $ 787 44 513 41 534

10 Total Revenues $17,763 1000 $12,455 1000 428

Expenses

11 RegIstered RepresentatIves'

CompensatIon $ 3,506 197 $ 2,216 178 582

12 Clerical and Administrative

Employees' Expenses 2,792 157 2,070 166 349

13 Oornrmssrons and Clearance Paid

to Others 556 31 SOl 40 110

14 Interest Expense 3,756 211 2,964 240 259

15 ccmmumcanon and Date

Processing 1,108 62 893 72 241

16 Occupancy and EqUIpment 581 33 481 39 208

17 CompensatIOn to Partners and Voting

Stockholder OffIcers 675 38 523 42 291

18 All Other Expenses $ 2,173 123 $ 1,417 114 534

19 Total Expenses $15,147 852 $11.085 890 366

Pre- Tax Income

20 Pre-Tax Income $ 2,636 148 $ 1,370 110 924

Note Includes information for firms that carry customer accounts or clear secunues transactions

Percentages may not add due to rounding

Source FOCUS Reports

103
Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers increased

from 4.875 in 1979 to 5.102 in 1980.

During the same period. the number of

branch offices increased from 6.640 to

6.999.

At the end of 1980. 53,388 full-time

registered representatives were associated

104

with members of the New York Stock Ex.

change ("NYSE") and 76.781 full-time

registered representatives were employed

in the securities industry. The total of full.

time personnel employed in the securities

business rose 19 percent from 165.948 at

the end of 1979 to 197.722 at the end of

1980. NYSE member firms accounted for

80 percent of the industry's full-time employees.
Broker-Dealers and Branch Offices

o 3000 6000 9000

1973

1974

1975

1976

1977

1978

1979

1980

I

~~@~~~~~~~~~tr:~~;::~~~~~:tr~::::-:: :~.;::. ;.::}ft (: ..;.;;:; ;{t:ri. I4088 I

I

7223

I

mf~~~\ij;~j~~If\:".::::.::~i~~~~i~;~;~;i;I11r::'t::~::::. tf:::.::1408 7 I

1

6307

I

:~~:~~:t~~~i~J~~I~~~~~~:;;:\Iit~t~r;::; ::'::::;~;~;:l~{jfrrr :::J 40 79 I

R

I

6267

I

m~~:t;:t::: :~\;;~~::jjm~ ~;::'::'::r::::~rf:~r: -,:.:,)jj~jj~~tfjf~:~:~:~:~J 43 75 I

1

6290

I

~1tr~:~~~~~~~~~jt~~ri:::;)t)~~i~f~ii1;:;: :~i~~:M)~~~jj)~j:l):~::;;;::::::::~q 4484 I

1

6498

I

~~:~:~:~~:::~:rrfr~~:~~::::r~~t~~~~~~~f~:t::~::::~:ilrii/;;::::~::~::(j~~~~~~?:'::':':".': ..::l 4998 I

R

1

5893

I

:i~~~~t~~~~~~~~~:;:fi6;:ir~:~::::;:;~~~j~jrj:~;~:::,{;;;':;:;)j~~::~~:(\~::"'::' ~,::::.{.){'I487 5 I

R

I6640R

I

::}~J~~~rtt~~:r~:::tj~trjtIi~i:~i~jt?jf::~~~;:;:::~~;~~~j~tfIjt~ii:~~.J 5 7O!' I

I6999P

. I I

I' 'J ',. .'

...::..:.:.::: ....:..:.:.... Broker-Dealers

...... ,'" ;

___ , Branch OffIces

P=Preliminary R=Revlsed

SOURCE' FORM X-17A-10 AND FOCUS REPORTS

105
Table 5

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF

1934-EFFECTIVE REGISTRANTS AS OF SEPTEMBER 30, 1981 CLASSIFIED BY TYPE OF

ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE

Number of Propnetors

Number of RegIstrants Partners. Officers. Etc 1 2

Sole Sole

Total Propria. Partner- Corpora- Total Propne- Partner- Corporatorsmps ships 110ns3 torshrps ships hons

Alabama 27 4 0 23 127 4 0 123

Alaska 0 0 0 0 0 0 0 0

Arizona 28 3 2 23 101 3 7 91

Arkansas 22 2 0 20 113 2 0 111

California 693 218 65 410 2.484 218 289 1,977

Colorado 108 3 3 102 575 3 59 513

Connecticut 84 10 12 62 460 10 98 352

Delaware 10 1 0 9 33 1 0 32

Distnct of Columbia 38 2 7 29 304 2 30 272

Flonda 203 9 11 183 663 9 31 623

Georgia 70 3 6 61 380 3 17 350

Hawau 22 1 1 20 85 1 2 82

Idaho 9 2 0 7 30 2 0 28

"'InOIS 2,177 1,485 213 479 4,285 1,486 1,071 1,723

Indiana 50 7 1 42 258 7 2 249

Iowa 34 3 0 31 180 3 0 177

Kansas 31 2 2 27 156 2 9 145

Kentucky 10 1 0 9 62 1 0 61

LOUISiana 37 6 5 26 209 6 20 183

Mame 10 0 3 7 45 0 19 25

Maryland 49 5 3 41 266 5 70 191

Massachusetts 177 28 14 135 1053 28 94 931

Michigan 71 7 5 59 464 7 166 291

Minnesota 84 1 0 83 597 1 0 596

MISSISSIPPI 20 1 3 16 88 1 7 80

MIssouri 67 1 3 63 712 1 64 647

Montana 4 0 0 4 25 0 0 25

Nebraska 14 0 0 14 121 0 0 121

Nevada 4 1 1 2 8 1 2 5

New Hampshire 7 1 0 6 27 1 0 26

New Jersey 202 30 17 155 727 30 51 646

New MeXICO 7 1 0 6 41 1 0 40

New York (excludrng NY City) 306 77 25 204 1,902 78 263 1,581

North Carol rna 35 3 0 32 145 3 0 142

North Dakota 3 0 0 3 9 0 0 9

Ohro 90 5 11 74 660 5 198 457

Oklahoma 49 5 0 44 219 5 0 214

Oregon 35 1 0 34 138 1 0 137

Pennsylvania 271 24 71 176 1,350 24 258 1,068

Rhode Island 18 5 2 11 45 5 8 32

South Carolrna 9 1 1 7 29 1 2 26

South Dakota 2 0 0 2 14 0 0 14

Tennessee 53 2 2 49 293 2 6 285

Texas 212 15 8 189 1328 15 33 1,280

Utah 36 3 2 31 135 3 7 125

Vermont 5 1 1 3 39 1 2 35

Virginia 34 4 6 26 367 4 15 348

Washington 76 5 1 70 360 5 6 349

West Vlrgrnla 8 2 0 6 25 2 0 23

Wisconsin 57 7 1 49 425 7 2 416

Wyomrng 5 1 0 4 15 1 0 14

Total (excludrng NY City) 5,673 1,999 506 3,163 22,177 2,001 2,908 17,268

New York City 1,729 646 270 813 9,102 646 2,371 6,085

Subtotal 7.402 2,645 776 3,981 31,279 2,647 5,279 23,353

Forelgn4 21 0 2 19 142 0 9 133

Grand Total 7,423 2,645 778 4,000 31,421 2,647 5,288 23,485

'Includes directors, officers. trustees and all other persons occupymg Similar status or performing SImilar functions

'Allocations made on the baSIS of location of pnncrpai otnces of registrants, not actual locations of persons

31ncludes all forms of organization other than sale propnetorsrups and partnerships

"Registrants whose principal offices are located In foreign countnes or other JUrisdictions not listed

106
Table 6

PRINCIPAL BUSINESS OF SECO BROKER-DEALERS

1979

Fiscal year-end

1980 1981

Exchange member primarily engaged In exchange cornrrnssion business

Exchange member primarily engaged In floor activities

Broker or dealer In general securities business

Mutual fund underwriter

Mutual fund distnbutor

Broker or dealer seiling vanable annuity contracts

Solicitor of savings and loan accounts

Real estate syndicator and mortgage broker and dealer

Real estate condominium Interests

limited partnership Interests

Broker or dealer seiling 011and gas Interests

Put and call broker or dealer or option writer (non-exchange options)

Broker or dealer seiling securities of only one Issuer or associated Issuers (other

than mutual funds)

Broker or dealer seiling church securities

Government bond dealer (other than municipal)

Broker or dealer In municipal bonds

Broker or dealer In other securities business

No secunties business

Totals

Based on data provided by 305 of the 367 broker-dealers

Based on data provided by 353 of the 400 broker-dealers

Based on data provided by 360 of the 450 broker-dealers

6 1 13

6 5 5

33 41 37

7 6 5

2 2 1

6 9 7

5 4 5

32 32 30

1 3 3

71 69 116

19 27 23

4 6 7

33 27 25

9 10 6

0 1 1

4 6 5

36 42 47

25 26 22

.305 •• 352 ••• 360

107
Table 7

APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERS

AND INVESTMENT ADVISERS

Fiscal Year 1981

BROKER-DEALER APPLICATIONS

Applications pending at close of preceding year

Appucauons received dUring tiscal 1981

Total applrcatrons for drsposmon

Drsposrtron of Applications

Accepted for filing

Returned

Withdrawn

Denoed

Total applications disposed of

Applications pending as of September 30, 1981

BROKER-DEALER REGISTRATIONS

Effective registrations at close of preceding year

RegIstrations effective dUring fiscal 1981

Total regIstrations

Registrations terminated dunnq fiscal 1981

Withdrawn

Revoked

Cancelled

Total registrations terminated

Total registrations at end of fiscal 1981

INVESTMENT ADVISER APPLICATIONS

Applications pending at close of preceding year

Applications received dUring fiscal 1981

Total applications for drsposmon

DISPOSition of applications

Accepted for filing

Returned

Withdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1981

INVESTMENT ADVISER REGISTRATIONS

Effective regIstrations at close of preceding year

Registrations effective dUring IIscal 1981

Total registrations

Registrations terminated dUring fiscal 1981

Withdrawn

Revoked

Cancelled

Total registrations terminated

Total registrations at end of fiscal 1981

108

-0-

1,738

1,738

1,379

359

0

0

1,738

-0-

6,751

1,379

8,130

677

30

0

456

7,423

-0-

1,150

1,150

879

271

0

0

1,150

-0-

5,680

879

6559

286

0

8

294

6,265
Table 8

APPLICATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES

DEALERS AND TRANSFER AGENTS

Fiscal Year 1981

MUNICIPAL SECURITIES DEALERS APPLICATIONS

Applications pending at close 01 preceding year

Applications received durong I,scal 1981

Total applications lor disposillon

DISposition 01 Applications

Accepted for IIlIng. • .

Relurned . " . . .

Denied

Total applications disposed of .

Applications pending as of September 30. 1981

MUNICIPAL SECURITIES DEALERS REGISTRATIONS

Effecllve reglslrallons at close of precedong year

Reglslrallons effective durong fiscal 1981 .

Total registratIons.. .., . . ....

Reglslratlons terminated durong fiscal 1981

Withdrawn

Cancelled ..

Suspended. '" .

Total reglslrallons termmated

Total reglslratlons at end of fiscal 1981

TRANSFER AGENTS APPLICATIONS

11

1

o

o

o

o

.0-

12

12

12

o

350

11

361

o

361

Appllcallons pending al close of precedong year .

Applications received durong fIscal 1981

Total applications for diSposition ....

DIspoSition of appllcallons

Accepled for filing . .

Relurned ... ....

Wllhdrawn . .

Denied. ....• .

Total applications diSposed of .

ApplicatIons pendIng as of September 30. 1981

TRANSFER AGENTS REGISTRATIONS

Effective registrations at erose of precedong year.

Reglslratlons effective durong fiscal 1981

Total reglslratlons ....

Reglstrallons lermonaled durong fiscal year 1981

Withdrawn .. ... ..

Cancelled

Suspended .

Total registrations termonated .

Total reglslratlons at end of fiscal 1981

.0-

58

58

53

5

0

0

58

.0-

935

53

988

0

0

0

0

988

109
SeJf-Reguiatory Organizations:

Revenues. Expenses and Balance

Sheet Structure

From a financial perspective, most SelfRegulatory Organizations (SROs) and their

subsidiaries fared well in 1980, due in large

part to increased trading volume. The sole

exception, the ISE, experienced negative

pre-tax income for the second year in succession. Total revenue of SROs amounted

to $368.5 million, an increase of 24 percent

over the level of 1979. Total expenses increased by only 13 percent, from $271.7

million to $307.6 million. As a result, aggregate pre-tax income soared last year, up

$35.1 million to $60.9 million.

Revenues obtained from volume-related

activities are an important component of

SROs' income. For example, commission

fees accounted for $g().7 million in 1980, or

25 percent of total SROs' revenues. Usting

and communication fees contributed another $57.8 million (16 percent) and $522

million (14 percent), respectively. The

largest increase in revenues occurred in the

"other" revenues category, which grew 138

percent to $92.0 million. As a result of this

growth "other" revenues became the most

important revenue source. This category

consists primarily of Income from interest

and investments, and its growth could be

reflective of increasing equity prices and

bond yields in 1980.

Although increasing only marginally

during the year (0.5 percent), employee

costs continued to represent the largest

component of expenses for SROs last year.

Such costs aggregated $132.8 million

during the year, or43 percent of total SROs'

expenses. Communication, data processing and collection costs rose by 10 per.

cent to $70.6 million, while occupancy

costs declined by $33 million to $153

million. The greatest increase in expenses

was in "all other expenses," which rose by

94 percent to $50.1 million, or 16 percent of

the total.

The individual organizations are quite

different in the pattem of their income

statements and balance sheets. Financial

110

information for individual SROs is pre.

sented on the accompanying tables.

Aggregate pre-tax income of SROs expanded by 136 percent in 1980, although

this growth was not spread evenly. In dollar

terms the NYSE accounted for $15.4

million (or 44 percent) of the aggregate

increase, followed by the ASE and the

CBOE, which experienced increases of

$53 million and $5.9 million in pre-tax income, respectively.

The NYSE, with assets of slightly less

than $168.6 million at the end of 1980 has

the largest asset base among SROs. The

NYSE was followed by the MSE ($155.5

million) and the PHLX ($44.0 million). To a

large extent, the differences in cost structure and asset distribution among SROs

are a function of the market served. For ex.

ample, the NYSE is a large "auction" market, where members of the exchange

gather in a central location to effect trans.

actions. Because of this, the NYSE incurs

relatively large fixed overhead costs and

makes substantial investments in plant and

equipment In contrast, the nature of the

"dealer" market served by the NASD is

such that large fixed cost outlays for business-related property are not required.

However, no matter what the form of the

market served by an SRO, the chief component of liabilities is accounts payable.

At the end of 1980 the net worth (or

members' equity) of SROs totalled $211.1

million, an increase of 19 percent over

1979. The NYSE, with $102.5 rrullion, accounted for nearly 49 percent of total SROs'

net worth last year. The next largest SROs

in terms of net worth, the ASE and the

NASD, had 14 percent and 13 percent

shares, respectively. Since 1975 the total

net worth of SROs has grown at an average

annual rate of 10 percent

C1eanng agency revenues increased

approximately $30 million during 1980.

A large portion of this increase can be

attributed to an $18.4 million increase in

the "Interest and Other Revenues" category. This category, which consists primarilyof interest income, increased due to
an over-all rise in interest rates as compared

to the previous year. Revenues from clearing and depository seJVicesalso increased

during 1980; each rising $6.6 million and

$4.9 million, respectively. The growth in

revenue from these seJVicesis due, in large

part, to an expansion of trading volume

which occurred during the year. The additional depository revenues can also be attributed to increased bank participation.

Another factor in the rise of clearing agency

revenues was the removal of the two and

one-half year Commission moratorium on

expansion of option listings. In particular,

Options Clearing Corporation experienced

a 35 percent growth in revenues as a consequenc-e of increased option trading resulting from the termination of the moratorium.

Aggregate clearing agency expenses increased by $282 million during the year.

Generally, these cost increases occurred

In categories which are sensitive to the

volume of transactions processed. For example, "Employee Costs" which includes

labor costs and associated expenses, increased $10.8 million.

In conclusion, 1980 was a year of stable

growth in clearing and depository services,

with increases in aggregate clearing agen.

cy expenses offset by increases in revenues.

III
112

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Table 10

REVENUES AND EXPENSES OF SELF-REGULATORY ORGANIZATIONS

1975-1980

(Thousands of Dollars)

1975R 1976R 1977R 1978R 1979R 1980R

REVENUES

Oornmissron Fees/Transacnon

Revenues. 32,844 38,601 s 37,231 $ 52,087 57,699 $ 90 733

lIsting Fees 31,769 40,792 42,277 43,109 47,137 57,846

Ccrnrnurucatron Fees 25,947 39,817 54,485 54,208 47,666 52218

Clearing Fees 35,450 41,218 8,886 10,331 11,707 14,657

Depository Fees 27,792 36,227 37,934 46,585 54,747 11,511

Tabulation Services 13,554 16,536 16,029 5,430 3,123 3,503

All Other Revenues 38,482 42,788 52,632 62,929 75,426 138,025

Membership Dues 11,267 13,057 14,437 15,553 16,572 20,351

Registration Fees, 5,130 4,234 4,361 6,245 7,649 10,757

Floor Usage Revenues 6,966 9,022 10,653 11,073 11,229 12,123

Corporate FInance Fees 1,121 1,033 922 1,127 1,236 2,759

Other 13,998 15,442 22,259 28,931 38,740 92,035

Total Revenues $ 205,838 $ 255,979 $ 249,474 $ 274,679 $ 297,505 $ 368,493

EXPENSES

Employee Costs $ 84,275 $ 99,967 $ 103,021 $ 110,109 $ 132,160 132,773

Occupancy Costs 12,885 14714 15929 15,101 18,618 15,289

EqUIpment Costs 3,504 4,373 3,243 3,365 3,405 5,553

Professronal and legal services 8,001 8,564 9374 9,806 12,670 14,485

Depreciatron and Arnornzatron 4,822 9,063 8,489 8,755 8,941 10.547

AdvertIsing, Printing and Postage 3,339 3,442 3.551 4,202 5,940 8,265

Cornmurncanon, Data Processing

and Collecnon • 58.847 77,708 73199 68,256 64,104 70,592

All Other Expenses 15,854 25.029 18036 22,100 25.841 50,092

Total Expenses $ 191,527 $ 242.860 $ 234,842 $ 241,694 $ 271,679 $ 307,596

PRE-TAX INCOME $ 14,311 $ 13,119 $ 14,632 $ 32.985 $ 25,826 $ 60,897

R = ReVised

Note Figures represent unaudited tmanciat data FIgures for 1980 exclude Deposrtory Trust Company

Source Survey of Self-Regulatory Organizations

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Table 14

REVENUE AND EXPENSES OF MUNICIPAL SECURITIES RULEMAKING BOARD

Years Ended September 30

1981 1980'

Revenues

Assessment Fees

Annual Fees

trunal Fees

Interest Income

Other

Expenses

Salaries and employee benefits

Board and Cornrruttee

Operations

Education and cornrnurucatron

Professional services

Depreciation and amortization

Revenues over (under) expenses

Fund balance, beginning of year

Fund balance, end of year

'ReclassIfIed for comparative purposes

$ 1,257,786

178,294

12,200

48.635

16018

1,512.933

460,236

325.153

138,663

166,043

42,508

10,977

1,143,580

369.353

281 349

$ 650,702

$484,391

190.202

15.900

36,833

17,386

744,712

431,373

315,363

141,947

137432

58.705

11.366

1,096.186

(351,474)

632.823

$281,349

EXEMPTIONS

Section 12(h) Exemptions

Section 12(h) of the Exchange Act

authorizes the Commission to grant a complete or partial exemption from the registration provisions of Section 12(g) orfrom

other disclosure and insider trading provisions of the Act where such exemption is

consistent with the public interest and the

protection of investors.

For the year beginning October 1, 1980,

15 applications were pending, and an additional 13 applications were filed during the

year. Of these 28 applications, 13 were

granted and 6 were withdrawn. Nine applications were pending at the close of the

year.

The decrease in the number of applications from previous years may have resulted from the wider use of general exemptive rules.

Exemptions for Foreign Private

Issuers

Rule 12g3-2 provides various exemptions from the registration provisions of

Section 12(g) of the Exchange Act for the

securities of foreign private issuers. Perhaps the most important of these is that

contained in subparagraph (b) which provides an exemption for certam foreign

issuers which submit on a current basis

material specified in the rule. Such material

includes that information about which investors ought reasonably to be informed

and which the issuer: (1) has made public

pursuant to the law of the country of domicile or in which it IS incorporated or organized; (2) has filed with a foreign stock exchange on which its securities are traded

and which was made public by such exchange and/or (3) has distributed to its security holders. Periodically, the Comrnistion publishes a list of those foreign issuers

which appear to be current under the exemptive provision. The most current list is

as of September 30, 1981 and contains a

total of 360 foreign issuers.

Section 15(a) Exemptions

The Commission received two requests

for exemption from the broker-dealer registration requirement of Section 15(a) of the

Exchange Act. The Commission denied

119
one applicant's exemption request but

granted an exemption to the National Association of Investment Clubs (NNC) in connection with its stock purchase program.

The Commission determined that an ex.

emption for NNC would be consistent with

the public interest and the protection of

investors.

Rule 101>-6Exemptions

Exchange Act Rule 10b-6 imposes certain prohibitions upon trading in securities

by persons interested in a distribution of

such securities. During the fiscal year, the

Commission granted approximately 350

exemptions pursuant to paragraph (f) of

Rule 10b-6 under circumstances indicating

that proposed purchase transactions did

not appear to constitute manipulative or

deceptive devices or contrivances comprehended within the purposes of the rule.

FINANCIAL INSTJT(JTJONS

Stock Transactions of Selected

F'mancial Institutions

Private noninsured pension funds, open.

end investment companies, life insurance

companies and property-liability insurance

companies purchased $103.0 billion of

common stock and sold $g3.1 billion in

1980. During 1979 gross purchases and

sales by these institutions were $59.7

billion and $55.1 billion, respectively. These

laoels represent an increase of about 70

percent over 1979. An increase of similar

magnitude, 60 percent, was exhibited in the

120

market value of stock purchased on U.S.

Securities Exchanges. Net purchases rose

sharply to $g.9 billion up from $4.6 billion in

1979. The common stock activity rate rose

from 29.8 percent in 1979 to 43.1 percent

in 1980. (Activity rate is defined as the average of gross purchases and sales, annualized, divided by the average market value

of holdings.)

Open-end investment companies again

had the highest activity rate for the year,

593 percent, increasing from 44.5 percent

in 1979. The second highest activity rate,

49.4 percent, was exhibited by separate

accounts of life insurance companies.

Separate accounts are held apart from gen.

eral accounts of life insurance companies,

and investments of up to 100 percent in

equities are allowed by law.

Purchases and sales by foreign investors

established new highs in 1980, rising to

$403 billion and $35.0 billion, respectively,

and resulted in net acquisitions of $5.4

billion. These figures compare to year

earlier purchases of $22.6 billion, sales of

$21.0 billion, and net acquisitions of $1.6

billion.

Revisions have been made in the rnethodology by which estimates are obtained

for common stock transactions of private

noninsured pension funds and propertyliability insurance companies. Revisions

have been made to the 1979 and 1980 data

and are presented along with unrevised

data for 1973.1977. Due to these revisions,

data for 1979 and 1980 are not comparable with the data for earlier years.
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Stoekholdings of Institutional

Investors and Others

At year-end 1980. the ten major categories of institutional investors listed in the

accompanying table held a combined total

of $519.9 billion in total corporate stock

outstanding (common and preferred stock

combined). This represented a 27.9 percent gain from the $406.4 billion in stocks

held a year earlier by these investors compared to the 33.6 percent growth of stock

held by all investors. Thus, the share oftotal

stock outstanding that was held by these

institutional investors dropped from 34.5

percent to 33.0 percent during calendar

1980. The value of stockholdings of other

domestic investors (primarily individuals

but also including broker<lealers and other

institutional investors not shown separately)rose 38.2 percent in 1980. At$938.9

billion, stockholdings of other domestic

investors accounted for 59.7 percent of

total stock outstanding at year-end 1980.

compared to 57.7 percent a year earlier.

Foreign investors held 73 percent of total

stock outstanding as of December 31,

1980, down from 7.8 percent a year earlier.

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Table 17

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

AS OF SEPTEMBER 30. 1981

Number of Registered Companies Approximate

Market Value

of Aseets of

Active Inactive! Total Active

Companies

(Millions)

Management open-end ("Mutual Funds") 996 34 1.030 $166.918

Variable annuity-separate accounts 56 2 58 1.346

All other load funds 940 32 972 165.572

Management closed-end 161 51 212 7,067

Small business Investment companies 36 6 42 351

All other closed-end companies. 125 45 170 6,716

UnIl Investment trust 413 20 433 19345'

Varrable annuity-separate aCCOU'lIS 80 1 81 2.364

All other umt investment trusts 333 19 352 16.981

Face-amount certificate companies 4 4 8 32

Total. 1.574 109 1.683 $193.362

'Inactive refers to regIStered companies which as of September 30. 1981. were," the process of being uqurdated or

merged. or have filed an application pursuant to Section 8(f) of the Act for dereg,stratlon. or which have otherwise gone out

of existence and remain only unnl such time as the Commission Issues order under Section 8(t) terrrunatmq their

registration

'1 Includes about 3 8 billion of assets 01 trusts which Invest In securtnes of other Investment companies, substantially all

of them mutual funds

125
Table 18

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

Approximate

market value

of assets

Registered Registered Registration Registered of active

Fiscal year ended at beginning dUring terminated at end 01 companies

September 30 of year year dUring year year (millions)

1941 0 450 14 436 $ 2,500

1942 436 17 46 407 2,400

1943 407 14 31 390 2,300

1944 390 18 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 3700

1950 358 26 18 366 4.700

1951 366 12 10 366 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

1956 387 46 34 399 14,000

1957 399 49 16 432 15,000

1958 432 42 21 453 17,000

1959 453 70 11 512 20,000

1960 512 67 9 570 23.500

1961 570 118 25 663 29.000

1962 663 97 33 727 27,300

1963 727 48 48 727 36,000

1964 727 52 48 731 41.600

1965 731 50 54 727 44,600

1966 727 78 30 775 49.800

1967 755 108 41 842 58,197

1968 842 167 42 967 69,732

1969 967 222 22 1,167 72,465

1970 1,167 187 26 1,328 56,337

1971 1,328 121 98 1.351 78,109

1972 1.351 91 108 1,334 80.816

1973 1,334 91 64 1,361 73,149

1974 1.361 106 90 1.377 62,287

1975 1,377 68 66 1,399 74.192

1976 1,399 63 86 1.376 80,564

1977' 1,403 91 57 1,437 76.904

1978 1,437 98 64 1,471 93.921

1979 1,471 83 47 1,507 108.572

1980 1,507 136 52 1,591 155,981

1981 1,591 172 80 1,683 193,362

'Began F.scal Year Ending September 30. 1977

126
Table 19

NEW INVESTMENT COMPANY REGISTRATIONS

Management open-end

Van able Annuities.

All others

Sub-total.

Management closed-end

SBIC's

All others ..

Sub-total.

Unit Investment trust

Vanable annuitres

All others .

Sub-total

Face amount certificates

Total Registered

Table 20

INVESTMENT COMPANY REGISTRATIONS TERMINATED

Management open-end

Variable annurtres

All others

Sub-total

Management closed-end

SBIC's .

All others

Sub-total

Urnt Investment trust

Variable annumes

All others

Sub-total

Face amount certificates

Total terminated

1981

3

128

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11

16

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172

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80

127
Private Noninsured Pension

Fund Assets

At the end of 1980, total assets of private

noninsured pension funds were $256.9

billion at book value and $2972 billion at

market value. These figures represent in.

creases of $33.4 billion and $72.0 billion,

respectively, over totals at the end of 1979.

The most important explanatory factor in

the growth of pension fund assets during

the year was a large increase in holdings of

common stock. At book value, common

stock holdings rose by $175 billion to

$1285 billion, an increase of 15.8 percent

The market value of common stock hold'

ings grew to $174.4 billion, gaining $51.7

billion or 42.1 percent (Itshould be borne

in mind that common stock prices rose

considerably during 1980. E.g., the Stan.

dard & Poor's 500 Indexand the New York

.Stock Exchange Composite Index in.

creased by 23.8 percent and 242 percent,

respectively.) Other categories of assets

which grew substantially during 1980 were

128

U.S. Government securities (increasing by

$5.8 billion at book value and $4.8 billion

at market value), and Corporate and Other

Bonds (increasing by $4.4 billion at book

and $8.7 at market).

The composition of assets of private non.

insured pension funds has changed con.

siderably in the past seven years. Viewedat

book value, the most important shift has

occurred with respect to common stock

holdings. In 1973, common stock holdings

accounted for 63.7 percent of total assets;

however, this percentage declined steadily,

reaching a trough of 49.1 percent in the

second quarter of 1979. Since that time

common stocks have gradually increased

in importance, to 50 percent oftotal assets.

U.S. Government securities have grown

significantly as a percentage of the aggregate portfolio, from 35 percent in 1973 to

11.0 percent in 1980. The importance of

Other Assets has virtually doubled since

1973 to 8.4 percent of total assets, perhaps

an indication of diversification into newer

forms of investments.
Table 21

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

(Millions of Dollars)

1973 1974 1975 1976 1977 1978 1979 1980

Book Value. End of Year

Cash and Deposits 2.336 4.286 2.962 2.199 3.721 8.110 8.609 9.290

U S Government Securities 4.404 5.533 10764 14.713 20.138 19.695 22,459 28.312

Corporate and Other Bonds 30.334 35.029 37.809 39.070 45.580 53.824 59.537 63.910

Preferred Stock 1.258 1.129 1.188 1.250 1.168 1.274 1.350 1.322

Common Stock 80.593 79.319 83.654 93.359 96.984 100,424 110.943 128.473

Own Company 4.098 4.588 5.075 NA NA NA NA NA

Other Companoes 76,495 74.731 78.579 NA NA NA NA NA

Mortgages 2.377 2.372 2.383 2.369 2,497 2.789 3.091 4.085

Other Assets 5.229 6.063 6.406 7.454 11.421 16.121 17.476 21506

Total Assets 126531 133.731 145.168 160.414 181.509 202.237 223.465 256.898

Market Value End of Year

Cash and DepOSits 2.336 4.286 2.962 2.199 3.721 8.110 8.609 9.290

U S Government Securities 4.474 5.582 11.097 14.918 20.017 18.767 21.516 26.334

Corporate and Other Bonds 27.684 30.825 34.519 37.858 42.754 48.633 51.261 59.987

Preferred Stock 985 703 892 1.212 1.009 1.162 1.099 1.367

Common Stock 89.538 62.582 87.669 108.483 100.863 106.732 122.703 174,437

Own Company 6.947 5.230 6.958 NA NA NA NA NA -:

Other Companoes. 82.591 57.352 80.711 NA NA NA NA NA

Mortgages 2.108 2.063 2.139 2.160 2.362 2.554 2.664 3.814

Other Assets 5.140 5.681 6.341 7.073 10.383 15.585 17.336 21.980

Total Assets 132.247 111.724 145.622 173.906 181.564 201.545 225.188 297.209

N A ; Not Available

NOTE Includes deferred profit sharing funds and pension funds of corporations. unions. mulliemployer groups. and

nonpront organizations

129
SECURmES ON EXCHANGES

Market Value and Share Volume

In 1980 the total market value of all

equity securities transactions on registered

exchanges totaled $5222 billion. Of this

total. $475.8 billion or 91.1 percent represented market value in stocks and $45.8

billion or 8.8 percent in market value for

options. The remainder represents market

value for warrants and rights. The market

value of the New York Stock Exchange

transactions was $398 billion in 1980.

which increased 58.2 percent from the

previous year. The market value of the

American Stock Exchange transactions

was $47.4 billion. which increased 73.9

percent Total market value of equity secu130

rities on regional exchanges amounted to

$76.8 billion. an increase of 70.8 percent

The Chicago Board Options Exchange

contract volume for 1980 was 52.9 million.

up 503 percent from 352 million in 1979.

The American Stock Exchange contract

volume was 292 million in 1980. an increase from 1979 of 67.1 percent Philadelphia Stock Exchange contract volume

for 1980 was 7.7 million (up 55.9 percent).

while Pacific Stock Exchange contract

volume for 1980 was 5.5 million. (up 33.1

percent). Midwest Stock Exchange con.

tract volume was 1.5 million, (a decrease of

41.8 percent). In June 1980. Midwest Stock

Exchange discontinued trading in options.

The market value of option contracts traded

in 1980 was $45.8 billion and the number of

contracts traded was 96.8 million.
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NASDAQ (Volume and Market Value)

NASDAQ share volume and market

value information for over-the-counter

trading has been reported on a daily basis

since November I, 1971. At the end of

1980, there were 3,050 issues in the

NASDAQ system, an increase of 142 percent from 2,670 issues in 1979. Volume for

1980 was 6.7 billion shares, up 833 per.

cent from 3.7 billion in the previous year.

Market value for 1980 was $68.7 billion.

This trading volume reflects the number of

shares bought and sold by market-makers

plus their net inventory changes.

Share and Dollar Volume by Exchange

Share volume in 1980 for stocks, rights,

132

and warrants on exchanges for 1980 totaled $15.6 billion, an increase of 42.1 percent since last year. The New York Stock

Exchange accounted for 80 percent of

share volume for stocks, rights, and warrants; the American Stock Exchange, 10.8

percent; the Midwest Stock Exchange, 3.8

percent; and the Pacific Stock Exchange,

2.8 percent

Market value of stocks, rights, and warrants was $476.4 billion, an increase of

585 percent over the previous year. The

New York Stock Exchange represented

835 percent of the total; the American

Stock Exchange and the MidwestStock Exchange represented 73 percent and 43

percent of the total, respectively.
Market Value Of Securities Traded On

All U.S. Stock Exchanges

Dollars Billions

500

450

400

350

300

250

B

Stocks, Rights

& Warrants

Options

200

150

100

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1970 71 72 73 74 75 76 71 78 79 1980

133
Table 23

SHARE VOLUME BY EXCHANGES'

In Percentage

Total Share Volume

Year (thousands) NYSE AM EX MSE PSE PHLX BSE CSE Other'

1935 681.971 7313 1242 191 269 110 096 003 776

1940 377.897 7544 1320 211 278 133 119 008 387

1945 769.018 6587 2131 177 298 106 066 005 630

1950 893.320 7632 1354 216 311 097 065 009 316

1955 1.321,401 68 85 1919 209 308 085 048 005 541

1960 1.441.120 6847 2227 220 311 088 038 004 265

1961 2.142.523 6499 2558 222 341 079 030 004 267

1962 1.711.945 7131 2011 234 295 087 031 004 207

1963 1.880.793 7293 1883 232 282 083 029 004 194

1964 2.118.326 7281 1942 243 265 093 029 003 144

1965 2.671.012 6980 2253 263 233 081 026 005 149

1966 3.313.899 6938 2284 256 268 086 040 005 123

1967 4.646.553 6440 2841 235 246 087 043 002 106

1968 5,407.923 6198 2974 263 264 089 078 001 133

1969 5.134.856 6316 2761 284 347 122 051 000 119

1970 4.834.887 7128 1903 316 368 163 051 002 069

1971 6.172.668 7134 1842 352 372 372 191 043 063

1972 6.518.132 7047 1822 371 413 221 059 003 064

1973 5.899.678 7492 1375 409 368 219 071 004 062

1974 4.950.633 7847 1027 439 348 182 086 004 067

1975 6.381.669 8092 896 405 325 154 084 013 031

1976 7.125.201 8003 935 387 393 141 078 044 019

1977 7.134.946 7954 973 395 371 149 066 064 028

1978 9.564.663 8008 1075 358 314 149 060 015 021

1979 10.977.775 7978 1082 329 338 164 054 027 028

1980 15.584.209 7995 1079 383 280 151 056 032 024

'Share volume for exchanges Includes stocks, rrghts, and warrants

'Other Includes all exchanges not listed above

Table 24

DOLLAR VOLUME BY EXCHANGES'

In Percentage

Total Dollar Volume

Year (thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other'

1935 $15.396.139 8664 783 132 139 068 134 004 056

1940 8.419.772 8517 768 207 152 111 191 009 045

1945 16.284.552 8275 1081 200 178 096 116 006 048

1950 21.808.284 8591 685 235 219 103 112 011 044

1955 38.039.107 8631 698 244 190 103 078 009 047

1960 45.309.825 8380 935 272 194 103 060 007 049

1961 64.071.623 8243 1071 275 199 103 049 007 053

1962 54.855.293 8632 681 275 200 105 046 007 054

1963 64.437.900 8519 751 272 239 106 041 006 066

1964 72.461.584 8349 845 315 248 114 042 006 081

1965 89,549,093 8178 991 344 243 112 042 008 082

1966 123.697,737 7977 1184 314 284 110 056 007 068

1967 162,189,211 77 29 1448 308 279 113 086 003 054

1968 197.116.367 7355 1799 312 265 113 104 001 051

1969 176.389759 7348 1759 339 312 143 067 001 031

1970 131,707,946 7844 1111 376 381 199 067 003 019

1971 186.375.130 7907 998 400 379 229 058 005 024

1972 205.956,263 7777 1037 429 394 256 075 005 027

1973 178,863.622 8207 606 454 355 245 100 006 027

1974 118.828,272 83 62 439 489 350 202 123 006 029

1975 157,555,469 8504 366 482 325 172 118 017 016

1976 195,224,815 8435 387 475 382 168 093 053 007

1977 187,393,082 8396 460 479 353 162 073 074 003

1978 249,603.319 8435 617 419 284 163 061 017 004

1979 300,728,389 8365 693 382 285 180 056 035 004

1960 476,416.379 8354 732 432 227 159 051 040 005

'Dollar volume for exchanges Includes stocks. rights. and warrants

'Other Includes all exchanges not listed above

134
Special Block Distributions block distributions and 98 percent of the

In 1980, there were 50 special block value. The special offering method was

distributions with a value of $1,077.4 employed four times and the exchange

million. Secondary distributions accounted distribution method was used twice In

for 88 percent of the total number of special 1980.

Table 25

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary distributions Exchange drstnoutrons Special offerings

YEAR

Number Shares Value No Shares Value No Shares Value

Sold sold sold

1942 116 2,397,454 $ 82,840 0 0 0 79 812,390 $22,694

1943 81 4,270,580 127,462 0 0 0 80 1,097,338 31,054

1944 94 4,097,298 135,760 0 0 0 87 1,053,667 32,454

1945 115 9,457,358 191,961 0 0 0 79 947,231 29,878

1946 100 6,481,291 232,398 0 0 0 23 308,134 11,002

1947 73 3,961,572 124,671 0 0 0 24 314,270 9,133

1948 95 7,302,420 175,991 0 0 0 21 238,879 5,466

1949 86 3,737,249 104,062 0 0 0 32 500,211 10,956

1950 77 4,280,681 88,743 0 0 0 20 150308 4,940

1951 88 5,193,756 146,459 0 0 0 27 323,013 10,751

1952 76 4,223,258 149,117 0 0 0 22 357,897 9,931

1953 68 6,906,017 108,229 0 0 0 17 380,660 10,486

1954 84 5,738,359 218,490 57 705,781 $ 24,664 14 189772 6,670

1955 116 6,756,767 344,871 19 258,348 10,211 9 161,850 7,223

1956 146 11,696,174 520,966 17 156,481 4,645 8 131,755 4,557

1957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,845

1958 122 9,508,505 361,886 38 619,876 29454 5 88,152 3,286

1959 148 17,330,941 822,336 28 545,038 26,491 3 33,500 3,730

1960 92 11,439,065 424,688 20 441,644 11,108 3 63,663 5,439

1961 130 19,910,013 926,514 33 1,127,266 58,072 2 35,000 1,504

1962 59 12,143,656 658,656 41 2,345,076 65,459 2 48200 588

1963 100 18,937,935 814,964 72 2,892,233 107,498 0 0 0

1964 110 19,462,343 909,821 68 2,553,237 97,711 0 0 0

1965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 0

1966 126 29,045,038 1,523,373 52 3,042,599 118,349 0 0 0

1967 143 30,783,604 1,154,479 51 3.452,856 125,404 0 0 0

1968 174 36,110,489 1,571,600 35 2,669,938 93,528 1 3,352 63

1969 142 38,224,799 1,244,186 32 1,706,572 52,198 0 0 0

1970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 0

1971 204 72,801,243 2,007,517 30 2,595,104 65,765 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,666 30,156 0 0 0

1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662,111 79,889

1974 45 7,512,200 133,838 4 82,200 6,836 33 1,921,755 16,805

1975 51 34,149,069 1,409,933 14 483,646 8,300 14 1,252,925 11,521

1976 44 20,568,432 517,546 16 752,600 13,919 22 1,475,842 18,459

1977 39 9,848,986 261,257 6 295,264 5,242 18 1,074,290 14,519

1978 37 15,233,141 569,487 3 79,000 1,429 3 130,675 1,820

1979 37 12721,775 251,418 3 1,647,600 86,065 6 309,887 4,078

1980 A 44 34 161,263 1,065,054 2 181,600 5,236 4 434440 7,098

R; ReVised

135
Value and Number of Securities

Usted on Exchanges

The market value of stocks and bonds

listed on U.S. exchanges by the end of

1980 was $1.863 billion.an increase of 252

percent over the previous year. The market

value for stocks was $1,350 billion and

$514 billion in bonds. The market value of

stocks listed increased 32 percent in 1980.

and the value of bonds increased 10.5 percent Stocks with primary listingon the New

YorkStock Exchange had a market value of

$1,242.8 billion and represented 92.1 percent of the common and preferred listed

stocks. Those listed on the AJIIF)( accounted for 7.7 percent of the total and

valued $103.5 billion.This increase in value

was 722 percent

Table 26

SECURITIES LISTED ON EXCHANGES'

December 31. 1980

EXCHANGES COMMON PREFERRED BONDS TOTAL SECURITIES

Market Value Market Value Market Value Market Value

Registered Number (MIllion) Number (Million) Number (Million) Number (Million)

American 925 $101.548 104 $1.974 232 $5.196 1.261 $108.718

Boston 47 731 2 9 1 1 50 741

Cmcmnan 5 28 2 1 5 27 12 56

Midwest 15 545 5 16 0 0 20 561

New York 1.540 1.215.394 688 27,410 3.057 507.770 5.265 1.750.574

Pacific 48 1.307 12 207 33 936 93 2.450

Philadelphia 17 4 81 55 22 284 120 343

tntermountarn 35 3 0 0 0 0 35 3

Spokane 34 42 0 0 0 0 34 42

Total 2.666 1.319.602 894 $29.672 3.350 $514.214 6.910 $1.863,488

Includes the follOWing

lorelgn stocks

Registered

New York 37 $52.260 1 $9 150 $7.544 188 $59.813

American 56 23.329 0 0 7 NA 63 23.329

PacifiC 3 326 2 21 0 0 5 347

Total 96 $75.915 3 $30 157 $7.544 256 $83.489

lExcludlng securities which were suspended from trading at the end of the year, and secunnes which because of inactivity

had no available Quotes

Source SEC Form 1392

136
Table 27

VALUE OF STOCKS LISTED ON EXCHANGES

(Brllrons of dollars)

New York Arnencan Exclusively

Dec 31 Stock Stock On Other Total

Exchange Exchange Exchanges

1936 $599 $148 $747

1937 389 102 491

1938 475 108 583

1939 465 101 566

1940 419 86 505

1941 358 74 432

1942 388 78 466

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 670 119 $30 819

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405

1953 117 3 153 28 1354

1954 1691 221 36 1948

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 4417

1964 4743 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 612 60 7595

1969 6295 477 54 6826

1970 6364 395 48 6807

1971 7418 491 47 7956

1972 8715 556 56 9327

1973 7210 387 41 7638

1974 511 1 233 29 5373

1975 6851 293 43 7187

1976 8583 360 42 8985

1977 7767 376 42 8185

1978 8227 392 29 8648

1979 9606 578 39 1,0223

1980 1,2428 1035 29 1,3492

137
Securities on Exchanges

As of September 30, 1981, a total of

7,062 securities, representing 3,128

issuers, were admitted to trading on

securities exchanges in the United States.

This compares with 6,850 issues, involving

3,082 issuers a year earlier. Over 5,000

Issues were listed and registered on the

New York Stock Exchange, accounting

for 61.4 percent of the stock issues and

89.7 percent of the bond issues. Data

below on "Secunties Traded on Ex.

changes" involved some duplication since

it includes both solely and dually listed

securities.

Table 28

SECURITIES TRADED ON EXCHANGES

Issuers Stocks Bonds'

Temporarily

Registered exempted Unlisted Total

American 970 987 40 1.028 240

Boston 748 121 669 790 15

Chicago Board of Trade 3 1 2 3

Cmcmnati 330 50 297 347 17

Intermountain 48 47 1 48

Midwest 574 337 301 639 35

New York 1.918 2.284 2.285 2.980

Pactfrc Coast 791 791 158 950 116

Philadelphia 868 353 671 1.024 90

Spokane 35 34 4 38

'Issuers exempted under Section 3(a)(12) of the Act. such as obligations of US Government, the state, and cities. are not

rncluded m ttus table

Table 29

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(September 30. 1981)

Issuers

Stocks Bonds Total Involved

RegIstered and Listed 3.682 3.328 7.010 3.097

Temporarily Exempted from registration 2 2 4 2

Admitted to unlisted tracrnq privileges 35 13 48 29

Total 3.719 3.343 7.062 3.128

138
1933 ACT REGISTRATIONS

Effective Registration Statements

During the fiscal year ending September

30, 1981, 4,319 registration statements

valued at $144.0 billion became effective. The number of effective registrations

rose by 917 (27 percent) from the 3,402

effective registrations in the previous

fiscal year. The value of effective registrations rose by $3.3.4 billion (30 percent)

from the $110.6 billion of effective registrations in the previous fiscal year.

Among effective registration statements,

there were 1,460 first-time registrants in

fiscal 1981, an increase of 442 first-time

registrants (43 percent) from the previous

fiscal year's total of 1,018.

The number of registration statement

filed rose by 34 percent to 4,223 in fiscal

year 1981 from the 3,147 statements filed

in fiscal year 1980.

139
Table 30

EFFECTIVE REGISTRATIONS

(DollarsonMIllions)

CashSalefor Accountof Issuers

Fiscal Year Total Bonds. Numberof Common Debentures Preferred Total

Statements Value Stock' Stock andNotes

Fiscal Year ended June 30

1935' 284 $913 $168 $490 $28 $686

1936 669 4,835 0531 3,153 252 3,936

1937 840 4,851 0802 2,426 406 3,634

1938 412 2,101 0474 666 209 1,349

1939 344 2,579 0318 1,593 109 2,020

1940 306 1,787 0210 1,112 110 1,432

1941 313 2,611 0196 1,721 184 2,081

1942 193 2,003 0263 1,041 162 1,466

1943 123 659 0137 316 32 485

1944 221 1,760 272 732 343 1,347

1945 340 3225 456 1851 407 2714

1946 661 7,073 1,331 3,102 991 5,424

1947 493 6,732 1,150 2,937 787 4,874

1948 435 6,405 1,678 2,817 537 5,032

1949 429 5,333 1,083 2,795 326 4,204

1950 487 5,307 1,786 2,127 468 4,381

1951 487 6,459 1,904 2,838 427 5.169

1952 835 9,500 3,332 3,346 851 7,529

1953 593 7,507 2,608 3,093 424 6,325

1954 631 9,174 2,610 4,240 531 7,381

1955 779 10,960 3,884 3,951 462 8,277

1956 906 13,096 4,544 4,123 539 9.206

1957 876 14,624 5,858 5,669 472 12,019

1958 813 16,490 5,998 6,857 427 13,282

1959 1,070 15,657 6,387 5,265 443 12,095

1960 1,426 14,367 7,260 4,224 253 11,737

1961 1,550 19,070 9,850 6,162 248 16,260

1962 1,844 19,547 11,521 4,512 253 16.286

1983 1,157 14,790 7,227 4,372 270 11,869

1984 1,121 16,860 10,006 4,554 224 14,784

1965 1,266 19,437 10,838 3,710 307 14,655

1966 1,523 30,109 18,218 7,061 444 25,723

1977 1,1>49 34,218 15,083 12,309 558 27,950

1968 2,417 54,076 22,092 14,036 1,140 37,266

1969 3,645 86,810 39,614 11,674 751 52,039

1970 3,389 59137 28,939 18,436 823 48,198

1971 2,989 69,562 27,455 27,837 3,360 58,452

1972 3,712 62,487 26,518 20,127 3,237 49,882

1973 3,285 59,310 26,615 14,841 2,578 44,034

1974 2,890 56,924 19,811 20,997 2,274 43,082

1975 2,780 77,457 30,502 37,557 2,201 70,260

1976 2813 87,733 37,115 29,373 3,013 69,501

Transmon Quarter

Jly-Sept1976 639 15,010 6,767 5,066 413 12,246

Frscal Yearended

September30

1977 2915 92579 47,116 28,026 2,426 77,566

1978' 3,037 65,043 25,330 23,251 2,128 50,709

1979 3,112 77,400 22,714 28,894 1,712 53,320

1980 3,402 110,583 33,076 42,764 2,879 78.719

1981 4,319 144,028 49,244 40,183 2,476 91,883

Cumulative Total 70,240 $1,448,178 $580871 $478,027 $43,875 $1,102,773

(r) = revised

(p) = preliminary

'Includes warrants, share of beneticral Interest, certificates of participation and all other

equity Interests not elsewhere Included

'For 10 months ended June 30, 1935

'The adoption of Rule 24F-2 (17 CFR 270 24F-2) effective November 3, 1977 made It impossible to report the dollar value of securrtres registered by Investment companies

Note The Total Cash Sale differs from earlier presentations due to changes In rounding

procedures

140
Securities Effectively Registered With S.E.C.

1935.1981

Dollars Brlhons

150

130

BILLIONS OF DOLLARS

110

90

70

50

30

40

30

20

10

o

1935 40 45 50 55 60 65 70 75 1981

(F.scol Yeors)

1111111 FISCAL YEAR END CHANGED FROM JUHE TO SEPTEMBER

DATA FOR TRANSITION QUARTER JUlY.SEPTEMBER 1976 HOT SHOWHOH CHARTSEFFECTIVE REGISTRATIOHS 515.0 BllLlOH, HUMBER OF REGISTRATIONS 639

!!DOES NOT INCLUDE INVESTMEHT COMPAHIES AS OF 1/1/78 DUE TO RULE CHAHGE

141
Purpose and Type of Registration

Effective registrations for cash sale for

the account of issuers amounted to $91.9

billion, or 64 percent, of all $144.0 billion

of effective reqistrations in fiscal year 1981.

Some $61.0 billion of these effective registrations (42 percent of all registrations)

were intended for immediate offerings

rather than for extended or other types of

offerings, a slight decline ($743 million or

1 percent) from the $61.7 billion of such

registrations in the previous fiscal year.

Offerings by business to the general public

totalled $57.2 billion in fiscal year

1981, a decline of $839 million (1 percent)

from the $58.0 billion of such offerings in

fiscal year 1980. Of this amount, debt

securities accounted for $302 billion (53

percent), preferred stock $2.4 billion (6 percent) and common stock $24.6 billion (43

percent). Cash rights offerings (offerings

to security holders) came to $656 million in

fiscal year 1981, a decline of $1.1 billion

(62 percent) from the $1.8 billion of such

offerings In fiscal 1980. Cash offerings by

foreign govemments in fiscal year 1981

totalled $3.1 billion, an increase of $1.2

billion (65 percent) from the $1.9 billion

of such offerings in fiscal year 1980.

In fiscal year 1981, another $30.9 billion

of securities (21 percent of all registrations)

were registered for cash sale for the

account of the issuer in extended and

similar types of offerings other than those

for Immediate cash sale.Securities register.

ed for the account of issuers other than for

cash sale (in conjunction with exchange

offers, for example) amounted to $493

bilhon in fiscal year 1981, 34 percent of all

142

registrations. Registration of securities

for secondary offerings (for the account of

selling security holders rather than issuers)

amounted to $2.9 billion (2 percent) of all

registrations in fiscal year 1981. Of these

registrations for secondary offerings, $1.7

billion (59 percent) were in conjunction with cash sales and $12 billion

(41 percent) were for other types of offerings such as exchange offerings.

In fiscal year 1981, debt securities were

primarily registered for cash sale to the

general public in immediate offerings for

the account of issuer ($302 billion, 72

percent of total debt registrations of $422

billion). Registrations of other types of

securities, however, were more evenly

divided between registrations for immediate cash sale and registrations for

other types of offerings. All registrations of

preferred stock of $5.4 billion were principally divided between those for immediate

cash sale for the account of issuer ($2.5

billion, or 45 percent of preferred stock

registrations) and registration for other

than cash sale for the account of issuer

($2.9 billion, or 54 percent of all reqistrations of preferred stock). All registrations of

common stock ($96.5 billion) were principally divided among registrations for

immediate cash sale for the account of

issuer ($252 billion, or 26 percent of all

common stock registrations), registrations

for extended cash sale for the account of

issuer ($24.0 billion, or 25 percent of all

common stock registrations) and registrations for other than cash sale for the

account of issuer ($44.4 billion, or 46

percent of all common stock registrations).

Note: 1980 figures have been revised.
Table 31

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY

FISCAL YEAR 1981

Purpose of reglstrallOns

All reglstrahons (esnrnated value)

For account of Issuer for cash sale

lrnrnedrate offering

Corporate

Offered to

General Pubtrc

Security Holders

Foreign Governments

Extended cash sale and other Issues

For account of Issuer for other than cash sale

Secondary Ottennqs

Cash Sale

Other

(Dollars In Milions)

Type of security

Total Bonds Preferred Common

debentures Stock Stock'

and notes

$144,028 $42,150 $5,424 $96,455

91,882 40153 2476 49244

60 988 33272 2456 25230

57855 30 159 2466 25230

57199 30154 2439 24,605

656 5 23 624

3113 3,113 0 0

30914 6391 9 24014

49264 1390 2941 44433

2,882 97 7 2773

1 711 1 0 1710

1 171 96 7 1053

1Includes warrants. shares of beneficial Interest certificates of participation and all other equity Interests not elsewhere

Included

Note Preliminary

143
Effective Registrations

Cash Sale For Account Of Issuers

1935-1981

Dollan B.lIlou

50

65 70 75 * 1981

I

I

n

II

/I

II

J

"

I

I I

I \

J

J

J

J

J

I

I

,

-,

Common Stock ,

~~:

,\

,

,

;, J

I ' I

I V

/

J

J

,

J

50 55 60

(foscol Yeo,.)

45

Bond.

... ,

.I Preferred Stock _I / •..

,.-:;. " .'. . '::i

.,,-. .

o

1935 40

20

10

30

40

*IlEGINNING IN 1977, FISCAL YEARS END IN SEPTEMIlER RATHER THAN JUNE.

DATA FOR TRAHSITION QUARTER JULY.SEPTEMBER 1976 HOT SHOWH ON CHART.

BONDS $5.1 BILLIOH, PREFERRED STOCK $.4 BILLIOH, COMMOH STOCK $6.8 BILLIOH

144
Regulation A Offerings

During fiscal year 1981, 347 notifications

were filed for proposed offenngs under RegulatIon A. Issues between $500,000-

$1,500,000 predominated. It should be

noted that the ceiling for Regulation A

was raised to $1.5 rrullion on September

11,1978.

Table 32

OFFERINGS UNDER REGULATION A

F.scal Fiscal Fiscal

1981 1980 1979

Size

$100.000 or Less 8 17 10

$100,000-$200,000 31 25 33

$200.000-$300.000 39 17 27

$300,000-$400.000 23 23 30

$400.000-$500,000 35 35 44

$500,000-$1.500,000 303 281 203

Total 439 398 347

Underwnters

Used 172 100 98

Not Used 267 298 249

Total 439 398 347

Offerors

ISSUIng Companies 429 382 331

Stockholders 3 14 3

Issuers and Stockholders JOintly 7 2 13

Total 439 398 347

ENFORCEMENT

Types of Proceeding

As the table reflects, the secunties

laws provide for a wide range of enforcement actions by the Commission. The

most common types of actions are in.

junctive proceedings instituted in the

Federal district courts to enjoin continued

or threatened securities law violators, and

administrative proceedings pertaining to

broker-dealer firms and/or individuals as.

sociated with such firms which may lead

to various remedial sanctions as required

In the public interest When an injunction

is entered by a court, violation of the

court's decree is a basis for criminal con.

tempt against the violator.

145
Table 33

TYPES OF PROCEEDINGS

ADMINISTRA TIVE PROCEEDINGS

Persons Subject to. Acts Constituting.

and Basrs for. Enforcement Action

Broker-duler, municipal securities

dealer, Inveslmenl adviser or ,,"oclaled person

Willful violation of sscuntres acts provrsron or rule. aiding

or abetting such violation, failure reasonably to supervise

others willful misstatement or orrussron In filing with the

Cornrrussron. convicnon of or injunction against certain

Crimes or conduct

Regiltered securities a.soci.llon

Organization or rule not conforming to statutory requirements

vrotanon of or mabillty to comply with the 1934 Act rules

thereunder or Its own rules uruusutrao failure to enforce

compliance with the foregOing or with rules of the Municipal Securities Huternakrnq Board by a member or person associated with a member

Member of registered securities

association. or a.sociated perscn

BeIOg subject to Commission order pursuant to 1934 Act

g15(b) willful violation of or effective transactron for other

person with reason to believe that person was violating

securities acts provrsrons rules thereunder or rules of

Mumctpal Securities Rulemaklng Board

Nallonal securilies exchange

Orqaruzanon or rules not conform 109 to statutory requirernents

Violation of or inability to comply with 1934 Act rules

thereunder or ItS own rules unjustified failure to enforce

compliance with the foregOing by a member or person

associated with a member

Member 01 nallonal securillel

exchange. or .uoelated persons

Being subject to Commission order pursuant to 1934 Act

~ 15(b) willful violation of or effective transacnon for

other person with reason to believe that person was

violating securities acts provrsrons or rules tnereunder

Regiliered clearing agency

vroratron of or inability to comply with 1934 Act rules

thereunder or ItS own rules failure to enforce compliance

With Its own rules by participants

Partlclpanl In Reglslered clearing

agency

Being subject to Comrrussron order pursuant to 1934 Act

~ 15{b)(4) willful viotanon of or effecting transaction

for other person With reason to beueve that person was

Violating provrsrons of cieannq agency rules

Sanction

Censure or nrrutanon on activities revocanon SUSpt:':SlOn

or denial of registration bar or suspensron from aS~OCJanon (1934 Act ~~ 158(c)(2)-4 15(b)(4)-(6) AJvlsers

Act ~~ 203(e)-(f)) •

Suspension of registration or Irrmtatron of acuvres funclions or operations (1934 Act ~ 19(h)(1))

Suspensron or revocauon of reqrstranon censure Or

limitation of actrvurss functions. or operations (1934 Act

~ 19(h)(1))

Suspension or expulsion from the aSSOCiatIOn bar or suspension from aSSOCiatIOn with member of assocrauon

(1934 Act ~~ 19(h)(2)-(3)

Suspension of registration or limitation of activities functions or operations (1934 Act ~ 19(h)(1»

Suspension or revocatron of registration censure or

limitation of activities tunctrons or operations (1934

Act ~ 19(H)(1))

Suspension Or exptusion from exchange bar or suspension 'rom association with member (1934 Act H 19(h)

(2}-(311

Suspension or revocation of registration censure Or

limitation of activities functions or operations (1934 Act

~ 19(h)(1))

Suspension or expulsron from cleaflng agency (1934 Act

~ 19(h)(2))

"Statutory references are as follows 1933 Act the Secunties Act of 1933 1934 Act the Securrues Exchange Act of

1934 Investment Company Act The Investment Company Act of 1940 Advisers Act the Investment Aov.sers Act of

1940 Holding Company Act the Pubnc Uturty Holdmq Company Act of 1935 Trust Indenture Act the Trust Indenture

Act of 1939 and SIPA the Securities Investor Protection Act of 1970

146
Table 33-Contlnued

TABLE OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject. Acts Constituting.

and BaSIS for. Enforcement Action

Securt"" Inlorm.Uon proceuor

Violation of or inability to comply with provrsions 011934

Act or rules thereunder

Tran.'" .... ,

Willful vrotanon of or inability to comply With 1934 Act. SS

17 or 17A. or regulations thereunder

Any person

Willful Violation of sscunues act provssson or rule. aiding or

abetting such vrotanon, willful misstatement In filing With

Commission

Ollice or director of .. 11-

.egulelory orgenlullon.

Wlillul vrotauon of 1934 Act. rules thereunder. or the

organization's own rules. Willful abuse of autnonty or

unJustlfoed failure to enforce compliance

PrIncipii 01 broker"'''r

Engaging In business as a broker-dealer after appointment

of SIPC Irustee

1933 Acl .egl,'rallon ,"'em ... t

Statement materially Inaccurate or incomplete

Investment company has not attained $100.000 net worth

90 days alter statement became effect,ve

PwIon. IUbjecl 10 Secllon. 12. 13

or 15(d) 01 the 1934 Act.

Matenal noncompliance With such provrsrons

Securtllll laue

Noncompliance Dy Issuer With 1934 Act or rules tnereunder

Public Interest requires trading suspension

RllIlallrad In ... _nl complny

Failure to f,le Investment Company Act registration statement or required report. filing materially Incomplete or

mlsleadlhg slatement of report

Company has not attarned $100.000 net worth 90 days

after 1933 Act registration statement became effective

Atto y. accoun"nl. or other

prol IORII or expert

Lack of reqursrte qualifications to represent others lack.

In9 In character or Integraty. unethical or Improper pro.

Iesstonal conduct Willful Violation of secunties laws or

rules. or aiding and abetting such Violation

sanctIOn

Censure or operational limitations. suspension or revocation of reglstr.tlo~ (1934 Act S 11A(b)(6))

Censure or limitation of activities, dernat, suspension, or

revocation of reglstraloon (1934 Act. S 17A(c)(3))

Temporary or permanent prohibition from serving In

certain capacitres for registered Investment company

(Investment Company Act. S 9(b))

Removal from office or censure (1934 Act. S 19(h)(4))

Bar or suspension from being or being associated With a

broker-dealer (SIPA. S 10(b)) P

Stop order suspendlhg effectiveness (1933 Act. S B(d»

Slop order (Investment Company. Act. S 14(a))

Order dorectlhg compliance (1934 Act. S 15(c)(4))

Denial. suspension of effective date. suspension or revocation of registration on natronal secunues excttange

(1934 Act. S 12(J)

Summary suspension of ever-the-counter or exchange

tradlhg (1934 Act. S 12(k))

Revocation of registration (Investment Company Act.

S B(e»

Revocation or suspension of registration (Investment

Company Act. S 14(a))

Permanent of temporary denial of priVilege to appear or

practice before the Commission (17 C FRS 201 2(e)(1 H

147
Table 33-Contlnued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constituting

and Basts for Enforcement Action

A"omey suspended or disbarred by court,

expert's license revoked or suspended; convlcllon

of a felony or misdemeanor Involving moral lurpltude

Permanent mjuncnon against or finding of securities

Violation In Commission-Instituted action 'lndlng of

secunnes Violation by Commission In administrative

proceedings

Member of Municipal Securilies

Rulemaklng Board

Willful Violation of securities laws rules thereunder or

rules of the Board

Sanction

Automatic suspension from appearance or practice before

the Commission (17 C F R ~ 201 2(e)(2))

Temporary suspension from appearance before Comrrussron (17 C F R ~ 201 2(e)(3))

Censure or removal from office 1934 Act ~ 156(c)(8))

CIVIL PROCEEDtNGS IN FEDERAL DISTRICT COURTS

Persons SUbject to Acts Constituting

and Basrs for Enforcement Action

Any person

Engaging In or about to engage In acts or practices vrolatIng securities acts rules or orders thereunder (mcludIng rules of a registered self-regulatory organization)

Noncompliance With provrsrons of law rule or requtatron

under 1933 1934 or Holding Company Acts order Issued

by Cornrrusston rules of a registered self-regulatory

organization or undertaktnq In a req-strauon statement

Securilies Inveslor Prolecllon

Corportlon

Refusal to commit funds or act for the protection of

customers

National securities exchange or

registered securities association

Noncompliance by Its members and persons associated

With ItS members With the 1934 Act rules and orders

thereunder or rules of the exchange or associanon

Reglslered clearing agency

Noncompliance by Its parucrpants With Its own rules

Issuer subject to reporting requirements

Failure to file reports requued under ~ 15(d) of 1934 Act

Registered Investment company or

allilosle

Name of company or Of securrty Issued by It deceptive

or misleading

Officer, director, member of

advisory board, adviser, depoillor, or

underwlrter of Inveltment company

Engage In act or practice constituting breach of fIdUCiary

duty mvotvmq personal misconduct

148

Sanction

InjunctIOn against acts or practices which constitute or

would constitute Violations (plus other equitable relief

under court's general equity powers) (1933 Act Sec 20(b),

1934 Act Sec 21(d) 1935 Act Sec 18(f) Investmenl

Company Act ~ 42(e), Advisers Act ~ 209(e) Trust Indenture Act ~ 321)

Writ of mandamus injunction or order directing compliance (1933 Act ~ 20(c), 1934 Act ~ 21(e) Holding

Company Act ~ 18(g))

Order directing discharge of obligations or other appropriate relref (SIPA ~ l(b)/

Writ of mandamus injunction or order directing such

exchange or assocranon to enforce compliance (1934 Act

~ 21(e))

Writ of mandamus injunction or order directing cleannq

agency to enforce cornptaince (1934 Act ~ 21 (e))

Forfeiture of $100 per day (1934 Act ~ 32(b))

Injunction agamst use of name (Investment Company Act.

~ 35(d))

truuncnon against acting In certain capacities for investment company and other appropnate relief (Investment

Company Act, ~ 36(a))
Table 33-Continued

TYPES OF PROCEEDINGS

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to Acts Constituting

and Basts for Enforcement Action

Any person having fiduciary duty

relpecting receipt 01 compensalion

Irom Inveltment company

Breach of fiduciary duty

Sanction

In/unct,on (Investment Company Act ~ 36(a))

III REFERRAL TO ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

Basis for Enforcement ACIIon

Any ISluer which vlolatel Seclion 3OA(a) 01

the 1934 Act (Ioreign corrupt praetlees).

Any officer of director of an Issuer of any

stockholder actmg on behalf of such Issuer

who willfully violates Section 3OA(a) at

the 1934 Act

Any employee or agent (subject to the

Junsdrcnon of the United States) of

an Issuer found to have violated Section 3OA{a)

of the 1934 Act who willfully earned out

the act or practice constituting sucn

violation

Any ISluer which violatel Section 3OA(I) 01

the 1934 Act (Iorelgn corrupt practlcel).

Any officer or director of an Issuer or any

stockholder acting on behalf of such Issuer

who willfully violates Section 3OA(a) 01

the 1934 Act

Any employee or agent (subject 10 the

Jurrsdlct,on of the United States) 01

an Issuer found to have violated Secuon 30A(a)

of the 1934 Act who willfully earned out

the act or practice conentunng such

violation

Sanr-tion or Relief

MaXimum, penalty $1000000 line (1934 Act Sec 32(c)

(1))

Maximum penalty $10000 fine and 5 years Imprisonment

(1934 Act Sec 32(c)(2))

Maximum penalty $10000 hne and 5 years Imprisonment

(1934 Act Sec 32(c)(3))

MaXimum penally $1000000 fine (1934 Act Sec 32{c)

(1))

MaXimum penally $10000 fine and 5 years rmpnsonrnant

(1934 Act Sec 32(c)(2))

MaXimum penalty $10000 Ime and 5 years rmpnsonment (1934 Act Sec 32(c)(3)))

149
Table 34

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending September 30. 1980

Opened

Total for Distribution

Closed

Pending September 30. 1981

1.099

303

1,402

481

921

During the fiscal year ending September

30, 1981. 132 formal orders were issued

by the Commission upon recommendation of the Division of Enforcement

Table 35

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30, 1981

Broker Dealer Proceedings

Investment Adviser Proceedings

Stop Order, Reg A Suspension and Other Disclosure Cases

Table 36

INJUNCTIVE ACTIONS

34

18

20

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

Fiscal Year Cases Instituted

119

178

148

174

158

166

135

108

103

114

Defendants

511

654

613

749

722

715

607

511

387

291

Table 37

CRIMINAL CASES

Number of cases

referred/access Number of Defendants

Fiscal Year Justice Dept Indictments Indicted Convictions

1972 38 28 67 75

1973 49 40 178 83

1974 67 40 169 81

1975 83 53 199 116

1976 116 23 118 97

1977 100 68 230 135

1978 109 50 144 174

1979 45 42 112 87

1980 74 26 49 58

1981 86 26 53 26

150
Trading Suspensions

During fiscal 1981, the Commission

suspended trading in the securities of 23

companies, two less than the 25 trading

suspensions in fiscal 1980 and equal to the

23 trading suspensions in fiscal 1979. In

most instances, the trading suspension was

ordered either because of substantial

questions as to the adequacy, accuracy

or availability of public information con.

ceming the company's financial condition

or business operations, or because transactions in the company's secunties

suggested possible manipulation or other

violations.

Foreign Restricted list

The Commission maintains and publishes a Foreign Restricted List which is

designed to put broker-dealers, financial

institutions, investors and others on notice

of unla\\lful distributions of foreign securities in the United States. The list consists

of names of foreign companies whose

securities the Commission has reason to

believe have been, or are being, offered for

public sale in the United States in violation of the registration requirements of Section 5 of the Securities Act The offer and

sale of unregistered securities deprives investors of all the protections afforded by

the Securities Act, including the right to

receive a prospectus containing the

information required by the Act While

most broker-dealers refuse to effect transactions in securities issued by companies

on the Foreign Restricted List, this does

not necessarily prevent promoters from

illegally offering such securities directly to

investors in the United States by mail, by

telephone, and sometimes by personal

solicitation. The total number of corpora.

tions on the list is 99.

During the past fiscal year, one corporation, Rancho San Rafel, SA, was added to

the Foreign Restricted Ust.

Information came to the Commission's

attention that Rancho San Rafel, SA. of

Costa Rica was soliciting investors in the

United States to purchase its securities.

Since no registration statement has been

filed nor become effective pursuant to the

Securities Act of 1933 with respect to these

securities, their offer and sale may be in

violation of Section 5 of the Securities Act

of 1933.

The complete hst of all foreign corporations and other foreign entities on the

Foreign Restricted List on September

30, 1981 is as follows:

1. Aguacate Consolidated Mines, Incorporated (Costa Rica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration

Company, Ltd. (Canada)

4. Allied Fund for Capital Appreciation (AFCA, SA) (Panama)

5. Amalgamated Rare Earth Mines,

Ltd. (Canada)

6. American Industrial Research SA,

also known as Investigaction In.

dustrialAmericana, SA(~co)

7_ American International Mining

(Bahamas)

8. American Mobile Telephone and

Tape Co., Ltd. (Canada)

9. Antellntemational Corporation, Ltd.

(Canada)

10. Antoine Silver Mines, Ltd.

11. ASCA Enterprisers Umited (Hong

Kong)

12. Atholl Brose (Exports) Ltd. (England)

14. Atlantic and Pacific Bank and Trust

Co., Ltd. (Baharnes)

15. Bank of Sark (United Kingdom)

16. Briar Court Mines, Ltd. (Canada)

17. British Overseas Mutual Fund

Corporation Ltd. (Canada)

18. California & Caracas Mining Corp.,

Ltd. (Canada)

19. Canterra Development Corporation,

Ltd. (Canada)

20. Cardwell Oil Corporation, Ltd.

(Canada)

21. Caribbean Empire Company, Ltd.

(British Honduras)

22. Caye Chapel Club, Ltd. (British

Honduras)

151
23. Central and Southem Industries

Corp. (Panama)

24. Cerro Azul Coffee Plantation

(Panama)

25. Ga. Rio Banano, SA (Costa Rica)

26. Gty Bank AS. (Denmark)

27. Claw Lake Molybdenum Mines, Ltd.

(Canada)

28. Claravella Corporation (Costa Rica)

29. Compressed Air Corporation, Limited (Bahamas)

30. Continental and Southem Industries, SA (Panama)

31. Crossroads Corporation, SA

(Panama)

32. Darien Exploration Company, SA

(Panama)

33. Derkglen, Ltd. (England)

34. De Veers Consolidated Mining Corporation, SA (Panama)

35. Doncannon Spirits, Ltd. (Bahamas)

36. Durman, Ltd. formerly known as

Bankers International Investment

Corporation (Bahamas)

37. Empresia Minera Caudalosa de

Panama, SA (Panma)

38. Ethel Copper Mines, Ltd. (Canada)

39. Euroforeign Banking Corporation,

Ltd. (Panama)

40. Finansbanken a/ s (Denmark)

41. First Uberty Fund, Ltd. (Bahamas)

42. Global Explorations, Inc. (Panarna)

43. Global Insurance Company, Limited

(British West Indies)

44. Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

45. Golden Age Mines, Ltd. (Canada)

46. Hebilla Mining Corporation (Costa

Rica)

47. Hemisphere Land Corporation

Umited (Bahamas)

48. Henry Ost & Son, Ltd. (England)

49. Intemational Communications Corporation (British West Indies)

50. Intemational Monetary Exchange

(Panama)

51. International Trade Development

of Costa Rica, SA

52. Ironco Mining & Smelting Company, Ltd. (Canada)

152

53. James G. Allan & Sons (Scotland)

54. J. P. Morgan & Company, Ltd., of

London, England (not to be confused with J. P. Morgan & Co., Incorporated, New York)

55. Jupiter Explorations, Ltd. (Canada)

56. Kenilworth Mines, Ltd. (Canada)

57. Klondike Yukon Mining Company

(Canada)

58. Kokanee Moly Mines, Ltd. (Canada)

59. Land Sales Corporation (Canada)

60. Los Dos Hermanos, SA (Spain)

61. Lynbar Mining Corp., Ltd. (Canada)

62. Mercantile Bank and Trust & Company., Ltd. (Cayman Islands)

63. Norart Minerals Umited (Canada)

64. Norrnandie Trust Company, SA

(Panama)

65. Northem Survey (Canada)

67. Northland Minerals, Ltd. (Canada)

68. Obsco Corporation, Ltd. (Canada)

69. Pacific Northwest Developments,

Ltd. (Canada)

70. Panamerican Bank & Trust Company (Panama)

71. Paulpic Gold Mines Ltd. (Canada)

72. Pyrotex Mining and Exploration Co.,

Ltd. (Canada)

73. Radio Hill Mines Co., Ltd. (Canada)

74. Rancho San Rafel, SA (Costa Rica)

75. Rodney Gold Mines Umited

(Canada)

76. Royal Greyhound and Turf Holdings

Limited (South Africa)

77. SA Valles & Co., Inc. (Philippines)

78. San Salvador Savings & Loan Co.,

Ltd. (Bahamas)

79. Santack Mines Umited (Canada)

80. Security Capital Fiscal & Guaranty

Corporation SA (Panama)

81. Silver Stack Mines Umited (Canada)

82. Societe Anonyme de Refinancement (Switzerland)

83. Strathmore Distillery Company,

Inc. (ScotJannd)

84. Strathross Blending Company

Umited (England)

85. Swiss Caribbean Development &

Finance Corporation (Switzerland)

86. Tam O'Shanter, Ltd. (Switzerland)
87. Timerland (Canada)

88. Trans-American Investments.

Umited (Canada)

89. Trihope Resources. Ltd. (Canada)

90. Trust Company of Jamaica. Ltd.

(West Indies)

91. United Mining and Milling Cor.

poration (Bahamas)

92. Unitrust Limited (Ireland)

93. Vacationland (Canada)

94. Valores de Inversion. SA (Mexico)

95. Victoria Oriente, Inc. (Panama)

96. Warden Walker Worldwide Invest.

ment Co. (England)

97. Wee Gee Uranium Mines. Ltd.

(Canada)

98. Western International Exploretions, Ltd. (Bahamas)

99. Yukon Wolverine Mining Company

(Canada)

Right to Financial Privacy

Section 2l(h)(6) of the Securities

Exchange Act of 1934 [15 U.S.c. 78u(h)

(6)1 requires that the Commission "com.

pile an annual tabulation of the occasions

on which the Commission used each

separate subparagraph or clause of

[Section 21(h) (6) 1or the provisions of the

Right to Financial Privacy Act of 1978

[12 U.S.c. 3401-22 (the "RFPA")] to obtain

access to financial records of a customer

and include it in its annual report to the

Congress." During the fiscal year. the

Commission did not use any subparagraph

cr clause of Section 2I(h) (2) for such pur.

pose. The table below sets forth the

number of occasions upon which the Com.

mission obtained access to financial

records of a customer using the procedures provided by (i) Section 1104 of

the RFPA [12 u.s.c. 34041, applicable to

customer authorizations; (ij) Section 1105

of the RFPA [12 us.c. 3405], applicable

to administrative subpoenas; and (iii)

Section 1107 of the RFPA [12 U.S.c.

34071, applicable to judicial subpoenas:

Section 1104 Section 1105 Section 1107

2 108 2

P(]BUC UTILfTY HOLDING

COMPANIES

System Companies

At fiscal year 1981 there were 13 holding

companies registered under the Act of

which 12 are "active". In the 13 registered

systems, there were 58 e1ectnc and! or gas

utility subsidianes, 61 non-utihty sub.

sidiaries, and 19 inactive companies, or a

total of 155 system companies Including

the top parent and subholding companies

The following table lists the active systems.

153
Table 38

PUBLIC UTILITY HOLDING COMPANY SYSTEM

Solely

Registered

Holding

Companies

Registered Electric

Holding and/or

Operating Gas Utlhty Nonutlhty Inactive Total

Companies Subsidiaries Subsidiaries Companies Companies Other

c Yankee Atomic Electnc Co

30% NEES. 31 5% NBU. 45% EUA

o

1

Connecticut Yankee AtomiC

Power Co 15%NEES, 44% NEU.

45%EUA

Allegheny Power System (APS)

American Electric Power

Company (AEP)

Central and South West

Corporation (CSW)

Columbia Gas System

(CGS)

Consolidated Netural Gas

Company (CNG)

Eastern Utlhtles Associates

(EUA)

General Pubhc utrnues

(GPU)

Middle South Utilities

(MSU)

National Fuel Gas Company

(NFG)

New England Electric System

(NEES)

Northeast ununes (NEU)

Philadelphia Electric Power

Co (PEP)

Southern Company (SC)

Total Companies

aPeach Bottom Power Co. Inc

-50%APS

50%AEP

Ohio Valley Elec Corp & Subs

12

3 0 0 8

0 12 14 4 31

3 4 10

0 8 10 0 19

0 5 6 0 12

0 3 2

0 4 3 2 10

0 7 2 3 13

0 3 0 5

0 4 2 0 7

0 5 8 6 20

1 1 0 1 3

0 5 4 0 10

5 58 61 19 155

bArklahoma Corp

-32%CSW

34%MSU

34% Oklahoma Gas & Elec

3

8

Indiana-Kentucky Elec Corp

-eiectnc utrhty

-378%AEP

125%APS

49 7% Other Companies

154

Vermont Yankee Nuclear Power

Corp 20% NEES. 12%NDU.

25%EUA

Maine Yankee Atomic Power

Co 20% NEES. 15%NDU.

4%EUA

-Statutory utility subsrdianes
Table 39

KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY

HOLDING COMPANY SYSTEMS

As of June 30.1981 (000 omitted)

Name of Company

Allegheny Power System (APS)

Amencan Electnc Power Company. Inc (AEP)

Central and South West Ccrporatron (CSW)

Colurnbra Gas System. Inc. The (CGS) •

Consolidated Natural Gas Company (CNG)

Eastern Utilities Associates (EUA)

General Public uunues Corp (GPU)

MIddle South Utrtmes, Inc (MSU)

Natronai Fuel Gas Company (NFG)

New England Electnc Sytem (NEES)

Northeast Utrlmes (NEU)

PhIladelphia Electnc Power Company (PEP)

Southern Company. The (SC)

Total Assets

$ 3.086.336

11.053,447

4.410.876

3.832.810

2.751.887

404.992

5.055.056

7.683.685

759.226

2185.763

3.745.155

59.305

11 971 077

$56999.615

Operating Revenue

$ 1.384 240

4.072.066

1.893.502

3897.081

2.652552

276.067

1.958052

2.541.166

852.920

1.259417

1522892

6710

4140000

$26,456665

155
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Table 41

SUBSIDIARY SERVICE COMPANIES OF

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

As of December 31. 1980

Total Total Total

Name of Company Billings Assets Personnel

Allegheny Power Service Corp $ 23.851.502 $ 2.482.980 625

American Electnc Power Service Corp 108.203.000 26.717.000 2.552

Central and South West Services. Inc 15.124.000 4.693.000 221

Columbia Gas System Service Corp 37.594.000 20.008.000 716

Consolidated Natural Gas Service Co 24.633.000 4.899.000 364

EUA Service Corp • 8.508.462 1.638.248 235

GPU Service Corp 53.874.000 32.530.000 1.027

Middle South ServiCes 39.742.000 54.753.000 597

New England Power Service Co 63.110.696 7.763.882 1.663

Northeast unnnes servrcs Co 107.877.000 81.195.000 2.379

Southern Company Services . 125.831.000 66.238.000 2.660

Total $608.348.660 $302.918.110 13.039

Fuel Programs

During fiscal year 1981, the Commission

authorized approximately $1 billion for fuel

exploration and development activities for

the holding company systems. This represents a 72 percent increase over fiscal

year 1980 fuel expenditures. The following

table lists the authorization by holding com.

pany system for each fuel program.

Largely as a result of radical changes in

cost and availability of fuel, utilities have

embarked on major programs to acquire

158

control over part of their fuel supply.

Generally, the arrangments involve the

formation of subsidiaries or entry into joint

ventures for the production, transportation

and financing of fuel supplies or the supply

of capital for the exploration and the de.

velopment of reserves with a right to share

in any discovered reserves. Since 1971 ,the

Commission has authorized expenditures

of over $4.2 billion for fuel programs of

holding companies subject to the Holding

Company Act
E

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_G>G>

U::>~

::> u. ::>

Z eQ.

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159
Corporate Reorganizations

During the fiscal year the Commission

entered 18 reorganization cases filed

under Chapter 11 of the Bankruptcy Code

involving companies with aggregate stated

assets of about $2.5 billion and 130,000

public investors. Including the new cases

the Commission was a party in a total of 35

Chapter 11 cases durinq the fiscal year.The

stated assets of the companies involved

in these cases totaled approximately $3.95

billion and their indebtedness of about

$4.1 billion. During the fiscal year 12 cases

160

involving assets of $250 million and llabilities of $210 million were concluded

either through confirmation of a plan of

reorganization, liquidation or dismissal,

leaving 23 cases in which the Commission

was a party at year-end.

The Commission also continued its

participation in pending reorganization

cases under Chapter X of the prior Bankruptcy Act. During the fiscal year 15

Chapter X cases were closed, leaving at

year-end 52 open reorganization cases.
Table 43

PENDING REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE

BANKRUPTCY ACT IN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1981

SEC Notice of

Debtor District Court Petition Flied Appearance Flied

Aldersgate Foundation. Inc 2 M 0 Fla Sept 12 1974 Oct 3,1974

Amencan Associated Systems, Inc 1 ED Ky Dec 24,1970 Feb 26,1971

Arlan's Dept Stores, Inc 2 S D NY March 8,1974 March 8,1974

Bankers Trust Co 2 S D MISS Dec 16,1976 April 5 1977

Beck lndustnes. Inc S D NY May 27,1971 July 30 1971

Bermec Corp 2 S D NY April 16,1971 Apnl 19,1971

Beverly Hills Bancorp CD Cal Apnl 11 1974 May 14,1974

Brethren's Home, The S D Ohio Nov 23 1977 Dec 27,1977

Bubble Up Delaware, Inc CD Cal Aug 31 1970 Oct 19,1970

Carolina Caribbean Corp 2 WDNC Feb 28 1975 April 17,1975

Citizens Mortgage Investment Trust D Mass Oct 5 1978 Nov 1 1978

Coast Inventors, Inc 1 W D Wash April 1 1964 June 10 1964

Commonwealth Corp 2 NO Fla June 28,1974 July 17,1974

Continental Investment Corp) o Mass Oct 31,1978 Oct 31,1978

Continental Mortgage Investors o Mass Oct 21,1976 Oct 21 1976

Davenport Hotel, Inc I ED Wash Dec 20,1972 Jan 26,1973

Detroit Port Development Corp' ED Mlch Sept 14,1976 Nov 17,1976

Diversified EqUity Corp 1 SO Ind Jan 24,1977 Feb 17,1977

Diversified Mountaineer Corp 2 S D WVa Feb 8,1974 April 24,1974

Duplan Corp SD NY Oct 5,1976 Oct 5,1976

E T & T Leasmq, Inc' o Md Dec 20 1974 June 5,1975

Farnngton Manufacturing Co 2 ED Va Dec 22,1970 Jan 14,1971

First Baptist Church, Inc of Margate, Fla' S D Fla Sept 10,1973 Oct 1,1973

First Home Investment Corp of Kansas. Inc 2 D Kan Apnl 24,1973 April 24 1973

First Research Corp' S D Fla March 2,1970 April 14,1970

Fort Cobb, Okla lrnqatron Fuel Authonty W D Okla April 20,1979 July 16,1979

GAC Corp' S D Fla May 19,1976 June 14 1976

GEBCO Investment Corp WD Pa Feb 8,1977 March 24 1977

Wm Gluckrn Co , Ltd SO NY Feb 22,1973 March 6 1973

Guaranty Trust Co W 0 Okla Apnl 9,1979 April 9,1979

Gulfco Investment Corp WD Okla March 22,1974 March 28,1974

Gulf Union Corp 1 M D La Aug 29,1974 Nov 5,1974

Harmony Loan. Inc 2 ED Ky Jan 31,1973 Jan 31,1973

Hawau Corp 3 J o Hawau March 17,1977 March 17,1977

Horne-Stake Production Co N D Okla Sept 20,1973 Oct 2,1973

Investors ASSOCiated, Inc 1 W D Wash March 3,1965 March 17 1965

Investors Funding Corp of New York' SD NY Oct 21,1974 Oct 22,1974

J 0 Jewell, Inc' N D Ga Oct 20,1972 Nov 7,1972

King Resources Co ;/ D Colo Aug 16,1971 Oct 19,1971

Lake WIOnebago Development Co , Inc WD Mo Oct 14,1970 Oct 26,1970

Lusk Corp o AriZ Oct 28,1965 Nov 15,1965

Mount Everest Corp 2 ED Pa May 29 1974 June 28,1974

National Telephone Co. Inc 2 D Conn July 10 1975 May 27 1976

North American Acceptance Corp 2 N D Ga March 5 1974 March 28,1974

Omega-Alpha Inc' N D Texas Jan 10,1975 Jan 10 1975

Paortro Homes- CD Cal Dec 9,1977 Feb 2 1978

Pan Amencan Financial Corp 2 o Hawau Oct 2,1972 Jan 9 1973

Parkview Gem Inc 2 WD Mo Dec 18,1973 Dec 28 1S'7J

Pocono Downs Inc M D Pa Aug 20,1975 Aug 20 1975

John Rich Enterprises, Inc 2 o Utah Jan 161970 Feb 6 1970

Reliance Industries Inc o Hawau May 24 1976 Aug 10,1976

Royal Inns of Arnenca, Inc ;/ 5 D Cal Apnl 24 1975 June 24,1975

161
Table 43-Contmued

PENDING REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE

BANKRUPTCY ACT IN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1981

SEC Notice of

Debtor Distnct Court Pennon FIled Appearance FIled

Sierra Trading Corp' o Colo July 7,1970 July 22,1970

Sound Mortgage Co. Inc 1 WO Wash July 27,1965 Aug 31,1965

Southern Land Title Corp' ED La Dec 7,1966 Dec 31,1966

Stanndco Developers, Inc WO NY Feb 5,1974 March 7,1974

Stirling Homex Corp' WO NY July 11,1972 July 24,1972

Sunset tnternanonat Petroleum Corp 2 NO Texas May 27,1970 June 10,1970

TMT Trailer Ferry, Inc' SOFia June 27,1957 Nov 22,1957

Tuco, Inc 2 o Kans Feb 7,1973 Feb 22,1973

Tower Credit Corp' M 0 Fla Apnl 13,1966 Sept 6,1966

U S Financial, Inc 2 SO Cal Sept 23,1975 Nov 3,1975

Virgin Island Properties, Inc' o VI Oct 22,1971 Apnl 11,1972

Washington Group, Inc MONC June 20,1977 July 25,1977

Western Growth Capital Corp o Anz Feb 10,1967 May 16,1968

Westgate California Corp SO Cal Feb 26,1974 March 8,1974

Wonderbowl, Inc 2 CD Cal March 10,1967 June 7,1967

I Reorganization proceedings closed dUring fiscal year 1981

a Plan has been substantially consummated but no final decree has been entered because of pending matters

, Report or memorandum on plan of reorqaruzatton filed dunng frscal year 1981

Table 44

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Airlift International, Inc

Amencan Nautilus FitnessCenter3

Arctrc Enterpnses. Inc

Auto Train Corp'

Christian Life Center.

Coleman American Companies. Inc

Combustion EqUipment Assocranon

Computer Communications

Fidelity Amencan Financial Corp

FWD Corporation 1

General Resources Corp

Goldblatt Brothers, Inc

Grove Finance Company

G Weeks Securities

Haven Properties, Inc

Hawau Nevada Investment Corp

Hentage Investment Group of Ark J

Honzon Hospital, Inc

In1orex. Inc 1 •

Itel Corporation

LS Good&Co'

Mansfield Tire & Rubber

NOVAREIT

Omega F,nanclallnvestment Corp 2

Park Nursing Center

Penn-DIXie Industries

Pleasant Grove Medical Center'

Resource Exploration, Inc'

SBE, Incorporated'

Seatratn Lines. Inc

162

District

Court

SO FL

SO CA

o MN

o DC

NOCA

o KS

SO NY

COCA

ED PA

ED WI

NOGA

NOlL

o UT

WOTN

o OR

o NV

ED AR

MOFL

o MA

NOCA

NOWV

NO OH

ED VA

COCA

ED MI

SO NY

NOTX

NOOH

NOCA

SO NY

Fiscal

Year Filed

1981

1981

1981

1980

1980

1980

1981

1981

1981

1981

1980

1981

1981

1980

1981

1981

1981

1981

1980

1981

1980

1980

1981

1981

1980

1980

1980

1980

1980

1981
Table 44-Contlnued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Southland Lutheran Home'

Tenna Corp 2

Topps & Trowsers '

Unoshelter, Inc

Western Farmers ASSOciation

White Motor Corp

1Plan of reorganization confirmed

2 Case liquidated under Chapter 7

J Chapter 11 petotoon drsmissed

SEC OPERATIONS

The Cornrrussion collects fees for the

registration of securities, securities transactions on national securitIes exchanges,

and miscellaneous filings, reports and

applications. In fiscal year 1981, the Com'

mission expects to collect a record $51

Drstnct Fiscal

Court Year Filed

COCA 1980

NOaH 1980

NOCA 1980

ED WI 1981

0 WA 1980

NOaH 1980

million dollars In fees. representing approximately 64% of the total funds appropriated

by the Congress for Commission operations. This FY-1981 estimated revenue IS

up from $49 million In FY.1980, which

represented 68% of appropnated funds.

163
Appropriated Funds vs Fees Collected

Dollars Millions

90

80

70

60

50

40

30

20

10

o

164

.............. ::~~q~~~q1~nn

.::d1111~1~1~1~~~j i1111~

APPROPRIATlON~ .: ~~~~~~~~~~~~~~~~~~~~~~~~~~

.:;~~~.~~~~:~~~~~~~~:~ .............................. ................................ ..

,;::::!i!lI-!!!IIII!!!lllllil!!llllllllllilllllllillililll1III

.:::::::::: NET COST OF :::::::::::::

•• ::::::::::::: COMMISSION ::::::::::::

:i::illill!iiiiiiiiiiiiiiiiiiiiijl~~~~::l:i'!II:i;

.:: ~1~jj11~~~~~~~~~~~jj~j j~11~~~~H~~~~~~~~~~~~~~~~~~~~~j~~~: CO:LEE~TED

::11~111!!illllllll 111::11 IIII11 IIIIW! ~1; ~~jY:::"':::::~~~~~::.

...............................

............................

.........................

....................

1972 73 74 75 76 77 78 79 80 81 1982l!

l! EstImated
~I

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::;:

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00

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c-,

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::;:

>-

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::;: . '" in c:

00

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0..;0 , '" u; c:

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13

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u:~a 0..;0

165